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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
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For the Quarterly Period Ended September 30, 2000 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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
At November 1, 2000, the Registrant had 2,270,406 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format
YES ____ NO X
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TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION PAGE
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Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 1
Consolidated Statements of Income for the Three and Nine Month Periods
Ended September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the Nine Month Periods Ended
September 30, 2000 and 1999 3
Consolidated Statement of Changes in Stockholder's Equity for the Nine Month
Periods Ended September 30, 2000 and 1999 4
Notes to Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 8
PART II - OTHER INFORMATION
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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 - 12
SIGNATURES..................................................................................... 13
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This Report contains statements, which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the securities exchange Act of 1934. These statements appear in a number of
places in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy; and (iv) the declaration and payment of dividends. Investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors discussed herein and those factors discussed in the
Company's filings with the Securities and Exchange Commission.
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PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets as
of September 30, 2000 and December 31, 1999
(In thousands)
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(Unaudited) (Audited)
September 30, December 31,
1999 2000
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Assets
Cash and due from banks $ 3,654 $ 5,665
Federal funds sold and other overnight investments 7,895 11,432
Federal Reserve Bank stock, at cost 361 361
Investment securities available for sale 31,240 23,408
Loans, less allowance for credit losses of $1,542 and $1,159 81,766 81,198
Premises and equipment 3,850 2,741
Core deposit premium and other intangibles - 43
Accrued interest receivable 997 822
Deferred income taxes 478 341
Other real estate owned - 57
Other assets 509 665
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Total assets $ 130,750 $ 126,733
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Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 15,017 $ 13,321
Interest-bearing 91,715 91,773
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Total deposits 106,732 105,094
Securities sold under agreements to repurchase 10,577 8,497
Accrued interest and other liabilities 359 415
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Total liabilities 117,668 114,006
Stockholders' Equity
Preferred stock - $0.01 par value - -
Common stock - $0.01 par value 23 23
Capital surplus 12,922 13,192
Retained earnings (deficit) 146 (454)
Accumulated other comprehensive income (loss) (9) (34)
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Total stockholders' equity 13,082 12,727
Total liabilities and stockholders' equity $ 130,750 $ 126,733
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Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
for The Three and Nine Month Periods Ended September 30, 2000 and 1999
(Unaudited)
(In thousands, except Per Share data)
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For the Three Months For the Nine Months
Ended Ended
September 30 September 30,
2000 1999 2000 1999
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Interest income:
Loans $ 2,063 $ 1,992 $ 5,823 $ 6,174
Investment securities 570 358 1,507 701
Federal funds sold and securities purchased 85 131 393 358
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Total interest income 2,718 2,481 7,723 7,233
Interest expense:
Interest-bearing deposits 839 841 2,480 2,338
Securities sold under agreements to repurchase 95 91 261 244
Other borrowed money - - - 12
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Total interest expense 934 932 2,741 2,594
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Net interest income 1,784 1,549 4,982 4,639
Provision for credit losses - - 36 432
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Net interest income after provision for
credit losses 1,784 1,549 4,946 4,207
Noninterest income
Service charges and fees 186 148 517 471
Mortgage banking fees 16 25 71 80
Other fee income 30 24 88 81
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Total noninterest income 232 197 676 632
Noninterest expense
Personnel 800 603 2,306 1,824
Occupancy and equipment 242 148 724 425
Other operating expenses 534 615 1,532 1,745
Amortization of intangibles - 22 43 65
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Total noninterest expense 1,576 1,388 4,605 4,059
Income before income taxes 440 358 1,017 780
Income tax expense 129 131 347 275
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Net income $ 311 $ 227 $ 670 $ 505
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Basic Earnings Per Share $ 0.14 $ 0.10 $ 0.29 $ 0.22
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Diluted Earnings Per Share $ 0.14 $ 0.10 $ 0.29 $ 0.22
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Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
for the Nine Month Periods Ended September 30, 2000 and 1999
(Unaudited and in thousands)
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For the Nine Months Ended
September 30,
2000 1999
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Cash flows from operating activities
Net income $ 670 $ 505
Adjustments to reconcile net income to net cash
provided by operating activities
Deferred income taxes (137) -
Depreciation and amortization of furniture,
equipment and leasehold improvements 236 196
Amortization of premiums and accretions of discounts, net (137) (357)
Amortization of intangible assets acquired 43 65
(Increase) in accrued interest receivable (175) (5)
Net loss on sale of loans, equipment and other real estate owned - 30
Provision for credit losses 36 432
Other 141 120
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Net cash provided by operating activities 677 986
Cash flows from investing activities
Net (increase) decrease in loans (604) 3,259
Purchase of investment securities - available-for-sale (23,535) (80,790)
Proceeds from redemption of securities and principal repayments 15,881 66,252
Net decrease in federal funds sold 3,537 5,493
Proceeds from sale of equipment - 39
Purchase of furniture, equipment and leasehold improvements (1,345) (272)
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Net cash used in investing activities (6,066) (6,019)
Cash flows from financing activities
Proceeds from employee stock options - 50
Stock repurchase (270) -
Net increase in deposits 1,638 3,847
Net increase in securities sold under agreements to repurchase 2,080 1,721
Payment of dividends (70) (46)
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Net cash provided by financing 3,378 5,572
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Net (decrease) increase in cash (2,011) 539
Cash and due from banks, beginning of period 5,665 3,846
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Cash and due from banks, end of period $ 3,654 $ 4,385
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Supplemental cash flow information
Interest paid on deposits and repurchase agreements $ 2,734 $ 2,598
Income taxes paid $ 338 $ 409
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Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholder's Equity
for the Nine Month Periods Ended September 30, 2000 and 1999
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(Dollars in thousands)
Accumulated
Retained Other
Common Stock Earnings Comprehensive
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Shares Par Value Surplus (Deficit) Income Total
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Balance, January 1, 2000 2,323,506 $ 23 $ 13,192 $ (454) $ (34) $ 12,727
Net income --- -- --- 670 -- 670
Unrealized loss on investment securities
available for sale, net of tax --- --- --- 25 25
Stock repurchase (53,100) -- (270) (270)
Dividends paid --- -- --- (70) -- (70)
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Balances, September 30, 2000 (unaudited) 2,270,406 $ 23 $ 12,922 $ 146 $ (9) $ 13,082
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Accumulated
Retained Other
Common Stock Earnings Comprehensive
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Shares Par Value Surplus (Deficit) Income Total
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Balance, January 1, 1999 2,313,506 $ 23 $ 13,143 $ (1,075) $ --- $ 12,091
Net income --- -- --- 505 --- 505
Unrealized loss on investment securities
available for sale, net of tax --- -- --- --- (24) (24)
Stock options exercised 10,000 -- 50 --- 50
Dividends paid --- -- --- (46) -- (46)
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Balances, September 30, 1999 (unaudited) 2,323,506 $ 23 $ 13,193 $ (616) $ (24) $ 12,576
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Annapolis National Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements of Annapolis
National Bancorp, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB. Accordingly, they do not include all the
information and footnotes required for complete financial statements. In the
opinion of management, all adjustments and reclassifications are of a normal and
recurring nature, and those considered necessary for fair presentation have been
included. Operating results for the nine month period ended September 30, 2000,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2000. The unaudited consolidated financial statements should
be read in conjunction with the consolidated financial statements and footnotes
for the year ended December 31, 1999. Certain reclassifications have been made
to amounts previously reported in order to comply with current classifications.
Note B - New Accounting Pronouncement
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement 133, requires that derivative instruments be carried at fair
value on the balance sheet. The statement continues to allow derivative
instruments to be used to hedge various risks and sets forth specific criteria
to be used to determine when hedge accounting can be used. The statement also
provides for offsetting changes in fair value or cash flows of both the
derivative and the hedged asset or liability to be recognized in earnings in the
same period; however, any changes in fair value or cash flow that represent the
ineffective portion of a hedge are required to be recognized in earnings and
cannot be deferred. For derivative instruments not accounted for as hedges,
changes in fair value are required to be recognized in earnings.
The Company plans to adopt the provisions of this statement, as amended, for its
quarterly and annual reporting beginning January 1, 2001, the statement's
effective date. The impact of adopting the provisions of this statement on the
Company's financial position, results of operations and cash flows subsequent to
the effective date is not currently estimable and will depend on the financial
position of the Company and the nature and purpose of any derivative instruments
in use at the time.
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Item 2- Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at September 30, 2000 and December 31, 1999
Total assets at September 30, 2000 were $130.7 million, an increase of $4.0
million or 3.2% from total assets at December 31, 1999 of $126.7 million.
Federal funds sold and other overnight investments decreased $3.5 million or
30.9%, while investment securities-available for sale increased $7.8 million or
33.5%.
Net loans receivable at September 30, 2000 were $81.8 million, up $0.6 million
from $81.2 million at December 31, 1999, an increase of 0.7%. The increase was
due primarily to increases in real estate and construction loans offset by a
decrease in commercial loans.
The allowance for credit losses increased $59,000 to $1,542,000 at September 30,
2000 from $1,483,000 at December 31, 1999. The increase in the allowance for
loan losses includes a provision of $36,000 and net recoveries on loans
previously charged off of $23,000. 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 September 30, 2000 and December 31, 1999 the allowance for
credit losses to total loans was 1.85% and 1.79% respectively.
Deposits of $106.7 million at September 30, 2000 represent a $1.6 million or
1.6% increase from December 31, 1999 deposits of $105.1 million. The increase
was due primarily to a $4.5 million or 7.6% increase in core deposits offset by
a $2.9 million or 6.3% decrease in IRAs and certificates of deposit.
Stockholders' equity increased $0.3 million or 2.8% to $13.1 million at
September 30, 2000 from $12.7 million at December 31, 1999, due to an increase
in net retained earnings of $0.6 million, a reduction of $25,000 in the
unrealized loss on investment securities available for sale, a component of
accumulated other comprehensive income, a $270,000 decrease in capital surplus
due to the Company's stock repurchase program, and $70,000 paid in cash
dividends.
Since the inception of the stock repurchase program the Company has repurchased
53,100 shares at an average repurchase price of $5.09 per share.
Comparison of Operating Results for the Nine Months Ended September 30, 2000 and
1999.
General. Net income for the nine months ended September 30, 2000 totaled
$670,000 or $0.29 per basic and diluted share as compared to $505,000 or $0.22
per basic and diluted share for the nine months ended September 30, 1999. The
increase in net income can be attributed mainly to a reduction in the provision
for credit losses of $396,000, an increase in interest income of $346,000 and an
increase in noninterest income of $49,000 offset by higher noninterest expenses
of $579,000. For the nine months ended September 30, 1999 the Bank recorded a
provision for
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credit losses of $432,000 that included a special provision of $330,000. A
provision of $36,000 was recorded for the same period in 2000.
Interest Income. Interest income increased $0.5 million as a result of higher
average levels of investment securities, up $7.8 million to $31.6 million for
the nine months ended September 30, 2000. Offsetting the increase in interest
income from investments was the decrease of $10.0 million in the average level
of net loans receivable, down to $80.3 million at September 30, 2000 from $90.3
million at September 30, 1999. Offsetting the lower average loan balance was a
higher overall yield on the loan portfolio increasing to 9.7% for the nine
months ended September 30, 2000 from 9.2% for the same period in 1999.
Interest Expense. Interest expense increased by $172,000 or 6.6% for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999. This increase was due primarily to a rise in the average level of
certificates of deposit from $42.6 million to $43.1 million, a $0.5 million or
1.3% increase, and an increase in the yield on certificates from 5.10% to 5.35%.
Net Interest Income. Net interest income increased $346,000 or 7.5% for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999, due primarily to an increase in interest income on investment securities
and federal funds sold, offset by a decrease in interest income on commercial
and construction loans caused by a change in the mix of balances between loan
products.
At September 30, 2000, the net interest margin increased to 5.51% from 5.26% at
September 30, 1999. The increase in the net interest margin was the result of an
overall increase in the yield on earnings assets to 8.55% from 8.20% for the
same period in 1999. Offsetting this is a higher overall cost of deposits up to
3.58% for the nine months ended September 30, 2000 from 3.48% for the same
period in 1999.
Provision for Credit Losses. The provision for credit losses for the nine
months ended September 30, 2000 and 1999 totaled $36,000 and $432,000,
respectively. The 1999 provision for credit losses included a special provision
of $330,000 related to management's reassessment of the loan loss reserve
methodology.
Noninterest Income. Noninterest income, which is comprised primarily of fees and
charges on deposit accounts, increased by $49,000 or 7.9% to $675,000 at
September 30, 2000 compared to $626,000 at September 30, 1999. The increase in
non-interest income was due to improved deposit fee generation and an increase
in fees generated by the Bank's new VISA debit card.
Noninterest Expense. Noninterest expense increased by $0.6 million or 14.4% for
the nine months ended September 30, 2000 to $4.6 million from $4.0 million for
the nine months ended September 30, 1999. The increase in noninterest expense
was primarily due to increased compensation and benefits expenses of $482,000
due to filling positions that had been vacant at September 30, 1999, and higher
marketing expenses of $67,000 offset by lower data processing expenses of
$70,000.
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Income Tax Expense. The Company recorded federal income tax expense for the
nine-month period ended September 30, 2000 of $347,000. The Company's effective
federal tax rate is approximately 34.2%.
Financial Modernization Legislation
On November 12, 1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999
became law. The Modernization Act contains new financial privacy provisions that
will generally prohibit financial institutions, including the Company, from
disclosing nonpublic personal financial information to third parties unless
customers have the opportunity to "opt out" of the disclosure. The Modernization
Act also allows, among other things, for bank holding companies meeting certain
management, capital and CRA standards to engage in a substantially broader range
of nonbanking activities than were previously permissible, including insurance
underwriting and merchant banking investment in commercial and financial
companies. The Modernization Act further allows insurers and other financial
services companies to acquire banks; removes various restrictions that currently
apply to bank holding company ownership of securities firms and mutual fund
advisory companies; and establishes the overall regulatory structure applicable
to bank holding companies that also engage in insurance and securities
operations.
Because the Modernization Act permits banks, securities firms and insurers to
combine and to offer a wide variety of financial products and services, many of
these resulting companies will be larger and have more resources than the
Company. Should these companies choose to compete directly with the Company in
its target markets, the Company's results of operations could be adversely
impacted.
Regulatory Matters
In September of 1999, the Bank entered into a formal agreement with the Office
of the Comptroller of the Currency ("OCC") whereby the Bank was required to
improve the Bank's management and policies and procedures. This agreement has no
way restricted or impedes the Bank's ability to conduct normal banking and
business transactions. The Bank remains committed to complying with the
provisions of this agreement.
The Bank has applied and received approval to change the Bank's charter from a
national charter to a state charter. As a result, the primary regulator for the
Bank will be the State of Maryland. This change is expected to be effective on
or about November 1, 2000. This change will also require the Bank to remove the
word "national" from its name.
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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 Earnings Per Share
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, 1997.
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SIGNATURES
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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: 11/1/00 /s/ Richard M. Lerner
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Richard M. Lerner
Chief Executive Officer
Date: 11/1/00 /s/ Margaret Theiss Faison
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Margaret Theiss Faison
Chief Financial Officer
