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 September 30, 1999
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Commission File Number 0-22961
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ANNAPOLIS NATIONAL BANCORP, INC.
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(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
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(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 November 12, 1999, the Registrant had 2,323,506 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 September 30, 1999 and
December 31, 1998 1
Consolidated Income Statements for the Three Months Ended
September 30, 1999 and 1998 and for the Nine Months Ended
September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 3-4
Consolidated statement of Changes in Stockholder's Equity for
the Year Ended December 31, 1998 and the Nine-Month
Period Ended September 30, 1999 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-13
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
SIGNATURES................................................................. 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(In thousands)
(Unaudited) (Audited)
September 30, December 31,
1999 1998
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ASSETS
Cash and due from banks $ 4,385 $ 3,846
Federal funds sold and other overnight investments 4,791 10,284
Investment securities available-for-sale 29,372 15,191
Loans, less allowance for credit losses 83,409 86,924
Premises and equipment 2,725 2,679
Core deposit premium and other intangibles 65 130
Accrued interest receivable 595 590
Deferred income taxes 320 320
Other real estate owned 57 91
Other assets 819 402
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Total assets $ 126,538 $ 120,457
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 12,476 $ 11,304
Interest-bearing 92,113 89,438
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Total Deposits 104,589 100,742
Securities sold under agreements to
repurchase 8,895 7,174
Other Borrowings 0 0
Accrued interest and other liabilities 478 450
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Total liabilities 113,962 108,366
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Stockholders' equity
Preferred stock - $.01 par value -- $ --
Common stock - $.01 par value 23 23
Capital surplus 13,193 13,143
Accumulated deficit (616) (1,075)
Accumulated other comprehensive income (24) 0
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Total stockholders' equity 12,576 12,091
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Total liabilities and stockholders' equity $ 126,538 $ 120,457
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<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
AND THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited and in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
--------------------- -------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------ ------ ------ ------
INTEREST INCOME
Loans $1,992 $1,893 $6,174 $5,566
Investment securities 358 240 701 758
Federal funds sold and securities purchased 131 310 358 963
------ ------ ------ ------
Total interest income 2,481 2,443 7,233 7,287
INTEREST EXPENSE
Interest bearing deposits 841 890 2,338 2,693
Securities sold under agreements to repurchase 91 99 244 288
Interest on other borrowed money 0 0 12 0
------ ------ ------ ------
Total interest expense 932 989 2,594 2,981
------ ------ ------ ------
Net interest income 1,549 1,454 4,639 4,306
Provision for credit losses 0 75 432 225
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Net interest income after provision
for credit losses 1,549 1,379 4,207 4,081
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NON-INTEREST INCOME
Service charges and fees 77 110 252 342
Mortgage banking fees 25 37 80 71
Other income 95 48 300 153
------ ------ ------ ------
Total non-interest income 197 195 632 566
------ ------ ------ ------
NON-INTEREST EXPENSE
Personnel 603 634 1,824 1,760
Occupancy and equipment 148 142 425 420
Other operating expenses 615 406 1,745 1,193
Amortization of intangible assets
acquired 22 22 65 65
------ ------ ------ ------
Total non-interest expense 1,388 1,204 4,059 3,438
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES 358 370 780 1,209
INCOME TAX EXPENSE (BENEFIT) 131 126 275 411
------ ------ ------ ------
NET INCOME $ 227 $ 244 $ 505 $ 798
====== ====== ====== ======
Basic earnings Per Share $ 0.10 $ 0.11 $ 0.22 $ 0.35
====== ====== ======
Diluted earnings per share $ 0.10 $ 0.11 $ 0.22 $ 0.35
====== ====== ====== ======
</TABLE>
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited and in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
<S> <C> <C>
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 505 $ 798
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
Deferred income taxes 0 392
Amortization of premiums and accretion of discounts, net (357) 0
Depreciation and amortization of furniture, equipment,
and leasehold improvements 196 141
Amortization of intangible assets acquired 65 65
Decrease (increase) in accrued interest receivable (5) (301)
Net loss (gain) on sale of loans, equipment, and other real estate owned 30 (3)
Provision for credit losses 432 225
Other 120 (428)
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Net cash provided by operating activities $ 986 $ 889
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CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans 3,259 (10,471)
Purchase of investment securities - available-for-sale (80,790) (38,579)
Proceeds from redemption of securities
and principal repayments
66,252 41,418
Proceeds form sale of available for sale securities 0 2,479
Net decrease (increase) in federal funds sold 5,493 5,069
Proceeds from sale of equipment and oreo 39 13
Purchase of land 0 (1,389)
Purchase of furniture, equipment, and leasehold improvements (272) (43)
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Net cash used in investing activities $ (6,019) $ (1,503)
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</TABLE>
(CONTINUED)
<PAGE>
For the Nine Months Ended
September 30,
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1999 1998
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 3,847 $ 2,578
Net increase (decrease) in securities sold
under agreements to repurchase 1,721 (3,671)
Cash dividends paid (46) 0
Net proceeds from exercise of employee stock options 50
Net cash provided by financing activities 5,572 (1,093)
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Net increase (decrease) in cash 539 (1,707)
Cash, beginning of period 3,846 5,611
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Cash, end of period $ 4,385 $ 3,904
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Supplemental cash flow information:
Interest paid on deposits and repurchase agreements $ 2,598 $ 2,946
Income taxes paid $ 405 $ 5
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
-------------------------------------- Accumulated Comprehensive
Shares Par Value Surplus Deficit Income Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 2,313,506 $ 23 $ 13,143 $ (1,075) $ 0 $ 12,091
Net income -- -- -- 505 -- 505
Stock options exercised 10,000 50 50
Cash dividends (46) (46)
Unrealized loss on investment securities
Available for sale, net of income tax -- -- -- -- (24) (24)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1999 (UNAUDITED) 2,323,506 $ 23 $ 13,193 $ (616) $ (24) $ 12,576
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of regulation S-B of the Securities and Exchange Commission. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal and recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 1999, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto for the Company's fiscal year ended December 31, 1998,
included in the Company's Form 10-KSB for the year ended December 31, 1998.
2. CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, unrestricted amounts due from banks, overnight investments in
repurchase agreements, and federal funds sold.
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Total assets at September 30, 1999 were $126.5 million, an increase of
$6.1 million or 5.0% from total assets at December 31, 1998 of $120.4 million.
Investments in short term securities increased by $14.2 million, or 93.4%, in
preparation for the upcoming Year 2000 event. Federal funds sold and other
overnight investments decreased $5.5 million, or 53.4%, and net loans receivable
decreased $3.5 million, or 4.0%, during the period.
Following the appointment of an interim chief executive officer on May
7, 1999, the Bank undertook a thorough and comprehensive review of its allowance
for credit losses. The purpose of the review was to evaluate the adequacy of the
allowance for credit losses and the methodology employed in determining it. As a
result of the review and with input received from its primary regulator during
the course of a regularly scheduled safety and soundness examination, the Bank
developed a revised methodology to estimate the inherent losses in its
portfolio. Adoption of this methodology has resulted in a net increase of
$312,000 in the allowance for credit losses to $1,471,000 at September 30, 1999
from $1,159,000 at December 31, 1998.
<PAGE>
While management believes that, based on information currently
available, the Bank's allowance for credit losses is sufficient to absorb
estimated losses in its loan portfolio at this time, no assurances can be given
that the Bank's level of allowance for credit losses will be sufficient to
absorb future losses incurred by the Bank or that future adjustments to the
allowance for credit losses will not be necessary if economic and other
conditions differ substantially from the time management determined the current
level of the allowance for credit losses. At September 30, 1999 and December 31,
1998, the ratio of allowance for credit losses to total loans was 1.73% and
1.32%, respectively.
At September 30, 1999, the Bank had $1,934,000 in non-performing assets
(consisting of $1,877,000 in non-accrual loans and $57,000 in "other real estate
owned"), a net increase of $1,126,000 over December 31, 1998 non-performing
assets of $808,000. The increase in non-performing assets resulted from a review
of the loan portfolio following the May 7, 1999 change in management and the
subsequent decision to place certain loans on non-accrual status. Loans on
non-accrual status at September 30, 1999 include commercial loans with principal
balances totaling $1,241,000 (of which $758,000 is subject to U.S. Small
Business guaranties), two acquisition, development and construction loans with
principal balances totaling $342,000, and a commercial real estate loan in the
amount of $294,000. The largest of the loans placed on non-accrual status is an
$831,000 loan to a technology company that is subject to a 75% SBA guaranty.
Although this loan is current in its principal and interest payments, repayment
is contingent on future cash flows that may be in doubt due to the depletion of
capital from prior losses and a deterioration in the quality of the borrower's
accounts receivable.
Net loans receivable at September 30, 1999 were $83.4 million, a
decrease of $3.5 million or 4.0% from net loans receivable of $86.9 million at
December 31, 1998. The decrease was due to a $7.6 million or 28.3% decrease in
commercial loans that was partially offset by a $4.4 million or 7.2% increase in
real estate and construction loans. The decrease in commercial loans is
attributable to a reduced volume of originations combined with normal
amortizations and repayments on commercial lines of credit.
Other assets increased $417,000 or 103.7% due to prepaid taxes of
$179,000 and an increase in other prepaid expenses and receivables of $238,000.
Deposits of $104.6 million at September 30, 1999 increased by $3.8
million or 3.8% from deposits of $100.7 million at December 31, 1998.
Non-interest-bearing accounts grew by $1.2 million or 10.4%, and
interest-bearing deposits increased by $2.6 million or 3.0%.
Stockholders' equity increased by $485,000 for the nine months ended
September 30, 1999 due largely to an increase in net retained earnings of
$505,000, offset by a decrease of $24,000 in accumulated other comprehensive
income. Equity was further increased by $50,000 from the exercise of 10,000
employee stock options. The company has paid two quarterly dividends of $23,000
each, or $.01 per share, to stockholders of record on April 29, 1999 and August
2, 1999.
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998.
GENERAL. Net income for the nine months ended September 30, 1999
totaled $505,000 or $0.22 per basic and diluted share as compared to $798,000 or
$0.35 per basic and diluted share for the nine months ended September 30, 1998.
The decrease in net income can be attributed mainly to additional provisions for
credit losses of $207,000 and increased operating expenses of $621,000. The
increased provisions for credit losses were due to management's reassessment of
the adequacy of the allowance for credit losses following the change in
management on May 7, 1999. The increase in operating expenses was due primarily
to increased data processing expense of $84,000, an increase of $83,000 in
repairs, maintenance, and depreciation resulting from the installation of new
computer equipment related to the Bank's data processing conversion, a $50,000
increase in marketing and advertising expense, and $141,000 in increased legal
and consulting fees related to regulatory issues and the change in management on
May 7, 1999.
NET INTEREST INCOME. Net interest income increased $333,000 or 7.7% for
the nine months ended September 30, 1999 to $4.6 million from $4.3 million for
the nine months ended September 30, 1998, due primarily to an decrease in
interest expense of $387,000 that was partially offset by a decrease of $54,000
in interest income.
At September 30, 1999, the net interest margin increased to 5.26% from
5.02% at September 30, 1998. The increase in the net interest margin was the
result of a $3.3 million or 2.8% increase in the average volume of earning
assets to $118.0 million at September 30, 1999 from $114.7 million at September
30, 1998. The yield on earning assets decreased to 8.20% at September 30, 1999
from 8.49% at September 30, 1998. The cost of interest bearing liabilities
decreased to 3.48% at September 30, 1999 from 4.05% at September 30, 1998.
INTEREST INCOME. The decrease in interest income of $54,000 was
primarily the result of reduced interest on federal funds and other overnight
investments, which decreased by $605,000 or 62.8% to $358,000 for the nine
months ended September 30, 1999 from $963,000 for the nine months ended
September 30, 1998. The average balance of federal funds and other overnight
investments dropped by $13.1 million to $10.1 million at September 30, 1999 from
$23.2 million at September 30, 1998. In addition, interest on investment
securities decreased by $57,000 or 7.5% as a result of a lower yield on the
portfolio to 5.32% at September 30, 1999 from 5.83% at September 30, 1998.
INTEREST EXPENSE. Interest expense decreased by $387,000 or 13.0% for
the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998. This decrease was due primarily to a reduction in the
average cost of interest bearing liabilities to 3.48% at September 30, 1999 from
4.05% at September 30, 1998. The lower average cost of interest bearing
liabilities was partially offset by a $1.3 million increase in the average
volume of interest bearing liabilities, which grew to $99.8 million at September
30, 1999 from $98.5 million at September 30, 1998.
<PAGE>
PROVISION FOR CREDIT LOSSES. The provision for credit losses for the
nine months ended September 30, 1999 and 1998 totaled $432,000 and $225,000,
respectively. The increase in the provision for credit losses at September 30,
1999 was primarily attributable to management's reassessment of the adequacy of
the allowance for credit losses following the change in management on May 7,
1999.
NON-INTEREST INCOME. Non-interest income, which is comprised primarily
of fees and charges on deposit accounts, increased by $66,000 or 11.7% to
$632,000 at September 30, 1999 from $566,000 at September 30, 1998. The increase
in non-interest income was primarily due to an increase in fees generated by the
Bank's new VISA debit card, and increased fees related to ATM usage and mortgage
banking activity.
NON-INTEREST EXPENSE. Non-Interest expense increased by $621,000 or
18.1% for the nine months ended September 30, 1999 to $4.1 million from $3.4
million for the nine months ended September 30, 1998. The increase in
non-interest expense was due primarily to increased compensation and benefits
expense of $64,000, data processing expense of $84,000 relating to the Bank's
data processing conversion, repairs, maintenance, and depreciation of $83,000
reflecting depreciation of new and upgraded hardware and software relating to
the conversion and Year 2000, and legal, audit, and consulting expense of
$141,000 related to regulatory issues and the change in management that occurred
on May 7, 1999.
INCOME TAX EXPENSE. The Company recorded income tax expense for the
nine-month period ended September 30, 1999 of $275,000. This amount includes
$260,000 of federal income taxes and approximately $15,000 of state income
taxes. The Company's combined effective federal and state income tax rate is
approximately 38.6%.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998.
GENERAL. Net income for the three months ended September 30, 1999
totaled $227,000 or $0.10 per basic and diluted share as compared to $244,000 or
$0.11 per basic and diluted share for the three months ended September 30, 1998.
The decrease in net income is primarily attributed to a $184,000 or 15.3%
increase in non-interest expense, which was partially offset by a $95,000 or
6.5% increase in net interest income.
INTEREST INCOME. The increase in interest income of $38,000 or 1.6% was
derived from an increase of $99,000 or 5.2% in interest income on net loans
receivable, and an increase of $118,000 or 49.2% in interest income on
investment securities. These increases were partially offset by reduced interest
on federal funds and other overnight investments of $179,000 or 57.7%, as
overnight investments were shifted to higher yielding loans and investments. The
average balance of net loans receivable increased by $8.9 million to $85.7
million at September 30, 1999 from $76.8 million at September 30, 1998, and the
average balance of investment securities increased by $11.0 million to $27.5
million at September 30, 1999 from $16.5 million at September 30, 1998.
<PAGE>
INTEREST EXPENSE. Interest expense decreased by $57,000 or 5.8% for the
three months ended September 30, 1999 compared to the three months ended
September 30, 1998, due primarily to a decrease in the average cost of deposits
to 3.59% at September 30, 1999 from 4.0% at September 30, 1998. This decrease
was partially offset by a $5.9 million increase in the average volume of
interest bearing liabilities to $104.1 million for the three months ended
September 30, 1999 from $98.2 million for the three months ended September 30,
1998.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for the
three months ended September 30, 1999 was zero compared to $75,000 for the three
months ended September 30, 1998, reflecting management's assessment of the
credit risk in the loan portfolio and negative loan growth for the quarter.
NON-INTEREST INCOME. Non-interest income increased by $2,000 or 1.0% to
$197,000 for the three months ended September 30, 1999 compared to $195,000 for
the three months ended September 30, 1998. The increase in non-interest income
was primarily due to additional fees generated by the Bank's products and
services.
NON-INTEREST EXPENSE. Non-interest expense increased by $184,000 or
15.3% for the three months ended September 30, 1999. The increase in
non-interest expense was primarily due to additional data processing expense of
$34,000, compensation and related benefits of $31,000, repairs, maintenance, and
depreciation of $32,000 attributable mainly to new computer equipment, and
marketing expense of $31,000.
INCOME TAX EXPENSE. The Company recorded income tax expense for the
three month period ended September 30, 1999 of $131,000 based on a combined
effective federal and state tax rate of 38.6%.
YEAR 2000 COMPLIANCE. As a financial institution, the Bank is highly
dependent on computer systems and applications to conduct its business. The Year
2000 (Y2K) issue arises from the use of two digits rather than four to signify
the calendar year in date-sensitive computer programs. Many of the Bank's
computer applications may recognize the date "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculation causing
disruption of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities for both the
Bank and its customers who rely on its financial products and services.
The Bank is actively engaged in an ongoing program designed to make its
computer systems, applications, and facilities Y2K compliant. This program
consists of the following phases: (i) awareness; (ii) assessment; (iii)
renovation; (iv) validation, and; (v) implementation. During the awareness
phase, the Bank identified its project team and responsibilities, prepared and
allocated the project budget, defined the project scope, and established program
and management policies.
Although complete, the awareness phase continues to be reviewed and
updated. The assessment phase--requiring an inventory of software, hardware,
vendors, material customers,
<PAGE>
and facilities-- has also been completed. The renovation phase relating to the
Bank's new internal systems was completed by January 31, 1999.
The Bank converted its mission critical systems to a new service bureau
on January 25, 1999. The new service bureau completed its Y2K testing phase by
March 31, 1999. The Bank participated in this process, utilizing the proxy test
method. The Bank used internal resources to validate the test results of all
mission-critical systems (deposits, loans, and general ledger). The validation
phase also included testing of internal systems as they relate to each other,
and testing of external interfaces with business partners. The implementation
phase, which involved either updating or replacing software and hardware that is
non-compliant, has also been completed.
An institution-wide contingency plan has been developed to establish
policies and procedures to be followed in the event of a business disruption
caused by Y2K or other disasters. The plan's objective is to enable the
continued safe operation of the Bank for a reasonable period of time until
impacted systems can be restored. Elements of the plan include performing
certain processes manually, repairing systems or obtaining replacements, and
changing suppliers. The Bank strongly believes that the contingency planning
process must be continuous and ongoing. Modifications to the plan will be made
as additional information is obtained.
The Bank has budgeted $675,000 for conversion of its data processing
system and for expenses related to the Y2K effort. To date, the Bank has spent
the amount budgeted towards these projects. All costs to date and any remaining
costs related to Y2K will be funded through operating cash flows. Any additional
expenses are not expected to have a material effect on the Bank's operations.
The Bank believes that conversions, renovations and modifications of
its systems and equipment has enabled the Bank to be in a position to be Y2K
ready. There can be no assurances, however, that the Bank's internal systems or
equipment, or those of third parties upon which the Bank relies, will be Y2K
ready. There also can be no assurances that the Bank's contingency plans, or
those of third parties, will mitigate the effects of Y2K non-compliance. The
Bank is part of a regulated industry that has issued standards for Y2K and is
conducting audits of financial institutions, including the Bank, to ensure
compliance. In the most likely worst case scenario, the Bank believes that its
customers could experience some manual processes or an inability to access their
cash immediately. Such events could have a material adverse effect on the Bank's
financial position, liquidity and results of operations.
The preceding Y2K discussion contains various forward-looking
statements, which represent the Company's beliefs or expectations regarding
future events. When used in the Y2K discussion, the words "believes," "expects,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Forward looking statements include, without limitation, the
Company's: (i) expectations as to when it will complete the renovation and
testing phase of its Y2K program and its Y2K contingency plans; (ii) estimated
cost of achieving Y2K readiness, and; (iii) expressed belief that its internal
systems and equipment will be Y2K compliant in a timely fashion.
All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results. Factors that may cause
<PAGE>
these differences include, but are not limited to: (i) the availability of
qualified personnel and other information technology resources; (ii) the ability
to identify and renovate all data sensitive lines of computer code or to replace
imbedded computer chips in affected systems and equipment, and; (iii) the
actions of government agencies and other third parties with respect to Y2K
problems.
FINANCIAL MODERNIZATION LEGISLATION
Over the past several years, Congress has considered legislation to modernize
the relationships between banks and other financial services companies. In 1999,
both the House of Representatives and the Senate passed different versions of a
bill that would repeal the laws that have restricted cross-ownership of banks,
insurers and securities firms. On November 4, 1999, a compromise bill was
approved by both houses of Congress and was expected to be signed into law by
the President during the week of November 8, 1999. If the revised bill is
enacted into law, it would permit banks, securities firms and insurers to
combine and to offer a wide variety of financial products and services. Many of
the resulting companies would be larger and have more resources than the Bank,
and, should they choose to compete directly with the Bank in providing products
similar to those of the Bank, they could adversely impact the Bank's results of
operations. While press reports currently indicate that passage is likely, the
financial reform legislation has been controversial, and there can be no
assurances that the compromise bill will be signed into law by the President.
Due to this uncertainty, as well the wide range of reforms contemplated by the
bill, the Bank is unable to predict the impact that the financial modernization
legislation will have on its business and results of operations.
RECENT DEVELOPMENTS
The Bank has entered into a formal agreement with the Office of the Comptroller
of the Currency ("OCC") whereby the Bank is required to improve the Bank's
management and policies and procedures. This agreement in no way restricts or
impedes the Bank's ability to conduct normal banking and business transactions.
The Bank has developed a detailed action plan to ensure prompt compliance with
the agreement and is on schedule to meet all deadlines imposed by the agreement.
The Bank has recently hired a new Chief Executive Officer, Mark H. Anders, and a
new Chief Credit Officer, Robert E. Kendrick, III, and is in the process of
evaluating the need, if any, to hire additional senior management personnel. In
addition, the Bank has engaged outside firms to perform loan and compliance
reviews and is currently accepting proposals for outsourcing internal audit
functions. The Bank is also in the process of developing, updating, and
implementing policies and procedures to address specific concerns of the OCC,
including policies and procedures related to lending, risk management, and asset
diversification.
The Bank is committed to complying with the provisions of the agreement and
believes that the changes it is making will have a positive impact on future
operations.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
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.*
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 September 23, 1998.
<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: 11/15/99 /s/ Richard M. Lerner
-------- ---------------------------
Richard M. Lerner
Chief Executive Officer
Date: 11/15/99 /s/ Russell J. Grimes Jr.
-------- ---------------------------
Russell J.Grimes, Jr.
Chief Financial Officer
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In thousands, except Earnings per Share)
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1999 September 30, 1998
--------------------------- ----------------------------
<S> <C> <C>
Net income $227 $244
Average Shares Outstanding 2,323 2,312
Basic Earnings Per Share $0.10 $0.11
Diluted Earnings Per Share $0.10 $0.11
Nine Months Ended
September 30, 1999 September 30, 1998
--------------------------- ----------------------------
Net income $505 $798
Average Shares Outstanding 2,318 2,321
Basic Earnings Per Share $0.22 $0.35
Diluted Earnings Per Share $0.22 $0.35
</TABLE>
(1) Includes the dilutive effect of 8,344 incentive stock options.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,385
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,791
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,372
<INVESTMENTS-CARRYING> 29,372
<INVESTMENTS-MARKET> 29,372
<LOANS> 83,409
<ALLOWANCE> 1,471
<TOTAL-ASSETS> 126,538
<DEPOSITS> 104,589
<SHORT-TERM> 0
<LIABILITIES-OTHER> 478
<LONG-TERM> 0
0
0
<COMMON> 23
<OTHER-SE> 12,553
<TOTAL-LIABILITIES-AND-EQUITY> 126,538
<INTEREST-LOAN> 6,174
<INTEREST-INVEST> 701
<INTEREST-OTHER> 358
<INTEREST-TOTAL> 7,233
<INTEREST-DEPOSIT> 2,338
<INTEREST-EXPENSE> 2,594
<INTEREST-INCOME-NET> 4,639
<LOAN-LOSSES> 432
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,059
<INCOME-PRETAX> 780
<INCOME-PRE-EXTRAORDINARY> 780
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 505
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 820
<LOANS-NON> 1,877
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,223
<ALLOWANCE-OPEN> 1,159
<CHARGE-OFFS> 209
<RECOVERIES> 89
<ALLOWANCE-CLOSE> 1,471
<ALLOWANCE-DOMESTIC> 1,471
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
