-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AcVJHFUo1f/3JPkTq0hmS22B0UKs4zkOboHAqy5SaLWE5fj80ekkN2Hz1lTIOG3W vKgs0ZrHeW7Cz9I5yRCIzA== 0000950168-99-002280.txt : 19990817 0000950168-99-002280.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950168-99-002280 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANNAPOLIS NATIONAL BANCORP INC CENTRAL INDEX KEY: 0001041429 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 521648903 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-22961 FILM NUMBER: 99693693 BUSINESS ADDRESS: STREET 1: 180 ADMIRAL COCHRANE DRIVE SUITE 300 CITY: ANNAPOLIS STATE: MD ZIP: 21401 BUSINESS PHONE: 4102244455 MAIL ADDRESS: STREET 1: 180 ADMIRAL COCHRANE DRIVE SUITE 300 CITY: ANNAPOLIS STATE: MD ZIP: 21401 10QSB 1 ANNAPOLIS NATIONAL BANCORP INC. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1999 Commission File Number 0-22961 ------------- ------- ANNAPOLIS NATIONAL BANCORP, INC. (Exact name of small business issuer as specified in its charter) Maryland 52-1648903 -------- ---------- (State or other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 180 Admiral Cochrane Drive, Suite 300, Annapolis, Maryland 21401 ---------------------------------------------------------------- (Address of principal executive offices) (410) 224-4455 -------------- (Issuer's telephone number, including area code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) YES X NO ---------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At June 30, 1999, the Registrant had 2,323,506 shares of Common Stock outstanding. Transitional Small Business Disclosure Format YES NO X ------ ------- TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE - ------------------------------ ---- Item 1 - Financial Statements Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3 Consolidated Income Statements for the Three Months Ended June 30, 1999 and 1998 and for the Six Months Ended June 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 5 - 6 Consolidated Statement of Changes in Stockholders' Equity as of June 30, 1999 and December 31, 1998 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 14 PART II - OTHER INFORMATION - --------------------------- Item 1 - Legal Proceedings 15 Item 2 - Changes in Securities 15 Item 3 - Defaults Upon Senior Securities 15 Item 4 - Submission of Matters to a Vote of Security Holders 15 Item 5 - Other Information 15 Item 6 - Exhibits and Reports on Form 8-K 15-16 SIGNATURES........................................................................ 17
2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND DECEMBER 31, 1998 (In thousands)
(Unaudited) (Audited) June 30, December 31, 1999 1998 ------------------- ------------------- ASSETS Cash and due from banks $ 4,280 $ 3,846 Federal funds sold and other overnight investments 17,839 10,284 Investment securities available-for-sale 17,630 15,191 Loans, less allowance for credit losses 88,464 86,924 Premises and equipment 2,777 2,679 Core deposits and other intangible assets acquired 87 130 Accrued interest receivable 580 590 Deferred income taxes 331 320 Other real estate owned 57 91 Other assets 597 402 ------- ------- Total assets $132,642 $120,457 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing 13,338 11,304 Interest-bearing 93,430 89,438 --------- ------ Total deposits 106,768 100,742 Securities sold under agreements to repurchase 12,911 7,174 Accrued interest and other liabilities 588 450 --------- ------- Total liabilities 120,267 108,366 ------- ------- Stockholders' equity Preferred stock - $.01 par value $ -- $ -- Common stock - $.01 par value 23 23 Capital surplus 13,193 13,143 Accumulated deficit (820) (1,075) Accumulated other comprehensive income (21) 0 ------- ------- Total stockholders' equity 12,375 12,091 ------- ------- Total liabilities and stockholders' equity $ 132,642 $ 120,457 ========= =========
3 ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 (Unaudited and in thousands)
For the Three Months Ended For the Six Months June 30, Ended June 30, ---------------------------------------------------------- 1999 1998 1999 1998 -------------- -------------- ----------------------- INTEREST INCOME Loans $2,110 $1,889 $4,169 $3,711 Investment securities 181 228 343 518 Federal funds sold and securities purchased 116 356 227 653 ----- ----- ----- ----- Total interest income 2,407 2,473 4,739 4,882 ----- ----- ----- ----- INTEREST EXPENSE Interest bearing deposits 778 917 1,497 1,802 Securities sold under agreements to repurchase 83 88 153 190 Other borrowed money 12 --- 12 --- ----- ----- ----- ----- Total interest expense 873 1,005 1,662 1,992 ----- ----- ----- ----- Net interest income 1,534 1,468 3,077 2,890 Provision for credit losses 27 75 432 150 ----- ----- ----- ----- Net interest income after provision for credit losses 1,507 1,393 2,645 2,740 ----- ----- ----- ----- NON-INTEREST INCOME Service charges and fees 98 111 233 226 Mortgage banking fees 21 21 54 35 Other income 95 69 151 110 ----- ----- ----- ----- Total non-interest income 214 201 438 371 ----- ----- ----- ----- NON-INTEREST EXPENSE Personnel 632 582 1,252 1,164 Occupancy and equipment 141 138 278 278 Other operating expenses 595 397 1,089 787 Amortization of intangible assets acquired 22 22 43 43 ----- ----- ----- ----- Total non-interest expense 1,390 1,139 2,662 2,272 ----- ----- ----- ----- INCOME (LOSS) BEFORE INCOME TAXES 331 455 421 839 INCOME TAX EXPENSE 113 155 143 285 ----- ----- ----- ----- NET INCOME $ 218 $ 300 $ 278 $ 554 ===== ===== ===== ===== Basic earnings Per Share $ 0.09 $ 0.13 $0.12 $0.24 ==== ==== ==== ===== Diluted earnings per share $ 0.09 $ 0.13 $0.12 $0.24 ==== ==== ==== =====
4 ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 (Unaudited and in thousands)
For the Six Months Ended June 30, -------------------------------- 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $278 $554 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Deferred income taxes 269 Depreciation and amortization of furniture, equipment, and leasehold improvements 125 94 Amortization of premiums and accretion of discounts, net (165) --- Amortization of intangible assets acquired 43 43 Decrease (increase) in accrued interest receivable 10 (90) Net loss (gain) on sale of loans, equipment, and other real estate owned 30 (3) Provision for credit losses 432 150 Other 58 (218) ---- ---- Net cash provided by operating activities $811 $799 ---- ---- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (1,783) (3,123) Purchase of investment in securities - available-for-sale (45,790) (24,585) Proceeds from redemption of securities and principal repayments 43,186 30,970 Net decrease (increase) in federal funds sold (7,555) (10,737) Proceeds from sale of equipment 5 13 Purchase of furniture, equipment, and leasehold improvements (253) (35) ---- ---- Net cash used in investing activities $ (12,190) $ (7,497) ---- ---- (CONTINUED)
5
For the Six Months Ended June 30, ----------------------------------- 1999 1998 ----------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from employee stock options 50 Net increase (decrease) in deposits $6,026 $7,837 Net increase (decrease) in securities sold under agreements to repurchase 5,737 (2,872) ------ ------ Net cash provided by financing activities 11,813 4,965 ------ ------ Net increase (decrease) in cash 434 (1,733) Cash, beginning of period 3,846 5,611 ------ ------ Cash, end of period $4,280 $3,878 ====== ====== Supplemental cash flow information: Interest paid on deposits and repurchase agreements $ 1,475 $ 1,578 Income taxes paid $ 39 ---
6 ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTH PERIOD ENDED JUNE 30, 1999 (Dollars in thousands)
Accumulated Common Stock Other ------------------------------------------ Accumulated Comprehensive Shares Par Value Surplus Deficit Income Total --------------- ------------ ------------- -------------- -------------- ----------- BALANCE, DECEMBER 31, 1998 2,313,506 $ 23 $ 13,143 $ (1,075) $ 0 $ 12,091 Net income --- -- -- 278 -- 278 Cash dividend (23) (23) Stock options exercised 10,000 50 50 Unrealized loss on investment securities Available for sale, net of income tax --- -- -- -- (21) (21) ---- BALANCE, JUNE 30, 1999 (UNAUDITED) 2,323,506 $ 23 $ 13,193 $ (820) $ (21) $ 12,375 ========= === ====== ===== ========= ======
7 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of regulation S-B of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto for the Company's fiscal year ended December 31, 1998, included in the Company's Form 10-KSB for the year ended December 31, 1998. 2. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, unrestricted amounts due from banks, overnight investments in repurchase agreements, and federal funds sold. ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND DECEMBER 31, 1998 Total assets at June 30, 1999 were $132.6 million an increase of $12.2 million or 10.1% from total assets at December 31, 1998 of $120.4 million. The increase was due to an increase in federal funds sold and other overnight investments of $7.6 million or 73.5%. In addition, net loans grew $1.5 million or 1.8% of total assets, and investment securities increased $2.4 million or 16.1%. Following the recent appointment of a new interim chief executive officer on May 7, 1999, the Bank undertook a thorough and comprehensive review of its allowance for credit losses. The purpose of the review was to evaluate the adequacy of the allowance for credit losses and the methodology employed in determining it. As a result of the review and with input received during the course of a regularly scheduled safety and soundness examination, the Bank developed a revised methodology to estimate the inherent losses in its loan portfolio. Adoption of this methodology has resulted in a net increase in the allowance for credit losses of $265,000 or 22.9% to $1,424,000 at June 30, 1999 from $1,159,000 at December 31, 1998. 8 While management believes that, based on information currently available, the Bank's allowance for credit losses is sufficient to absorb estimated losses inherent in its loan portfolio at this time, no assurances can be given that the Bank's level of allowance for credit losses will be sufficient to absorb future losses incurred by the Bank or that future adjustments to the allowance for credit losses will not be necessary if economic and other conditions differ substantially from the time management determined the current level of the allowance for credit losses. At June 30, 1999 and December 31, 1998, the allowance for credit losses to total loans was 1.58% and 1.32%, respectively. At June 30, 1999, the Bank had $2,187,000 in non-performing assets (consisting of $2,130,000 in non-accrual loans and $57,000 in "other real estate owned"), a net increase of $1,378,000 over December 31, 1998 non-performing assets of $808,000. The increase in non-performing assets resulted from a review of the loan portfolio following the recent change in management and the subsequent decision to place certain loans on non-accrual status. Loans on non-accrual status at June 30, 1999 include commercial loans with principal balances totaling $1,312,000 (of which $772,000 is subject to U.S. Small Business Administration guaranties), three acquisition, development and construction loans with principal balances totaling $502,000, a commercial real estate loan in the amount of $295,000, and one $21,000 consumer loan. The largest of the loans placed on non-accrual status is an $849,000 commercial loan to a technology company that is subject to a 75% SBA guaranty. Although this loan is current in its principal and interest payments, repayment is contingent on future cash flows that may be in doubt due to depletion of capital from prior losses and a deterioration in the quality of the borrower's accounts receivable. One of the three acquisition development and construction loans in the amount of $152,000 has been paid off since June 30, 1999. Federal funds and other overnight investments were $17.8 million, at June 30, 1999, an increase of $7.6 million or 73.5% from $10.3 million at December 31, 1998. The increase in federal funds and other overnight investments was due in part to an increase in deposits and repurchase agreements as the company focused its efforts in its market area to develop additional core deposit relationships. Investment securities available for sale were $17.6 million, at June 30, 1999, an increase of $2.4 million or 16.1% from $15.2 million at December 31, 1998. The increase in investment securities reflected additional purchases of state tax exempt U.S. government agency securities with maturity ranges of two years or less. Deposits of $106.8 million at June 30, 1999 represent a $6.0 million or 6.0% increase from December 31, 1998 deposits of $100.7 million. The increase was due to a $2.0 million or 18.0% increase in non-interest-bearing accounts and a $4.0 million or 4.5% increase in interest bearing deposits. 9 Stockholders' equity increased $284,000 for the six months ended June 30, 1999 due to an increase in net retained earnings of $255,000, offset by a decrease of $21,000 in accumulated other comprehensive income. Equity was further increased by $50,000 from the exercise of 10,000 employee stock options. The company paid its first dividend of $23, 000 or $.01 per share to stockholders of record on April 29, 1999. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998. GENERAL. Net income for the six months ended June 30, 1999 totaled $278,000 or $0.12 per basic and diluted share as compared to $554,000 or $0.24 per basic and diluted share for the six months ended June 30, 1998. The decrease in net income can be attributed mainly to additions to the provision for credit losses of $282,000 and increased operating expenses of $390,000. The increase in the provision for credit losses was due to management's reassessment of the adequacy of the allowance for credit losses following, the change in management on May 7, 1999. The increase in operating expenses was due primarily to increased compensation and benefits of $88,000, data processing expense of $50,000, and $87,000 in legal and consulting expense related to continuing year 2000 preparations, regulatory issues and the change in management on May 7, 1999. NET INTEREST INCOME. Net interest income increased $187,000 or 6.5% for the six months ended June 30, 1999 to $3.1 million from $2.9 million for the six months ended June 30, 1998, due primarily to a decrease in interest expense of $330,000, offset by a decrease in interest income of $143,000. The change in net interest income reflects an increase in the net interest margin to 5.38% at June 30, 1999 from 5.09% at June 30, 1998. The increase was the result of a decline in the cost of average interest bearing liabilities to 3.40% at June 30, 1999 from 4.08% at June 30, 1998, and was partially offset by a decrease in the yield on interest earning assets to 8.29% at June 30, 1999 from 8.60% at June 30, 1998. The decrease in interest income was due to reductions in interest and earned on investment securities which reductions were partially offset by increased interest income on net loans receivable. Interest earned on investment securities fell by $175,000 or 33.8% from $518,000 for the six months ended June 30, 1998 to $343,000 for the six months ended June 30, 1999. This was attributable to a decline in the average balance of investment securities from $17.8 million for the six month period ended June 30, 1998 to $13.0 million for the same period this year. Interest earned on federal funds sold and other overnight investments also fell from period to period, down $426,000 or 65.4% from $653,000 in 1998 to $227,000 in 1999. Average balances declined from $23.8 million in the first six months of 1998 to $10.4 million in the first six months of 1999. Interest income on net loans receivable grew by $458,000 or 12.3% from $3,711,000 for the six months ended June 30, 1998 to $4,169,000 for the six months ended June 31, 1999. The average balance of net loans receivable jumped $19.1 million or 26.3% from 72.8 million for the first six months of 1998 to $91.9 million for the same period this year. Loan growth occurred in the commercial real estate and construction portfolios, and was offset in part by lower commercial loan originations and payoffs during the period. Interest expense decreased $330,000 or 16.6% to $1.7 million for the six months ended June 30, 1999 from $2.0 million for the six months ended June 30, 1998, due primarily to a decrease in the average cost of interest bearing deposits to 3.40% at June 30, 1999 from 4.08% at June 30, 1998. 10 PROVISION FOR CREDIT LOSSES. The provision for credit losses for the six months ended June 30, 1999 and 1998 totaled $432,000 and $150,000 respectively. The increase in the provision for credit losses at June 30, 1999 was primarily attributable to management's reassessment of the adequacy of the allowance for credit losses following the change in management on May 7, 1999. NON-INTEREST INCOME. Non-interest income, which is comprised primarily of fees and charges on deposit accounts, increased $67,000 or 18.1% to $438,000 at June 30, 1999 from $371,000 at June 30, 1998. The increase in non-interest income was primarily due to fees generated by the bank's new Visa debit card, and increased fees related to ATM usage and mortgage banking activity. NON-INTEREST EXPENSE. Non-Interest expense increased $390,000 or 17.2% for the six months ended June 30, 1999 to $2.7 million from $2.3 million for the six months ended June 30, 1998. The increase in non-interest expense was due primarily to increased compensation and benefits of $88,000, data processing expense of $50,000, and $87,000 in legal and consulting expense related to regulatory issues and the change in management that became effective on May 7, 1999. INCOME TAX EXPENSE. The Company recorded income tax expense for the six-month period ended June 30, 1999 of $143,000. The Company's federal tax rate is approximately 34%. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998. GENERAL. Net income for the three months ended June 30, 1999 totaled $218,000 or $0.09 per basic and diluted share compared to $300,000 or $0.13 per basic and diluted share for the three months ended June 30, 1998. The decrease in net income can be attributed mainly to an increase in operating expenses of $251,000 or 22.0% which was partially offset by an increase in net interest income of $66,000 or 4.5% and an increase in non-interest income of $13,000 or 6.5%. INTEREST INCOME. Interest income fell $66,000 or 2.7% to $2,407,000 for the three months ended June 30, 1999 from $2,473,000 for the same period in 1998. Interest earned on investment securities dropped by $47,000 or 20.6% to $181,000 in the second quarter of 1999 from $228,000 in the second quarter of 1998. This was due to a decline in the average balance of investment securities of $1.7 million or 10.5% to $14.0 million for the three months ended June 30, 1999 from $15.7 million over the three months ended June 30, 1998. Interest earned on federal funds sold and other overnight investments also fell from period to period, down $240,000 or 67.4% to $116,000 in 1999 from $356,000 in 1998. Average balances declined by $16.0 million to $9.8 million in the second quarter of 1999 from $25.8 million in the same quarter last year. Interest income on net loans receivable grew by $221,000 or 11.7% to $2,110,000 for the three months ended June 30, 1999 from $1,889,000 for the same three months last year. 11 INTEREST EXPENSE. Interest expense decreased $132,000 or 13.1% to $873,000 for the three months ended June 30, 1999 from $1,005,000 for the three months ended June 30, 1998, due primarily to a decrease in the cost of interest bearing liabilities to 3.49% for the three months ended June 30, 1999 from 4.15% for the three months ended June 30, 1998. This decrease was partially offset by additional interest expense resulting from an increase of $2.1 million or 2.1% in the average balances of interest bearing deposits to $100.3 million for the three months ended June 30, 1999 from $98.2 million for the three months ended June 30, 1998. PROVISION FOR CREDIT LOSSES. The provision for credit losses for the three months ended June 30, 1999 and 1998 totalled $27,000 and $75,000 respectively. The decrease in the provision for credit losses at June 30, 1999 reflected negative loan growth of $3.8 million for the quarter and management's assessment of the credit risk in the loan portfolio. NON-INTEREST INCOME. Non-interest income increased $13,000 or 6.5% to $214,000 for the three months ended June 30, 1999 from $201,000 for the three months ended June 30, 1999. The increase in non-interest income was primarily due to fees generated by the bank's new Visa debit card and additional ATM service fees. NON-INTEREST EXPENSE. Non-interest expense increased $251,000 or 22.0% to $1.4 million for the three months ended June 30, 1999 from $1.1 million at June 30, 1998. The increase in non-interest expenses was primarily due to a $50,000 increase in compensation and related expenses, $72,000 in legal and consulting fees relating to regulatory issues and the change in management and a $30,000 increase in depreciation expense resulting from the installation of new computer equipment related to the bank's data processing conversion and Year 2000 compliance. INCOME TAX EXPENSE. The Company recorded income tax expense for the three month period ended June 30, 1999 of $113,000 based on a federal tax rate of 34%. YEAR 2000 COMPLIANCE. As a financial institution, the Bank is highly dependent on computer systems and applications to conduct its business. The Year 2000 (Y2K) issue arises from the use of two digits rather than four to signify the calendar year in date-sensitive computer programs. Many of the Bank's computer applications may recognize the date "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruption of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities for both the Bank and its customers who rely on its financial products and services. The Bank is actively engaged in an ongoing program designed to make its computer systems, applications, and facilities Y2K compliant. This program consists of the following phases: (i) awareness; (ii) assessment; (iii) renovation; (iv) validation, and; (v) implementation. During the awareness phase, the Bank identified its project team and responsibilities, prepared and allocated the project budget, defined the project scope, and established program and management policies. 12 Although complete, the awareness phase continues to be reviewed and updated. The assessment phase-- requiring an inventory of software, hardware, vendors, material customers, and facilities-- has also been completed. The renovation phase relating to the Bank's new internal systems was completed by January 31, 1999. The Bank converted its mission critical systems to a new service bureau on January 25, 1999. The new service bureau completed its Y2K testing phase by March 31, 1999. The Bank participated in this process, utilizing the proxy test method. The Bank used internal resources to validate the test results of all mission critical systems (deposits, loans, and general ledger). The validation phase also included testing of internal systems as they relate to each other, and testing of external interfaces with business partners. The implementation phase, which involved either updating or replacing software and hardware that is non-compliant, has also been completed. An institution-wide contingency plan has recently been developed to establish policies and procedures to be followed in the event of a business disruption caused by Y2K or other disasters. The plan's objective is to enable the continued safe operation of the Bank for a reasonable period of time until impacted systems can be restored. Elements of the plan include performing certain processes manually, repairing systems or obtaining replacements, and changing suppliers. The Bank strongly believes that the contingency planning process must be continuous and ongoing. Modifications to the plan will be made as additional information is obtained. The Bank budgeted $675,000 for conversion of its data processing system and for expenses related to the Y2K effort. To date, the Bank has spent the amount budgeted towards these projects. All costs to date and any remaining costs related to Y2K will be funded through operating cash flows. Any additional expenses are not expected to have a material effect on the Bank's operations. The Bank believes that conversions, renovations and modifications of its systems and equipment has enabled the Bank to be in a position to be Y2K ready. There can be no assurances, however, that the Bank's internal systems or equipment, or those of third parties upon which the Bank relies, will be Y2K ready. There also can be no assurances that the Bank's contingency plans, or those of third parties, will mitigate the effects of Y2K non-compliance. The Bank is part of a regulated industry that has issued standards for Y2K and is conducting audits of financial institutions, including the Bank, to ensure compliance. In the most likely worst case scenario, the Bank believes that its customers could experience some manual processes or an inability to access their cash immediately. Such events could have a material adverse effect on the Bank's financial position, liquidity and results of operations. The preceding Y2K discussion contains various forward-looking statements, which represent the Company's beliefs or expectations regarding future events. When used in the Y2K discussion, the words "believes," "expects," "estimates" and similar expressions are intended to identify forward-looking statements. Forward looking statements include, without limitation, the Company's: (i) expectations as to when it will complete the renovation and testing phase of its Y2K program and its Y2K contingency plans; (ii) estimated cost of achieving Y2K readiness, 13 and; (iii) expressed belief that its internal systems and equipment will be Y2K compliant in a timely fashion. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to: (i) the availability of qualified personnel and other information technology resources; (ii) the ability to identify and renovate all data sensitive lines of computer code or to replace imbedded computer chips in affected systems and equipment, and; (iii) the actions of government agencies and other third parties with respect to Y2K problems. 14 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 2 - CHANGES IN SECURITIES None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting on April 29, 1999 at the Annapolis Holiday Inn, 210 Holiday Court, Annapolis, Md. 21401 at 6:00 p.m. The Company received the following shares voted for the election of directors: For Percentage Withheld Ronald E. Gardner 1,974,631 99.5% 9,350 Lawrence E. Lerner 1,974,631 99.5% 9,350 Lawrence W. Schwartz 1,974,631 99.5% 9,350 The Company received the following shares voted for the nomination of Rowles & Company, LLP, to perform the annual audit for the year ending December 31, 1999. For Percentage Against Abstain 1,977,231 99.7% 5,900 850 ITEM 5 - OTHER INFORMATION None ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Certificate of Incorporation of Annapolis National Bancorp, Inc.* 3.2 Bylaws of Annapolis National Bancorp, Inc.* 11 Statement re: Computation of Per Share Earnings 27 Financial Data Schedule 15 (b) Reports on Form 8-K The Company filed a Form 8-K on May 10, 1999, announcing that the Company had accepted the resignation of John W. Marhefka, Jr. as Chief Executive Officer, Vice President and Director of the Company, and as President, Chief Executive Officer and Director of the Company's wholly owned subsidiary, Annapolis National Bank. The Company also announced that Richard M. Lerner, Chairman of the Board of Directors of the Bank and a member of the Board of the Company and Bank since 1990, was appointed on an interim basis President and Chief Executive Officer of the Bank. *Incorporated by reference to Registration Statement on Form SB-2, as amended, Commission File Number 333-29841, originally filed with the Securities and Exchange Commission on June 23, 1998. 16 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ANNAPOLIS NATIONAL BANCORP, INC. (Registrant) Date: 8/16/99 /s/ Richard M. Lerner ------- --------------------------- Richard M. Lerner Chief Executive Officer Date: 8/16/99 /s/ Russell J. Grimes Jr. ------- ------------------------------ Russell J.Grimes Jr. Chief Financial Officer 17 EX-11 2 EXHIBIT 11 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (In thousands, except Earnings per Share) Three Months Ended June 30, 1999 June 30, 1998 -------------------- -------------------- Net income $218 $300 Average Shares Outstanding 2,318 2,312 Basic Earnings Per Share $0.09 $0.13 Diluted Earnings Per Share $0.09 $0.13 Six Months Ended June 30, 1999 June 30, 1998 ---------------- ----------------- Net Income $278 $554 Average Shares Outstanding 2,316 (1) 2,332 Basic Earnings Per Share $0.12 $0.24 Diluted Earnings Per Share $0.12 $0.24 (1) includes the dilutive effect of 19,375 incentive stock options. EX-27 3 FINANCIAL DATA SCHEDULE
9 6-MOS DEC-31-1998 JAN-01-1999 JUN-30-1999 4,280 0 17,839 0 17,630 17,630 17,630 88,464 1,424 132,642 106,768 0 588 0 0 0 23 12,352 132,642 4,169 343 227 4,739 1,497 1,662 3,077 432 0 2,662 421 421 0 0 278 0.12 0.12 9.15 2,129 0 0 0 1,158 170 3 1,424 1,424 0 0
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