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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
For the Quarterly Period Ended June 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
Incorporation or Organization) Identification No.)
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 August 1, 2000, the Registrant had 2,319,506 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format
YES ___ NO X
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1
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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 June 30,
2000 and December 31, 1999 1
Consolidated Statements of Income for the Three and Six Month Periods Ended
June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the Six Month Periods Ended
June 30, 2000 and 1999 3
Consolidated Statement of Changes in Stockholder's Equity for the Six Month
Periods Ended June 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 June 30, 2000 and December 31, 1999
(In thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, December 31,
2000 1999
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Assets
Cash and due from banks $ 4,576 $ 5,665
Federal funds sold and other overnight investments 6,737 11,432
Federal Reserve Bank stock, at cost 361 361
Investment securities available for sale 35,641 23,408
Loans, less allowance for credit losses 77,343 81,198
Premises and equipment 3,292 2,741
Core deposit premium and other intangibles -- 43
Accrued interest receivable 1,098 822
Deferred income taxes 502 341
Other real estate owned 57 57
Other assets 534 665
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Total assets $ 130,141 $ 126,733
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Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 13,210 $ 13,321
Interest-bearing 92,438 91,773
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Total deposits 105,648 105,094
Securities sold under agreements to repurchase 11,132 8,497
Accrued interest and other liabilities 356 415
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Total liabilities 117,136 114,006
Stockholders' Equity
Preferred stock - $0.01 par value -- --
Common stock - $0.01 par value 23 23
Capital surplus 13,176 13,192
Accumulated deficit (143) (454)
Accumulated other comprehensive income (51) (34)
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Stockholders' equity 13,005 12,727
Total liabilities and stockholders' equity $ 130,141 $ 126,733
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Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
for The Three and Six Month Periods Ended June 30, 2000 and 1999
(Unaudited)
(In thousands, except Per Share data)
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For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Interest income:
Loans $ 1,869 $ 2,110 $ 3,760 $ 4,169
Investment securities 560 181 937 343
Federal funds sold and securities purchased 145 116 308 227
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Total interest income 2,574 2,407 5,005 4,739
Interest expense:
Interest-bearing deposits 820 778 1,641 1,497
Securities sold under agreements to repurchase 88 83 166 153
Other borrowed money -- 12 -- 12
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Total interest expense 908 873 1,807 1,662
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Net interest income 1,666 1,534 3,198 3,077
Provision for credit losses -- 27 36 432
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Net interest income after provision for
credit losses 1,666 1,507 3,162 2,645
Noninterest income
Service charges and fees 176 98 329 233
Mortgage banking fees 15 21 55 54
Other fee income 29 95 59 151
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Total noninterest income 220 214 443 438
Noninterest expense
Personnel 760 632 1,506 1,252
Occupancy and equipment 246 141 482 278
Other operating expenses 511 595 998 1,089
Amortization of intangibles 21 22 43 43
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Total noninterest expense 1,538 1,390 3,029 2,662
Income before income taxes 348 331 576 421
Income tax expense 132 113 218 143
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Net income $ 216 $ 218 $ 358 $ 278
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Basic Earnings Per Share $ 0.09 $ 0.09 $ 0.15 $ 0.12
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Diluted Earnings Per Share $ 0.09 $ 0.09 $ 0.15 $ 0.12
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2
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Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
for the Six Month Periods Ended June 30, 2000 and 1999
(Unaudited and in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
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2000 1999
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<S> <C> <C>
Cash flows from operating activities
Net income $ 358 $ 278
Adjustments to reconcile net income to net cash
provided by operating activities
Deferred income taxes (161) --
Depreciation and amortization of furniture,
equipment and leasehold improvements 156 125
Amortization of premiums and accretions of discounts, net (105) (165)
Amortization of intangible assets acquired 43 43
(Increase) Decrease in accrued interest receivable (276) 10
Net loss on sale of loans, equipment and other real estate owned -- 30
Provision for credit losses 36 432
Other 55 58
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Net cash provided by operating activities 106 811
Cash flows from investing activities
Net decrease (increase) in loans 3,819 (1,783)
Investment in securities - available-for-sale (23,510) (45,790)
Proceeds from redemption of securities and principal repayments 11,382 43,186
Net (increase) decrease in federal funds sold 4,695 (7,555)
Proceeds from sale of equipment -- 5
Purchase of furniture, equipment and leasehold improvements (707) (253)
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Net cash used in investing activities (4,321) (12,190)
Cash flows from financing activities
Proceeds from employee stock options -- 50
Stock repurchase (16) --
Net increase in deposits 554 6,026
Net increase in securities sold under agreements to repurchase 2,635 5,737
Payment of dividends (47) --
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Net cash provided by financing 3,126 11,813
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Net (decrease) increase in cash (1,089) 434
Cash and due from banks, beginning of period 5,665 3,846
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Cash and due from banks, end of period $ 4,576 $ 4,280
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Supplemental cash flow information
Interest paid on deposits and repurchase agreements $ 1,803 $ 1,475
Income taxes paid $ 265 $ 39
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3
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Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholder's Equity
for the Six Month Periods Ended June 30, 2000 and 1999
(Dollars in thousands)
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Accumulated
Other
Common Stock Accumulated Comprehensive
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Shares Par Value Surplus Deficit Income Total
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<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 2,323,506 $ 23 $ 13,192 $ (454) $ (34) $ 12,727
Net income -- -- -- 358 -- 358
Unrealized loss on investment
securities available for sale,
net of tax -- -- -- (17) (17)
Stock repurchase (4,000) -- (16) (16)
Dividends paid -- -- -- (47) -- (47)
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Balances, June 30, 2000 (unaudited) 2,319,506 $ 23 $ 13,176 $ (143) $ (51) $ 13,005
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<CAPTION>
Accumulated
Other
Common Stock Accumulated Comprehensive
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Shares Par Value Surplus Deficit Income Total
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<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 2,313,506 $ 23 $ 13,143 $ (1,075) $ -- $ 12,091
Net income -- -- -- 278 -- 278
Unrealized loss on
investment securities
available for sale, net
of tax -- -- -- -- (21) (21)
Stock options exercised 10,000 -- 50 -- 50
Dividends paid -- -- -- (23) -- (23)
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Balances, June 30, 1999 (unaudited) 2,323,506 $ 23 $ 13,193 $ (820) $ (21) $ 12,375
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4
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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 consist, of a
normal and recurring nature, and those considered necessary for fair
presentation have been included. Operating results for the six month period
ended June 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.
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 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.
5
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Item 2 - Management Discussion and Analyses of Financial Condition and Results
of Operation
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Total assets at June 30, 2000 were $130.1 million, an increase of $3.4
million or 2.7% from total assets at December 31, 1999 of $126.7 million.
Federal funds sold and other overnight investments decreased $4.7 million or
41.1%, while investment securities-available for sale increased $12.2 million or
52.3%.
Net loans receivable at June 30, 2000 were $77.3 million, down from $81.2
million at December 31, 1999, a decrease of $3.9 million or 4.8%. The decrease
was due primarily to a $2.6 million decrease in real estate and construction
loans and a $1.0 million decrease in commercial loans.
The allowance for credit losses increased $52,000 to $1,535,000 at June 30,
2000 from $1,483,000 at December 31, 1999. The increase in the allowance for
loan losses includes general reserves of $36,000 and net recoveries on loans
previously charged off of $16,000. 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 June 30, 2000 and December 31, 1999 the allowance for credit
losses to total loans was 1.95% and 1.79% respectively.
Deposits of $105.7 million at June 30, 2000 represent a $0.6 million or
0.5% increase from December 31, 1999 deposits of $105.1 million. The increase
was due primarily to a $5.7 million or 9.6% increase in core deposits offset by
a $5.2 million or 11.4% decrease in IRAs and certificates of deposit.
Stockholders' equity increased $0.3 million or 2.2% to $13.0 million at
June 30, 2000 from $12.7 million at December 31, 1999, due to an increase in net
retained earnings of $0.3 million, offset by an increase of $17,000 in the
unrealized loss on investment securities available for sale, a component of
accumulated other comprehensive income, a $16,000 decrease in capital surplus
due to the Company's stock repurchase program and $47,000 in cash dividends.
6
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Comparison of Operating Results for the Six months Ended June 30, 2000 and 1999.
General. Net income for the six months ended June 30, 2000 totaled $358,000
or $0.15 per basic and diluted share as compared to $278,000 or $0.12 per basic
and diluted share for the six months ended June 30, 1999. The increase in net
income can be attributed mainly to a reduction in the provision for credit
losses of $396,000 offset by higher noninterest expenses of $367,000. For the
six months ended June 30, 1999 the Bank recorded a provision for 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 $0.3 million as a result of a
higher average level of investment securities, up $17.1 million to $30.1 million
for the six months ended June 30, 2000. Offsetting the increase in interest
income from investments was the decrease of $11.7 million in the average level
of net loans receivable down to $80.2 million at June 30, 2000 from $91.9
million at June 30, 1999. Offsetting the lower average loan balance was a higher
overall yield on the loan portfolio increasing to 9.43% for the six months ended
June 30, 2000 from 9.15% for the same period in 1999.
Interest Expense. Interest expense increased by $169,000 or 10.2% for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
This increase was due primarily to a rise in the average level of certificates
of deposit from $41.0 million to $44.0 million, an $3.0 million or 7.1%
increase.
Net Interest Income. Net interest income increased $96,000 or 3.1% for the
six months ended June 30, 2000 compared to the six months ended June 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.
At June 30, 2000, the net interest margin decreased to 5.33% from 5.38% at
June 30, 1999. The decrease in the net interest margin was the result of an
increase in the overall cost of deposits up to 3.55% for the six months ended
June 30, 2000 from 3.40% for the same period in 1999. Average loan volumes
decreased while average investment volumes for the same period increased. The
yield on earning assets increased to 8.34% at June 30, 2000 from 8.29% at June
30, 1999.
Provision for Credit Losses. The provision for credit losses for the six
months ended June 30, 2000 and 1999 totaled $36,000 and $432,000, respectively.
The 1999 provision for credit losses included a special provision of $330,000
provision related to management's reassessment of the loan loss reserve
methodology.
7
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Noninterest Income. Noninterest income, which is comprised primarily of
fees and charges on deposit accounts, increased by $5,000 or 1.1% to $443,000 at
June 30, 2000 from $438,000 at June 30, 1999. The increase in non-interest
income was primarily due to an increase in fees generated by the Bank's new VISA
debit card.
Noninterest Expense. Noninterest expense increased by $0.3 million or 13.8%
for the six months ended June 30, 2000 to $3.0 million from $2.7 million for the
six months ended June 30, 1999. The increase in noninterest expense was
primarily due to increased compensation and benefits expense of $254,000 due to
filling positions that had been vacant at June 30, 1999; legal and professional
fees of $38,000 related to regulatory issues and the outsourcing of internal
audit and other expense of $12,000 related to a robbery at a branch location.
Lower data processing expenses of $58,000 offset these increases in noninterest
expense.
Income Tax Expense. The Company recorded federal income tax expense for the
six-month period ended June 30, 2000 of $218,000. The Company's effective
federal tax rate is approximately 37.9%.
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.
8
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Regulatory Matters
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 is committed to complying with the provisions of the
agreement.
9
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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)
(b) Reports on Form 8-K
The Company filed a Form 8-K on May 17, 2000 announcing
a stock repurchase agreement under which it will acquire up
to 5% of its outstanding common stock.
*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: 8/1/00 /s/ Richard M. Lerner
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Richard M. Lerner
Chief Executive Officer
Date: 8/1/00 /s/ Margaret Theiss Faison
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Margaret Theiss Faison
Chief Financial Officer
11
