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 June 30, 1998 Commission File Number 0-22961
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ANNAPOLIS NATIONAL BANCORP, INC.
------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 52-1648903
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(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
180 Admiral Cochrane Drive, Suite 300, Annapolis, Maryland 21401
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(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 June 30, 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
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 1
Consolidated Income Statements for the Three Months Ended
June 30, 1998 and 1997 and for the Six Months Ended
June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 3 - 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 5 - 8
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 10
SIGNATURES 11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
As of June 30, 1998 and December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, December 31,
1998 1997
----------- ------------
<S><C>
ASSETS
Cash and due from banks $ 3,878 $ 5,611
Federal funds sold and other overnight investments 31,481 20,744
Federal Reserve Bank stock, at cost 330 327
Investment securities available-for-sale 11,829 16,238
Investment securities held-to-maturity 1,996 3,975
Loans, less allowance for credit losses 74,006 70,985
Premises and equipment 1,171 1,239
Core deposits and other intangible assets
acquired 173 216
Accrued interest receivable 606 516
Deferred income taxes 497 766
Other real estate owned 91 43
Other assets 214 167
-------- --------
Total assets $126,272 $120,827
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 12,191 $ 10,330
Interest-bearing 91,708 85,732
-------- --------
Total deposits 103,899 96,062
Securities sold under agreements to
repurchase 10,434 13,306
Accrued interest and other liabilities 320 372
-------- --------
Total liabilities 114,653 109,740
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Stockholders' equity
Preferred stock - $.01 par value $ -- $ --
Common stock - $.01 par value 23 23
Capital surplus 13,135 13,135
Accumulated deficit (1,524) (2,078)
Unrealized losses on investments in available
for sale securities (15) 7
-------- --------
Total stockholders' equity 11,619 11,087
-------- --------
Total liabilities and stockholders' equity $126,272 $120,827
======== ========
</TABLE>
<PAGE>
Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
For The Three Month Periods Ended June 30, 1998 and 1997
And The Six Month Periods Ended June 30, 1998 and 1997
(Unaudited and in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
June 30 June 30,
----------------------------------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S><C>
Interest income
Loans $1,889 $1,902 $3,711 $3,631
Investment securities 228 188 518 338
Federal funds sold and securities purchased 356 186 653 307
------ ------ ------ ------
Total interest income 2,473 2,276 4,882 4,276
------ ------ ------ ------
Interest expense
Interest bearing deposits 917 813 1,802 1,490
Securities sold under agreements to repurchase 88 60 190 114
Interest on notes payable --- 20 --- 39
------ ------ ------ ------
Total interest expense 1,005 893 1,992 1,643
------ ------ ------ ------
Net interest income 1,468 1,383 2,890 2,633
Provision for credit losses 75 82 150 319
------ ------ ------ ------
Net interest income after provision
for credit losses 1,393 1,301 2,740 2,314
------ ------ ------ ------
Non-interest Income
Service charges and fees 111 124 226 186
Mortgage banking fees 21 23 35 41
Other income 69 41 110 109
------ ------ ------ ------
Total non-interest income 201 188 371 336
------ ------ ------ ------
Non-interest Expense
Personnel 582 544 1,164 1,060
Occupancy and equipment 138 142 278 288
Restructuring -- -- -- 796
Other operating expenses 397 366 787 769
Amortization of intangible assets
acquired 22 22 43 58
------ ------ ------ ------
Total non-interest expense 1,139 1,074 2,272 2,971
------ ------ ------ ------
Income (loss) before income taxes 455 415 839 (321)
Income tax expense (benefit) 155 141 285 (978)
------ ------ ------ ------
Net income $ 300 $ 274 $ 554 $ 657
====== ====== ====== ======
Basic earnings Per Share $ 0.13 $ 0.19 $ 0.24 $ 0.44
====== ====== ====== ======
Diluted earnings per share $ 0.13 $ 0.19 $ 0.24 $ 0.44
====== ====== ====== ======
</TABLE>
<PAGE>
Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statement of Cash Flows
for the Six Month Periods Ended June 30, 1998 and 1997
(Unaudited and in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------
1998 1997
-------- --------
<S><C>
Cash flows from operating activities
Net income $ 554 $ 657
Adjustments to reconcile net income to net cash provided
by operating activities
Deferred income taxes 269 (978)
Write-off of intangibles --- 471
Depreciation and amortization of furniture, equipment,
and leasehold improvements 94 99
Amortization of intangible assets acquired 43 57
Decrease (increase) in accrued interest receivable (90) (87)
Accrued interest on note to stockholder --- 39
Net loss (gain) on sale of loans, equipment, and other real estate owned (3) ---
Provision for credit losses 150 319
Other (218) 320
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Net cash provided by operating activities $ 799 $ 897
-------- -------
Cash flows from investing activities
Net increase in loans (3,123) (5,654)
Investment in securities - held-to-maturity --- (1,899)
Investment in securities - available-for-sale (24,585) (10,093)
Proceeds from redemption of securities
and principal repayments 30,970 10,000
Net decrease (increase) in federal funds sold (10,737) (2,469)
Net decrease (increase) in securities purchased
under agreement to resell --- (3,055)
Proceeds from sale of equipment 13 ---
Purchase of furniture, equipment, and leasehold improvements (35) (13)
-------- --------
Net cash used in investing activities $ (7,497) $(13,183)
-------- --------
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------
1998 1997
-------- --------
<S><C>
Cash flows from financing activities
Net increase (decrease) in deposits $ 7,837 $ 8,614
Net increase (decrease) in securities sold
under agreements to repurchase (2,872) 1,676
-------- --------
Net cash provided by financing activities 4,965 10,290
-------- --------
Net increase (decrease) in cash (1,733) (1,996)
Cash, beginning of period 5,611 6,084
-------- --------
Cash, end of period $ 3,878 $ 4,088
======== ========
Supplemental cash flow information:
Interest paid on deposits and repurchase agreements $ 1,950 $ 1,578
Income taxes paid $ 5 ---
</TABLE>
<PAGE>
Item 2 - Management Discussion and Analyses of Financial Condition and Results
of Operation
Comparison of Financial Condition at June 30, 1998 and December 31, 1997
Total assets at June 30, 1998 were $126.3 million an increase of $5.4
million or 4.5% 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 $10.7 million or 51.8%. In addition, net loans grew $3.0 million
or 2.4% of total assets, and investment securities decreased $6.4 million or
31.6%.
Net loans receivable at June 30, 1998 were $74.0 million, an increase
of $3.0 million or 4.26% from net loans receivable of $71.0 million at December
31, 1997. The increase was due to a $7.0 million increase in real estate and
construction loans and was partially offset by a $3.8 million decrease in
commercial loans.
The allowance for credit losses increased $102,000 or 8.7% to
$1,279,000 at June 30, 1998 from $1,177,000 at December 31, 1997. The increase
in the allowance for credit losses was due primarily to additional general
reserves. Management makes periodic provisions to the allowance for credit
losses to maintain the allowance at an acceptable level commensurate with
management's assessment of the credit risk inherent in the loan portfolio. At
June 30, 1998 and 1997 the allowance for credit losses to total assets was 1.0%
and 0.97% respectively.
Deferred income taxes decreased $269,000 or 35.1% to $497,000 from
$766,000 at December 31, 1997. The Company recorded federal tax expense of
$285,000 for the six months ended June 30, 1998 reflecting an effective federal
tax rate of 34%.
Deposits of $103.9 million at June 30, 1998 represent a $7.8 million or
8.2% increase from December 31, 1997 deposits of $96.1 million. The increase was
due to a $1.8 million or 2.2% increase in non-interest-bearing accounts and a
$6.0 million or 6.0% increase in interest bearing deposits.
Stockholders' equity increased $532,000 for the six months ended June
30, 1998 due to an increase in net retained earnings of $554,000, offset by a
<PAGE>
increase of $22,000 in the unrealized loss on investments in available for sale
securities.
Comparison of Operating Results for the Six Months Ended June 30, 1998 and 1997.
General. Net income for the six months ended June 30, 1998 totaled
$554,000 or $0.24 per basic share as compared to $657,000 or $0.44 per basic
share for the six months ended June 30, 1997. The decrease in net income can be
attributed mainly to a one time recognition of a deferred tax adjustment in the
amount of $1.1 million in 1997 as a result of the Company recording the tax
effect of net operating loss carryforwards and other deferred tax assets. The
increase was partially offset a $796,000 one time restructuring expense
resulting from the revised business strategy implemented by the Board of
Directors in February 1997. Also, at June 30, 1998, the net interest margin
decreased to 5.17% from 5.55% at June 30, 1997. The decrease in the net interest
margin was the result of an decrease in the average rate on earning assets from
9.07% at June 30, 1997 to 8.60% at June 30, 1998, and an increase in the cost of
interest bearing liabilities from 3.97% at June 30, 1997 to 4.08% at June 30,
1998. The decrease in basic earnings per share can be attributed in part to an
additional 833,334 shares of common stock issued in connection with the
Company's successful stock offering which closed on September 30, 1997.
Net Interest Income. Net interest income increased $257,000 or 9.8% for
the six months ended June 30, 1998 to $2.9 million from $2.6 million for the six
months ended June 30, 1997, due primarily to an increase in interest income of
$606,000 and was partially offset by an increase in interest expense of
$349,000.
The increase in interest income was derived primarily from interest on
federal funds and other overnight investments which increased $346,000 or 112.7%
from $307,000 for the six months ended June 30, 1997 to $653,000 for the six
months ended June 30, 1998. This increase was due primarily to an increase in
the average balance of $12.0 from $11.8 million at June 30, 1997 to $23.8
million at June 30, 1998 and an increase of $180,000 or 53.3% of interest on
investment securities as a result of an increase in the average
<PAGE>
balance of $5.8 million or 48.7% from $11.9 million at June 30, 1997 to $17.8
million at June 30, 1998.
Interest expense increased $349,000 or 21.2% for the six months ended
June 30, 1998 as compared to the six months ended June 30, 1997, due primarily
to a increase in the average balance of interest bearing deposits of $14.9
million or 17.8% from $83.7 million at June 30, 1997 to $98.6 million at June
30, 1998 and an increase in the cost of deposits from 3.97% at June 30, 1997 to
4.08% at June 30, 1998.
Provision for Credit Losses. The provision for credit losses for the
six months ended June 30, 1998 and 1997 totalled $150,000 and $319,000
respectively. The decrease in the provision for credit losses at June 30, 1998
was primarily attributable to fewer additional specific reserves on commercial
loans.
Non-Interest Income. Non-interest income, which is comprised primarily of fees
and charges on deposit accounts, increased $35,000 or 10.4% to $371,000 at June
30, 1998 from $336,000 at June 30, 1997. The increase in non-interest income was
primarily due to an increase in fees and charges on deposit accounts of $40,000
and $26,000 of other income realized on a bad debt previously written off.
Non-Interest Expense. Non-Interest expense decreased $699,000 or 23.5% for the
six months ended June 30, 1998 from $3.0 million for the six months ended June
30, 1997 to $2.3 million for the six months ended June 30, 1998. The decrease in
non-interest expense was due primarily to a one time restructuring expense of
$796,000 for the six months ended June 30, 1997 resulting from the
implementation of a revised business strategy adopted by the Board of Directors.
Compensation expense increased $104,000 or 9.8% for the six months ended June
30, 1998 from $1.06 million for the six months ended June 30, 1997 to $1.2
million for the six months ended June 30, 1998, due additional loan personnel in
the real estate and mortgage banking departments and incentive compensation paid
for loan origination's.
Income Tax Expense. The Company recorded income tax expense for
the six month period ended June 30, 1998 of $285,000. The Company's federal
tax rate is approximately 34%.
Comparison of Operating Results for the Three Months Ended June 30, 1998 and
1997.
<PAGE>
General. Net income for the three months ended June 30, 1998 totaled
$300,000 or $0.13 per basic share as compared to $274,000 or $0.19 per basic
share for the three months ended June 30, 1997. The increase in net income can
be attributed mainly to an increase in net interest income which increased
$85,000 or 6.2% at June 30, 1998, and an increase in non-interest income of
$13,000 or 6.9% which was partially offset by an increase in non-interest
expense of $65,000 or 6.1%.
Interest Income. The increase in interest income was derived primarily
from interest on federal funds and other overnight investments which increased
$170,000 or 91.4% from $186,000 for the three months ended June 30, 1997 to
$356,000 for the three months ended June 30, 1998. This increase was due
primarily to an increase in the average balance of federal funds and other
overnight investments of $11.8 million from $14.0 million for the three months
ended June 30, 1997 to $25.8 million for the three months ended June 30, 1998.
Interest on investment securities increased $40,000 or 21.3% from $188,000 for
the three months ended June 30, 1997 to $228,000 for the three months ended June
30, 1998 due to an increase in the average balance of $2.9 million from $12.8
million at June 30, 1997 to 15.7 million at June 30, 1998.
Interest Expense. Interest expense increased $112,000 or 12.5% for the
three months ended June 30, 1998 as compared to the three months ended June 30,
1997, due primarily to an increase in the average volume of deposits from $87.6
million for the three months ended June 30, 1997 to $98.2 million for the three
months ended June 30, 1998 and an increase in the cost of interest bearing
liabilities from 4.09% for the three months ended June 30, 1997 to 4.15% for the
three months ended June 30, 1998.
Provision for Credit Losses. The provision for credit losses for the
three months ended June 30, 1998 and 1997 totalled $75,000 and $82,000
respectively. The decrease in the provision for credit losses at June 30, 1998
reflected management's assessment of the credit risk in the loan portfolio.
Non-Interest Income. Non-interest income increased $13,000 or 6.9% to
$201,000 for the three months ended June 30, 1998 from $188,000 for the three
months ended June 30, 1997. The increase in non-interest income was
<PAGE>
primarily due to $26,000 of other income realized on a bad debt previously
written off.
Non-Interest Expense. Non-interest expense increased $65,000 or 6.1%
for the three months ended June 30, 1998. The increase in non-interest expenses
was primarily due to a $38,000 increase in compensation and related expenses and
a increase in data processing expense due to an increase in the volume of
transaction accounts.
Income Tax Expense. The Company recorded income tax expense for the
three month period ended June 30, 1998 of $155,000 based on a federal tax rate
of 34% which reduced the deferred tax asset established at March 31, 1997 to
$497,000.
Comprehensive Income. Effective January 1, 1998 the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires the reporting of comprehensive
income which includes unrealized gains and losses not recognized in net income.
Unrealized gains and losses on available-for-sale securities which have been
reported as a separate component of stockholders' equity are included in
comprehensive income. The adoption of SFAS 130 had no impact on the Company's
net income or stockholders' equity.
<PAGE>
Part II - Other Information
Item 1 - Legal Proceedings
Other than the civil action discussed below, the Company is not
involved in any legal proceedings at this time other than those
occurring in the ordinary course of business. The Company is
involved in a civil action filed by a shareholder against the
Company and John W. Marhefka, Jr., in the United States District
Court for the District of Maryland on March 11, 1998. The
shareholder alleges federal and state securities law claims and
seeks $160,000 in damages arising from the transfer of Company stock
by the shareholder to a family trust. The Company believes the
lawsuit is baseless and intends to vigorously defend against it.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on April 23, 1998 at the
Annapolis Holiday Inn, 210 Holiday Court, Annapolis, Md. 21401 at
6:00 p.m. The Company received the following shares voted for the
election of directors:
For Percentage Withheld
Stanley J. Klos 1,979,907 85.6% 800
Richard M. Lerner 1,979,907 85.6% 800
John W. Marhefka Jr. 1,979,907 85.6% 800
Stanley H. Katsef 1,979,907 85.6% 800
The Company received the following shares voted for the nomination
of Rowles & Company, LLP, to perform the annual audit for the year
ending December 31, 1998.
For Percentage Against Abstain
1,975,057 85.4% 450 5,200
Item 5 - Other Information
None
<PAGE>
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: 8/14/98 /s/ John W. Marhefka, Jr.
___________ _____________________________
John W. Marhefka, Jr.
Chief Executive Officer
Date: 8/14/98 /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 Share)
Three Months Ended
June 30, 1998 June 30, 1997
--------------- ---------------
Net income $ 300 $ 274
Average Shares Outstanding 2,312 1,479
Basic Earnings Per Share $0.13 $0.19
Six Months Ended
June 30, 1998 June 30, 1997
--------------- ---------------
Net Income $ 554 $ 657
Average Shares Outstanding(1) 2,332 1,479
Diluted Earnings Per Share $0.24 $0.44
(1) includes the dilutive effect of 19,375 incentive stock options.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,878
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 31,481
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,829
<INVESTMENTS-CARRYING> 1,996
<INVESTMENTS-MARKET> 1,996
<LOANS> 74,006
<ALLOWANCE> 1,279
<TOTAL-ASSETS> 126,272
<DEPOSITS> 103,899
<SHORT-TERM> 10,434
<LIABILITIES-OTHER> 320
<LONG-TERM> 0
0
0
<COMMON> 23
<OTHER-SE> 11,596
<TOTAL-LIABILITIES-AND-EQUITY> 126,272
<INTEREST-LOAN> 3,711
<INTEREST-INVEST> 518
<INTEREST-OTHER> 653
<INTEREST-TOTAL> 4,882
<INTEREST-DEPOSIT> 1,802
<INTEREST-EXPENSE> 1,992
<INTEREST-INCOME-NET> 2,890
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,272
<INCOME-PRETAX> 839
<INCOME-PRE-EXTRAORDINARY> 839
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 554
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
<YIELD-ACTUAL> 8.60
<LOANS-NON> 1,262
<LOANS-PAST> 515
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,177
<CHARGE-OFFS> 75
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 1,279
<ALLOWANCE-DOMESTIC> 1,279
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 827
</TABLE>
