SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission file number 0-10971
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ABIGAIL ADAMS NATIONAL BANCORP, INC.
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(Exact 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 ID No.)
Incorporation or organization)
1627 K Street, N.W. Washington, D.C. 20006
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(Address of principal executive offices)
202-466-4090
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Issuer's telephone number including area code
N / A
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Former name, address, and fiscal year, if changes since last report
Indicate by check whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity as of November 5, 1999:
2,085,816 shares of Common Stock, Par Value $0.01/share
Transitional Small Business Disclosure Format (check one): Yes No X
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Operations and Comprehensive Income 2-3
Consolidated Statements of Changes in Stockholder's Equity 4
Consolidate Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-11
Item 2 - Management's Discussion and Analysis 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 4 - Submission of Matters to Vote of Securities Holders 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
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ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1999 and 1998 and December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Sept 30, Sept 30, Dec 31,
1999 1998 1998
-------------- -------------- ----------------
Assets
<S> <C> <C> <C>
Cash and due from banks $ 5,224,472 $5,457,560 $ 5,836,099
Short-term investments:
Federal funds sold 4,205,458 13,100,000 3,793,204
Interest-bearing deposits in other banks 1,512,742 4,281,497 1,814,084
------------- ------------ --------------
Total short-term investments 5,718,200 17,381,497 5,607,288
Securities available for sale 13,006,068 14,862,168 13,813,009
Investment securities (market value of $3,900,677, $8,065,386
and $8,027,302 at September 30, 1999, September 30, 1998 and
December 31, 1998, respectively) 3,946,891 8,009,409 7,976,376
Loans (net of deferred fees and unearned discounts) 102,989,128 85,468,733 94,219,747
Less: Allowance for loan losses (1,144,986) (1,114,088) (1,134,128)
--------------- -------------- ---------------
Loans, net 101,844,142 84,354,645 93,085,619
-------------- -------------- --------------
Bank premises and equipment, net 987,847 1,124,690 1,159,827
Other assets 2,189,726 2,182,405 1,403,106
--------------- -------------- ---------------
Total assets $ 132,917,346 $ 133,372,374 $ 128,881,324
============== ============= ==============
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand deposits $ 37,707,591 $ 32,887,474 $ 31,058,149
NOW accounts 10,194,612 10,329,403 9,499,197
Money market accounts 23,467,362 28,233,617 26,207,011
Savings accounts 2,727,810 2,347,027 2,797,881
Certificates of deposit of $100,000 or greater 13,811,490 21,354,161 18,158,496
Certificates of deposit less than $100,000 22,350,807 18,787,422 20,944,354
-------------- -------------- --------------
Total deposits 110,259,672 113,939,104 108,665,088
------------- ------------- -------------
Short-term borrowings 6,554,345 3,527,827 4,647,740
Long-term borrowings/debt 974,984 1,037,882 1,022,711
Other liabilities 948,530 1,653,677 946,502
--------------- --------------- ----------------
Total liabilities 118,737,531 120,158,490 115,282,041
------------- ------------- -------------
Stockholders' equity:
Common stock, par value $0.01 per share, authorized 5,000,000
shares; issued 2,094,468 at September 30, 1999, 2,092,901 at
September 30, 1998 and 2,091,760 shares at December 31, 1998;
outstanding 2,085,816 shares at September 30, 1999, 2,087,051
shares at September 30, 1998 and 2,085,910 shares at
December 31, 1998 20,945 20,929 20,918
Surplus 12,503,895 12,370,805 12,482,926
Retained earnings 2,154,880 1,035,750 1,325,052
Accumulated other comprehensive income, net of taxes (285,761) 34,797 3,813
--------------- -------------- ----------------
14,393,959 13,462,281 13,827,709
Less: Employee Stock Ownership Plan shares at cost of 23,396 at
September 30, 1999, 23,396 at December 31, 1998, and
25,108 at September 30, 1998 (147,891) (219,687) (204,716)
Less: Treasury stock, shares at cost of 8,652 at September 30, 1999,
and 5,850 at Dec. 31, 1998, and Sept. 30, 1998, respectively (66,253) (28,710) (28,710)
--------------- -------------- --------------
Total stockholders' equity 14,179,815 13,213,884 13,599,283
-------------- --------------- --------------
Total liabilities and stockholders' equity $ 132,917,346 $ 133,372,374 $ 128,881,324
============== ============== =============
</TABLE>
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<TABLE>
<CAPTION>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations and
Comprehensive Income
For the Periods Ended September 30, 1999 and 1998
(Unaudited)
For the three months For the nine months
Ended Sept. 30, Ended Sept. 30,
1999 1998 1999 1998
Interest income
<S> <C> <C> <C> <C>
Interest and fees on loans $2,336,862 $2,229,228 $6,768,931 $6,449,096
Interest on securities available for sale:
U.S. Treasury -- 14,253 21,144 42,678
Obligations of U.S. government agencies and corporations 194,133 260,997 545,839 818,608
---------- ---------- ------------ -----------
Total interest on securities available for sale 194,133 275,250 566,983 861,286
Interest and dividends on investment securities:
U.S. Treasury 19,009 42,030 83,681 96,381
Obligations of U.S. government agencies and corporations 44,891 63,627 157,841 188,550
Other securities 18,418 13,890 41,527 40,592
----------- ----------- ------------- ------------
Total interest and dividends on investment securities 82,318 119,547 283,049 325,523
Interest on short-term investments:
Federal funds sold 21,966 175,434 129,457 381,096
Deposits with other banks 53,486 33,047 87,407 99,019
----------- ----------- ------------- ------------
Total interest on short-term investments 75,452 208,481 216,864
----------- ---------- ------------
480,115
Total interest income 2,688,765 2,832,506 7,835,827 8,116,020
---------- ---------- ----------- ----------
Interest expense
Interest on deposits:
NOW accounts 52,148 55,708 148,256 163,282
Money market accounts 212,497 329,129 641,891 859,186
Savings accounts 18,782 16,168 57,400 43,619
Certificates of deposit:
$100,000 or greater 210,674 298,864 679,353 895,741
Less than $100,000 272,563 251,090 783,127 838,996
----------- ----------- ------------ -----------
Total interest on deposits 766,664 950,959 2,310,027 2,800,824
Federal funds purchased and
repurchase agreements 30,079 47,950 122,212 139,135
Interest on long-term borrowings/debt 17,269 18,356 52,266 55,434
------------ ------------- ------------- ------------
Total interest expense 814,012 1,017,265 2,484,505 2,995,393
----------- ----------- ----------- ----------
Net interest income 1,874,753 1,815,241 5,351,322 5,120,627
Provision (benefit) for loan losses 40,000 -- 70,000 (25,000)
----------------------------- ------------ ------------
Net interest income after provision 1,834,753 1,815,241 5,281,322 5,145,627
---------- ---------- ----------- ----------
Other Noninterest income
Service charges on deposit accounts 329,527 295,519 1,027,420 904,754
Other income 30,833 82,249 121,431 114,034
------------ ------------ -------------- ------------
Total other noninterest income 360,360 377,768 1,148,851 1, 018,788
----------- ----------- -------------- ------------
Other Noninterest expense
Salaries and employee benefits 672,195 541,115 1,861,364 2,647,040
Occupancy and equipment expense 303,595 304,873 956,311 905,838
Professional fees 29,597 31,278 159,474 780,024
Data processing fees 41,974 168,600 275,034 426,294
Other expense 288,061 249,779 801,415 885,270
----------- ----------- ------------ -----------
Total other noninterest expense 1,335,422 1,295,645 4,053,598 5,644,466
---------- ---------- ----------- ----------
Income before taxes 859,691 897,364 2,376,575 519,949
Applicable income tax expense 335,280 197,264 926,864 197,264
----------- ---------- ------------ -----------
Net income $ 524,411 $ 700,100 $ 1,449,711 $ 322,685
----------- ---------- ----------- ---------
Continued:
</TABLE>
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<TABLE>
<CAPTION>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations and
Comprehensive Income (Continued)
For the Periods Ended September 30, 1999 and 1998
(Unaudited)
For the three months For the nine months
Ended Sept. 30, Ended Sept. 30,
1999 1998 1999 1998
------ ------ ------ ------
Other Comprehensive Income:
<S> <C> <C> <C> <C>
Unrealized (losses) gains on securities, before tax $(95,091) $56,991 $(488,856) $82,818
Income tax expense (benefit) related to items of
Other comprehensive income 38,764 (23,233) 199,282 (33,641)
----------- ----------- ---------- ------------
Other comprehensive income (loss), net of tax (56,327) 33,758 (289,574) 49,177
Comprehensive income $ 468,084 $ 733,858 $1,160,137 $ 371,862
========= ========= ========== =========
Earnings per common share:
Basic earnings per share $ .25 $ .34 $ .70 $ .16
============= ============= =============== =============
Diluted earnings per share $ .25 $ . 33 $ .68 $ .15
============= ============= =============== =============
Weighted average number of shares used
to compute earnings per share:
Basic 2,065,222 2,061,850 2,064,170 2,052,677
========== ========= ========= =========
Diluted 2,127,010 2,116,649 2,121,507 2,107,477
========== ========= ========= =========
</TABLE>
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<TABLE>
<CAPTION>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1999, and 1998
(Unaudited)
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, 1997 $ 20,699 $12,227,447 $1,044,369 $ (28,710) $(219,687) $ (14,380) $13,029,738
Net income --- --- 322,685 --- --- --- 322,685
Dividends declared --- --- (331,304) --- --- --- (331,304)
Issuance of shares under Employee
Incentive Stock Option Plan 230 143,358 --- --- --- --- 143,588
Unrealized gain on securities,
net of taxes --- --- --- --- --- 49,177 49,177
--------- ------------ ---------- ---------- --------- ---------- -----------
Balance at September 30, 1998 $20,929 $12,370,805 $1,035,750 $(28,710) $(219,687) $ 34,797 $13,213,884
======= =========== ========== ========= ========== ======== ===========
Balance at December 31, 1998 $20,918 $12,482,926 $1,325,052 $ (28,710) $(204,716) $ 3,813 $13,599,283
Net income --- --- 1,449,711 --- --- --- 1,449,711
Dividends declared --- --- (619,883) --- --- --- (619,883)
Issuance of shares under Employee
Incentive Stock Option Plan 27 20,969 --- --- --- --- 20,996
Release of shares under
Employee Stock Ownership
Plan --- --- --- --- 56,825 --- 56,825
Distribution from ESOP (37,543) (37,543)
Unrealized loss on securities,
net of taxes --- --- --- --- --- (289,574) (289,574)
-------- ----------- ---------- --------- --------- ---------- -----------
Balance at September 30, 1999 $ 20,945 $12,503,895 $2,154,880 $ (66,253) $(147,891) $(285,761) $14,179,815
======== =========== =========== ========== ========== ========== ===========
</TABLE>
4
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<TABLE>
<CAPTION>
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
1999 1998
-------- ---------
Operating Activities
<S> <C> <C>
Net income $1,449,711 $ 322,685
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision (Benefit) for loan losses 70,000 (25,000)
Depreciation and amortization 353,138 325,280
Accretion of loan discounts and fees (187,073) (134,808)
Accretion of discounts and premiums on securities 3,924 (37,375)
(Benefit) provision for deferred income taxes (327,486) (777,549)
(Increase) decrease in other assets (459,136) 562,875
Increase (decrease) in other liabilities 191,833 99,340
---------- ----------
Net cash provided by operating activities 1,094,911 335,448
------------ -----------
Investing Activities
Proceeds from repayment and maturity of investment securities
and securities available for sale 8,300,000 22,498,193
Proceeds from repayment of mortgage-backed securities 37,632 71,247
Purchase of investment securities and
securities available for sale (3,984,508) (17,358,941)
Net decrease (increase)in short-term investments 301,342 (2,315,243)
Purchase of restricted investments -- (185,254)
Principal collected on loans 18,296,269 12,519,199
Loans originated (24,124,114) (13,493,164)
Net (increase) decrease in short-term loans (322,929) 97,822
Net (increase) decrease in lines of credit (2,490,675) 834,946
Purchase of bank premises and equipment (181,158) (197,557)
Other, net -- 1,667
----------------- --------------
Net cash provided (used) by investing activities 4,168,141) 2,472,915
------------ ------------
Financing Activities
Net increase in transaction and savings deposits 4,535,137 7,864,108
Proceeds from issuance of time deposits 19,650,385 30,061,243
Payments for maturing time deposits (22,590,938) (36,247,642)
Net (decrease) increase in short-term borrowings 1,906,605 38,564
Payments on long-term debt (47,727) (48,054)
Proceeds from issuance of common stock 20,996 143,588
Payment on ESOP loan 56,825 --
Payments of distributions from ESOP (37,543) --
Cash dividends paid to common stockholders (619,883) (166,957)
------------- -------------
Net cash provided (used) by financing activities 2,873,857 1,644,850
------------- -------------
(Decrease) increase in cash and cash equivalents (199,373) 4,453,213
Cash and cash equivalents at beginning of year 9,629,303 14,104,347
------------- ------------
Cash and cash equivalents at end of period $ 9,429,930 $ 18,557,560
============ =============
Supplementary disclosures:
Interest paid on deposits and borrowings $ 2,602,474
============
$ 2,995,393
Income taxes paid $ 910,000 $ --
============= ===================
</TABLE>
5
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Abigail Adams National Bancorp, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
1. General
The unaudited information at and for the nine months ended September 30,
1999 and 1998 furnished herein reflects all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented. All adjustments are of a normal and recurring nature.
Certain reclassifications have been made to amounts previously reported in 1998
to conform with the 1999 presentation.
2. 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 was 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 has tested and validated 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
6
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December 1998 by several banks and the results were provided to the Bank for
review. The Bank performed client specific testing with Fiserv during the first
quarter of 1999. These tests confirmed 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 followed-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 $2,000.
Incremental expenses for the Bank to address the Year 2000 issue are not
expected to materially impact operating results in
any one period.
3. Contingent Liabilities
In the normal course of business, there are various outstanding
commitments and contingent liabilities such as commitments to extend credit and
standby letters of credit that are not reflected in the accompanying
consolidated financial statements. No material losses are anticipated as a
result of these transactions on either a completed or uncompleted basis.
Under the terms of an employment agreement with the current President and
Chief Executive Officer of the Bank, the Company is obligated to make payments
to her totaling approximately $150,000, in the event she chooses to exercise her
rights under a Severance Agreement on or before July 20, 2000, and these funds
are held in a grantor trust established on February 25, 1998.
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Under the terms of an employment agreement with the former President and
Chief Executive Officer, the Company is obligated to make payments up to $7,000
for the continuation of her former benefits to May 18, 2000. These funds are
held in a grantor trust established on February 25,
1998.
The Company maintains directors' and officers' liability insurance. In
addition, according to the by-laws, the Company is obligated to indemnify any
director or officer for any losses incurred in the performance of their duties
as director to the full extent authorized or permitted by Delaware general
corporation law. Three directors put the present Board of Directors and current
management on notice that to the best of their belief and knowledge, they are
entitled to indemnification for their legal expenses in defending themselves in
the lawsuits as discussed in Part II, Item 1 "Legal Proceedings". During 1998,
$240,000 was accrued in other liabilities for such indemnification of these
expenses.
4. Shareholder Rights Plan
On April 12, 1994, the Board of Directors of the Company adopted a Rights
Agreement ("Rights Agreement"), which was amended April 20, 1995. Pursuant to
the Rights Agreement, the Board of Directors of the Company declared a dividend
of one share purchase right for each share of the Company's common stock
outstanding on April 25, 1994 ("Right"). Among other things, each Right entitles
the holder to purchase one share of the Company's common stock at an exercise
price of $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.
5. 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
8
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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. All the options became fully vested 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 September 30, 1999, 18,381 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. All
options became fully vested in 1998. Options under both plans expire not later
than ten years after the date of grant. 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 to employees in 1997 at prices
ranging from $9.37 to $9.46. As of September 30, 1999, 7,768 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 at $5.39. The option are fully vested and have not been exercised
as of September 30, 1999.
On September 21, 1999, the Company adopted a nonqualified stock option
plan covering key employees and outside directors that provides non-statutory
options to purchase 20,000 options at a price equal to 85% of the fair market
value of the Company's common stock on the date of grant at $11.14. The option
vest beginning in 1999 at 33.3% per year. No options were granted in 1997 or
1998.
On April 16, 1996, the Company and the Bank adopted an employee stock
ownership plan ("ESOP") with 401(k) provisions, replacing the Bank's former
401(k) Plan, which covered all full-time employees 21 years of age or older who
have completed 500 hours of service. Participants may elect to contribute to the
ESOP a portion of their salary, which may not be less than 1% nor more than 15%,
of their annual salary up to $10,000 for 1999. 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
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vest. All employer's discretionary contributions are vested as follows: 33 and
1/3% for one year of service; 66 and 2/3% for two years of service; 100% for
three years of service.
6. Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earning per share for entities with publicly held common stock
or potential common stock. Basic earnings per share is calculated by dividing
net income, after deduction for preferred stock dividends, by the weighted
average number of shares of common stock. Diluted earnings per share is
calculated by dividing net income, after deduction for preferred stock
dividends, by the weighted average number of shares of common stock and common
stock equivalents, unless determined to be anti-dilutive.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------------------- --------------------------------
Basic Diluted Basic Diluted
EPS EPS EPS EPS
<S> <C> <C> <C> <C>
Net Income 1,449,711 1,449,711 322,685 322,685
Income (loss) available to
Common stockholders 1,449,711 1,449,711 322,685 322,685
Weighted average share
outstanding 2,065,222 2,065,222 2,052,677 2,052,677
Weighted average
dilutive effect of
Stock option Plans n/a 61,788 n/a 54,800
Adjusted weighted
average shares
outstanding 2,065,222 2,127,010 2,052,677 2,107,477
Basic EPS 1 $.70 $.16
Diluted EPS $.68 $.15
</TABLE>
- --------
1 The per share data and average shares outstanding give effect to a
five-for-four stock split in the form of a stock dividend that occurred on
December 31, 1998.
10
<PAGE>
7. New Financial Accounting Standards
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 Statement as
of the beginning of any fiscal quarter beginning 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 133 is not expected to have a
material impact on the Company.
11
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
- --------------------------------------------------------------------------------
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
The following discussion should be read and reviewed in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Form 10-KSB for the year ended December
31, 1998.
Overview
Total assets of Abigail Adams National Bancorp, Inc. and subsidiary (the
"Company") were $132.9 million at September 30, 1999, as compared to $128.9
million at December 31, 1998, an increase of $4.0 million or 3.13%. Total loans
increased by $8.8 million or 9.3% to $103.0 million at September 30, 1999 from $
94.2 million at December 31, 1998. Total investment securities decreased by $4.8
million or 22.2% for the same period, due to matured investment securities, the
proceeds of which were reinvested in higher yielding loans. Total deposits
increased by $1.6 million or 1.5% to $110.3 million at September 30, 1999 from
$108.7 million at December 31, 1998. Stockholders' equity at September 30, 1999
was $14.2 million, an increase of $0.6 million or 4.3% from $13.6 million at
December 31, 1998. The book value per share of common stock at September 30,
1999 was $6.87 as compared to $6.59 per share at December 31, 1998.
The Company reported net income for the nine months ended September 30,
1999 of $1.45 million, or $0.68 per share, for an annualized return on average
assets of 1.51% and an annualized return on average equity of 13.92%. The net
income for the same period in 1998 was $322.7 thousand or $0.15 per share, with
a return on average assets of 0.33% and a return on average equity of 3.28%. Net
income increased by $1.1 million for the nine months ended September 30, 1999,
as compared to the same period in 1998. The improved net earnings of the Company
reflects greater profitability of the Bank's core business operations and
improved operating efficiency.
The Company reported net income for the three months ended September 30,
1999 of $524.4 thousand, or $0.25 per share, for an annualized return on average
assets of 1.60% and an annualized return on average equity of 14.72%. The net
income for the same period in 1998 was $700.1 thousand or $0.33 per share, with
a return on average assets of 2.07% and a return on average equity of 21.51%.
The third quarter of 1998 was enhanced by a $190 thousand collection on a
nonaccrual loan for the payment of back interest owed, the collection of late
charges, and the collection of legal fees, as well as, a reversal of a tax
provision for the quarter. The third quarter of 1999 is more indicative of the
Company's strong core business growth.
Analysis of Net Interest Income
Net interest income, the most significant component of the Company's
earnings, increased by $230.7 thousand or 4.5%, to $5.4 million for the nine
months ended September 30, 1999, as compared to $5.1 million for the comparable
1998 period. Average earning assets for the first nine months of 1999 of $121.7
million increased $246 thousand, or 0.2%, over the comparable 1998 period. The
increase in net interest income for the current year-to-date period compared to
the prior year was primarily a result of the favorable decreases in the cost of
funds combined with the continued maintenance of high yielding assets. The
average loan portfolio for the first nine months
12
<PAGE>
of 1999 was $97.0 million, an increase of $13.8 million or 16.6% over the
comparable 1998 period. The average investment security portfolio for the first
nine months of 1999 was $18.7 million, a decrease of $8.0 million or 30.0% from
the comparable 1998 period. Average interest bearing deposits for the first nine
months of 1999 were $76.6 million, a decrease of $4.4 million or 5.4%, from the
comparable 1998 period. The net interest rate spread for the first nine months
of 1999 of 4.54% and the net interest margin of 5.88% for the same period,
reflected an increase of 28 basis points and 24 basis points, respectively, from
the prior year.
Noninterest Income
Total noninterest income increased by $130.1 thousand, or 12.8%, to $1.1
million for the nine months ended September 30, 1999, as compared to the same
period in 1998, primarily due to increased income recognized on service charges
on deposit accounts.
Noninterest Expense
Noninterest expense for the first nine months of 1999 was $4.1 million, a
decrease of $1.6 million or 28.2%, as compared to the $5.6 million for the same
period in 1998. Salaries and benefits of $1.9 million for the first nine months
of 1999 decreased by $785.7 thousand or 29.7%, over the same period in 1998,
primarily due to the severance paid to former employees in 1998. Net occupancy
expense of $956.3 thousand for the first nine months of 1999 reflects an
increase of $50.5 thousand, or 5.6%, from one year earlier, due both to the
relocation of the Georgetown branch in 1999 and the additional depreciation
associated with office renovations and technology investments. Professional fees
of $159.5 thousand for the nine months ended September 30, 1999 decreased by
$620.5 thousand, as compared to the same period in 1998, due in part to the
legal expenses in 1998 associated with the lawsuits against three directors by
shareholders of the Company. Data processing expense of $275.0 thousand the
first nine months of 1999 decreased by $151.3 thousand from the prior year, due
to the lower fees associated with the change in data processing service bureaus
completed in October of 1998 and the incentive received from the Company's back
office provider. Other operating expense of $801.4 thousand for year-to-date
1999 decreased by $83.9 thousand from the prior year, due primarily to cost
controls over advertising, and other expenses in general.
Income Tax Expense
Income tax expense of $926.9 thousand for the first nine months of 1999
increased $729.6 thousand, as compared to the same period one year earlier, as a
result of the increase in net income before tax of $1.9 million. The income tax
provision for the third quarter of 1999 was $335.3 thousand on a before tax net
income of $859.7 thousand, as compared to the third quarter of 1998 tax
provision of a $197.3 thousand on a before tax net income of $897.4 thousand, an
increase of $138.0 thousand or 69.9% from the third quarter of 1998. The
Company's effective tax rate for the first nine months of 1999 was 39%.
Analysis of Loans
The loan portfolio at September 30, 1999 of $103.0 million increased by
$8.8 million or 9.3%,
13
<PAGE>
as compared to the December 31, 1998 balance of $94.2 million, and increased by
$17.5 million or 20.5% as compared to the September 30, 1998 balance of $85.5
million. New loans of $24.1 million, exclusive of short-term loans and lines of
credit, were originated during the first nine months of 1999. Loan principal
payments of $18.3 million offset this increase. The loan to deposit ratio at
September 30, 1999 was 93.4%, as compared to 86.7% at December 31, 1998. On
average, the loan to deposit ratio for the nine months of 1999 was 89.3%, as
compared to 75.0% during the comparable period in 1998.
The Bank has not experienced any deterioration in its loan portfolio as a
result of the Year 2000 issue. Management will continue to monitor its loan
portfolio for deterioration associated with borrower's inability to be Year 2000
compliant.
Loan concentrations at September 30, 1999 and December 31, 1998 are
summarized as follows:
Loan Concentrations
At September 30, 1999 and December 31, 1998
Sept. 30 Dec. 31
1999 1998
------- ----
Service industry 32% 38%
Commercial real estate/finance 34 32
Wholesale/retail 23 22
Other 11 8
------ ----
Total 100% 100%
==== ====
Analysis of Investments
Securities classified as available for sale of $13.0 million decreased by
$806.9 thousand or 5.8% during the first nine months of 1999, as compared to
$13.8 million at December 31, 1998.The activity during the first nine months of
1999 included purchases of $4.0 million, maturities of $4.3 million, scheduled
accretion of discounts, and market value adjustments. Compared to the same
period one year ago, securities classified as available for sale decrease by
$1.9 million or 12.5%.
Long term investment securities of $3.9 million decreased by $4.0
million or 50.5%, as compared to $8.0 million at December 31, 1998, and
decreased by $4.1 million or 50.7% from September 30, 1998. The activity for the
first nine months of 1999 included maturities of $4.0 million, scheduled
accretion of discounts, and normal pay downs on mortgage-backed
securities.
Short term investments of $5.7 million increased $110.9 thousand from
December 31, 1998, as a result of normal fluctuations in deposit levels of some
of the Company's large corporate customers. Short term investments compared to
the same period one year ago decreased by $11.6 million, as a result of funding
the loan portfolio growth and seasonal outflow of deposits in the fourth quarter
of 1998.
14
<PAGE>
Noninterest-Earning Assets
Cash and due from banks of $5.2 million at September 30, 1999 decreased
by $612 thousand from the December 31, 1998 balance of $5.8 million. This
decrease is due to fluctuations in cash balances in the normal course of
business for the Bank.
Deposits
Total deposits of $110.3 million at September 30, 1999 increased by
$1.6 million or 1.5%, from the December 31, 1998 balance of $108.7 million.
Demand deposits of $37.7 million at September 30, 1999 grew $6.6 million or
21.4% from the $31.1 million balance at December 31, 1998. Normal fluctuations
in the deposits of both personal and nonprofit accounts make up a significant
portion of the $695.4 thousand increase in NOW accounts to $10.2 million at
September 30, 1999, as compared to $9.5 million at December 31, 1998. Money
market accounts of $23.5 million at September 30, 1999 decreased by $2.7 million
from the $26.2 million balance reported at December 31, 1998, due primarily to
normal fluctuations in the balances of some of the Company's large corporate
customers. Savings deposits decreased slightly to $2.7 million from $2.8 million
at December 31, 1998. Certificates of deposit at September 30, 1999 of $36.2
million decreased by $2.9 million or 7.5%, as compared to $39.1 million at
December 31, 1998. Certificates of deposit with balances under $100,000
increased by $1.4 million and certificates of deposit with balances greater than
$100,000 decreased by $4.3 million, due to the maturity of deposits in
government sponsored programs.
Average noninterest-bearing demand deposits for the nine months ended
September 30, 1999 of $32.1 million increased by $64 thousand, from the
comparable 1998 period, and average interest-bearing deposits decreased by $4.4
million during the same period to $76.6 million. Average noninterest-bearing
deposits to average total deposits during the nine months ended September 30,
1999 represent 29.5%, as compared to 28.3% one year earlier. Year-to-date 1999
average NOW accounts of $9.8 million decreased slightly, and average money
market deposits of $24.3 million decreased by $1.9 million from the average
balances for the same period in 1998. Year-to-date average certificates of
deposit with balances of $100,000 and over decreased by $3.0 million to $18.4
million, as compared to the 1998 year-to-date averages. Average certificates of
deposit with balances under $100,000 for the first nine months of 1999 of $21.2
million increased by $864 thousand over the comparable period in 1998.
Asset Quality
Loan Portfolio and Adequacy of Allowance for Loan Losses
The Company manages the risk characteristics of its loan portfolio
through various control processes, such as credit evaluation of individual
borrowers, establishment of lending limits to individuals and application of
lending procedures, such as the holding of adequate collateral and the
maintenance of compensating balances. As part of the underwriting process,
commercial borrowers must indicate in writing that they are aware of the Year
2000 issue and are either Year 2000 compliant or in the process of becoming Year
2000 compliant. Although credit policies are designed to minimize risk,
management recognizes that loan losses will occur and that the amount of these
15
<PAGE>
losses will fluctuate depending on the risk characteristics of the loan
portfolio, as well as, general and regional economic conditions.
Due to the loan growth in 1999, the Bank added $70 thousand to the loan
loss reserve, an increase of $95 thousand from the same period in 1998. The
Company has evaluated 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 $1.1 million at September
30, 1999 to be adequate.
At September 30, 1999, the allowance for loan losses as a percentage of
outstanding loans was 1.11%, as compared to 1.20% at December 31, 1998. The
table entitled "Allocation for Loan Losses" sets forth an analysis of the
allocation for loan losses by categories as of September 30,
1999 and December 31, 1998.
Allocation of Allowance for Loan Losses
At September 30, 1999 and December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------------------- -------------------------------
Reserve % of loans Reserve % of loans
Amount to total loans Amount to total loans
------- --------------- ------- ----------------
<S> <C> <C> <C> <C>
Commercial $ 508 43.9% $ 573 45.4%
Real estate- commercial mortgage 581 50.4 493 48.3
Real estate- residential mortgage -- -- 12 1.4
Real estate- construction -- -- -- --
Installment 42 5.7 48 4.9
Unallocated 14 -- 8 --
----------- ------------ -------- ----------
Total $ 1,145 100.0% $ 1,134 100.0%
========= ========= ======= =======
</TABLE>
Transactions in the allowance for loan losses for the nine months ended
September 30, 1999 and 1998 are summarized in the following table:
16
<PAGE>
Transactions in the Allowance for Loans Losses for the
Nine Months Ended September 30, 1999 and 1998
(Dollars in thousands)
1999 1998
--------- ---------
Balance at January 1 $1,134 $1,142
Provision (benefit) 70 (25)
Recoveries:
Commercial 27 20
Real estate - mortgage -- 13
Installment to individuals 23 78
------- -------
Total recoveries 50 111
Loans charged off:
Commercial (19) (59)
Credit cards (15) --
Installment to individuals (75) (55)
-------- --------
Total charge-offs (109) (114)
------- -------
Net (charge-offs) (59) (3)
-------- --------
Balance at September 30 $ 1,145 $ 1,114
======= =======
Ratio of net charge-offs to
average loans (1) (0.08)% (0.004)%
======== =========
(1) Ratio of net charge-offs to average loans is computed on an
annualized basis for the nine months ended September 30, 1999 and
1998.
17
<PAGE>
Nonperforming Assets
Nonaccrual loans at September 30, 1999 of $163 thousand decreased
$132 thousand, as compared to the $295 thousand reported at December 31, 1998,
and decreased $227 thousand, as compared to $390 thousand reported at September
30, 1998. There were no nonaccrual loans at September 30, 1999 guaranteed by the
U.S. Small Business Administration ("SBA"), which requires that the full balance
of these loans be placed on nonaccrual status, despite the SBA guarantee. Loans
past due 90 days or more and still accruing interest decreased $126 thousand to
$10 thousand at September 30, 1999, as compared to $136 thousand at December 31,
1998, and decreased $18 thousand, as compared to $28 thousand reported at
September 30, 1998.
Analysis of Nonperforming Assets
At September 30, 1999 and December 31, 1998
(Dollars in thousands)
Sept. 30, Dec. 31 ,
1999 1998
------ ------
Nonaccrual loans:
Commercial $ 146 $ 208
Real estate - commercial mortgage -- 87
Installment - individuals 17 --
----- ------
Total nonaccrual loans (1) 163 295
----- -----
Past due loans:
Commercial 5 --
Real estate - commercial mortgage -- --
Credit Cards 4
Installment - individuals 1 136
------ -------
Total past due loans 10 136
------ -------
Restructured loans:
Commercial -- --
--- ----
Total restructured loans -- --
--- ----
Total nonperforming assets $ 173 $ 431
===== =====
Total nonperforming assets exclusive of
SBA guaranteed balances $ 173 $ 383
===== =====
Ratio of nonperforming assets
to gross loans plus foreclosed properties .18% .46%
Ratio of nonperforming assets to total
assets (2) .13% .33
Percentage of allowance for loan losses to
nonperforming assets (2) 662% 263%
- ----------------------------
(1) There were no nonaccrual loans guaranteed by the SBA at September 30, 1999
and December 31, 1998, respectively.
(2) Ratios include SBA guaranteed loan balances.
18
<PAGE>
Potential Problem Loans
At September 30, 1999 and December 31, 1998, loans totaling $351 thousand
and $1.1 million, respectively, were classified as potential problem loans,
which are not reported in the table entitled "Analysis of Nonperforming Assets."
Of the problem loans at September 30, 1999, there were no balances guaranteed by
the SBA, as compared to $504 thousand or 38% at December 31, 1998. These loans
are subject to management's attention as a result of financial difficulties of
the borrowers, and their classifications are reviewed on a quarterly basis.
Interest Rate Sensitivity
Through the Bank's Asset/Liability Committee, sensitivity of net
interest income to fluctuations in interest rates is considered through analyses
of the interest sensitivity positions of major asset and liability categories.
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. A "most likely" interest rate
scenario is forecasted based upon an analysis of current market conditions and
expectations. The results are compared to risk tolerance limits set by corporate
policy. Based on the Company's most recent interest rate sensitivity analysis,
the net interest income and the economic value of equity are well within the
tolerance limits for both a rising or declining interest rate environment.
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 borrowings.
In addition to $10.9 million in cash and short-term investments at September 30,
1999, the Company has a securities portfolio which can be pledged to raise
additional deposits and borrowings of which $9.8 million in unpledged securities
are available. As a percentage of total assets, the amount of these cash
equivalent assets at September 30, 1999 and December 31, 1998 was 15.6% and
15.7%, respectively. The Company has adequate resources to meet its liquidity
needs.
Fluctuations in the Company's liquidity position are often a result of
normal fluctuations in the deposit levels of some of the Company's large
corporate customers. 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 representing 87% of total deposits at September 30, 1999, as compared
to 81% of total deposits at September 30, 1998.
The Company has other sources of funds, such as short term borrowings,
advances available through its membership in the Federal home Loan Bank of
Atlanta, and access to other collateralized borrowing programs through U.S.
government agencies to raise additional deposits, when liquidity needs dictate.
Advances from the Federal Home Loan Bank of Atlanta at September 30, 1999
consist
19
<PAGE>
of a long term borrowing of $974.9 thousand and a short term borrowing of $4.0
million, as compared to a long term borrowing of $1.0 million at September 30,
1998.
Stockholders' Equity and Regulatory Capital
Stockholders' equity at September 30, 1999 was $14.2 million, an
increase of $580.5 thousand from year-end 1998, and an increase of $965.9
thousand from September 30, 1998. The increase from December 31, 1998 was the
result of net earnings of $1.4 million, partially offset by dividends on common
stock of $620 thousand and an unrealized loss on investment securities available
for sale of $290 thousand. Average stockholders' equity as a percentage of
average total assets for 1999 was 10.9% as compared to 10.0% for the comparable
prior year period. Book value per common share was $6.87 as of September 30,
1999, compared to $6.59 at December 31, 1998 and $6.41 at September 30, 1998.
The table below presents the capital position of the Company and the
Bank relative to their various minimum statutory and regulatory capital
requirements at September 30, 1999 and 1998. At September 30, 1999 and 1998,
both the Company and the Bank were considered "well-capitalized."
<TABLE>
<CAPTION>
Bank Company Minimum Capital
Amount Ratio Amount Ratio Requirements
------ ----- ------ ----- ---------------
(Dollars in thousands)
September 30, 1999:
<S> <C> <C> <C> <C> <C>
Leverage ratio 1 $ 13,377 10.28% $ 14,471 11.10% 4.00%
Tier 1 risk-based ratio 2 13,377 12.21 14,471 13.16 4.00
Total risk-based ratio 2 14,522 13.25 15,616 14.20 8.00
September 30, 1998:
Leverage ratio 1 $ 11,410 7.97% $ 13,179 10.01% 4.00%
Tier 1 risk-based ratio 2 11,410 11.46 13,179 13.13 4.00
Total risk-based ratio 2 12,524 12.58 14,293 14.24 8.00
</TABLE>
- -----------------------------------------------
1 Based on annual average assets.
2 Based on risk-adjusted assets.
Factors Affecting Future Results
In addition to historical information, this Form 10-QSB includes
certain forward looking statements based on current management's expectations
which involve risks and uncertainties such as statements of the Company's plans,
expectations and unknown outcomes. The Company's actual results could differ
materially from management's expectations. Factors that could cause future
results to vary from current management expectations include, but are not
limited to, general economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, changes in tax policies,
rates and regulations of federal and local tax authorities,
20
<PAGE>
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of the Bank's loan and investment portfolios, changes in ownership
status resulting in the loss of eligibility for participation in government and
corporate programs for minority and women-owned banks, uncertainties with
respect to costs which the Company may incur as result of litigation against the
Company, certain directors of the Company and certain related stockholders
brought by two minority shareholders, changes in accounting principles, policies
or guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices.
21
<PAGE>
PART II.
Item 1 - Legal Proceedings
Although the Bank, from time to time, is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Company or the Bank is a party or to which any of their
property is subject, except for the matters discussed below.
On 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.
22
<PAGE>
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to Vote of Security Holders
None
Item 5 - Other Matters
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
- ---------- ----------------------
27 Financial Data Schedule
(b) On October 1, 1999, the Company filed a current report on Form 8-K to
report that it changed its outside auditing firm from Arthur Andersen
LLP to Keller Bruner & Company, LLP.
23
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
ABIGAIL ADAMS NATIONAL BANCORP, INC.
------------------------------------
Registrant
Date: November 10, 1999 /s/ Jeanne D. Hubbard
------------------- ----------------------------------------
Jeanne D. Hubbard
Chairwoman of the Board,
President and Director
(Principal Executive Officer)
Date: November 10, 1999 /s/ Karen E. Schafke
------------------- -----------------------------------------
Karen E. Schafke
Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 5224
<INT-BEARING-DEPOSITS> 1513
<FED-FUNDS-SOLD> 4204
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13006
<INVESTMENTS-CARRYING> 3947
<INVESTMENTS-MARKET> 3901
<LOANS> 102989
<ALLOWANCE> 1145
<TOTAL-ASSETS> 132917
<DEPOSITS> 110260
<SHORT-TERM> 6554
<LIABILITIES-OTHER> 948
<LONG-TERM> 975
12525
0
<COMMON> 0
<OTHER-SE> 1655
<TOTAL-LIABILITIES-AND-EQUITY> 132917
<INTEREST-LOAN> 6769
<INTEREST-INVEST> 1067
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7836
<INTEREST-DEPOSIT> 2310
<INTEREST-EXPENSE> 2485
<INTEREST-INCOME-NET> 5351
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4054
<INCOME-PRETAX> 2377
<INCOME-PRE-EXTRAORDINARY> 2377
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1450
<EPS-BASIC> .70
<EPS-DILUTED> .68
<YIELD-ACTUAL> 5.88
<LOANS-NON> 163
<LOANS-PAST> 10
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<LOANS-PROBLEM> 351
<ALLOWANCE-OPEN> 1134
<CHARGE-OFFS> 109
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 1145
<ALLOWANCE-DOMESTIC> 1131
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 14
</TABLE>
