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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to ___________
Commission file number 0-10971
ABIGAIL ADAMS NATIONAL BANCORP. INC.
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(Name of small business issuer as specified in its charter)
Delaware 52-1508198
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1627 K Street, N.W., Washington, D C. 20006
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(Address of principal executive offices) (Zip Code)
(202) 466-4090
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(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.01 per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period as 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
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year $12,088,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the bid and asked prices of
such stock on the NASDAQ SmallCap Market as of March 29, 1999, was $13.8
million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of March 29, 1999 the Company had issued and outstanding 2,086,483 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders of
Abigail Adams National Bancorp, Inc., to be filed with the Securities and
Exchange Commission on or before April 30, 1999, are incorporated herein by
reference in Part III of this Annual Report on Form 10-KSB.
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PART I
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Item 1. Business
General
Abigail Adams National Bancorp, Inc. (the "Company") is a Delaware-
chartered bank holding company which conducts business through its wholly-owned
bank subsidiary, The Adams National Bank (the "Bank"). The Bank serves the
nation's capital through five full-service offices located in Washington, D.C.
The Company is subject to regulation by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The Company's assets consist
primarily of shares of the Bank's common stock and cash it receives from the
Bank in the form of dividends or other capital distributions. At December 31,
1998, the Company had consolidated assets of $128,881,000, deposits of
$108,665,000 and stockholders' equity of $13,599,000. The Bank exceeds all
applicable regulatory capital requirements. See "Supervision and Regulation."
The Bank was founded in 1977 as a national bank. Its deposits are federally
insured to the maximum amount permitted by law.
The executive office of both the Company and the Bank is located at 1627 K
Street, N.W., Washington, D.C. 20006. The telephone number is (202) 466-4090.
Market Area
The Bank draws most of its customer deposits and conducts most of its
lending activities from and within the Washington, D.C. 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 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.
Services of the Bank
The Bank is a community oriented financial institution offering a full
range of banking services to its customers. The Bank attracts deposits from the
general public and historically has used such deposits, together with other
funds to provide a broad level of commercial and retail banking services in
Washington, D.C. and the surrounding communities.
The services offered by the Bank can be broadly characterized as being
commercial or retail in nature. Commercial services offered by the Bank include
offering a variety of commercial real estate and commercial business loans, cash
management services, letters of credit and collateralized repurchase agreements.
Commercial business loans are typically made on a secured basis to corporations,
partnerships and individual businesses. To a lesser extent, the Bank offers
consumer loans to its retail customers. The Bank's retail banking services also
include offering a variety of deposit account products including transaction
accounts, money market accounts, certificates of deposit and Individual
Retirement Accounts. The Bank uses funds it has on hand as well as borrowings
in order to fund its lending and investment activities.
The Bank has automated teller machine access to the MOST and CIRRUS
systems. The Bank also offers its customers computer banking and 24 hour
telephone banking services, VISA credit card services and custodial services.
Lending Activities
The Bank provides a range of commercial and retail lending services to
individuals, small to medium-sized businesses, professional corporations,
nonprofit organizations and other organizations. These services include, but are
not limited to, commercial business loans, commercial real estate loans,
renovation and mortgage loans, loan
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participations, consumer loans, revolving lines of credit and letters of credit,
with an emphasis on commercial real estate lending. Consumer lending primarily
consists of automobile, home equity and personal loans made on a direct, secured
basis. Real estate loans are originated for both commercial and consumer
purposes. To a lesser extent, the Bank originates one-to-four family mortgage or
residential loans and construction loans. The Bank offers loans which have fixed
rates as well as loans with rates which adjust periodically. At December 31,
1998, approximately 72% of the Bank's total loan portfolio was comprised of
loans with adjustable rates.
The Bank provides financing to nonprofit organizations for construction and
renovation of local headquarters, working capital lines of credit and equipment
financing. Current nonprofit customers of the Bank include organizations which
focus on issues relating to children's rights, community housing, education and
health care. At December 31, 1998, commercial and real estate loans to these
customers totaled $2,279,257.
Commercial and real estate lending is performed by the Bank's Lending
Division, which is comprised of five loan officers and a credit analyst. The
Treasury Division includes the Loan Operations' staff of five, who are
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 credit analysis computer program, which provides not
only the flexibility necessary to analyze loans but also the structure to ensure
that all documentation requirements are appropriately met.
Policies and procedures have been established by the Bank to promote safe
and sound lending. Loan officers have individual lending authorities based on
the individual's 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 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
$500,000. Loans over $250,000 on an unsecured basis and over $500,000 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 existing loans, reviews past due loans and
approves the charge-off of loans.
Loan Portfolio Composition. The following information concerning the
composition of the Bank's loan portfolio in dollar amounts is presented (before
deductions for allowances for losses) as of the dates indicated.
At
December 31,
1998 1997
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Commercial.................................... $23,094,000 $20,254,000
Real Estate:
Commercial mortgage........................ 43,924,000 41,730,000
Residential mortgage....................... 20,190,000 17,531,000
Construction or development................... 5,154,000 3,498,000
Installment to individuals.................... 2,069,000 2,569,000
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Total Loans: 94,431,000 85,582,000
Less: Deferred income and unearned discounts.. (211,000) (268,000)
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Total, net................................. $94,220,000 $85,314,000
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Commercial Business Lending
The 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 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 one year to three years. These loans often require that borrowers maintain
certain levels of deposits with the 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. The primary repayment risk for
commercial loans is the failure of the business due to economic or financial
factors. As of December 31, 1998, commercial loans totaled $23,094,000.
The Bank also offers SBA-guaranteed loans which provide better terms and
more flexible repayment schedules than conventional financing. As lending
requirements of small businesses grow to exceed the Bank's lending limit, the
Bank has the ability to sell participations in these larger loans to other
financial institutions. The Bank believes that such participations will help to
preserve lending relationships while providing a high level of customer service.
At December 31, 1998, SBA-guaranteed loans totaled $3,745,000.
Real Estate Lending
At December 31, 1998, the Bank's real estate loan portfolio consisted of
commercial real estate mortgages totaling $43,924,000, and residential real
estate mortgages totaling $20,190,000. The majority of these loans have
adjustable rates. Commercial real estate loans are generally for terms of five
years and amortize over a 15- and 25-year period. Commercial real estate loans
are generally originated in amounts up to 75% loan to value of the underlying
collateral.
The majority of the $5,154,000 in loans classified as construction and land
development loans at December 31, 1998 are primarily for construction and
renovation of commercial real estate 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 involves 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 commercial property and multi-family residential units. To
minimize these risks, the 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 Bank. It is the Bank's current practice to obtain personal
guarantees and current financial statements from all principals obtaining
commercial real estate loans. The Bank also obtains appraisals on each property
in accordance with applicable regulations.
Consumer Lending
The Bank's consumer lending includes loans for motor vehicles, home
improvement, home equity, small personal credit lines and credit card
borrowings. 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
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and state laws, including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered. In underwriting consumer loans, the
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.
At December 31, 1998, consumer loans totaled $2,069,000.
Delinquencies and Classified Assets
Collection Procedures. Outstanding loans are reviewed on a weekly basis.
When a loan becomes 10 days past due, loan officers attempt to contact the
borrower. Generally, loans that are 30 days delinquent will receive a default
notice from the Bank. With respect to consumer loans, the Bank will commence
efforts to repossess the collateral after the loan becomes 30 days delinquent.
Generally, after 90 days the Bank will commence legal action.
Loans Past Due and Nonperforming Assets. Loans are reviewed on a regular
basis and are placed on nonaccrual status when, in the opinion of management,
the collection of additional interest is doubtful. Loans are placed on
nonaccrual status when either principal or interest is 90 days or more past due.
Interest accrued and unpaid at the time a loan is placed on a nonaccrual status
is reversed from interest income. At December 31, 1998, the Bank had
nonperforming loans of $431,000 and a ratio of nonperforming loans to total
assets of .46%.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio and current economic conditions. Such evaluation
also includes a review of all loans on which full collectibility may not be
reasonably assured, considers among other matters, the estimated net realizable
value or the fair value of the underlying collateral, economic conditions,
historical loan loss experience, geographic concentrations and other factors
that warrant recognition in providing for an adequate loan loss allowance. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses and valuation
of other real estate owned. Such agencies may require us to recognize additions
to the allowance based on their judgment about information available to them at
the time of their examination. At December 31, 1998, the total allowance was
$1,134,000, which amounted to 1.2% of total loans and 262% of nonperforming
loans. Management considers whether the allowance should be adjusted to protect
against risks in the loan portfolio. Management will continue to monitor and
modify the level of the allowance for loan losses in order to maintain it at a
level which management considers adequate to provide for potential loan losses.
For the year ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans of $295,000 been current in
accordance with their original terms amounted to $32,000. The amounts that were
included in interest income on such loans was $0 for the year ended December 31,
1998. For further information regarding the Bank's allowance for loan losses
and asset quality see "Management's Discussion and Analysis of Financial
Condition and Results of Operations- Asset Quality" in the Annual Report to
Shareholders and Note 4 to the Notes to the Consolidated Financial Statements.
Investment Activities
The Bank's investment portfolio consists of short-term U.S. Treasury
securities and obligations of U.S. Government agencies and corporations. At
December 31, 1998, U.S. Treasury securities totaled $4,009,000, of which
$1,007,000 were classified as available for sale. At that date, investments in
obligations of U.S. Government agencies and corporations totaled $16,806,000 of
which $12,806,000 were classified as available for sale. Total investment
securities were $21,789,000 at December 31, 1998. For further information
regarding the Bank's investments see "Management's Discussion and Analysis of
Financial Condition and Results of Operations- Analysis of Investments" in the
Annual Report to Shareholders.
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Deposits
The Bank offers a variety of deposit accounts with a range of interest
rates and terms. The flow of deposits is influenced by a variety of factors
including general economic conditions, changes in market rates, prevailing
interest rates and competition. The Bank relies on competitive pricing of its
deposit products and customer service to attract and retain deposits, however
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits.
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Bank as of the dates indicated.
December 31,
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1998 1997
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Amount Percent Amount Percent
-------- -------- -------- --------
(Dollars in Thousands)
Demand deposits.................. $ 31,058 28.6% $ 27,184 24.2%
Savings accounts................. 2,798 2.6 1,899 1.7
NOW accounts..................... 9,499 8.7 9,881 8.8
Money market accounts............ 26,207 24.1 26,969 24.0
-------- ----- -------- -----
Total non-certificates........... 69,562 64.0 65,933 58.7
-------- ----- -------- -----
Total certificates............... 39,103 36.0 46,328 41.3
-------- ----- -------- -----
Total deposits................... $108,665 100.0% $112,261 100.0%
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The following table shows weighted average rate and maturity information
for the Bank's certificates of deposit as of December 31, 1998.
Certificate accounts maturing in Weighted
- -------------------------------- Total Average Percent of
quarter ending: Balance Rate Total
- -------------- ---------- ---------- ----------
(Dollars in Thousands)
Less than 3 months.................. $ 14,980 5.23% 38.3%
More than 3 months.................. 11,191 5.04 28.6
More than 6 months.................. 11,065 5.21 28.3
More than 1 year.................... 1,544 5.46 4.0
More than 3 years................... 323 6.20 .8
More than 5 years................... -- -- --
---------- ---------- ----------
Total........................... $ 39,103 5.19% 100.0%
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The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1998.
Maturity
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Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- -------- -------- --------- --------
(In Thousands)
Certificates of deposit less
than $100,000................. $ 7,692 $ 4,307 $ 7,798 $1,148 $20,945
Certificates of deposit of
$100,000 or more.............. 7,288 6,884 3,267 719 18,158
------- ------- ------- ------ -------
Total certificates of deposit.. $14,980 $11,191 $11,065 $1,867 $39,103
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/(1)/ Deposits from governmental and other public entities.
5
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Borrowed Funds
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and securities sold under agreements to repurchase for
the periods indicated. The Bank had no other borrowings outstanding at the date
indicated.
At December 31,
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1998 1997
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(In Thousands)
Maximum Balance:
- ---------------
FHLB advances..................... $1,086 $1,139
Securities sold under agreements
to repurchase.................... 4,899 5,048
Average Balance:
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FHLB advances..................... $1,052 $1,111
Securities sold under agreements
to repurchase.................... 3,920 2,724
The following table sets forth certain information as to the Bank's borrowings
at the dates indicated.
At December 31,
------------------------
1998 1997
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(In Thousands)
FHLB advances...................... $1,023 $1,086
Securities sold under agreements
to repurchase.................... 4,648 3,489
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Total borrowings................. $5,671 $4,575
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Weighted average interest rate of
FHLB advances.................... 6.99% 6.93%
Weighted average interest rate of
securities sold under agreements
to repurchase.................... 4.70% 4.95%
Competition
The Bank faces strong competition among financial institutions in
Washington, D.C., 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 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 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
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financial intermediaries operating in the Bank's market areas offer certain
services, such as trust, investment and international banking services, which
the Bank does not offer. Additionally, banks with 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 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 Bank is unable to accommodate a customer's needs, the Bank will
arrange for those services to be provided by its correspondents.
Employees
At December 31, 1998, the Company employed 53 people on a full time basis.
The employees are not represented by a union and management believes that its
relations with its employees are good.
Supervision and Regulation
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 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 the Company and the
Bank. The description does not purport to be complete and is qualified in its
entirety by reference to the applicable laws and regulations.
The Company
The Company, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Such
regulations include prior approval of Company affiliates and subsidiaries. The
Company 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 BHCA. The Federal Reserve Board may conduct
examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company 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, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA 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, the Company is required by
the Federal Reserve Board to maintain certain levels of capital.
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The Company 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 the Company and another bank holding company.
The Company is prohibited by the BHCA, 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, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in any activities, or acquire
shares of companies engaged in activities that are deemed by the Federal Reserve
Board to be so closer, 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 Bank
The 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 Bank, the OCC
should determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity or other aspects of the Bank's
operations are unsatisfactory or that the 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 any
violation of law or unsafe or unsound practice, to issue an administrative order
that can be judicially enforced, to direct an increase in capital, to restrict
the growth of the 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 Bank is not subject to any such actions by the OCC or the FDIC.
The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a semiannual
statutory assessment. Various other requirements and restrictions under the
laws of the United States affect the operations of the Bank. Federal statutes
and regulations relate to many aspects of the 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 Bank is required to maintain certain levels of
capital.
Restrictions on Transfers of Funds to the Company by the Bank
The Company is a legal entity separate and distinct from the Bank. The
Company's ability to pay cash dividends is limited by Delaware corporate law. In
addition, the prior approval of the OCC is required if the total of
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all dividends declared by the Bank in any calendar year exceeds the Bank'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.
The OCC also has authority to prohibit the 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 Bank or the Company may pay.
The 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, the Company 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 the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate is limited to 10% of the 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 Bank's capital and
surplus (as defined by federal regulations). Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law.
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, 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 secures, 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 FDIC regulations, an institution is
generally considered "well capitalized" if it has a total risk-based capital
ratio of at least 10%, a Tier I risk-based capital ratio of at least 6%, and a
Tier I 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.
9
<PAGE>
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 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 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% of $1
billion or more of the assets of such organization. Such an organization (unless
exempted by the banking regulators) and certain other banking organization
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, the Company 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 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
10
<PAGE>
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.
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.
Guidelines for asset quality and earnings standards will be adopted in the
future. 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. 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 2 basis points effective for the
semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such as
the Bank is categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three categories based
on supervisory evaluations by its primary federal regulator (in the 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. The Bank was not required to pay a deposit
insurance premium for 1998.
In addition to the payment of deposit insurance assessments, depository
institutions are required to make quarterly assessment payments to the FDIC on
their BIF assessable deposits, which will be paid FICO to enable it to pay
interest and certain other expenses on bonds which it issued pursuant to the
Financing 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, FICO, with the approval of the FDIC, establishes
assessment rates based upon estimates of (i) expected operating expenses, case
resolution expenditures and income of FICO; (ii) the effect of assessments upon
members' earnings and capital; and (iii) any other factors deemed appropriate by
it. Assessment rates for 1998 were set at 1.2 basis points annually for BIF-
assessable deposits, subject to quarterly review and adjustment.
11
<PAGE>
Community Reinvestment Act
The 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 bank operates. The OCC examines the 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.
Interstate Banking and Branching
Under the Riegel-Neal Interstate Banking and Branching Efficiency Act of
1994, as amended (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 BHCA to acquire an existing bank located in another
state generally without regard to state law prohibitions on such acquisitions. A
bank holding company, however, can 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 expand across state lines where
qualifying legislation adopted by certain states prior to that date prohibits
such interstate expansion. 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 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.
--------
Factors Affecting Future Results
In addition to historical information, this Form 10-KSB includes certain
forward looking statements that 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 management expectations.
Factors that could contribute to those differences 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, among other
things, the loss of eligibility for participation in government and corporate
programs for minority and women-owned banks, change in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices.
12
<PAGE>
Item 2. Properties.
The principal executive offices of the Company and the main office of the
Bank are located in leased space at 1627 K Street, N.W., Washington, D.C. 20006.
The Bank leases four other offices, located at 2905 M Street, N.W., Washington,
D.C. 20007; Union Station, 50 Massachusetts Avenue, N.E., Washington, D.C.
20002; 1604 17th Street, N.W., Washington, D.C. 20009 and 802 7th Street,:N.W.,
Washington, D.C. 20001. 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:
Location Expiration of Lease
--------------------------------------------------------------
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
In 1998, the Company and the Bank incurred rental expense on leased real
estate of approximately $582,000. The Company considers all of the properties
leased by the Bank to be suitable and adequate for their intended purposes.
Item 3. 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 matter discussed below.
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, Inc.,
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 is vigorously defending
this suit. A motion to dismiss this suit was filed on or before July 31, 1998
by the Company and the stockholders/directors. The Court of Chancery has
granted the plaintiffs leave to file an amended compliant. The plaintiffs have
agreed to dismiss Ferris Baker Watts, Inc. from the state action. The Company
is awaiting the judge's ruling on the Motion to Dismiss.
On June 8, 1998 a second suit was filed in United States District Court,
District Court 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 the Company, Nominal Defendant and Marshall T. Reynolds,
Jeanne D. Hubbard, Robert H. Shell, Jr. and Ferris Baker Watts, Inc. The
federal action is based on the same facts underlying the State action, and
asserts both derivative claims on behalf of the bank and individual claims on
behalf of the stockholders of the Bank. The complaint in the federal action
alleges that certain stockholders/directors of the Bank, and Marshall T.
Reynolds, Jeanne D. Hubbard, Robert H. Shell, Jr., as well as the investment
banking firm, Ferris Baker Watts, Inc. violated the Securities Exchange Act of
1934 (the "Exchange Act") in soliciting proxies against the proposed merger
between the Bank and Ballston Bancorp, which was not approved by the
shareholders at a special meeting held December 31, 1997, and also alleges that
the individual stockholders/directors violated the Exchange Act in soliciting
proxies to remove four directors of the Bank. The Company has hired Delaware
counsel and is vigorously defending this suit. The District Court has stayed
the Federal action pending a decision in the state action.
13
<PAGE>
Management and the Board of Directors of the Company have reviewed the
above-described litigation and believe that it will prevail on the merits.
Consequently, the Company has not accrued for a potential adverse result.
Item 4. Submission of Matters to a Vote of Security-Holders.
None
PART II
-------
Item 5. Market for Registrant's Equity and Related Stockholder Matters.
(a) The Company's Common Stock is quoted on the Nasdaq SmallCap Market
under the symbol AANB.
The following table sets forth the range of the high and low bid prices
of the Company's Common Stock for the prior eight calendar quarters and is based
upon information provided by Nasdaq.
Prices of Common Stock
--------------------------------
Dividends
High Low Paid
---------- --------- ---------
Calendar Quarter Ended/(1)/
March 31, 1997 $ 9.80 $ 9.00 $ .08
June 30, 1997 10.60 9.20 .08
September 30, 1997 11.00 8.60 .08
December31, 1997 11.60 9.80 --
March 31, 1998 11.50 11.20 .08
June 30, 1998 11.80 11.60 --
September 30, 1998 12.20 12.00 .08
December 31, 1998 14.20 13.60 .08
/(1)/ Common Stock market data gives effect to a five-for-four stock spilt in
the form of a stock dividend which took place on December 31, 1998.
(b) As of December 31, 1998, the Company had 601 stockholders of record.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Management's Discussion and Analysis is incorporated by reference to
the Company's Annual Report to Shareholders, which is filed as Exhibit 13
hereto.
Item 7. Financial Statements and Supplementary Data.
See Annual Report to Shareholders which is filed at Exhibit 14 hereto.
PART III
The information called for by Items 9, 10, 11 and 12 is incorporated
herein by reference to the Registrant's definitive Proxy Statement for the 1999
Annual Meeting of Stockholders to be filed within 120 days after the end of the
fiscal year covered by the Form 10-KSB.
Item 9. Directors and Executive Officers of the Registrant.
Item 10. Executive Compensation.
14
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Item 12. Certain Relationships and Related Transactions.
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Certificate of Incorporation of the Company, as amended (1)
3.1.1 Amendment to the Certificate of Incorporation of the Company (2)
3.2 By-laws of the Company, as amended (3)
4.1.1 Rights Agreement dated as of April 12, 1994, between the Company
and The First National Bank of Maryland, as Rights Agent (Right
Certificate attached as Exhibit A to Rights Agreement and Summary
of Rights to Purchase Common Shares attached as Exhibit B to Rights
Agreement) (4)
4.1.2 First Amendment dated April 20, 1995 between the Company and The
First National Bank of Maryland, as Rights Agent (5)
10.1 Non-qualified Stock Option Plan, as amended (6)
10.2 Employee Incentive Stock Option Plan and Agreement (7)
10.3 Directors Stock Option Plan and Agreement (8)
10.4 Non-Qualified Stock Option Agreement (9)
10.5 1996 Employee Incentive Stock Option Plan and Agreement (10)
10.6 1996 Directors Stock Option Plan and Agreement (11)
10.7 Amendment to The Adams National Bank Employee Stock Ownership Plan
with 401(k) provisions, dated February 18, 1997 (12)
10.7.1 Second Amendment to The Adams National Bank Employee Stock
Ownership Plan with 401(k) Provisions (12)
10.8 Lease Agreement dated November 1, 1992 between Chase Manhattan
Bank, N.A. as Trustee and The Adams National Bank (14)
10.9 Lease Agreement dated November I, 1992 between Chase Manhattan
Bank, N.A. as Trustee and The Adams National Bank (15)
10.10 Lease Agreement dated April 21, 1988 between Union Station Joint
Venture, Ltd. and The Adams National Bank (16)
15
<PAGE>
10.11 Lease Agreement dated April 21, 1989, as amended on August 1, 1989
between Union Station Joint Venture, Ltd. and The Adams National Bank
(17)
10.12 Amendment dated December 20, 1993 to Lease Agreement dated April 21,
1989, as amended on August 1, 1989 between Union Station Joint
Venture, Ltd. and The Adams National Bank (18)
10.13 Lease Agreement dated December 20, 1993 between Union Station Joint
Venture,~Ltd., and The Adams National Bank (19)
10.14 Sublease Agreement dated September 1, 1981, as amended September 1,
1984, between 2909 M Associates and The Adams National Bank (20)
10.15 Lease Agreement dated March 6, 1996 between 1604 17th Street Limited
Partners and The Adams National Bank (21)
10.16 Lease Agreement dated January 8, 1997 between Riverdale International,
Inc. and The Adams National Bank (22)
10.17 Agreement for Information Technology Services between Electronic Data
Systems Corporation and The Adams National Bank (23)
10.18 Special Program Financial Services Agreement dated December 30, 1993
between IBAA Bancard, Inc. and The Adams National Bank (24)
10.19 Deposit Insurance Transfer and Asset Purchase Agreement dated as of
May 1, 1992 by and among the Federal Deposit Insurance Corporation as
Receiver of Metropolitan Bank, N.A., the Federal Deposit Insurance
Corporation and The Adams National Bank (25)
10.20 Asset Pool Proposal Form and the Asset Pool Sale Agreement dated as of
July 6, 1993 by and among the Federal Deposit Insurance Corporation as
Receiver of City National Bank, the Federal Deposit Insurance
Corporation and The Adams National Bank (26)
10.21 Agreement, dated April 20, 1995 between the Company and Marshall T.
Reynolds (27)
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant (28)
27 Financial Data Schedule for Bank Holding Companies
- ----------------------------
(1) Incorporated by reference to Exhibit 3 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1987.
16
<PAGE>
(2) Incorporated by reference to Exhibit 3.2 of Amendment No. 2 to Form
SB-2 filed July 9, 1996.
(3) Incorporated by reference to Exhibit 3 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1987.
(4) Incorporated by reference to Exhibits 1-3 of the Company's
Registration Statement on Form 8-A dated April 12, 1994.
(5) Incorporated by reference to Exhibit 4 to the Company's Registration
Statement on Form 8-K/A dated April 21, 1995.
(6) Incorporated by reference to Exhibit l0(b) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987 and
Exhibit l0(i) of the Company's Annual Report on Form 10K for fiscal
year ended December 31, 1989.
(7) Incorporated by reference to Exhibit 10.2.2 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(8) Incorporated by reference to Exhibit 10.2.3 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(9) Incorporated by reference to Exhibit 10.2.4 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(10) Incorporated by reference to Exhibit 10.5 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(11) Incorporated by reference to Exhibit 10.6 of the Company's Annual
Report on Form10-K for the fiscal year ended December 31, 1996.
(12) Incorporated by reference to Exhibit 10.7 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(14) Incorporated by reference to Exhibit l0(d) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
(15) Incorporated by reference to Exhibit l0(e) of the Company's Annual
Report on Form 10-K for the fiscal year ended. December 31, 1992.
(16) Incorporated by reference to Exhibit l0(f) of the Company's Quarterly
Report on Form10-Q for the quarter ended September 30, 1988.
(17) Incorporated by reference to Exhibit l0(g) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
(18) Incorporated by reference to Exhibit 10.7.2 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(19) Incorporated by reference to Exhibit 10.8 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(20) Incorporated by reference to Exhibit 10.9 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
17
<PAGE>
(21) Incorporated by reference to Exhibit 10.10 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(22) Incorporated by reference to Exhibit 10.17 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(23) Incorporated by reference to Exhibit 10 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1992.
(24) Incorporated by reference to Exhibit 10.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
(25) Incorporated by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992.
(26) Incorporated by reference to Exhibit 10 of the Company s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992.
(27) Incorporated by reference to Exhibit 5 of the Company's Registration
Statement on Form 8-K/A, dated April 21, 1995.
(28) Incorporated by reference to Exhibit 22 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1987.
(b) No reports on Form 8-K were filed during the last quarter of
the fiscal year ended December 31, 1998
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersized, "hereunto duly
authorized.
ABIGAIL ADAMS NATIONAL BANCORP, INC.
------------------------------------
Date: April 8, 1999 By: /s/ Jeanne D. Hubbard
---------------------
Jeanne D. Hubbard, Chairwoman of the Board,
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following Behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<S> <C>
By: /s/ Jeanne D. Hubbard By: /s/ Karen Schafke
--------------------------------------- ---------------------------------------
Jeanne D. Hubbard, Chairwoman of the Board Karen Schafke, Principal Financial
and Chief Executive Officer and Accounting Officer
Date: April 8, 1999 Date: April 8, 1999
By: /s/ A. George Cook By: /s/ Marshall T. Reynolds
--------------------------------------- ---------------------------------------
A.George Cook, Director Marshall T. Reynolds, Director
Date: April 8, 1999 Date: April 8, 1999
By: /s/ Robert L. Shell By: /s/ Marianne Steiner
--------------------------------------- ---------------------------------------
Robert L. Shell, Jr., Director Marianne Steiner, Director
Date: April 8, 1999 Date: April 8, 1999
By: /s/ Joseph L. Williams By: /s/ Bonita A. Wilson
--------------------------------------- ---------------------------------------
Joseph L. Williams, Director Bonita A. Wilson, Director
Date: April 8, 1999 Date: April 8, 1999
By: /s/ Kathleen W, Carr
---------------------------------------
Kathleen W. Carr, Director
Date: April 8, 1999
</TABLE>
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Certificate of Incorporation of the Company, as amended (1)
3.1.1 Amendment to the Certificate of Incorporation of the Company (2)
3.2 By-laws of the Company, as amended (3)
4.1.1 Rights Agreement dated as of April 12, 1994, between the Company and
The First National Bank of Maryland, as Rights Agent (Right
Certificate attached as Exhibit A to Rights Agreement and Summary of
Rights to Purchase Common Shares attached as Exhibit B to Rights
Agreement) (4)
4.1.2 First Amendment dated April 20, 1995 between the Company and The First
National Bank of Maryland, as Rights Agent (5)
10.1 Non-qualified Stock Option Plan, as amended (6)
10.2 Employee Incentive Stock Option Plan and Agreement (7)
10.3 Directors Stock Option Plan and Agreement (8)
10.4 Non-Qualified Stock Option Agreement (9)
10.5 1996 Employee Incentive Stock Option Plan and Agreement (10)
10.6 1996 Directors Stock Option Plan and Agreement (11)
10.7 Amendment to The Adams National Bank Employee Stock Ownership Plan
with 401(k) provisions, dated February 18, 1997 (12)
10.7.1 Second Amendment to The Adams National Bank Employee Stock Ownership
Plan with 401(k) Provisions (12)
10.8 Lease Agreement dated November 1, 1992 between Chase Manhattan Bank,
N.A. as Trustee and The Adams National Bank (14)
10.9 Lease Agreement dated November 1, 1992 between Chase Manhattan Bank,
N.A. as Trustee and The Adams National Bank (15)
10.10 Lease Agreement dated April 21, 1988 between Union Station Joint
Venture, Ltd. and The Adams National Bank (16)
10.11 Lease Agreement dated April 21, 1989, as amended on August 1, 1989
between Union Station Joint Venture, Ltd. and The Adams National Bank
(17)
10.12 Amendment dated December 20, 1993 to Lease Agreement dated April 21,
1989, as amended on August 1, 1989 between Union Station Joint
Venture, Ltd. and The Adams National Bank (18)
10.13 Lease Agreement dated December 20, 1993 between Union Station Joint
Venture,~Ltd., and The Adams National Bank (19)
20
<PAGE>
10.14 Sublease Agreement dated September 1, 1981, as amended September 1,
1984, between 2909 M Associates and The Adams National Bank (20)
10.15 Lease Agreement dated March 6, 1996 between 1604 17th Street Limited
Partners and The Adams National Bank (21)
10.16 Lease Agreement dated January 8, 1997 between Riverdale International,
Inc. and The Adams National Bank (22)
10.17 Agreement for Information Technology Services between Electronic Data
Systems Corporation and The Adams National Bank (23)
10.18 Special Program Financial Services Agreement dated December 30, 1993
between IBAA Bancard, Inc. and The Adams National Bank (24)
10.19 Deposit Insurance Transfer and Asset Purchase Agreement dated as of
May 1, 1992 by and among the Federal Deposit Insurance Corporation as
Receiver of Metropolitan Bank, N.A., the Federal Deposit Insurance
Corporation and The Adams National Bank (25)
10.20 Asset Pool Proposal Form and the Asset Pool Sale Agreement dated as of
July 6, 1993 by and among the Federal Deposit Insurance Corporation as
Receiver of City National Bank, the Federal Deposit Insurance
Corporation and The Adams National Bank (26)
10.21 Agreement, dated April 20, 1995 between the Company and Marshall T.
Reynolds (27)
21 Subsidiaries of the Registrant (28)
27 Financial Data Schedule for Bank Holding Companies
- ----------------------
(1) Incorporated by reference to Exhibit 3 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1987.
(2) Incorporated by reference to Exhibit 3.2 of Amendment No. 2 to Form
SB-2 filed July 9, 1996.
(3) Incorporated by reference to Exhibit 3 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1987.
(4) Incorporated by reference to Exhibits 1-3 of the Company's
Registration Statement on Form 8-A dated April 12, 1994.
21
<PAGE>
(5) Incorporated by reference to Exhibit 4 to the Company's Registration
Statement on Form 8-K/A dated April 21, 1995.
(6) Incorporated by reference to Exhibit l0(b) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987 and
Exhibit l0(i) of the Company's Annual Report on Form 10K for fiscal
year ended December 31, 1989.
(7) Incorporated by reference to Exhibit 10.2.2 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(8) Incorporated by reference to Exhibit 10.2.3 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(9) Incorporated by reference to Exhibit 10.2.4 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(10) Incorporated by reference to Exhibit 10.5 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(11) Incorporated by reference to Exhibit 10.6 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(12) Incorporated by reference to Exhibit 10.7 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(13) Reserved
(14) Incorporated by reference to Exhibit l0(d) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
(15) Incorporated by reference to Exhibit l0(e) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
(16) Incorporated by reference to Exhibit l0(f) of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1988.
(17) Incorporated by reference to Exhibit l0(g) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
(18) Incorporated by reference to Exhibit 10.7.2 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(19) Incorporated by reference to Exhibit 10.8 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(20) Incorporated by reference to Exhibit 10.9 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
(21) Incorporated by reference to Exhibit 10.10 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(22) Incorporated by reference to Exhibit 10.17 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
22
<PAGE>
(23) Incorporated by reference to Exhibit 10 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1992.
(24) Incorporated by reference to Exhibit 10.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
(25) Incorporated by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992.
(26) Incorporated by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992.
(27) Incorporated by reference to Exhibit 5 of the Company's Registration
Statement on Form 8-KA, dated April 21, 1995.
(28) Incorporated by reference to Exhibit 22 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1988.
(b) No reports on Form 8-K were filed during the last quarter of
the fiscal year ended December 31, 1997
23
<PAGE>
FINANCIAL CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Highlights......................................................................................................... 2
Five Year Condensed Consolidated Balance Sheet, Asset Quality and Capital Ratio Data......................................... 3
Five Year Condensed Consolidated Income Statement Data and Selected Performance Ratios....................................... 4
Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 5
Summary of Operations by Quarter and Summary of Market Data.................................................................. 21
Consolidated Balance Sheets.................................................................................................. 22
Consolidated Statements of Operations and Comprehensive Income............................................................... 23
Consolidated Statements of Changes in Stockholders' Equity................................................................... 25
Consolidated Statements of Cash Flows........................................................................................ 26
Notes to Consolidated Financial Statements................................................................................... 28
Independent Auditors' Report................................................................................................. 52
</TABLE>
1
<PAGE>
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Averages
Assets.................................. $130,965 $117,567
Loans, net.............................. 84,000 79,360
Deposits................................ 111,627 99,368
Stockholders' equity.................... 13,190 13,385
At Year-End
Assets.................................. $128,881 $131,239
Loans, net.............................. 93,086 84,172
Deposits................................ 108,665 112,261
Stockholders' equity.................... 13,599 13,030
Book value per share.................... 6.60 6.39
For the Year
Net income.............................. $ 816 $ 342
Cash dividends.......................... 536 489
Per Common Share
Basic earnings.......................... $ .40 $ .17
Diluted earnings........................ .39 .16
Cash dividends.......................... .24 .24
</TABLE>
2
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Five Year Condensed Consolidated Balance Sheet, Asset Quality and Capital Ratio
Data
December 31, 1998-1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
- -------------------
Assets
Cash and due from banks $ 5,836 $ 7,654 $ 9,785 $ 4,953 $ 4,349
Short-term investments 5,607 8,231 5,579 9,962 1,791
Securities available for sale 13,813 20,453 11,205 5,508 6,009
Investment securities 7,976 7,509 11,641 8,193 9,081
Loans, net 93,086 84,172 71,965 62,318 59,440
Bank premises and equipment 1,160 1,252 840 278 369
Other assets 1,403 1,968 1,147 1,153 1,221
-------- -------- -------- ------- -------
Total assets $128,881 $131,239 $112,162 $92,365 $82,260
======== ======== ======== ======= =======
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 31,058 $ 27,184 $ 23,678 $23,444 $19,677
Interest-bearing 77,607 85,077 71,477 59,619 55,616
-------- -------- -------- ------- -------
Total deposits 108,665 112,261 95,155 83,063 75,293
Short-term borrowings 4,648 3,489 1,916 1,786 361
Long-term borrowings/debt 1,023 1,086 1,139 186 261
Other liabilities 946 1,373 812 711 583
-------- -------- -------- ------- -------
Total liabilities 115,282 118,209 99,022 85,746 76,498
Stockholders' equity 13,599 13,030 13,140 6,619 5,762
-------- -------- -------- ------- -------
Total liabilities and stockholders' equity $128,881 $131,239 $112,162 $92,365 $82,260
======== ======== ======== ======= =======
Asset Quality:
- --------------
Nonaccrual loans $ 295 $ 411 $ 963 $ 1,561 $ 1,244
Loans past due 90 days or more 136 103 153 6 3
Restructured loans -- -- 573 1,245 1,301
-------- -------- -------- ------- -------
Total nonperforming loans $ 431 $ 514 $ 1,689 $ 2,812 $ 2,548
======== ======== ======== ======= =======
Asset Quality Ratios:
- ---------------------
Net charge-offs (recoveries) to average loans (.01)% (.12)% (.08)% .03% .55%
Nonperforming loans to period-end loans .46 .60 2.31 4.42 4.20
Allowance for loan losses to period-end loans 1.20 1.34 1.44 2.00 2.12
Allowance for loan losses to
period-end nonperforming loans 261.56 222.12 62.05 45.30 50.61
Consolidated Capital Ratios:
- ----------------------------
Tier 1 risk-based 12.66% 13.76% 16.22% 9.77% 9.40%
Total risk-based 13.72 14.97 17.47 11.06 10.76
Leverage 10.38 11.09 13.81 8.09 7.13
</TABLE>
3
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Five Year Condensed Consolidated Income Statement Data and Selected Performance
Ratios
Years Ended December 31, 1998-1994
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
- ----------------------
Total interest income $10,753 $ 9,603 $7,573 $6,914 $6,082
Total interest expense 3,930 3,822 2,933 2,747 1,934
------- ------- ------ ------ ------
Net interest income 6,823 5,781 4,640 4,167 4,148
Provision (benefit) for loan losses (15) -- (275) -- 221
------- ------- ------ ------ ------
Net interest income after
provision for loan losses 6,838 5,781 4,915 4,167 3,927
------- ------- ------ ------ ------
Total other income 1,335 1,204 953 841 790
Total other expense 6,838 6,419 4,093 3,781 4,901
------- ------- ------ ------ ------
Income (loss) before taxes 1,335 566 1,775 1,227 (184)
Applicable income tax expense 519 224 648 268 --
------- ------- ------ ------ ------
Net income (loss) $ 816 $ 342 $1,127 $ 959 $ (184)
======= ======= ====== ====== ======
Per Common Share Data:
- ----------------------
Basic net income (loss) $ 0.40 $ 0.17 $ 0.75 $ 0.90 $(0.18)
======= ======= ====== ====== ======
Diluted net income (loss) $ 0.39 $ 0.16 $ 0.74 $ 0.90 $(0.18)
======= ======= ====== ====== ======
Selected Performance Ratios:
- ----------------------------
Return on average assets .63% 0.29% 1.18% 1.17% (.22)%
Return on average stockholders' equity 6.19 2.55 11.75 15.53 (3.15)
Average stockholders' equity to average assets 10.38 11.38 10.06 7.50 7.13
Dividend payout ratio 65.62 143.10 41.46 14.85 --
Noninterest expense to average assets 5.22 5.46 4.29 4.60 5.98
Net interest margin 5.57 5.25 5.23 5.39 5.42
</TABLE>
4
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations Overview
Abigail Adams National Bancorp, Inc. (the "Company") is the parent of The
Adams National Bank (the "Bank"), a bank with five full-service branches located
in Washington, D.C. The Company's newest branch in Chinatown in the District of
Columbia was opened in November 1997. The Company reports its financial results
on a consolidated basis with the Bank.
When used in this Annual Report the words or phrases "will likely result,"
"are expected to," "will continue", "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including among other
things, changes in economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, uncertainties related to
year 2000 that could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward looking
statements, which speak only as of the date made. The Company wishes to advise
readers that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
The Company does not undertake, and specifically declines any obligation,
to publicly release the results of any revisions which may be made to any
forward looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
The Company reported a 138.8% increase in net income and a 10.4% increase
in total loans for 1998 as compared to 1997. Total assets at December 31, 1998,
were $128,881,000, down from $131,239,000 one year ago, while total loans of
$94,220,000 at year-end were up from $85,314,000 at the end of 1997. The Company
reported net income of $816,000, or $.40 per share, for 1998, an increase of
$474,000 from the $342,000, or $.17 per share, reported for the year ended
December 31, 1997. The increase in net income was attributable principally to
the increase in average earning assets, which resulted in an increase in net
interest income of 18% to $6,823,000 at December 31, 1998 as compared to
$5,781,000 at year end 1997. Net income for 1997 included the write-off of
approximately $1,200,000 in costs incurred in conjunction with the Company's
aborted purchase of Ballston Bancorp, Inc. (Ballston Bancorp). The acquisition
of Ballston Bancorp was not approved by shareholders at the Company's Special
Meeting of Shareholders held on December 31, 1997.
The Company continues to maintain a "well-capitalized" status with a total
risk-based capital ratio (total capital divided by assets weighted for risk
elements) of 13.72% at December 31, 1998, of which 12.66% was Tier 1 capital.
The leverage ratio (based on annual average assets) was 10.38% at December 31,
1998. The following analysis of financial condition and
5
<PAGE>
results of operations should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto.
Analysis of Net Interest Income
Net interest income, the most significant component of the Company's
earnings, increased by $1,043,000, or 18%, to $6,824,000 in 1998 as compared to
$5,781,000 in 1997. This improvement in net interest income was a result of a
11% increase in average earning assets and an increase in average non interest-
bearing sources of funds. The average loan to deposit ratio decreased
moderately to 76% from 81% in 1997. 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 4.18% and a
fully taxable equivalent ("FTE") net interest margin (FTE net interest income as
a percentage of average interest-earning assets) of 5.57% for 1998, reflecting
increases of 32 basis points and 32 basis points, respectively, from 1997.
Loans, the highest yielding component of earning assets, represented
approximately 69% of total average earning assets for 1998 as compared to
approximately 73% for 1997. The decrease in loans as a percentage of earning
assets is due to the greater increase in earning assets as compared to the
increase in loans. Average loans increased to $85.1 million for the year ended
1998 from $80.5 million, while average earning assets increased to $122.5
million from $110.2 million.
Net interest income increased by $1,144,000, or 25%, to $5,781,000 in 1997
as compared to $4,640,000 in 1996. This improvement in net interest income was
a result of a 24% increase in average earning assets, an increase in the average
loan to deposit ratio from 81% from 76% and increases in average net non-
interest bearing sources of funds. These factors combined to produce a net
interest spread of 3.87% and a net interest margin of 5.25% for 1997, reflecting
increases of 1 basis point and 2 basis points, respectively, from 1996. Loans
represented approximately 73% of total average earning assets for 1997 as
compared to approximately 70% for 1996.
6
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity
Yields and Rates
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- ----------------------------
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/ $ 85,124 $ 8,594 10.10% $ 80,460 $7,880 9.79% $62,350 $6,072 9.74%
Securities 25,734 1,523 5.92 21,837 1,285 5.88 12,795 755 5.90
Federal funds sold and
resale agreements 8,643 486 5.62 6,378 352 5.52 12,752 693 5.43
Interest-bearing deposits
in other banks 3,039 152 5.01 1,509 89 5.90 860 53 6.16
-------- ------- -------- ------ ------- ------
Total interest-earning assets 122,540 10,755 8.78 110,184 9,606 8.72 88,757 7,573 8.53
Allowance for loan losses (1,124) (1,100) (1,272)
Cash and due from banks 6,373 6,042 6,091
Bank premises and equipment 1,201 941 487
Other assets 1,975 1,500 1,319
-------- -------- -------
Total assets $130,965 $117,567 $95,382
======== ======== =======
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Time deposits $ 38,953 1,386 3.56 $ 34,051 1,355 3.98 $32,195 1,257 3.90
Certificates of deposit 41,658 2,286 5.49 40,849 2,255 5.52 28,102 1,554 5.53
Federal funds purchased and
repurchase agreements 3,920 184 4.70 2,724 135 4.96 2,148 105 4.89
Other short-term borrowings -- -- -- -- -- -- -- -- --
Long-term borrowings/debt 1,052 74 6.99 1,111 77 6.93 357 17 4.76
-------- ------- -------- ------ ------- ------
Total interest-bearing liabilities 85,583 3,930 4.59 78,735 3,822 4.85 62,802 2,933 4.67
------ ------
Noninterest-bearing liabilities:
Demand deposits 31,016 24,468 22,099
Other liabilities 1,176 979 888
Stockholders' equity 13,190 13,385 9,593
-------- -------- -------
Total liabilities and
stockholders' equity $130,965 $117,567 $95,382
======== ======== =======
FTE net interest income /2/ $ 6,825 $5,784 $4,640
======= ====== ======
Net interest spread 4.18% 3.87% 3.86%
===== ==== ====
Net interest margin 5.57% 5.25% 5.23%
===== ==== ====
</TABLE>
____________________________
1 Nonaccrual loans are included in the average loan balances. Interest on
loans includes fees of approximately $224,000, $244,000 and $141,000 in
1998, 1997 and 1996, respectively.
2 Taxable equivalent adjustments for tax-exempt securities were $2,000,
$3,000 and $0 for 1998, 1997 and 1996.
7
<PAGE>
Interest Rates and Interest Differential
Analysis of Changes in Fully Taxable Equivalent Net Interest Income
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31, For the years ended December 31,
1998 versus 1997 1997 versus 1996
----------------------------------- -----------------------------------
Net Net
Increase Change per: Increase Change per:
----------------- -----------------
(Decrease)/1/ Rate Volume (Decrease)/1/ Rate Volume
---------------- ------- -------- ---------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income from:
Loans /2/ $ 714 $ 257 $457 $1,808 $ 44 $1,764
Securities 238 9 229 530 (3) 533
Federal funds sold and
resale agreements 134 9 125 (341) 6 (347)
Interest-bearing deposits
in banks 63 (27) 90 36 (4) 40
------ ----- ---- ------ ----- ------
Total interest income /3, 4/ 1,149 248 901 2,033 43 1,990
Interest expense on:
Time deposits /5/ 32 (115) 147 98 25 73
Certificates of deposit 30 (15) 45 701 (4) 705
Short-term borrowings 49 (10) 59 30 1 29
Long-term borrowings/debt (3) 1 (4) 60 24 36
------ ----- ---- ------ ----- ------
Total interest expense /3/ 108 (139) 247 889 46 843
------ ----- ---- ------ ----- ------
Net interest income /4/ $1,041 $ 387 $654 $1,144 ($ 3) $1,147
====== ===== ==== ====== ===== ======
</TABLE>
_________________________________
1 Changes due to both rate and volume are allocated to rate.
2 Interest on loans includes loan fees of approximately $224,000, $244,000
and $141,000 in 1998, 1997 and 1996, 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.
4 Taxable equivalent adjustments for tax-exempt securities were $2,000,
$3,000 and $0 for 1998, 1997 and 1996.
5 Includes transaction accounts.
Other Income
Total other income, which consists primarily of service charges on deposits
and other fee income, increased by approximately $131,000, or 11%, to $1,335,000
in 1998 as compared to $1,204,000 in 1997. Service charges on deposit accounts
increased by approximately $35,000, or 3%, to $1,160,000 in 1998 as compared to
$1,126,000 in 1997 principally due to the increase in income recognized on ATM
transactions. Other fee income increased by approximately $96,000, or 123%, to
$175,000 in 1998 as compared to $78,000 in 1997, primarily due to income
recognized in 1998 related to the recovery of expenses on nonaccrual loans paid
in the prior year.
8
<PAGE>
In 1997, total other income increased by approximately $251,000, or 26%, to
$1,204,000 as compared to $953,000 in 1996. Service charges on deposit accounts
increased by approximately $338,000, or 43%, to $1,126,000 in 1997 as compared
to $788,000 in 1996 principally due to a $369,000 increase in income recognized
on ATM transactions, primarily from the implementation in late 1996 of the $1.00
surcharge on noncustomer ATM transactions. This was partially offset by a
$31,000 decrease in service charges on overdrafts. Other income decreased by
approximately $87,000, or 53%, to $78,000 in 1997 as compared to $165,000 in
1996, primarily due to rental income recognized in 1996 from other real estate
coupled with gains recognized on the sale of other real estate.
Other Expense
Total other expense increased by $419,000, or 6.5%, to $6,838,000 in 1998
from $6,419,000 in 1997. Salaries and benefits for 1998 increased by $902,000,
or 40%, to $3,158,000 from $2,255,000 in 1997. The increase in salaries and
benefits was primarily the result of a one time severance payment of $766,400 to
the Company's former chief executive officer and six executive officers, a full
year's impact of employees hired for the new branch opened in late 1997, and
normal merit increases and associated increases in employee benefits. Occupancy
and equipment expense increased by $222,000, or 22%, to $1,231,000 in 1998 from
$1,009,000 in 1997 primarily due to the full year's effect of the new branch
opened in late 1997. Professional fees decreased by $494,000, or 38%, to
$796,000 in 1998 from $1,290,000 in 1997, due primarily to approximately
$991,000 in professional fees incurred in connection with the Company's proposed
purchase of Ballston Bancorp, Inc. in the last quarter of 1997 and additional
professional costs associated with the re-engineering of management systems in
1997. Data processing expense increased by $65,000, or 13%, to $560,000 in 1998
from $495,000 in 1997, due to the costs associated with the conversion to new
data processing service providers and a normal increase in customer accounts.
Other operating expense decreased by $276,000, or 20%, to $1,093,000 in 1998
from $1,369,000 in 1997 due primarily to decreases in printing costs associated
with public disclosures. Other expense may be adversely affected as a result of
litigation commenced in 1998 against certain directors of the Company. See Note
11 to the Notes to Consolidated Financial Statements.
In 1997, total other expense increased by $2,326,000, or 57%, to $6,419,000
from $4,093,000 in 1996. Salaries and benefits for 1997 increased by $350,000,
or 18%, to $2,255,000 from $1,905,000 in 1996, due to the full year's impact of
employees hired for the new branch opened in late 1996, an increase in the
number of employees resulting from the new branch opened in late 1997, normal
merit increases, and associated increases in employee benefits. Occupancy and
equipment expense increased by $231,000, or 30%, to $1,009,000 in 1997 from
$778,000 in 1996 primarily due to the rental expense from new branches.
Professional fees increased by $1,147,000 to $1,290,000 in 1997 from $143,000 in
1996 due primarily to approximately $991,000 in professional fees incurred in
connection with the Company's proposed purchase of Ballston Bancorp, Inc. which
was not approved by the shareholders on December 31, 1997. Additionally,
professional costs associated with the re-engineering of
9
<PAGE>
management systems were also incurred in 1997, further contributing to the
increase in professional fees. Data processing expense increased by $136,000, or
38%, to $495,000 in 1997 from $359,000 in 1996 due to an increase in accounts
from the new branches opened in late 1996 and 1997, as well as increased numbers
of accounts and activity thereon. Other operating expense increased by $460,000,
or 51%, to $1,369,000 in 1997 from $909,000 in 1996 due primarily to increases
in administrative and overhead expenses associated with the opening of the new
branches and the write-off of other costs relating to the proposed purchase of
Ballston Bancorp, such as printing, public relations, and regulatory filing
fees.
Year 2000 Issues
Like many financial institutions, the Bank relies upon computers for the
daily conduct of its business and for data processing in general. There is
concern that on January 1, 2000 computers will be unable to handle the century
date change, and as a consequence, there may be wide spread system malfunctions.
To address this situation the Bank developed a formal Year 2000 committee
comprised of the Bank's senior management and members of the Board of Directors.
The Bank developed a year 2000 project plan in June 1997, and diligent efforts
have been made to complete the project plan on schedule. The Bank's project
plan follows the guidelines set forth by the Federal Financial Institutions
Examination Council (FFIEC) and includes five phases; assessment, evaluation,
renovation, validation, and implementation. During the first quarter of 1999,
the project will be substantially complete, including the process of client
specific testing with key vendors. Management of the Bank believes all "mission
critical" applications have been identified and appropriate renovations have
been made. The Bank has identified potential information and non information
technology applications including, for example, electrical utilities, telephone
services, alarm systems and building access systems, which may have problems
associated with the year 2000. To the extent applications suppliers assert their
applications are year 2000 ready, whether they are information technology or non
information technology related, the Bank is currently testing and validating
their claims, while working toward solutions with others. However, legal
recourse against the Bank's third party vendors may be limited to having the
third party vendor correct any service deficiency that fails in the event the
service is not year 2000 compliant. Management does not believe that it would be
able to obtain any material compensatory or punitive damages in the event a
vendor is not year 2000 compliant. All systems for which the Bank has control
have been tested and/or certified by vendors for year 2000 compliance.
Extraneous systems, such as electrical utilities and telephone services, should
they fail will have an impact on our ability to perform daily functions. The
progress of these vendors is being closely monitored. In the event that these
systems are not ready, the Bank has prepared a contingency plan that will enable
business to be conducted without them.
The Bank contracts with Fiserv Atlanta to provide all direct processing of
the Banks' loan and deposit transactions, together with calculations of interest
income and expense thereon. Fiserv Atlanta has completed all testing and
renovations of their systems. Proxy tests were conducted in December 1998 by
several banks and the results were provided to the Bank for
10
<PAGE>
review. The Bank is scheduled to perform client specific testing with Fiserv
during the first quarter of 1999. These tests are expected to confirm the
ability of Fiserv Atlanta systems and software to handle the century date
change.
Since the Bank's business relies on the ability of computers to track and
credit deposits and loan repayments, the failure of the Bank's computer systems
would materially and adversely affect the Bank's ability to conduct its
business. The Bank's loan portfolio primarily consists of commercial loans and
loans secured by residential and commercial real estate. The Bank does not
believe that its residential real estate lending operations are dependent on
borrowers' compliance with the year 2000 issue. With respect to outstanding
loans made to commercial borrowers, the Bank has reviewed all commercial loan
files and assigned risk factors to each loan relating to credit problems which
might arise with respect to year 2000 issues. In addition, the Bank's loan
officers have asked their commercial borrowers to advise the Bank of the
exposure of the borrower's business to the year 2000 issue and how the borrower
is addressing the year 2000 issue. In this regard, the Bank has sent its
commercial loan customers a letter asking them if they are aware of the year
2000 issue and the potential exposure of the customer's business to the year
2000 issue, and what steps they have taken to remediate any problems that they
might have in becoming year 2000 compliant. Bank personnel follow-up the letter
with a telephone call to its customers to discuss each customer's exposure to
the year 2000 and the customer's contingency plans to become year 2000
compliant. With respect to new commercial loans, all borrowers must describe
how dependent their business is on computer technology, the actions taken by the
borrower to ensure that their business or property will not be adversely
affected by the year 2000 issue, and the contingency planning the borrower is
undertaking to ensure their business is year 2000 compliant. As part of the
loan underwriting process, commercial borrowers must indicate in writing to the
Bank that they are aware of the year 2000 issue and are either year 2000
compliant, or are taking steps to become year 2000 compliant. As a result of
its actions, the Bank believes that its commercial borrowers are aware of the
year 2000 issue and are taking actions to become year 2000 compliant.
Management has estimated the future remediation costs to be $30,000. Incremental
expenses for the Bank to address the Year 2000 issue are not expected to
materially impact operating results in any one period.
Income Tax Expense
Income tax expense of $519,000 for 1998 reflected an increase of $295,000
over the $225,000 tax expense recorded one year earlier due to a $770,000
increase in income before taxes. The Company's effective tax rate for 1998 was
39%
Income tax expense of $225,000 for 1997 reflected a decrease of $423,000
over the $648,000 tax expense recorded one year earlier due to a $1,219,000
decrease in income before
11
<PAGE>
taxes, partially offset by an increase in the Company's effective tax rate to
40% from 36% one year earlier.
Analysis of Loans
The loan portfolio at December 31, 1998 increased by $8,906,000, or 10.4%,
to $94,220,000 from $85,314,000 at December 31, 1997. The majority of this
growth was in the commercial real estate mortgages as the Company focused its
marketing efforts on commercial real estate loans. The Company 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. The Company also
believes that loans secured by real estate are less likely to result in losses
to the Bank than loans that are dependent upon the operation of a business or
which are secured by a rapidly depreciating asset. On average, the Company's
loans increased by $4,664,000, or 5.8%, to $85,124,000 for 1998 from $80,460,000
for 1997. The loan portfolio maintained the December 1997 levels for the greater
part of the year and grew by $8.7 million in the fourth quarter of 1998. The
average loan to deposit ratio decreased to 76% in 1998 from 81% in 1997, as a
result of the average deposit growth which exceeded the average loan portfolio
growth by a greater percentage. The loan to deposit ratio at December 31, 1998
was 87% while the ratio at December 31, 1997 was 76%. The Company 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, 1998 and 1997,
see Note 4 of the Notes to Consolidated Financial Statements.
The table entitled "Analysis of Loan Maturity and Interest Sensitivity" below,
summarizes the maturity distribution and interest sensitivity of the Company's
loan portfolio at December 31, 1998.
Analysis of Loan Maturity and Interest Sensitivity
At December 31, 1998
(In thousands)
Within 1 1 - 5 After
Year/(1)/ Years 5 Years Total
------- ------- ------- -------
Maturity of Loans: /(2)(3)/
Commercial $20,356 $ 2,720 $ -- $23,076
Real estate - commercial mortgage 12,898 22,453 8,582 43,933
Real estate - residential mortgage 8,719 8,477 3,487 20,683
Real estate - construction 4,442 -- -- 4,442
Installment 1 656 430 -- 2,086
------- ------- ------- -------
Total loans $48,071 $34,080 $12,069 $94,220
======= ======= ======= =======
Interest Rate Sensitivity of Loans:
With predetermined interest rates $12,580 $13,275 $ 81 $25,936
With floating or
adjustable interest rates 35,491 20,805 11,988 68,284
------- ------- ------- -------
Total loans $48,071 $34,080 $12,069 $94,220
======= ======= ======= =======
- ---------------
12
<PAGE>
(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. The Company
has not established a rollover policy. Each loan is reviewed on a case by
case basis with respect to renewal.
(3) The Company has no foreign loans.
Analysis of Investments
The Company classifies its debt and marketable equity securities at
acquisition 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 the Company's stockholders' equity is subject
to fluctuation based on changes in interest rates.
Securities available for sale totaling $25,000,000 matured or were repaid
during 1998 as compared to purchases of $18,360,000 during the same period.
These securities transactions coupled with scheduled amortization and accretion
for the year accounted for the decrease in the available for sale portfolio of
$6,640,000, or 32%, to $13,813,000 at December 31, 1998 as compared to
$20,453,000 at December 31, 1997. Investment maturities of $6,498,000 and normal
paydowns on mortgage-backed securities, partially offset by purchases totaling
$7,004,000, accounted for the increase in investment securities of $467,000, or
6%, to $7,976,000 at December 31, 1998 from $7,509,000 at December 31, 1997.
The net decrease in the combined investment and available for sale securities
portfolio is due to the Company's increase in the loan portfolio combined with
the decrease in the Jumbo certificates of deposit. See "Liquidity and Capital
Resources" for a further analysis of liquidity. On average for 1998, the
combined investment and available for sale securities portfolio increased by
$3,897,000, or 18%, to $25,734,000 for 1998 from $21,837,000 for 1997.
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, 1998.
13
<PAGE>
Analysis of Securities Portfolio
At December 31, 1998
(Dollars 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 $3,002 $3,017 5.56% $ 1,003 $ 1,007 5.67%
After one, but within five years -- -- -- -- -- --
------ ------ ------- -------
Total 3,002 3,017 5.56 1,003 1,007 5.67
------ ------ ------- -------
Obligations of other U.S.
Government agencies
and corporations: /2/
After one, but within five years 3,999 4,025 6.17 $ 6,805 $ 6,826 5.86
After five, but within ten years -- -- -- 5,999 5,980 5.91
------ ------ ------- -------
Total 3,999 4,025 6.17 12,804 12,806 5.88
------ ------ ------- -------
Mortgage-backed securities: /3/
Federal Home Loan Mortgage Corporation:
After one, but within five years 93 97 8.74 -- -- --
------ ------ ------- -------
Obligations of states and municipalities:
After ten years 310 316 5.15 -- -- --
------ ------ ------- -------
Federal Reserve Bank stock 173 173 6.00 -- -- --
------ ------ ------- -------
Federal Home Loan Bank stock 386 386 7.50 -- -- --
------ ------ ------- -------
Corporate securities 13 13 -- -- -- --
------ ------ ------- -------
Total investment securities $7,976 $8,027 5.98% $13,807 $13,813 5.87%
====== ====== ===== ======= ======= =====
</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.
Obligations of other U.S. Government agencies and corporations are shown
based on final maturity, although securities may be called prior to such
date.
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.
For additional information about investment securities and securities
available for sale at December 31, 1998 and 1997, see Note 3 of the Notes to
Consolidated Financial Statements.
14
<PAGE>
Financial Condition
Assets
Total assets decreased to $128,881,000 at December 31, 1998 from
$131,239,000 at December 31, 1997. The decrease in total assets is attributable
to decreases of $1,818,000 in the balance of cash due from banks, $93,000, or 7%
in the carrying value of bank premises and equipment, and $6,640,000, or 32.5%
in securities available for sale. The decreases noted above were partially
offset by a $8,914,000, or 10.6% increase in loans, net. The changes in the
composition of assets reflects management's decision to maximize the income
received from interest earning assets.
Liabilities
The Bank's liabilities consist of deposits and short-term and long-term
borrowings. At December 31, 1998, liabilities totaled $115,282,000, a decrease
of $2,927,000. The decrease in liabilities resulted from a decrease in deposits
of $3,596,000, or 3.2%, partially offset by a slight increase in short-term
borrowings. Short-term borrowings, consisting of repurchase agreements, totaled
$4,648,000 at December 31, 1998, as compared to $3,489,000 at December 31, 1997.
Long-term borrowings consisted of a term loan from the FHLB which had a
principal balance of $1,022,000 at December 31, 1998.
Stockholders' Equity
Stockholders' equity at December 31, 1998 of $13,599,000 reflected an
increase of $569,000 from the balance at December 31, 1997 of $13,030,000.
Average stockholders' equity as a percentage of average total assets for 1998
was 10.07% as compared to 11.38% for the comparable prior year period. On
December 31, 1998, the Company issued a five-for-four stock split in the form of
a stock dividend of five shares for every four shares, with fractional shares
paid in cash.
The following table presents the Company's and the Bank's capital position
relative to their various minimum statutory and regulatory capital requirements
at December 31, 1998. The Company and the 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/ $13,595 10.38% $12,016 9.27% 4.00%
Tier 1 risk-based ratio /2/ 13,595 12.66 12,016 11.20 4.00
Total risk-based ratio /2/ 14,730 13.72 13,150 12.26 8.00
</TABLE>
- --------------------
1 Based on annual average assets
2 Based on risk-adjusted assets
15
<PAGE>
Asset Quality
Loan Portfolio and Adequacy of the 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. 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 recoveries, the Company
recorded a net benefit for loan losses of $15,000 for 1998. Net recoveries
during 1998 added $7,409 to the level of loan loss reserves. However, strong
loan growth during 1998, 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, 1998 to $8,000 from $61,000 one year earlier. 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
$1,134,000 at December 31, 1998 to be adequate.
At December 31, 1998, the allowance for loan losses as a percentage of
outstanding loans was 1.20% as compared to 1.34% at December 31, 1997. 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 Board of Directors. The
Board of Directors reviews the Company's Classified and Criticized Loans
Quarterly Report and quarterly loan loss analyses. In addition, the Company'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 the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination. The Company also has an independent loan review
performed by a consultant on an annual basis. While management uses available
information to recognize losses on loans, future additions may be necessary
based on changes in economic conditions and other factors.
16
<PAGE>
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, 1998, 1997 and 1996.
Allocation of Allowance for Loan Losses
At December 31, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
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 $ 573 45.4% $ 486 45.6% $ 438 53.8%
Real estate - commercial mortgage 493 48.3 464 45.1 360 33.9
Real estate - residential mortgage 12 1.4 23 2.3 19 3.6
Real estate - construction -- -- 49 4.9 31 5.7
Installment 48 4.9 59 2.1 83 3.0
Unallocated 8 -- 61 -- 117 --
------ ----- ------ ----- ------ -----
Total $1,134 100.0% $1,142 100.0% $1,048 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Nonperforming Assets
Nonperforming assets include nonaccrual loans, restructured loans, past due
loans and other real estate. See Note 4 of the Notes to Consolidated Financial
Statements.
Nonaccrual loans at December 31, 1998 of $295,000 decreased by $116,000
from $411,000 at December 31, 1997. Past due loans increased by $33,000 to
$136,000 at December 31, 1998 from $103,000 at December 31, 1997. At
December 31, 1998 and 1997, nonaccrual loans included $0 and $104,000,
respectively, in loans guaranteed by the SBA for a total of $0 and $94,000,
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.
The table entitled "Analysis of Nonperforming Assets" presents
nonperforming assets, by category, at December 31, 1998 and 1997.
17
<PAGE>
Analysis of Nonperforming Assets
At December 31, 1998 and 1997
(Dollars in thousands)
1998 1997
----- -----
Nonaccrual loans:
Commercial $ 208 $ 411
Real estate - commercial mortgage 87 --
----- -----
Total nonaccrual loans /1/ 295 411
Past due loans:
Real estate - commercial mortgage -- 96
Installment - individuals 136 7
----- -----
Total past due loans 136 103
Restructured loans:
Commercial -- --
----- -----
Total restructured loans -- --
----- -----
Total nonperforming assets $ 431 $ 514
===== =====
Total nonperforming assets exclusive
of SBA guaranteed balances $ 383 $ 420
===== =====
Ratio of nonperforming asset
to gross loans /2/ .46% .60%
Ratio of nonperforming assets
to total assets /2/ .33% .32%
Percentage of allowance for loan losses to
nonperforming assets /2/ 262% 222%
Ratio of net charge-offs (recoveries) to
average loans (.01)% (.12)%
- -----------------------------
1 Nonaccrual loans include $0 and $104,000 in loans guaranteed by the SBA at
December 31, 1998 and 1997, respectively. The outstanding balance of these
loans at December 31, 1997 was insured for 90.0% or $94,000.
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, 1998 and 1997, respectively, loans totaling $1,339,000 and
$1,154,000 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
subject to management attention and their classification is reviewed on a
quarterly basis. Of the $1,339,000 in problem loans at December 31, 1998, 38% of
18
<PAGE>
the balance is guaranteed by the SBA for a total of $504,000. The remaining 62%
of the balance, or $835,000 is fully secured.
Market Risk
The Company like most financial institutions has as its greatest market
risk exposure fluctuations in interest rates. The Company has established the
Asset/Liability Committee to monitor and manage those risks. The company manages
its interest rate risk sensitivity through the use of a simulation model that
project the impact of rate shocks, rate cycles and rate forecast risk
estimates on the net interest income and economic value of equity. The rate
shock risk simulation projects the dollar change in the net interest margin and
the economic value of equity should the yield curve instantaneously shift up or
down parallel to its beginning position. This simulation provides a test for
embedded interest rate risk estimates and other factors such as prepayments,
repricing limits, and decay factors. At December 31, 1998, a rate shift of up
200 basis points indicates a positive change of $698,000 or 11.27% increase in
net interest income and the impact on the economic value of equity an increase
of $344,000 or a 2.82% change from the base case. Likewise, an immediate rate
shift of down 200 basis points indicates a negative $412,000 or 6.65% change in
the net interest income and the impact on the economic value of equity a
negative change of $822,000 or a 13.27% change from the base case.
The rate forecast risk analysis projects a "most likely" interest rate risk
stress test is based on current market conditions. At December 31, 1998, the
forecasted impact of the "most likely" scenario over a one year time frame was a
change in net interest margin of a positive $10,000 or .16%, and the impact on
the economic value of equity projected one year forward was a negative $196,000
or -1.43%. The results of the simulation modeling at December 31, 1998 indicated
that the company maintained an asset sensitive position and that the current
interest rate sensitivity level is manageable and moderate.
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 $11,443,000 in cash and short-term investments at December 31, 1998,
the Company has a securities portfolio which can be pledged to raise additional
deposits and borrowings, if necessary. At December 31, 1998, the Company had
$8,845,000 in unpledged securities which were available for such use. This
compares with cash and short-term investments of $15,885,000 and unpledged
securities of $8,003,000 at December 31, 1997. As a percentage of total assets,
the amount of these cash equivalent assets at December
19
<PAGE>
31, 1998 and 1997 was 16% and 18%, respectively. Normal fluctuations in the
deposit levels of some of the Company's large corporate customers may result in
corresponding fluctuations in the Company's liquidity position (short-term
investments). On average, the Company's short-term investments, which consist of
Federal funds sold and interest-bearing deposits in other banks, decreased
during 1998 by $3,795,000, or 48%, to $11,682,000 for 1998 as compared to
$7,887,000 for 1997. 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% and 71% of the average total
deposit base in 1998 and 1997, respectively. 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 Bank maintained an average loan to
deposit ratio of 76% and 81% during 1998 and 1997, respectively, and accesses
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, at December 31, 1998 the Bank was eligible to borrow up to
approximately $1,820,000 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 December 31, 1998, $1,023,000 in borrowings
from the FHLB were outstanding. The Bank is eligible to increase the maximum
amount to be borrowed by $7,200,000 with the purchase of $226,000 of additional
stock in the FHLB. The Company has adequate resources to meet its liquidity
needs.
The net increase in the loan portfolio and the purchase of investment
securities was funded by the repayment of loans, the decrease in cash and short-
term investments, as well as matured investment securities, which contributed to
an overall decrease in investing activities. Financing activities decreased due
to the net decrease in deposits and the payment of dividends, partially offset
by the net increase in short-term borrowings and common stock issued from the
exercise of stock options by employees.
20
<PAGE>
Summary of Operations by Quarter and Summary of Market Data
Summary of Operations by Quarter
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 quarters ended
------------------------------------------------------------
3/31 6/30 9/30 12/31 Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income $ 2,638 $ 2,645 $ 2,788 $ 2,682 $ 10,753
Net interest income 1,604 1,702 1,771 1,747 6,824
Benefit (Provision) for loan losses 25 -- -- (10) 15
Net Income 265 (642) 700 493 816
Per common share /2/:
Basic earnings .13 (.31) .34 .24 .40
Diluted earnings .13 (.30) .33 .23 .39
Dividends declared /1,2/ .08 -- .08 .08 .24
Average shares outstanding for:
Basic earnings per share 2,039,585 2,056,352 2,061,850 2,061,850 2,055,014
Diluted earnings per share 2,097,955 2,121,303 2,116,649 2,126,836 2,115,791
<CAPTION>
1997 quarters ended
------------------------------------------------------------
3/31 6/30 9/30 12/31 Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income $ 2,102 $ 2,292 $ 2,559 $ 2,650 $ 9,603
Net interest income 1,296 1,363 1,551 1,571 5,781
Net income 249 237 333 (477) 342
Per common share: /2/
Basic earnings .12 .12 .16 (.23) .17
Diluted earnings .11 .11 .16 (.22) .16
Dividends declared /1,2/ .08 .08 .08 --- .24
Average shares outstanding for:/2/
Basic earnings per share 2,037,706 2,038,681 2,038,681 2,038,681 2,038,331
Diluted earnings per share 2,088,875 2,092,115 2,092,139 2,096,441 2,092,371
</TABLE>
- --------------------------------
1 For information on dividend restrictions, see Note 12 of the Notes to
Consolidated Financial Statements.
2 The Per common share data and Average shares outstanding give effect to a
five-for-four stock split in the form of a stock dividend which took place
on December 31, 1998.
Summary of Market Data
<TABLE>
<CAPTION>
Quarters ended
----------------------------------------------------------------------------------------
3/31 6/30 9/30 12/31 Total
-------------- -------------- ---------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Common stock market data /1, 2/
1998 $11 1/5-11 1/2 $11 3/5-11 4/5 $12-12 1/5 $13 3/5-14 1/5 $12 11/32-12 1/3
1997 9 - 9 4/5 9 1/5-10 3/5 8 3/5-11 9 4/5-11 3/5 8 3/5-11 3/5
</TABLE>
- --------------------------------
1 The above data presents the range of high and low bid price quotations for
the shares as reported by the Nasdaq National Market. The prices reported
by the National Quotation Bureau reflect inter-dealer prices without retail
mark-up, mark-down or commissions and do not necessarily represent actual
transactions.
2 Common stock market data gives effect to a five-for-four stock split in the
form of a stock dividend which took place on December 31, 1998.
21
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Assets
Cash and due from banks $ 5,836,099 $ 7,654,347
Short-term investments:
Federal funds sold 3,793,204 6,450,000
Interest-bearing deposits in other banks 1,814,084 1,781,000
------------ ------------
Total short-term investments 5,607,288 8,231,000
Securities available for sale 13,813,009 20,452,799
Investment securities (market value of $8,027,302 and $7,532,256
for 1998 and 1997, respectively) 7,976,376 7,508,850
Loans (net of deferred fees and unearned discounts) 94,219,747 85,313,591
Less: Allowance for loan losses (1,134,128) (1,141,719)
------------ ------------
Loans, net 93,085,619 84,171,872
------------ ------------
Bank premises and equipment, net 1,159,827 1,252,413
Other assets 1,403,106 1,967,733
------------ ------------
Total assets $128,881,324 $131,239,014
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand deposits $ 31,058,149 $ 27,184,087
NOW accounts 9,499,197 9,880,968
Money market accounts 26,207,011 26,969,638
Savings accounts 2,797,881 1,898,721
Certificates of deposit of $100,000 or greater 18,158,496 25,255,095
Certificates of deposit less than $100,000 20,944,354 21,072,887
------------ ------------
Total deposits 108,665,088 112,261,396
------------ ------------
Short-term borrowings 4,647,740 3,489,263
Long-term borrowings/debt 1,022,711 1,085,936
Other liabilities 946,502 1,372,681
------------ ------------
Total liabilities 115,282,041 118,209,276
------------ ------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.01 per share, authorized 6,250,000 shares;
issued 2,091,760 shares in 1998 and 2,069,882 shares in 1997;
outstanding 2,085,910 shares in 1998 and 2,064,032 shares in 1997 20,918 20,699
Surplus 12,482,926 12,227,447
Retained earnings 1,325,052 1,044,369
------------ ------------
13,828,896 13,292,515
Less: Employee Stock Ownership Plan shares, 23,396 shares in 1998 and
25,107 shares in 1997, at cost (204,716) (219,687)
Less: Treasury stock, 5,850 shares at cost (28,710) (28,710)
Less: Accumulated other comprehensive income (loss), net of tax 3,813 (14,380)
------------ ------------
Total stockholders' equity 13,599,283 13,029,738
------------ ------------
Total liabilities and stockholders' equity $128,881,324 $131,239,014
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations and
Comprehensive Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 8,593,850 $7,879,610 $6,072,500
Interest on securities available for sale:
U.S. Treasury 57,066 31,582 48,098
Obligations of U.S. government agencies and corporations 1,024,618 652,203 207,408
----------- ---------- ----------
Total interest on securities available for sale 1,081,684 683,785 255,506
Interest and dividends on investment securities:
U.S. Treasury 138,561 59,787 49,700
Obligations of U.S. government agencies and corporations 233,886 481,328 394,780
Mortgage-backed securities 12,870 8,390 27,705
Obligations of states and municipalities 15,965 15,965 1,907
Other securities 38,517 32,797 25,468
----------- ---------- ----------
Total interest and dividends on investment securities 439,799 598,267 499,560
Interest on short-term investments:
Federal funds sold 485,676 352,235 692,614
Deposits with other banks 152,268 88,633 53,044
----------- ---------- ----------
Total interest on short-term investments 637,944 440,868 745,658
----------- ---------- ----------
Total interest income 10,753,277 9,602,530 7,573,224
----------- ---------- ----------
Interest expense
Interest on deposits:
NOW accounts 209,995 182,782 194,092
Money market accounts 1,115,404 1,128,860 1,028,668
Savings accounts 60,251 42,979 34,182
Certificates of deposit:
$100,000 or greater 1,177,991 1,206,372 583,180
Less than $100,000 1,108,436 1,048,540 970,818
----------- ---------- ----------
Total interest on deposits 3,672,077 3,609,533 2,810,940
Interest on short-term borrowings:
Federal funds purchased and
repurchase agreements 184,134 134,909 104,532
----------- ---------- ----------
Total interest on short-term borrowings 184,134 134,909 104,532
Interest on long-term borrowings/debt 73,535 77,162 17,435
----------- ---------- ----------
Total interest expense 3,929,746 3,821,604 2,932,907
----------- ---------- ----------
Net interest income 6,823,531 5,780,926 4,640,317
Benefit for loan losses 15,000 -- 275,000
----------- ---------- ----------
Net interest income after benefit for
loan losses 6,838,531 5,780,926 4,915,317
----------- ---------- ----------
(Continued)
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations and
Comprehensive Income (Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Other income
Service charges on deposit accounts $1,160,262 $1,125,694 $ 788,207
Other income 174,852 78,403 164,996
---------- ---------- ----------
Total other income 1,335,114 1,204,097 953,203
---------- ---------- ----------
Other expense
Salaries and employee benefits 3,157,693 2,255,446 1,904,873
Occupancy and equipment expense 1,230,854 1,008,792 777,513
Professional fees 795,854 1,289,650 143,357
Data processing fees 560,053 495,455 358,555
Other operating expense 1,093,373 1,369,346 909,098
---------- ---------- ----------
Total other expense 6,837,827 6,418,689 4,093,396
---------- ---------- ----------
Income before taxes 1,335,818 566,334 1,775,124
Applicable income tax expense 519,449 224,507 647,819
---------- ---------- ----------
Net income $ 816,369 $ 341,827 $1,127,305
---------- ---------- ----------
Other comprehensive income:
Unrealized gains on securities,
before tax $ 30,350 $ 33,183 $ 10,752
Income tax expense related to items
of other comprehensive income (12,157) (13,573) (4,475)
---------- ---------- ----------
Other comprehensive income, net of
tax 18,193 19,610 6,277
---------- ---------- ----------
Comprehensive income $ 834,562 $ 361,437 $1,133,582
========== ========== ==========
Earnings per common share:
Basic earnings per common share $0.40 $0.17 $0.75
========== ========== ==========
Diluted earnings per common share $0.39 $0.16 $0.74
========== ========== ==========
Average shares outstanding for
computation of:
Basic earnings 2,055,014 2,038,331 1,501,004
Diluted earnings 2,115,791 2,092,371 1,524,381
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Employee Accumulated
Additional Retained Stock Other
Common Paid-in Earnings Treasury Ownership Comprehensive
Stock Capital (Deficit) Stock Plan Income (loss) Total
------ ---------- --------- -------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,1995 $10,740 $ 6,145,273 $ 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 994,375 shares
of common stock, net 9,944 6,008,984 --- --- --- --- 6,018,928
Employee Stock Ownership
Plan, 31,250 shares --- 54,688 --- --- (273,438) --- (218,750)
Release of shares under
Employee Stock Ownership
Plan, 5,851 shares --- 3,804 --- --- 51,196 --- 55,000
Unrealized gain on securities,
net of taxes --- --- --- --- --- 6,277 6,277
-------- ----------- ---------- --------- --------- ------------ -----------
Balance at December 31, 1996 20,684 12,212,749 1,191,706 (28,710) (222,242) (33,990) 13,140,197
-------- ----------- ---------- --------- --------- ------------ -----------
Net income --- --- 341,827 --- --- --- 341,827
Dividends declared --- --- (489,164) --- --- --- (489,164)
Issuance of shares under Employee
Incentive Stock Option Plan 15 9,752 --- --- --- --- 9,767
Release of shares under
Employee Stock Ownership
Plan, 292 shares --- 4,946 --- --- 2,555 --- 7,501
Unrealized gain on securities,
net of taxes --- --- --- --- --- 19,610 19,610
-------- ----------- ---------- --------- --------- ------------ -----------
Balance at December 31, 1997 20,699 12,227,447 1,044,369 (28,710) (219,687) (14,380) 13,029,738
-------- ----------- ---------- --------- --------- ------------ -----------
Net income --- --- 816,369 --- --- --- 816,369
Dividends declared --- --- (535,686) --- --- --- (535,686)
Issuance of shares under Employee
Incentive Stock Option Plan 219 253,028 --- --- --- --- 253,247
Release of shares under
Employee Stock Ownership
Plan, 1,711 shares --- 2,451 --- --- 14,971 --- 17,422
Unrealized gain on securities,
net of taxes --- --- --- --- --- 18,193 18,193
-------- ----------- ---------- --------- --------- ------------ -----------
Balance at December 31, 1998 $20,918 $12,482,926 $1,325,052 $(28,710) $(204,716) $ 3,813 $13,599,283
======== =========== ========== ========= ========= ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Operating Activities
Net income $816,369 $ 341,827 $ 1,127,305
Adjustments to reconcile net income to net cash
provided by operating activities:
Benefit for loan losses (15,000) -- (275,000)
ESOP compensation expense paid in stock -- 6,203 --
Depreciation and amortization 434,304 308,584 164,475
Profit sharing contribution of ESOP shares 11,925 -- 55,000
Gain on sale of other real estate -- -- (27,181)
Accretion of loan discounts and fees (166,543) (194,242) (122,194)
Accretion of discounts on securities (35,142) (164,508) (10,200)
(Benefit) provision for deferred income taxes (69,335) 54,351 31,174
Increase (decrease) in other assets 631,282 (766,282) (25,514)
(Decrease) increase in other liabilities (426,179) 709,748 5,175
------------ ------------ ------------
Net cash provided by operating activities 1,181,681 186,979 923,040
------------ ------------ ------------
Investing Activities
Proceeds from repayment and maturity of investment securities 6,498,192 6,150,000 5,300,000
Proceeds from maturity of securities available for sale 25,000,000 18,810,000 9,000,000
Proceeds from repayment of mortgage-backed securities 93,715 64,762 117,452
Purchase of investment securities (7,003,891) (2,058,500) (8,830,713)
Purchase of securities available for sale (18,359,738) (27,884,125) (14,710,872)
Net increase in interest-bearing deposits in other banks (33,084) (302,000) (992,285)
Principal collected on loans 16,102,095 17,890,513 12,858,837
Loans originated (22,633,450) (30,528,260) (19,815,190)
Net decrease (increase) in short-term loans 653,391 (64,981) (200,684)
Net (increase) decrease in lines of credit (2,854,238) 690,025 (2,331,395)
Purchase of bank premises and equipment (341,718) (720,946) (727,009)
Investment in other real estate -- -- (78,250)
Proceeds from disposition of other real estate -- -- 344,562
------------ ------------ ------------
Net cash used in investing activities (2,878,726) (17,953,512) (20,065,547)
------------ ------------ ------------
Financing Activities
Net increase in transaction and savings deposits 3,628,824 3,302,282 9,134,873
Proceeds from issuance of time deposits 38,309,679 54,949,563 23,785,579
Payments for maturing time deposits (45,534,811) (41,145,189) (20,828,907)
Net increase in short-term borrowings 1,158,477 1,572,574 131,287
Payments on long-term debt -- -- (186,250)
Proceeds from other long-term borrowings -- -- 1,143,000
Payments on other long-term borrowings (63,225) (52,879) (4,185)
Proceeds from issuance of common stock, net of expenses 258,743 9,767 6,018,928
Loan to Employee Stock Ownership Plan -- -- (218,750)
Cash dividends paid to common stockholders (535,686) (650,370) (376,136)
------------ ------------ ------------
Net cash (used in) provided by financing activities (2,777,999) 17,985,748 18,599,439
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (4,475,044) 219,215 (543,068)
Cash and cash equivalents at beginning of year 14,104,347 13,885,132 14,428,200
------------ ------------ ------------
Cash and cash equivalents at end of year $ 9,629,303 $ 14,104,347 $ 13,885,132
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
--------- --------- ---------
Supplementary disclosures:
Interest paid on deposits and
borrowings $4,022,522 $3,659,897 $2,928,906
========== ========== ==========
Income taxes paid $ 0 $ 798,600 $ 651,600
========== ========== ==========
See accompanying notes to consolidated financial statements.
27
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 classification 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. Unrealized
gains and losses reflect the difference between fair market value and
amortized cost of the individual securities as of the reporting date.
The unrealized gain on securities recognized had the effect of
increasing the Company's stockholders' equity by approximately $4,000,
net of tax, at December 31, 1998, and the unrealized loss on securities
recognized had the effect of decreasing the Company's stockholders'
equity by approximately $14,000, net of tax, at December 31, 1997. 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 their 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, generally when a loan
which is well secured becomes 90 days past due or management becomes
aware of other circumstances which indicate that accrual of interest is
no longer appropriate. Accrued interest at that date on such loans is
either charged against current income or the allowance for loan losses.
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. Loans, and the related
28
<PAGE>
accrued interest, which are past due 90 days or more which are not well-
secured are charged to the allowance for loan losses.
The Company follows SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan", which defines impaired loans as specifically
reviewed loans for which it is probable that the Company will be unable
to collect all amounts due according to the terms of the loan agreement.
The Company's impaired loans generally are defined as nonaccrual,
restructured and potential problem loans as detailed in Note 4. Per SFAS
No. 114, impaired loans do not include large groups of smaller balance
loans with similar collateral characteristics such as residential
mortgage and consumer installment loans, which are evaluated
collectively for impairment. Impaired loans are therefore primarily
commercial and industrial loans, real estate commercial mortgage and
construction and development loans.
(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
recoveries and provisions charged to operating expense and is decreased
by loans charged-off. 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.
The specific reserves for impaired loans, under SFAS No. 114 at December
31, 1998, are included in the allowance for loan losses discussed above.
Impaired loans are valued based on the fair value of the related
collateral if the loans are collateral dependent, and for all other
impaired loans, the specific reserves approximate the present values of
expected future cash flows discounted at each loan's initial effective
interest rate.
(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 been 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.
29
<PAGE>
(h) Stockholders' Equity
All financial information presented gives retroactive effect to the
issuance on December 31, 1998 of a five- for-four stock split in the
form of a stock dividend of five shares of Common Stock for each four
shares of Common Stock outstanding.
(i) Earnings Per Share
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). SFAS No. 128, which supersedes Accounting Principles Board
Opinion No. 15 ("APB No. 15"), conforms earnings per share to the
international standards, as well as simplifies the computation under APB
No. 15. Basic earnings per share is calculated by dividing net income
after deduction for preferred stock dividends, if any, 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, if any, by the weighted average number of shares of common
stock and common stock equivalents, unless determined to be anti-
dilutive. The weighted average shares outstanding were 2,055,014,
2,038,331 and 1,501,004 for 1998, 1997 and 1996, respectively. The
dilutive effect of stock option plans on weighted average shares
outstanding was 60,777, 54,040 and 23,377 for the same periods.
(j) 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. Items applicable to the Company include unrealized
gains and losses on securities available for sale. Items identified as
comprehensive income are reported in the financial statements, under
separate captions. SFAS No. 130 became effective for the Company on
January 1, 1998 including the restatement of prior periods reported
consistent with this pronouncement. The implementation of SFAS 130 has
not had a material impact on the Company.
(k) 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 would
have been effective for the Company on January 1, 1998, including the
restatement of prior periods reported consistent with this
pronouncement, if practical. The Company did not have more than one
reportable segment, thus the implementation of SFAS 131 did not have an
impact.
30
<PAGE>
(l) 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. SFAS No. 133 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 company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The
Company may also implement the SFAS No. 133 as of the beginning of any
fiscal quarter beginning on June 16, 1998 and thereafter. SFAS No. 133
cannot be applied retroactively. SFAS No. 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 No. 133 is
not expected to have a material impact on the Company.
(m) 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 owned or serving as collateral for loans.
(n) Reclassifications
Certain reclassifications have been made to amounts previously reported
in 1997 and 1996 to conform with the 1998 presentation.
(o) Income Taxes
The Corporation records a provision for income taxes based upon the
amounts of current taxes payable (or refundable) and the change in net
deferred tax assets or liabilities during the year. Deferred tax assets
and liabilities are recognized for the tax effects of differing carrying
values of assets and liabilities for tax and financial statement
reporting purposes that will reverse in future periods. Using
management's judgement and estimates concerning the likelihood of
realization in future periods, deferred tax assets are reduced by a
valuation allowance as necessary.
31
<PAGE>
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. Restricted balances maintained totaled
$1,785,000 and $1,749,000 at December 31, 1998 and 1997, respectively. There
were no other withdrawal, usage restrictions or legally required compensating
balances at December 31, 1998 or 1997.
3. Securities
Investment securities (including held to maturity and other securities) at
December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
Gross Gross
Adjusted Unrealized Unrealized Market
Cost Basis Gains Losses Value
---------- --------- -------- -------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 3,002,261 $14,302 $ -- $3,016,563
After one, but within five years -- -- -- --
--------- ------ -------- ---------
Total 3,002,261 14,302 -- 3,016,563
--------- ------ -------- ---------
Obligations of U.S. government
agencies and corporations:
Within one year -- -- -- --
After one, but within five years 3,999,109 26,141 -- 4,025,250
--------- ------ -------- ---------
Total 3,999,109 26,141 -- 4,025,250
--------- ------ -------- ---------
Obligations of states and
municipalities:
After ten years 310,000 6,423 -- 316,423
--------- ------ -------- ---------
Mortgage-backed securities:
Federal Home Loan Mortgage Corp.:
After one, but within five years 93,106 4,060 -- 97,166
--------- ------ -------- ---------
Corporate securities (1) 12,500 -- -- 12,500
--------- ------ -------- ---------
Federal Reserve Bank Stock (1) 173,200 -- -- 173,200
--------- ------ -------- ---------
Federal Home Loan Bank Stock (1) 386,200 -- -- 386,200
--------- ------ -------- ---------
Total investment securities $7,976,376 $50,926 $ -- $8,027,302
========== ======= ======== ==========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Gross Gross
Adjusted Unrealized Unrealized Market
Cost Basis Gains Losses Value
---------- --------- -------- -------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 499,943 $ 1,307 $ -- $ 501,250
After one, but within five years 1,000,000 -- -- 1,000,000
---------- ------- -------- ----------
Total 1,499,943 1,307 -- 1,501,250
---------- ------- -------- ----------
Obligations of U.S. government
agencies and corporations:
Within one year 3,489,283 10,105 -- 3,499,388
After one, but within five years 1,497,724 -- 224 1,497,500
---------- ------- -------- ----------
Total 4,987,007 10,105 224 4,996,888
---------- ------- -------- ----------
Obligations of states and municipalities:
After ten years 310,000 3,602 -- 313,602
---------- ------- -------- ----------
Mortgage-backed securities:
Federal Home Loan Mortgage Corp.:
After one, but within five years 196,300 8,616 -- 204,916
---------- ------- -------- ----------
Corporate securities (1) 12,500 -- -- 12,500
---------- ------- -------- ----------
Federal Reserve Bank Stock (1) 173,200 -- -- 173,200
---------- ------- -------- ----------
Federal Home Loan Bank Stock (1) 329,900 -- -- 329,900
---------- ------- -------- ----------
Total investment securities $7,508,850 $23,630 $ 224 $7,532,256
========== ======= ======== ==========
</TABLE>
1 Corporate securities, Federal Reserve Bank and Federal Home Loan Bank Stocks
have no stated maturities.
Securities available for sale at December 31, 1998 and 1997 are summarized
below:
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Gross Gross
Adjusted Unrealized Unrealized Market
Cost Basis Gains Losses Value
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 1,002,454 $ 4,109 $ -- $ 1,006,563
------------ ------- -------- -----------
Obligations of U.S. government:
After one, but within five years 6,804,722 30,970 9,929 6,825,763
After five, but within ten years 5,999,395 152 18,864 5,980,683
------------ ------- -------- -----------
12,804,117 31,122 28,793 12,806,446
------------ ------- -------- -----------
Total securities available for sale $ 13,806,571 $35,231 $ 28,793 $13,813,009
============ ======= ======== ===========
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Gross Gross
Adjusted Unrealized Unrealized Market
Cost Basis Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury:
After one, but within five years $ 1,009,138 $ 237 $ -- $ 1,009,375
----------- ------ ------- -----------
Obligations of U.S. government:
Within one year 5,933,057 2,347 887 5,934,517
After one, but within five years 13,523,289 2,876 17,258 13,508,907
----------- ------ ------- -----------
19,456,346 5,223 18,145 19,443,424
----------- ------ ------- -----------
Total securities available for sale $20,465,484 $5,460 $18,145 $20,452,799
=========== ====== ======= ===========
</TABLE>
Securities in the amount of approximately $13,033,000 and $19,443,000 were
pledged to collateralize public deposits and repurchase agreements at December
31, 1998 and 1997, respectively.
During 1998 and 1997, the Company held one security totaling $310,000 which was
exempt from federal taxation.
4. Loans
Loans at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Commercial and industrial $23,094,000 $20,254,000
Real estate:
Commercial mortgage 43,924,000 41,730,000
Residential mortgage 20,190,000 17,531,000
Construction and development 5,154,000 3,498,000
Installment to individuals 2,069,000 2,569,000
----------- -----------
94,431,000 85,582,000
Less: Deferred income and unearned discounts (211,000) (268,000)
----------- -----------
Total $94,220,000 $85,314,000
=========== ===========
</TABLE>
Loan concentrations at December 31, 1998 and 1997 are summarized as follows:
1998 1997
---- ----
Service industry 38% 34%
Real estate development/finance 32 31
Wholesale/retail 22 23
Other 8 12
---- ----
Total 100% 100%
==== ====
A substantial portion, $69,268,000, or approximately 74%, at December 31,
1998, and $61,948,000, or approximately 73%, at December 31, 1997, 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.
Transactions in the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996 are summarized as follows:
34
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1 $1,141,719 $1,048,487 $1,273,965
Net benefit for loan losses (15,000) -- (275,000)
Recoveries:
Commercial 21,836 103,533 52,082
Real estate: /1/
Commercial mortgage 13,278 56,277 680
Installment to individuals 98,019 34,878 111,981
---------- ---------- ----------
Total recoveries 133,133 194,688 164,743
---------- ---------- ----------
Loans charged off:
Commercial (67,861) (3,000) (71,937)
Installment to individuals (57,863) (98,456) (43,284)
---------- ---------- ----------
Total loans charged off (125,724) (101,456) (115,221)
---------- ---------- ----------
Net recoveries 7,409 93,232 49,522
---------- ---------- ----------
Balance at December 31 $1,134,128 $1,141,719 $1,048,487
========== ========== ==========
</TABLE>
1 The Company has had no charge-offs for construction and development loans.
Included in the accompanying consolidated balance sheets are certain loans
that are accounted for on a nonaccrual basis. These nonaccrual loans totaled
approximately $295,000, $411,000 and $963,000 at December 31, 1998, 1997 and
1996, respectively. Had the loans been current in accordance with their
original terms, gross interest income for these loans would have been $32,000,
$54,000 and $124,000 in 1998, 1997 and 1996, respectively. Nonaccrual loans
include $0, $104,000 and $607,000 in loans guaranteed by the U.S. Small
Business Administration at December 31, 1998, 1997 and 1996, respectively.
These loans are guaranteed for an average of 90% of the outstanding balance at
December 31, 1997, or $94,000, and 97.9% of the outstanding balance, or
$594,000 at December 31, 1996. Also included in the accompanying consolidated
balance sheets are $0, $0 and $573,000 in loans at December 31, 1998, 1997 and
1996, 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
$0, $0 and $63,000 in 1998, 1997, and 1996, respectively, which is not
materially different from that which would have been recorded if the loans had
been current in accordance with their original terms. As of year-end 1998,
1997 and 1996, 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, 1998, 1997 and 1996. At December 31, 1998, 1997
and 1996, the Company had $136,000, $103,000 and $153,000, respectively, in
loans greater than 90 days delinquent which were still accruing interest.
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 $295,000, $698,000 and $1,955,000 at December 31, 1998, 1997 and 1996,
respectively. Of the balance at December 31, 1998, 1997 and 1996, $295,000,
$411,000 and $1,509,000, respectively, are on nonaccrual status or as
restructured loans. Included in these amounts for December 31, 1998, 1997 and
1996, respectively, are
35
<PAGE>
$295,000, $544,000 and $1,855,000 of impaired loans for which the related
impairment allowance is $70,000, $116,000 and $264,000. Loans that do not have
an impairment allowance were $156,000, $154,000 and $100,000 at December 31,
1998, 1997 and 1996, respectively. The average recorded investment in impaired
loans was $426,000, $1,587,000 and $2,619,000 during 1998, 1997 and 1996,
respectively. Interest income recognized on impaired loans during the years
ended December 31, 1998, 1997 and 1996 which has not been disclosed above in
the discussion of nonaccrual and restructured loans was $0, $23,000 and
$19,000, respectively. The allowance for credit losses contains additional
amounts for impaired loans as deemed necessary to maintain allowances at
levels considered adequate by management.
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 for comparable loans with other persons and do not involve more
than the normal risk of collectibility. At December 31, 1998 and 1997, 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, 1998 and 1997 was as follows:
1998 1997
---------- ------------
Balance at January 1 $ 133,748 $ 1,236,852
Additions 0 319,593
Repayments (128,748) (1,399,466)
Retirements 0 (23,231)
--------- -----------
Balance at December 31 $ 5,000 $ 133,748
========= ===========
5. Bank Premises and Equipment
Bank premises and equipment at December 31, 1998 and 1997 is summarized as
follows:
1998 1997
------------ ------------
Furniture, fixtures and equipment $ 1,386,047 $ 1,281,275
Leasehold improvements 2,441,120 2,208,979
----------- -----------
Total, at cost 3,827,167 3,490,254
Less: Accumulated depreciation and amortization (2,667,340) (2,237,841)
----------- -----------
Total, net $ 1,159,827 $ 1,252,413
=========== ===========
Amounts charged to operating expenses for depreciation and amortization
expense aggregated $434,304, $308,584 and $164,475 in 1998, 1997 and 1996,
respectively.
6. Interest-Bearing Deposits
Related party deposits totaled approximately $188,000 and $5,704,000 at
December 31, 1998 and 1997, respectively. The decline in the related party
deposits was due to the change in control in the Board of Directors and
management of the Company. In management's opinion, rates paid on these
deposits, where applicable, are available to others at the same terms.
36
<PAGE>
At December 31, 1998 and 1997, brokered deposits totaled approximately
$495,000 and $8,790,000, respectively. The decrease in the balance of
brokered deposits was due to maturities during 1998. No new broker deposits
were made during 1998.
At December 31, 1998, time deposits totaling $1,866,000 have scheduled
maturities greater than one through five years.
2000 $1,296,000
2001 247,000
2002 209,000
2003 114,000
----------
Total $1,866,000
==========
7. Leasing Arrangements
The Company leases its main office space under two leases which expire in
2002. The Company also leases space for four branch offices and two automated
teller machines. The leases on the Union Station branch and the two automated
teller machines expire in 1999. The lease on the Dupont Circle East branch
expires in 2016, the lease on the Chinatown branch expires in 2007, and the
lease on the Georgetown branch expires in 2008. All leases are classified as
operating leases.
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, 1998:
1999 $ 562,468
2000 564,842
2001 569,013
2002 514,240
2003 239,229
2004 and thereafter 1,570,323
----------
Total $4,020,115
==========
Rental expense in 1998, 1997 and 1996 was approximately $582,000, $505,000
and $464,000, respectively.
37
<PAGE>
8. Income Taxes
Income tax expense for 1998, 1997 and 1996 consists of:
1998 1997 1996
---------- ---------- ----------
Current:
Federal $520,648 $235,260 $484,762
District of Columbia 68,136 43,598 131,883
------ ------ -------
588,784 278,858 616,645
------- ------- -------
Deferred:
Federal (52,279) (37,060) 6,290
District of Columbia (17,056) (17,291) 24,884
------- ------- -------
(69,335) (54,351) 31,174
------- ------- -------
Total:
Federal 468,369 198,200 491,052
District of Columbia 51,080 26,307 156,767
------- ------- -------
$519,449 $224,507 $647,819
======== ======== ========
Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 34 percent to pretax income as a result of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ----------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate $454,178 34.0% $192,554 34.0% $603,542 34.0%
Increase in taxes
resulting from District of
Columbia franchise tax, net
of Federal tax effect 46,185 3.5 14,186 2.5 103,466 5.8
Other 19,086 1.4 17,767 3.1 (59,189) (3.3)
-------- ----- -------- ----- --------- ----
$519,449 38.9% $224,507 39.6% $647,819 36.5%
======== ===== ======== ===== ========= ====
</TABLE>
38
<PAGE>
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, 1998 and 1997:
1998 1997
------- -------
Deferred tax assets:
Allowance for loan losses $148,780 $151,457
Interest income on nonaccrual loans 5,253 5,253
Deferred loan fees 93,397 111,482
Furniture and equipment 181,194 54,522
Unrealized losses on securities 2,624 9,748
Compensated absences (4,277) 36,880
-------- --------
Total gross deferred tax assets 426,971 369,342
Deferred tax liabilities:
Prepaid expenses (8,821) (13,860)
Other (2,927) (2,470)
-------- --------
Total gross deferred tax liabilities (11,748) (16,330)
-------- --------
Net deferred tax assets $415,223 $353,012
======== ========
The net deferred income tax asset at December 31, 1998 and 1997 was $415,223
and $353,012, respectively, and are included in other assets in the
accompanying financial statements. Also included in other assets at December
31, 1998 and 1997, were current tax receivables of $0 and $589,000,
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, 1998 to collateralize
this debt is disclosed in Note 10 below. Annual principal maturities as of
December 31, 1998 are as follows:
1999 $ 64,402
2000 70,794
2001 77,821
2002 85,544
2003 94,034
2004 and thereafter 630,116
----------
$1,022,711
==========
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,
1998 and 1997 of $4,647,740 and $3,489,263, 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
39
<PAGE>
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, 1998 and 1997 was approximately $4,700,000 and
$4,787,000, respectively.
Other short-term borrowings may 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, 1998 and 1997, the outstanding balances of loans
pledged at December 31, 1998 and 1997 to collateralize long-term borrowings
as well as future long term borrowings from the FHLB was $3,755,000 and
$4,011,000, respectively. The excess collateral value of the loans pledged
at both December 31, 1998 and 1997 was approximately $1,820,000 and
$1,860,000, respectively.
Short-term borrowings for 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal funds purchased
Balance at end of year -- $ --
Daily average balance outstanding during year -- 14,383
Maximum balance outstanding as of any month-end during year -- --
Daily average interest rate during year -- 5.41%
Securities sold under repurchase agreements
Balance at end of year $4,647,740 $3,489,263
Daily average balance outstanding during year 3,919,783 2,710,121
Maximum balance outstanding as of any
month-end during year 4,898,836 5,047,960
Daily average interest rate during year 4.70% 4.95%
Average interest rate on balance at end of year 4.24% 5.21%
</TABLE>
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,
1998 and 1997, the Company had outstanding letters of credit aggregating
approximately $697,000 and $692,000, commitments to originate variable rate
loans aggregating approximately $17,364,000 and $18,608,000, and commitments
to originate fixed rate loans aggregating approximately $1,875,000 and
$2,832,000, 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.
40
<PAGE>
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 86%
and 77% at December 31, 1998 and 1997, respectively.
On February 25, 1998, the Board of Directors of the Company approved the
establishment of a grantor trust in the amount of $1,132,000 for the purpose
of funding the severance agreements with eight key management officials in
connection with the termination of their employment following a change in
control. On May 18, 1998, the President and CEO and six employees exercised
their rights to receive payments under these severance agreements for a
total of $766,400, which is reflected in the statement of operations and
comprehensive income. Under the terms of an employment agreement with the
former President and Chief Executive Officer of the Company and the Bank,
the Company is obligated to make payments totaling up to $28,000 for the
continuation of her former benefits for up to two years. Certain unvested
stock options granted to the President and Chief Executive Officer and the
employees became immediately vested upon the change in control. Under the
terms of an employment agreement with the current President and CEO of the
Bank, the Bank is obligated to make payments totaling approximately
$140,000, in the event she chooses to exercise her rights under her
severance agreement on or before May 18, 1999, and these funds are held in
the grantor trust.
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 losses incurred to the full extent authorized or permitted by
Delaware general corporation law. Three directors put the present Board of
Directors and current 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 the lawsuits discussed below. During
1998, $240,000 was accrued in other liabilities for the indemnification of
these expenses.
Although the Company, 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. (Ballston), 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, at a special shareholders' meeting on December
31, 1997, a majority of the shareholders voted against the acquisition.
Subsequently, on January 23, 1998, the Company filed an amended complaint
against the same
41
<PAGE>
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.
On March 11, 1998, Marshall T. Reynolds, his wife, Shirley A.Reynolds 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 and the election of four new directors to fill
the vacancies created by the removal of the four directors. Another
amendment to Schedule 13D was filed on March 11, 1998 relating to the
efforts to effect the change in the membership of the Board of Directors of
the Company. On May 18, 1998, consents representing a majority of the
Company's shareholders voted to remove four directors, Barbara Blum, Shireen
L. Dodson, Susan Hager, and Clarence L. James and replace them with A.
George Cook, Marianne Steiner, Joseph L. Williams and Bonita Wilson. On May
19, 1998, the four new directors were sworn in, Jeanne D. Hubbard was
elected Chairwoman and CEO, and Kathleen W. Carr was elected President and
Chief Operating Officer of the Bank.
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 is
vigorously defending this suit. A motion to dismiss this suit was filed on
or before July 31, 1998 by the Company and the stockholders/directors. The
Court of Chancery has granted the plaintiffs leave to file an amended
complaint. The plaintiffs have agreed to dismiss Ferris Baker Watts, Inc.
from the state action. The Company is awaiting the judge's ruling on the
Motion to Dismiss.
On June 8, 1998 a second 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 the Company, Nominal Defendant, and Marshall T.
Reynolds, Jeanne D. Hubbard, Robert L. Shell, Jr. and Ferris Baker Watts,
Inc. The federal action is based on the same facts underlying the State
action, and asserts both derivative claims on behalf of the Bank and
individual claims on behalf of stockholders of the Bank. The complaint in
the Federal action alleges that certain stockholders/directors of the Bank,
and Marshall T. Reynolds, Jeanne D. Hubbard and Robert H. Shell, Jr., as
well as the investment banking firm, Ferris Baker Watts, Inc., violated the
Securities Exchange Act of 1934 ( the "Exchange Act") in soliciting proxies
against the proposed merger between the Bank and Ballston, which was not
approved by the shareholders at a special meeting held December 31, 1997,
and also alleges that the individual stockholder/directors violated the
Exchange Act in soliciting proxies to remove four directors of the Bank. The
Company has hired Delaware counsel and is vigorously defending this suit.
The District Court has stayed the Federal action pending a decision in the
State action.
Management and the Board of Directors of the Company have reviewed the above
described litigation and believe that it will prevail on the merits.
Consequently, the Company has not accrued for a potential adverse result.
42
<PAGE>
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,
1998, approximately $2,662,000 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. As of December 31,
1998, dividends paid did not exceed the net income available to common
shareholders for 1998 by approximately $281,000. 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, 1998, 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.
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
------ ------
<S> <C> <C>
Assets
Due from banks and interest-bearing balances with subsidiary bank $ 1,009,157 $ 2,356,267
Investment in subsidiary bank 12,019,925 8,595,752
Loans -- 2,034,278
Less: Allowance for loan losses -- (25,000)
----------- -----------
Loans, net -- 2,009,278
Other assets 879,245 559,919
----------- -----------
Total assets $13,908,327 $13,521,216
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Other liabilities $ 309,044 $ 491,478
Stockholders' equity:
Common stock, par value $0.01 per share, authorized 6,250,000
shares; issued 2,091,760 shares in 1998 and 2,069,882 in 1997;
outstanding 2,085,910 shares in 1998 and 2,064,032 shares in 1997 20,918 20,699
Additional paid-in capital 12,482,926 12,227,447
Retained earnings 1,328,865 1,029,989
----------- -----------
13,832,709 13,278,135
Less: Employee Stock Ownership Plan shares, 23,396 shares in 1998 and
25,107 shares in 1997, at cost (204,716) (219,687)
Less: Treasury Stock, 5,850 shares at cost (28,710) (28,710)
----------- -----------
Total stockholders' equity 13,599,283 13,029,738
----------- -----------
Total liabilities and stockholders' equity $13,908,327 $13,521,216
=========== ===========
</TABLE>
43
<PAGE>
Condensed Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Income
Dividends from subsidiary bank $ -- $ -- $ 307,425
Interest earned on balances with subsidiary bank 41,460 110,920 115,427
Interest on loans 48,464 233,800 27,218
--------- --------- ----------
Total income 89,924 344,720 450,070
--------- --------- ----------
Expenses
Salaries and benefits 111,173 6,203 6,500
Professional fees 563,085 1,043,450 44,009
(Benefit) provision for loan losses (25,000) -- 25,000
Other 246,338 431,327 176,863
--------- --------- ----------
Total expenses 895,596 1,480,980 252,372
--------- --------- ----------
Income (loss) before taxes and equity
in undistributed net income of subsidiary (805,672) (1,136,260) 197,698
Applicable income tax benefit 325,721 447,693 104,730
--------- --------- ----------
Income (loss) before equity
in undistributed net income of subsidiary (479,951) (688,567) 302,428
Equity in undistributed net income of subsidiary 1,296,320 1,030,394 824,877
--------- --------- ----------
Net income $ 816,369 $ 341,827 $1,127,305
========= ========== ==========
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net income $ 816,369 $ 341,827 $ 1,127,305
Adjustments to reconcile net income to net cash
(used in) provided by operating
activities:
Equity in undistributed net income of subsidiary (1,296,320) (1,030,394) (824,877)
Provision (benefit) for loan losses (25,000) -- 25,000
ESOP compensation expense paid in stock 5,496 6,203 --
Other, net (515,247) 73,888 (10,643)
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,014,702) (608,476) 316,785
Investing Activities
Net decrease (increase) in lines of credit 474,007 848,339 (1,010,546)
Loans originated (470,000) (2,394,500) (1,242,500)
Principal collected on loans 2,030,271 1,706,913 58,016
----------- ----------- -----------
Net cash provided (used in) by investing activities 2,034,278 160,752 (2,195,030)
Financing Activities
Proceeds from issuance of common stock, net 253,247 9,767 6,018,928
Loan to Employee Stock Ownership Plan 11,926 -- (218,750)
Rabbi Trust contribution, net (96,173) -- --
Contribution of capital to subsidiary (2,000,000) (350,000) --
Cash dividends paid to stockholders (535,686) (650,370) (376,136)
----------- ----------- -----------
Net cash (used in) provided by financing activities (2,366,686) (990,603) 5,424,042
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (1,347,110) (1,438,327) 3,545,797
Cash and cash equivalents at beginning of year 2,356,267 3,794,594 248,797
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,009,157 $ 2,356,267 $ 3,794,594
=========== =========== ===========
</TABLE>
44
<PAGE>
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 under-capitalized" 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, 1998 and
1997, both the Company and the Bank were considered "well-capitalized." The
table below presents the capital position of the Company and the Bank relative
to their various minimum statutory and regulatory capital requirements at
December 31, 1998. The Company and the 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/ $13,595 10.38% $12,016 9.27% 4.00%
Tier 1 risk-based ratio /2/ 13,595 12.66 12,016 11.20 4.00
Total risk-based ratio /2/ 14,730 13.72 13,150 12.26 8.00
- ---------------------
</TABLE>
1 Based on annual average assets
2 Based on risk-adjusted assets
15. Employee Benefits
45
<PAGE>
15. Employee Benefits
The Company has adopted a Nonqualified Stock Option Plan for certain officers
and key employees and has reserved 112,500 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. All the options are now fully vested
as a result of a change in control which occurred in 1998. 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 20,520 shares of common stock available for grant
under the above Plans were granted in 1996 at a price of $5.39 for directors and
$6.34 for employees. As of December 31, 1998, 17,128 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, and are now fully
vested. Options for a total of 27,641 shares of common stock are available for
grant under the above Plans. Options totaling 25,760 were granted in 1996 at a
price of $7.30 for directors and $8.59 for employees. Options totaling 1,881
were granted in 1997 at prices ranging from $9.37 to $9.46 for employees. As of
December 31, 1998, 6,243 options have been exercised under these plans.
On March 29, 1996, the Company granted the former President and Chief Executive
Officer a nonqualified stock option to purchase 93,750 shares at a price equal
to 85% of the fair market value of the Company's common stock on the date of
grant ($5.39). The option began vesting in 1996 at an annual rate of 20% at the
end of each year and became fully vested upon her departure from the employment
of the Company and the Bank in 1998.
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 January 23, 1996 Employee Plan and the November 19, 1996 Employee Plan.
Compensation expense of approximately $67,000, $24,000 and $19,000 in 1998, 1997
and 1996, respectively, 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. The compensation expense was accelerated in 1998, due to the
change in control, at which time all the options vested.
46
<PAGE>
Had compensation cost for these plans been determined consistent with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS No. 123) the Company's net income and basic earnings per
share for 1998, 1997 and 1996 would have been $849,000 and $.41 per share,
$344,000 and $.17 per share, and $1,105,000, and $.74 per share, respectively.
Diluted earnings per share for 1998, 1997 and 1996 would have been $.40 per
share, $.16 per share and $.72 per share, respectively.
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, 1998 and 1997 and changes during
the years then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
1998
---------------------------------------
Directors Plans and
CEO Grants Employee Plans
------------------- -----------------
Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price
-------- -------- ------ --------
Outstanding at beginning of year 111,686 $5.56 28,733 $7.78
Granted -- -- -- --
Exercised (8,889) 5.89 (12,989) 7.02
Forfeited/Expired -- -- (11,087) 8.45
Outstanding at end of year 102,797 5.53 4,657 8.32
Exercisable at end of year 102,797 5.53 4,657 8.32
Weighted average fair value of options granted -- -- -- --
<CAPTION>
1997
---------------------------------------
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 111,686 $5.56 28,344 $7.60
Granted -- -- 1,881 9.40
Exercised -- -- (1,493) 6.34
Forfeited/Expired -- -- -- --
Outstanding at end of year 111,686 5.56 28,733 7.78
Exercisable at end of year 44,015 5.54 17,739 7.26
Weighted average fair value of options
granted -- n/a -- $1.70
</TABLE>
At December 31, 1998, 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 $5.39 and $7.30, with a weighted average exercise price of $5.53 and a
weighted average remaining contractual life of 7.1 years. Of these options,
102,797 are exercisable. At December 31, 1998, options granted under the
Employee Plan and the 1996 Employee Plan have exercise prices between $6.34 and
$8.59, with a weighted average exercise price of $8.32 and a weighted average
remaining contractual life of 7.7 years. Of these options, 4,657 are
exercisable.
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes based option pricing model 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%. The following weighted average assumptions are used for grants in 1997:
risk-free interest rate of 5.94%; expected dividend yields of 3.48%; expected
lives of 1.3 years; and expected volatility of 30%. There were no grants in
1998.
47
<PAGE>
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 had 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% or more than 15%, of their annual
salary (up to $10,000 for 1998 and $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; and 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 $18,000, $41,000 and
$23,000 in 1998, 1997 and 1996, respectively. These amounts are included in
salaries and employee benefits in the accompanying consolidated statements of
operations and comprehensive income. 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 31,250 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 and
comprehensive income. In accordance with the terms of the ESOP, dividends paid
on all shares allocated to the participants' accounts and are reflected as
dividends declared in the accompanying consolidated statement of changes in
stockholders' equity. Dividends paid on all remaining unallocated shares owned
by the ESOP are also allocated to the participants' accounts and are included in
salaries and benefits for 1998 in the accompanying consolidated statement of
operations and comprehensive income. As of December 31, 1998, 6,143 shares were
allocated to participants' accounts, 1,711 shares were committed to be released
and the remaining 23,396 shares are unearned ESOP shares held in suspense. In
1998, the Company paid $8,125 on the ESOP shares and made a capital contribution
of $9,297. The capital contribution was directly applied toward the ESOP loan.
Dividends paid on allocated shares may be paid to participants or used to repay
the ESOP loan, with an equivalent number of shares allocated to participants'
accounts. Dividends on unallocated shares are expected to be used to repay the
ESOP loan with the equivalent number of shares allocated to participants'
accounts. 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,
1998 and 1997 is $403,700 and $351,300, respectively.
16. Other Operating Expense
Other operating expense for 1998, 1997 and 1996 is summarized as follows:
1998 1997 1996
---- ---- ----
Courier service and bank security $ 132,504 $ 157,116 $169,207
Stationery and office supplies 146,836 159,638 97,602
Printing 39,332 152,189 39,632
Advertising 97,790 97,534 85,572
FDIC insurance premiums 14,538 10,271 2,363
Other 662,373 792,598 514,722
---------- ---------- --------
Total other operating expense $1,093,373 $1,369,346 $909,098
========== ========== ========
48
<PAGE>
Other operating expenses for 1997 includes approximately $222,000 in costs
written-off in connection with the proposed acquisition of Ballston Bancorp,
Inc., which was not approved by the shareholders at a Special Meeting of the
Shareholders on December 31, 1997. Total cost incurred in connection with this
acquisition were $1,213,000, inclusive of the $222,000 reported above, with the
remaining costs included in professional fees.
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 $16.09.
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
The Company follows SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", 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 their fair 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
49
<PAGE>
from the low-cost funding provided by such deposit liabilities, as compared to
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, 1998 and 1997 followed by a general description of
the methods and assumptions used to estimate such fair values.
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Value Amount Value
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 5,836,099 $ 5,836,099 $ 7,654,347 $ 7,654,347
Short-term investments 5,607,288 5,607,288 8,231,000 8,231,000
Securities available for sale 13,806,571 13,813,009 20,465,484 20,452,799
Investment securities 7,976,376 8,027,302 7,508,850 7,532,256
Loans 94,219,747 85,313,591
Less: Allowance for loan losses (1,134,128) (1,141,719)
----------- ----------- ----------- -----------
Net loans 93,085,619 94,750,000 84,171,872 83,233,356
Financial liabilities
Noninterest-bearing deposits 31,058,149 31,058,149 27,184,087 27,184,087
Interest-bearing deposits
with no stated maturity 38,504,089 38,504,089 38,749,327 38,749,327
Time deposits 39,102,850 39,202,000 46,327,982 46,383,831
Short-term borrowings 4,647,740 4,647,740 3,489,263 3,489,263
Long-term borrowings/debt 1,022,711 1,105,000 1,085,936 1,138,688
</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
50
<PAGE>
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.
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, 1998 and
1997, the Company had commitments to extend credit of $19,239,000 and
$21,440,000 and letters of credit of $697,000 and $692,000, 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, 1998 and 1997, approximately 95% and 78%, 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.
51
<PAGE>
Report of Independent Public Accountants
The Board of Directors and Stockholders
Abigail Adams National Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Abigail Adams
National Bancorp, Inc. and subsidiary (the Company) as of December 31, 1998 and
1997, and the related consolidated statements of operations and comprehensive
income, changes in stockholders' equity and cash flows for the three years ended
December 31, 1998. 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 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 Abigail Adams
National Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for the three years ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
February 2, 1999
52
<PAGE>
ABIGAIL ADAMS NATIONAL BANCORP, INC.
OFFICERS:
Jeanne D. Hubbard ..................................Chairwoman, President & CEO
Karen E. Schafke ...............Senior Vice President & Chief Financial Officer
THE ADAMS NATIONAL BANK
OFFICERS:
Kathleen Walsh Carr ............................................President & CEO
Karen E. Schafke ...............Senior Vice President & Chief Financial Officer
Loren C.Geisler ...........................Senior Vice President & Chief Lender
Betty J. Serrano ....................................Vice President, Operations
David M. Glaser............................Vice President, Retail Administration
Hanh D. Nguyen .....................................Vice President & Controller
Arthur C. Smith III ...................................Vice President, Lending
Marc A. Herbst .........................................Vice President, Lending
Catherine Upshur Purnell.............Vice President, Branch Manager, Main Office
Scott M. Shaver..........Assistant Vice President, Branch Manager, DuPont Circle
Kathryn R. Speakman............................Assistant Vice President, Lending
Patrice G. Goss................................Assistant Vice President, Lending
Holly Pham.........................Assistant Vice President, Loan Administration
Martha Holmes-Lockamy.......................Assistant Vice President, Operations
Everette Hitchner..................Assistant Vice President, Assistant Treasurer
Mary E. Mills...................Assistant Vice President, Information Technology
53
<PAGE>
DIRECTORS OF ABIGAIL ADAMS NATIONAL BANCORP, INC. AND THE ADAMS NATIONAL BANK
Jeanne D. Hubbard
Chairwoman, President and Chief Executive Officer
Abigail Adams National Bancorp., Inc.
Kathleen Walsh Carr
President & Chief Executive Officer
The Adams National Bank
Michelle D. Bernard
Partner
Patton Boggs, L.L.P.
A. George Cook
Principal
George Cook & Company
Carl E. Hecht
Chairman
US Tag
Lynne M. Miller
Chief Executive Officer
Environmental Strategies Corporation
Marshall T. Reynolds
Chairman & Chief Executive Officer
Champion Industries, Inc.
Patricia G. Shannon
President & Chief Executive Officer
Boys & Girls Clubs of Greater Washington
Robert L. Shell, Jr.
Chief Executive Officer
Guyan International
Marianne Steiner
Principal
Larkspur Marketing
Joseph L. Williams
Chairman & Chief Executive Officer
Basic Supply Company, Inc.
Bonita A. Wilson
Principal
Bonnie Wilson & Company
54
<PAGE>
Form 10-KSB
- ---------------------------------------------------------------------
Copies of the Annual Report as filed with the Securities and Exchange Commission
on Form 10-KSB are available without charge, upon written request to Ms. Karen
E. Schafke, Senior Vice President and Chief Financial Officer, Abigail Adams
National Bancorp, Inc. 1627 K Street, N.W. Washington, D.C. 20006.
EXECUTIVE OFFICES:
1627 K Street, N.W.
Washington, D.C. 20006
(202) 466-4090
TRANSFER AGENT:
American Stock Transfer & Trust Company
40 Wall Street
New York, N.Y. 10005
SPECIAL COUNSEL:
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue. N.W.
Suite 400
Washington, D.C. 20015
ONLINE:
http://www.adamsbank.com
STOCK LISTING:
Abigail Adams National Bancorp, Inc. Common Stock is
listed on the Nasdaq National Market under the symbol AANB.
55
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,836
<INT-BEARING-DEPOSITS> 1,814
<FED-FUNDS-SOLD> 3,793
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,813
<INVESTMENTS-CARRYING> 7,976
<INVESTMENTS-MARKET> 8,027
<LOANS> 94,220
<ALLOWANCE> (1,134)
<TOTAL-ASSETS> 128,881
<DEPOSITS> 108,665
<SHORT-TERM> 4,648
<LIABILITIES-OTHER> 946
<LONG-TERM> 1,023
0
0
<COMMON> 12,504
<OTHER-SE> 1,095
<TOTAL-LIABILITIES-AND-EQUITY> 128,881
<INTEREST-LOAN> 8,594
<INTEREST-INVEST> 2,159
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,753
<INTEREST-DEPOSIT> 3,672
<INTEREST-EXPENSE> 3,930
<INTEREST-INCOME-NET> 6,824
<LOAN-LOSSES> (15)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,838
<INCOME-PRETAX> 1,336
<INCOME-PRE-EXTRAORDINARY> 1,336
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 816
<EPS-PRIMARY> .40
<EPS-DILUTED> .39
<YIELD-ACTUAL> 5.57
<LOANS-NON> 295
<LOANS-PAST> 136
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,339
<ALLOWANCE-OPEN> 1,142
<CHARGE-OFFS> 126
<RECOVERIES> 133
<ALLOWANCE-CLOSE> 1,134
<ALLOWANCE-DOMESTIC> 1,126
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8
</TABLE>
