United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
-------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- --------------------
Commission File Number: 0-10971
----------------------------------------------
Abigail Adams National Bancorp, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1508198
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1130 Connecticut Ave., NW, Washington, DC 20036
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
202.772.3600
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
n/a
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. X Yes No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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.
As of May 12, 2004, registrant had outstanding 3,014,343 shares of Common
stock.
Table of Contents
Part I - Financial Information Page
- -------------------------------- ----
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
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 12
Item 4 - Controls and Procedures 12
Part II - Other Information
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities and Use of Proceeds 12
Item 3 - Defaults Upon Senior Securities 12
Item 4 - Submission of Matters to Vote of Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit 31.1 14
Exhibit 31.2 15
Exhibit 32 16
Abigail Adams National Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2004 (unaudited) and December 31, 2003
March 31, 2004 December 31, 2003
--------------------- --------------------
Assets
Cash and due from banks $6,642,773 $9,746,854
Federal funds sold 134,000 8,690,315
Interest-bearing deposits in other banks 3,543,926 10,130,699
Investment securities available for sale at fair value 34,753,704 30,456,229
Investment securities held to maturity (market values of $13,773,352
and $13,901,669 for 2004 and 2003, respectively) 13,727,296 13,961,384
Loans 158,313,981 156,034,227
Less: allowance for loan losses (2,231,955) (2,119,448)
--------------------- --------------------
Loans, net 156,082,026 153,914,779
--------------------- --------------------
Premises and equipment, net 1,444,080 1,475,535
Other assets 3,907,386 3,530,000
--------------------- --------------------
Total assets $220,235,191 $231,905,795
===================== ====================
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Noninterest-bearing deposits $57,825,327 $56,828,660
Interest-bearing deposits 124,561,558 135,927,747
--------------------- --------------------
Total deposits 182,386,885 192,756,407
Short-term borrowings 3,043,741 5,390,326
Long-term debt 9,805,185 10,030,117
Other liabilities 1,479,487 853,863
--------------------- --------------------
Total liabilities 196,715,298 209,030,713
--------------------- --------------------
Commitments and contingencies (Note 2)
Stockholders' equity:
Common stock, $0.01 par value, authorized 5,000,000 shares; issued
3,030,783 shares in 2004 and 3,030,783 shares in 2003; outstanding
3,014,343 shares in 2004 and 3,014,343 shares in 2003 30,308 30,308
Additional paid-in capital 17,241,143 17,241,143
Retained earnings 6,019,928 5,578,431
Less: Treasury stock, 16,440 shares in 2004 and 2003, at cost (98,349) (98,349)
Accumulated other comprehensive income 326,863 123,549
--------------------- --------------------
Total stockholders' equity 23,519,893 22,875,082
--------------------- --------------------
Total liabilities and stockholders' equity $220,235,191 $231,905,795
===================== ====================
See Notes to Condensed Consolidated Financial Statements
1
Abigail Adams National Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
For the Three Months Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
-------------- --------------
Interest Income
Interest and fees on loans $2,749,628 $2,781,993
Interest and dividends on investment securities 513,339 327,393
Other interest income 22,802 25,964
-------------- --------------
Total interest income 3,285,769 3,135,350
-------------- --------------
Interest Expense
Interest on deposits 379,272 482,810
Interest on short-term borrowings 6,339 16,121
Interest on long-term debt 73,083 20,465
-------------- --------------
Total interest expense 458,694 519,396
-------------- --------------
Net interest income 2,827,075 2,615,954
Provision for loan losses 105,000 70,000
-------------- --------------
Net interest income after provision for loan losses 2,722,075 2,545,954
-------------- --------------
Noninterest income
Service charges on deposit accounts 406,719 434,567
Gain on sale of investment securities 27,055 29,252
Other income 21,458 56,109
-------------- --------------
Total noninterest income 455,232 519,928
-------------- --------------
Noninterest expense
Salaries and employee benefits 898,708 809,196
Occupancy and equipment expense 333,537 276,514
Professional fees 110,409 49,636
Data processing fees 131,524 110,214
Other operating expense 344,103 311,038
-------------- --------------
Total noninterest expense 1,818,281 1,556,598
-------------- --------------
Income before provision for income taxes 1,359,026 1,509,284
Provision for income taxes 540,735 606,781
-------------- --------------
Net Income $818,291 $902,503
============== ==============
Earnings per share:
Basic $0.27 $0.30
Diluted $0.27 $0.30
Average common shares outstanding:
Basic 3,014,343 3,005,315
Diluted 3,026,474 3,021,673
Dividends per share: $0.125 $.12
See Notes to Condensed Consolidated Financial Statements
2
Abigail Adams National Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 2004 and 2003
(Unaudited)
Accumulated
Additional Other
Common Paid-in Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
------------ --------------- --------------- --------------- ------------- -------------
------------ --------------- --------------- --------------- ------------- -------------
Balance at December 31, 2002 $30,211 $17,185,310 $3,886,313 ($98,349) $188,356 $21,191,841
Comprehensive income:
Net income -- -- 902,503 -- -- 902,503
Change in net unrealized gain on
investment securities available
for sale, net of taxes of $39,467 -- -- -- -- (57,781) (57,781)
------------
------------
Total comprehensive income -- -- -- -- -- 844,722
------------
------------
Dividends declared ($0.12 per share) -- -- (356,099) -- -- (356,099)
Issuance of shares under Stock
Option Programs 32 16,626 -- -- -- 16,658
------------ --------------- --------------- --------------- --------------- ------------
------------ --------------- --------------- --------------- --------------- ------------
Balance at March 31, 2003 $30,243 $17,201,936 $4,432,717 ($98,349) $130,575 $21,697,122
============ =============== =============== =============== =============== ============
============ =============== =============== =============== =============== =============
Balance at December 31, 2003 $30,308 $17,241,143 $5,578,431 ($98,349) $123,549 $22,875,082
Comprehensive income:
Net income -- -- 818,291 -- -- 818,291
Change in net unrealized gain on
investment securities available
for sale, net of taxes of $138,870 -- -- -- -- 203,314 203,314
------------
------------
Total comprehensive income -- -- -- -- -- 1,021,605
------------
------------
Dividends declared ($0.125 per share) -- -- (376,794) -- -- (376,794)
------------ --------------- --------------- --------------- --------------- -------------
------------ --------------- --------------- --------------- --------------- -------------
Balance at March 31, 2004 $30,308 $17,241,143 $6,019,928 ($98,349) $326,863 $23,519,893
============ =============== =============== =============== =============== =============
============ =============== =============== =============== =============== =============
See Notes to Condensed Consolidated Financial Statements
3
Abigail Adams National Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
------------- ---------------
------------- ---------------
Cash flows from operating activities:
Net income $818,291 $902,503
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 105,000 70,000
Depreciation and amortization 74,305 70,439
Accretion of loan discounts and fees (51,544) (70,962)
Gain on sale of investment securities (27,055) (29,252)
Net discount (accretion)/premium amortization on investment securities 26,938 9,542
(Increase) decrease in other assets (516,258) 34,921
Increase in other liabilities 625,625 728,469
------------- ---------------
Net cash provided by operating activities 1,055,302 1,715,660
------------- ---------------
Cash flows from investing activities:
Proceeds from maturities of investment securities held to maturity -- 6,000,000
Proceeds from maturities of investment securities available for sale -- 6,000,000
Proceeds from repayment of mortgage-backed securities held to maturity 226,992 930,513
Proceeds from repayment of mortgage-backed securities available for sale 302,215 --
Proceeds from the sale of investment securities available for sale 616,553 529,252
Purchase of investment securities held to maturity -- (5,000,000)
Purchase of investment securities available for sale (4,866,845) (7,445,148)
Net (increase) decrease in interest-bearing deposits in other banks 6,586,773 (3,904,233)
Net (increase) decrease in loans (2,220,703) 4,402,585
Purchase of premises and equipment (42,850) (305,465)
------------- ---------------
Net cash provided by investing activities 602,135 1,207,504
------------- ---------------
Cash flows from financing activities:
Net decrease in transaction and savings deposits (8,828,389) (1,042,372)
Net decrease in time deposits (1,541,133) (5,035,329)
Net decrease in short-term borrowings (2,346,585) (1,102,895)
Repayment of Federal Home Loan Bank borrowings (224,932) (22,681)
Proceeds from Federal Home Loan Bank borrowings -- 10,000,000
Proceeds from issuance of common stock, net of expenses -- 16,658
Cash dividends paid to common stockholders (376,794) (356,099)
------------- ---------------
Net cash (used in) provided by financing activities (13,317,833) 2,457,282
------------- ---------------
Net (decrease) increase in cash and cash equivalents (11,660,396) 5,380,446
Cash and cash equivalents at beginning of year 18,437,169 15,976,161
------------- ---------------
Cash and cash equivalents at end of year $6,776,773 $21,356,607
============= ===============
Supplementary disclosures:
Interest paid on deposits and borrowings $404,244 $478,641
============= ===============
Income taxes paid $119,470 $--
============= ===============
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 prepares its consolidated financial statements on the accrual basis
and in conformity with accounting principles generally accepted in the United
States, the instructions for Form 10-Q, and regulation S-X. The accompanying
financial statements are unaudited except for the balance sheet at December 31,
2003, which was derived from the audited consolidated 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. These statements should be read in conjunction with the consolidated
financial statements and accompanying notes included with the Company's 2003
Annual Report to Stockholders, since they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America. Operating results for the three months ended March 31, 2004
(unaudited) are not necessarily indicative of the results that may be expected
for the year ending December 31, 2004. Certain reclassifications may have been
made to amounts previously reported for 2003 to conform with the 2004
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. There were no material changes, since December 31, 2003.
3. Earnings per share
Basic 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. The following table provides a reconciliation between
the computation of basic EPS and diluted EPS for the quarters ended March 31,
2004 and 2003:
For the three months ended March
31,
----------------------------------
2004 2003
--------------- ---------------
Weighted average shares 3,014,343 3,005,315
Effect of dilutive stock options 12,131 16,358
--------------- ---------------
Dilutive potential average common shares 3,026,474 3,021,673
=============== ===============
4. Stock-based compensation plans
At March 31, 2004, the Company has five stock-based compensation plans. The
Company continues to account for grants under its stock option plans based on
the recognition and measurement principals of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. There were no new
stock-based compensation plans issued during the periods presented.
5. Fair value of securities with unrealized losses
The fair value of investment securities with unrealized losses by length of time
that the individual securities have been in a continuous loss position at March
31, 2004, are presented in the following table
5
Continuous unrealized Continuous unrealized
losses exiting for less losses existing greater
than 12 months than 12 months Total
---------------------------- --------------------------- ---------------------------- -------------------------
Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized
Losses Losses Losses
---------------------------- ------------- ------------- ------------ --------------- ------------ ------------
U.S. government agencies $1,984,380 $15,620 $-- $-- $1,984,380 $15,620
---------------------------- ------------- ------------- ------------ --------------- ------------ ------------
Mortgage-backed securities 3,197,750 26,401 -- -- 3,197,750 26,401
---------------------------- ------------- ------------- ------------ --------------- ------------ ------------
Equity securities 3,837,575 52,893 -- -- 3,837,575 52,893
---------------------------- ------------- ------------- ------------ --------------- ------------ ------------
Total $9,019,705 $94,914 $-- $-- $9,019,705 $94,914
---------------------------- ============= ============= ============ =============== ============ ============
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Abigail Adams National Bancorp, Inc. (the "Company") is the parent of The Adams
National Bank (the "Bank"), a national bank with six full-service branches
located in the greater metropolitan Washington, D.C. area. The Company reports
its financial results on a consolidated basis with the Bank.
The following analysis of financial condition and results of operations should
be read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto for the year ended December 31, 2003.
Results of Operations
Overview
The Company recorded net income of $818,000 for the first three months of 2004,
as compared to $903,000 for the first quarter of 2003. Diluted earnings per
share were $0.27 and $0.30 for the first quarter of 2004 and 2003, respectively.
The 9.4% decrease in net income compared to the same quarter last year was
predominantly due to a 16.8% increase in noninterest expense that was offset by
an 8.1% increase in net interest income. Book value per share was $7.80 at March
31, 2004, an increase of $0.21 from the book value per share of $7.59 at
December 31, 2003. Dividends per common share increased 4.2% to $0.125 for the
first quarter of 2004, as compared to $0.12 paid for the first quarter last
year. The return on average assets was 1.50% and the return on average equity
was 14.15% for the first quarter of 2004, compared to a return on average assets
of 1.84% and a return on average equity of 16.98% for the same period last year.
Analysis of Net Interest Income
Net interest income, which is the sum of interest and certain fees generated by
earning assets minus interest paid on deposits and other funding sources, is the
principal source of the Company's earnings. Net interest income for the quarter
ended March 31, 2004 increased 8.1% to $2,827,000 from $2,616,000 for the first
quarter of 2003. The growth in net interest income was attributable to the
growth in average earning assets, particularly investment securities. Average
investment securities increased 75.1% to $46,312,000 compared to $26,445,000 in
the prior year. Average loans increased 1.6% to $155,478,000 compared to the
prior period. The yield on average assets was 6.26%, a decrease of 47 basis
points from the yield of 6.73% for the first quarter of 2003. The net interest
margin continued to experience compression, due to the decline in market
interest rates during the last three years to the lowest levels in forty years.
In addition, the Company is asset sensitive, with assets repricing more quickly
than liabilities in response to changes in interest rates.
Funding for earning assets comes from interest-bearing liabilities,
non-interest-bearing liabilities and stockholders' equity. The percentage of
average earning assets funded by average interest-bearing liabilities decreased
to 66.7% during the first quarter of 2004, compared to 69.2% for the same period
in 2003. Average interest bearing liabilities increased 7.7%, over the first
quarter of 2003. The cost of interest-bearing funds for the quarter ended March
31, 2004, decreased 30 basis points to 1.31%. The decrease in the cost of
interest-bearing funds was due to the repricing of existing deposits at lower
interest rates.
6
Our net interest margin, which is net interest income as a percentage of average
interest-earning assets, was 5.39% for the first quarter of 2004, a decrease of
22 basis points from 5.61% for the first quarter of 2003. The net interest
spread, which is the difference between the average interest rate earned on
interest-earning assets and interest paid on interest-bearing liabilities, was
4.95% for 2004, reflecting a decrease of 17 basis points from the 5.12% reported
in the first quarter of 2003.
The following table presents the average balances, net interest income and
interest yields/rates for the first three months of 2004 and 2003.
Distribution of Assets, Liabilities and Stockholders' Equity Yields and Rates
For the Three Months Ended March 31, 2004 and 2003
(Dollars in thousands)
2004 2003
------------------------------- --------------------------------
Interest Interest
Average Income/ Average Average Income Average
Balances Expense Rates Balances Expense Rates
---------- ---------- --------- ---------- ---------- ----------
Assets
Loans (1) $155,478 $2,750 7.11% $153,103 $2,782 7.37%
Investment securities 46,312 513 4.46% 26,445 327 5.01%
Federal funds sold 3,520 8 .91% 4,460 12 1.09%
Interest-earning bank balances 5,793 15 1.04% 4,953 14 1.15%
---------- ---------- ---------- ----------
Total earnings assets 211,103 3,286 6.26% 188,961 3,135 6.73%
---------- ---------- ---------- ----------
Allowance for loan losses (2,171) (2,335)
Cash and due from banks 7,550 7,626
Other assets 4,882 4,499
---------- ----------
Total assets $221,364 $198,751
========== ==========
Liabilities and Stockholders' Equity
Savings, NOW and money market
accounts $79,876 173 0.87% $70,964 201 1.15%
Certificates of deposit 46,330 206 1.79% 50,364 282 2.27%
Short term borrowings 4,682 7 0.60% 7,419 16 0.87%
Long-term debt 9,944 73 2.95% 2,050 20 3.96%
---------- ---------- ---------- ----------
Total interest-bearing
liabilities 140,832 459 1.31% 130,797 519 1.61%
---------- ---------- ---------- ----------
Noninterest-bearing deposits 56,223 45,099
Other liabilities 1,058 1,298
Stockholders' equity 23,251 21,557
---------- ----------
Total liabilities and $221,364 $198,751
stockholders' equity
========== ==========
Net interest income $2,827 $2,616
========== ==========
========== ==========
Net interest spread 4.95% 5.12%
Net interest margin 5.39% 5.61%
(1) The loan averages are stated net of unearned income and include loans on
which the accrual of interest has been discontinued.
7
Noninterest Income
Total noninterest income consists primarily of service charges on deposits and
other fee-based services, as well as gains on the sales of investment securities
and loans. Noninterest income totaled $455,000, a decrease of 12.4% or $65,000
from the first quarter of 2003. Service charges on deposit accounts totaled
$407,000, a decrease of 6.4% from the prior year total of $435,000. The decrease
was due in part to a lower level of overdraft fees. Other income, consisting of
other fee-based services and the gain on the sale of loans, decreased 61.8% in
2004 to $21,000, compared to the same period in 2003. The first quarter of 2004
did not include a gain on sale of the guaranteed portion of SBA loans, whereas
the first quarter of 2003 included a gain of $33,000. The gain on the sale of
investment securities for the first quarter was $27,000, compared to $29,000 in
2003.
Noninterest Expense
Total noninterest expense for the first quarter of 2004 totaled $1,818,000, an
increase of 16.8%, as compared to the first quarter of 2003. Salaries and
benefits expense increased 11.1% to $899,000, due to increased staffing and
benefit cost. Occupancy and equipment expense increased 20.6% to $334,000,
primarily due to the opening of a branch office in Maryland in September 2003.
Professional fees increased 122.4% to a total of $110,000, as a result of an
increase in legal fees. The efficiency ratio declined in the first quarter of
2004 to 55.4%, compared to 49.7% for the same period in 2003.
Income Tax Expense
Income tax expense totaled $541,000 for the quarter ended March 31, 2004, a
decrease of 10.9% from the income tax expense reported for the first quarter of
2003. The decrease in income tax expense in 2004 was a result of the 9.96%
decrease in the Company's pretax income, as compared to the first quarter of
2003. The effective tax rate for 2004 was 39.8%, compared to 40.2% for the first
quarter of 2003.
Financial Condition
Overview
Total assets were $220,235,000 at March 31, 2004, compared to $231,906,000 at
December 31, 2003, a decrease of $11,671,000 or 5.0%. The decrease in total
assets was primarily attributable to a decrease of $15,143,000 in short-term
investments consisting of federal funds sold and interest-bearing deposits in
other banks. Total loans increased to $158,314,000, as compared to the prior
year end total of $156,034,000. Total liabilities decreased 5.9% or $12,315,000
to $196,715,000, primarily due to a decrease in deposits.
Loans
Total loans outstanding at March 31, 2004 increased 1.5% or $2,280,000 from
December 31, 2003 to a balance of $158,314,000. Commercial real estate loans
grew 6.0% from the previous year-end, while commercial loan balances declined by
19.2%. Loan growth for the first quarter of 2004 showed signs of improvement,
but was negatively effected by the continued weakness in the general economic
conditions and increased competition for the small to medium size commercial
loan business. . Investments securities Investment securities available-for-sale
are carried at estimated fair value and totaled $34,754,000 at March 31, 2004,
an increase of $4,297,000 or 14.1% from the balance at December 31, 2003.
Investment securities classified as held-to-maturity were $13,727,000 at March
31, 2004, an slight decrease of $234,000 or 1.7% from December 31, 2003.
Short-term investments
Short-term investments consisting of federal funds and interest bearing deposits
in banks decreased a total of $15,143,000 or 8.1% in the first quarter of 2004,
as compared to December 31, 2003, primarily to fund the loan and investment
security growth and the outflow of deposits.
Deposits
Deposits are the Company's primary source of funds. Total deposits decreased
5.4% to $182,387,000 at March 31, 2004, a decrease of $10,370,000 from December
31, 2003, due to seasonal fluctuations in the balances of some of the Company's
large commercial and not-for-profit customers. Noninterest-bearing deposits
totaled $57,825,000, an increase of $997,000 or 1.8% from the previous year-end.
Interest-bearing deposits were $124,562,000, a decrease of $11,366,000 or 8.4%
compared to the balance of $135,928,000 at December 31, 2003. The largest
decreases were in money market accounts that decreased 15.7% and certificates of
deposit that decreased 3.2% from the previous year-end.
8
Short-term borrowings
Short-term borrowings consisting of repurchase agreements decreased $2,347,000
or 43.5% to a balance of $3,044,000 at March 31, 2004.
Long-term debt
Long-term debt consisted of term loans from the Federal Home Loan Bank of
Atlanta ("FHLB") and totaled $9,805,000 at March 31, 2004, a decrease of
$225,000 from the previous year-end, as a result of scheduled payments.
Stockholders' Equity
Stockholders' equity at March 31, 2004 was $23,520,000, an increase of 2.8% from
December 31, 2003. The increase was primarily due to first quarter earnings of
$818,000, less the dividends paid on the Company's common stock totaling
$377,000, combined with the unrealized gain on available-for-sale investment
securities totaling $203,000.
Asset Quality
Loan Portfolio and Adequacy of the Allowance for Loan Losses
Management believes the allowance for loan losses accounting policy is critical
to the portrayal and understanding of our financial condition and results of
operations. As such, selection and application of this "critical accounting
policy" involves judgments, estimates, and uncertainties that are susceptible to
change. In the event that different assumptions or conditions were to prevail,
and depending upon the severity of such changes, the possibility of materially
different financial condition or results of operations is a reasonable
likelihood.
The Company manages the risk characteristics of its entire loan portfolio in an
effort to maintain an adequate allowance for loans losses and identify problem
loans so that the risks in the portfolio can be identified on a timely basis.
Management performs a periodic analysis of risk factors that includes the
primary sources of repayment on individual loans, liquidity and financial
condition of borrowers and guarantors, and the adequacy of collateral. Loans
subject to individual reviews are analyzed and segregated by risk according to
the Company's internal risk rating scale. Management also considers the
character of the loan portfolio, changes in nonperforming and past-due loans,
historical loss experience, concentrations of loans to specific borrowers and
industries, and general and regional economic conditions, as well as other
factors existing at the determination date. This review takes into account the
judgment of the individual loan officers, the credit risk manager, senior
management and the Board of Directors. The Company also has an independent loan
review performed by an outside consultant periodically throughout the year.
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.
The allowance for loan losses is established through provisions for loan losses
as a charge to earnings based upon management's ongoing evaluation. The
provision for loan losses increased in the first quarter of 2004 to a total of
$105,000, compared to $70,000 for the same period in 2003. The balance of the
allowance for loan losses was $2,232,000 or 1.41% of total loans at March 31,
2004, compared to $2,119,000 or 1.36% of loans at December 31, 2003. Net loan
recoveries were $8,000 in the first quarter of 2004. The weak economic
environment has adversely impacted the cash flows of some of our small
commercial and commercial real estate borrowers, and as a result the Company
experienced an increase in nonperforming loans in 2003 that carried over into
the first quarter of 2004. The increase in the provision is intended to address
known and inherent losses that are both probable and estimable at March 31,
2004. While historical losses have been modest in prior years, the current
economic conditions of the market area and the concentration of loans in the
higher risk classifications (e.g. commercial and industrial, and commercial real
estate mortgages) warrant maintenance of the allowance for loan losses at its
current level. Management believes that the allowance for loan losses at March
31, 2004 is adequate given past experience and the underlying assessment of the
Company's loan portfolio.
9
The following table presents an analysis of the allowance for loan losses at
March 31, 2004 and December 31, 2003.
2004 2003
---------- ----------
(Dollars in thousands)
-------------------------
Balance at beginning of period $2,119 $2,297
Loans charged off:
Commercial -- 829
Real estate - commercial -- --
Real estate - residential -- --
Construction and development -- --
Installment - individuals 3 4
---------- ----------
Total charge-offs 3 833
---------- ----------
Recoveries:
Commercial 6 23
Real estate - commercial -- --
Real estate - residential -- --
Construction and development -- --
Installment - individuals 5 41
---------- ----------
Total recoveries 11 64
---------- ----------
Net (recoveries) charge-offs (8) 769
---------- ----------
Provision for loan losses 105 591
---------- ----------
Balance at end of period $2,232 $2,119
========== ==========
Ratio of net (recoveries) charge-offs to average
loans (0.01%) 0.51%
Nonperforming Assets
Nonperforming assets include nonaccrual loans, restructured loans, past-due
loans and other real estate owned. Past due loans are loans that are 90 days or
more delinquent and still accruing interest. There was one past-due loan
totaling $798,000 at March 31, 2004 that was still accruing interest, which was
brought current subsequent to that reporting date. In comparison, there were no
delinquent loans still accruing interest at December 31, 2003. Total
nonperforming loans at March 31, 2004 were $3,822,000, with balances of
$2,261,000 guaranteed by the SBA, and represented 1.74% of total assets. In
comparison, nonperforming loans at December 31, 2003 were 1.24% of total assets
and totaled $2,873,000, with balances of $1,666,000 guaranteed by the SBA. The
increase in nonperforming loans was largely due to the 90 day delinquent loan
that was still accruing interest. The largest component of nonperforming loans
is a commercial SBA loan with a balance of $798,000. The largest commercial real
estate loan has a balance of $360,000.
The following table presents nonperforming assets by category at March 31, 2004
and December 31, 2003.
2004 2003
---------- ----------
(Dollars in thousands)
-------------------------
Nonaccrual loans:
Commercial $2,111 $2,133
Real Estate 914 740
Installment - individuals -- --
---------- ----------
Total nonaccrual loans 3,025 2,873
---------- ----------
Past-due loans:
Commercial 797 --
---------- ----------
Total nonperforming assets $3,822 $2,873
========== ==========
Nonperforming assets exclusive of SBA guarantee $1,561 $1,208
Ratio of nonperforming assets to gross loans 2.41% 1.84%
Ratio of nonperforming assets to total assets 1.74% 1.24%
Allowance for loan losses to nonperforming assets 58% 74%
Loans totaling $7,832,000 and $7,290,000 at March 31, 2004 and December 31,
2003, respectively, were classified as monitored credits subject to management's
10
attention and are not reported in the preceding table. The classification of
monitored credits is reviewed on a quarterly basis. The balances of the
monitored credits guaranteed by the SBA totaled $1,656,000 and $1,552,000 as of
March 31, 2003 and December 31, 2003, respectively.
Liquidity and Capital Resources
Liquidity
Liquidity is a product of the Company's operating, investing, and financing
activities and is represented by cash and cash equivalents. Principal sources of
funds are from deposits, short and long term debt, principal and interest
payments on outstanding loans, maturity of investment securities, and funds
provided from operations. Overall, net cash and cash equivalents decreased for
the quarter ended March 31, 2004 by $11,660,000, to a balance of $6,777,000, as
compared to the balance of $18,437,000 at December 31, 2003. Liquid assets
decreased to 3.1% of total assets at March 31, 2004, as compared to 7.95% of
total assets at December 31, 2003.
The Company has additional sources of liquidity available through unpledged
investment securities available-for-sale totaling $22,749,000, and unsecured
lines of credit available from correspondent banks, which can provide up to
$16,000,000, as well as a credit facility through its membership in the FHLB.
Capital Resources
Capital levels are monitored by management on a quarterly basis in relation to
financial forecasts for the year and regulatory requirements. The Company and
the Bank continue to maintain a strong capital position. The following table
presents the Company's and the Bank's capital position relative to their various
minimum statutory and regulatory capital requirements at March 31, 2004. The
Company and the Bank are considered "well-capitalized" under regulatory
guidelines.
Company Bank
------------------------- ------------------------- Minimal Capital
Amount Ratio Amount Ratio Requirements
---------- ----------- ----------- ---------- ---------------------
(Dollars in thousands)
Leverage ratio $23,193 10.48% $22,838 10.32% 4.00%
Tier 1 risk-based ratio 23,193 12.53% 22,838 12.36% 4.00%
Total risk-based ratio 25,425 13.74% 25,319 13.70% 8.00%
Forward Looking Statements
When used in this Form 10-Q, 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.
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.
11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks in the normal course of
conducting its' business. Market risk is the potential loss arising from adverse
changes in interest rates, prices, and liquidity. The Company has established
the Asset/Liability Committee (ALCO) to monitor and manage those risks. ALCO
meets periodically and is responsible for approving asset/liability policies,
formulating and implementing strategies to improve balance sheet and income
statement positioning, and monitoring the interest rate sensitivity. 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
estimates on the net interest income and economic value of equity (the net
present value of expected cash flows from assets and liabilities). These
simulations provide a test for embedded interest rate risk and takes into
consideration factors such as maturities, reinvestment rates, prepayment speeds,
repricing limits, decay rates and other factors. The results are compared to
risk tolerance limits set by ALCO policy. Based on the Company's most recent
interest rate sensitivity analysis, the impact to the net interest income and
economic value of equity are well within the tolerance limits for both a rising
or declining interest rate environment and sensitivity to market risk is
moderate.
Item 4 - Controls and Procedures
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II.
Item 1 - Legal Proceedings
None
Item 2- Changes in Securities and Use of Proceeds
None
Item 3- Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to Vote of Security Holders
None
Item 5 - Other Information
None
12
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Certification of the Chief Executive Officer
Exhibit 31.2 Certification of the Chief Financial Officer
Exhibit 32 Certification of Chief Executive Officer and
Chief Financial Officer
(b) Reports on From 8-K
The Company filed a Form 8-K on May 3, 2004 to report that the Company
had issued a press release announcing earnings for the three month
period ending March 31, 2004.
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: May 13, 2004 /s/ Jeanne D. Hubbard
-----------------------------
Jeanne D. Hubbard
Chairwoman of the Board,
President and Director
(Principal Executive Officer)
13
Exhibit 31.1
I, Jeanne D. Hubbard, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Abigail Adams
National Bancorp;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosures and procedures to be designed under our supervision, 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 report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any changes in the registrant's internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth quarter in the case of
an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 13, 2004 /s/ Jeanne D. Hubbard
-----------------------------
Jeanne D. Hubbard
President and Chief Executive Officer
14
Exhibit 31.2
I, Karen E. Troutman, Sr. Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of The Abigail Adams
National Bancorp;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosures and procedures to be designed under our supervision, 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 report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any changes in the registrant's internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth quarter in the case of
an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 13, 2004 /s/ Karen E. Troutman
---------------------------
Karen E. Troutman
Sr. Vice President and
Chief Financial Officer
15
Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer
Jeanne D. Hubbard, President and Chief Executive Officer, and Karen E. Troutman,
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 on Form 10-Q for the quarter
ended March 31, 2004 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 of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
Date: May 13, 2004 /s/ Jeanne D. Hubbard
----------------------
Jeanne D. Hubbard
Chief Executive Officer
Date: May 13, 2004 /s/ Karen E. Troutman
----------------------
Karen E. Troutman
Chief Financial Officer
16