-----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, P4Rz+DLiaoesQqj5CRHLTelyzu4OrKKdvujOFZNa7OFFvWD9OPxKrC+q3WmNb3Jl NQeFJtnLJuA5EGXwI97yJA== 0000950168-99-002942.txt : 19991117 0000950168-99-002942.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950168-99-002942 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99752861 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. 10QSB 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 September 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 November 12, 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 September 30, 1999 and December 31, 1998 1 Consolidated Income Statements for the Three Months Ended September 30, 1999 and 1998 and for the Nine Months Ended September 30, 1999 and 1998 2 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 3-4 Consolidated statement of Changes in Stockholder's Equity for the Year Ended December 31, 1998 and the Nine-Month Period Ended September 30, 1999 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 6-13 PART II - OTHER INFORMATION - --------------------------- Item 1 - Legal Proceedings 14 Item 2 - Changes in Securities Item 3 - Defaults Upon Senior Securities 14 Item 4 - Submission of Matters to a Vote of Security Holders 14 Item 5 - Other Information 14 Item 6 - Exhibits and Reports on Form 8-K 14 SIGNATURES................................................................. 16 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (In thousands) (Unaudited) (Audited) September 30, December 31, 1999 1998 ------------- ------------ ASSETS Cash and due from banks $ 4,385 $ 3,846 Federal funds sold and other overnight investments 4,791 10,284 Investment securities available-for-sale 29,372 15,191 Loans, less allowance for credit losses 83,409 86,924 Premises and equipment 2,725 2,679 Core deposit premium and other intangibles 65 130 Accrued interest receivable 595 590 Deferred income taxes 320 320 Other real estate owned 57 91 Other assets 819 402 --------- --------- Total assets $ 126,538 $ 120,457 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing $ 12,476 $ 11,304 Interest-bearing 92,113 89,438 --------- --------- Total Deposits 104,589 100,742 Securities sold under agreements to repurchase 8,895 7,174 Other Borrowings 0 0 Accrued interest and other liabilities 478 450 --------- --------- Total liabilities 113,962 108,366 --------- --------- Stockholders' equity Preferred stock - $.01 par value -- $ -- Common stock - $.01 par value 23 23 Capital surplus 13,193 13,143 Accumulated deficit (616) (1,075) Accumulated other comprehensive income (24) 0 --------- --------- Total stockholders' equity 12,576 12,091 --------- --------- Total liabilities and stockholders' equity $ 126,538 $ 120,457 ========= ========= ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 AND THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited and in thousands)
For the Three Months For the Nine Months Ended Ended September 30, September 30, --------------------- ------------------- 1999 1998 1999 1998 ------ ------ ------ ------ INTEREST INCOME Loans $1,992 $1,893 $6,174 $5,566 Investment securities 358 240 701 758 Federal funds sold and securities purchased 131 310 358 963 ------ ------ ------ ------ Total interest income 2,481 2,443 7,233 7,287 INTEREST EXPENSE Interest bearing deposits 841 890 2,338 2,693 Securities sold under agreements to repurchase 91 99 244 288 Interest on other borrowed money 0 0 12 0 ------ ------ ------ ------ Total interest expense 932 989 2,594 2,981 ------ ------ ------ ------ Net interest income 1,549 1,454 4,639 4,306 Provision for credit losses 0 75 432 225 ------ ------ ------ ------ Net interest income after provision for credit losses 1,549 1,379 4,207 4,081 ------ ------ ------ ------ NON-INTEREST INCOME Service charges and fees 77 110 252 342 Mortgage banking fees 25 37 80 71 Other income 95 48 300 153 ------ ------ ------ ------ Total non-interest income 197 195 632 566 ------ ------ ------ ------ NON-INTEREST EXPENSE Personnel 603 634 1,824 1,760 Occupancy and equipment 148 142 425 420 Other operating expenses 615 406 1,745 1,193 Amortization of intangible assets acquired 22 22 65 65 ------ ------ ------ ------ Total non-interest expense 1,388 1,204 4,059 3,438 ------ ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAXES 358 370 780 1,209 INCOME TAX EXPENSE (BENEFIT) 131 126 275 411 ------ ------ ------ ------ NET INCOME $ 227 $ 244 $ 505 $ 798 ====== ====== ====== ====== Basic earnings Per Share $ 0.10 $ 0.11 $ 0.22 $ 0.35 ====== ====== ====== Diluted earnings per share $ 0.10 $ 0.11 $ 0.22 $ 0.35 ====== ====== ====== ======
ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited and in thousands)
For the Nine Months Ended September 30, ------------------------- 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 505 $ 798 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Deferred income taxes 0 392 Amortization of premiums and accretion of discounts, net (357) 0 Depreciation and amortization of furniture, equipment, and leasehold improvements 196 141 Amortization of intangible assets acquired 65 65 Decrease (increase) in accrued interest receivable (5) (301) Net loss (gain) on sale of loans, equipment, and other real estate owned 30 (3) Provision for credit losses 432 225 Other 120 (428) -------- -------- Net cash provided by operating activities $ 986 $ 889 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans 3,259 (10,471) Purchase of investment securities - available-for-sale (80,790) (38,579) Proceeds from redemption of securities and principal repayments 66,252 41,418 Proceeds form sale of available for sale securities 0 2,479 Net decrease (increase) in federal funds sold 5,493 5,069 Proceeds from sale of equipment and oreo 39 13 Purchase of land 0 (1,389) Purchase of furniture, equipment, and leasehold improvements (272) (43) -------- -------- Net cash used in investing activities $ (6,019) $ (1,503) -------- --------
(CONTINUED) For the Nine Months Ended September 30, ------------------------- 1999 1998 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits $ 3,847 $ 2,578 Net increase (decrease) in securities sold under agreements to repurchase 1,721 (3,671) Cash dividends paid (46) 0 Net proceeds from exercise of employee stock options 50 Net cash provided by financing activities 5,572 (1,093) ------- ------- Net increase (decrease) in cash 539 (1,707) Cash, beginning of period 3,846 5,611 ------- ------- Cash, end of period $ 4,385 $ 3,904 ======= ======= Supplemental cash flow information: Interest paid on deposits and repurchase agreements $ 2,598 $ 2,946 Income taxes paid $ 405 $ 5 ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE-MONTH PERIOD ENDED SEPTEMBER 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 -- -- -- 505 -- 505 Stock options exercised 10,000 50 50 Cash dividends (46) (46) Unrealized loss on investment securities Available for sale, net of income tax -- -- -- -- (24) (24) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, SEPTEMBER 30, 1999 (UNAUDITED) 2,323,506 $ 23 $ 13,193 $ (616) $ (24) $ 12,576 ========== ========== ========== ========== ========== ==========
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 nine months ended September 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 SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 Total assets at September 30, 1999 were $126.5 million, an increase of $6.1 million or 5.0% from total assets at December 31, 1998 of $120.4 million. Investments in short term securities increased by $14.2 million, or 93.4%, in preparation for the upcoming Year 2000 event. Federal funds sold and other overnight investments decreased $5.5 million, or 53.4%, and net loans receivable decreased $3.5 million, or 4.0%, during the period. Following the appointment of an 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 from its primary regulator during the course of a regularly scheduled safety and soundness examination, the Bank developed a revised methodology to estimate the inherent losses in its portfolio. Adoption of this methodology has resulted in a net increase of $312,000 in the allowance for credit losses to $1,471,000 at September 30, 1999 from $1,159,000 at December 31, 1998. While management believes that, based on information currently available, the Bank's allowance for credit losses is sufficient to absorb estimated losses 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 September 30, 1999 and December 31, 1998, the ratio of allowance for credit losses to total loans was 1.73% and 1.32%, respectively. At September 30, 1999, the Bank had $1,934,000 in non-performing assets (consisting of $1,877,000 in non-accrual loans and $57,000 in "other real estate owned"), a net increase of $1,126,000 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 May 7, 1999 change in management and the subsequent decision to place certain loans on non-accrual status. Loans on non-accrual status at September 30, 1999 include commercial loans with principal balances totaling $1,241,000 (of which $758,000 is subject to U.S. Small Business guaranties), two acquisition, development and construction loans with principal balances totaling $342,000, and a commercial real estate loan in the amount of $294,000. The largest of the loans placed on non-accrual status is an $831,000 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 the depletion of capital from prior losses and a deterioration in the quality of the borrower's accounts receivable. Net loans receivable at September 30, 1999 were $83.4 million, a decrease of $3.5 million or 4.0% from net loans receivable of $86.9 million at December 31, 1998. The decrease was due to a $7.6 million or 28.3% decrease in commercial loans that was partially offset by a $4.4 million or 7.2% increase in real estate and construction loans. The decrease in commercial loans is attributable to a reduced volume of originations combined with normal amortizations and repayments on commercial lines of credit. Other assets increased $417,000 or 103.7% due to prepaid taxes of $179,000 and an increase in other prepaid expenses and receivables of $238,000. Deposits of $104.6 million at September 30, 1999 increased by $3.8 million or 3.8% from deposits of $100.7 million at December 31, 1998. Non-interest-bearing accounts grew by $1.2 million or 10.4%, and interest-bearing deposits increased by $2.6 million or 3.0%. Stockholders' equity increased by $485,000 for the nine months ended September 30, 1999 due largely to an increase in net retained earnings of $505,000, offset by a decrease of $24,000 in accumulated other comprehensive income. Equity was further increased by $50,000 from the exercise of 10,000 employee stock options. The company has paid two quarterly dividends of $23,000 each, or $.01 per share, to stockholders of record on April 29, 1999 and August 2, 1999. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998. GENERAL. Net income for the nine months ended September 30, 1999 totaled $505,000 or $0.22 per basic and diluted share as compared to $798,000 or $0.35 per basic and diluted share for the nine months ended September 30, 1998. The decrease in net income can be attributed mainly to additional provisions for credit losses of $207,000 and increased operating expenses of $621,000. The increased provisions for credit losses were 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 data processing expense of $84,000, an increase of $83,000 in repairs, maintenance, and depreciation resulting from the installation of new computer equipment related to the Bank's data processing conversion, a $50,000 increase in marketing and advertising expense, and $141,000 in increased legal and consulting fees related to regulatory issues and the change in management on May 7, 1999. NET INTEREST INCOME. Net interest income increased $333,000 or 7.7% for the nine months ended September 30, 1999 to $4.6 million from $4.3 million for the nine months ended September 30, 1998, due primarily to an decrease in interest expense of $387,000 that was partially offset by a decrease of $54,000 in interest income. At September 30, 1999, the net interest margin increased to 5.26% from 5.02% at September 30, 1998. The increase in the net interest margin was the result of a $3.3 million or 2.8% increase in the average volume of earning assets to $118.0 million at September 30, 1999 from $114.7 million at September 30, 1998. The yield on earning assets decreased to 8.20% at September 30, 1999 from 8.49% at September 30, 1998. The cost of interest bearing liabilities decreased to 3.48% at September 30, 1999 from 4.05% at September 30, 1998. INTEREST INCOME. The decrease in interest income of $54,000 was primarily the result of reduced interest on federal funds and other overnight investments, which decreased by $605,000 or 62.8% to $358,000 for the nine months ended September 30, 1999 from $963,000 for the nine months ended September 30, 1998. The average balance of federal funds and other overnight investments dropped by $13.1 million to $10.1 million at September 30, 1999 from $23.2 million at September 30, 1998. In addition, interest on investment securities decreased by $57,000 or 7.5% as a result of a lower yield on the portfolio to 5.32% at September 30, 1999 from 5.83% at September 30, 1998. INTEREST EXPENSE. Interest expense decreased by $387,000 or 13.0% for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. This decrease was due primarily to a reduction in the average cost of interest bearing liabilities to 3.48% at September 30, 1999 from 4.05% at September 30, 1998. The lower average cost of interest bearing liabilities was partially offset by a $1.3 million increase in the average volume of interest bearing liabilities, which grew to $99.8 million at September 30, 1999 from $98.5 million at September 30, 1998. PROVISION FOR CREDIT LOSSES. The provision for credit losses for the nine months ended September 30, 1999 and 1998 totaled $432,000 and $225,000, respectively. The increase in the provision for credit losses at September 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 by $66,000 or 11.7% to $632,000 at September 30, 1999 from $566,000 at September 30, 1998. The increase in non-interest income was primarily due to an increase in 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 by $621,000 or 18.1% for the nine months ended September 30, 1999 to $4.1 million from $3.4 million for the nine months ended September 30, 1998. The increase in non-interest expense was due primarily to increased compensation and benefits expense of $64,000, data processing expense of $84,000 relating to the Bank's data processing conversion, repairs, maintenance, and depreciation of $83,000 reflecting depreciation of new and upgraded hardware and software relating to the conversion and Year 2000, and legal, audit, and consulting expense of $141,000 related to regulatory issues and the change in management that occurred on May 7, 1999. INCOME TAX EXPENSE. The Company recorded income tax expense for the nine-month period ended September 30, 1999 of $275,000. This amount includes $260,000 of federal income taxes and approximately $15,000 of state income taxes. The Company's combined effective federal and state income tax rate is approximately 38.6%. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998. GENERAL. Net income for the three months ended September 30, 1999 totaled $227,000 or $0.10 per basic and diluted share as compared to $244,000 or $0.11 per basic and diluted share for the three months ended September 30, 1998. The decrease in net income is primarily attributed to a $184,000 or 15.3% increase in non-interest expense, which was partially offset by a $95,000 or 6.5% increase in net interest income. INTEREST INCOME. The increase in interest income of $38,000 or 1.6% was derived from an increase of $99,000 or 5.2% in interest income on net loans receivable, and an increase of $118,000 or 49.2% in interest income on investment securities. These increases were partially offset by reduced interest on federal funds and other overnight investments of $179,000 or 57.7%, as overnight investments were shifted to higher yielding loans and investments. The average balance of net loans receivable increased by $8.9 million to $85.7 million at September 30, 1999 from $76.8 million at September 30, 1998, and the average balance of investment securities increased by $11.0 million to $27.5 million at September 30, 1999 from $16.5 million at September 30, 1998. INTEREST EXPENSE. Interest expense decreased by $57,000 or 5.8% for the three months ended September 30, 1999 compared to the three months ended September 30, 1998, due primarily to a decrease in the average cost of deposits to 3.59% at September 30, 1999 from 4.0% at September 30, 1998. This decrease was partially offset by a $5.9 million increase in the average volume of interest bearing liabilities to $104.1 million for the three months ended September 30, 1999 from $98.2 million for the three months ended September 30, 1998. PROVISION FOR CREDIT LOSSES. The provision for credit losses for the three months ended September 30, 1999 was zero compared to $75,000 for the three months ended September 30, 1998, reflecting management's assessment of the credit risk in the loan portfolio and negative loan growth for the quarter. NON-INTEREST INCOME. Non-interest income increased by $2,000 or 1.0% to $197,000 for the three months ended September 30, 1999 compared to $195,000 for the three months ended September 30, 1998. The increase in non-interest income was primarily due to additional fees generated by the Bank's products and services. NON-INTEREST EXPENSE. Non-interest expense increased by $184,000 or 15.3% for the three months ended September 30, 1999. The increase in non-interest expense was primarily due to additional data processing expense of $34,000, compensation and related benefits of $31,000, repairs, maintenance, and depreciation of $32,000 attributable mainly to new computer equipment, and marketing expense of $31,000. INCOME TAX EXPENSE. The Company recorded income tax expense for the three month period ended September 30, 1999 of $131,000 based on a combined effective federal and state tax rate of 38.6%. 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. 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 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 has 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, 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. FINANCIAL MODERNIZATION LEGISLATION Over the past several years, Congress has considered legislation to modernize the relationships between banks and other financial services companies. In 1999, both the House of Representatives and the Senate passed different versions of a bill that would repeal the laws that have restricted cross-ownership of banks, insurers and securities firms. On November 4, 1999, a compromise bill was approved by both houses of Congress and was expected to be signed into law by the President during the week of November 8, 1999. If the revised bill is enacted into law, it would permit banks, securities firms and insurers to combine and to offer a wide variety of financial products and services. Many of the resulting companies would be larger and have more resources than the Bank, and, should they choose to compete directly with the Bank in providing products similar to those of the Bank, they could adversely impact the Bank's results of operations. While press reports currently indicate that passage is likely, the financial reform legislation has been controversial, and there can be no assurances that the compromise bill will be signed into law by the President. Due to this uncertainty, as well the wide range of reforms contemplated by the bill, the Bank is unable to predict the impact that the financial modernization legislation will have on its business and results of operations. RECENT DEVELOPMENTS The Bank has entered into a formal agreement with the Office of the Comptroller of the Currency ("OCC") whereby the Bank is required to improve the Bank's management and policies and procedures. This agreement in no way restricts or impedes the Bank's ability to conduct normal banking and business transactions. The Bank has developed a detailed action plan to ensure prompt compliance with the agreement and is on schedule to meet all deadlines imposed by the agreement. The Bank has recently hired a new Chief Executive Officer, Mark H. Anders, and a new Chief Credit Officer, Robert E. Kendrick, III, and is in the process of evaluating the need, if any, to hire additional senior management personnel. In addition, the Bank has engaged outside firms to perform loan and compliance reviews and is currently accepting proposals for outsourcing internal audit functions. The Bank is also in the process of developing, updating, and implementing policies and procedures to address specific concerns of the OCC, including policies and procedures related to lending, risk management, and asset diversification. The Bank is committed to complying with the provisions of the agreement and believes that the changes it is making will have a positive impact on future operations. 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 None 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 (b) Reports on Form 8-K None *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 September 23, 1998. 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: 11/15/99 /s/ Richard M. Lerner -------- --------------------------- Richard M. Lerner Chief Executive Officer Date: 11/15/99 /s/ Russell J. Grimes Jr. -------- --------------------------- Russell J.Grimes, Jr. Chief Financial Officer EX-11 2 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (In thousands, except Earnings per Share)
Three Months Ended September 30, 1999 September 30, 1998 --------------------------- ---------------------------- Net income $227 $244 Average Shares Outstanding 2,323 2,312 Basic Earnings Per Share $0.10 $0.11 Diluted Earnings Per Share $0.10 $0.11 Nine Months Ended September 30, 1999 September 30, 1998 --------------------------- ---------------------------- Net income $505 $798 Average Shares Outstanding 2,318 2,321 Basic Earnings Per Share $0.22 $0.35 Diluted Earnings Per Share $0.22 $0.35
(1) Includes the dilutive effect of 8,344 incentive stock options. EX-27 3 EXHIBIT 27
9 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 4,385 0 4,791 0 29,372 29,372 29,372 83,409 1,471 126,538 104,589 0 478 0 0 0 23 12,553 126,538 6,174 701 358 7,233 2,338 2,594 4,639 432 0 4,059 780 780 0 0 505 0.22 0.22 820 1,877 0 0 1,223 1,159 209 89 1,471 1,471 0 0
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