SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to______________
Commission file number 0-10971
__________
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
______________________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Delaware 52-1508198
______________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer ID No.)
Incorporation or organization)
1627 K Street, N.W. Washington, D.C. 20006
______________________________________________________________________________
(Address of principal executive offices)
202-466-4090
______________________________________________________________________________
Issuer's telephone number including area code
N / A
______________________________________________________________________________
Former name, address, and fiscal year, if changes since last report
Indicate by check whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No .
___ ___
State the number of shares outstanding of each of the issuer's classes
of common equity as of October 30, 1998:
1,668,464 shares of Common Stock, Par Value $0.01/share
Transitional Small Business Disclosure Format (check one): Yes No X
_____ _____
<PAGE>
PART I.
______________________________________________________________________________
Item 1 - Financial Statements
______________________________________________________________________________
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1998 and 1997 and December 31, 1997
<TABLE>
September 30, September30, Dec 31,
1998 1997 1997
____________ ____________ ___________
<S> <C> <C> <C>
Assets (Unaudited) (Unaudited) (Unaudited)
Cash and due from banks $ 5,457,560 $ 5,688,064 $ 7,654,347
Short-term investments:
Federal funds sold 13,100,000 3,950,000 6,450,000
Restricted CD's - Rabbi Trust 185,254 -- --
Interest-bearing deposits
in other banks 4,096,243 1,479,000 1,781,000
_________ _________ _________
Total short-term
investments 17,381,497 5,429,000 8,231,000
Securities available for sale 14,862,168 18,052,860 20,452,799
Investment securities
(market value of $8,065,386,
$8,551,040 and $7,532,256 at
September 30,1998,
September 30, 1997 and
December 31, 1997,
respectively) 8,009,409 8,513,840 7,508,850
Loans (net of deferred
fees and unearned discounts) 85,468,733 84,728,757 85,313,591
Less: Allowance for loan
losses (1,114,088) (1,123,642) (1,141,719)
___________ ___________ ___________
Loans, net 84,354,645 83,605,115 84,171,872
___________ ___________ ___________
Bank premises and equipment,
net 1,124,690 981,070 1,252,413
Other real estate owned -- -- --
Other assets 2,182,405 1,707,167 1,967,733
___________ ___________ ___________
Total assets $ 133,372,374 $ 123,977,116 $ 131,239,014
=========== =========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand deposits $ 32,887,474 $ 26,754,959 $ 27,184,087
NOW accounts 10,329,403 7,783,730 9,880,968
Money market accounts 28,233,617 24,893,285 26,969,638
Savings accounts 2,347,027 1,699,123 1,898,721
Certificates of deposit
of $100,000 or greater 21,354,161 23,961,781 25,255,095
Certificates of deposit
less than $100,000 18,787,422 20,353,335 21,072,887
__________ __________ __________
Total deposits 113,939,104 105,446,213 112,261,396
___________ ___________ ___________
Short-term borrowings 3,527,827 2,879,419 3,489,263
Long-term borrowings/debt 1,037,882 1,095,100 1,085,936
Other liabilities 1,653,677 1,049,830 1,372,681
___________ ___________ ___________
Total liabilities 120,158,490 110,470,562 118,209,276
___________ ___________ ___________
Stockholders' equity:
Common stock, par value
$0.01 per share, authorized
5,000,000 shares; issued
1,673,144 at September 30, 1998,
1,655,906 at September 30, 1997
and 1,651,226 shares at
December 31, 1997;
outstanding 1,668,464 shares
at September 30, 1998,
1,651,226 shares at
September 30, 1997 and
1,655,906 shares at
December 31, 1997 16,734 16,559 16,559
Surplus 12,331,070 12,182,595 12,187,657
Retained earnings 1,035,750 1,521,505 1,044,369
__________ __________ __________
13,383,554 13,720,659 13,248,585
Less: Employee Stock
Ownership Plan shares,
20,243 shares at cost (175,757) (176,899) (175,757)
Less: Treasury stock,
4,680 shares at cost (28,710) (28,710) (28,710)
Less: Unrealized gain (loss)
on securities, net of taxes 34,797 (8,496) (14,380)
__________ __________ __________
Total stockholders'
equity 13,213,884 13,506,554 13,029,738
__________ __________ __________
Total liabilities and
stockholders' equity $ 133,372,374 $ 123,977,116 $ 131,239,014
=========== =========== ===========
</TABLE>
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the Period Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
For the three months For the
nine months
Ended September 30, Ended
September 30,
<S> <C> <C> <C>
<C>
1998 1997 1998
1997
____ ____ ____
____
<S> <C> <C> <C>
<C>
Interest income
Interest and fees on loans 2,184,857 $2,138,827 $6,404,725
5,739,672
Interest on securities
available for sale:
U.S. Treasury 14,253 14,854 42,678
18,232
Obligations of U.S.
government agencies
and corporations 260,997 136,573 818,608
401,178
__________ _________ _________
_________
Total interest on
securities available
for sale 275,250 151,427 861,286
419,410
Interest and dividends on
investment securities:
U.S. Treasury 42,030 15,237 96,381
42,087
Obligations of U.S.
government agencies
and corporations 60,848 100,627 178,107
380,341
Mortgage-backed securities 2,779 3,662 10,443
12,644
Obligations of states and
municipalities 3,992 3,992 11,974
11,974
Other securities 9,898 6,923 28,618
28,085
__________ _________ _________
_________
Total interest and
dividends on investment
securities 119,547 130,441 325,523
475,131
Interest on short-term investments:
Federal funds sold 175,434 116,307 381,096
254,514
Interest on Restricted CDs
- Rabbi Trust 3,152 -- 16,108
--
Deposits with other banks 29,895 21,943 82,911
64,200
__________ _________ _________
_________
Total interest on short-
term investments 208,481 138,250 480,115
318,714
__________ _________ _________
_________
Total interest income 2,788,135 2,558,945 8,071,649
6,952,927
__________ _________ _________
_________
Interest expense
Interest on deposits:
NOW accounts 55,708 46,646 163,282
135,534
Money market accounts 329,129 289,760 859,186
806,053
Savings accounts 16,168 11,026 43,619
31,411
Certificates of deposit:
$100,000 or greater 298,864 324,740 895,741
876,882
Less than $100,000 251,090 284,441 838,996
739,141
__________ _________ _________
_________
Total interest
on deposits 950,95 956,613 2,800,824
2,589,021
Federal funds purchased
and repurchase agreements 47,950 31,626 139,135
95,392
Interest on long-term
borrowings/debt 18,356 19,605 55,434
58,302
__________ _________ _________
_________
Total interest expense 1,017,265 1,007,844 2,995,393
2,742,715
__________ _________ _________
_________
Net interest income 1,770,870 1,551,101 5,076,256
4,210,212
Provision for loan losses -- -- (25,000)
--
Net interest income
after provision 1,770,870 1,551,101 5,101,256
4,210,212
Other income
Service charges on
deposit accounts 295,519 280,905 904,754
845,050
Other income 126,641 13,737 158,405
51,496
__________ _________ _________
_________
Total other income 422,160 294,642 1,063,159
896,546
__________ _________ _________
_________
Other expense
Salaries and employee
benefits 541,115 544,626 2,647,040
1,627,716
Occupancy and equipment
expense 304,873 257,940 905,838
730,633
Professional fees 31,278 71,589 780,024
222,686
Data processing fees 168,600 137,363 426,294
350,165
Other operating expense 249,799 278,030 885,270
823,681
__________ _________ _________
_________
Total other expense 1,295,665 1,289,548 5,644,466
3,754,881
___________ _________ _________
_________
Income (loss) before taxes 897,365 556,195 519,949
1,351,877
Applicable income tax expense 197,264 223,579 197,264
532,914
___________ _________ _________
_________
Net income $ 700,101 $ 332,616 $ 322,685
$818,963
=========== ========= =========
=========
Basic earnings per common
share $ .42 $ .20 $ .20
$ .50
=========== ========= =========
=========
Diluted earning per common
share $ .41 $ .20 $ .19
$ .49
=========== ========= =========
=========
Weighted average number of shares
used to compute EPS:
Basic 1,648,847 1,630,945 1,641,768
1,630,505
=========== ========= =========
=========
Diluted 1,693,846 1,673,711 1,686,767
1,672,791
=========== ========= =========
=========
</TABLE>
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements
of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
Employee
Additional Retained
Stock Unrealized Compre-
Common Paid-in Earnings Treasury
Ownership Loss on hensive
Stock Capital (Deficit) Stock
Plan Securities Total Income
________ _________ _________ ________
_________ ___________ __________ ________
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Balance at January 1,1997 $ 16,547 $12,172,435 $1,191,706 $ (28,710)
$(177,791) $ (33,990) $13,140,197
Net income --- --- 818,963 ---
--- --- 818,963 818,963
Dividends declared --- --- (489,164) ---
--- --- (489,164)
Dividends on allocated shares
of the Employee Stock
Ownership Plan --- 405 --- ---
892 --- 1,297
Issuance of common stock under
the Employee Incentive Stock
Option Plan 12 9,755 --- ---
--- --- 9,767
Unrealized loss on securities,
net of taxes --- --- --- -
--- 25,494 25,494 25,494
______ _________ _________ _________
_________ __________ __________ _______
Comprehensive Income
844,457
=======
Balance at September 30, 1997 $ 16,559 $12,182,595 $1,521,505 $ (28,710)
$(176,899) $ (8,496) $13,506,554
======= =========== ========= =========
========== ========== ==========
Balance at January 1, 1998 $ 16,559 $12,187,657 $1,044,369 $ (28,710)
$(175,757) $ (14,380) 13,029,738
Net Income --- --- 322,685 ---
--- --- 322,685 322,685
Dividends declared --- --- (331,304) ---
--- --- (331,304)
Issuance of common stock
under the Employee
Incentive Option Plan 175 143,413 --- ---
--- --- 143,588
Unrealized gain/loss on
securities net of taxes --- --- ---
--- 49,177 49,177 49,177
_______ ___________ __________ _________
_________ __________ __________ ________
Comprehensive Income
371,862
========
Balance at Sept. 30, 1998 $ 16,734 $12,331,070 $ 1,035,750 $ (28,710)
$(175,757) $ 34,797 $13,213,884
======== =========== ============ =========
======== ========= ===========
</TABLE>
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
1998 1997
_________ _________
<S> <C> <C>
Operating Activities
Net income $ 322,685 $818,963
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Benefit for loan losses (25,000) --
Depreciation and amortization 325,280 217,974
Accretion of loan discounts and fees (134,808) (111,197)
Amortization and accretion of discounts and
premiums on securities (37,375) (131,718)
Provision for deferred income taxes (777,549) (101,724)
Increase (decrease) in other assets 562,875 (458,343)
Increase in other liabilities 99,340 220,245
_________ ________
Net cash provided by operating activities 335,448 454,200
_________ _________
Investing Activities
Proceeds from repayment and maturity of investment
securities and securities available for sale 22,498,193 15,325,000
Proceeds from repayment of mortgage-
backed securities 71,247 46,596
Purchase of investment securities (17,358,941) (18,917,387)
Purchase of short term investments (2,315,243) --
Purchase of restricted CD's for rabbi trust (185,254) --
Principal collected on loans 12,519,199 2,820,752
Loans originated (13,493,164) (24,818,779)
Net decrease (increase)in short-term loans 97,822 (92,819)
Net decrease in lines of credit 834,946 561,855
Purchase of bank premises and equipment (197,557) (358,993)
Other, Net 1,667 --
__________ _________
Net cash provided (used) by
investing activities 2,472,915 (15,433,775)
__________ __________
Financing Activities
Net increase (decrease) in transaction
and savings deposits 7,864,108 (1,514,886)
Proceeds from issuance of time deposits 30,061,243 43,238,503
Payments for maturing time deposits (36,247,642) (31,432,145)
Net increase in short-term borrowings 38,564 962,731
Payments on long-term debt (48,054) (43,715)
Proceeds from issuance of common stock 143,588 9,767
Cash dividends paid to common stockholders (166,957) (487,748)
_________ __________
Net cash provided (used)
by financing activities 1,644,850 10,732,507
_________ __________
Increase (decrease) in cash
and cash equivalents 4,453,213 (4,247,068)
Cash and cash equivalents at beginning of year 14,104,347 13,885,132
_________ ___________
Cash and cash equivalents at end of year $18,557,560 $9,638,064
=========== ==========
Supplementary disclosures:
Interest paid on deposits and borrowings $ 2,995,393 $2,697,404
=========== ==========
Income taxes paid -0- $ 553,000
=========== ==========
</TABLE>
<PAGE>
Abigail Adams National Bancorp, Inc.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
1. General
The unaudited information at and for the nine months ended September 30,
1998 and 1997 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. Certain reclassifications have been made to amounts previously
reported in 1997 to conform with the 1998 presentation.
2. Year 2000 Issues
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
computer programs used by the Company that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in major miscalculations or system failure and could materially
impact the Company's business. Management has completed its assessment of the
Year 2000 issue for all major systems. The Company has a formal written Year
2000 Plan in place, and a Year 2000 Committee which meets on a regular basis
and reports at least quarterly to the Board of Directors. The Company has
conducted tests of its computer applications and hardware to ensure that they
will be Year 2000 compliant and has made satisfactory progress toward being
Year 2000 compliant. Currently, the Bank contracts with an outside firm to
provide data processing and back-room operations. The Bank has reviewed its
data processing systems provided by its outside data processor which could be
affected by the "Year 2000" issue and found that the company was not making
satisfactory progress towards that end; therefore, the Bank converted to a new
outside processor in October 1998, who has represented to the Company that it
is Year 2000 compliant. The enhanced resources provided by this firm, in
conjunction with the Bank's internal data management system, enable the Bank
to provide a high level of customer service while effectively managing its
growth. To date, representations have been received from the Bank's primary
processing vendors that their systems already adequately address the Year 2000
issue or that plans have been developed to address the issue. Overall,
management believes that both computer hardware and software, through
documented testing, is approximately 90% compliant and will be fully compliant
by December 31, 1998.
The Bank's customers, including its borrowers, are also faced with
potential Year 2000 problems. Through its Loan Committee, the Bank has
analyzed its customer base to determine which types of customers are likely to
be affected and has sent inquiries to those borrowers requesting in writing
their steps to address the Year 2000 issue to ensure compliance. The failure
of its borrowers to resolve the problem could adversely affect their
operations and impair their ability to repay their loans to the Bank.
Therefore, even if the Bank adequately addresses its own Year 2000 problems,
it could nevertheless be materially and adversely affected if its borrowers do
not also successfully resolve their Year 2000 problems.
The Year 2000 problem is pervasive and complex, and virtually every
computer operation
<PAGE>
will be affected in some way. Consequently, no assurance can be given that
unforeseen problems in the computer systems used by the Bank and its software
maintained by third party providers, will not have a material impact on the
Bank's ability to conduct business. The Company has developed a general
contingency plan for the Year 2000 issue and will have developed a detailed
contingency plan by year end. An estimate of future remediation costs is
$45,000, of which $30,000 is the cost of conversion to the new outside data
processor in October 1998. Current data processing expense includes a $35,000
accrual for Year 2000 expenses. Any additional costs related to the Year 2000
issue will be charged to expense as they are incurred and are not expected to
materially impact operating results in any one period. The Company's progress
and Year 2000 plan is subject to review and examination by the Office of the
Comptroller of the Currency.
3. 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 current President
and Chief Executive Officer of the Bank, the Company is obligated to make
payments to her totaling approximately $140,000, in the event she chooses to
exercise her rights under a Severance Agreement on or before May 18, 1999.
On February 25, 1998, the Board of Directors of the Company approved the
establishment of a grantor trust for the Company and the Bank with a third
party trustee for the purpose of funding the severance agreements with seven
former key management officials and for other amounts payable to the former
President and Chief Executive Officer in connection with the termination of
their employment following a change of control. The trusts were irrevocable
for one year. On May 18, 1998 the former Chairwoman, President & CEO of the
company and six former management officials of the Bank exercised their rights
to payments under these agreements.
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. The September 30, 1998 unaudited financial statements
reflect an accrual of $240,000 for such indemnification, resulting from the
Company's dismissed legal action against three directors and certain other
shareholders. (See "Legal Proceedings" for additional discussion of these
issues)
4. 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
<PAGE>
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.
5. 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 September 30, 1998,13,702
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 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
<PAGE>
totaling 1,505 were granted to employees in 1997 at prices ranging from $11.71
to $11.83. As of September 30, 1998, 4,994 options have been exercised under
these plans. No options were granted in 1997 or 1998.
On March 29, 1996, the Company granted the former 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 became fully vested at the time the
former President and CEO left the employment of Company and the Bank. These
options have not been exercised as of September 30, 1998.
Compensation expense is recognized on the Directors Plan, the 1996
Directors Plan and the options granted to the former 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.
6. Earnings Per Common 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 earning per share for entities with publicly held
common stock or potential common stock. Basic earnings per share is calculated
by dividing net income, after deduction for preferred stock dividends, by the
weighted average number of shares of common stock. Diluted earnings per share
is calculated by dividing net income, after deduction for preferred stock
dividends, by the weighted average number of shares of common stock and common
stock equivalents , unless determined to be anti-dilutive. SFAS No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997.
<PAGE>
<TABLE>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
Basic Diluted Basic Diluted
EPS EPS EPS EPS
_____ _______ _____ _______
<S> <C> <C> <C> <C>
Net Income 322,685 322,685 818,963 818,963
Dividends on Preferred
Stock n/a n/a n/a n/a
Income Available to
Common Stockholders 322,685 322,685 818,963 818,963
Weighted average share
outstanding 1,641,768 1,641,768 1,630,505
1,630,505
Weighted average
dilutive effect of
Stock Option Plans n/a 44,999 n/a 42,286
Adjusted Weighted
average shares
Outstanding 1,641,768 1,686,767 1,630,505
1,672,791
Basic EPS $.20 $.50
Diluted EPS $.19 $.49
</TABLE>
7. New Financial Accounting Standards
(a) 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.
(b) Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130). SFAS No. 130 requires that certain financial activity
typically disclosed in stockholders' equity be reported in the financial
statements as an adjustment to net income in determining comprehensive income.
<PAGE>
Items applicable to the Company would include unrealized gains and losses on
securities available for sale. Items identified as comprehensive income have
been presented in the statement of changes in stockholders' equity, under
separate captions. SFAS No. 130 is effective for the Company on January 1,
1998 including the restatement of prior periods reported consistent with this
pronouncement. The implementation of SFAS No. 130 has not had a material
impact on the Company.
(c) Disclosures about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 requires the
reporting of selected segment information in quarterly and annual reports.
Information from operating segments is derived from methods used by the
Company's management to allocate resources and measure performance. The
Company is required to disclose profit and loss, revenues and assets for each
segment identified including reconciliations of these items to consolidated
totals. The Company is also required to disclose the basis for identifying
the segments and the types of products and services within each segment.
SFAS No. 131 is effective for the Company on January 1, 1998, including the
restatement of prior periods reported consistent with this pronouncement, if
practical. The Company does not anticipate any material impact from the
implementation of SFAS No. 131.
(d) Employers' Disclosures about Pensions and Other Postretirement Benefits
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" - an amendment of FASB
Statements No. 87, 88 and 106" (SFAS No. 132). SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans.
It standardizes the disclosure requirement for pensions and other
postretirement benefits and requires additional information on changes in the
benefit obligations and fair values of plan assets. SFAS No. 132 also
eliminates certain disclosures which were required by SFAS No. 87, "Employers'
Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." SFAS No. 132 is effective for the Company on
January 1, 1998. The implementation of SFAS No. 132 will not have a material
impact on the Company.
(e) Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualified hedges allows a derivative's gain and losses
to offset related results on the hedged item in the income statement, and
requires that a
<PAGE>
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. Statement 133 is effective for
fiscal years beginning after June 15, 1999. The Company may also implement
the Statement as of the beginning of any fiscal quarter beginning June 16,
1998 and thereafter. Statement 133 cannot be applies retroactively. Statement
133 must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997. The implementation of SFAS
133 will not have a material impact on the Company.
PART I. FINANCIAL INFORMATION (Continued)
______________________________________________________________________________
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
______________________________________________________________________________
The following discussion should be read and reviewed in conjunction
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Form 10-KSB for the year ended December
31, 1997.
Overview
Total assets of Abigail Adams National Bancorp, Inc. and subsidiary (the
"Company") were $133,372,000 at September 30, 1998 as compared to $131,239,000
at December 31, 1997. Total assets at September 30, 1998 increased by
$2,133,000 from December 31, 1997 predominantly due to an increase in short
term investments. Total deposits increased by $1,678,000 during the same
period to $113,939,000 at September 30, 1998, due primarily to increases in
demand deposit, NOW, and money markets accounts offset by planned decreases
in large certificates of deposits.
The Company reported net income for the first nine months of 1998 of
$323,000, or $0.20 per share, for an annualized return on average assets of
.33% and an annualized return on average equity of 3.28%. Net income for the
third quarter of 1998 was $700,000, an increase of 186% from June 30, 1998.
Net income for the first nine months of 1997 was $819,000 or $0.50 per share,
with a return on assets of .96% and a return on equity of 8.21%.Compared to
the first nine months of 1997, net income declined 60.6%. Income taxes of
$197,000 for the first nine months of 1998 reflects a 63% decrease over the
comparable 1997 period. Increases in net interest income and other income
were offset by increases in legal fees and salary expense. The legal
expense was incurred by previous management in the law suit against three
directors and other shareholders, which was later dismissed, and in the suit
filed by two minority shareholders. Salary expense increased due to the
severance payments paid under an employment contract and severance agreements
to seven former employees.
Analysis of Net Interest Income
Net interest income, the most significant component of the Company's
earnings, increased by $866,000, or 21%,to $5,076,000 for the first nine
months of 1998, as compared to $4,210,000 for
<PAGE>
the comparable 1997 period. Average earning assets for the first nine months
of 1998 of $121,501,000 increased by $14,661,000, or 13.7%, over the
comparable 1997 period. The increase in net interest income resulted from
increased earning assets and the collection of interest on nonaccrual loans
for the current period. The net interest spread for the first nine months of
1998 of 4.02% and a net interest margin of 5.35% for the same period,
reflected increase of 14 basis points and 7 basis points, respectively, from
the prior year.
Other Income
Total other income increased by approximately $167,000, or 19%, to
$1,063,000 for the first nine months of 1998, primarily due to increased
income recognized on ATM transactions and the recovery of prior year legal
expense on charged off loans.
Other Expense
Salaries and benefits of $2,647,000 for the first nine months of 1998
increased by $1,019,000 or 62.6%, over the first nine months of 1997, due
primarily to payments of the severance agreements and employment contracts of
the seven former management employees. Net occupancy expense of $906,000 for
the first nine months of 1998 reflects an increase of $175,000, or 24%, from
one year earlier due both to the opening of the new branch during 1997 and
additional depreciation associated with office renovations and technology
investments. Professional fees of $780,000 for the first nine months of 1998
increased by $557,000 from one year earlier, due primarily to legal expenses
associated with the lawsuits against three directors and other shareholders of
the Company. Data processing expense of $426,000 for the first nine months of
1998 increased by $76,000 over the prior year due to the conversion costs
associated with changing data processors to be Year 2000 compliant, increased
activity levels and item charges, as well as, other Year 2000 compliance
costs. Other operating expense of $885,000 for the first nine months of 1998
reflects an increase of $62,000 over the prior year due primarily to increases
in advertising, public relations, printing, and regulatory fees.
Income Tax Expense
Income tax expense of $197,000 for the first nine months of 1998
reflects a decrease of $336,000 over the $533,000 tax expense recorded one
year earlier due to a decrease in pretax income. The Company's effective tax
rate for the first nine months of 1998 was 38% as compared to 39% for the
first nine months of 1997.
Analysis of Loans
The loan portfolio at September 30, 1998 of $85,469,000 increased by
$155,000 or .18%, as compared to the December 31, 1997 balance of $85,314,000.
New loans of $13,493,000, exclusive of short-term loans and lines of credit,
were originated in the first nine months of 1998. Loan principal payments of
$12,519,000 offset this increase. The loan to deposit ratio at June 30, 1998
was 74.1% as compared to 76% at December 31, 1997. On average, the loan to
deposit ratio for the first nine months of 1998 was 73%, as compared to 82%
during the comparable period of the prior year. The Bank has not experienced
any deterioration in its loan portfolio as a result of the Year 2000 issue.
Management will continue to monitor its loan portfolio for deterioration
associated with
<PAGE>
borrower's inability to be Year 2000 compliant.
Loan concentrations at September 30, 1998 and December 31, 1997 are
summarized as follows:
<TABLE>
Loan Concentrations
At September 30, 1998 and December 31, 1997
Sept 30, Dec 31,
1998 1997
_______ _______
<S> <C> <C>
Service industry 34% 34%
Real estate development/finance 30 31
Wholesale/retail 24 23
Other 12 12
_______ _______
Total 100% 100%
======= =======
</TABLE>
Analysis of Investments
Securities available for sale totaling $22,498,000 matured during the
first nine months of 1998 as compared to purchases of $17,359,000 during the
same period. These securities transactions coupled with scheduled
amortization and accretion for the first nine months accounted for the
$5,591,000 decrease in the available for sale portfolio to $14,862,000 at
September 30, 1998 as compared to $20,453,000 at December 31, 1997. Long-term
investment purchases of $7,003,000 partially offset by maturities totaling
$6,503,000 and normal pay downs on mortgage-backed and other amortizing
securities, account for the $501,000 decrease in long-term investments to
$8,009,000 at September 30, 1998 from $7,509,000 at December 31, 1997.
Short term investments increased $9,150,000 from December 31, 1997 to
$17,381,000, primarily due to proceeds from maturing investment securities
that were not reinvested in similar investments.
Noninterest-Earning Assets
Cash and due from banks of $5,457,000 at September 30, 1998 decreased by
$2,197,000 from the December 31, 1997 balance of $7,654,000. This decrease is
due to the investment of previously unearning deposits and fluctuations in
cash in the normal course of business for the Bank.
Deposits
Total deposits of $113,939,000 at September 30, 1998 increased by
$1,677,000, or 1.5%, from the December 31, 1997 balance of $112,261,000.
Demand deposits of $32,887,000 at September 30, 1998 reflect a $5,703,000, or
21%, increase from the $27,184,000 balance at December 31, 1997, due
principally to growth in the deposits of the Company's new branches, as well
as, normal fluctuations in the deposits of some of the Company's large
corporate customers. Normal fluctuations in the deposits of both personal and
nonprofit accounts make up a significant portion of the $448,000 increase in
NOW accounts to $10,329,000 at September 30, 1998, as
<PAGE>
compared to $9,881,000 at December 31, 1997. Money market accounts of
$28,234,000 at September 30, 1998 increased by $1,264,000 from the
$26,970,000 balance reported at December 31, 1997, due primarily to normal
fluctuations in the balances of some of the Company's large corporate
customers. Certificates of deposit at September 30, 1998 of $40,142,000
decreased by $6,186,000 from the $46,328,000 balance at December 31, 1997,
with certificates of deposit $100,000 and over decreasing by $3,901,000 and
certificates of deposit under $100,000 decreasing by $2,285,000. The decrease
in certificates of deposit over $100,000 is primarily due to decreases in both
brokered deposits and collateralized government deposits.
Average noninterest-bearing demand deposits for the first nine months of
1998 of $32,024,000 increased by $8,118,000, or 34%, from the comparable 1997
period, while average interest-bearing deposits increased by $9,774,000 during
the same period to $81,956,000. For the first nine months of 1998, average
NOW accounts of $10,822,000 increased by $3,360,000, and average money market
deposits $27,184,000 increased by $3,323,000 over the prior ear's average
balance. Average certificates of deposit $100,000 and over decreased slightly
to $21,407,000 for the first nine months of 1998, as compared to the first
nine months of 1997. Average certificates of deposit under $100,000 for the
first nine months of 1998 of $20,336,000 increased by $2,475,000 over the
comparable period of the prior year. Average noninterest-bearing deposits to
average total deposits during the first nine months of 1998 represent 39% as
compared to 33% one year earlier.
Asset Quality
Loan Portfolio and Adequacy of Allowance for Loan Losses
The Company 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. As part of the underwriting process,
commercial borrowers must indicate in writing that they are aware of the Year
2000 issue and are either Year 2000 compliant or in the process of becoming
Year 2000 compliant. 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.
Net recoveries during 1997 added to the level of available reserves.
However, strong loan growth during 1997, coupled with a more conservative
allocation of the loan loss reserves to nonclassified commercial and real
estate loans resulted in a decrease in the unallocated portion of the
allowance for loan losses at December 31, 1997 as compared to earlier periods.
During the first quarter of 1998, the Abigail Adams National Bancorp, Inc.,
the
parent company, down streamed $2,000,000 in capital to its wholly-owned
subsidiary, The Adams National Bank (the "Bank"), thus enabling the Bank to
repurchase loan participations from the Company on which the Company
maintained
a $25,000 loan loss reserve. As a result, during the first quarter of 1998,
with loans no longer outstanding at the parent company and with an increasing
unallocated balance in the Bank's allowance for loan losses, the parent
company reversed the $25,000 loan loss reserve recorded on its books.
Throughout this process, the Company 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 $1,114,000 at September 30, 1998 to be
<PAGE>
adequate.
At September 30, 1998, the allowance for loan losses as a percentage of
outstanding loans was 1.30% as compared to 1.34% at December 31, 1997.
<TABLE>
Allocation of Allowance for Loan Losses
At September 30, 1998 and December 31, 1997
(In thousands)
September 30, December 31,
1998 1997
_______________________ _____________________
Reserve % of loans Reserve % of loans
Amount to total loans Amount total loans
_______ ______________ _______ ___________
<S> <C> <C> <C> <C>
Specific Reserves:
Commercial $99 8.9% $ 8 .7%
Commercial Real Estate 24 2.1 256 22.4
General Reserves:
Commercial 375 33.7 261 22.9
Commercial Real Estate 372 33.4 268 23.4
Consumer 60 5.4 75 6.6
Loan Commitments 21 1.9 39 3.4
Unallocated 163 14.6 235 20.6
_______ _______ ______ ______
Total $ 1,114 100.0% $1,142 100.0%
======= ======= ====== ======
</TABLE>
<PAGE>
Transactions in the allowance for loan losses for the nine months ended
September 30, 1998 and 1997 are summarized as follows:
<TABLE>
Transactions in the Allowance for Loans Losses for the
Nine Months Ended September 30, 1998 and 1997
(In thousands)
1998 1997
______ ______
<S> <C> <C>
Balance at January 1 $1,142 $1,048
Benefit (25)
Recoveries:
Commercial 20 105
Real estate - mortgage 13 35
Installment to individuals 78 13
______ ______
Total recoveries 111 153
Loans charged off:
Commercial (59) (3)
Installment to individuals (55) (75)
______ ______
Total charge-offs (114) (78)
______ ______
Net recoveries (charge-offs) (3) 75
______ ______
Balance at June 30 $ 1,114 $1,123
====== ======
Ratio of net recoveries (charge-offs)
to average loans (1) 0.05% 0.13%
====== ======
</TABLE>
__________________
(1) Ratio of net charge-offs to average loans is computed on an annualized
basis for the nine months ended September 30, 1998 and 1997.
Nonperforming Assets
Nonaccrual loans at September 30, 1998 of $390,000 decreased by $21,000
from the $411,000 reported at December 31, 1997. Nonaccrual loans at
September 30, 1998 include loans guaranteed by the U.S. Small Business
Administration ("SBA") totaling $62,000. 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. Loans past due 90 days or more
decreased to $28,000 at September 30, 1998 from $103,000 at December 31, 1997,
due principally to transfers to nonaccrual status.
<PAGE>
<TABLE>
Analysis of Nonperforming Assets
At September 30, 1998 and December 31,1997
(In thousands)
September 30, December 31,
1998 1997
_____________ ____________
<S> <C> <C>
Nonaccrual loans:
Commercial $ 23 $ 411
Real estate - commercial mortgage 89
Installment - individuals 278
____ ____
Total nonaccrual loans (1) 390 411
____ ____
Past due loans:
Commercial --
Real estate - commercial mortgage -- 96
Credit Cards 28
Installment - individuals -- 7
Total past due loans 28 103
Restructured loans:
Commercial --
Total restructured loans --
Total nonperforming assets $ 418 $ 514
===== =====
Total nonperforming assets exclusive
of SBA guaranteed balances $ 368 $ 420
===== =====
Ratio of nonperforming assets
to gross loans plus foreclosed properties (2) .49% .60%
Ratio of nonperforming assets to total
assets (2) .31% .39%
Percentage of allowance for loan losses to
nonperforming assets (2) 266.6% 222.2%
</TABLE>
____________________________
(1) Nonaccrual loans include $62,000 and $104,000 in loans guaranteed by
the SBA at September 30, 1998 and December 31, 1997, respectively. The
outstanding balance of these loans are insured for 80%, or $50,000 and
90%, or $94,000, respectively.
(2) Ratios include SBA guaranteed loan balances.
Potential Problem Loans
At September 30, 1998 and December 31, 1997, respectively, loans totaling
$1,237,000 and $1,154,000 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.
Interest Sensitivity
Through the Bank's Asset/Liability Investment Committee, sensitivity of
net interest income
<PAGE>
to fluctuations in interest rates is considered through analysis of the
interest sensitivity positions of major asset and liability categories. A
rate sensitivity position is computed for various repricing intervals by
calculating rate sensitivity gaps. In these rate sensitivity positions,
interest earning assets and interest bearing liabilities are distributed based
on their repricing opportunities, giving consideration to projected prepayment
patterns, historical relationships to changes in market interest rates, or
call dates of securities in light of current market interest rates. Rate
sensitivity gaps constantly change as funds are acquired and invested. As a
result of inherent limitations in this type of analysis, the Company does not
necessarily attempt to maintain a matched position for each time frame. To
augment this analysis, the Company also prepares an analysis of the effect on
net interest income if all market rates were to uniformly increase or decrease
by 1%, 2% and 3% as compared to the results of a flat interest rate
environment. Based on the Company's interest sensitivity position and the
analyses performed on the effect of interest rate movements at September 30,
1998 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 $22,654,000 in cash and short-term investments at September 30,
1998, the Company has a securities portfolio which can be pledged to raise
additional deposits and borrowings, if necessary. At September 30, 1998, the
Company had $5,272,000 in unpledged securities which were available for such
use. As a percentage of total assets, the amount of these cash equivalent
assets at September 30, 1998 and December 31, 1997 was 21% and 18%,
respectively. Normal fluctuations in the deposit levels of some of the
Company's large corporate customers resulted in corresponding fluctuations in
the Company's liquidity position (short-term investments). The 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 81% of average total deposits for the nine months ended
September 30, 1998 and 71% of average total deposits for the nine months ended
June 30, 1997. In addition, the Bank has unsecured lines of credit from
correspondent financial institutions which can provide up to an additional
$2,000,000 in liquidity, as well as, access to other collateralized borrowing
programs. The Company maintained an average loan to deposit ratio of 76% and
82% for the first nine months of 1998 and 1997 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 Bank is eligible to borrow up to approximately
$1,606,000 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 September 30, 1998, $1,038,000 in borrowings from
the FHLB were outstanding.
<PAGE>
The Bank is eligible to increase the maximum amount to be borrowed by
$7,962,000 with the purchase of up to $63,900 in additional stock in the FHLB.
The Company has adequate resources to meet its liquidity needs.
Increases in deposit levels and the repayment and maturity of loans and
investment securities comprise the majority of the Company's net cash inflows
from financing activities for the first nine months of 1998. Loan
originations, the purchase of investment securities, and maturing time
deposits, during the first nine months of 1998 constitute the majority of the
Company's cash outflows from investing activities.
Stockholders' Equity
Stockholders' equity at September 30, 1998 of $13,214,000 increased by
$184,000 from December 31, 1997. The net income of $323,000 for the first nine
months of 1998 combined with stock options exercised in the amount of
$144,000 and an unrealized gain on investment securities of $49,000, offset by
the dividends declared in the first and third quarters of $331,000, accounted
for the increase. Average stockholders' equity as a percentage of average
total assets for 1998 was 10.03% as compared to 11.69% for the comparable
prior year period.
Under the risk based capital guidelines issued by the Federal Reserve
Board and the Comptroller of the Currency, total capital consists of core
capital (Tier 1) and supplementary capital (Tier 2). For the Company and the
Bank, Tier 1 capital consists of stockholders' equity, excluding unrealized
gains and losses on securities, and Tier 2 capital consists of long-term debt
and a portion of the allowance for loan losses. Assets include items both on
and off the balance sheet, with each item being assigned a "risk-weight" for
the determination of the ratio of capital to risk- adjusted assets. These
guidelines require a minimum of 8% total capital to risk-adjusted assets, with
at least 4% being in Tier 1 capital. At September 30, 1998, the Company's
total risk-based capital ratio and Tier 1 capital ratio of 14.24% and 13.13%,
respectively, met the regulatory definition of "well-capitalized." Under
regulatory guidelines, an institution is generally considered
"well-capitalized" if it has a total risk-based capital ratio of 10% or
greater, a Tier 1 capital ratio of 6% or greater and a leverage ratio of 5% or
greater (discussed below). The Company's September 30, 1998 ratios are based
on total capital of $14,293,000, Tier 1 capital of $13,179,000 and risk
adjusted assets of $100,407,000. At September 30, 1998, the Bank's total
risk-based capital ratio and Tier 1 capital ratio of 12.58% and 11.46%,
respectively, also met the definition of "well-capitalized." The September
30, 1998 ratios for the Bank are based on total capital of $12,524,000, Tier 1
capital of $11,410,000 and risk-adjusted assets of $99,552,000.
The Federal Reserve Board and the Comptroller of the Currency have also
adopted a minimum leverage ratio of Tier 1 capital to total assets which is
intended to supplement the risk-based capital guidelines. The minimum Tier 1
leverage ratio is 3% for the most highly rated institutions which meet certain
standards. For other banks and bank holding companies, the guidelines provide
that the Tier 1 leverage ratio should be at least 1% to 2% higher. At
September 30, 1998, the Company's and the Bank's Tier 1 leverage ratios based
on annual average assets of
<PAGE>
$130,679,000 and $129,880,000 were 10.01% and 7.97%, respectively, meeting the
regulatory definition of "well-capitalized."
Factors Affecting Future Results
In addition to historical information, this Form 10-QSB includes certain
forward looking statements based on current management expectations which
involve risks and uncertainties such as statements of the Company's plans,
expectations and unknown outcomes. The Company'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 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, uncertainties with respect to costs which the Company may
incur as result of litigation against the Company, Director Marshall T.
Reynolds and certain related stockholders brought by two minority
shareholders, changes in accounting principles, policies or guidelines, and
other economic, competitive, governmental and technological factors affecting
the Company's operations, markets, products, services and prices.
<PAGE>
PART II.
Item 1 - Legal Proceedings
Although the 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 the Company or the Bank is a party or to which any of
their property is subject, except for the matters discussed below.
On December 12, 1997, the Company commenced an action against three
directors, Marshall Reynolds, Jeanne Hubbard and Robert Shell, Jr., and
certain other shareholders, in United States District Court for the District
of Columbia seeking relief in various counts to enjoin the defendants from
voting their shares at the shareholders meeting scheduled to vote on the
acquisition of Ballston Bancorp, Inc., and for other relief. That complaint,
in various counts, alleged that the defendants had violated federal securities
laws by inter alia, failing to file a complete and accurate Schedule 13D, and
soliciting of shareholder proxies unlawfully by failing to file proxy
solicitation material with the Securities and Exchange Commission. The
complaint also alleged that the director defendants breached their fiduciary
duties by opposing the acquisition after they had voted for it agreeing to use
their best efforts to bring it to fruition and caused the Company to enter
into a binding definitive agreement with Ballston. On December 16, 1997, the
District Court denied the Company's motion for a preliminary injunction and,
as described elsewhere, a majority of the shareholders voted against the
acquisition. Subsequently, on January 23, 1998, the Company filed an amended
complaint against the same defendants, and joined Ferris, Baker, Watts, Inc.,
an investment banking firm, alleging that it also participated in an unlawful
solicitation of proxies.
On May 4, 1998, the Company discontinued this action by the filing of a
Notice of Dismissal without prejudice. The directors put previous management
on notice that to the best of their belief and knowledge, they were entitled
to indemnification for their legal expenses in defending themselves in this
lawsuit. During the second quarter of 1998, $240,000.00 was escrowed in
professional fees for the indemnification of these expenses.
On May 29, 1998 a suit was filed in The Court of Chancery of the State of
Delaware by Rose Z. Thorman and Martha Burke as custodian for Holly McMackin,
Jake McMackin, Ashtyn Talley and Casey Talley against Marshall T. Reynolds,
Jeanne D. Hubbard, Robert H. Shell, Jr. and Ferris Baker Watts, defendants,
and Abigail Adams National Bancorp, Inc., Nominal Defendant asserting claims
for individual, derivative and class action for: (1) breach of fiduciary
duties of loyalty and disclosure; (2) aiding and abetting breach of fiduciary
duties; and (3) tortious interference with economic and contractual relations.
The Company has hired Delaware counsel and intends to vigorously defend this
suit. A motion to dismiss this suit was filed on or before July 31, 1998 and
all filings regarding this motion are complete. The Company is awaiting the
judge's ruling on the Motion to Dismiss.
On June 8, 1998 a suit was filed in United States District Court,
District of Delaware by Rose Z. Thorman, and Martha Burke, individually and as
custodian for Holly McMackin, Jake McMackin, Ashtyn Talley and Casey Talley,
Plaintiffs against Abigail Adams National Bancorp, Inc. a Delaware
<PAGE>
Corporation, Nominal Defendant, and Marshall T. Reynolds, Jeanne D. Hubbard,
Robert L. Shell, Jr. and Ferris Baker Watts, Incorporated, a Delaware
Corporation, Defendants asserting claims under 15 U.S.C. Sec. 78n(a) - Action
of violations of 14(a) resulting from defendants': (1) solicitations of
proxies without filing proxy statements with the SEC; (2) failure to provide
persons solicited with proxy statements concurrent or in advance of
the solicitation; and (3) solicitations containing false or misleading
statements of material facts. The Company has hired Delaware counsel and
intends to vigorously defend this suit. Counsel for the plaintiffs has
entered into a stipulation agreement to extend the time for answering, moving
or otherwise pleading in this case until the Chancery Court has ruled upon the
motions to dismiss filed in these cases in court.
On July 22, 1998, Thomas O. Griel, a former executive officer of the
Bank filed a suit in the District of Columbia District Court alleging wrongful
termination and requesting $2 million in damages from the Bank and its former
President and CEO. The Company believes that the suit is without merit and
will vigorously defend it. The Bank is covered by insurance and the insurance
company has been notified of this suit.
On October 26, 1998, the Bank was served with notice of a second suit
filed against the Bank by Thomas O. Griel, a former executive officer of the
bank alleging that officers of the bank are thwarting his efforts to organize
a new bank and defaming his character and requesting $2 million in damages.
The Company believes that the suit is without merit and will vigorously defend
it. The Bank is covered by insurance and the insurance company has been
notified of this suit.
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to Vote of Security Holders
The Company dud not conduct a solicitation of its security holders during
the period under report.
Item 5 - Other Matters
On December 30, 1997, Mr. Reynolds and certain related stockholders (the
"Reynolds Group") filed an amendment to their report of beneficial ownership
on Schedule 13D originally filed on May 1, 1995 and subsequently amended,
which amendment stated, among other things, that the
<PAGE>
Reynolds Group may seek to effect a change in the composition of the Board of
Directors of the Company. Subsequently, on March 11, 1998, Mr. Reynolds, his
wife and two other director/stockholders, Jeanne D. Hubbard and Robert L.
Shell, Jr., filed a preliminary consent solicitation statement with the
Securities and Exchange Commission, relating to their proposed solicitation of
consents for the removal of four directors - Barbara Davis Blum, Clarence L.
James, Jr., Shireen L. Dodson and Susan Hager - and the election of four new
directors - A. George Cook, Marianne Steiner, Bonita Wilson and Joseph L.
Williams - to fill the vacancies created by the removal of the four directors.
The Reynolds Group also filed another amendment to Schedule 13D on March 11,
1998 relating to the efforts to effect the change in the membership of the
Board of Directors of the Company. Both the preliminary consent solicitation
statement and the amendment to Schedule 13D stated that it is the intent of
the Reynolds Group to request the nonparty directors to dismiss the lawsuit
(described in Item 1) upon a change of control. On May 4, 1998 this lawsuit
was dismissed by previous management and the existing board of the bank. On
May 18, 1998, the Reynolds Group delivered sufficient consents to the Company
to effect the removal of the four directors and the election of the four new
directors. On May 19, 1998 at a regularly scheduled Board of Directors
Meeting Jeanne D. Hubbard was elected Chairwoman, President and CEO of the
Company. At this same meeting Jeanne D. Hubbard was elected Chairwoman and
CEO of the Bank and Kathleen Walsh Carr was elected President and COO of the
Bank. At the regularly scheduled Board Of Directors meeting on June 15, 1998
Michelle D. Bernard and Lynne M. Miller were elected to the Board of The Adams
National Bank. At the regularly scheduled meeting of the Board of Directors
on September 15, 1998 Carl Hecht was elected to the Board of The Adams
National Bank.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
___________ ______________________
13 Abigail Adams National Bancorp, Inc. Financial Summary for
September 30, 1998
27 Financial Data Schedule
(b) On May 22, 1998, the Company filed a report on Form 8-K(earliest event
reported May 22, 1998)reporting that the resignation of three directors
pursuant to Item 6. Resignations of the Registrant's Directors.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
ABIGAIL ADAMS NATIONAL BANCORP, INC.
___________________________________
Registrant
Date: November 12, 1998 /s/Jeanne D. Hubbard
_________________ ____________________
Jeanne D. Hubbard
Chairwoman of the Board,
President and Director
Principal Executive Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5458
<INT-BEARING-DEPOSITS> 4281
<FED-FUNDS-SOLD> 13,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,862
<INVESTMENTS-CARRYING> 8,009
<INVESTMENTS-MARKET> 8,065
<LOANS> 85,469
<ALLOWANCE> 1,114
<TOTAL-ASSETS> 133,372
<DEPOSITS> 113,939
<SHORT-TERM> 3,528
<LIABILITIES-OTHER> 1,653
<LONG-TERM> 1,038
<COMMON> 12,348
0
0
<OTHER-SE> 866
<TOTAL-LIABILITIES-AND-EQUITY> 133,372
<INTEREST-LOAN> 6405
<INTEREST-INVEST> 1,667
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8072
<INTEREST-DEPOSIT> 2801
<INTEREST-EXPENSE> 2995
<INTEREST-INCOME-NET> 5076
<LOAN-LOSSES> (257)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5644
<INCOME-PRETAX> 323
<INCOME-PRE-EXTRAORDINARY> 323
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 323
<EPS-PRIMARY> .20
<EPS-DILUTED> .41
<YIELD-ACTUAL> 5.35
<LOANS-NON> 390
<LOANS-PAST> 28
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1142
<CHARGE-OFFS> 114
<RECOVERIES> 111
<ALLOWANCE-CLOSE> 1114
<ALLOWANCE-DOMESTIC> 1114
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 163
</TABLE>
