UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER: 000-50407
FREDERICK COUNTY BANCORP, INC.
(Exact name of issuer as specified in its charter)
MARYLAND 20-0049496
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 WEST PATRICK STREET
FREDERICK, MARYLAND 21701
(Address of principal executive offices)(Zip Code)
301.620.1400
(Issuer's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and has
been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date. There were 1,457,402
shares of Common Stock outstanding as of October 29, 2004.
Transitional Small Business Disclosure Format (check one) Yes |_| No |X|
FREDERICK COUNTY BANCORP, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets, September 30, 2004 (Unaudited) and
December 31, 2003
Consolidated Statements of Operations (Unaudited), Three and Nine
Months Ended September 30, 2004 and 2003
Consolidated Statements of Changes in Shareholders' Equity (Unaudited),
Nine Months Ended September 30, 2004 and 2003
Consolidated Statements of Cash Flows (Unaudited), Nine Months Ended
September 30, 2004 and 2003
Notes to Consolidated Financial Statements (Unaudited)
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3 Controls and Procedures
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
2
FREDERICK COUNTY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
--------------------------------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------------------------------
(dollars in thousands)
--------------------------------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------------------------------
Cash and due from banks $ 4,781 $ 5,619
Federal funds sold 11,815 10,355
Interest-bearing deposits in other banks 300 1,575
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents 16,896 17,549
--------------------------------------------------------------------------------------------------------
Investment securities available for sale-at fair value 16,682 15,932
--------------------------------------------------------------------------------------------------------
Investment securities held-to-maturity 299 --
--------------------------------------------------------------------------------------------------------
Restricted stock 773 626
--------------------------------------------------------------------------------------------------------
Loans 123,589 96,029
Less: Allowance for loan losses (1,296) (985)
--------------------------------------------------------------------------------------------------------
Net loans 122,293 95,044
--------------------------------------------------------------------------------------------------------
Bank premises and equipment 1,469 936
--------------------------------------------------------------------------------------------------------
Other assets 780 548
--------------------------------------------------------------------------------------------------------
Total assets $159,192 $130,635
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 21,071 $ 17,180
Interest-bearing deposits 123,337 100,311
--------------------------------------------------------------------------------------------------------
Total deposits 144,408 117,491
Short-term borrowings 450 120
Accrued interest and other liabilities 604 316
--------------------------------------------------------------------------------------------------------
Total liabilities 145,462 117,927
--------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, per share par value $.01;
10,000,000 shares authorized; 1,455,152 and
727,576 shares issued and outstanding, respectively 15 7
Additional paid-in capital 14,609 14,617
Retained earnings (deficit) (899) (1,929)
Accumulated other comprehensive income 5 13
--------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,730 12,708
--------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $159,192 $130,635
========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
FREDERICK COUNTY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------------------
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
--------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $1,784 $1,268 $4,844 $3,428
Interest and dividends on investment securities:
Interest 146 87 425 386
Dividends 9 8 27 23
Interest on federal funds sold 34 18 85 65
Other interest income 2 15 4 34
--------------------------------------------------------------------------------------------------------------------------
Total interest income 1,975 1,396 5,385 3,936
--------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 451 366 1,227 1,115
Interest on other short-term borrowings 5 -- 12 --
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Total interest expense 456 366 1,239 1,115
--------------------------------------------------------------------------------------------------------------------------
Net interest income 1,519 1,030 4,146 2,821
Provision for loan losses 105 105 315 315
--------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,414 925 3,831 2,506
--------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Securities gains (losses) (6) -- (5) 34
Service fees 35 30 106 75
Other operating income 28 20 77 56
--------------------------------------------------------------------------------------------------------------------------
Total noninterest income 57 50 178 165
--------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 644 508 1,806 1,521
Occupancy and equipment expenses 168 164 479 461
Other operating expenses 231 171 694 488
--------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,043 843 2,979 2,470
--------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 428 132 1,030 201
Provision for income taxes -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
Net income $ 428 $ 132 $1,030 $ 201
==========================================================================================================================
Basic earnings per share (1) $ 0.29 $ 0.09 $0.71 $ 0.14
==========================================================================================================================
Diluted earnings per share (1) $ 0.28 $ 0.09 $0.68 $ 0.14
==========================================================================================================================
Basic weighted average number of shares outstanding (1) 1,455,152 1,455,152 1,455,152 1,455,152
==========================================================================================================================
Diluted weighted average number of shares outstanding (1) 1,514,843 1,477,638 1,511,325 1,475,486
==========================================================================================================================
(1) The amounts shown have been restated for the effects of a two-for-one stock
split effected in the form of a 100% stock dividend declared in August 2004 and
paid in September 2004.
The accompanying notes are an integral part of these consolidated financial
statements.
4
FREDERICK COUNTY BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY (UNAUDITED)
Accumulated
Other
Additional Retained Comprehensive Total
Shares Common Paid-in Earnings Income Shareholders'
(dollars in thousands) Outstanding Stock Capital (Deficit) (Loss) Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2003 727,576 $7 $14,617 $ (2,359) $ 100 $12,365
Comprehensive income:
Net income 201 201
Other comprehensive income (loss) (119) (119)
-------------
Comprehensive income 82
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2003 727,576 $7 $14,617 $ (2,158) $ (19) $12,447
====================================================================================================================================
Balance, January 1, 2004 727,576 $7 $14,617 $ (1,929) $ 13 $12,708
Comprehensive income:
Net income 1,030 1,030
Other comprehensive income (loss) (8) (8)
-------------
Comprehensive income 1,022
-------------
Shares issued with stock split, effected
in the form of a stock dividend 727,576 8 (8) -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 1,455,152 $15 $14,609 $ (899) $5 $13,730
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
5
FREDERICK COUNTY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2004 2003
------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,030 $ 201
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 149 137
Provision for loan losses 315 315
Securities (gains) losses 5 (34)
Net premium amortization on investment securities 78 243
Decrease (increase) in other assets (233) 52
Increase (decrease) in accrued interest and other liabilities 294 (223)
------------------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities 1,638 691
------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities available for sale (5,144) (10,261)
Purchases of investment securities held to maturity (299) --
Proceeds from sales of investment securities available for sale 1,188 2,382
Proceeds from maturities of investment securities available for sale 3,110 12,949
Purchases of restricted stock (147) (196)
Net increase in loans (27,564) (30,794)
Purchases of bank premises and equipment (682) (24)
------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (29,538) (25,944)
------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in NOW, money market accounts, savings accounts and
noninterest-bearing deposits 14,512 11,176
Net increase in time deposits 12,405 9,620
Net increase (decrease) in short-term borrowings 330 (200)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 27,247 20,596
------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (653) (4,657)
Cash and cash equivalents - beginning of period 17,549 19,948
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $16,896 $15,291
========================================================================================================================
Supplemental cash flow disclosures:
Interest paid $1,227 $1,119
========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
6
FREDERICK COUNTY BANCORP, INC.
Notes to Financial Statements (Unaudited)
NOTE 1. GENERAL:
On September 30, 2003, the Agreement and Plan of Share Exchange (the "Exchange")
between Frederick County Bancorp, Inc. (the "Bancorp") and Frederick County Bank
(the "Bank"), dated June 9, 2003, approved at the Special Meeting of
Shareholders of the Bank held on September 22, 2003, became effective. Pursuant
to the Exchange, each of the outstanding shares of common stock $10.00 par value
of the Bank was converted into one share of the common stock $0.01 par value of
the Bancorp. As a result of the Exchange, the Bank has become a wholly owned
subsidiary of the Bancorp and Bancorp recognized the assets and liabilities
transferred at the carrying amounts in the accounts of the Bank.
The accompanying consolidated financial statements of Frederick County Bancorp,
Inc. and its wholly-owned subsidiary, Frederick County Bank, (collectively, the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
are presented as if the exchange of shares occurred on January 1, 2003.
Accordingly, they do not include all of the information and disclosures required
by generally accepted accounting principles for complete financial statements.
The financial statements for the three-month and nine-month periods ended
September 30, 2003 reflect only the operations of the Bank, since the Bancorp
had not been formed at that time. These statements should be read in conjunction
with the financial statements and accompanying footnotes included in the
Company's 2003 Annual Report to Shareholders. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included. The results shown in this interim
report are not necessarily indicative of results to be expected for any other
period or for the full year ended December 31, 2004.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates and assumptions are based on
information available as of the date of the financial statements and could
differ from actual results.
On August 30, 2000, the Bank was incorporated and in 2001, became engaged in the
developmental activities needed to obtain a commercial bank charter in the State
of Maryland. The Bank received regulatory approval to commence banking
operations on October 18, 2001 and, accordingly, became operational during the
year ended December 31, 2001. The Bank provides its customers with various
banking services. The Bank offers various loan and deposit products to their
customers.
NOTE 2. EARNINGS PER SHARE:
Earnings per share ("EPS") are disclosed as basic and diluted. Basic EPS is
generally computed by dividing net income by the weighted-average number of
common shares outstanding for the period, whereas diluted EPS essentially
reflects the potential dilution in basic EPS that could occur if other contracts
to issue common stock were exercised.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------
Net income $428 $132 $1,030 $201
---------------------------------------------------------------------------------------------------------------------
Basic earnings per share $0.29 $0.09 $0.71 $0.14
---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $0.28 $0.09 $0.68 $0.14
---------------------------------------------------------------------------------------------------------------------
Basic weighted average number of shares outstanding 1,455,152 1,455,152 1,455,152 1,455,152
Effect of dilutive securities - stock options 59,691 22,486 56,173 20,334
---------------------------------------------------------------------------------------------------------------------
Diluted weighted average number of shares outstanding 1,514,843 1,477,638 1,511,325 1,475,486
=====================================================================================================================
7
NOTE 3. EMPLOYEE STOCK OPTION PLAN:
On April 10, 2002, the shareholders of the Bank approved the stock-based
compensation plan, which was assumed by the Company in connection with the
Exchange. The Company accounts for this plan under the recognition and
measurement principles of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, no stock-based employee compensation cost has been recognized, as
all options granted under this plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share had compensation
cost for the stock-based compensation plan been determined based on the grant
date fair values of awards (the method described in SFAS No. 123, Accounting for
Stock-Based Compensation):
---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------
Net income:
As reported $428 $132 $1,030 $201
---------------------------------------------------------------------------------------------------------------------
Deduct total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects -- (11) -- (32)
---------------------------------------------------------------------------------------------------------------------
Pro forma $428 $121 $1,030 $169
=====================================================================================================================
Basic earnings per share:
As reported $0.29 $0.09 $0.71 $0.14
=====================================================================================================================
Pro forma $0.29 $0.08 $0.71 $0.12
=====================================================================================================================
Diluted earnings per share:
As reported $0.28 $0.09 $0.68 $0.14
=====================================================================================================================
Pro forma $0.28 $0.08 $0.68 $0.11
=====================================================================================================================
The stock options granted during 2001 to purchase 133,660 shares have a vesting
schedule of 30% on October 18, 2001, 30% on October 18, 2002, and the remaining
40% on October 18, 2003.
There were no options granted in 2004 or 2003. The fair value of the options
granted in 2001 were estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
----------------------------------------------------------------------------
Dividend yield 2.5%
----------------------------------------------------------------------------
Expected Volatility 10.00%
----------------------------------------------------------------------------
Risk free interest rate 4.57%
----------------------------------------------------------------------------
Expected life, in years 10
----------------------------------------------------------------------------
Weighted-average fair value of options granted during the year $1.75
----------------------------------------------------------------------------
NOTE 4. INVESTMENT PORTFOLIO:
The following tables set forth certain information regarding the Company's
investment portfolio at September 30, 2004 and December 31, 2003:
AVAILABLE-FOR-SALE PORTFOLIO
September 30, 2004
-------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Value Average
(dollars in thousands) Cost Gain Loss Yield
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury and other U.S. government
Agencies and corporations:
Due after one year through five years $ 500 $-- $ 8 $ 492 2.37%
Mortgage-backed debt securities 15,973 71 54 15,990 4.04%
Equity Securities 200 -- -- 200 --
-------------------------------------------------------------------------------------------------------------------
$16,673 $71 $62 $16,682 3.75%
===================================================================================================================
8
December 31, 2003
-----------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Value Average
(dollars in thousands) Cost Gain Loss Yield
-----------------------------------------------------------------------------------------------------------------
U.S. Treasury and other U.S. government
Agencies and corporations:
Due after one year through five years $ 1,000 $ -- $16 $ 984 2.21%
Mortgage-backed debt securities 14,911 89 52 14,948 3.73%
-----------------------------------------------------------------------------------------------------------------
$15,911 $89 $68 $15,932 3.63%
=================================================================================================================
HELD-TO-MATURITY PORTFOLIO
September 30, 2004
-----------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Value Average
(dollars in thousands) Cost Gain Loss Yield
-----------------------------------------------------------------------------------------------------------------
State and political subdivisions:
-----------------------------------------------------------------------------------------------------------------
Due after five years through ten years $299 $-- $-- $299 4.78%
=================================================================================================================
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES:
Loans consist of the following:
September 30, % of December 31, % of
(dollars in thousands) 2004 Loans 2003 Loans
-------------------------------------------------------------------------------------------------------------------------------
Real estate loans:
Construction and land development $21,953 18% $10,741 11%
-------------------------------------------------------------------------------------------------------------------------------
Mortgage loans:
Secured by 1 to 4 family residential properties 25,430 21% 18,349 19%
Secured by multi-family (5 or more) residential properties 3,404 3% -- --%
Secured by commercial properties 45,860 37% 43,726 46%
Secured by farm land 4,248 3% 1,139 1%
-------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 78,942 64% 63,214 66%
-------------------------------------------------------------------------------------------------------------------------------
Loans to farmers -- -- 775 1%
Commercial and industrial loans 19,068 15% 19,290 20%
Loans to individuals for household, family and other personal expenditures 3,626 3% 2,009 2%
-------------------------------------------------------------------------------------------------------------------------------
123,589 100% 96,029 100%
======= =========
Less allowance for loan losses (1,296) (985)
-------------------------------------------------------------------------------------------------------------------------------
Net loans $122,293 $95,044
============================================================================================== =================
9
Transactions in the allowance for loan losses are summarized as follows:
-----------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------------------------------------------------------------------
(dollars in thousands) 2004 2003
-----------------------------------------------------------------------------------
Average total loans outstanding during period $109,138 $74,274
-----------------------------------------------------------------------------------
Balance at beginning of period $985 $613
Provision charged to operating expenses 315 315
Recoveries of loans previously charged-off -- 2
-----------------------------------------------------------------------------------
1,300 930
Loans charged-off (4) (50)
-----------------------------------------------------------------------------------
Balance at end of period $1,296 $880
===================================================================================
NOTE 6. NONINTEREST EXPENSES:
Noninterest expenses consist of the following:
---------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------------------------------------------------
(dollars in thousands) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------
Salaries $ 602 $472 $1,663 $1,387
Deferred Personnel Costs (42) (32) (115) (98)
Payroll Taxes 35 31 115 113
Employee Insurance 28 18 81 58
Other Employee Benefits 21 19 62 60
Depreciation 52 46 149 137
Rent 60 52 162 145
Utilities 13 17 42 49
Repairs and Maintenance 15 29 53 70
ATM Expense 13 11 39 33
Other Occupancy and Equipment Expenses 15 9 34 28
Postage and Supplies 17 9 44 31
Data Processing 74 60 218 172
Advertising and Promotion 31 22 104 71
Legal 2 6 22 16
Insurance 12 15 33 36
Consulting 11 11 31 31
Courier 10 7 25 21
Audit Fees 22 13 66 30
Shareholder Relations 2 1 8 1
Other 50 27 143 79
---------------------------------------------------------------------------------------------------------
$1,043 $843 $2,979 $2,470
=========================================================================================================
A bonus accrual of $153,000 and $80,000 is included in the salaries expense for
the nine and three-month periods ended September 30, 2004, whereas, there are no
accruals for either period in 2003.
NOTE 7. 401(k) PROFIT SHARING PLAN:
The Company has a Section 401(k) profit sharing plan covering employees meeting
certain eligibility requirements as to minimum age and years of service.
Employees may make voluntary contributions to the Plan through payroll
deductions on a pre-tax basis. The Company makes discretionary contributions to
the Plan based on the Company's earnings. The Company's contributions are
subject to a vesting schedule (20 percent per year) requiring the completion of
five years of service with the Company, before these benefits are fully vested.
A participant's account under the Plan, together with investment earnings
thereon, is normally distributable, following retirement, death, disability or
other termination of employment, in a single lump-sum payment.
The Company made contributions to the Plan in the amounts of $26,000 and $24,000
for the first nine months of 2004 and 2003, respectively.
10
NOTE 8. SHAREHOLDERS' EQUITY:
Capital:
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and Tier 1 capital (as
defined) to average assets (as defined). In addition, since the Bank is a new
financial institution, it is required by the Federal Reserve Bank to maintain a
9.0% Tier 1 capital to average asset ratio (leverage ratio) until October 2004.
Management believes that the Company and the Bank met all capital adequacy
requirements to which they are subject as of September 30, 2004.
As of September 30, 2004, the most recent notification from the regulatory
agency categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since that
notification which management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios at September 30,
2004 and December 31, 2003 are presented in the following tables.
-----------------------------------------------------------------------------------------------------------------------
Minimum To Be Well
Capitalized Under
For Capital Prompt Corrective
September 30, 2004 Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------------------------------
Tier 1 Capital
To Risk-Weighted Assets
Company $13,725 10.12% $5,426 4.00% N/A N/A
Bank $13,788 10.18% $5,416 4.00% $8,124 6.00%
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Total Capital
To Risk-Weighted Assets
Company $15,021 11.07% $10,852 8.00% N/A N/A
Bank $15,084 11.14% $10,832 8.00% $13,540 10.00%
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Tier 1 Capital
To Average Assets(1)
Company $13,725 9.10% $6,032 4.00% N/A N/A
Bank $13,788 9.16% $6,022 4.00% $7,528 5.00%
-----------------------------------------------------------------------------------------------------------------------
11
-----------------------------------------------------------------------------------------------------------------------
Minimum To Be Well
Capitalized Under
For Capital Prompt Corrective
December 31, 2003 Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------------------------------
Tier 1 Capital
To Risk-Weighted Assets
Company $12,695 11.95% $4,250 4.00% N/A N/A
Bank $12,733 11.99% $4,247 4.00% $6,370 6.00%
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Total Capital
To Risk-Weighted Assets
Company $13,680 12.88% $8,499 8.00% N/A N/A
Bank $13,718 12.92% $8,494 8.00% $10,617 10.00%
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Tier 1 Capital
To Average Assets(1)
Company $12,695 10.39% $4,886 4.00% N/A N/A
Bank $12,733 10.43% $4,885 4.00% $6,107 5.00%
-----------------------------------------------------------------------------------------------------------------------
(1) The Bank is required to have a Tier 1 Capital to Average Assets Ratios
of only 4.00% and 5.00% for Capital Adequacy Purposes and to be Well
Capitalized Under Prompt Corrective Action Provisions, respectively.
However, under the approval received from the Federal Reserve Bank, the
Bank is also required to maintain a minimum Tier 1 Capital to Average
Assets of 9.00% until October 2004. At September 30, 2004, and December
31, 2003, the level of Tier 1 Capital required to meet the 9%
requirement totaled $13,551,000 and $10,992,000, respectively.
Additionally, the Company has not repurchased any outstanding shares of its
common stock, nor does it have an approved repurchase program at this time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
This management's discussion and analysis contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including statements relating to the Frederick County Bancorp, Inc. (the
"Company") beliefs, expectations, anticipations and plans regarding, among other
things, general economic trends, interest rates, product expansions and other
matters. Such forward-looking statements are identified by terminology such as
"may", "will", "believe", "expect", "estimate", "anticipate", "likely",
"unlikely", "continue", or similar terms and are subject to numerous
uncertainties, such as federal monetary policy, inflation, employment,
profitability and consumer confidence levels, both nationally and in the
Company's market area, the health of the real estate and construction market in
the Company's market area, the Company's ability to develop and market new
products and to enter new markets, competitive challenges in the Company's
market, legislative changes and other factors, and as such, there can be no
assurance that future events will develop in accordance with the forward-looking
statements contained herein. Readers are cautioned against placing undue
reliance on any such forward-looking statement. In addition, the Company's past
results of operations do not necessarily indicate its future results.
The following paragraphs provide an overview of the financial condition and
results of operations of the Company. This discussion is intended to assist the
readers in their analysis of the accompanying financial statements and notes
thereto.
The Company was organized in May 2003 and on September 30, 2003, the Agreement
and Plan of Share Exchange (the "Exchange") between the Company and Frederick
County Bank (the "Bank"), dated June 9, 2003, approved at the Special Meeting of
Shareholders of the Bank held on September 22, 2003, became effective. Pursuant
to the Exchange, each of the outstanding shares of common stock $10.00 par value
of the Bank was converted into one share of the common stock $0.01 par value of
the Company. As a result of the Exchange, the Bank has become a wholly owned
subsidiary of the Company. During February 2004, the Company received approval
from the Federal Reserve Bank of Richmond to become a financial holding company.
The Bank was incorporated on August 30, 2000 and during 2001 became actively
involved in the developmental activities needed to obtain a commercial bank
charter in the State of Maryland. All regulatory approvals were received, and
the Bank commenced operations on October 18, 2001.
12
The Company is continually looking for promising branch sites that will
contribute to the Company's growth and profit expectations. While additional
branching activity is anticipated, there can be no assurance as to when or if,
additional branches will be established, whether any such branches can be
operated profitably, or whether such expansion will result in increased assets,
earnings, return on equity or shareholder value.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with accounting
principles generally accepted ("GAAP") in the United States of America and
follow general practices within the industry in which it operates. Application
of these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions, and judgments. Certain policies inherently have a
greater reliance on the use of estimates, assumptions, and judgments and as such
have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available. The estimates used in management's assessment of the adequacy of
the allowance for credit losses require that management make assumptions about
matters that are uncertain at the time of estimation. Differences in these
assumptions and differences between the estimated and actual losses could have a
material effect. Further information is located in the section labeled Allowance
for Loan Losses, later in this report.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
The net income was $1.03 million and $201,000 for the nine-month periods ended
September 30, 2004 and 2003, respectively. The basic earnings per share for the
nine months ended September 30, 2004 and 2003 are $0.71 and $0.14, respectively,
and based on the weighted-average number of shares outstanding of 1,455,152 for
each period. The diluted earnings per share for the nine months ended September
30, 2004 and 2003 are $0.68 and $0.14, respectively, and based on the
weighted-average number of shares outstanding of 1,511,325 and 1,475,486,
respectively.
The Company experienced an annualized return on average assets of 0.97% and
0.25% for the nine-month periods ended September 30, 2004 and 2003,
respectively. Additionally, the Company experienced an annualized return on
average shareholders' equity of 10.41% and 2.16% for the nine-month periods
ended September 30, 2004 and 2003, respectively.
The Company experienced significant asset growth of $28.56 million, or 21.7%,
during the first nine months of 2004, reaching $159.19 million at September 30,
2004, up from the $130.64 million as of December 31, 2003. Gross loans increased
$27.56 million, or 28.7% to end the period at $123.59 million, up from $96.03
million as of December 31, 2003. Deposits also grew, and stood at $144.41
million at September 30, 2004, an increase of 22.9% since December 31, 2003. The
increase in the bank premises and equipment was primarily due to the purchase of
land for a new branch site in the amount of $550,000.
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
The net income was $428,000 for the three months ended September 30, 2004. This
compares favorably to the $132,000 profit recorded for the same period in 2003.
The basic earnings per share for the three months ended September 30, 2004 and
2003 are $0.29 and $0.09, respectively, and based on the weighted-average number
of shares outstanding of 1,455,152 for each period. The diluted earnings per
share for the three months ended September 30, 2004 and 2003 are $0.28 and
$0.09, respectively, and based on the weighted-average number of shares
outstanding of 1,514,843 and 1,477,638, respectively.
The Company experienced an annualized return on average assets of 1.14% and
0.44% for the three-month periods ended September 30, 2004 and 2003,
respectively. Additionally, the Company experienced an annualized return on
average shareholders' equity of 12.71% and 4.23% for the three-month periods
ended September 30, 2004 and 2003, respectively.
13
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The "Comparative Statement Analysis," shows average balances of asset and
liability categories, interest income and interest paid, and average yields and
rates for the periods indicated.
FREDERICK COUNTY BANCORP, INC.
COMPARATIVE STATEMENT ANALYSIS
Nine months ended September 30, 2004 2003
-----------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Daily Income/ Yield/ Daily Income/ Yield/
(dollars in thousands) Balance Paid Rate Balance Paid Rate
-----------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Federal funds sold $10,262 $ 85 1.10% $ 8,160 $ 65 1.07%
Interest bearing deposits in other banks 527 4 1.01 4,313 34 1.05
Investment securities:
Taxable 16,934 452 3.56 18,623 409 2.94
Loans 109,138 4,844 5.91 74,274 3,428 6.17
-----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 136,861 5,385 5.24 105,370 3,936 4.99
-----------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 4,700 3,978
-----------------------------------------------------------------------------------------------------------------------------
Total assets $141,561 $109,348
=============================================================================================================================
Liabilities and Shareholders' Equity
Interest-bearing liabilities
NOW accounts $ 15,623 20 0.17% $ 15,230 24 0.21%
Savings accounts 3,396 13 0.51 2,196 11 0.67
Money market accounts 28,814 201 0.93 20,066 148 0.99
Certificates of deposit
$100,000 or more 29,266 472 2.15 20,695 408 2.64
Certificates of deposit
less than $100,000 30,986 521 2.24 25,843 524 2.71
Short-term borrowings 388 12 4.12 17 -- --
-----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 108,473 1,239 1.52 84,047 1,115 1.77
-----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 19,617 12,651
Noninterest-bearing liabilities 283 218
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities 128,373 96,616
-----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,188 12,432
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' $141,561
equity $109,348
=============================================================================================================================
Net interest income $4,146 $2,821
=============================================================================================================================
Net interest spread 3.72% 3.22%
=============================================================================================================================
Net interest margin 4.04% 3.58%
=============================================================================================================================
14
FREDERICK COUNTY BANCORP, INC.
COMPARATIVE STATEMENT ANALYSIS
Three months ended September 30, 2004 2003
------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Daily Income/ Yield/ Daily Income/ Yield/
(dollars in thousands) Balance Paid Rate Balance Paid Rate
------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Federal funds sold $ 9,697 $ 34 1.39% $ 8,058 $ 18 0.89%
Interest bearing deposits in other banks 746 2 1.06 6,578 15 0.90
Investment securities:
Taxable 16,960 155 3.63 17,170 95 2.20
Loans 118,598 1,784 5.97 84,236 1,268 5.97
------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 146,001 1,975 5.37 116,042 1,396 4.77
------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 4,812 3,737
------------------------------------------------------------------------------------------------------------------------------
Total assets $150,813 $119,779
==============================================================================================================================
Liabilities and Shareholders' Equity
Interest-bearing liabilities
NOW accounts $16,712 7 0.17% $ 19,197 10 0.21%
Savings accounts 3,534 4 0.45 2,334 3 0.51
Money market accounts 29,982 70 0.93 22,068 50 0.90
Certificates of deposit
$100,000 or more 31,700 182 2.28 22,998 138 2.38
Certificates of deposit
less than $100,000 32,966 188 2.26 26,048 165 2.51
Short-term borrowings 450 5 4.41 -- -- --
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 115,344 456 1.57 92,645 366 1.57
------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 21,648 14,464
Noninterest-bearing liabilities 348 202
------------------------------------------------------------------------------------------------------------------------------
Total liabilities 137,340 107,311
------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,473 12,468
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' $150,813
equity $119,779
==============================================================================================================================
Net interest income $1,519 $1,030
==============================================================================================================================
Net interest spread 3.80% 3.21%
==============================================================================================================================
Net interest margin 4.13% 3.52%
==============================================================================================================================
NET INTEREST INCOME
Net interest income is generated from the Company's lending and investment
activities, and is the most significant component of the Company's earnings. Net
interest income is the difference between interest and rate-related fee income
on earning assets (primarily loans and investment securities) and the interest
paid on the funds (primarily deposits) supporting them. While the Company
currently relies almost entirely on deposits to fund loans and investments, with
minimal short term borrowings, in future periods it may utilize a higher level
of short-term borrowings, including borrowings from the Federal Home Loan Bank,
federal funds lines with correspondent banks and repurchase agreements, to fund
operations, depending on economic conditions, deposit availability and pricing,
interest rates and other factors.
The Bank commenced operations on October 18, 2001. Since it's opening,
management has been pleased with the Bank's asset growth. Core deposit
relationships are being developed within the local market place, driven by
competitive pricing and excellent customer service.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
The interest income of $5.39 million in 2004 was $1.45 million higher than the
amount recognized in 2003. This dramatic increase in interest income is due to
the growth in average earning assets of $31.49 million or 29.9% since September
30, 2003. The yield on average earning assets in 2004 increased to 5.24% from
4.99% in 2003. The Company's net interest margin was 4.04% and 3.58%
and the net interest spread was 3.72% and 3.22% for the nine-month periods ended
September 30, 2004 and 2003, respectively. The increase in yield on earning
assets, net interest margin and net interest spread, despite the decline in the
yield on the loan portfolio, primarily reflects the increase in average loans as
a percentage of average earning assets to 79.7% at September 30, 2004, as
compared to 70.5% at September 30, 2003.
15
The interest expense increased marginally from $1.12 million in 2003 to $1.24
million in 2004 due to the 29.1% increase in volume of average interest-bearing
liabilities that increased from $84.05 million as of September 30, 2003 to
$108.47 million as of September 30, 2004, net of the offset caused by the
decline in the average rate paid on these liabilities from 1.77% in 2003 to
1.52% in 2004.
The decline in the rate paid on interest-bearing liabilities for the first nine
months of 2004 from the levels in 2003, reflect the continued impact of the
significant rate reductions effected by the Federal Reserve in 2001 and
continued into 2002 with the last rate reduction occurring in June 2003. While
the Federal Reserve has begun increasing interest rates, an aggregate increase
of 0.75% since June 30, 2004, the effect of these increases has not been fully
reflected in rates paid on deposit accounts.
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
The interest income of $1.98 million in 2004 was $579,000 higher than the amount
recognized in 2003. This dramatic increase in interest income is due to the
growth in average earning assets of $29.96 million or 25.8% since September 30,
2003. The yield on earning assets in 2004 increased to 5.37% from 4.77% in 2003.
This increase in yield is attributable to the impact of a larger percentage of
loans to average interest-earning assets. The Company's net interest margin was
4.13% and 3.52% and the net interest spread was 3.80% and 3.21% for the
three-month periods ended September 30, 2004 and 2003, respectively. Average
loans as a percentage of average interest-earnings assets increased to 81.2% for
the three months ended September 30, 2004, as compared to 72.6% for the same
period in 2003.
The interest expense increased marginally from $366,000 in 2003 to $456,000 in
2004 due to the increase in volume of interest-bearing liabilities since the
rate paid on these liabilities remained constant at 1.57% for both periods. As
noted above, increases in interest rates by the Federal Reserve have not yet had
a significant impact on rates paid on deposits, although it is expected that
such rates will increase over time.
NONINTEREST INCOME
Noninterest income was $178,000 and $165,000 for the nine-month periods ended
September 30, 2004 and 2003, respectively, attributable primarily to service
fees on deposit accounts and ATM interchange fees. Included in the noninterest
income for 2003 is $34,000 of securities gains, which were realized in the first
quarter, and for 2004, $5,000 in securities losses realized in the third
quarter.
The Company's management is committed to developing and offering innovative,
market-driven products and services that will generate additional sources of
noninterest income. However, the future results of any of these products or
services cannot be predicted at this time.
NONINTEREST EXPENSES
Noninterest expenses amounted to $2.98 million and $2.47 million for the first
nine months of 2004 and 2003, respectively. See Note 6 to the financial
statements for a schedule showing a detailed breakdown of the Company's
noninterest expenses. The changes in noninterest expenses are principally
related to the following: an increase in personnel costs (including a bonus
accrual of $153,000 and $80,000 for the nine and three month periods ended
September 30, 2004, whereas, there were no accruals for either period in 2003);
the increase in data processing expenses, which increase as the number and
volume of loans and deposit accounts increase, along with the introduction of
new products; and the additional advertising expense to increase the Bank's name
recognition in the local community.
INCOME TAXES
The Company has recorded a $344,000 deferred tax valuation allowance related to
various temporary differences, principally consisting of the provision for loan
losses, against $500,000 in deferred tax assets as of September 30, 2004. At
December 31, 2003 the Company had a 100% deferred tax valuation allowance to
various temporary differences, principally consisting of the provision for loan
losses and its net operating loss carryforward totaling $910,000.
MARKET RISK, LIQUIDITY AND INTEREST RATE SENSITIVITY
Asset/liability management involves the funding and investment strategies
necessary to maintain an appropriate balance between interest sensitive assets
and liabilities. It also involves providing adequate liquidity while sustaining
stable growth in net interest income. Regular review and analysis of deposit and
loan trends, cash flows in various categories of loans, and monitoring of
interest spread relationships are vital to this process.
16
The conduct of our banking business requires that we maintain adequate liquidity
to meet changes in the composition and volume of assets and liabilities due to
seasonal, cyclical or other reasons. Liquidity describes the ability of the
Company to meet financial obligations 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 for meeting
current and future planned expenditures. This liquidity is typically provided by
the funds received through customer deposits, investment maturities, loan
repayments, borrowings, and income. Management considers the current liquidity
position to be adequate to meet the needs of the Company and its customers.
The Company seeks to limit the risks associated with interest rate fluctuations
by managing the balance between interest sensitive assets and liabilities.
Managing to mitigate interest rate risk is, however, not an exact science. Not
only does the interval until repricing of interest rates on assets and
liabilities change from day to day as the assets and liabilities change, but for
some assets and liabilities, contractual maturity and the actual maturity
experienced are not the same. Similarly, NOW and money market accounts, by
contract, may be withdrawn in their entirety upon demand and savings deposits
may be withdrawn on seven days notice. While these contracts are extremely
short, it is the Company's belief that these accounts turn over at the rate of
five percent (5%) per year. The Company therefore treats them as having
maturities staggered over all periods. If all of the Company's NOW, money
market, and savings accounts were treated as repricing in one year or less, the
cumulative gap at one year or less would be $(22.46) million.
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of the Company's earning assets and
funding sources. An Asset/Liability Committee manages the interest rate
sensitivity position in order to maintain an appropriate balance between the
maturity and repricing characteristics of assets and liabilities that is
consistent with the Company's liquidity analysis, growth, and capital adequacy
goals. It is the objective of the Asset/Liability Committee to maximize net
interest margins during periods of both volatile and stable interest rates, to
attain earnings growth, and to maintain sufficient liquidity to satisfy
depositors' requirements and meet credit needs of customers.
The table below, "Interest Rate Sensitivity Gap Analysis," summarizes, as of
September 30, 2004, the anticipated maturities or repricing of the Company's
interest-earning assets and interest-bearing liabilities, the Company's interest
rate sensitivity gap (interest-earning assets less interest-bearing
liabilities), the Company's cumulative interest rate sensitivity gap, and the
Company's cumulative interest sensitivity gap ratio (cumulative interest rate
sensitivity gap divided by total assets). A negative gap for any time period
means that more interest-bearing liabilities will reprice or mature during that
time period than interest-earning assets. During periods of rising interest
rates, a negative gap position would generally decrease earnings, and during
periods of declining interest rates, a negative gap position would generally
increase earnings. The converse would be true for a positive gap position.
Therefore, a positive gap for any time period means that more interest-earning
assets will reprice or mature during that time period than interest-bearing
liabilities. During periods of rising interest rates, a positive gap position
would generally increase earnings, and during periods of declining interest
rates, a positive gap position would generally decrease earnings.
17
It is important to note that the following table represents the static gap
position for interest sensitive assets and liabilities at September 30, 2004.
The table does not give effect to prepayments or extensions of loans as a result
of changes in general market interest rates. Moreover, while the table does
indicate the opportunities to reprice assets and liabilities within certain time
frames, it does not account for timing differences that occur during periods of
repricing. For example, changes to deposit rates tend to lag in a rising rate
environment and lead in a falling rate environment.
INTEREST RATE SENSITIVITY GAP ANALYSIS
SEPTEMBER 30, 2004
Expected Repricing or Maturity Date
------------------------------------------------------------------------------------------------------------------------------------
Within One to Three to After
(dollars in thousands) One Year Three Years Five Years Five Years Total
------------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold $11,815 $ - $ -- $ -- $ 11,815
Interest-bearing deposits in
other banks 300 -- -- -- 300
Investment securities 1,062 1,864 5,065 8,790 16,781
Loans 57,009 20,084 37,600 8,896 123,589
------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 70,186 21,948 42,665 17,686 152,485
------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Savings and NOW Accounts 1,292 2,584 2,584 19,382 25,842
Money Market Accounts 1,477 2,954 2,954 22,156 29,541
Certificates of Deposit 36,811 19,646 11,497 -- 67,954
Short-term borrowings 450 -- -- -- 450
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 40,030 25,184 17,035 41,538 123,787
------------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $30,156 $(3,236) $25,630 $(23,852) $ 28,698
====================================================================================================================================
Cumulative interest rate
sensitivity gap $30,156 $26,920 $52,550 $ 28,698
====================================================================================================================================
Cumulative gap ratio as a
percentage of total assets 18.94% 16.91% 33.01% 18.03%
====================================================================================================================================
CRITICAL ACCOUNTING POLICY:
ALLOWANCE FOR LOAN LOSSES
The Company makes provisions for loan losses in amounts deemed necessary to
maintain the allowance for loan losses at an appropriate level. The provision
for loan losses is determined based upon management's estimate of the amount
required to maintain an adequate allowance for loan losses reflective of the
risks in the Company's loan portfolio. The Company's provision for loan losses
for the first nine months of 2004 and 2003 was $315,000. The loan growth was
$27.56 million for the first nine months of 2004. At September 30, 2004 and
December 31, 2003, the allowance for loan losses was $1.30 million and $985,000,
respectively.
The allowance for loan losses is an estimate of the losses that are inherent in
the loan portfolio. The allowance is based on two basic principles of
accounting: (i) SFAS No. 5, Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimatable and (ii)
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires
that losses be accrued based on the differences between the loan balance and
either the value of collateral, or the present value of future cash flows, or
the loan's value as observable in the secondary market. The provision for loan
losses included in the statements of operations serve to maintain the allowance
at a level management considers adequate.
The Company's allowance for loan losses has three basic components: the specific
allowance, the formula allowance and the pooled allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. As a result of the uncertainties inherent in the estimation
process, management's estimate of loan losses and the related allowance could
change in the near term.
The specific allowance component is used to individually allocate an allowance
for loans identified as impaired. Impairment testing includes consideration of
the borrower's overall financial condition, resources and payment record,
support available from financial guarantors and the fair market value of
collateral. These factors are combined to estimate the probability and severity
of inherent losses. When impairment is identified, then a specific reserve is
established based on the Company's calculation of the loss embedded in the
individual loan. Large groups of smaller balance, homogeneous loans are
collectively evaluated for impairment. Accordingly, the Company does not
separately identify individual consumer and residential loans for impairment. At
September 30, 2004 there were no loans deemed to be impaired.
18
The formula allowance component is used for estimating the loss on internally
risk rated loans and those loans identified for impairment testing, for which no
impairment was identified. The loans meeting the Company's internal criteria for
classification, such as special mention, substandard, doubtful and loss, as well
as, impaired loans, are segregated from performing loans within the portfolio.
These internally classified loans are then grouped by loan type (commercial,
commercial real estate, commercial construction, residential real estate,
residential construction or installment). Each loan type is assigned an
allowance factor based on management's estimate of the associated risk,
complexity and size of the individual loans within the particular loan category.
Classified loans are assigned a higher allowance factor than non-classified
loans due to management's concerns regarding collectability or management's
knowledge of particular elements surrounding the borrower. Allowance factors
increase with the worsening of the internal risk rating.
The pooled formula component is used to estimate the losses inherent in the
pools of non-classified loans. These loans are then also segregated by loan type
and allowance factors are assigned by management based on delinquencies, loss
history, trends in volume and terms of loans, effects of changes in lending
policy, the experience and depth of management, national and local economic
trends, concentrations of credit, quality of loan review system and the effect
of external factors (i.e. competition and regulatory requirements). The
allowance factors assigned differ by loan type.
Allowance factors and overall size of the allowance may change from period to
period based on management's assessment of the above-described factors and the
relative weights given to each factor.
Management believes that the allowance for loan losses is adequate. There can be
no assurance, however, that additional provisions for loan losses will not be
required in the future, including as a result of changes in the economic
assumptions underlying management's estimates and judgments, adverse
developments in the economy, on a national basis or in the Company's market
area, or changes in the circumstances of particular borrowers.
As of September 30, 2004, the real estate loan portfolio constituted 82% of the
total loan portfolio. The Company does not have a concentration of loans that
exceed 10% of the total loan portfolio to any one industry. An industry for this
purpose is defined as a group of counterparties that are engaged in similar
activities and have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes in
economic or other conditions.
September 30,
---------------------------------------------------------------------------------------------
(dollars in thousands) 2004 2003
---------------------------------------------------------------------------------------------
Average total loans outstanding during period $109,138 $74,274
---------------------------------------------------------------------------------------------
Balance at beginning of period $ 985 $ 613
Provision charged to operating expenses 315 315
Recoveries of loans previously charged-off -- 2
---------------------------------------------------------------------------------------------
1,300 930
Loans charged-off (4) (50)
---------------------------------------------------------------------------------------------
Balance at end of period $ 1,296 $ 880
=============================================================================================
The allocation of the allowance, presented in the following table, is based
primarily on the factors discussed above in evaluating the adequacy of the
allowance as a whole. Since all of those factors are subject to change, the
allocation is not necessarily indicative of the category of recognized loan
losses, and does not restrict the use of the allowance to absorb losses in any
category.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
-----------------------------------------------------------------------------
September 30, 2004 % of
Loans
-----------------------------------------------------------------------------
Real estate-construction $ 121 18%
Real estate-mortgage 821 64%
Commercial and industrial loans 292 15%
Loans to individuals 62 3%
-----------------------------------------------------------------------------
$1,296 100%
=============================================================================
19
September 30, December 31,
-------------------------------------------------------------------------------
2004 2003
-------------------------------------------------------------------------------
Nonaccrual loans $120 $--
Loans 90 days past due -- --
-------------------------------------------------------------------------------
Total nonperforming loans 120 --
Other real estate owned -- --
-------------------------------------------------------------------------------
Total nonperforming assets $120 $--
===============================================================================
Nonperforming assets to total assets 0.08% 0.00%
===============================================================================
There were no other interest-bearing assets at September 30, 2004 nor December
31, 2003, classified as past due 90 days or more and still accruing,
restructured or problem assets, and no loans which were currently performing in
accordance with their terms, but as to which information known to management
caused it to have serious doubts about the ability of the borrower to comply
with the loan as currently written.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments included commitments to extend credit, including
unused portions of lines of credit, and standby letters of credit. The Company
has also entered into long-term lease obligations for some of its premises and
equipment, the terms of which generally include options to renew. The above
instruments and obligations involve, to varying degrees, elements of off-balance
sheet risk in excess of the amount recognized in the statements of financial
condition. None of these instruments or obligations have or are reasonably
likely to have a current or future effect on the Company's financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors.
Commitments to extend credit and standby letters of credit as of September 30,
2004 were as follows:
September 30,
-------------------------------------------------------------------------------
2004
-------------------------------------------------------------------------------
Contractual
(dollars in thousands) Amount
-------------------------------------------------------------------------------
Financial instruments whose notional or contract
amounts represent credit risk:
Commitments to extend credit $24,580
Standby letters of credit 1,683
-------------------------------------------------------------------------------
Total $26,263
===============================================================================
See Note 8 to the Notes to the Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003 for additional
information regarding the Company's long-term lease obligations.
CAPITAL RESOURCES
In the fourth quarter of 2001, the Bank completed its offering of common stock,
raising an aggregate of $9.44 million net of expenses of the offering. During
the third quarter of 2002, the Bank completed the sale of 250,000 shares of
common stock in a secondary stock offering, raising an additional $5.17 million,
net of expenses of the offering. The ability of the Company to grow is dependent
on the availability of capital with which to meet regulatory requirements,
discussed below, and to absorb initial operating losses. To the extent the
Company is successful it may need to acquire additional capital through the sale
of additional common stock, other qualifying equity instruments or subordinated
debt, or through incurrence of debt which does not qualify as holding company
capital, but which can be contributed as capital to the Bank or utilized for
other corporate purposes. There can be no assurance that additional capital will
be available to the Company on a timely basis or on attractive terms. At
September 30, 2004, the Company had outstanding unsecured variable rate debt of
$450,000, due in 2006.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
20
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and Tier 1 capital (as defined) to average assets (as defined). In
addition, since the Bank is a new financial institution, it is required by the
Federal Reserve Bank to maintain a 9.0% Tier 1 capital to average asset ratio
(leverage ratio) until October 2004. Management believes that the Company and
the Bank met all capital adequacy requirements to which they are subject as of
September 30, 2004. See Note 8 to the consolidated financial statements for a
table depicting compliance with regulatory capital requirements.
As of September 30, 2004, the most recent notification from the regulatory
agency categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table in Note 8. There are no conditions or events
since that notification which management believes have changed the Bank's
category.
Additionally, the Company has not repurchased any outstanding shares of its
common stock, nor does it have an approved repurchase program at this time.
INFLATION
The effect of changing prices on financial institutions is typically different
than on non-banking companies since virtually all of a Company's assets and
liabilities are monetary in nature. In particular, interest rates are
significantly affected by inflation, but neither the timing nor magnitude of the
changes are directly related to price level indices; therefore, the Company can
best counter inflation over the long term by managing net interest income and
controlling net increases in noninterest income and expenses.
ITEM. 3 CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, evaluated, as
of the last day of the period covered by this report, the effectiveness of the
design and operation of the Company's disclosure controls and procedures, as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were adequate.
There were no changes in the Company's internal control over financial reporting
(as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter
ended September 30, 2004 that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities. None
(b) Use of Proceeds. Not Applicable.
(c) Small Business Issuer Purchases of Securities None
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
(a) Information which should have been Reported on Form 8-K. None
(b) Material Changes to Procedures for Director Nomination by Shareholders.
None
Item 6. Exhibits
Exhibit No. Description of Exhibits
3(a) Articles of Incorporation of the Company, as amended(1)
3(b) Bylaws of the Company(2)
10(a) 2001 Stock Option Plan(3)
10(b) Employment Agreement between the Bank and Martin S.
Lapera (4)
10(c) Employment Agreement between the Bank and William R. Talley,
Jr. (4)
10(d) Consulting Agreement between the Bank and Raymond Raedy (4)
11 Statement Regarding Computation of Per Share Income -
Please refer to Note 2 to the unaudited consolidated
financial statements included herein
31(a) Certification of Martin S. Lapera, President and Chief
Executive Officer
31(b) Certification of William R. Talley, Jr., Executive Vice
President and Chief Financial Officer
32(a) Certification of Martin S. Lapera, President and Chief
Executive Officer
32(b) Certification of William R. Talley, Jr., Executive Vice
President and Chief Financial Officer
----------------------------
(1) Incorporated by reference to exhibit of the same number to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2004, as filed with the Securities and
Exchange Commission.
(2) Incorporated by reference to exhibit of the same number to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2003, as filed with the Securities and
Exchange Commission.
(3) Incorporated by reference to exhibit 4 to the Company's
Registration Statement on Form S-8 (No. 333-111761).
(4) Incorporated by reference to exhibit of the same number to the
Bank's Registration Statement on Form 10-SB as filed with the
Board of Governors of the Federal Reserve System.
22
SIGNATURES
In accordance the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FREDERICK COUNTY BANCORP, INC.
Date: November 8, 2004 By: /s/ Martin S. Lapera
----------------------------------------
Martin S. Lapera
President and Chief Executive Officer
Date: November 8, 2004 By: /s/ William R. Talley, Jr.
----------------------------------------
William R. Talley, Jr.
Executive Vice President and Chief Financial
Officer