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, 2002
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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)
1130 Connecticut Ave., N.W. Washington, D.C. 20036
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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 11, 2002:
2,729,677 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
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Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Changes in Stockholders' Equity 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis 6-15
Item 3 - Controls and Procedures 15
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on From 8-K 15
Signatures 16
Certification of Chief Executive Officer 17
Certification of Chief Financial Officer 18
Exhibit 99.1 19
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
September 30, 2002 (unaudited) and December 31, 2001
September 30, December 31,
2002 2001
----------------- ------------------
Assets
Cash and due from banks $7,764,557 $5,607,875
Federal funds sold 8,935,548 4,163,836
Interest-bearing deposits in other banks 4,353,492 4,328,091
Investment securities available for sale at fair value 19,056,142 19,899,546
Investment securities held to maturity (market value of $7,523,000 and
$4,425,356 for 2002 and 2001, respectively 7,501,475 4,512,960
Loans 146,148,349 138,060,683
Less: allowance for loan losses (2,164,905) (1,910,963)
----------------- ------------------
Loans, net 143,983,444 136,149,720
----------------- ------------------
Bank premises and equipment, net 503,531 670,200
Other assets 3,219,419 2,837,887
----------------- ------------------
Total assets $195,317,608 $178,170,115
================= ==================
Liabilities and Stockholders' equity
Liabilities:
Deposits
Noninterest-bearing deposits $47,159,152 $40,407,437
Interest-bearing deposits 118,247,830 112,683,200
----------------- ------------------
Total deposits 165,406,982 153,090,637
----------------- ------------------
Short-term borrowings 7,493,690 4,436,618
Long-term debt 746,302 809,695
Other liabilities 1,011,463 944,903
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Total liabilities 174,658,437 159,281,853
----------------- ------------------
Commitments and contingencies (Note 2) Stockholders' equity:
Common stock, $0.01 par value, authorized 5,000,000 shares; issued 2,744,623
shares in 2002 and 2,742,582 shares in 2001; outstanding 2,729,677 shares in
2002 and 2,727,636 shares in 2001. 27,445 27,426
Capital surplus 13,059,578 13,047,784
Retained earnings 7,429,811 5,884,201
Less: Treasury stock, 14,946 shares, at cost (98,349) (98,349)
Accumulated other comprehensive income 240,686 27,200
----------------- ------------------
Total stockholders' equity 20,659,171 18,888,262
----------------- ------------------
Total liabilities and stockholders' equity $195,317,608 $178,170,115
================= ==================
See notes to condensed consolidated financial statements.
- 1 -
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income
For the Periods Ended September 30, 2002 and 2001
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
------------------------------- -----------------------------
2002 2001 2002 2001
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Interest income
Interest and fees on loans $2,823,781 $2,781,619 $8,302,406 $8,198,837
Interest and dividends on investment securities:
Taxable 364,647 280,957 1,070,394 947,766
Other interest income 62,424 110,470 146,887 404,104
-------------- -------------- ------------- -------------
Total interest income 3,250,852 3,173,046 9,519,687 9,550,707
-------------- -------------- ------------- -------------
Interest expense
Interest on deposits 602,817 877,283 1,878,864 2,741,751
Interest on short-term borrowings 27,077 27,962 65,966 119,343
Interest on long-term debt 13,328 14,771 40,794 44,972
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Total interest expense 643,222 920,016 1,985,624 2,906,066
-------------- -------------- ------------- -------------
Net interest income 2,607,630 2,253,030 7,534,063 6,644,641
Provision for loan losses 105,000 70,000 292,500 190,000
-------------- -------------- ------------- -------------
Net interest income after provision for loan losses 2,502,630 2,183,030 7,241,563 6,454,641
-------------- -------------- ------------- -------------
Noninterest income
Service charges on deposit accounts 412,636 391,867 1,220,646 1,149,180
Other income 54,635 45,229 207,595 336,740
-------------- -------------- ------------- -------------
Total noninterest income 467,271 437,096 1,428,241 1,485,920
-------------- -------------- ------------- -------------
Noninterest expense
Salaries and employee benefits 740,310 752,306 2,164,668 2,230,895
Occupancy and equipment expense 309,999 288,576 903,804 864,412
Professional fees 61,169 74,954 167,536 193,196
Data processing fees 103,956 108,500 319,255 303,920
Other operating expense 296,897 309,912 915,738 940,364
-------------- -------------- ------------- -------------
Total noninterest expense 1,512,331 1,534,248 4,471,001 4,532,787
-------------- -------------- ------------- -------------
Income before provision for income taxes 1,457,570 1,085,878 4,198,803 3,407,774
Provision for income taxes 583,300 362,131 1,683,646 1,271,119
-------------- -------------- ------------- -------------
Net income $874,270 $723,747 $2,515,157 $2,136,655
============== ============== ============= =============
Earnings per share:
Basic $0.32 $0.27 $0.92 $0.79
Diluted $0.32 $0.27 $0.92 $0.79
Average common shares outstanding:
Basic 2,729,052 2,712,180 2,728,864 2,712,180
Diluted 2,743,622 2,722,339 2,744,801 2,718,996
See notes to condensed consolidated financial statements
- 2 -
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
Employee Accumulated
Stock Other
Ownership Comprehensive
Capital Retained Treasury Plan Income
Common Stock Surplus Earnings Stock (ESOP) (Loss) Total
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Balance at December 31, 2000 $27,354 $12,992,334 $4,082,112 ($87,144) ($55,122) $13,876 $16,973,410
Comprehensive income:
Net income -- -- 2,136,655 -- -- -- 2,136,655
Change in net unrealized gain
on investment securities
available for sale, net of taxes of $74,636 -- -- -- -- -- 109,377 109,377
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Total comprehensive income -- -- -- -- -- -- 2,246,032
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Dividends declared ($0.28 per share) -- -- (756,778) -- -- -- (756,778)
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Balance at September 30, 2001 $27,354 $12,992,334 $5,461,989 ($87,144) ($55,122) $123,253 $18,462,664
========================================================================================
Balance at December 31, 2001 $27,426 $13,047,784 $5,884,201 ($98,349) -- $27,200 $18,888,262
Comprehensive income:
Net income -- -- 2,515,157 -- -- -- 2,515,157
Change in net unrealized gain on investment
securities available for sale, net of
taxes of $145,818 -- -- -- -- -- 213,486 213,486
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Total comprehensive income -- -- -- -- -- -- 2,728,643
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Dividends declared ($0.36 per share) -- -- (969,547) -- -- -- (969,547)
Issuance of shares Stock Option Plan 19 11,794 -- -- -- -- 11,813
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Balance at September 30, 2002 $27,445 $13,059,578 $7,429,811 ($98,349) -- $240,686 $20,659,171
=======================================================================================
See notes to condensed consolidated financial statements
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ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
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Cash flows from Operating Activities:
Net Income $2,515,157 $2,136,655
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 292,500 190,000
Depreciation and amortization 207,186 214,340
Accretion of loan discounts and fees (173,589) (115,256)
Net premium amortization/discount (accretion) on investment securities 16,810 (202,580)
(Increase) decrease in other assets (565,906) 160,076
Increase in other liabilities 66,560 212,404
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Net cash provided by operating activities 2,358,718 2,595,639
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Cash flows from Investing Activities:
Proceeds from maturities of investment securities held to maturity 1,000,000 2,499,375
Proceeds from maturities of investment securities available for sale 7,000,000 21,975,625
Proceeds from repayment of mortgage-backed securities 685,996 12,452
Purchase of investment securities available for sale (6,988,612) (15,799,638)
Purchase of investment securities held to maturity (3,500,000) --
Net increase in interest-bearing deposits in other banks (25,401) (1,011,639)
Net increase in loans (7,914,077) (8,370,592)
Purchase of bank premises and equipment (40,517) (144,940)
Net cash used in investing activities (9,782,611) (839,357)
----------------- -----------------
Cash flows from Financing Activities:
Net increase in transaction and savings deposits 20,256,386 2,986,104
Net increase in time deposits (7,940,044) 2,681,439
Net increase in short-term borrowings 3,057,072 489,188
Payments on long-term debt (63,393) (57,669)
Proceeds from issuance of common stock 11,813 --
Cash dividends paid to common stockholders (969,547) (756,778)
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Net cash provided by financing activities 14,352,287 5,342,284
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Net increase in cash and cash equivalents 6,928,394 7,098,566
Cash and cash equivalents at beginning of year 9,771,711 9,924,149
----------------- -----------------
Cash and cash equivalents at end of period $16,700,105 $17,022,715
================= =================
Supplementary disclosures:
Interest paid on deposits and borrowings $2,019,057 $2,894,202
================= =================
Income taxes paid $1,780,000 $1,586,602
================= =================
See notes to condensed consolidated financial statements.
-4-
ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
1. Basis of presentation
Abigail Adams National Bancorp, Inc. (the "Company") is the parent company
of The Adams National Bank (the "Bank"). As used herein, the term Company
includes the Bank, unless the context otherwise requires.
The Company and the Bank prepare their financial statements on the accrual
basis and in conformity with accounting principles generally accepted in the
United States of America, the instructions for Form 10-QSB, and Regulation S-X.
The accompanying financial statements are unaudited except for the balance sheet
at December 31, 2001, which was derived from the audited financial statements as
of that date. The unaudited information furnished herein reflects all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary to a fair statement of the results for the interim
periods presented. They do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. Operating results for the nine months
ended September 30, 2002 (unaudited) are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. Certain
reclassifications may have been made to amounts previously reported in 2001 to
conform with the 2002 presentation.
2. 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.
3. Stockholders' Equity
All financial information and per share data presented has been
retroactively adjusted for the five-for-four stock split effected in the form of
a 25% stock dividend issued on December 31, 2001.
4. Earnings per share
Earnings per share computations are based upon the weighted average number
of shares outstanding during the periods. Diluted earnings per share
computations are based upon the weighted average number of shares outstanding
during the period plus the dilutive effect of outstanding stock options and
stock performance awards. Per share amounts are based on the weighted average
number of shares outstanding during each period and adjusted for the stock split
effected in the form of a stock dividend on December 31, 2001.
For the 3 months For the 9 months
ended September 30 ended September 30
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2002 2001 2002 2001
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Basic EPS weighted average
shares outstanding 2,729,052 2,712,180 2,728,864 2,712,180
Dilutive effect of stock options 14,570 10,159 15,937 6,816
------------------ ----------------- ----------------- ----------------
Diluted EPS weighted 2,743,622 2,722,339 2,744,801 2,718,996
average shares outstanding ================== ================= ================= ================
No adjustments were made to net income in the computation of earnings per share
for any of the periods presented.
-5-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following discussion provides information about the results of
operations and financial condition, liquidity, and capital resources of the
Company and should be read in conjunction with our consolidated financial
statements and footnotes thereto for the year ended December 31, 2001.
The Company does not undertake, and specifically declines any obligation,
to publicly release the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Overview
The Company reported net income for the three months ended September 30,
2002 of $874,000, an increase of 20.7% compared to the $724,000 earned during
the comparable quarter of 2001. On a diluted per share basis, earning for the
third quarter of 2002 were $0.32 per share, compared to $0.27 per share for the
same period in 2001. The Company's operating results for the third quarter of
2002 produced an annualized return on average assets of 1.79% and an annualized
return on average equity of 16.97%, compared to the prior year ratios of 1.76%
and 15.73%, respectively.
For the nine months ended September 30, 2002, net income was $2,515,000, an
increase of 17.7%, compared to the $2,137,000 earned for the first nine months
of 2001. On a diluted per share basis, year-to-date earnings were $0.92 per
share, compared to $0.79 per share for the same period in 2001. The annualized
return on average assets was 1.81% and the annualized return on average equity
was 16.99%, compared to 1.79% and 16.05%, respectively, for the same period in
2001.
Net Interest Income
Net interest income, which is the sum of interest and certain fees
generated by earning assets minus the cost of deposits and other funding
sources, is the principal source of the Company's earnings. Net interest income
increased by $355,000, or 15.8%, to $2,608,000 for the three months ended
September 30, 2002, as compared to $2,253,000 for the comparable period in 2001.
Average earning assets totaling $185,005,000 increased by $29,546,000, or 19.0%,
as compared to the average of $155,459,000 for the third quarter of 2001. The
average yield on total earning assets was 6.97%, a decrease of 113 basis points
from the average yield of 8.10%, for the third quarter of 2001. The decrease in
average yields was due to the significant decrease in market interest rates for
the comparable periods. The yield on average loans decreased 110 basis points,
due to adjustable and variable rate loans that use the Prime rate as an index.
The yield on average investment securities decreased 46 basis points this
quarter compared the same quarter in 2001. Called investment securities were
replaced with comparable bonds with similar terms at lower yields, as a result
of the decline in bond yields. Average interest bearing liabilities for the
third quarter of 2002 of $125,526,000 increased by $21,182,000, or 20.3%, as
compared to $104,344,000 for the third quarter of 2001. The cost of funds was
2.03%, a decrease of 147 basis points from the yield of 3.50% for the third
quarter of 2001, predominantly due to the lower rates paid on all deposit
products. The net interest margin (net interest income as a percentage of
average interest-earning assets) was 5.59% for the third quarter of 2002, as
compared to 5.75% for the same period in 2001, a decrease of 16 basis points.
The net interest spread (the difference between the average interest rate earned
on interest-earning assets and interest paid on interest-bearing liabilities)
was 4.94% for the third quarter of 2002, as compared to 4.60% for the third
quarter of 2001, an increase of 34 basis points.
Net interest income for the first nine months of 2002 increased by
$889,000, or 13.38%, to $7,534,000, as compared to $6,645,000 for the comparable
period in 2001. Average earning assets for the first nine months of 2002 were
$177,849,000, an increase of $26,036,000, or 17.15%, as compared to $151,813,000
for the same period in 2001. The yield on total earning assets was 7.16%, a
decrease of 125 basis points from the yield of 8.41% for the same period last
year. The decrease in yields was due to the significant decrease in market
interest rates, compared to the same period last year. Average interest-bearing
liabilities increased $20,226,000 or 20.32% to $119,764,000 from
-6-
$99,538,000 for the same period in 2001. The cost of funds was 2.22%, a decrease
of 168 basis points from the yield of 3.90% for the same period in 2001. The
overall improvement in net interest income was the result of the increase in
average interest-earning assets, combined with the decline in the yield on
interest bearing liabilities. The net interest spread was 4.94% and the net
interest margin was 5.66% for the first nine months of 2002, reflecting an
increase of 43 basis points in net interest spread and a decrease of 19 basis
points in net interest margin, from the same period in 2001. Throughout 2001 and
2002, Management focused on managing the net interest margin and net interest
spread to mitigate the impact of the general decline in market yields.
Average balances and rates for each major category of interest-earning assets
and interest-bearing liabilities for the third quarter and year-to-date periods
of 2002 and 2001 are presented on a comparative basis in the following tables.
Distribution of Assets, Liabilities and Stockholders' Equity Yields and Rates
For the Three Months Ended September 30, 2002 and 2001
(Dollars in Thousands)
2002 2001
----------------------------------- --------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balances Expense Rates Balances Expense Rates
----------- ----------- ---------- ------------ ----------- -----------
Assets
Loans (a) $142,880 $2,824 7.84% $123,385 $2,782 8.94%
Investment securities (b) 27,321 365 5.30% 19,340 281 5.76%
Federal funds sold 9,761 39 1.59% 6,672 57 3.40%
Interest-bearing bank balances 5,043 23 1.81% 6,062 53 3.49%
----------- ----------- ------------ -----------
Total earnings assets 185,005 3,251 6.97% 155,459 3,173 8.10%
----------- ----------- ------------ -----------
Allowance for loan losses (2,114) (1,797)
Cash and due from banks 7,409 6,306
Other assets 3,525 2,957
Total assets $193,825 $162,925
=========== ============
Liabilities and Stockholders' Equity
Savings, NOW and money market $66,695 256 1.52% $49,314 278 2.24%
Certificates of deposit 52,068 347 2.64% 50,225 599 4.73%
Customer repurchase agreements 6,002 27 1.78% 3,963 28 2.80%
Long- term debt 761 13 7.02% 842 15 6.96%
Total interest-bearing liabilities 125,526 643 2.03% 104,344 920 3.50%
----------- ----------- ------------ -----------
Noninterest bearing deposits 46,872 39,301
Other liabilities 982 1,022
Stockholders' equity 20,445 18,258
Total liabilities and stockholders'
equity $193,825 $162,925
========== ============
Net interest income $2,608 $2,253
=========== ===========
Net interest spread 4.94% 4.60%
Net interest margin 5.59% 5.75%
a) The loan averages are stated net of unearned income and include loans on
which the accrual of interest has been discontinued.
b) Yields related to investment securities exempt from D.C. income taxes
(9.975%) are stated on a fully tax-equivalent basis.
-7-
Distribution of Assets, Liabilities and Stockholders' Equity Yields and Rates
For the Nine Months Ended September 30, 2002 and 2001
(Dollars in Thousands)
2002 2001
----------------------------------- --------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balances Expense Rates Balances Expense Rates
----------- ----------- ----------- ----------- ------------ -----------
Assets
Loans (a) $140,449 $8,303 7.90% $118,939 $8,199 9.22%
Investment securities (b) 25,863 1,070 5.53% 20,760 948 6.10%
Federal funds sold 6,871 83 1.62% 7,350 246 4.47%
Interest-bearing bank balances 4,666 64 1.83% 4,764 158 4.44%
----------- ----------- ----------- ------------
Total earnings assets 177,849 9,520 7.16% 151,813 9,551 8.41%
----------- ----------- ----------- ------------
Allowance for loan losses (2,025) (1,734)
Cash and due from banks 6,916 6,450
Other assets 3,534 2,959
Total assets $186,274 $159,488
=========== ===========
Liabilities and Stockholders' Equity
Savings, NOW and money market $60,022 653 1.45% $46,539 909 2.61%
Certificates of deposit 53,782 1,226 3.05% 47,368 1,833 5.17%
Customer repurchase agreements 5,179 66 1.70% 4,770 119 3.35%
Long- term debt 781 41 6.98% 861 45 6.99%
Total interest-bearing liabilities 119,764 1,986 2.22% 99,538 2,906 3.90%
----------- ----------- ----------- ------------
Noninterest bearing deposits 45,645 41,077
Other liabilities 1,071 1,073
Stockholders' equity 19,794 17,800
Total liabilities and stockholder
equity $186,274 $159,488
=========== ===========
Net interest income $7,534 $6,645
=========== ============
Net interest spread 4.94% 4.51%
Net interest margin 5.66% 5.85%
a) The loan averages are stated net of unearned income and include loans on
which the accrual of interest has been discontinued.
b) Yields related to investment securities exempt from D.C. income taxes
(9.975%) are stated on a fully tax-equivalent basis.
Noninterest Income
Total noninterest income for the three months ended September 30, 2002 was
$467,000, an increase of $30,000 or 6.9%, compared to the third quarter of 2001.
Service charges on deposit accounts totaled $413,000, an increase of $21,000 or
5.4% for the third quarter of 2002, as compared to the same period last year.
This increase was due to increases in the ATM and overdraft fees. Other
noninterest income totaled $55,000, an increase of $10,000 or 22.2%, and
included a $13,000 gain on the sale of the guaranteed portion of SBA loans.
Total noninterest income for the nine months ended September 30, 2002 was
$1,428,000, a decrease of $58,000 or 3.9%, compared to the same period in 2001.
Service charges on deposit accounts totaled $1,221,000, an increase of $72,000
or 6.3% for the first nine months of 2002. This increase was due to the increase
in ATM fees, overdraft fees and transaction activity. Other noninterest income
totaled $208,000, a decrease of $129,000 or 38.3%, as compared to the same
period in 2001. Excluding the $183,000 in income during 2001 that was realized
from the unamortized discounts on investment securities that were called, other
income increased $54,000 in 2002 compared to 2001. In addition, other
noninterest income included a $68,000 gain on the sale of the guaranteed portion
of SBA loans in 2002, as compared to $60,000 in 2001.
-8-
Noninterest Expense
Total noninterest expense for the three months ended September 30, 2002
decreased $22,000 or 1.4% to $1,512,000, as compared $1,534,000 for the third
quarter of 2001. The Company's efficiency ratio (ratio of non-interest expense
to the sum of net interest income and non-interest income) was 49.2% for the
third quarter of 2002, as compared to 57.0% for the same quarter in 2001.
Salaries and benefits of $740,000 decreased by $12,000 or 1.6%, as compared to
the third quarter of 2001, due to reductions in staff and increases in contra
loan fees. Net occupancy expense of $310,000 for the third quarter of 2002
increased $21,000, or 7.3%, from the same period in 2001, due to additional
depreciation expense. Professional fees of $61,000 decreased $14,000 or 18.7%,
compared to the prior year as a result of the lower level of legal fees. Data
processing expense of $104,000 decreased by $5,000 or 4.6%. Other operating
expense of $297,000 decreased by $13,000 or 4.2% from the same period in 2001.
Total noninterest expense for the nine months ended September 30, 2002
decreased $62,000 or 1.4% to $4,471,000, as compared $4,533,000 for the same
period in 2001. The Company's efficiency ratio decreased to 49.9%, from 55.8%
for last year. Salaries and benefits of $2,165,000 decreased by $66,000 or 3.0%,
from $2,231,000 reported last year, due to reductions in staff and the increase
in contra loan fees. Net occupancy expense of $904,000 increased $40,000, or
4.6%, from $864,000 for the same period in 2001, due to increases in
depreciation expense. Professional fees of $168,000 decreased by $25,000 or
13.0% from the $193,000 reported last year, as a result of the lower level of
legal fees. Data processing expense of $319,000 increased by $15,000 or 4.9%,
compared to the same period in 2001, due to increases related to redundant
computer systems for the disaster recovery plan. Other operating expense of
$916,000 decreased by $24,000 or 2.6% from $940,000 in 2001, as a result of cost
control measures.
Income Tax Expense
Income tax expense of $583,000 for the three months September 30, 2002
increased $221,000 from the same period in 2001, as a result of the increase in
pretax net income and a deferred tax adjustment in 2001 of $75,000. The
Company's effective tax rate for the third quarter of 2002 was 40.0%, as
compared to 33.3% for the third quarter of 2001.
Income tax expense of $1,684,000 for the nine months ended September 30,
2002 increased $413,000 from the same period in 2001, due primarily to the
increase in pretax income in 2002 and the deferred tax adjustment made in the
third quarter of 2001. The Company's effective tax rate for the nine months
ended September 30, 2002 was 40.1%, as compared to 37.3% for the same period in
2001.
Financial Condition
Overview
Total assets increased to $195,318,000 at September 30, 2002 from
$178,170,000 at December 31, 2001, an increase of $17,148,000 or 9.6%. The
increase in assets was primarily attributable to the increase in loans, which
increased by $8,087,000. Investment securities increased $2,145,000, while
short- term investments grew $4,797,000 and cash on hand and due from banks
increased by $2,157,000. Total deposits increased 8.0% to $165,407,000.
Short-term borrowings increased $3,057,000, while long term debt decreased
$64,000. Total stockholders' equity increased $1,771,000 or 9.4% to $20,659,000.
The book value per common share at September 30 2002 was $7.57, as compared to
$6.92 at December 31, 2001. The third quarter dividend was $.12 per share or a
20.0% increase over the dividend paid in the third quarter of 2001.
The major balance sheet categories are further discussed in detail the
following sections.
-9-
Loans
The loan portfolio at September 30, 2002 totaled $146,148,000, an increase
of $8,087,000 or 5.9%, as compared to the December 31, 2001 balance of
$138,061,000. The guaranteed portion of SBA loans totaling $745,000 were sold
during this period. Commercial real estate secured loans grew 11.1% or
$10,673,000 to the balance of $106,704,000 from $96,031,000 at December 31,
2001. Installment loans increased 8.2% or $1,310,000 to $17,276,000, as compared
to $15,966,000 at the previous year end, and commercial loans decreased 14.5% or
$3,701,000 to $21,814,000 from $25,515,000, due to prepayments in excess of new
loans added to the portfolio.
Investment securities
Total investment securities increased by $2,145,000 or 8.8% to $26,558,000
at September 30, 2002 from $24,413,000 at December 31, 2001. This net increase
reflects $8,000,000 in investment securities that were called or matured.
Available-for-sale securities, consisting of U.S. government agencies and
mortgage-backed securities, purchased during this period totaled $6,989,000.
Investment securities classified as hold- to-maturity purchased totaled
$3,500,000.
Short-term investments
Federal funds sold of $8,936,000 at September 30, 2002 increased $4,772,000
or 114.6% from $4,164,000 at December 31, 2001. Interest-bearing deposits in
other banks of $4,353,000 was relatively unchanged from December 31, 2001.
Cash and due from banks
Cash and due from banks increased at September 30, 2002 by $2,157,000 or
38.5% to the balance of $7,765,000, as compared to the balance of $5,608,000 at
December 31, 2001. This increase was due to normal fluctuations in correspondent
bank relationships.
Deposits
Total deposits increased by $12,316,000, or 8.0% to $165,407,000 at
September 30, 2002 from the December 31, 2001 balance of $153,091,000. Demand
deposits of $47,159,000 increased $6,752,000, or 16.7% from $40,407,000 at year
end. NOW accounts increased 33.0% or $5,723,000 to $23,055,000, as compared to
$17,332,000 at December 31, 2001. Money market accounts increased $7,436,000 or
23.3% to $39,327,000 from the balance of $31,891,000 reported at year end. The
changes in demand deposits, NOW and money market accounts are attributed to the
normal fluctuations in the balances of some of the Company's large corporate and
not-for-profit customers. Savings deposits increased to $4,756,000 or 7.8% from
$4,411,000 at December 31, 2001. Total certificates of deposit decreased by
$7,940,000 or 13.4% to $51,109,000 from the December 31, 2001 balance of
$59,049,000, primarily due to Jumbo CD's that were not renewed.
Short-term borrowings and long-term debt
Short-term borrowings consisting entirely of customer repurchase agreements
increased $3,057,000 or 68.9% to $7,494,000 at September 30, 2002 from the
December 31, 2001 balance of $4,437,000, as demand for this product increased.
Long-term debt consisting of a Federal Home Loan Bank advance decreased
$64,000 or 7.9% to $746,000 from the balance of $810,000 at December 31, 2001,
as a result of scheduled repayments.
-10-
Stockholders' equity
Stockholders' equity at September 30, 2002 was $20,659,000, an increase of
$1,771,000 or 9.4% from December 31, 2001 balance of $18,888,000. This increase
was principally attributable to net income for this period of $2,515,000, an
increase in the unrealized gain on investment securities classified as
available- for-sale of $213,000, less the dividends paid on the Company's common
stock totaling $970,000. On September 30, 2002, the quarterly dividend paid was
$0.12 per share, an increase of $0.02 per share from the $0.10 per share paid in
the third quarter of 2001. The book value per share of common stock at September
30, 2002 was $7.57, as compared to $6.92 at December 31, 2001. Average
stockholders' equity to average assets for the third quarter of 2002 and 2001
was 10.55% and 11.21%, respectively.
Asset Quality
Allowance for Loan Losses
The Company manages the risk characteristics of its loan portfolio through
various control processes, such as credit evaluation of individual borrowers,
establishment of lending limits to individuals and application of lending
procedures, such as the holding of adequate collateral and the maintenance of
compensating balances. Although credit policies are designed to minimize risk,
management recognizes that loan losses will occur and that the amount of these
losses will fluctuate depending on the risk characteristics of the loan
portfolio, as well as, general and regional economic conditions.
During the first nine months of 2002, the Bank added $293,000 to the loan
loss reserve. The increase in the allowance for loan loss provision was
indicative of the risk associated with the increase in nonperforming loans, the
increase in monitored credits, and the overall increase in the loan portfolio
this year. Management evaluates the risk characteristics of the loan portfolio
on an ongoing basis, including specific reserves for problem credits and general
reserves for the overall loan portfolio. At September 30, 2002, the allowance
for loan losses as a percentage of outstanding loans was 1.48%, as compared to
1.38% at December 31, 2001. Management deems the allowance for loan losses of
$2,165,000 at September 30, 2002 to be adequate.
The table entitled "Allocation of Allowances for Loan Losses" sets forth an
analysis of the allocation for loan losses by categories as of September 30,
2002 and December 31, 2001.
Allocation of Allowances for Loan Losses
For the Periods Ended September 30, 2002 and December 31, 2001
September 30, 2002 December 31, 2001
-------------------------------- -------------------------------
% of Loans % of Loans
Reserve to Total Reserve to Total
Amount Loans Amount Loans
-------------- -------------- ------------- --------------
(Dollars in Thousands)
-------------- ------------- --------------
Commercial $743 26.5% $673 23.7%
Real estate - secured 1,347 72.9% 1,155 75.3%
Installment 18 0.6% 34 1.0%
====
Unallocated 57 -- 49 --
Total loans $2,165 100.0% $1,911 100.0%
============== ============== ============= ==============
-11-
The following table summarizes the changes in the allowance for loan losses
for the nine months ended September 30, 2002 and 2001 as follows:
Changes in the Allowance for Loans Losses for the
Nine Months Ended September 30, 2002 and 2001
(Dollars in thousands)
2002 2001
------------ ------------
Balance at January 1 $1,911 $1,654
------------ ------------
Provision for loan losses 293 190
------------ ------------
Recoveries:
Commercial 6 2
Installment to individuals -- 2
Credit card 3 6
------------ ------------
Total recoveries 9 10
------------ ------------
Charge-offs:
Commercial (33) (9)
Installment to individuals (14) (4)
Credit card (1)
------------ ------------
Total charge-offs (48) (13)
------------ ------------
Net charge-offs (39) (3)
------------ ------------
Balance at end of period $2,165 $1,841
============ ============
Ratio of net charge-offs to average total loans 0.028% 0.003%
Average total loans outstanding during the year $140,449 $118,939
Nonperforming Assets
Nonperforming assets at September 30, 2002 were $456,000, an increase of
$70,000 from the $386,000 reported at December 31, 2001. The nonaccrual loan
balances guaranteed by the U.S. Small Business Administration ("SBA") totaled
$288,000 at September 30, 2002. The table entitled "Analysis of Nonperforming
Assets" presents nonperforming assets, by category, at September 30, 2002 and
December 31, 2001.
Past Due and Potential Problem Loans
There were no loans contractually past due 90 days and still accruing
interest at September 30, 2002 or December 31, 2001. Loans totaling $1,675,000
were classified as monitored credits, an increase of $332,000 from the balance
of $1,343,000 at December 31, 2001. The balances of classified credits
guaranteed by the SBA totaled $1,144,000 and $215,000 at September 30, 2002 and
December 31, 2001, respectively. Classified loans are subject to management's
attention, and their classification is reviewed on a quarterly basis.
-12-
Analysis of Nonperforming Assets
September 30, 2002 and December 31, 2001
(Dollars in thousands)
2002 2001
------ -----
Nonaccrual loans:
Commercial $456 $385
Installment -- 1
Total nonaccrual loans 456 386
-------------- -------------
Past due loans:
Commercial -- --
Total past due loans -- --
-------------- -------------
Total nonperforming assets $456 $386
============== =============
Nonperforming assets exclusive of SBA guarantee $168 $157
Nonperforming assets to gross loans 0.31% 0.28%
Nonperforming assets to total assets 0.23% 0.22%
Allowance for loan losses to nonperforming assets 475% 495%
Liquidity and Capital Resources
Liquidity
Principal sources of liquidity are cash and cash equivalents. On September
30, 2002, liquid assets totaled $21,054,000 or 10.8% of total assets. In
comparison, liquid assets were $14,100,000 or 7.9% of total assets at December
31, 2001. The Company has additional sources of liquidity available, one of
which is unpledged investment securities available- for-sale that totaled
$5,662,000 at September 30, 2002. In addition, the Bank has unsecured lines of
credit available from correspondent banks, which can provide up to $7,000,000 in
liquidity, as well as, a line of credit through its membership in the Federal
Home Loan Bank of Atlanta (the "FHLB"), which serves as a reserve or central
bank for member institutions within its region. The Bank is eligible to borrow
up to approximately $22,692,000 in funds from the FHLB collateralized by loans
secured by first liens on one-to-four family or multifamily dwellings and
commercial mortgages, as well as, investment securities.
Capital Resources
The following table presents the capital position of the Company and the
Bank relative to their various minimum statutory and regulatory capital
requirements at September 30, 2002 and December 31, 2001. Both the Company and
the Bank continue to be considered "well capitalized" and exceed the regulatory
guidelines.
-13-
Capital Ratios
Actual Minimum Capital Minimum To Be Well
Requirements Capitalized
-------------------------- ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ---------- ----------- ---------- ----------
(Dollars in Thousands)
-----------
September 30, 2002:
Total Capital to Risk Weighted Assets:
Consolidated $22,442 13.84% $12,968 8.00% $ N/A N/A
Bank 22,262 13.75% 12,952 8.00% 16,190 10.00%
Tier 1 Capital to Risk Weighted Assets:
Consolidated 20,418 12.60% 6,484 4.00% N/A N/A
Bank 19,988 12.35% 6,476 4.00% 9,714 6.00%
Leverage Ratio:
Consolidated 20,418 10.53% 7,753 4.00% N/A N/A
Bank 19,988 10.32% 7,751 4.00% 9,689 5.00%
December 31, 2001:
Total Capital to Risk Weighted Assets:
Consolidated $20,746 13.74% $12,082 8.00% N/A N/A
Bank 20,508 13.60% 12,061 8.00% 15,077 10.00%
Tier 1 Capital to Risk Weighted Assets:
Consolidated 18,861 12.49% 6,041 4.00% N/A N/A
Bank 18,373 12.19% 6,031 4.00% 9,046 6.00%
Leverage Ratio:
Consolidated 18,861 10.86% 6,944 4.00% N/A N/A
Bank 18,373 10.55% 6,965 4.00% 8,706 5.00%
N/A = not applicable
Interest Rate Sensitivity
Through the Bank's Asset/Liability Committee, sensitivity of the net
interest income and the economic value of equity 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 projects 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. The results are compared to risk tolerance limits set by corporate
policy. Based on the most recent rate shock analysis, an instantaneous rate
increase of 100 basis points indicates a positive change of $17,000
-14-
or a .17% increase in net interest income and indicates a negative change of
$1,246,000 or 4.2% decrease in the economic value of equity, compared to the
base case. Likewise, an instantaneous decrease in rates of 100 basis points
indicates a positive change of $52,000 or .54% increase in net interest income
and a positive change of $1,546,000 or 5.0% increase in the economic value of
equity, compared to the base case. The results of the Company's most recent
interest rate sensitivity analysis are within the tolerance limits set by Board
policy for both a rising or declining interest rate environment.
Forward Looking Statements
When used in this Form 10-QSB, the words or phrases "will likely result,"
"are expected to,""will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward- looking statements, which speak only as of
the date made. The company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
Item 3 - Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to the filing date of
this report, that the Company's disclosure controls and procedures (as defined
in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commissions rules and forms. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
foregoing evaluation.
PART II.
Item 6 - Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K - None.
(b) Exhibits - 99.1 Officers' Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-15-
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 13, 2002 /s/ Jeanne D. Hubbard
------------------- ---------------------------------------
Jeanne D. Hubbard
Chairwoman of the Board,
President and Director
(Principal Executive Officer)
-16-
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jeanne D. Hubbard, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of The Abigail Adams
National Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made know to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of the date within 90 days prior to the filing date of this
quarterly report (the "evaluation Date"); and c) presented in this
quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether the re were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Jeanne D. Hubbard
----------------- ---------------------
Jeanne D. Hubbard
President and Chief Executive Officer
-17-
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Karen E. Schafke, Sr. Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of The Abigail
Adams National Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made know to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior
to the filing date of this quarterly report (the "evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Karen E. Schafke
----------------- --------------------
Sr. Vice President and
Chief Financial Officer
-18-
Exhibit 99.1
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Jeanne D. Hubbard, President and Chief Executive Officer, and Karen E.
Schafke, Senior Vice President and Chief Financial Officer of Abigail Adams
National Bancorp, Inc. (the "Company") each certify in her capacity as an
officer of the Company that she has reviewed the quarterly report of the Company
on Form 10-QSB for the quarter ended September 30, 2002 and that to the best of
her knowledge:
(1) the report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all
material respects, the financial condition and results of operations.
The purpose of this statement is solely to comply with Title 18, Chapter
63, Section 1350 of the Unites States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
Date: November 13, 2002 /s/ Jeanne D. Hubbard
------------------- ---------------------------------------
Jeanne D. Hubbard
President and Chief Executive Officer
Date: November 13, 2002 /s/ Karen E. Schafke
------------------- ---------------------------------------
Karen E. Schafke
Sr. Vice President and
Chief Financial Officer
-19-