SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998 Commission File Number 0-22961
ANNAPOLIS NATIONAL BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
Maryland 52-1648903
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
180 Admiral Cochrane Drive, Suite 300,
Annapolis, Maryland 21401
(Address of principal executive offices)
(410) 224-4455
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
(1) YES X NO
---------- ---------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At March 31, 1998, the Registrant had 2,312,306 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format
YES NO X
---------- ----------
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements 1
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 1
Consolidated Income Statements for the Three Months Ended
March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 3
Consolidated Statement of Changes in Stockholders' Equity 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 9
Item 2 - Changes in Securities 9
Item 3 - Defaults Upon Senior Securities 9
Item 4 - Submission of Matters to a Vote of Security Holders 9
Item 5 - Other Information 9
Item 6 - Exhibits and Reports on Form 8-K 9
SIGNATURES..................................................................10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, December 31,
1998 1997
------------------- -------------------
<S> <C>
ASSETS
Cash and due from banks $ 5,689 $ 5,611
Federal funds sold 23,729 20,744
Federal Reserve Bank stock, at cost 330 327
Investment securities available-for-sale 16,330 16,238
Investment securities held-to-maturity 1,992 3,975
Loans, less allowance for credit losses 72,917 70,985
Premises and equipment 1,201 1,239
Core deposits and other intangible assets
acquired 195 216
Accrued interest receivable 582 516
Deferred income taxes 646 766
Other real estate owned 43 43
Other assets 210 167
-------- --------
Total assets $123,864 $120,827
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 9,250 $ 10,330
Interest-bearing 89,230 85,732
------- -------
Total Deposits 98,480 96,062
Securities sold under agreements to
repurchase 13,744 13,306
Accrued interest and other liabilities 305 372
-------- --------
Total liabilities 112,529 109,740
Stockholders' equity
Preferred stock - $.01 par value $ -- $ --
Common stock - $.01 par value 23 23
Capital surplus 13,135 13,135
Accumulated deficit (1,824) (2,078)
Unrealized losses on investments in available
For sale securities 1 7
-------- -------- -
Total stockholders' equity 11,335 11,087
-------- --------
Total liabilities and stockholders' equity $123,864 $120,827
======== ========
</TABLE>
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(Unaudited and in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------
1998 1997
-------------- -------------
<S> <C>
INTEREST INCOME:
Loans $1,822 $1,729
Investment securities 297 121
Federal funds sold and securities purchased 290 150
------ ------
Total interest income 2,409 2,000
INTEREST EXPENSE:
Interest bearing deposits 884 678
Securities sold under agreements to repurchase 102 54
Interest on notes payable 0 19
------ ------
Total interest expense 986 751
------ ------
Net interest income 1,423 1,249
Provision for credit losses 75 237
------ ------
Net interest income after provision
for credit losses 1,348 1,012
OTHER INCOME:
Service charges and fees 111 87
Mortgage banking fees 13 18
Other fee income 46 44
------ ------
170 149
OPERATING EXPENSES:
Personnel 571 517
Occupancy and equipment 140 145
Restructuring 0 830
Other operating expenses 400 383
Amortization of intangible assets
acquired 22 22
------ ------
1,133 1,897
INCOME (LOSS) BEFORE INCOME TAXES 385 (736)
INCOME TAX EXPENSE (BENEFIT) 131 (1,120)
------ ------
NET INCOME $ 254 $ 384
====== ======
Basic Earnings Per Share $ 0.11 $ 0.26
====== ======
Diluted Earnings per share $ 0.11 $ 0.26
====== ======
</TABLE>
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(Unaudited and in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
1998 1997
----------------- ----------------
<S> <C>
Cash flows from operating activities
Net income $ 254 $ 384
Adjustments to reconcile net income to net cash provided
by operating activities
Deferred income taxes 120 (1,120)
Write-off of intangibles -- 471
Depreciation and amortization of furniture, equipment,
and leasehold improvements 55 50
Amortization of intangible assets acquired 21 36
Decrease (increase) in accrued interest receivable (66) --
Accrued interest on note to stockholder -- 19
Net loss (gain) on sale of loans, equipment, and other real estate owned (3) --
Provision for credit losses 75 237
Other (181) 263
------ ------
Net cash provided by operating activities $ 275 $ 340
------ ------
Cash flows from investing activities
Net increase in loans (1,971) (32)
Investment in securities - held-to-maturity -- (1,899)
Investment in securities - available-for-sale (12,082) --
Proceeds from redemption of securities
and principal repayments 13,970 4,886
Net decrease (increase) in federal funds sold (2,985) (3,659)
Net decrease (increase) in securities purchased
under agreement to resell -- 487
Proceeds from sale of equipment 13 --
Purchase of furniture, equipment, and leasehold improvements (17) (3)
------ ------
Net cash used in investing activities $(3,072) $(220)
------ ------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
1998 1997
----------------- ----------------
<S> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 2,437 $(3,549)
Net increase (decrease) in securities sold
under agreements to repurchase 438 797
-------- -------
Net cash provided by financing activities $2,875 $(2,752)
-------- -------
Net increase (decrease) in cash 78 (2,632)
Cash, beginning of period 5,611 6,084
-------- -------
Cash, end of period $5,689 $4,452
======== ======
Supplemental cash flow information
Interest paid on deposits and repurchase agreements $ 954 $ 739
Income taxes paid $ 5 $ --
</TABLE>
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE THREE MONTH PERIOD ENDED MARCH 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Loss on
Accumulated Investment
Common Stock Deficit Securities Total
-------------------------------------------
Shares Par Value Surplus
--------------- ------------ ------------- -------------- -------------- -----------
<S> <C>
BALANCE, DECEMBER 31, 1997 2,312,306 $23 $13,135 $(2,078) $7 $11,087
Net income -- -- -- 254 -- 254
Changes in unrealized loss -- -- -- -- (6) (6)
--------- --- ------- ------- -- -------
BALANCE, MARCH 31, 1998 (UNAUDITED) 2,312,306 $23 $13,135 $(1,824) $1 $11,335
========= === ======= ======== == =======
</TABLE>
<PAGE>
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND DECEMBER 31, 1997
Total assets at March 31, 1998 were $123.9 million an increase of $3.0
million or 2.51% from total assets at December 31, 1997 of $120.8 million. The
increase was due to an increase in federal funds sold and other overnight
investments of $3.0 million or 14.39%. In addition, net loans grew $1.9 million
or 1.60% of total assets, and investment securities - held to maturity decreased
$2.0 million or 49.89%.
Net loans receivable at March 31, 1998 were $72.9 million, an increase
of $2.0 million or 2.72% from net loans receivable of $70.9 million at December
31, 1997. The increase was due to a $3.0 million increase in real estate and
construction loans and was partially offset by a $1.5 million decrease in
commercial loans.
The allowance for credit losses increased $28,000 or 2.38% to
$1,205,000 at March 31, 1998 from $1,177,000 at December 31, 1997. The increase
in the allowance for loan losses was due primarily to additional general
reserves. Management makes periodic provisions to the allowance for loan losses
to maintain the allowance at an acceptable level commensurate with management's
assessment of the credit risk inherent in the loan portfolio. At March 31, 1998
and 1997 the allowance for credit losses to total assets was 0.97% respectively.
Deferred income taxes decreased $120,000 or 15.67% to $646,000 from
$766,000 at December 31, 1997. The Company recorded federal tax expense of
$131,000 for the quarter ended March 31, 1998 reflecting an effective federal
tax rate of 34%.
Deposits of $98.5 million at March 31, 1998 represent a $2.4 million or
2.52% increase from December 31, 1997 deposits of $96.0 million. The increase
was due to a $3.2 million increase in savings and money market accounts and was
partially offset by a $1.0 million decrease in non-interest bearing deposits.
Stockholders' equity increased $248,000 during the first three months
of 1998 as a result of an increase in net retained earnings of $254,000, offset
by a increase of $6,000 in the unrealized loss on investments in available for
sale securities.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
1997.
General. Net income for the three months ended March 31, 1998 totaled
$254,000 or $0.11 per share as compared to $384,000 or $0.26 per share for the
three months ended March 31, 1997. The decrease in net income is attributed
mainly to a one time recognition of a deferred tax benefit in the amount of $1.1
million at March 31, 1997, as a result of the Company recording the tax effect
of net operating loss carryforwards and other deferred tax assets, and was
<PAGE>
partially offset by a $830,000 one time restructuring expense relating to the
revised business strategy implemented by the board of directors in February
1997. At March 31, 1998 the net interest margin decreased to 5.01% at March 31,
1998 from 5.53% at March 31, 1997. The decrease in the net interest margin was
the result of a decrease in the net yield on earning assets from 8.88% at March
31, 1997 to 8.47% at March 31, 1998, and an increase in the cost of interest
bearing liabilities from 3.84% at March 31, 1997 to 4.04% at March 31, 1998.
During the quarter ended March 31, 1998, the provision for loan losses decreased
by $162,000, and other income increased by $21,000 mainly due to increased
service fees and charges.
During the period March 31, 1997 to March 31, 1998, the Company's
average number of common shares outstanding increased by 833,334 due to the
successful completion of its public stock offering that closed on September 30,
1997. The increased number of shares contributed in part, to the lower earnings
per share at March 31, 1998.
Net interest income. Net interest income increased $174,000 or 13.93%
for the three months ended March 31, 1998 to $1.4 million from $1.2 million for
the three months ended March 31, 1997, due primarily to an increase in interest
income of $409,000, offset by an increase in interest expense of $235,000.
The increase in interest income was derived primarily from interest on
federal funds sold which increased $140,000 or 93.33% from $150,000 at March 31,
1997 to $290,000 at March 31, 1998, and investment securities which increased
$176,000 or 145.45% from $121,000 at March 31, 1997 to $297,000 at March 31,
1998. This increase was due primarily to an increase in the average balance of
federal funds sold from $9.6 million at March 31, 1997 to $21.8 million at March
31, 1998, and a increase in the average balance of investment securities from
$11.1 million at March 31, 1997 to $20.0 million at March 31, 1998. Interest on
loans receivable increased $93,000 or 5.38% from $1.7 million for the three
months ended March 31, 1997 to $1.8 million for the three months ended March 31,
1998. This increase was due primarily to an increase in the average balance of
loans receivable from $69.3 million for the three months ended March 31, 1997 to
$72.0 million for the three months ended March 31, 1998 and an increase in the
average yield on loans receivable from 9.97% at March 31, 1997 to 10.13% at
March 31, 1998.
Interest expense increased $235,000 or 31.29% for the three months
ended March 31, 1998 as compared to the three months ended March 31, 1997, due
primarily to an increase in the average volume of deposits from $79.7 million
for the three months ended March 31, 1997 to $98.9 million for the three months
ended March 31, 1998. In addition, the average cost of interest bearing
liabilities increased from 3.84% at March 31, 1997 to 4.04% at March 31, 1998.
Provision for Loan Losses. The provision for loan losses for the three
months ended March 31, 1998 and 1997 totaled $75,000 and $237,000 respectively.
The decrease in the provision for loan losses from March 31, 1997 to March 31,
1998 was mainly attributable to the implementation of specific reserves on
certain commercial loans identified by management at March 31, 1997 in
connection with the revised business strategy adopted by the Board of Directors
in February 1997.
<PAGE>
Other Income. Other income increased $21,000 or 14.09% to $170,000 for
the three months ended March 31, 1998 from $149,000 for the three months ended
March 31, 1997. The increase in other income was primarily due to the
implementation of ATM surcharge fees beginning in May 1997 and an increase of
fees and charges on deposit accounts.
Operating Expense. Operating expense decreased $764,000 or 40.27% from
$1.9 million for the three months ended March 31, 1997 to $1.1 million for the
three months ended March 31, 1998. The decrease in operating expenses was
primarily due to a one time restructuring expense of $830,000 at March 31, 1997
resulting from the implementation of a revised business strategy by the Board of
Directors and senior management beginning in February 1997. The restructuring
expense included $471,000 of goodwill written off in relation to the intangible
assets acquired in the June 1990 acquisition of a failed savings and loan
association, severance payments and benefits of $136,000, branch consolidation
expense of $119,000, $50,000 of expense related to the termination of a planned
de novo bank organization in accordance with Mr. Marhefka's employment
agreement, and various other expenses of $54,000. Personnel expense increased
$64,000 or 10.44% from $517,000 for the three months ended March 31, 1997 to
$571,000 for the three months ended March 31, 1998, due mainly to additional
staff in the Company's Real Estate Lending and Mortgage Banking departments.
Income Tax Expense. The Company had approximately $2.1 million of net
operating loss carryforwards at March 31, 1998. The Company recorded income tax
expense for the three month period ended March 31, 1998 of $131,000 based on a
federal income tax rate of 34% which reduced the deferred tax asset established
at March 31, 1998 of $766,000 to $646,000.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings of a material
nature at this time other than those occurring in the ordinary course of
business which in the aggregate involves amounts which are believed by
management to be immaterial to the financial condition of the Company.
ITEM 2 - CHANGES IN 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
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Annapolis National
Bancorp, Inc.*
3.2 Bylaws of Annapolis National Bancorp, Inc.*
10.1 Employment contract between Annapolis National
Bancorp, Inc. and John W. Marhefka Jr.*
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
None
*Incorporated by reference to Registration Statement on Form SB-2, as
amended, Commission File Number 333-29841, originally filed with the
Securities and Exchange Commission on June 23, 1997.
<PAGE>
SIGNATURES
In accordance with 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.
ANNAPOLIS NATIONAL BANCORP, INC.
(Registrant)
Date: 5/15/98 /s/ John W. Marhefka, Jr.
----------- -------------------------
John W. Marhefka, Jr.
Chief Executive Officer
Date: 5/15/98 /s/ Russell J. Grimes Jr.
----------- -------------------------
Russell J.Grimes Jr.
Chief Financial Officer
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In thousands, except Earnings per Common Share)
Three Months Ended
March 31, 1998 March 31, 1997
--------------- --------------
Net income $ 254 $ 384
Average Shares Outstanding 2,312 1,479
Basic Earnings per Share $ 0.11 $ 0.26
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
Net Income $ 254 $ 384
Average Shares Outstanding 2,362 1,479
Diluted Earnings Per Share $ 0.11 $ 0.26
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,689
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,729
<TRADING-ASSETS> 16,330
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 1,992
<INVESTMENTS-MARKET> 1,992
<LOANS> 72,917
<ALLOWANCE> 1,205
<TOTAL-ASSETS> 123,864
<DEPOSITS> 98,480
<SHORT-TERM> 13,744
<LIABILITIES-OTHER> 305
<LONG-TERM> 0
0
0
<COMMON> 23
<OTHER-SE> 11,312
<TOTAL-LIABILITIES-AND-EQUITY> 123,864
<INTEREST-LOAN> 1,822
<INTEREST-INVEST> 0
<INTEREST-OTHER> 297
<INTEREST-TOTAL> 2,409
<INTEREST-DEPOSIT> 884
<INTEREST-EXPENSE> 986
<INTEREST-INCOME-NET> 1,423
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,133
<INCOME-PRETAX> 385
<INCOME-PRE-EXTRAORDINARY> 385
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 254
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
<YIELD-ACTUAL> 10.13
<LOANS-NON> 1,024
<LOANS-PAST> 523
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 965
<ALLOWANCE-OPEN> 1,177
<CHARGE-OFFS> 74
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 1,205
<ALLOWANCE-DOMESTIC> 1,205
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 844
</TABLE>
