Selected Financial Highlights
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Columbia Bancorp was formed November 16, 1987 and is a Maryland chartered bank holding compa-ny. The Company holds all of the issued and outstanding shares of common stock of The Columbia Bank (the "Bank").The Bank is a Maryland trust company which engages in general commercial banking opera-tions. The Bank provides a full range of financial services to individuals, businesses and organizations through thirteen branch banking offices, three mortgage loan origination offices and fourteen Automated Teller Machines. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC").The Company considers its home market area to be Howard County, Maryland, with extension of business throughout the contiguous counties comprising central Maryland.
In addition to historical information, this annual report contains forward-looking statements.The for-ward- looking statements contained herein 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. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by the Company in 1998.
The Company reported an increase in net income from $3.8 million in 1996 to $4.2 million in 1997, representing an 11.1% increase and marking the sixth consecutive year during which the Company posted improved earnings. Net income for 1996 was reduced $299,000 as a result of a one-time special assessment imposed by the FDIC to recapitalize the Savings Association Insurance Fund ("SAIF").
Diluted net income per share for 1997 was $1.82 as compared to $1.66 ($1.79 if adjusted to exclude the SAIF assessment) for 1996. Return on average assets and return on average equity for 1997 were 1.2% and 12.8%, respectively. Tangible book value per share increased to $15.54 at December 31, 1997.
The year 1997 can be characterized as a year during which the Company continued its aggressive growth strategy and investment in the future, balanced with solid financial results. Key factors which influ-enced the Company's financial performance during 1997 and which will continue to influence future per-formance include:
Expansion of the Company's branch network with the addition of three full-service branch facilities in Howard County, Maryland.
Expansion of the Company's mortgage banking business, including the addition of personnel as well as the opening of two offices in Baltimore and Montgomery Counties, Maryland.
Growth in total deposits of 23.1%. Core deposits, representing deposits exclusive of certificates of deposit in excess of $100,000, grew $51.9 million or 21.4%.
Growth in loans, net of unearned income and inclusive of loans held for sale, of $32.3 million or 13.5%.
Maintenance of the net yield on earning assets well above the peer group's ratio. The net yield on earning assets was 5.9% during 1997 as compared to 4.8% for the peer group.
The discussion which follows provides further detailed analysis regarding the Company's financial condi-tion and results of operations. It is intended to assist readers in their analysis of the accompanying consoli-dated financial statements and notes thereto.
Net interest income, the amount by which interest income on interest-earning assets exceeds interest expense on interest-bearing liabilities, is the most significant component of the Company's earnings. Net interest income is a function of several factors, including changes in the volume and mix of interest-earning assets and funding sources, and market interest rates.While management policies influence these factors, external forces, including customer needs and demands, competition, the economic policies of the federal government and the monetary policies of the Federal Reserve Board, are also important.
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 liabili-ties. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.
Net interest income on a tax equivalent basis increased to $18.8 million for the year ended December 31, 1997, compared to $17.1 million for 1996.The increase in net interest income during 1997 was primar-ily the result of growth in average interest-earning assets during 1997 of $57.8 million or 22.4%.While interest income increased in 1997, the net interest margin (representing net interest income divided by average interest-earning assets) declined from 6.6% during 1996 to 5.9% during 1997.The decline reflected the impact of competitive forces on loan and deposit pricing, a larger nonperforming loan portfolio and changes in the mix of interest-earning assets and funding sources.
The following table and the related discussions of interest income and interest expense provide further analysis of the increases in net interest income during 1997 and 1996.
primarily as a result of an increase in the average balance of loans and investment securities outstanding in 1997 as compared to 1996. Average loans outstanding, net of unearned income, increased $41.6 million or 19.3% during 1997 and reflected growth in the Company's consumer, commercial and residential develop-ment and construction loan portfolios. Average investment securities and securities available-for-sale increased $20.3 million or 56.7% during 1997 as compared to 1996 as a result of increased investments in U.S. Treasury securities.
The increase in interest income due to average balances was mitigated by a decrease in the yield on interest-earning assets from 10.00% in 1996 to 9.57% in 1997. Specifically, the yield on loans decreased to 10.42% in 1997, compared to 10.89% in 1996 as a result of competitive pricing pressure and a higher non-performing loan portfolio on average. In addition, loans, the Company's highest yielding asset, on average declined as a percentage of interest-earning assets from 83.4% in 1996 to 81.3% in 1997.
Interest income increased $3.6 million or 16.3% in 1996 as compared to 1995, also primarily as a result of an increase in the average balance of loans outstanding. Average loans outstanding, net of unearned income, increased $40.0 million or 22.8% during 1996. Loans also became a larger percentage of average interest-earning assets, increasing from 79.1% in 1995 to 83.4% in 1996.
Interest ExpenseInterest expense increased $2.7 million or 30.8% in 1997 as compared to 1996.This increase reflected growth in deposits and short-term borrowings combined with an increase in the cost of funds. Specifically, average interest-bearing deposits and short-term borrowings increased $40.3 million and $11.7 million, respectively, during 1997. Also, the cost of interest-bearing funds increased from 4.1% in 1996 to 4.3% in 1997, reflecting a higher interest rate environment as well as competitive pricing pressure.
Interest expense increased $877,000 in 1996 as compared to 1995, again reflecting growth in deposits. Average interest-bearing deposits increased $23.6 million or 13.6% in 1996, as compared to 1995.
Provision and Allowance for Loan LossesThe 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, provi-sions are made to maintain the Allowance at a level adequate to absorb potential losses within the loan portfolio. The provision for credit losses was $663,000 for the year ended 1997 as compared with $621,000 and $559,000 for the years ended 1996 and 1995, respectively.
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 con-tinuing 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 borrowers and guar-antors; and a continuing evaluation of the present and future economic environment. Regular review of the loan portfolio's quality is conducted by the Company's staff. In addition, bank supervisory authorities and independent consultants and accountants periodically review the loan portfolio. At December 31, 1997 the Allowance was 1.37% of total loans, net of unearned income. The Allowance at December 31, 1997 is con-sidered by management to be sufficient to address the credit risk in the current loan portfolio.
The following table presents certain information regarding the Allowance:
A breakdown of the Allowance is provided in the table below; however, management does not believe that the Allowance can be segregated by category with any precision that would be useful.The breakdown of the Allowance is based primarily on those factors discussed previously in evaluating the adequacy of the Allowance as a whole. Since all of those factors are subject to change, the breakdown is not necessarily indicative of the category of potential future credit losses.
The following table presents the allocation of the Allowance among the various loan categories.
The table below provides a percentage breakdown of the loan portfolio by category to total loans, net of unearned income.
Noninterest Income
The Company's primary sources of noninterest income are fees charged for services and gains and fees
recognized on the sales of residential mortgage loans. In addition, included in noninterest income is the
increase in cash surrender value on life insurance contracts, covering certain executive officers, for which
the Bank is the beneficiary. Noninterest income increased $590,000 during 1997 as compared to 1996.The
increase during 1997 was primarily the result of an increase in fees charged for services of $262,000,
reflecting growth in deposit accounts.The total number of non-certificate deposit accounts increased
14.5%, from 23,200 at December 31, 1996 to 26,600 at December 31, 1997.The Company also continued
its promotion of fee-based cash management services to numerous larger and more sophisticated corporate
customers. The recognition of the increase in cash surrender value of $201,000 during 1997 also con-tributed
to the growth in noninterest income. The insurance contracts were purchased in November 1996
and April 1997 and therefore, did not contribute significantly to 1996 noninterest income. Gains and fees
on sales of residential mortgage loans increased $69,000 during 1997 as compared to 1996 and correspond-ed
with an increase in residential mortgage loans sold from $47.9 million in 1996 to $51.9 million in 1997.
Noninterest income increased $483,000 during 1996 as compared to 1995.The growth in noninterest income during 1996 was primarily driven by an increase in fees charged for services of $233,000, reflecting expansion of the Company's deposit base. In addition, gains and fees on sales of residential mortgage loans increased $103,000, reflecting an increased volume of loans sold.
Noninterest Expense
Noninterest expense primarily consists of costs associated with personnel, occupancy and equipment,
data processing and marketing.The Company's noninterest expense for 1997 totalled $14.2 million, repre-senting
an increase of $1.8 million or 14.9% over 1996.The increase was primarily driven by continued
corporate expansion. Expansion initiatives during 1997 included the addition of three full-service branch
facilities and the expansion of the Company's mortgage banking operations with the addition of two offices
in Baltimore and Montgomery Counties, Maryland.
Salaries and employee benefits, the largest component of noninterest expense, increased from $6.0 mil-lion during 1996 to $7.3 million during 1997.The increase was primarily attributable to higher staffing levels required during 1997 in order to accommodate growth. At December 31, 1997, the Company employed 197 full-time and 30 part-time employees compared to 160 full-time and 25 part-time employ-ees at December 31, 1996.
Occupancy and equipment expenses, recorded net of rental income, grew $545,000 or 28.5% during 1997.The increase was attributable to the addition of three full-service branch facilities and two mortgage banking locations and the recognition of a full year's costs associated with branch expansion initiatives com-pleted in 1996.
The growth in noninterest expense during 1997 was also attributable to an increase in professional fees of $118,000 and in net expenses on other real estate owned of $123,000. In both cases, the increases reflected a higher level of activity associated with the workout of problem assets.
Growth in noninterest expense during 1997 was mitigated by a decline in the Company's FDIC insur-ance premium of $575,000.The decline reflected the $486,000 special, one-time FDIC assessment levied in 1996 to recapitalize the SAIF.
Noninterest expense for 1996 totalled $12.4 million and represented an increase over 1995 of 26.7% or $2.6 million.The primary component of the increase was an increase in salaries and employee benefits.The Company employed a total of 185 employees at December 31, 1996 versus 164 employees at December 31, 1995. In addition, the Company incurred an increase in occupancy and equipment expenses of $587,000 during 1996 as a result of the expansion of its branch network (which included the addition of two full-service branch facilities and the relocation of a third branch facility) and the upgrading of backoffice data processing. Also, the Company was assessed a special, one-time FDIC assessment of $486,000.
Income Taxes
Income tax expense was $2.4 million in 1997 and 1996, with higher pre-tax income in 1997.The 1997
effective tax rate was 36.1%, down from 38.9% for 1996 and 38.6% for 1995.The decrease in 1997 was a
result of changes in state tax laws which now permit, on a phased-in basis, the exclusion of interest income
on U.S. Treasury obligations.The changes in state tax laws, however, now subject the Company, on a
phased-in basis, to personal property taxes which are included in other noninterest expense.
Cash and Due From Banks
Cash and due from banks represents cash on hand, cash on deposit with other banks and cash items in
process of collection. As a result of the Company's cash management services provided to large, sophisticat-ed
corporate customers (which includes processing coin and currency transactions for, and checks received
by, retail customers), cash balances may be higher than industry averages for banks of a similar asset size.
Analysis of Investments
The investment portfolio consists of investment securities and securities available-for-sale. Investment
securities are those securities that the Company has the positive intent and ability to hold to maturity and
are carried at amortized cost. Securities available-for-sale are those securities which the Company intends
to hold for an indefinite period of time but not necessarily until maturity. These securities are carried at fair
value and may be sold as part of an asset/liability management strategy, liquidity management, interest rate
risk management, regulatory capital management or other similar factors.
The components of the investment portfolio at December 31 were as follows:
The investment portfolio increased $22.5 million from December 31, 1996 to December 31, 1997.The increase represented purchases of U.S. Treasury securities totalling $36.0 million with maturities of two years, net of maturities and repayments.There were no securities sold during 1997, 1996 or 1995.
The amortized cost and estimated fair values and tax equivalent yield of debt securities at December 31, 1997, by maturities, are shown below. Collateralized mortgage obligations and mortgage-backed securities are categorized by their estimated maturities based upon the most recent monthly prepayment factors, which may change. All other debt securities are categorized based on contractual maturities.
Analysis of Loans
The table below represents a breakdown of loan balances of the Company at December 31.
(a) At December 31, 1997, 1996, 1995, 1994 and 1993 loans to individuals for constructing primary personal residences represent-ed $15,895, $10,780, $16,071, $18,631 and $16,456, respectively, of these loans.
(b) Primarily loans secured by the borrowers'principal residences in the form of home equity lines of credit and second mortgages.
Total loans increased $26.8 million during the year ended December 31, 1997, representing an 11.2% increase. Commercial loans, inclusive of commercial mortgages, and retail loans, primarily second mortgages and home equity lines of credit, exhibited strong growth during 1997, accounting for $13.7 million and $16.4 million, respectively, of the overall growth in the portfolio. The residential development and construc-tion portfolio declined from $112.8 million at December 31, 1996 to $110.4 million at December 31, 1997 largely as a result of competitive pressures.
The following table summarizes the Company's exposure resulting from loan concentrations in its loan portfolio. Loan concentrations result when loans are made to a number of borrowers engaged in similar activities which may be similarly impacted by economic or other conditions.This table presents the Company's credit concentration to borrowers involved in residential real estate development and/or con-struction as of December 31, 1997.There were no other loan concentrations exceeding 10% of gross loans as of December 31, 1997.
The following table shows the contractual maturities and interest rate sensitivities of loans of the Company at December 31, 1997, exclusive of nonaccrual loans totalling $599,000. Some loans may include contractual installment payments which are not reflected in the table until final maturity. In addition, the Company's experience indicates that a significant number of loans will be extended or repaid prior to con-tractual maturity. Consequently, the table cannot necessarily be viewed as an accurate forecast of future cash repayments.
(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 principal and interest is in doubt. Management may grant a waiver from nonaccrual status for a 90-day past-due loan which is both well secured and in the process of collection. A loan remains in nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to pay and remain current.
The largest component of nonperforming assets at December 31, 1997 was the Company's portfolio of other real estate owned totalling $4.6 million. At December 31, 1997 other real estate owned included the following four properties:
Nonaccrual loans totalled $599,000 at December 31, 1997 and consisted primarily of a residential mort-gage totalling $267,000, which was paid in full subsequent to December 31, 1997, and eight home equity lines of credit and second mortgages totalling $197,000.
A loan is determined to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest past-due. The Company generally considers a period of delay in payment to include delinquency up to 90 days.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 114,"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114") and SFAS No. 118,"Accounting by Creditors for Impairment of a LoanÑIncome Recognition and Disclosures" ("SFAS No. 118"), the Company measures impaired loans (i) at the present value of expected future cash flows discounted at the loan's effective inter-est rate; (ii) at the observable market price; or (iii) at the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, an impair-ment is recognized through a valuation allowance and corresponding provision for credit losses. SFAS No. 114 does not apply to larger groups of smaller-balance homogeneous loans such as consumer installment, residential first and second mortgage loans and credit card loans.These loans are collectively evaluated for impairment.The Company's impaired loans are therefore comprised primarily of commercial loans, includ-ing commercial mortgage loans, and real estate development and construction loans. In addition, impaired loans are generally loans which management has placed in nonaccrual status since loans are generally placed in nonaccrual status on the earlier of the date that management determines that the collection of principal and/or interest is in doubt or the date that principal or interest is 90 days or more past-due.
Impaired loans at December 31, 1997 totalled $443,000 and were all collateral dependent loans. Collateral dependent loans are measured based on the fair value of the collateral.There were no impaired loans at December 31, 1997 with an allocated valuation allowance. An impaired loan is charged-off when the loan, or a portion thereof, is considered uncollectible.
Deposit Analysis
The following table sets forth the average deposit balances and average rates paid on deposits during the
periods indicated.
Total deposits increased $58.7 million during the year ended December 31, 1997.The aggregate growth in deposits during 1997 was primarily attributable to growth in certificates of deposit totalling $36.8 mil-lion and growth in noninterest-bearing deposits totalling $12.6 million.
The following table provides the maturities of certificates of deposit of the Company in amounts of $100,000 or more. The Company had no brokered deposits as of December 31, 1997.
Short-term Borrowings
Short-term borrowings consist of short-term promissory notes issued to certain qualified investors and
borrowings from the FHLB. The short-term promissory notes are in the form of commercial paper, which
reprice daily and have maturities of 270 days or less. Borrowings from the FHLB outstanding during 1997,
1996 and 1995 repriced daily, had maturities of one year or less and could have been prepaid without
penalty.
The table below presents certain information with respect to short-term borrowings:
Liquidity
Liquidity describes the ability of the Company to meet financial obligations, including lending commit-ments
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 December 31, 1997, total deposits were $313.4 million. Core deposits, defined as all deposits except certificates of deposit of $100,000 or more, totalled $294.4 million or 93.9% of total deposits. Also, the Bank, as a member of the Federal Home Loan Bank of Atlanta ("FHLB"), has the ability to utilize established credit as an additional source of liquidity. Collateral must be pledged to the FHLB before advances can be obtained. At December 31, 1997, outstanding advances from the FHLB totalled $3.0 million.The Bank's approved credit line was $45.0 million. However, the Bank had sufficient collateral to borrow up to $62.2 million. Borrowings above the approved credit limit require special approval of the FHLB. In addition, liquidity is provided by the Company's overnight investment in federal funds sold. At December 31, 1997, federal funds sold totalled $2.0 million.
Market Risk and Interest Rate Sensitivity
Market risk represents the risk of loss from adverse changes in market prices and rates.The Company's
market risk arises primarily from interest rate risk inherent in its lending, investment and deposit taking
activities. Interest rate risk is the exposure of the Company's earnings and capital arising from changes in
interest rates.The Company's profitability is affected by fluctuations in interest rates. A sudden and substan-tial
change in interest rates may adversely impact the Company's earnings to the extent that the interest
rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same
basis. In addition, as rates change, the fair market value of assets and liabilities, and correspondingly, the
Company's capital, change. Given the potential exposure to adverse changes in interest rates, management
actively monitors and manages its interest rate risk.
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 an appropriate balance between the maturity and repricing characteristics of assets and liabilities that is consis-tent with the Company's liquidity, asset and earnings growth, and capital adequacy goals. Critical to the managment 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 watch rate sensitive assets and rate sensitive liabilities. Spread manage-ment represents managing investments, loans, and funding sources to achieve an acceptable spread between the Company's return on its earning assets and its cost of funds.
Currently, the Company does not believe the use of derivative financial instruments and hedging strate-gies are appropriate in the management of its interest rate risk. Since the Company is not exposed to signif-icant market risk from trading activities, does not utilize hedging strategies and/or off balance sheet man-agement strategies, and does not have an asset and liability structure which possesses meaningful optionabil-ity (i.e., assets and liabilities which may prepay or extend given changes in interest rates), the ALCO relies primarily on analyses of the Company's interest sensitivity gap position (i.e., interest-earning assets less interest-bearing liabilities) and internal budgets to assess interest rate risk exposure.
The following table summarizes the anticipated maturities or repricing of the Company's interest-earn-ing assets and interest-bearing liabilities as of December 31, 1997 and the Company's interest sensitivity gap. A positive sensitivity gap for any time period indicates that more interest-earning assets will mature or reprice during that time period than interest-bearing liabilities.The Company's goal is generally to main-tain a reasonably balanced cumulative interest sensitivity gap position for the period of one year or less in order to mitigate the impact of changes in interest rates on liquidity, interest margins and corresponding operating results. During periods of rising interest rates, a short-term positive interest sensitivity gap posi-tion would generally result in an increase in net interest income, and during periods of falling interest rates, a short-term positive interest sensitivity gap position would generally result in a decrease in net interest income.
The Company has managed its interest rate risk primarily through the origination of variable rate loans. At December 31, 1997, $220.0 million of the total loan portfolio, or 80.8%, represented variable rate loans. Of this amount, $193.4 million were loans tied to the prime rate of interest, which generally reprice either immediately upon the change in the prime rate of interest or during the month following a change in the prime rate of interest. As the following table indicates, the strategy of emphasizing variable rate lending results in a positive interest sensitivity gap for all periods.With a positive interest sensitivity gap, the Company was positioned well and benefited from the rise in the prime rate of interest in March, 1997.The Company's cumulative interest sensitivity gap position is currently at a level satisfactory to management. There can be no assurances, however, that the Company will be able to maintain the current interest sensi-tivity gap position.The level of the movement of interest rates up or down is an uncertainty and could impact the earnings of the Company.
It is important to note that the table represents the static gap position for interest sensitive assets and lia-bilities at December 31, 1997.The table does not give effect to prepayment or extension of loans as a result of changes in general market rates. And, while the table does indicate the opportunities to reprice assets and liabilities within certain time frames, it does not account for timing differences which occur during periods of repricing. For example, deposit rates tend to lag in a rising rate environment and lead in a falling rate environment. Also, the table does not account for the core deposit relationship with customers which might suggest that the balances of NOW, savings, and money market accounts totalling $115.4 million are less sen-sitive than interest-bearing liabilities maturing in three months or less.
The analysis provided in the table above includes the following significant assumptions: Fixed-rate loans and investments other than collateralized mortgage obligations and mortgage-backed securities are sched-uled by contractual maturity, and variable-rate loans and investments other than collateralized mortgage obligations and mortgage-backed securities are scheduled by repricing date. Collateralized mortgage obliga-tions and mortgage-backed securities are scheduled according to estimated maturity based upon the most recent monthly prepayment factors. Residential mortgage loans originated for sale are scheduled based on their expected sale dates, generally 10 to 14 days after settlement. Due to their liquid nature, the entire bal-ance of NOW, savings and money market accounts is assumed to be immediately sensitive.
Capital Adequacy
The Federal Reserve Board has adopted risk-based guidelines for bank holding companies. As of
December 31, 1997, the minimum ratio of capital to risk-weighted assets (including certain off-balance-sheet
items, such as standby letters of credit) was 8.0%. At least half of the total capital must be comprised
of common equity, retained earnings and a limited amount of perpetual preferred stock, after subtracting
goodwill and making certain other adjustments ("Tier 1 capital").The remainder may consist of perpetual
debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock
and limited amounts of credit loss reserves ("Tier 2 capital").The maximum amount of supplementary cap-ital
elements that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill and certain
other intangible assets.The Federal Reserve Board also has adopted a minimum leverage ratio (Tier 1 capi-tal
to assets) of 3% for bank holding companies that meet certain specified criteria, including having the
highest regulatory rating.The rule indicates that the minimum leverage ratio should be at least 1.0% to
2.0% higher for holding companies that do not have the highest rating or that are undertaking major
expansion programs. Failure to meet the capital guidelines could subject a banking institution to a variety
of enforcement remedies available to federal bank regulatory agencies.
The tables below present the Company's capital position relative to its various minimum statutory and regulatory capital requirements.
(b) Tier 2 capital is comprised of the allowance for credit losses limited to 1.25% of risk-based assets, or $3,632.
Year 2000 Action Plan
In 1997, the Company adopted a Year 2000 Action Plan (the "Plan").The Plan identifies the process by
which the Company will address Year 2000 related issues. It also establishes a committee, lead by senior
management, assigned the responsibility to complete Year 2000 preparations, with a targeted completion
date of December 31, 1998. The Plan includes several phases as follows: awareness; assessment; renovation;
validation; and implementation.
The Company relies heavily upon its third party service bureau to provide its data processing services. The Company has reviewed the Year 2000 plan established by its data processing service bureau and regu-larly evaluates the progress being made. In addition, the Company is working with other vendors to ensure timely completion of the Year 2000 project.
Costs associated with the Year 2000 project will primarily include costs incurred to upgrade existing software and hardware not currently Year 2000 compliant.The Company estimates that these costs will be incurred in the normal course of business as software and hardware is ordinarily upgraded to keep pace with technological advances.These costs could range to $200,000 over a period of eighteen months, much of which will be capitalized with the purchase of hardware and software.
Recent Accounting Developments
In June 1997,The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,"Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose financial statements. It requires
all items that are required to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed in equal prominence with other financial state-ments.
It requires that an enterprise display an amount representing total comprehensive income for each
period. It does not require per share amounts of comprehensive income to be disclosed. SFAS No. 130 is
effective for both interim and annual periods beginning after December 15, 1997.
In June 1997, FASB issued SFAS No. 131,"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enter-prises to report selected information about operating segments in interim financial reports issued to share-holders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997.