FORM 10-Q--QUARTERLY REPORT UNDER SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the quarterly period ended September 30, 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: 4,506,035 shares as of
November 9, 1999.
<PAGE>
COLUMBIA BANCORP
CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Condition as of
September 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income and Comprehensive Income
for the Three Months and Nine Months Ended
September 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
(2)
<PAGE>
PART I ITEM 1. FINANCIAL STATEMENTS
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,929 $ 15,430
Federal funds sold 4,451 17,099
Investment securities (fair value $98,014
in 1999 and $74,308 in 1998) 98,624 73,782
Securities available-for-sale 11,095 10,234
Residential mortgage loans originated for sale 2,994 17,387
Loans:
Commercial 75,193 49,841
Real estate development and construction 98,469 111,868
Real estate mortgage:
Residential 10,078 9,950
Commercial 19,916 16,280
Retail, principally residential equity lines of credit 99,629 85,146
Credit card 2,120 1,694
--------- ---------
Total loans 305,405 274,779
Less: Unearned income, net of origination costs 66 366
Allowance for credit losses 4,227 3,965
--------- ---------
Loans, net 301,112 270,448
Other real estate owned 3,086 4,043
Property and equipment, net 8,114 8,616
Prepaid expenses and other assets 10,682 10,296
--------- ---------
Total assets $ 460,087 $ 427,335
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 70,914 $ 60,372
Interest-bearing deposits 283,110 278,964
--------- ---------
Total deposits 354,024 339,336
Short-term borrowings 43,660 27,012
Long-term borrowings 20,000 20,000
Accrued expenses and other liabilities 2,492 2,633
--------- ---------
Total liabilities 420,176 388,981
--------- ---------
Stockholders' equity:
Common stock, $.01 par value per share;
authorized 10,000,000 shares; outstanding
4,506,035 and 4,561,650 shares, respectively 45 46
Additional paid-in capital 22,370 23,491
Retained earnings 17,629 14,846
Accumulated other comprehensive income (133) (29)
--------- ---------
Total stockholders' equity 39,911 38,354
--------- ---------
Total liabilities and stockholders' equity $ 460,087 $ 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 and Nine Months Ended September 30, 1999 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 7,083 $ 7,045 $ 20,380 $ 21,014
Investment securities 1,603 1,227 4,179 3,281
Federal funds sold 100 250 636 413
-------- -------- -------- --------
Total interest income 8,786 8,522 25,195 24,708
-------- -------- -------- --------
Interest expense:
Deposits 2,509 2,843 7,661 8,292
Borrowings 706 536 1,831 1,414
-------- -------- -------- --------
Total interest expense 3,215 3,379 9,492 9,706
-------- -------- -------- --------
Net interest income 5,571 5,143 15,703 15,002
Provision for credit losses 63 334 290 517
-------- -------- -------- --------
Net interest income after provision
for credit losses 5,508 4,809 15,413 14,485
-------- -------- -------- --------
Noninterest income:
Fees charged for services 452 374 1,235 1,006
Gains on sales of mortgage loans, net of costs 149 483 757 837
Other 178 188 577 578
-------- -------- -------- --------
Total noninterest income 779 1,045 2,569 2,421
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits 2,126 2,033 6,097 5,787
Occupancy, net 506 485 1,498 1,406
Equipment 296 309 934 893
Data processing 254 192 700 576
Marketing 155 107 397 405
Cash management services 132 91 304 255
Professional fees 67 119 177 265
Net expense (income) on other real estate owned 16 (31) 5 (39)
Deposit insurance 35 32 104 94
Other 670 529 1,857 1,813
-------- -------- -------- --------
Total noninterest expense 4,257 3,866 12,073 11,455
-------- -------- -------- --------
Income before income taxes 2,030 1,988 5,909 5,451
Income tax provision 693 697 2,042 1,910
-------- -------- -------- --------
Net income 1,337 1,291 3,867 3,541
Other comprehensive income, net of tax - unrealized
gains (losses) on securities available-for-sale (89) -- (104) 1
-------- -------- -------- --------
Comprehensive income $ 1,248 $ 1,291 $ 3,763 $ 3,542
======== ======== ======== ========
Per common share data:
Net income: Basic $ 0.30 $ 0.28 $ 0.86 $ 0.78
Diluted 0.29 0.28 0.84 0.77
Cash dividends declared 0.08 0.07 0.24 0.21
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
(4)
<PAGE>
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,867 $ 3,541
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 851 834
Amortization of loan fee income (1,054) (1,327)
Provision for credit losses 290 517
Provision for losses on other real estate owned 8 41
Gains on sales of mortgage loans, net of costs (757) (837)
Proceeds from sales of mortgage loans originated for sale 78,834 112,598
Disbursements for residential mortgage loans originated for sale (63,683) (116,937)
Loan fees deferred, net of origination costs 754 1,147
Decrease (increase) in prepaid expenses and other assets 310 (762)
Increase (decrease) in accrued expenses and other liabilities (138) 584
--------- ---------
Net cash provided by (used in) operating activities 19,282 (601)
--------- ---------
Cash flows provided by (used in) investing activities:
Loan disbursments in excess of principal repayments (29,261) (6,513)
Loan purchases (4,631) (3,561)
Loan sales 3,195 6,657
Purchases of investment securities (54,863) (33,586)
Purchases of investment securities available-for-sale (1,035) (3,157)
Proceeds from maturities and principal repayments of
investment securities 30,040 25,997
Proceeds from maturities and principal repayments of
securities available-for-sale 1 701
Additions to other real estate owned (466) (1,405)
Sales of other real estate owned 1,458 2,175
Purchases of property and equipment (369) (525)
Purchase of life insurance (470) --
Increase in cash surrender value of life insurance (156) (137)
--------- ---------
Net cash used in investing activities (56,557) (13,354)
--------- ---------
Cash flows provided by (used in) financing activities:
Net increase in deposits 14,688 17,314
Increase in short-term borrowings 16,648 5,362
Increase in long-term borrowings -- 15,000
Cash dividends distributed on common stock (1,088) (945)
Net proceeds from stock options and warrants
exercised and common stock exchanged 158 781
Purchase of common stock (1,280) --
--------- ---------
Net cash provided by financing activities 29,126 37,512
--------- ---------
Net increase (decrease) in cash and cash equivalents (8,149) 23,557
Cash and cash equivalents at beginning of period 32,529 15,511
--------- ---------
Cash and cash equivalents at end of period $ 24,380 $ 39,068
--------- ---------
Supplemental information:
Interest paid on deposits and borrowings $ 9,372 $ 9,650
Income taxes paid 2,070 1,990
Transfer of loans to other real estate owned 43 334
========= =========
</TABLE>
(5)
<PAGE>
COLUMBIA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three months and nine months
ended September 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 September 30, 1999 and for
the three months and nine months ended September 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 nine months ended September 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 - INVESTMENTS
The amortized cost and estimated fair values of investment securities
and securities available-for-sale at September 30, 1999 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Treasury securities $23,998 $ 31 $ -- $24,029
Federal agency securities 73,603 7 615 72,995
Mortgage-backed securities 1,023 2 35 990
----------------------------------------------------------------
Total $98,624 $ 40 $ 650 $98,014
----------------------------------------------------------------
Securities available-for-sale:
Trust preferred stock $ 9,903 $ -- $ 222 $ 9,681
Mortgage-backed securities 4 -- -- 4
Investment in Federal Home
Loan Bank stock 1,410 -- -- 1,410
----------------------------------------------------------------
Total $11,317 $ -- $ 222 $11,095
----------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair values of investment securities
and securities available-for-sale at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Treasury securities $53,978 $ 403 $ -- $54,381
Federal agency securities 19,002 124 -- 19,126
Mortgage-backed securities 802 2 3 801
-----------------------------------------------------------------
Total $73,782 $ 529 $ 3 $74,308
-----------------------------------------------------------------
Securities available-for-sale:
Trust preferred stock $ 9,152 $ 15 $ 64 $ 9,103
Mortgage-backed securities 5 1 -- 6
Investment in Federal Home
Loan Bank stock 1,125 -- -- 1,125
-----------------------------------------------------------------
Total $10,282 $ 16 $ 64 $10,234
-----------------------------------------------------------------
</TABLE>
(7)
<PAGE>
NOTE 4 - PER SHARE DATA
Information relating to the calculations of earnings per common share
("EPS") is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------
1999 1998
----------------------- ----------------------
Basic Diluted Basic Diluted
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net income $1,336,748 $1,336,748 $1,291,345 $1,291,345
======================= =======================
Weighted average shares outstanding 4,505,756 4,505,756 4,571,841 4,571,841
Dilutive securities -- 60,945 -- 88,308
----------------------- -----------------------
Adjusted weighted average shares used in
EPS computation 4,505,756 4,566,701 4,571,841 4,660,149
======================= =======================
Net income per common share $ 0.30 $ 0.29 $ 0.28 $ 0.28
======================= =======================
Nine Months Ended September 30,
------------------------------------------------
1999 1998
------------------------------------------------
Basic Diluted Basic Diluted
----------------------- -----------------------
Net income $3,866,732 $3,866,732 $3,540,778 $3,540,778
=================================================
Weighted average shares outstanding 4,519,283 4,519,283 4,514,949 4,514,949
Dilutive securities -- 70,305 -- 102,618
-------------------------------------------------
Adjusted weighted average shares used in
EPS computation 4,519,283 4,589,588 4,514,949 4,617,567
=================================================
Net income per common share $ 0.86 $ 0.84 $ 0.78 $ 0.77
=================================================
</TABLE>
NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing needs of
customers. These financial instruments include commitments to extend credit,
standby letters of credit and mortgage loans sold with limited recourse.
The Company applies the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. A summary
of the financial instruments at September 30, 1999 whose contract amounts
represent potential credit risk is as follows:
September 30,
1999
-------------------------------------------------------------------
(dollars in thousands)
Commitments to extend credit (a) $187,606
Standby letters of credit 13,185
Limited recourse on mortgage loans sold 2,735
- -------------------------------------
(a) Includes unused lines of credit totalling $180.9 million regardless of
whether fee paid and whether adverse change clauses exist. The amount also
includes commitments to extend new credit totalling $6.7 million.
(8)
<PAGE>
NOTE 6 - PROPOSED MERGER
On September 28, 1999, the Company announced a definitive agreement
whereby Suburban Bancshares, Inc. ("Suburban"), the bank holding company for
Suburban Bank of Maryland, will merge into the Company ("the Merger"). The
Merger is intended to be a tax-free reorganization for federal income tax
purposes and to be accounted for as a pooling-of-interests.
Under the Merger Agreement, each share of Suburban common stock
outstanding immediately prior to the effective time of the Merger will be
converted into 0.2196 shares of the Company's common stock (rounded to the
nearest hundredth of a share, with cash being paid in lieu of fractional shares
of interests). The conversion ratio is subject to increase, but not decrease, to
the extent necessary to cause the value of the Company's shares into which each
share of Suburban common stock shall have been converted to be $3.00 per share
(based on the mean of the daily high and low trade prices of the Company's
common stock for the 10 trading days ending on the trading day that is three
days before the effective date of the Merger, or, if there are no trades, the
daily high bid and low asked prices, reported on NASDAQ), provided that the
adjusted conversion ratio may not exceed 0.2338 shares of the Company's common
stock per share of Suburban common stock. Options to purchase Suburban common
stock outstanding at the effective time of the Merger will be converted as to
each whole share subject to such option into a proportionally adjusted option to
purchase, for the same aggregate exercise price, the number of whole shares of
Suburban common stock subject to the option multiplied by the conversion ratio.
Consummation of the Merger is subject to various conditions, including (i)
the approval of the shareholders of the Company and Suburban, (ii) the approval
of the appropriate state and federal bank regulators and other governmental
agencies, (iii) the receipt of a letter from the Company's independent auditors
that the Merger will qualify for pooling-of-interests accounting treatment, (iv)
the receipt of an opinion of counsel that the Merger will be treated for federal
tax purposes as a tax-free reorganization, and (v) other customary conditions to
closing.
In connection with the Merger Agreement, the Company and Suburban entered into
an option agreement which provides the Company with the right to purchase up to
19.9% of Suburban's common stock at an exercise price of $2.313 per share
(subject to adjustment in certain circumstances), upon the occurrence of certain
events described in the option agreement. The Company and Suburban also entered
into a substantially identical agreement which provides Suburban the right to
purchase up to 9.9% of the Company's common stock at an exercise price of
$13.063 per share (subject to adjustment in certain circumstances), upon the
occurrence of certain events described in the option agreement. The options were
granted by each of the Company and Suburban as a condition to the other party's
entering into the Merger Agreement.
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 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
(9)
<PAGE>
organizations through fourteen branch banking offices (a fifteenth is scheduled
to open in the fourth quarter of 1999), three mortgage loan origination offices
and fifteen Automated Teller Machines. Deposits in the Bank are insured by the
Federal Deposit Insurance Corporation. 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 September
30, 1999, total deposits were $354.0 million. Core deposits, defined as all
deposits except certificates of deposit of $100,000 or more, totalled $324.0
million or 91.5% of total deposits. In addition, the Bank has established a
credit line with the Federal Home Loan Bank of Atlanta ("FHLB") as an additional
source of liquidity. The FHLB has established a credit availability for the Bank
at 14% of the Bank's total assets. Total assets are based on the most recent
quarterly financial information submitted by the Bank to the appropriate
regulatory agency. The ability to borrow funds is subject to the Bank's
continued creditworthiness, compliance with the terms and conditions of the
Advance Application and the pledging of sufficient eligible collateral to secure
advances. At September 30, 1999 the Company's approved credit limit with the
FHLB was $64.0 million and advances outstanding totaled $28.2 million. However,
the Company had collateral sufficient to borrow up to $105.4 million. Individual
advances in excess of $5 million or total advances above the approved $64.0
million limit require FHLB approval. Liquidity is also provided through the
Company's overnight investment in federal funds sold, as well as securities
available-for-sale and investment securities with maturities less than one year.
At September 30, 1999, federal funds sold totaled $4.5 million or 1.0% of total
assets, investments available-for-sale totaled $11.1 million or 2.4% of total
assets and the fair value of investment securities due in one year or less was
$39.0 million or 8.5% of total assets.
Capital Resources
Total stockholders' equity was $39.9 million at September 30, 1999,
representing an increase of $1.6 million or 4.1% from December 31, 1998. The
growth in stockholders' equity during 1999 was primarily comprised of the
earnings of the Company of $3.9 million less cash dividends declared on common
stock of $1.1 million. In addition, during the first nine 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 nine months of 1999 were $.24 per share,
compared to $.21 per share in the first nine months of 1998.
The following table summarizes the Company's risk-based capital ratios:
<TABLE>
<CAPTION>
Columbia Bancorp Minimum
-------------------------------------
September 30, December 31, 1998 Regulatory
1999 Requirements
---------------------------------- ------------------- --------------------- ----------------
<S> <C> <C> <C>
Risk-based capital ratios:
Tier 1 capital 11.29% 11.49% 4.00%
Total capital 12.49 12.68 8.00
Tier 1 leverage ratio 8.77 9.00 3.00
</TABLE>
(10)
<PAGE>
Market Risk and Interest Rate Sensitivity
- -----------------------------------------
The Company's interest rate risk represents the level of exposure it
has to fluctuations in interest rates and is primarily measured as the change in
earnings and the theoretical market value of equity that results from changes in
interest rates. 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.
One tool used by the Company to assess and manage its interest rate
risk is the gap analysis. The gap analysis measures the mismatch in repricing
between interest-sensitive assets and interest-sensitive liabilities and
provides a general indication of the interest sensitivity of the balance sheet
at a specified point in time. By limiting the size of the gap position, the
Company can limit the net interest income at risk arising from repricing
imbalances. The following table summarizes the anticipated maturities or
repricing of the Company's interest-earning assets and interest-bearing
liabilities as of September 30, 1999 and the Company's interest sensitivity gap
position at that date. A negative sensitivity gap for any time period indicates
that more interest-bearing liabilities will mature or reprice during that time
period than interest-earning assets. 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 negative interest
sensitivity gap position would generally result in a decrease in net interest
income, and during periods of falling interest rates, a short-term negative
interest sensitivity gap position would generally result in an increase in net
interest income (assuming all earning assets and interest-bearing liabilities
are affected by a rate change equally and simultaneously).
<TABLE>
<CAPTION>
After One
One Year Through After
or Less Three Years Three Years Total
- -------------------------------------------------------------------------------------------------------
dollars in thousands
<S> <C> <C> <C> <C>
Federal funds sold $ 4,451 $ - $ - $ 4,451
Investment securities and
securities available for sale 50,341 54,605 4,773 109,719
Loans, exclusive of nonaccrual loans 217,570 24,003 66,511 308,084
-----------------------------------------------------------
Interest earning assets 272,382 78,608 71,284 422,254
-----------------------------------------------------------
Interest-bearing deposits 247,129 33,185 2,796 283,110
Other borrowings 43,660 - 20,000 63,660
-----------------------------------------------------------
Interest-bearing liabilities 290,789 33,185 22,796 346,770
-----------------------------------------------------------
Interest sensitivity gap $ (18,427) $ 45,423 $ 48,488 $ 75,484
===========================================================
Cumulative interest sensitivity gap $ (18,427) $ 26,996 $ 75,484
===========================================================
Cumulative interest sensitivity
gap ratio -4.01% 5.87% 16.41%
===========================================================
</TABLE>
11
<PAGE>
The Company also uses a computer simulation analysis to assess and
manage its interest rate risk. The simulation analysis assumes an immediate,
parallel shift of 200 basis points in the Treasury Yield Curve. The analysis
measures the potential change in earnings and in the market value of portfolio
equity over a one-year time horizon and captures optionality factors such as
call features imbedded in investment and loan portfolio contracts. Measured
based on August 31, 1999 data, the simulation analysis provided the following
profile of the Company's interest rate risk:
<TABLE>
<CAPTION>
Immediate Rate Change
---------------------
<S> <C> <C> <C>
+200BP -200BP Policy
------ ------ ------
Net interest income at risk 0.0% -3.7% +/-7.5%
Economic value of equity -2.1% -4.5% +/-20.0%
</TABLE>
Based on the mix of assets and liabilities and the current interest rate
environment, management does not believe there has been a significant change
since August 31, 1999.
Both of the above tools used to assess interest rate risk have
strengths and weaknesses. Because the gap analysis reflects a static position at
a single point in time, it is limited in quantifying the total impact of market
rate changes which do not affect all earning assets and interest-bearing
liabilities equally or simultaneously. In addition, gap reports depict the
existing structure, excluding exposure arising from new business. While the
simulation process is a powerful tool in analyzing interest rate sensitivity,
many of the assumptions used in the process are highly qualitative and
subjective and are subject to the risk that past historical activity may not
generate accurate predictions of the future. Both measurement tools, however,
provide a comprehensive evaluation of the Company's exposure to changes in
interest rates, enabling management to control the volatility of earnings.
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 $14.4 million or 82.8%
from December 31, 1998 to September 30, 1999 due primarily to less first
mortgage refinancing activity, influenced heavily by the interest rate
environment.
Loans and Nonperforming Assets:
At September 30, 1999, the Company's loan portfolio, net of unearned
income, totalled $305.4 million, or 66.4% of its total assets of $460.1 million.
The categories of loans in the Company's portfolio are commercial, real estate
development and construction, residential and commercial mortgages and consumer.
Since December 31, 1998, total loans increased $30.6 million, or 11.1%.
Commercial loans and retail loans, principally residential equity lines of
credit, accounted for substantially all of the increase in total loans
outstanding, increasing by $25.4 million and $14.5 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. These increases, however, were partially offset
by a decrease of $13.4 million in real estate development and construction
loans.
(12)
<PAGE>
Real estate development and construction loans continue to constitute
a significant portion of the Company's lending activities, and consisted of the
following at September 30, 1999:
Amount Percent
- -----------------------------------------------------------
(dollars in thousands)
Residential construction (a) $ 46,237 47.0%
Residential land development 33,995 34.5
Residential land acquisition (b) 9,856 10.0
Commercial construction 8,381 8.5
------------ ------
$ 98,469 100.0%
============ ======
- ------------------------
(a) Includes $11.7 million of loans to individuals for construction of primary
personal residences.
(b) Includes $1.8 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 September 30, 1999,
loans to individuals for the construction of primary personal residences
accounted for $11.7 million of the $46.2 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 $34.5 million of residential construction loans represented loans
to residential builders and developers. Approximately 64% 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 September 30, 1999, totaling $34.0 million or 34.5% 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.
(13)
<PAGE>
The following table provides information concerning nonperforming
assets and past-due loans:
September 30, December 31, September 30,
1999 1998 1998
- ------------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans (a) $ 315 $ 2,995 $ 624
Other real estate owned 3,086 4,043 4,145
----------- ------------- -----------
Total nonperforming assets $ 3,401 $ 7,038 $ 4,769
=========== ============= ===========
Loans past-due 90 days or more $ 9 $ 63 $ 222
=========== ============= ===========
- ------------------------------
(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 September 30, 1999 was
the Company's portfolio of other real estate owned totaling $3.1 million. At
September 30, 1999, other real estate owned consisted primarily of a residential
development project with a remaining 28 single family and 159 townhouse building
lots at a carrying value of $3.1 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 September 30, 1999, 52 single family and
23 townhouse lots had been delivered. All remaining single family and townhouse
lots are under option contract of sale with two residential builders and a
takedown schedule that runs through September 2003.
Nonaccrual loans totaled $315,000 at September 30, 1999 and included
two real estate development and construction projects totaling $188,000.
Impaired loans at September 30, 1999 totaled $188,000 and consisted of
two residential development and construction loans on nonaccrual status. All
impaired loans were collateral dependent loans, which are measured based on the
fair value of the collateral. There were no impaired loans at September 30, 1999
with an allocated valuation allowance. An impaired loan is charged-off when the
loan, or a portion thereof, is considered uncollectible.
Allowance for Credit Losses:
The Company provides for credit losses through the establishment of an
allowance for credit losses (the "Allowance") by provisions charged against
earnings. Based upon management's 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 September 30, 1999, the Allowance was 1.38% of
total loans, net of unearned income. The Allowance at September 30, 1999 is
considered by management to be sufficient to address the credit risk in the
current loan portfolio.
(14)
<PAGE>
The changes in the Allowance are presented in the following table.
Nine months ended September 30,
-------------------------------
1999 1998
- ----------------------------------------------------------------------------
(dollars in thousands)
Allowance for credit losses -
beginning of period $ 3,965 $ 3,632
Provision for credit losses 290 517
Charge-offs (158) (252)
Recoveries 130 10
------------- ------------
Allowance for credit losses -
end of period $ 4,227 $ 3,907
============= ============
Allowance as a percentage of loans
receivable, net of unearned income 1.38% 1.46%
Allowance as a percentage of nonperforming
loans and loans past-due 90 days or more (a) 1304.63% 461.82%
============= ============
- ----------------------------------
(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 $3.9 million for
the three months and nine months ended September 30, 1999, representing diluted
net income per share of $0.29 and $0.84, respectively. Net income was $1.3
million and $3.5 million for the corresponding periods in 1998, representing
diluted net income per share of $0.28 and $0.77, respectively.
Net Interest Income
- -------------------
Net interest income totaled $5.6 million and $15.7 million for the
three months and nine months ended September 30, 1999, compared to $5.1 million
and $15.0 million for the same periods in 1998. Net interest income increased in
1999 as compared to 1998 as increases in interest-earning assets and
interest-bearing liabilities were largely offset by decreases in interest rates.
Specifically, average interest-earning assets increased $43.5 million or 11.5%
and $45.7 million or 12.6% during the three months and nine months ended
September 30, 1999, respectively, compared to the same periods in 1998, as a
result of loan growth and increased investments in other debt securities.
However, the weighted average yield on a taxable equivalent basis on
interest-earning assets decreased from 8.97% and 9.13% in the three months and
nine months ended September 30, 1998, respectively, to 8.29% and 8.27% for the
same periods in 1999. Similarly, average deposits and borrowings increased $25.1
million or 7.9% and $30.6 or 10.1% during the three months and nine months ended
September 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 4.29% in the three months and nine months ended September 30, 1998 to
3.73% and 3.81% 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, 1998 and
November 18, 1998, offset by an increase in the prime rate of interest of 50
basis points between July 1, 1999 and August 25, 1999. 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 77.0% at September 30, 1998 to 72.2% at
September 30, 1999.
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
(15)
<PAGE>
on a taxable equivalent basis from 5.42% and 5.55% during the three months
and nine months ended September 30, 1998, respectively, to 5.26% and 5.15%
during the same periods of 1999.
The following table sets forth, for the periods indicated, information
regarding the average balances of interest-earning assets and interest-bearing
liabilities, the amount of interest income and interest expense and the
resulting yields on average interest-earning assets and rates paid on average
interest-bearing liabilities. Average balances are also provided for
noninterest-earning assets and noninterest-bearing liabilities.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
-------------------------------- -------------------------------
Average Average
Balances (a) Interest Rate Balances (a) Interest Rate
- ------------------------------------------------------------------------------------- -------------------------------
(dollars in thousands)
Assets
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income (b)(c ) $ 294,567 $ 20,406 9.26% $ 279,050 $ 21,045 10.08%
Investment securities and securities
available-for-sale (c ) 94,934 4,179 5.89% 73,299 3,281 5.98%
Federal funds sold 18,468 636 4.60% 9,866 413 5.60%
------------------------- ----------------------
Total interest-earning assets 407,969 25,221 8.27% 362,215 24,762 9.13%
---------- ---------
Noninterest-earning assets:
Cash and due from banks 15,998 14,016
Property and equipment, net 8,355 8,937
Other assets 14,182 14,185
Less allowance for credit losses (4,118) (3,724)
----------- -----------
Total assets $ 442,386 $ 395,629
----------- -----------
Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
NOW accounts $ 41,144 $ 326 1.06% 34,166 414 1.62%
Savings accounts 48,138 1,001 2.78% 45,913 1,102 3.21%
Money market accounts 44,273 1,027 3.10% 40,040 938 3.13%
Certificates of deposit 148,351 5,307 4.78% 146,805 5,838 5.32%
Short-term borrowings 31,553 1,031 4.37% 27,889 1,087 5.21%
Long-term borrowings 20,000 800 5.35% 8,000 327 5.46%
------------------------- ----------------------
Total interest-bearing liabilities 333,459 9,492 3.81% 302,813 9,706 4.29%
----------------- -----------------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 67,410 54,368
Other liabilities 2,489 2,275
Stockholders' equity 39,027 36,173
----------- -----------
Total liabilities and
stockholders' equity $ 442,385 $ 395,629
----------- -----------
Net interest income $ 15,729 $ 15,033
----------- -----------
Net interest spread 4.46% 4.84%
----------- -----------
Net interest margin 5.15% 5.55%
----------- -----------
</TABLE>
(a) Average balances are calculated as the average of month-end balances.
(b) Average loan balances include first mortgage loans originated for sale and
nonaccrual loans. Interest income on loans includes amortized loan fees, net
of costs, of $1.1 million and $1.3 million for the nine months ended
September 30, 1999 and 1998, respectively.
(c) Interest on tax exempt loans and securities is presented on a
taxable equivalent basis, adjusted for items exempt from federal tax.
(16)
<PAGE>
The following table provides further analysis of the increase in net interest
income.
Nine months ended September 30, 1999
compared to the nine months ended
September 30, 1998
- --------------------------------------------------------------------------------
Increase/(Decrease)
Increase due to (a):
(Decrease) ----------------------
Rate Volume
------------------------------------
(dollars in thousands)
Interest income:
Loans (b)(c ) $ (639) $ (2,848) $ 2,209
Investment securities and
securities available-for-sale (c ) 898 53 845
Federal funds sold 223 (181) 404
--------- ---------- ---------
Total interest income 482 (2,976) 3,458
--------- ---------- ---------
Interest expense:
Deposits (631) (1,584) 953
Borrowings 417 (330) 747
--------- ---------- ---------
Total interest expense (214) (1,914) 1,700
--------- ---------- ---------
Net interest income $ 696 $ (1,062) $ 1,758
========= ========== =========
- ---------------------------------------
(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.
(c) Interest on tax-exempt loans and securities is presented on a taxable
equivalent basis, adjusted for items exempt from federal tax.
Noninterest Income
- ------------------
Noninterest income totaled $779,000 and $2.6 million for the three
months and nine months ended September 30, 1999, respectively, as compared to
$1.0 million and $2.4 million for the corresponding periods in 1998. The
$266,000 decline in noninterest income during the third quarter of 1999 as
compared to the same quarter of 1998 was due to an decrease in gains on sales of
mortgage loans, net of costs, of $334,000, offset by an increase in fees charged
for services of $78,000. Noninterest income increased $148,000 during the nine
months ended September 30, 1999 compared to the same period of 1998 due to
increases in fees charged for services of $229,000 offset by decreases in gains
on sales of mortgage loans, net of costs, of $80,000.
Service fee income increased in the three months and nine months ended
September 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 $334,000 for the
three months ended September 30, 1999 as compared to the same period in 1998 due
to a $23.0 million or 54.1% decrease in the volume of loans sold. For the nine
months ended September 30, 1999, the gain on sales decreased by only $80,000
when compared with the amount recorded during the same period in 1998, in spite
of a year-to-date decrease in the volume of loans sold of $33.8 million or
30.0%, due primarily to the implementation of a revised commission system, which
enhanced net revenue to the Company.
(17)
<PAGE>
Noninterest Expense
- -------------------
Noninterest expense increased $391,000 or 10.1% and $618,000 or 5.4%
for the three months and nine months ended September 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 $93,000
and $310,000 for the three months and nine months ended September 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
September 30, 1998 to September 30, 1999.
Data processing costs increased $62,000 or 32.3% and $124,000 or 21.5%
in the three months and nine months ended September 30, 1999 as compared to the
same periods in 1998 primarily due to increases in the number of loan and
deposit accounts, as well as an increase in the volume of electronic
transactions processed. The increase in marketing expense of $48,000 or 44.9% in
the third quarter of 1999 as compared to the same period in 1998 reflected
increased emphasis on deposit generation. Cash management expense, which
increased $41,000 or 45.1% and 49,000 or 19.2% in the three months and nine
months ended September 30, 1999 as compared to the same periods in 1999,
generally fluctuates in response to the number of customers and the mix of
products and services provided to those customers. Finally, other expenses
increased $141,000 or 26.6% in the three months ended September 30, 1999 as
compared to the same period in 1998 due primarily to increases in stationery and
supplies and recruiting, reflecting general increases in business activity.
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 is progressing in accordance with their
Year 2000 plans. 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
current status of such:
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 Year 2000 compliant in its current form. The vendor has completed
testing and has provided written assurances to the Company regarding its
Year 2000 compliance. The vendor has been examined for Year 2000 readiness
by federal bank examiners and has had a third party audit review of their
Year 2000 project.
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.
(18)
<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 all phases of on-site testing have 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 largely 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
telephone companies and the utilities have reported that they have
substantially completed all renovation and testing. The Company will
continue to monitor their progress.
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 September 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 $130,000 to date
and are primarily related to the upgrade of ATMs and the replacement of the
Bank's telephone banking system. 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 operational and/or financial impact on commercial
customers and, correspondingly, their ability to meet
(19)
<PAGE>
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 requirements 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 September 27, 1999, the Board of Directors of the Company declared an
$.08 per share cash dividend to common stockholders of record on October 15,
1999, payable October 29, 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 22
(b) A report on Form 8K was filed on September 28, 1999
relating to the announcement that Columbia Bancorp and
Suburban Bancshares, Inc. had entered into a Plan and
Agreement to Merge pursuant to which Suburban Bancshares
will be merged into Columbia Bancorp.
(20)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLUMBIA BANCORP
PRINCIPAL EXECUTIVE OFFICER:
November 15, 1999 /s/ John M. Bond, Jr.
- ----------------- -----------------------
Date: John M. Bond, Jr.
President and
Chief Executive Officer
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
November 15, 1999 /s/ John A. Scaldara, Jr.
- ----------------- -------------------------
Date: John A. Scaldara, Jr.
Executive Vice President,
Corporate Secretary and
Chief Financial Officer
(21)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,929
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,451
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,095
<INVESTMENTS-CARRYING> 98,624
<INVESTMENTS-MARKET> 98,014
<LOANS> 305,339
<ALLOWANCE> 4,227
<TOTAL-ASSETS> 460,087
<DEPOSITS> 354,024
<SHORT-TERM> 43,660
<LIABILITIES-OTHER> 2,492
<LONG-TERM> 20,000
0
0
<COMMON> 45
<OTHER-SE> 39,866
<TOTAL-LIABILITIES-AND-EQUITY> 460,087
<INTEREST-LOAN> 20,380
<INTEREST-INVEST> 4,179
<INTEREST-OTHER> 636
<INTEREST-TOTAL> 25,195
<INTEREST-DEPOSIT> 7,661
<INTEREST-EXPENSE> 9,492
<INTEREST-INCOME-NET> 15,703
<LOAN-LOSSES> 290
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,073
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<EPS-DILUTED> 0.84
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<LOANS-PROBLEM> 1,503
<ALLOWANCE-OPEN> (3,965)
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<ALLOWANCE-CLOSE> (4,227)
<ALLOWANCE-DOMESTIC> (4,227)
<ALLOWANCE-FOREIGN> 0
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</TABLE>
