<PAGE>
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, 2000
------------------
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: 7,156,025 shares as of
November 6, 2000.
<PAGE>
COLUMBIA BANCORP
CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Condition as of September 30, 2000
(unaudited) and December 31, 1999 3
Consolidated Statements of Income and Comprehensive Income for
the Three and Nine Months Ended September 30, 2000 and 1999
(unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements 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 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
(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,
2000 1999
------------- ------------
ASSETS (unaudited)
------
<S> <C> <C>
Cash and due from banks $ 34,015 $ 37,108
Federal funds sold 26,296 22,507
Investment securities (fair value $101,186 in 2000 and
$92,356 in 1999) 101,780 93,412
Securities available-for-sale 61,493 57,492
Residential mortgage loans originated for sale 1,423 2,707
Loans:
Commercial 172,293 141,675
Real estate development and construction 114,956 100,729
Real estate mortgage:
Residential 18,252 24,334
Commercial 72,151 68,450
Retail, principally residential equity lines of credit 135,056 111,230
Credit card 2,325 2,217
Other 531 783
-------- --------
Total loans 515,564 449,418
Less: Unearned income, net of origination costs (445) (193)
Allowance for credit losses (6,737) (6,071)
-------- --------
Loans, net 508,382 443,154
Other real estate owned 3,233 4,035
Property and equipment, net 10,899 10,473
Prepaid expenses and other assets 17,133 17,142
-------- --------
Total assets $764,654 $688,030
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits
Noninterest-bearing demand deposits $127,021 $120,165
Interest-bearing deposits 479,937 431,195
-------- --------
Total deposits 606,958 551,360
Short-term borrowings 69,172 51,728
Long-term borrowings 20,000 20,000
Accrued expenses and other liabilities 4,888 3,656
Total liabilities 701,018 626,744
-------- --------
Stockholders' equity
Common stock, $.01 par value per share;
authorized 10,000,000 shares; outstanding
7,156,025 and 7,150,371 shares, respectively 71 71
Additional paid-in-capital 48,449 48,424
Retained earnings 15,906 13,938
Accumulated other comprehensive income (790) (1,147)
Total stockholders' equity 63,636 61,286
-------- --------
Total liabilities and stockholders' equity $764,654 $688,030
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
(3)
<PAGE>
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For Three and Nine Months ended September 30, 2000 and 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------ ------------------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans and leases $12,504 $ 9,910 $34,572 $28,350
Investment securities 2,576 2,328 7,495 6,361
Federal funds sold 275 310 833 1,294
Total interest income 15,355 12,548 42,900 36,005
------- ------- ------- -------
Interest expense:
Deposits 5,124 4,037 14,085 12,232
Borrowings 1,105 815 3,105 2,099
Total interest expense 6,229 4,852 17,190 14,331
------- ------- ------- -------
Net interest income 9,126 7,696 25,710 21,674
Provision for credit losses 618 168 1,430 659
------- ------- ------- -------
Net interest income after provision
for credit losses 8,508 7,528 24,280 21,015
------- ------- ------- -------
Noninterest income:
Fees charged for services 590 598 1,750 1,685
Gains on sales of mortgage
loans, net of costs 103 152 270 812
Net income on other real
estate owned 118 22 174 24
Gains on sale of securities
available for sale - - - 23
Other 236 230 730 743
Total noninterest income 1,047 1,002 2,924 3,287
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 3,418 3,109 9,492 8,866
Occupancy, net 794 769 2,548 2,217
Equipment 494 414 1,459 1,194
Data processing 318 395 1,134 1,189
Marketing 164 188 659 480
Cash management services 141 132 356 304
Professional fees 167 102 489 291
Deposit insurance 43 46 127 135
Merger-related expenses 1 - 2,310 -
Other 860 956 2,477 2,650
Total noninterest expense 6,400 6,111 21,051 17,326
------- ------- ------- -------
Income before income taxes 3,155 2,419 6,153 6,976
Income tax provision 1,076 825 2,252 2,399
------- ------- ------- -------
Net income 2,079 1,594 3,901 4,577
Other comprehensive income, net
of tax - unrealized gains (losses)
on securities available-for-sale 408 (271) 357 (1,132)
------- ------- ------- -------
Comprehensive income $ 2,487 $ 1,323 $ 4,258 $ 3,445
======= ======= ======= =======
Per common share data:
Net income: Basic $ 0.29 $ 0.22 $ 0.55 $ 0.64
Diluted 0.29 0.22 0.54 0.63
Cash dividends declared 0.09 0.05 0.27 0.15
======= ======= ======= =======
</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, 2000 and 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
2000 1999
---------------- ---------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,901 $ 4,577
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,223 1,053
Amortization of loan fee income (950) (485)
Provision for credit losses 1,430 659
Provision for losses on other real estate owned - 8
Gains on sales of mortgage loans, net of costs (270) (812)
Proceeds from sales of residential mortgage loans originated for sale 34,613 86,917
Disbursements for residential mortgage loans originated for sale (33,059) (70,157)
Loan fees deferred, net of origination costs 1,136 761
Net realized gain on available for sale securities - (23)
(Increase) decrease in prepaid expenses and other assets (42) 647
Increase in accrued expenses and other liabilities 994 640
-------- --------
Net cash provided by operating activities 8,976 23,785
-------- --------
Cash flows provided by (used in) investing activities:
Loan disbursements in excess of principal repayments (68,694) (37,279)
Loan purchases (313) (4,631)
Loan sales 2,163 3,195
Purchases of investment securities (39,143) (16,297)
Purchases of securities available-for-sale (8,302) (54,863)
Proceeds from maturities and principal repayments of
Investment securities 30,783 30,040
Proceeds from maturities and principal repayments of
Securities available-for-sale 4,916 12,545
Proceeds from sales of securities available-for-sale - 505
Additions to other real estate owned (383) (466)
Sales of other real estate owned 1,185 1,838
Purchases of property and equipment (1,684) (1,137)
Purchase of life insurance - (470)
Increase in cash surrender value of life insurance (180) (156)
-------- --------
Net cash used in investing activities (79,652) (67,176)
-------- --------
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 55,598 (5,000)
Increase in short-term borrowings 17,444 20,077
Cash paid for fractional shares (5) -
Cash dividends distributed on common stock (1,695) (1,088)
Net proceeds from stock options and common stock exchanged 30 193
Purchase of common stock - (1,280)
-------- --------
Net cash provided by financing activities 71,372 12,902
-------- --------
Net increase (decrease) in cash and cash equivalents 696 (30,489)
Cash and cash equivalents at beginning of period 59,615 87,902
-------- --------
Cash and cash equivalents at end of period $ 60,311 $ 57,413
======== ========
Supplemental information:
Interest paid on deposits and borrowings $ 16,921 $ 14,246
Income taxes paid 1,700 2,132
Transfer of loans to other real estate owned - 347
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
(5)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three and nine months
ended September 30, 2000 and 1999 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 1999 Annual Report on Form 10-K.
The consolidated financial statements include the accounts of the Company's
subsidiary, The Columbia Bank, and The Columbia Bank's wholly-owned
subsidiaries, McAlpine Enterprises, Inc., Howard I, LLP and Howard II, LLP
(collectively, the "Bank"). All significant intercompany balances and
transactions have been eliminated.
The consolidated financial statements as of September 30, 2000 and for the
three and nine months ended September 30, 2000 and 1999 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, 2000 are not necessarily indicative of the
results that will be achieved for the entire year. The financial data for 1999
have been restated to reflect the effects of the merger of Suburban Bancshares,
Inc. ("Suburban") with and into Columbia Bancorp in March 2000, which was
accounted for using the pooling-of-interests method.
NOTE 2 - MERGER
On March 8, 2000, the Company completed the merger of Suburban with and
into the Company and the merger of Suburban Bank of Maryland with and into the
Bank. The Company and Suburban had entered into a definitive agreement on
September 28, 1999. As a result of the merger, each share of the outstanding
common stock of Suburban was converted into .2338 shares of the Company's common
stock, resulting in the issuance of 2,641,705 shares.
Merger-related expenses of $2.3 million are included in the consolidated
statement of income for the nine months ended September 30, 2000 and consist of
$683,000 for systems conversion costs, $499,000 for professional fees, $481,000
for contract termination fees, $59,000 for severance payments to terminated
employees and $588,000 for other expenses.
The merger added approximately $220 million in assets, $185 million in
deposits and $20 million in stockholders' equity. In addition, the Company's
branch network increased from 15 branches to 23 branches, located in Howard,
Baltimore, Prince George's and Montgomery Counties, Maryland, and Baltimore
City, Maryland.
(6)
<PAGE>
NOTE 3 - INVESTMENTS
The amortized cost and estimated fair values of investment securities and
securities available-for-sale at September 30, 2000 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:
Federal agency securities $ 98,749 $ 98 $ 663 $ 98,184
Mortgage-backed securities 3,031 2 31 3,002
----------------------------------------------------------------
Total $101,780 $100 $ 694 $101,186
================================================================
Securities available-for-sale:
U.S. Treasury securities $ 700 $ -- $ -- $ 700
Federal agency securities 32,582 9 825 31,766
Mortgage-backed securities 8,863 -- 308 8,555
Trust preferred stocks 15,885 237 351 15,771
Investment in Federal Home Loan
Bank stock 2,682 -- -- 2,682
Other 2,065 -- 46 2,019
----------------------------------------------------------------
Total $ 62,777 $246 $1,530 $ 61,493
================================================================
</TABLE>
The amortized cost and estimated fair values of investment securities and
securities available-for-sale at December 31, 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 $ 14,999 $ -- $ 7 $ 14,992
Federal agency securities 74,603 -- 1,002 73,601
Mortgage-backed securities 3,810 1 48 3,763
----------------------------------------------------------------
Total $ 93,412 $ 1 $1,057 $ 92,356
================================================================
Securities available-for-sale:
U.S. Treasury securities $ 1,199 $ 3 $ -- $ 1,202
Federal agency securities 32,715 6 1,198 31,523
Mortgage-backed securities 9,728 1 479 9,250
Trust preferred stocks 11,904 50 229 11,725
Investment in Federal Home Loan
Bank stock 1,939 -- -- 1,939
Other 1,880 15 42 1,853
----------------------------------------------------------------
Total $ 59,365 $ 75 $1,948 $ 57,492
================================================================
</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,
----------------------------------------------------------------------
2000 1999
---------------------------- ----------------------------
Basic Diluted Basic Diluted
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income $2,079,229 $2,079,229 $1,593,499 $1,593,499
Net income, before merger-related
expenses, net of tax 2,079,678 2,079,678 1,593,499 1,593,499
Weighted average shares outstanding 7,156,025 7,156,025 7,147,502 7,147,502
Dilutive securities -- 42,402 -- 60,945
---------------------------- ----------------------------
Adjusted weighted average shares
used in EPS computation 7,156,025 7,198,427 7,147,502 7,208,447
============================ ============================
Net income per common share $ 0.29 $ 0.29 $ 0.22 $ 0.22
============================ ============================
Net income per common share, before
merger-related expenses, net of tax $ 0.29 $ 0.29 $ 0.22 $ 0.22
============================ ============================
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------
2000 1999
---------------------------- ----------------------------
Basic Diluted Basic Diluted
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income $3,900,809 $3,900,809 $4,576,987 $4,576,987
Net income, before merger-related
expenses, net of tax 5,514,634 5,514,634 4,576,987 4,576,987
Weighted average shares outstanding 7,155,262 7,155,262 7,161,029 7,161,029
Dilutive securities -- 42,197 -- 70,305
---------------------------- ----------------------------
Adjusted weighted average shares
used in EPS computation 7,155,262 7,197,459 7,161,029 7,231,334
============================ ============================
Net income per common share $ 0.55 $ 0.54 $ 0.64 $ 0.63
============================ ============================
Net income per common share, before
merger-related expenses, net of tax $ 0.77 $ 0.77 $ 0.64 $ 0.63
============================ ============================
</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.
(8)
<PAGE>
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, 2000 whose contract amounts
represent potential credit risk is as follows:
September 30,
2000
----------------------
(dollars in thousands)
Commitments to extend credit (a) $236,432
Standby letters of credit 13,747
Limited recourse on mortgage loans sold 4,464
-------------------
(a) Includes unused lines of credit totalling $232.2 million regardless of
whether fee paid and whether adverse change clauses exist. The amount
also includes commitments to extend new credit totalling $4.2 million.
NOTE 6 - 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. On the effective date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133. The
Company does not currently have any hedging relationships or derivative
instruments that would require reclassification under the provisions of SFAS No.
133.
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 Bank. The Bank is a Maryland trust company that
engages in general commercial banking operations. The Bank provides a full range
of financial services to individuals, businesses and organizations through 23
branch banking offices, as well as mortgage and commercial loan origination
offices and 28 Automated Teller Machines. Deposits in the Bank are insured by
the Federal Deposit Insurance Corporation. The Company considers its primary
market area to be Howard, Baltimore, Montgomery and Prince George's Counties,
Maryland, with extension of business throughout the contiguous counties
comprising central Maryland.
(9)
<PAGE>
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,
2000, total deposits were $607.0 million. Core deposits, defined as all
deposits except certificates of deposit of $100,000 or more, totalled $546.6
million or 90.0% 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, 2000 the Company's approved credit limit with the
FHLB was $103.2 million and advances outstanding totaled $20.0 million. However,
the Company had collateral sufficient to borrow up to $137.0 million.
Individual advances in excess of $5 million or total advances above the approved
$103.2 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, 2000, federal funds sold totaled $26.3 million or 3.4% of total
assets, investments available-for-sale totaled $61.5 million or 8.0% of total
assets and the fair value of investment securities due in one year or less was
$5.5 million or 0.7% of total assets.
Capital Resources
-----------------
Total stockholders' equity was $63.6 million at September 30, 2000,
representing an increase of $2.3 million or 3.8% from December 31, 1999.
Earnings were mitigated by the effect of merger-related costs, net of taxes, of
$1.6 million. Retained earnings was reduced by cash dividends declared of
$1,933,000 which was partially offset by a decrease in unrealized losses on
investment securities available-for-sale of $356,000.
Dividends for the first nine months of 2000 were $.27 per share, compared
to $.15 per share in 1999.
The following table summarizes the Company's risk-based capital ratios:
<TABLE>
<CAPTION>
Columbia Bancorp
---------------------------------- Minimum
September 30, December 31, Regulatory
2000 1999 Requirements
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-based capital ratios:
Tier 1 capital 10.81% 12.33% 4.00%
Total capital 11.95 13.48 8.00
Tier 1 leverage ratio 8.71 9.05 4.00
</TABLE>
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
(10)
<PAGE>
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, summarized in the following table, 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, 2000 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 $ 26,296 $ -- $ -- $ 26,296
Investment securities and
securities available for sale 20,739 105,839 36,695 163,273
Loans, exclusive of nonaccrual loans 334,523 54,375 126,715 515,613
Interest-earning assets 381,558 160,214 163,410 705,182
---------------------------------------------------------------------------
Interest-bearing deposits 385,235 89,763 4,939 479,937
Other borrowings 69,172 --- 20,000 89,172
Interest-bearing liabilities 454,407 89,763 24,939 569,109
---------------------------------------------------------------------------
Interest sensitivity gap $(72,849) $ 70,451 $138,471 136,073
===========================================================================
Cumulative interest sensitivity gap $(72,849) $ (2,398) $136,073
======================================================
Cumulative interest sensitivity
gap ratio -9.53% -0.31% 17.80%
======================================================
</TABLE>
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
June 30, 2000 data, the simulation analysis provided the following profile of
the Company's interest rate risk:
<TABLE>
<CAPTION>
Immediate Rate Change
--------------------------------------------------
+200 BP -200 BP Policy
--------------------------------------------------
<S> <C> <C> <C>
Net interest income at risk: -0.6% -6.2% +/- 7.5%
Change in Economic value of equity: +12.2% +11.6% +/- 20.0%
</TABLE>
(11)
<PAGE>
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 $1,284,000 or 47.4% from
December 31, 1999 to September 30, 2000 due primarily to less emphasis on first
mortgage origination activity.
Loans and Nonperforming Assets:
At September 30, 2000, the Company's loan portfolio, net of unearned
income, totalled $515.1 million, or 67.4% of its total assets of $764.7 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, 1999, total loans increased $65.9 million, or 14.7%.
Commercial loans and retail loans, principally residential equity lines of
credit, accounted for substantially all of the increase in total loans
outstanding, increasing by $30.6 million and $23.8 million, respectively, since
December 31, 1999. The increase in commercial loans reflected sustained business
development efforts particularly in the Baltimore and Howard County regions and
the implementation of expanded product lines. The growth in retail loans is the
result of general business expansion with continued emphasis on home equity and
second mortgage originations and the introduction of additional products. These
increases, however, were partially offset by a decrease of $6.1 million in
residential mortgage loans.
Commercial loans constitute the largest portion of the Company's loan
portfolio. Commercial business loans are made to provide working capital to
businesses in the form of lines of credit which may be secured by real estate,
accounts receivable, inventory, equipment or other assets. Commercial mortgages
are typically secured by office condominiums, retail buildings, warehouse and
general purpose space, and generally have maturities of five years or less. At
September 30, 2000, commercial loans totaled $244.4 million, or 47.4% of total
loans, including $72.2 million in commercial mortgages. The financial condition
and cash flow of commercial borrowers are closely monitored by the submission of
corporate financial statements, personal financial statements and income tax
returns. The frequency of submissions of required information depends upon the
size and complexity of the credit and the collateral that secures the loan. It
is also the Company's general policy to obtain personal guarantees from the
principals of the commercial loan borrowers.
Retail loans, principally residential equity lines of credit, represent the
second largest component of the Company's loan portfolio, totaling $135.1
million, or 26.2% of the Company's loan portfolio, at September 30, 2000. Of
this amount, $115.6 million was comprised of home equity loans and lines of
credit. Such loans are typically originated for up to 90% of the appraised value
of the property, less the amount of any prior liens on the property. Home equity
loans have maximum terms of fifteen to thirty years and the interest rates are
generally adjustable. The Company secures these loans with mortgages on the
homes (typically a second mortgage). The second mortgage loans originated by the
Company have maximum terms ranging from ten to thirty years. They generally
carry a fixed rate of interest for the first five years, repricing every five
years thereafter at a predetermined spread to the prime rate of interest.
(12)
<PAGE>
Real estate development and construction loans continue to constitute a
significant portion of the Company's lending activities, totaling $115.0 million
at September 30, 2000. A breakdown by type follows:
Amount Percent
---------------------------------------------------------------------------
(dollars in thousands)
Residential construction (a) $ 60,338 52.5%
Residential land development 31,888 27.7%
Residential land acquisition (b) 9,825 8.6%
Commercial construction 12,905 11.2%
-------- -----
$114,956 100.0%
======== =====
-------------------
(a) Includes $17.2 million of loans to individuals for construction of primary
personal residences.
(b) Includes $2.8 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. 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.
The following table provides information concerning nonperforming assets
and past-due loans:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
-------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans (a) $1,374 $2,284 $1,866
Other real estate owned 3,233 4,035 3,544
-------------------------------------------------------
Total nonperforming assets $4,607 $6,319 $5,410
=======================================================
Loans past-due 90 days or more $ 319 $ 5 $ 102
=======================================================
</TABLE>
---------------------
(a) Loans are placed in nonaccrual status when they are past-due 90 days
as to either principal or interest or when, in the opinion of
management, the collection of all 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, 2000 was
the Company's portfolio of other real estate owned totaling $3.2 million. At
September 30, 2000, other real estate owned consisted primarily of a residential
development project with 126 townhouse building lots remaining, at a carrying
value of $2.6 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, 2000, 80 single family and 56 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 June 2003.
Nonaccrual loans totaled $1,374,000 at September 30, 2000 and included ten
commercial loans totaling $1,050,000, one real estate development and
construction loan totaling $95,000, six home equity loans totaling $189,000 and
four consumer loans totaling $40,000.
Impaired loans at September 30, 2000 totaled $574,000 and consisted of ten
commercial and residential development and construction loans on nonaccrual
status, net of government guarantees. All impaired loans were collateral
dependent loans, which are measured based on the fair value of the
(13)
<PAGE>
collateral. There were no impaired loans at September 30, 2000 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, 2000, the Allowance was 1.31% of
total loans, net of unearned income. The Allowance at September 30, 2000 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.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
2000 1999
-----------------------
(dollars in thousands)
<S> <C> <C>
Allowance for credit losses -
beginning of period $ 6,071 $ 5,490
Provision for credit losses 1,430 659
Charge-offs (898) (447)
Recoveries 134 171
-----------------------
Allowance for credit losses -
end of period $ 6,737 $ 5,873
=======================
Allowance as a percentage of loans
receivable, net of unearned income 1.31% 1.34%
Allowance as a percentage of nonperforming
loans and loans past-due 90 days or more (a) 397.93% 298.42%
=======================
</TABLE>
-----------------
(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 $3.90 million for the nine months ended
September 30, 2000, compared to $4.58 million for the same period in 1999.
However, net income before specific one-time merger-related costs, net of tax
("core earnings") was $5.52 million for the first nine months of 2000, an
increase of 20.5% over the corresponding period in 1999. Net income per diluted
share, exclusive of merger-related costs, was $0.77 per share for the nine
months ended September 30, 2000, compared to $0.63 for the same period in 1999.
For the three months ended September 30, 2000, the Company reported net
income of $2.08 million, a 30.5% increase from net income reported for the third
quarter of 1999. Diluted net income per share was $0.29 for the three months
ended September 30, 2000, compared to $0.22 for the third quarter in 1999.
(14)
<PAGE>
Return on average assets and return on average equity are key measures of a
bank's performance. Return on average assets, the product of net income divided
by total average assets, measures how effectively the Company utilizes its
assets to produce income. Excluding merger-related expenses, the Company's
return on average assets for the nine months ended September 30, 2000 was 1.02%,
compared to 0.93% for the corresponding period in 1999. Return on average
equity, the product of net income divided by average equity, measures how
effectively the Company invests its capital to produce income. Excluding
merger-related expenses, return on average equity for the nine months ended
September 30, 2000 was 11.93%, compared to 10.17% for the corresponding period
in 1999.
Net Interest Income
-------------------
Net interest income totaled $25.7 million for the nine months ended
September 30, 2000, compared to $21.7 million for the same period in 1999. Net
interest income increased $4.0 million in 2000 as compared to 1999 due to
increases in average interest-earning assets and the rates earned on those
assets, offset somewhat by increases in average balances of interest-bearing
liabilities and the rates paid on those liabilities. Specifically, average
interest-earning assets increased $57.0 million or 9.4% during the nine months
ended September 30, 2000, compared to the same period in 1999, primarily as a
result of loan growth. Correspondingly, the average taxable equivalent yield on
interest-earning assets increased from 7.94% for the nine months ended September
30, 1999 to 8.64% for the same period in 2000. The increase in the yield was
due largely to increases in the prime rate of interest of 25 basis points in
July 1999, August 1999, November 1999, February 2000, and March 2000 and 50
basis points in May 2000.
Net interest income for the three months ended September 30, 2000 was $9.1
million, a $1.4 million, or 18.6% increase from $7.7 million in 1999, the result
of increases in average interest-earning assets and the yield on these assets,
offset somewhat by increases in interest bearing liabilities.
The increases in interest income were mitigated by increases in average
interest-bearing liabilities from $496.7 million and $487.1 million,
respectively, for the three months and nine months ended September 30, 1999 to
$549.3 million and $531.5 million, respectively, for the same periods in 2000.
In addition, the rate paid on interest-bearing liabilities increased from 3.88%
and 3.93%, respectively for the three months and nine months ended September 30,
1999 to 4.51% and 4.32%, respectively, for the same periods in 2000.
Net interest income for the three months and nine months ended September
30, 2000 was also affected by a change in the mix of interest-earning assets as
loans, the Company's highest yielding asset, on average increased as a
percentage of interest-earning assets from 70.3% at September 30, 1999 to 73.5%
at September 30, 2000.
The result of increases in interest-earning assets, interest-bearing
liabilities, yields and rates and the changes in the mix of interest-earning
assets was an increase in the net interest margin on a taxable equivalent basis
from 4.78% during the nine months ended September 30, 1999 to 5.18% during the
same period of 2000.
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.
(15)
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------------------ ------------------------------
Average Average
Balances (a) Interest Rate Balances (a) Interest Rate
------------------------------ ------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans, net of unearned income (b) (c) $487,911 $34,595 9.47% $426,492 $28,376 8.90%
Investment securities and securities
Available-for-sale 157,787 7,495 6.34% 144,732 6,361 5.88%
Federal funds sold 17,865 833 6.23% 35,321 1,294 4.90%
------------------------ ------------------------
Total interest-earning assets 663,563 42,923 8.64% 606,545 36,031 7.94%
------------ ------------
Noninterest-earning assets:
Cash and due from banks 30,707 25,832
Property and equipment, net 11,030 10,235
Other assets 19,986 19,679
Less: allowance for credit losses (6,458) (5,790)
------------ ------------
Total assets $718,828 $656,501
============ ============
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
NOW accounts $ 57,562 $ 490 1.14% $ 54,056 $ 527 1.30%
Savings accounts 72,543 1,613 2.97% 75,356 1,801 3.20%
Money market accounts 101,838 2,911 3.82% 98,612 2,548 3.45%
Certificates of deposit 224,739 9,071 5.39% 198,248 7,356 4.96%
Short-term borrowings 54,808 2,303 5.61% 40,781 1,299 4.26%
Long-term borrowings 20,000 802 5.36% 20,000 800 5.35%
------------------------ ------------------------
Total interest-bearing liabilities 531,490 17,190 4.32% 487,053 14,331 3.93%
------------ ------------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 118,668 102,179
Other liabilities 6,924 7,095
Stockholders' equity 61,746 60,174
------------ ------------
Total liabilities and
Stockholders' equity $718,828 $656,501
============ ============
Net interest income $25,733 $21,700
============ ============
Net interest spread 4.32% 4.01%
========= =========
Net interest margin 5.18% 4.78%
========= =========
</TABLE>
(a) Average balances are calculated as the daily average 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 $783,000 and $657,000 for the nine months ended
Septemberne 30, 2000 and 1999, respectively.
(c) Interest on tax-exempt loans 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.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
Compared to the Nine Months Ended
September 30, 1999
-------------------------------------------
Increase/(Decrease)
Due to (a)
Increase -----------------------
(Decrease) Rate Volume
-------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Interest income:
Loans (b)(c) $6,219 $1,948 $4,271
Investment securities and securities
available-for-sale 1,134 536 598
Federal funds sold (461) 291 (752)
-------------------------------------------
Total interest income 6,892 2,775 4,117
-------------------------------------------
Interest expense:
Deposits 1,853 765 1,088
Borrowings 1,006 485 521
-------------------------------------------
Total interest expense 2,859 1,250 1,609
-------------------------------------------
Net interest income $4,033 $1,525 $2,508
===========================================
</TABLE>
---------------------
(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 is presented on a taxable equivalent
basis, adjusted for items exempt from federal tax.
Noninterest Income
------------------
Noninterest income totaled $2,924,000 for the nine months ended September
30, 2000, as compared to $3,287,000 for the corresponding period in 1999. The
$363,000 decline in noninterest income during the first nine months of 2000 as
compared to the same period of 1999 was due to a decrease in gains on sales of
mortgage loans, net of costs, of $542,000. Net gains on the sales of mortgage
loans decreased due to a $52.2 million or 60.2% decrease in the volume of loans
sold.
For the three months ended September 30, noninterest income rose $45,000,
from $1,002,000 in 1999 to $1,047,000 in 2000, primarily the result of an
increase in gains on sales of other real estate owned.
Noninterest Expense
-------------------
Noninterest expense, exclusive of merger-related expenses totaling
$2,310,000, increased $1,415,000 or 8.2% for the nine months ended September 30,
2000, as compared to the same period in 1999. A significant portion of the
increase in noninterest expense was due to increases in salaries and benefits of
$626,000 for the nine months ended September 30, 2000 as compared to the same
period in 1999. Salaries and benefits increased primarily as a result of an
increase in the number of full time equivalent employees due to general business
expansion efforts, general merit and performance increases and increased costs
associated with a more competitive labor market.
Occupancy costs increased $331,000 or 14.9% during the nine months ended
September 30, 2000 as compared to the same period in 1999 as a result of
continued expansion of the branch network, with the opening of two full-service
branches in Timonium and Beltsville, Maryland and the relocation of a third
branch since June 30, 1999.
Noninterest expense, excluding merger-related expenses, increased $288,000,
or 4.7%, for the three months ended September 30, 2000 as compared to the same
period in 1999. Increases during the period were primarily related to costs of
expansion of the branch network, as discussed above.
(17)
<PAGE>
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
As reported in the Form 10-Q dated March 31, 2000, on April 7, 2000, the
Bank filed a class action interpleader lawsuit (The Columbia Bank vs. Network 1
Financial Corporation, et. al., Civil Action No.WMN-00-CV1002) in the United
States District Court for the District of Maryland, Northern Division (the
"Court") and deposited with the Court approximately $6.0 million (the "Fund").
The Fund was on deposit with the Bank as the result of a computer file (the
"File") sent through a computerized debit and credit system, known as the
Automated Clearing House, on behalf of the originators of the File
(collectively, the "Originators of the File"). The interpleader lawsuit filed by
the Bank alleges, among other things, that the Originators of the File did not
have the authorization of the accountholders whose accounts were debited by the
file in accordance with the rules governing the ACH Network and that the
Originators of the File were negligent in that they originated and processed an
unauthorized ACH file. The interpleader lawsuit seeks the Court's assistance in
determining the rights of the parties to the Fund, recovery of legal costs
incurred by the Bank and discharge of the Bank from any liability that may arise
from the File. The Originators of the File have filed counterclaims with the
Court under various theories including breach of contract, conversion and
tortious interference with contract and with prospective business relations. The
Originators of the File seek monetary damages ranging from $225,000 to $100
million in various counts under these theories.
In the Form 10-Q dated June 30, 2000, the Company reported that the Bank
had filed with the Court motions to dismiss various of the counterclaims filed
by the Originators of the File. As of this date, the motions remain pending with
the Court. Court ordered mediation concluded in October 2000 without reaching a
settlement.
The Bank continues to consider the counterclaims meritless and will
vigorously defend all claims brought against it.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
(18)
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On September 25, 2000, the Board of Directors of the Company declared a
$.09 per share cash dividend to common stockholders of record on October 13,
2000, payable October 27, 2000.
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.
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 10, 2000
----------------- -----------------------------
Date John M. Bond, Jr.
President and
Chief Executive Officer
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
November 10, 2000
----------------- -----------------------------
Date John A. Scaldara, Jr.
Executive Vice President,
Corporate Secretary and
Chief Financial Officer
(19)
