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 June 30, 1999
-------------
- ------ 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: 4,505,661 shares as of August
10, 1999.
<PAGE>
COLUMBIA BANCORP
CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Condition as of
June 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income and Comprehensive Income
for the Three Months and Six Months Ended
June 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 (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
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
(2)
<PAGE>
PART I ITEM 1. FINANCIAL STATEMENTS
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(dollars in thousands)
June 30, December 31,
1999 1998
-------- ------------
(unaudited)
ASSETS
Cash and due from banks $ 17,352 $ 15,430
Federal funds sold 24,600 17,099
Investment securities (fair value $87,796
in 1999 and $74,308 in 1998) 88,118 73,782
Securities available-for-sale 10,366 10,234
Residential mortgage loans originated for sale 4,797 17,387
Loans:
Commercial 63,836 49,841
Real estate development and construction 106,988 111,868
Real estate mortgage:
Residential 10,029 9,950
Commercial 16,102 16,280
Retail, principally residential equity lines credit 95,372 85,146
Credit card 1,876 1,694
--------- ---------
Total loans 294,203 274,779
Less: Unearned income, net of origination cost 244 366
Allowance for credit losses 4,181 3,965
--------- ---------
Loans, net 289,778 270,448
Other real estate owned 3,462 4,043
Property and equipment, net 8,240 8,616
Prepaid expenses and other assets 10,542 10,296
--------- ---------
Total assets $ 457,255 $ 427,335
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 74,628 $ 60,372
Interest-bearing deposits 281,999 278,964
--------- ---------
Total deposits 356,627 339,336
Short-term borrowings 39,296 27,012
Long-term borrowings 20,000 20,000
Accrued expenses and other liabilities 2,311 2,633
--------- ---------
Total liabilities 418,234 388,981
--------- ---------
Stockholders' equity:
Common stock, $.01 par value per share;
authorized 9,550,000 shares; outstanding
4,571,670 and 4,561,650 shares, respectively 45 46
Additional paid-in capital 22,367 23,491
Retained earnings 16,653 14,846
Accumulated other comprehensive income (44) (29)
--------- ---------
Total stockholders' equity 39,021 38,354
--------- ---------
Total liabilities and stockholders $ 457,255 $ 427,335
========= =========
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 Six Months Ended June 30, 1999 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- ------- -------- --------
(unaudited) (unaudited)
<S><C>
Interest income:
Loans $ 6,684 $ 6,947 $ 13,297 $ 13,969
Investment securities 1,343 1,058 2,576 2,054
Federal funds sold 266 132 536 163
------- ------- ------- -------
Total interest income 8,293 8,137 16,409 16,186
------- ------- ------- -------
Interest expense:
Deposits 2,526 2,719 5,152 5,449
Borrowings 602 474 1,125 878
------- ------- ------- -------
Total interest expense 3,128 3,193 6,277 6,327
------- ------- ------- -------
Net interest income 5,165 4,944 10,132 9,859
Provision for credit losses 92 99 227 183
------- ------- ------- -------
Net interest income after provision
for credit losses 5,073 4,845 9,905 9,676
------- ------- ------- -------
Noninterest income:
Fees charged for services 411 337 783 632
Gains on sales of mortgage loans, net of costs 198 236 608 354
Other 189 186 399 390
------- ------- ------- -------
Total noninterest income 798 759 1,790 1,376
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 2,082 1,894 3,971 3,814
Occupancy, net 498 442 992 921
Equipment 315 298 638 584
Data processing 227 203 446 384
Marketing 118 130 242 298
Cash management services 104 93 172 164
Professional fees 39 65 110 146
Net income on other real estate owned (50) (11) (10) (8)
Deposit insurance 35 31 69 62
Other 587 666 1,186 1,224
------- ------- ------- -------
Total noninterest expense 3,955 3,811 7,816 7,589
------- ------- ------- -------
Income before income taxes 1,916 1,793 3,879 3,463
Income tax provision 646 617 1,349 1,213
------- ------- ------- -------
Net income 1,270 1,176 2,530 2,250
Other comprehensive income, net of tax - unrealized
gains (losses) on securities available-for-sale (45) - (15) 1
------- ------- ------- -------
Comprehensive income $ 1,225 $ 1,176 $ 2,515 $ 2,251
======= ======= ======= =======
Per common share data:
Net income: Basic $ 0.28 $ 0.26 $ 0.56 $ 0.50
Diluted 0.28 0.25 0.55 0.49
Cash dividends declared 0.08 0.07 0.16 0.14
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
(4)
<PAGE>
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
-------- --------
(unaudited)
<S><C>
Cash flows from operating activities:
Net income $ 2,530 $ 2,250
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 570 555
Amortization of loan fee income (700) (919)
Provision for credit losses 227 183
Provision for losses on other real estate owned - 30
Gains on sales of mortgage loans, net of costs (608) (354)
Proceeds from sales of mortgage loans originated for sale 59,279 70,035
Disbursements for residential mortgage loans originated for sale (46,080) (74,756)
Loan fees deferred, net of origination costs 577 861
Decrease (increase) in prepaid expenses and other assets 336 (1,126)
Increase (decrease) in accrued expenses and other liabilities (318) 133
-------- --------
Net cash provided by (used in) operating activities 15,813 (3,108)
-------- --------
Cash flows provided by (used in) investing activities:
Loan disbursments in excess of principal repayments (18,654) (6,914)
Loan purchases (3,480) (1,294)
Loan sales 2,656 5,167
Purchases of investment securities (13,097) (19,592)
Purchases of investment securities available-for-sale (157) (157)
Proceeds from maturities and principal repayments of
investment securities 11,684 12,412
Proceeds from maturities and principal repayments of
securities available-for-sale 1 501
Additions to other real estate owned (340) (673)
Sales of other real estate owned 964 1,527
Purchases of property and equipment (205) (336)
Purchase of life insurance (470) -
Increase in cash surrender value of life insurance (101) (103)
-------- --------
Net cash used in investing activities (21,199) (9,462)
-------- --------
Cash flows provided by (used in) financing activities:
Net increase in deposits 17,291 15,775
Increase in short-term borrowings 12,284 1,720
Increase in long-term borrowings - 15,000
Cash dividends distributed on common stock (727) (628)
Net proceeds from stock options and warrants
exercised and common stock exchanged 155 779
Purchase of common stock (1,280) -
-------- --------
Net cash provided by financing activities 27,723 32,646
-------- --------
Net increase in cash and cash equivalents 22,337 20,076
Cash and cash equivalents at beginning of period 32,529 15,511
-------- --------
Cash and cash equivalents at end of period $ 54,866 $ 35,587
======== ========
Supplemental information:
Interest paid on deposits and borrowings $ 6,420 $ 6,261
Income taxes paid 1,420 1,290
Transfer of loans to other real estate owned 43 334
======== ========
</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 three months and six months
ended June 30, 1999 and 1998 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 1998 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 1998 have been reclassified to conform to the
presentation for 1999.
The consolidated financial statements as of June 30, 1999 and for the
three months and six months ended June 30, 1999 and 1998 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 results of operations for the
six months ended June 30, 1999 are not necessarily indicative of the results
that will be achieved for the entire year.
NOTE 2 - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 of fiscal years beginning
after June 15, 2000. Initial application of SFAS No. 133 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.
(6)
<PAGE>
NOTE 3 - PER SHARE DATA
Information relating to the calculations of earnings per common share
("EPS") is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------
1999 1998
----------------------- -----------------------
Basic Diluted Basic Diluted
----------------------- -----------------------
<S><C>
Net income $1,269,590 $1,269,590 $1,175,562 $1,175,562
======================= =======================
Weighted average shares outstanding 4,506,448 4,506,448 4,548,573 4,548,573
Dilutive securities - 69,943 - 121,540
----------------------- -----------------------
Adjusted weighted average shares used in
EPS computation 4,506,448 4,576,391 4,548,573 4,670,113
======================= =======================
Net income per common share $ 0.28 $ 0.28 $ 0.26 $ 0.25
======================= =======================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------
1999 1998
----------------------- -----------------------
Basic Diluted Basic Diluted
----------------------- -----------------------
<S><C>
Net income $2,529,984 $2,529,984 $2,249,433 $2,249,433
======================= =======================
Weighted average shares outstanding 4,526,158 4,526,158 4,486,031 4,486,031
Dilutive securities - 75,063 - 111,610
----------------------- -----------------------
Adjusted weighted average shares used in
EPS computation 4,526,158 4,601,221 4,486,031 4,597,641
======================= =======================
Net income per common share $ 0.56 $ 0.55 $ 0.50 $ 0.49
======================= =======================
</TABLE>
NOTE 4 - 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 June 30, 1999 whose contract amounts represent
potential credit risk is as follows:
June 30,
1999
-------------------------------------------------------
(dollars in thousands)
Commitments to extend credit(a) $190,621
Standby letters of credit 12,711
Limited recourse on mortgage
loans sold 63
---------------
(a) Includes unused lines of credit totalling $181.0 million regardless
of whether fee paid and whether adverse change clauses exist. The
amount also includes commitments to extend new credit totalling
$9.6 million.
(7)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD - LOOKING STATEMENTS
In addition to historical information, this quarterly report contains
forward-looking statements, which are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed in this section. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
THE COMPANY
Columbia Bancorp (the "Company") was formed November 16, 1987 and is a
Maryland chartered bank holding company. The Company holds all of the issued and
outstanding shares of common stock of The Columbia Bank (the "Bank"). The Bank
is a Maryland trust company that engages in general commercial banking
operations. The Bank provides a full range of financial services to individuals,
businesses and organizations through fourteen branch banking offices, three
mortgage loan origination offices and fifteen Automated Teller Machines
("ATMs"). Deposits in the Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC"). The Company considers its home market area to be
Howard County, Maryland, with extension of business throughout the contiguous
counties comprising central Maryland.
REVIEW OF FINANCIAL CONDITION
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 source of liquidity ("financing activities" as used in
the Consolidated Statements of Cash Flows) is its deposit base. At June 30,
1999, total deposits were $356.6 million. Core deposits, defined as all deposits
except certificates of deposit of $100,000 or more, totalled $327.0 million or
91.7% of total deposits. Also, the Bank has established a credit line with the
Federal Home Loan Bank of Atlanta ("FHLB") as an additional source of liquidity.
At June 30, 1999, outstanding advances from the FHLB totalled $20.0 million.
Collateral must be pledged to the FHLB before advances can be obtained. At June
30, 1999 the Company's approved credit limit with the FHLB was $45.0 million.
However, the Company had collateral sufficient to borrow up to $93.1 million.
Borrowings above the approved credit limit require special approval of the FHLB.
In addition, liquidity is provided through the Company's overnight investment in
federal funds sold. At June 30, 1999, federal funds sold totaled $24.6 million
or 5.4% of total assets.
(8)
<PAGE>
Capital Resources
Total stockholders' equity was $39.0 million at June 30, 1999,
representing an increase of $667,000 or 1.7% from December 31, 1998. The growth
in stockholders' equity during 1999 was primarily comprised of the earnings of
the Company of $2.5 million less cash dividends declared on common stock of
$723,000. In addition, during the first six months of 1999, the Company
repurchased 85,800 shares of its common stock under terms of its Stock
Repurchase Program, which authorized the repurchase of up to 400,000 shares.
These shares were repurchased and retired at prices ranging from $13.50 to
$16.75, which reduced stockholders' equity by $1.3 million.
Dividends for the first six months of 1999 were $.16 per share, compared
to $.14 per share in the first half of 1998.
The following table summarizes the Company's risk-based capital ratios:
Columbia Bancorp
------------------------- Minimum
June 30, December 31, Regulatory
1999 1998 Requirements
----------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 capital 11.43% 11.49% 4.00%
Total capital 12.65 12.68 8.00
Tier 1 leverage ratios 8.79 9.00 3.00
Market Risk and Interest Rate Sensitivity
The Asset/Liability Management Committee of the Board of Directors (the
"ALCO") oversees the Company's management of interest rate risk. The objective
of the management of interest rate risk is to optimize net interest income
during periods of volatile as well as stable interest rates while maintaining a
balance between the maturity and repricing characteristics of assets and
liabilities that is consistent with the Company's liquidity, asset and earnings
growth, and capital adequacy goals. Critical to the management of this process
is the ALCO's interest rate program, designed to manage interest rate
sensitivity (gap management) and balance sheet mix and pricing (spread
management). Gap management represents those actions taken to measure and
monitor rate sensitive assets and rate sensitive liabilities. Spread management
requires managing investments, loans, and funding sources to achieve an
acceptable spread between the Company's return on its earning assets and its
cost of funds.
Currently, the Company does not believe that the use of derivative
financial or commodity instruments and hedging strategies is appropriate in the
management of its interest rate risk. Since the Company is not exposed to
significant market risk from trading activities, does not utilize hedging
strategies and/or off-balance-sheet management strategies, and does not have an
asset and liability structure with meaningful optionability (i.e., assets and
liabilities which may prepay or extend given changes in interest rates), the
ALCO relies primarily on analyses of the Company's interest sensitivity gap
position (i.e., interest-earning assets less interest-bearing liabilities) and
internal budgets to assess interest rate risk exposure.
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
June 30, 1999 and the Company's interest sensitivity gap. A positive sensitivity
gap for any time period indicates that more interest-earning assets will mature
or reprice during that time period than interest-bearing liabilities. The
Company's goal is generally to maintain a reasonably balanced cumulative
interest sensitivity gap position for the period of one year or less in order to
mitigate the impact of changes in interest rates on liquidity, interest margins
and corresponding operating results. During periods of rising interest rates, a
short-term positive interest sensitivity gap position would generally result in
an increase in net interest income, and during periods of falling interest
rates, a short-term positive interest sensitivity gap position would generally
result in a decrease in net interest income.
(9)
<PAGE>
The Company has managed its interest rate risk primarily through the
origination of variable rate loans. At June 30, 1999, $211.8 million, or 72.1%
of the total loan portfolio represented variable rate loans. Of this amount,
$206.0 million were loans tied to the prime rate of interest, which generally
reprice either immediately upon a change in the prime rate of interest or during
the month following a change. As the following table indicates, the strategy of
emphasizing variable rate lending results in a positive cumulative interest
sensitivity gap for all periods.
After One
One Year Through After
or Less Three Years Three Years Total
-----------------------------------------
(dollars in thousands)
Federal funds sold $ 24,600 $ - $ - $ 24,600
Investment securities and
securities available-for-sale 44,608 50,105 3,771 98,484
Loans, exclusive of nonaccrual 224,438 18,867 55,373 298,678
-----------------------------------------
Interest-earning assets 293,646 68,972 59,144 421,762
-----------------------------------------
Interest-bearing deposits 248,431 31,044 2,524 281,999
Other borrowings 39,296 - 20,000 59,296
-----------------------------------------
Interest-bearing liabilities 287,727 31,044 22,524 341,295
--------------------- -------------------
Interest sensitivity gap $ 5,919 $ 37,928 $ 36,620 $ 80,467
=========================================
Cumulative interest sensitivity $ 5,919 $ 43,847 $ 80,467
==============================
Cumulative interest sensitivity
gap ratio 1.29% 9.59% 17.60%
==============================
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 cash concentration activities and processing coin and
currency transactions), 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 decreased $12.6 million or 72.4% from
December 31, 1998 to June 30, 1999 due primarily to less first mortgage
refinancing activity, influenced heavily by the interest rate environment.
Loans and Nonperforming Assets:
At June 30, 1999, the Company's loan portfolio, net of unearned income,
totalled $294.0 million, or 64.3% of its total assets of $457.3 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, 1998, total loans increased $19.4 million, or 7.1%.
Commercial loans and retail loans, principally residential equity lines of
credit, accounted for substantially all of the increase in total loans
outstanding, increasing by $14.0 million and $10.2 million, respectively, since
December 31, 1998. The increase in commercial loans corresponded to general
business expansion, including expansion of loan origination staffing. The growth
in retail loans is also the result of general business expansion as well as less
mortgage refinancing activity.
(10)
<PAGE>
These increases, however, were partially offset by a decrease of $4.9
million in real estate development and construction loans.
Real estate development and construction loans continue to constitute the
largest portion of the Company's lending activities, and consisted of the
following at June 30, 1999:
Amount Percent
------------------------------------------------------
(dollars in thousands)
Residential construction(a) $ 47,842 44.7%
Residential land development 38,378 35.8
Residential land acquisition(b) 9,479 8.9
Commercial construction 11,289 10.6
-------- -----
$106,988 100.0%
======== =====
-----------
(a) Includes $13.4 million of loans to individuals for construction
of primary personal residences.
(b) Includes $1.9 million of loans to individuals for the purchase
of residential building lots.
The Company makes residential real estate development and construction
loans generally to provide interim financing on property during the development
and construction period. Borrowers include builders, developers and persons who
will ultimately occupy the single-family dwellings. 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 June 30, 1999, loans
to individuals for the construction of primary personal residences accounted for
$13.4 million of the $47.8 million residential construction portfolio. These
loans are typically secured by the property under construction, frequently
include additional collateral (such as a second mortgage on the borrower's
present home), and commonly have maturities of six to twelve months. The
remaining $34.4 million of residential construction loans represented loans to
residential builders and developers. Approximately 68% 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
that 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 June 30, 1999, totaling $38.4 million or 35.8% of the portfolio. Generally,
development loans are extended 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 eighteen 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
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.
(11)
<PAGE>
The following table provides information concerning nonperforming assets
and past-due loans.
June 30, December 31, June 30,
1999 1998 1998
- --------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans (a) $ 321 $ 2,995 $ 2,053
Other real estate owned 3,462 4,043 4,072
----------- ----------- -----------
Total nonperforming assets $ 3,783 $ 7,038 $ 6,125
=========== =========== ===========
Loans past-due 90 days or more $ 36 $ 63 $ 27
=========== =========== ===========
- --------------
(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 interest and/or principal is in doubt. Management may
grant a waiver from nonaccrual status for a 90-day past-due loan that 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 June 30, 1999 was the
Company's portfolio of other real estate owned totaling $3.5 million. At June
30, 1999, other real estate owned included the following properties:
o A residential development project consisting of 80 single family and
184 townhouse building lots with a carrying value of $3.3 million net
of participations. The Company has entered into a contract with an
independent third-party contractor to manage the completion of
development work. As of June 30, 1999, 42 single family and 23
townhouse lots had been delivered. All remaining single family and
townhouse lots are under contract of sale with a takedown schedule that
runs through March 2004.
o A construction project consisting of one residential condominium
building pad site with a carrying value of $158,000. The property is
currently under contract of sale.
Nonaccrual loans totaled $321,000 at June 30, 1999 and consisted primarily
of two real estate development and construction projects totaling $206,000.
Impaired loans at June 30, 1999 totaled $212,000 and consisted of three
residential development and construction nonaccrual loans. All impaired loans
were collateral dependent loans, which are measured based on the fair value of
the collateral. There were no impaired loans at June 30, 1999 with an allocated
valuation allowance. An impaired loan is charged-off when the loan, or a portion
thereof, is considered uncollectible.
There were no loans identified at June 30, 1999 with potential weaknesses
that were not adversely classified.
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 monthly evaluation, 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 economic environment. Regular review of the quality of the
loan portfolio is conducted by the Company's staff. In addition, bank
supervisory authorities and independent consultants and accountants periodically
review the loan portfolio. At June 30, 1999, the Allowance was 1.42% of total
loans, net of unearned income. The
(12)
<PAGE>
Allowance at June 30, 1999 is considered by management to be sufficient to
address the credit risk in the current loan portfolio.
The changes in the Allowance are presented in the following table.
Six months ended June 30,
-------------------------
1999 1998
- ---------------------------------------------------------------------------
(dollars in thousands)
Allowance for credit losses -
beginning of period $ 3,965 $ 3,632
Provision for credit losses 227 183
Charge-offs (141) (150)
Recoveries 130 8
-------- ---------
Allowance for credit losses -
end of period $ 4,181 $ 3,673
======== =========
Allowance as a percentage of loans
receivable, net of unearned income 1.42% 1.37%
Allowance as a percentage of nonperforming
loans and loans past-due 90 days or more(a) 1171.15% 176.59%
========= =========
- --------------
(a) There is no direct relationship between the size of the Allowance (and the
related provision for credit losses) and nonperforming and past-due loans.
Accordingly, the ratio of Allowance to nonperforming and past-due loans may
tend to fluctuate significantly.
RESULTS OF OPERATIONS
The Company reported net income of $1.3 million and $2.5 million for the
three months and six months ended June 30, 1999, representing diluted net income
per share of $0.28 and $0.55, respectively. Net income was $1.2 million and $2.3
million for the corresponding periods in 1998, representing diluted net income
per share of $0.25 and $0.49, respectively.
Net Interest Income
Net interest income totaled $5.2 million and $10.1 million for the three
months and six months ended June 30, 1999, compared to $4.9 million and $9.9
million for the same periods in 1998. Net interest income increased minimally in
1999 as compared to 1998 as increases in interest-earning assets and
interest-bearing liabilities were negated by decreases in interest rates.
Specifically, average interest-earning assets increased $49.1 million or 13.6%
and $48.3 million or 13.6% during the three months and six months ended June 30,
1999, respectively, compared to the same periods in 1998, as a result of loan
growth, higher overnight investments in federal funds sold and increased
investments in other debt securities. However, the weighted average yield on
interest-earning assets decreased from 9.05% and 9.19% in the three months and
six months ended June 30, 1998, respectively, to 8.11% and 8.20% for the same
periods in 1999. Similarly, average deposits and borrowings increased $31.7
million or 10.5% and $33.7 or 11.4% during the three months and six months ended
June 30, 1999, respectively, as compared to the same periods in 1998. The
weighted average rate paid on deposits and borrowings decreased, however, from
4.24% and 4.30% in the three months and six months ended June 30, 1998 to 3.76%
and 3.83% for the same periods in 1999. The decrease in rates was the result of
competitive pricing pressures and a decrease in the prime rate of interest of 75
basis points during the period between September 30 and November 18, 1998.
Additional changes in net interest income resulted from a change in the mix of
interest-earning assets as loans, the Company's highest yielding asset, on
average declined as a percentage of interest-earning assets from 75.1% at June
30, 1998 to 70.0% at June 30, 1999.
(13)
<PAGE>
The result of increases in interest-earning assets and interest-bearing
liabilities, the changes in the mix of interest-earning assets and decreases in
interest rates was a decline in the net interest margin from 5.50% and 5.60%
during the three months and six months ended June 30, 1998, respectively, to
5.05% and 5.07% during the same periods of 1999.
The following table provides further analysis of the increase in net
interest income.
Six months ended June 30, 1999
compared to the six months ended
June 30, 1998
- -----------------------------------------------------------------------
Increase/(Decrease)
due to (a):
Increase -------------------
(Decrease) Rate Volume
----------------------------------
(dollars in thousands)
Interest income:
Loans (b) $ (672) $ (2,905) $ 2,233
Investment securities and
securities available-for-sale 522 (75) 597
Federal funds sold 373 (118) 491
------ ------- ------
Total interest income 223 (3,098) 3,321
------ ------- ------
Interest expense:
Deposits (297) (2,202) 1,905
Borrowings 247 (516) 763
------ ------- ------
Total interest expense (50) (2,718) 2,668
------ ------- ------
Net interest income $ 273 $ (380) $ 653
====== ======= ======
- --------------
(a) The change in interest income and interest expense due to both rate and
volume has 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 totaled $798,000 and $1.8 million for the three months
and six months ended June 30, 1999, respectively, as compared to $759,000 and
$1.4 million for the corresponding periods in 1998. The $39,000 growth in
noninterest income during the second quarter of 1999 as compared to the same
quarter of 1998 was due to an increase in fees charged for services of $74,000,
offset by a decrease of $38,000 in net gains on the sales of mortgage loans.
Noninterest income increased $414,000 during the six months ended June 30, 1999
compared to the same period of 1998 due to increases of $151,000 and $254,000 in
fees charged for services and net gains on the sales of mortgage loans,
respectively.
Service fee income increased in the three months and six months ended June
30, 1999 compared to the same periods in 1998 due to increased cash management
income, a 7% increase in the total number of transaction accounts and increased
fees collected for use of the Company's ATMs by account holders of other
institutions.
Net gains on the sales of mortgage loans decreased $38,000 for the three
months ended June 30, 1999 as compared to the same period in 1998 due to a $20.3
million or 53.5% decrease in the volume of loans sold. For the six months ended
June 30, 1999, the gain on sales exceeded the amount recorded during the same
period in 1998 by $254,000, in spite of a year-to-date decrease in the volume of
loans sold of $10.7 million or 15.4%. This recovery was due primarily to the
implementation of a revised commission system, which decreased the amount of the
incentives paid to mortgage originators, resulting in increased net gains on
sales of mortgage loans.
(14)
<PAGE>
Noninterest Expense
Noninterest expense increased $144,000 or 3.8% and $227,000 or 3.0% for
the three months and six months ended June 30, 1999, respectively, as compared
to the same periods in 1998. A significant portion of these increases in
noninterest expense was due to increases in salaries and benefits of $188,000
and $157,000 for the three months and six months ended June 30, 1999 as compared
to the same periods in 1998. Salaries and benefits increased primarily as a
result of a net increase of eleven full time equivalent employees from June 30,
1998 to June 30, 1999.
YEAR 2000 READINESS DISCLOSURE
The following information represents "Year 2000 Readiness Disclosure" in
conformance with the Year 2000 Information and Readiness Disclosure Act of 1998
(Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998.
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.
As of the date of this report, the Company has completed all phases of the
Plan. In addition, all Systems have been risk-rated in order to identify those
that 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 neither
internally developed software nor any unique hardware which require customized
renovation.
Identified below are several of the "mission critical" Systems and their
current status:
o Data processing - The Company's data processing is provided by a large
national service bureau that 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
that utilizes a four-digit date field. The platform system is expected to be
Year 2000 compliant essentially in its current form. The vendor has completed
testing and is in the process of finalizing year-end event planning.
o 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. All testing and validation has been completed.
(15)
<PAGE>
o 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 been renovated or replaced.
o 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 final phase of on-site testing has been completed.
o Telecommunications and Utilities - The Company's ability to electronically
transmit and receive data to and from its data processing service provider
and others is entirely dependent upon its local and long distance telephone
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.
o 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 completed and
confirmed compliant.
o 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 June 30, 1999, 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. Costs associated with the replacement and/or upgrade of systems
specifically as a result of Year 2000 have totaled $80,000 to date and are
primarily related to the upgrade of ATMs and the replacement of Telephone
Banking systems. Because the Company has neither customized software nor
hardware, no programming costs have been incurred.
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 that will require the
delivery of critical transaction data on magnetic media to its data processing
service provider in Milwaukee, Wisconsin. The Company's data processing service
provider has the capability to process the data and produce all 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 houses the Company's data processing department
that 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 that 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
(16)
<PAGE>
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 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, the Company's customer newsletter and
information available through the Company's internet site. As Year 2000
approaches, the Company will carefully monitor its liquidity position and, if
necessary, access available alternative sources of liquidity in order to meet
funding needs through Year 2000 and beyond.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Market Risk and Interest Rate Sensitivity" in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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 June 28, 1999, the Board of Directors of the Company declared an $.08 per
share cash dividend to common stockholders of record on July 13, 1999, payable
July 28, 1999.
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 19
(b) Reports on Form 8-K
None
(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.
COLUMBIA BANCORP
PRINCIPAL EXECUTIVE OFFICER:
August 13, 1999 /s/ John M. Bond, Jr.
- ------------------------ ----------------------------------
Date: President and
Chief Executive Officer
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
August 13, 1999 /s/ John A. Scaldara, Jr.
- ------------------------ ----------------------------------
Date: Executive Vice President,
Corporate Secretary and
Chief Financial Officer
(18)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,352
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 24,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,366
<INVESTMENTS-CARRYING> 88,118
<INVESTMENTS-MARKET> 75,400
<LOANS> 293,959
<ALLOWANCE> (4,181)
<TOTAL-ASSETS> 457,255
<DEPOSITS> 356,627
<SHORT-TERM> 39,296
<LIABILITIES-OTHER> 2,311
<LONG-TERM> 20,000
0
0
<COMMON> 45
<OTHER-SE> 38,976
<TOTAL-LIABILITIES-AND-EQUITY> 457,255
<INTEREST-LOAN> 13,297
<INTEREST-INVEST> 2,576
<INTEREST-OTHER> 536
<INTEREST-TOTAL> 16,409
<INTEREST-DEPOSIT> 5,152
<INTEREST-EXPENSE> 6,277
<INTEREST-INCOME-NET> 10,132
<LOAN-LOSSES> 227
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,816
<INCOME-PRETAX> 3,879
<INCOME-PRE-EXTRAORDINARY> 2,530
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,530
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.55
<YIELD-ACTUAL> 5.07
<LOANS-NON> 321
<LOANS-PAST> 36
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (3,965)
<CHARGE-OFFS> 141
<RECOVERIES> 130
<ALLOWANCE-CLOSE> (4,181)
<ALLOWANCE-DOMESTIC> (4,181)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
