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 March 31, 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: 4,504,676 shares as of May
7, 1999.
(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 Condition as of
March 31, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income and Comprehensive Income for
the Three Months Ended March 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
(2)
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------------- ----------------
(unaudited)
<S><C>
ASSETS
Cash and due from banks $ 14,095 $ 15,430
Federal funds sold 39,513 17,099
Investment securities ( fair value $75,405
in 1999 and $74,308, in 1998) 75,205 73,782
Securities available-for-sale 10,440 10,234
Residential mortgage loans originated for sale 3,455 17,387
Loans:
Commercial 56,445 49,841
Real estate development and construction 106,424 111,868
Real estate mortgage:
Residential 9,744 9,950
Commercial 17,159 16,280
Retail, principally residential equity
lines of credit 89,100 85,146
Credit card 1,567 1,694
----------------- ----------------
Total loans 280,439 274,779
Less: Unearned income, net of
origination costs 221 366
Allowance for credit losses 4,086 3,965
----------------- ----------------
Loans, net 276,132 270,448
Other real estate owned 3,793 4,043
Property and equipment, net 8,448 8,616
Prepaid expenses and other assets 10,420 10,296
----------------- ----------------
Total assets $ 441,501 $ 427,335
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 66,699 $ 60,372
Interest-bearing deposits 283,009 278,964
----------------- ----------------
Total deposits 349,708 339,336
Short-term borrowings 29,962 27,012
Long-term borrowings 20,000 20,000
Accrued expenses and other liabilities 3,223 2,633
----------------- ----------------
Total liabilities 402,893 388,981
----------------- ----------------
Stockholders' equity:
Common stock, $.01 par value per share; authorized 9,550,000 shares;
outstanding 4,523,662 and 4,561,650 shares,
respectively 45 46
Additional paid in capital 22,818 23,491
Retained earnings 15,744 14,846
Accumulated other comprehensive income 1 (29)
----------------- ----------------
Total stockholders' equity 38,608 38,354
----------------- ----------------
Total liabilities and
stockholders' equity $ 441,501 $ 427,335
================= ================
</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 Ended March 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
--------------- -------------
(unaudited)
<S><C>
Interest income:
Loans $ 6,613 $ 7,022
Investment securities 1,233 996
Federal funds sold 270 31
--------------- -------------
Total interest income 8,116 8,049
--------------- -------------
Interest expense:
Deposits 2,626 2,730
Borrowings 523 404
--------------- -------------
Total interest expense 3,149 3,134
--------------- -------------
Net interest income 4,967 4,915
Provision for credit losses 135 84
--------------- -------------
Net interest income after provision for
credit losses 4,832 4,831
--------------- -------------
Noninterest income:
Gains on sales of mortgage loans, net of costs 411 118
Fees charged for services 372 295
Other 209 204
--------------- -------------
Total noninterest income 992 617
--------------- -------------
Noninterest expense:
Salaries and employee benefits 1,889 1,920
Occupancy, net 494 479
Equipment 323 286
Data processing 219 181
Marketing 124 168
Cash management services 68 71
Professional fees 71 81
Net expense on other real estate owned 40 3
Deposit insurance 34 31
Other 599 558
--------------- -------------
Total noninterest expense 3,861 3,778
--------------- -------------
Income before income taxes 1,963 1,670
Income tax provision 703 596
--------------- -------------
Net income 1,260 1,074
Other comprehensive income, net of tax -
unrealized gains on securities
available-for-sale 30 1
--------------- -------------
Comprehensive income $ 1,290 $ 1,075
=============== =============
Per common share data:
Net income: Basic $ 0.28 $ 0.24
Diluted 0.27 0.23
Cash dividends declared $ 0.08 $ 0.07
=============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
(4)
<PAGE>
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
1999 1998
--------------- -----------------
(unaudited)
<S><C>
Cash flows from operating activities:
Net income $ 1,260 $ 1,074
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 281 277
Amortization of loan fee income (359) (480)
Provision for credit losses 135 84
Provision for losses on other real estate owned - 15
Gains on sales of mortgage loans, net of costs (411) (118)
Proceeds from sales of residential
mortgage loans originated for sale 41,590 31,986
Disbursements for residential mortgage loans
originated for sale (27,247) (40,481)
Loan fees deferred, net of origination costs 214 522
Decrease (increase) in prepaid expenses and other assets 442 (500)
Increase in accrued expenses and other liabilities 592 527
--------------- -----------------
Net cash provided by (used in) operating activities 16,497 (7,094)
--------------- -----------------
Cash flows provided by (used in) investing activities:
Loan disbursements in excess of principal repayments (4,685) (3,559)
Loan purchases (1,716) (386)
Loan sales 683 4,100
Purchases of investment securities (13,097) (9,257)
Purchases of investment securities available-for-sale (157) (157)
Proceeds from maturities and principal repayments
of investment securities 11,684 5,199
Proceeds from maturities and principal repayments of
securities available-for-sale 1 500
Additions to other real estate owned (107) (155)
Sales of other real estate owned 401 644
Purchases of property and equipment (123) (162)
Purchase of life insurance (470) -
Increase in cash surrender value of life insurance (115) (52)
--------------- -----------------
Net cash used in investing activities (7,701) (3,285)
--------------- -----------------
Cash flows provided by (used in) financing activities:
Net increase in deposits 10,372 7,807
Increase in short-term borrowings 2,950 8,783
Cash dividends distributed on common stock (365) (308)
Net proceeds from stock options and warrants
exercised and common stock exchanged 44 182
Purchase of common stock (718) -
--------------- -----------------
Net cash provided by financing activities 12,283 16,464
--------------- -----------------
Net increase in cash and cash equivalents 21,079 6,085
Cash and cash equivalents at beginning of period 32,529 15,511
--------------- -----------------
Cash and cash equivalents at end of period $ 53,608 $ 21,596
=============== =================
Supplemental information:
Interest paid on deposits and borrowings $ 3,244 $ 3,198
Income taxes paid 15 125
Transfer of loans to other real estate owned 44 286
=============== =================
</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
ended March 31, 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 March 31, 1999 and for the
three months ended March 31, 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 three months ended March 31, 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, 1999. 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
is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------
1999 1998
-----------------------------------------------------------
Basic Diluted Basic Diluted
-------------- -------------- ------------- ---------------
<S><C>
Net income $1,260,394 $1,260,394 $1,073,871 $1,073,871
============== ============== ============= ===============
Weighted average shares outstanding (a) 4,546,087 4,546,087 4,422,790 4,422,790
Dilutive securities (a) - 80,241 - 203,140
-------------- -------------- ------------- ---------------
Adjusted weighted average shares used in EPS
computation (a) 4,546,087 4,626,328 4,422,790 4,625,930
============== ============== ============= ===============
Net income per common share $ 0.28 $ 0.27 $ 0.24 $ 0.23
============== ============== ============= ===============
</TABLE>
- --------------------------------
(a) Weighted average shares outstanding and dilutive securities for
1998 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 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 March 31, 1999 whose contract amounts represent
potential credit risk is as follows:
March 31,
1999
------------------------------------------- ------------------------
(dollars in thousands)
Commitments to extend credit (a) $160,728
Standby letters of credit 14,323
Limited recourse on mortgage loans sold 3,720
- ----------------------------------
(a) Includes unused lines of credit totalling $157.4 million regardless of
whether fee paid and whether adverse change clauses exist. The amount also
includes commitments to extend new credit totalling $3.3 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 which 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 fourteen 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 sources of liquidity ("financing activities" as
used in the Consolidated Statements of Cash Flows) is its deposit base. At March
31, 1999, total deposits were $349.7 million. Core deposits, defined as all
deposits except certificates of deposit of $100,000 or more, totalled $322.4
million or 92.2% 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 March 31, 1999, outstanding advances from the FHLB totalled $20.0
million. Collateral must be pledged to the FHLB before advances can be obtained.
At March 31, 1999 the Company's approved credit limit with the FHLB was $45.0
million. However, the Company had collateral sufficient to borrow up to $77.6
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 March 31, 1999, federal funds sold totalled
$39.5 million or 8.9% of total assets.
(8)
<PAGE>
Capital Resources
Total stockholders' equity was $38.6 million at March 31, 1999,
representing an increase of $254,000 or .7% from December 31, 1998. The growth
in stockholders' equity during 1999 was primarily comprised of the earnings of
the Company of $1.3 million less cash dividends declared on common stock of
$362,000. In addition, during the first quarter of 1999, the Company repurchased
45,800 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 $14.00 to $16.75, which reduced
stockholders' equity by $718,000.
Dividends for the first quarter of 1999 were $.08 per share, compared
to $.07 per share in the first quarter of 1998.
The following table summarizes the Company's risk-based capital ratios:
<TABLE>
<CAPTION>
Columbia Bancorp
--------------------------------- Minimum
March 31, December 31, Regulatory
1999 1998 Requirements
--------------------------------- --------------- --------------------- --------------
<S><C>
Risk-based capital ratios:
Tier 1 capital 11.54% 11.49% 4.00%
Total capital 12.77 12.68 8.00
Tier 1 leverage ratios 8.95 9.00 3.00
</TABLE>
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
March 31, 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
(9)
<PAGE>
falling interest rates, a short-term positive interest sensitivity gap position
would generally result in a decrease in net interest income.
The Company has managed its interest rate risk primarily through the
origination of variable rate loans. At March 31, 1999, $203.9 million of the
total loan portfolio, or 72.7%, represented variable rate loans. Of this amount,
$183.7 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.
<TABLE>
<CAPTION>
After One
One Year Through After
or Less Three Years Three Years Total
--------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S><C>
Federal funds sold $ 39,513 $ - $ - $ 39,513
Investment securities and
securities available-for-sale 43,769 38,098 3,778 85,645
Loans, exclusive of nonaccrual loans 213,184 21,035 49,264 283,483
---------------------------------------------------------------
Interest-earning assets 296,466 59,133 53,042 408,641
---------------------------------------------------------------
Interest-bearing deposits 253,605 26,998 2,406 283,009
Other borrowings 29,962 - 20,000 49,962
---------------------------------------------------------------
Interest-bearing liabilities 283,567 26,998 22,406 332,971
---------------------------------------------------------------
Interest sensitivity gap $ 12,899 $ 32,135 $ 30,636 $ 75,670
===============================================================
Cumulative interest sensitivity gap $ 12,899 $ 45,034 $ 75,670 $ 75,670
===============================================================
Cumulative interest
sensitivity gap ratio 2.92% 10.20% 17.14%
=================================================
</TABLE>
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 $13.9 million or 80.1%
from December 31, 1998 to March 31, 1999 due primarily to less first mortgage
refinancing activity, influenced heavily by the interest rate environment.
Loans and Nonperforming Assets:
At March 31, 1999, the Company's loan portfolio, net of unearned
income, totalled $280.2 million, or 63.5% of its total assets of $441.5 million.
The categories of loans in the Company's portfolio are commercial, real estate
development and construction, residential and commercial mortgages and consumer.
(10)
<PAGE>
Since December 31, 1998, total loans increased $5.8 million, or 2.1%.
Commercial loans and retail loans, principally residential equity lines of
credit, accounted for substantially all of the increase in total loans
outstanding, increasing $6.6 million and $4.0 million, respectively, since
December 31, 1998. This was partially offset, however, by a decrease of $5.4
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 March 31, 1999:
Amount Percent
------------------------------------------------------------------
(dollars in thousands)
Residential construction (a) $ 49,959 46.9%
Residential land development 38,282 36.0
Residential land acquisition (b) 9,434 8.9
Commercial construction 8,749 8.2
--------- -----
$ 106,424 100.0%
========= =====
- ---------------------------------
(a) Includes $12.1 million of loans to individuals for construction of
primary personal residences.
(b) Includes $2.0 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 March 31, 1999, loans
to individuals for the construction of primary personal residences accounted for
$12.1 million of the $50.0 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 $37.9 million of residential construction loans represented loans to
residential builders and developers. Approximately 61% 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 March 31, 1999, totalling $38.3 million or 36.0% 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
(11)
<PAGE>
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.
March 31, December 31, March 31,
1999 1998 1998
- -------------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans (a) $ 411 $ 2,995 $ 1,708
Other real estate owned 3,793 4,043 4,404
---------- ---------- ----------
Total nonperforming assets $ 4,204 $ 7,038 $ 6,112
========== ========== ==========
Loans past-due 90 days or more $ 68 $ 63 $ 152
========== ========== ==========
------------------------------
(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 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 March 31, 1999 was the
Company's portfolio of other real estate owned totalling $3.8 million. At March
31, 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 $3.5 million. The Company
has entered into a contract with an independent third-party contractor to
manage the completion of development work. As of March 31, 1999, 32 single
family and 15 townhouse lots had been sold. Of the unsold lots, all single
family and 110 townhouse lots are under contract of sale with a takedown
schedule which runs through March 2001. The remaining lots are being marketed
for sale.
o A construction project consisting of a 24 unit residential condominium
building with a carrying value of $43,000. At March 31, 1999, 23 of the 24
units had been sold. The remaining unit is being marketed for sale.
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 totalled $411,000 at March 31, 1999 and consisted
primarily of four real estate development and construction projects totalling
$296,000.
Impaired loans at March 31, 1999 totalled $298,000 and consisted of
residential construction and commercial 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 March 31, 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 March 31, 1999 with potential
weaknesses which 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
(12)
<PAGE>
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, bank
supervisory authorities and independent consultants and accountants periodically
review the loan portfolio. At March 31, 1999 the Allowance was 1.46% of total
loans, net of unearned income. The Allowance at March 31, 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.
Three months ended March 31,
----------------------------
1999 1998
- ---------------------------------------------------------------------------
(dollars in thousands)
Allowance for credit losses -
beginning of period $ 3,965 $ 3,632
Provision for credit losses 135 84
Charge-offs (112) (43)
Recoveries 98 5
-------- ---------
Allowance for credit losses -
end of period $ 4,086 $ 3,678
======== =========
Allowance as a percentage of loans
receivable, net of unearned income 1.46% 1.39%
Allowance as a percentage of nonperforming
loans and loans past-due 90 days or more (a) 853.03% 197.74%
======== =========
----------------------------------
(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 for the three months
ended March 31, 1999, representing diluted net income per share of $0.27. Net
income was $1.1 million for the corresponding period in 1998, representing
diluted net income per share of $0.23.
Net Interest Income
Net interest income totalled $5.0 million for the three months ended
March 31, 1999, compared to $4.9 million for the same period in 1998. Net
interest income remained relatively unchanged 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 $42.9 million or 12.3% during the three months ended March 31,
1999 compared to the same period 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 9.36% in the first three months of 1998 to 8.40% for the same
period in 1999. Similarly, deposits and borrowings increased $31.0 million or
10.6% during the three months ended March 31, 1999 as compared to the same
period in 1998. The weighted average rate paid on deposits and borrowings
decreased, however, from 4.36% in the first three months of 1998 to 3.95% for
the same period 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 79.8% at March
31, 1998 to 72.7% at March 31, 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 5.71% during the
first quarter of 1998 to 5.08% during the same period of 1999.
The following table provides further analysis of the increase in net interest
income.
Three months ended March 31, 1999
compared to the three months ended
March 31, 1998
- --------------------------------------------------------------------------------
Increase/(Decrease)
due to (a):
Increase -------------------------
(Decrease) Rate Volume
----------------------------------------
(dollars in thousands)
Interest income:
Loans (b) $ (409) $ (4,887) $ 4,478
Investment securities and
securities available-for-sale 237 2 235
Federal funds sold 239 (114) 353
-------- --------- --------
Total interest income 67 (4,999) 5,066
-------- --------- --------
Interest expense:
Deposits (104) (3,922) 3,818
Borrowings 119 (1,113) 1,232
-------- --------- --------
Total interest expense 15 (5,035) 5,050
-------- --------- --------
Net interest income $ 52 $ 36 $ 16
======== ========= ========
---------------------------
(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 totalled $1.0 million for the three months ended
March 31, 1999, as compared to $617,000 for the corresponding period in 1998.
Growth in noninterest income primarily reflected an increase in gains on sales
of mortgage loans originated for sale, net of deferred costs, of $293,000 for
the three months ended March 31, 1999, as compared to the same period in 1998.
The increase was a result of higher loan sale volume, as total mortgage loans
sold increased from $32.0 million during the three months ended March 31, 1998,
to $41.6 million for the same period in 1999. In addition, the Company
restructured the manner in which incentives are calculated and paid to mortgage
originators, resulting in increased gains on sales of mortgage loans.
Service fee income increased $77,000 in the first three months of 1999
compared to the same period in 1998 due to increased cash management income, a
10% 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.
Noninterest Expense
Noninterest expense increased $83,000 or 2.2% for the three months
ended March 31, 1999 as compared to the same period in 1998. Increases in
expense were experienced in occupancy, equipment, data processing, deposit
insurance and other noninterest expenses, reflecting general growth in business
activity. These increases were mitigated by decreases in salaries and employee
benefits, marketing, cash management and professional fees. None of the
individual variances from 1998 to 1999 exceeded $50,000.
(14)
<PAGE>
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 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:
|X| 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 has completed testing and is in the process of performing a final
analysis of those test results.
|X| 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.
|X| 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 scheduled for replacement in the normal
course of business.
|X| 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.
(15)
<PAGE>
|X| 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 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.
|X| 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.
|X| 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 March 31, 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 totalled $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. 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 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 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 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.
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.
(16)
<PAGE>
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
At the Company's Annual Meeting of Stockholders held April 27, 1999, the
following directors were elected based upon the identified voting statistics to
serve a three-year term expiring upon the date of the Company's 2002 Annual
Meeting or until their respective successors are duly elected and qualified.
Votes Cast
----------------------------------------------
For Withheld Total
----- -------- -----
John M. Bond, Jr. 3,511,973 11,040 3,523,013
William L. Hermann 3,512,523 10,490 3,523,013
Charles C. Holman 3,513,773 9,240 3,523,013
Harry L. Lundy, Jr. 3,512,873 10,140 3,523,013
James R. Moxley, III 3,447,910 75,103 3,523,013
Mary S. Scrivener 3,513,173 9,840 3,523,013
Theodore G. Venetoulis 3,501,159 21,854 3,523,013
The following are those directors of the Company who will continue to
serve as directors until the expiration of their terms upon the date of the
Company's annual meeting in their respective class years or until their
respective successors are duly elected and qualified.
Class of 2000 Class of 2001
------------- -------------
Anand S. Bhasin Hugh F.Z. Cole, Jr.
Garnett Y. Clark, Jr. G. William Floyd
Robert J. Gaw Herschel L. Langenthal
Maurice M. Simpkins Richard E. McCready
Robert N. Smelkinson James R. Moxley, Jr.
(17)
<PAGE>
ITEM 5. OTHER INFORMATION
On March 29, 1999, the Board of Directors of the Company declared
an $.08 per share cash dividend to common stockholders of record on April 13,
1999, payable April 23, 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 20
(b) Reports on Form 8-K
None
(18)
<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:
_______________________ ____________________________________
Date President and
Chief Executive Officer
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
_______________________ ____________________________________
Date Executive Vice President,
Corporate Secretary and
Chief Financial Officer
(19)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,095
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 39,513
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,440
<INVESTMENTS-CARRYING> 75,205
<INVESTMENTS-MARKET> 75,405
<LOANS> 283,673
<ALLOWANCE> (4,086)
<TOTAL-ASSETS> 441,501
<DEPOSITS> 349,708
<SHORT-TERM> 29,962
<LIABILITIES-OTHER> 3,223
<LONG-TERM> 20,000
0
0
<COMMON> 45
<OTHER-SE> 38,563
<TOTAL-LIABILITIES-AND-EQUITY> 441,501
<INTEREST-LOAN> 6,613
<INTEREST-INVEST> 1,233
<INTEREST-OTHER> 270
<INTEREST-TOTAL> 8,116
<INTEREST-DEPOSIT> 2,626
<INTEREST-EXPENSE> 3,149
<INTEREST-INCOME-NET> 4,967
<LOAN-LOSSES> 135
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,861
<INCOME-PRETAX> 1,963
<INCOME-PRE-EXTRAORDINARY> 1,260
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,260
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 5.08
<LOANS-NON> 411
<LOANS-PAST> 68
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (3,965)
<CHARGE-OFFS> 112
<RECOVERIES> 98
<ALLOWANCE-CLOSE> (4,086)
<ALLOWANCE-DOMESTIC> (4,086)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
