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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
ABIGAIL ADAMS NATIONAL BANCORP, INC.
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(Name of Registrant as Specified In Its Charter)
ABIGAIL ADAMS NATIONAL BANCORP, INC.
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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BALLSTON BANCORP, INC.
1667 K Street, N.W., Suite 700
Washington, D.C. 20006
November 10, 1997
To the Stockholders of Ballston Bancorp, Inc.
Dear Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of
Ballston Bancorp, Inc. ("Ballston") and any adjournment or postponement thereof
(the "Ballston Meeting"), which will be held on December 15, 1997, at 4:00 p.m.,
local time, in the banking lobby of The Bank of Northern Virginia, at 1010 North
Glebe Road, Arlington, Virginia.
At this meeting, you will be asked to consider and vote upon a proposal to
approve an Agreement and Plan of Reorganization dated as of June 23, 1997 as
amended (the "Agreement"), by and among Abigail Adams National Bancorp, Inc.
("AANB"), Ballston, and The Bank of Northern Virginia, pursuant to which
Ballston would merge with and into Adams Acquisition Corporation ("Subsidiary"),
a to-be-formed Delaware corporation (the "Holding Company Merger"), The Bank of
Northern Virginia would become a wholly-owned subsidiary of AANB, and each
outstanding share of Ballston Stock shall be entitled to elect to receive a pro
rata portion of the Exchange Price (subject to adjustment in certain
circumstances described in the enclosed Proxy Statement/Prospectus) in (a) AANB
Common Stock, with cash being paid in lieu of any fractional share interests,
(b) cash, or (c) a combination of AANB Common Stock and cash. Following the
Holding Company Merger AANB intends to cause the merger of The Bank of Northern
Virginia with and into The Adams National Bank with The Adams National Bank
being the surviving entity.
The proposed Holding Company Merger has been approved by the Board of
Directors of Ballston. Your Board of Directors has determined that the Holding
Company Merger is fair to, and in the best interests of, Ballston and its
Stockholders and unanimously recommends that you vote FOR approval of the
Agreement and Holding Company Merger.
Consummation of the Holding Company Merger is subject to certain
conditions, including the approval of the Agreement and Holding Company Merger
by Ballston's Stockholders. The enclosed Notice of Special Meeting of
Stockholders and Proxy Statement/Prospectus describe the Agreement and the
Holding Company Merger and provide specific information concerning the Special
Meeting as well as other information about AANB, Ballston and The Bank of
Northern Virginia. In view of the significance of these matters, you are urged
to read this Proxy Statement/Prospectus, as well as the appendices thereto.
It is important that your shares be represented at the Ballston Meeting,
regardless of whether you plan to attend in person. The affirmative vote of a
majority of all of the outstanding shares of Ballston Stock is required to
approve the Agreement and Holding Company Merger. Consequently, a failure to
vote will have the same effect as a vote against the proposal. Therefore, I urge
you to execute, date and return the enclosed proxy card in the enclosed postage-
paid envelope as soon as possible to ensure that your shares will be voted at
the Ballston Meeting. You should not forward any of your stock certificates at
this time.
I also urge you to take advantage of your opportunity to register your
preference between receiving AANB Common Stock and receiving cash in return for
your Ballston Stock. Enclosed you will find a form of election which you should
execute, date and return in the enclosed postage-paid envelope. You may elect to
receive all AANB Common Stock, or all cash, or such combination of
<PAGE>
the two as you choose. If we do not receive your form of election before the
adjournment of the Special Meeting of Shareholders, you will be deemed to have
registered no preference between AANB Common Stock and cash and will have less
control over the type of consideration you may receive. While every stockholder
may not receive his or her preferred type of consideration, every effort will be
made to provide each stockholder with as much consideration in the form that he
or she prefers, provided that the form of election is properly completed and
timely received.
On behalf of the Board of Directors, I urge you to vote FOR approval of the
Agreement and the Holding Company Merger.
Sincerely,
/s/ Robert F. Kelleher
Robert F. Kelleher
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
BALLSTON BANCORP, INC.
1667 K Street, N.W., Suite 700
Washington, D.C. 20006
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
to be held December 15, 1997
Notice Is Hereby Given that, pursuant to a call of its Directors, a Special
Meeting of Stockholders of Ballston Bancorp, Inc. ("Ballston") will be held in
the banking lobby of The Bank of Northern Virginia, at 1010 North Glebe Road,
Arlington, Virginia on December 15, 1997, at 4:00 p.m. local time and any
adjournment thereof (the "Ballston Meeting"), for the following purposes:
(1) To consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Reorganization, dated as of June 23, 1997 as amended (the
"Agreement"), by and among Abigail Adams National Bancorp, Inc. ("AANB"),
Ballston Bancorp, Inc. ("Ballston") and The Bank of Northern Virginia and
the merger provided for therein (the "Holding Company Merger"). A copy of
the Agreement is attached as Appendix A to, and described in, the
accompanying Proxy Statement/Prospectus. Pursuant to the Agreement, (i)
Ballston will merge with and into Adams Acquisition Corporation, a to-be-
formed subsidiary of AANB ("Subsidiary"); and (ii) each outstanding share
of the Ballston common stock, $0.20 par value (the "Ballston Stock"), shall
be converted into the right to receive a pro rata portion of the Exchange
Price (as defined in the Agreement) and shall be entitled to elect to
receive a pro rata portion of the Exchange Price in (a) AANB Common Stock
("Stock Consideration") with cash being paid in lieu of fractional share
interests, (b) cash ("Cash Consideration"), or (c) a combination of AANB
Common Stock and cash, provided that in no event shall more than 50% in the
aggregate of the Exchange Price be paid in AANB Common Stock nor more than
50% in cash. The shares of Ballston Stock of Ballston Stockholders electing
and who are allocated Stock Consideration automatically shall become and be
converted into shares of the common stock, $0.01 par value of AANB (the
"AANB Stock"). Holders of Ballston Stock who make no election as between
Cash Consideration and Stock Consideration will receive that portion of
Cash Consideration and AANB Stock Consideration as determined by Ballston
in implementing allocation procedures set forth in the Agreement so that no
more than 50% of the aggregate Exchange Price is paid in AANB Common Stock
nor more than 50% of the aggregate Exchange Price is paid in cash. Cash
will be paid in lieu of fractional shares. Immediately prior to the Holding
Company Merger, The Adams National Bank will become a subsidiary of
Subsidiary and following the Holding Company Merger, AANB will cause the
merger of The Bank of Northern Virginia with and into The Adams National
Bank (the "Bank Merger") with The Adams National Bank being the surviving
entity.
(2) To vote on such other business as may properly come before the Ballston
Meeting.
If the Agreement and the Holding Company Merger are approved, adopted and
consummated, each stockholder of Ballston will have the right to dissent and
demand payment of the fair value of his or her shares. This right is contingent
upon strict compliance with the procedures set forth in the applicable statute.
The full text of this statute is included as Appendix B to the accompanying
Proxy Statement/Prospectus.
<PAGE>
The Ballston Board of Directors has fixed November 9, 1997, as the record
date for the Ballston Meeting. All of the holders of Ballston Stock at the close
of business on that date are entitled to receive notice of and to vote at the
Ballston Meeting.
All stockholders are urged to attend the Ballston Meeting in person.
Whether or not you now plan to attend the Ballston Meeting, you are asked to
complete, date, sign and mail promptly the enclosed proxy card for which a
postage paid envelope is provided. If you decide to attend the Ballston Meeting,
you may revoke your proxy and vote your shares in person.
By Order of the Board of Directors
/s/ Brian D. Alprin
Brian D. Alprin, Secretary
Washington, D.C.
November 10, 1997
THE BOARD OF DIRECTORS OF BALLSTON RECOMMENDS THAT THE HOLDERS OF BALLSTON
COMMON STOCK VOTE TO APPROVE AND ADOPT THE AGREEMENT AND HOLDING COMPANY MERGER.
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
1627 K Street, N.W.
Washington, D.C. 20006
November 10, 1997
To Our Stockholders:
I am pleased to enclose the following information relating to the Special
Meeting of Stockholders of Abigail Adams National Bancorp, Inc. ("AANB") and any
adjournment or postponement thereof (the "AANB Meeting") to be held at 1627 K
Street, N.W.,Washington, D.C. 20006, on December 17, 1997 at 3:00 p.m.
At the AANB Meeting, you will be asked to consider and vote upon a proposal
to ratify the Board of Directors' approval of an Agreement and Plan of
Reorganization, dated as of June 23, 1997, as amended (the "Agreement"), by and
among AANB, Ballston Bancorp, Inc. ("Ballston") and The Bank of Northern
Virginia. You will also be asked to ratify the Board of Directors' approval of
the merger described in the Agreement and to approve the issuance of shares of
AANB common stock to the stockholders of Ballston in the merger.
Your Board of Directors has approved the Agreement and the merger and the
Issuance of AANB shares in the merger and believes that it is in the best
interests of AANB and our stockholders that the stockholders vote FOR the
proposal described in the enclosed materials.
Management estimates the merger will be accretive to AANB's earnings
beginning in the first half of 1998, after giving effect to anticipated cost
savings following the merger and the combination of the banks' operations.
We also believe that the transaction will have important strategic benefits
in addition to the financial benefits. For example, the addition of
approximately $72 million in assets to The Adams National Bank enhances our
customer base and establishes our presence in the high growth Northern Virginia
market with branches initially in Arlington and Ballston. With the Ballston
acquisition we are continuing our strategy of expansion to keep pace with and to
take advantage of the growth in the National Capital region we serve. The
combined bank, with an estimated $200 million in assets, will serve the needs of
existing and future customers of both banks by providing a greater asset base to
enable us to consider larger loan requests as well as provide The Bank of
Northern Virginia's customers based in Washington, D.C. with more convenient
banking access.
In making its decision to approve the merger, the Board of Directors
received and considered the opinion of its financial advisor, Baxter Fentriss, a
copy of which is included in the attached materials, that the consideration to
be paid by AANB is fair to our stockholders from a financial point of view. In
addition, the Board of Directors also reviewed and considered the financial
information presented to the Board by management which was based on information
provided by Baxter Fentriss.
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE
ENCLOSED ENVELOPE AS SOON AS POSSIBLE. YOUR VOTE IS IMPORTANT REGARDLESS OF THE
NUMBER OF SHARES YOU OWN.
Sincerely,
/s/ Barbara Davis Blum
Barbara Davis Blum
Chairwoman of the Board,
President and Chief Executive Officer
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
1627 K Street, N.W.
Washington, D.C. 20006
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
to be held on December 17, 1997
NOTICE IS HEREBY GIVEN that the Special Meeting of the Stockholders of
Abigail Adams National Bancorp, Inc. ("AANB") will be held on December 17, 1997
at 3:00 p.m. local time and any adjournment or postponement thereof (the
"AANB Meeting") at 1627 K Street, N.W., Washington, D.C. 20006 for the following
purposes:
(1) To consider and vote upon a proposal to ratify the Board's approval
and adoption of the Agreement and Plan of Reorganization, dated as of
June 23, 1997 as amended (the "Agreement"), by and among AANB,
Ballston Bancorp, Inc. ("Ballston") and The Bank of Northern Virginia
and the merger provided for therein (the "Holding Company Merger")
and approve the issuance of a number of shares, subject to adjustment
(the "Issuance") of the common stock of AANB, par value $0.01 per
share (the "AANB Common Stock"), to holders of the common stock, par
value $0.20 per share of Ballston sufficient to complete AANB's
proposed acquisition (estimated to be 554,226 shares as of June 30,
1997) of Ballston through the merger of Ballston with and into Adams
Acquisition Corporation, a to-be-formed wholly-owned subsidiary of
AANB. A copy of the Agreement is attached as Appendix A to, and
described in, the accompanying Proxy Statement/Prospectus.
To vote on such other business as may properly come before the AANB
Meeting or any adjournment or postponement thereof.
The AANB Board of Directors has fixed November 5, 1997, as the record date
for the AANB Meeting. All holders of record of AANB Common Stock at the close of
business on that date are entitled to receive notice of and to vote at the AANB
Meeting or any adjournments or postponements thereof.
All stockholders are urged to attend the AANB Meeting in person. WHETHER OR
NOT YOU NOW PLAN TO ATTEND THE AANB MEETING, YOU ARE ASKED TO COMPLETE, DATE,
SIGN AND MAIL PROMPTLY THE ENCLOSED PROXY CARD FOR WHICH A POSTAGE PAID ENVELOPE
IS PROVIDED. If you are a stockholder of record and decide to attend the AANB
Meeting, you may revoke your proxy and vote your shares in person.
By Order of the Board of Directors
/s/ Joyce R. Hertz
Joyce R. Hertz, Secretary
November 10, 1997
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
PROXY STATEMENT/PROSPECTUS
Up to 750,000 Shares of Common Stock
-----------------------------
BALLSTON BANCORP, INC.
PROXY STATEMENT
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is being
furnished to the holders of common stock, par value $0.01 per share ("AANB
Common Stock"), of Abigail Adams National Bancorp, Inc., a Delaware corporation
("AANB"), in connection with the solicitation of proxies by the AANB Board of
Directors for use at a Special Meeting of AANB shareholders to be held at
3:00 p.m., local time, on December 17, 1997, at 1627 K Street, N.W.,Washington,
D.C. 20006, and at any adjournments or postponements thereof (the "AANB
Meeting").
This Proxy Statement/Prospectus is also being furnished to the holders of
the common stock, par value $0.20 per share (the "Ballston Stock") of Ballston
Bancorp, Inc., a Delaware corporation ("Ballston") in connection with the
solicitation of proxies by the Board of Directors of Ballston for use at a
Special Meeting of Stockholders of Ballston to be held in the banking lobby of
The Bank of Northern Virginia, at 1010 North Glebe Road, Arlington, Virginia, on
December 15, 1997, at 4:00 p.m., and at any adjournments or postponements
thereof (the "Ballston Meeting").
This Proxy Statement/Prospectus relates to AANB's proposed acquisition of
Ballston to be effected by a merger (the "Holding Company Merger") of Ballston
with and into Adams Acquisition Corporation ("Subsidiary"), a to-be-formed
wholly-owned subsidiary of AANB, pursuant to an Agreement and Plan of
Reorganization dated as of June 23, 1997, as amended (the "Agreement"), among
AANB, Ballston and The Bank of Northern Virginia whereby Ballston will be merged
with Subsidiary. In the Holding Company Merger each outstanding share of
Ballston Stock would be converted into the right to receive upon election by
each Ballston Stockholder his or her pro rata portion of the Exchange Price
(subject to adjustment in certain circumstances described in the enclosed Proxy
Statement/Prospectus), in (a) AANB Common Stock, with cash being paid in lieu of
any fractional share interests, (b) cash, or (c) a combination of AANB Common
Stock and cash. In no event, however, will
(Cover continued on next page)
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), ANY STATE SECURITIES
COMMISSION, THE BUREAU OF FINANCIAL INSTITUTIONS OF THE COMMONWEALTH OF VIRGINIA
(THE "VIRGINIA COMMISSIONER"), THE OFFICE OF THE COMPTROLLER OF THE CURRENCY
(THE "OCC"), OR THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), NOR HAS THE
COMMISSION, ANY STATE SECURITIES COMMISSION, THE VIRGINIA COMMISSIONER, THE OCC
OR THE FDIC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF AANB COMMON STOCK OFFERED HEREBY ARE NOT DEPOSIT ACCOUNTS AND ARE
NOT INSURED BY THE FDIC, THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
The date of this Proxy Statement/Prospectus is November 7, 1997.
<PAGE>
more than 50% of the Exchange Price be paid in AANB Common Stock nor more than
50% of the Exchange Price be paid in cash. Immediately prior to the Holding
Company Merger, The Adams National Bank will become a subsidiary of Subsidiary
and following the Holding Company Merger, AANB will merge The Bank of Northern
Virginia with and into The Adams National Bank (the "Bank Merger") with The
Adams National Bank being the surviving entity. Consummation of the Holding
Company Merger is subject to various conditions, including the approval and the
adoption of the Agreement and the Holding Company Merger provided for therein by
the affirmative vote of the holders of a majority of the outstanding shares of
the Ballston Stock entitled to vote thereon at the Ballston Meeting and the
ratification of the Board of Directors' approval and adoption of the Agreement
and the Holding Company Merger and approval of the issuance of shares of AANB
Common Stock in connection with the Holding Company Merger by a majority of the
total votes cast, in person or by proxy, at the AANB Meeting. In the event that
the Holding Company Merger is consummated, certain of the Ballston Stockholders
will become stockholders of AANB, whose rights will be governed by Delaware law
and the AANB Certificate of Incorporation and By-Laws, rather than the Ballston
Certificate of Incorporation and By-Laws. Consequently, Ballston Stockholders
may relinquish certain rights, including legal rights, in the Holding Company
Merger. See "Proposed Holding Company Merger of Ballston and Subsidiary--Certain
Differences in Rights of Stockholders of Ballston and AANB."
Certain of the directors and stockholders of Ballston, who in the aggregate
have the power to vote 53.8% of the outstanding shares of Ballston stock, have
agreed to vote their shares of Ballston Stock in favor of the Agreement and the
Holding Company Merger provided for therein and such vote is sufficient to
approve the Agreement and the Holding Company Merger. Therefore, the Agreement
and the Holding Company Merger will be approved, notwithstanding the vote of
other Ballston Stockholders. In addition, a Ballston Stockholder who votes to
approve the Holding Company Merger may be deemed to have ratified the terms
(including the fairness) thereof and may be precluded from asserting dissenters'
rights or from challenging the Holding Company Merger in a subsequent legal
proceeding.
See "Risk Factors" beginning at page 14 for certain information that
should be considered by AANB and Ballston Stockholders.
The outstanding shares of AANB Common Stock are listed on the Nasdaq
National Market ("Nasdaq/NMS") under the symbol "AANB". The last reported sale
price of AANB Common Stock on the Nasdaq/NMS on October 1, 1997 was $12.50 per
share. In the event the proposed Holding Company Merger is consummated at an
Exchange Price (as hereinafter defined) of $13,858,374.60, shareholders of the
Ballston would hold approximately 30%, 25% or 22% of the outstanding stock of
AANB in the event the 20 Trading Day Price of the AANB Common Stock is $9.90,
$12.50 or $14.85, respectively.
This Proxy Statement/Prospectus and the accompanying proxy cards are first
being mailed to stockholders of AANB and Ballston on or about November 10,
1997.
This Proxy Statement/Prospectus is also being furnished to the holders of
the Ballston Stock as the Prospectus of AANB with respect to the issuance of a
number of shares, subject to adjustment (the "Issuance") of AANB Common Stock
sufficient to complete the Holding Company Merger.
AANB's principal executive office is located at 1627 K Street, N.W.,
Washington, D.C. 20006; telephone number (202) 446-4090. Ballston's principal
executive office is located at 1667 K Street, N.W., Suite 700, Washington, D.C.
20006; telephone number (202) 776-7800. The information presented in this Proxy
Statement/Prospectus concerning AANB and its subsidiaries has been provided
<PAGE>
by AANB, and the information concerning Ballston and The Bank of Northern
Virginia has been provided by Ballston.
AVAILABLE INFORMATION
AANB is subject to the information requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). Copies of such reports, proxy statements and other
information can be obtained, upon payment of prescribed fees, from the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, such
reports, proxy statements and other information can be inspected at the SEC's
facilities referred to above and at the SEC's Regional Offices at Seven World
Trade Center (13th Floor), New York, New York 10048 and Citicorp Center, 500
West Madison, Suite 1400, Chicago, Illinois 60661. The AANB Common Stock is
listed on the Nasdaq/NMS under the symbol "AANB." Reports, proxy statements and
other information concerning AANB should be available for inspection and copying
at the offices of the Nasdaq/NMS, 1735 K Street, N.W., Washington, D.C. AANB has
filed with the SEC a Registration Statement on Form S-4 (together with any
amendments thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the AANB Common Stock.
This Proxy Statement/Prospectus does not contain all the information set forth
in the Registration Statement. Such additional information may be obtained from
the SEC's principal office in Washington, D.C. Statements contained in this
Proxy Statement/Prospectus or in any document incorporated by reference in this
Proxy Statement/Prospectus as to the contents of any contract or other document
referred to herein or therein contains a description of the material provisions
thereof but are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference. The SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of that
site is http://www.sec.gov.
FORWARD LOOKING INFORMATION
In addition to historical information, this Proxy Statement/Prospectus
includes certain forward looking statements based on current management
expectations. AANB's and Ballston's actual results, including those of their
respective subsidiaries, The Adams National Bank and The Bank of Northern
Virginia, could differ materially from those management expectations. Factors
that could cause future results to vary from current management expectations
include, but are not limited to, general economic conditions, legislative and
regulatory changes, monetary and fiscal policies of the federal government,
changes in tax policies, rates and regulations of federal and local tax
authorities, changes in interest rates, deposit flows, the cost of funds, demand
for loan products, demand for financial services, competition, changes in the
quality or composition of The Adams National Bank's and The Bank of Northern
Virginia's loan and investment portfolios, changes in ownership status resulting
in the loss of eligibility for participation in government and corporate
programs for minority and women-owned banks, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting AANB's and Ballston's operations, markets,
products, services and prices.
i
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THE
SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS
NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF AANB OR
BALLSTON OR THEIR RESPECTIVE SUBSIDIARIES SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION ...................................................... ii
FORWARD LOOKING INFORMATION ................................................ ii
SUMMARY OF THE TRANSACTION ................................................. 1
The Companies ......................................................... 1
Proposed Holding Company Merger ....................................... 1
Consideration for Ballston Stock ...................................... 2
Valuation of AANB Common Stock ........................................ 3
Required Regulatory Approval .......................................... 3
Required Vote--Ballston Stockholders; Record Date ..................... 4
Required Vote--AANB Stockholders; Record Date ......................... 4
Recommendation of the Ballston Board .................................. 5
Interests of Certain Ballston Management in the Holding Company Merger. 5
Recommendation of the AANB Board ...................................... 6
Opinion of AANB Financial Advisor ..................................... 6
Opinion of Ballston Financial Advisor ................................. 6
Dissenters' Rights of Ballston Stockholders ........................... 7
Accounting Treatment .................................................. 7
Certain Material Federal Income Tax Consequences ...................... 7
Termination of the Agreement .......................................... 8
Market Value of Common Stock .......................................... 8
Summary Consolidated Financial and Other Data ......................... 9
Comparative Unaudited Per Share Data .................................. 14
RISK FACTORS ............................................................... 15
Financial Performance of AANB; No Assurance of Continued Profitability. 15
Government Regulation ................................................. 15
Competition ........................................................... 15
Regional Economic Conditions .......................................... 16
Risk of Loan Losses ................................................... 16
Legal Lending Limits; Lending Risks ................................... 17
Impact of Change of Ownership Status .................................. 17
Limitations on Payment of Dividends ................................... 18
Anti-Takeover and Change in Control Provisions ........................ 18
Monetary Policy and General Economic Conditions ....................... 19
Adjustment of the Exchange Price ...................................... 19
Allocation of AANB Common Stock ....................................... 19
THE BALLSTON SPECIAL MEETING ............................................... 19
Purpose of the Ballston Special Meeting ............................... 19
Record Date; Voting Rights; Proxies ................................... 20
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Solicitation of Proxies ............................................... 20
Quorum ................................................................ 20
Required Vote ......................................................... 21
THE AANB SPECIAL MEETING ................................................... 21
Purpose of the AANB Special Meeting ................................... 21
Record Date; Voting Rights; Proxies ................................... 22
Solicitation of Proxies ............................................... 22
Quorum ................................................................ 22
Required Vote ......................................................... 23
PROPOSED MERGER OF BALLSTON AND SUBSIDIARY ................................. 23
General Description of the Transaction ................................ 23
Effective Date of the Holding Company Merger; Termination ............. 27
Background of and Reasons for the Transaction ......................... 29
Recommendation of the Ballston Board .................................. 32
Interests of Certain Persons in the Holding Company Merger ............ 32
Recommendation of the Board of Directors of AANB ...................... 33
Business Pending the Holding Company Merger ........................... 33
Opinion of AANB Financial Advisor ..................................... 34
Opinion of Ballston Financial Advisor ................................. 37
Conditions to the Holding Company Merger .............................. 40
Support Agreements and Undertakings ................................... 40
Certain Material Federal Income Tax Consequences ...................... 41
Accounting Treatment .................................................. 44
Regulatory Approvals .................................................. 45
Federal Securities Law Consequences ................................... 46
Certain Material Differences in Rights of Stockholders of Ballston
and AANB .............................................................. 47
Rights of Dissenting Stockholders ..................................... 48
DESCRIPTION OF ABIGAIL ADAMS NATIONAL BANCORP, INC. ........................ 49
General ............................................................... 49
Market Area ........................................................... 49
Services of The Adams National Bank ................................... 49
Strategy .............................................................. 51
Lending Activities .................................................... 52
Competition ........................................................... 54
Employees ............................................................. 55
Supervision and Regulation ............................................ 55
Properties ............................................................ 62
Legal Proceedings ..................................................... 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF AANB
Year Ended December 31, 1996 Compared to December 31, 1995 ............ 63
Overview .............................................................. 63
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Analysis of Net Interest Income ....................................... 64
Other Income .......................................................... 66
Other Expense ......................................................... 66
Income Tax Expense .................................................... 67
Analysis of Loans ..................................................... 67
Analysis of Investments ............................................... 68
Noninterest-Earning Assets ............................................ 70
Deposits .............................................................. 70
Short-Term Borrowings ................................................. 71
Long-Term Borrowings .................................................. 71
Asset Quality ......................................................... 72
Interest Sensitivity Management ....................................... 75
Six Month Ended June 30, 1997 Compared to Six Months Ended
June 30, 1996 ....................................................... 76
Overview .............................................................. 76
Analysis of Net Interest Income ....................................... 77
Other Income .......................................................... 77
Other Expense ......................................................... 77
Income Tax Expense .................................................... 77
Analysis of Loans ..................................................... 78
Analysis of Investments ............................................... 78
Noninterest-Earning Assets ............................................ 78
Deposits .............................................................. 78
Asset Quality ......................................................... 79
Interest Sensitivity .................................................. 82
Liquidity and Capital Resources ....................................... 82
Changes in Accounting Principles ...................................... 83
Factors Affecting Future Results ...................................... 84
PRO FORMA COMBINED FINANCIAL STATEMENTS (Unaudited) ........................ 84
CHANGES IN AND DISAGREEMENTS WITH AANB ACCOUNTANTS ......................... 93
DESCRIPTION OF AANB CAPITAL STOCK .......................................... 93
Common Stock .......................................................... 93
Common Stock Purchase Rights .......................................... 94
Delaware Business Combination Law ..................................... 95
Transfer Agent ........................................................ 95
Market for AANB'S Equity and Related Stockholder Matters .............. 96
EXECUTIVE OFFICERS AND DIRECTORS OF AANB ................................... 96
Board Meetings and Committees ......................................... 99
Directors' Compensation .............................................. 100
BENEFICIAL OWNERSHIP OF AANB SHARES ....................................... 100
AANB EXECUTIVE COMPENSATION ............................................... 102
Summary Compensation Table ........................................... 103
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Option Grants in Last Fiscal Year .................................... 103
Aggregate Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values ............................................. 104
Employment Agreement ................................................. 104
Non-Qualified Stock Option Plan ...................................... 105
Employee Incentive Stock Option Plan ................................. 105
1996 Employee Incentive Stock Option Plan ............................ 105
Directors Stock Option Plan .......................................... 106
1996 Directors Stock Option Plan ..................................... 106
Employee Stock Ownership Plan with 401(k) Provisions ................. 106
Severance Agreements ................................................. 107
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--AANB ...................... 108
Banking Transactions ................................................. 108
Other Transactions ................................................... 108
DESCRIPTION OF BALLSTON BANCORP, INC. ..................................... 108
General .............................................................. 108
The Bank of Northern Virginia ........................................ 108
Properties ........................................................... 109
Ballston Capital Stock ............................................... 110
Market Price, Dividends and Related Stockholder Matters .............. 111
Supervision and Regulation ........................................... 112
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BALLSTON ................. 113
Overview.............................................................. 113
Results of Operations................................................. 113
Financial Condition................................................... 116
Liquidity............................................................. 119
STATISTICAL INFORMATION AND ANALYSIS--BALLSTON ............................ 120
PRINCIPAL HOLDERS OF BALLSTON STOCK ....................................... 127
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- BALLSTON ................ 129
STOCKHOLDER PROPOSALS ..................................................... 129
OTHER MATTERS ............................................................. 129
LEGAL MATTERS ............................................................. 130
EXPERTS ................................................................... 130
INDEX TO AANB CONSOLIDATED FINANCIAL STATEMENTS ........................... F-1
INDEX TO BALLSTON CONSOLIDATED FINANCIAL STATEMENTS ....................... FF-1
</TABLE>
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SUMMARY OF THE TRANSACTION
The following summary is intended to supply certain facts and highlights
from the more detailed information contained elsewhere herein or incorporated
herein by reference. This summary is qualified in all respects by the Agreement,
financial statements and other materials included herein or incorporated herein
by reference.
The Companies
Abigail Adams National Bancorp, Inc. ("AANB") is a bank holding company
which conducts business through its wholly-owned bank subsidiary, The Adams
National Bank. The Adams National Bank was organized in 1977 under the laws of
the United States of America and serves the nation's capital through four full-
service offices located in Washington. The Adams National Bank's newest branch
opened in October of 1996 and a fifth branch is expected to open in the fourth
quarter of 1997. See "Description of Abigail Adams National Bancorp, Inc." At
December 31, 1996 AANB had consolidated assets of $112,162,000, deposits of
$95,155,000 and stockholders' equity of $13,140,000 and reported net income of
$1,127,000 for the year ended December 31, 1996. At June 30, 1997, AANB had
consolidated assets of $120,859,000, deposits of $103,562,000 and stockholders'
equity of $13,329,000, and reported net income of $486,000 for the six months
ended June 30, 1997. The Adams National Bank exceeds all regulatory capital
requirements.
AANB was incorporated under the laws of the State of Delaware in 1981. Its
principal executive offices are located at 1627 K Street, N.W., Washington, D.C.
20006. Its telephone number is (202) 466-4090.
Ballston Bancorp, Inc. ("Ballston") is a bank holding company which
conducts business through its wholly-owned bank subsidiary, The Bank of Northern
Virginia ("The Bank of Northern Virginia"). The Bank of Northern Virginia was
organized under Virginia law and is engaged in the business of full-service
banking. See "Description of Ballston Bancorp, Inc." At December 31, 1996,
Ballston had consolidated assets of $78,580,000, deposits of $63,424,000 and
stockholders' equity of $7,602,000 and reported net income of $741,000 for the
year ended December 31, 1996. At June 30, 1997, Ballston had consolidated assets
of $71,706,000, deposits of $57,454,000, and stockholders' equity of $7,867,000,
and reported net income of $332,000 for the six months ended June 30, 1997. The
Bank of Northern Virginia exceeds all regulatory capital requirements.
Ballston was incorporated under the laws of the State of Delaware in 1987.
Its principal offices are located at 1667 K Street, N.W., Washington, D.C. 20006
and its telephone number is (202) 776-7800.
Proposed Holding Company Merger
Under the Agreement, Ballston will merge with and into Adams Acquisition
Corporation ("Subsidiary") and Subsidiary will be the surviving corporation (the
"Holding Company Merger"), and The Bank of Northern Virginia will become a
wholly-owned subsidiary of Subsidiary. The separate existence of Ballston will
cease upon effectiveness of the Holding Company Merger. Immediately prior to
the Holding Company Merger, (a) AANB will contribute the Exchange Price (cash
and AANB Common Stock) to Subsidiary and (b)
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The Adams National Bank will become a subsidiary of Subsidiary. Immediately
following the Holding Company Merger, AANB will cause the merger of The Bank of
Northern Virginia with and into The Adams National Bank (the "Bank Merger")
with The Adams National Bank being the surviving entity. The Holding Company
Merger and the Bank Merger will be effected after the close of business on the
Friday following approval of the Agreement and the Holding Company Merger by
Ballston Stockholders, ratification of the approval thereof by AANB
Stockholders and approval of the Issuance by AANB Stockholders, provided that
all necessary regulatory approvals have been received by that date and all
other conditions to the effectiveness of the Holding Company Merger have been
satisfied.
At the Ballston Meeting, the holders of Ballston Stock (the "Ballston
Stockholders") will vote on the Agreement and the Holding Company Merger. The
affirmative vote of the holders of a majority of the outstanding Ballston shares
entitled to vote thereon is required to approve the Agreement and Holding
Company Merger. Certain stockholders of Ballston, who own more than a majority
of the issued and outstanding shares of Ballston Stock, an amount sufficient to
approve the Agreement and the Holding Company Merger, have agreed to vote for
the Holding Company Merger. As a result of the Holding Company Merger, the
holders of Ballston Stock who receive AANB Common Stock (with 50% of the
aggregate Exchange Price (as defined in the Agreement) payable in AANB Common
Stock) are to become stockholders of AANB. On the effective date of the Holding
Company Merger (the "Effective Date") each issued and outstanding share of
Ballston Stock, other than shares held by Ballston Stockholders who have
properly perfected their dissenters' rights (the "Dissenting Shares"), will be
entitled to elect to receive their pro rata portion of the Exchange Price in (a)
AANB Common Stock ("Stock Consideration"), with cash being paid in lieu of
fractional share interests, (b) cash ("Cash Consideration"), or (c) a
combination of AANB Common Stock and cash, provided, however, that, in
implementing allocation procedures set forth in the Agreement, Ballston may
reallocate certain of such elections such that 50% of the Exchange Price is paid
in Stock Consideration and 50% thereof is paid in Cash Consideration. See
"Proposed Holding Company Merger of Ballston and Subsidiary--General Description
of the Transaction--Manner of Exchange." Cash will be paid in lieu of
fractional shares. After the Effective Date, the Subsidiary will be the
surviving corporation of the Holding Company Merger, and the separate corporate
existence of Ballston will cease. Following the Holding Company Merger, AANB
intends to effect the Bank Merger. See "Proposed Holding Company Merger of
Ballston and Subsidiary" for a more detailed description of the terms of the
Agreement and of the Holding Company Merger and of the Bank Merger and Appendix
A.
The stockholders of AANB ("AANB Stockholders") will be asked to vote to
ratify the AANB Board of Directors' (the "AANB Board") approval of the Agreement
and Holding Company Merger and to approve the Issuance of a number of shares,
subject to adjustment, of AANB Common Stock sufficient to complete AANB's
proposed acquisition of Ballston, estimated as of June 30, 1997 to be
approximately 554,226 shares (34% of AANB's outstanding shares).
Consideration for Ballston Stock
The Exchange Price that the Ballston Stockholders will be entitled to
receive for the outstanding shares of Ballston Stock comprises a base amount and
adjustments, which adjustments may increase or decrease the Exchange Price.
Subject to such adjustments, the consideration will equal $13,858,374.60 plus
(a) one times any earnings, if any (or less one times any
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losses, if any), of Ballston from April 1, 1997, until Closing, less (b) any
dividends declared by Ballston on or after April 1, 1997 until Closing (the
"Exchange Price").
The value of the consideration exchanged for each share of Ballston Stock
shall be the Exchange Price divided by the total number of outstanding shares of
Ballston Stock at Closing. Assuming that the Exchange Price equaled $13,994,200
on June 30, 1997, and assuming no reallocation of elections, each share of
Ballston Stock would have had an exchange value of $8.64, which would have been
exchangeable for .6845 shares of AANB Common Stock (assuming the Stockholder
received 100% Stock Consideration) or $8.64 in cash (assuming the Stockholder
received 100% Cash Consideration). This example is for illustrative purposes
only, as the actual Exchange Price will not be determined until closing.
Therefore, the exchange value of each share of Ballston Stock may differ from
this example.
The amount and form of the Exchange Price were arrived at through arm's-
length negotiations between AANB and Ballston. See "Proposed Holding Company
Merger of Ballston and Subsidiary--Background of the Holding Company Merger,"
"--Opinion of AANB Financial Advisor" and "--Opinion of Ballston Financial
Advisor."
Because the Exchange Price may be more or less than $13,994,200, in the
event that the Exchange Price is materially less than that amount, management
of Ballston will resolicit the proxies of the Ballston Stockholders. If the
Exchange Price should be less than $13,994,200, the judgment whether the
difference between such Exchange Price and $13,994,200 is material will be made
based upon the facts and circumstances and in light of advice of Ballston's
legal and financial advisors.
Valuation of AANB Common Stock
Except in the case of an Acquisition Event (as hereinafter defined), for
purposes of determining how many shares of AANB Common Stock will be issued by
AANB, the value per share of AANB Common Stock ("AANB Stock Value") shall be the
average mid-point of the closing bid and asked price of the first twenty (20) of
the twenty-one (21) trading days of the AANB Common Stock immediately prior to
Closing (the "20 Trading Day Period") subject to a minimum of $9.90 per share
and a maximum of $14.85 per share. See "Proposed Holding Company Merger of
Ballston and Subsidiary--Valuation of AANB Common Stock."
Required Regulatory Approval
Unless waived pursuant to the regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") the Holding Company Merger
is subject to the prior approval of the Federal Reserve Board under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). AANB has been advised
by the Federal Reserve Bank of Richmond that it does not object to the
consummation of the transaction without the filing of a formal application.
In addition, the Holding Company Merger is subject to approval or other action
of the Bureau of Financial Institutions ("BFI") of the State Corporation
Commission of the Commonwealth of Virginia ("SCC"), which has been received.
The Bank Merger is subject to prior approval of the Office of the
Comptroller of the Currency ("OCC") as an interstate bank-to-bank merger under
Section 44 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Act") and under the Bank Merger Act, and may not be
consummated before the 30th day (subject to reduction to 15 days if the OCC has
not received any adverse comments from the United States Attorney General (the
"USAG") relating to competitive factors of the Bank Merger, and the USAG
consents to a shorter waiting period) following such approval
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AANB has filed applications for regulatory review and
approval, as are necessary, or taken such other action with the Federal Reserve
Board, the OCC, the BFI and such other regulatory authorities as required.
The Federal Reserve Board, the OCC and the BFI have advised that they have no
objection to or have approved the Holding Company Merger and the Bank Merger.
See "Proposed Holding Company Merger of Ballston and Subsidiary--Conditions to
the Holding Company Merger" and "--Regulatory Approvals."
Required Vote--Ballston Stockholders; Record Date
Only Ballston Stockholders of record at the close of business on
November 9, 1997 (the "Ballston Record Date"), will be entitled to vote at the
Ballston Meeting. The affirmative vote of the holders of a majority of the
outstanding shares (each share being entitled to one vote) of Ballston Stock
entitled to vote thereon will be required to approve the Agreement and Holding
Company Merger. As of the Ballston Record Date, there were 1,619,474 shares of
Ballston Stock outstanding and entitled to be voted.
The directors and executive officers of Ballston and their affiliates
beneficially owned, as of the Ballston Record Date, 784,716 shares or
approximately 48.5% of the outstanding shares of Ballston Stock. The directors
and executive officers of AANB and their affiliates beneficially owned, as of
the Ballston Record Date, no shares of Ballston Stock. As of that date, no
subsidiary of either Ballston or AANB held of record or in the name of nominees
any shares of Ballston Stock in a fiduciary capacity. See "The Ballston Special
Meeting--Vote Required" and "Description of Ballston Bancorp, Inc."
Pursuant to the Agreement, members of the Ballston Board of Directors (the
"Ballston Board") and one Stockholder of Ballston (who in the aggregate have the
power to vote 53.8% of the outstanding shares of Ballston Stock as of the
Ballston Record Date) have agreed to vote their shares of Ballston Stock in
favor of the Holding Company Merger. As a result, approval of the Agreement and
Holding Company Merger by Ballston Stockholders is assured.
Required Vote--AANB Stockholders; Record Date
Only AANB Stockholders of record at the close of business on November 5,
1997 (the "AANB Record Date") will be entitled to vote at the AANB Meeting. At
the AANB Meeting, each share of AANB Common Stock will entitle its holder to
one vote. The affirmative vote of AANB Stockholders holding at least a majority
of the total votes cast in person or represented by proxy at the AANB Meeting is
required to approve the proposal to ratify the approval and adoption of the
Agreement and Holding Company Merger and the Issuance of a number of shares,
subject to adjustment, of the AANB Common Stock to Ballston Stockholders
sufficient to complete AANB's proposed acquisition of Ballston, estimated to be
approximately 554,226 shares as of June 30, 1997.
As of the AANB Record Date, directors, executive officers and affiliates of
AANB held an aggregate of 546,928 shares or approximately 33.1%, of the
outstanding shares of capital stock of AANB entitled to vote. See "The AANB
Special Meeting--Vote Required." Management of AANB is not aware that
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any officer or director of AANB will not support and vote his or her shares to
ratify the approval of the Agreement and Merger and to approve the Issuance
except that Marshall Reynolds, a director, has advised the AANB Board that he
will not support the Holding Company Merger and the Issuance. See "Beneficial
Ownership of AANB Shares."
Recommendation of the Ballston Board
The Ballston Board believes the terms of the Agreement and Holding Company
Merger are fair to, and in the best interests of, Ballston and its Stockholders
and has unanimously (with one director being absent) adopted the Agreement and
approved the Holding Company Merger. In adopting the Agreement and approving
the Holding Company Merger, the Ballston Board considered, among other things,
the financial terms of the Holding Company Merger, the benefits to the Ballston
Stockholders and The Bank of Northern Virginia customers, employees and
communities, the fact that the Holding Company Merger would be a tax-free
reorganization under the Internal Revenue Code of 1986, as amended (the "Code"),
the marketability of the AANB Common Stock, certain information as to AANB and
the viability of other strategic alternatives.
On June 20, 1997, the Ballston Board adopted a resolution in which it
unanimously (with one director being absent) approved and adopted the Agreement
in its then-current form and the Holding Company Merger, and recommended that
the Agreement and the Holding Company Merger be submitted to Ballston
Stockholders for their consideration and approval. The Ballston Board therefore
recommends that the Ballston Stockholders vote to approve and adopt the
Agreement and the Holding Company Merger provided for therein. See "Proposed
Holding Company Merger of Ballston and Subsidiary--Recommendation of the Board
of Directors of Ballston; Reasons for the Holding Company Merger."
Interests of Certain Ballston Management in the Holding Company Merger
In considering the recommendations of the Ballston Board with respect to
the Agreement and the Holding Company Merger provided therein, the Ballston
Stockholders should be aware that certain members of Ballston management and the
Ballston Board have certain interests in the Holding Company Merger that are in
addition to the interests of Ballston Stockholders generally. Under the
Agreement, AANB has agreed not to take any action, for a period of six years
following the closing under the Agreement (the "Closing"), to abrogate or
diminish any right accorded under the Ballston Certificate of Incorporation or
Bylaws or The Bank of Northern Virginia Certificate of Incorporation or Bylaws
as they existed immediately prior to Closing to any officer or director of
Ballston or The Bank of Northern Virginia with respect to indemnification.
Ballston and AANB will together arrange for similar insurance coverage for the
officers and directors of Ballston and The Bank of Northern Virginia against
claims made following the Closing until the sixth anniversary thereof and will
divide and accrue the cost equally prior to calculating the Exchange Price
unless the existing officers and directors policy of Ballston and The Bank of
Northern Virginia provides for coverage against claims made after the Closing.
Such accrual will have the effect of reducing the Exchange Price. See "The
Proposed Holding Company Merger of Ballston and Subsidiary--Interests of Certain
Persons in the Holding Company Merger."
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Recommendation of the AANB Board
The AANB Board believes that the Holding Company Merger and the Issuance
are in the best interests of AANB and the AANB Stockholders and approved the
Holding Company Merger and the Issuance. In approving the Agreement, the Holding
Company Merger and the Issuance in connection therewith, the AANB Board
considered, among other things, the financial terms of the Holding Company
Merger, the benefits to the AANB Stockholders and AANB customers, employees and
communities, certain information as to Ballston and alternatives for
accomplishing AANB's strategic objectives.
The AANB Board has received the opinion of Baxter Fentriss, its financial
advisor, a copy of which is attached as Appendix C, that the consideration is
fair from a financial point of view to our stockholders. In considering the
transaction, the AANB Board also reviewed and considered the financial
information presented to the AANB Board by management which was based on
information provided by Baxter Fentriss. Management estimates, giving effect to
anticipated cost savings following the Holding Company Merger and the
combination of the bank's operations, that beginning in the first half of 1998
the Holding Company Merger will be accretive to AANB's earnings. The AANB Board
believes that the Holding Company Merger will have a positive financial impact
as well as strategic benefits. The AANB Board strongly recommends that AANB
Stockholders vote to ratify the AANB Board's approval of the Agreement and
Holding Company Merger and to approve the Issuance. See "Proposed Holding
Company Merger of Ballston and Subsidiary--Recommendation of the AANB Board;
Reasons for the Holding Company Merger."
Opinion of AANB Financial Advisor
AANB has engaged Baxter Fentriss and Company ("Baxter Fentriss") as its
financial advisor in evaluating the financial terms of the Holding Company
Merger. Baxter Fentriss has delivered to the AANB Board its written opinion,
dated June 23, 1997, that the terms of the Holding Company Merger are fair to
the AANB Stockholders from a financial point of view. Baxter Fentriss is not
affiliated with AANB.
A copy of the opinion of Baxter Fentriss, which sets forth the assumptions
made, matters considered and limits on review undertaken, is included as
Appendix C to this Proxy Statement/Prospectus. AANB Stockholders are urged to
read the opinion in its entirety. For a description of the analysis underlying
the opinion, see "Proposed Holding Company Merger of Ballston and Subsidiary--
Opinion of AANB Financial Advisor."
Opinion of Ballston Financial Advisor
Ballston has engaged Danielson Associates Inc. ("Danielson Associates") as
its financial advisor in evaluating the financial terms of the Holding Company
Merger. Danielson Associates has delivered to the Ballston Board its written
opinion, dated June 20, 1997, that the terms of the Holding Company Merger are
fair to the Ballston Stockholders from a financial point of view. Danielson
Associates is not affiliated with Ballston.
A copy of the opinion of Danielson Associates, which sets forth the
assumptions made, matters considered and limits on review undertaken, is
included as Appendix D to this Proxy Statement/Prospectus. Ballston Stockholders
are urged to read the opinion in its entirety. For a description of the analysis
underlying the opinion, see "Proposed Holding Company Merger of Ballston and
Subsidiary--Opinion of Ballston Financial Advisor."
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Dissenters' Rights of Ballston Stockholders
Under Delaware law, Ballston Stockholders have the right to dissent from
the Holding Company Merger and perfect appraisal rights as to the value of the
Ballston Stock held by them as of the Effective Date. Any holder of Ballston
Stock who (i) gives notice in writing to Ballston prior to the vote on the
Holding Company Merger of his or her intent to demand payment for his or her
shares if the Holding Company Merger is effectuated, and (ii) does not vote his
or her shares in favor of the Holding Company Merger shall be entitled to the
fair value of his or her Ballston Stock. The appraisal demand of each of the
Ballston Stockholders shall state his or her name and address, the number of
shares as to which he or she dissents and a demand for payment of the fair value
of his or her shares. Failure to follow the statutory provisions precisely may
result in loss of dissenters' rights. A written demand for appraisal should be
sent to Ballston at 1667 K Street, N.W., Suite 700, Washington, D.C. 20006-1608,
Attn: Brian D. Alprin, Esq., Secretary. Since the preservation and exercise of
appraisal rights are conditioned on strict observance of the applicable section
of the Delaware General Corporation Law, each Ballston Stockholder who might
exercise appraisal rights should consult and strictly observe the statute. A
copy of the statutory provisions is included as Appendix B to this Proxy
Statement/Prospectus. See also "Proposed Holding Company Merger of Ballston and
Subsidiary--Rights of Dissenting Stockholders."
Stockholders of AANB have no appraisal rights with respect to their vote on
the ratification of the approval of the Agreement and the Holding Company
Merger and approval of the Issuance.
Accounting Treatment
The acquisition will be accounted for as a purchase and all of the assets
and liabilities of Ballston will be recorded in AANB's consolidated financial
statements at their fair value at the Effective Date. The amount, if any, by
which the purchase price paid by AANB exceeds the fair value of the tangible and
identifiable intangible assets acquired through the Holding Company Merger will
be recorded as goodwill on the books of AANB. AANB's consolidated financial
statements will include the operations of Ballston after the Effective Date. The
unaudited pro forma financial information included in the Proxy
Statement/Prospectus reflects the Holding Company Merger using the purchase
method of accounting. See "Summary --Comparative Per Share Data" and "ProForma
Combined Financial Statements (Unaudited)."
Certain Material Federal Income Tax Consequences
It is intended that the Holding Company Merger will be treated as a
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and, accordingly, among other things, for federal
income tax purposes, (i) no gain or loss will be recognized by a Ballston
Stockholder upon the exchange of Ballston Stock solely for AANB Common Stock;
(ii) any gain realized by a Ballston Stockholder who receives AANB Common Stock
and cash (excluding any cash received in lieu of a fractional share of AANB
Common Stock) in exchange for Ballston Stock will be recognized in an amount not
in excess of the amount of the cash received (excluding any cash received in
lieu of a fractional share of AANB Common Stock), that gain will be capital gain
unless the receipt of the cash has the effect of the distribution of a dividend,
and any loss on the exchange will not be recognized; and (iii) cash received by
a Ballston
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Stockholder who has elected to receive only cash and has received only cash
will be treated as a distribution in redemption of the Ballston Stock held by
that stockholder, subject to the provisions and limitations of Section 302 of
the Code. Consummation of the Holding Company Merger is conditioned upon
receipt by Ballston of an opinion of Duane, Morris & Heckscher LLP dated as of
the Effective Date substantially to this effect. The opinion may be based on
assumptions and representations made by officers of AANB and Ballston to Duane,
Morris & Heckscher LLP and may contain qualifications appropriate to its subject
matter. See "The Proposed Holding Company Merger of Ballston and Subsidiary--
Certain Material Federal Income Tax Consequences--Ballston Opinion."
Because certain tax consequences of the Holding Company Merger may vary
depending upon the particular circumstances of each stockholder and other
factors, each Ballston Stockholder is urged to consult such holder's own tax
adviser to determine the particular tax consequences to such holder of receipt
of the AANB Common Stock, cash or a combination of cash and stock (including the
application and effect of state and local income and other tax laws).
Termination of the Agreement
The Agreement may be terminated, and the Holding Company Merger abandoned,
prior to the Effective Date, either before or after its approval by the Ballston
Stockholders, (i) by the mutual consent of AANB and Ballston or (ii) by either
of them individually under certain specified circumstances, including if the
Holding Company Merger has not become effective by December 31, 1997. See "The
Proposed Holding Company Merger of Ballston and Subsidiary--Effective Date of
the Holding Company Merger; Termination."
In addition, the Agreement provides if the average mid-point of the closing
bid and asked prices for the 20 Trading Day Period is over $14.85 per share and
an Acquisition Event (as defined in the Agreement) has not occurred, then AANB
shall have the right to terminate the transaction and not proceed to Closing.
If the average mid-point of the closing bid and asked prices for the 20 Trading
Day Period is over $14.85 per share and an Acquisition Event has occurred, then
AANB shall have no right to terminate the transaction. If the average mid-point
of the closing bid and asked prices for the 20 Trading Day Period is less than
$9.90 per share, Ballston shall have the right to terminate the transaction and
not proceed to Closing. Prior to making any decision to terminate the Agreement
pursuant to this provision, the AANB Board or the Ballston Board, as the case
may be, would consult with its financial and other advisers and would consider
all financial and other information it deemed relevant to its decision. The
matter would not, however, be resubmitted to Stockholders of Ballston or AANB.
See "The Proposed Holding Company Merger of Ballston and Subsidiary--Effective
Date of the Holding Company Merger; Termination."
Market Value of Common Stock
The information provided below with respect to AANB Common Stock reflects
the closing price as reported by the Nasdaq/NMS on the day prior to the
announcement of the Agreement and proposed Holding Company Merger.
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
There is no market for Ballston Stock, although transfers occur from time
to time in privately negotiated transactions. Ballston is not aware of each of
the prices at which Ballston Stock is traded. The price set forth in the
following table is not necessarily representative of the market value of
Ballston Stock. The price presented reflects the book value of the Ballston
Stock as of June 30, 1997. The Equivalent Per Share Price assumes that the
Holding Company Merger took place on June 30, 1997.
<TABLE>
<CAPTION>
Equivalent Per
AANB Ballston Share Price
---- -------- --------------
<S> <C> <C>
$12.625 $4.86 $8.64
</TABLE>
Because the Exchange Price is subject to certain adjustments and 50% of the
Exchange Price will be paid in AANB Common Stock, the market price of which is
subject to fluctuation, the Exchange Price and the per share market value of the
AANB Common Stock that Ballston Stockholders may elect to receive pursuant to
the Holding Company Merger may increase or decrease prior to the Effective Date.
Ballston Stockholders are urged to obtain current market quotations for the AANB
Common Stock.
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected financial data for AANB and
Ballston for the five fiscal years ended December 31, 1996 and for the year to
date periods ended June 30, 1997 and June 30, 1996 (unaudited).
The summary consolidated financial and other data of AANB set forth below
gives effect to a three-for-one stock split in the form of a stock dividend,
which took place on July 9, 1996. The selected financial and other data of AANB
and Ballston set forth below do not purport to be complete. The summary data
should be read in conjunction with, and is qualified in its entirety by, the
more detailed information appearing elsewhere in this Proxy Statement/Prospectus
or incorporated by reference herein, including the financial statements and
related notes.
- --------------------------------------------------------------------------------
9
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands, Except per Share Data)
<TABLE>
<CAPTION>
AT OR FOR THE SIX AT OR FOR THE YEAR
MONTHS ENDED JUNE 30, ENDED DECEMBER 31,
--------------------- --------------------------------------------------
(UNAUDITED)
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income .................................. $4,394 $3,562 $7,573 $6,914 $6,082 $5,513 $5,420
Interest expense ................................. 1,735 1,390 2,933 2,747 1,934 1,508 1,879
------ ------ ------ ------ ------ ------ ------
Net interest income .............................. 2,659 2,172 4,640 4,167 4,148 4,005 3,541
Provision (benefit) for loan losses .............. -- -- (275) -- 221 175 237
Noninterest income ............................... 602 407 953 841 790 885 1,045
Noninterest expense .............................. 2,466 1,808 4,093 3,781 4,901 4,104 3,747
------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes and
extraordinary item ............................. 795 771 1,775 1,227 (184) 611 602
Applicable income tax expense .................... 309 286 648 268 -- -- 213
------ ------ ------ ------ ------ ------ ------
Net income (loss after taxes and before
extraordinary item) ............................ 486 485 1,127 959 (184) 611 389
Extraordinary item-utilization of net
operating loss carryforward .................... -- -- -- -- -- -- 213
------ ------ ------ ------ ------ ------ ------
Net income (loss) ................................ $ 486 $ 485 $ 1,127 $ 959 $ (184) $ 611 $ 602
====== ====== ====== ====== ====== ====== ======
PER SHARE DATA:(1)
Income (loss) before extraordinary item .......... $ 0.30 $ 0.56 $ 0.94 $ 1.12 $(0.22) $ 0.72 $ 0.45
Extraordinary item-utilization of net operating
loss carryforward .............................. -- -- -- -- -- -- 0.25
------ ------ ------ ------ ------ ------ ------
Net income (loss) ................................ $ 0.30 $ 0.56 $ 0.94 $ 1.12 $(0.22) $ 0.72 $ 0.70
====== ====== ====== ====== ====== ====== ======
Book value (2) ................................... $ 8.17 $ 8.16 $ 8.06 $ 7.75 $ 6.74 $ 7.05 $ 6.34
Dividends ........................................ 0.20 0.167 0.37 0.167 -- -- --
Weighted average number of common shares
and common share equivalents (6) ............... 1,630,559 864,682 1,200,803 854,532 854,532 854,532 854,532
PERIOD END BALANCE SHEET DATA:
Total assets ..................................... $120,859 $88,035 $112,162 $92,365 $82,260 $80,110 $68,704
Securities available for sale .................... 9,578 3,998 11,205 5,508 6,009 11,005 7,604
Investment securities ............................ 10,517 7,536 11,641 8,193 9,081 5,006 10,992
Loans, net of unearned income .................... 84,628 59,400 73,013 63,592 60,729 54,750 43,459
Reserve for loan losses .......................... (1,116) (1,261) (1,048) (1,274) (1,289) (1,386) (1,320)
Deposits ......................................... 103,562 78,584 95,155 83,063 75,293 72,456 60,847
Long-term debt ................................... 1,109 -- 1,139 186 261 317 355
Stockholders' equity ............................. 13,329 6,969 13,140 6,619 5,762 6,027 5,416
Common shares outstanding (6) .................... 1,651,226 854,532 1,650,032 854,532 854,532 854,532 854,532
SELECTED PERFORMANCE RATIOS:(3)
Return on average assets ......................... 0.89% 1.12% 1.18% 1.17% (0.22)% 0.84% 0.83%
Return on average stockholders' equity ........... 7.38 14.32 11.75 15.53 (3.15) 10.83 11.90
Net interest margin (4) .......................... 5.18 5.40 5.23 5.39 5.42 5.89 5.33
Dividend payout ratio ............................ 67.07 29.34 41.46 14.85 -- -- --
Average stockholders' equity to average
total assets ................................... 12.02 7.80 10.06 7.50 7.13 7.73 7.01
Allowance for loan losses to total loans ......... 1.32 2.12 1.44 2.00 2.12 2.53 3.04
Allowance for loan losses to nonperforming loans . 65.11 45.48 62.05 45.30 50.61 41.69 29.18
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE SIX AT OR FOR THE YEAR
MONTHS ENDED JUNE 30, ENDED DECEMBER 31,
--------------------- --------------------------------------------------
(UNAUDITED)
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED CAPITAL RATIOS:
Tier 1 risk-based ....................... 15.81% 11.82% 16.22% 9.77% 9.40% 10.32% 11.61%
Total risk-based ........................ 14.59 10.57 17.47 11.06 10.76 11.78 13.25
Leverage (5) ............................ 12.07 8.02 13.81 8.09 7.13 8.26 7.51
</TABLE>
- ----------------------
(1) All Per Share Data reflects the three-for-one stock split, in the form
of a stock dividend, which took place on July 9, 1996.
(2) All book value per share numbers are based on the number of shares
outstanding at period end, net of unallocated Employee Stock Ownership
Plan shares.
(3) The Selected Performance Ratios for June 30, 1997 and 1996 are computed
on an annualized basis.
(4) Taxable equivalent adjustments of approximately $4,000 on AANB's tax-
exempt securities are included in the computation of net interest
margin for the six months ended June 30, 1997.
(5) Based on annual average assets.
(6) Increase in shares at and for the year ended December 31, 1996 and at
and for the six months ended June 30, 1997 is attributable to the
issuance of 795,500 shares in a public offering completed during the
third quarter of 1996.
11
<PAGE>
BALLSTON BANCORP, INC.
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands, Except per Share Data)
<TABLE>
<CAPTION>
AT OR FOR THE SIX AT OR FOR THE YEAR
MONTHS ENDED JUNE 30, ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income ....................................... $ 2,823 $ 2,694 $ 5,480 $ 5,119 $ 4,099
Interest expense ...................................... 1,120 1,054 2,225 1,903 1,351
----------- ----------- ----------- ----------- -----------
Net interest income ................................... 1,703 1,640 3,255 3,216 2,748
Provision for loan losses ............................. 30 30 12 120 297
Noninterest income .................................... 225 175 365 341 365
Noninterest expense ................................... 1,387 1,282 2,475 2,496 2,371
----------- ----------- ----------- ----------- -----------
Income before income taxes and cumulative effect of
accounting change .................................... 511 503 1,133 941 445
Applicable income tax expense ......................... 179 173 392 319 138
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of accounting change .. 332 330 741 622 307
Cumulative effect of change in accounting
for income taxes ...................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income ............................................ $ 332 $ 330 $ 741 $ 622 $ 307
=========== =========== =========== =========== ===========
PER SHARE DATA:
Income before cumulative effect of accounting change $ 0.20 $ 0.20 $ 0.46 $ 0.38 $ 0.19
Cumulative effect of change in accounting
for income taxes .................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income ............................................ 0.20 0.20 0.46 0.38 0.19
----------- ----------- ----------- ----------- -----------
Book value ............................................ $ 4.86 $ 4.48 $ 4.69 $ 4.31 $ 3.96
Dividends ............................................. 0.04 0.035 0.07 0.06 0.04
Weighted average number of common shares
and common share equivalents ..................... 1,619,474 1,619,474 1,619,474 1,624,248 1,636,974
PERIOD END BALANCE SHEET DATA:
Total assets .......................................... $ 71,706 $ 65,181 $ 78,580 $ 68,104 $ 61,041
Investment securities available for sale .............. 4,247 716 8,246 1,054 1,505
Investment securities held to maturity ................ 13,055 16,801 15,576 16,373 14,628
Loans, net of unearned income ......................... 43,147 41,113 42,750 39,616 37,168
Allowance for loan losses ............................. (623) (680) (613) (652) (529)
Deposits .............................................. 57,454 52,636 63,424 55,100 47,593
Long-term debt ........................................ 681 1,243 681 1,243 1,090
Stockholders' equity .................................. 7,867 7,252 7,602 6,979 6,476
Common shares outstanding ............................. 1,619,474 1,619,474 1,619,474 1,619,474 1,636,974
SELECTED PERFORMANCE RATIOS:
Return on average assets .............................. 0.90% 0.99% 1.06% 0.97% 0.53%
Return on average stockholders' equity ................ 8.61 9.28 10.21 9.33 4.86
Net interest margin ................................... 4.99 5.14 5.02 5.40 5.23
Dividend payout ratio ................................. 19.52 17.17 15.30 15.70 21.35
Average stockholders' equity to average total assets .. 10.44 10.63 10.56 10.52 11.24
Allowance for loan losses to total loans .............. 1.44 1.65 1.43 1.64 1.42
Allowance for loan losses to nonperforming loans ...... 2,076.67 450.33 315.98 187.90 423.20
CONSOLIDATED CAPITAL RATIOS:
Tier 1 risk-based ..................................... 16.48% 15.84% 16.21% 15.18% 15.02%
Total risk-based ...................................... 17.73 17.10 17.46 16.43 16.24
Leverage .............................................. 11.17 10.88 10.90 11.04 10.86
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-------------------------
(UNAUDITED)
1993 1992
---- ----
<S> <C> <C>
INCOME STATEMENT DATA:
Interest income ....................................... $ 3,167 $ 2,723
Interest expense ...................................... 935 1,036
----------- -----------
Net interest income ................................... 2,232 1,687
Provision for loan losses ............................. 180 96
Noninterest income .................................... 368 287
Noninterest expense ................................... 2,192 1,809
----------- -----------
Income before income taxes and cumulative effect of
accounting change .................................... 228 69
Applicable income tax expense ......................... 85 (18)
----------- -----------
Income before cumulative effect of accounting change . 143 87
Cumulative effect of change in accounting
for income taxes ...................................... 445 --
----------- -----------
Net income ............................................ $ 588 $ 87
----------- -----------
PER SHARE DATA:
Income before cumulative effect of accounting change $ 0.09 $ 0.06
Cumulative effect of change in accounting
for income taxes .................................... 0.27 --
----------- -----------
Net income ............................................ 0.36 0.06
----------- -----------
Book value ............................................ $ 3.83 $ 3.47
Dividends ............................................. -- --
Weighted average number of common shares
and common share equivalents ..................... 1,636,974 1,534,819
PERIOD END BALANCE SHEET DATA:
Total assets .......................................... $ 54,274 $ 40,815
Investment securities available for sale .............. --(1) --(1)
Investment securities held to maturity ................ --(1) --(1)
Loans, net of unearned income ......................... 34,440 26,117
Allowance for loan losses ............................. (461) (285)
Deposits .............................................. 40,397 33,359
Long-term debt ........................................ 2,000 --
Stockholders' equity .................................. 6,265 5,676
Common shares outstanding ............................. 1,636,974 1,636,974
SELECTED PERFORMANCE RATIOS:
Return on average assets .............................. 1.24% 0.25%
Return on average stockholders' equity ................ 10.20 1.66
Net interest margin ................................... 5.27 5.19
Dividend payout ratio ................................. -- --
Average stockholders' equity to average total assets .. 12.73 14.71
Allowance for loan losses to total loans .............. 1.33 1.09
Allowance for loan losses to nonperforming loans ...... 113.55 83.82
CONSOLIDATED CAPITAL RATIOS:
Tier 1 risk-based ..................................... 15.94% 19.13%
Total risk-based ...................................... 17.11 20.09
Leverage .............................................. 12.51 13.81
</TABLE>
12
<PAGE>
====================
(1)Prior to January 1, 1994 Ballston did not categorize its investment
securities as "available for sale" or "held to maturity."
13
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth for the periods indicated selected
historical per share data of Abigail Adams National Bancorp, Inc. and Ballston
Bancorp., Inc. and the corresponding pro forma and pro forma equivalent per
share amounts giving effect to the proposed Holding Company Merger. The data
presented is based upon the supplemental consolidated financial statements and
related notes of Abigail Adams National Bancorp, Inc. and the consolidated
financial statements and related notes of Ballston Bancorp, Inc. included in
this Proxy Statement/Prospectus or in documents incorporated herein by
reference, and the pro forma condensed combined balance sheet and income
statements, including the notes thereto, appearing elsewhere herein. This
information should be read in conjunction with such historical and pro forma
financial statements and related notes thereto. The assumptions used in the
preparation of this table appear in the notes to the pro forma financial
information appearing elsewhere in this Proxy Statement/Prospectus. See "Pro
Forma Condensed Combined Financial Statements." This data is not necessarily
indicative of the results of the future operations of the combined organization
or the actual results that would have occurred if the Holding Company Merger had
been consummated prior to the periods indicated.
<TABLE>
<CAPTION>
AANB/BALLSTON AANB/BALLSTON
AANB BALLSTON PRO FORMA PRO FORMA
HISTORICAL HISTORICAL COMBINED (2) EQUIVALENT (3)
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Book Value Per Common Share:
June 30, 1997............................. $ 8.17 $ 4.86 $ 9.30 $ 6.37
December 31, 1996......................... 8.06 4.69 9.20 6.30
Cash Dividends Declared Per Common Share:
Six months ended June 30, 1997............ $ .20 $ .04 $ .18 $ .12
Year ended December 31, 1996.............. .37 .07 .32 .22
Net Income Per Share:
Six months ended June 30, 1997............ $ .30 $ .20 $ .22 $ .15
Year ended December 31, 1996.............. .94 .46 .67 .46
Primary Earnings Per Share:
Six months ended June 30, 1997............ N/A N/A $ .21 $ .14
Year ended December 31, 1996.............. N/A N/A .65 .44
Fully Diluted Earnings Per Share:
Six months ended June 30, 1997............ N/A N/A $ .21 $ .14
Year ended December 31, 1996.............. N/A N/A .65 .44
Market Price Per Common Share (1):.................... $12.625 $ 4.86 N/A N/A
</TABLE>
- ----------------------------
(1) The market value of AANB Common Stock was determined as of the last trading
day preceding the public announcement of the Holding Company Merger. The market
value of Ballston Stock reflects book value as of June 30, 1997.
(2) Includes the effect of pro forma adjustments for the Merger. See "Pro Forma
Combined Financial Statements (unaudited)."
(3) Based upon the pro forma combined per share amounts multiplied by an assumed
Exchange Ratio of .684452, which Exchange Ratio is subject to adjustment. See
"Pro Forma Combined Financial Statements (unaudited)."
14
<PAGE>
RISK FACTORS
Financial Performance of AANB; No Assurance of Continued Profitability
Although AANB's operations have been profitable in recent years, there can
be no assurance that AANB will be as profitable or profitable at all in the
future. A decline in AANB's financial performance could adversely affect the
value of the consideration which the Ballston Stockholders will receive in the
Holding Company Merger. Among many factors which could adversely affect AANB's
financial performance are government regulation, increased competition, and
unfavorable economic conditions. See "--Government Regulation;" "--Competition;"
and "--Regional Economic Conditions."
Government Regulation
AANB and The Adams National Bank are subject to extensive governmental
supervision, regulations and control. Future legislation and government policy
could adversely affect the banking industry and the operations of AANB and The
Adams National Bank. There can be no assurance that the profitability of AANB
and The Adams National Bank will not be adversely affected by changes in
applicable laws, regulations, and policies. For example, recent changes in
Federal banking laws are expected to result in increased competition in the
banking industry. See "--Competition."
The operations of AANB and The Adams National Bank are and will be affected
by current and future legislation and by the policies established from time to
time by various federal and state regulatory authorities. The Adams National
Bank is subject to supervision and periodic examination by the Federal Deposit
Insurance Corporation ("FDIC"), the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board') and the OCC. The Adams National Bank is
subject to supervision by the Federal Reserve Board. Banking regulations,
designed primarily for the safety of depositors, may limit a financial
institution's growth and the return to its investors by restricting such
activities as the payment of dividends, mergers with or acquisitions by other
institutions, investments, loans and interest rates, interest rates paid on
deposits, expansion of branch offices, and providing securities or trust
services. The Adams National Bank also is subject to capitalization guidelines
set forth in federal legislation, and could be subject to enforcement actions to
the extent that The Adams National Bank is found by regulatory examiners to be
undercapitalized. It is not possible to predict what changes, if any, will be
made to existing federal and state legislation and regulations or the effect
that such changes may have on the future business and earnings prospects of AANB
and The Adams National Bank. The cost of compliance with regulatory
requirements may adversely affect AANB's ability to operate profitably.
Competition
AANB operates in a competitive environment, competing for deposits and
loans with commercial banks, thrift institutions and other financial
institutions. Numerous mergers and consolidations involving Maryland, Virginia
and Washington, D.C. banks have been announced and/or have occurred recently,
resulting in an intensification of competition in the banking industry in AANB's
geographic market; additional mergers are likely to occur in the future,
resulting in additional competition. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
and mutual funds and other investment alternatives. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries. AANB faces competition
for deposits and loans throughout its market not only from local institutions
but also from out-of-
15
<PAGE>
state financial intermediaries which have opened loan production offices or
which solicit deposits in its market areas. Many of the financial intermediaries
operating in AANB's market area offer certain services, such as trust,
investment and international banking services, which AANB does not offer.
Additionally, banks with a larger capitalization and financial intermediaries
not subject to bank regulatory restrictions have larger lending limits and are
thereby able to serve the needs of larger customers.
Recent changes in Federal banking laws are expected to facilitate
interstate branching and merger activity among banks. Since September 1995, with
exceptions, certain bank holding companies are authorized to acquire banks
throughout the United States. In addition, as of June 1, 1997, certain banks are
permitted to merge with banks organized under the laws of different states. Such
changes may result in an even greater degree of competition in the banking
industry and AANB may be brought into competition with institutions with which
it does not presently compete. There can be no assurance that the profitability
of AANB will not be adversely affected by the increased competition which may
characterize the banking industry in the future.
Regional Economic Conditions
The Adams National Bank's lending customers are concentrated in the
Washington metropolitan region. At June 30, 1997, $62,610,000 or 74% of the loan
portfolio, consisted of commercial loans secured by real estate located in this
region. In the early 1990s, segments of the commercial real estate market in
this region experienced deteriorating economic trends, including declining
occupancy, rental rates, and property values. Although the economy has been
somewhat uneven over the last 18 months, the past 12 months have shown signs of
renewed economic stability and health. In the event of future unfavorable
economic conditions, including those resulting from federal budget cutbacks,
AANB may be required to make provisions and writedowns, and nonperforming
assets, along with the cost of carrying such assets, could increase. The scope
of any provisions and writedowns cannot be estimated at this time, due to the
uncertainties associated with regional economic conditions. The extent to which
provisions and write downs may be required will be dependent upon actual future
economic conditions and their effect on The Adams National Bank's borrowers.
Risk of Loan Losses
The risk of credit losses on loans varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the value and marketability of the collateral for the loan. Management of The
Adams National Bank maintains an allowance for loan losses based upon, among
other things, historical experience, an evaluation of economic conditions and
regular reviews of delinquencies and loan portfolio quality. Based upon such
factors, Management of The Adams National Bank makes various assumptions and
judgments about the ultimate collectibility of the loan portfolio and provides
an allowance for loan losses based upon a percentage of the outstanding balances
and for specific loans when their ultimate collectibility is considered
questionable. If Management's assumptions and judgments (or those of Ballston's
Management as to the Bank of Northern Virginia's loan portfolio) prove to be
incorrect and the allowance for loan losses is inadequate to absorb future
losses, or if the bank regulatory authorities require The Adams National Bank to
increase the allowance for loan losses, The Adams National Bank's earnings could
be significantly and adversely affected. Because certain lending activities
involve greater risks, the percentage applied to specific loan types may vary.
Commercial loans may involve greater risk than real estate mortgage loans. As of
June 30, 1997, The Adams National Bank had a total of $39,671,000 in commercial
loans and a total of $42,679,000 in real estate mortgages and construction
loans. Of this amount, $77,928,000 was either fully or partially secured and
$4,422,000 was unsecured.
16
<PAGE>
As of June 30, 1997, the allowance for loan losses was $1,116,000, which
represented 1.32% of outstanding loans, net of unearned income. At such date,
AANB had nonaccrual loans totaling $966,000. The Adams National Bank actively
manages its nonperforming loans in an effort to minimize credit losses and
monitors its asset quality to maintain an adequate allowance for credit losses.
Although The Adams National Bank's management believes that its allowance for
loan losses is adequate, there can be no assurance that the allowance will be
sufficient to cover future loan losses, including future loan losses arising
out of the Bank of Northern Virginia's loan portfolio following the Holding
Company Merger. Further, although AANB management uses the best information
available to make determinations with respect to the allowance for loan losses,
future adjustments may be necessary if economic conditions differ substantially
from the assumptions used or if adverse developments arise with respect to The
Adams National Bank's nonperforming or performing loans. Material additions to
The Adams National Bank's allowance for loan losses would result in a decrease
in The Adams National Bank's net income and its capital, and could have a
material adverse effect on AANB. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of AANB -- Asset Quality."
Legal Lending Limits; Lending Risks
At June 30, 1997, the legal lending limit of The Adams National Bank was
approximately $1,371,000 per customer. Accordingly, the size of the loans which
The Adams National Bank can offer to potential customers is less than the size
of the loans which many of The Adams National Bank's larger competitors are able
to offer, although The Adams National Bank is able to serve customers' needs by
participating loans with other financial institutions. There is no assurance
that the lending limit will increase in the future, although increases are
anticipated, or that The Adams National Bank will be successful in attracting or
maintaining larger volume customers. The risk of nonpayment (or deferred
payment) of loans is inherent to commercial banking. Moreover, The Adams
National Bank's marketing focus on individual customers and small to medium-
sized businesses may result in the assumption by The Adams National Bank of
certain lending risks that are different from those attendant to loans to larger
companies. Management of The Adams National Bank attempts to minimize The Adams
National Bank's credit risk exposure through obtaining third party or government
guarantees, and through loan application evaluation, approval, and monitoring
procedures, but there can be no assurance that such procedures will
significantly reduce such lending risks.
Impact of Change of Ownership Status
AANB qualifies for participation in federal and local government programs
that require funds to be deposited in minority or women-owned banks. Some
Fortune 500 companies also have banking relationships with AANB due to corporate
strategies that encourage business with such banks. As a result of the Holding
Company Merger, less than 50% of the AANB Common Stock may be held by women or
minorities and AANB's eligibility for participation in government and corporate
programs for minority and women-owned banks could as a result be terminated.
Notwithstanding termination of these programs, AANB would continue to maintain
its commitment to the banking needs of women and minorities. At June 30, 1997,
AANB had deposits of $4,883,000, or 5% of total deposits, and loans of
$2,219,000, or 3% of total loans, directly resulting from its participation in
such programs. If these deposits and loans were withdrawn or repaid and
replaced with deposits and loans having a market rate of interest, net income at
June 30, 1997 would have been reduced by a range of approximately $14,000
(assuming deposits are replaced at approximately the same average cost and loans
are replaced at the same rate, or prime) to $32,000 (assuming Fortune 500 loans
and deposits are not replaced and remaining deposits are replaced at the same
cost). The termination of AANB's eligibility for participation in such programs
also could constitute an event of default under the lease for The Adams National
Bank's branch in Union Station. Although, in AANB management's opinion, a
termination
17
<PAGE>
of the lease for the Union Station branch would not have a significant financial
impact upon AANB, a termination of leases for The Adams National Bank's ATMs in
Union Station could adversely affect AANB's results of operations.
Limitations on Payment of Dividends
The revenues of AANB result from dividends paid to it by The Adams National
Bank. The Adams National Bank is subject to various statutory restrictions on
its ability to pay dividends to AANB. Under current supervisory practices, prior
regulatory approval is required if cash dividends declared in any given year
exceed net income for that year plus retained earnings of the two preceding
years less any required transfers to surplus or fund for the retirement of
preferred stock. Consistent with this restriction, at December 31, 1996, and
June 30, 1997, $1,774,000 and $2,004,000, respectively, were available for the
payment of dividends from The Adams National Bank to AANB. In addition, Delaware
law precludes any distribution by AANB to its Stockholders if, after such
distributions, (i) AANB would not be able to pay its debts as they become due in
the usual course of business or (ii) its total assets would be less than its
total liabilities. The Federal Reserve Board has issued a statement effective
November 14, 1985 which indicates that dividends to AANB Stockholders should
only be paid out of net income to common shareholders over the past year. Bank
regulatory agencies have authority to prohibit The Adams National Bank or AANB
from paying dividends if such payment would constitute an unsafe or unsound
practice. Under the Federal Deposit Insurance Act, The Adams National Bank is
prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, it would become
"undercapitalized" (as such term is used in the statute). As a consequence of
the foregoing, there can be no assurance that The Adams National Bank will be
permitted to pay dividends to AANB at any specified level or at all. In
addition, the Federal Deposit Insurance Act prohibits AANB from making capital
distributions, including the payment of dividends, without prior regulatory
approval, if The Adams National Bank is undercapitalized.
Anti-Takeover and Change in Control Provisions
Pursuant to AANB's Certificate of Incorporation, AANB's Board of Directors
has the authority to issue shares of stock without any further vote or action by
the stockholders, subject to certain provisions of rules governing companies
whose stock is quoted on the Nasdaq/NMS. The issuance of stock under certain
circumstances could have the effect of delaying or preventing a change in
control of AANB. In addition, AANB has adopted a Rights Agreement which
entitles each stockholder to purchase from AANB one share of Common Stock at a
price of $20.11 per share, subject to adjustment, upon certain events involving
a potential significant change in ownership of AANB's Common Stock. The Rights
Agreement also provides for the issuance to AANB's stockholders of certain
shares of common stock of an acquiring company in the event that the Company is
acquired in a merger or other business combination transaction or 50% or more of
its consolidated assets or earning power are sold. The Rights Agreement also
may have the effect of delaying or preventing a change in control of AANB.
Finally, the Delaware General Corporation Law establishes special requirements
with respect to "business combinations" between a Delaware corporation and an
"interested stockholder." These provisions of the Delaware General Corporation
Law could have the effect of delaying or preventing a change in control of the
Company. See "Description of AANB Capital Stock --Common Stock," "-- Common
Stock Purchase Rights," and "-- Delaware Business Combination Law."
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Monetary Policy and General Economic Conditions
The operating and net income of The Adams National Bank and any banks
acquired by AANB in the future will depend to a great extent on "rate
differentials," i.e., the difference between the income a bank receives from
earning assets such as loans, investment securities, and other assets, and the
interest paid on interest-bearing liabilities such as deposits. These rates are
highly sensitive to many factors that are beyond the control of AANB and The
Adams National Bank, including general economic conditions and the policies of
various governmental and regulatory authorities, in particular the Federal
Reserve Board.
Adjustment of the Exchange Price
Pursuant to the Agreement, Ballston and The Bank of Northern Virginia have
agreed to make such additional accruals, reserves and charge-offs through
appropriate entries in their respective books and records as may be required by
applicable provisions of generally accepted accounting principles ("GAAP") prior
to the Closing Date. There can be no assurance as to the amount or effect of any
of such accruals, reserves and charge-offs or any other adjustments which may
occur prior to Closing on the Exchange Price. As of the date of this Proxy
Statement/Prospectus, the parties are unable to predict whether, as a result of
such accruals, the Exchange Price will be increased or diminished. In the event
of a material diminution in the Exchange Price, management of Ballston will
resolicit the proxies of the Ballston Stockholders. In that event, the judgment
whether the diminution in the Exchange Price has been material will be based
upon the facts and circumstances at the time and in light of advice of
Ballston's legal and financial advisers. If the Exchange Price were to be
diminished, then the amount of consideration to be received by each Ballston
Stockholder in exchange for his or her Ballston Stock would likewise be
diminished. See "Proposed Merger of Ballston and Subsidiary--General Description
of the Transaction."
In addition, Ballston and AANB agreed to engage two appraisers to appraise
two parcels of real estate owned by The Bank of Northern Virginia and to adjust
the Exchange Price by an amount equal to the difference between the values of
these two parcels of real estate as determined by such appraisals and their
values as shown on the books of Ballston, adjusted by an amount equal to the
amount of the hypothetical federal and state tax that would be owed as if a sale
of both parcels had occurred the day before Closing at the respective appraised
values. The appraisals have been performed and reflect an aggregate market value
in excess of the book value of such parcels, adjusted by the amount of tax that
would be owed as if a sale had occurred, of $118,262.18. Accordingly, the
Exchange Price will be increased by such amount. One of such parcels was sold
subsequent to the appraisal at a pre-tax gain of $25,000 less than the appraised
value. The parties are discussing the effect of such sale on calculation of the
Exchange Price. The effect of the sale on the calculation of the Exchange Price
is not deemed by the parties to be material.
Allocation of AANB Common Stock
Although the shares of Ballston Stock held by Ballston Stockholders will be
converted into the right to receive, in exchange for their Ballston Stock, their
pro rata share of the Exchange Price as Cash Consideration or Stock
Consideration, or a combination of Cash Consideration and Stock Consideration,
the Exchange Price is payable, in the aggregate, 50% in AANB Common Stock and
50% in cash. Therefore, in the event that Ballston Stockholders, in the
aggregate, have elected to receive more than 50% of the Exchange Price in cash
or AANB Common Stock, Ballston will adjust the elections. Non-elections shall be
adjusted first, to maximize the satisfaction of the elections by Ballston
Stockholders who return their forms of election properly and timely prior to the
close of business on the Wednesday immediately preceding the Closing Date (the
"Election Deadline"). Therefore, there can be no assurance that Ballston
Stockholders will receive the form of consideration elected. See "Proposed
Holding Company Merger of Ballston and Subsidiary--General Description of the
Transaction."
THE BALLSTON SPECIAL MEETING
Purpose of the Ballston Special Meeting
At the Ballston Meeting, holders of Ballston Stock will consider and vote
upon a proposal to approve and adopt the Agreement and approve the Holding
Company Merger provided for therein and such other matters as may properly be
brought before the Ballston Meeting.
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The Ballston Board has unanimously (with one director not present) approved
the Agreement and the Holding Company Merger provided for therein and recommends
a vote FOR approval and adoption of the Agreement and the Holding Company
Merger.
Record Date; Voting Rights; Proxies
The Ballston Board has fixed the close of business on November 9, 1997
as the record date (the "Ballston Record Date") for determining holders entitled
to notice of and to vote at the Ballston Meeting.
As of the Ballston Record Date, there were 1,651,226 shares of Ballston
Stock issued and outstanding. Each share of Ballston Stock will entitle its
holder to one vote at the Ballston Meeting. All shares of Ballston Stock
represented by properly executed proxies will, unless such proxies have been
previously revoked, be voted in accordance with the instructions indicated in
such proxies. If no instructions are indicated, such shares of Ballston Stock
will be voted for approval and adoption of the Agreement and approval of the
Holding Company Merger provided for therein. Ballston does not know of any
matters other than as described in the Notice of Special Meeting that are to
come before the Ballston Meeting. If any other matter or matters are properly
presented for action at the Ballston Meeting, the persons named in the enclosed
form of proxy and acting thereunder will have the discretion to vote on such
matters in accordance with their best judgment, unless such authorization is
withheld. A Ballston Stockholder who has given a proxy may revoke it at any time
prior to its exercise by giving written notice thereof to the Secretary of
Ballston, by signing and returning a later dated proxy, or by voting in person
at the Ballston Meeting. Mere attendance at the Ballston Meeting will not in and
of itself have the effect of revoking a previously granted proxy.
Votes cast by proxy or in person at the Ballston Meeting will be tabulated
by the election inspectors appointed for the Ballston Meeting, who will
determine whether or not a quorum is present. Where, as to any matter submitted
to a vote of the Ballston Stockholders, proxies are marked as abstentions (or
Stockholders appear in person but abstain from voting), such abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum.
Solicitation of Proxies
Ballston will bear its own cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by the directors and officers of
Ballston by personal interview, telephone or telegram. Such directors and
officers will not receive additional compensation for such solicitation but may
be reimbursed for out-of-pocket expenses incurred in connection therewith.
Arrangements may also be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares of Ballston Stock held of record by such persons, in which case
Ballston will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in connection
therewith. AANB reserves the right to engage a proxy solicitor in connection
with the AANB Meeting. Management of AANB has been advised that, if engaged, the
cost thereof is estimated to be $20,000 to $30,000.
Quorum
The presence in person or by properly executed proxy of holders of issued
and outstanding shares representing a majority of the voting power of Ballston
Stock is necessary to constitute a quorum at the Ballston Meeting.
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Required Vote
Each share of Ballston Stock will entitle its holder to one vote at the
Ballston Meeting. The affirmative vote of the holders of a majority of
outstanding shares of the Ballston Stock entitled to vote thereon is necessary
to approve the Agreement and the Holding Company Merger provided for therein.
Because the required vote of Ballston Stockholders on the Agreement and the
Holding Company Merger is based upon the total number of votes attributable to
the outstanding shares of the Ballston Stock, failure to submit a proxy card (or
failure to vote in person at the Ballston Meeting) and abstentions from voting
will have the same effect as a vote against the Agreement and the Holding
Company Merger.
As of the Ballston Record Date, directors and executive officers of
Ballston and their affiliates owned approximately 48.5% of the shares of the
Ballston Stock outstanding and entitled to vote at the Ballston Meeting. The
Directors of Ballston have agreed to vote their shares of Ballston Stock in
favor of the Agreement and the Holding Company Merger provided therein. In
addition, one Ballston Stockholder who is not a director of Ballston who holds
an aggregate of 113,288 shares or approximately 7.0% of the outstanding shares
of Ballston Stock has agreed to vote its shares of Ballston Stock in favor of
the Agreement and the Holding Company Merger provided therein.
THE MATTERS TO BE CONSIDERED AT THE BALLSTON MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF BALLSTON. ACCORDINGLY, BALLSTON STOCKHOLDERS
ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
THE AANB SPECIAL MEETING
Purpose of the AANB Special Meeting
At the AANB Meeting, holders of AANB Common Stock will be asked to consider
and vote upon the ratification of the AANB Board of Directors' approval and
adoption of the Agreement and the Holding Company Merger provided for therein
and the Issuance of a number of shares, subject to adjustment, of AANB Common
Stock to stockholders of Ballston Bancorp, Inc. sufficient to complete AANB's
proposed acquisition of Ballston, estimated to be approximately 554,226 shares
as of June 30, 1997. Assuming that the Exchange Price was $14,085,000 on
September 30, 1997, in connection with the Holding Company Merger, AANB would
have issued 599,354 shares of AANB Common Stock which would represent
approximately 27% of its outstanding stock as of that date. Due to the fact that
the number of shares of AANB Common Stock to be issued in the Holding Company
Merger will exceed 20% of the outstanding shares of AANB Common Stock, the rules
of the Nasdaq Stock Market require AANB to obtain stockholder approval of the
issuance of those shares. AANB Stockholder approval of the ratification of the
approval and adoption of the Agreement and Holding Company Merger and the
Issuance will constitute the approval required by the Nasdaq Stock Market.
The Board of Directors of AANB has approved the Agreement, the Holding
Company Merger provided for therein and the Issuance in connection with the
Holding Company Merger and recommends a vote FOR the ratification of the
approval of the Agreement and the Holding Company Merger and the Issuance in
connection therewith.
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Record Date; Voting Rights; Proxies
The AANB Board of Directors has fixed the close of business on
November 5, 1997 as the record date (the "AANB Record Date") for
determining holders entitled to notice of and to vote at the AANB Meeting.
As of the AANB Record Date, there were 1,651,226 shares of AANB Common
Stock issued and outstanding, each of which entitles the holder thereof to one
vote at the AANB Meeting. All shares of AANB Common Stock represented by
properly executed proxies will, unless such proxies have been previously
revoked, be voted in accordance with the instructions indicated in such proxies.
If no instructions are indicated, such shares of AANB Common Stock will be voted
for ratification of the approval and adoption of the Agreement and the Holding
Company Merger and the Issuance in connection therewith. AANB does not know of
any matters other than as described in the Notice of Special Meeting that are to
come before the AANB Meeting. If any other matter or matters are properly
presented for action at the AANB Meeting, the persons named in the enclosed form
of proxy and acting thereunder will have the discretion to vote on such matters
in accordance with their best judgment, unless such authorization is withheld.
An AANB Stockholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice thereof to the Secretary of AANB, by signing
and returning a later dated proxy, or, as to Stockholders of record, by voting
in person at the AANB Meeting. Mere attendance at the AANB Meeting will not in
and of itself have the effect of revoking a previously granted proxy.
Votes cast by proxy or in person at the AANB Meeting will be tabulated by
the election inspectors appointed for the AANB Meeting who will determine
whether or not a quorum is present. Where, as to any matter submitted to a vote
of the AANB Stockholders, proxies are marked as abstentions (or Stockholders
appear in person but abstain from voting) or a broker indicates on a proxy that
it does not have discretionary authority with respect to certain shares, such
abstentions and "broker non-votes" will be treated as shares that are present
and entitled to vote for purposes of determining the presence of a quorum.
Solicitation of Proxies
AANB will bear its own cost of solicitation of proxies. In addition to the
use of the mails, proxies may be solicited by the directors and officers of AANB
by personal interview, telephone or telegram. Such directors and officers will
not receive additional compensation for such solicitation but may be reimbursed
for out-of-pocket expenses incurred in connection therewith. Arrangements may
also be made with brokerage firms and other custodians, nominees and fiduciaries
to forward solicitation materials to the beneficial owners of shares of AANB
Common Stock held of record by such persons, in which case AANB will reimburse
such brokerage firms, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. AANB has
engaged Georgeson & Company, Inc. as its proxy solicitor in connection with the
AANB Meeting. Management of AANB has been advised that the cost thereof is
estimated to be $20,000 to $30,000.
Quorum
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of AANB Common Stock entitled to
vote is necessary to constitute a quorum at the AANB Meeting.
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Required Vote
The approval of the ratification of the approval and adoption of the
Agreement, the Holding Company Merger provided for therein and the Issuance in
connection therewith requires the affirmative vote of the holders of a majority
of the total votes present in person or by proxy at the AANB Meeting. As of the
AANB Record Date, the directors and executive officers of AANB and its
affiliates owned an aggregate of 546,928 shares (33.1%) of the AANB Common
Stock. Management of AANB is not aware that any officer or director of AANB will
not vote his or her shares of AANB Common Stock in favor of the ratification of
the approval and adoption of the Agreement and Holding Company Merger and the
Issuance in connection therewith except that Marshall T. Reynolds, a director,
has advised the AANB Board that he will not support the Holding Company Merger
and the Issuance. See "Beneficial Ownership of AANB Shares."
THE MATTERS TO BE CONSIDERED AT THE AANB MEETING ARE OF GREAT IMPORTANCE TO
THE STOCKHOLDERS OF AANB. ACCORDINGLY, AANB STOCKHOLDERS ARE URGED TO READ AND
CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS,
AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ENCLOSED POSTAGE PAID ENVELOPE.
PROPOSED MERGER OF BALLSTON AND SUBSIDIARY
The Ballston Stockholders are being asked to approve and adopt the
Agreement and approve the Holding Company Merger provided for therein. The AANB
Stockholders are being asked to ratify the AANB Board's approval and adoption of
the Agreement and the Holding Company Merger provided for therein and to approve
the Issuance in connection therewith. While the following description reflects
all material terms of the Agreement, it is a summary only and is qualified in
its entirety by reference to the full text of the Agreement. A copy of the
Agreement is included as Appendix A to this Proxy Statement/Prospectus and is
incorporated herein by reference. AANB Stockholders and Ballston Stockholders
are urged to read the Agreement in its entirety.
General Description of the Transaction
Under the Agreement, Ballston will merge with and into Adams Acquisition
Corporation ("Subsidiary"), and Subsidiary will be the surviving corporation.
The separate existence of Ballston will cease upon effectiveness of the Holding
Company Merger. Immediately prior to the Holding Company Merger, (a) AANB will
contribute the Exchange Price (cash and AANB Common Stock) to Subsidiary and (b)
The Adams National Bank will become a subsidiary of Subsidiary. Immediately
following the Holding Company Merger, AANB will merge The Bank of Northern
Virginia with and into The Adams National Bank (the "Bank Merger") with The
Adams National Bank being the surviving entity. The Holding Company Merger and
the Bank Merger will be effected after the close of business on the Friday
following approval of the Agreement and the Holding Company Merger by Ballston
Stockholders and ratification of the Agreement and Holding Company Merger and
approval of the Issuance in connection therewith by AANB Stockholders provided
that all necessary regulatory approvals have been received by that date and all
other conditions to the effectiveness of the Holding Company Merger have been
satisfied.
The Exchange Price that will be paid by Subsidiary to the Stockholders of
Ballston comprises a base amount and adjustments, which adjustments may increase
or decrease the Exchange Price. Subject to such adjustments, the consideration
will equal $13,858,374.60 plus (a) one times any earnings, if any (or less one
times any losses, if any), of Ballston from April 1, 1997, until Closing, less
(b) any dividends declared by Ballston on or after April 1,1997 until Closing
(previously defined as the "Exchange Price").
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The value of the consideration to be received by each holder of a share of
Ballston Stock shall be the Exchange Price divided by the total number of
outstanding shares of Ballston Stock at Closing.
Except in the case of an Acquisition Event (as hereinafter defined), for
purposes of determining how many shares of AANB Common Stock will be issued by
AANB, the value per share of AANB Common Stock ("AANB Stock Value") shall be the
average mid-point of the closing bid and asked price of the first twenty (20) of
the twenty-one (21) trading days of the AANB Common Stock immediately prior to
Closing (the "20 Trading Day Period") subject to a minimum of $9.90 per share
and a maximum of $14.85 per share. See "Proposed Holding Company Merger of
Ballston and Subsidiary--Valuation of AANB Common Stock."
An "Acquisition Event" has been defined in the Agreement to mean the
authorization by the AANB Board of the execution of an agreement with (not
subsequently terminated) or support for an offer or proposal by (and not
subsequently withdrawn) a third party prior to Closing under the Agreement where
there is a change of voting power in excess of 50% of the outstanding stock of
AANB. If an Acquisition Event occurs, the value per share shall be the average
mid-point of the closing bid and asked price of the last 20 trading days prior
to the public announcement of such event provided that such calculation is less
than the AANB Stock Value.
On the Effective Date and subject to the election adjustment, Ballston
Stockholders who receive AANB Common Stock (up to a maximum of 50% of the
Exchange Price) will become Stockholders of AANB. Each such issued and
outstanding share of Ballston Stock (other than the Dissenting Shares, see "--
Rights of Dissenting Shareholders") automatically, without further act, shall be
converted into and become shares of AANB Common Stock. Cash will be paid to the
Ballston Stockholders who receive the Cash Consideration and cash will also be
paid in lieu of fractional shares on the basis of the average mid-point of the
closing bid and asked price during the 20 Trading Day Period (or, if an
Acquisition Event has occurred, during the 20 trading days prior to its public
announcement) of the AANB Common Stock as reported on the Nasdaq/NMS prior to
Closing subject to a minimum of $9.90 per share and a maximum of $14.85 per
share.
Manner of Exchange. Each non-dissenting holder of Ballston Stock will be
entitled to elect to receive his pro rata share of the Exchange Price for his
Ballston Stock as either Stock Consideration, Cash Consideration, or a
combination thereof. However, the maximum number of shares of Ballston Stock to
be converted into Cash Consideration shall be no greater than 50% of the number
of shares of Ballston Stock issued and outstanding immediately prior to the
Effective Date of the Holding Company Merger less the sum of (i) dissenting
shares and (ii) the number of shares of Ballston Stock converted into the right
to receive fractional shares and paid for in cash. The maximum number of shares
of Ballston Stock to be converted into the right to receive Stock Consideration
shall be no greater than the number which when converted would equal 50% of the
Exchange Price. Non-elections shall otherwise be adjusted to maximize the
satisfaction of holders of Ballston Stock who have made proper and timely cash
elections and stock elections. If holders of Ballston Stock as a group elect to
receive an amount of Cash Consideration or Stock Consideration greater than the
maximum amounts described above, the exchange elections shall be subject to
adjustment as follows:
1. If cash elections exceed the maximum amount of Cash Consideration
payable in the exchange, then all shares of Ballston Stock covered by elections
for Stock Consideration and all shares of Ballston Stock covered by non-
elections shall be converted into the right to receive AANB Common Stock and all
shares subject to elections for Cash Consideration shall be converted in the
right to receive Cash Consideration and Stock Consideration on a pro-rata basis,
so that upon completion of the allocation 50% of the number of shares of
Ballston Stock should be converted into the right to receive Stock
Consideration.
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2. If the elections for Stock Consideration exceed the amount of
consideration payable in AANB Stock, then all shares of Ballston Stock covered
by elections for Cash Consideration and non-elections shall be converted into
the right to receive Cash Consideration and all shares of Ballston Stock covered
by elections for Stock Consideration shall be converted into the right to
receive Stock Consideration and Cash Consideration on a pro-rata basis, so that
upon completion of the allocation 50% of the number of shares of Ballston Stock
should be converted into the right to receive Stock Consideration.
Exercise of Elections. All elections shall be made on a form of election
("Form of Election") mailed to holders of record of shares of Ballston Stock as
of the Ballston Record Date or such other date as AANB and Ballston shall
mutually agree (the "Election Form Record Date"). Ballston shall make available
one or more Forms of Election as may be reasonably requested by all persons who
become holders or beneficial owners of Ballston Stock between the Election Form
Record Date and the close of business on the day prior to the Election Deadline.
Holders of Ballston Stock may make elections by mailing to Ballston a Form
of Election or by delivering a Form of Election to Ballston at the Ballston
Meeting. As previously noted, any holder of Ballston Stock may allocate his or
her Ballston Stock among elections for Cash Consideration, Stock Consideration
or non-elections as he or she sees fit, provided that if the sum of the shares
of any holder as to which elections and non-elections are made exceed the total
number of shares held by the holder, Ballston shall consider all the elections
submitted by the holder to have been not properly made.
To be effective, a Form of Election must be properly completed and signed
and received by Ballston no later than the adjournment of the Ballston Meeting,
or else the holder will be deemed to have made a non-election.
Ballston will have the discretion to reasonably determine whether Forms of
Election have been properly completed, signed, and submitted or revoked and to
disregard immaterial defects in election forms. Neither AANB nor Ballston will
be under any obligation to notify any person of any defect in a Form of Election
submitted to Ballston, but Ballston shall use commercially reasonable efforts to
notify a holder of any such defect. The Agreement provides that Ballston shall
make all computations relating to elections and all computations shall be
conclusive and binding on the holders of Ballston Stock.
For the purposes hereof, a holder of Ballston Stock (including a dissenting
holder who shall have failed to perfect, or shall have effectively withdrawn or
lost, his or her right to dissent from the Holding Company Merger under Delaware
law) who does not submit a Form of Election which is received by Ballston prior
to the Election Deadline shall be deemed to have made a non-election. If
Ballston shall determine that any purported election for Cash Consideration or
Stock Consideration was not properly made, such purported election shall be
deemed to be of no force and effect and the Ballston Stockholder making such
purported election shall for purposes hereof be deemed to have made a non-
election.
Revocation or Modification; Deadline. Any holder of Ballston Stock who has
made an election by submitting a Form of Election to Ballston (including those
who have been known to have made a non-election) may at any time prior to close
of business on the Wednesday immediately preceding the Closing Date (the
"Election Deadline") change his or her election by submitting to Ballston, by
certified mail or by a nationally recognized overnight service, a revised Form
of Election, properly completed and signed, that is received by Ballston by the
Election Deadline. Any holder of Ballston Stock may at any time prior to the
Election Deadline revoke his or her election (including any deemed non-election)
by written notice submitted
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to Ballston by certified mail or by a nationally recognized overnight service,
that is received by Ballston by the Election Deadline. Any holder of Ballston
Stock may at any time prior to the Election Deadline revoke his or her non-
election by submitting to Ballston, by certified mail or by a nationally
recognized overnight service, a Form of Election, properly completed and signed,
that is received by Ballston by the Election Deadline. Ballston shall
determine the allocation as to all Ballston Stockholders of the Cash
Consideration and the Stock Consideration and shall notify AANB and the Exchange
Agent of its determination at Closing.
Procedures for Exchange of Certificates. On and after the Effective Date,
certificates for shares of Ballston Stock shall represent the right to receive
certificates representing the number of shares of AANB Common Stock and cash as
well as cash in lieu of fractional shares represented thereby, as described
above. As promptly as practicable after the Effective Date, AANB shall cause
American Stock Transfer & Trust Co., acting as the exchange agent (the "Exchange
Agent") to send to each holder of record of Ballston Stock immediately prior to
the Effective Date transmittal materials and instructions for use in exchanging
such certificates of Ballston Stock (other than Dissenting Shares, see "--Rights
of Dissenting Stockholders") for the consideration to be received by holders of
Ballston Stock, be it cash or new certificates representing shares of AANB
Common Stock or a combination of cash and new certificates representing shares
of AANB Common Stock. Certificates of AANB Common Stock, any checks for amounts
due in payment of Cash Consideration and in respect of fractional shares and any
dividends that a holder may be entitled to receive after the Effective Date
shall be paid by the Exchange Agent only after the delivery to the Exchange
Agent of such holder's certificates representing all of such holder's shares of
Ballston Stock. No interest shall be paid on any amounts due in respect of Cash
Consideration, fractional shares or dividends.
Until surrendered, certificates formerly representing shares of Ballston
Stock (other than Dissenting Shares, see "--Rights of Dissenting Stockholders")
will be deemed for all corporate purposes to evidence the number of whole shares
of the AANB Common Stock that a holder would be entitled to receive upon
surrender and that portion of the Cash Consideration to which he or she is
entitled plus the cash to be paid in respect of fractional shares as determined
by Ballston and reported by Ballston to the Exchange Agent.
BALLSTON STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES UNTIL THEY HAVE
RECEIVED TRANSMITTAL MATERIALS AND INSTRUCTIONS FROM THE EXCHANGE AGENT.
BALLSTON STOCKHOLDERS SHOULD RETURN ONLY THE FORM OF ELECTION WITH THE ENCLOSED
PROXY AND SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY OR WITH
---
THE ENCLOSED FORM OF ELECTION.
Certain Restrictions on Resale by Controlling Persons. Directors and
certain other affiliates of Ballston will be subject to restrictions on the
transfer of shares of AANB Common Stock received by them in the Holding Company
Merger. These restrictions are imposed pursuant to Rule 145 under the Securities
Act. There will generally be no restrictions imposed on resale of AANB Common
Stock received in the Holding Company Merger by other Ballston Stockholders.
Certain Employment Matters. Except as otherwise consented to by AANB, any
employee that is hired by Ballston or The Bank of Northern Virginia between the
date of the Agreement and Closing shall be subject to a probationary period
consisting of six (6) months for all professional employees and ninety (90) days
for all staff members. All employees of Ballston or The Bank of Northern
Virginia who are employed by Subsidiary, The Bank of Northern Virginia or The
Adams National Bank immediately following the Holding Company Merger
("Transferred Employees") will be covered by AANB's employee benefit plans as to
which
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they are eligible based on their length of service, compensation, location, job
classification, and position, including, where applicable, any incentive
compensation plan. Notwithstanding the foregoing, AANB may determine to
continue any of the Ballston or The Bank of Northern Virginia benefit plans for
Transferred Employees in lieu of offering participation in AANB's benefit plans
providing similar benefits, to terminate any of the Ballston or The Bank of
Northern Virginia benefit plans, or to merge any such benefit plans with AANB's
benefit plans. Except as otherwise prohibited by law, Transferred Employees'
service with Ballston or The Bank of Northern Virginia which is recognized by
the applicable benefit plan of Ballston or The Bank of Northern Virginia at the
Effective Date of the Holding Company Merger shall be recognized as service with
AANB or The Adams National Bank for purposes of eligibility to participate and
vesting, if applicable (but not for purposes of benefit accrual) under the
corresponding AANB or The Adams National Bank benefit plan, if any, subject to
applicable break-in-service rules.
AANB has agreed that immediately following the Holding Company Merger, all
participants who then have accounts in the 401(k) plan maintained by Ballston or
The Bank of Northern Virginia (the "401(k) Plan") shall be vested in accordance
with their existing plan and shall be vested consistent therewith in their
account balances. AANB, at its election, may continue the 401(k) Plan for the
benefit of Transferred Employees (as such plan may be amended as of the
Effective Date of the Holding Company Merger to provide current contributions
and eligibility provisions identical to those under the AANB Employees' Plan),
may merge the 401(k) Plan into the AANB Employees' Plan, or may cease additional
benefit accruals under and contributions to the 401(k) Plan and continue to hold
the assets of such 401(k) Plan until they are distributable in accordance with
its terms. In the event of a merger of the 401(k) Plan into the AANB Employees'
Plan or a cessation of accruals and contributions under the 401(k) Plan, the
AANB Employee's Plan will recognize for purposes of eligibility to participate,
early retirement, and eligibility for vesting, all Transferred Employees'
service which is recognized under the 401(k) Plan, subject to applicable break-
in-service rules.
Effective Date of the Holding Company Merger; Termination
Subject to the satisfaction of all conditions contained in the Agreement
which have not been waived by AANB and Subsidiary, or by Ballston or by The Bank
of Northern Virginia, as the case may be, the Holding Company Merger will become
effective on the later of the date the Certificate of Merger is filed with the
Secretary of State or the effective date designated in the Certificate of
Merger. The Holding Company Merger is not contingent upon the completion of the
Bank Merger.
The Agreement shall be terminated, and the Holding Company Merger
abandoned, if the Stockholders of AANB or Ballston shall at a duly called
meeting convened for such purpose fail to give the required approval.
Notwithstanding such approval by such Stockholders, the Agreement may be
terminated at any time prior to the Effective Date by:
(a) The mutual consent of AANB and Ballston, as expressed by their
respective Boards of Directors;
(b) Either AANB on the one hand or Ballston on the other hand, as
expressed by their respective Boards of Directors, if the Holding Company
Merger has not occurred by December 31, 1997, provided that the failure of
the Holding Company Merger to so occur shall not be due to a willful breach
of any representation, warranty, covenant or agreement by the party seeking
to terminate the Agreement;
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(c) AANB in writing authorized by its Board of Directors if
Ballston or The Bank of Northern Virginia has, or by Ballston in writing
authorized by its Board of Directors, if AANB has, in any material respect,
breached (i) any covenant or agreement contained in the Agreement, or (ii)
any representation or warranty contained therein, in any case if such
breach has not been cured by the earlier of 30 days after the date on which
written notice of such breach is given to the party committing such breach
or the Closing Date; provided that either party may terminate the Agreement
on the basis of any such material breach of any representation or warranty
which is not cured within 30 days of written notice thereof notwithstanding
any qualification therein relating to the knowledge of the other party;
(d) Either AANB on the one hand or Ballston on the other hand, as
expressed by their respective Boards of Directors, in the event that any of
the conditions precedent to the obligations of such parties to consummate
the Holding Company Merger have not been satisfied or fulfilled or waived
by the party entitled to so waive on or before the Closing Date, provided
that no party shall be entitled to terminate the Agreement under such
circumstances if the condition precedent or conditions precedent which
provide the basis for termination can reasonably be and are satisfied
within a reasonable period of time, in which case, the Closing shall be
appropriately postponed;
(e) Ballston, if the Board of Directors of Ballston shall have
determined in its sole discretion, exercised in good faith, that the
Holding Company Merger has become inadvisable or impracticable by reason of
the institution of any litigation, proceeding or investigation (including
under federal antitrust laws) to restrain or prohibit the consummation of
the Holding Company Merger or to obtain other relief in connection with the
Agreement;
(f) AANB, if the Board of Directors of AANB shall have determined
in its sole discretion, exercised in good faith, that the Holding Company
Merger has become inadvisable or impracticable by reason of the institution
of any litigation, proceeding or investigation (including under federal
antitrust laws) to restrain or prohibit the consummation of the Holding
Company Merger or to obtain other relief in connection with the Agreement;
(g) AANB or Ballston, if the Federal Reserve Board, the Federal
Deposit Insurance Corporation (the "FDIC") or the SCC deny approval of the
Holding Company Merger and the time period for all appeals or requests for
reconsideration has run;
(h) AANB, in the event the average mid-point of the closing bid and
asked prices for the 20 Trading Day Period is above $14.85 and an
Acquisition Event has not occurred; or Ballston, in the event the average
mid-point of the closing bid and asked prices for the 20 Trading Day Period
is below $9.90 per share.
Unless and until the Agreement shall have been terminated pursuant to its
terms, neither Ballston, The Bank of Northern Virginia nor any of their
executive officers, directors, representatives, agents or affiliates shall,
directly or indirectly, encourage, solicit or initiate discussions or
negotiations (with any person other than AANB) concerning any merger, sale of
substantial assets, tender offer, sale of shares of stock or similar transaction
involving Ballston or The Bank of Northern Virginia or, subject to their
fiduciary duties to shareholders (a) disclose, directly or indirectly, any
information not customarily disclosed to the public concerning Ballston or The
Bank of Northern Virginia, (b) afford to any other person access to the
properties, books or records of Ballston or The Bank of Northern Virginia or
otherwise assist any person preparing to
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make or who has made such an offer, or (c) enter into any agreement with any
third party providing for a business combination transaction, equity investment
or sale of significant amount of assets.
AANB has not determined whether it will act to terminate the Agreement
prior to the Effective Date in the event that the average mid-point of the
closing bid and asked prices for the 20 Trading Day period is above $14.85 per
share. In the event that such price is above $14.85 per share, the AANB Board of
Directors will determine whether such price is materially above $14.85 and,
after consultation with its legal and financial advisors, whether based on the
facts and circumstances at the time, including the fact that the number of
shares issuable as Stock Consideration in that event would be calculated at the
$14.85 per share level, it as advisable to proceed to closing and whether
resolicitation of AANB Stockholders is necessary or advisable.
Ballston has not determined whether it will act to terminate the Agreement
prior to the Effective Date in the event that the average mid-point of the
closing bid and asked prices for the 20 Trading Day period is below $9.90 per
share. Such a determination will be made on the basis of factors not currently
capable of evaluation, including but not limited to Ballston's perceptions
regarding the likelihood of a recovery in AANB's stock price and Ballston's
perceptions regarding the availability of alternative affiliation transactions
as well as the attractiveness of continuing operations as an independent
concern. In the event Ballston determines not to terminate the Agreement but
instead to proceed to closing despite an average price for AANB's stock during
the 20 Trading Day period that is below $9.90 per share, the aggregate market
value of the consideration to be received by stockholders of Ballston who
receive AANB Common Stock as some or all of the consideration for their Ballston
Stock will be less than their ratable share of the Exchange Price. This is
because the number of shares of AANB Common Stock to be issued in this situation
will be determined by dividing one-half the Exchange Price by $9.90 rather than
by the lower number representing average price for AANB's Common Stock during
the 20 Trading Day Period. Depending upon the disparity between the average
price for AANB's Common Stock during the 20 Trading Day Period and $9.90,
Ballston may decide to resolicit the proxies of its stockholders. Specifically,
in the event the aggregate market value of the consideration to be received by
stockholders of Ballston who receive AANB Common Stock as some or all of the
Consideration for their Ballston stock will be materially less than one-half of
the Exchange Price, Ballston will resolicit the proxies of its stockholders.
The judgment whether the aggregate market value of the Stock consideration is
materially less than one-half of the Exchange Price will be made based upon the
facts and circumstances available at the time, including the amount of the
Exchange Price and the trading history of AANB Common Stock during and
immediately following the end of the 20 Trading Day Period, and will be made in
light of the advice of Ballston's legal and financial advisors.
Background of and Reasons for the Transaction
The past several years have been a period of substantial and rapid change
in the banking industry in general and in the northern Virginia market served by
The Bank of Northern Virginia in particular. In light of the general
consolidation of banking institutions and the need for expertise, advanced
technology, and other resources required in today's banking environment,
financial institutions which have been resolute in maintaining their
independence are increasingly being forced to reevaluate that strategy.
Ballston has been contacted periodically by banks, bank holding companies,
and others with suggestions that the possibility of a merger or purchase be
explored. In general, the board of directors has considered these approaches as
either premature or not in the best interests of Ballston and did not pursue
them. Ballston instead focused upon a strategy of internal growth. By 1997,
that strategy was achieving limited results due to the difficulty that Ballston
was facing in attracting business in the face of the competition afforded by
larger financial institutions as well as smaller institutions whose need for
growth appears to propel them towards less-rational policies towards pricing and
other means of competition. Because The Bank of Northern Virginia was committed
foremost to maintaining a high-quality loan portfolio and a prudent approach to
pricing products and services, The Bank of Northern Virginia experienced
difficulty in reaching budgeted levels of assets, loans, and deposits.
In the first quarter of 1997, legal counsel for AANB contacted the chairman
and chief executive officer of The Bank of Northern Virginia, Mr. Fred A.
Burroughs, III, regarding a potential merger with a client of his. When they
met, counsel revealed that his client was AANB and that AANB might be interested
in discussing a possible affiliation. Counsel inquired whether The Bank of
Northern Virginia had any interest in discussing a possible affiliation with
AANB. Mr. Burroughs indicated that he was unable to respond to such a question
without the benefit of guidance from the other members of the board of directors
of The Bank of Northern Virginia, and he offered to refer the matter to the
board. Mr. Burroughs reported the results of the meeting to the other members of
the board of directors of The Bank of Northern Virginia. Further meetings ensued
with Ms. Barbara Davis Blum, chairwoman and chief executive officer of AANB, Ms.
Kimberly J. Levine, chief financial officer of AANB, and certain members of the
board of directors of The Bank of Northern Virginia. At these meetings, AANB
outlined its interest in seeking an affiliation with a Virginia institution with
the approximate size and market penetration of Ballston. Thereafter, Mr. Sidney
G. Simmonds of Simmonds & Klima, Ltd., a director of The Bank of Northern
Virginia and a consultant to Ballston, Mr. Robert F. Kelleher, the chairman,
president and chief executive officer of Ballston, and Brian D. Alprin, Esq. of
Duane, Morris & Heckscher LLP, secretary and treasurer and legal counsel for
Ballston, met several times with representatives of AANB. These meetings focused
upon a range of subjects, including: the prices paid recently for comparable
institutions and in comparable transactions within the Middle Atlantic states;
the forms of consideration that might be offered (i.e., cash and stock) and the
relative proportions of cash and stock that could be included in a possible
offer; whether AANB would be willing to pay for undistributed net earnings of
Ballston for periods after December 31, 1996; whether Ballston would be willing
to grant a termination right to AANB in the event that the trading price of AANB
fell below specified price levels; the cost savings that could be realized by a
combined entity through consolidation of bank operations; and the underlying
value of AANB stock as compared to its market price. These meetings led to the
Ballston Board's determination on May 23, 1997 to authorize the execution of a
nonbinding letter of intent, which was signed June 3, 1997. The letter set forth
the parameters of the Holding Company Merger.
During the course of its consideration of a possible merger with AANB,
management of Ballston perceived that there was a close fit between AANB's and
Ballston's stockholder bases (both being strongly women-oriented), operating
styles (both being based upon personalized attention to the needs of individual
customers), and organizational mandates (both being strongly community-
oriented). Management of Ballston thus felt that the possibility existed for a
unique combination of similar institutions which could achieve their common
goals better together than separately. Management of Ballston was also aware
that each of the current executive officers of The Bank of Northern Virginia had
either a short-term employment contract or no employment contract, and thus that
Ballston faced a near-term decision whether, on the one hand, to provide for
long-term management succession through new employment contracts or, on the
other hand, to take advantage of the salability of Ballston which might exist
due to the short-term nature of its then-current
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contractual commitments. In view of these considerations, both the management
and board of directors of Ballston determined to pursue merger discussions with
AANB.
Following extensive negotiations between AANB, Ballston, and their
respective advisors, on June 20, 1997 the Ballston Board voted unanimously (with
one director not present) to authorize the execution of a definitive agreement.
The board of directors of The Bank of Northern Virginia met on June 23, 1997 to
consider the merger agreement and unanimously voted at that time to authorize
its execution. The agreement was executed and delivered by Ballston and The Bank
of Northern Virginia as of June 23, 1997.
It is the judgment of the Ballston Board that consummation of the Holding
Company Merger is in the best interests of the stockholders and employees of
Ballston and the communities it serves. A merger will allow Ballston to address
the increased competition it will face in the future from larger, wealthier
financial institutions. Recent changes in applicable law have placed the
smaller community banks in more direct competition with larger banks and other
non-bank financial intermediaries for originating deposits and loans. The trend
towards industry consolidation, which has been acutely felt within the greater
Washington, D.C. area with the emergence or entry of such large institutions as
NationsBank, First Union, Citibank, and Crestar, combined with emerging
technological changes and increased regulatory and other costs of operation,
create a difficult environment for independent institutions of the size of
Ballston to compete efficiently. The Ballston Board felt that it would be
difficult to grow the size of Ballston substantially through independent
operations within a reasonable period of time, and that therefore the potential
to increase profits measurably within such a time period was limited. In
addition, successful future expansion of the operations of Ballston could be
difficult to achieve considering the size and number of competitors which
Ballston faces.
In the opinion of the Ballston Board, the Holding Company Merger with AANB
will provide Ballston Stockholders with more marketable shares or cash, its
employees with greater opportunities, and its customers with enhanced services.
The community, in turn, should benefit from the Holding Company Merger. The
Ballston Board believes that the Holding Company Merger offers stockholders the
best means of realizing the value of their investment, preserving employees'
jobs within The Bank of Northern Virginia, and continuing to offer the customers
and the community the deposit, lending, financing, and other banking services
they will require in the future.
The Ballston Board considered the business, operations, earnings, and
financial condition of AANB on both an historical and a prospective basis and
the enhanced opportunities for growth in stockholder values which the Holding
Company Merger would make possible. The Ballston Board believes that the
community-bank orientation of AANB, as well as the compatibility of the
stockholder bases in both of which businesswomen and women professional, civic,
and community-service leaders are prominent, would complement and promote the
business potential of Ballston. The Ballston Board was also favorably impressed
with recent enhancements that AANB had made to its management team.
The Ballston Board considered the financial terms of the Holding Company
Merger, including the price offered, the present and prospective value of shares
of AANB that would constitute 50 percent of the merger consideration, an
estimate of the future value of Ballston as an independent entity, and the
relationship of the market value, book value, and earnings per share of AANB to
the current value, book value, and earnings per share of Ballston. In this
regard, Ballston took into consideration the informal discussions which it had
had with one other potential acquirer, a Virginia-based commercial banking
company, which never made a formal offer. Formal discussions between Ballston
and this banking company were not pursued. Ballston also considered the contents
of informal discussions it had had over the past months with other banking
companies, none of which suggested that acquisition premiums would be available
which were higher than the premium offered by AANB. The Ballston Board
considered the fact that the price per share offered by AANB represents a
significant premium over the book value of Ballston Stock and also compared
favorably with the consideration that seemed likely to result from other
possible transactions available to Ballston during the same time period. In
addition, the board of directors compared the price offered to the prices and
premiums
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paid in comparable acquisition transactions involving other financial
institutions of which the board was aware. The Ballston Board considered the
favorable opinion of Danielson Associates Inc. that the terms of the transaction
proposed by AANB were fair to the Stockholders of Ballston from a financial
point of view.
The Ballston Board took into account the current and prospective economic
and competitive environment facing the financial services industry generally,
and the respective capacities of Ballston and AANB to compete effectively given
the rapid changes in the financial services industry. The Ballston Board
concluded that with the increasing competition in the financial services
industry and the need for substantially increased investments in personnel and
automated systems to remain competitive, it was in the best interest of Ballston
Stockholders not to take the financial and performance risk of making those
investments alone in order to maintain momentum. The conclusion of the Ballston
Board was that in partnership with AANB, Ballston would have greater access to
technology, expertise, and other resources for competitive effectiveness in the
current banking environment.
The Ballston Board considered the prospects of continued employment by most
employees of The Bank of Northern Virginia. Because AANB currently does not
have any presence in northern Virginia, the board of directors believes that the
Holding Company Merger provides an opportunity for employees of The Bank of
Northern Virginia that other merger candidates may not be able to offer.
The Ballston Board considered that the AANB Common Stock, which represents
50 percent of the proposed merger consideration, offers an annual dividend yield
that exceeds the historical yield on Ballston Common Stock and a broader and
more liquid market. The Ballston Board considered the fact that AANB Common
Stock is quoted on the National Market System of the Nasdaq Stock Market. By
contrast, the Ballston Stock is not listed or quoted on any market, as a result
of which stockholders of Ballston who have wished to sell their shares or
purchase additional shares have faced limited opportunities to do so. The
Ballston Board also considered that based upon the advice and information
available to it, providing Stockholders of Ballston an opportunity to elect to
participate as AANB Stockholders in the anticipated growth of the combined
company's business would provide the Stockholders of Ballston with a greater
opportunity for long-term appreciation than if Ballston had remained
independent.
The Ballston Board reviewed with its advisors the provisions of the Holding
Company Merger and the treatment of the Holding Company Merger as a
reorganization under section 368(a) of the Code for federal income tax purposes.
The Ballston Board considered the fact that the transaction is structured to be
tax-free for federal income tax purposes to those stockholders of Ballston who
receive solely AANB Common Stock.
The Ballston Board also considered the likelihood of the Holding Company
Merger being approved by applicable regulatory authorities without undue
conditions or delay. The Ballston Board concluded that there were no reasonable
bases to fear regulatory disapproval or delay of the Holding Company Merger due
to antitrust or other regulatory concerns.
Based upon its consideration of the foregoing factors, the Ballston Board
concluded that the Holding Company Merger offers the Stockholders of Ballston
the best means of realizing the value of their investment, preserving employees'
jobs within The Bank of Northern Virginia, and offering the customers of The
Bank of Northern Virginia and the community a set of enhanced services, a more
elaborate branch and automated teller machine network, and a more competitive
banking institution which will result from the Holding Company Merger.
Accordingly, the Ballston Board (with one director not present) unanimously
approved the Holding Company Merger as being in the best interest of Ballston
and its Stockholders.
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Each member of the Ballston Board has agreed to vote those shares of
Ballston which such director owns in favor of the Holding Company Merger. The
directors of Ballston, together with one stockholder which has similarly agreed
to vote its shares in favor of the Merger, beneficially own approximately 53.8
percent of the outstanding shares of Ballston Stock. Each of them will receive
the same price per share under the terms of the Holding Company Merger, and the
same opportunity to elect between cash and stock consideration, as all other
Ballston Stockholders.
Recommendation of the Ballston Board
On June 20, 1997, the Ballston Board unanimously (with one director not
present) approved the Agreement in its then-current form, subject to certain
technical changes, all of which were made prior to execution.
The Ballston Board has approved the Agreement and the Holding Company
Merger provided for therein and recommends a vote FOR approval and adoption of
the Agreement and the Holding Company Merger.
For a discussion of the interests of certain directors and officers in the
Holding Company Merger, see "--Interests of Certain Persons in the Holding
Company Merger."
Interests of Certain Persons in the Holding Company Merger
In considering the recommendations of the Ballston Board with respect to
the Holding Company Merger, holders of Ballston Stock should be aware that
certain members of Ballston's management, some of whom are or were members of
the Ballston Board, and the members of the Ballston Board have certain interests
in the Holding Company Merger, in addition to those of the Ballston Stockholders
generally. The Ballston Board was aware of these interests when it considered
and approved the Holding Company Merger and the Agreement.
Employment Arrangements. Management of AANB is engaged in discussions with
one or more members of senior management of Ballston and/or the Bank of Northern
Virginia with respect to continuing employment following the Holding Company
Merger; however, no agreements have been reached as of the date hereof.
Indemnification. Following the Closing under the Agreement until the sixth
anniversary of the Agreement and subject to compliance with Delaware law, AANB
will not take any action to abrogate or diminish any right accorded under the
certificate or articles of incorporation or by-laws of Ballston or articles of
incorporation, by-laws or board resolutions of The Bank of Northern Virginia as
they existed immediately prior to the Closing to any person who, on or prior to
the Closing, was a director or officer of Ballston or The Bank of Northern
Virginia to indemnification from or against losses, expenses, claims, demands,
damages, liabilities, judgments, fines, penalties, costs, expenses (including
without limitation reasonable attorneys fees) and amounts paid in settlement
pertaining to or incurred in connection with any threatened or actual action,
suit, claim, or proceeding (whether civil, criminal, administrative,
arbitration, or investigative) arising out of events, matters, actions, or
omissions occurring on or prior to the Closing.
Unless the existing directors and officers insurance policy of Ballston and
The Bank of Northern Virginia provides for coverage against claims made after
the Closing with respect to acts that occurred prior to the
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Closing, AANB and Ballston will together arrange for similar coverage for the
directors and officers of Ballston and The Bank of Northern Virginia against
such claims made following the Closing until the sixth anniversary thereof and
will divide and accrue the cost equally between AANB and Ballston prior to the
calculation of the Exchange Price.
Recommendation of the Board of Directors of AANB
The Board of Directors of AANB has approved the Agreement, the Holding
Company Merger and the Issuance in connection therewith and recommends a vote
FOR the ratification of the approval and adoption of the Agreement and the
Holding Company Merger and the Issuance in connection therewith.
In reaching its conclusions that the Holding Company Merger and the
Issuance are fair to, and in the best interests of, AANB and its Stockholders,
the AANB Board of Directors considered, among other things, the financial terms
of the Holding Company Merger, the strategic value of enhancing AANB's customer
base and establishing its presence in the Northern Virginia banking environment
and the opinion of Baxter Fentriss that the transaction is fair from a financial
point of view to AANB and its Stockholders. In considering the transaction, the
Board also reviewed and considered the financial information presented to the
AANB Board of Directors by management which was based on information provided by
Baxter Fentriss. Management estimates, giving effect to anticipated cost savings
following the Holding Company Merger and the combination of the banks'
operations, that beginning in the first half of 1998 the Holding Company Merger
will be accretive to AANB's earnings. The AANB Board believes that the Holding
Company Merger will have a positive financial impact as well as strategic
benefits. The Board of Directors strongly recommends that AANB stockholders vote
to ratify the Board's approval of the Agreement and Holding Company Merger and
to approve the Issuance.
Business Pending the Holding Company Merger
Until the effective time of the Holding Company Merger, Ballston and The
Bank of Northern Virginia will operate their respective businesses substantially
as presently operated and only in the ordinary course and in general conformity
with applicable laws and regulations, and, consistent with such operation, they
will use their best efforts to preserve intact their present business
organizations and relationships with persons having business dealings with them.
Until consummation of the Holding Company Merger, Ballston and The Bank of
Northern Virginia may not, without prior written notice to AANB, unless required
by regulatory authorities, (i) make any change in the salaries (subject to
AANB's prior written consent as to salary increases), bonuses or title of any
officer or any other employee, other than those permitted by current employment
policies in the ordinary course of business, any of which changes shall be
reported promptly to AANB; (ii) enter into any bonus, incentive compensation,
deferred compensation, profit sharing, thrift, retirement, pension, group
insurance or other benefit plan or any employment, severance or consulting
agreement or increase benefits under existing plans and agreements, provided
that nothing in the Agreement shall prevent The Bank of Northern Virginia from
extending any existing employment agreement until no later than the Effective
Date (without AANB's prior written consent); (iii) create or otherwise become
liable with respect to any indebtedness for money borrowed or purchase money
indebtedness except in the ordinary course of business; (iv) amend its
Certificate or Articles of Incorporation or Bylaws except as the parties have
otherwise agreed as to amendment of the Ballston Bylaws with respect to an
exception to mandatory indemnification; (v) issue or contract to issue any
shares of Ballston capital stock or securities exchangeable for or convertible
into capital stock; (vi) purchase any shares of Ballston capital stock (without
AANB's prior written consent); (vii) enter into or assume any material contract
or obligation, except in the ordinary course of business (without AANB's prior
written consent); (viii) other than with respect to the workout of certain
nonperforming assets, waive, release, compromise or assign any right or claim
involving $25,000 or more without compliance with The Bank of Northern Virginia
credit policies; (ix) propose or take any other action designed to make any
representation or warranty of Ballston or The Bank of Northern Virginia
contained in the Agreement untrue; (x) introduce any material new products or
services or change the rate of interest on any deposit instrument to more than
25 basis points higher than the average interest rate of Community Bank of
Northern Virginia, F&M Bank of Northern Virginia, George Mason Bank, Tysons
National Bank, and Virginia Commerce Bank
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for comparable deposit instruments; (xi) make any material change in policies
respecting extensions of credit or loan charge offs; (xii) change in any
material respect reserve requirement policies; (xiii) change securities
portfolio policies in any material respect; (xiv) acquire a policy or enter into
any new agreement, amendment or endorsement or make any changes relating to
insurance coverage, including coverage for its directors and officers, which
would result in an additional payment obligation of $5,000 or more; (xv) propose
or take any action with respect to the closing of any branches; (xvi) amend the
terms of the Ballston Option Agreement or any other stock based compensation
plan for employees or directors; (xvii) amend the terms of any written severance
or employment agreements (without AANB's prior written consent); or (xviii) make
any change in any tax election or material accounting method or system of
internal accounting controls, except as may be appropriate to conform to any
change in regulatory accounting requirements or generally accepted accounting
principles (without AANB's prior written consent). Ballston and The Bank of
Northern Virginia further will consult with AANB regarding all actions described
above. In addition, all loans by Ballston or The Bank of Northern Virginia will
be approved by Fred A. Burroughs or Robert F. Kelleher, within their now
existing loan authority, and (A) loan portfolio management, including management
and work out of nonperforming assets, and credit review and approval procedures,
including notice of any new loans in excess of $25,000 and as to a renewal of a
loan existing as of the date of the Agreement in excess of $50,000 shall be
submitted to a designee of AANB who shall provide comments within one business
day following receipt of documentation thereon. Further, a representative of
AANB shall have a right to attend loan committee meetings, and (B) securities
portfolio and funds management, including management of interest rate risk,
including notice of changes in investments, shall be reviewed by AANB's
representative as shall be designated by AANB from time to time. The Bank of
Northern Virginia has agreed to use its best efforts to maintain current
deposits of certain officers, directors, shareholders and depositors at their
historic levels for as long as possible.
AANB and its subsidiaries will conduct their respective operations
substantially as presently operated and only in the ordinary course of business
consistent with past practice and in general conformity with applicable laws and
regulations, and will use its best efforts to preserve intact their respective
business organizations, keep available the services of their officers and
employees and maintain satisfactory relationships with licensors, suppliers,
distributors, customers, clients and others having business relationships with
them.
Opinion of AANB Financial Advisor
Baxter Fentriss has acted as financial advisor to AANB in connection with
the Holding Company Merger. Baxter Fentriss previously assisted AANB in
identifying prospective merger opportunities. On July 24, 1997, (having given
its oral opinion to the AANB Board on or about June 20, 1997), Baxter Fentriss
delivered to AANB its opinion dated June 23, 1997, that, on the basis of matters
referred to herein, the offer is fair, from a financial point of view, to the
holders of AANB Common Stock. In rendering its opinion Baxter Fentriss consulted
with the management of AANB and Ballston, reviewed the Agreement and Plan of
Reorganization and certain publicly-available information on the parties and
reviewed certain additional materials made available by the management of the
respective banks.
In addition Baxter Fentriss discussed with the management of AANB and
Ballston their respective businesses and outlook. Baxter Fentriss was involved
in the negotiations with Ballston. No limitations were imposed by AANB's Board
of Directors upon Baxter Fentriss with respect to the investigation made or
procedures followed by it in rendering its opinion. The full text of Baxter
Fentriss' written opinion is attached as Appendix C to this Proxy
Statement/Prospectus and should be read in its entirety with respect to the
procedures followed, assumptions made, matters considered and qualifications and
limitations on the review undertaken by Baxter Fentriss in connection therewith.
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Baxter Fentriss' opinion is directed to AANB's Board of Directors and
is directed only to the fairness, from a financial point of view, of the
consideration provided. It does not address AANB's underlying business decision
to effect the proposed Holding Company Merger, nor does it constitute a
recommendation to any AANB Stockholder as to how such stockholder should vote
with respect to the Holding Company Merger at the AANB Meeting or as to any
other matter.
Baxter Fentriss' opinion was one of many factors taken into consideration
by AANB's Board of Directors in making its determination to approve the
Agreement and Holding Company Merger, and the receipt of Baxter Fentriss'
opinion is a condition precedent to AANB's consummating the Holding Company
Merger. The opinion of Baxter Fentriss does not address the relative merits of
the Holding Company Merger as compared to any alternative business strategies
that might exist for AANB or the effect of any other business combination in
which AANB might engage.
Baxter Fentriss, as part of its investment banking business, is continually
engaged in the valuation of financial institutions and their securities in
connection with mergers and acquisitions and valuations for estate, corporate
and other purposes. Baxter Fentriss is a nationally ranked advisor to firms in
the financial services industry on mergers and acquisitions. AANB selected
Baxter Fentriss as its financial advisor because Baxter Fentriss is an
investment banking firm focusing on transactions involving community banks and
thrifts and because of the firm's extensive experience and expertise in
transactions similar to the Holding Company Merger. Baxter Fentriss is not
affiliated with AANB or Ballston.
In connection with rendering its opinion to AANB's Board of Directors,
Baxter Fentriss performed a variety of financial analyses. In conducting its
analyses and arriving at its opinion as expressed herein, Baxter Fentriss
considered such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (i) the historical and
current financial condition and results of operations of Ballston and AANB
including interest income, interest expense, interest sensitivity, noninterest
income, noninterest expense, earnings, book value, returns on assets and equity,
and possible tax consequences resulting from the transaction; (ii) the business
prospects of Ballston and AANB; (iii) the economies of Ballston's and AANB's
respective market areas; and (iv) the nature and terms of certain other merger
transactions that it believed to be relevant. Baxter Fentriss also considered
its assessment of general economic, market, financial and regulatory conditions
and trends, as well as its knowledge of the financial institutions industry, its
experience in connection with similar transactions, its knowledge of securities
valuation generally, and its knowledge of merger transactions in the Washington
DC metropolitan area and throughout the United States.
In connection with rendering its opinion, Baxter Fentriss reviewed (i) the
Agreement; (ii) drafts of this Proxy Statement/Prospectus; (iii) the Annual
Reports to Stockholders, including the audited financial statements of Ballston
for the fiscal years ended December 31, 1994, 1995 and 1996; (iv) the Annual
Reports to Stockholders of AANB for the years ended December 31, 1994, 1995 and
1996; (v) pro-forma combined unaudited condensed balance sheets and statements
of income as of March 31, 1997, and (vi) certain additional financial and
operating information with respect to the business, operations and prospects of
Ballston and AANB as it deemed appropriate. Baxter Fentriss also (a) held
discussions with members of the senior management of Ballston and AANB regarding
the historical and current business operation, financial condition and future
prospects of their respective companies; (b) reviewed the historical market
prices and trading activity for the common stock of AANB and compared them with
those of certain publicly traded companies that it deemed to be relevant;
(c) compared the results of operations of Ballston and AANB with those of
certain banking companies that it deemed to be relevant; (d) analyzed the pro-
forma financial impact
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of the Holding Company Merger on AANB; and (e) conducted such other studies,
analyses, inquiries and examinations as Baxter Fentriss deemed appropriate.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Moreover, the evaluation of fairness, from a financial point of
view, of the consideration provided to the holders of Ballston Stock was to some
extent a subjective one based on the experience and judgment of Baxter Fentriss
and not merely the result of mathematical analysis of financial data.
Accordingly, notwithstanding the separate factors as summarized below, Baxter
Fentriss believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion. The ranges of valuations resulting
from any particular analysis described below should not be taken to be Baxter
Fentriss' view of the actual value of AANB or Ballston.
In performing its analyses, Baxter Fentriss made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of Ballston and AANB. The analyses
performed by Baxter Fentriss are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses. Additionally, analyses relating to the values of businesses do
not purport to be appraisals or to reflect the prices at which businesses may
actually be sold. In rendering its opinion, Baxter Fentriss assumed that, in the
course of obtaining the necessary regulatory approvals for the Holding Company
Merger, no conditions will be imposed that will have a material adverse effect
on the contemplated benefits of the Holding Company Merger, on a pro-forma
basis, to AANB.
The following is a summary of material analyses performed by Baxter
Fentriss in connection with its opinion.
1. Comparative Analysis. Baxter Fentriss compared the price to earnings
multiple, price to book multiple and price to assets multiple of the offer with
15 other comparable merger transactions in the Washington Metropolitan Area. The
average pricing multiples for the comparables were price to earnings of 21.25
times, price to book of 2.15 times and price to assets of 20.05%, compared to
Ballston's multiples of 19.39 times, 1.80 times and 20.10%, respectively. The
comparative multiples included both bank and thrift sales during the last three
years. These sales included Jefferson Bankshares/Bank of Loudon, Mercantile
Bankshares/Fredericksburg National, Crestar Financial/Independent Bank, F&M
National Corp./Bank of Potomac, United Bankshares/First Commercial, F&M National
Corp./Fairfax Bank & Trust, United Bankshares/First Patriot Bankshares, First
Virginia Banks/Farmers National, Financial Trust Corp./Washington County
National, FCNB Corp./Laurel Bancorp, F&M National Corp./Allegiance Banc Corp,
Sandy Spring Bancorp/Annapolis Bankshares, Mercantile Bankshares/Home Bank,
Crestar Financial/Citizens Bancorp, and Mercantile Bankshares/Farmers Bank.
2. Pro Forma Analysis. Baxter Fentriss evaluated the earnings, book value
and market value of common stock of AANB and considered the pro-forma earnings,
book value and potential long range impact on the market value of AANB Common
Stock. Based on this analysis, Baxter Fentriss concluded the transaction should
have a positive long-term impact on the AANB shares.
3. Discounted Cash Flow Analysis. Baxter Fentriss determined a
hypothetical return on investment using management's earnings projections at the
time of negotiations. The analysis indicated a potential return on investment of
13.69%.
Using publicly available information on AANB and Ballston and applying the
capital guidelines of banking regulators, Baxter Fentriss' analysis indicated
that the Holding Company Merger would not seriously dilute the capital and
earnings capacity of AANB and would, therefore, likely not be opposed by the
banking
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regulatory agencies from a capital perspective. Furthermore, Baxter Fentriss
considered the likely market overlap and the Federal Reserve guidelines with
regard to market concentration and did not believe there to be an issue with
regard to possible antitrust concerns.
Baxter Fentriss has relied, without any independent verification, upon the
accuracy and completeness of all financial and other information reviewed.
Baxter Fentriss has assumed that all estimates, including those as to possible
economies of scale, were reasonably prepared by management, and reflect their
best current judgments. Baxter Fentriss did not make an independent appraisal of
the assets or liabilities of either AANB or Ballston, and has not been furnished
such an appraisal.
No company or transaction used as a comparison in the above analysis is
identical to Ballston, AANB or the Holding Company Merger. Accordingly, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies used for comparison in the above analysis.
Baxter Fentriss will be paid (i) a merger fee equal to $80,000, $40,000 at
the execution of the Agreement and $40,000 at closing of the transaction and
(ii) reasonable out-of-pocket expenses for its services. AANB has agreed to
indemnify Baxter Fentriss against certain liabilities, including certain
liabilities under federal securities laws.
Opinion of Ballston Financial Advisor
Ballston retained Danielson Associates, Inc. ("Danielson Associates") to
advise the Ballston Board as to its "fair" sale value and the fairness to its
shareholders of the financial terms of the offer to acquire Ballston. Danielson
Associates is regularly engaged in the valuation of banks, bank holding
companies, and thrifts in the connection with mergers, acquisitions, and other
securities transactions; and has knowledge of, and experience with, Virginia
banking markets and banking organizations operating in those markets. Danielson
Associates was selected by Ballston because of its knowledge of, experience
with, and reputation in the financial services industry.
In such capacity, Danielson Associates reviewed the Agreement with respect
to the pricing and other terms and conditions of the Holding Company Merger, but
the decision as to accepting the offer was ultimately made by the Ballston
Board. Danielson Associates rendered its oral opinion to the Ballston Board,
which it subsequently confirmed in writing, that as of the date of such opinion,
the financial terms of AANB's offer were "fair" to Ballston and its
shareholders. No limitations were imposed by the Ballston Board upon Danielson
Associates with respect to the investigation made or procedures followed by it
in arriving at its opinion.
In arriving at its opinion, Danielson Associates (a) reviewed certain
business and financial information relating to Ballston and AANB, including
annual reports for the fiscal year ended December 31, 1996 and call report data
from 1989 to 1996 including quarterly reports for 1997; (b) discussed the past
and current operations, financial condition and prospects of Ballston with its
senior executives; (c) analyzed the pro forma impact of the merger on AANB's
earnings per share, capitalization, and financial ratios; (d) reviewed the
reported prices and trading activity for the Ballston and the AANB Common Stock
and compared them to similar bank holding companies; (e) reviewed and compared
the financial terms, to the extent publicly
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available, with comparable transactions; (f) reviewed the Agreement and certain
related documents; and (g) considered such other factors as were deemed
appropriate.
Danielson Associates did not obtain any independent appraisal of assets or
liabilities of Ballston or AANB or their respective subsidiaries. Further,
Danielson Associates did not independently verify the information provided by
Ballston or AANB and assumed the accuracy and completeness of all such
information.
In arriving at its opinion, Danielson Associates performed a variety of
financial analyses. Danielson Associates believes that its analyses must be
considered as a whole and that consideration of portions of such analyses and
the factors considered therein, without considering all factors and analyses,
could create an incomplete view of the analyses and the process underlying
Danielson Associates' opinion. The preparation of a fairness opinion is a
complex process involving subjective judgments and is not necessarily
susceptible to partial analysis and summary description.
In its analyses, Danielson Associates made certain assumptions with respect
to industry performance, business and economic conditions, and other matters,
many of which were beyond Ballston's or AANB's control. Any estimates contained
in Danielson Associates' analyses are not necessarily indicative of the future
results of value, which may be significantly more or less favorable than such
estimates. Estimates of values of companies do not purport to be appraisals or
necessarily reflect the prices at which companies or their securities may
actually be sold.
The following is a summary of material analyses considered by Danielson
Associates in connection with its opinion letter.
Pro Forma Holding Company Merger Analyses. Danielson Associates analyzed
the changes in the amount of earnings and book value represented by the receipt
of about $13.9 million for all of the outstanding shares of Ballston Stock, half
of which would be paid in cash and half in AANB's Common Stock. The analysis
evaluated, among other things, possible dilution in earnings and capital per
share for AANB Common Stock.
Comparable Companies Analyses. Danielson Associates compared Ballston's
(a) tangible capital of 10.77% of assets as of December 31, 1996, (b) 1.68% of
assets nonperforming as of December 31, 1996, and (c) net operating income of
1.71% of average assets for the trailing twelve month period ending December 31,
1996, with the medians for selected Virginia banks which Danielson Associates
deemed comparable. These banks included The Bank of Alexandria, Community Bank
of Northern Virginia, The Horizon Bank of Virginia, Rockingham Heritage Bank,
Tysons Financial Corporation, Virginia Commerce, and Virginia Heartland Bank.
Their medians were (a) tangible capital of 8.57% of assets, (b) 1.33% of assets
nonperforming, and (c) net operating income of 1.51% of average assets.
Danielson Associates also compared AANB's (a) stock price as of June 18,
1997 of 14.9 times earnings and 156% of book, (b) dividend yield based on
trailing four quarters as of March 31, 1997 and stock price as of June 18, 1997
of 3.20%, (c) tangible capital as of March 31, 1997 of 11.40% of assets,
(d) nonperforming assets as of March 31, 1997 equal to 1.37% total assets,
(e) return on average assets during the trailing four quarters ended March 31,
1997, of 1.10% and (f) return on average equity during the same period of 10.58%
with the medians for selected banks and bank holding companies that Danielson
Associates deemed to be comparable to AANB. The selected institutions included
Carrollton Bancorp, Central Virginia Bankshares,
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Incorporated, Codorus Valley Bancorp, CommerceBank/Harrisburg N.A., First
Leesport Bancorp, Inc., FNB Financial Services Corporation, Madison Bancshares
Group, Ltd., Marathon Financial Corporation, Peoples Bank, Resource Bank, and
Tysons Financial Corporation. The comparable medians were (a) stock price of
17.0 times earnings and 174% of book, (b) dividend yield of 1.71%, (c) tangible
capital of 9.44% of assets, (d) .72% of assets not performing, (e) return on
average assets of 1.05% and (f) return on average equity of 12.08%. Danielson
Associates also compared other income, expense, and balance sheet information of
such companies with similar information about AANB.
Comparable Transaction Analysis. Danielson Associates compared the
consideration to be paid in the merger to the latest twelve months earnings and
equity capital of Ballston with earnings and capital multiples paid in
acquisitions of MidAtlantic banks in 1996 and 1997 through the opinion date. The
selected transactions included United Bankshares, Inc./First Patriot Bankshares,
Sandy Spring Bancorp, Inc./Annapolis Bancshares Corporation, Fulton
Financial/Peoples Bank of Elkton, Community Bankshares/County Bank of
Chesterfield, Crestar Financial Corporation/Citizens Bancorp, First Virginia
Banks, Inc./Premier Bankshares, F&M National Corp./Allegiance Banc Corp.,
MainStreet BankGroup Inc./First National Bank of Clifton Forge, Mercantile
Bankshares Corporation/Home Bank, Union/King George State Bank, Mercantile
Bankshares Corporation/Farmers Bank of Mardela Springs, Premier Bankshares
Corp./Big Stone Gap B&T Co. and MainStreet BankGroup Incorporated/Hanover Bank.
At the time Danielson Associates made its analysis, the consideration to be paid
in the Holding Company Merger was 180% of Ballston's March 31, 1997 book value
and 20.2 times Ballston's earnings for the trailing four quarters as of
March 31, 1997. This compares to median multiples of 211% of book value and 18.9
times earnings for the comparable acquisitions.
The transaction price was also compared to the prices paid for nineteen
sales involving East Coast banks that had opened in 1985 or later. The median
comparable deal prices in these transaction were 208% of book and 18.6 times
earnings.
Other Analysis. In addition to performing the analyses summarized above,
Danielson Associates also considered the general market for bank and thrift
mergers, the historical financial performance of Ballston and AANB, the deposit
market shares of both banks, and the general economic conditions and prospects
of those banks.
No company or transaction used in this composite analysis is identical to
Ballston and AANB. Accordingly, an analysis of the results of the foregoing is
not mathematical; rather it involved complex considerations and judgements
concerning differences in financial and operating characteristics of the
companies and other factors that could affect the public trading values of the
company or companies to which they are being compared.
The summary set forth above covers all material analyses performed by
Danielson Associates but does not purport to be a complete description of the
analyses and procedures performed by Danielson Associates in the course of
arriving at its opinions. In payment for its services as the financial advisor
to Ballston, Danielson Associates was paid the fee of $15,000.
The full text of the opinion of Danielson Associates dated as of June 20,
1997, which sets forth assumptions made and matters considered, is attached
hereto as Appendix D to this Proxy Statement/Prospectus. Ballston Stockholders
are urged to read this opinion in its entirety. Danielson Associates' opinion is
directed only to the consideration to be received by Ballston Stockholders in
the Holding Company Merger and does not constitute a recommendation to any
Ballston Stockholder as to how such stockholder should vote at the Ballston
Meeting.
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Conditions to the Holding Company Merger
The Holding Company Merger will occur only if approved by the affirmative
vote of the holders of a majority of the vote attributable to outstanding shares
of the Ballston Stock, voting together as a single class, and only if the
Agreement and Holding Company Merger are ratified and the Issuance is approved
by the affirmative vote of the holders of a majority of the votes cast by AANB
Stockholders at the AANB Meeting.
The Holding Company Merger is also subject to certain other conditions,
unless waived, to the extent waiver is permitted by the Agreement. Such
conditions include (i) the effectiveness of the Registration Statement of which
this Proxy Statement/Prospectus is a part and the absence of a stop order
suspending effectiveness or threat thereof; and (ii) the receipt of all
necessary regulatory approvals, including any required approval of the Federal
Reserve Board, the OCC and any other regulatory approval.
The obligations of AANB to consummate the Holding Company Merger are
subject to the satisfaction of certain conditions prior to the Effective Date,
including the following: (a) the performance by Ballston and The Bank of
Northern Virginia, in all respects, of all of their respective obligations
required to be performed under the Agreement and the continued accuracy, as of
the Effective Date, of certain representations and warranties made by Ballston
and The Bank of Northern Virginia in the Agreement; (b) the receipt of
commitments and undertakings from certain Stockholders of Ballston to the effect
that they will abide by certain restrictions with respect to the disposition of
the shares of AANB Common Stock to be received by them pursuant to the Holding
Company Merger; (c) the receipt of an opinion from Duane, Morris & Heckscher
LLP, counsel to Ballston and The Bank of Northern Virginia, as to certain
corporate and legal matters; (d) AANB's receipt of an opinion from Hazel &
Thomas, P.C. to the effect that the Holding Company Merger qualifies as a
"reorganization" under Section 368 of the Code and as to certain federal income
tax consequences of the Holding Company Merger; (e) the Nasdaq Stock Market
shall have approved the AANB Stock to be issued in the Holding Company Merger
for listing upon notice of issuance.
The obligations of Ballston and The Bank of Northern Virginia to consummate
the Holding Company Merger are subject to the satisfaction of certain conditions
prior to the Effective Date, including the following: (a) the performance by
AANB and Subsidiary, in all respects, of all of their respective obligations
required to be performed under the Agreement; (b) the continued accuracy, as of
the Effective Date, of certain representations and warranties made by AANB and
Subsidiary in the Agreement; (c) receipt of an opinion from Hazel & Thomas,
P.C., counsel to AANB and The Adams National Bank, as to certain corporate and
legal matters; and (d) receipt of an opinion from Duane Morris & Heckscher LLP
to the effect that the Holding Company Merger qualifies as a "reorganization"
under Section 368 of the Code and as to certain material federal income tax
consequences of the Holding Company Merger.
Any of the conditions summarized above may be waived by the appropriate
parties in their discretion. While such an occurrence is not contemplated, in
the event that the condition relating to the delivery of the Duane Morris &
Heckscher LLP tax opinion will be waived by AANB and Ballston, and the material
federal income tax consequences of the Holding Company Merger are materially
different to the stockholders of AANB or Ballston from that described
hereinbelow under the heading "Certain Material Federal Income Tax
Consequences," such stockholders would be resolicited prior to proceeding to
Closing.
Support Agreements and Undertakings
The directors of Ballston have signed an agreement to support and vote the
shares of Ballston Stock owned by or controlled by them in favor of approval and
adoption of the Agreement and the Holding Company Merger. Such persons have also
agreed to abide by all limitations imposed by Rule 145 of the General Rules and
Regulations under the Securities Act with respect to the sale or other
disposition of the shares of AANB Common Stock to be received by them pursuant
to the Holding Company Merger.
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Certain Material Federal Income Tax Consequences
The obligation of AANB and the obligation of Ballston to consummate the
Holding Company Merger are subject to the receipt by each of an opinion from its
counsel (in the case of Ballston, Duane, Morris & Heckscher LLP, and, in the
case of AANB, Hazel & Thomas, P.C.) with respect to the federal income tax
consequences of the Holding Company Merger.
The following discussions are based upon the opinions of Duane, Morris &
Heckscher LLP, counsel for Ballston and The Bank of Northern Virginia and of
Hazel & Thomas, P.C., Counsel for AANB and Subsidiary. The discussions are based
upon the Code, Treasury Regulations thereunder and administrative rulings and
court decisions as of the date hereof. All of the foregoing are subject to
change, and any such change could affect the continuing validity of the
discussion. The discussions do not address the tax consequences that may be
relevant to a particular stockholder subject to special treatment under certain
federal income tax laws, such as dealers in securities, banks, insurance
companies, tax-exempt organizations, non-United States persons and Stockholders
who acquired Ballston Stock pursuant to the exercise of options or otherwise as
compensation, nor any consequences arising under the laws of any state, locality
or foreign jurisdiction. Holders of Ballston Stock are urged to consult their
own tax advisors as to the particular tax consequences of the Holding Company
Merger to them, including the effect of state and local taxes.
Ballston Tax Opinion. It is a condition to closing that Ballston receive an
opinion of Duane, Morris & Heckscher LLP to the effect that for federal income
tax purposes: (i) the Holding Company Merger will qualify as a "reorganization"
under Section 368(a) of the Code; (ii) no gain or loss will be recognized by a
Ballston Stockholder upon the exchange of Ballston Stock solely for AANB Common
Stock; (iii) any gain realized by a Ballston Stockholder who receives AANB
Common Stock and cash (excluding any cash received in lieu of a fractional share
of AANB Common Stock) in exchange for Ballston Stock pursuant to the Holding
Company Merger will be recognized in an amount not in excess of the amount of
the cash received (excluding any cash received in lieu of a fractional share of
AANB Common Stock), that gain will be capital gain unless the receipt of the
cash has the effect of the distribution of a dividend, and any loss on the
exchange will not be recognized; (iv) the basis of the AANB Common Stock
received by a Ballston Stockholder pursuant to the Holding Company Merger
(including any fractional share of AANB Common Stock to which that shareholder
may be entitled) will be the same as the basis of the Ballston Stock exchanged
therefor, decreased by the amount of cash received, if any (excluding any cash
received in lieu of a fractional share of AANB Common Stock), and increased by
the amount of gain, if any, recognized on the exchange; (v) the holding period
of the AANB Common Stock received by a Ballston Stockholder pursuant to the
Holding Company Merger (including any fractional share of AANB Common Stock to
which that shareholder may be entitled) will include the holding period of the
Ballston Stock exchanged therefor, provided the Ballston Stock is held as a
capital asset by the shareholder at the Effective Time of the Holding Company
Merger; (vi) a Ballston Stockholder who receives cash in lieu of a fractional
share of AANB Common Stock will recognize gain or loss equal to the difference
between the cash received and the shareholder's basis in that fractional share,
and that gain or loss will be capital gain or loss if the fractional share would
have been a capital asset in the hands of the shareholder; (vii) cash received
by a Ballston Stockholder who has elected pursuant to a Cash Election, as
defined in the Agreement, to receive only cash and has received only cash will
be treated as a distribution in redemption of the Ballston Stock held by that
shareholder, subject to the provisions and limitations of Section 302 of the
Code; and (viii) cash received by a Ballston Stockholder who has perfected
Dissenters' Rights as to his or her Ballston Stock will be treated as a
distribution in redemption of such shares, subject to the provisions and
limitations of Section 302 of the Code. The opinion may be based on assumptions,
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representations made by officers of AANB and Ballston to Duane, Morris &
Heckscher LLP and may contain qualifications appropriate to its subject matter.
The discussion below summarizes certain conclusions reached in the opinion
of Duane, Morris & Heckscher LLP and contains certain additional information. No
rulings have been requested from the Internal Revenue Service as to the federal
income tax consequences of the Holding Company Merger. In addition, the opinion
of counsel is not binding on the Internal Revenue Service, and there can be no
assurance that the Internal Revenue Service will not take a position contrary to
one or more positions reflected in such opinion or that such positions will be
upheld by the courts if challenged by the Internal Revenue Service.
Holders of Ballston Stock - General. As discussed below, the federal income
tax consequences of the Holding Company Merger to a Ballston Stockholder depend
on whether the stockholder receives cash or AANB Common Stock or some
combination thereof for his or her Ballston Stock and may further depend on
whether all Ballston Stock actually and constructively owned by him or her are
exchanged only for cash, only for AANB Common Stock, or for some combination
thereof. For purposes of determining whether all Ballston Stock actually and
constructively owned by a Ballston Stockholder are so exchanged, the stockholder
must take into account not only the Ballston Stock owned by the stockholder
(including shares owned by him or her and held on his or her behalf by brokerage
firms, banks or other agents), but also Ballston Stock the stockholder is
treated as owning for federal income tax purposes, such as those owned by a
related individual or entity as described below under "Constructive Ownership."
Only AANB Common Stock Received. A Ballston Stockholder who receives only
shares of AANB Common Stock (and cash in lieu of a fractional share of AANB
Common Stock) on the conversion of his or her Ballston Stock will recognize no
gain or loss (except as discussed below in connection with any cash received in
lieu of a fractional share of AANB Common Stock). The tax basis of the shares of
AANB Common Stock received upon the conversion will be the same as the tax basis
of the Ballston Stock converted in the Holding Company Merger (except as reduced
by the portion of the basis attributable to any fractional share redeemed for
cash). If the Ballston Stock was held as a capital asset, the holding period of
the shares of AANB Common Stock received will include the holding period of the
Ballston Stock converted. If a holder of Ballston Stock receives only shares of
AANB Common Stock and cash in lieu of a fractional share of AANB Common Stock in
the Holding Company Merger, such cash amounts will be treated as received in
exchange for the fractional share and not as a dividend. Gain or loss recognized
as a result of that exchange will be equal to the cash amount received for the
fractional share reduced by the proportion of the holder's tax basis in Ballston
Stock converted and allocable to the fractional share of the AANB Common Stock
and will be capital gain or loss if the fractional share would have been a
capital asset in the hands of the Ballston Stockholder.
Only Cash Received. Except as described below, a Ballston Stockholder who
receives in the Holding Company Merger solely cash on the conversion of Ballston
Stock or who exercises Dissenters' Rights and receives solely cash will
recognize gain or loss measured by the difference between the amount of cash
received and the tax basis of Ballston Stock converted.
If, after the receipt of cash, a holder of Ballston Stock has completely
terminated his or her actual and constructive interest (see below for a
discussion of constructive ownership) in both Ballston and AANB (and any
affiliate of Ballston and AANB) within the meaning of Section 302(b)(3) of the
Code, then any gain or loss recognized on the conversion of Ballston Stock into
cash will be treated as capital gain or loss if the Ballston Stock was held as a
capital asset. If a Ballston Stockholder does not completely terminate his or
her
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interest in Ballston or AANB within the meaning of Section 302(b)(3), the cash
received on the conversion may be treated as ordinary income from a dividend,
unless the holder qualifies for capital gain or loss treatment under the "80%
test" (described below) of Section 302(b)(2) of the Code, or unless other
exceptions from dividend treatment contained in Section 302 of the Code are
available, based upon the facts and circumstances of the particular case.
Under the 80% test of Section 302(b)(2), gain recognized by a Ballston
Stockholder on conversion of his or her Ballston Stock in the Holding Company
Merger will not be treated as ordinary income from a dividend if, immediately
after the Holding Company Merger, the stockholder's percentage ownership
(determined in accordance with the constructive ownership rules discussed below)
of shares of AANB Common Stock outstanding immediately after the Holding Company
Merger is less than 80% of such stockholder's percentage ownership of the total
number of shares of AANB Common Stock which would have been outstanding if all
holders of Ballston Stock had received solely AANB Common Stock in the Holding
Company Merger. Gain or loss recognized by a holder of Ballston Stock who
satisfies the 80% test will be capital gain or loss if the Ballston Stock was
held as a capital asset.
Shares of AANB Common Stock and Cash Received. A Ballston Stockholder who,
as a result of prorations or allocations resulting from limitations on cash (see
"Proposed Holding Company Merger of Ballston and Subsidiary - Manner of
Exchange") or as a result of a partial Cash Election receives both shares of
AANB Common Stock and cash on conversion of Ballston Stock he or she owns, will
not recognize loss (except in connection with any cash received in lieu of a
fractional share of AANB Common Stock). However, under Section 356(a)(1) of the
Code, the stockholder will recognize gain (measured by the sum of the fair
market value of the shares of AANB Common Stock received plus the amount of any
cash received minus the tax basis of Ballston Stock converted), if any, but only
to the extent of the amount of any cash received.
Any recognized gain will be treated either as capital gain (if the Ballston
Stock was held as a capital asset) or as a dividend. Under Section 356(a)(2) of
the Code and Internal Revenue Service guidelines, the standards of Section 302,
particularly the 80% test described above and the constructive ownership rules
discussed below, apply for purposes of determining the tax treatment of such
gain.
A Ballston Stockholder who makes a Cash Election but who receives both cash
and shares of AANB Common Stock due to the proration or allocation provisions
being implemented (see "Proposed Holding Company Merger of Ballston and
Subsidiary - Manner of Exchange") or a Ballston Stockholder who makes a partial
Cash Election and receives both cash and shares of AANB Common Stock will not
have undergone a complete termination of interest under Section 302(b)(3) of the
Code. Additionally, a holder of Ballston Stock who fails to make a joint Cash
Election covering all Ballston Stock considered to be constructively owned (as
discussed below) may receive both shares of AANB Common Stock and cash with
respect to Ballston Stock he or she owns both actually and constructively and,
consequently, will not have undergone a complete termination of interest under
Section 302(b)(3) of the Code. However, if such Ballston Stockholders qualify
under the 80% test described above, they will avoid dividend treatment for the
cash received. In addition, even if a holder of Ballston Stock fails to meet the
80% test described above, other exceptions from dividend treatment contained in
Section 302 of the Code may be available depending on the facts and
circumstances of the particular case.
The tax basis of the shares of AANB Common Stock received will be the same
as the tax basis of the Ballston Stock converted, decreased by the basis of any
fractional share interest for which cash is received
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in the Holding Company Merger, and further decreased by the amount of cash
received (other than cash received for a fractional share interest), and
increased by the amount of gain recognized on the conversion (including any
portion that is treated as a dividend). The holding period of the shares of AANB
Common Stock received will include the holding period of the Ballston Stock
converted, if the Ballston Stock was held as a capital asset.
Constructive Ownership. The rules of Section 318 of the Code apply for
purposes of determining constructive ownership of Ballston Stock or AANB Common
Stock. Under Section 318 of the Code, a shareholder is, for example, considered
to own shares that are directly or indirectly owned by certain members of his or
her family or by certain related entities and is also considered to own shares
with respect to which he or she holds exercisable options. The constructive
ownership rules are important in determining whether the tests contained in
Section 302 of the Code are met regarding whether amounts received by a Ballston
Stockholder as a result of the Holding Company Merger qualify for capital gain
or dividend treatment.
EACH BALLSTON STOCKHOLDER SHOULD CONSULT HIS OWN TAX ADVISOR WITH RESPECT
TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
AANB Tax Opinion. The discussion below summarizes certain conclusions
reached in the opinion of Hazel & Thomas, P.C. No rulings have been requested
from the Internal Revenue Service as to the federal income tax consequences of
the Holding Company Merger. In addition, the opinion of counsel is not binding
on the Internal Revenue Service, and there can be no assurance that the Internal
Revenue Service will not take a position contrary to one or more positions
reflected in such opinion or that such positions will be upheld by the courts if
challenged by the Internal Revenue Service.
It is a condition to closing that AANB receive an opinion of Hazel & Thomas
P.C. to the effect that, for federal income tax purposes, the Holding Company
Merger will qualify as a "reorganization" under Section 368(a) of the Code, and
no taxable gain will be recognized by AANB, Subsidiary or Ballston in the
Holding Company Merger (i) upon the transfer of Ballston's assets to Subsidiary
in exchange for AANB Common Stock and cash and the assumption of Ballston's
liabilities or (ii) upon distribution of AANB Common Stock and cash to the
Ballston Stockholders. The opinion may be based on assumptions, representations
made by officers of AANB and Ballston to Hazel & Thomas, P.C. and may contain
qualifications appropriate to its subject matter.
Accounting Treatment
It is expected that the Holding Company Merger will be treated by AANB as a
purchase for accounting purposes and all of the assets and liabilities of
Ballston will be recorded in AANB's consolidated financial statements at their
fair value at the Effective Date. The amount, if any, by which the purchase
price paid by AANB exceeds the fair value of the assets acquired through the
Holding Company Merger will be recorded as goodwill on the books of AANB. AANB's
consolidated financial statements will include the operations of Ballston after
the Effective Date. The unaudited pro forma financial information included in
the Proxy Statement/Prospectus reflects the Holding Company Merger using the
purchase method of accounting. See "Summary -- Comparative Per Share Data" and
"Pro Forma Combined Financial Statements (unaudited)."
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Regulatory Approvals
Office of the Comptroller of the Currency. The Bank Merger is subject to
prior approval of the Office of the Comptroller of the Currency ("OCC") as an
interstate bank-to-bank merger under Section 44 of the Riegle-Neal Interstate
Banking and Branch Efficiency Act of 1994 (the "Interstate Act") and under the
Bank Merger Act, and may not be consummated before the 30th day (subject to
reduction to 15 days if the OCC has not received any adverse comments from the
United States Attorney General (the "USAG") relating to competitive factors of
the Bank Merger, and the USAG consents to a shorter waiting period) following
such approval. The OCC cannot approve the Bank Merger if it would result in a
monopoly, or it would be in furtherance of any combination or conspiracy to
monopolize or to attempt to monopolize the business of banking in any part of
the United States. Nor may the OCC approve the Bank Merger if the effect of the
Bank Merger in any section of the country may be substantially to lessen
competition, or to tend to create a monopoly, or in any other manner would be in
restraint of trade, unless the OCC finds that the anti-competitive effects of
the proposed Bank Merger are clearly outweighed in the public interest by the
probable effect of the Bank Merger in meeting the convenience and needs of the
community to be served. Nor may the OCC approve the Bank Merger if the resulting
bank upon consummation of the Bank Merger would control more than 10% of the
total amount of deposits of insured depository institutions in the United
States. In considering approval, the OCC must also take into consideration the
financial and managerial resources and future prospects of the existing and
proposed institutions, and the convenience and needs of the community to be
served.
The Bank Merger Act provides for the publication of notice and public
comment on the application for the OCC's approval of the Bank Merger and
authorizes the OCC to permit interested parties to intervene in the proceedings.
If an interested party is permitted to intervene, such intervention could delay
the regulatory approvals required for consummation of the Bank Merger and the
Holding Company Merger.
Federal Reserve Board. The Bank Holding Company Act of 1956, as amended
(the "BHC Act") also allows the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") to require its approval of the Holding Company
Merger. However, in a transaction such as the Holding Company Merger, Federal
Reserve Board regulations waive the requirement of Federal Reserve Board
approval as long as written notice of the Holding Company Merger, a description
of the Holding Company Merger, and a copy of the application to the OCC for
approval is provided to the Federal Reserve Board and it does not within the 10
day period prescribed in such regulations require application for Federal
Reserve Board approval.
Virginia Bureau of Financial Institutions. In addition, the Holding Company
Merger is subject to the approval or other action of the Bureau of Financial
Institutions ("BFI") of the State Corporation Commission of the Commonwealth of
Virginia (the "SCC").
The Interstate Act also requires compliance with any filing requirements of
Virginia. Virginia law requires that the SCC be provided with a copy of the
application to the OCC for approval, that the statutory provisions concerning
mergers of a Virginia corporation be complied with, and that the resulting bank
qualifies as a foreign corporation in Virginia.
Status of Regulatory Approvals and Other Information. AANB, Ballston and
The Bank of Northern Virginia have filed (or will file) all applications and
have taken (or will take) other appropriate action with respect to any requisite
approvals or other action of governmental authorities. By letter dated August
25, 1997, AANB has been notified by the Federal Reserve Board that it does not
object to consummation of the acquisition without the filing of a formal
application. In addition, on October 2, 1997, the BFI entered its Order
Approving the Acquisition and by letter of October 9, 1997, the BFI confirmed
that it had no objection to the Bank Merger. By letter of October 10, 1997, the
OCC approved the Bank Merger.
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The Agreement provides that the obligation of each of AANB and Ballston to
consummate the Holding Company Merger is conditioned upon the receipt of all
requisite regulatory approvals, including the approval of the Federal Reserve
Board. There can be no assurance that the Federal Reserve Board, the OCC, the
BFI or any other governmental agency will approve or take any other required
action with respect to the Holding Company Merger and, if approvals are received
or action is taken, there can be no assurance as to the date(s) thereof, that
such approvals or actions will not be conditioned upon matters that would cause
the parties to abandon the Holding Company Merger or that no action will be
brought challenging such approvals or actions, including a challenge by the
USAG, or if such a challenge is made, the result thereof.
AANB and Ballston are not aware of any governmental approvals or actions
that may be required for consummation of the Holding Company Merger other than
as described above. Should any other approval or action be required, it would be
sought. There can be no assurance, however, that any such approval or action, if
needed, could be obtained and would not be conditioned in a manner that would
cause the parties to abandon the Holding Company Merger.
See "--Effective Date of the Holding Company Merger; Termination" and
"--Conditions to the Holding Company Merger."
Federal Securities Law Consequences
All AANB Common Stock issued in connection with the Holding Company Merger
will be freely transferable, except that any AANB Common Stock received by
persons who are deemed to be "affiliates" (as such term is defined under the
Securities Act) of Ballston or AANB prior to the Holding Company Merger may be
sold by them only in transactions permitted by the resale provisions of Rule 145
under the Securities Act with respect to persons who are or become affiliates of
Ballston, or Rule 144 under the Securities Act with respect to persons who are
or become affiliates of AANB, or as otherwise permitted under the Securities
Act. Persons who may be deemed to be affiliates of Ballston or AANB generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal stockholders of such party.
Affiliates may not sell their shares of AANB Common Stock acquired in
connection with the Holding Company Merger, except pursuant to an effective
registration under the Securities Act covering such shares or in compliance with
Rule 145 (or Rule 144 under the Securities Act in the case of persons who become
affiliated with AANB) or another applicable exemption from the registration
requirements of the Securities Act. In general, under Rule 145, for one year
following the Effective Date an affiliate (together with certain related
persons) would be entitled to sell shares of AANB Common Stock acquired in
connection with the Holding Company Merger only through unsolicited "broker
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 144. Additionally, the number of shares to be sold by an
affiliate (together with certain related persons and certain persons acting in
concert) within any three-month period for purposes of Rule 145 may not exceed
the greater of 1% of the outstanding shares of AANB Common Stock or the average
weekly trading volume of such stock during the four calendar weeks preceding
such sale. Rule 145 would only remain available, however, to affiliates if AANB
remained current in its informational filings with the Commission under the
Exchange Act. One year after the Effective Date, an affiliate would be able to
sell such AANB Common Stock without such manner of sale or volume limitations
provided that AANB was current with its Exchange Act informational filings and
such affiliate was not then an affiliate of AANB. Two years after the Effective
Date, an affiliate would be able to sell such shares of
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AANB Common Stock without any restrictions so long as such affiliate had not
been an affiliate of AANB for at least three months prior thereto.
Certain Material Differences in Rights of Stockholders of Ballston and AANB
AANB is incorporated in the State of Delaware and the rights of AANB
Stockholders are governed by Delaware law and AANB's Certificate of
Incorporation and By-Laws. Ballston is incorporated in the State of Delaware and
the rights of Ballston Stockholders currently are governed by Delaware law and
Ballston's Certificate of Incorporation and By-Laws. Upon consummation of the
Holding Company Merger, certain of Ballston Stockholders who receive Stock
Consideration will become AANB Stockholders and their rights will be governed by
Delaware law and AANB's Certificate of Incorporation and By-Laws. The material
differences between the rights of AANB Stockholders and Ballston Stockholders
are summarized below.
Special Meetings. AANB's Bylaws permit special meetings to be called by the
Board of Directors, the Chairman of the Board or upon the request in writing of
the holders of at least one-fifth of the shares of the corporation's issued and
outstanding stock and entitled to vote.
Ballston's Bylaws provide that a special meeting may be called at any time
by the Board of Directors, the Chairman of the Board of Directors, or, if there
is none, by the President, or by the holders of not less than one-half of all
the shares entitled to vote at such meeting.
Directors. The AANB Bylaws provide that each director shall, during the
full term of his directorship, own capital stock of AANB equal to or greater
than one of the following: (i) $1,000 of aggregate par value; (ii) $1,000 of
aggregate fair market value; or (iii) $1,000 of aggregate shareholders' equity.
In addition, no person shall be eligible to become a director after he shall
have attained the age of 72. No similar provisions are contained in the Ballston
Bylaws.
Indemnification. The Articles and Bylaws of AANB and Ballston generally
authorize indemnification to the fullest extent permitted by the Delaware
General Corporation Law; however, the Delaware General Corporation Law provides
that no indemnification shall be made for expenses in defense or in connection
with settlement of an action as to which an indemnified person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which the action or suit was brought shall
determine upon application that the person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. The Ballston
Bylaws narrow the exception to instances in which the director or officer
seeking indemnification has been adjudged to be liable for negligence or
misconduct in the performance of his or her duty to the corporation.
Rights Agreement. Pursuant to a Rights Agreement dated as of April 12, 1994
and amended as of April 20, 1995 (the "Rights Agreement"), Stockholders of
record of AANB on April 25, 1994 received a dividend consisting of a common
share purchase right which entitles each holder to purchase from AANB one share
of Common Stock at a price of $20.11 per share, subject to adjustment, under
certain circumstances (a "Right"). The Rights Agreement also provides for the
issuance of one Right with respect to each share of AANB Common Stock that shall
become outstanding between April 25, 1994 and the earliest of the Distribution
Date (defined below), the date the Rights are redeemed by AANB in accordance
with the Rights Agreement, and the Final Expiration Date (defined below). See
"Description of AANB Common Stock--Common Stock Purchase Rights; Shareholder
Rights Plan."
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Rights of Dissenting Stockholders
Under Section 262 of the Delaware General Corporation Law (the "DGCL"), a
copy of which is included as Appendix B to this Proxy Statement/Prospectus, each
holder of Ballston Stock will be entitled to dissent and demand an appraisal of
the "fair value" of Ballston Stock held thereby if, prior to the vote at the
Ballston Meeting, such Ballston Stockholder files with Ballston a written demand
for appraisal. Within ten days after the Effective Date of the Holding Company
Merger, Subsidiary shall notify each Ballston Stockholder exercising appraisal
rights in compliance with Section 262 of the DGCL of the date that the Holding
Company Merger has become effective. At any time within 60 days after the
Effective Date, any stockholder shall have the right to withdraw demand for
appraisal and to accept the terms offered upon the Holding Company Merger. A
written demand for appraisal should be sent to Ballston at 1667 K Street, N.W.,
Suite 700, Washington, D.C. 20006, Attn: Brian D. Alprin, Secretary. Any
Ballston Stockholder who fails to comply with the requirements described above
will be bound by the terms of the Holding Company Merger.
Within 120 days after the Effective Date, Subsidiary or any Ballston
Stockholder who has perfected appraisal rights in accordance with Section 262 of
the DGCL, may file a petition with the Delaware Court of Chancery (the "Court")
demanding a determination of the value of the stock of all such Stockholders. If
no petition is filed within such time, the dissenting Stockholders' appraisal
rights shall terminate. At the hearing on such petition, the Court shall
determine the Ballston Stockholders who have complied with Section 262 and who
have become entitled to appraisal rights. The Court may require that the
Stockholders submit their certificates of stock, if any, to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings, and
if any stockholder fails to comply with such direction, the Court may dismiss
the proceedings as to such stockholder.
After determining the Stockholders entitled to an appraisal, the Court
shall appraise the shares as to their fair value. In determining their fair
value, the Court shall take into account all relevant factors exclusive of any
element of value arising from the accomplishment or expectation of the Holding
Company Merger. The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by Subsidiary to the Stockholders
entitled to such payment. The costs of the proceedings may be determined by the
Court and assessed against either Subsidiary or the Stockholders, or both. The
value determined by the Court may be the same as, more than, or less than the
Exchange Price to be paid pursuant to the Agreement.
The foregoing summary of the rights of Stockholders requesting appraisal
contains material information relating to the exercise of appraisal rights but
does not purport to be a complete statement of the procedures to be followed by
Ballston Stockholders desiring to exercise their rights requesting appraisal.
The preservation and exercise of appraisal rights are conditioned on strict
adherence to the applicable provisions of Section 262 of the DGCL. Each Ballston
Stockholder desiring to exercise appraisal rights should refer to Section 262 of
the DGCL for a complete statement of the stockholder's rights and the steps
which must be followed in connection with the exercise of those rights.
Holders of shares of AANB Common Stock will not be entitled to assert
dissenters' or appraisal rights in connection with the Holding Company Merger or
their vote in connection with the Issuance.
For further information relating to the exercise of appraisal rights, see
Appendix B to this Proxy Statement/Prospectus.
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DESCRIPTION OF ABIGAIL ADAMS NATIONAL BANCORP, INC.
General
Abigail Adams National Bancorp, Inc. ("AANB") is a bank holding company
which conducts business through its wholly-owned bank subsidiary, The Adams
National Bank. The Adams National Bank serves the nation's capital through four
full-service offices located in Washington. The Adams National Bank's newest
branch opened in October of 1996 and a fifth branch is expected to open in the
fourth quarter of 1997. At December 31, 1996, AANB had consolidated assets of
$112,162,000, deposits of $95,155,000 stockholders' equity of $13,140,000 and
reported net income of $1,127,000 for the fiscal year ended December 31, 1996.
At June 30, 1997, AANB had consolidated assets of $120,859,000, deposits of
$103,562,000 and stockholders' equity of $13,329,000, and reported net income of
$486,000 for the six months ended June 30, 1997. The Adams National Bank exceeds
all regulatory capital requirements. See "--Supervision and Regulation."
Founded in 1977, The Adams National Bank was the first federally-chartered
bank in the United States to be owned and managed by women. Originally named The
Women's National Bank, the bank changed its name in 1986 to alter the perception
that The Adams National Bank existed exclusively to serve the needs of women.
Based on assets and deposits, The Adams National Bank is the largest women-
controlled bank in the United States.
Market Area
The Adams National Bank draws most of its customer deposits and conducts
most of its lending activities from and within the Washington metropolitan
region, including suburban Virginia and Maryland. The nation's capital attracts
a significant number of businesses of all sizes, professional corporations and
national nonprofit organizations. The Adams National Bank actively solicits
banking relationships with these firms and organizations, as well as their
professional staff, and with the significant population of high net worth
individuals who live and work in the region.
AANB seeks to identify acquisitions in neighboring markets in Virginia and
Maryland. These areas are experiencing accelerating commercial growth,
especially in the areas of women owned and high technology businesses.
Management expects that a strategic acquisition in such markets would contribute
to the overall growth of AANB.
Services of The Adams National Bank
The Adams National Bank offers a full range of banking services to its
customers. While providing financial services to a wide-ranging customer base,
including high net worth individuals, Fortune 100 corporations, small to medium-
sized businesses and nonprofit and other organizations, The Adams National Bank
remains committed to assisting women and minority business owners with access to
credit.
The following types of services are offered by The Adams National Bank:
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Commercial Services
. Loans, including working capital loans and lines of credit, a wide
range of demand, term and time loans, and loans for real estate land
acquisition, development and construction, equipment, inventory and
accounts receivable financing.
. Cash management, including automatic overnight investment of funds.
. Collateralized repurchase agreements.
. Investments, including certificates of deposit.
. Direct deposit of payroll.
. Letters of credit.
. ExecuBanc Business Banking, a computer accessed banking service.
Retail Services
. Transaction accounts, including checking and NOW accounts.
. Money market accounts.
. Overdraft checking.
. Certificates of deposit.
. Individual retirement accounts and Keogh accounts.
. Installment and home equity loans.
. Residential construction and first mortgage loans.
. Direct deposit.
. 24-hour automated teller machines ("ATMs") with access to the MOST(R)
and CIRRUS(R) systems.
. 24-hour telephone banking.
. VISA(R) credit card services.
. Traveler's checks, money orders, cashier's checks and safe deposit
boxes.
. Custodial services.
Commercial and consumer loans are made to corporations, partnerships and
individuals, primarily on a secured basis. Commercial lending focuses on
business, capital, renovation, inventory and real estate loans. Consumer lending
focuses on automobile, home equity and personal loans made on a direct, secured
basis. Real estate loans are originated for both commercial and consumer
purposes.
As technological developments continue to become available to all banks,
large and small, The Adams National Bank has also enhanced its delivery systems
and reached beyond its branch network to access
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customers on a cost-effective basis through technological means. The Adams
National Bank has developed its own electronic site (home page) on the Internet
(World Wide Web). Management believes that use of electronic media such as the
Internet will allow The Adams National Bank to further enhance its image in its
target market and identify future prospects for electronic and home banking
services. In 1997, it will offer customers the ability to pay certain bills by
personal computer. The Adams National Bank also offers its retail customers 24-
hour banking by means of an interactive voice response system activated by a
touch tone phone which enables customers to access account information and
transfer funds. The Adams National Bank also maintains an integrated PC-based
server network system that provides immediate interaction among all operating
functions of The Adams National Bank, thereby enhancing internal communications
and customer service.
The Adams National Bank contracts with an outside firm to provide data
processing and back room operations. The state-of-the-art resources provided by
this firm, in conjunction with The Adams National Bank's internal data
management system, enable The Adams National Bank to provide a high level of
customer service while effectively managing its growth. The Adams National Bank
has reviewed the data processing systems provided by its outside data processor
as well as the computer applications which are used in-house and has determined
that The Adams National Bank's data processing will not be materially impacted
by any date-sensitive calculations related to the year 2000. The Adams National
Bank's contract with its outside data processor is scheduled to expire in the
second quarter of 1998. While The Adams National Bank is presently considering
renewal options as well as other state-of-the-art data processing alternatives,
The Adams National Bank will only consider data processing systems which can
appropriately recognize this date-sensitive information.
Strategy
AANB's strategy is to provide a high level of personalized service and
quality products to customers within the community it serves, through its
experienced staff. In addition, AANB seeks to diversify both its market area and
asset base while increasing profitability through acquisitions and expansion.
Management believes that it possesses substantial expertise in lending to groups
traditionally under served by the banking industry and that these capabilities
could be leveraged by making strategic acquisitions in the neighboring markets
of Maryland and Virginia.
Although AANB continues to explore acquisition opportunities in Washington
and suburban Maryland and Virginia, no banks other than The Bank of Northern
Virginia have been identified as probable merger or acquisition candidates. It
is expected that additional discussions will take place in the future as
opportunities are presented. However, no assurance can be given that any such
merger or acquisition candidates will be identified or that any merger or
acquisition will be consummated.
The Company also considers establishing branches as a means of expanding
its presence in current or new market areas and is presently reviewing potential
locations in Washington and suburban Maryland and Virginia. In January 1997,
AANB signed a lease to open a fifth branch in Washington. AANB will also
consider the expansion into other lines of business closely related to banking
if it believes these lines could be profitable without undue risk to AANB and if
AANB can be competitive. No specific lines of business are under consideration
at this time.
In 1992, AANB initiated a strategy to expand through acquisition by
purchasing from the FDIC and the Resolution Trust Corporation insured deposits
and certain performing loans of financial institutions which were placed into
receivership in the Washington metropolitan region. The Company was the
successful bidder
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on three such purchases, one in each of 1992, 1993 and 1994. In 1992, AANB
purchased insured deposits and certain performing loans from the FDIC, for a
premium of $1,000. In addition, AANB was entitled to any future recoveries
received on loans charged off prior to the bid date for the sale of the loans.
As of both December 31, 1996 and June 30, 1997, $152,000 in recoveries on such
loans have been received. AANB also purchased certain performing loans from the
FDIC at discounted prices of 96.2% and 96.9% of the outstanding loan amounts in
1993 and 1994, respectively.
Lending Activities
The Adams National Bank provides a range of commercial and retail lending
services to individuals, small to medium-sized businesses, professional
corporations, nonprofits and other organizations. These services include, but
are not limited to, commercial business loans, commercial and residential real
estate loans, renovation and mortgage loans, loan participations, consumer
loans, revolving lines of credit and letters of credit. Consumer lending focuses
on automobile, home equity and personal loans made on a direct, secured basis.
Real estate loans are originated for both commercial and consumer purposes. As
of December 31, 1996 and June 30, 1997, approximately 74% and 78%, respectively,
of The Adams National Bank's total loan portfolio was comprised of loans with
interest rates which either float or generally adjust on an annual basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of AANB -- Analysis of Loans."
The Adams National Bank aggressively markets its services to qualified
lending customers in both the commercial and consumer sectors, including small
businesses and nonprofit organizations. The Adams National Bank offers SBA-
guaranteed loans which provide better terms and more flexible repayment
schedules than conventional financing. Management believes that making such
loans helps the local community and provides The Adams National Bank with
attractive returns with minimal risk, as the majority of each loan is guaranteed
by the SBA, and solid future lending relationships as such businesses grow and
prosper. As lending requirements of small businesses grow to exceed The Adams
National Bank's lending limit, The Adams National Bank has the ability to sell
participations in these larger loans to other financial institutions. The Adams
National Bank believes that such participations will help to preserve lending
relationships while providing a high level of customer service. As of
December 31, 1996 and June 30, 1997, commercial and real estate SBA loans
totaled $3,134,000 and $3,012,000, respectively.
The Adams National Bank provides financing to nonprofit organizations for
construction and renovation of local headquarters offices and other facilities,
working capital lines of credit and equipment financing. Current nonprofit
customers of The Adams National Bank include organizations which focus on issues
relating to children's rights, minority rights and healthcare as well as
historic landmarks. At December 31, 1996 and June 30, 1997, commercial and real
estate loans to these customers totaled $1,497,000 and $3,328,000, respectively.
Commercial and real estate lending is performed by The Adams National
Bank's Lending Division, which is comprised of five loan officers and a credit
analyst. The Treasury Division includes a Loan Operations staff of three,
responsible for preparing loan documents, recording and processing new loans and
loan payments, ensuring compliance with regulatory requirements, and working
with the Lending Division, in order to ensure the timely receipt of all initial
and ongoing loan documentation and the prompt reporting of any exceptions.
Credit analysis on loans is performed by either individual loan officers or the
credit analyst, using a sophisticated credit analysis computer program, which
provides not only the flexibility necessary to analyze loans but also the
structure necessary to ensure that all documentation requirements are
appropriately met.
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Policies and procedures have been established by The Adams National Bank to
promote safe and sound lending. Loan officers have individual lending
authorities established based on both their seniority and experience. Loans in
excess of individual officers' lending limits are presented to the Officers'
Loan Committee ("OLC"), which meets weekly, and is comprised of all loan
officers and the President of The Adams National Bank. While a maximum of three
loan officers may pool their loan authorities to approve a loan, most loans over
$100,000 are brought to the OLC. The OLC has authority to approve unsecured
loans up to $250,000 and secured loans up to $400,000. Loans over $250,000 on an
unsecured basis and over $400,000 on a secured basis are brought to the
Executive Loan Committee ("ELC"), which meets approximately twice per month. The
ELC is comprised of two outside directors and the President of the Bank. In
addition to approving new loans, this Committee approves the restructuring of
loans it originally approved, reviews past due loans and approves charge-offs.
Commercial Lending
The Adams National Bank provides a wide range of commercial business loans,
including lines of credit for working capital purposes and term loans for the
acquisition of equipment and other purposes. In most cases, The Adams National
Bank has collateralized these loans and/or taken personal guarantees to help
assure repayment. Collateral for these loans generally includes accounts
receivable, inventory, equipment and real estate. Terms of commercial business
loans generally range from three months to five years. These loans often require
that borrowers maintain certain levels of deposits with The Adams National Bank
as compensating balances. Commercial business lending generally involves greater
risk than residential mortgage lending and involves risks that are different
from those associated with residential, commercial and multi-family real estate
lending. Although commercial business loans are often collateralized by real
estate, equipment, inventory, accounts receivable or other business assets, the
liquidation of collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts receivable may be uncollectible
and inventories and equipment may be obsolete or of limited use, among other
things. The primary repayment risk for commercial loans is the failure of the
business due to economic or financial factors. As of December 31, 1996 and
June 30, 1997, commercial loans totaled $39,419,000 and $39,671,000,
respectively.
Real Estate Lending
At December 31, 1996 and June 30, 1997, The Adams National Bank's real
estate loan portfolio consisted of commercial real estate mortgages totaling
$24,840,000 and $34,235,000, respectively, and residential real estate mortgages
totaling $2,631,000 and $2,940,000, respectively. The majority of these loans
are amortizing variable rate or annually repricing mortgage loans with a maximum
maturity of five years.
The majority of the $4,140,000 in loans classified as construction and land
development loans at December 31, 1996 in the Consolidated Financial Statements
are primarily for renovation of commercial properties. The majority of the
$5,504,000 in loans classified as construction and land development loans in the
Unaudited Consolidated Financial Statements at June 30, 1997, are primarily for
construction and renovation of commercial and residential properties.
Construction financing generally is considered to involve a higher degree of
risk of loss than long-term financing on improved, occupied real estate. Multi-
family and commercial real estate lending entails significant additional risks
as compared to one- to four-family residential lending. For example, such loans
typically involve large loans to single borrowers or related borrowers, the
payment experience on such loans is typically dependent on the successful
operation of the project, and these risks can be significantly affected by the
supply and demand conditions in the market for
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commercial property and multi-family residential units. To minimize these risks,
The Adams National Bank limits the aggregate amount of outstanding construction
loans, and generally makes such loans only in its market area and to borrowers
with which it has substantial experience or who are otherwise well known to The
Adams National Bank. It is The Adams National Bank's current practice to obtain
personal guarantees and current financial statements from all principals
obtaining commercial real estate loans. The Adams National Bank also obtains
appraisals on each property in accordance with applicable regulations.
Consumer Lending
The Adams National Bank's consumer lending includes loans for motor
vehicles, home improvement, home equity and small personal credit lines.
Consumer loans generally involve more risk than first mortgage residential and
commercial real estate loans. Repossessed collateral for a defaulted loan may
not provide an adequate source of repayment of the outstanding loan balance as a
result of damage, loss or depreciation, and the remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In
addition, loan collections are dependent on the borrower's continuing financial
stability. Further, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered. In underwriting consumer loans, The Adams National Bank considers
the borrower's credit history, an analysis of the borrower's income, expenses
and ability to repay the loan and the value of the collateral.
During 1994, The Adams National Bank entered the credit card market by
issuing its own VISA(R) card at competitive rates and with no annual fee. The
credit card is offered to both new and existing customers as well as corporate
accounts, and provides various cardmember benefits, including frequent flyer
miles. Through its credit card services, The Adams National Bank hopes to
increase profits and augment its cross-selling opportunities by increasing its
marketing base. As of December 31, 1996 and June 30, 1997, consumer loans
totaled $2,203,000 and $2,579,000, respectively.
Competition
The Adams National Bank faces strong competition among financial
institutions in Washington, Northern Virginia and suburban Maryland for both
deposits and loans. Principal competitors include other community commercial
banks and larger financial institutions with branches in The Adams National
Bank's service area. Intense competition is expected to continue as bank mergers
and acquisitions of smaller banks by larger institutions in the Washington,
D.C., metropolitan region may be expected to continue for the foreseeable
future.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries. The Adams National Bank
faces competition for deposits and loans throughout its market areas not only
from local institutions but also from out-of-state financial intermediaries
which have opened loan production offices or which solicit deposits in its
market areas. Many of the financial intermediaries operating in The Adams
National Bank's market areas offer certain services, such as trust, investment
and international banking services, which The Adams National Bank does not
offer. Additionally, banks with
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larger capitalization and financial intermediaries not subject to bank
regulatory restrictions have larger lending limits and are thereby able to serve
the needs of larger customers.
In order to compete with other financial services providers, The Adams
National Bank principally relies upon local promotional activities, personal
relationships established by officers, directors and employees with its
customers, and specialized services tailored to meet its customers' needs. In
those instances where The Adams National Bank is unable to accommodate a
customer's needs, The Adams National Bank will arrange for those services to be
provided by its correspondents.
Employees
At June 30, 1997, AANB employed 43 people, 42 on a full time and one on a
part time basis. The employees are not represented by a union and management
believes that its relations with its employees are good.
Supervision and Regulation
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by The Adams National Bank on its
deposits and its other borrowings and the interest rate received by The Adams
National Bank on loans extended to its customers and securities held in The
Adams National Bank's portfolio comprise the major portion of The Adams National
Bank's earnings. These rates are highly sensitive to many factors that are
beyond the control of The Adams National Bank. Accordingly, the earnings and
growth of AANB are subject to the influence of domestic and foreign economic
conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in U.S. Government securities, by adjusting the
required level of reserves for financial institutions subject to its reserve
requirements and by varying the discount rates applicable to borrowings by
depository institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain
provisions of certain laws which relate to the regulation of AANB and The Adams
National Bank. The description does not purport to be complete and is qualified
in its entirety by reference to the applicable laws and regulations.
AANB
AANB, as a registered bank holding company, is subject to regulation under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). AANB is
required to file quarterly reports and annual reports with the Federal Reserve
Board and such additional information as the Federal Reserve Board may require
pursuant to the BHC Act. The Federal Reserve Board may conduct examinations of
AANB and its subsidiaries.
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The Federal Reserve Board may require that AANB terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve Board believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any of its banking subsidiaries. The Federal Reserve
Board also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, AANB must file written
notice and obtain approval from the Federal Reserve Board prior to purchasing or
redeeming its equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, AANB is
required by the Federal Reserve Board to maintain certain minimum levels of
capital.
AANB is required to obtain the prior approval of the Federal Reserve Board
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank holding
company. Prior approval of the Federal Reserve Board is also required for the
merger or consolidation of AANB and another bank holding company.
AANB is prohibited by the BHC Act, except in certain statutorily prescribed
instances, from acquiring direct or indirect ownership or control of more than
5% of the outstanding voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks or furnishing services to
its subsidiaries. However, AANB, subject to the prior approval of the Federal
Reserve Board, may engage in activities, or acquire shares of companies engaged
in activities that are deemed by the Federal Reserve Board to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both. This doctrine has become known as the "source of strength"
doctrine. The validity of the source of strength doctrine has been and is likely
to continue to be the subject of litigation until definitively resolved by the
courts or by Congress.
The Adams National Bank
The Adams National Bank, as a national banking association, is subject to
primary supervision, examination and regulation by the Office of the Comptroller
of the Currency (the "OCC"). If, as a result of an examination of The Adams
National Bank, the OCC should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other
aspects of The Adams National Bank's operations are unsatisfactory or that The
Adams National Bank or its management is violating or has violated any law or
regulation, various remedies are available to the OCC. Such remedies include the
power to enjoin "unsafe or unsound practices," to require affirmative action to
correct any conditions resulting from
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any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the growth of
The Adams National Bank, to assess civil monetary penalties, and to remove
officers and directors. The FDIC has similar enforcement authority, in addition
to its authority to terminate a bank's deposit insurance, in the absence of
action by the OCC and upon a finding that a bank is in an unsafe or unsound
condition, is engaging in unsafe or unsound activities, or that its conduct
poses a risk to the deposit insurance fund or may prejudice the interest of its
depositors. The Adams National Bank is not subject to any such actions by the
OCC or the FDIC.
The deposits of The Adams National Bank are insured by the FDIC in the
manner and to the extent provided by law. For this protection, The Adams
National Bank pays a semiannual statutory assessment. See "Premiums for Deposit
Insurance." Various other requirements and restrictions under the laws of the
United States affect the operations of The Adams National Bank. Federal statutes
and regulations relate to many aspects of The Adams National Bank's operations,
including reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices, capital requirements and disclosure obligations to depositors
and borrowers. Further, The Adams National Bank is required to maintain certain
levels of capital. See "Capital Standards."
Restrictions on Transfers of Funds to AANB by The Adams National Bank
AANB is a legal entity separate and distinct from The Adams National Bank.
AANB's ability to pay cash dividends is limited by Delaware state law. In
addition, the prior approval of the OCC for payment by The Adams National Bank
of dividends to AANB is required if the total of all dividends declared by The
Adams National Bank in any calendar year exceeds AANB's net profits (as defined)
for that year combined with its retained net profits (as defined) for the
preceding two years, less any transfers to surplus or fund for the retirement of
preferred stock.
The OCC also has authority to prohibit The Adams National Bank from
engaging in activities that, in the OCC's opinion, constitute unsafe or unsound
practices in conducting its business. It is possible, depending upon the
financial condition of the bank in question and other factors, that the OCC
could assert that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice. Further, the OCC and the
Federal Reserve Board have established guidelines with respect to the
maintenance of appropriate levels of capital by banks or bank holding companies
under their jurisdiction. Compliance with the standards set forth in such
guidelines and the restrictions that are or may be imposed under the prompt
corrective action provisions of federal law could limit the amount of dividends
which The Adams National Bank or AANB may pay. See "Prompt Corrective Regulatory
Action and Other Enforcement Mechanisms" and "Capital Standards" for a
discussion of these additional restrictions on capital distributions.
The Adams National Bank is subject to certain restrictions imposed by
federal law on any extensions of credit to, or the issuance of a guarantee or
letter of credit on behalf of, AANB or other affiliates, the purchase of or
investments in stock or other securities thereof, the taking of such securities
as collateral for loans and the purchase of assets of AANB or other affiliates.
Such restrictions prevent AANB and such other affiliates from borrowing from The
Adams National Bank unless the loans are secured by marketable obligations of
designated amounts. Further, such secured loans and investments by The Adams
National Bank to or in AANB or to or in any other affiliate is limited to 10% of
The Adams National Bank's capital and surplus (as defined by federal
regulations) and such secured loans and investments are limited, in the
aggregate, to 20% of The Adams National Bank's capital and surplus (as defined
by federal regulations). Additional restrictions
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on transactions with affiliates may be imposed on The Adams National Bank under
the prompt corrective action provisions of federal law. See "Prompt Corrective
Action and Other Enforcement Mechanisms."
Capital Standards
The Federal Reserve Board and the OCC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, cumulative
preferred stock, long term preferred stock, eligible term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. The federal banking agencies
require a minimum ratio of qualifying total capital to risk-adjusted assets of
8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In
addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio.
Only a "well capitalized" depository institution may accept brokered
deposits without prior regulatory approval. Under OCC regulations, an
institution is generally considered "well capitalized" if it has a total risk-
based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at
least 6%, and a Tier 1 capital (leverage) ratio of at least 5%. Federal law
generally requires full-scope on-site annual examinations of all insured
depository institutions by the appropriate federal bank regulatory agency
although the examination may occur at longer intervals for small well-
capitalized or state chartered banks.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. See Note 8 of the
Notes to Consolidated Financial Statements. The federal banking agencies issued
final rules, effective April 1, 1995, which limit the amount of deferred tax
assets that are allowable in computing an institution's regulatory capital. The
standard has been in effect on an interim basis since March 1993.
The current risk-based capital ratio analysis establishes minimum
supervisory guidelines and standards. It does not evaluate all factors affecting
an organization's financial condition. Factors which are not evaluated include
(i) overall interest rate exposure; (ii) quality and level of earnings;
(iii) investment or loan portfolio concentrations; (iv) quality of loans and
investments; (v) the effectiveness of loan and investment policies; (vi) certain
risks arising from nontraditional activities; and (vii) management's overall
ability to monitor and control other financial and operating risks, including
the risks presented by concentrations of credit and nontraditional activities.
The capital adequacy assessment of federal bank regulators will, however,
continue
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to include analyses of the foregoing considerations and in particular, the level
and severity of problem and classified assets. Market risk of a banking
organization -- risk of loss stemming from movements in market prices -- is not
evaluated under the current risk-based capital ratio analysis (and is therefore
analyzed by the bank regulators through a general assessment of an
organization's capital adequacy) unless trading activities constitute 10 percent
or $1 billion or more of the assets of such organization. Such an organization
(unless exempted by the banking regulators) and certain other banking
organizations designated by the banking regulators must, beginning on or before
January 1, 1998, include in its risk-based capital ratio analysis charges for,
and hold capital against, general market risk of all positions held in its
trading account and of foreign exchange and commodity positions wherever
located, as well as against specific risk of debt and equity positions located
in its trading account. Currently, AANB does not calculate a risk-based capital
charge for its market risk.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of The Adams National Bank to grow and could restrict the
amount of profits, if any, available for the payment of dividends.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law requires each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. In September 1992, the federal
banking agencies issued uniform final regulations implementing the prompt
corrective action provisions of federal law.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
In addition to restrictions and sanctions imposed under the prompt
corrective action provisions, commercial banking organizations may be subject to
potential enforcement actions by the federal regulators for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease and desist order that can be
judicially enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against institution-
affiliated parties and the enforcement of such actions through injunctions or
restraining orders based upon a judicial determination that the agency would be
harmed if such equitable relief was not granted.
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Safety and Soundness Standards
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness. The guidelines set forth
operational and managerial standards relating to internal controls, information
systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits, asset
quality and earnings. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
Premiums for Deposit Insurance
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. The result of these provisions is that the assessment rate on
deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, effective
January 1, 1994, under which an institution's premium assessment is based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution, the likely amount of any such loss, and the revenue needs of
the deposit insurance fund and certain other factors. On August 8, 1995, the
FDIC issued final regulations adopting an assessment rate schedule for BIF
members of 4 to 31 basis points effective on June 1, 1995. On November 14, 1995,
the FDIC further reduced deposit insurance premiums to a range of 0 to 27 basis
points effective for the semi-annual period beginning January 1, 1996. The FDIC
has since acted to continue this range of assessment rates through
December 31, 1997.
Under the risk-based assessment system, a BIF member institution such as
The Adams National Bank is categorized into one of three capital categories
(well capitalized, adequately capitalized, and undercapitalized) and one of
three categories based in part on supervisory evaluations by its primary federal
regulator (in The Adams National Bank's case, the FDIC). The three supervisory
categories are: financially sound with only a few minor weaknesses (Group A),
demonstrates weaknesses that could result in significant deterioration (Group
B), and poses a substantial probability of loss (Group C). The capital ratios
used by the FDIC to define well-capitalized, adequately capitalized and
undercapitalized are the same in the FDIC's prompt corrective action
regulations.
Since The Adams National Bank is considered well-capitalized under
regulatory standards and met certain other criteria during 1996, The Adams
National Bank paid the flat FDIC insurance premium rate of $2,000 per year for
1996. For the first six months of 1977, The Adams National Bank, as a Bank
Insurance Fund Member, paid a Financing Corporation ("FICO") assessment of
$6,000 under the Deposit Insurance Funds Act of 1996, which is an assessment
separate from and in addition to deposit insurance premiums. The Adams National
Bank was not required to pay a deposit insurance premium for the first six
months of 1997.
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In addition to the payment of deposit insurance assessments, depository
institutions are required to make quarterly assessments payments to the FDIC on
their BIF assessable deposits which will be paid to FICO to enable it to pay
interest and certain other expenses on bonds which it issued pursuant to the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as
amended, to facilitate the resolution of failed savings associations. Pursuant
to the Federal Home Loan Bank Act, the Financing Corporation, with the approval
of the FDIC, establishes assessment rates based upon estimates of (i) expected
operating expenses, case resolution expenditures and income of the Financing
Corporation; (ii) the effect of assessments upon members' earnings and capital;
and (iii) any other factors deemed appropriate by it. Assessment rates for the
second semi-annual period of 1997 have been set at .63 basis points annually for
BIF-assessable deposits, subject to quarterly review and adjustment.
Community Reinvestment Act
The Adams National Bank is subject to the provisions of the Community
Reinvestment Act ("CRA") which requires banks to assess and help meet the credit
needs of the community in which The Adams National Bank operates. The OCC
examines The Adams National Bank to determine its level of compliance with CRA.
The OCC and the Federal Reserve Board are required to consider the level of CRA
compliance when regulatory applications are reviewed. The Adams National Bank's
last review resulted in a "satisfactory" CRA rating.
Interstate Banking and Branching
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (as since amended, the "Interstate Act") became law.
Under the Interstate Act, beginning one year after the date of enactment, a bank
holding company that is adequately capitalized and managed may obtain approval
under the BHC Act to acquire an existing bank located in another state generally
without regard to state law prohibitions on such acquisitions. A bank holding
company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not acquire
a state bank in existence for less than a minimum length of time that may be
prescribed by state law except that a state may not impose more than a five year
existence requirement. Since June 1, 1997 (and prior to that date in some
instances) banks have been able to branch across state lines by merger except
where qualifying legislation adopted by certain states prior to that date
prohibit interstate expansion by this means. Banks may also expand across state
lines through the acquisition of an individual branch of a bank located in
another state or through the establishment of a de novo branch in another state
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where the law of the state in which the branch is to be acquired or established
specifically authorizes such acquisition or de novo branch establishment.
-- ----
Virginia law authorizes the acquisition of a bank holding company having its
principal place of business in the Commonwealth and not owned by a bank holding
company not having its principal place of business therein (each, a "Virginia
Bank Holding Company" and collectively, "Virginia Bank Holding Companies") or a
bank having its main office and all branch offices (save for off-shore branches)
in the Commonwealth (each, a "Virginia Bank" and collectively, "Virginia Banks")
by a bank holding company having its principal place of business other than the
Commonwealth and which currently owns no Virginia Bank Subsidiary (other than
one acquired in satisfaction of a debt previously contracted or in an FDIC
assistance transaction) to
61
<PAGE>
acquire a Virginia Bank Holding Company or Virginia Bank upon prior SCC
approval. The SCC may approve such acquisition if it determines (i) the laws of
the state in which the acquirer has its principal place of business permit
Virginia Bank Holding Companies to acquire bank holding companies and banks in
that state, (ii) the laws of the state in which the acquirer has its principal
place of business permit the acquirer to be acquired by the Virginia Bank
Holding Company or Virginia Bank to be acquired and (iii) the Virginia Bank or
all bank subsidiaries of the Virginia Bank Holding Company to be acquired have
been in existence and continuously operating for more than two years, and makes
the acquisition subject to any conditions that the home state of the acquirer
would apply to the acquisition of a bank holding company or bank in such state
by a Virginia Bank Holding Company or Virginia Bank but not to an acquirer
located in that state.
District of Columbia law authorizes a bank holding company having its
principal place of business in the Commonwealth of Virginia, not owned by a bank
holding company, not having its principal place of business in the Commonwealth
and 80% of whose deposits are held by a bank located in the Commonwealth of
Virginia to acquire a bank holding company having its principal place of
business in the District which is not owned by a bank holding company not having
its principal place of business in the District and 80% of whose deposits are
held by a bank located in the District (a "District of Columbia Bank Holding
Company") or a bank organized under the laws of the District and having branches
only therein (a "District of Columbia Bank") upon the prior approval of the
Superintendent of Banking and Financial Institutions of the District of
Columbia, where (i) the laws of the state in which the acquirer has its
principal place of business permit the acquirer to be acquired by the District
of Columbia Bank Holding Company or District of Columbia Bank sought to be
acquired, (ii) the District of Columbia Bank or all bank subsidiaries of the
District of Columbia Bank Holding Company to be acquired have been in existence
and have been operating for more than two years and (iii) the acquisition
complies with any conditions that the home state of the acquirer would apply to
the acquisition of a bank holding company or bank in such state by a District of
Columbia Bank Holding Company or District of Columbia Bank but not to an
acquirer located in that state.
Because The Bank of Northern Virginia was established in 1988 and has been
in continuous operation since that time and The Adams National Bank was
established in 1979 and has been in continuous operation since that time,
neither bank is owned by a bank holding company not having a principal place of
business different therefrom and 80% of the deposits of each of Ballston and
AANB are held by a bank located in their respective principal places of
business, and the conditions upon which Virginia Bank Holding Companies and
Virginia Banks may acquire District of Columbia Holding Companies and District
of Columbia Banks and upon which District of Columbia Bank Holding Companies and
District of Columbia Banks may acquire Virginia Bank Holding Companies and
Virginia Banks are largely reciprocal, the Holding Company Merger comports with
Virginia laws governing interstate bank acquisitions.
Properties
The principal executive offices of AANB and the main office of The Adams
National Bank are located in leased space at 1627 K Street, N.W., Washington,
D.C. 20006. The Adams National Bank leases three other offices, located at 2905
M Street, N.W., Washington, D.C.; Union Station, 50 Massachusetts Avenue, N.E.,
Washington, D.C.; and 1604 17th Street, N.W., Washington, D.C. In January 1997,
The Adams National Bank entered into a lease for a branch to be located at 802
7th Street, N.W. anticipated to open in the fourth quarter of 1997. An ATM at
this location is presently operational. An additional ATM was opened in Union
Station in 1989 and a third ATM was opened in Union Station in May 1994. Leases
for these facilities expire as follows:
62
<PAGE>
<TABLE>
<CAPTION>
Location Expiration of Lease
-------- -------------------
<S> <C>
1627 K Street, N.W. 2002
2905 M Street, N.W. Month-to-month term
50 Massachusetts Avenue, N.E. 1998
Union Station ATM 1999
Union Station ATM 1999
802 7th Street, N.W. 2007
1604 17th Street, N.W. 2016
</TABLE>
In 1996, AANB and The Adams National Bank incurred rental expense on leased
real estate of approximately $464,000. AANB considers all of the properties
leased by The Adams National Bank to be suitable and adequate for their intended
purposes.
Legal Proceedings
Although The Adams National Bank, from time to time, is involved in various
legal proceedings in the normal course of business, there are no material legal
proceedings to which AANB or The Adams National Bank is a party or to which any
of their property is subject.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF AANB
Year Ended December 31, 1996 Compared to December 31, 1995
Overview
AANB is the parent of The Adams National Bank, a bank with four full
service branches located in Washington, D.C. The Adams National Bank's newest
branch was opened in October of 1996 and a fifth branch is expected to open in
the fourth quarter of 1997.
In the year ended December 31, 1996 AANB reported record net income of
$1,127,000, an increase of 18% over the $959,000 reported for the year ended
December 31, 1995. However, as a result of the issuance of 795,500 shares of
common stock in the public stock offering completed in the third quarter of
1996, earnings per share of $.94 for 1996 reflected a decrease from $1.12
reported for 1995. Total assets at December 31, 1996 of $112,162,000 increased
by $19,797,000 over December 31, 1995, surpassing the $100,000,000 milestone.
AANB continued to maintain a "well-capitalized" status with a total risk-
based capital ratio (total capital divided by assets weighted for risk elements)
of 17.47% at December 31, 1996, of which 16.22% was Tier 1 capital. The leverage
ratio (based on annual average assets) was 13.81%. The following analysis of
financial condition and results of operations should be read in conjunction with
AANB's consolidated Financial Statements and Notes thereto.
63
<PAGE>
Analysis of Net Interest Income
Net interest income, the most significant component of AANB's earnings,
increased by $473,000, or 11%, to $4,640,000 in 1996 as compared to $4,167,000
in 1995. This improvement in net interest income was a result of a 15% increase
in average earning assets, partially offset by both a decrease in the average
loan to deposit ratio to 76% from 82% and deposit rates which did not decrease
as rapidly as earning asset rates during the same period. These factors combined
to produce a net interest spread (the difference between the average interest
rate earned on interest-earning assets and paid on interest-bearing liabilities)
of 3.86% and a net interest margin (net interest income as a percentage of
average interest-earning assets) of 5.23% for 1996, reflecting decreases of 26
basis points and 16 basis points, respectively, from 1995. Loans, the highest
yielding component of earning assets, represented approximately 70% of total
average earning assets for 1996 as compared to approximately 78% for 1995.
Net interest income, increased by $19,000, or less than 1%, to $4,167,000
in 1995 as compared to $4,148,000 in 1994. This variance was consistent with the
1% increase in average earning assets during the same period. Although the mix
of earning assets during 1995 was more heavily weighted towards loans, thus
improving interest income, a 138 basis point increase in rates paid on deposits
for 1995 as compared to 1994 offset virtually all the positive variances.
Although the net interest spread decreased by 38 basis points from 4.50% in 1994
to 4.12% in 1995, a $762,000 increase in the level of earning assets coupled
with improvements in the mix of earning assets during the same period caused net
interest income to increase by $19,000. The net interest margin for 1995
declined to 5.39% from 5.42% for 1994. Loans represented approximately 78% of
total average earning assets for 1995 as compared to approximately 76% for the
comparable 1994 period.
Distribution of Assets, Liabilities and Stockholders' Equity
Yields and Rates
For the Years Ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- -------------------------- --------------------------
Average Income Average Average Income Average Average Income Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans/1/ $62,350 $6,072 9.74% $60,318 $5,902 9.78% $58,245 $5,100 8.76%
Securities 12,795 755 5.90 14,367 859 5.98 15,609 876 5.61
Federal funds sold and
resale agreements 12,752 693 5.43 2,235 130 5.82 2,246 88 3.92
Interest-bearing deposits
in other banks 860 53 6.16 433 23 5.31 491 18 3.67
------- ------ ------- ------ ------- ------
Total interest-earning assets 88,757 7,573 8.53 77,353 6,914 8.94 76,591 6,082 7.94
Allowance for loan losses (1,272) (1,299) (1,351)
Cash and due from banks 6,091 4,715 4,951
Bank premises and equipment 487 320 364
Other assets 1,319 1,205 1,394
------- ------- -------
Total assets $95,382 $82,294 $81,949
======= ======= =======
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Time deposits $32,195 1,257 3.90 $27,740 1,094 3.94 $28,556 839 2.94
Certificates of deposit 28,102 1,554 5.53 27,300 1,544 5.66 25,798 1,017 3.94
Federal funds purchased and
repurchase agreements 2,148 105 4.89 1,600 89 5.56 1,549 57 3.68
Other short-term borrowings -- -- -- 104 6 5.77 61 3 4.92
Long-term borrowings/debt 357 17 4.76 233 14 6.01 299 18 6.02
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities 62,802 2,933 4.67 56,977 2,747 4.82 56,263 1,934 3.44
------ ------ ------
</TABLE>
64
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing liabilities:
Demand deposits 22,099 18,547 18,877
Other liabilities 888 594 966
Stockholders' equity 9,593 6,176 5,843
------- ------- -------
Total liabilities and
Stockholders' equity $95,382 $82,294 $81,949
======= ======= =======
Net interest income/2/ $4,640 $4,167 $4,148
====== ====== ======
Net interest spread 3.86% 4.12% 4.50%
==== ==== ====
Net interest margin 5.23% 5.39% 5.42%
==== ==== ====
</TABLE>
- ----------------------------
1 Nonaccrual loans are included in the average loan balances. Interest on
loans includes fees of approximately $141,000, $152,000 and $151,000 in
1996, 1995 and 1994, respectively.
2 No taxable equivalent adjustments are necessary because AANB did not have
material tax-exempt securities or loans during 1996 and had no tax-exempt
securities or loans during 1995 and 1994.
Interest Rates and Interest Differential
Analysis of Changes in Net Interest Income
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31, For the years ended December 31,
1996 versus 1995 1995 versus 1994
----------------------------------- ----------------------------------
Net Change per: Net Change per:
Increase ---------------- Increase ----------------
(Decrease)/1/ Rate Volume (Decrease)/1/ Rate Volume
------------- ---- ------ ------------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income from:
Loans/2/ $ 171 $(28) $199 $802 $620 $182
Securities (104) (10) (94) (17) 53 (70)
Federal funds sold and
resale agreements 563 (49) 612 42 43 (1)
Interest-bearing deposits
in banks 30 7 23 5 7 (2)
----- ---- ---- ---- ---- ----
Total interest income/3,4/ 660 (80) 740 832 723 109
Interest expense on:
Time deposits/5/ 164 (12) 176 255 279 (24)
Certificates of deposit 10 (35) 45 527 468 59
Short-term borrowings 10 (15) 25 35 32 3
Long-term borrowings/debt 3 (4) 7 (4) -- (4)
----- ---- ---- ---- ---- ----
Total interest expense/3/ 187 (66) 253 813 779 34
----- ---- ---- ---- ---- ----
Net interest income/4/ $ 473 $(14) $487 $ 19 $(56) $ 75
===== ==== ==== ==== ==== ====
</TABLE>
- ---------------------------------
1 Changes due to both rate and volume are allocated to rate.
2 Interest on loans includes loan fees of approximately $141,000, $152,000
and $151,000 in 1996, 1995 and 1994, respectively.
3 Changes are computed on a line-by-line basis and do not sum to the rate and
volume changes of total interest income or total interest expense because
of changes in the mix of interest-earning assets and interest-bearing
liabilities from year to year.
65
<PAGE>
4 No taxable equivalent adjustments are necessary because AANB did not have
material tax-exempt securities or loans during 1996 and had no tax-exempt
securities or loans during 1995 and 1994.
5 Includes transaction accounts.
Other Income
Total other income, which consists primarily of service charges on deposits
and other fee income, increased by approximately $112,000, or 13%, to $953,000
in 1996 as compared to $841,000 in 1995. Service charges on deposit accounts
increased by approximately $51,000, or 7%, to $788,000 in 1996 as compared to
$737,000 in 1995 principally due to a $94,000 increase in income recognized on
ATM transactions, primarily from the implementation in 1996 of the $1.00
surcharge on noncustomer ATM transactions. This was partially offset by a
$35,000 decrease in service charges on overdrafts. Other income increased by
approximately $61,000, or 59%, to $165,000 in 1996 as compared to $104,000 in
1995, primarily due to rental income received from other real estate coupled
with gains recognized on the sale of other real estate.
Total other income increased by $51,000, or 6%, to $841,000 in 1995 as
compared to $790,000 in 1994. This increase was due to increases in ATM income
resulting from the installation of more efficient ATM equipment in AANB's Union
Station location, as well as the full year's effect of the addition of one new
ATM at that location in April 1994.
Other Expense
Total other expense increased by $312,000, or 8%, to $4,093,000 in 1996
from $3,781,000 in 1995. Salaries and benefits for 1996 increased by $256,000,
or 16%, to $1,905,000 from $1,649,000 in 1995, due to an increase in the number
of employees resulting from the new branch, normal merit increases and the
hiring of employees to fill certain vacancies. Occupancy and equipment expense
increased by $79,000, or 11%, to $778,000 in 1996 from $699,000 in 1995 due to
the additional rental expense on the new branch, higher operating costs of
AANB's main office location which were passed through to AANB by the landlord
and the additional depreciation expense of a local area network installed in the
later part of the second quarter of 1996. Professional fees decreased by
$210,000, or 59%, to $143,000 in 1996 from $353,000 in 1995 due primarily to
lower legal fees associated with loan workouts and other corporate matters, as
well as partial reimbursement by the Small Business Administration ("SBA") of
legal fees incurred for the workout of two troubled SBA guaranteed loans. Data
processing expense increased by $59,000, or 20%, to $359,000 in 1996 from
$300,000 in 1995 due to the opening of the new branch, as well as increased
activity levels and item charges. Other operating expense increased by $128,000,
or 16%, to $909,000 in 1996 from $781,000 in 1995 due primarily to increases in
administrative and overhead expenses associated with the opening of the new
branch, partially offset by a decrease in FDIC deposit insurance premiums.
AANB has reviewed the data processing systems provided by The Adams
National Bank's outside data processor as well as the computer applications
which are used in-house and has determined that The Adams National Bank's data
processing will not be materially impacted by any date-sensitive calculations
related to the year 2000. The Adams National Bank's contract with its outside
data processor is scheduled to expire in the second quarter of 1997 (and
subsequently renewed to the second quarter of 1998). While The Adams National
Bank is presently considering renewal options as well as
66
<PAGE>
other data processing alternatives, The Adams National Bank will only consider
data processing systems which can appropriately recognize this date-sensitive
information.
Total other expense decreased by $1,120,000, or 23%, to $3,781,000 in 1995
as compared to 1994. Salaries and benefits for 1995 increased by $38,000, or 2%,
to $1,649,000 as compared to 1994, primarily due to normal merit increases.
Occupancy and equipment expense decreased by $52,000, or 7%, to $699,000 during
the same period, principally due to decreases in operating costs of AANB's main
office location which were passed through to AANB by the landlord. Professional
fees decreased by $534,000, or 60%, to $353,000. This decrease is attributable
to decreases in legal and other costs related to the issue of the ownership of
certain shares of AANB's Common Stock, the expensing in 1994 of previously
deferred professional fees related to AANB's proposed securities offering and
decreases in legal fees related to three employment related lawsuits which were
concluded in 1994. Professional fees for 1995 included costs of approximately
$102,000 incurred to finalize the issues surrounding the ownership of certain
shares of AANB's Common Stock. Data processing expense increased by $34,000, or
13%, to $300,000 in 1995 as compared to 1994. Other operating expense decreased
by $605,000 in 1995 as compared to 1994. Of this decrease, $387,000 was
attributable to expenses incurred in 1994 for two employment related lawsuits
settled in 1994. During 1995, The Adams National Bank also experienced an
$87,000 decrease in total FDIC insurance premiums as a result of additional
premium rate reductions. The remainder of the decrease was due to savings in
various office operating expenses.
Income Tax Expense
Income tax expense of $648,000 for 1996 reflected an increase of $380,000
over the $268,000 tax expense recorded one year earlier due to an increase in
AANB's effective tax rate to 36% from 22% one year earlier. During 1995, AANB
reduced its deferred tax valuation allowance to zero which reduced the effective
tax rate.
Income tax expense for 1995 was recorded at a combined tax rate of 22%, as
AANB eliminated the remaining valuation allowance on deferred tax assets during
the year. See Note 8 of the Notes to Consolidated Financial Statements.
Analysis of Loans
The loan portfolio at December 31, 1996 increased by $9,421,000, or 15%, to
$73,013,000 from $63,592,000 at December 31, 1995. The majority of this growth
was in commercial real estate mortgages as AANB focused its marketing efforts on
commercial real estate loans. AANB believes such loans are cost effective
because larger balances can be underwritten in the same amount of time as lesser
amounts of other types of loans. AANB also believes that such loans are secured
by collateral which is more permanent in nature and requires less periodic
monitoring to assess AANB's ongoing security position. On average, AANB's loans
increased by $2,032,000, or 3%, to $62,350,000 for 1996 from $60,318,000 for
1995, however, the average loan to deposit ratio decreased to 76% from 82%
during the same period. The loan to deposit ratio at both December 31, 1996 and
1995 was 77%. AANB has a target loan to deposit ratio of 80% based on quarterly
averages. See "Liquidity and Capital Resources" for a further discussion of this
ratio.
For a summary of loans by category and by industry concentration at
December 31, 1996 and 1995, see Note 4 of the Notes to Consolidated Financial
Statements.
67
<PAGE>
The table entitled "Analysis of Loan Maturity and Interest Sensitivity"
below, summarizes the maturity distribution and interest sensitivity of AANB's
loan portfolio at December 31, 1996.
Analysis of Loan Maturity and Interest Sensitivity
At December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Within 1 1 - 5 After
Year/1/ Years 5 Years Total
------- ----- ------- -------
<S> <C> <C> <C> <C>
Maturity of Loans:/2,3/
Commercial $17,368 $15,640 $ 6,411 $39,419
Real estate:
Commercial mortgage 1,864 16,489 6,487 24,840
Residential mortgage 134 1,832 665 2,631
Construction 2,242 1,737 160 4,139
Installment 643 1,021 539 2,203
------- ------- ------- -------
Total loans/4/ $22,251 $36,719 $14,262 $73,232
======= ======= ======= =======
Interest Rate Sensitivity of Loans:
With predetermined interest rates $ 6,305 $ 8,213 $ 1,496 $16,014
With floating or adjustable
interest rates 15,946 28,506 12,766 57,218
------- ------- ------- -------
Total loans/4/ $22,251 $36,719 $14,262 $73,232
======= ======= ======= =======
</TABLE>
- -------------------------
1 Includes demand loans, loans having no stated schedule of repayment and no
stated maturity, and overdrafts.
2 Loan maturity is based upon individual loan contract terms. AANB has not
established a rollover policy. Each loan is reviewed on a case by case
basis with respect to renewal.
3 AANB has no foreign loans.
4 The above table does not include deferred income and unearned discounts
which total a credit balance of $218,558.
Analysis of Investments
AANB classifies its debt and marketable equity securities into one of three
categories: trading, available for sale, or held to maturity. See Note 1(c) of
the Notes to Consolidated Financial Statements. The available for sale portfolio
exists to maintain adequate liquidity and to provide a base for executing
asset/liability management strategy. These securities may be sold in response to
changes in interest rates, restructuring of maturity distributions, need for
additional funds for loans, tax planning and regulatory needs, as well as for
other purposes. The value of securities recorded as available for sale
fluctuates based on changes in interest rates. Generally, an increase in
interest rates will result in a decline in the value of securities available for
sale, while a decline in interest rates will result in an increase in the value
of such securities. Therefore, the value of securities available for sale and
AANB's Stockholders' equity is subject to fluctuation based on changes in
interest rates.
Securities available for sale increased by $5,697,000, or 103%, to
$11,205,000 at December 31, 1996 from $5,508,000 at December 31, 1995. During
the last quarter of 1996, funds raised in AANB's public offering of common stock
completed in the third quarter of 1996 were principally invested in obligations
of U.S. Government agencies with up to three year maturities, pending the
longer-term use
68
<PAGE>
of the proceeds. Investment securities increased by $3,448,000, or 42%, to
$11,641,000 at December 31, 1996 from $8,193,000 at December 31, 1995,
reflective of AANB's increased liquidity levels. See "Liquidity and Capital
Resources" for a further analysis of liquidity. On average for 1996, the
combined investment and available for sale securities portfolio decreased by
$1,572,000, or 11%, to $12,795,000 for 1996 from $14,367,000 for 1995.
The table entitled "Analysis of Securities Portfolio" below, sets forth by
major categories, the adjusted cost bases, approximate market values and the
weighted average yields of investment securities and securities available for
sale at December 31, 1996.
Analysis of Securities Portfolio
At December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Investment Securities Securities Available for Sale
--------------------------------- --------------------------------
Adjusted Market Average Adjusted Market Average
Cost Basis/1/ Value Yield Cost Basis/1/ Value Yield
------------- ----- ----- ------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 1,000 $ 1,004 6.08% $ -- $ -- --%
------- ------- ------- -------
Obligations of other U.S.
Government agencies
and corporations:/2/
Within one year 1,151 1,152 6.01 8,088 8,083 5.35
After one, but within five years 8,455 8,477 6.20 3,135 3,122 6.27
------- ------- ------- -------
Total 9,606 9,629 6.17 11,223 11,205 5.61
------- ------- ------- -------
Mortgage-backed securities: /3/
Federal National Mortgage Association:
Within one year 6 6 9.00 -- -- --
Federal Home Loan Mortgage Corporation:
After one, but within five years 262 274 8.70 -- -- --
------- ------- ------- -------
Total 268 280 8.71 -- -- --
------- ------- ------- -------
Obligations of states and municipalities:
After ten years 310 310 5.15 -- -- --
------- ------- -------
Federal Reserve Bank stock 163 163 6.00 -- -- --
------- ------- ------- -------
Federal Home Loan Bank stock 282 282 7.25 -- -- --
------- ------- ------- -------
Corporate securities:
After ten years 12 12 -- -- -- --
------- ------- ------- -------
Total investment securities $11,641 $11,680 6.21% $11,223 $11,205 5.61%
======= ======= ===== ======= ======= =====
</TABLE>
1 The adjusted cost basis of securities which were transferred from available
for sale to investment securities is shown net of unrealized loss on the
date of transfer.
2 Includes obligations of quasi-government agencies and corporations.
3 This reflects final maturity, although contractual maturity is not a
reliable indicator of expected life because borrowers have the right to
repay their obligations at any time. Monthly amortization prior to the
final maturity is not shown as it cannot be reasonably estimated.
69
<PAGE>
For additional information about investment securities and securities
available for sale at December 31, 1996 and 1995, see Note 3 of the Notes to
Consolidated Financial Statements.
Noninterest-Earning Assets
Cash and due from banks of $9,785,000 at December 31, 1996 reflected an
increase of $4,832,000, or 98%, from the $4,953,000 balance at December 31,
1995. Of this increase $2,800,000 was attributable to one large deposit received
on December 31, 1996 from one of AANB's large commercial customers which was not
yet available for investment with other financial institutions, while the
remainder was attributable to higher cash levels due to the new branch as well
as normal fluctuations in cash balances maintained at the Federal Reserve Bank
between December 31, 1996 and December 31, 1995.
Bank premises and equipment of $840,000 at December 31, 1996 reflected a
202% increase of $562,000 from the $278,000 balance reported at December 31,
1995. This increase was due to leasehold improvements and equipment associated
with the opening of the new branch as well as the local area network which was
installed during 1996.
Deposits
Total deposits of $95,155,000 at December 31, 1996 increased by
$12,092,000, or 15%, from the December 31, 1995 balance of $83,063,000.
Although demand deposit balances of $23,678,000 at December 31, 1996
increased $234,000 over the balance at December 31, 1995 of $23,444,000, average
demand deposits for 1996 of $22,099,000 increased $3,552,000, or 19%, over the
average balance for 1995. Negotiable Order of Withdrawal, or "NOW" accounts, at
December 31, 1996 of $8,040,000 increased $697,000, or 9%, over the balance at
December 31, 1995 of $7,343,000, while average NOW accounts for 1996 of
$8,019,000 decreased $2,110,000, or 21%, as compared to the average balance for
1995. Money market accounts of $29,533,000 at December 31, 1996 increased
$8,141,000, or 38%, over the $21,392,000 balance at December 31, 1995, due
principally to the opening of new deposit accounts as well as increases in the
balances of corporate and personal accounts, with a corresponding effect on the
average balances. In addition, the new branch opening in the fourth quarter of
1996 contributed to the deposit increases.
Certificates of deposit of $100,000 or greater at December 31, 1996 of
$15,658,000 increased by $2,067,000, or 15%, from the $13,591,000 reported at
December 31, 1995 primarily due to increases in collateralized government
deposits. Certificates of deposit under $100,000 increased by $890,000, or 6%,
to $16,866,000 at December 31, 1996 from $15,976,000 at December 31, 1995. This
increase is primarily due to the issuance of brokered deposits in the first half
of 1996.
The table entitled "Maturity Distribution of Certificates of Deposit
$100,000 and Over" sets forth, by time remaining to maturity, certificates of
deposit in amounts of $100,000 or more at December 31, 1996 and 1995.
70
<PAGE>
Maturity Distribution of Certificates of Deposit $100,000 and Over
At December 31, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Within three months $ 8,183 $ 5,716
After three months but within six months 5,075 4,772
After six months but within twelve months 2,100 1,403
After twelve months 300 1,700
------- -------
Total $15,658 $13,591
======= =======
</TABLE>
The table entitled "Average Deposits and Rates," sets forth the average
balances and average rate paid by major deposit category for the years ended
December 31, 1996 and 1995.
Average Deposits and Rates
For the Years Ended December 31, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Average Average Average Average
Balance Rate Balance Rate
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest-bearing demand accounts $ 8,019 2.42% $10,129 2.46%
Savings deposits 1,283 2.66 1,160 2.68
Money market deposit accounts 22,893 4.49 16,451 4.94
CD's $100,000 and over 10,977 5.31 12,672 5.51
Other time deposits 17,125 5.67 14,628 5.78
------- -------
Total interest-bearing deposits 60,297 4.66 55,040 4.79
Noninterest-bearing demand deposits 22,099 18,547
------- -------
Total deposits $82,396 $73,587
======= =======
</TABLE>
Short-Term Borrowings
Short-term borrowings of $1,917,000 at December 31, 1996 consisted entirely
of repurchase agreements with customers of AANB. This compares with repurchase
agreements outstanding at December 31, 1995 of $1,785,000. For additional
information on short-term borrowings, see Note 10 of the Notes to Consolidated
Financial Statements.
Long-Term Borrowings
On May 21, 1996, The Adams National Bank paid off the remaining balance on
its long-term capital note with Minbanc Capital Corp. On October 1, 1996, The
Adams National Bank entered into an agreement to borrow $1,143,000 for
approximately twelve years at 6.95% from the Federal Home Loan Bank Board under
its Community Investment Program. These proceeds were used to fund a loan at a
positive spread with a like amortization and maturity.
71
<PAGE>
Asset Quality
Loan Portfolio and Adequacy of the Allowance for Loan Losses
AANB manages the risk characteristics of its loan portfolio through various
control processes, such as credit evaluation of individual borrowers,
establishment of lending limits to individuals and application of lending
procedures, such as the holding of adequate collateral and the maintenance of
compensating balances. Although credit policies are designed to minimize risk,
management recognizes that loan losses will occur and that the amount of these
losses will fluctuate depending on the risk characteristics of the loan
portfolio as well as general and regional economic conditions.
As a result of improvement in the quality of the loan portfolio over the
last few years as well as relatively low levels of net charge-offs, AANB has not
taken a provision for loan losses since the third quarter of 1994. Despite this,
the unallocated portion of AANB's Allowance for Loan Losses has continued to
increase since that time. During the third quarter of 1996, AANB received a
recovery of approximately $87,000 on a previously charged off loan, further
increasing the level of the unallocated reserves. As of December 31, 1996, AANB
evaluated the level of the Allowance for Loan Losses, specifically the
unallocated portion, to determine the level which would be prudent given AANB's
nonperforming asset and charge-off trends while at the same time providing an
appropriate level of unallocated reserve for any potential losses which may be
identified. Following this evaluation, AANB reversed $275,000 of the loan loss
provision during 1996, leaving the unallocated portion of the allowance for loan
losses at $117,000 at December 31, 1996. Throughout this process, AANB continues
to recognize the risk characteristics of the loan portfolio, including specific
reserves for problem credits and general reserves for the overall loan
portfolio, and deems the allowance for loan losses of $1,048,000 at December 31,
1996 to be adequate.
At December 31, 1996, the allowance for loan losses as a percentage of
outstanding loans was 1.44% as compared to 2.00% at December 31, 1995. This
decrease is predominantly due to improvement in the quality of the loan
portfolio. See analysis of "Nonperforming Assets" for a further discussion of
asset quality. In assessing the adequacy of the allowance for loan losses,
management primarily relies on its ongoing review of the loan portfolio, which
is undertaken both to determine whether there are probable losses which must be
written off and to assess the risk characteristics of the loan portfolio as a
whole. In addition to actual loss experience, management considers factors such
as industry specific composition of the loan portfolio and the general and
regional economic conditions. This review takes into account the judgment of the
individual loan officer, senior management and The Adams National Bank Board of
Directors. The Board of Directors reviews AANB's Classified and Criticized Loans
Quarterly Report and quarterly loan loss analyses. In addition, AANB's review
takes into account the judgment of the regulatory agencies that review the loan
portfolio as a part of the regular examination process. Such regulatory agencies
may require AANB to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
AANB also has an independent loan review performed by a consultant on an annual
basis, which during the last three years covered approximately 72% of the dollar
volume of the loan portfolio, and included 97% of the criticized and classified
loans. While management uses available information to recognize losses on loans,
future additions may be necessary based on changes in economic conditions and
other factors.
72
<PAGE>
In reviewing the adequacy of the allowance for loan losses, AANB also
prepares a detailed migration analysis which measures AANB's historical loss
experience relative to the risk classifications within the individual loan
portfolio pools. This historical loss experience is then adjusted for external
factors such as trends in volumes and characteristics of loans, national and
local economic trends and management experience, among other factors, and is
applied to the current outstanding loan portfolio pools within each risk
classification. Based on the results of this migration analysis, which
encompasses all of the factors previously used, management makes a determination
as to the adequacy of the allowance for loan losses.
The table entitled "Allocation of Allowance for Loan Losses" sets forth an
analysis of the allocation of the allowance for loan losses by categories as of
December 31, 1996, 1995 and 1994.
Allocation of Allowance for Loan Losses
At December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ --------------
Reserve % of Loans Reserve % of Loans Reserve % of Loans
Amount to Total Loans Amount to Total Loans Amount to Total Loans
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 438 53.8% $ 658 68.1% $ 760 70.3%
Real estate - commercial mortgage 360 33.9 252 19.7 194 15.8
Real estate - residential mortgage 19 3.6 39 2.4 21 2.3
Real estate - construction 31 5.7 27 4.1 21 5.3
Installment 83 3.0 45 5.7 46 6.3
Unallocated 117 -- 253 -- 248 --
------ ----- ------ ----- ------ -----
Total $1,048 100.0% $1,274 100.0% $1,290 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Nonperforming Assets
Nonperforming assets include nonaccrual loans, restructured loans, past due
loans and other real estate. See Note 1(d) of the Notes to Consolidated
Financial Statements.
Nonaccrual loans at December 31, 1996 of $963,000 decreased by $598,000
from $1,561,000 at December 31, 1995, while restructured loans decreased by
$672,000 to $573,000 at December 31, 1996 due to the payoff of one loan. Past
due loans increased by $147,000 to $153,000 at December 31, 1996 from $6,000 at
December 31, 1995 due principally to one credit which was both well secured and
in the process of collection. At December 31, 1996 and 1995, nonaccrual loans
included $607,000 and $875,000, respectively, in loans guaranteed by the SBA for
a total of $594,000 and $743,000, respectively. Banking regulations require that
the full balance of these loans be placed on nonaccrual status, despite the SBA
guarantee on a portion of the loan. During 1996, AANB transferred $249,000 to
other real estate from loans
73
<PAGE>
recorded on nonaccrual status at December 31, 1995, reflecting real property
acquired in satisfaction of the loan balance. All such property was sold during
1996 at a gain of $27,000.
The table entitled "Analysis of Nonperforming Assets" presents
nonperforming assets, by category, at December 31, 1996 and 1995.
Analysis of Nonperforming Assets
At December 31, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 863 $1,244
Real estate - commercial mortgage 100 122
Real estate - residential mortgage -- 195
------ ------
Total nonaccrual loans /1/ 963 1,561
Past due loans:
Real estate - commercial mortgage 142 --
Installment - individuals 11 6
------ ------
Total past due loans 153 6
Restructured loans:
Commercial 573 1,245
------ ------
Total restructured loans 573 1,245
------ ------
Total nonperforming assets $1,689 $2,812
====== ======
Total nonperforming assets exclusive of
SBA guaranteed balances $1,094 $2,070
====== ======
Ratio of nonperforming assets
to gross loans /2/ 2.31% 4.42%
Ratio of nonperforming assets to total
assets /2/ 1.51% 3.04%
Percentage of allowance for loan losses to
nonperforming assets /2/ 62.05% 45.30%
Ratio of net charge-offs (recoveries) to average loans (.08)% .03%
</TABLE>
- ----------------------------
1 Nonaccrual loans include $607,000 and $875,000 in loans guaranteed by the
SBA at December 31, 1996 and 1995, respectively. The outstanding balance of
these loans are insured for 97.9%, or $594,000, and 84.9%, or $743,000,
respectively.
2 Ratios include SBA guaranteed loan balances.
For additional information concerning nonaccrual, restructured and past due
loans, see Note 4 to the Notes to Consolidated Financial Statements included
herein.
Potential Problem Loans
At December 31, 1996 and 1995, respectively, loans totaling $781,000 and
$618,000 were classified as potential problem loans which are not reported in
the table entitled "Analysis of Nonperforming Assets". These loans were made to
borrowers who subsequently experienced financial difficulties. The loans are
74
<PAGE>
subject to management attention and their classification is reviewed on a
quarterly basis. Of the potential problem loans at December 31, 1996, 91% of the
balance represents loans which are partially to fully secured. The remaining 9%
of the balance, or $73,000, is guaranteed by the SBA for a total of $66,000.
Of the $618,000 in problem loans at December 31, 1995, 98% were partially
to fully secured with the remaining 2%, or $15,000, guaranteed by the SBA.
Impaired Loans
At December 31, 1996 and 1995, respectively, loans totaling $1,955,000 and
$2,790,000 were classified as impaired loans, all of which are reported as
nonaccrual, restructured or potential problem loans. For additional information
concerning impaired loans, see Note 4 to the Notes to Consolidated Financial
Statements.
Interest Sensitivity Management
The sensitivity of net interest income to fluctuations in interest rates is
known as interest rate risk. Sensitivity arises when assets and liabilities are
not subject to rate repricing within the same period. As shown by the table
entitled "Analysis of Interest Rate Sensitivity," at December 31, 1996, interest
sensitive assets repricing within each period of less than one year ranged from
78% to 103% of interest sensitive liabilities repricing in the comparable
periods. When non-rate sensitive assets and liabilities are excluded, the
interest sensitive assets in each remaining period beyond one year exceed
interest sensitive liabilities repricing in the comparable periods. Management
of interest rate sensitivity is monitored by the Asset/Liability Investment
Committee of The Adams National Bank which meets monthly and includes members of
The Adams National Bank's Board of Directors as well as The Adams National
Bank's officers.
The Committee considers, among other things, the sensitivity of major asset
and liability categories to anticipated interest rate changes. AANB does not
necessarily attempt to maintain a matched position for each time frame. While
interest sensitivity analysis is a useful tool for asset/liability management,
limitations exist which make it difficult to predict AANB's net interest income
solely on the basis of the interest sensitivity position. For example, the
relationship between interest rates earned on loans, particularly the prime
rate, and interest rates paid on deposits is not constant over time. Despite
these limitations, in an effort to better predict the effect of possible
interest rate changes on net interest income, AANB also prepares an analysis of
the effect on net interest income of interest rate shocks of 1%, 2% and 3% in
either direction. Based on AANB's interest sensitivity position and the analyses
performed of the effect of interest rate movements at December 31, 1996, net
interest income will not be materially impacted by either a rising or declining
interest rate environment.
75
<PAGE>
Analysis of Interest Rate Sensitivity
At December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Total Non-Rate
0-90 91-180 181-365 Rate Sensitive &
Days Days Days Sensitive Over 1 Year Total
----- ----- ----- --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 30,263 $ 7,490 $ 18,407 $ 56,160 $ 16,853 $ 73,013
Securities/1/ 2,172 6,122 2,550 10,844 12,002 22,846
Short-term investments 4,197 -- 1,382 5,579 -- 5,579
Noninterest-earning assets -- -- -- -- 10,724 10,724
------- ------ ------- ------- ------- -------
Total assets 36,632 13,612 22,339 72,583 39,579 $112,162
=======
Interest-bearing liabilities:
Deposits/2/ 44,732 10,108 13,353 68,193 3,284 $ 71,477
Short-term borrowings 1,916 -- -- 1,916 -- 1,916
Long-term borrowings/debt 17 13 27 57 1,082 1,139
Noninterest-bearing sources -- -- -- -- 37,630 37,630
------- ------ ------- ------- ------- -------
Total liabilities and Stockholders' equity 46,665 10,121 13,380 70,166 41,996 $112,162
=======
Excess (deficiency) of interest sensitive
assets over like liabilities:
For the period $(10,033) $ 3,491 $ 8,959 $ 2,417 $ (2,417)
Cumulative (10,033) (6,542) 2,417
Cumulative gap as a % of total
interest-earning assets (27.39)% (13.02)% (3.33)%
Rate sensitive assets/
rate sensitive liabilities:
Cumulative 0.78x 0.88x 1.03x
</TABLE>
- ------------
1 Includes both investment securities and available for sale securities.
2 NOW and savings accounts are reflected in the 181-365 days classification,
based on AANB's evaluation of historical runoff and interest sensitivity of
these deposits.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Overview
Total assets of AANB and The Adams National Bank were $120,859,000 at
June 30, 1997 as compared to $112,162,000 at December 31, 1996. Total assets at
June 30, 1997 increased by $8,697,000 from December 31, 1996 predominantly due
to increases in loans of $11,615,000, offset by decreases in securities of
$2,751,000. Total deposits increased by $8,407,000 during the same period to
$103,562,000 at June 30, 1997 due primarily to increases in demand deposits and
certificates of deposit, partially offset by normal fluctuations in money market
accounts.
AANB reported net income for the first six months of 1997 of $486,000, or
$0.30 per share, for an annualized return on average assets of .89% and an
annualized return on average equity of 7.38%. This compares with return on
assets of 1.12% and return on equity of 14.34% for the first six months of 1996.
Net income for the first six months of 1997 remains virtually unchanged from the
$485,000 net income, or $0.56 per share, recorded for the first six months of
1996. Income before taxes of $796,000 for the first six months of 1997 reflects
a 3%
76
<PAGE>
increase over the comparable 1996 period. Increases in net interest income and
other income, partially offset by increases in operating expenses associated
with the opening of a new branch in the fourth quarter of 1996 and professional
fees, accounted for the growth in net income. Net income per share declined
during this period as a result of the issuance of 795,500 shares of common stock
in the public stock offering completed in the third quarter of 1996.
Analysis of Net Interest Income
Net interest income, the most significant component of AANB's earnings,
increased by $487,000, or 22%, to $2,659,000 for the first six months of 1997 as
compared to $2,172,000 for the comparable 1996 period. Average earning assets
for the first six months of 1997 of $103,649,000 increased by $22,808,000, or
28%, over the comparable 1996 period. The increase in net interest income
resulted from increased earning assets, an increase in the average loan to
deposit ratio of 82% for the first six months of 1997 from 78% for the
comparable prior year period and a 10% increase in average demand deposit
accounts during the same period. The net interest spread for the first six
months of 1997 of 3.77% and a net interest margin of 5.18% for the same period,
reflected decrease of 32 basis points and 22 basis points, respectively, from
the prior year.
Other Income
Total other income increased by approximately $194,000, or 47%, to $602,000
for the first six months of 1997, primarily due to increased income recognized
on ATM transactions resulting from the implementation in September 1996 of the
$1.00 surcharge on noncustomer ATM transactions.
Other Expense
Salaries and benefits of $1,083,000 for the first six months of 1997
increased by $199,000, or 22%, over the first six months of 1996, due primarily
to an increase in the number of employees attributable to the new branch, normal
merit increases and associated increases in employee benefits. Net occupancy
expense of $473,000 for the first six months of 1997 reflects an increase of
$117,000, or 33%, from one year earlier due both to the opening of the new
branch during 1996 and additional depreciation expense of a local area network
installed in the later part of the second quarter of 1996. It is anticipated
that both salaries and benefits and net occupancy expense will increase during
the second half of 1997, with the opening of The Adams National Bank's fifth
branch scheduled for the fall of 1997. Professional fees of $151,000 for the
first six months of 1997 increased by $136,000 from one year earlier due
primarily to consulting expenses incurred in connection with augmenting AANB's
compliance infrastructure as well as to partial reimbursement during 1996 by the
Small Business Administration ("SBA") of legal fees incurred for the workout of
two troubled SBA guaranteed loans. Data processing expense of $213,000 for the
first six months of 1997 increased by $39,000, or 23%, over the prior year due
to the opening of the new branch as well as increased activity levels and item
charges. Other operating expense of $546,000 for the first six months of 1997
reflects an increase of $165,000, or 44%, over the prior year due primarily to
increases in advertising, public relations, printing and regulatory fees, as
well as increases in administrative and overhead expenses associated with
opening the new branch.
Income Tax Expense
Income tax expense of $309,000 for the first six months of 1997 reflects an
increase of $24,000 over the $286,000 tax expense recorded one year earlier due
to an increases in pretax income. AANB's effective tax rate for the first six
months of 1997 increased to 39% from approximately 37% for the first six months
of 1996.
77
<PAGE>
Analysis of Loans
The loan portfolio at June 30, 1997 of $84,628,000 increased by
$11,615,000, or 16%, as compared to the December 31, 1996 balance of $73,013,000
primarily as a result of increased lending activity in the first six months of
1997 associated with the arrival of The Adams National Bank's new Chief Lending
Officer in January 1997. New loans of $18,449,000, exclusive of short-term loans
and lines of credit, were originated in the first six months of 1997. Loan
principal payments of $6,843,000 offset only a portion of this increase. The
loan to deposit ratio at June 30, 1997 was 82% as compared to 77% at December
31, 1996. On average, the loan to deposit ratio for the first six months of 1997
was 82% as compared to 78% during the comparable period of the prior year.
Loan concentrations at June 30, 1997 and December 31, 1996 are summarized
as follows:
Loan Concentrations
At June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Service industry 39% 38%
Real estate development/finance 26 30
Wholesale/retail 24 22
Other 11 10
--- ---
Total 100% 100%
=== ===
</TABLE>
Analysis of Investments
Securities available for sale totaling $8,675,000 matured during the first
six months of 1997 as compared to purchases of $6,944,000 during the same
period. These securities transactions coupled with scheduled amortization and
accretion for the first six months accounted for the $1,628,000 decrease in the
available for sale portfolio to $9,578,000 at June 30, 1997 as compared to
$11,205,000 at December 31, 1996. Long-term investment purchases of $1,048,000
partially offset by maturities totaling $2,150,000 and normal pay downs on
mortgage-backed and other amortizing securities, account for the $1,124,000
decrease in long-term investments to $10,517,000 at June 30, 1997 from
$11,641,000 at December 31, 1996. Proceeds from maturing securities net of
reinvestments were used to fund new loans.
Short-term investments decreased by $250,000 to $5,329,000 at June 30, 1997
from December 31, 1996 due to normal fluctuations in The Adams National Bank's
liquidity.
Noninterest-Earning Assets
Cash and due from banks of $9,570,000 at June 30, 1997 decreased by
$215,000 from the December 31, 1996 balance of $9,785,000. Large deposits were
received from one of The Adams National Bank's large commercial customers at
both June 30, 1997 and December 31, 1996. The deposits were not available for
investment with other financial institutions until the business day following
those dates.
Deposits
Total deposits of $103,562,000 at June 30, 1997 increased by $8,407,000, or
9%, from the December 31, 1996 balance of $95,155,000. Demand deposits of
$26,618,000 at June 30, 1997 reflect a $2,940,000, or 12%,
78
<PAGE>
increase from the $23,678,000 balance at December 31, 1996 due principally to
growth in the deposits of The Adams National Bank's new branch as well as an
increase in The Adams National Bank's official checks outstanding. Normal
fluctuations in the deposits of both personal and nonprofit accounts make up the
majority of the $318,000 decrease in NOW accounts to $7,722,000 at June 30, 1997
as compared to $8,040,000 at December 31, 1996. Money market accounts of
$25,317,000 at June 30, 1997 decreased by $4,216,000 from the $29,533,000
balance reported at December 31, 1996 due primarily to normal fluctuations in
the balances of some of The Adams National Bank's large corporate customers.
Certificates of deposit at June 30, 1997 of $42,304,000 increased by $9,780,000
from the $32,524,000 balance at December 31, 1996, with certificates of deposit
$100,000 and over increasing by $6,858,000 and certificates of deposit under
$100,000 increasing by $2,921,000. The increase in certificates of deposit over
$100,000 is primarily due to increases in both brokered deposits and
collateralized government deposits, while the increase in certificates of
deposit under $100,000 is primarily due to both new products and the new branch
opened in the fall of 1996.
Average noninterest-bearing demand deposits for the first six months of
1997 of $23,388,000 increased by $2,215,000, or 10%, from the comparable 1996
period, while average interest-bearing deposits increased by $13,008,000 during
the same period to $69,332,000. Average NOW accounts for the first six months of
1997 of $7,451,000 decreased by $178,000. Average money market deposits for the
first six months of 1997 of $23,144,000 increased by $2,389,000 over the prior
year's average balance. Average certificates of deposit $100,000 and over
increased by $10,013,000 to $20,581,000 for the first six months of 1997 as
compared to the first six months of 1996 due principally to increases in both
collateralized government deposits and brokered deposits. Average certificates
of deposit under $100,000 for the first six months of 1997 of $16,604,000
increased by $529,000 over the comparable period of the prior year primarily due
to the issuance of brokered deposits during the first quarter of 1997. Average
noninterest-bearing deposits to average total deposits during the first six
months of 1997 represent 25% as compared to 27% one year earlier.
Asset Quality
Loan Portfolio and Adequacy of Allowance for Loan Losses
As a result of improvement in the quality of the loan portfolio over the
last few years as well as relatively low levels of net charge-offs from mid 1994
through mid 1996, AANB did not record a provision for loan losses. Nonetheless,
the unallocated portion of AANB's allowance for loan losses continued to
increase. In the last half of 1996, AANB reversed $275,000 of loan loss
provision. Throughout this process, AANB continues to recognize the risk
characteristics of the loan portfolio, including specific reserves for problem
credits and general reserves for the overall loan portfolio, and deems the
allowance for loan losses of $1,116,000 at June 30, 1997 to be adequate. The
allowance for loan losses as a percentage of outstanding loans at June 30, 1997
was 1.32%, down from the 1.44% reported at December 31, 1996. Both the total
dollar amount of the allowance for loan losses, as well as the portion of the
allowance for loan losses which is not allocated to any particular component of
the loan portfolio at June 30, 1997 have increased from December 31, 1996. The
unallocated portion of the allowance for loan losses of $126,000 increased from
the December 31, 1996 level of $117,000 despite the 16% growth in the total loan
portfolio.
79
<PAGE>
Allocation of Allowance for Loan Losses
At June 30, 1997 and December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------------------ ------------------------
Reserve % of loans Reserve % of loans
Amount to total loans Amount to total loans
------- --------------- ------- ---------------
<S> <C> <C> <C> <C>
Commercial $ 465 46.7% $ 438 53.8%
Real estate - commercial mortgage 400 40.3 360 33.9
Real estate - residential mortgage 20 3.5 19 3.6
Real estate - construction 37 6.5 31 5.7
Installment 68 3.0 83 3.0
Unallocated 126 -- 117 --
------ ----- ------ -----
Total $1,116 100.0% $1,048 100.0%
====== ===== ====== =====
</TABLE>
Transactions in the allowance for loan losses for the six months ended June
30, 1997 and 1996 are summarized as follows:
Transactions in the Allowance for Loans Losses for the
Six Months Ended June 30, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Balance at January 1 $1,048 $1,274
Recoveries:
Commercial 89 31
Real estate - mortgage 16 1
Installment to individuals 10 17
------ ------
Total recoveries 115 49
Loans charged off:
Commercial (3) (41)
Installment to individuals (44) (21)
------ ------
Total charge-offs (47) (62)
------ ------
Net recoveries (charge-offs) 68 (13)
------ ------
Balance at June 30 $1,116 $1,261
====== ======
Ratio of net recoveries (charge-offs)
to average loans /(1)/ 0.09% 0.04%
====== ======
</TABLE>
- ------------------------
(1) Ratio of net charge-offs to average loans is computed on an annualized
basis for the six months ended June 30, 1997 and 1996.
Nonperforming Assets
Nonaccrual loans at June 30, 1997 of $966,000 are up by $3,000 from the
$963,000 reported at December 31, 1996. Nonaccrual loans at June 30, 1997
include loans guaranteed by the SBA totaling $653,000. Banking regulations
require that the full balance of these loans be placed on nonaccrual status,
despite the SBA guarantee on an average of 100% of the total. Restructured loans
at June 30, 1997 of $571,000 remain virtually unchanged from the $573,000
reported at December 31, 1996. Loans past due 90 days or more increased to
$177,000 at June 30, 1997 from $153,000 at December 31, 1996 due principally to
the addition of three loans to two borrowers at June 30, 1997.
80
<PAGE>
Analysis of Nonperforming Assets
At June 30, 1997 and December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Nonaccrual loans:
Commercial $ 966 $ 863
Real estate - commercial mortgage -- 100
------ ------
Total nonaccrual loans/(1)/ 966 963
------ ------
Past due loans:
Commercial 177 --
Real estate - commercial mortgage -- 142
Installment - individuals -- 11
------ ------
Total past due loans 177 153
------ ------
Restructured loans:
Commercial 571 573
------ ------
Total restructured loans 571 573
------ ------
Total nonperforming assets $1,714 $1,689
====== ======
Total nonperforming assets exclusive of
SBA guaranteed balances $1,072 $1,094
====== ======
Ratio of nonperforming assets
to gross loans plus foreclosed properties/(2)/ 2.03% 2.31%
Ratio of nonperforming assets to total
assets/(2)/ 1.42% 1.51%
Percentage of allowance for loan losses to
nonperforming assets/(2)/ 65.11% 62.05%
</TABLE>
- --------------------------
(1) Nonaccrual loans include $653,000 and $607,000 in loans guaranteed by the
SBA at June 30, 1997 and December 31, 1996, respectively. The outstanding
balance of these loans are insured for 98.3%, or $642,000 and 97.9%, or
$594,000, respectively.
(2) Ratios include SBA guaranteed loan balances.
Potential Problem Loans
At June 30, 1997 and December 31, 1996, respectively, loans totaling
$1,029,000 and $781,000 were classified as potential problem loans which are not
reported in the table entitled "Analysis of Nonperforming Assets." The loans are
subject to management attention as a result of financial difficulties of the
borrowers and their classification is reviewed on a quarterly basis. All of the
potential problem loans at June 30, 1997 are partially to fully secured. At
December 31, 1996, 91% of potential problem loans were partially to fully
secured, with $66,000 of the remaining 9%, or $73,000, guaranteed by the SBA.
The $248,000 increase in potential problem loans from December 31, 1996 to
June 30, 1997 is primarily attributable to the addition in 1997 of three
potential problem loans offset by the transfer of one loan to nonaccrual status.
81
<PAGE>
Impaired Loans
At June 30, 1997 and December 31, 1996, respectively, loans totaling
$2,091,000 and $1,955,000 were classified as impaired loans, all of which are
reported above as nonaccrual, restructured or potential problem loans.
Interest Sensitivity
Through The Adams National Bank's Asset/Liability Investment Committee,
sensitivity of net interest income to fluctuations in interest rates is
considered through analysis of the interest sensitivity positions of major asset
and liability categories. As a result of inherent limitations in this type of
analysis, AANB does not necessarily attempt to maintain a matched position for
each time frame. To augment this analysis, AANB also prepares an analysis of the
effect on net interest income of 1%, 2% and 3% interest rate movements in either
direction. Based on the AANB's interest sensitivity position and the analyses
performed on the effect of interest rate movements at June 30, 1997 net interest
income will not be materially impacted by either a rising or declining interest
rate environment.
Liquidity and Capital Resources
Liquidity
Principal sources of liquidity are cash and unpledged assets that can be
readily converted into cash, including investment securities maturing within one
year, the available for sale security portfolio and short-term loans. In
addition to $14,900,000 in cash and short-term investments at June 30, 1997,
AANB has a securities portfolio which can be pledged to raise additional
deposits and borrowings, if necessary. At June 30, 1997, AANB had $3,729,000 in
unpledged securities which were available for such use. As a percentage of total
assets, the amount of these cash equivalent assets at June 30, 1997 and December
31, 1996 was 15% and 20%, respectively. Normal fluctuations in the deposit
levels of some of AANB's large corporate customers resulted in corresponding
fluctuations in the AANB's liquidity position (short-term investments). The
Adams National Bank's liquidity needs are mitigated by the sizeable base of
relatively stable funds which includes demand deposits, NOW and money market
accounts, savings deposits and nonbrokered certificates of deposit under
$100,000 (excluding financial institutions and custodial funds raised under
deposit acquisition programs) representing 70% of average total deposits for the
six months ended June 30, 1997 and 79% of average total deposits for the year
ended December 31, 1996. In addition, The Adams National Bank has unsecured
lines of credit from correspondent financial institutions which can provide up
to an additional $3,000,000 in liquidity as well as access to other
collateralized borrowing programs. AANB maintained an average loan to deposit
ratio of 82% and 76% for the first six months of 1997 and the year ended
December 31, 1996, respectively, and can access collateralized deposit programs
through U.S. government agencies to raise additional deposits, when liquidity
needs dictate.
Through its membership in the Federal Home Loan Bank of Atlanta (the
"FHLB"), which serves as a reserve or central bank for member institutions
within its region, The Adams National Bank is eligible to borrow up to
approximately $1,501,000 in funds from the FHLB collateralized by loans secured
by first liens on one to four family, multifamily and commercial mortgages as
well as investment securities. At June 30, 1997, $1,109,000 in borrowings from
the FHLB were outstanding. The Adams National Bank is eligible to increase the
maximum amount to be borrowed by $7,499,000 with the purchase of up to
$1,648,000 in additional stock in the FHLB. AANB has adequate resources to meet
its liquidity needs.
82
<PAGE>
In June 1997 AANB entered into the Agreement. The Cash Consideration in
connection with the Holding Company Merger is expected to be funded through both
internally generated funds as well as external funding sources (approximately $3
million). Although there can be no assurance that such financing will be
consummated, AANB has received a commitment from George Mason Bank for a line of
credit of $3 million with a five year term, payable interest only the first year
with outstanding sums bearing interest at prime less one-half percent. The line
of credit will be secured by a pledge of the stock of the Adams National Bank.
In the event that such financing is not consummated, AANB would be required to
seek additional financing from other commercial lending sources or through one
or more debt or equity offerings in the capital markets.
Increases in deposit levels comprise the majority of AANB's net cash
inflows from financing activities for the first six months of 1997. Loan
originations, net of repayments and maturities of securities, during the first
six months of 1997 constitute the majority of AANB's cash outflows from
investing activities.
Stockholders' Equity
In the third quarter of 1996, AANB completed a stock offering issuing
795,500 shares at a price of $8.75 per share, resulting in net proceeds to AANB
of $6,019,000 after underwriting discounts, commissions and expenses. Of these
proceeds, $219,000 was used to fund a loan to The Adams National Bank Employee
Stock Ownership Plan with 401(k) Provisions ("ESOP") to purchase stock in that
public offering. Immediately prior to the stock offering, AANB increased the
number of shares of authorized Common Stock from 800,000 to 5,000,000, reduced
the par value to $0.01 per share and effected a three-for-one stock split in the
form of a stock dividend of two shares of Common Stock for each share of Common
Stock issued and outstanding. As of July 12, 1996, the effective date of the
offering, AANB's Common Stock was approved for listing on the Nasdaq/NMS.
Stockholders' equity at June 30, 1997 of $13,329,000 increased by $189,000
from December 31, 1996. Common stock issued through the exercise of options
granted under the Employee Incentive Stock Option Plan coupled with dividends
paid on allocated shares of the Employee Stock Ownership Plan with 401(k)
Provisions accounted for a portion of this increase. Net income of $486,000 for
the first six months of 1997 and an $18,000 increase in unrealized losses on
securities, net of taxes, were partially offset by dividends declared during the
quarter of $326,000. Average stockholders' equity as a percentage of average
total assets for 1997 was 12.01% as compared to 7.80% for the comparable prior
year period.
The following table presents AANB's and The Adams National Bank's capital
position relative to their various minimum statutory and regulatory capital
requirements at December 31, 1996. AANB and The Adams National Bank are
considered "well-capitalized" under regulatory guidelines.
<TABLE>
<CAPTION>
Company Bank Minimum
------------------ ----------------- Capital
Amount Ratio Amount Ratio Requirements
------ ----- ------ ----- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Leverage ratio/1/ $ 13,345 12.07% $ 8,049 7.44% 4.00%
Tier 1 risk-based ratio/2/ 13,345 14.59 8,049 9.01 4.00
Total risk-based ratio/2/ 14,461 15.81 9,140 10.23 8.00
- ---------------------
</TABLE>
1 Based on annual average assets
2 Based on risk-adjusted assets
Changes in Accounting Principles
For a discussion of changes in accounting principles, see Note 1 of the
Notes to Consolidated Financial Statements.
83
<PAGE>
Factors Affecting Future Results
In addition to historical information, this unaudited financial information
includes certain forward looking statements based on current management
expectations. AANB's actual results could differ materially from those
management expectations. Factors that could cause future results to vary from
current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal and local tax authorities, changes in interest rates,
deposit flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of The Adams
National Bank's loan and investment portfolios, changes in ownership status
resulting in the loss of eligibility for participation in government and
corporate programs for minority and women-owned banks, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting the AANB's operations, markets,
products, services and prices.
PRO FORMA COMBINED FINANCIAL STATEMENTS (Unaudited)
The unaudited pro forma combined financial statements should be read in
conjunction with the accompanying notes to pro forma combined financial
statements and with the historical consolidated financial statements, including
the notes thereto, of AANB that are incorporated by reference in this Proxy
Statement/Prospectus and the historical consolidated financial statements,
including the notes thereto, of Ballston included elsewhere herein. The
historical interim financial information for the six months ended June 30, 1997,
used as a basis for the pro forma condensed combined financial statements,
include all necessary adjustments, which in managements' opinions, are necessary
to present the data fairly.
The following unaudited pro forma combined balance sheet gives effect to
the Holding Company Merger as if it had been consummated on June 30, 1997. The
following unaudited pro forma combined income statements for the six months
ended June 30, 1997 and for the year ended December 31, 1996 set forth the
results of operations of AANB combined with the results of operations of
Ballston as if the Holding Company Merger had been consummated at the beginning
of the respective periods. The pro forma combined per share data give effect to
the assumed issuance of 554,226 shares of AANB Common Stock, which assumes that
none of the outstanding stock options to purchase Ballston Stock are exercised.
The unaudited pro forma condensed combined financial statements include pro
forma adjustments which are based on certain assumptions using the purchase
method of accounting. The actual purchase accounting adjustments will be made on
the basis of evaluations as of the date of consummation of the Holding Company
Merger at which time the merger consideration will be increased by Ballston's
net income and decreased by Ballston's dividends declared subsequent to June 30,
1997. Management does not anticipate that the actual purchase accounting
adjustments will otherwise differ materially from the adjustments reflected in
these pro forma financial statements or as reflected in the notes thereto.
These unaudited pro forma combined financial statements are presented for
illustrative purposes only and are not necessarily indicative of the results of
operations or financial position that actually would have occurred if the
Holding Company Merger had been consummated on the date assumed above nor is it
necessarily indicative of future operating results or financial position that
may be achieved in the future.
84
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
PRO FORMA COMBINED BALANCE SHEET
REFLECTING THE ACQUISITION OF BALLSTON BANCORP, INC.
JUNE 30, 1997
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-----------------------
AANB/
BALLSTON
AANB BALLSTON PROFORMA
HISTORICAL HISTORICAL DEBIT CREDIT COMBINED
---------- ---------- ----- ------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks ............ $ 9,570 $ 2,714 $ 12,284
Interest bearing deposits in
other banks ..................... 1,479 2,388 3,867
Federal funds sold ................. 3,850 4,308 4,437(A) 3,721
Securities available for sale ...... 9,578 4,247 13,825
Investment securities .............. 10,517 13,055 17(B) 23,555
Loans .............................. 84,628 43,147 403(C) 127,372
Allowance for loan losses ..... (1,116) (623) (1,739)
--------- --------- --------- ---------
Net Loans ............ 83,512 42,524 403 125,633
Bank premises and equipment, net ... 893 625 1,518
Other real estate .................. -- 1,074 --(D) 1,074
Goodwill ........................... -- -- 6,750(E) 6,750
Other assets ....................... 1,460 771 170(F) 2,401
--------- --------- --------- --------- ---------
TOTAL ASSETS ............... $ 120,859 $ 71,706 $ 6,920 $ 4,857 $ 194,628
========= ========= ========= ========= =========
LIABILITIES
Deposits:
Noninterest bearing .............. $ 26,618 $ 12,610 $ 39,228
Interest bearing ................. 76,944 44,844 155(G) 121,633
--------- --------- --------- --------- ---------
Total Deposits ........ 103,562 57,454 155 160,861
Short-term borrowings .............. 1,824 5,264 7,088
Long-term debt ..................... 1,109 681 88(H) 1,878
Acquisition debt ................... 3,000(I) 3,000
Other liabilities .................. 1,035 440 1,475
--------- --------- --------- --------- ---------
TOTAL LIABILITIES ............. 107,530 63,839 155 3,088 174,302
========= ========= ========= ========= =========
STOCKHOLDERS' EQUITY
Common stock ..................... 17 324 324(J) 5(J) 22
Surplus .......................... 12,182 6,631 6,631(K) 6,992(K) 19,174
Retained earnings ................ 1,352 921 921(L) 1,352
Employee stock ownership shares .. (177) -- (177)
Treasury stock ................... (29) -- (29)
Net unrealized loss on securities. (16) (9) (9)(L) (16)
--------- --------- --------- --------- ---------
TOTAL STOCKHOLDERS'
EQUITY ..................... 13,329 7,867 7,867 6,997 20,326
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ....... $ 120,859 $ 71,706 $ 8,022 $ 10,085 $ 194,628
========= ========= ========= ========= =========
</TABLE>
85
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
NOTES TO PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED; DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(A) AANB intends to utilize $4,437,000 of federal funds sold as a source of
funds for the cash portion of the Exchange Price. The total cash
component of the acquisition price is calculated below:
<TABLE>
<S> <C>
Shares of Ballston Common Stock
outstanding at June 30, 1997 1,619,474
Cash payment per share $ 4.3206
---------
Cash portion of the Exchange Price $ 6,997,100
Estimated acquisition costs 440,000
---------
Total estimated cash payment by AANB $ 7,437,100
=========
</TABLE>
The funds for the cash portion of the acquisition price were assumed to come
from the following sources:
<TABLE>
<S> <C>
Redemption of cash from federal funds sold $ 4,437,100
Issuance of long-term debt (see note I) 3,000,000
---------
$ 7,437,100
=========
</TABLE>
The remaining acquisition price will be in the form of Abigail Adams National
Bancorp, Inc. Common Stock as shown below:
<TABLE>
<S> <C>
Shares of Ballston Common Stock
outstanding at June 30, 1997 1,619,474
Stock portion 50%
Exchange ratio .684452
---------
Total shares of AANB Common Stock to be issued 554,226
=========
</TABLE>
Fractional shares are not determinable at this time. Cash will be paid
in lieu of fractional shares at a rate of $8.64 per full share of
Ballston Bancorp, Inc. common stock.
(B) The adjustment to investment securities reflects the write-down of
Ballston's portfolio to its estimated market value.
(C) The adjustment to loans reflects the write-down of Ballston's portfolio
to its estimated market value by discounting the portfolio using the
earlier of the estimated remaining lives or earliest repricing date of
the various types of loans at estimated current interest rates.
(D) Other real estate is recorded at Ballston's book value. Appraisals will
be performed prior to closing and actual values may differ from book
value. Any adjustments necessary to record the other real estate at fair
value will result in a purchase price adjustment and will not
materially affect the recorded amount of AANB's goodwill.
86
<PAGE>
(E) The purchase price and allocation of purchase price are as follows:
<TABLE>
<S> <C>
Consideration to be paid to Ballston stockholders:
Cash................................................. $6,997,100
AANB Common Stock (554,226) shares @ $12.625......... 6,997,100
Acquisition fees paid to advisors......................... 440,000
-------
Total Purchase Price...................................... $14,434,200
==========
</TABLE>
The $12.625 share value reflects the average closing price of AANB Common
Stock on June 17, 1997, the last trading day prior to the announcement of the
intention to acquire Ballston.
<TABLE>
<S> <C>
The purchase price has been allocated as follows:
Historical net book value of Ballston..................... $7,867,000
Adjustments to fair value of assets and liabilities:
Loans (see note C)................................... (403,000)
Investments (see note B)............................. (17,000)
Deferred income taxes (see note F)................... 170,500
Deposits (see note G)................................ 154,600
Long-term debt (see note H).......................... (88,200)
Adjustment to goodwill (see notes B, C, F, G, and H)...... 6,750,300
---------
Total purchase price................................. $14,434,200
==========
</TABLE>
(F) Represents the deferred tax asset created by tax effecting the
adjustment of Ballston's assets and liabilities to fair market value.
(G) Reflects the adjustment of deposits to their estimated market value by
discounting such liabilities using the estimated remaining lives of the
various types of deposits and estimated current interest rates.
(H) Reflects the adjustment of borrowed funds to their estimated market
value by discounting such liabilities using the estimated remaining
lives of the advances and estimated current interest rates.
(I) The $3,000,000 adjustment to borrowings reflects the incurrence of long-
term debt by AANB to partially finance the cash portion of the
acquisition price. For purposes of the proforma financial statements,
the debt is assumed to bear a fixed rate of interest of 9.00%, with
interest only payments for the first year and principal and interest
payments for the remaining five years, to be collateralized by stock of
The Adams National Bank. As AANB has not yet finalized the terms of the
debt, the actual terms may differ.
(J) Represents the elimination of Ballston's Common Stock and the issuance
of 554,226 shares of AANB Common Stock at a par value of $.01 per share.
87
<PAGE>
(K) Represents the elimination of Ballston's Surplus and the issuance of
554,226 shares of AANB Common Stock at the current market value of
$12.625 per share on June 30, 1997.
(L) Represents the elimination of Ballston's retained earnings and
unrealized loss on securities.
88
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
REFLECTING THE ACQUISITION OF BALLSTON BANCORP, INC.
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AANB/
AANB BALLSTON PRO FORMA BALLSTON
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- COMBINED
DEBIT CREDIT --------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans........................... $3,601 $2,040 $ 72(B) $5,713
Securities:
Taxable......................................... 605 603 3(C) 1,211
Tax-exempt...................................... 8 -- 8
Short-term investments............................... 180 180 120(A) 240
------ ------ ------- ------
TOTAL INTEREST INCOME ..................... 4,394 2,823 7,172
Interest expense:
Deposits............................................. 1,632 953 71(D) 2,656
Federal funds purchased and repurchase agreements.... 64 141 205
Long-term debt....................................... 39 26 135(F) 1(E) 199
------ ------ ------- ------- ------
TOTAL INTEREST EXPENSE..................... 1,735 1,120 3,060
------ ------ ------
NET INTEREST INCOME............... 2,659 1,703 4,112
Provision for loan losses................................. -- 30 30
------ ------ ------
NET INTEREST INCOME AFTER
PROVISION (BENEFIT) FOR LOAN
LOSSES..................................... 2,659 1,673 4,082
Other income:
Service charges on deposit accounts.................. 564 97 661
Other income......................................... 38 128 166
------ ------ ------
TOTAL OTHER INCOME......................... 602 225 827
Other Expense:
Salaries and employee benefits....................... 1,083 638 53(H) 1,668
Occupancy and equipment expense, net................. 473 217 690
Professional fees.................................... 151 142 293
Data processing fees................................. 213 114 327
Other operating expense ............................. 546 276 225(G) 1,047
------ ------ ------- ------
TOTAL OTHER EXPENSE................... 2,466 1,387 4,025
------ ------ ------
INCOME BEFORE INCOME TAXES............ 795 511 884
Applicable income tax expense........................ 309 179 81(I) 407
------ ------ ------- ------- ------
NET INCOME............................ $ 486 $ 332 $551 $210 $ 477
====== ====== ======= ======= ======
Net income per share: (J)
Net income............................................. $.30 $.20 $.22
Primary............................................... .21
Fully diluted......................................... .21
</TABLE>
89
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Weighted Average Number of Shares:
Net income...................................... 1,630,559 1,619,474 (1,619,474) 554,226 2,184,785
Primary......................................... 2,254,619
Fully diluted................................... 2,263,199
</TABLE>
See Notes to Pro Forma Combined Statements of Income.
90
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADAMS/BALLSTON
ADAMS BALLSTON ADJUSTMENTS PRO FORMA
HISTORICAL HISTORICAL DEBIT CREDIT COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans......................... $6,072 $3,972 $118(B) $10,162
Securities:
Taxable....................................... 755 1,119 6(C) 1,880
Tax-exempt.................................... -- -- --
Short-term investments............................. 746 389 240(A) 895
------ ------ ------ ---
TOTAL INTEREST INCOME ................... 7,573 5,480 12,937
Interest expense:
Deposits........................................... 2,811 1,926 141(D) 4,878
Federal funds purchased and repurchase agreements.. 105 263 368
Long-term debt..................................... 17 36 270(F) 3(E) 320
------ ------ ------ ---- -----
TOTAL INTEREST EXPENSE................... 2,933 2,225 5,566
------ ----- -----
NET INTEREST INCOME............. 4,640 3,255 7,371
Provision (benefit) for loan losses................ (275) 12 (263)
------ ------ -----
NET INTEREST INCOME AFTER
PROVISION (BENEFIT) FOR LOAN LOSSES 4,915 3,243 7,634
Other income:
Service charges on deposit accounts................ 788 200 988
Other income....................................... 165 164 329
------ ------ ---
TOTAL OTHER INCOME....................... 953 364 1,317
Other Expense:
Salaries and employee benefits..................... 1,905 1,216 105(H) 3,016
Occupancy and equipment expense, net............... 777 398 1,175
Professional fees.................................. 143 154 297
Data processing fees............................... 359 237 596
Other ............................................. 909 469 450(G) 1,828
----- ----- ------ -----
TOTAL OTHER EXPENSE...................... 4,093 2,474 6,912
----- ----- -----
INCOME BEFORE INCOME TAXES............... 1,775 1,133 2,039
Applicable income tax expense...................... 648 392 172(I) 868
------ ------ ----- ------ ---
NET INCOME............................... $1,127 $ 741 $1,101 $404 $1,171
===== ====== ======= ==== ======
Net income per share: (J)
Net income................................. $ .94 $ .46 $ .67
Primary.................................... .65
Fully diluted.............................. .65
Weighted Average Number of Shares:
</TABLE>
91
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Net income................................. 1,200,803 1,619,474 (1,619,474) 554,226 1,755,029
Primary.................................... 1,800,543
Fully diluted.............................. 1,815,378
</TABLE>
See Notes to Pro Forma Combined Statements of Income
ABIGAIL ADAMS NATIONAL BANCORP, INC.
NOTES TO PRO FORMA COMBINED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1997 and
the Twelve Months Ended December 31, 1996
(Unaudited)
(A) Represents the loss of earnings on the $4,437,000 of federal funds sold
used to partially fund the cash portion of the acquisition price, at an
average rate of 5.40% for the six months ended June 30,1 997 and for the
year ended December 31, 1996.
(B) Represents the current period amortization of the adjustment to fair
value of the loans of Ballston on the level yield method over an
estimated average life of approximately 5 years.
(C) Represents the current period amortization of the Financial Accounting
Standards Board ("FASB") No. 115 adjustment to fair value of the
investment securities of Ballston using a method which approximates the
level yield method over an estimated average life of 7.5 years.
(D) Represents the current period accretion of the adjustment to fair value
of the interest-bearing deposits of Ballston on the level yield method
over an estimated average life of approximately 1.5 years.
(E) Represents the current period accretion of the adjustment to fair value
of the advances from the FHLB of Atlanta on the level yield method.
(F) Represents the current period interest expense on the long-term debt to
be incurred in connection with the Merger, at an average rate of 9.00%
for 1996 and the six months ended June 30, 1997. An average balance of
$3,000,000 was assumed to be outstanding for both periods.
(G) Represents the current period write-off of the amortization expense on
goodwill of $6,750,300 over an estimated life of 15 years.
(H) Represents savings on salaries and benefits costs due to two positions
which as of June 30, 1997 were already vacant, namely, the Chief
Financial Officer position, which AANB does not intend to fill, and the
Chief Lender position, which AANB intends to fill at a non-executive
level.
Savings on salaries and benefits are computed as follows:
<TABLE>
<CAPTION>
For the For the Six
Year Ended Months Ended
12/31/96 6/30/97
----------- ------------
<S> <C> <C>
Chief Financial Officer position $ 85,000 $42,500
Chief Lender position 20,000 10,000
-------- -------
Total estimated savings $105,000 $52,500
</TABLE>
Additional economies which may be obtained in the future are not
reflected in these pro forma financial statements.
(I) Represents the reduction in current period income tax expense with
respect to the purchase accounting adjustments.
(J) Earnings per share are based upon the combined historical income of AANB
and Ballston, including the effects of the proforma purchase accounting
adjustments. For purposed of calculating proforma earnings per share the
554,226 shares of AANB Common Stock to be issued to Ballston's
stockholders were assumed to be issued as of the beginning of each of
the periods presented.
92
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH AANB ACCOUNTANTS
Upon recommendation of the Audit Committee, AANB solicited bids for the
audit of AANB's financial statements. KPMG Peat Marwick LLP was previously
AANB's and The Adams National Bank's principal independent public accountants in
1995 and had served AANB and The Adams National Bank in that capacity since
their organization. On August 27, 1996, KPMG's appointment as principal
accountants was terminated and Arthur Andersen LLP was engaged as principal
accountants. The decision to change accountants was approved by the Audit
Committee of the Board of Directors.
In connection with the audits as of December 31, 1995 and 1994 and for each
of the years in the three year period ended December 31, 1995 and the subsequent
interim period through August 27, 1996, there were no disagreements with KPMG
Peat Marwick LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements if
not resolved to their satisfaction would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement.
The audit reports of KPMG Peat Marwick LLP on the consolidated financial
statements of AANB and The Adams National Bank as of December 31, 1995 and 1994
and for each of the years in the three year period ended December 31, 1995, did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
DESCRIPTION OF AANB CAPITAL STOCK
Common Stock
The authorized capital of AANB consists of 5,000,000 shares of AANB Common
Stock, $.01 par value. As of the Record Date there were issued and outstanding
1,651,226 shares of AANB Common Stock and 113,529 shares issuable upon the
exercise of options to purchase AANB Common Stock. AANB Common Stock is listed
on the Nasdaq/NMS under the symbol "AANB."
Each holder of AANB Common Stock is entitled to one vote for each share
held of record on each matter submitted to a vote of Stockholders. Cumulative
voting in the election of directors is not permitted. As a result, the holders
of more than 50% of the outstanding shares have the power to elect all
directors.
The holders of shares of AANB Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor and, in the event of the liquidation, dissolution or
winding up of AANB, to share ratably in all assets remaining after the payment
of liabilities. There are no preemptive or other subscription rights, conversion
rights, or redemption or sinking fund provisions with respect to shares of AANB
Common Stock. All of the shares of AANB Common Stock outstanding are legally
issued, fully paid and nonassessable. The shares of AANB Common Stock to be
issued to Ballston Stockholders in connection with the Holding Company Merger
will be fully paid and non-assessable upon exchange and receipt of the shares of
Ballston Stock.
93
<PAGE>
Common Stock Purchase Rights; Shareholder Rights Plan
On April 12, 1994, AANB's Board of Directors adopted a shareholders rights
plan, the purpose of which was to provide the Board of Directors with adequate
time to respond effectively to a takeover attempt and in a manner that would
maximize value for all stockholders. Pursuant to the plan, the AANB Board
declared a dividend of one common share purchase right (a "Right") for each
outstanding share of AANB's Common Stock (the "Common Shares"). The dividend was
paid on April 25, 1994 (the "1994 Record Date") to the shareholders of record on
that date. Each Right entitles the registered holder to purchase from AANB one
share of AANB Common Stock, at a price of $20.11 per share (the "Purchase
Price"), subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement, as amended on April 20, 1995 (the "Rights
Agreement"), between AANB and The First National Bank of Maryland, as Rights
Agent (the "Rights Agent").
Until the earliest to occur of (a) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired, or obtained the right to acquire, beneficial ownership or
record ownership of 25% or more of the outstanding Common Shares; (b) 10 days
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership or record ownership by a person or group of 25% or more of such
outstanding Common Shares; or (c) the date a person or group of affiliated or
associated persons is or becomes the beneficial or record owner of 15% or more
of the outstanding Common Shares and (i) the actions of such person proposes to
take are likely to have a material adverse impact on the business or prospects
of AANB; (ii) such person intends to cause AANB to repurchase the Common Shares
owned by such person; (iii) such person exercises or attempts to exercise a
controlling influence over AANB; or (iv) such person transfers all or a portion
of such Common Shares in a manner that results in a person owning 9.9% or more
of the Common Shares (an "Adverse Person") (the earliest of such dates being
called the "Distribution Date"), the Rights will be evidenced, with respect to
any of the Common Share certificates outstanding as of the Record Date, by such
Common Share certificate with a copy of a Summary of Rights attached thereto.
Notwithstanding the foregoing, the Rights Agreement, as amended on
April 20, 1995, provides that neither (i) the entry by Marshall T. Reynolds into
an agreement with Citibank to purchase certain pledged shares (the "Pledged
Shares") or the purchase by Mr. Reynolds (or any of his permitted assignees) of
the Pledged Shares nor (ii) the announcement, conduct or completion of the
tender offer by Mr. Reynolds to the AANB Stockholders of AANB Common Stock
(other than Citibank) at an offering price of $21.00 per Common Share, pursuant
to that certain agreement between Mr. Reynolds and AANB dated as of the same
date as the Rights Agreement (the "Tender Offer") would trigger the
exercisability of the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on December 31, 2003 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed by AANB.
At any time prior to the date a person becomes an Acquiring Person or an Adverse
Person, the AANB Board may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (the "Redemption Price"). Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the AANB Board without the consent of
the holders of the Rights, including an amendment to extend the Final Expiration
Date and, provided there is no Acquiring Person or Adverse Person, to extend the
period during which the Rights may be redeemed, except that from and after such
time as any person becomes an Acquiring Person or an Adverse Person no such
amendment may adversely affect the interests of the holders of the Rights.
94
<PAGE>
In the event that AANB is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold, each holder of a Right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction will have a market value of two times the exercise
price of the Right. In the event that any person becomes an Acquiring Person or
an Adverse Person, each holder of a Right, other than Rights beneficially owned
by the Acquiring Person or Adverse Person (which will thereafter be void), will
thereafter have the right to receive upon exercise of a Right that number of
Common Shares having a market value of two times the exercise price of the
Right, but in no event will the purchase price per share be less than the par
value of the Common Shares.
Delaware Business Combination Law
Section 203 of the Delaware General Corporation Law prevents an "interested
stockholder" (defined in Section 203, generally, as a person owning 15% or more
of a corporation's outstanding voting stock), from engaging in a "business
combination" (as defined in Section 203) with a publicly-owned Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became such or approved the business combination
transaction, (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding stock held by directors who are
also officers of the corporation and by associated stock plans that do not
provide associates with the rights to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer) or
(iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of Stockholders by the affirmative
vote of the holders of two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder.
Transfer Agent
The transfer agent and registrar for the AANB Common Stock is American
Stock Transfer & Trust Company, New York, New York.
Market for AANB'S Equity and Related Stockholder Matters
As of July 12, 1996, AANB's Common Stock is quoted on Nasdaq/NMS under the
symbol "AANB." Prior to that time, the stock was traded on a limited and
sporadic basis in the over-the-counter market and reported in the "pink sheets."
The following table sets forth the range of the high and low bid prices of
AANB's Common Stock for 1995 and 1996 and the first two quarters of 1997 and is
based upon information provided by the National Quotation Bureau, and the high
and low closing bid prices as reported by Nasdaq/NMS for the remainder of 1996.
The prices reported by the National Quotation Bureau reflect inter-dealer prices
and do not include retail mark-ups, mark-downs or commissions and may not have
represented actual transactions. The information presented gives effect to
three-for-one stock split in the form of a stock dividend which took place on
July 9, 1996.
95
<PAGE>
<TABLE>
<CAPTION>
Bid Prices of Dividends
Common Stock Declared
------------ --------
Calendar Quarter Ended High Low
- ---------------------- ---- ---
<S> <C> <C> <C>
March 31, 1995 $5.00 $5.00 --
June 30, 1995 5.50 5.00 --
September 30, 1995 7.67 5.00 --
December 31, 1995 8.17 7.33 $.17
March 31, 1996 $8.25 $8.17 $.08
June 30, 1996 8.33 7.83 .09
September 30, 1996 8.75 8.00 .10
December 31, 1996 11.25 8.50 .10
March 31, 1997 $12.25 $11.25 $.10
June 30, 1997 13.25 11.50 .10
September 30, 1997 13.75 11.00 .10
</TABLE>
As of the Record date, AANB had approximately 708 Stockholders of
record.
AANB's ability to pay cash dividends is limited by the provisions of
Delaware law, which permit the payment of dividends from either surplus or
retained earnings. In addition, the ability of AANB to pay a cash dividend
depends largely on The Adams National Bank's ability to pay a cash dividend to
AANB. The National Bank Act imposes limitations on the amount of dividends that
a national bank, such as The Adams National Bank, may pay without prior
regulatory approval. Generally, the amount is limited to The Adams National
Bank's current year's net earnings plus the retained net earnings for the two
preceding years. See Note 12 of the Notes to Consolidated Financial Statements.
EXECUTIVE OFFICERS AND DIRECTORS OF AANB
<TABLE>
<CAPTION>
Director/Executive
Name Age Position with AANB Officer Since
- ---- --- ------------------ ------------------
<S> <C> <C> <C>
Barbara Davis Blum 58 Chairwoman of the Board, President and 1986
Chief Executive Officer*
Kimberly J. Levine 41 Senior Vice President, Treasurer and 1988
Chief Financial Officer*
Kathleen Walsh Carr 50 Senior Vice President, Lending** 1997
Shireen L. Dodson 46 Director 1993
Susan Hager 53 Director 1992
Jeanne D. Hubbard 49 Director 1995
Clarence L. James, Jr 64 Director 1993
Steve Protulis 55 Director 1996
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
Director/Executive
Name Age Position with AANB Officer Since
- ---- --- ------------------ -------------
<S> <C> <C> <C>
Marshall T. Reynolds 60 Director 1995
Robert L. Shell, Jr. 53 Director 1995
Dana B. Stebbins 51 Director 1993
Susan J. Williams 57 Director 1995
</TABLE>
- -----------------------
* The named individual holds the same positions with respect to Subsidiary.
** This position is held with The Adams National Bank.
Barbara Davis Blum has served as Chairwoman of the Board of AANB and The
Adams National Bank since March 1986, President and Chief Executive Officer of
AANB since 1985 and President and Chief Executive Officer of The Adams National
Bank since 1983. She is also a director of the Washington Area Water and Sewer
Authority. She serves as Chairwoman of the Economic Development Finance
Corporation, a quasi-public economic development corporation for the benefit of
District of Columbia businesses; Chairwoman, Center for Policy Alternatives, a
national nonprofit organization; and a Director of Kaiser Permanente Health Care
of the Mid-Atlantic States. She is a director of the Greater Washington Board of
Trade; a Trustee of the Federal City Council; a member of the National Advisory
Council of the U.S. Small Business Administration; Senior Advisor, Commercial
Real Estate Women; and a Director of the Institute of American Indian Art, a
Presidential appointment requiring Senate confirmation. She was a founder of
Leadership Washington in 1985 and served as its Chairwoman in 1987. She also
served as 1995 and 1996 Greater Washington Area, United States Savings Bonds
Chairwoman. From 1981 to 1983, she served as President of Direction
International, an environmental consulting firm, and from 1977 to 1981 she
served as the Deputy Administrator of the U.S. Environmental Protection Agency.
Kimberly J. Levine, CPA, has been Senior Vice President and Treasurer of
AANB and The Adams National Bank since 1988. From 1984 to 1987, she was Vice
President and Controller of First American Bank, N.A. From 1979 to 1984, she was
Assistant Vice President of Suburban Bank in various accounting and reporting
positions. From 1977 to 1979, she was a Senior Accountant with Arthur Andersen &
Co. She formerly served as a member of the Corporate Reporting Task Force, a
combination public and private sector task force designed to address District of
Columbia government tax issues and has been an instructor for the American
Institute of Banking. She also serves as a trustee at the Levine School of
Music. Ms. Levine holds a Bachelor of Economics from the Wharton School of
Business of the University of Pennsylvania.
Kathleen Walsh Carr has been Senior Vice President and Chief Lender of The
Adams National Bank since February 1997. From 1986 to 1997, she was Senior Vice
President of Commercial Lending and subsequently Private Banking and from 1980
to 1986, she was Vice President of Commercial Lending with NationsBank. From
1972 to 1979, she held various management positions with National Bank of
Washington. She serves as a director of Jubilee Jobs and the Poor Roberts
Foundation. Ms. Carr holds a Bachelor of Arts degree from Marquette University.
97
<PAGE>
Shireen L. Dodson has served as the Assistant Director of Administration
and Planning for the Center for African American History and Culture (formerly
called the National African American Museum Project) of the Smithsonian
Institution since 1993. From 1985 to 1992, she served as Comptroller of the
Smithsonian Institution. She also served as a Commissioner of the District of
Columbia Minority Business Opportunity Commission from 1989 to 1992. She has
been President of the Coalition of 100 Black Women of D.C., Inc. and currently
serves on the Advisory Committee of that organization. She is also Assistant
Treasurer of the Girl Scout Council of the National Capital. She is Treasurer
of the Washington D.C. Chamber of Commerce and has been a Director of the
Company since 1993 and a Director of The Adams National Bank since February
1992.
Susan Hager has been the President of Hager Sharp, Inc., an issues oriented
communications firm, since 1973. She is also a Director of the Greater
Washington Board of Trade, Chairwoman of the Board of the Lab School of
Washington, a member of the National Advisory Council of the U.S. Small Business
Administration and a Trustee of the Federal City Council. She served as
President of National Small Business United, a national small business trade
association, and Chairwoman of the U.S. Department of the Treasury's Small
Business Advisory Council. She was a founder of the National Association of
Women Business Owners (NAWBO). She has been a Director of AANB and The Adams
National Bank since June 1992.
Jeanne D. Hubbard has been Executive Vice President and Senior Lending
Officer of First Sentry Bank, Huntington, West Virginia since 1996. She served
as a consultant to First Guaranty Bank, Hammond, Louisiana since 1993 and
previously served as an executive officer of First Guaranty Bank during 1996.
From 1980 to 1993, Ms. Hubbard held a variety of officer positions, including
Vice President and Senior Commercial Lender and Chairwoman of the Loan Committee
and Asset/Liability Committee, with First Bank of Ceredo, Ceredo, West Virginia.
She served as President of the C-K Rotary Club and Chairwoman of the Citizens
Advisory Committee of the United Way in Huntington, West Virginia. She has been
a Director of AANB and The Adams National Bank since October 1995.
Clarence L. James, Jr. has served as Executive Director since 1996 and an
ex-officio member of the Board since 1994 of Executive Leadership Council, an
association of the top national African American business leaders. From 1995 to
1996, he was a partner with the law firm of Manatt, Phelps & Phillips, LLP. From
1983 to 1995, he served as President and Chief Operating Officer of The Keefe
Company, a government relations and public affairs firm. From 1981 to 1983, he
was Vice President of Domestic Affairs and General Counsel of The Keefe Company.
Since 1990, he has also served as Chairman of the Board of Douglas James
Securities, Incorporated, a registered broker-dealer and a member of the
National Association of Securities Dealers, Inc. From 1977 to 1981, he served as
Commissioner and Chairman of the Copyright Royalty Tribunal, a Presidential
appointment. From 1971 to 1977, he was Managing Partner of James, Moore, Douglas
& Co., LPA, a corporate, tax and land development law practice. He has been a
Director of AANB and The Adams National Bank since February 1993.
Steve Protulis is the Executive Director of the National Council of Senior
Citizens ("NCSC"), a position he has held since August 1995. From 1988 to 1995,
he coordinated senior efforts for the AFL-CIO COPE Department, and was the
national coordinator for various related support groups. Mr. Protulis has two
decades of experience working with the United Auto Workers and various
legislative efforts. He has been an executive board member of NCSC since 1984, a
member of the board of the Congressional Hispanic Caucus Institute since 1991,
and an executive board member of the National Council on Aging since 1994. He
has been a director of AANB since October 1996 and a Director of The Adams
National Bank since September 1995.
98
<PAGE>
Marshall T. Reynolds is the Chairman of the Board, President and Chief
Executive Officer of Champion Industries, Inc., a holding company for commercial
printing and office products companies, a position he has held since 1993. He
became Chairman of the Board of Premier Financial Bancorp, Georgetown, Kentucky
in the first quarter of 1996 and Chairman of the Board of First Guaranty Bank,
Hammond, Louisiana during the second quarter. He became Chairman of the Board of
Broughton Dairy during the fourth quarter of 1996. From 1964 to present, Mr.
Reynolds was President and Manager of The Harrah and Reynolds Corporation
(predecessor to Champion Industries, Inc.). He was Chairman of the Board of Banc
One, West Virginia Corporation and its predecessor company(ies) from 1983 to
November 1993. He has served as Chairman of United Way of the River Cities, Inc.
and Boys and Girls Clubs of Huntington. He has been a Director of AANB and The
Adams National Bank since November 1995.
Robert L. Shell, Jr., is the Chairman and Chief Executive Officer of Guyan
International, a privately held holding company for manufacturing and service
companies, a position he has held since 1985. Mr. Shell is also the Chairman of
Standard Leasing Co. and Permco Hydraulik AG. He has been a director of First
Guaranty Bank, Hammond, Louisiana since 1993 and a director of First State Bank
of Sarasota since February 1994. He is a member of the Huntington Boys and Girls
Club, the Cabell Huntington Hospital Foundation and the West Virginia Foundation
for Independent Colleges. He was formerly the Chairman of the Marshall Artists
Series. He has been a Director of AANB and The Adams National Bank since October
1995.
Dana B. Stebbins is a partner in Wilkes, Artis, Hedrick & Lane, a law firm
located in Washington, D.C., where she has practiced since 1989. From 1983 to
1989, she was Special Counsel for Klimek, Kolodney & Casale, P.C. From 1981 to
1983, she was Special Counsel for the U.S. House of Representatives Committee on
Small Business. From 1980 to 1982, she was Special Assistant to the Associate
Administrator of the U.S. Small Business Administration. From 1978 to 1980, she
was the Special Assistant and White House Liaison to the Chairman of the
Commodity Futures Trading Commission. From 1977 to 1978, she was Advisor to the
White House Office of Domestic and Urban Policy. She is the immediate Past
President of the Washington, D.C. Chamber of Commerce, a Trustee of the Federal
City Council and is on the Board of the Greater Washington Boys and Girls Clubs,
as well as the Lab School of Washington. She has been a Director of AANB and The
Adams National Bank since March 1993.
Susan J. Williams is the President of Bracy Williams & Company, a
government and public affairs consulting firm, a position she has held since
1982. In 1986, she was a representative on the Southern Growth Policies Board
for the State of Virginia. From 1979 to 1981, Ms. Williams served as Assistant
Secretary for Governmental Affairs of the U.S. Department of Transportation and
from 1977 to 1979 she was Deputy Assistant Secretary for Governmental and Public
Affairs for that agency. She is the Chairwoman of the Greater Washington Board
of Trade, having previously served as Secretary. She is also a Trustee of the
Federal City Council and a Director of the Henry L. Stimson Center and the
American Institute for Public Service. She has been a Director of AANB since
October 1995 and a Director of The Adams National Bank since September 1994.
Board Meetings and Committees
During 1996, the Board of Directors of AANB met 10 times. Each member of
the Board of AANB reelected at the last Annual Meeting of Stockholders attended
more than 75% of the combined Board of Directors and Board Committee meetings,
except for Dana Stebbins who attended 70% of the combined meetings. The
Personnel Committee which consisted of Susan Hager, Shireen Dodson, Steve
Protulis, Barbara Davis Blum and Clarence
99
<PAGE>
L. James, Jr. (through February 1996) met three times during 1996 with all
members in attendance, except for Barbara Davis Blum and Steve Protulis, who
each missed one meeting. The Personnel Committee recommends nominations to the
Board of Directors of AANB and The Adams National Bank, recommends nominations
to the Board Committees and reviews personnel and compensation issues. The
Personnel Committee does not consider nominations to the Board of Directors of
the Company and The Adams National Bank recommended by Stockholders. The
Audit/Compliance Committee which consisted of Barbara Davis Blum, Shireen Dodson
and Clarence L. James, Jr. met five times during 1996 with all members in
attendance, except for Barbara Davis Blum who missed one meeting. The
Audit/Compliance Committee monitors the safety and soundness of The Adams
National Bank's assets and the protection of depositors by overseeing The Adams
National Bank's internal accounting controls, reviewing internal and independent
audit reports and regulatory examinations and ensuring adequate management
follow-up. The Executive Loan Committee of AANB which consisted of Barbara Davis
Blum, Shireen Dodson and Clarence L. James, Jr. met two times during 1996 with
all members in attendance, except for Clarence L. James, Jr. who missed one
meeting. The Executive Loan Committee reviews and approves loans to be made by
AANB.
Directors' Compensation
During 1996, each director of AANB received $250 for each meeting of the
Board of Directors, $200 for each Executive Loan Committee meeting and $100 for
all other committee meetings attended by such director. In addition, each
director is eligible to participate in the nonqualified 1996 Directors Stock
Option Plan based upon their total months of 1996 Board service. During 1996,
each director was granted options to purchase 792 shares of the Company's Common
Stock at an exercise price of 85% of the fair market value on the date of grant,
or $9.13. See "Executive Compensation--1996 Directors Stock Option Plan."
BENEFICIAL OWNERSHIP OF AANB SHARES
The following table sets forth information as of the AANB Record Date,
relating to the beneficial ownership of the AANB Common Stock by (i) each person
or group known by AANB to own beneficially more than 5% of the outstanding AANB
Common Stock; (ii) each of AANB's directors; and (iii) all directors and
executive officers of AANB as a group. Unless otherwise noted below, the persons
named in the table have sole voting and sole investment powers with respect to
each of the shares reported as beneficially owned by such person.
<TABLE>
<CAPTION>
Beneficial Percent of
Ownership Class
Name and Address of Shares Owned
- ---------------- ---------- -----
<S> <C> <C>
Shirley A. Reynolds.................... 345,495(1)(2) 20.9%
1130 13th Avenue
Huntington, West Virginia 25701
Barbara W. Beymer...................... 39,000(1) 2.4%
214 North Boulevard West
Huntington, West Virginia 25701
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
Beneficial Percent of
Ownership Class
Name and Address of Shares Owned
- ---------------- ---------- -----
<S> <C> <C>
Deborah P. Wright........................ 81,000(1)(3) 3.6%
1517 Diederich Boulevard
Flatwoods, Kentucky 41139
Barbara Davis Blum....................... 20,844(4) 1.2%
Kimberly J. Levine....................... 2,205(5) *
Shireen L. Dodson........................ 484(6) *
Susan Hager.............................. 1,750(6) *
Jeanne D. Hubbard........................ 4,546(1)(7) *
Clarence L. James, Jr.................... 484(6) *
Steve Protulis........................... 2,577(8) *
Marshall T. Reynolds..................... 225,526(1)(2)(9) 13.7%
Robert L. Shell, Jr...................... 66,046(1)(7)(10)(11) 4.0%
Dana B. Stebbins......................... 484(6) *
Susan J. Williams........................ 1,750(6) *
All directors and executive officers as a
group (11 persons)...................... 566,696(12) 33.9%
</TABLE>
- -----------------------------
* Less than 1%
(1) Based upon Amendment No. 1 to Schedule 13D dated July 21, 1995, Marshall T.
Reynolds, Shirley A. Reynolds, Robert L. Shell, Jr., Robert H. Beymer,
Barbara W. Beymer, Thomas W. Wright, Deborah P. Wright and Jeanne D.
Hubbard acquired 609,114 outstanding shares of AANB. Amendment No. 2 to
Schedule 13D dated March 5, 1996 evidences the disposition of a total of
45,000 shares by Marshall T. Reynolds and Robert L. Shell, Jr. An
additional 13,881 shares were acquired by Mr. and Mrs. Reynolds, jointly,
in a tender offer which was completed on September 15, 1995.
(2) Marshall T. Reynolds and Shirley A. Reynolds share voting and dispositive
power with respect to 195,495 shares owned jointly. An additional 30,000
shares are held by a dependent child.
(3) Thomas W. Wright and Deborah P. Wright share voting and dispositive power
with respect to 21,000 shares owned jointly.
(4) Includes options to purchase 2,268 shares granted to Ms. Blum under the
Employee Incentive Stock Option Plan, options to purchase 15,000 shares
granted to Ms. Blum under the Nonqualified Stock Option Agreement between
AANB and the President and Chief Executive Officer, options to purchase 184
shares granted to Ms. Blum under the Directors Stock Option Plan and 536
shares granted to Ms. Blum under The Adams National Bank's Employee Stock
Ownership Plan with 401(k) Provisions. See "Executive
101
<PAGE>
Compensation -- Employment Agreement," "--Employee Incentive Stock Option
Plan," "--Directors Stock Option Plan" and "--Employee Stock Ownership Plan
with 401(k) Provisions."
(5) Includes options to purchase 1,212 shares granted to Ms. Levine under the
Employee Incentive Stock Option Plan, and 393 shares granted to Ms. Levine
under The Adams National Bank's Employee Stock Ownership Plan with 401(k)
Provisions. See "Executive Compensation--Employee Incentive Stock Option
Plan" and "--Employee Stock Ownership Plan with 401(k) Provisions."
(6) Includes options to purchase 184 shares granted to Ms. Dodson, Ms. Hager,
Mr. James, Ms. Stebbins, and Ms. Williams under the Directors Stock Option
Plan. See "Executive Compensation-- Directors Stock Option Plan."
(7) Includes options to purchase 46 shares granted to Ms. Hubbard and Mr. Shell
under the Directors Stock Option Plan. See "Executive Compensation--
Directors Stock Option Plan."
(8) Includes options to purchase 61 shares granted to Mr. Protulis under the
Directors Stock Option Plan. See "Executive Compensation--Directors Stock
Option Plan."
(9) Includes options to purchase 31 shares granted to Mr. Reynolds under the
Directors Stock Option Plan. See "Executive Compensation--Directors Stock
Option Plan."
(10) Mr. Shell's shares include 6,000 shares transferred by gift to his wife.
(11) Robert L. Shell, Jr. shares voting and dispositive power with respect to
20,000 shares owned jointly with his wife, Lena Ji Shell.
(12) Includes options to purchase 19,768 shares granted to all directors and
executive officers as a group and 929 shares granted under The Adams
National Bank's ESOP to all executive officers as a group.
AANB EXECUTIVE COMPENSATION
The executive officers of AANB receive cash compensation from The Adams
National Bank in connection with their positions as executive officers of The
Adams National Bank. AANB generally does not separately compensate its executive
officers.
The following table shows the cash compensation paid by The Adams National
Bank and AANB during the fiscal years ended December 31, 1996, 1995 and 1994 to
the Chief Executive Officer and the Chief Financial Officer, who are the only
executive officers of AANB and The Adams National Bank whose cash compensation
exceeded $100,000, for services rendered during the year:
102
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
-------------------------------------------- ------
Securities All Other
Name and Underlying Compen-
Principal Position Year Salary Bonus/Other Options sation (1)
------------------ ---- ------ ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Barbara Davis Blum, 1996 $194,413 0 81,694(2) $11,635
Chairwoman of the Board, 1995 185,155 0 --- 5,555
President and Chief Executive 1994 185,155 0 --- 5,183
Officer of AANB and The
Adams National Bank
Kimberly J. Levine, 1996 $108,167 $5,000 2,749(3) $ 7,993
Senior Vice President and Chief 1995 98,500 0 --- 2,960
Financial Officer of AANB and 1994 95,167 0 --- 2,830
The Adams National Bank
</TABLE>
- --------------------------------------
(1) Represents The Adams National Bank's matching contribution of cash and
discretionary contribution of AANB Common Stock under the 401(k) Plan
(now Employee Stock Ownership Plan with 401(k) Provisions) for the
accounts of Barbara Davis Blum and Kimberly J. Levine. Ms. Blum received
certain perquisites but the cost of providing such perquisites did not
exceed the lesser of $50,000 or 10% of her salary.
(2) Represents options to purchase shares granted under the Directors Stock
Option Plans, the Employee Incentive Stock Option Plans and the
Nonqualified Stock Option Agreement between Ms. Blum and AANB. See Option
Grants in Last Fiscal Year table below.
(3) Represents options to purchase shares granted under the Employee
Incentive Stock Option Plans. See Option Grants in Last Fiscal Year
table below.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Securities Percent of Total Market Price
Underlying Options Granted Exercise Price on Date of Expiration
Name Options Granted in Fiscal Year per Share Grant Date
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Barbara Davis 918(1) 0.8% $ 6.74 $ 7.93 Jan 2006
Blum 75,000(2) 67.0 6.74 7.93 Feb 2006
2,268(3) 2.0 7.93 7.93 Jan 2006
792(4) 0.7 9.13 10.74 Nov 2006
2,716(5) 2.4 10.74 10.74 Nov 2006
81,694
Kimberly J. 1,212(3) 1.1% $ 7.93 $ 7.93 Jan 2006
Levine 1,537(5) 1.4 10.74 10.74 Nov 2006
-----
2,749
</TABLE>
- --------------------------------------
(1) Options to purchase 918 shares granted under the Directors Stock Option
Plan vest beginning in 1996 at an annual rate of 20% at the end of each
year and become fully vested in the event of a Change in Control, as
defined in the Directors Plan, or in the event that the director leaves
the Board. As of June 30, 1997, options to purchase 184 shares are
vested.
(2) Options to purchase 75,000 granted to Ms. Blum under the Nonqualified
Stock Option Agreement between Ms. Blum and AANB vest beginning in 1996
at an annual rate of 20% at the end of each year and become fully vested
in the event of a Change in Control, as defined in the Agreement, or in
the event that she leaves AANB or The Adams National Bank. As of June 30,
1997, options to purchase 15,000 shares are vested.
(3) Options to purchase 2,268 shares granted to Ms. Blum and options to
purchase 1,212 shares granted to Ms. Levine under the Employee Incentive
Stock Option Plan are fully vested.
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(4) Options to purchase 792 shares granted under the 1996 Directors Stock
Option Plan vest beginning in 1997 at an annual rate of 33 and 1/3% at the
end of each year and become fully vested in the event of a Change in
Control, as defined in the Directors Plan. As of June 30, 1997, no options
are vested.
(5) Options to purchase 2,716 shares granted to Ms. Blum and options to
purchase 1,537 shares granted to Ms. Levine under the 1996 Employee
Incentive Stock Option Plan vest beginning in 1997 at an annual rate of 33
and 1/3% at the end of each year and become fully vested in the event of a
Change in Control, as defined in the 1996 Employee Plan. As of June 30,
1997, no options are vested.
<TABLE>
<CAPTION>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options in the Money Options at
Acquired on Value at Year End Year End
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- -------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Barbara Davis Blum -- -- Exercisable - 17,452 $ 84,734
Unexercisable - 64,242 309,098
Kimberly J. Levine -- -- Exercisable - 1,212 $ 4,630
Unexercisable - 1,537 1,552
</TABLE>
Employment Agreement
On February 20, 1996, AANB and The Adams National Bank entered into an
employment agreement with Barbara Davis Blum providing for the employment by
AANB and The Adams National Bank of Ms. Blum as Chairwoman, President and Chief
Executive Officer of AANB and The Adams National Bank through February 20, 1998.
The agreement shall automatically be extended for an additional two-year period
unless, six months prior to the expiration date, the Boards of Directors of AANB
and The Adams National Bank determine in a duly adopted resolution that the
agreement should not be extended and so notify Ms. Blum. Under the terms of the
employment agreement, which was amended on March 29, 1996, Ms. Blum is entitled
to receive a base salary for 1997 of $194,413, all benefits provided by any plan
available by The Adams National Bank to its employees, certain executive fringe
benefits and annual or other bonuses at the sole discretion of AANB's and The
Adams National Bank's Boards. As of the date of this Proxy Statement/Prospectus,
no annual increases or bonuses have been granted to Ms. Blum.
Ms. Blum also was granted a nonqualified stock option (the "Option") to
purchase 75,000 shares of AANB's Common Stock. The Option vests beginning in
1996 at an annual rate of 20% at the end of each year and is exercisable for a
period of 10 years from the date of grant at an exercise price equal to $6.74
per share, which is 85% of the fair market value of AANB's Common Stock on the
date of grant. The Option shall become fully vested in the event of a "Change in
Control" (as defined in the employment agreement) or in the event Ms. Blum's
employment should terminate for any reason, and remain exercisable for a period
of two years. Ms. Blum was granted certain registration rights in connection
with the shares subject to the Option, including "piggyback" rights for
registration at AANB's expense, and one "demand" right for registration at
AANB's expense, each subject to certain limitations.
The employment agreement provides that, in the event Ms. Blum shall resign
with 60 days notification, she shall be entitled to receive a cash payment equal
to the current year's salary then in effect. In addition, the agreement provides
that in the event of Ms. Blum's death, disability, termination without just
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cause or termination without her written consent and for a reason other than
just cause in connection with or within 12 months after any Change in Control,
or upon the occurrence of certain other events in connection with a Change in
Control, she shall be entitled to receive a cash payment equal to two times her
base salary (in semi-monthly payments in the event of disability) and the
acceleration of the unvested portion of any stock options. In addition, she
shall be included to the full extent eligible in all plans providing benefits,
including group life insurance, disability insurance and pension programs for
executive employees of AANB during the term of the employment agreement and for
two years following her disability or termination without just cause or one year
following her voluntary termination. The change in control benefits are
estimated to have an aggregate value of approximately $830,000 at June 30, 1997.
Ms. Blum has agreed not to engage in the banking business elsewhere in the
Washington or Baltimore, Maryland metropolitan areas or to solicit The Adams
National Bank's customers or employees for a period of one year following the
voluntary termination of her employment.
Non-Qualified Stock Option Plan
No options have been granted to date under AANB's Non-Qualified Stock
Option Plan (the "Plan"). A total of 90,000 shares of AANB's Common Stock are
authorized for issuance under the Plan, in which officers of AANB and The Adams
National Bank who have been employed for at least one year are eligible to
participate. The option exercise price of any options granted under the Plan
will equal 100% of the book value of the shares as of the date of grant. Any
options granted under the Plan will become exercisable on a cumulative basis at
a rate of 25% per year during the period of four years after the grant;
provided, however, that the first 25% will not become exercisable until the
expiration of six months after the date of grant.
Employee Incentive Stock Option Plan
On January 23, 1996, the Board of Directors of AANB approved a qualified
Employee Incentive Stock Option Plan (the "Employee Plan"). A total of 9,987
shares of AANB's Common Stock are authorized for issuance under the Employee
Plan, in which key employees of AANB and The Adams National Bank are eligible to
participate. On January 23, 1996, all such options were granted at an exercise
price of 100% of fair market value at the date of grant, or $7.93. Options
granted under the Employee Plan are immediately exercisable and expire not later
than ten years following the date of grant.
1996 Employee Incentive Stock Option Plan
On November 19, 1996, the Board of Directors of AANB approved a qualified
1996 Employee Incentive Stock Option Plan covering key employees (the "1996
Employee Plan"). A total of 14,193 shares of AANB's Common Stock are authorized
for issuance under the 1996 Employee Plan, in which key employees of AANB and
The Adams National Bank are eligible to participate. On November 19, 1996,
12,688 options were granted at an exercise price of 100% of fair market value,
or $10.74. On January 21, 1997, 1,000 options were granted at an exercise price
of 100% of fair market value, or $11.71. On February 18, 1997, 505 options were
granted at an exercise price of 100% of fair market value, or $11.83. Options
granted under the 1996 Employee Plan vest beginning in 1997 at an annual rate
ranging from 33.33% to 100% at the end of each year and become fully vested in
the event of a Change in Control, as defined in the 1996 Employee Plan. Options
under the 1996 Employee Plan expire not later than ten years after the date of
grant.
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Directors Stock Option Plan
On January 23, 1996, the Board of Directors of AANB approved a nonqualified
Directors Stock Option Plan (the "Directors Plan"). A total of 6,429 shares of
AANB's Common Stock are authorized for issuance under the Directors Plan, in
which all directors of AANB and The Adams National Bank in 1995 are eligible to
participate based upon the total months of 1995 Board service. On January 23,
1996, all such options were granted at an exercise price of 85% of fair market
value at the date of grant, or $6.74. Options granted under the Directors Plan
vest beginning in 1996 at an annual rate of 20% at the end of each year and
expire at the earlier of ten years following the date of grant or two years
after leaving the Board. However, in the event of death or disability, options
expire one year after leaving the Board. The options shall become fully vested
in the event of a "Change in Control" (as defined in the Directors Plan) or in
the event the director leaves the Board.
1996 Directors Stock Option Plan
On November 19, 1996, the Board of Directors of AANB approved a
nonqualified Directors Stock Option Plan (the "1996 Directors Plan"). A total of
7,920 shares of AANB's Common Stock are authorized for issuance under the 1996
Directors Plan, in which all directors of AANB and The Adams National Bank are
eligible to participate based upon the total months of 1996 Board service. On
November 19, 1996, all such options were granted at an exercise price of 85% of
fair market value, or $9.13. Options granted under the 1996 Directors Plan vest
beginning in 1997 at an annual rate of 33.33% at the end of each year and expire
at the earlier of ten years following the date of grant or immediately upon
leaving the Board. However, in the event of death or disability, options expire
two years after leaving the Board. The options shall become fully vested in the
event of a "Change in Control" (as defined in the 1996 Directors Plan).
Employee Stock Ownership Plan with 401(k) Provisions
On April 16, 1996, AANB's and The Adams National Bank's Boards of Directors
adopted an employee stock ownership plan with 401(k) provisions ("ESOP"). The
ESOP was amended effective as of January 1, 1997 to modify certain vesting
provisions. The ESOP replaced The Adams National Bank's former 401(k) Plan.
Employees of The Adams National Bank who are at least 21 years of age and who
have completed one year of service are eligible to participate. AANB has
submitted an application to the Internal Revenue Service for a letter of
determination as to the tax-qualified status of the ESOP. Although no assurances
can be given, AANB expects the ESOP to receive a favorable letter of
determination. The ESOP may be amended or terminated at any time by The Adams
National Bank. The ESOP is to be funded by contributions made by The Adams
National Bank in cash or shares of AANB's Common Stock. On July 17, 1996, the
ESOP borrowed $218,750 in funds from AANB which was an amount sufficient to
purchase 25,000 shares of Common Stock. This loan is secured by the shares of
Common Stock purchased and earnings thereon. Shares purchased with such loan
proceeds will be held in a suspense account for allocation, as the loan is
repaid, among participants who are eligible to share in The Adams National
Bank's contribution for the year. Dividends paid on allocated shares may be paid
to participants or used to repay the ESOP loan. Dividends on unallocated shares
are expected to be used to repay the ESOP loan.
Participants may elect to contribute a percentage of their salary, which
amount may not be less than 1% nor more than 15% of the participant's annual
salary up to $9,500 for 1997. In addition, The Adams
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National Bank may make a discretionary matching contribution equal to one-half
of the percentage of the amount of the salary reduction elected by each
participant (up to a maximum of 3%), which percentage will be determined each
year by The Adams National Bank, and an additional discretionary contribution
determined each year by The Adams National Bank. Contributions by The Adams
National Bank and shares released from the suspense account will be allocated
among participants on the basis of their annual wages subject to federal income
tax withholding, plus amounts withheld under certain qualified plans. Each
participant is immediately vested in his or her contributions, The Adams
National Bank's matching contributions and The Adams National Bank's initial
discretionary contribution made during 1996. Each participant will begin to vest
in his or her interest in The Adams National Bank's future discretionary
contributions to the ESOP after one year of service and will be fully vested
upon three years of service. Benefits are payable upon a participant's
retirement, death, disability, or separation from service, in a single lump-sum
payment or in installments. Distributions at retirement will be in the form of
cash or shares of Common Stock or both. In addition, the participant or
beneficiary has certain put rights in the event that the Common Stock
distributed cannot be readily sold.
The Trustee of the ESOP will vote all shares of Common Stock held by it as
a part of the ESOP assets, provided that a participant or beneficiary will be
entitled to direct the Trustee as to the manner in which voting rights are to be
exercised, with respect to shares of Common Stock allocated to the participant,
in connection with certain corporate transactions as described in the ESOP. The
Adams National Bank intends to appoint an unrelated corporate Trustee for the
ESOP.
AANB made matching cash contributions to the ESOP of $23,000 in 1996 and an
additional discretionary contribution of 4,681 shares of AANB Common Stock, at
an aggregate fair market value on the date of grant of $55,000.
Severance Agreements
On April 7, 1994, the Board of Directors of The Adams National Bank
approved severance arrangements for seven key management officers, namely,
Kimberly Levine, Alexander Beltran, Devin Blum, Thomas O. Griel, Joyce R. Hertz,
Melrose Nathan and Bijan Partovi. These arrangements were incorporated into
Severance Agreements, dated as of April 7, 1994. On January 21, 1997, the Board
of Directors of The Adams National Bank approved an additional severance
arrangement for a key management officer, Kathleen Walsh Carr (collectively, the
"Severance Agreements") effective February 10, 1997.
The Severance Agreements provide that, in the event of a "Change in
Control" (as defined in the Severance Agreements), the officers will be entitled
to resign from The Adams National Bank within the one year period following a
Change in Control and receive a lump sum payment equal to one year's full base
salary at the rate applicable to the officer in effect at that time. The term
Change in Control does not include a transaction approved by a majority of the
"Continuing Directors" (as defined in the Severance Agreements) then in office.
In addition, an officer will be entitled to receive such severance payment in
the event the officer's employment with The Adams National Bank is "Terminated"
(as defined in the Severance Agreements) within the one year period following a
Change in Control, prior to the resignation of the officer. These benefits are
estimated to have an aggregate value of approximately $633,000 as of June 30,
1997 based on current salary levels. Any severance payment payable under the
Severance Agreements will be reduced to the extent that any such payment
constitutes an "Excess Parachute Payment" as such term is defined in the
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Internal Revenue Code of 1986, as amended. The Severance Agreements are binding
on The Adams National Bank and its successors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--AANB
Banking Transactions
The Adams National Bank has had, and it is expected that it will have in
the future, banking transactions in the ordinary course of business with AANB's
directors, officers and their associates on substantially the same terms,
including interest rates, collateral and payment terms on extensions of credit,
as those prevailing at the same time for comparable transactions with others. In
the opinion of AANB Management these transactions did not in 1996 and to date in
1997 involve more than a normal risk of collectibility or present other
unfavorable features. As of June 30, 1997, the aggregate principal amount of
indebtedness to The Adams National Bank owed by officers and directors of AANB
and their associates on that date was approximately $252,000. The highest
aggregate principal amount owed during 1996 by all officers and directors of
AANB and their associates who were indebted to The Adams National Bank during
the year was approximately $1,376,000.
Other Transactions
AANB has engaged in transactions in the ordinary course of business with
some of its directors, officers, principal stockholders and their associates.
Management believes that all such transactions are made on the same terms as
those prevailing at the time with other persons. During 1994, 1995 and 1996,
AANB engaged Hager Sharp, Inc., of which Susan Hager, a director of AANB, is
President, to provide public relations services. For the fiscal year ended
December 31, 1996, 1995 and 1994, AANB paid Hager Sharp, Inc. $5,000, $15,000
and $32,000, respectively, for such services.
DESCRIPTION OF BALLSTON BANCORP, INC.
General
Ballston was organized on January 28, 1987 under the laws of the State of
Delaware to serve as a bank holding company. Ballston engages in no business
activity and has no paid employees. The primary activities of Ballston to date
have been to provide assistance to The Bank of Northern Virginia in the
management and coordination of its financial planning, regulatory liaison
services, shareholder services, and public relations services for The Bank of
Northern Virginia. Ballston is also available as a vehicle for establishing or
acquiring other business entities or expanding across state jurisdictional
lines.
The Bank of Northern Virginia
The Bank of Northern Virginia was organized under the laws of the
Commonwealth of Virginia on June 23, 1987 and began operations as a commercial
bank on October 3, 1988. It has been in business continuously since that date at
its main office location at 1010 North Glebe Road, in the Ballston area of
Arlington, Virginia. The Bank of Northern Virginia has also initiated limited
operations in the Ballston Common shopping center and in Arlington Hospital, in
both locations through automated teller machines and, in the case of Ballston
Common, through a limited purpose merchant window and a night depository drop-
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box. The Bank of Northern Virginia has received all regulatory approvals to open
a full-service branch office at 200 Little Falls Street, Falls Church, Virginia.
If certain contingencies are resolved in a manner that will permit The Bank of
Northern Virginia to erect drive-through teller lanes at the site, the branch
may open for business during the second half of 1997.
The Bank of Northern Virginia is a member of the Federal Reserve System
(the "Federal Reserve") and the Federal Home Loan Bank System, and its deposits
are insured within statutory limits by the FDIC. The Bank of Northern Virginia
provides a range of banking services for its commercial, industrial, and
financial customers, including commercial and construction loans. Commercial
lending activities include short-term and medium-term loans, revolving credit
arrangements, inventory and accounts receivable financing, equipment financing,
and interim and long-term real estate lending. Other services that are offered
include commercial checking accounts, wire transfers, credit counseling
programs, federal tax depository service, twenty-four hour depository services,
and Visa and MasterCard merchant accounts.
The Bank of Northern Virginia also provides consumer banking services,
including savings and checking accounts, negotiable order of withdrawal ("NOW")
and Super NOW accounts, money market deposit accounts, various savings programs,
including certificates of deposit, Individual Retirement Accounts, and
installment and other personal loans. The Bank of Northern Virginia makes
automobile, personal consumer, home improvement, and residential loans, and
provides safe deposit facilities, a direct deposit program, bank-by-mail
service, money orders and cashiers checks, and notary public services.
The Bank of Northern Virginia has adopted a deliberately conservative
lending and investment strategy which is designed to minimize loan losses and
insulate The Bank of Northern Virginia against economic downturns. The Bank of
Northern Virginia has no foreign loans. The Bank of Northern Virginia has no
investments in highly leveraged transactions and does not participate in
leveraged buy-outs. The Bank of Northern Virginia has no investments in high-
yield bonds or similar obligations commonly known as "junk bonds."
Properties
Neither Ballston nor The Bank of Northern Virginia owns any real property,
with the exception of two parcels of real estate which The Bank of Northern
Virginia acquired through foreclosure on loans. One of such parcels, the West
Virginia property, was sold on October 10, 1997, for a gross sale price of
$575,000. The book value of such property on June 30, 1997 was $402,727.23. See
the Notes to the Ballston Consolidated Financial Statements attached hereto.
The Bank of Northern Virginia leases from an unaffiliated party
approximately 4,163 square feet of space on the first floor of the building
situated at 1010 North Glebe Road, Arlington, Virginia, for use in its retail
and commercial banking operations. The lease on this facility expires April 30,
1998. The lease may be extended for two additional five-year terms at rental
levels approximating market rates.
The Bank of Northern Virginia also leases from an unaffiliated party
approximately 3,205 square feet of space on the tenth floor of the building
situated at 1110 North Glebe Road, Arlington, Virginia for use as executive
offices. The lease on this facility expires September 30, 1998.
The Bank of Northern Virginia also leases from an unaffiliated party a
kiosk, containing an automatic teller machine ("ATM"), night depository box and
a limited-purpose The Bank of Northern Virginia-staffed
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walk-up window, located in the Ballston Common shopping center in Arlington,
Virginia. The Bank of Northern Virginia provides services from this location
solely to the merchants of the shopping center, except that the ATM and night
depository box may be used by other customers of The Bank of Northern Virginia
and, in the case of the ATM, by members of the general public. The lease on this
facility expires on December 31, 2000.
In 1994, The Bank of Northern Virginia entered into an arrangement with the
Arlington Hospital, a 350-bed hospital located in Arlington, Virginia, pursuant
to which The Bank of Northern Virginia operates an ATM in the main lobby area of
the hospital. The ATM is equipped to receive deposits as well as dispense cash.
The Bank of Northern Virginia has agreed to keep the facility in service for a
minimum of five years. The hospital provides electrical service and similar
utilities, and The Bank of Northern Virginia bears the cost of maintaining the
facility in working order. There are no rent payments associated with this
arrangement.
In 1996 The Bank of Northern Virginia entered into a lease with an
unaffiliated party for approximately 2,035 square feet of space at the Falls
Church Professional Center, 200 Little Falls Street, Falls Church, Virginia for
use as a bank branch at an initial rental of $4,240 per month. The lease would
extend for five years beginning on the date that all contingencies set forth in
the lease agreement are met. Contingencies include obtaining all necessary
consents and permits from the City of Falls Church to install two drive-through
teller lanes on common property adjacent to the rear of the facility. Requests
for these consents and permits are currently pending, and whether they will be
granted and the timing of any such grant cannot be predicted at the present
time. The lease may be extended for two additional five-year terms, at the same
base rental rate and subject to the same rate escalation clause as governs the
initial term of the lease. AANB and Ballston are reviewing the business
prospects for the branch and determining whether to proceed with the plans to
open a branch at that location. If the parties decide against opening a branch
at that location at this time, there may be adverse financial consequences
resulting from termination of the lease or absorption of the lease costs over
the remaining term of the lease.
The Bank of Northern Virginia entered into a contemporaneous lease with a
second unaffiliated party under which The Bank of Northern Virginia would lease
a portion of the common area of the property adjacent to the rear of the Falls
Church Professional Center, on which The Bank of Northern Virginia would install
two drive-through teller lanes and an automated teller machine in the event a
branch is opened at the site. In lieu of rent The Bank of Northern Virginia has
agreed to improve the rear entrance of the building at the expense of The Bank
of Northern Virginia, the amount of which expense is estimated at $75,000. The
lease would extend for five years beginning on the date that all contingencies
set forth in the lease agreement are met. The contingencies to which this lease
is subject are similar to those to which the lease on the Falls Church
Professional Center facility is subject. The lease on the common area may be
extended for two additional five-year terms. The Bank of Northern Virginia may
terminate the lease on the common area upon thirty days' notice if the lease on
the Falls Church Professional Center facility is terminated or if The Bank of
Northern Virginia is unable to use the drive-through teller lanes for any reason
except its own negligence or willful misconduct.
Ballston Capital Stock
Ballston has only one class of capital stock outstanding, its $.20 par
value common stock (the "Ballston Stock"). As of June 30, 1997, 1,619,474 shares
of Ballston Stock were issued and outstanding. On that date, options to purchase
75,000 shares of Ballston Stock at $3.76 per share were outstanding and held by
two executive officers of The Bank of Northern Virginia, but none of these
options were exercisable. There were no other outstanding options, warrants, or
other rights with respect to the capital stock of Ballston.
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Fred A. Burroughs, III, Chairman and CEO of The Bank of Northern Virginia,
was granted options to purchase 50,000 shares of the common stock of Ballston at
$3.76 per share, and Robert F. Kelleher, Chairman, President and CEO of
Ballston, to purchase 25,000 shares at $3.76 per share. The purchase price
represents 110 percent of the book value per share of the common stock of
Ballston as of the date of grant. In the case of each officer, the options
expired August 17, 1997. The options were not exercisable until such time as
total assets of The Bank of Northern Virginia equaled or exceeded $100 Million
and the return on average assets of The Bank of Northern Virginia reached 0.8
percent.
Market Price, Dividends and Related Stockholder Matters
The Ballston Stock is not traded on any securities exchange or in any other
organized fashion, and there are no market makers for the Ballston Stock.
Ballston does endeavor to assist persons who wish to buy or sell securities of
Ballston by locating other willing sellers and purchasers. To the best of the
knowledge of Ballston Management, the most recent purchase of shares of Ballston
was at a price of $5.125 per share. Since there is no active trading for the
Ballston Stock and all trades have been privately negotiated, this price is not
necessarily indicative of the value thereof. There were approximately 208
shareholders of record as of June 30, 1997.
The following table presents by calendar quarter for the periods indicated
the dividends declared by Ballston on each share of its common stock:
<TABLE>
<S> <C> <C>
1995 First Quarter $.015
Second Quarter .015
Third Quarter .015
Fourth Quarter .015
-----
$.06
1996 First Quarter $.0175
Second Quarter .0175
Third Quarter .0175
Fourth Quarter .0175
-----
$.07
1997 First Quarter $.02
Second Quarter .02
Third Quarter .02
</TABLE>
The payment of dividends on or the making of other distributions with
respect to the Ballston Stock is determined by the Ballston Board in light of
circumstances and conditions then existing, including the debt-to-equity ratio
of Ballston, the earnings of Ballston and The Bank of Northern Virginia, their
funding requirements and financial condition, compliance with applicable laws
and regulations, and general business conditions.
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The ability of The Bank of Northern Virginia to pay dividends to Ballston
is restricted by provisions of the Virginia Banking Act. The Virginia Banking
Act provides that a Virginia chartered bank may pay dividends from its net
undivided profits, but only if any deficit in capital funds originally paid in
has been restored by earnings to their initial level. Additionally, no dividend
may be declared or paid which would impair the paid-in capital of The Bank of
Northern Virginia. The Virginia Commissioner of Banking (the "Banking
Commissioner") has the right to prohibit the payment of dividends by a state
bank when such payment is deemed to be not in the public interest and an unsafe
and unsound banking practice. Furthermore, the Federal Reserve Board, as the
primary federal regulator of state-chartered banks that are members of the
Federal Reserve, prohibits the payment of dividends by The Bank of Northern
Virginia (i) in an amount greater than its net profits then on hand, (ii) in
excess of the total of its net profits for the present year combined with its
retained net profits of the two previous years or (iii) if at any time The Bank
of Northern Virginia has sustained losses which equal or exceed its undivided
profits then on hand.
Supervision and Regulation
Ballston is a bank holding company within the meaning of the BHC Act, and
is registered, and regulated and supervised by, the Federal Reserve Board. See
"Description of Abigail Adams National Bancorp, Inc. -- Supervision and
Regulation." Under the BHC Act, Ballston's activities, and those of companies
which it controls or in which it holds more than five percent of the voting
stock, are limited to banking or managing or controlling banks or furnishing
services to or performing services for its subsidiaries, or any other activity
which the Federal Reserve Board determines to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
such determinations, the Federal Reserve Board is required to consider whether
the performance of such activities by a bank holding company or its subsidiaries
can reasonably be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency that outweigh possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. Ballston has no
subsidiaries other than The Bank of Northern Virginia and engages in no business
activities except through The Bank of Northern Virginia.
Ballston is also subject to Title 6.1, Chapter 13 of the Code of Virginia,
dealing with financial institution holding companies. As a "Virginia financial
institution holding company" it is also subject to certain reporting
requirements to the SCC.
The operation of The Bank of Northern Virginia is subject to state and
federal statutes applicable to state banks and to regulations promulgated and
enforced primarily by the Federal Reserve Board. The applicable statutes and
regulations relate to insurance of deposits, required reserves, allowable
investments, loans, mergers, consolidations, issuance of securities, payment of
dividends, establishment of branches, limitations on credit to subsidiaries and
other aspects of the business of The Bank of Northern Virginia. The Federal
Reserve Board has broad authority to initiate proceedings designed to prohibit
The Bank of Northern Virginia from engaging in unsafe or unsound banking
practices. The Bank of Northern Virginia is also subject to Federal Reserve
regulations regarding reserves against deposits.
In addition, Ballston and The Bank of Northern Virginia are subject to
various other state and federal laws and regulations, including usury laws, laws
relating to consumer credit, and equal credit and fair credit reporting laws.
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Ballston is also subject to Title 6.1, Chapter 13 of the Code of Virginia,
dealing with financial institution holding companies. As a "Virginia financial
institution holding company" it is also subject to certain reporting
requirements to the State Banking Commission (the "Banking Commission").
The SCC, by statute, shall conduct an examination of each bank incorporated
under the laws of, and doing business in, the Commonwealth of Virginia, at least
twice in every three-year period.
The SCC regulates or monitors all areas of the operations of The Bank of
Northern Virginia, including reserves, loans, mergers, issuance of securities;
payment of dividends, interest rates, and establishment of branches. Interest
and certain other charges collected or contracted for by The Bank of Northern
Virginia will be also subject to state usury laws and certain federal laws
concerning interest rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BALLSTON
The following discussion contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements relating to Ballston's beliefs, expectations, and anticipations
regarding, among other things, general economic trends, interest rates, and
other matters. Such statements are subject to numerous uncertainties, such as
federal monetary policy, inflation, employment, profitability and consumer
confidence levels, both nationally and in Ballston's market area, the health of
the real estate and construction market in Ballston's market area, competitive
challenges in Ballston's market, legislative changes and other factors, and as
such, there can be no assurance that future events will develop in accordance
with the forward looking statements contained herein.
The following analysis of Ballston's financial condition and results of
operations as of and for the first six months of 1997 and as of and for the
three year period ended December 31, 1996, should be read in conjunction with
the consolidated financial statements of Ballston and statistical data presented
elsewhere herein.
Overview
Ballston does not engage in any substantial business activity other than as
a bank holding company that holds all of the issued and outstanding stock of The
Bank of Northern Virginia, (herein, the "Bank"), its principal asset. Unless
otherwise noted, the following discussion relates to Ballston and The Bank of
Northern Virginia on a consolidated basis.
Results of Operations
Net Income
Net income for Ballston for the first six months of 1997 was $332 thousand,
a 0.6 percent increase or $2 thousand over the $330 thousand earned in the first
six months of 1996. The increase was attributable primarily to increased net
interest income of $63 thousand, as higher interest income on loans and other
investments more than offset higher levels of interest expense and other
operating costs.
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Net income for 1996 was $741 thousand, an increase of 19.2 percent or $119
thousand from the $622 thousand earned in 1995. This increase is primarily the
result of a reduction in the provision for possible loan losses. The reduction
in the provision, in the amount of $108 thousand, is attributable to a perceived
improvement in asset quality on the part of management.
Net income for 1995 was $622 thousand, a 102.8 percent increase over the
$307 thousand earned in 1994. The increase is primarily attributable to an
increase in net interest income of $468 thousand, combined with a reduction of
$177 thousand in the provision for possible loan losses. During 1995 Ballston
was able to increase its interest-earning assets, funded principally by
increases in deposits. This factor more than offset increases in operating
expenses which increases amounted to $124 thousand as well as income taxes which
in 1995 exceeded 1994 levels by $181 thousand.
The percentage of other expenses to total interest income declined from
48.8% for 1995 to 45.2% for 1996. This decrease was primarily attributable to an
increase in average interest-earning assets during 1996 as other expenses were
essentially unchanged.
The percentage of other expenses to total interest income declined from
57.9% for 1994 to 48.8% for 1995. This decrease was attributable to an increase
in average interest-earning assets during 1995, offset primarily by an increase
in salaries and employee benefits.
Net Interest Income
Net interest income is generated from Ballston's lending and investment
activities and is the most significant component of Ballston's earnings. Net
interest income is interest earned on loans and the investment portfolio less
interest paid on customer deposits and debt. Net interest income for the first
six months of 1997 was $1,703 thousand, an increase of 3.8 percent or $63
thousand above net interest income during the first six months of 1996. The
increase was primarily attributable to increases in interest income on both
loans ($70 thousand higher) and investment securities ($54 thousand higher).
During 1996 net interest income was $3,255 thousand or 1.2 percent higher
than the $3,216 thousand in net interest income earned during 1995. While
increases in both the loan and investment portfolios between 1995 and 1996 led
to higher interest income, the costs of funding the deposits and borrowings
which supported these higher asset levels largely negated the effects of these
increases. During the latter half of 1996 Ballston marketed sixteen-month
certificates of deposit at above-market interest rates in an effort to expand
its customer base. Largely due to the high level of customer acceptance of this
promotion, the average rate which Ballston paid on its interest-bearing
liabilities (deposits and borrowed funds) increased from 4.32 percent in 1995 to
4.47 percent in 1996. Ballston was unable to sustain equivalent rate increases
on its interest-yielding assets, whose average yield declined slightly from 8.59
percent to 8.44 percent. The resulting compression of the interest rate spread
(the difference between the rate of interest earned on interest earning assets
and the rate of interest paid on interest bearing liabilities) prevented the
growth of Ballston's assets and liabilities from driving meaningful earnings
increases.
Net interest income increased from $2,748 thousand in 1994 to $3,216
thousand in 1995, an increase of $468 thousand or 17.0 percent. Increased
interest income of $1,020 thousand was well in excess of the increased interest
expense of $552 thousand. During 1995 Ballston was successful in issuing
certificates of deposits and other deposit instruments and reinvesting the funds
thus received in loans and investment securities at favorable rates.
Provision for Loan Losses
The provision for loan losses was $30 thousand in the first six months of
1997, equal to the provision made during the first six months of the prior year.
The provision made in the first six months of 1997 was used primarily to allow
for the overall growth of Ballston's loan portfolio.
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The $12 thousand provision in 1996 was reduced substantially from the $120
thousand provision made during 1995. During 1996 management revised its
conclusions on the extent of possible loan losses inherent in the portfolio, as
the dollar amount of loans on the "watch list" declined substantially as the
year progressed. As a result, Ballston was able to reserve its portfolio
adequately without making significant loan-loss provisions during 1996.
The provision for loan losses made during 1995, $120 thousand, was $177
thousand less than the $297 thousand provision made for 1994. The disparity is
due to the high level of provisions made during 1994 to replenish the allowance
for loan losses following the charge-off of certain loans during 1994.
Non-Interest Income
Non-interest income was $225 thousand during the first six months of 1997,
an increase of $50 thousand or 28.6 percent over the $175 thousand in non-
interest income in the first six months of 1996. The higher level of non-
interest income was due in large measure to the implementation of policies to
charge non-customers of Ballston for the use of its automated teller machines on
a per-transaction basis.
Non-interest income during 1996 was $365 thousand, an increase of $24
thousand or 7.0 percent over the level for 1995. The increase was primarily due
to changes in policies towards pricing for use of Ballston's automated teller
machines and other services.
Non-interest income decreased by $24 thousand or 6.7 percent from 1994 to
1995. Ballston had determined to increase substantially certain of the service
charges applicable to certain deposit accounts and transactions, and to waive
service charges less often, in an effort to more fully price for costly services
provided to a portion of its customers. The result, which had been foreseen, was
a reduction in income from service charges, as these customers responded
rationally to the pricing changes by modifying their behavior in an effort to
avoid being assessed the higher service charges.
Non-Interest Expense
Non-interest expense in the first six months of 1997 increased by $105
thousand or 8.2 percent from the first six months of 1996, from $1,282 thousand
to $1,387 thousand. Principal contributors to this increase were the expenses of
salaries and benefits, up $15 thousand, and professional fees incurred by the
parent company, up $34 thousand due to merger-related factors. Management
expects Ballston to continue to incur unusual costs related to preparations for
the pending merger. The cost of salaries and benefits should decline in the
third quarter of 1997, however, on account of the departure of two executive
officers and one other employee; due to the pendency of the merger with Abigail
Adams National Bancorp, Inc., it is the current intent of management not to fill
these vacant positions.
Salary and benefit expense may rise again in the fourth quarter of 1997 or
the first quarter of 1998 in the event that a branch is opened at the Falls
Church site. Management currently budgets for as many as five full-time
equivalent employees to provide this branch with adequate staffing. If the Falls
Church branch opens, Ballston will incur costs of equipping the Falls Church
branch (in addition to the $75 thousand expended as of June 30, 1997) with
furniture, equipment, and leasehold improvements. Rent expense for this
facility, which exceeds $4 thousand per month, began in May 1997. See
"Description of Ballston Bancorp, Inc. -- Properties."
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<PAGE>
During 1996 non-interest expense was $2,475 thousand, a decline of $21
thousand or 0.8 percent from $2,496 thousand a year earlier. Management
instituted stringent cost controls which curtailed and in some cases reversed
the trend of normal increases in operating costs.
Non-interest expense in 1995 of $2,496 thousand was $125 thousand or 5.2
percent higher than in 1994, when non-interest expense was $2,371 thousand.
Increases were observed across most subcatagories of operating expense, the
notable exception being professional fees. Due largely to the settlement of a
significant item of litigation, professional fees declined by $124 thousand
between 1994 and 1995. In 1995 Ballston did, however, incur non-interest expense
of $72 thousand to settle this litigation; no comparable item of expense had
been recorded in 1994.
The percentage of other expenses to total interest income declined from
48.8% for 1995 to 45.2% for 1996. This decrease was primarily attributable to an
increase in average interest-earning assets during 1996 as other expenses were
essentially unchanged.
The percentage of other expenses to total interest income declined from
57.9% for 1994 to 48.8% for 1995. This decrease was attributable to an increase
in average interest-earning assets during 1995, offset primarily by an increase
in salaries and employee benefits.
Income Taxes
Ballston's income tax provision for the first six months of 1997 was $179
thousand, up $6 thousand from the $173 thousand of the prior year's period and
reflective of increased earnings and a higher effective federal tax rate.
In 1996 the provision for income tax was $392 thousand, up $73 thousand or
22.8 percent from $319 thousand in 1995, principally on account of higher levels
of income before income taxes. The 1995 provision was 130.9 percent higher than
in 1994, as income before income taxes more than doubled.
Financial Condition
Total Assets
Total assets of Ballston decreased by $6,874 thousand or 8.7 percent from
December 31, 1996 to June 30, 1997. The decline was principally due to an
anticipated decrease in investment securities of $6,520 thousand. Maturation of
securities met scheduled deposit withdrawal requirements which in turn were due
in large part to the withdrawal of most of a large, temporary escrow deposit of
$8,000 thousand accepted late in 1996. The loss of the bulk of this deposit had
been anticipated at the time it was received.
During 1996, total assets increased by $10,476 thousand or 15.4 percent.
Most of this asset growth is attributable to the acceptance of the deposit whose
withdrawal in 1997 was mentioned above. The other major factor contributing to
asset growth during 1996 was the increase of 8.1 percent in net loans.
Assets rose during 1995 from $61,041 thousand to $68,104 thousand, an
increase of $7,063 thousand or 11.6 percent. Increases in net loans, amounting
to $2,325 thousand, were principally responsible for this total asset growth,
along with increases of $2,339 thousand in cash and cash equivalents and $1,294
thousand in investment securities. Management permitted cash and investments to
rise, believing that identification of quality loan opportunities would require
a degree of patience in the then-current economic environment.
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<PAGE>
Loans
Net loans increased by $386 thousand, or 0.9 percent, during the first six
months of 1997, to $42,524 thousand from $42,138 thousand at the end of 1996.
Management maintained its selective approach to loan opportunities in view of
the reduced level of deposit funding.
Net loans increased to $42,138 thousand at December 31, 1996 from $38,964
thousand a year earlier. This increase, amounting to $3,174 thousand or 8.1
percent, was due largely to increases in the real estate loan portfolio. This
portfolio, the largest component of Ballston's loans, increased by $1,753
thousand during 1996.
During 1995 net loans rose to $38,964 thousand from $36,639 thousand, an
increase of $2,325 thousand or 6.3 percent. Time and demand loans increased by
$1,757 thousand, accounting for the bulk of the increase.
Investment Portfolio
The investment activities of Ballston are designed to provide an investment
alternative for funds not presently required to meet loan demand; assist The
Bank of Northern Virginia in meeting potential liquidity requirements; assist in
maximizing income consistent with quality and liquidity requirements; supply
collateral to secure public funds; and provide consistent income and market
value throughout changing economic times.
Ballston's portfolio consists primarily of obligations of the U.S.
government, U.S. government agencies and corporations, as well as agency
collateralized obligation securities.
Investment securities declined to $17,302 thousand at June 30, 1997 from
$23,822 thousand at December 31, 1996, a decline of $6,520 thousand or 27.4
percent. Proceeds of securities which reached their scheduled maturities were
deployed in large part to meet the requirements of the anticipated withdrawal of
a large, temporary deposit accepted late in 1996.
During 1996 the investment securities of Ballston increased by $6,395
thousand, or 36.7 percent, from $17,427 thousand to $23,822 thousand, as
increased deposits were used primarily to increase the size of the investment
portfolio pending the foreseen withdrawal of most of a large, temporary deposit.
The carrying value of Ballston's U.S. treasury securities holdings increased by
$5,980 thousand, accounting for almost all of the increase in investment
securities.
In 1995 investment securities increased by $1,294 thousand, or 8.0 percent,
from $16,133 thousand to $17,427 thousand.
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), Accounting for Certain
Investments in Debt and Equity Securities. This statement addresses the
accounting and reporting for investments that have readily determinable fair
market values. Those investments are to be classified in three categories and
accounted for as follows:
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1. Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
2. Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair market value, with unrealized gains and
losses included in earnings.
3. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair market value, with unrealized gains and
losses excluded from earnings and reported in a separate component of
shareholders' equity, net of related deferred taxes.
Ballston implemented SFAS 115 on January 1, 1994, by classifying all
securities into either held-to-maturity investment securities or available-for-
sale investment securities. Ballston does not maintain a trading portfolio.
Non-Performing Assets
Non-performing assets include non-performing loans and other real estate
owned ("OREO"). The non-performing loans category includes loans on which the
accrual of interest in discontinued when the collectibility of principal or
interest is in doubt, or when payments of principal or interest have become
ninety days past due and have arrearages that have not been eliminated. In
certain instances, non-performing loans may also include loans that have become
ninety days past due but remain on accrual status because the value of the
collateral securing the loan is sufficient to cover principal and interest and
the loan is in the process of collection. OREO consists of real estate acquired
through foreclosure proceedings. In addition to the preceding two categories,
Ballston may, under appropriate circumstances, restructure loans as a concession
to a borrower. At June 30, 1997, December 31, 1996, and December 31, 1995 no
troubled debt restructurings were included in Ballston's loan portfolio.
Non-performing assets fell from $1,318 thousand at December 31, 1996 to
$1,104 thousand at June 30, 1997, a decline of 16.2 percent, primarily on
account of improved repayment experience in the past-due loan category.
Nonaccrual loans at June 30, 1997 were $15 thousand, the same level as existed
at December 31, 1996. Loans ninety or more days past due but still accruing fell
from $179 thousand at December 31, 1996 to $15 thousand at June 30, 1997, a
decline of 91.6 percent. The carrying value of foreclosed real estate declined
by 4.4 percent, from $1,124 thousand to $1,074 thousand.
Non-performing assets at December 31, 1996 were reduced by $231 thousand or
14.9 percent from year-earlier levels, from $1,549 thousand to $1,318 thousand,
due to a significantly decreased level of nonaccrual loans, which declined from
$202 thousand at December 31, 1995 to $15 thousand at December 31, 1996, a
decline of 92.6 percent. The decline in the level of nonaccruals was due
primarily to the fact that one large loan was refinanced by another financial
institution, permitting Ballston to be repaid in full. Loans ninety or more days
past due but still accruing rose by 23.4 percent during this period, from $145
thousand to $179 thousand, and the carrying value of foreclosed real estate was
reduced from $1,202 thousand to $1,124 thousand, or 6.5 percent.
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At December 31, 1995 the level of non-performing assets stood at $1,549
thousand, 121.9 percent higher than the $698 thousand of non-performing assets
reported at December 31, 1994. Higher levels of nonaccrual loans and foreclosed
real estate were responsible for this increase. During 1995 nonaccrual loans
rose from $10 thousand to $202 thousand, an increase of 1,920.0 percent, as two
loans were added to nonaccrual status. Loans ninety or more days past due and
still accruing rose from $115 thousand to $145 thousand, or 26.1 percent, and
foreclosed real estate increased from $573 thousand to $1,202 thousand, or 109.8
percent, the latter as a result of a single large foreclosure.
Deposits
Total deposits decreased to $57,454 thousand at June 30, 1997 from $63,424
thousand at December 31, 1996, a decline of $5,970 thousand or 9.4 percent. The
decline in deposits was due preponderantly to the withdrawal of most of a large,
temporary escrow deposit of $8,000 thousand accepted late in 1996. The loss of
the bulk of this deposit had been anticipated at the time it was received.
On December 31, 1996 total deposits were $63,424 thousand, an increase of
$8,324 thousand or 15.1 percent from the level one year earlier. The predominant
increase was in the category of NOW (negotiable order of withdrawal) accounts,
which increased by $7,822 thousand or 116.7 percent between December 31, 1995
and December 31, 1996. The large, temporary escrow account described above
accounted for this increase. Demand deposits declined during 1996 from $12,812
thousand to $10,792 thousand, a decline of $2,020 thousand or 15.8 percent. As
demand deposits do not bear interest, the decline in these balances in the
context of a general increase in deposit balances overall had the effect of
raising the overall cost of funds, with an unfavorable impact on interest rate
spread during 1996.
Total deposits rose during 1995 from $47,593 thousand at December 31, 1994
to $55,100 thousand at December 31, 1995, an increase of $7,507 thousand or 15.8
percent. An increase in time deposits over this period, in the amount of $8,776
thousand, more than compensated for declines in demand deposits of $381 thousand
and in savings deposits of $1,834 thousand but exerted an upward impact on
Ballston's overall cost of funds.
Liquidity
Liquidity is defined as the ability to meet current and future financial
obligations of a short-term nature. Ballston further defines liquidity as the
ability to respond to the needs of depositors and borrowers and to earnings-
enhancement opportunities in a changing marketplace. Primary sources of
liquidity consist of deposit inflows, loan repayments, borrowings from the
Federal Home Loan Bank System, securities sold under agreement to repurchase,
maturity of investment securities, and sales of securities from the available-
for-sale portfolio. These sources fund Ballston's lending and investment
activities.
During the six months ended June 30, 1997, deposits declined by $5,970
thousand from December 31, 1996, as most of a large, temporary escrow deposit of
$8,000 thousand accepted late in 1996 was withdrawn. This development was
foreseen by management at the time of the acceptance of the deposit and, as
such, does not have either long-term or short-term implications for the deposit-
gathering business of Ballston. Because the withdrawal of these funds was
anticipated, it was met primarily through the scheduled maturity of $6,000
thousand of investment securities held at December 31, 1996 as well as through
principal collections of $704 thousand on investment securities in the first six
months of 1997, partially offset by new securities purchases in the first six
months of 1997 of $198 thousand, mostly in the held-to-maturity category. During
the six months ended June 30, 1997, cash and cash equivalents increased by
$1,149 thousand, offset by a decrease in interest bearing deposits with other
financial institutions in the amount of $1,875 thousand. Total investment
securities at June 30, 1997 were $6,520 thousand less than six months earlier,
but were only approximately 1 percent lower than the levels that existed at June
30, 1996 and December 31, 1995, respectively.
Ballston's total-asset growth of $10,476 thousand during 1996 was financed
by the acceptance of deposits (whose net increase in 1996 was $8,323 thousand,
including the $8,000 thousand temporary deposit discussed earlier), and the sale
of securities under agreement to repurchase (whose net increase in 1996 was
$2,052 thousand). Ballston deployed some of these funds during 1996 by
increasing loans outstanding by $3,275 thousand, but more significantly by
purchasing $11,602 thousand in investment securities, which was partially offset
by maturities and principal collections of $5,193 thousand during the year, and
by depositing a net $2,386 thousand with other financial institutions in the
form of interest bearing deposits, thus positioning Ballston for the anticipated
withdrawal of most of the temporary deposit early in 1997. During 1995, Ballston
increased its deposits by $7,508 thousand, using the proceeds to increase loans
by $3,160 thousand, to reduce the balance of funds borrowed from the Federal
Home Loan Bank by $2,847 thousand, and to increase the investment portfolio by
$1,217 thousand.
At June 30, 1997, cash and due from banks, federal funds sold, and
available-for-sale short-term investments (maturing within one year) amounted to
$10,706 thousand, or 14.9 percent of total assets. These amounts compare to
$14,432 thousand or 18.4 percent of total assets at December 31, 1996, and
$9,078 thousand or 13.3 percent of total assets at December 31, 1995. Membership
of The Bank of Northern Virginia in the Federal Home Loan Bank System as well as
the Federal Reserve System affords additional access to borrowing that could
assist Ballston in meeting its liquidity needs. Ballston believes that there are
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no adverse trends in its liquidity or capital reserves, and that it maintains
adequate liquidity to meet its commitments.
Capital Resources
Total stockholders' equity of Ballston at June 30, 1997 was $7,867
thousand, which was $265 thousand higher than the level of $7,602 thousand that
existed at December 31, 1996. The increase was primarily the result of earnings
of Ballston net of dividends declared to its shareholders.
Stockholders' equity increased $622 thousand during 1996 and $503 thousand
during 1995. These increases were caused primarily by the retention of earnings
in excess of dividend declarations.
STATISTICAL INFORMATION AND ANALYSIS--BALLSTON
The following tables present certain statistical information regarding
Ballston Bancorp, Inc. ("Ballston") and should be read in connection with
Ballston's consolidated Financial Statements and notes set forth elsewhere
herein.
The following table sets forth information regarding Ballston's
consolidated average statements of financial condition for the periods
presented.
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Ballston Bancorp, Inc.
Average Balance Sheets
Years ended December 31
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
-------- --------
<S> <C> <C>
Cash and due from banks $ 1,806 $ 1,772
Interest bearing deposits with
financial institutions 1,710 1,726
Investments
Federal funds sold 5,316 4,124
U.S. Treasuries 2,611 1,585
U.S. agencies 13,310 11,996
Other investments 1,198 1,896
------ ------
Total investments 22,435 19,601
Loans
Commercial 10,642 9,261
Real estate 28,892 27,895
Consumer 1,371 1,346
Less allowance for loan losses and unearned fees (775) (773)
------ ------
Total loans 40,130 37,729
Other assets
Bank premises and equipment, net 604 661
Accrued interest receivable 377 352
Other real estate owned 1,198 1,074
Other assets 456 489
------ ------
Total other assets 2,635 2,576
------ ------
Total assets $68,716 $63,404
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand $11,126 $12,146
NOW accounts 7,094 6,522
Savings 11,610 14,348
Time 25,106 15,845
------ ------
Total deposits 54,936 48,861
Borrowed funds 5,941 7,323
Accrued interest payable 402 265
Other liabilities 180 287
------ ------
Total liabilities 61,459 56,736
Common stock 324 324
Surplus 6,631 6,631
Retained earnings (deficit) 304 (269)
Net unrealized holding loss, net of tax (2) (18)
------ ------
Total stockholders' equity 7,257 6,668
------ ------
Total liabilities and stockholders' equity $68,716 $63,404
====== ======
</TABLE>
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The following table sets forth certain information regarding interest yielding
assets and interest bearing liabilities on Ballston's consolidated average
statements of financial condition, together with the total dollar amounts of
interest income and expense and the weighted average interest rates for the
periods presented. Nonaccruing loans were included in the average loan amounts
presented. As Ballston had no assets that earned tax-exempt income during the
periods in question, there has been no need to recognize the effects of any such
exemption in presenting the tables that follow.
Ballston Bancorp, Inc.: Analysis of Net Interest Earnings
Years ended December 31, 1996 and December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Average Average
yield on rate on Net yield
interest interest on interest
Average earning bearing earning
balance Interest Yield Rate assets liabilities assets
------- -------- ----- -------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
- ----
Interest earning assets:
Interest bearing deposits with
financial institutions $ 1,710 $ 104 6.08%
Federal funds sold 5,316 285 5.36
U.S. Treasuries 2,611 166 6.36
U.S. agencies 13,310 885 6.65
Other investments 1,198 69 5.76
Loans 40,760 3,971 9.74
------- -------
Total $ 64,905 $ 5,480 8.44% 5.02%
======= =======
Interest bearing liabilities:
Deposits
NOW accounts $ 7,094 $ 161 2.27%
Savings 11,610 363 3.12
Time 25,106 1,402 5.58
Borrowed funds 5,941 299 5.03
-------- -------
Total $ 49,751 $ 2,225 4.47%
======== =======
1995
- ----
Interest earning assets:
Interest bearing deposits with
financial institutions $ 1,726 $ 104 6.03%
Federal funds sold 4,124 243 5.89
U.S. Treasuries 1,585 107 6.75
U.S. agencies 11,996 793 6.61
Other investments 1,896 114 6.01
Loans 38,264 3,758 9.82
-------- -------
Total $ 59,591 $ 5,119 8.59% 5.40%
======== =======
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Interest bearing liabilities:
Deposits
NOW accounts $ 6,522 $ 171 2.62%
Savings 14,348 456 3.18
Time 15,845 893 5.64
Borrowed funds 7,323 383 5.23
--------
Total $ 44,038 $ 1,903 4.32%
======= ========
</TABLE>
The following table presents certain information regarding changes in
interest income and interest expense of Ballston during the periods indicated.
The dollar amounts of interest income and interest expense fluctuate depending
upon changes in interest rates and upon changes in amounts (volume) of
Ballston's interest earning assets and interest bearing liabilities. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average outstanding balances multiplied by the prior period's rate)
and (ii) changes in rate (changes in average interest rate multiplied by the
prior period's volume). The volume/rate variance have been allocated
proportionately to both volume and rate.
Ballston Bancorp, Inc.
Analysis of Volume and Interest Rates
Years ended December 31
(dollars in thousands)
<TABLE>
<CAPTION>
1996 compared to 1995 1995 compared to 1994
---------------------------------- ----------------------------------
Attributable to change Attributable to change
---------------------------------- ----------------------------------
Total Change in Volume in Rate Total Change in Volume in Rate
------------ --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Interest bearing deposits with
financial institutions $ - $ - $ - $ 26 $ 12 $ 14
Federal funds sold 42 61 (19) 51 (6) 57
U.S. Treasuries 59 65 (6) 46 38 8
U.S. agencies 92 87 5 229 202 27
Other investments (46) (40) (6) (11) (19) 8
Loans 214 183 31 679 400 279
---- ---- ----- ------ ---- ----
Total 361 356 5 1,020 627 393
Interest expense
Deposits
NOW accounts $(10) $ 19 $ (29) $ 34 $ 42 $ (8)
Savings (93) (87) (6) 18 (21) 39
Time 509 517 (8) 416 214 202
Borrowed funds (84) (53) (31) 84 23 61
---- ---- ----- ------ ---- ----
Total 322 396 (74) 552 258 294
---- ---- ----- ------ ---- ----
$ 39 $ (40) $ 79 $ 468 $369 $ 99
===== ===== ===== ===== ===== =====
</TABLE>
Investment Securities Portfolio
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The investment activities of Ballston Bancorp, Inc. are designed to provide
an investment alternative for funds not presently required to meet loan demand;
assist The Bank of Northern Virginia in meeting potential liquidity
requirements; assist in maximizing income consistent with quality and liquidity
requirements; supply collateral to secure public funds; and provide consistent
income and market value throughout changing economic times.
Ballston's portfolio consists primarily of obligations of the U.S. government,
U.S. government agencies and corporations, and state and local governments, as
well as agency collateralized obligation securities.
The following table sets forth the composition of Ballston's investment
securities portfolio, in thousands of dollars, at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
U.S. Treasuries $ 7,991 $ 2,011
U.S. Agencies 15,113 13,901
Other 718 1,515
------- -------
$23,822 $17,427
======= =======
</TABLE>
For the investment securities portfolio as of December 31, 1996, the
following table sets forth a summary of yields and maturities. Dollars are in
thousands. As Ballston had no assets that earned tax-exempt income during the
periods in question, there has been no need to recognize the effects of any such
exemption in presenting the following table.
<TABLE>
<CAPTION>
One year or less 1-5 years 5-10 years Over 10 years Total
------------------ ------------------- ---------------- ----------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $4,496 5.24% $ 3,495 6.23% $ - - $ - - $ 7,991 5.67%
U.S. Agencies - - 6,706 5.75% 495 6.58% 7,912 7.18% 15,113 6.53%
Other securities 301 5.10% - - - - 417 5.00% 718 5.07%
------ ---- ------- ---- ---- ---- ------ ---- ------- ----
Total $4,797 5.23% $10,201 5.91% $495 6.58% $8,329 7.07% $23,822 6.19%
====== ==== ======= ==== ==== ==== ====== ==== ======= ====
</TABLE>
Loans
The following table presents the balance, in thousands of dollars, of each
major category of loans at the dates indicated. Ballston engaged in no lease
financing during the periods in question.
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
------------- -------------
% of % of
Amount Loans Amount Loans
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Loan Category
Commercial $12,162 28.38% $10,533 26.51%
Real estate
Construction 4,582 10.69 2,686 6.76
</TABLE>
124
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Residential 8,186 19.10 8,603 21.65
Other 16,844 39.31 16,569 41.71
Consumer 1,078 2.52 1,340 3.37
------- ------ ------- -----
42,852 100.00% 39,731 100.00%
====== ======
Less
Unearned Fees 101 115
Allowance for
loan losses 613 652
------- -------
$42,138 $38,964
======= =======
</TABLE>
The following table sets forth a summary of the maturity or repricing of
the components of Ballston's loan portfolio as of December 31, 1996.
Ballston Bancorp, Inc.
Loan Repricing or Maturing
As of December 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
One year
or less 1-5 years 5-10 years Total
-------- --------- ---------- -------
<S> <C> <C> <C> <C>
Loan Category
Commercial $10,926 $1,236 $ 0 $12,162
Real estate--construction 4,582 0 0 4,582
Other 19,165 5,562 1,381 26,108
------- ------ ------ -------
$34,673 $6,798 $1,381 $42,852
======= ====== ====== =======
Predetermined interest rate
loans 8,452 6,512 1,381 16,345
Floating or adjustable interest
rate loans 26,221 286 0 26,507
------- ------ ------ -------
$34,673 $6,798 $1,381 $42,852
======= ====== ====== =======
</TABLE>
Certain non-performing assets of Ballston are summarized, in thousands of
dollars, at December 31,
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Non-accrual loans $ 15 $ 202
Loans past due 90 days or more 179 145
Restructured loans - -
</TABLE>
Ballston's policy with regard to non-accrual loans is generally to place a loan
on non-accrual status when it is more than 90 days past due, unless it is well
collateralized and collection is being actively pursued.
If Ballston's non-performing loans during 1996 had been current in accordance
with their original terms and had been outstanding throughout 1996 or, if
extended during 1996, had been outstanding since origination, then the gross
interest income that would have been recorded in 1996 and was not recorded would
have been
125
<PAGE>
$11 thousand. The amount of interest income that was included in net income on
those loans in 1996 was $1 thousand.
The allowance for loan losses is maintained at an amount deemed necessary by
Ballston's management, based on its frequent and extensive review of the loan
portfolio combined with trend and other statistical analysis tools. The
following are some of the more significant items taken into consideration by
management when evaluating the adequacy of the allowance for loan losses:
. Loan delinquency trends and loans on non-accrual;
. Analysis of "graded" loans;
. The mix of the loan portfolio including concentrations by borrower type;
and
. Analysis of allowance for loan loss ratios for prior periods.
The following table sets forth changes in Ballston's loan loss reserve, in
thousands of dollars, as of the date indicated for the years ended December 31.
Ballston engaged in no lease financing during the periods in question.
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Balance, beginning of year $ 652 $ 529
Provision for loan losses 12 120
Charge offs
Commercial - -
Real estate--construction - -
Real estate--mortgage 52 -
Consumer 2 -
----- ------
Total charge offs 54 -
----- ------
Recoveries
Commercial 1 2
Real estate--construction - -
Real estate--mortgage - -
Consumer 2 1
----- ------
Total loan recoveries 3 3
----- ------
Net charge offs 51 (3)
----- ------
Balance, end of year $ 613 $ 652
===== ======
Ratio of net charge-offs during the
year to average loans outstanding
during the year: 0.13% (0.01%)
</TABLE>
The following table allocates the allowance for loan losses, in thousands
of dollars, based on management's judgment of potential losses in the respective
areas. While management has allocated the allowance to various portfolio
segments for purposes of this table, the allowance is general in nature and is
available for the portfolio in its entirety. Ballston engaged in no lease
financing during the periods in question.
126
<PAGE>
<TABLE>
<CAPTION>
Commercial R/E-Constr R/E-Mort Consumer Unallocated Total
----------- ----------- --------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
1996
- ----
Allowance for loan losses $ 163 $ 66 $ 368 $ 16 - $ 613
% of loans to total loans 28.4% 10.7% 58.4% 2.5% - 100.0%
1995
- ----
Allowance for loan losses $ 166 $ 44 $ 417 $ 25 - $ 652
% of loans to total loans 26.5% 6.7% 63.4% 3.4% - 100.0%
</TABLE>
Deposits
The following tables set forth a summary of Ballston's deposits, as of the
years ended December 31, in thousands of dollars, and the maturity of time
deposits over $100,000:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Average Average Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Demand $11,126 .00% $12,146 .00%
Interest bearing
NOW accounts 7,094 2.27 6,522 2.62
Savings 11,610 3.12 14,348 3.18
Time 25,106 5.58 15,845 5.64
------- ---- ------- ----
$54,936 3.51% $48,861 3.11%
======= ==== ======= ====
</TABLE>
Time Deposit Maturity Schedule
As of December 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
3 months Over
or less 3-6 months 6-12 months 12 months Total
-------- ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
Time deposits
$100,000 and over $5,462 $4,603 $3,185 $1,440 $14,690
<CAPTION>
Return on Equity and Assets
1996 1995
---- ----
<S> <C> <C>
Return on assets 1.06% 0.97%
Return on equity 10.21% 9.33%
Dividend payout ratio 15.30% 15.70%
Equity to assets ratio 10.56% 10.52%
</TABLE>
PRINCIPAL HOLDERS OF BALLSTON STOCK
The following table sets forth as of the Ballston Record Date the record
and beneficial ownership of Ballston Stock by each person who owns in excess of
5% of the Ballston Stock.
127
<PAGE>
<TABLE>
<CAPTION>
Common Stock
------------
Name and Address Type of Ownership No. of Shares % of Class
- ---------------- ----------------- ------------- ----------
<S> <C> <C> <C>
Estate of Eugene J. Metzger, Record & beneficial 451,893(1) 27.9
Helena B. Metzger, Executrix
2561 North Vermont Street
Arlington, VA 22207
Soma Family Limited Partnership Record & beneficial 155,459(2) 9.6
3233 Saul Road
Kensington, Md 20895
Woodlawn Foundation, Inc. Record & beneficial 113,288 7.0
524 North Avenue
New Rochelle, NY 10801
Robert F. Kelleher Record & beneficial 100,100(3) 6.2
1667 K Street, N.W.
Washington, D.C. 20006
</TABLE>
- -------------------------------------------
(1) Includes 1,100 shares owned by Mrs. Metzger individually and 2,436 shares
held by her as trustee of trusts for the benefit of her two adult children.
(2) Includes 47,365 shares owned by Smith Barney Shearson, Custodian, FBO
Edward D. Soma, M.D. and 12,500 shares owned by Dr. Edward D. Soma.
(3) Includes 98,700 shares owned together with his wife as Tenants by the
entirety.
Set forth below is the beneficial ownership, as of the Ballston Record Date
of Ballston Stock by each of Ballston's directors and executive officers, and
all directors and executive officers as a group.
<TABLE>
<CAPTION>
Common Stock
Name Position with Ballston No. of Shares % of Class
---- ---------------------- ------------- ----------
<S> <C> <C> <C>
Brian D. Alprin Treasurer, Secretary 26,500(1) 1.64
Mary E. Fricano Director 28,182 1.74
Dr. Kenneth M. Haggerty Director 22,182(2) 1.37
Robert F. Kelleher Chairman, President, Chief Executive 100,100(3) 6.18
Officer & Director of Ballston
John E. Kilcarr Director 200 *
Helena B. Metzger Director 451,893(4) 27.90
Paul A. Owens Director 200 *
Dr. Edward D. Soma Director 155,459(5) 9.60
</TABLE>
128
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Name Position with Ballston No. of Shares % of Class
---- ---------------------- ------------- ----------
<S> <C> <C> <C>
All directors and
executive officers as a
group (8 persons) 784,716 48.5%
</TABLE>
- --------------------------------------------
* less than 1/10th of one percent.
(1) Owned together with his wife as tenants by the entirety.
(2) Includes 10,000 shares owned by Kenneth M. Haggerty, D.D.S. F.I.C.D., P.C.
Retirement Plan.
(3) Includes 98,700 shares owned together with his wife as tenants by the
entirety.
(4) Includes 448,357 shares owned by the estate of Mrs. Metzger's husband of
which Mrs. Metzger is executrix and 2,436 shares held by Mrs. Metzger as
trustee of trusts established for the benefit of her two adult children.
(5) Includes 95,594 shares held by Soma Family Limited Partnership and 47,365
shares owned by Smith Barney Shearson, Custodian, FBO Edward D. Soma, M.D.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- BALLSTON
Ballston and The Bank of Northern Virginia receive legal representation
from the Washington, D.C. law firm of Duane, Morris & Heckscher LLP. Brian D.
Alprin, treasurer and secretary of Ballston, is a partner in the law firm. On
March 3, 1997, Duane, Morris & Heckscher LLP began its representation of
Ballston and The Bank of Northern Virginia.
STOCKHOLDER PROPOSALS
Stockholders who wish for a proposal to be included in AANB's proxy
statement relating to the next annual meeting of AANB Stockholders should
deliver a written copy of their proposal to the principal office of AANB no
later than December 31, 1997 in order for the proposal to be considered for
inclusion in the proxy statement for that meeting. Proposals should be directed
to President, Abigail Adams National Bancorp, Inc., 1627 K Street, N.W.,
Washington, D.C. 20006. Proposals must comply with the proxy rules of the
Commission relating to stockholder proposals in order to be included in AANB's
proxy materials.
OTHER MATTERS
It is not expected that any matters other than those described in this
Proxy Statement/Prospectus will be brought before the Ballston Meeting or the
AANB Meeting. If any other matters are presented, however, it is the intention
of the persons named in the Ballston proxy and the AANB proxy to vote the proxy
in accordance with the discretion of the persons named in such proxy.
129
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby and the Holding Company Merger have been or will be passed upon
for AANB by Hazel & Thomas, P.C., Falls Church, Virginia. Certain federal income
tax consequences of the Holding Company Merger to Ballston and the Ballston
Stockholders have been passed upon for Ballston by Duane, Morris & Heckscher
LLP, Washington, D.C. See "Certain Relationships and Related Transactions --
Ballston."
EXPERTS
The consolidated financial statements of AANB at December 31, 1995 and for
each of the years in the two year period ended December 31, 1995 have been
included herein and in the registration statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of AANB at December 31, 1996 and for
the year ended December 31, 1996 included in this Proxy Statement/Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving the said report.
The consolidated financial statements of Ballston as of December 31, 1996
and 1995, and for each of the years in the three-year period ended December 31,
1996, which are referred to and made a part of this Proxy Statement/Prospectus,
have been audited by Stoy, Malone & Company, P.C., independent auditors as set
forth in their report appearing elsewhere herein, and are included herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
130
<PAGE>
<TABLE>
<CAPTION>
INDEX TO AANB CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------------------
ABIGAIL ADAMS NATIONAL BANCORP, INC.
Page
<S> <C>
Consolidated Balance Sheets as of December 31, 1996 and 1995................................................. F-2
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994..................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994................... F-6
Notes to Consolidated Financial Statements at December 31, 1996 and 1995..................................... F-8
Independent Auditors' Reports................................................................................ F-27
Consolidated Balance Sheets as of June 30, 1997 and 1996 (unaudited)......................................... F-29
Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996 (unaudited)............ F-30
Consolidated Statements of Changes in Stockholders' Equity for the six months ended
June 30, 1997 and 1996 (unaudited)................................................................... F-31
Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 (unaudited)............ F-32
Notes to Consolidated Financial Statements (unaudited)....................................................... F-33
</TABLE>
F-1
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Cash and due from banks $ 9,785,132 $ 4,953,200
Short-term investments:
Federal funds sold 4,100,000 9,475,000
Interest-bearing deposits in other banks 1,479,000 486,715
------------ -----------
Total short-term investments 5,579,000 9,961,715
Securities available for sale 11,205,282 5,508,406
Investment securities (market value of $11,679,607 and $8,309,265
for 1996 and 1995, respectively) 11,640,813 8,192,647
Loans (net of deferred fees and unearned discounts) 73,013,413 63,592,395
Less: Allowance for loan losses (1,048,487) (1,273,965)
------------ -----------
Loans, net 71,964,926 62,318,430
------------ -----------
Bank premises and equipment, net 840,051 277,517
Other assets 1,147,100 1,152,761
------------ -----------
Total assets $112,162,304 $92,364,676
============ ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand deposits $ 23,678,374 $23,443,937
NOW accounts 8,039,994 7,343,282
Money market accounts 29,533,210 21,391,814
Savings accounts 1,379,554 1,317,226
Certificates of deposit of $100,000 or greater 15,657,818 13,590,946
Certificates of deposit less than $100,000 16,865,790 15,975,990
------------ -----------
Total deposits 95,154,740 83,063,195
------------ -----------
Short-term borrowings 1,916,689 1,785,402
Long-term borrowings/debt 1,138,815 186,250
Other liabilities 811,863 710,963
------------ -----------
Total liabilities 99,022,107 85,745,810
------------ -----------
Stockholders' equity:
Common stock, par value $0.01 per share, authorized 5,000,000 shares;
issued 1,654,712 shares in 1996 and 859,212 shares in 1995;
outstanding 1,650,032 shares in 1996 and 854,532 shares in 1995 16,547 8,592
Surplus 12,172,435 6,147,421
Retained earnings 1,191,706 531,830
------------ -----------
13,380,688 6,687,843
Less: Employee Stock Ownership Plan shares, 20,319 shares at cost (177,791) --
Less: Treasury stock, 4,680 shares at cost (28,710) (28,710)
Less: Unrealized loss on securities, net of taxes (33,990) (40,267)
------------ -----------
Total stockholders' equity 13,140,197 6,618,866
------------ -----------
Total liabilities and stockholders' equity $112,162,304 $92,364,676
============ ===========
</TABLE>
Commitments and contingent liabilities
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 6,072,500 $ 5,902,325 $ 5,100,609
Interest on securities available for sale:
U.S. Treasury 48,098 175,979 220,986
Obligations of U.S. government agencies and corporations 207,408 128,954 173,619
---------- ---------- ----------
Total interest on securities available for sale 255,506 304,933 394,605
Interest and dividends on investment securities:
U.S. Treasury 49,700 69,417 45,055
Obligations of U.S. government agencies and corporations 394,780 413,396 373,813
Mortgage-backed securities 27,705 38,539 50,862
Obligations of states and municipalities 1,907 -- --
Other securities 25,468 32,460 11,774
---------- ---------- ----------
Total interest and dividends on investment securities 499,560 553,812 481,504
Interest on short-term investments:
Federal funds sold 692,614 130,069 87,954
Deposits with other banks 53,044 22,920 18,025
---------- ---------- ----------
Total interest on short-term investments 745,658 152,989 105,979
---------- ---------- ----------
Total interest income 7,573,224 6,914,059 6,082,697
---------- ---------- ----------
Interest expense
Interest on deposits:
NOW accounts 194,092 249,377 264,771
Money market accounts 1,028,668 812,916 544,798
Savings accounts 34,182 31,060 29,125
Certificates of deposit:
$100,000 or greater 583,180 698,356 525,099
Less than $100,000 970,818 845,681 492,134
---------- ---------- ----------
Total interest on deposits 2,810,940 2,637,390 1,855,927
Interest on short-term borrowings:
Federal funds purchased and
repurchase agreements 104,532 88,871 57,131
Other short-term borrowings -- 6,364 3,382
---------- ---------- ----------
Total interest on short-term borrowings 104,532 95,235 60,513
Interest on long-term borrowings/debt 17,435 13,969 18,028
---------- ---------- ----------
Total interest expense 2,932,907 2,746,594 1,934,468
---------- ---------- ----------
Net interest income 4,640,317 4,167,465 4,148,229
Provision (benefit) for loan losses (275,000) -- 221,572
---------- ---------- ----------
Net interest income after provision for
loan losses 4,915,317 4,167,465 3,926,657
---------- ---------- ----------
(Continued)
</TABLE>
F-3
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations (Continued)
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Other income
Service charges on deposit accounts 788,207 737,059 696,829
Other income 164,996 103,712 93,556
---------- ---------- ----------
Total other income 953,203 840,771 790,385
---------- ---------- ----------
Other expense
Salaries and employee benefits 1,904,873 1,649,071 1,611,127
Occupancy and equipment expense 777,513 698,570 750,359
Professional fees 143,357 353,205 887,347
Data processing fees 358,555 299,580 265,897
Other operating expense 909,098 781,000 1,386,444
---------- ---------- ----------
Total other expense 4,093,396 3,781,426 4,901,174
---------- ---------- ----------
Income (loss) before taxes 1,775,124 1,226,810 (184,132)
Applicable income tax expense 647,819 267,912 --
---------- ---------- ----------
Net income (loss) $1,127,305 $ 958,898 $ (184,132)
========== ========== ==========
Net income (loss) per common
share $ 0.94 $ 1.12 $ (0.22)
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Employee
Additional Retained Stock Unrealized
Common Paid-in Earnings Treasury Ownership Loss on
Stock Capital (Deficit) Stock Plan Securities Total
------------ ------------ ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ 2,864,040 $ 3,291,973 $ (100,514) $(28,710) $ --- $ --- $ 6,026,789
Net loss --- --- (184,132) --- --- --- (184,132)
Unrealized loss on securities,
net of taxes --- --- --- --- --- (80,387) (80,387)
----------- ----------- ---------- --------- ---------- ---------- -----------
Balance at December 31, 1994 2,864,040 3,291,973 (284,646) (28,710) --- (80,387) 5,762,270
Change in par value of common
stock (2,861,176) 2,861,176 --- --- --- --- ---
Shares issued in three-for-one
stock split in the form of a
stock dividend 5,728 (5,728) --- --- --- --- ---
Net income --- --- 958,898 --- --- --- 958,898
Dividends declared --- --- (142,422) --- --- --- (142,422)
Unrealized gain on securities,
net of taxes --- --- --- --- --- 40,120 40,120
----------- ----------- ---------- --------- ---------- ---------- -----------
Balance at December 31,1995 8,592 6,147,421 531,830 (28,710) --- (40,267) 6,618,866
Net income --- --- 1,127,305 --- --- --- 1,127,305
Dividends declared --- --- (467,429) --- --- --- (467,429)
Issuance of 795,500 shares
of common stock, net 7,955 6,010,973 --- --- --- --- 6,018,928
Employee Stock Ownership
Plan, 25,000 shares --- --- --- --- (218,750) --- (218,750)
Release of shares under
Employee Stock Ownership
Plan, 4,681 shares --- 14,041 --- --- 40,959 --- 55,000
Unrealized gain on securities,
net of taxes --- --- --- --- --- 6,277 6,277
----------- ----------- ---------- --------- ---------- ---------- -----------
Balance at December 31, 1996 $ 16,547 $12,172,435 $1,191,706 $(28,710) $(177,791) $(33,990) $13,140,197
=========== =========== ========== ========= ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 1,127,305 $ 958,898 $ (184,132)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision (benefit) for loan losses (275,000) -- 221,572
Depreciation and amortization 164,475 146,084 154,177
Profit sharing contribution of ESOP shares 55,000 -- --
Loss on sale of securities -- -- 281
Loss (gain) on sale of other real estate (27,181) -- 11,516
Accretion of loan discounts and fees (122,194) (106,116) (6,549)
Amortization and accretion of discounts and
premiums on securities (10,200) 19,097 33,226
Benefit (provision) for deferred income taxes 31,174 (300,227) 254,046
Decrease (increase) in other assets (25,514) 369,045 (444,958)
Increase (decrease) in other liabilities 5,175 (11,874) (476,874)
------------ ------------ ------------
Net cash provided (used) by operating activities 923,040 1,074,907 (437,695)
------------ ------------ ------------
Investing Activities
Proceeds from repayment and maturity
of investment securities 5,300,000 1,888,400 800,000
Proceeds from maturity of securities
available for sale 9,000,000 10,000,000 6,750,000
Proceeds from repayment of mortgage-
backed securities 117,452 126,951 258,705
Proceeds from sale of securities -- -- 449,718
Purchase of investment securities (8,830,713) (1,092,225) (1,758,334)
Purchase of securities available for sale (14,710,872) (9,485,625) (5,747,500)
Net decrease (increase) in interest-bearing deposits
in other banks (992,285) 4,000 --
Principal collected on loans 12,858,837 14,072,132 10,402,119
Loans originated (19,815,190) (12,771,600) (16,665,764)
Loans purchased from FDIC as receiver for other banks -- -- (493,086)
Net increase in short-term loans (200,684) (96,137) (160,958)
Net decrease (increase) in lines of credit (2,331,395) (3,936,146) 754,607
Purchase of bank premises and equipment (727,009) (54,383) (184,284)
Investment in other real estate (78,250) -- --
Proceeds from disposition of other real estate 344,562 -- 716,984
------------ ------------ ------------
Net cash used by investing activities (20,065,547) (1,344,633) (4,877,793)
------------ ------------ ------------
Financing Activities
Net increase in transaction and savings deposits 9,134,873 4,361,262 2,948,474
Proceeds from issuance of time deposits 23,785,579 40,745,855 34,897,519
Payments for maturing time deposits (20,828,907) (37,337,424) (35,008,768)
Net increase in short-term borrowings 131,287 1,424,694 165,818
Payments on long-term debt (186,250) (74,500) (56,250)
Proceeds from other long-term borrowings 1,143,000 -- --
Payments on other long-term borrowings (4,185) -- --
Proceeds from issuance of common stock, net of expenses 6,018,928 -- --
Loan to Employee Stock Ownership Plan (218,750) -- --
Cash dividends paid to common stockholders (376,136) (71,211) --
------------ ------------ ------------
Net cash provided by financing activities 18,599,439 9,048,676 2,946,793
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (543,068) 8,778,950 (2,368,695)
Cash and cash equivalents at beginning of year 14,428,200 5,649,250 8,017,945
------------ ------------ ------------
Cash and cash equivalents at end of year $ 13,885,132 $ 14,428,200 $ 5,649,250
============ ============ ============
</TABLE>
F-6
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Supplementary disclosures:
Interest paid on deposits and borrowings $2,928,906 $2,711,626 $1,924,179
========== ========== ==========
Income taxes paid $ 651,600 $ 327,593 $ 511,250
========== ========== ==========
Securities transferred to investment
securities $ -- $ -- $3,500,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies
Abigail Adams National Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, The Adams National Bank (the "Bank"), prepare their financial
statements on the accrual basis and in conformity with generally accepted
accounting principles. The more significant accounting policies are explained
below. As used herein, the term the Company includes the Bank unless the
context otherwise requires.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
The Company has defined cash and cash equivalents as those amounts
included in cash and due from banks and Federal funds sold.
(c) Securities
Management determines the appropriate classifications of securities at
the time of purchase. Securities which the Company has the ability and
the intent to hold until maturity are classified as investment
securities and reported at amortized cost. Securities bought and held
principally for the purpose of selling them in the near term are
classified as trading and reported at fair market value with unrealized
gains and losses included in earnings. Securities which are not
classified as trading or held to maturity are classified as available
for sale and are reported at fair value with unrealized gains and losses
reported as a separate component of stockholders' equity. The unrealized
loss on securities recognized had the effect of decreasing the Company's
stockholders' equity by approximately $34,000 and $40,000, net of tax,
at December 31, 1996 and 1995, respectively. The Company does not
maintain a trading account.
Premiums and discounts are amortized using a method which approximates
the effective interest method over the term of the security.
(d) Loans
Loans are stated at unpaid principal amount, net of unearned discount
and deferred loan fees and costs.
The Company discontinues the accrual of interest when the timely
collection of principal or interest is doubtful. Interest accruals are
resumed on such loans when they are brought fully current with respect
to interest and principal or when, in the judgment of management, the
loans have demonstrated a new period of performance and are estimated to
be fully collectible as to both principal and interest.
(e) Allowance for Loan Losses
The allowance for loan losses is a current estimate of the anticipated
losses in the present loan portfolio. The allowance is increased by
provisions charged to operating expenses and decreased by loan charge-
offs, net of recoveries. The allowance for loan losses is based on
management's evaluation of several factors, including loan loss
experience, composition and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
trends and specific conditions that may effect the borrower's ability to
pay. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about information
available to them at the time of their examination. Management believes
that the current allowance for loan losses is adequate to absorb losses
that are inherent in the current loan portfolio.
F-8
<PAGE>
(f) Loan Origination Fees and Costs
All fee income received from loan origination and purchases as well as
costs directly attributable to the loan origination are deferred. The
net deferred fees are amortized into interest income on loans as a yield
adjustment over the estimated life of the loan. Deferred fees and costs
are not amortized during periods in which interest income is not being
recognized because of concerns about the realization of loan principal
or interest. Discounts obtained on loans purchased from the FDIC as
receiver for other banks are considered credit discounts and are not
amortized into income until such time as a periodic credit evaluation
deems that the discount, or a portion thereof, is no longer necessary or
until such time as the loans have paid off. If the credit evaluation
deems all or some of the discount is no longer necessary, it is then
amortized into interest on loans as a yield adjustment over the
remaining estimated life of the loan.
(g) Depreciation
Depreciation of Bank premises and equipment is computed over the
estimated useful lives of the respective assets, ranging from three to
five years, on the straight-line basis. Leasehold improvements are
amortized on a straight-line basis over the estimated useful lives of
the respective assets or the terms of the respective leases, whichever
is shorter. Expenditures for major renewals and betterments of Bank
premises and equipment are capitalized at cost and those for maintenance
and repairs are charged to expense as incurred.
(h) Other Real Estate
Other real estate includes assets that have been acquired in
satisfaction of debt ("assets owned"). Other real estate is recorded at
the lower of cost or fair value. Any valuation adjustments required at
the date of transfer are charged to the allowance for loan losses.
Subsequent to acquisition, other real estate is carried at the lower of
its cost basis at foreclosure or fair value less estimated selling
costs, based upon periodic evaluations.
(i) Stockholders' Equity
All financial information presented gives retroactive effect to an
increase in the number of shares of authorized Common Stock from 800,000
to 5,000,000 and a reduction of par value to $0.01 per share as of July
8, 1996, and the issuance by the Company on July 9, 1996 of a three-for-
one stock split in the form of a stock dividend of two shares of Common
Stock for each share of Common Stock issued and outstanding.
Dividends totaling $467,000, or $.37 per share, and $142,000, or $.17
per share, were declared in 1996 and 1995, respectively.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(k) Net Income (Loss) Per Share
Net income (loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding
during the year, 1,200,803 in 1996, and 854,532 in 1995 and 1994.
(l) Fair Value Disclosures
In December, 1991 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS No. 107). SFAS No. 107
requires entities to disclose the fair value of financial instruments,
both assets and liabilities recognized and not recognized in the
statement of financial position, for which it is practical to estimate
fair value. SFAS No. 107 is effective for the Company at December 31,
1995. The fair value of the Company's financial instruments is reported
in Note 18.
(m) Accounting by Creditors for Impairment of a Loan
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS No. 114) and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures" (SFAS No. 118) which
amended SFAS No. 114. SFAS No. 114 and SFAS No. 118 require creditors to
measure impaired loans in one of three ways: the present value of
expected future cash flows discounted at the loan's effective interest
rate, the loan's observable market price or the fair value of the
underlying collateral. If the measure of the impaired loan is less than
the recorded investment in the loan, the creditor shall recognize the
impairment by creating a valuation allowance
F-9
<PAGE>
with a corresponding charge to expense. SFAS No. 114 and SFAS No. 118
were adopted by the Company as of January 1, 1995. The adoption of SFAS
No. 114 and SFAS No. 118 did not have a material impact on the Company.
(n) Derivative Financial Instruments
In October 1994, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments" (SFAS No. 119). SFAS No. 119 requires entities to disclose
the amount, nature and terms of all derivative financial instruments,
such as futures, forward, swap or option contracts, or other financial
instruments with similar characteristics, and to separately disclose
certain information about these instruments which are held or issued for
trading purposes and those which are held or issued for purposes other
than trading. SFAS No. 119 was adopted as of January 1, 1995.
(o) Accounting for the Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" (SFAS No. 121). SFAS No. 121 requires that assets to be held and
used be evaluated for impairment whenever events or circumstances
indicate that the carrying value may not be recoverable. SFAS No. 121
also requires that assets to be disposed of be reported at the lower of
cost or fair value less selling costs. SFAS No. 121, which was adopted
by the Company as of January 1, 1996, does not have a material impact on
the results of operations or financial position.
(p) Accounting for Mortgage Servicing Rights
In May 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" (SFAS No. 122). SFAS No. 122 provides accounting for
mortgage servicers that sell or securitize loans and retain servicing
rights. SFAS No. 122 is effective as of January 1, 1996. The Company
does not sell or securitize mortgage loans and therefore the
implementation of SFAS No. 122 will not have a material impact.
(q) Accounting for Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" (SFAS No. 123). SFAS No. 123 allows companies
either to continue to account for stock-based employee compensation
plans under existing accounting standards or to adopt a fair-value-based
method of accounting as defined in the new standard. The Company follows
the existing accounting standards for these plans, but has provided pro-
forma disclosure of net income and earnings per share as if the expense
provisions of SFAS No. 123 had been adopted in Note 15.
(r) Risks and Uncertainties
The Company is subject to competition from other financial institutions,
and is also subject to the regulations of certain federal agencies and
undergoes periodic examination by those regulatory authorities.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for
loan losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for loan losses and other real estate,
management periodically obtains independent appraisals for significant
properties.
(s) Reclassifications
Certain reclassifications have been made to amounts previously reported
in 1995 and 1994 to conform with the 1996 presentation.
2. Restrictions on Cash Balances
Included in cash and due from banks are balances maintained within the Company
to satisfy legally required reserves and to compensate for services provided
from correspondent banks. Balances maintained totaled $1,543,000 and $1,475,000
at December 31, 1996 and 1995, respectively. There were no other withdrawal,
usage restrictions or legally required compensating balances at December 31,
1996 or 1995.
F-10
<PAGE>
3. Securities
Investment securities at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
Gross Gross
Adjusted Unrealized Unrealized Market
Cost Basis Gains Losses Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 500,000 $ 1,094 $ -- $ 501,094
After one, but within five years 499,789 2,711 -- 502,500
----------- ------- ---------- -----------
Total 999,789 3,805 -- 1,003,594
----------- ------- ---------- -----------
Obligations of U.S. government
agencies and corporations:
Within one year 1,150,680 1,508 -- 1,152,188
After one, but within five years 8,454,924 32,204 10,198 8,476,930
----------- ------- ---------- -----------
Total 9,605,604 33,712 10,198 9,629,118
----------- ------- ---------- -----------
Obligations of states and municipalities:
After ten years 310,000 244 -- 310,244
----------- ------- ---------- -----------
Mortgage-backed securities:
Federal National Mortgage Association:
Within one year 5,781 123 -- 5,904
Federal Home Loan Mortgage Corp.:
After one, but within five years 262,539 11,108 -- 273,647
----------- ------- ---------- -----------
Total 268,320 11,231 -- 279,551
----------- ------- ---------- -----------
Corporate securities (1) 12,500 -- -- 12,500
----------- ------- ---------- -----------
Federal Reserve Bank Stock (1) 162,700 -- -- 162,700
----------- ------- ---------- -----------
Federal Home Loan Bank Stock (1) 281,900 -- -- 281,900
----------- ------- ---------- -----------
Total investment securities $11,640,813 $48,992 $10,198 $11,679,607
=========== ======= ========== ===========
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------
Gross Gross
Adjusted Unrealized Unrealized Market
Cost Basis Gains Losses Value
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 1,499,200 $ 1,581 $ -- $ 1,500,781
----------- -------- ------------ -----------
Total 1,499,200 1,581 -- 1,500,781
----------- -------- ------------ -----------
Obligations of U.S. government
agencies and corporations:
Within one year 1,005,685 9,627 -- 1,015,312
After one, but within five years 4,875,445 90,630 2,500 4,963,575
----------- -------- ------------ -----------
Total 5,881,130 100,257 2,500 5,978,887
----------- -------- ------------ -----------
Mortgage-backed securities:
Federal National Mortgage Association:
After one, but within five years 16,961 343 -- 17,304
Federal Home Loan Mortgage Corp.:
After five, but within ten years 368,656 16,937 -- 385,593
----------- -------- ------------ -----------
Total 385,617 17,280 -- 402,897
----------- -------- ------------ -----------
Corporate securities (1) 12,500 -- -- 12,500
----------- -------- ------------ -----------
Federal Reserve Bank Stock (1) 162,700 -- -- 162,700
----------- -------- ------------ -----------
Federal Home Loan Bank Stock (1) 251,500 -- -- 251,500
----------- -------- ------------ -----------
Total investment securities $ 8,192,647 $119,118 $ 2,500 $ 8,309,265
=========== ======== ============ ===========
</TABLE>
(1) Corporate securities, Federal Reserve Bank and Federal Home Loan Bank
Stocks have no stated maturities.
Securities available for sale at December 31, 1996 and 1995 are summarized
below:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
Gross Gross
Adjusted Unrealized Unrealized Market
Cost Basis Gains Losses Value
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Obligations of U.S. government
agencies and corporations:
Within one year $ 8,088,415 $ 2,098 $ 7,411 $ 8,083,102
After one, but within five years 3,135,000 -- 12,820 3,122,180
----------- -------- ------------ -----------
Total $11,223,415 $ 2,098 $ 20,231 $11,205,282
=========== ======== ============ ===========
<CAPTION>
1995
----------------------------------------------------
Gross Gross
Adjusted Unrealized Unrealized Market
Cost Basis Gains Losses Value
----------- -------- ------------ -------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 1,995,654 $ 6,220 $ -- $ 2,001,874
----------- -------- ------------ -----------
Total 1,995,654 6,220 -- 2,001,874
----------- -------- ------------ -----------
Obligations of U.S. government
agencies and corporations:
Within one year 2,501,562 1,249 -- 2,502,811
After one, but within five years 1,000,000 3,721 -- 1,003,721
----------- -------- ------------ -----------
Total 3,501,562 4,970 -- 3,506,532
----------- -------- ------------ -----------
Total securities available for sale $ 5,497,216 $ 11,190 $ -- $ 5,508,406
=========== ======== ============ ===========
</TABLE>
Securities in the amount of approximately $14,938,000 and $8,616,000 were
pledged to collateralize public deposits and repurchase agreements at December
31, 1996 and 1995, respectively.
F-12
<PAGE>
The Company had no securities whose book value as to any single issuer
exceeded 10% of stockholders' equity. During 1996, the Company held one
security totaling $310,000 which was exempt from federal taxation. No
securities which were exempt from federal taxation were held during 1995.
During 1994, the Company reclassified $3,500,000 in securities previously
classified as available for sale to the held to maturity portfolio, resulting
in an unrealized loss, net of taxes, on the date of transfer of approximately
$86,000. This unrealized loss is recorded in equity and amortized as a yield
adjustment over the remaining terms of the reclassified securities. This
amortization of approximately $63,000, net of taxes, as of December 31, 1996,
coupled with unrealized losses in the remaining available for sale portfolio
of $11,000, net of taxes, brought the equity balance of unrealized loss on
securities to $34,000 at December 31, 1996.
4. Loans
Loans at December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Commercial and industrial $39,418,672 $43,547,303
Real estate:
Commercial mortgage 24,840,270 12,603,988
Residential mortgage 2,630,845 1,546,590
Construction and
development 4,139,569 2,617,836
Installment to individuals 2,202,615 3,652,022
----------- -----------
73,231,971 63,967,739
Less: Deferred income and
unearned discounts (218,558) (375,344)
----------- -----------
Total $73,013,413 $63,592,395
=========== ===========
</TABLE>
Loan concentrations at December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service industry 38% 38%
Real estate development/finance 30 32
Wholesale/retail 22 21
Other 10 9
---- ----
Total 100% 100%
==== ====
</TABLE>
A substantial portion, $50,211,000, or approximately 69%, at December 31, 1996,
and $41,418,000, or approximately 65%, at December 31, 1995, of the Company's
loans are secured by real estate in the Washington, D.C. metropolitan area.
Accordingly, the ultimate collectibility of a substantial portion of the
Company's loan portfolio is susceptible to changes in market conditions in the
Washington metropolitan area.
F-13
<PAGE>
Transactions in the allowance for loan losses for the years ended December
31, 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at January 1 $1,273,965 $1,289,562 $1,385,875
Provision (benefit) for loan losses (275,000) -- 221,572
Recoveries:
Commercial 52,082 55,372 122,393
Real estate:
Commercial mortgage 680 9,516 --
Residential mortgage -- -- 3,000
Installment to individuals 111,981 33,105 30,981
---------- ---------- ----------
Total recoveries 164,743 97,993 156,374
---------- ---------- ----------
Loans charged off:
Commercial (71,937) (14,551) (429,090)
Installment to individuals (43,284) (99,039) (45,169)
---------- ---------- ----------
Total loans charged off (115,221) (113,590) (474,259)
---------- ---------- ----------
Net recoveries (charge-offs) 49,522 (15,597) (317,885)
---------- ---------- ----------
Balance at December 31 $1,048,487 $1,273,965 $1,289,562
========== ========== ==========
</TABLE>
Included in the accompanying consolidated balance sheets are certain loans that
are accounted for on a nonaccrual basis. These nonaccrual loans totaled
approximately $963,000, $1,561,000 and $1,244,000 at December 31, 1996, 1995 and
1994, respectively. Had the loans been current in accordance with their original
terms, gross interest income for these loans would have been $124,000, $212,000
and $150,000 in 1996, 1995 and 1994, respectively. Actual recorded interest
income on these loans was $0, $40,000 and $53,000 in 1996, 1995 and 1994,
respectively. Nonaccrual loans include $607,000, $875,000 and $1,013,000 in
loans guaranteed by the U.S. Small Business Administration at December 31, 1996,
1995 and 1994, respectively. These loans are guaranteed for an average of 97.9%
of the outstanding balance, or $594,000, 84.9% of the outstanding balance, or
$743,000, and 87.3% of the outstanding balance, or $884,000 at December 31,
1996, 1995 and 1994, respectively. Also included in the accompanying
consolidated balance sheets are $573,000, $1,245,000 and $1,301,000 in loans at
December 31, 1996, 1995 and 1994, respectively, restructured due to a
deterioration in the financial condition of the borrowers. Actual interest
income recorded subsequent to the date of restructuring on loans reported as
restructured at each year-end was $63,000, $124,000 and $110,000 in 1996, 1995
and 1994, respectively. As of year-end 1996, 1995 and 1994, these loans were
performing substantially in accordance with the restructured terms. The Company
had no commitments to lend additional funds to any of the borrowers whose loans
are recorded as nonaccrual or restructured at December 31, 1996, 1995 and 1994.
At December 31, 1996, 1995 and 1994, the Company had $153,000, $6,000 and
$3,000, respectively, in loans greater than 90 days delinquent which were still
accruing. These loans consisted primarily of loans which were both adequately
secured and in the process of collection.
A loan is considered impaired when, based on current information and events, the
Company deems it probable it will be unable to collect all amounts contractually
due under the loan. The recorded investment in impaired loans was $1,955,000 and
$2,790,000 at December 31, 1996 and 1995, respectively. Of the balance at
December 31, 1996 and 1995, $1,509,000 and $2,775,000, respectively, are on
nonaccrual status or as restructured loans. Included in these amounts for
December 31, 1996 and 1995, respectively, are $1,855,000 and $1,631,000 of
impaired loans for which the related impairment allowance is $264,000 and
$416,000. Loans that do not have an impairment allowance were $100,000 and
$1,037,000 at December 31, 1996 and 1995, respectively. The average recorded
investment in impaired loans was $2,619,000 and $2,918,000 during 1996 and 1995,
respectively. Interest income recognized on impaired loans during the years
ended December 31, 1996 and 1995 which has not been disclosed above in the
discussion of nonaccrual and restructured loans was $19,000 and $2,000,
respectively. The allowance for credit losses contains additional amounts for
impaired loans as deemed necessary to maintain allowances at levels considered
adequate by management.
F-14
<PAGE>
The Company has engaged in banking transactions in the ordinary course of
business with some of its directors, officers, principal shareholders and
their associates. Management believes that all loans or commitments to extend
loans and the payment of overdrafts included in such transactions are made on
the same terms, including interest rates and collateral, as those prevailing
at the time of comparable loans with other persons and do not involve more
than the normal risk of collectibility. At December 31, 1996 and 1995, none
of these loans are either reported as nonaccrual, restructured or classified.
The aggregate amount of loans to related parties for the years ended December
31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance at January 1 $ 532,577 $ 726,153
Additions 1,261,700 481,774
Repayments (542,609) (675,350)
Retirements (14,816) --
----------- -----------
Balance at December 31 $ 1,236,852 $ 532,577
=========== ===========
</TABLE>
5. Bank Premises and Equipment
Bank premises and equipment at December 31, 1996 and 1995 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Furniture, fixtures and equipment $ 1,811,318 $ 1,351,454
Leasehold improvements 960,081 692,936
----------- -----------
Total, at cost 2,771,399 2,044,390
Less: Accumulated depreciation and
amortization (1,931,348) (1,766,873)
----------- -----------
Total, net $ 840,051 $ 277,517
=========== ===========
</TABLE>
Amounts charged to operating expenses for depreciation and amortization
aggregated approximately $165,000, $146,000 and $154,000 in 1996, 1995 and
1994, respectively.
6. Interest-Bearing Deposits
Related party deposits totaled approximately $5,376,000 and $2,481,000 at
December 31, 1996 and 1995, respectively. In management's opinion, rates paid
on these deposits, where applicable, are available to others at the same
terms.
At December 31, 1996 and 1995, brokered deposits totaled approximately
$7,674,000 and $7,090,000, respectively. At December 31, 1996, time deposits
totaling $300,000 have scheduled maturities greater than one year as follows:
1998 $ 200,000
1999 100,000
---------
$ 300,000
=========
7. Leasing Arrangements
The Company leases its main office space under two leases which expire in
2002. The Company also leases space for three branch offices and two
automated teller machines. The leases on the Union Station branch and the two
automated teller machines expire in 1998 and 1999, respectively. The lease on
the Dupont Circle East branch expires in 2016. The M Street branch is leased
on a month to month basis. All leases are classified as operating leases. In
January 1997, the Bank entered into a lease for a branch location in
Chinatown, to expire in 2007.
The following is a schedule of future minimum payments under operating leases
that have initial or remaining noncancelable lease terms in excess of one
year as of December 31, 1996:
F-15
<PAGE>
<TABLE>
<CAPTION>
Lease
Payments
--------
<S> <C>
1997 $441,935
1998 438,156
1999 375,888
2000 373,875
2001 373,875
2002 and thereafter 995,337
</TABLE>
Rental expense in 1996, 1995 and 1994 was approximately $464,000, $408,000
and $452,000, respectively.
8. Income Taxes
Income tax expense attributable to income from continuing operations for
1996, 1995 and 1994 consists of:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal $ 484,762 $ 428,452 $(167,026)
District of Columbia 131,883 139,687 (87,020)
--------- --------- ---------
616,645 568,139 (254,046)
--------- --------- ---------
Deferred:
Federal 6,290 (160,540) 167,026
District of Columbia 24,884 (139,687) 87,020
--------- --------- ---------
31,174 (300,227) 254,046
--------- --------- ---------
Total:
Federal 491,052 267,912 --
District of Columbia 156,767 -- --
--------- --------- ---------
$ 647,819 $ 267,912 $ --
========= ========= ==========
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ------------------ ------------------
Amount % Amount % Amount %
---------- ----- ---------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate $603,542 34.0% $ 417,116 34.0% $(62,605) (34.0)%
Increase (decrease) in taxes
resulting from District of
Columbia franchise tax, net
of Federal tax effect 103,466 5.8 124,952 10.2 (31,583) (17.2)
Other (59,189) (3.3) 37,235 3.0 2,550 1.4
Change in valuation allowance -- -- (311,391) (25.4) 91,638 49.8
-------- ---- --------- ----- -------- ------
$647,819 36.5% $ 267,912 21.8% $ -- 0.0%
======== ==== ========= ===== ======== ======
</TABLE>
F-16
<PAGE>
The significant components of deferred income tax expense attributable to
income from continuing operations for the year ended December 31, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------ ----------
<S> <C> <C> <C>
Deferred tax benefit (exclusive of
the effects of other components
listed below) $31,174 $ 11,164 $162,409
Increase (decrease) in the
valuation allowance for deferred
tax assets -- (311,391) 91,637
------- --------- --------
$31,174 $(300,227) $254,046
======= ========= ========
</TABLE>
The following is a summary of the tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $186,959 $197,595
Interest income on nonaccrual loans 24,507 51,401
Deferred loan fees 87,070 76,344
Furniture and equipment 88,309 101,962
Unrealized losses on securities 23,275 26,778
Compensated absences 18,699 8,184
-------- --------
Total gross deferred tax assets 428,819 462,264
Deferred tax liabilities:
Prepaid expenses (9,649) (19,513)
Other (14,622) --
-------- --------
Total gross deferred tax liabilities (24,271) (19,513)
-------- --------
Net deferred tax assets $404,548 $442,751
======== ========
</TABLE>
Deferred income tax assets at December 31, 1996 and 1995 were $404,548 and
$442,751, respectively, and are included in other assets in the accompanying
financial statements. Also included in other assets at December 31, 1996 and
1995, were current tax receivables of $18,000 and $54,000, respectively.
Included in other liabilities at December 31, 1996 and 1995, were current tax
payables of $46,000 and $61,000, respectively.
9. Long-Term Borrowings/Debt
On October 1, 1996, the Bank entered into an agreement to borrow funds from
the Federal Home Loan Bank of Atlanta ("FHLB"). The principal balance of this
note shall be repaid in 146 monthly installments commencing on November 1,
1996 through the note's maturity on December 1, 2008. The rate of interest
payable on the principal balance of this note is fixed at 6.95%. The
outstanding balance of loans pledged at December 31, 1996 to collateralize
this debt is disclosed in Note 10 below. Annual principal maturities as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 57,516
1998 58,588
1999 64,402
2000 70,794
2001 77,821
2002 and thereafter 809,694
----------
$1,138,815
==========
</TABLE>
On May 21, 1996, the Bank repaid its long-term capital note with Minbanc
Capital Corp. At December 31, 1995, the balance due on the note, which
carried an interest rate on that date of 6.00%, was $186,250 due to be repaid
in ten quarterly installments of $18,625 each. Prior to the repayment, the
note agreement restricted the total cash dividends which could be paid by the
Bank in any twelve month period to 25% of net operating income.
F-17
<PAGE>
10. Short-term Borrowings
Short-term borrowings consist primarily of Federal funds purchased and
securities sold under repurchase agreements. Federal funds purchased
represent overnight funds, while securities sold under repurchase agreements
generally involve the receipt of immediately available funds which mature in
one business day or roll over under a continuing contract.
The balance of securities sold under repurchase agreements at December 31,
1996 and 1995 of $1,916,689 and $1,785,402, respectively, represents funds
received by the Company for securities sold to customers of the Company, at
the customer's request, which mature in one business day but roll over under
a continuing contract. In accordance with these contracts, the underlying
securities sold are U.S. Treasuries or government agencies which are
segregated from the Company's other investment securities in the Bank's
Federal Reserve Bank account. The book value of the underlying securities
sold under these repurchase agreements at December 31, 1996 and 1995 was
approximately $2,296,000 and $2,060,000, respectively. The market value of
these same securities at December 31, 1996 and 1995 was $2,295,000 and
$2,094,000, respectively. At maturity, the same security is repurchased by
the Company.
Repurchase agreements are entered into with related parties in the normal
course of business. At December 31, 1996 and 1995, such related party
repurchase agreements totaled approximately $757,000 and $500,000,
respectively. In management's opinion, rates paid on these repurchase
agreements are available to others at the same terms.
In the normal course of business, there are securities sold under repurchase
agreements that the Company initiates with correspondent banks for liquidity
purposes. As with the customer repurchase agreements, these contracts
generally involve the receipt of immediately available funds which mature in
one business day or roll over under a continuing contract, however, the
underlying securities sold are transferred to the correspondent bank's
Federal Reserve Bank account until maturity. At maturity, the same security
is repurchased by the Company.
Other short-term borrowings during 1995 consist of borrowings from the FHLB
for liquidity purposes. Borrowings are collateralized by loans secured by
first liens on one to four family, multifamily and commercial mortgages as
well as investment securities. Although no short-term FHLB borrowings are
outstanding at December 31, 1996 and 1995, the outstanding balances of loans
pledged at December 31, 1996 and 1995 to collateralize long-term borrowings
as well as future short-term borrowings from the FHLB was $2,557,000 and
$3,194,000, respectively. The collateral value of the loans pledged at
December 31, 1996 and 1995 was $1,860,000 and $2,127,000, respectively.
Short-term borrowings for 1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal funds purchased
Balance at end of year $ -- $ --
Daily average balance
outstanding during year -- 89,114
Maximum balance outstanding as
of any month-end during year -- 850,000
Daily average interest rate
during year -- 5.34%
Securities sold under repurchase
agreements
Balance at end of year $1,916,689 $1,785,402
Daily average balance
outstanding during year 2,147,737 1,510,954
Maximum balance outstanding as
of any month-end during year 3,042,801 3,217,340
Daily average interest rate
during year 4.87% 5.57%
Average interest rate on balance
at end of year 5.95% 4.92%
Other short-term borrowings
Balance at end of year $ -- $ --
Daily average balance
outstanding during year -- 103,493
Maximum balance outstanding as
of any month-end during year -- 1,200,000
Daily average interest rate
during year -- 6.15%
</TABLE>
F-18
<PAGE>
11. Commitments and Contingent Liabilities
In the normal course of business, there are various outstanding commitments
and contingent liabilities such as commitments to extend credit that are not
reflected in the accompanying consolidated financial statements. No material
losses are anticipated as a result of these transactions. At December 31,
1996 and 1995, the Company had outstanding letters of credit aggregating
approximately $1,806,000 and $706,000, commitments to originate variable
rate loans aggregating approximately $18,026,000 and $13,867,000, and
commitments to originate fixed rate loans aggregating approximately
$2,464,000 and $1,410,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness on a case by case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of
credit is based on management's credit evaluation. Collateral held varies
but may include accounts receivable, inventory, property, plant and
equipment, and residential and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support lease and security deposits and
private borrowing arrangements. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan
facilities to customers. The Company holds cash, marketable securities and
other collateral supporting those commitments for which collateral is deemed
necessary. The portion of letters of credit which are collateralized was 47%
and 100% at December 31, 1996 and 1995, respectively.
Under the terms of an employment agreement with the President and Chief
Executive Officer of the Company and the Bank, the Company is obligated to
make payments totaling up to $389,000 to her under certain conditions, in
the event her employment is terminated. In addition, upon termination,
certain unvested stock options granted to the President and Chief Executive
Officer shall become immediately vested. Such unvested options are estimated
to have an aggregate value of approximately $304,000 at December 31, 1996.
Under the terms of severance agreements with seven key management officials
of the Bank, at December 31, 1996 the Bank is obligated to make payments
totaling $539,000 under certain conditions in the event of a change in
control of the Company or the Bank.
The Company maintains directors' and officers' liability insurance in the
amount of $2,000,000, subject to certain exclusions. In addition, according
to the by-laws, the Company is obligated to indemnify any director or
officer for losses incurred to the full extent authorized or permitted by
Delaware general corporation law.
12. Restrictions on Dividend Payments and Loans by Affiliated Bank
Any dividends payable by the Company are dependent on dividends payable from
the Bank to the Company. Federal banking laws restrict the total dividend
payments that a national banking association may make during any calendar
year to the total net income of the bank for the current year plus retained
net income for the preceding two years, except with the prior written
approval of the Office of the Comptroller of the Currency. At December 31,
1996, approximately $1,774,000 of retained earnings of the Bank was
available for dividend declarations without prior regulatory approval. The
Federal Reserve Board has issued a statement effective November 14, 1985
which indicates that dividends should only be paid out of net income
available to common shareholders over the past year. At December 31, 1996,
approximately $660,000 of retained earnings of the Company was available for
dividend declaration without prior regulatory approval. Restrictions are
also imposed upon the ability of the Bank to make loans to the Company,
purchase stock in the Company or use the Company's securities as collateral
for indebtedness of the Bank. At December 31, 1996, the Company and the Bank
were in compliance with regulatory requirements.
13. Parent Company Information
On April 1, 1982, the Company acquired, through merger, all of the
outstanding shares of the Bank, becoming the parent and sole stockholder.
The earnings (losses) of the Bank are recorded by the Company using the
equity method of accounting. Earnings (losses) are recorded as an increase
(decrease) in the Company's investment, and dividends declared by the Bank
are recorded as reductions in the Company's investment in the Bank.
F-19
<PAGE>
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
------ ------
<S> <C> <C>
Assets
Due from banks and interest-bearing balances with subsidiary bank $ 3,794,594 $ 248,797
Investment in subsidiary bank 7,195,748 6,364,594
Loans 2,195,030 --
Less: Allowance for loan losses (25,000) --
------------ -----------
Loans, net 2,170,030 --
Dividend receivable from subsidiary bank -- 71,211
Other assets 151,023 8,459
------------ -----------
Total assets $ 13,311,395 $ 6,693,061
============ ===========
Liabilities and Stockholders' Equity
Liabilities:
Other liabilities $ 171,198 $ 74,195
Stockholders' equity:
Common stock, par value $0.01 per share, authorized 5,000,000
shares; issued 1,654,712 shares in 1996 and 859,212 in 1995;
outstanding 1,650,032 shares in 1996 and 854,532 shares in 1995 16,547 8,592
Additional paid-in capital 12,172,435 6,147,421
Retained earnings 1,157,716 491,563
------------ -----------
13,346,698 6,647,576
Less: Employee Stock Ownership Plan shares, 20,319 shares at cost (177,791) --
Less: Treasury Stock, 4,680 shares at cost (28,710) (28,710)
------------ -----------
Total Stockholders' equity 13,140,197 6,618,866
------------ -----------
Total liabilities and stockholders' equity $ 13,311,395 $ 6,693,061
============ ===========
</TABLE>
Condensed Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Income
Dividends from subsidiary bank $ 307,425 $213,633 $ --
Interest earned on balances with subsidiary bank 115,427 4,906 5,881
Interest on loans 27,218 -- --
Interest on securities available for sale -- -- 7,518
Management fees earned from subsidiary bank -- 444 31,880
---------- -------- ----------
Total income 450,070 218,983 45,279
Expenses
Salaries and benefits 6,500 -- --
Professional fees 44,009 125,569 433,641
Provision for loan losses 25,000 -- --
Other 176,863 75,046 157,315
---------- -------- ----------
Total expenses 252,372 200,615 590,956
---------- -------- ----------
Income (loss) before taxes and equity
in undistributed net income of subsidiary 197,698 18,368 (545,677)
Applicable income tax benefit 104,730 300,993 --
---------- -------- ----------
Income (loss) before equity
in undistributed net income of subsidiary 302,428 319,361 (545,677)
Equity in undistributed net income of subsidiary 824,877 639,537 361,545
---------- -------- ----------
Net Income (loss) $1,127,305 $958,898 $ (184,132)
========== ======== ==========
</TABLE>
F-20
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 1,127,305 $ 958,898 $ (184,132)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (824,877) (639,537) (361,545)
Provision for loan losses 25,000 -- --
Dividends declared from subsidiary bank not received -- (71,211) --
Other, net (10,643) (97,910) 94,102
----------- ----------- -----------
Net cash provided (used) by operating activities 316,785 150,240 (451,575)
Investing Activities
Proceeds from maturity of securities available for sale -- -- 450,000
Net increase in lines of credit (1,010,546) -- --
Loans originated (1,242,500) -- --
Principal collected on loans 58,016 -- --
----------- ----------- -----------
Net cash provided (used) by investing activities (2,195,030) -- 450,000
Financing Activities
Proceeds from issuance of common stock, net 6,018,928 -- --
Loan to Employee Stock Ownership Plan (218,750) -- --
Cash dividends paid to stockholders (376,136) (71,211) --
----------- ----------- -----------
Net cash used by financing activities 5,424,042 (71,211) --
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 3,545,797 79,029 (1,575)
Cash and cash equivalents at beginning of year 248,797 169,768 171,343
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,794,594 $ 248,797 $ 169,768
=========== =========== ===========
</TABLE>
14. Federal Deposit Insurance Corporation Improvement Act
Regulations implementing the prompt corrective action provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
became effective on December 19, 1992. FDICIA requires the regulators to
stratify institutions into five quality tiers based upon their respective
capital strengths and to increase progressively the degree of regulation
over the weaker institutions, limits the pass-through deposit insurance
treatment of certain types of accounts, adopts a "Truth in Savings" program,
calls for the adoption of risk-based premiums on deposit insurance and
requires banks to observe insider credit underwriting procedures no less
strict than those applied to comparable noninsider transactions.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in
declining order, are "well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." Institutions categorized as "undercapitalized" or below
are subject to certain restrictions, including the requirement to file a
capital plan with its primary federal regulator, prohibitions on the payment
of dividends and management fees, restrictions on executive compensation and
increased supervisory monitoring, among other things. Other restrictions may
be imposed on the institution either by its primary federal regulator or by
the FDIC, including requirements to raise additional capital, sell assets or
sell the entire institution. Once an institution becomes "critically
undercapitalized" it is generally placed in receivership or conservatorship
within 90 days.
To be considered "well-capitalized," an institution must generally have a
leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least
6% and a total risk-based capital ratio of at least 10%. At December 31,
1996 and 1995, both the Company and the Bank were considered "well-
capitalized." The table below present the capital position of the Company
and the Bank relative to their various minimum statutory and regulatory
capital requirements at December 31, 1996. The Company and the Bank are
considered "well-capitalized" under regulatory guidelines.
F-21
<PAGE>
<TABLE>
<CAPTION>
Company Bank Minimum
------------------------------------- Capital
Amount Ratio Amount Ratio Requirements
------ ----- ------ ----- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Leverage ratio/1/ $13,174 13.81% $ 7,230 7.61% 4.00%
Tier 1 risk-based ratio/2/ 13,174 16.22 7,230 9.19 4.00
Total risk-based ratio/2/ 14,190 17.47 8,213 10.44 8.00
</TABLE>
--------------------
1 Based on annual average assets
2 Based on risk-adjusted assets
15. Employee Benefits
The Company has adopted a Nonqualified Stock Option Plan for certain
officers and key employees and has reserved 90,000 shares of common stock
for options to be granted under the plan. No options have been granted to
date.
On January 23, 1996, the Company adopted a nonqualified Directors Stock
Option Plan (the "Directors Plan") and a qualified Employee Incentive Stock
Option Plan covering key employees (the "Employee Plan"), which were
approved by the shareholders on October 15, 1996. Shares subject to options
under these plans may be authorized but unissued shares or treasury shares.
Options under the Directors Plan are granted at a price not less than 85% of
the fair market value of the Company's common stock on the date of grant.
The options vest beginning in 1996 at an annual rate of 20% at the end of
each year and become fully vested in the event of a Change in Control, as
defined in the Directors Plan, or in the event that the Director leaves the
Board. Options under the Employee Plan are granted at a price of 100% of the
fair market value of the Company's common stock on the date of grant and are
immediately exercisable. Options under both plans expire not later than ten
years after the date of grant. Options for a total of 16,416 shares of
common stock available for grant under the above Plans were granted in 1996
at a price of $6.74 for directors and $7.93 for employees. As of December
31, 1996, no options have been exercised under these plans.
On November 19, 1996, the Company adopted a nonqualified Directors Stock
Option Plan (the "1996 Directors Plan") and a qualified Employee Incentive
Stock Option Plan covering key employees (the "1996 Employee Plan"). Shares
subject to options under these plans may be authorized but unissued shares
or treasury shares. Options under the 1996 Directors Plan are granted at a
price not less than 85% of the fair market value of the Company's common
stock on the date of grant. Options under the 1996 Employee Plan are granted
at a price of 100% of the fair market value of the Company's common stock on
the date of grant. The options granted under both the 1996 Directors Plan
and the 1996 Employee Plan vest beginning in 1997 at an annual rate of 33.3%
at the end of each year and become fully vested in the event of a Change in
Control, as defined in the 1996 Directors Plan and the 1996 Employee Plan.
Options under both plans expire not later than ten years after the date of
grant. Options for a total of 22,113 shares of common stock are available
for grant under the above Plans. Options totaling 20,608 were granted in
1996 at a price of $9.13 for directors and $10.74 for employees. No options
have been exercised under these plans.
On March 29, 1996, the Company granted the President and Chief Executive
Officer a nonqualified stock option to purchase 75,000 shares at a price
equal to 85% of the fair market value of the Company's common stock on the
date of grant ($6.74). The option vests beginning in 1996 at an annual rate
of 20% at the end of each year and becomes fully vested in the event of a
Change in Control as defined in the Agreement, or in the event that she
leaves the Company or the Bank.
The Company accounts for its stock option plans under APB Opinion No. 25. In
accordance with APB Opinion No. 25, no compensation expense has been
recorded for the Employee Plan and the 1996 Employee Plan and compensation
expense of $19,000 in 1996 has been recorded for the Directors Plan, the
1996 Directors Plan and the options granted to the President and Chief
Executive Officer which is an amount equal to the difference between the
quoted market price of the stock at the date of grant and the amount the
employee/director is required to pay, ratably over the options' vesting
periods.
Had compensation cost for these plans been determined consistent with SFAS
No. 123 the Company's net income and earnings per share for 1996 would have
been $1,105,000 and $.92, respectively.
F-22
<PAGE>
A summary of the status of the Company's four stock option plans and the one
out-of-plan stock option grant at December 31, 1996 and changes during the
year then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
Directors Plans and
CEO Grants Employee Plans
------------------- -----------------
Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 0 $ -- 0 $ --
Granted 89,349 6.95 22,675 9.50
Exercised -- -- -- --
Forfeited/Expired -- -- -- --
Outstanding at end of year 89,349 6.95 22,675 9.50
Exercisable at end of year 16,286 6.74 9,987 7.93
Weighted average fair value of options granted $ .43 $ 2.19
</TABLE>
At December 31, 1996, options granted under the Directors Plan and the 1996
Directors Plan and under the Non-Qualified Stock Option Agreement between
the Company and the President and Chief Executive Officer have exercise
prices between $6.74 and $9.13, with a weighted average exercise price of
$6.95 and a weighted average remaining contractual life of 9.1 years. Of
these options 16,286 are exercisable. At December 31, 1996, options granted
under the Employee Plan and the 1996 Employee Plan have exercise prices
between $7.93 and $10.74, with a weighted average exercise price of $9.50
and a weighted average remaining contractual life of 9.5 years. Of these
options, 9,987 are exercisable.
The fair value of each option grant is estimated on the date of grant using
a Black-Scholes-based option pricing model (Noreen Wolfson) with the
following weighted average assumptions used for grants in 1996: risk-free
interest rate of 5.81%; expected dividend yields of 5.04%; expected lives of
10 years; and expected volatility of 50%.
On April 16, 1996, the Company and the Bank adopted an employee stock
ownership plan ("ESOP") with 401(k) provisions, replacing the Bank's former
401(k) Plan, which covered all full-time employees 21 years of age or older
who have completed one year of service. Participants may elect to contribute
to the ESOP a portion of their salary, which may not be less than 1% nor
more than 15%, of their annual salary (up to $9,500 for 1996). In addition,
the Bank may make a discretionary matching contribution equal to one-half of
the percentage amount of the salary reduction elected by each participant
(up to a maximum of 3%), which percentage will be determined each year by
the Bank, and an additional discretionary contribution determined each year
by the Bank. Employee contributions and the employer's matching
contributions immediately vest. The initial employer's discretionary
contribution was immediately vested. All future employer's discretionary
contributions are vested as follows: 33 and 1/3% for one year of service; 66
and 2/3% for two years of service; 100% for three years of service, however,
an employee's vested percentage will not be less than their vested
percentage under the former 401(k) Plan.
The Company made matching contributions to the Plan of $23,000, $34,000 and
$40,000 in 1996, 1995 and 1994, respectively. These amounts are included in
salaries and employee benefits in the accompanying consolidated statements
of operations. In 1996, the Company made an additional discretionary
contribution of 4,681 shares of Company stock, at a fair market value of
$55,000 on December 31, 1996, from the 25,000 shares purchased by the ESOP
to all eligible employees. This amount is included in salaries and benefits
for 1996 in the accompanying consolidated statements of operations. As of
December 31, 1996, these 4,681 shares are committed to be released and the
remaining 20,319 shares are unearned ESOP shares held in suspense. Dividends
paid on allocated shares may be paid to participants or used to repay the
ESOP loan. Dividends on unallocated shares are expected to be used to repay
the ESOP loan. The participating employee has certain put rights in the
event that the common stock distributed cannot be readily sold. Only shares
which are allocated or committed to be released are considered for purposes
of computing earnings per share. The fair value of the unearned ESOP shares
at December 31, 1996 is $239,000.
16. Other Operating Expense
Other operating expense for 1996, 1995 and 1994 is summarized as follows:
F-23
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Courier service and bank security $ 169,207 $ 149,689 $ 148,884
Stationery and office supplies 97,602 75,585 103,017
Advertising 85,572 14,616 27,483
FDIC insurance premiums 2,363 84,607 171,582
Employment litigation expense -- -- 387,000
Other 554,354 456,503 548,478
---------- ---------- ----------
Total other operating expense $ 909,098 $ 781,000 $1,386,444
========== ========== ==========
</TABLE>
The Company has engaged in transactions in the ordinary course of business
with some of its directors, officers, principal stockholders and their
associates. Management believes that all such transactions are made on the
same terms as those prevailing at the time with other persons. The Company
expensed $5,000, $15,000 and $32,000 during 1996, 1995 and 1994,
respectively, to such related parties in connection with public relations
activities. The Company expensed $9,000 and $17,000 to such related parties
for legal services during 1996 and 1995, respectively.
17. Shareholder Rights Plan
On April 12, 1994, the Board of Directors of the Company adopted a Rights
Agreement ("Rights Agreement"), which was amended April 20, 1995. Pursuant
to the Rights Agreement, the Board of Directors of the Company declared a
dividend of one share purchase right for each share of the Company's common
stock outstanding on April 25, 1994 ("Right"). Among other things, each
Right entitles the holder to purchase one share of the Company's common
stock at an exercise price of $20.11.
Subject to certain exceptions, the Rights will be exercisable if a person or
group of persons acquires 25% or more of the Company's common stock
("Acquiring Person"), or announces a tender offer, the consummation of which
would result in ownership by a person or group of persons of 25% or more of
the common stock, or if the Board determines that a person or group of
persons holding 15% or more of the Company's common stock is an Adverse
Person, as defined in the Rights Agreement.
Upon the occurrence of one of the triggering events, all holders of Rights,
except the Acquiring Person or Adverse Person, would be entitled to purchase
the Company's common stock at 50% of the market price. If the Company is
acquired in a merger or business combination, each holder of a Right would
be entitled to purchase common stock of the Acquiring Person at a similar
discount.
The Board of Directors may redeem the Rights for $0.01 per share or amend
the Plan at any time before a person becomes an Acquiring Person. The Rights
expire on December 31, 2003.
18. Fair Value of Financial Instruments
During 1995, the Company adopted SFAS No. 107, which requires the disclosure
of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate
that value. Quoted market prices, when available, are used as the measure of
fair value. In cases where quoted market prices are not available, fair
values are based on present value estimates or other valuation techniques.
These derived fair values are estimates at a specific point in time and are
significantly affected by assumptions used, principally the timing of future
cash flows and the discount rate. Because assumptions are inherently
subjective in nature, the estimated fair values cannot be substantiated by
comparison to independent market quotes and, in many cases, the estimated
fair values would not necessarily be realized in an immediate sale or
settlement of the instrument. The disclosure requirements of SFAS No. 107
exclude certain financial instruments and all nonfinancial instruments. The
estimated fair values presented do not give effect to the values associated
with the Company's banking business, existing customer relationships, branch
network, property or equipment. Also, under SFAS No. 107, the fair value of
noninterest bearing demand deposits, savings and NOW accounts and money
market deposit accounts is equal to the carrying amount because these
deposits have no stated maturity. This approach to estimating fair value
excludes the significant benefit that results from the low-cost funding
provided by such deposit liabilities, as compared to
F-24
<PAGE>
alternative sources of funding. Accordingly, the aggregate fair value
amounts presented do not represent management's estimation of the underlying
value of the Company.
The following are the estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 followed by a general description
of the methods and assumptions used to estimate such fair values.
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 9,785,132 $ 9,785,132 $ 4,953,200 $ 4,953,200
Short-term investments 5,579,000 5,579,000 9,961,715 9,961,715
Securities available for sale 11,205,282 11,205,282 5,508,406 5,508,406
Investment securities 11,640,813 11,679,607 8,192,647 8,309,265
Loans 73,013,413 63,592,395
Less: Allowance for loan losses (1,048,487) (1,273,965)
---------- ---------
Net loans 71,964,926 72,097,490 62,318,430 62,145,121
Financial liabilities
Noninterest-bearing deposits 23,678,374 23,678,374 23,443,937 23,443,937
Interest -bearing deposits
with no stated maturity 38,952,758 38,952,758 30,052,322 30,052,322
Time deposits 32,523,608 32,463,709 29,566,936 29,101,285
Short-term borrowings 1,916,689 1,916,689 1,785,402 1,785,402
Long-term borrowings/debt 1,138,815 1,137,349 186,250 186,250
</TABLE>
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and due from banks. The carrying amounts reported in the balance
sheet approximate fair value due to the short-term nature of these assets.
Short-term investments. The carrying amounts of short-term investments on
the balance sheet with maturities of 90 days or less approximate fair value.
For short-term investments with maturities of greater than 90 days, fair
value estimates are based on market quotes for similar instruments adjusted
for such differences between the quoted instruments and the instruments
being valued as to maturity and credit quality.
Securities available for sale and Investment securities. The estimated
fair values of securities by type are based on quoted market prices, when
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans. Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are classified by variable rate, fixed rate
and loans which reprice on a predetermined schedule. Non-variable rate loans
are further classified by general purpose within the commercial, real estate
and consumer portfolios. Loans are further classified by performing or
nonperforming loans.
For performing variable-rate loans which reprice immediately as market
rates change, the carrying amounts approximate fair value. Additionally,
most variable rate lines of credit, which comprise more than half of the
variable loan portfolio, are reviewed and extended on at least an annual
basis. At the time of that review, these loans are repriced to reflect the
current credit risk inherent in these loans. For performing fixed-rate loans
and loans which reprice on a pre-determined schedule, fair values are
estimated by discounting the expected cash flows up to and including the
date of repricing, if applicable, by a discount rate that reflects the
interest rate and credit risk inherent in the loan. The estimated maturity
of these loans reflects both contractual maturity and management's
assessment of prepayments, economic condition, and other factors that may
affect the maturity of the portfolio. The discount rate is based on the rate
that would be currently offered for loans with similar terms to borrowers of
similar credit quality.
F-25
<PAGE>
Nonperforming loans are included in each of the loan portfolios previously
described. The fair value of nonperforming loans is estimated in a manner which
approximates discounting the expected return of principal over the period of
time the Company anticipates receiving principal payments on the loan at a
discount rate which is reflective of the higher risk surrounding these assets
compared to a performing loan.
Deposits. The fair value of deposits with no stated maturity, such as
noninterest-bearing deposits, NOW accounts, savings and money market deposit
accounts, is the amount payable on demand as of year-end. For time deposits,
fair value is estimated by discounting the contractual cash flows using a
discount rate equal to the incremental deposit rate for similar remaining
maturities.
Short-term borrowings. The carrying values of federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings
approximate fair values.
Long-term borrowings/debt. The fair values of long-term borrowings/debt are
estimated by discounting the contractual cash flows for each instrument. The
discount rate applied is based on the current incremental borrowing rates for
similar arrangements with similar maturities.
Commitments to extend credit and letters of credit. At December 31, 1996 and
1995, the Company had commitments to extend credit of $20,490,000 and
$15,277,000 and letters of credit of $1,806,000 and $706,000, respectively.
Pricing of these financial instruments is based on the credit quality and
relationship, fees, interest rates, probability of funding, compensating balance
and other covenant requirements. Non-credit card commitments generally have
fixed expiration dates, are variable rate and contain termination and other
clauses which provide for relief from funding in the event that there is a
significant deterioration in the credit quality of the customer. Many loan
commitments are expected to, and typically do, expire without being drawn upon.
At December 31, 1996 and 1995, approximately 84% and 85%, respectively, of the
Company's commitments to lend expire within one year or are otherwise
cancelable. The rates and terms of the Company's commitments to lend and letters
of credit are competitive with others in the markets in which the Company
operates. Carrying amounts which are comprised of the unamortized fee income
and, where necessary, reserves for any expected credit losses from these
financial instruments, are immaterial.
F-26
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Abigail Adams National Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Abigail Adams
National Bancorp, Inc. and subsidiary as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The financial statements of Abigail Adams
National Bancorp, Inc. and subsidiary as of December 31, 1995 and 1994, were
audited by other auditors whose report dated January 26, 1996 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Abigail Adams
National Bancorp, Inc. and subsidiary as of December 31, 1996 and the results of
their operations and their cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
January 17, 1997
F-27
<PAGE>
The Board of Directors and Stockholders
Abigail Adams National Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Abigail Adams
National Bancorp, Inc. and subsidiary as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the years in the two-year period then ended. These
consolidated financial statements are the responsibility of Abigail Adams
National Bancorp, Inc.'s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Abigail Adams
National Bancorp, Inc. and subsidiary as of December 31, 1995 and the results of
their operations and their cash flows for each of the years in the two-year
period then ended, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Washington, D.C.
January 26, 1996
F-28
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1997 and 1996 and December 31, 1996
<TABLE>
<CAPTION>
June 30, June 30, Dec 31,
1997 1996 1996
-------------- -------------- --------------
Assets (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 9,570,362 $ 5,824,109 $ 9,785,132
Short-term investments:
Federal funds sold 3,850,000 9,950,000 4,100,000
Interest-bearing deposits in
other banks 1,479,000 486,715 1,479,000
------------ ----------- ------------
Total short-term investments 5,329,000 10,436,715 5,579,000
Securities available for sale 9,577,815 3,997,812 11,205,282
Investment securities (market
value of $10,565,358,
$7,562,045 and $11,679,607 at
June 30,1997, June 30, 1996
and December 31, 1996,
respectively) 10,517,060 7,536,421 11,640,813
Loans (net of deferred fees
and unearned discounts) 84,627,598 59,400,325 73,013,413
Less: Allowance for loan
losses (1,116,201) (1,260,922) (1,048,487)
------------ ----------- ------------
Loans, net 83,511,397 58,139,403 71,964,926
------------ ----------- ------------
Bank premises and equipment, net 893,371 500,009 840,051
Other real estate owned -- 317,381 --
Other assets 1,460,145 1,283,441 1,147,100
------------ ----------- ------------
Total assets $120,859,150 $88,035,291 $112,162,304
============ =========== ============
Liabilities and Stockholders'
Equity
Liabilities:
Deposits:
Demand deposits $ 26,618,370 $20,295,942 $ 23,678,374
NOW accounts 7,721,611 7,503,649 8,039,994
Money market accounts 25,317,094 22,070,938 29,533,210
Savings accounts 1,601,558 1,273,014 1,379,554
Certificates of deposit of
$100,000 or greater 22,516,474 8,804,361 15,657,818
Certificates of deposit
less than $100,000 19,787,373 18,636,549 16,865,790
------------ ----------- ------------
Total deposits 103,562,480 78,584,453 95,154,740
------------ ----------- ------------
Short-term borrowings 1,823,709 1,738,580 1,916,689
Long-term borrowings/debt 1,108,578 -- 1,138,815
Other liabilities 1,035,277 743,326 811,863
------------ ----------- ------------
Total liabilities 107,530,044 81,066,359 99,022,107
------------ ----------- ------------
Stockholders' equity:
Common stock, par value
$0.01 per share, authorized
5,000,000 shares; Issued
1,655,906 at June 30, 1997,
859,212 at June 30, 1996 and
1,654,712 shares at
December 31, 1996;
outstanding 1,651,226 shares
at June 30, 1997, 854,532
shares at June 30, 1996 and
1,650,032 shares at
December 31, 1996 16,559 8,592 16,547
Surplus 12,182,466 6,147,421 12,172,435
Retained earnings 1,351,868 874,888 1,191,706
------------ ----------- ------------
13,550,893 7,030,901 13,380,688
Less: Employee Stock
Ownership Plan shares,
20,243 shares at cost (177,126) -- (177,791)
Less: Treasury stock, 4,680
shares at cost (28,710) (28,710) (28,710)
Less: Unrealized loss on
securities, net of taxes (15,951) (33,259) (33,990)
------------ ----------- ------------
Total stockholders' equity 13,329,106 6,968,932 13,140,197
------------ ----------- ------------
Total liabilities and
stockholders' equity $120,859,150 $88,035,291 $112,162,304
============ =========== ============
</TABLE>
F-29
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the Period Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
Ended June 30, Ended June 30,
1997 1996 1997 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $1,903,418 $1,470,918 $3,600,845 $2,979,645
Interest on securities available for sale:
U.S. Treasury 3,378 14,266 3,378 40,828
Obligations of U.S. government agencies and corporations 111,724 37,928 264,605 85,239
---------- ---------- ---------- ----------
Total interest on securities available for sale 115,102 52,194 267,983 126,067
Interest and dividends on investment securities:
U.S. Treasury 11,780 11,659 26,850 19,148
Obligations of U.S. government agencies and corporations 135,526 91,838 279,714 177,431
Mortgage-backed securities 4,185 7,139 8,982 15,267
Obligations of states and municipalities 3,991 -- 7,982 --
Other securities 9,084 6,941 21,162 13,977
---------- ---------- ---------- ----------
Total interest and dividends on investment securities 164,566 117,577 344,690 225,823
Interest on short-term investments:
Federal funds sold 86,246 105,043 138,207 214,281
Deposits with other banks 22,198 8,980 42,257 15,846
---------- ---------- ---------- ----------
Total interest on short-term investments 108,444 114,023 180,464 230,127
---------- ---------- ---------- ----------
Total interest income 2,291,530 1,754,712 4,393,982 3,561,662
---------- ---------- ---------- ----------
Interest expense
Interest on deposits:
NOW accounts 44,673 45,554 88,888 91,618
Money market accounts 265,629 253,398 516,293 470,786
Savings accounts 10,757 8,492 20,385 17,178
Certificates of deposit:
$100,000 or greater 318,449 116,072 552,142 287,541
Less than $100,000 240,066 228,090 454,700 466,765
---------- ---------- ---------- ----------
Total interest on deposits 879,574 651,606 1,632,408 1,333,888
Federal funds purchased and
repurchase agreements 29,975 22,963 63,766 51,410
Interest on long-term borrowings/debt 18,696 1,425 38,697 4,219
---------- ---------- ---------- ----------
Total interest expense 928,245 675,994 1,734,871 1,389,517
---------- ---------- ---------- ----------
Net interest income 1,363,285 1,078,718 2,659,111 2,172,145
Other income
Service charges on deposit accounts 273,068 175,764 564,145 348,033
Other income 26,166 47,285 37,759 59,435
---------- ---------- ---------- ----------
Total other income 299,234 223,049 601,904 407,468
---------- ---------- ---------- ----------
Other expense
Salaries and employee benefits 544,806 452,756 1,083,090 884,447
Occupancy and equipment expense 244,071 183,601 472,693 355,325
Professional fees 86,464 (27,390) 151,097 15,227
Data processing fees 115,413 86,454 212,802 173,333
Other operating expense 274,370 211,791 545,651 380,214
---------- ---------- ---------- ----------
Total other expense 1,265,124 907,212 2,465,333 1,808,546
---------- ---------- ---------- ----------
Income (loss) before taxes 397,395 394,555 795,682 771,067
Applicable income tax expense 160,019 147,108 309,335 285,587
---------- ---------- ---------- ----------
Net income $ 237,376 $ 247,447 $ 486,347 $ 485,480
========== ========== ========== ==========
Net income per common share $ .15 $ .28 $ .30 $ .56
========== ========== ========== ==========
Weighted average number of shares
used to compute EPS 1,630,948 868,423 1,630,559 864,682
========== ========== ========== ==========
</TABLE>
F-30
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Employee
Additional Retained Stock Unrealized
Common Paid-in Earnings Treasury Ownership Loss on
Stock Capital (Deficit) Stock Plan Securities Total
-------- ----------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,1996 $ 8,592 $ 6,147,421 $ 531,830 $ (28,710) $ --- $ (40,267) $ 6,618,866
Net income --- --- 485,480 --- --- --- 485,480
Dividends declared --- --- (142,422) --- --- --- (142,422)
Unrealized gain on securities,
net of taxes --- --- --- --- --- 7,008 7,008
-------- ----------- ---------- --------- ---------- --------- -----------
Balance at June 30, 1996 $ 8,592 $ 6,147,421 $ 874,888 $ (28,710) $ --- $ (33,259) $ 6,968,932
======== =========== ========== ========= ========== ========= ===========
Balance at January 1,1997 $ 16,547 $12,172,435 $1,191,706 $ (28,710) $ (177,791) $ (33,990) $13,140,197
Net income --- --- 486,347 --- --- --- 486,347
Dividends declared --- --- (326,185) --- --- --- (326,185)
Dividends on allocated shares
of the Employee Stock
Ownership Plan --- 276 --- --- 665 --- 941
Issuance of common stock under
the Employee Incentive Stock
Option Plan 12 9,755 --- --- --- --- 9,767
Unrealized loss on securities,
net of taxes --- --- --- --- --- 18,039 18,039
-------- ----------- ---------- --------- ---------- -------- -----------
Balance at June 30, 1997 $ 16,559 $12,182,466 $1,351,868 $ (28,710) $ (177,126) $(15,951) $13,329,106
======== =========== ========== ========= ========== ======== ===========
</TABLE>
F-31
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Operating Activities
Net income $ 486,347 $ 485,480
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 138,882 57,307
Accretion of loan discounts and fees (60,345) (17,956)
Amortization and accretion of discounts and premiums on securities (87,043) (182)
Provision for deferred income taxes (106,874) (192,146)
Increase (decrease) in other assets (206,171) 61,466
Increase in other liabilities 210,842 27,464
------------ ------------
Net cash provided by operating activities 375,638 421,433
------------ ------------
Investing Activities
Proceeds from repayment and maturity of investment securities 2,150,000 3,150,000
Proceeds from maturity of securities available for sale 8,675,000 4,500,000
Proceeds from repayment of mortgage-backed securities 35,862 50,716
Purchase of investment securities (1,048,000) (2,521,806)
Purchase of securities available for sale (6,944,107) (3,000,000)
Principal collected on loans 6,842,511 4,129,198
Loans originated (18,449,315) (3,892,818)
Net decrease in short-term loans 57,343 59,184
Net decrease in lines of credit 63,336 3,901,418
Purchase of bank premises and equipment (192,204) (279,798)
Purchase of other real estate -- (317,381)
------------ ------------
Net cash provided (used) by investing activities (8,809,574) 5,778,713
------------ ------------
Financing Activities
Net increase in transaction and savings deposits (1,372,499) (2,352,716)
Proceeds from issuance of time deposits 30,790,345 8,934,363
Payments for maturing time deposits (21,010,106) (11,060,389)
Net increase in short-term borrowings (92,979) (46,823)
Payments on long-term debt (30,237) (186,250)
Proceeds from issuance of common stock 9,767 --
Cash dividends paid to common stockholders (325,125) (142,422)
------------ ------------
Net cash provided (used) by financing activities 7,969,166 (4,854,237)
------------ ------------
Increase (decrease) in cash and cash equivalents (464,770) 1,345,909
Cash and cash equivalents at beginning of year 13,885,132 14,428,200
------------ ------------
Cash and cash equivalents at end of year $ 13,420,362 $ 15,774,109
============ ============
Supplementary disclosures:
Interest paid on deposits and borrowings $ 1,698,883 $ 1,433,843
============ ============
Income taxes paid $ 535,000 $ 246,500
============ ============
</TABLE>
F-32
<PAGE>
Abigail Adams National Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
1. General
The unaudited information at and for the six months ended June 30,
1997 and 1996 furnished herein reflects all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for
the interim periods presented. All adjustments are of a normal and
recurring nature. All financial information presented gives retroactive
effect to (i) an increase in the number of shares of authorized Common
Stock from 800,000 to 5,000,000 and a reduction of par value to $0.01 per
share as of July 8, 1996, and (ii) the issuance by the Company on July 9,
1996 of a three-for-one stock split in the form of a stock dividend of
two shares of Common Stock for each share of Common Stock issued and
outstanding.
2. Contingent Liabilities
In the normal course of business, there are various outstanding
commitments and contingent liabilities such as commitments to extend
credit and standby letters of credit that are not reflected in the
accompanying consolidated financial statements. No material losses are
anticipated as a result of these transactions on either a completed or
uncompleted basis.
Under the terms of an employment agreement with the President and
Chief Executive Officer of the Company and the Bank, the Company is
obligated to make payments to her under certain conditions, totaling
approximately $389,000, in the event her employment is terminated. In
addition, upon termination, certain unvested stock options granted to the
President and Chief Executive Officer shall become immediately vested.
Such unvested options are estimated to have an aggregate value of
approximately $395,000 at June 30, 1997.
Under the terms of severance agreements with eight key management
officials of the Bank, the Bank is obligated to make payments totaling
$633,000 under certain conditions in the event of a change in control of
the Company or the Bank.
The Company maintains directors' and officers' liability insurance in
the amount of $5,000,000, subject to certain exclusions. In addition,
according to the by-laws, the Company is obligated to indemnify any
director or officer for any losses incurred in the performance of their
duties as director to the full extent authorized or permitted by Delaware
general corporation law.
3. Shareholder Rights Plan
On April 12, 1994, the Board of Directors of the Company adopted a
Rights Agreement ("Rights Agreement"), which was amended April 20, 1995.
Pursuant to the Rights Agreement, the Board of Directors of the Company
declared a dividend of one share purchase right for each share of the
Company's common stock outstanding on April 25, 1994 ("Right"). Among
other things, each Right entitles the holder to purchase one share of the
Company's common stock at an exercise price of $20.11.
F-33
<PAGE>
Subject to certain exceptions, the Rights will be exercisable if a
person or group of persons acquires 25% or more of the Company's common
stock ("Acquiring Person"), or announces a tender offer, the consummation
of which would result in ownership by a person or group of persons of 25%
or more of the common stock, or if the Board determines that a person or
group of persons holding 15% or more of the Company's common stock is an
Adverse Person, as defined in the Rights Agreement.
Upon the occurrence of one of the triggering events, all holders of
Rights, except the Acquiring Person or Adverse Person, would be entitled
to purchase the Company's common stock at 50% of the market price. If
the Company is acquired in a merger or business combination, each holder
of a Right would be entitled to purchase common stock of the Acquiring
Person at a similar discount.
The Board of Directors may redeem the Rights for $0.01 per share or
amend the Plan at any time before a person becomes an Acquiring Person.
The Rights expire on December 31, 2003.
4. Employee Benefits
The Company has adopted a Nonqualified Stock Option Plan for certain
officers and key employees and has reserved 90,000 shares of common stock
for options to be granted under the plan. No options have been granted
to date.
On January 23, 1996, the Company adopted a nonqualified Directors
Stock Option Plan (the "Directors Plan") and a qualified Employee
Incentive Stock Option Plan covering key employees (the "Employee Plan"),
which were approved by the shareholders on October 15, 1996. Shares
subject to options under these plans may be authorized but unissued
shares or treasury shares. Options under the Directors Plan are granted
at a price not less than 85% of the fair market value of the Company's
common stock on the date of grant. The options vest beginning in 1996 at
an annual rate of 20% at the end of each year and become fully vested in
the event of a Change in Control, as defined in the Directors Plan, or in
the event that the Director leaves the Board. Options under the Employee
Plan are granted at a price of 100% of the fair market value of the
Company's common stock on the date of grant and are immediately
exercisable. Options under both plans expire not later than ten years
after the date of grant. Options for a total of 16,416 shares of common
stock available for grant under the above Plans were granted in 1996 at a
price of $6.74 for directors and $7.93 for employees. As of June 30,
1997, 1,194 options have been exercised under these plans.
On November 19, 1996, the Company adopted a nonqualified Directors
Stock Option Plan (the "1996 Directors Plan") and a qualified Employee
Incentive Stock Option Plan covering key employees (the "1996 Employee
Plan"). Shares subject to options under these plans may be authorized
but unissued shares or treasury shares. Options under the 1996 Directors
Plan are granted at a price not less than 85% of the fair market value of
the Company's common stock on the date of grant. Options under the 1996
Employee Plan are granted at a price of 100% of the fair market value of
the Company's common stock on the date of grant. The options granted
under both the 1996 Directors Plan and the 1996 Employee Plan vest
beginning in 1997 at an annual rate of 33.3% to 100% at the end of each
year and become fully vested in the event of a
F-34
<PAGE>
Change in Control, as defined in the 1996 Directors Plan and the 1996
Employee Plan. Options under both plans expire not later than ten years
after the date of grant. Options for a total of 22,113 shares of common
stock are available for grant under the above Plans. Options totaling
20,608 were granted in 1996 at a price of $9.13 for directors and $10.74
for employees. Options totaling 1,505 were granted to employees in 1997
at prices ranging from $11.71 to $11.83. As of June 30, 1997, no options
have been exercised under these plans.
On March 29, 1996, the Company granted the President and Chief
Executive Officer a nonqualified stock option to purchase 75,000 shares
at a price equal to 85% of the fair market value of the Company's common
stock on the date of grant ($6.74). The option vests beginning in 1996 at
an annual rate of 20% at the end of each year and becomes fully vested in
the event of a Change in Control as defined in the Agreement, or in the
event that she leaves the Company or the Bank.
Compensation expense is recognized on the Directors Plan, the 1996
Directors Plan and the options granted to the President and Chief
Executive Officer in an amount equal to the difference between the quoted
market price of the stock at the date of grant and the amount the
employee/director is required to pay, ratably over the five year vesting
periods.
On April 16, 1996, the Company and the Bank adopted an employee stock
ownership plan ("ESOP") with 401(k) provisions, replacing the Bank's
former 401(k) Plan, which covered all full-time employees 21 years of age
or older who have completed one year of service. Participants may elect
to contribute to the ESOP a portion of their salary, which may not be
less than 1% nor more than 15%, of their annual salary (up to $9,500 for
1997). In addition, the Bank may make a discretionary matching
contribution equal to one-half of the percentage amount of the salary
reduction elected by each participant (up to a maximum of 3%), which
percentage will be determined each year by the Bank, and an additional
discretionary contribution determined each year by the Bank. Employee
contributions and the employer's matching contributions immediately vest.
The initial employer's discretionary contribution was immediately vested.
All future employer's discretionary contributions are vested as follows:
33 and 1/3% for one year of service; 66 and 2/3% for two years of
service; 100% for three years of service, however, an employee's vested
percentage will not be less than their vested percentage under the former
401(k) Plan.
5. Net Income Per Share
Net income per common share is calculated by dividing net income by
the weighted average number of common shares and common share equivalents
outstanding during the period, 1,630,559 and 864,682 for the six months
ended June 30, 1997 and 1996, respectively and 1,630,948 and 868,423 for
the three months ended June 30, 1997 and 1996, respectively. Stock
options are included as common share equivalents in the first and second
quarters of 1996 but are not included in the first and second quarters of
1997 as the dilution is immaterial.
6. Change in Accounting Principles
(a) Accounting for Stock Based Compensation
F-35
<PAGE>
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" (SFAS No. 123). SFAS No. 123 allows companies
either to continue to account for stock-based employee compensation plans
under existing accounting standards or to adopt a fair-value-based method
of accounting as defined in the new standard. The Company follows the
existing accounting standards for these plans, but provides annual pro-
forma disclosure of net income and earnings per share as if the expense
provisions of SFAS No. 123 had been adopted.
(b) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128). SFAS No. 128 specifies the computation, presentation and
disclosure requirements for earnings per share for entities with publicly
held common stock or potential common stock. The objective of SFAS No.
128 is to simplify the computation of earnings per share and to make the
U.S. standard for computing earnings per share more compatible with the
standards of other countries. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after December 15,
1997. The adoption of SFAS No. 128 is not expected to have a material
impact on the Company.
(c) Disclosure of Information about Capital Structure
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129). SFAS No. 129
continues the existing requirements for companies to disclose the
pertinent rights and privileges of all securities other than ordinary
common stock, but expands the number of companies subject to portions of
its requirements. SFAS No. 129 is effective for financial statements for
periods ending after December 15, 1997. The adoption of SFAS No. 129 is
not expected to have a material impact on the Company.
F-36
<PAGE>
Index to Ballston Consolidated Financial Statements
---------------------------------------------------
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report FF-2
Financial Statements:
Consolidated Statements of Condition as of December 31, 1996 and 1995 FF-3
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994 FF-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 FF-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 FF-6
Notes to Consolidated Financial Statements FF-7 - FF-20
- -------------------------------------------------------------------------------------------------------------------
Financial Statements:
Consolidated Statements of Condition as of June 30, 1997 and 1996 (unaudited) FF-21
Consolidated Statements of Income for the six months ended June 30, 1997
and 1996 (unaudited) FF-22
Consolidated Statements of Changes in Stockholders' Equity for the six
months ended June 30, 1997 and 1996 (unaudited) FF-23
Consolidated Statements of Cash Flows for the six months ended June 30,
1997 and 1996 (unaudited) FF-24
Notes to Consolidated Financial Statements (unaudited) FF-25 - FF-26
</TABLE>
FF-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Ballston Bancorp, Inc.
We have audited the accompanying consolidated statements of condition of
Ballston Bancorp, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These financial statements are the responsibility of the Corporations'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ballston Bancorp,
Inc. and Subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
STOY, MALONE & COMPANY, P.C.
Bethesda, Maryland
January 13, 1997, except for
Notes 1, and 17 as to which the date
is June 23, 1997
FF-2
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF CONDITION
------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
ASSETS
------
<S> <C> <C>
Cash and due from banks $ 2,247,261 $ 3,207,981
Federal funds sold 3,625,344 3,942,859
------------ ------------
Cash and cash equivalents 5,872,605 7,150,840
Interest bearing deposits with financial
institutions 4,263,378 1,876,887
Investment securities 23,821,565 17,427,072
Loans, net 42,137,641 38,963,680
Bank premises and equipment, net 555,222 636,011
Accrued interest receivable 396,522 365,019
Foreclosed real estate held for sale 1,124,383 1,202,039
Other assets 408,841 482,485
------------ ------------
Total assets $ 78,580,157 $ 68,104,033
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
LIABILITIES:
Deposits:
Demand $ 10,792,315 $ 12,811,720
NOW accounts 14,522,875 6,700,563
Savings 14,180,324 13,132,869
Time, $100,000 and over 14,689,867 12,766,404
Other time 9,238,405 9,688,769
------------ ------------
Total deposits 63,423,786 55,100,325
Borrowed funds:
Securities sold under repurchase agreements 5,610,208 3,558,529
Advances from Federal Home Loan Bank 1,531,000 1,743,000
Accrued interest and other liabilities 413,540 723,027
------------ ------------
Total liabilities 70,978,534 61,124,881
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.20 par value, 500,000 shares
authorized, none issued and outstanding -- --
Common stock, $.20 par value, 2,500,000 shares
authorized, 1,619,474 shares issued and
outstanding 323,895 323,895
Surplus 6,631,306 6,631,306
Retained earnings 653,300 25,490
Net unrealized holding loss, net of tax (6,878) (1,539)
------------ ------------
Total stockholders' equity 7,601,623 6,979,152
------------ ------------
Total liabilities and stockholders' equity $ 78,580,157 $ 68,104,033
============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
FF-3
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,972,316 $ 3,758,394 $ 3,079,872
Interest on investment securities:
U.S. Treasury securities 165,739 106,547 60,084
U.S. Government agencies and corporations 884,874 792,584 563,599
Other 68,199 114,478 125,248
Interest on federal funds sold 284,994 242,781 191,597
Interest on deposits with financial institutions 104,173 104,202 78,626
------------ ------------ ------------
Total interest income 5,480,295 5,118,986 4,099,026
------------ ------------ ------------
Interest expense:
Interest on deposits 1,925,810 1,519,454 1,052,120
Interest on borrowed funds 299,241 383,302 298,713
------------ ------------ ------------
Total interest expense 2,225,051 1,902,756 1,350,833
------------ ------------ ------------
Net interest income 3,255,244 3,216,230 2,748,193
Provision for loan losses 12,000 120,000 297,000
------------ ------------ ------------
Net interest income after provision for loan losses 3,243,244 3,096,230 2,451,193
------------ ------------ ------------
Other income:
Service charges on deposit accounts 199,531 194,069 240,815
Other 165,099 146,557 124,242
------------ ------------ ------------
Total other income 364,630 340,626 365,057
------------ ------------ ------------
Other expenses:
Salaries and employee benefits 1,215,569 1,218,545 1,151,650
Occupancy expense 212,281 204,945 197,863
Furniture and equipment expenses 185,657 199,278 188,440
Other operating expenses 861,203 872,907 833,404
------------ ------------ ------------
Total other expenses 2,474,710 2,495,675 2,371,357
------------ ------------ ------------
Income before income taxes 1,133,164 941,181 444,893
Income taxes 391,991 319,292 138,262
------------ ------------ ------------
NET INCOME $ 741,173 $ 621,889 $ 306,631
============ ============ ============
Net income per share $ .46 $ .38 $ .19
===== ===== =====
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
FF-4
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<TABLE>
<CAPTION>
Net Total
Retained Unrealized Stock-
Common Earnings Holding Loss, Treasury holders'
Stock Surplus (Deficit) Net of Tax Stock Equity
------------- -------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 327,395 $ 6,677,806 $ (739,933) $ -- $ -- $ 6,265,268
Net income -- -- 306,631 -- -- 306,631
Cash dividends - $.04
per share -- -- (65,479) -- -- (65,479)
Net change in unrealized
holding loss, net of tax -- -- -- (29,988) -- (29,988)
----------- ----------- ---------- ----------- ----------- -----------
Balance, December 31, 1994 327,395 6,677,806 (498,781) (29,988) -- 6,476,432
Net income -- -- 621,889 -- -- 621,889
Cash dividends - $.06
per share -- -- (97,618) -- -- (97,618)
Issuance of 20,000 shares
of common stock 4,000 96,000 -- -- -- 100,000
Acquisition of treasury stock,
37,500 shares at cost -- -- -- -- (150,000) (150,000)
Retirement of treasury stock (7,500) (142,500) -- -- 150,000 --
Net change in unrealized
holding loss, net of tax -- -- -- 28,449 -- 28,449
----------- ----------- ---------- ----------- ----------- -----------
Balance, December 31, 1995 323,895 6,631,306 25,490 (1,539) -- 6,979,152
Net income -- -- 741,173 -- -- 741,173
Cash dividends - $.07
per share -- -- (113,363) -- -- (113,363)
Net change in unrealized
holding loss, net of tax -- -- -- (5,339) -- (5,339)
----------- ----------- ---------- ----------- ----------- -----------
Balance, December 31, 1996 $ 323,895 $ 6,631,306 $ 653,300 $ (6,878) $ -- $ 7,601,623
=========== =========== ========== =========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
FF-5
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
---------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 741,173 $ 621,889 $ 306,631
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income taxes 18,525 (19,545) 103,344
Gain on sales of investment securities - - (330)
Accretion and amortization of discounts and premiums, net 5,737 (34,064) 60,368
Provision for loan losses 12,000 120,000 297,000
Loss on sale of foreclosed real estate 1,167 - -
Depreciation and amortization on bank premises and equipment 116,139 115,921 120,101
Increase in accrued interest receivable (31,503) (16,936) (119,403)
Decrease (increase) in other assets 57,871 (122,798) (8,326)
Increase (decrease) in accrued interest and other liabilities (309,487) 432,140 15,757
--------------- -------------- ---------------
Net cash provided by operating activities 611,622 1,096,607 775,142
--------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest bearing deposits with
financial institutions (2,386,491) (383,642) 305,309
Purchases of investment securities held-to-maturity (4,050,492) (5,638,034) (6,903,453)
Proceeds from maturities of investment securities held-to-maturity 2,950,000 2,550,000 -
Principal collected on investment securities held-to-maturity 1,893,373 1,381,651 988,277
Purchases of investment securities available-for-sale (7,551,202) (15,050) (50,750)
Proceeds from maturities of investment securities available-for-sale 350,000 100,000 700,000
Proceeds from sales of investment securities available-for-sale - 404,400 43,807
Principal collected on investment securities available-for-sale - - 30,758
Net increase in loans (3,275,247) (3,160,404) (2,956,585)
Purchase of bank premises and equipment (35,350) (63,877) (86,543)
Proceeds from sales of foreclosed real estate 101,578 - -
Payments received on foreclosed real estate 64,197 86,310 28,120
--------------- -------------- ---------------
Net cash used in investing activities (11,939,634) (4,738,646) (7,901,060)
--------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 8,323,461 7,507,646 7,195,268
Net increase (decrease) in securities sold under repurchase agreements 2,051,679 1,467,671 (1,220,900)
Advances from Federal Home Loan Bank 288,000 653,000 2,090,000
Repayments of Federal Home Loan Bank advances (500,000) (3,500,000) (1,500,000)
Proceeds from issuance of common stock - 100,000 -
Acquisition of treasury stock - (150,000) -
Cash dividends paid (113,363) (97,618) (65,479)
--------------- -------------- ---------------
Net cash provided by financing activities 10,049,777 5,980,699 6,498,889
--------------- -------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,278,235) 2,338,660 (627,029)
CASH AND CASH EQUIVALENTS:
Beginning of year 7,150,840 4,812,180 5,439,209
--------------- -------------- ---------------
End of year $ 5,872,605 $ 7,150,840 $ 4,812,180
=============== ============== ===============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
FF-6
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Ballston Bancorp, Inc. (the "Company") was organized under the laws of the State
of Delaware to serve as a bank holding company. The Bank of Northern Virginia
("The Bank") operates as a commercial bank in Arlington, Virginia. Its primary
deposit base and principal real estate lending market includes Arlington and the
surrounding area in Northern Virginia.
Pursuant to an Agreement and Plan of Reorganization dated as of June 23, 1997 by
and among Abigail Adams National Bancorp, Inc. ("AANB"), the Company and The
Bank, the Company would merge with and into a to-be-formed subsidiary of AANB.
The exchange price that AANB will pay for all of the outstanding shares of the
Company will equal approximately $13,858,000 plus adjustments for, if
applicable, the exercising of stock options of the Company and earnings of and
dividends paid by the Company from April 1, 1997 to final closing.
A summary of significant accounting policies of Ballston Bancorp, Inc. and
Subsidiary (the "Corporations") is as follows:
BASIS OF ACCOUNTING:
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles and conform to
general practices within the banking industry.
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
the Company and The Bank, its wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance
for loan losses and the valuation of foreclosed real estate, management
obtains independent appraisals for significant properties. While management
uses available information to recognize losses on loans and foreclosed
FF-7
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: (Cont'd.)
real estate, future additions to the allowance may be necessary based on
changes in local economic conditions. Federal, state and local governments
employ a significant portion of the Northern Virginia area labor force.
Adverse changes in economic conditions could have a direct impact on the
collectibility of The Bank's loan portfolio and the recovery of a
substantial portion of the carrying amount of foreclosed real estate. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review The Bank's allowance for loan losses and
valuation of foreclosed real estate. Such agencies may require The Bank to
recognize additions to the allowance based on their judgments about
information available to them at the time of their examination. Because of
these factors, it is reasonably possible that the allowance for loan losses
and the valuation of foreclosed real estate may change materially in the
near term.
CASH AND CASH EQUIVALENTS:
For financial reporting purposes, cash and cash equivalents includes cash on
hand, amounts due from banks (including cash items in process of clearing),
and federal funds sold. Cash flows from interest bearing deposits with
financial institutions, loans, deposits and securities sold under repurchase
agreements are reported net.
INVESTMENT SECURITIES:
Held-to-maturity securities are those securities which the Corporations have
the ability and intent to hold until maturity. Available-for-sale securities
represent those securities not classified as held-to-maturity and are stated
at fair value. Unrealized holding gains and losses, net of the related
deferred tax effect, are reported as a separate component of stockholders'
equity.
Premiums and discounts on investments in debt securities are amortized over
their contractual lives. The method of amortization results in a constant
effective yield on those securities which approximates the interest method.
Realized gains and losses are included in income and are determined by the
specific-identification method.
LOANS AND ACCOUNTING CHANGE:
Loans are stated at the amount of unpaid principal reduced by unearned fees
and an allowance for loan losses.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature
of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance for loan losses is
increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
FF-8
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: (Cont'd.)
LOANS AND ACCOUNTING CHANGE: (Cont'd.)
Interest is accrued daily on the outstanding balances. Accrual of interest
is discontinued on a loan when management believes, after considering
collection efforts and other factors, that the borrower's financial
condition is such that collection of interest is doubtful.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield on the related loan.
Effective January 1, 1995, the Corporations adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS No. 114"). SFAS No. 114, as amended by SFAS No. 118, requires
that impaired loans that are within its scope be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The adoption of SFAS No. 114, as amended by SFAS No.
118, did not have a material effect on the Corporations' consolidated
financial statements.
FORECLOSED REAL ESTATE HELD FOR SALE:
Real estate acquired through foreclosure and held for sale is carried at the
lower of cost or fair value minus estimated costs to sell. Holding costs are
charged to expense in the period in which incurred.
BANK PREMISES AND EQUIPMENT:
Bank premises and equipment is stated at cost less accumulated depreciation
and amortization. Leasehold improvements are amortized on the straight-line
method over the shorter of the estimated useful lives of the improvements or
the terms of the related leases. Furniture and equipment is depreciated on
the straight-line method over the estimated useful lives of the assets.
ADVERTISING:
Advertising expenses are expensed as incurred. These expenses amounted to
$14,843, $20,090 and $9,862 for the years ended December 31, 1996, 1995 and
1994, respectively, and are included in other operating expenses in the
consolidated statements of income.
INCOME TAXES:
The Corporations file a consolidated Federal income tax return. Deferred tax
assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
FF-9
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: (Cont'd.)
NET INCOME PER SHARE:
Net income per share is based on the weighted-average number of shares
outstanding during the year.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS:
In the ordinary course of business, The Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they become payable.
NOTE 2 - INVESTMENT SECURITIES:
A summary of investment securities is as follows:
<TABLE>
<CAPTION>
Gross Gross Aggregate
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1996
- -----------------
Available-for-sale:
Debt securities:
U.S. Treasury securities $ 4,990,425 $ -- $ 5,185 $ 4,985,240 $ 4,985,240
U.S. Government agencies
and corporations 498,438 -- 3,908 494,530 494,530
Corporate securities 301,650 -- 1,327 300,323 300,323
Mortgage-backed securities 2,048,745 -- -- 2,048,745 2,048,745
----------- ---------- ----------- ----------- -----------
7,839,258 -- 10,420 7,828,838 7,828,838
Equity securities 417,000 -- -- 417,000 417,000
----------- ---------- ----------- ----------- -----------
8,256,258 -- 10,420 8,245,838 8,245,838
----------- ---------- ----------- ----------- -----------
Held-to-maturity:
Debt securities:
U.S. Treasury securities 3,005,695 34,007 486 3,039,216 3,005,695
U.S. Government agencies
and corporations 5,098,991 41,714 29,075 5,111,630 5,098,991
Mortgage-backed securities 7,471,041 59,477 102,688 7,427,830 7,471,041
----------- ----------- ----------- ----------- -----------
15,575,727 135,198 132,249 15,578,676 15,575,727
----------- ----------- ----------- ----------- -----------
Total $23,831,985 $ 135,198 $ 142,669 $23,824,514 $23,821,565
=========== =========== =========== =========== ===========
</TABLE>
FF-10
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 2 - INVESTMENT SECURITIES: (Cont'd.)
<TABLE>
<CAPTION>
Gross Gross Aggregate
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1995
- -----------------
Available-for-sale:
Debt securities:
U.S. Government agencies
and corporations $ 300,000 $ -- $ -- $ 300,000 $ 300,000
Corporate securities 354,141 9 2,338 351,812 351,812
----------- ----------- ----------- ----------- -----------
654,141 9 2,338 651,812 651,812
Equity securities 402,350 -- -- 402,350 402,350
----------- ----------- ----------- ----------- -----------
1,056,491 9 2,338 1,054,162 1,054,162
----------- ----------- ----------- ----------- -----------
Held-to-maturity:
Debt securities:
U.S. Treasury securities 2,010,777 68,440 -- 2,079,217 2,010,777
U.S. Government agencies
and corporations 4,247,262 59,384 9,007 4,297,639 4,247,262
Corporate securities 760,837 2,339 1,927 761,249 760,837
Mortgage-backed securities 9,354,034 91,758 51,872 9,393,920 9,354,034
----------- ----------- ----------- ----------- -----------
16,372,910 221,921 62,806 16,532,025 16,372,910
----------- ----------- ----------- ----------- -----------
Total $17,429,401 $ 221,930 $ 65,144 $17,586,187 $17,427,072
=========== =========== =========== =========== ===========
</TABLE>
The amortized cost and aggregate fair value of debt securities at December 31,
1996 by contractual maturity, are shown below. Maturities may differ from
contractual maturities in mortgage-backed securities because the mortgages
underlying the securities may be called or repaid without any penalties.
Therefore, these securities are not included in the maturity categories in the
following maturity summary.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
--------------------------------------------------------------------
Amortized Aggregate Amortized Aggregate
Cost Fair Value Cost Fair Value
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Due in one year or less $4,297,516 $4,295,563 $ 500,689 $ 500,781
Due from one year to five years 994,559 990,000 7,303,997 7,356,908
Due from five years to ten years 498,438 494,530 -- --
Due after ten years -- -- 300,000 293,157
Mortgage-backed securities 2,048,745 2,048,745 7,471,041 7,427,830
---------- ---------- ------------- -------------
$7,839,258 $7,828,838 $15,575,727 $15,578,676
========== ========== ============= =============
</TABLE>
FF-11
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 2 - INVESTMENT SECURITIES: (Cont'd.)
There were no sales of investment securities during the year ended December 31,
1996. No gains or losses were realized from the sales of investment securities
for the year ended December 31, 1995. Gross realized gains totaled $330 for the
year ended December 31, 1994.
The change in unrealized holding gain (loss) during the years ended December 31,
1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance, beginning of year $ (1,539) $ (29,988)
Unrealized gain (loss) on available-for-sale securities (8,091) 43,104
Related deferred taxes 2,752 (14,655)
----------- -----------
Balance, end of year $ (6,878) $ (1,539)
=========== ===========
</TABLE>
At December 31, 1996 and 1995, investment securities with a carrying value of
approximately $12,400,000 and $9,469,000, respectively, were pledged to secure
securities sold under repurchase agreements, public deposits as required or
permitted by law, and at December 31, 1995, advances from the Federal Home Loan
Bank.
NOTE 3 - LOANS:
The composition of net loans is as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Time and demand $12,162,325 $10,532,721
Real estate 29,611,223 27,858,345
Consumer 1,077,778 1,339,864
----------- -----------
42,851,326 39,730,930
Less: Unearned fees 100,954 115,093
Allowance for loan losses 612,731 652,157
----------- -----------
Loans, net $42,137,641 $38,963,680
=========== ===========
</TABLE>
Loans with fixed interest rates amounted to approximately $16,966,000 and
$13,519,000 at December 31, 1996 and 1995, respectively. Variable rate loans
totaled approximately $25,885,000 and $26,212,000 at December 31, 1996 and 1995,
respectively.
FF-12
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 3 - LOANS: (Cont'd.)
The Bank had nonaccrual loans of approximately $15,000 and $202,000 at December
31, 1996 and 1995, respectively. Nonaccrual loans had the effect of reducing
interest income by approximately $100, $10,000 and $3,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Interest income on these loans,
which is recorded only when received, amounted to approximately $9,000 for the
years ended December 31, 1995. There was no interest received on nonaccrual
loans for the years ended December 31, 1996 and 1994.
Loans with a carrying value of approximately $3,800,000 were pledged to secure
advances from the Federal Home Loan Bank at December 31, 1996.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES:
Changes in the allowance for loan losses were as follows during the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $652,157 $529,421 $461,045
Provision charged to expense 12,000 120,000 297,000
-------- -------- --------
664,157 649,421 758,045
Losses charged to allowance, net of recoveries (51,426) 2,736 (228,624)
-------- -------- --------
Balance, end of year $612,731 $652,157 $529,421
======== ======== ========
</TABLE>
NOTE 5 - BANK PREMISES AND EQUIPMENT:
The major classes of bank premises and equipment and the total accumulated
depreciation and amortization are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Leasehold improvements $ 750,005 $ 748,923
Furniture and equipment 671,282 637,014
----------- -----------
1,421,287 1,385,937
Less accumulated depreciation and amortization 866,065 749,926
----------- -----------
Bank premises and equipment, net $ 555,222 $ 636,011
=========== ===========
</TABLE>
FF-13
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 6 - DEPOSITS:
The scheduled maturities of time deposits are as follows as of December 31,
1996:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $21,132,251
1998 2,196,052
1999 477,537
2000 104,500
2001 17,932
-----------
$23,928,272
===========
</TABLE>
NOTE 7 - BORROWED FUNDS:
Securities sold under repurchase agreements generally mature within one to four
days from the transaction date and totaled $5,610,208 and $3,558,529 at December
31, 1996 and 1995, respectively. The maximum amount of outstanding agreements at
any month end during the years ended December 31, 1996 and 1995 was $5,851,760
and $4,243,232, respectively. The average end of month outstanding agreements
were $4,396,943 and $2,965,582 during the years ended December 31, 1996 and
1995, respectively. All investment securities underlying these agreements were
under The Bank's control.
At December 31, 1996 and 1995, The Bank had outstanding advances from the
Federal Home Loan Bank totaling $1,531,000 and $1,743,000, respectively.
Weighted-average interest rates on these advances were 6.10% and 5.85% at
December 31, 1996 and 1995, respectively.
Future maturities of borrowed funds are as follows at December 31, 1996:
<TABLE>
<CAPTION>
Amount
----------
Year ending December 31,
<S> <C>
1997 $6,460,208
After 2001 681,000
----------
$7,141,208
==========
</TABLE>
As described in Note 2, certain investment securities are pledged to secure
borrowed funds.
FF-14
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 8 - OPERATING LEASES:
The Corporations have operating leases for office, retail, and storage space and
equipment. These leases are noncancelable and expire during 1997-1998. The
office, retail and storage space leases require minimum annual rental payments
plus an adjustment based on 30% of the increase in the Consumer Price Index. In
addition, the leases provide for the Corporations to pay their proportionate
share of operating expense increases. The retail space lease contains two
five-year renewal options.
The following is a schedule by years of future minimum rental payments
applicable to the leases described above, as of December 31, 1996:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $179,107
1998 112,610
--------
$291,717
========
</TABLE>
The following schedule indicates the composition of total rent expense for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Minimum rentals $169,326 $168,972 $168,795
Contingent rentals 27,819 26,224 21,396
-------- -------- --------
$197,145 $195,196 $190,191
======== ======== ========
</TABLE>
FF-15
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 9 - INCOME TAXES:
The components of income tax expense for the years ended December 31, 1996, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current tax expense $373,466 $338,837 $ 34,918
Deferred tax expense (benefit) 18,525 (19,545) 103,344
-------- -------- --------
$391,991 $319,292 $138,262
======== ======== ========
</TABLE>
Components of the Corporations' deferred tax asset are as follows at
December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Unearned fees $ 13,351 $ 27,710
Allowance for loan losses 208,328 221,733
Net unrealized holding loss 3,543 793
Accumulated depreciation and amortization 35,949 26,710
Net operating loss carryforwards for state
income tax purposes 74,941 73,735
-------- --------
336,112 350,681
Less valuation allowance 74,941 73,735
-------- --------
Total deferred tax assets $261,171 $276,946
======== ========
</TABLE>
The deferred tax assets are included in other assets in the consolidated
statements of condition.
NOTE 10 - RETIREMENT PLAN:
The Bank has a defined contribution 401(k) retirement plan which covers
employees that meet certain age and length of service requirements. Under this
plan, The Bank will match the employees' contributions up to 6% of the
employees' compensation. For the years ended December 31, 1996, 1995 and 1994,
The Bank's contribution amounted to $25,314, $20,746 and $23,529, respectively.
FF-16
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
risk not recognized in the consolidated statements of condition. The contract
amounts of those instruments reflect the extent of involvement The Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
A summary of The Bank's commitments as of December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Commitments to extend credit $10,794,000 $8,615,000
Standby letters of credit 1,002,000 1,094,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since commitments frequently expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
The Bank upon extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts receivable,
marketable securities, inventory, property and equipment, residential real
estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by The Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and
generally expire within one year from issuance. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Collateral held varies as specified above and is
required in instances which The Bank deems necessary.
FF-17
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES: (Cont'd.)
LITIGATION:
The Bank is a defendant in a lawsuit in which the plaintiff alleges breach of a
loan commitment agreement. The ultimate outcome of the litigation is not
currently predictable and no provision for any liability has been made in the
accompanying consolidated financial statements. However, it is the opinion of
management that the final resolution of this action will not have a materially
adverse effect on the Corporations' consolidated financial position. For the
year ended December 31, 1996, legal fees totalling approximately $3,000 were
incurred in connection with the lawsuit and are included in other operating
expenses in the consolidated statements of income. See Note 17.
OTHER:
The Bank has a contract with an entity, whereby such entity will perform certain
processing work necessary to The Bank's operations for a period of five years
expiring in 2000. The contract provides for automatic five-year renewals until
it is terminated. There are no minimum annual fees.
NOTE 12 - RELATED PARTY TRANSACTIONS:
The Corporations have had, and may be expected to have in the future,
transactions in the ordinary course of business with stockholders, directors,
officers and affiliated entities in which they are principal owners, all of
which have been, in the opinion of management, on the same terms as those
prevailing at the time for comparable transactions with others.
Loans with related parties totaled $3,628,012 and $3,355,338 at December 31,
1996 and 1995, respectively.
Legal fees were paid to law firms in which stockholders of the Company are
principals. These fees totaled $66,859, $71,729 and $55,478 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 13 - STOCK OPTION AGREEMENTS:
The Company has granted options to purchase 75,000 shares of its common stock to
two key employees of The Bank. The options can only be exercised if certain
performance measures are met by The Bank or if there is a change in control of
the Company or The Bank, as defined in the agreements. The exercise price of the
options is the higher of the par value per share of common stock or $3.76 per
share. These options expire August 17, 1997 or ninety days after the grantee
terminates employment with The Bank, whichever occurs first.
FF-18
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 14 - DIVIDEND RESTRICTIONS:
Banking regulations limit the amount of dividends that may be paid by The Bank
without prior regulatory approval. At December 31, 1996, The Bank had retained
earnings of approximately $1,294,000 available for the payment of dividends.
NOTE 15 - REGULATORY MATTERS:
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on The
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, The Bank must meet specific
capital guidelines that involve quantitative measures of The Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require The Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that The Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1995, the most recent notification from the Board of
Governors of the Federal Reserve System categorized The Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, The Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed The Bank's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes:
----------------------- ----------------------------------
Amount Ratio Amount
---------- ------ -----------------------------------
<S> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk-
weighted assets) $7,497,000 15.97% greater than or equal to $3,756,000
Tier I capital (to risk-
weighted assets) 6,910,000 14.72% greater than or equal to 1,878,000
Tier I capital (to average
assets) 6,910,000 9.90% greater than or equal to 2,792,320
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes: Action Provisions:
------------------------------ ---------------------------------------------------------------------
Ratio Amount Ratio
------------------------------ ---------------------------------- --------------------------------
<S> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk-
weighted assets) greater than or equal to 8.00% greater than or equal to $4,695,000 greater than or equal to 10.00%
Tier I capital (to risk-
weighted assets) greater than or equal to 4.00% greater than or equal to 2,817,000 greater than or equal to 6.00%
Tier I capital (to
average assets) greater than or equal to 4.00% greater than or equal to 3,490,400 greater than or equal to 5.00%
</TABLE>
FF-19
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 16 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid for:
Interest on deposits $1,891,446 $1,378,575 $1,039,808
Interest on borrowed funds 243,519 339,034 264,239
Income taxes 675,398 45,378 2,415
Transfer from loans to foreclosed real estate 89,286 715,235 --
</TABLE>
NOTE 17 - SUBSEQUENT EVENT:
In June, 1997, The Bank settled the lawsuit described in Note 11. The terms of
the settlement agreement required The Bank to pay $9,000, which is not included
in the consolidated statement of income.
FF-20
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF CONDITION
------------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
----------------- -----------------
(Unaudited) (Unaudited)
ASSETS
------
<S> <C> <C>
Cash and due from banks $ 2,714 $ 1,751
Federal funds sold 4,308 1,630
-------- --------
Cash and cash equivalents 7,022 3,381
Interest bearing deposits with financial institutions 2,388 1,303
Investment securities 17,302 17,517
Loans, net 42,524 40,433
Bank premises and equipment, net 625 607
Accrued interest receivable 368 382
Foreclosed real estate held for sale 1,074 1,192
Other assets 403 366
-------- --------
Total assets $ 71,706 $ 65,181
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits $ 57,454 $ 52,636
Borrowed funds:
Securities sold under repurchase agreements 5,264 3,622
Advances from Federal Home Loan Bank 681 1,243
Accrued interest and other liabilities 440 428
-------- --------
Total liabilities 63,839 57,929
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 324 324
Surplus 6,631 6,631
Retained earnings 921 299
Net unrealized holding loss, net of tax (9) (2)
-------- --------
Total stockholders' equity 7,867 7,252
-------- --------
Total liabilities and stockholders' equity $ 71,706 $ 65,181
======== ========
</TABLE>
FF-21
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Interest income:
Interest and fees on loans $ 2,040 $ 1,970
Interest on investment securities 603 549
Interest on federal funds sold 105 127
Interest on deposits with financial institutions 75 48
------- -------
Total interest income 2,823 2,694
------- -------
Interest expense:
Interest on deposits 953 941
Interest on borrowed funds 167 113
------- -------
Total interest expense 1,120 1,054
------- -------
Net interest income 1,703 1,640
Provision for loan losses 30 30
------- -------
Net interest income after provision for loan losses 1,673 1,610
------- -------
Other income:
Service charges on deposit accounts 97 104
Other 128 71
------- -------
Total other income 225 175
------- -------
Other expenses:
Salaries and employee benefits 638 623
Occupancy expense 119 108
Furniture and equipment expenses 98 90
Other operating expenses 532 461
------- -------
Total other expenses 1,387 1,282
------- -------
Income before income taxes 511 503
Income taxes 179 173
------- -------
NET INCOME $ 332 $ 330
======= =======
</TABLE>
FF-22
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Net Total
Unrealized Stock-
Common Retained Holding Loss, holders'
Stock Surplus Earnings Net of Tax Equity
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
For the six months ended June 30,
1997: (Unaudited)
Balance, January 1, 1997 $ 324 $ 6,631 $ 653 $ (7) $ 7,601
Net income - - 332 - 332
Cash dividends - - (64) - (64)
Net change in unrealized holding -
loss, net of tax - - - (2) (2)
----- ------- ----- ---- -------
Balance, June 30, 1997 $ 324 $ 6,631 $ 921 $ (9) $ 7,867
===== ======= ===== ==== =======
For the six months ended June 30,
1996: (Unaudited)
Balance, January 1, 1996 $ 324 $ 6,631 $ 25 $ (2) $ 6,978
Net income - - 330 - 330
Cash dividends - - (56) - (56)
Net change in unrealized holding -
loss, net of tax - - - - -
----- ------- ----- ---- -------
Balance, June 30, 1996 $ 324 $ 6,631 $ 299 $ (2) $ 7,252
===== ======= ===== ==== =======
</TABLE>
FF-23
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 332 $ 330
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income taxes (9) (10)
Accretion and amortization of discounts and premiums, net 12 (10)
Provision for loan losses 30 30
Depreciation and amortization on bank premises and equipment 57 57
Decrease (increase) in accrued interest receivable 28 (17)
Decrease in other assets 15 126
Increase (decrease) in accrued interest and other liabilities 26 (295)
------- -------
Net cash provided by operating activities 491 211
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest bearing deposits with financial institutions 1,875 574
Purchases of investment securities held-to-maturity (155) (2,799)
Proceeds from maturities of investment securities held-to-maturity 2,000 750
Principal collected on investment securities held-to-maturity 662 1,634
Purchases of investment securities available-for-sale (43) (15)
Proceeds from maturities of investment securities available-for-sale 4,000 350
Principal collected on investment securities available-for-sale 42 -
Net increase in loans (416) (1,499)
Purchase of bank premises and equipment (127) (28)
Payments received on foreclosed real estate 50 10
------- -------
Net cash provided by (used in) investing activities 7,888 (1,023)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (5,970) (2,465)
Net increase (decrease) in securities sold under repurchase
agreements (346) 63
Repayments of Federal Home Loan Bank advances (850) (500)
Cash dividends paid (64) (56)
------- -------
Net cash used in financing activities (7,230) (2,958)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,149 (3,770)
CASH AND CASH EQUIVALENTS:
Beginning of period 5,873 7,151
------- -------
End of period $ 7,022 $ 3,381
======= =======
</TABLE>
FF-24
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
------------------------------------------
NOTE 1 - REPRESENTATION BY MANAGEMENT:
In the opinion of management the accompanying interim consolidated financial
statements of Ballston Bancorp, Inc. and its wholly-owned subsidiary, The Bank
of Northern Virginia (the "Corporations"), include all adjustments which consist
only of normal recurring adjustments necessary for a fair presentation of these
financial statements.
NOTE 2 - LOANS:
Certain non-performing assets of the Corporations are summarized, in thousands
of dollars, for the six months ended June 30, 1997:
<TABLE>
<S> <C>
Non-accrual loans $15
Loans past due 90 days or more 16
Restructured loans -
</TABLE>
The Corporations' policy with regard to non-accrual loans is generally to place
a loan on non-accrual status when it is more than 90 days past due, unless it is
well collateralized and collection is being actively pursued.
If the Corporations' non-accrual and restructured loans during the first six
months of 1997 had been current in accordance with their original terms and had
been outstanding throughout the first six months of 1997 or, if extended during
the first six months of 1997, had been outstanding since origination, then the
gross interest income that would have been recorded in the first six months of
1997 and was not recorded would have been $1 thousand. The amount of interest
income that was included in net income on those loans in the first six months of
1997 was zero.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is maintained at an amount deemed necessary by the
Corporations' management, based on its frequent and extensive review of the loan
portfolio combined with trend and other statistical analysis tools. The
following are some of the more significant items taken into consideration by
management when evaluating the adequacy of the allowance for loan losses:
. Loan delinquency trends and loans on non-accrual;
. Analysis of "graded" loans;
. The mix of the loan portfolio including concentrations by borrower type; and
. Analysis of allowance for loan loss reserve ratios for prior periods.
FF-25
<PAGE>
BALLSTON BANCORP, INC. AND SUBSIDIARY
- -------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Cont'd.)
- ------------------------------------------
NOTE 3 - ALLOWANCE FOR LOAN LOSSES: (Cont'd.)
The following table sets forth changes in the Corporations' loan loss reserve,
in thousands of dollars, as of the date indicated for the six months ended June
30, 1997. The Corporations engaged in no lease financing during the six months
ended June 30, 1997.
<TABLE>
<S> <C>
Balance, beginning of period $613
Provision for loan losses 30
Charge offs:
Commercial 18
Real estate--construction -
Real estate--mortgage -
Consumer 2
-------
Total charge offs 20
Recoveries:
Commercial -
Real estate-construction -
Real estate--mortgage -
Consumer -
-------
Total loan recoveries -
-------
Net charge offs 20
Balance, end of period $623
Ratio (annualized) of net charge-offs
during the period to average loans
outstanding during the period 0.09%
</TABLE>
The following table allocates the loan loss reserve, in thousands of dollars,
based on management's judgment of potential losses in the respective areas.
While management has allocated reserves to various portfolio segments for
purposes of this table, the reserve is general in nature and is available for
the portfolio in its entirety. The Corporations engaged in no lease financing
during the six months ended June 30, 1997.
<TABLE>
<CAPTION>
Commercial R/E Const. R/E Mortg. Consumer Lease Fin. Unallocated Total
---------- ---------- ---------- -------- ---------- ----------- -----
First Six Months of 1997
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan losses $ 149 $ 42 $ 408 $ 24 $ - $ - $ 623
% of loans in category to
total loans 23.9% 6.8% 65.4% 3.9% - - 100%
</TABLE>
NOTE 4 - LEGAL MATTERS:
In June 1997, the Bank settled a lawsuit. The terms of the settlement agreement
required the Corporations to pay $9 thousand, which is included in other
operating expenses in the consolidated statements of income.
FF-26
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
among
ABIGAIL ADAMS NATIONAL BANCORP, INC.,
BALLSTON BANCORP, INC.
and
THE BANK OF NORTHERN VIRGINIA
A-i
<PAGE>
INDEX
ARTICLE PAGE
ARTICLE I
General................................................................. A-2
1.1. Holding Company Merger............................................ A-2
1.2. Issuance of AANB Common Stock and Payment of Cash................ A-2
1.3. Taking of Necessary Action........................................ A-2
ARTICLE II
Effect of Transaction on Common Stock,
Capitalization of Abigail Adams National Bancorp, Inc.,
Adams Acquisition Corporation, Ballston Bancorp, Inc.
and The Bank of Northern Virginia....................................... A-2
2.1. Exchange Price; Exchange Ratio.................................... A-2
2.2. Manner of Exchange................................................ A-4
2.3. No Fractional Shares.............................................. A-8
2.4. Dissenting Shares................................................. A-8
ARTICLE III
Representations and Warranties.......................................... A-8
3.1. Representations and Warranties of Ballston and NV Bank............ A-8
(a) Organization, Standing and Power.............................. A-9
(b) Capital Structure............................................. A-9
(c) Authority..................................................... A-9
(d) Investments................................................... A-10
(e) Financial Statements.......................................... A-11
(f) Absence of Undisclosed Liabilities............................ A-11
(g) Tax Matters................................................... A-11
(h) Options, Warrants and Related Matters......................... A-13
(i) Property...................................................... A-13
(j) Additional Schedules Furnished to AANB........................ A-13
(k) Agreements in Force and Effect................................ A-14
(1) Legal Proceedings; Compliance with Laws....................... A-14
(m) Employee Benefit Plans........................................ A-15
(n) Insurance..................................................... A-17
(o) Loan Portfolio................................................ A-17
(p) Absence of Changes............................................ A-18
(q) Brokers and Finders........................................... A-18
(r) Subsidiaries; Partnerships and Joint Ventures................. A-18
(s) Reports....................................................... A-18
A-ii
<PAGE>
(t) Environmental Matters......................................... A-19
(u) Tax; Regulatory Matters....................................... A-20
(v) Regulatory Approvals.......................................... A-20
(w) Ballston Stock Buyback Program................................ A-20
(x) Disclosure.................................................... A-20
3.2. Representations and Warranties of AANB............................ A-20
(a) Organization, Standing and Power.............................. A-20
(b) Capital Structure............................................. A-21
(c) Authority..................................................... A-21
(d) Investments................................................... A-22
(e) Financial Statements.......................................... A-22
(f) Absence of Undisclosed Liabilities............................ A-23
(g) Absence of Changes............................................ A-23
(h) Subsidiaries.................................................. A-23
(i) Reports....................................................... A-23
(j) Additional Schedules Furnished to Ballston.................... A-23
(k) Tax Matters................................................... A-24
(l) Property...................................................... A-24
(m) Agreements in Force and Effect................................ A-25
(n) Legal Proceedings; Compliance with Laws....................... A-25
(o) Loan Portfolio................................................ A-25
(p) Employee Benefit Plans........................................ A-26
(q) Regulatory Approvals.......................................... A-27
(r) Disclosure.................................................... A-27
(s) Tax; Regulatory Matters....................................... A-27
(t) Environmental Matters......................................... A-27
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Merger............................................ A-29
4.1. Access to Records and Properties of AANB, Ballston and NV Bank;
Confidentiality................................................... A-29
4.2. Registration Statement, Proxy Statement, Shareholder Approval..... A-29
4.3. Operation of the Business of Ballston, NV Bank and AANB........... A-30
(a) Operation of the Business of Ballston and NV Bank............. A-30
(b) Conduct of the Business of AANB............................... A-32
4.4. No Solicitation................................................... A-32
4.5. Dividends......................................................... A-33
4.6. Regulatory Filings; Best Efforts.................................. A-33
4.7. Public Announcements.............................................. A-33
4.8. Operating Synergies; Conformance to Reserve Policies, Etc......... A-33
4.9. Agreement as to Efforts to Consummate............................. A-33
4.10. Adverse Changes in Condition...................................... A-34
4.11. Updating of Schedules............................................. A-34
A-iii
<PAGE>
4.12. Transactions in AANB Common Stock................................. A-34
4.13. Accruals and Accounting Adjustments............................... A-34
ARTICLE V
Conditions of Merger.................................................... A-34
5.1. Conditions of Obligations of AANB................................. A-34
(a) Representations and Warranties; Performance of Obligations.... A-35
(b) Authorization of Transaction.................................. A-35
(c) Opinion of Counsel............................................ A-35
(d) The Registration Statement.................................... A-35
(e) Tax Opinion................................................... A-35
(f) Regulatory Approvals.......................................... A-35
(g) Affiliate Letters............................................. A-36
(h) NASDAQ Listing................................................ A-36
(i) AANB Shareholder Approval..................................... A-36
(j) Acceptance by AANB Counsel.................................... A-36
5.2. Conditions of Obligations of Ballston and NV Bank................. A-36
(a) Representations and Warranties; Performance of Obligations.... A-36
(b) Authorization of Transaction.................................. A-36
(c) Opinion of Counsel............................................ A-37
(d) The Registration Statement.................................... A-37
(e) Regulatory Approvals.......................................... A-37
(f) Tax Opinion................................................... A-37
(g) NASDAQ Listing................................................ A-38
(h) Ballston Shareholder Approval................................. A-38
(i) Acceptance by Ballston's Counsel.............................. A-38
ARTICLE VI
Closing Date; Effective Time............................................ A-38
6.1. Closing Date...................................................... A-38
6.2. Filings at Closing................................................ A-38
6.3. Effective Time.................................................... A-38
ARTICLE VII
Termination; Survival of Representations,
Warranties and Covenants; Waiver and Amendment.......................... A-39
7.1. Termination....................................................... A-39
7.2. Effect of Termination............................................. A-40
7.3. Survival of Representations, Warranties and Covenants............. A-40
7.4. Waiver and Amendment.............................................. A-40
A-iv
<PAGE>
ARTICLE VIII
Additional Covenants and Agreements..................................... A-40
8.1. Indemnification of Ballston and NV Bank officers and Directors;
Liability Insurance............................................... A-41
8.2 Employment of Employees of Ballston and NV Bank by AANB........... A-41
8.3. Employee Benefit Matters.......................................... A-42
8.4. Stock Options..................................................... A-43
8.5. Status of AANB as "Women Owned Bank."............................. A-43
8.6. Actions by Subsidiary............................................. A-43
ARTICLE IX
Miscellaneous........................................................... A-43
9.1. Expenses.......................................................... A-43
9.2 Materiality....................................................... A-43
9.3. Entire Agreement.................................................. A-43
9.4. Descriptive Headings.............................................. A-43
9.5. Notices........................................................... A-43
9.6. Counterparts...................................................... A-44
9.7. Governing Law..................................................... A-44
9.8. No Third Party Beneficiary Intended............................... A-44
9.9. Extension; Waiver................................................. A-45
9.10. Amendments........................................................ A-45
9.11. No Assignment..................................................... A-45
Exhibit A - Holding Company Plan of Merger of Ballston into AANB
Exhibit B - Opinions of Duane, Morris & Heckscher LLP, counsel to Ballston
and NV Bank
Exhibit C - Form of Affiliate's Undertaking
Exhibit D - Opinion of Hazel & Thomas, P.C., counsel to AANB
A-v
<PAGE>
INDEX TO SCHEDULES
Schedule Description
3.1(b) 5 Percent Owners
3.1(d) Investments
3.1(e) Ballston Financial Statements
3.1(f) Liabilities
3.1(g) Ballston Tax Matters
3.1(h) Ballston Options, Warrants & Related Matters
3.1(j)(1) Ballston Employees; Director Owned Stock
3.1(j)(2) Certain Contracts
3.1(j)(3) Employment Contracts and Related Matters
3.1(j)(4) Real Estate
3.1(j)(5) Ballston Affiliates
3.1(l) Legal Proceedings, Compliance with Laws
3.1(m) Ballston Employee Benefit Plans
3.1(n) Insurance
3.1(o) Ballston Loan Portfolio
3.1(p) Changes
3.1(r) Subsidiaries, Partnerships and Joint Ventures
3.1(t) Environmental Matters
3.2(d) Pledged Securities
3.2(e) AANB Financial Statements
3.2(g) Absence of Changes
3.2(j)(1) AANB Certain Contracts
3.2(j)(2) AANB Real Estate
3.2(k) AANB Tax Matters
3.2(n) Legal Proceedings; Compliance with Laws
A-vi
<PAGE>
Schedule Description
3.2(o) AANB Loan Porfolio
3.2(t) AANB Environmental Matters
INDEX TO DEFINITIONS
Page
----
1933 Act............................................................ A-14
1934 Act............................................................ A-29
20 Trading Day Period............................................... A-3
401(k) Plan......................................................... A-42
AANB................................................................ A-1
AANB Affiliates..................................................... A-24
AANB Common Stock................................................... A-1
AANB Employee Plans................................................. A-26
AANB Financial Statements........................................... A-22
AANB Group.......................................................... A-24
AANB Stock Value.................................................... A-3
Acquisition Event................................................... A-3
Adams Bank.......................................................... A-1
Adjusted Cash Consideration......................................... A-5
Adjusted Cash Consideration Per Share............................... A-5
Agreement........................................................... A-1
Alternate Value..................................................... A-3
Ballston............................................................ A-1
Ballston Affiliates................................................. A-14
Ballston Financial Statements....................................... A-11
Ballston Group...................................................... A-12
Cash Consideration.................................................. A-2
Cash Election....................................................... A-4
Cash Election Shares................................................ A-5
Cash Fraction....................................................... A-5
Change of Control................................................... A-3
Closing Date........................................................ A-38
Code................................................................ A-1
Dissenting Shares................................................... A-8
Effective Time of the Holding Company Merger ....................... A-38
Election Deadline................................................... A-7
Election Form Record Date........................................... A-6
Employee Plans...................................................... A-15
Environmental Law................................................... A-19, A-27
A-vii
<PAGE>
ERISA............................................................... A-14
Exchange Price...................................................... A-2
FDIC................................................................ A-10
Federal Reserve Board............................................... A-10
Form of Election.................................................... A-6
GAAP................................................................ A-11
Hazardous Substance................................................. A-19, A-28
Holding Company Merger.............................................. A-1
Holding Company Plan of Merger...................................... A-1
IRS................................................................. A-15
Loan Portfolio Properties and Other Properties Owned................ A-19, A-28
Material............................................................ A-43
Maximum Cash Election Number........................................ A-4
Maximum Stock Election Number....................................... A-4
NASDAQ Stock Market................................................. A-1
Non-Election........................................................ A-4
Non-Election Fraction............................................... A-6
Non-Election Shares................................................. A-5
NV Bank............................................................. A-1
OCC................................................................. A-18
OREO................................................................ A-14
PBGC................................................................ A-15
Pension Plan........................................................ A-15, A-26
Permits............................................................. A-14
Proxy Statement Prospectus.......................................... A-30
Registration Statement.............................................. A-30
SCC................................................................. A-10
SEC................................................................. A-21
Shareholder Meeting................................................. A-6
Stock Consideration................................................. A-2
Stock Consideration Per Share....................................... A-5
Stock Election...................................................... A-4
Stock Election Shares............................................... A-5
Stock Fraction...................................................... A-5
Subsidiary.......................................................... A-1
Surviving Company................................................... A-2
Taxes............................................................... A-12, A-24
Third Party......................................................... A-3
Transferred Employees............................................... A-42
Virginia Bureau..................................................... A-18
A-viii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") dated as of
June ____, 1997, among ABIGAIL ADAMS NATIONAL BANCORP, INC., a Delaware
corporation ("AANB"), BALLSTON BANCORP, INC., a Delaware corporation
("Ballston"), and THE BANK OF NORTHERN VIRGINIA, a Virginia banking corporation,
wholly-owned by Ballston ("NV Bank"), recites and provides:
A. AANB is a public company, the common stock, par value $0.01 ("AANB
Common Stock"), of which is traded on the Nasdaq Stock Market's National Market
System ("NASDAQ Stock Market"), and is the parent corporation of The Adams
National Bank ("Adams Bank"), a national bank headquartered in Washington, D.C.,
and Ballston is a privately held stock corporation, and the parent corporation
of NV Bank.
B. AANB and Ballston have reached agreement pursuant to which AANB will
acquire 100% of the equity securities of Ballston in a statutory merger in
exchange for the payment to its shareholders in the aggregate of fifty percent
(50%) of the acquisition price in AANB Common Stock and fifty percent (50%) in
cash.
C. The boards of directors of AANB and Ballston deem it advisable to merge
Ballston into Adams Acquisition Corporation ("Subsidiary"), a to-be-formed
Virginia corporation (the "Holding Company Merger"), pursuant to this Agreement
and the Plan of Merger attached as Exhibit A (the "Holding Company Plan of
---------
Merger").
D. To effectuate the foregoing, the parties desire to adopt this Agreement
and the Holding Company Plan of Merger, which shall represent a plan of
reorganization in accordance with the provisions of Section 368(a) of the United
States Internal Revenue Code, as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual benefits to be derived from
this Agreement, and of the representations, warranties, conditions and promises
herein contained, AANB, Subsidiary, Ballston and NV Bank hereby adopt this
Agreement whereby at the "Effective Time of the Holding Company Merger" (as
defined in Article VI hereof) Ballston shall be merged into Subsidiary in
accordance with the Holding Company Plan of Merger. The outstanding shares of
Ballston Common Stock shall be converted into shares of AANB Common Stock and
cash which shall be paid to the shareholders of Ballston as provided in this
Agreement on the basis, terms and conditions contained herein and in the Holding
Company Plan of Merger.
In connection therewith, the parties hereto agree as follows:
A-1
<PAGE>
ARTICLE I
General
1.1. Holding Company Merger. Subject to the provisions of this Agreement
and the Holding Company Plan of Merger, at the Effective Time of the Holding
Company Merger the separate existence of Ballston shall cease and Ballston shall
be merged with and into Subsidiary (the "Surviving Company").
1.2. Issuance of AANB Common Stock and Payment of Cash. AANB agrees to
cause the Subsidiary on the Effective Time of the Holding Company Merger to
exchange an equal amount of AANB Common Stock and cash to the extent set forth
herein, and in accordance with, the terms of this Agreement and the Holding
Company Plan of Merger for all of the equity securities of Ballston.
1.3. Taking of Necessary Action. In case at any time after the Effective
Time of the Holding Company Merger any further action is necessary or desirable
to carry out the purposes of this Agreement and to vest the Surviving Company
with full title to all properties, assets, rights, approvals, immunities and
franchises of Ballston, the officers and directors of the Surviving Company
shall take all such necessary action.
ARTICLE II
Effect of Transaction on Common Stock,
Capitalization of Abigail Adams National Bancorp, Inc.,
Adams Acquisition Corporation, Ballston Bancorp, Inc.
and The Bank of Northern Virginia
2.1. Exchange Price; Exchange Ratio. At the Effective Time of the Holding
Company Merger:
(a) AANB shall acquire one hundred percent (100%) of the equity
securities but not unexercised stock options of Ballston for $13,858,374.60
plus (1) 1.8 times the contributions to capital of Ballston accompanying
the exercise of options on Ballston common stock on or after April 1, 1997
until Closing, plus (2) one times any earnings, if any (or less one times
any losses, if any), of Ballston from April 1, 1997, until Closing, less
(3) any dividends declared by Ballston on or after April 1, 1997 until
Closing (the "Exchange Price").
(b) The value of the consideration exchanged for each share of
Ballston Common Stock shall be the Exchange Price divided by the total
number of outstanding shares of Ballston Common Stock at Closing.
(c) Payment of Exchange Price. The Exchange Price shall be paid 50% in
cash (the "Cash Consideration") and 50% in shares of AANB Common Stock (the
"Stock
A-2
<PAGE>
Consideration"). All such shares of AANB Common Stock shall be duly issued,
fully paid and nonassessable. The allocation of cash and AANB Common Stock
among individual Ballston Shareholders shall be determined as provided in
Section 2.2.
(d) Valuation of AANB Common Stock.
(i) Except in the case of an Acquisition Event (as hereinafter
defined), for purposes of determining how many shares of AANB
Common Stock will be issued pursuant to Section 2.2, the value per
share of AANB Common Stock ("AANB Stock Value") shall be the
average mid-point of the closing bid and asked price of the first
twenty (20) of the twenty-one (21) trading days of the AANB Common
Stock immediately prior to Closing (the "20 Trading Day Period")
subject to the minimums and maximums set forth in paragraph (iii)
of this Section 2.1(d).
(ii) If an Acquisition Event has occurred prior to the Closing of
this Agreement and the average mid-point of the closing bid and
asked price of the last twenty (20) trading days prior to the
public announcement of the Acquisition Event (the "Alternate
Value") is lower than the AANB Stock Value computed under (d)(i)
above, then the Alternate Value shall become the AANB Stock Value
for purposes of this Agreement subject to the minimums and maximums
set forth in paragraph (iii) of this Section 2.1(d).
(iii) For purposes of paragraphs (i) and (ii) of this Section 2.18,
the maximum share price of the AANB shares is $14.85 per share. For
purposes of paragraphs (i) and (ii) of this Section 2.18, the
minimum share price of the AANB shares is $9.90 per share. If the
average mid-point of the closing bid and asked prices for the 20
Trading Pay Period is over $14.85 per share and an Acquisition
Event has not occurred, then AANB shall have the right to terminate
the transaction and not proceed to Closing. If the average mid-
point of the cloisng bid and asked prices for the 20 Trading Day
Period is over $14.85 per share and an Acquisition Event has
occurred, then AANB shall have no right to terminate under this
provision. If the average mid-point of the closing bid and asked
prices for the 20 Trading Day Period is less than $9.90 per share,
Ballston shall have the right to terminate the transaction and not
proceed to Closing.
(iv) As used in this subparagraph "Acquisition Event" means that
the Board of Directors of AANB shall have (i) authorized the
execution of an agreement (not subsequently terminated) with any
person or group of persons ("Third Party") pursuant to which such
Third Party will acquire, merge or consolidate with, or acquire all
or substantially all of the assets of AANB (or engage in a
substantially similar transaction) in a transaction where there is
a change of voting power in excess of 50% of the outstanding shares
of AANB ("Change of Control"), or (ii) supported (and not
subsequently withdrawn its support
A-3
<PAGE>
for) an offer or proposal by any Third Party to acquire, merge or
consolidate with AANB, which would constitute a Change of Control,
or acquire all or substantially all of the assets of AANB (or to
engage in a substantially similar transaction).
(v) The stock portion of the Exchange Price at the Effective Time
of the Holding Company Merger shall be adjusted to reflect any
consolidation, split-up, other subdivisions or combinations of AANB
Common Stock, any dividend payable in AANB Common Stock, or any
capital reorganization involving the reclassification of AANB
Common Stock subsequent to the date of this Agreement.
2.2. Manner of Exchange.
(a) Elections to Receive AANB Stock and Cash by Shareholders of Ballston.
(1) Entitlement to Elect. Subject to the election and allocation
procedures set forth in this section, each holder of Ballston Common Stock
(other than holders of dissenting shares) will be entitled with respect to each
share of Ballston Common Stock held by such holder, to (i) elect to receive all
or a portion of their prorata portion of the Exchange Price in AANB Common Stock
(a "Stock Election"), or (ii) elect to receive all or a portion of their prorata
portion of the Exchange Price in cash (a "Cash Election"), or (iii) indicate
that such holder has no preference as between receipt of AANB Common Stock and
receipt of cash (a "Non-Election").
(2) Maximum Cash Election Number. The number of shares of Ballston
Common Stock to be converted into the right to receive the Cash Consideration in
the Holding Company Merger shall be no greater than fifty percent (50%) of (i)
the number of shares of Ballston Common Stock issued and outstanding immediately
prior to the Effective Time of the Holding Company Merger, less (ii) the sum of
the Dissenting Shares (defined in Section 2.4) and the number of shares of
Ballston Common Stock converted into fractional shares of AANB Common Stock and
paid for in cash under Section 2.3. The maximum number of shares of Ballston
Common Stock to be converted into the right to receive the Cash Consideration,
as calculated pursuant to this paragraph, is referred to in this Agreement as
the "Maximum Cash Election Number."
(3) Maximum Stock Election Number. The number of shares of Ballston
Common Stock to be converted into the right to receive consideration in AANB
Common Stock in the Holding Company Merger shall be no greater than that number
which when converted would equal fifty percent (50%) of the Exchange Price. The
maximum number of shares of Ballston Stock to be converted into the right to
receive the AANB Stock consideration, as calculated pursuant to this paragraph,
is referred to in this Agreement as the "Maximum Stock Election Number."
A-4
<PAGE>
(4) Election-Adjustments.
(i) If the aggregate number of shares of Ballston Stock covered by
Cash Elections (the "Cash Election Shares") exceeds the Maximum Cash Election
Number, then (i) all shares of Ballston Common Stock covered by Stock Elections
(the "Stock Election Shares") and all shares of Ballston Common Stock covered by
Non-Elections (the "Non-Election Shares") shall each be converted into the right
to receive the Stock Consideration Per Share (as defined in paragraph (iv)
below), and (ii) all Cash Election Shares shall be converted into the right to
receive AANB Common Stock and cash in the following manner: each Cash Election
Share shall be converted into the right to receive (A) an amount in cash,
without interest, equal to the product of (1) the Adjusted Cash Consideration
Per Share (as defined in paragraph (iii) below) and (2) a fraction, the
numerator of which shall be the Maximum Cash Election Number and the denominator
of which shall be the total number of Cash Election Shares (the "Cash
Fraction"), and (B) a number of shares of AANB Stock equal to the product of (1)
the Stock Consideration Per Share and (2) a fraction equal to one minus the Cash
Fraction.
(ii) If the number of Stock Election Shares exceeds the Maximum Stock
Election Number, then (i) all Cash Election Shares and all Non-Election Shares
shall be converted into the right to receive the Adjusted Cash Consideration Per
Share, and (ii) all Stock Election Shares shall be converted into the right to
receive AANB Common Stock and cash in the following manner: each Stock Election
Share shall be converted into the right to receive (A) a number of shares of
AANB Common Stock equal to the product of (1) the Stock Consideration per Share
and (2) a fraction, the numerator of which shall be the Maximum Stock Election
Number and the denominator of which shall be the total number of Stock Election
Shares (the "Stock Fraction"), and (B) an amount of cash, without interest,
equal to the product of (1) the Adjusted Cash Consideration Per Share and (2) a
fraction equal to one minus the Stock Fraction.
(iii) "Adjusted Cash Consideration Per Share" means the quotient of
the Adjusted Cash Consideration divided by the Maximum Cash Election Number.
"Adjusted Cash Consideration" means the Cash Consideration less (a)the amount of
the Cash Consideration paid for Dissenting Shares pursuant to Section 2.4 and
(b) the amount of the Cash Consideration paid for fractional shares pursuant
to Section 2.3.
(iv) "Stock Consideration Per Share" means the quotient of
the Stock Consideration divided by the Maximum Stock Election Number.
(5) Non-Election Adjustments. In the event that Section 2.2(a)(4) of this
Agreement is not applicable, all Cash Election Shares shall be converted into
the right to receive the Adjusted Cash Consideration Per Share, all Stock
Election Shares shall be converted into the right to receive the Stock
Consideration Per Share, and the Non-Election Shares, if any, shall be converted
into the right to receive AANB Common Stock and cash in the following manner:
each Non-Election Share shall be converted into the right to receive (x) an
amount in cash, without interest, equal to the product of (A) the Adjusted Cash
A-5
<PAGE>
Consideration Per Share and (B) a fraction (the "Non-Election Fraction"), the
numerator of which shall be the excess of (1) the Maximum Cash Election Number
over (2) the total number of Cash Election Shares and the denominator of which
shall be the total number of Non-Election Shares and (y) a number of shares of
AANB Common Stock equal to the product of (A) the Common Stock Consideration Per
Share and (B) a fraction equal to one minus the Non-Election Fraction.
(6) Exercise of Election.
(i) All Cash Elections, Stock Elections, and Non-Elections shall be
made on a form designed for that purpose (a "Form of Election") and mailed to
holders of record of shares of Ballston Common Stock as of the record date for
the meeting at which the shareholders of Ballston meet to approve, ratify, and
confirm the transactions contemplated by this Agreement (the "Shareholder
Meeting") or such other date as AANB and Ballston shall mutually agree (the
"Election Form Record Date"). AANB and Ballston shall make available one or more
Forms of Election as may be reasonably requested by all persons who become
holders or beneficial owners of Ballston Stock between the Election Form Record
Date and the close of business on the day prior to the Election Deadline.
(ii) Elections shall be made by holders of Ballston Common Stock by
mailing to Ballston a Form of Election or by delivering a Form of Election to
Ballston at the Shareholder Meeting. Any holder of Ballston Common Stock may
allocate his or her Ballston Common Stock among Cash Election Shares, Stock
Election Shares, and Non-Election Shares as he or she sees fit, that is, by
electing to allocate all to one category or by dividing his or her AANB Stock
among more than one category, provided that if the sum of the shares of any
holder as to which Cash Elections, Stock Elections, and Non-Elections are made
exceed the total number of shares held by the holder, Ballston shall consider
all the elections submitted by the holder to have been not properly made and,
accordingly, subject to the procedures set forth in section 2.2(a)(8).
(iii) To be effective, a Form of Election must be properly completed
and signed and received by Ballston no later than the adjournment of the
Shareholder Meeting, or else the holder will be deemed to have made a Non-
Election.
(iv) Ballston will have the discretion to reasonably determine
whether Forms of Election have been properly completed, signed, and submitted or
revoked and to disregard immaterial defects in Forms of Election. The decision
of Ballston in such matters shall be conclusive and binding. Neither AANB nor
Ballston will be under any obligation to notify any person of any defect in a
Form of Election submitted to Ballston, but Ballston shall use commercially
reasonable efforts to notify a holder of any such defect.
(v) Ballston shall make all computations contemplated by this Section
2.2(a)(6), and all computations shall be conclusive and binding on the holders
of Ballston common stock.
A-6
<PAGE>
(7) Revocation or Modification; Deadline. Any holder of Ballston common
stock who has made an election by submitting a Form of Election to Ballston
(including those who have been known to have made a Non-Election) may at any
time prior to close of business on the Wednesday immediately preceding the
Closing Date (the "Election Deadline") change his or her election by submitting
to Ballston, by certified mail or by a nationally recognized overnight service,
a revised Form of Election, properly completed and signed, that is received by
Ballston by the Election Deadline. Any holder of Ballston common stock may at
any time prior to the Election Deadline revoke his or her election (including
any deemed Non-Election) and withdraw his or her certificates deposited with
Ballston by written notice submitted to Ballston by certified mail or by a
nationally recognized overnight service, that is received by Ballston by the
Election Deadline. Any holder of Ballston Common Stock may at any time prior to
the Election Deadline revoke his or her Non-Election (as defined in Section
2.2(a)(8)) by submitting to Ballston, by certified mail or by a nationally
recognized overnight service, a Form of Election, properly completed and signed,
that is received by Ballston by the Election Deadline. Ballston shall determine
the allocation by each shareholder of Ballston of the cash portion of the
Exchange Price and the stock portion of the Exchange Price and shall notify AANB
and the Exchange Agent of its determination at Closing.
(8) Deemed Non-Election. For the purposes hereof, a holder of Ballston
common stock (including a holder of Dissenting Shares who shall have failed to
perfect, or shall have effectively withdrawn or lost, his or her right to
dissent from the Merger under the Appraisal Laws) who does not submit a Form of
Election which is received by Ballston prior to the Election Deadline shall be
deemed to have made a Non-Election. If Ballston shall determine that any
purported Cash Election or Stock Election was not properly made, such purported
Cash Election or Stock Election shall be deemed to be of no force and effect and
the shareholder making such purported Cash Election or Stock Election shall for
purposes hereof be deemed to have made a Non-Election.
(9) Notwithstanding anything to the contrary herein, the Exchange Price
shall be paid fifty percent (50%) in cash and fifty percent (50%) in AANB Stock
collectively to the shareholders of Ballston to qualify the Holding Company
Merger as a reorganization under Section 368(a) of the Code.
(b) After the Effective Time of the Holding Company Merger, each holder of a
certificate for theretofore outstanding shares of Ballston Common Stock, upon
surrender of such certificate to the Exchange Agent, accompanied by a Letter of
Transmittal, which shall be mailed to each holder of a certificate for
theretofore outstanding shares of Ballston Stock by Exchange Agent as promptly
as practicable following the Effective Time of the Holding Company Merger, shall
be entitled to receive in exchange therefor a certificate or certificates
representing the pro rata portion of the Exchange Price in either cash, or AANB
Common Stock or both in accordance with the instructions from Ballston to the
Exchange Agent for which shares of Ballston Common Stock theretofore represented
by the certificate or certificates so surrendered to the Exchange Agent shall
have been exchanged as provided in this Article II. Until so surrendered, each
outstanding certificate which, prior to the Effective
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Time of the Holding Company Merger, represented Ballston Common Stock will be
deemed to evidence their right to receive the pro rata portion of the Exchange
Price; and, after the Effective Time of the Holding Company Merger will be
deemed for all corporate purposes of AANB to evidence ownership in the Exchange
Price and any AANB Stock and cash therewith into which the shares of Ballston
Common Stock represented thereby were converted.
(c) Until such outstanding certificates formerly representing Ballston
Common Stock are surrendered, no dividend payable to holders of record of AANB
Stock for any period as of any date subsequent to the Effective Time of the
Holding Company Merger shall be paid to the holder of such outstanding
certificates in respect thereof. After the Effective Time of the Holding Company
Merger, there shall be no further registry of transfer on the records of
Ballston of shares of Ballston Common Stock. If a certificate representing such
shares is presented to the Exchange Agent or AANB, it shall be canceled and
exchanged by the Exchange Agent for a certificate representing shares of AANB
Stock as herein provided and/or cash based on their pro rata portion of the
Exchange Price to which the shareholders are entitled. Upon surrender of
certificates of Ballston Common Stock in exchange for any AANB Stock, to the
extent applicable, there shall be paid to the record holder of the certificates
of AANB Stock issued in exchange therefor (i) the amount of dividends
theretofore paid for such full shares of AANB Stock as of any date subsequent to
the Effective Time of the Holding Company Merger which have not yet been paid to
a public official pursuant to abandoned property laws and (ii) at the
appropriate payment date the amount of dividends with a record date after the
Effective Time of the Holding Company Merger but prior to surrender and a
payment date subsequent to surrender. No interest shall be payable on such
dividends upon surrender of outstanding certificates.
2.3. No Fractional Shares. No certificates or scrip for fractional shares
of AANB Common Stock will be issued. In lieu thereof, AANB will pay the value of
such fractional shares in cash on the basis of the AANB Stock Value as defined
in section 2.1(d).
2.4. Dissenting Shares. Shareholders of Ballston shall have the right to
demand and receive payment of the fair value of their shares of Ballston Stock
pursuant to provisions of Section 262 et seq. of the Delaware Corporation Law
(the "Dissenting Shares"). If, however, a holder shall have failed to perfect
his right to dissent or shall have effectively withdrawn or lost such right,
each of his shares of Ballston Stock shall be deemed to constitute Non-Election
Shares in accordance with Section 2.2(a)(8) hereof.
ARTICLE III
Representations and Warranties
3.1. Representations and Warranties of Ballston and NV Bank. Ballston and
NV Bank represent and warrant to AANB as follows:
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(a) Organization, Standing and Power. Ballston is a corporation duly
organized, validly existing and in good standing under the laws of Delaware and
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted, to perform this
Agreement and the Holding Company Plan of Merger, and to effect the transactions
contemplated hereby and thereby. Ballston has delivered to AANB complete and
correct copies of (i) its Certificate of Incorporation and any amendments
thereto and (ii) its By-laws. Ballston is duly qualified to conduct business as
a foreign corporation in each jurisdiction where it owns or leases real property
or conducts business, except where the failure to be so qualified would not have
a material adverse effect on the business, operations, earnings, prospects,
assets or condition (financial or otherwise) of Ballston.
NV Bank is a banking corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Virginia and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted and to perform this
Agreement and to effect the transactions contemplated hereby. NV Bank's deposits
are insured by the Bank Insurance Fund of the FDIC to the maximum extent
permitted by law. NV Bank has delivered to AANB complete and correct copies of
(i) its Articles of Incorporation with any amendments thereto and (ii) its
Bylaws. NV Bank is duly qualified to conduct business as a foreign corporation
in each jurisdiction where it owns or leases real property or conducts business,
except where the failure to be so qualified would not have a material adverse
effect on the business, operations, earnings, prospects, assets or condition
(financial or otherwise) of NV Bank.
(b) Capital Structure. The authorized capital stock of Ballston consists of
2,500,000 shares of Ballston Common Stock, par value $.20, and 500,000 shares of
preferred stock, par value $.20. As of June 1, 1997, 1,619,474 shares of
Ballston Common Stock and no shares of preferred stock were outstanding. All of
the outstanding shares of Ballston Common Stock were validly issued, fully paid
and nonassessable at such date.
The authorized capital stock of NV Bank consists of 4,500 shares of Common
Stock. As of June 1, 1997, 3,350 shares of NV Bank Common Stock were outstanding
and all of such outstanding shares were validly issued, fully paid and
nonassessable. Ballston owns all of the issued and outstanding capital stock of
NV Bank free and clear of any liens, claims, encumbrances, charges or rights of
third parties of any kind whatsoever.
Ballston knows of no person who beneficially owns 5% or more of the
outstanding Ballston Common Stock as of the date hereof, except as disclosed on
Schedule 3.1(b).
(c) Authority. Subject to the approval of this Agreement and the Holding
Company Plan of Merger by the shareholders of Ballston as contemplated by
Section 4.2, the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby and by the Holding Company Plan of
Merger have been or will be duly and validly authorized by all necessary action
on the part of Ballston, and this Agreement is a valid and binding obligation of
Ballston, enforceable in accordance with its terms, except
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as enforceability may be limited by laws affecting the enforcement of
creditors' rights generally and subject to any equitable principles limiting the
right to obtain specific performance. The execution and delivery of this
Agreement, the consummation of the transactions contemplated hereby and by the
Holding Company Plan of Merger and compliance by Ballston with any of the
provisions hereof or thereof will not (i) conflict with or result in a breach of
any provision of its Certificate of Incorporation or By-laws or a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any note, bond, debenture, mortgage,
indenture, license, material agreement or other material instrument or
obligation to which Ballston is a party, or by which it or any of its properties
or assets may be bound, or (ii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Ballston or any of its properties or
assets. No consent or approval by any governmental authority, other than
compliance with applicable federal and state securities and banking laws, and
laws administered by and regulations of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), the Federal Deposit Insurance
Corporation (the "FDIC"), the State Corporation Commission of the Commonwealth
of Virginia (the "SCC") is required in connection with the execution and
delivery by Ballston of this Agreement or the consummation by Ballston of the
transactions contemplated hereby or by the Holding Company Plan of Merger.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and by the NV Bank Plan of Merger, as
applicable, have been duly and validly authorized by all necessary action on the
part of NV Bank, and this Agreement is a valid and binding obligation of NV
Bank, enforceable in accordance with its terms except as enforceability may be
limited by laws affecting insured depository institutions and laws affecting the
enforcement of creditors' rights generally and subject to any equitable
principles limiting the right to obtain specific performance. The execution and
delivery of this Agreement, the consummation of the transactions contemplated
hereby and compliance by NV Bank with any of the provisions hereof will not (i)
conflict with or result in a breach of any provision of its Articles of
Incorporation or Bylaws or a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, bond, debenture, mortgage, indenture, license, material agreement
or other material instrument or obligation to which NV Bank is a party, or by
which it or any of its properties or assets may be bound, or (ii) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to NV
Bank or any of its properties or assets. No consent or approval by any
governmental authority, other than compliance with applicable federal and state
banking laws, and laws administered by and regulations of the Federal Reserve
Board, the FDIC, and the SCC is required in connection with the execution and
delivery by NV Bank of this Agreement or the consummation by NV Bank of the
transactions contemplated hereby.
(d) Investments. All securities owned by Ballston and NV Bank of record and
beneficially are free and clear of all mortgages, liens, pledges, encumbrances
or any other restriction, whether contractual or statutory, which would
materially impair the ability of Ballston or NV Bank freely to dispose of any
such security at any time, except as noted on Schedule 3.1(d). Any securities
owned of record by Ballston and NV Bank in an amount
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equal to 5% or more of the issued and outstanding voting securities of the
issuer thereof have been noted on such Schedule 3.1(d). There are no voting
trusts or other agreements or undertakings of which Ballston or NV Bank is a
party with respect to the voting of such securities. With respect to all
repurchase agreements to which Ballston or NV Bank is a party, Ballston or NV
Bank has a valid, perfected first lien or security interest in the government
securities or other collateral securing the repurchase agreement, and the value
of the collateral securing each such repurchase agreement equals or exceeds the
amount of the debt secured by such collateral under such agreement.
(e) Financial Statements. Schedule 3.1(e) contains copies of the following
financial statements of Ballston (the "Ballston Financial Statements"):
(1) Consolidated Statement of Financial Condition as of April 30,
1997 and 1996 (unaudited) and as of December 31, 1996 and 1995 (audited);
(2) Consolidated Income Statements for the three month period
ended March 31, 1997 and 1996 (unaudited) and each of the three years ended
December 31, 1996, 1995, and 1994 (audited);
(3) Consolidated Statements of Changes in Stockholders' Equity for
each of the three years ended December 31, 1996, 1995 and 1994 (audited);
and
(4) Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1996, 1995 and 1994 (audited).
Such financial statements and the notes thereto have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated unless otherwise noted in the Ballston
Consolidated Financial Statements. Each of such consolidated statements of
financial condition, together with the notes thereto, presents fairly as of its
date the consolidated financial condition and assets and liabilities of
Ballston. The consolidated statements of operations, changes in stockholders'
equity and cash flows, together with the notes thereto, present fairly the
results of consolidated operations, consolidated changes in stockholders' equity
and consolidated cash flows of Ballston or NV Bank for the periods indicated in
accordance with generally accepted accounting principles ("GAAP").
(f) Absence of Undisclosed Liabilities. Except as disclosed on Schedule
3.1(f) at April 30, 1997, and December 31, 1996 Ballston and NV Bank had no
material obligations or liabilities (contingent or otherwise) of any nature
which were not reflected in the Ballston Financial Statements as of such dates,
or disclosed in the notes thereto, except for those which are disclosed in
Schedules specifically referred to herein or which in the aggregate are
immaterial.
(g) Tax Matters. Ballston and NV Bank are members of the same "affiliated
group," (as defined in Section 1504(a)(1) of the Code) for which Ballston is the
common
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parent (collectively, the "Ballston Group"), the Ballston Group files a
consolidated federal income tax return, and except as disclosed in Schedule
3.1(g), no member of the Ballston Group has ever filed a consolidated federal
income tax return with (or been included in a consolidated return of) any other
affiliated group. Each member of the Ballston Group has filed or caused to be
filed or (in the case of returns or reports not yet due) will file all tax
returns and reports required to have been filed by or for them before the
Effective Time of the Holding Company Merger, and all information set forth in
such returns or reports is or (in the case of such returns or reports not yet
due) will be accurate and complete in all material respects. Each member of the
Ballston Group has paid or made adequate provision for, or (with respect to
returns or reports not yet filed) before the Effective Time of the Holding
Company Merger will pay or make adequate provision for, all taxes, additions to
tax, penalties, and interest ("Taxes") for all periods covered by those returns
or reports. There are, and at the Effective Time of the Holding Company Merger
will be, no unpaid Taxes due and payable by any member of the Ballston Group for
periods ending on or before the Effective Time of the Holding Company Merger
that are or could become a lien on any asset (other than liens for Taxes not yet
due and payable), or otherwise materially adversely affect the business,
property or financial condition, of any member of the Ballston Group except for
Taxes (a) incurred in the ordinary course of business for which adequate
provision has been made by any member of the Ballston Group or (b) being
contested in good faith and disclosed in Schedule 3.1(g). Each member of the
Ballston Group has collected or withheld, or will collect or withhold before the
Effective Time of the Holding Company Merger, all amounts required to be
collected or withheld by it for any taxes, for periods ending on or before the
Effective Date of the Holding Company Merger, and all such amounts have been, or
before the Effective Time of the Holding Company Merger will have been, paid to
the appropriate governmental agencies or set aside in appropriate accounts for
future payment when due. Each member of the Ballston Group is in material
compliance with, and its records contain all information and documents
(including, without limitation, properly completed IRS Forms W-9) necessary to
comply in all material respects with, all applicable information reporting and
tax withholding requirements under federal, state, and local laws, rules, and
regulations, and such records identify with specificity all accounts subject to
backup withholding under Section 3406 of the Code. The consolidated statements
of financial condition contained in the Ballston Financial Statements fully and
properly reflect, as of the dates thereof, the aggregate liabilities of the
members of the Ballston Group for all accrued Taxes in accordance with GAAP. For
periods ending after December 31, 1996, the books and records of each member of
the Ballston Group fully and properly reflect their liability for all accrued
Taxes in accordance with GAAP. Except as disclosed in Schedule 3.1(g), no member
of the Ballston Group has granted (nor is it subject to) any waiver of the-
period of-limitations for the assessment of tax for any currently open taxable
period, no unpaid tax deficiency has been asserted in writing against or with
respect to any member of the Ballston Group by any taxing authority, and there
is no currently pending examination for which written notice thereof has been
received by a member of the Ballston Group or other administrative proceeding or
any judicial proceeding relating to any tax (including any refund thereof) of
any member of the Ballston Group. No member of the Ballston Group has made or
entered into, or holds any asset subject to, a consent filed pursuant to Section
341(f) of the Code and the regulations thereunder or a "safe harbor lease"
subject to former Section
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168(f)(8) of the Code and the regulations thereunder. Except as disclosed in
Schedule 3.1(g) no member of the Ballston Group is obligated to make, or is a
party to an agreement that could obligate it to make, any payment that would not
be deductible by reason of Section 162(m) or 28OG of the Code. Schedule 3.1(g)
describes all material tax elections, consents and agreements affecting any
member of the Ballston Group and lists all types of material taxes paid and tax
returns filed by or on behalf of each member of the Ballston Group. To the best
knowledge of Ballston, no Ballston shareholder is a "foreign person" for
purposes of Section 1445 of the Code except as set forth on Schedule 3.1(g).
Ballston is not a "United States real property holding company" as defined under
Section 897(c)(2) of the Code.
(h) Options, Warrants and Related Matters. There are no outstanding
unexercised options, warrants, calls, commitments or agreements of any character
to which Ballston or NV Bank is a party or by which it is bound, calling for the
issuance of securities of Ballston or NV Bank or any security representing the
right to purchase or otherwise receive any such security, except as set forth on
Schedule 3.1(h).
(i) Property. Ballston and NV Bank own (or enjoy use of under capital
leases) all property reflected on the Ballston Financial Statements as of April
30, 1997 and December 31, 1996 (except property sold or otherwise disposed of in
the ordinary course of business). All property shown as being owned is owned
free and clear of all mortgages, liens, pledges, charges or encumbrances of any
nature whatsoever, except those referred to in such Ballston Financial
Statements or the notes thereto, liens for current taxes not yet due and
payable, any unfiled mechanics' liens and such encumbrances and imperfections of
title, if any, as are not substantial in character or amount or otherwise
materially impair Ballston's consolidated business operations. The leases
relating to leased property are fairly reflected in such Ballston Financial
Statements.
All property and assets material to the business or operations of Ballston
and NV Bank, are in substantially good operating condition and repair and such
property and assets are adequate for the business and operations of Ballston and
NV Bank as currently conducted.
(j) Additional Schedules Furnished to AANB. In addition to any Schedules
furnished to AANB pursuant to other provisions of this Agreement, Ballston has
furnished to AANB the following Schedules which are correct and complete as of
the date hereof:
(1) Employees. Schedule 3.1(j)(1) lists as of the date hereof (A) the
names of and current annual salary rates for all present employees of
Ballston and NV Bank whether in salary or otherwise, and (B) the number of
shares of Ballston Stock owned beneficially by each director of Ballston or
NV Bank as of the date hereof.
(2) Certain Contracts. Schedule 3.1(j)(2) lists, with the exception of
loans by Ballston or NV Bank, all notes, bonds, mortgages, indentures,
licenses, lease agreements and other contracts and obligations to which
Ballston or NV Bank is an
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indebted party or a lessee, licensee or obligee as of the date hereof except
for those entered into by Ballston or NV Bank in the ordinary course of its
business consistent with its prior practice and that do not involve an
amount remaining greater than $5,000.
(3) Employment Contracts and Related Matters. Except in all cases as
set forth on Schedule 3.1(j)(3), neither Ballston nor NV Bank or any
subsidiary thereof is a party to any employment contract or severance
agreement not terminable at the option of Ballston or NV Bank without
liability. Except in all cases as set forth on Schedule 3.1(j)(3), neither
Ballston nor NV Bank is a party to (A) any retirement, profit sharing or
pension plan or thrift plan or agreement or employee benefit plan (as
defined in Section 3 of the Employee Retirement Income Security Act of 1974
("ERISA")), (B) any management or consulting agreement not terminable at the
option of Ballston or NV Bank without liability, or (C) any union or labor
agreement.
(4) Real Estate. Schedule 3.1(j)(4) describes, as of the date hereof,
all interests in real property owned, leased or otherwise claimed by
Ballston and NV Bank, including Other Real Estate Owned ("OREO").
(5) Affiliates. Schedule 3.1(j)(5) sets forth the names and number of
shares of Ballston Stock owned as of the date hereof beneficially or of
record by any persons Ballston considers to be affiliates of Ballston
("Ballston Affiliates") as that term is defined for purposes of Rule 145
under the Securities Act of 1933 (the "1933 Act").
(k) Agreements in Force and Effect. All contracts, agreements, plans,
leases, policies and licenses referred to in any Schedule of Ballston or NV Bank
referred to herein to the best knowledge of Ballston's management are valid and
in full force and effect, and neither Ballston nor NV Bank has breached any
provision of, nor is in default in any respect under the terms of, any such
contract, agreement, lease, policy or license, the effect of which breach or
default would have a material adverse effect upon either the financial
condition, results of operations, or business of Ballston on a consolidated
basis.
(1) Legal Proceedings; Compliance with Laws. Schedule 3.1(l) describes all
legal, administrative, arbitration or other proceeding or governmental
investigation known to Ballston or NV Bank pending or, to the knowledge of
Ballston's and NV Bank's management, threatened or probable of assertion against
Ballston or NV Bank. Except as set forth on Schedule 3.1(l), no such proceeding
or investigation, if decided adversely, would have a material adverse effect on
either the financial condition, results of operations or business of Ballston on
a consolidated basis. Except as set forth in Schedule 3.1(l), Ballston and NV
Bank have complied in all material respects with any laws, ordinances,
requirements, regulations or orders applicable to its business except where
noncompliance would not have a material adverse effect on either the financial
condition, results of operations or business of Ballston on a consolidated
basis. Ballston and NV Bank have all licenses, permits, orders or approvals
(collectively, the "Permits") of any federal, state, local
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or foreign governmental or regulatory body that are necessary for the
conduct of its business and the absence of which would have a material
adverse effect on the financial condition, results of operations or business
of Ballston on a consolidated basis; the Permits are in full force and
effect; Ballston and NV Bank are not aware of the existence of any material
violation of any Permits nor has Ballston or NV Bank received written notice
of any violations which would have a material adverse effect on the
financial condition, results of operations or business of Ballston on a
consolidated basis; and no proceeding is pending or, to the knowledge of
Ballston and NV Bank, threatened to revoke or limit any Permit. Except as
set forth in Schedule 3.1(l), neither Ballston nor NV Bank has entered into
any agreements or written understandings with the Federal Reserve, the SCC,
the FDIC or any other regulatory agency having authority over it. Neither
Ballston nor NV Bank is subject to any judgment, order, writ, injunction or
decree which materially adversely affects, or might reasonably be expected
materially adversely to affect either the financial condition, results of
operations, or business of Ballston on a consolidated basis.
(m) Employee Benefit Plans.
(1) Schedule 3.1(m) includes a correct and complete list of, and AANB
has been furnished a true and correct copy of (or an accurate written
description thereof in the case of oral agreements or arrangements) (A) all
qualified pension and profit-sharing plans, all deferred compensation,
consultant, severance, thrift, option, bonus and group insurance contracts
and all other incentive, welfare and employee benefit plans, trust, annuity
or other funding agreements, and all other agreements (including oral
agreements) that are presently in effect, or have been approved prior to
the date hereof, maintained for the benefit of employees or former
employees of Ballston or NV Bank or the dependents or beneficiaries of any
employee or former employee of Ballston or NV Bank, whether or not subject
to ERISA (the "Employee Plans"), (B) the most recent actuarial and
financial reports prepared or required to be prepared with respect to any
Employee Plan, and (C) the most recent annual reports filed with any
governmental agency, the most recent favorable determination letter issued
by the Internal Revenue Service, and any open requests for rulings or
determination letters, that pertain to any such qualified Employee Plan.
Schedule 3.1(m) identifies each Employee Plan that is intended to be
qualified under Section 401(a) of the Code and each such plan is qualified.
(2) Neither Ballston, NV Bank nor any employee pension benefit plan (as
defined in Section 3(2) of ERISA (a "Pension Plan")) maintained or
previously maintained by it, has incurred or is expected to incur any
material liability to the Pension Benefit Guaranty Corporation ("PBGC"), or
to the Internal Revenue Service ("IRS") or the Department of Labor with
respect to any Pension Plan. There is not currently pending with the PBGC
any filing with respect to under Section 4043 of ERISA nor has any
reportable event occurred as to which a has not been made.
(3) Full payment has been made (or proper accruals have been
established) for all contributions which are required or for which benefits
have
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accrued, for periods prior to the Closing Date, as defined in Section 6.1
hereof, under the terms of each Employee Plan, ERISA, or a collective
bargaining agreement, no accumulated funding deficiency (as defined in
Section 302 of ERISA or Section 412 of the Code) whether or not waived,
exists with respect to any Pension Plan (including any Pension Plan
previously maintained by Ballston or NV Bank), and except as set forth on
Schedule 3.1(m), there is no "unfunded current liability" (as defined in
Section 412 of the Code) with respect to any Pension Plan.
(4) No Employee Plan is a "multiemployer plan" (as defined in Section
3(37) of ERISA). Neither Ballston nor NV Bank has incurred any material
liability under Section 4201 of ERISA for a complete or partial withdrawal
from a multi-employer plan (as defined in Section 3(37) of ERISA). Neither
Ballston nor NV Bank has participated in or agreed to participate in, a
multiemployer plan (as defined in Section 3(37) of ERISA).
(5) All Employee Plans that are "employee benefit plans," as defined
in Section 3(3) of ERISA, that are maintained by Ballston or NV Bank or
previously maintained by Ballston or NV Bank comply and have been
administered in compliance in all material respects with ERISA and all
other applicable legal requirements, including the terms of such plans,
collective bargaining agreements, annual reporting requirements of the IRS
and the Department of Labor, and securities laws. Neither Ballston nor NV
Bank has any material liability under any such plan that is not reflected
in the Ballston Financial Statements or on Schedule 3.1(m) hereto.
(6) Except as set forth on Schedule 3.1(m), no prohibited transaction
has occurred with respect to any Employee Plan that is an "employee benefit
plan" (as defined in Section 3(3) of ERISA) maintained by Ballston or NV
Bank or previously maintained by Ballston or NV Bank that would result,
directly or indirectly, in material liability under ERISA or in the
imposition of a material excise tax under Section 4975 of the Code.
(7) Schedule 3.1(m) identifies each Employee Plan that is an "employee
welfare benefit plan" (as defined in Section 3(l) of ERISA) and which is
funded. The funding under each such plan does not exceed the limitations
under Section 419A(b) or 419A(c) of the Code. Neither Ballston nor NV Bank
is subject to taxation on the income of any such plan or any such plan
previously maintained by Ballston or NV Bank.
(8) Schedule 3.1(m) identifies the method of funding (including any
individual accounting) for all post-retirement medical or life insurance
benefits for the employees of Ballston and NV Bank. Schedule 3.1(m) also
discloses the funded status of these Employee Plans.
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(9) Schedule 3.1(m) identifies each corporate owned life insurance
policy, including any key man insurance policy and policy insuring the life
of any current or former director or employee of Ballston or NV Bank, and
indicates for each such policy, the face amount of coverage, cash surrender
value, if any, and annual premiums.
(10) No trade or business is, or has ever been, treated as a single
employer with Ballston or NV Bank for employee benefit purposes under ERISA
and the Code.
(n) Insurance. All policies or binders of fire, liability, product
liability, workmen's compensation, vehicular and other insurance held by or on
behalf of Ballston or NV Bank are described on Schedule 3.1(n) and are valid and
enforceable in accordance with their terms, are in full force and effect, and
insure against risks and liabilities to the extent and in the manner customary
for the industry and are deemed appropriate and sufficient by Ballston and NV
Bank. Neither Ballston nor NV Bank is in default with respect to any provision
contained in any such policy or binder and has not failed to give any notice or
present any claim under any such policy or binder in due and timely fashion.
Neither Ballston nor NV Bank has received notice of cancellation or non-renewal
of any such policy or binder. Neither Ballston nor NV Bank has knowledge of any
inaccuracy in any application for such policies or binders, any failure to pay
premiums when due or any similar state of facts that might form the basis for
termination of any such insurance. Neither Ballston nor NV Bank has knowledge of
any state of facts or of the occurrence of any event that is reasonably likely
to form the basis for any material claim against it not fully covered or
reserved against (except to the extent of any applicable deductible) by the
policies or binders referred to above. Neither Ballston nor NV Bank has received
notice from any of its insurance carriers that any insurance premiums will be
materially increased in the future or that any such insurance coverage will not
be available in the future on substantially the same terms as now in effect.
(o) Loan Portfolio. Each loan outstanding on the books of Ballston and NV
Bank was made in the ordinary course of business, was not known to be
uncollectible at the time it was made, accrues interest (except for loans
recorded on NV Bank's books as non-accrual) in accordance with the terms of the
loan, and with respect to loans originated by NV Bank was made in accordance
with NV Bank's standard loan policies as in effect at the time the loan was
negotiated except for loans to facilitate the sale of OREO or loans with
renegotiated terms and conditions. The records of NV Bank regarding all loans
outstanding and OREO owned by NV Bank are accurate in all material respects, and
the risk classifications for loans outstanding are, in the best judgment of the
management of Ballston, appropriate. The allowance for loan losses, as reflected
in the Ballston Financial Statements, has been established in accordance with
generally accepted accounting principles. In the best judgment of the management
of Ballston, such reserves are adequate as of the date hereof and will be
adequate as of the Effective Time of the Holding Company Merger to absorb all
known and anticipated loan losses in the loan portfolio of NV Bank. Except as
disclosed on Schedule 3.1(j)(4), the OREO included in any nonperforming asset of
NV Bank is recorded
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at the lower of cost or fair value less estimated costs to sell based on
independent appraisals that comply with the requirements of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 and Uniform Standards
of Professional Appraisal Practice. Except as identified on Schedule 3.1(o), to
the knowledge of the management of Ballston and NV Bank, each loan reflected as
an asset on the Ballston Financial Statements is the legal, valid and binding
obligation of the obligor and any guarantor, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws affecting issued depository institutions
and other laws of general applicability relating to or affecting creditors'
rights and to general principles of equity, and no defense, offset or
counterclaim has been asserted with respect to any such loan, which if
successful would have a material adverse effect on the financial condition,
results of operation or business of Ballston on a consolidated basis.
(p) Absence of Changes. Except as identified on Schedule 3.1(p), since
December 31, 1996, there has not been any material adverse change in the
aggregate assets or liabilities, earnings or business of Ballston, other than
changes resulting from or attributable to (i) changes since such date in laws or
regulations, generally accepted accounting principles or interpretations of
either thereof that affect the banking or savings and loan industries
generally,(ii) changes since such date in the general level of interest rates,
(iii) expenses since such date incurred in connection with the transactions
contemplated by this Agreement, (iv) accruals and reserves by Ballston or NV
Bank since such date pursuant to the terms of Section 4.8 hereof, or (v) any
other accruals, reserves or expenses incurred by Ballston or NV Bank since such
date and noted on Schedule 3.1(p). Since December 31, 1996, the business of
Ballston has been conducted only in the ordinary course.
(q) Brokers and Finders. Neither Ballston, NV Bank nor any of their
officers, directors or employees have employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated herein.
(r) Subsidiaries; Partnerships and Joint Ventures. Ballston has no other
subsidiary, direct or indirect, other than NV Bank. Ballston owns, directly all
of the issued and outstanding common stock of its subsidiary free and clear of
any liens, claims, encumbrances, charges or rights of third parties of any kind
whatsoever and is not a party to any joint venture agreement or partnership
except as set forth in Schedule 3.1(r).
(s) Reports. Since January 1, 1993 Ballston and NV Bank (and any
corporation merged into Ballston or NV Bank) have filed all material reports and
statements, together with any amendments required to be made with respect
thereto, that were required to be filed with (i) the FDIC, (ii) the Office of
the Comptroller of the Currency ("OCC"), (iii) the Virginia Bureau of Financial
Institutions (the "Virginia Bureau"), and (iv) any other governmental or
regulatory authority or agency having jurisdiction over their operations. No
such report or statement, or any amendments thereto, contains any statement
which, at the time and in light of the circumstances under which it was made,
was false or misleading with respect to any material fact necessary in order to
make the statements contained therein not false or misleading.
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(t) Environmental Matters. For purposes of this subsection, the following
terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any
governmental entity relating to (i) the protection, preservation or
restoration of the environment (including, without limitation, air, water
vapor, surface water, groundwater, drinking water supply, surface soil,
subsurface soil, plant and animal life or any other natural resource),
and/or (ii) the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or
disposal of Hazardous Substances. The term "Environmental Law" includes
without limitation (i) the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. Section 9601, et seq;
the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section
6901, et seq; the Clean Air Act, as amended, 42 U.S.C. Section 7401, et seq;
the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251,
et seq; the Toxic Substances Control Act, as amended, 15 U.S.C. Section
9601, et seq; the Emergency Planning and Community Right to Know Act, 42
U.S.C. Section 11001, et seq; the Safe Drinking Water Act, 42 U.S.C. Section
300f, et seq; and all comparable state and local laws, and (ii) any common
law (including without limitation common law that may impose strict
liability) that may impose liability or obligations for injuries or damages
due to, or threatened as a result of, the presence of or exposure to any
Hazardous Substance.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any material containing any such substance as a
component. Hazardous Substances include without limitation petroleum or any
derivative or byproduct thereof, asbestos, radioactive material, and
polychlorinated biphenyls.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned or operated by Ballston or NV Bank or any of their
subsidiaries, provided, such properties serving as collateral for any loans
made and retained by Ballston or NV Bank or for which Ballston or NV Bank
serves in a trust relationship for the loans retained in portfolio shall be
included within this definition only to the extent management of Ballston or
NV Bank has actual knowledge of a violation of any Environmental Law with
respect to any such property.
Except as disclosed in Schedule 3.1(t), to the best knowledge of
Ballston and NV Bank,
(i) neither Ballston nor NV Bank is in violation of or liable
under any Environmental Law;
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(ii) none of the Loan Portfolio Properties and Other Properties
Owned is in violation of or liable under any Environmental Law; and
(iii) there are no actions, suits, demands, notices, claims,
investigations or proceedings pending or threatened relating to the
liability of the Loan Portfolio Properties and Other Properties owned
under any Environmental Law, including without limitation any notices,
demand letters or requests for information from any federal or state
environmental agency relating to any such liabilities under or
violations of Environmental Law.
(u) Tax; Regulatory Matters. Ballston has not taken or agreed to take any
action or has any knowledge of any fact or circumstance that would prevent the
Holding Company Merger from qualifying as a reorganization within the meaning of
Section 368 of the Code, or that would materially impede or delay receipt of any
approval referred to in Section 4.6.
(v) Regulatory Approvals. Neither Ballston nor NV Bank knows of any reason
why the approvals, consents and waivers of governmental authorities referred to
in Sections 5.1(f) and 5.2(e) hereof should not be obtained on a timely basis
without the imposition of any condition of the type referred to in Section
5.1(f) hereof.
(w) Ballston Stock Buyback Program. Ballston does not have a stock buyback
program, nor has any plans to commence a stock buyback program.
(x) Disclosure. Except to the extent of any subsequent correction or
supplement with respect thereto furnished prior to the date hereof, no written
statement, certificate, schedule, list or other written information furnished by
or on behalf of Ballston at any time to AANB, in connection with this Agreement,
when considered as a whole, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in order
to make the statements herein or therein, in light of the circumstances under
which they were made, not misleading. Each document delivered or to be delivered
by Ballston to AANB is or will be a true and complete copy of such document,
unmodified except by another document delivered by Ballston.
3.2. Representations and Warranties of AANB. AANB represents and warrants
to Ballston and NV Bank as follows:
(a) Organization, Standing and Power. AANB is a corporation duly organized,
validly existing and in good standing under the laws of Delaware and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted to perform this Agreement
and the Holding Company Plan of Merger and to effect the transactions
contemplated hereby and thereby. AANB has delivered to Ballston complete and
correct copies of its Certificate of Incorporation and all amendments thereto to
the date hereof and its By-laws as amended to the date hereof. AANB is duly
qualified to conduct business as a foreign corporation in each jurisdiction
where it owns or leases real property or conducts business, except where the
failure to be so
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qualified would not have a material adverse effect on the business, operations,
earnings, prospects, assets or condition (financial or otherwise) of AANB.
The Adams Bank is a national bank duly organized, validly existing and in
good standing under the laws of the United States, in compliance in all material
respects as to all statutes, rules and regulations thereunder including, but not
limited to those promulgated by the OCC and any other relevant regulatory
authority, and has all requisite power and authority to own, lease and operate
its properties and to carry on its businesses as now being conducted. The Adams
Bank has delivered to Ballston complete and correct copies of (i) the Charter
and Articles of Association of Adams Bank and all amendments thereto to the date
hereof and (ii) the Bylaws of Adams Bank as amended to the date hereof. Adams
Bank is an "insured depository institution" as defined in the Federal Deposit
Insurance Act and applicable regulations thereunder.
(b) Capital Structure.
(1) AANB. The authorized capital stock of AANB consists of 5,000,000
shares of Common Stock, par value $0.01, of which 1,655,906 shares were
issued and of which 1,651,226 shares were outstanding as of April 30, 1997.
All of such issued and outstanding shares of AANB Stock were validly
issued, fully paid and nonassessable at such date. Except as disclosed in
the last proxy statement filed by AANB with the Securities and Exchange
Commission (the "SEC"), AANB knows of no shareholder who owns more than 5%
of the outstanding stock of AANB.
(2) Subsidiary. The authorized capital stock of Subsidiary will
consist of 1,000 shares of common stock, $5.00 par value, of which 100
shares will be issued and outstanding as of the Closing Date. All such
issued and outstanding shares of common stock of Subsidiary will be validly
issued, fully paid and nonassessable. AANB will own all of the issued and
outstanding capital stock of Subsidiary free and clear of any liens,
claims, encumbrances, charges or rights of third parties of any kind
whatsoever. Subsidiary will be organized solely to facilitate the
acquisition of Ballston. Subsidiary will have no business operations prior
to the Effective Time of the Holding Company Merger.
(c) Authority. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of AANB; and this Agreement is a
valid and binding obligation of AANB, enforceable in accordance with its terms.
The execution and delivery of this Agreement, the consummation of the
transactions contemplated hereby and compliance by AANB with any of the
provisions hereof will not (i) conflict with or result in a breach of any
provision of its Certificate of Incorporation or By-laws or a default (or give
rise to any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, bond, debenture, mortgage,
indenture, license, material agreement or other material instrument or
obligation to which AANB is a party, or by which it or any of its properties or
assets may be bound or (ii) violate any order, writ, injunction,
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<PAGE>
decree, statute, rule or regulation applicable to AANB or any of its properties
or assets. No consent or approval by any governmental authority, other than
compliance with applicable federal and state securities and banking laws, the
rules of the NASDAQ National Market and regulations of the SEC, the Federal
Reserve Board, the FDIC, and the SCC is required in connection with the
execution and delivery by AANB of this Agreement or the consummation by AANB of
the transactions contemplated hereby or by the Holding Company Plan of Merger.
(d) Investments. All securities owned by AANB and Adams Bank of record and
beneficially are free and clear of all mortgages, liens, pledges, encumbrances
or any other restriction, whether contractual or statutory, which would
materially impair the ability of AANB or Adams Bank freely to dispose of any
such security at any time, except as noted on Schedule 3.2(d). Any securities
owned of record by AANB or Adams Bank in an amount equal to 5% or more of the
issued and outstanding voting securities of the issuer thereof have been noted
on such Schedule 3.2(d). There are no voting trusts or other agreements or
undertakings of which AANB and Adams Bank is a party with respect to the voting
of such securities. With respect to all repurchase agreements to which AANB and
Adams Bank is a party, AANB or Adams Bank has a valid, perfected first lien or
security interest in the government securities or other collateral securing the
repurchase agreement, and the value of the collateral securing each such
repurchase agreement equals or exceeds the amount of the debt secured by such
collateral under such agreement.
(e) Financial Statements. Schedule 3.2(e) contains copies of the following
consolidated financial statements of AANB (the "AANB Financial Statements"):
(1) Consolidated Balance Sheets as of December 31, 1996 and 1995
(audited) and as of March 31, 1997 and 1996 (unaudited);
(2) Consolidated Income Statements for each of the three years
ended December 31, 1996, 1995, and 1994 (audited) and the three months
ended March 31, 1997 and 1996 (unaudited);
(3) Consolidated Statements of Changes in Shareholders' Equity for
each of the three years ended December 31, 1996, 1995 and 1994
(audited) and the three months ended March 31, 1997 and 1996
(unaudited); and
(4) Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1996, 1995 and 1994 (audited) and the three
months ended March 31, 1997 and 1996 (unaudited).
Such consolidated financial statements and the notes thereto have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods indicated unless otherwise noted in the
AANB Financial Statements. Each of such consolidated balance sheets, together
with the notes thereto, presents fairly as
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<PAGE>
of its date the financial condition and assets and liabilities of AANB. The
consolidated income statements, statements of changes in shareholders' equity
and statements of cash flows, together with the notes thereto, present fairly
the results of operations, shareholders' equity and cash flows of AANB for the
periods indicated in accordance with GAAP.
(f) Absence of Undisclosed Liabilities. At March 31, 1997 and December
31, 1996 AANB and its consolidated subsidiary had no material obligations or
liabilities, (contingent or otherwise) of any nature which were not reflected in
the AANB Financial Statement as of such dates, or disclosed in the notes
thereto, except for those which are disclosed in Schedules specifically referred
to herein or which in the aggregate are immaterial.
(g) Absence of Changes. Since the date of the financial statements
contained in the most recent report filed with the SEC by AANB, there has not
been any material adverse change in the condition (financial or otherwise),
aggregate assets or liabilities, earnings or business of AANB, other than
changes resulting from or attributable to (i) changes since such date in laws or
regulations, generally accepted accounting principles or interpretations of
either thereof that affect the banking or savings and loan industries generally,
(ii) changes since such date in the general level of interest rates, and (iii)
expenses since such date incurred in connection with the transactions
contemplated by this Agreement. Since the date of the financial statements
contained in the most recent report filed with the SEC by AANB, the business of
AANB has been conducted only in the ordinary course, except as set forth on
Schedule 3.2(g).
(h) Subsidiaries. AANB has or will have two subsidiaries, Adams Bank and
Subsidiary. As of the Closing Date, such corporations will be duly organized,
validly existing and in good standing under the laws of their respective
jurisdictions of incorporation and have all requisite corporate power and
authority to own, lease and operate their properties and to carry on their
business as now being conducted in all material respects. As of the date hereof,
AANB (other than in a fiduciary capacity) does not own directly or indirectly,
or have any rights to acquire, any shares of Ballston Common Stock.
(i) Reports. Since January 1, 1993, each of AANB and Adams Bank has filed
all material reports and statements, together with any amendments required to be
made with respect thereto, that were required to be filed with (i) the Federal
Reserve Board, (ii) the FDIC, (iii) the OCC, (iv) the SEC and (v) any other
governmental or regulatory authority or agency having jurisdiction over their
operations.
(j) Additional Schedules Furnished to Ballston. In addition to any
Schedules furnished to Ballston pursuant to other provisions of this Agreement,
AANB has furnished to Ballston the following Schedules which are correct and
complete as of the date hereof:
(1) Certain Contracts. Schedule 3.2(j)(1) lists, with the exception
of loans, all notes, bonds, mortgages, indentures, licenses, lease
agreements and other contracts and obligations to which AANB or Adams Bank
is an indebted party or a
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<PAGE>
lessee, licensee or obligee as of the date hereof except for those entered
into by AANB or Adams Bank in the ordinary course of its business
consistent with its prior practice and that do not involve an amount
remaining greater than $75,000.
(2) Real Estate. Schedule 3.2(j)(2) describes, as of the date hereof,
all interests in real property owned, leased or otherwise claimed by AANB
and Adams Bank, including OREO, if any.
(3) Affiliates. The names and number of shares of AANB Stock owned as
of the date hereof beneficially or of record by any persons AANB considered
to be affiliates of AANB ("AANB Affiliates") have been previously publicly
disclosed in the filings before the SEC as that term is defined for
purposes of Rule 145 under the 1933 Act.
(k) Tax Matters. AANB, and all other corporations that are members of the
same "affiliated group," as defined in Section 1504(a)(1) of the Code, for which
AANB is the common parent (collectively, the "AANB Group") has filed or caused
to be filed or (in the case of returns or reports not yet due) will file all tax
returns and reports required to have been filed by or for it before the
Effective Time of the Holding Company Merger. Each member of the AANB Group has
paid or made adequate provision for or (with respect to returns or reports not
yet filed) before the Effective Time of the Holding Company Merger will pay or
make adequate provision for all taxes, additions to tax, penalties, and interest
("Taxes") for all periods covered by those returns or reports. The consolidated
balance sheets contained in the AANB Financial Statements fully and properly
reflect, as of the dates thereof, the aggregate liabilities of the members of
the AANB Group for all accrued Taxes in accordance with GAAP. For periods ending
after December 31, 1996, the books and records of each member of the AANB Group
fully and properly reflect its liability for all accrued Taxes in accordance
with GAAP. Except as disclosed in Schedule 3.2(k), no member of the AANB Group
has granted (nor is it subject to) any waiver of the period of limitations for
the assessment of tax for any currently open taxable period, and no unpaid tax
deficiency has been asserted in writing against or with respect to any member of
the AANB Group by any taxing authority, and there is no currently pending
examination for which written notice thereof has been received by a member of
the AANB Group or other administrative proceeding or judicial proceeding
relating to any tax (including any refund thereof) of any member of the AANB
Group.
(l) Property. AANB and its subsidiary own (or enjoy use of under capital
leases) all property reflected on the AANB Financial Statements as of April 30,
1997 and December 31, 1996 as being owned by them (except property sold or
otherwise disposed of in the ordinary course of business). All property shown as
being owned is owned free and clear of mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except those referred to in such AANB
Financial Statements or the notes thereto, liens for current taxes not yet due
and payable, any unfiled mechanic's liens and such encumbrances and
imperfections of title, if any, as are not substantial in character or amount or
otherwise
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<PAGE>
would materially impair AANB's consolidated business operations. The leases
relating to leased property are fairly reflected in such AANB Financial
Statements.
All property and assets material to the business or operations of AANB and
Adams Bank are in substantially good operating condition and repair, and such
property and assets are adequate for the business and operations of AANB and
Adams Bank.
(m) Agreements in Force and Effect. All material contracts, agreements,
plans, leases, policies and licenses of AANB and Adams Bank are valid and in
full force and effect; and AANB and Adams Bank have not breached any material
provision of, or are in default in any material respect under the terms of, any
such contract, agreement, lease, policy or license, the effect of which breach
or default would have a material adverse effect upon the financial condition,
results of operations or business of AANB and Adams Bank taken as a whole.
(n) Legal Proceedings; Compliance with Laws. There is no legal,
administrative, arbitration or other proceeding or governmental investigation
pending, or, to the knowledge of AANB's management, threatened or probable of
assertion which, if decided adversely, would have a material adverse effect on
the financial condition, results of operations, business or prospects of AANB on
a consolidated basis. AANB and Adams Bank have complied with any laws,
ordinances, requirements, regulations or orders applicable to their respective
businesses, except where noncompliance would not have a material adverse effect
on the financial condition, results of operations, business or prospects of AANB
on a consolidated basis. AANB and Adams Bank have all licenses, permits, orders
or approvals of any federal, state, local or foreign governmental or regulatory
body that are necessary for the conduct of the respective businesses of AANB and
Adams Bank and the absence of which would have a material adverse effect on the
financial condition, results of operations, business or prospects of AANB on a
consolidated basis; the Permits are in full force and effect; AANB is not aware
of any material violations that are or have been recorded in respect of any
Permit nor has AANB or Adams Bank received notice of any violations; and no
proceeding is pending or, to the knowledge of AANB, threatened to revoke or
limit any Permit. Neither AANB nor Adams Bank are subject to any judgment,
order, writ, injunction or decree which materially adversely affects, or might
reasonably be expected to materially adversely affect, the financial condition,
results of operations, business or prospects of AANB on a consolidated basis.
Except as set forth in Schedule 3.2(n), neither AANB nor Adams Bank has entered
into any agreements or written understandings with the Federal Reserve, the SCC,
the FDIC or any other regulatory agency having authority over it. Neither AANB
nor Adams Bank is subject to any judgment, order, writ, injunction or decree
which materially adversely affects, or might reasonably be expected materially
adversely to affect either the financial condition, results of operations, or
business of AANB on a consolidated basis.
(o) Loan Portfolio. Each loan outstanding on the books of AANB and Adams
Bank was made in the ordinary course of business, was not known to be
uncollectible at the time it was made, accrues interest (except for loans
recorded on Adams Bank's books as non-
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<PAGE>
accrual) in accordance with the terms of the loan, and with respect to loans
originated by Adams Bank was made in accordance with Adams Bank's standard loan
policies as in effect at the time the loan was negotiated. The records of Adams
Bank regarding all loans outstanding are accurate in all material respects, and
the risk classifications for loans outstanding are, in the best judgment of the
management of AANB, appropriate. The allowance for loan losses, as reflected in
the AANB Financial Statements, has been established in accordance with generally
accepted accounting principles. In the best judgment of the management of AANB,
such reserves are adequate as of the date hereof and will be adequate as of the
Effective Time of the Holding Company Merger to absorb all known and anticipated
loan losses in the loan portfolio of Adams Bank. Except as identified on
Schedule 3.2(o), to the knowledge of the management of AANB and Adams Bank, each
loan reflected as an asset on the AANB Financial Statements is the legal, valid
and binding obligation of the obligor and any guarantor, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws affecting issued depository
institutions and other laws of general applicability relating to or affecting
creditors' rights and to general principles of equity, and no defense, offset or
counterclaim has been asserted with respect to any such loan, which if
successful would have a material adverse effect on the financial condition,
results of operation or business of AANB on a consolidated basis.
(p) Employee Benefit Plans.
(1) Neither AANB nor Adams Bank nor any employee benefit
pension plan (as defined in Section 3(2) of ERISA (a "Pension
Plan")) maintained by it, has incurred any material liability to
the PBGC or to the Internal Revenue Service with respect to any
Pension Plan, deferred compensation, consultant, severance, thrift,
option, bonus and group insurance contract or any other incentive,
welfare and employee benefit plan and agreement presently in
effect, or approved prior to the date hereof, for the benefit of
employees or former employees of AANB and Adams Bank or the
dependents or beneficiaries of any employee or former employee of
AANB or any subsidiary (the "AANB Employee Plans"). There is not
currently pending with the PBGC any filing with respect to any
reportable event under Section 4043 of ERISA nor has any reportable
event occurred as to which a filing is required and has not been
made.
(2) Full payment has been made (or proper accruals have been
established) of all contributions which are required or for which
benefits have accrued for periods prior to the Closing Date under
the terms of each AANB Employee Plan, ERISA, or a collective
bargaining agreement, and no accumulated funding deficiency (as
defined in Section 302 of ERISA or Section 412 of the Code) whether
or not waived, exists with respect to any Pension Plan (including
any Pension Plan presently maintained by AANB or Adams Bank) and
there is no "unfunded current liability" with respect to any
Pension Plan .
(3) No AANB Employee Plan is a "multiemployer plan" (as
defined in Section 3(37) of ERISA). AANB and Adams Bank has not
incurred any material
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liability under Section 4201 of ERISA for a complete or partial
withdrawal from a multiemployer plan (as defined in Section 3(37)
of ERISA). AANB and Adams Bank has not participated in or agreed to
participate in, a multiemployer plan (as-defined in-Section 3(37)
of ERISA).
(4) All "employee benefit plans," as defined in Section 3(3)
of ERISA, that are maintained by AANB or Adams Bank comply and have
been administered in compliance in all material respects with ERISA
and all other applicable legal requirements, including the terms of
such plans, collective bargaining agreements, annual reporting
requirements of the IRS or the Department of Labor, and securities
laws. Neither AANB nor Adams Bank has any material liability under
any such plan that is not reflected in the AANB Financial
Statements.
(5) No prohibited transaction has occurred with respect to any
"employee benefit plan" (as defined in Section 3(3) of ERISA)
maintained by AANB or Adams Bank that would result, directly or
indirectly, in material liability under ERISA or in the imposition
of a material excise tax under Section 4975 of the Code.
(q) Regulatory Approvals. AANB knows of no reason why the approvals,
consents and waivers of governmental authorities referred to in Sections 5.1(f)
and 5.2(e) hereof should not be obtained on a timely basis without the
imposition of any condition of the type referred to in Section 5.1(f) hereof.
(r) Disclosure. Except to the extent of any subsequent correction or
supplement with respect thereto furnished prior to the date hereof, no written
statement, certificate, schedule, list or other written information furnished by
or on behalf of AANB at any time to Ballston, in connection with this Agreement
when considered as a whole, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in order
to make the statements herein or therein, in light of the circumstances under
which they were made, not misleading. Each document delivered or to be delivered
by AANB to Ballston is or will be a true and complete copy of such document,
unmodified except by another document delivered by AANB.
(s) Tax; Regulatory Matters. AANB has not taken or agreed to take any
action or has any knowledge of any fact or circumstance that would prevent the
Holding Company Merger from qualifying as a reorganization within the meaning of
Section 368 of the Code or that would materially impede or delay receipt of any
approval referred to in Section 4.6.
(t) Environmental Matters. For purposes of this subsection, the following
terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with
any governmental entity relating to (i) the protection, preservation or
restoration of the environment
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(including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant
and animal life or any other natural resource), and/or (ii) the use,
storage, recycling, treatment, generation, transportation, processing,
handling, labeling, production, release or disposal of Hazardous
Substances. The term "Environmental Law" includes without limitation (i)
the Comprehensive Environmental Response, Compensation and Liability Act,
as amended, 42 U.S.C. Section 9601, et seq; the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. Section 6901, et seq; the Clean Air
Act, as amended, 42 U.S.C. Section 7401, et seq; the Federal Water
Pollution Control Act, as amended, 33 U.S.C. Section 1251, et seq; the
Toxic Substances Control Act, as amended, 15 U.S.C. Section 9601, et seq;
the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section
11001, et seq; the Safe Drinking Water Act, 42 U.S.C. Section 300f, et seq;
and all comparable state and local laws, and (ii) any common law (including
without limitation common law that may impose strict liability) that may
impose liability or obligations for injuries or damages due to, or
threatened as a result of, the presence of or exposure to any Hazardous
Substance.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any material containing any such substance as a
component. Hazardous Substances include without limitation petroleum or any
derivative or byproduct thereof, asbestos, radioactive material, and
polychlorinated biphenyls.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned or operated by AANB or Adams Bank or any of their
subsidiaries, provided, such properties serving as collateral for any loans
made and retained by AANB or Adams Bank or for which AANB or Adams Bank
serves in a trust relationship for the loans retained in portfolio shall be
included within this definition only to the extent management of AANB or
Adams Bank has actual knowledge of a violation of any Environmental Law
with respect to any such property.
Except as disclosed in Schedule 3.2(t), to the best knowledge
of AANB and Adams Bank,
(i) neither AANB nor Adams Bank is in violation of or liable under
any Environmental Law;
(ii) none of the Loan Portfolio Properties and Other Properties
Owned is in violation of or liable under any Environmental Law; and
(iii) there are no actions, suits, demands, notices, claims,
investigations or proceedings pending or threatened relating to the
liability of the Loan Portfolio Properties and Other Properties owned
under any Environmental Law, including without limitation any notices,
demand letters
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or requests for information from any federal or state
environmental agency relating to any such liabilities under or
violations of Environmental Law.
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Merger
4.1. Access to Records and Properties of AANB, Ballston and NV Bank;
Confidentiality. Between the date of this Agreement and the Effective Time of
the Holding Company Merger, AANB on the one hand, and each of Ballston and NV
Bank on the other, agree to give to the other reasonable access to all the
premises and books and records (including tax returns filed and those in
preparation) of it and its subsidiaries and to cause its officers to furnish the
other with such financial and operating data and other information with respect
to the business and properties as the other shall from time to time request for
the purposes of verifying the representations and warranties set forth herein,
preparing the Registration Statement (as defined in Section 4.2) and applicable
regulatory filings (as set forth in Section 4.6), and preparing unaudited
financial statements of Ballston as of a date prior to the Effective Time of the
Holding Company Merger in order to facilitate AANB's performance of its post-
Closing Date financial reporting requirements; provided, however, that any such
investigation shall be conducted in such manner as not to interfere unreasonably
with the operation of the respective business of the other. AANB and Ballston
shall each maintain the confidentiality of all confidential information
furnished to it by the other party hereto concerning the business, operations,
and financial condition of the party furnishing such information, and shall not
use any such information except in furtherance of the Holding Company Merger. If
this Agreement is terminated, each party hereto shall promptly return all
documents and copies of, and all workpapers containing, confidential information
received from the other party hereto. The obligations of confidentiality under
this Section 4.1 shall survive any such termination of this Agreement and shall
remain in effect, except to the extent that (a) one party shall have directly or
indirectly acquired the assets and business of the other party; (b) as to any
particular confidential information with respect to one party, such information
(i) shall become generally available to the public other than as a result of an
unauthorized disclosure by the other party or (ii) was available to the other
party on a nonconfidential basis prior to its disclosure by the first party; (c)
disclosure by any party is required by subpoena or order of a court of competent
jurisdiction or by order of a regulatory authority of competent jurisdiction; or
(d) disclosure is required by the SEC or federal or state bank regulatory
authorities in connection with the transactions contemplated by this Agreement,
provided that the disclosing party has, prior to such disclosure, advised the
other party of the circumstances necessitating such disclosure and have reached
mutually agreeable arrangements relating to such disclosure.
4.2. Registration Statement, Proxy Statement, Shareholder Approval.
Ballston and AANB will duly call and will hold meetings of their respective
shareholders for the purpose of approving, in the case of Ballston, the Holding
Company Merger and, in the case of AANB, the issuance of AANB Common Stock in
the Holding Company Merger and will comply fully with the provisions of the 1933
Act and the Securities Exchange Act of 1934 (the "1934 Act") and the rules and
regulations of the SEC under such acts to the extent applicable, and their
respective Certificates of
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Incorporation and Bylaws relating to the call and holding of meetings of
shareholders for such purpose. Subject to their fiduciary duties to
shareholders, the boards of directors of Ballston and AANB will recommend to and
actively encourage their respective shareholders that they vote in favor of, in
the case of Ballston, the Holding Company Merger and, in the case of AANB, the
issuance of AANB Common Stock and the payment of cash set forth as the Exchange
Price in the Holding Company Merger. If, in the case of AANB, the fairness
opinion received from Baxter Fentriss and Company on the date hereof, or in the
case of Ballston, the fairness opinion received from Danielson Associates Inc.
on the date hereof is withdrawn, the board of directors of the party with
respect to which such fairness opinion has been withdrawn may, in its
discretion, submit the matters described in this Section 4.2 for shareholder
approval without a recommendation from the board of directors. AANB and Ballston
will jointly prepare the joint proxy statement prospectus to be used in
connection with such meetings (the "Proxy Statement Prospectus") and AANB will
prepare and file with the SEC a Registration Statement on Form S-4 (the
"Registration Statement"), of which such Proxy Statement Prospectus shall be a
part, and will use its best efforts promptly to have the Registration Statement
declared effective. In connection with the foregoing, AANB will comply with the
requirements of the 1933 Act, the 1934 Act, the rules and regulations of the SEC
under such acts and the NASDAQ Stock Market with respect to the offering and
sale of AANB Common Stock in connection with the Holding Company Merger and with
all applicable state Blue Sky and securities laws. The notices of such meetings
and the Proxy Statement Prospectus shall not be mailed to AANB or Ballston
shareholders until the Registration Statement shall have become effective under
the 1933 Act. Ballston covenants that none of the information supplied by
Ballston, and AANB covenants that none of the information supplied by AANB, in
the Proxy Statement Prospectus will, at the time of the mailing of the Proxy
Statement Prospectus to AANB and Ballston shareholders, contain any untrue
statement of a material fact nor will any such information omit any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading;
and at all times subsequent to the time of the mailing of the Proxy Statement
Prospectus, up to and including the date of the meetings of AANB and Ballston
shareholders to which the Proxy Statement Prospectus relates, none of such
information in the Proxy Statement Prospectus, as amended or supplemented, will
contain an untrue statement of a material fact or omit any material fact
required to be stated therein in order to make the statements therein, in light
of the circumstances in which they were made, not misleading.
Ballston, as the sole shareholder of NV Bank, and AANB, as the sole
shareholder of Subsidiary, hereby approve this Agreement.
4.3. Operation of the Business of Ballston, NV Bank and AANB.
(a) Operation of the Business of Ballston and NV Bank. Ballston and NV
Bank agree that from the date of this Agreement to the Effective Time of
the Holding Company Merger, they will operate, their respective businesses
substantially as presently operated and, only in the ordinary course and in
general conformity with applicable laws and regulations, and, consistent
with such operation, they will use their best efforts to preserve intact
their present business organizations and relationships with persons having
business dealings with them, provided that nothing in this Agreement shall
require Ballston or NV Bank to replace
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departed officers who occupied positions of senior vice president or above.
Without limiting the generality of the foregoing, Ballston and NV Bank
agree that they will not, without prior written notice to AANB, and with
respect to clauses (i)--with respect to increases in compensation, (ii),
(vi), (vii), (xvii) and (xviii), without AANB's prior written consent,
unless required by regulatory authorities, (i) make any change in the
salaries, bonuses or title of any officer or any other employee, other than
those permitted by current employment policies in the ordinary course of
business, any of which changes shall be reported promptly to AANB; (ii)
enter into any bonus, incentive compensation, deferred compensation, profit
sharing, thrift, retirement, pension, group insurance or other benefit plan
or any employment, severance or consulting agreement or increase benefits
under existing plans and agreements, provided that nothing in this
Agreement shall prevent NV Bank from extending any existing employment
agreement until no later than the Effective Date; (iii) create or otherwise
become liable with respect to any indebtedness for money borrowed or
purchase money indebtedness except in the ordinary course of business; (iv)
amend its Certificate or Articles of Incorporation or Bylaws except as set
forth in that certain memorandum of Brian D. Alprin to Robert F. Kelleher
dated May 15, 1997, a copy of which has been provided to AANB; (v) issue or
contract to issue any shares of Ballston capital stock or securities
exchangeable for or convertible into capital stock except shares of
Ballston Common Stock issuable pursuant to Ballston Options outstanding as
of April 30, 1997, pursuant to the Option Agreement; (vi) purchase any
shares of Ballston capital stock; (vii) enter into or assume any material
contract or obligation, except in the ordinary course of business; (viii)
other than as provided in (a) below with respect to the workout of
nonperforming assets, waive, release, compromise or assign any right or
claim involving $25,000 or more without compliance with NV Bank credit
policies; (ix) propose or take any other action designed to make any
representation or warranty in Section 3.1 hereof untrue; (x) introduce any
material new products or services or change the rate of interest on any
deposit instrument to more than 25 basis points higher than the average
interest rate of Community Bank of Northern Virginia, F&M Bank of Northern
Virginia, George Mason Bank, Tysons National Bank, andVirginia Commerce
Bank for comparable deposit instruments; (xi) make any material change in
policies respecting extensions of credit or loan charge offs; (xii) change
in any material respect reserve requirement policies; (xiii) change
securities portfolio policies in any material respect; (xiv) acquire a
policy or enter into any new agreement, amendment or endorsement or make
any changes relating to insurance coverage, including coverage for its
directors and officers, which would result in an additional payment
obligation of $5,000 or more; (xv) propose or take any action with respect
to the closing of any branches; (xvi) amend the terms of the Ballston
Option Agreement or any other stock based compensation plan for employees
or directors; (xvii) amend the terms of any written severance or employment
agreements; or (xviii) make any change in any tax election or material
accounting method or system of internal accounting controls, except as may
be appropriate to conform to any change in regulatory accounting
requirements or generally accepted accounting principles.
Ballston and NV Bank further agree that, between the date of this Agreement
and the Effective Time of the Holding Company Merger, they will consult with
AANB regarding all actions described in the immediately preceding paragraph,
that all loans by Ballston or NV Bank will be
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approved by Fred A. Burroughs or Robert F. Kelleher, within their now existing
loan authority, and (A) loan portfolio management, including management and work
out of nonperforming assets, and credit review and approval procedures,
including notice of any new loans in excess of $25,000 and as to a renewal of a
loan existing as of the date hereof, in excess of $50,000 shall be submitted to
a designee of AANB who shall provide comments thereto within one (1) business
day following receipt of documentation thereon and a representative of AANB
shall have a right to attend loan committee meetings, and (B) securities
portfolio and funds management, including management of interest rate risk,
including notice of changes in investments, to such member of the AANB Treasury
Department as shall be designated by AANB from time to time.
(b) Conduct of the Business of AANB. AANB agrees that, except as
expressly permitted by this Agreement or otherwise consented to in writing
by Ballston, during the period from the date hereof to the Effective Time:
(i) AANB will and will cause its subsidiaries to conduct
their respective operations substantially as presently operated
and only in the ordinary course of business consistent with past
practice and in general conformity with applicable laws and
regulations, and will use its best efforts to preserve intact
their respective business organizations, keep available the
services of their officers and employees and maintain satisfactory
relationships with licensors, suppliers, distributors, customers,
clients and others having business relationships with them; and
(ii) AANB shall not, and shall not permit its subsidiaries
to, take any action, engage in any transactions or enter into any
agreement which would adversely affect or delay in any material
respect the ability of AANB or Ballston to obtain any necessary
approvals, consents or waivers of any governmental entity required
for the transactions contemplated hereby or to perform its
covenants and agreements on a timely basis under this Agreement.
4.4. No Solicitation. Unless and until this Agreement shall have been
terminated pursuant to its terms, neither Ballston, NV Bank nor any of their
executive officers, directors, representatives, agents or affiliates shall,
directly or indirectly, encourage, solicit or initiate discussions or
negotiations (with any person other than AANB) concerning any merger, sale of
substantial assets, tender offer, sale of shares of stock or similar transaction
involving Ballston or NV Bank or, subject to their fiduciary duties to
shareholders (a) disclose, directly or indirectly, any information not
customarily disclosed to the public concerning Ballston or NV Bank, (b) afford
to any other person access to the properties, books or records of Ballston or NV
Bank or otherwise assist any person preparing to make or who has made such an
offer, or (c) enter into any agreement with any third party providing for a
business combination transaction, equity investment or sale of significant
amount of assets.
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4.5. Dividends. Ballston agrees that subsequent to March 31, 1997 and until
the Effective Time of the Holding Company Merger, it will declare cash dividends
consistent (in terms of amount and timing of record and payment dates) with its
practice in effect in the first quarter of 1997.
4.6. Regulatory Filings; Best Efforts. AANB and Ballston shall jointly
prepare all regulatory filings required to consummate the transactions
contemplated by the Agreement and the Plan of Merger and submit the filings for
approval with the Federal Reserve Board, the FDIC, the SCC and the Virginia
Bureau as soon as practicable after the date hereof. AANB and Ballston shall use
their best efforts to obtain approvals of such filings.
4.7. Public Announcements. Each party will consult with the other before
issuing any press release or calling a news conference with respect to the
Holding Company Merger and shall not issue any press release or call a news
conference prior to such consultations and approval of the other party, which
approval shall not be unreasonably withheld, except as may be required by law.
4.8. Operating Synergies; Conformance to Reserve Policies, Etc. Between the
date hereof and the Effective Time of the Holding Company Merger, Ballston and
NV Bank's management will work with AANB in an effort to achieve appropriate
operating efficiencies following the Closing Date. Subject to Ballston approval,
which will not be unreasonably withheld, AANB notification to NV Bank's
customers and AANB's direct contact with customers will commence following
receipt of Federal Reserve Board and SCC approval but not earlier than 45 days
prior to the Closing Date. At the request of AANB and upon receipt by Ballston
and NV Bank of written confirmation from AANB that there are no conditions to
the obligations of AANB under this Agreement set forth in Article V which they
believe will not be fulfilled so as to permit them to consummate the Holding
Company Merger and the other transactions contemplated hereby, not earlier than
three days prior to the Effective Time of the Holding Company Merger Ballston
shall establish such additional accruals, reserves and charge offs, through
appropriate entries in its accounting books and records, provided such
adjustments are in accordance with GAAP and applicable law and regulation as may
be necessary to conform Ballston's accounting and credit loss reserve practices
and methods to those of Adams Bank (as such practices and methods are to be
applied from and after the Effective Time of the Holding Company Merger) and to
AANB' plans with respect to the conduct of the business of Ballston and NV Bank
following the Transaction, and prior to payment of any costs and expenses
relating to the consummation by Ballston and NV Bank of the Holding Company
Merger and the other transactions contemplated hereby. Any such accruals,
reserves and charge offs shall not be deemed to cause any representation and
warranty of Ballston and NV Bank to be untrue or inaccurate as of the Effective
Time of the Holding Company Merger and, anything in this Agreement to the
contrary notwithstanding, will not cause a reduction in the Exchange Price
except if the accruals, reserves or charge-offs are required pursuant to Section
4.13 hereof.
4.9. Agreement as to Efforts to Consummate. Subject to action taken by the
Board of Directors of Ballston pursuant to or as a result of the exception
clause to the first sentence of Section 4.4 hereof and to the other terms and
conditions of this Agreement, each of AANB and Ballston agrees to use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective, as soon as practicable
after the date of this Agreement, the transactions
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contemplated by this Agreement, including, without limitation, using reasonable
efforts to lift or rescind any injunction or restraining order or other order
adversely affecting the ability of the parties to consummate the transactions
contemplated herein. Each of AANB and Ballston shall use its best efforts to
obtain consents of all third parties and governmental bodies necessary or
desirable for the consummation of the transactions contemplated by this
Agreement.
4.10. Adverse Changes in Condition. AANB and Ballston each agrees to give
written notice promptly to the other concerning any event or circumstance which
would cause or constitute a breach of any of the representations, warranties or
covenants of such party contained herein. Each of AANB and Ballston shall use
its best efforts to prevent or promptly to remedy the same.
4.11. Updating of Schedules. Ballston shall notify AANB, and AANB shall
notify Ballston, of any changes, additions or events which may cause any change
in or addition to any Schedules delivered by it under this Agreement, promptly
after the occurrence of same and at the Closing Date by delivery of updates of
all Schedules, including future quarterly and annual Ballston and AANB financial
statements. No notification made pursuant to this Section 4.11 shall be deemed
to cure any breach of any representation or warranty made in this Agreement or
any Schedule unless AANB or Ballston, as the case may be, specifically agree
thereto in writing, nor shall any such notification be considered to constitute
or give rise to a waiver by Ballston or NV Bank on the one hand, or AANB on the
other hand, of any condition set forth in this Agreement.
4.12. Transactions in AANB Common Stock. Ballston or NV Bank will not,
directly or indirectly, purchase, publicly sell or publicly acquire any shares
of AANB Common Stock, or take any other action which has or may have any effect
on the market for the shares of AANB Common Stock on any trading day when the
Average Closing Price of AANB Common Stock is being calculated as provided in
Section 2.1(c) or during the twenty-one trading days before the Closing Date.
AANB will not institute or maintain a stock repurchase program other than
in accordance with Rule 10b-18 under the 1934 Act during the twenty-one trading
days before the Closing Date or take any action in contravention of Regulation M
under the 1934 Act.
4.13. Accruals and Accounting Adjustments. Ballston and NV Bank will each
make such additional accruals, reserves and charge-offs through appropriate
entries in its accounting books and records as may be required by applicable
provisions of GAAP prior to the Closing Date.
ARTICLE V
Conditions of Merger
5.1. Conditions of Obligations of AANB. The obligations of AANB to perform
this Agreement are subject to the satisfaction at or prior to the Effective Time
of the Merger of the following conditions unless waived by AANB.
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(a) Representations and Warranties; Performance of Obligations. The
representations and warranties of Ballston and NV Bank set forth in Section
3.1 hereof shall be true and correct in all material respects as of the
date of this Agreement and as of the Effective Time of the Holding Company
Merger as though made on and as of the Effective Time of the Holding
Company Merger (or on the date when made in the case of any representation
and warranty which specifically relates to an earlier date); Ballston and
NV Bank shall have in all material respects performed all obligations
required to be performed by them and satisfied all conditions required to
be satisfied by them under this Agreement prior to the Effective Time of
the Merger; and AANB shall have received a certificate signed by the Chief
Executive Officer and by the Chief Financial Officer of Ballston and NV
Bank, which may be to their best knowledge after due inquiry, to such
effects.
(b) Authorization of Transaction. All action necessary to authorize
the execution, delivery and performance of this Agreement by Ballston and
NV Bank and the consummation of the transactions contemplated herein
(including the shareholder action referred to in Section 4.2) shall have
been duly and validly taken by the Boards of Directors of Ballston and NV
Bank and by the shareholders of Ballston, and Ballston shall have full
power and right to be acquired by Subsidiary by merger on the terms
provided herein.
(c) Opinion of Counsel. AANB shall have received an Opinion of Duane,
Morris & Heckscher LLP, counsel to Ballston and NV Bank, dated the Closing
Date and satisfactory in form and substance to counsel to AANB, in the form
attached hereto as Exhibit B.
---------
(d) The Registration Statement. The Registration Statement shall be
effective under the 1933 Act and AANB shall have received all state
securities laws or "blue sky" permits and other authorizations or there
shall be exemptions from registration requirements necessary to offer and
issue the AANB Common Stock in connection with the Holding Company Merger,
and neither the Registration Statement nor any such permit, authorization
or exemption shall be subject to a stop order or threatened stop order by
the SEC or any state securities authority.
(e) Tax Opinion. AANB shall have received, in form and substance
satisfactory to it, an opinion of Hazel & Thomas, P.C. dated as of the
Closing Date to the effect that, for federal income tax purposes, the
Holding Company Merger will qualify as a "reorganization" under Section
368(a) of the Code, and no taxable gain will be recognized by AANB,
Subsidiary or Ballston in the Holding Company Merger (i) upon the transfer
of Ballston's assets to Subsidiary in exchange for AANB Common Stock and
cash and the assumption of Ballston liabilities or (ii) upon the
distribution of AANB Common Stock and cash to Ballston's shareholders. The
opinion may be based on assumptions, representations made by officers of
AANB and Ballston to Hazel & Thomas, P.C., and may contain qualifications
appropriate to its subject matter.
(f) Regulatory Approvals. All required approvals from federal and
state regulatory authorities having jurisdiction to permit AANB to
consummate the Holding Company Merger and to pay the Exchange Price to
Ballston shareholders shall have been
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received and shall have contained no conditions deemed in good faith to be
materially disadvantageous by AANB.
(g) Affiliate Letters. Ballston shall have employed its best efforts
to procure, within 60 days of the date hereof, from each shareholder of
Ballston who is a Ballston Affiliate, a commitment and undertaking in the
form of Exhibit C to the effect that (1) such shareholder will dispose of
----------
the shares of AANB Common Stock received by him in connection with the
Holding Company Merger only in accordance with the provisions of paragraph
(d) of Rule 145 under the 1933 Act; and (2) the certificates representing
said shares may bear a legend referring to the foregoing restrictions.
(h) NASDAQ Listing. Shares of AANB Common Stock to be issued in the
Holding Company Merger shall have been approved for listing and
transfer, upon notice of issuance, on the NASDAQ.
(i) AANB Shareholder Approval. The holders of the requisite majority
of AANB Common Stock shall have approved the Holding Company Merger.
(j) Acceptance by AANB Counsel. The form and substance of all legal
matters contemplated hereby and of all papers delivered hereunder shall be
reasonably acceptable to counsel for AANB.
5.2. Conditions of Obligations of Ballston and NV Bank. The obligations of
Ballston and NV Bank to perform this Agreement are subject to the satisfaction
at or prior to the Effective Time of the Holding Company Merger of the following
conditions unless waived by Ballston and NV Bank:
(a) Representations and Warranties; Performance of Obligations. The
representations and warranties of AANB set forth in Section 3.2 hereof
shall be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time of the Holding Company Merger as
though made on and as of the Effective Time of the Holding Company Merger
(or on the date when made in the case of any representation and warranty
which specifically relates to an earlier date); AANB shall have in all
material respects performed all obligations required to be performed by it
and satisfied all conditions required to be satisfied by it under this
Agreement prior to the Effective Time of the Holding Company Merger; and
Ballston and NV Bank shall have received a certificate signed by the Chief
Executive Officer and by the Chief Financial Officer of AANB, which may be
to their best knowledge after due inquiry, to such effects.
(b) Authorization of Transaction. All action necessary to authorize
the execution, delivery and performance of this Agreement by AANB and
Subsidiary and the consummation of the transactions contemplated herein
(including the shareholders' action referred to in Section 4.2) shall have
been duly and validly taken by the Board of Directors of AANB and by the
shareholders of AANB and Subsidiary, and Subsidiary shall have full power
and right to merge Ballston into Subsidiary on the terms provided herein.
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(c) Opinion of Counsel. Ballston and NV Bank shall have received an
opinion of Hazel & Thomas, P.C., counsel to AANB, dated the Closing Date
and satisfactory in form and substance to counsel to Ballston and NV Bank,
in the form attached hereto as Exhibit D.
---------
(d) The Registration Statement. The Registration Statement shall be
effective under the 1933 Act and AANB shall have received all state
securities laws or "blue sky" permits and other authorizations or there
shall be exemptions from registration requirements necessary to offer and
issue the AANB Common Stock in connection with the Holding Company Merger,
and neither the Registration Statement nor any such permit, authorization
or exemption shall be subject to a stop order or threatened stop order by
the SEC or any state securities authority.
(e) Regulatory Approvals. All required approvals from federal and
state regulatory authorities having jurisdiction to permit Ballston to
consummate the Holding Company Merger and to permit AANB to issue AANB
Common Stock and to pay cash to Ballston shareholders shall have been
received.
(f) Tax Opinion. Ballston shall have received, in form and substance
satisfactory to it, an opinion of Duane, Morris & Heckscher LLP dated as of
the Closing Date to the effect that, for federal income tax purposes, (i)
the Holding Company Merger will qualify as a "reorganization" under Section
368(a) of the Code; (ii) no gain or loss will be recognized by a
shareholder of Ballston upon the exchange of Ballston Common Stock solely
for AANB Common Stock; (iii) any gain realized by a shareholder of Ballston
who receives AANB Common Stock and cash (excluding any cash received in
lieu of a fractional share of AANB Common Stock) in exchange for Ballston
Common Stock will be recognized in an amount not in excess of the amount of
the cash received (excluding any cash received in lieu of a fractional
share of AANB Common Stock), that gain will be capital gain unless the
receipt of the cash has the effect of the distribution of a dividend, and
any loss on the exchange will not be recognized; (iv) the basis of AANB
Common Stock received by a shareholder of Ballston (including any
fractional share of AANB Common Stock to which that shareholder may be
entitled) will be the same as the basis of the Ballston Common Stock
exchanged therefor, decreased by the amount of cash received, if any
(excluding any cash received in lieu of a fractional share of AANB Common
Stock), and increased by the amount of gain, if any, recognized on the
exchange; (v) the holding period of AANB Common Stock received by a
shareholder of Ballston (including any fractional share of AANB Common
Stock to which that shareholder may be entitled) will include the holding
period of the Ballston Common Stock exchanged therefor, provided the
Ballston Common Stock is held as a capital asset by the shareholder at the
Effective Time of the Holding Company Merger; (vi) a shareholder of
Ballston who receives cash in lieu of a fractional share of AANB Common
Stock will recognize gain or loss equal to the difference between the cash
received and the shareholder's basis in that fractional share, and that
gain or loss will be capital gain or loss if the fractional share would
have been a capital asset in the hands of the shareholder; (vii) cash
received by a shareholder of Ballston who has elected pursuant to a Cash
Election to receive only cash and has received only cash will be treated as
a distribution in redemption
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of the Ballston Common Stock held by that shareholder, subject to the
provisions and limitations of Section 302 of the Code; and (viii) cash
received by a shareholder of Ballston who has perfected Dissenters' Rights
as to his or her Ballston Common stock will be treated as a distribution in
redemption of such shares, subject to the provisions and limitations of
Section 302 of the Code. The opinion may be based on assumptions,
representations made by officers of AANB and Ballston to Duane, Morris &
Heckscher LLP and may contain qualifications appropriate to its subject
matter.
(g) NASDAQ Listing. Shares of AANB Common Stock to be issued in the
Holding Company Merger shall have been approved for listing, upon notice of
issuance, on NASDAQ.
(h) Ballston Shareholder Approval. The holders of the requisite
majority of Ballston Common Stock shall have approved the Holding Company
Merger.
(i) Acceptance by Ballston's Counsel. The form and substance of all
legal matters contemplated hereby and of all papers delivered hereunder
shall be acceptable to counsel for Ballston.
ARTICLE VI
Closing Date; Effective Time
6.1. Closing Date. Unless another date or place is agreed to in writing by
the parties, the closing of the transactions contemplated in this Agreement
shall take place at the offices of Hazel & Thomas, P.C., 3110 Fairview Park
Drive, Suite 1400, Falls Church, Virginia 22042, at 10:00 o'clock A.M., local
time, on a Friday which shall be the first Friday following the satisfaction of
all conditions precedent to the Closing; provided, that the date so designated
shall not be earlier than 15 days after Federal Reserve Board approval (the
"Closing Date"). The parties agree to use their best efforts to make the Merger
effective on or before October 31, 1997.
6.2. Filings at Closing. Subject to the provisions of Article V, at the
Closing Date, AANB shall cause a Certificate of Merger relating to the Holding
Company Merger to be filed in accordance with the Delaware General Corporation
Law and Articles of Merger relating to the Holding Company Plan of Merger to be
filed in accordance with the Commonwealth of Virginia, the rules and regulations
of the Maryland Department and the Virginia Bureau, and each of AANB and
Ballston shall take any and all lawful actions to cause the Holding Company
Merger to become effective.
6.3. Effective Time. Subject to the terms and conditions set forth herein,
including receipt of all required regulatory approvals, the Holding Company
Merger shall become effective at the time the Certificate of Merger filed with
the Delaware Secretary of State and the Articles of Merger filed with the
Commonwealth of Virginia are made effective (the "Effective Time of the Holding
Company Merger").
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ARTICLE VII
Termination; Survival of Representations,
Warranties and Covenants; Waiver and Amendment
7.1. Termination. This Agreement shall be terminated, and the Transaction
abandoned, if the shareholders of AANB or Ballston shall at a duly called
meeting convened for such purpose failed to give the approval required by
Section 4.2. Notwithstanding such approval by such shareholders, this Agreement
may be terminated at any time prior to the Effective Time of the Holding Company
Merger, by:
(a) The mutual consent of AANB and Ballston, as expressed by their
respective Boards of Directors;
(b) Either AANB on the one hand or Ballston on the other hand, as
expressed by their respective Boards of Directors, if the Holding Company
Merger has not occurred by December 31, 1997, provided that the failure of
the Holding Company Merger to so occur shall not be due to a willful breach
of any representation, warranty, covenant or agreement by the party seeking
to terminate this Agreement;
(c) AANB in writing authorized by its Board of Directors if Ballston
or NV Bank has, or by Ballston in writing authorized by its Board of
Directors, if AANB has, in any material respect, breached (i) any covenant
or agreement contained herein, or (ii) any representation or warranty
contained herein, in any case if such breach has not been cured by the
earlier of 30 days after the date on which written notice of such breach is
given to the party committing such breach or the Closing Date; provided
that it is understood and agreed that either party may terminate this
Agreement on the basis of any such material breach of any representation or
warranty which is not cured within 30 days of written notice thereof
contained herein notwithstanding any qualification therein relating to the
knowledge of the other party;
(d) Either AANB on the one hand or Ballston on the other hand, as
expressed by their respective Boards of Directors, in the event that any of
the conditions precedent to the obligations of such parties to consummate
the Holding Company Merger have not been satisfied or fulfilled or waived
by the party entitled to so waive on or before the Closing Date, provided
that no party shall be entitled to terminate this Agreement pursuant to
this subparagraph (d) if the condition precedent or conditions precedent
which provide the basis for termination can reasonably be and are satisfied
within a reasonable period of time, in which case, the Closing Date shall
be appropriately postponed;
(e) Ballston, if the Board of Directors of Ballston shall have
determined in its sole discretion, exercised in good faith, that the
Holding Company Merger has become inadvisable or impracticable by reason of
the institution of any litigation, proceeding or investigation (including
under federal antitrust laws) to restrain or prohibit the consummation of
the Transaction or to obtain other relief in connection with this
Agreement;
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(f) AANB, if the Board of Directors of AANB shall have determined in
its sole discretion, exercised in good faith, that the Holding Company
Merger, has become inadvisable or impracticable by reason of the
institution of any litigation, proceeding or investigation (including under
federal antitrust laws) to restrain or prohibit the consummation of the
Transaction or to obtain other relief in connection with this Agreement;
(g) AANB or Ballston, if the Federal Reserve Board, the FDIC or the
SCC deny approval of the Transaction and the time period for all appeals or
requests for reconsideration has run;
(h) AANB or Ballston, by action of its Board of Directors, as the case
may be, if the conditions to the exercise of termination rights granted to
that party by Paragraph 2.1(d) are met.
7.2. Effect of Termination. In the event of the termination and abandonment
of this Agreement and the Holding Company Merger pursuant to Section 7.1, this
Agreement, other than the provisions of Sections 4.1 (last three sentences) and
9.1, shall become void and have no effect, without any liability on the part of
any party or its directors, officers or shareholders, provided that nothing
contained in this Section 7.2 shall relieve any party from liability for any
willful breach of this Agreement.
7.3. Survival of Representations, Warranties and Covenants. The respective
representations and warranties of AANB, Ballston and NV Bank contained herein
shall expire with, and be terminated and extinguished by, the effectiveness of
the Holding Company Merger and shall not survive the Effective Time of the
Holding Company Merger.
7.4. Waiver and Amendment. Any term or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders are,
entitled to the benefits thereof and this Agreement may be amended or
supplemented by written instructions duly executed by all parties hereto at any
time, whether before or after the meeting of AANB's or Ballston's shareholders
referred to in Section 4.2 hereof, excepting statutory requirements and
requisite approvals of shareholders and regulatory authorities, provided that
any such amendment or waiver executed after shareholders of AANB or Ballston
have approved this Agreement and the Holding Company Plan of Merger shall not
modify either the amount or form of the consideration to be received by such
Ballston shareholders for their shares of Ballston Common Stock or otherwise
materially adversely affect such shareholders without their approval.
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ARTICLE VIII
Additional Covenants and Agreements
8.1. Indemnification of Ballston and NV Bank officers and Directors;
Liability Insurance.
(a) Following the Closing hereunder until the sixth anniversary
thereof, AANB will not take any action to abrogate or diminish any right
accorded under the certificate or articles of incorporation or by-laws of
Ballston or articles of incorporation, by-laws or board resolutions of NV
Bank as they existed immediately prior to the Closing to any person who, on
or prior to the Closing, was a director or officer of Ballston or NV Bank
to indemnification from or against losses, expenses, claims, demands,
damages, liabilities, judgments, fines, penalties, costs, expenses
(including without limitation reasonable attorneys fees) and amounts paid
in settlement pertaining to or incurred in connection with any threatened
or actual action, suit, claim, or proceeding (whether civil, criminal,
administrative, arbitration, or investigative) arising out of events,
matters, actions, or omissions occurring on or prior to the Closing;
provided, however, that, notwithstanding the foregoing, a person who was a
director or officer of Ballston or NV Bank shall not be entitled to be
indemnified in connection with an action, suit, claim or proceeding to the
extent that such indemnification would be (A) in contravention of public
policy, or (B) prohibited by federal law, rule or regulation, and provided,
further that a person who was a director or officer of Ballston or NV Bank
shall not be entitled to be indemnified if such person (W) acted in bad
faith, (X) did not reasonably believe his or her actions were in (or not
opposed to) the best interests of Ballston or NV Bank, as the case may be,
(Y) with respect to a criminal action or proceeding, had reasonable cause
to believe that his or her conduct was unlawful, or (Z) was adjudged liable
to Ballston or NV Bank, unless and only to the extent that the Court of
Chancery or the court in which the action or suit was brought determines
that such person is entitled to indemnification. Following the Closing
hereunder until the sixth anniversary thereof, AANB will guarantee the
obligations of Subsidiary or any successor thereto, with respect to
indemnification within the scope of this paragraph, to which Subsidiary
shall succeed by virtue of the Holding Company Merger.
(b) Unless the existing directors and officers insurance policy of
Ballston and NV Bank provides for coverage against claims made after the
Closing with respect to acts that occurred prior to the Closing, AANB and
Ballston will together arrange for similar coverage for the directors and
officers of Ballston and NV Bank against such claims made following the
Closing until the sixth anniversary thereof and will divide and accrue the
cost equally between AANB and Ballston prior to the calculation of the
Exchange Price.
8.2 Employment of Employees of Ballston and NV Bank by AANB. Except as
otherwise consented to by AANB, any employee that is hired by Ballston or NV
Bank between the date of this Agreement and Closing shall be subject to a
probationary period as follows:
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(a) Six (6) Month Probationary Period -- all professional employees;
and
(b) Ninety (90) Day Probationary Period -- all staff.
8.3. Employee Benefit Matters.
(a) Transferred Employees. All employees of Ballston or NV Bank
(including subsidiaries) immediately prior to the Effective Time of the
Merger who are employed by Subsidiary, NV Bank or Adams Bank immediately
following the Effective Time of the Merger ("Transferred Employees") will
be covered by AANB's employee benefit plans as to which they are eligible
based on their length of service, compensation, location, job
classification, and position, including, where applicable, any incentive
compensation plan. Notwithstanding the foregoing, AANB may determine to
continue any of the Ballston or NV Bank benefit plans for Transferred
Employees in lieu of offering participation in AANB's benefit plans
providing similar benefits (e.g., medical and hospitalization benefits), to
terminate any of the Ballston or NV Bank benefit plans, or to merge any
such benefit plans with AANB's benefit plans. Except as otherwise
prohibited by law, Transferred Employees' service with Ballston or NV Bank
which is recognized by the applicable benefit plan of Ballston or NV Bank
at the Effective Time of the Holding Company Merger shall be recognized as
service with AANB or Adams Bank for purposes of eligibility to participate
and vesting, if applicable (but not for purposes of benefit accrual) under
the corresponding AANB or Adams Bank benefit plan, if any, subject to
applicable break-in-service rules.
(b) Health Plans. AANB agrees that any pre-existing condition,
limitation or exclusion in its health plans shall not apply to Transferred
Employees or their covered dependents who are covered under a medical or
hospitalization indemnity plan maintained by Ballston or NV Bank on the
date of the Holding Company Merger and who then change that coverage to
AANB's medical or hospitalization indemnity health plan at the time such
Transferred Employees are first given the option to enroll in AANB's health
plans.
(c) Ballston 401(k) Plan. AANB agrees that immediately following the
Merger, all participants who then have accounts in the 401(k) plan
maintained by Ballston or NV Bank (the "401(k) Plan") shall be vested in
accordance with their existing plan and shall be vested consistent
therewith in their account balances. AANB, at its election, may continue
the 401(k) Plan for the benefit of Transferred Employees (as such plan may
be amended as of the Effective Time of the Holding Company Merger to
provide current contributions and eligibility provisions identical to those
under the AANB Employees' Plan) may merge the 401(k) Plan into the AANB
Employees' Plan, or may cease additional benefit accruals under and
contributions to the 401(k) Plan and continue to hold the assets of such
Plan until they are distributable in accordance with its terms. In the
event of a merger of the 401(k) Plan into the AANB Employees' Plan or a
cessation of accruals and contributions under the 401(k) Plan, the AANB
Employee's Plan will recognize for purposes of eligibility to participate,
early retirement, and eligibility for vesting, all Transferred Employees'
service which is recognized under the 401(k) Plan, subject to applicable
break-in-service rules.
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(d) Cooperation. Ballston and NV Bank agree to cooperate with AANB in
implementing any decision made by AANB under this Section 8.3 with respect
to employee benefit plans and to provide to AANB on or before the Effective
Time of the Holding Company Merger a schedule of service credit for
prospective Transferred Employees.
8.4. Stock Options. Holders of outstanding Ballston Options shall exercise
the Ballston Options for Ballston Common Stock prior to the Closing Date (if
such options are by their terms then exercisable) and convert such Common Stock
held as of the Effective Time of the Holding Company Merger into AANB Common
Stock and cash paid as the Exchange Price.
8.5. Status of AANB as "Women Owned Bank." Each party affirms that the
parties have a commonality of interest in AANB remaining a "women owned bank"
both before and after Closing, i.e., a majority of the outstanding shares of
capital stock of AANB being owned or controlled by women.
8.6. Actions by Subsidiary. Subsidiary will not, and AANB will not and will
cause Subsidiary not to, take any actions that would cause the Holding Company
Merger not to qualify as a "reorganization" within the meaning of Section 368(a)
of the Code.
ARTICLE IX
Miscellaneous
9.1. Expenses. Each party hereto shall bear and pay the costs and expenses
incurred by it relating to the transactions contemplated hereby.
9.2 Materiality. The term "material" when used in a monetary context in
Sections 3.1(f), 3.1(m)(5), 3.1(n), 4.3(a)(vii), 4.3(a)(x), 4.3(a)(xi),
4.3(a)(xii), 4.3(a)(xiii), and 4.3(a)(xviii) is defined as Fifty Thousand and
No/100 Dollars ($50,000.00) or more.
9.3. Entire Agreement. This Agreement contains the entire agreement among
AANB, Subsidiary, Ballston and NV Bank with respect to the Holding Company
Merger and the related transactions and supersedes all prior agreements,
arrangements or understandings with respect thereto.
9.4. Descriptive Headings. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provisions of
this Agreement.
9.5. Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by registered or certified mail, postage prepaid, addressed as follows:
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If to AANB:
Abigail Adams National Bancorp, Inc.
1627 K Street, N.W.
Washington, D.C. 20006
Attention: Barbara D. Blum
Chairwoman & CEO
Copy to:
Duane W. Beckhorn, Esquire
Hazel & Thomas, P.C.
3110 Fairview Park Drive, Suite 1400
Falls Church, VA 20042
If to Ballston or NV Bank:
Ballston Bancorp, Inc.
1667 K Street, N.W., Suite 700
Washington, D.C. 20006
Attention: Robert F. Kelleher
Chairman, President & CEO
Copy to:
Brian D. Alprin, Esquire
Duane, Morris & Heckscher LLP
1667 K Street, N.W., Suite 700
Washington, D.C. 20006-1608
9.6. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
9.7. Governing Law. Except as may otherwise be required by the laws of the
United States, this Agreement shall be governed by and construed in accordance
with the laws of Delaware without application of conflict of law principles.
9.8. No Third Party Beneficiary Intended. It is expressly agreed and by
this statement specifically intended by the parties hereto that, unless it is
stated herein specifically to the contrary as to any separately identified
provision of this Agreement, nothing within this Agreement shall be construed as
indicating any intent by any other entity or person not a party signatory to
this Agreement by any provision contained herein or to entitle any third party
to any right of action on account hereof.
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9.9. Extension; Waiver. At any time prior to the Effective Time of the
Holding Company Merger, the parties hereto, by action taken or authorized by
their respective Boards of Directors, may, to the extent legally allowed, (i)
extend the time for the performance of any of the obligations or other acts of
the other party hereto, (ii) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party.
9.10. Amendments. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Board of Directors, at any time
before or after approval of the matters presented in connection with the Holding
Company Merger by the shareholders of AANB or Ballston, but, after such
approval, no amendment shall be made which by law requires further approval by
such shareholders without such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
9.11. No Assignment. None of the parties hereto may assign any of its
rights or delegate any of its obligations under this Agreement without the prior
written consent of the other parties hereto. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
[SIGNATURES COMMENCE ON NEXT PAGE]
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf and its corporate seal to be hereunto affixed and
attested by its officers thereunto duly authorized, all as of the day and year
first above written.
ABIGAIL ADAMS NATIONAL BANCORP, INC.
By: /s/ Barbara Davis Blum
----------------------------------------------------
Name: Barbara Davis Blum
----------------------------------------------------
Title: Chairwoman, President and CEO
----------------------------------------------------
BALLSTON BANCORP INC.
By: /s/ Robert F. Kelleher
----------------------------------------------------
Name: Robert F. Kelleher
----------------------------------------------------
Title: Chairman, President and Chief Executive Officer
----------------------------------------------------
THE BANK OF NORTHERN VIRGINIA
By: /s/ Fred A. Burroughs, III
----------------------------------------------------
Name: Fred A. Burroughs, III
----------------------------------------------------
Title: Chairman and Chief Executive Officer
----------------------------------------------------
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Each of the undersigned sets forth his signature below to evidence his
acknowledgment and agreement to Section 8.4 of the foregoing Agreement and Plan
of Reorganization.
Fred A. Burroughs
------------------
FRED A. BURROUGHS
Robert F. Kelleher
------------------
ROBERT F. KELLEHER
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All of the Directors of Ballston affix their signatures hereto for the purpose
of agreeing to vote all their shares of Ballston Common Stock beneficially owned
by them and with respect to which they have power to vote in favor of the
Holding Company Merger and, subject to their fiduciary duties as directors, to
cause the Holding Company Merger to be recommended by the Board of Directors of
Ballston to the shareholders of Ballston in the proxy statement sent to
shareholders in connection with such shareholders' meeting.
Edward D. Soma
---------------------
EDWARD D. SOMA
John E. Kilcarr
---------------------
JOHN E. KILCARR
Paul A. Owens
---------------------
PAUL A. OWENS
Mary E. Fricano
---------------------
MARY E. FRICANO
Helena B. Metzger
---------------------
HELENA B. METZGER
Robert F. Kelleher
---------------------
ROBERT F. KELLEHER
Kenneth Haggerty, MD
---------------------
DR. KENNETH HAGGERTY
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The undersigned Shareholder of Ballston affixes its signature hereto for the
purpose of agreeing to vote all its shares of Ballston Common Stock beneficially
owned by it and with respect to which it has power to vote in favor of the
Holding Company Merger.
WOODLAWN FOUNDATION, INC.
By: John F. Haley
------------------------
JOHN F. HALEY, PRESIDENT
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APPENDIX B
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
Section 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the Stockholders entitled to receive notice of and to vote at the
meeting of Stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the
Stockholders of the surviving corporation as provided in subsection (f) of ss.
251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss.ss. 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts
at the effective date of the merger or
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consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c.
of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
Stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its Stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to ss. 228 or
ss. 253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include
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<PAGE>
in such notice a copy of this section; provided that, if the notice is given on
or after the effective date of the merger or consolidation, such notice shall be
given by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such Stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice did not
notify Stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the Stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if the notice is
given on or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such Stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all Stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed
B-3
<PAGE>
by the surviving or resulting corporation, the petition shall be accompanied by
such a duly verified list. The Register in Chancery, if so ordered by the Court,
shall give notice of the time and place fixed for the hearing of such petition
by registered or certified mail to the surviving or resulting corporation and to
the Stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
Stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the Stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the Stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
Stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
B-4
<PAGE>
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to Stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting Stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
B-5
<PAGE>
APPENDIX C
BAXTER
FENTRISS
MAIN OFFICE: AND COMPANY REGIONAL OFFICE:
- ------------ ----------------
9100 ARBORETUM PARKWAY 4117 N. ROXBORO RD.
SUITE 280 SUITE 130
RICHMOND, VA 23236 DURHAM, NC 27704
(804) 323-7540 (919) 471-0340
FAX (804) 323-7457 FAX (919) 471-0534
July 24, 1997
The Board of Directors
Abigail Adams National Bancorp, Inc.
1627 K Street, N.W.
Washington, D.C. 20006
Dear Members of the Board
Ballston Bancorp, Inc. Washington, D.C. ("Ballston") and Abigail Adams National
Bancorp, Inc., Washington, D.C. ("AANB") have entered into an agreement
providing for the acquisition of Ballston by AANB ("Acquisition"). The terms of
the Acquisition are set forth in the Agreement and Plan of Reorganization dated
June 23, 1997.
The terms of the Acquisition provide that, with the possible exception of those
shares as to which dissenter's rights may be perfected, each common share of
Ballston ($.20 par value) shall be converted into the right to receive $8.56,
subject to certain adjustments, to be paid 50% in AANB common stock (par value
$.01) and 50% in cash ("Consideration").
You have asked our opinion as to whether the proposed transaction pursuant to
the terms of the Acquisition are fair to the respective shareholders of AANB
from a financial point of view.
In rendering our opinion, we have evaluated the consolidated financial
statements of Ballston and AANB available to us from published sources. In
addition, we have, among other things: (a) to the extent deemed relevant,
analyzed selected public information of certain other financial institutions;
(b) compared the terms of the Acquisition with the terms of certain other
comparable transactions to the extent information concerning such acquisitions
was publicly available; (c) reviewed the drafts of the Agreement and Plan of
Reorganization and related documents; and (d) made such other analyses and
examinations as we deemed necessary. We also met with various senior officers of
Ballston and AANB to discuss the foregoing as well as other maters that may be
relevant.
C-1
<PAGE>
We have not independently verified the financial and other information
concerning Ballston, or AANB, or other data which we have considered in our
review. We have assumed the accuracy and completeness of all such information;
however, we have no reason to believe that such information is not accurate and
complete. Our conclusion is rendered on the basis of securities market
conditions prevailing as of the date hereof and on the conditions and prospects,
financial and otherwise, of Ballston and AANB as they exist and are known to us
as of March 31, 1997.
We have acted as financial advisor to AANB in connection with he Acquisition and
will receive from AANB a fee for our services, a significant portion of which is
contingent upon the consummation of the Acquisition.
It is understood that this opinion may be included in its entirety in any
communication by AANB or the Board of Directors to the Stockholders of AANB. The
opinion may not, however, be summarized, excerpted from or otherwise publicly
referred to without our prior written consent.
Based on the foregoing, and subject to the limitations described above, we are
of the opinion that the Consideration is fair to the shareholders of AANB from a
financial point of view.
Sincerely,
/s/ Baxter Fentriss and Company
Baxter Fentriss and Company
C-2
<PAGE>
APPENDIX D
DANIELSON ASSOCIATES, INC.
6110 Executive Boulevard
Suite 504
Rockville, Maryland 20852-3903
TEL: (301) 468-4884
FAX: (301) 468-0013
PITTSBURGH OFFICE
-----------------
TEL: (412) 262-3207
June 20, 1997
Board of Directors
Ballston Bancorp, Inc.
1110 N. Glebe Road
Arlington, Virginia 22201
Dear Members of the Board:
You have requested our opinion as to the "fairness," from a financial
point of view, of the offer by Abigail Adams National Bancorp, Inc. ("Adams") of
Washington, D.C. to acquire all of the shares of the common stock of Ballston
Bancorp, Inc. ("Ballston" or the "Bank") of Arlington, Virginia and its banking
subsidiary, The Bank of Northern Virginia (also the "Bank") also of Arlington.
The Adams offer is to purchase all of the outstanding shares of Ballston for
$13,858,375 plus 1.8 times any capital resulting from the exercise of options
after April 1, 1997, until closing any earnings less losses by Ballston
subsequent to that same date, and minus any dividends declared by Ballston after
April 1, 1997. Half of the payment will be in cash and the remainder in Adams'
common stock. The "fair" sale value is defined as the price at which all of the
shares of Ballston's common stock would change hands between a willing seller
and a willing buyer, each having reasonable knowledge of the relevant facts. In
opining as to the "fairness" of the offer, it also must be determined if the
Adams common stock to be exchanged for Ballston's common stock is "fairly"
valued.
Danielson Associates Inc. ("Danielson Associates"), as part of its
investment banking business, is regularly engaged in the business of valuation
of banks, bank holding companies and thrifts in connection with mergers,
acquisitions and other securities transactions. Danielson Associates has
knowledge of, and experience with, Virginia banking markets and banking
organizations operating in those markets.
This opinion is based partly on data supplied to Danielson Associates by
Ballston, but it relies on some public information, all of which is believed to
be reliable, but neither the completeness nor accuracy of such information can
be guaranteed. In particular, the opinion assumes, based on management's
representation, that there are no significant asset quality problems beyond what
is stated in recent reports to regulatory agencies and in the monthly report to
the directors.
In arriving at this opinion, we reviewed (a) annual reports of Ballston
and Adams for the fiscal years ended December 31, 1995 and 1996; (b) call report
data on each from 1989 through 1996, including quarterly
D-1
<PAGE>
reports for March 31, 1997; (c) recently reported prices and trading activities
of, and dividends paid on, the common stock of Adams; and (d) certain other
publicly available information, including data relating to the current economic
and acquisition environment generally and the banking market in particular.
In preparing the opinion, the Bank's market has been analyzed and its
business and prospects have been discussed with management. In addition, we
conducted such other financial analyses as we deemed appropriate such as
comparable company analyses, comparable transaction analyses, and pro forma
dilution analyses. Any unique characteristics have been considered.
We believe that such analyses as described above must be considered as a
whole and that consideration of portions of such analyses and the factors
considered therein, without considering all factors and analyses, could create
an incomplete view of the analyses and the process underlying this opinion. The
preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to partial analyses and summary
description.
In this analyses, we made certain assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond Adams' or Ballston's control. Any estimates contained in our analyses
are not necessarily indicative of future results of value, which may be
significantly more or less favorable than such estimates.
Based on the foregoing, it is our opinion that, as of the date hereof, the
consideration to be given to the shareholders by Adams to acquire Ballston is
fair, from a financial point of view, to Ballston and its shareholders.
Respectfully submitted,
/s/ Arnold G. Danielson
Arnold G. Danielson
Chairman
Danielson Associates Inc.
D-2
<PAGE>
BALLSTON BANCORP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned Stockholder of Ballston Bancorp, Inc. ("Ballston") hereby
appoints Kenneth M. Haggerty, D.D.S., Frank M. Sands, and Sidney G. Simmonds, or
any of them, as lawful attorneys and proxies of the undersigned, with several
power of substitution, to vote all shares of the common stock of Ballston which
the undersigned is entitled to vote at the Special Meeting of the Stockholders
of Ballston to be held on December 15, 1997 at 4:00 p.m. local time, or at any
adjournment or postponement thereof as follows:
1. To approve and adopt the Agreement and Plan of Reorganization, dated as of
June 23, 1997, as amended (the "Agreement"), by and among Abigail Adams
National Bancorp, Inc., Ballston, and The Bank of Northern Virginia and
the merger of Ballston with and into Adams Acquisition Corporation
provided for therein (the "Holding Company Merger").
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS OF BALLSTON RECOMMENDS A VOTE TO APPROVE AND ADOPT THE
AGREEMENT AND THE HOLDING COMPANY MERGER PROVIDED FOR THEREIN.
2. In their discretion on such other matters as may properly come before the
Ballston Meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED IN THIS PROXY.
IF NO SPECIFIC INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED BY THIS PROXY WILL
BE VOTED TO APPROVE AND ADOPT THE AGREEMENT AND THE HOLDING COMPANY MERGER
PROVIDED FOR THEREIN AND IN THE BEST DISCRETION OF THE PROXY HOLDERS AS TO OTHER
MATTERS.
Dated:_____________________________, 1997
_________________________________________
Signature of Owner
_________________________________________
Additional Signature of Joint Owner
Please sign exactly as your name appears
hereon. If stock is jointly held, each
joint owner should sign. When signing as
attorney, executor, administrator, trustee
or guardian, please give full title as
such.
<PAGE>
FORM OF ELECTION
AS TO SHARES OF COMMON STOCK
OF BALLSTON BANCORP, INC.
This Form of Election is provided in connection with the proposed merger (the
"Merger") of Ballston Bancorp, Inc. ("Ballston") with and into a subsidiary of
Abigail Adams National Bancorp, Inc. ("AANB") pursuant to the Agreement and Plan
of Reorganization among them and The Bank of Northern Virginia dated as of June
23, 1997, as amended (the "Merger Agreement").
ALL FORMS OF ELECTION MUST BE DELIVERED TO BALLSTON ON OR
BEFORE THE ELECTION DEADLINE AS DESCRIBED HEREIN. ALL FORMS
OF ELECTION MUST BE DELIVERED IN A MANNER CONSISTENT WITH
THE INSTRUCTIONS PROVIDED WITH THIS FORM OF ELECTION.
This Form of Election must be completed by holders of shares of Common Stock,
$0.20 par value, of Ballston (the "Shares" or "Ballston Stock") who wish to make
an election (an "Election") as to the form of consideration (the "Merger
Consideration") into which such holders' Shares are to be converted in the
Merger. For an Election to be properly made and effective, this Form of
Election, properly completed, must be received by Ballston through one of the
following means:
(a) By the holder's bringing the Form of Election to the Special Meeting of
the Stockholders of Ballston at which the Merger will be considered (the
"Special Meeting") to be held on December 15, 1997, and surrendering it
at that time to an officer of Ballston;
(b) By the holder's submitting the Form of Election by any other means, no
later than the adjournment of the Special Meeting to be held on December
15, 1997, to Ballston at its office at:
1667 K STREET, N.W., SUITE 700
WASHINGTON, D.C. 20006
PHONE: 202-776-7800
FAX: 202-776-7801
(c) By the holder's submitting to Ballston the Form of Election, by
certified mail or by a nationally recognized overnight service, no later
than the close of business on the Wednesday immediately preceding the
closing date of the Merger (the "Election Deadline").
The Election is subject to (a) the terms, conditions, and limitations set forth
in the Merger Agreement, which is summarized by the Proxy Statement/Prospectus
relating to the Merger dated November 7, 1997 (the "Proxy
Statement/Prospectus"), and (b) the accompanying instructions. The Merger
Agreement and the Proxy Statement/Prospectus are incorporated herein by
reference. Any capitalized terms used in this Form of Election but not defined
herein shall have the meanings given to them in the Proxy Statement/ Prospectus.
1
<PAGE>
Additional copies of the Proxy Statement/Prospectus are available from Ballston
upon request (see Instruction B7). THE INSTRUCTIONS TO THIS FORM OF ELECTION
SHOULD BE READ CAREFULLY BEFORE THIS FORM OF ELECTION IS COMPLETED.
Delivery of this Form of Election to an address other than as set forth above
will not constitute a valid delivery. You must sign this Form of Election where
indicated below.
This Form of Election, completed and signed, should be returned to Ballston in
the accompanying self-addressed, postage-paid envelope. DO NOT SUBMIT YOUR
STOCK CERTIFICATES AT THIS TIME. Unless you intend to exercise dissenters'
rights (see Instruction A9), you should complete and return this Form of
Election prior to the Election Deadline, whether or not you intend to vote "for"
the Merger Agreement and the Merger. If the Merger is consummated, you will not
thereafter have another opportunity to make an Election as to the form of Merger
Consideration you prefer to receive.
You may enclose the proxy card with this Form of Election.
ALL SHAREHOLDERS SHOULD COMPLETE THE DESCRIPTION OF SHARES IN BOX A TO SPECIFY
THE SHARES COVERED HEREBY.
BOX A
DESCRIPTION OF SHARES
LIST BELOW THE SHARES TO WHICH THIS FORM OF ELECTION AND ELECTION RELATES
(ATTACH ADDITIONAL SHEETS IF NECESSARY)
NAME AND ADDRESS OF REGISTERED HOLDER(S):
(PLEASE FILL IN, IF BLANK)
<TABLE>
<CAPTION>
=========================================================================
<S> <C> <C>
CERTIFICATE NUMBER NUMBER OF SHARES REPRE- NUMBER OF SHARES AS TO
SENTED BY SUCH CERTIFICATE WHICH ELECTION IS MADE
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
TOTAL SHARES: TOTAL SHARES:
==========================================================================
</TABLE>
TO: BALLSTON BANCORP, INC.
1667 K STREET, N.W., SUITE 700
WASHINGTON, D.C. 20006
Ladies and Gentlemen:
The undersigned hereby makes the Election set forth in Box B below, or, if an
Election is not duly made, elects to have the undersigned's Shares treated as
Non-Election Shares.
The undersigned understands that the purposes of the election procedures
described herein are to permit holders of Shares to express their preferences
for the type of consideration they wish to receive in the Merger, and further
understands that no less and no more than 50 percent of the issued and
outstanding Shares of Ballston Stock may be exchanged for shares of AANB Stock
in the Merger. In addition, the Election by each holder of Ballston Stock,
including this Election by the undersigned, will be subject to the results of
the election and proration procedures set forth in the Merger Agreement and
summarized in the Proxy Statement/Prospectus under the caption "PROPOSED MERGER
OF BALLSTON AND SUBSIDIARY--General Description of the Transaction."
Accordingly, THERE CAN BE NO ASSURANCE THAT THE UNDERSIGNED HOLDER WILL RECEIVE
THE PROPORTION OF AANB STOCK AND/OR CASH INDICATED BY SUCH HOLDER'S ELECTION.
RECEIPT OF THE PROXY STATEMENT/PROSPECTUS IS HEREBY ACKNOWLEDGED.
In connection with the Merger, subject to the election and proration procedures
set forth in the Merger Agreement, each holder of Ballston Stock is entitled,
with respect to the Merger consideration to be received for such holder's Shares
of Ballston Stock, to (i) elect to receive all of his or her prorata portion of
the Exchange Price in AANB Common Stock (a "Stock Election"), (ii) elect to
receive all of his or her prorata portion of the Exchange Price in cash (a "Cash
Election"), or (iii) elect to receive a combination of shares of AANB Common
Stock for a specified number of such holder's Shares and cash (a "Combination
Election"). If a holder does not make an Election, his or her Shares will be
deemed "Non-Election Shares" (as defined in the Merger Agreement).
NEITHER THE AANB BOARD OF DIRECTORS NOR THE BALLSTON BOARD OF DIRECTORS
MAKES ANY RECOMMENDATION AS TO THE TYPE OF CONSIDERATION SHARE-
HOLDERS SHOULD ELECT TO RECEIVE. EACH SHAREHOLDER
MUST MAKE HIS OR HER OWN DECISION
WITH RESPECT TO SUCH ELECTION.
By completing Box B below, each Ballston shareholder may choose to make a Stock
Election, a Cash Election, a Combination Election, or no election with respect
to the Shares held by such holder.
3
<PAGE>
BOX B
ELECTION
(Check only one box)
The undersigned, subject to the terms and conditions set forth in this Form of
Election, including the Merger Agreement incorporated herein by reference, makes
the following Election with respect to the undersigned's Shares covered hereby:
[_] A Stock Election with respect to ALL of such Shares.
[_] A Cash Election with respect to ALL of such Shares.
[_] A Combination Election, in which the following numbers of such Shares
will be converted into AANB Stock and cash, respectively:
COMBINATION ELECTION
(FILL IN NUMBERS OF SHARES TO BE SO CONVERTED)
<TABLE>
<CAPTION>
====================================================================
<S> <C> <C> <C>
CERTIFICATE ELECTION OF STOCK ELECTION OF CASH TOTAL
NUMBER (NO. OF SHARES) (NO. OF SHARES) (NO. OF SHARES)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
[_] No Election.
Any Shares of the undersigned as to which the undersigned has not made
an effective Election will constitute Non-Election Shares.
THE UNDERSIGNED HEREBY CERTIFIES THAT THE ELECTION SET FORTH HEREIN COVERS ALL
OF THE SHARES OF BALLSTON STOCK REGISTERED IN THE NAME OF THE UNDERSIGNED AND
EITHER (I) BENEFICIALLY OWNED BY THE UNDERSIGNED, OR (II) OWNED BY THE
UNDERSIGNED IN ANY REPRESENTATIVE OR FIDUCIARY CAPACITY FOR A PARTICULAR
BENEFICIAL OWNER OR FOR ONE OR MORE BENEFICIAL OWNERS.
4
<PAGE>
The undersigned understands and acknowledges that all questions as to the
validity, form, and eligibility of any Election shall be determined by Ballston,
and any such determinations shall be final and binding. No authority herein
conferred or agreed to be conferred shall be affected by, and all such authority
shall survive, the death or incapacity of the undersigned. All obligations of
the undersigned hereunder shall be binding upon the heirs, personal
representatives, successors, and assigns of the undersigned.
IMPORTANT!
ALL BALLSTON SHAREHOLDERS SUBMITTING THIS FORM OF ELECTION
MUST SIGN HERE
The undersigned hereby represents and warrants that the undersigned has full
power and authority to complete and deliver this Form of Election. The
undersigned, upon request, shall execute and deliver all additional documents
deemed by Ballston necessary or desirable to complete the election.
BOX C
SHAREHOLDERS(S) SIGN HERE
==============================
____________________________
____________________________
==============================
Name(s):________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
_______________________________________________________________________________
(Include Zip Code)
_____________________________ ______________________________________________
(Area Code and Telephone No.) (Tax Identification or Social Security No.)
Must be signed by registered holder(s) exactly as name(s) appear(s) on stock
certificate(s). If signature is by attorney, executor, administrator, trustee
or guardian or other acting in a fiduciary capacity, set forth full title and
see Instruction A4.
5
<PAGE>
INSTRUCTIONS TO FORM OF ELECTION
A. FORM OF ELECTION
1. DELIVERY OF FORM OF ELECTION. THE SHARES OF BALLSTON SHAREHOLDERS WHOSE
FORMS OF ELECTION ARE NOT RECEIVED PRIOR TO THE ADJOURNMENT OF THE SPECIAL
MEETING TO BE HELD ON DECEMBER 15, 1997 WILL BE TREATED AS NON-ELECTION SHARES
(AS DEFINED IN THE MERGER AGREEMENT). A Ballston shareholder who is deemed to
have made a Non-Election may only change that deemed Non-Election by following
the instructions for modifying an Election between the adjournment of the
Special Meeting to be held on December 15, 1997 and the Election Deadline. Such
instructions must be followed precisely.
2. SHARES HELD BY NOMINEES, TRUSTEES OR OTHER REPRESENTATIVES. Any record
holder of Ballston Stock who holds such Ballston Stock as a nominee, trustee, or
in another representative or fiduciary capacity (a "nominee") may submit one or
more Forms of Election covering the aggregate number of shares of Ballston Stock
held by such nominee for the beneficial owners for whom the nominee is making an
Election; provided, that each submission of a Form of Election by a nominee
shall be deemed to constitute a certification by such nominee that such Form of
Election covers all of the Ballston Stock held by such nominee for a particular
beneficial owner. If any Shares of Ballston Stock held by a nominee are not
covered by an effective Election, they will be deemed to be Non-Election Shares.
3. METHOD OF DELIVERY. THE METHOD OF DELIVERY OF THIS FORM OF ELECTION IS AT
THE RISK OF THE SENDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY BALLSTON. The risk of loss of a Form of Election shall pass only
after Ballston has actually received the Form of Election. If delivery is by
mail, registered mail with return receipt requested, properly insured, is
recommended. In all cases, sufficient time should be allowed to ensure timely
delivery by the adjournment of the Special Meeting to be held on December 15,
1997. After the adjournment of the Special Meeting and until the Election
Deadline, Ballston Shareholders may change their Elections only by submitting a
revised Form of Election to Ballston via certified mail or a nationally
recognized overnight service.
4. SIGNATURES ON FORM OF ELECTION. If this Form of Election is signed by the
registered holder(s) of the Shares covered hereby, the signature(s) must
correspond with the name(s) on the face of the Certificates evidencing such
Shares without alteration, enlargement, or any other change whatsoever.
If any of the Shares covered hereby are owned of record by two or more
persons, all such persons must sign this Form of Election. If Ballston stock
certificates are registered in the names of different holders, it will be
necessary to complete, sign, and submit as many separate Forms of Election as
there are different registrations of certificates.
IF THIS FORM OF ELECTION IS SIGNED BY A TRUSTEE, EXECUTOR, ADMINISTRATOR,
GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF A CORPORATION, OR OTHER PERSON ACTING IN
A FIDUCIARY OR REPRESENTATIVE CAPACITY, SUCH PERSON SHOULD SO INDICATE
6
<PAGE>
WHEN SIGNING, AND PROPER EVIDENCE SATISFACTORY TO BALLSTON OF SUCH PERSON'S
AUTHORITY TO SO ACT MUST BE SUBMITTED.
5. GUARANTEE OF SIGNATURES. No signature guarantee is required on this Form
of Election.
6. DETERMINATION OF PROPER ELECTION. Ballston will have the reasonable
discretion to determine whether Forms of Election have been properly or timely
completed, signed, and submitted, modified, or revoked, and to disregard
immaterial defects in Forms of Election. In all such matters, the decision of
Ballston shall be conclusive and binding. Ballston will not be under any
obligation to notify any person of any defect in a Form of Election submitted to
Ballston. Ballston shall make all proration computations contemplated by the
Merger Agreement and all such computations shall be conclusive and binding on
the holders of Ballston Stock. No alternative, conditional, or contingent
Elections will be accepted. If Ballston shall reasonably determine that any
purported Stock Election, Cash Election, or Combination Election was not
properly made, such purported Stock Election, Cash Election, or Combination
Election will be of no force and effect and the shareholder making such
purported Stock Election, Cash Election, or Combination Election shall, for
purposes hereof and the Merger Agreement, be deemed not to have made an Election
and the Shares covered thereby shall be deemed to be Non-Election Shares.
7. INADEQUATE SPACE. If the space provided in Box A under "Description of
Shares" is inadequate, the Certificate numbers, the number of Shares evidenced
by such Certificates, and the number of Shares with respect to which Elections
are made should be listed on a separate schedule and attached to the Form of
Election.
8. TERMINATION OF MERGER AGREEMENT. All Elections will be revoked
automatically if the Merger Agreement has been terminated.
9. DISSENTERS' RIGHTS. Holders of Ballston Stock who wish to exercise
dissenters' rights should not complete this Form of Election. Any record holder
of Ballston Stock who has delivered a written demand for dissenters' rights and
who subsequently delivers a Form of Election to Ballston will be regarded as
having withdrawn such demand for dissenters' rights. Any holder who has
delivered a Form of Election and who simultaneously or subsequently makes a
written demand for dissenters' rights will be regarded as having revoked his or
her Election. For information concerning dissenters' rights, see the
information set forth in Appendix B of the Proxy Statement/Prospectus and the
summary set forth therein under the caption "SUMMARY OF THE TRANSACTION--
Dissenters' Rights of Ballston Stockholders."
B. ELECTION PROCEDURES
1. ELECTIONS. By completing Box B entitled "Election" and this Form of
Election, in accordance with these instructions, a Ballston shareholder will be
permitted to make a Stock Election, Cash Election, or Combination Election with
respect to the Shares held by such holder. All Elections are subject to the
election and proration procedures set forth in Section 2.2 of the Merger
Agreement. In connection with making any Election, a Ballston shareholder
should also carefully read, among other items, the information contained in the
Proxy Statement/Prospectus under "SUMMARY OF THE TRANSACTION--Certain Federal
Income Tax
7
<PAGE>
Considerations -- Ballston Opinion." Each Ballston shareholder should consult
his or her own tax advisor as to the specific tax consequences of an Election
and the Merger to such shareholder.
2. TREATMENT OF NON-ELECTING SHARES. Any Shares (other than Dissenting
Shares) with respect to which Ballston does not receive an effective, properly
completed Form of Election prior to the Election Deadline will be deemed to be
Non-Election Shares. This Form of Election will be deemed properly completed
only if an Election is indicated for each Share covered by this Form of
Election.
3. ELECTION DEADLINE. In order for an Election to be effective, Ballston
must receive a properly completed Form of Election no later than the close of
business on the Wednesday immediately preceding the closing date of the Merger
(the "Election Deadline"). Between the adjournment of the Special Meeting to be
held on December 15, 1997 and the Election Deadline, Form of Elections may be
submitted to Ballston only via certified mail or a nationally recognized
overnight service.
4. CHANGES TO ELECTIONS. Any holder of Ballston Stock who has made an
Election may, at any time prior to the Election Deadline, change his or her
Election by submitting to Ballston a properly completed and signed revised Form
of Election, provided that Ballston receives such revised Form of Election prior
to the Election Deadline and provided further that between the adjournment of
the Special Meeting to be held on December 15, 1997 and the Election Deadline, a
revised Form of Election may be submitted to Ballston only via certified mail or
a nationally recognized overnight service. Any holder of Ballston Stock may at
any time prior to the Election Deadline revoke his or her Election by written
notice to Ballston received prior to the Election Deadline, provided that
between the adjournment of the Special Meeting to be held on December 15, 1997
and the Election Deadline, a revocation may be submitted to Ballston only via
certified mail or a nationally recognized overnight service. If an Election is
revoked prior to the Election Deadline, the related Ballston Stock will
automatically become Non-Election Shares unless and until a new Election is
properly made with respect to such Ballston Stock on or before the Election
Deadline.
5. NO FRACTIONAL SHARES. No certificates representing fractional shares of
AANB Stock will be issued in the Merger. In lieu of any fractional share of
AANB Stock, holders of Shares that are converted into the right to receive AANB
Stock will receive cash (without interest) in an amount equal to such fractional
share of AANB Stock multiplied by the AANB Stock Value as defined in section
2.1(d) of the Merger Agreement.
6. NO LIABILITY. Neither AANB nor Ballston will be liable to any holder of
Shares of Ballston Stock for any shares of AANB Stock (or dividends or
distributions with respect thereto) or cash delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
8
<PAGE>
7. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance and
additional copies of the Proxy Statement/Prospectus or this Form of Election may
be directed to Ballston at its office at:
1667 K STREET, N.W., SUITE 700
WASHINGTON, D.C. 20006
PHONE: 202-776-7800
FAX: 202-776-7801
9
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned Stockholder of Abigail Adams National Bancorp, Inc.
("AANB") hereby appoints Joyce R. Hertz and Alexander Beltran, and either of
them, as lawful attorneys and proxies of the undersigned, with several power of
substitution, to vote all shares of the common stock of AANB which the
undersigned is entitled to vote at the Special Meeting of the Stockholders of
AANB to be held on December 17, 1997 at 3:00 p.m. local time, or at any
adjournment or postponement thereof as follows:
<PAGE>
Please date, sign and mail your
proxy card back as soon as possible!
Special Meeting of Stockholders
ABIGAIL ADAMS NATIONAL BANCORP, INC.
December 17, 1997
Please detach and mail in the Envelope Provided
_______________________________________________________________________________
1. To ratify the Board's approval and adoption of the Agreement and Plan of
Reorganization dated as of June 23, 1997 as amended (the "Agreement"),
by and among AANB, Ballston Bancorp, Inc. ("Ballston") and The Bank of
Northern Virginia and the Holding Company Merger provided for therein
and approve the issuance of a number of shares, subject to adjustment
(the "Issuance"), of the common stock of AANB to holders of the common
stock, par value $.20 per share, of Ballston sufficient to complete
AANB's proposed acquisition of Ballston through the merger of Ballston
with and into Adams Acquisition Corporation, a wholly-owned subsidiary
of AANB.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS OF AANB RECOMMENDS A VOTE TO RATIFY AND APPROVE THE
BOARD'S APPROVAL AND ADOPTION OF THE AGREEMENT AND HOLDING COMPANY MERGER AND TO
APPROVE THE ISSUANCE.
In their discretion to vote upon such other business as may properly come
before the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED IN THIS
PROXY. IF NO SPECIFIC INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED "FOR" THE RATIFICATION OF THE APPROVAL AND ADOPTION OF THE
AGREEMENT AND THE HOLDING COMPANY MERGER AND THE ISSUANCE IN CONNECTION
THEREWITH AND IN THE BEST DISCRETION OF THE PROXY HOLDERS AS TO OTHER MATTERS.
Dated: _______________________, 1997
______________________________________
Signature of Owner
______________________________________
Additional Signature of Joint Owner
Please sign exactly as your name
appears hereon. If stock is jointly
held, each joint owner should sign.
When signing as attorney, executor,
administrator, trustee or guardian
please give full title as such.
