-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AEiNiXTilOUyaQhnsqM1bUU7aIF6PqpmpAEt46m4mDFb+Ozs+CRuTnhsHVugin+C Tp7Ot5qmI+ZoU2HHUiazjQ== 0000928385-01-000919.txt : 20010329 0000928385-01-000919.hdr.sgml : 20010329 ACCESSION NUMBER: 0000928385-01-000919 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANNAPOLIS NATIONAL BANCORP INC CENTRAL INDEX KEY: 0001041429 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 521648903 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-22961 FILM NUMBER: 1581297 BUSINESS ADDRESS: STREET 1: 180 ADMIRAL COCHRANE DRIVE SUITE 300 CITY: ANNAPOLIS STATE: MD ZIP: 21401 BUSINESS PHONE: 4102244455 MAIL ADDRESS: STREET 1: 180 ADMIRAL COCHRANE DRIVE SUITE 300 CITY: ANNAPOLIS STATE: MD ZIP: 21401 10KSB 1 0001.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 2000 Commission File No.: 0-22961 ANNAPOLIS NATIONAL BANCORP, INC. (Name of small business issuer in its charter) MARYLAND 52-1648903 (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 108 ADMIRAL COCHRANE DRIVE, SUITE 300, ANNAPOLIS, MARYLAND 21401 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (410) 224-4455 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK PAR VALUE $0.01 PER SHARE (Title of class) THE NASDAQ SMALLCAP MARKET (Name of exchange on which registered) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes: X No: Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB Yes: X No: Issuer's revenues for its fiscal year ended December 31, 2000 were $11,388,065. The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is $6,028,751 and is based upon the last sales price as quoted on The NASDAQ Stock Market for March 23, 2001. The Registrant had 2,237,906 shares of Common Stock outstanding as of March 23, 2001. Transitional Small Business Disclosure Format. YES: NO: X DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2000, ARE INCORPORATED BY REFERENCE INTO PART I AND PART II OF THIS FORM 10-KSB. PORTIONS OF THE PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB. 1 INDEX
PART I PAGE Item 1. Description of Business....................................................... 2 Item 2. Properties.................................................................... 2-3 Item 3. Legal Proceedings............................................................. 3 Item 4. Submission of Matters to a Vote of Security Holders........................... 3 Additional Items Executive Officers of the Registrant.......................................... 3-4 Recent Developments........................................................... 4 PART II Item 5. Market for Common Equity and Related Stockholder Matters...................... 4 Item 6. Management's Discussion and Analysis.......................................... 4 Item 7. Financial Statements.......................................................... 4 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.................................................................... 4 PART III Item 9. Directors, Officers, Promoters and Control Persons; Compliance with Section 16 of the Exchange Act........................................................ 4 Item 10. Executive Compensation........................................................ 5 Item 11. Security Ownership of Certain Beneficial Owners and Management............... 5 Item 12. Certain Relationships and Related Transactions................................ 5 Item 13. Exhibits and Reports on Form 8-K.............................................. 5-6 SIGNATURES .............................................................................. 6-7
This Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the securities exchange Act of 1934. These statements appear in a number of places in this Report and include all statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company's financing plans; (ii) trends affecting the Company's financial condition or results of operations; (iii) the Company's growth strategy; and (iv) the declaration and payment of dividends. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein and those factors discussed in the Company's filings with the Securities and Exchange Commission. 2 PART I ITEM 1. DESCRIPTION OF BUSINESS The information relating to the description of business of the Registrant is incorporated herein by reference on page 27 of the Registrant's Annual Report to Shareholders. ITEM 2. PROPERTIES The executive offices of the Company and the Bank are located at 1000 Bestgate Drive, Suite 400, Annapolis, Maryland 21401. The following table sets forth the location of and certain additional information regarding the offices of the Company and the Bank at December 31, 2000.
NET BOOK VALUE OF PROPERTY OR ORIGINAL YEAR LEASEHOLD LEASED/ LEASED OR YEAR OF LEASE IMPROVEMENTS AT OWNED LOCATION ACQUIRED EXPIRATION DECEMBER 31, 2000 Administration Leased 1995 2005 (2) $ -- Bestgate Leased 1997 2001 (3) 12,126 Edgewater Land Leased 1996 2006 (1) 371,419 Cape St. Claire Leased 1995 2003 (1) 55,925 Kent Island Leased 1990 2001 (1) 4,020 Severna Park Leased 1996 2006 (1) 16,764
(1) These leases may be extended at the option of the Company for periods ranging from three to twenty years. (2) Lease early buy-out option exercised in 1999 at a cost of $36,000. A lease extension has been granted by the landlord through March 31, 2001. (3) A lease extension has been granted by the landlord through February 28, 2001 ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ADDITIONAL ITEMS. Executive Officers of the Registrant The information relating to directors and named executive officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2001 at pages 4 through 7. In addition, information concerning Executive Officers who are not directors is set forth below:
AGE AT POSITION WITH THE COMPANY AND BANK NAME 12/31/00 AND PAST FIVE YEARS EXPERIENCE - ---- -------- ------------------------------ Richard P. Brown 50 Senior Vice President and Customer Development Group Manager. Mr. Brown joined the Company in 2000. Prior to joining the Company in 2000, Mr. Brown was a partner with Wallingford Capital Corporation. Mr. Brown was previously Vice President of National Bank of Canada - Asset Based Lending Division. Rita D. Demma 53 Secretary of the Company Ms. Demma has been an officer of the Bank since 2000. Ms. Demma held similar positions in the health care industry prior to joining the Company.
3 Margaret Theiss Faison 42 Chief Financial Officer and Treasurer of the Company and Senior Vice President, Chief Financial Officer and Treasurer of the Bank. Prior to joining the Company in 1999, Ms. Faison was Senior Vice President and Chie financial Officer of Sterling Bank & Trust Co. of Baltimore. Ms. Faison was previously Vice President and Chief inancial Officer with Mellon Bank (MD). Robert E. Kendrick, III 55 Senior Vice President and Chief Credit Officer. Prior to joining the Company in 1999, Mr. Kendrick held similar positions with Citizens National Bank of Laurel, Bank of Maryland, Sterling Bank & Trust Co. of Baltimore and NationsBank.
Recent Developments Effective November 1, 2000 the Bank applied for and was accepted into the State of Maryland and the Federal Reserve Banking Systems thus terminating the Bank's national charter and regulatory association with the OCC. In conjunction with the state charter the Bank was required to remove the word national from its name. As a result on November 1, 2000 the Bank changed its name from Annapolis National Bank to BankAnnapolis. The Bank is currently under no regulatory agreement or action. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information relating to the market for Registrant's common equity and related stockholder matters appears in the Registrant's 2000 Annual Report to Stockholders on page 20, and is incorporated herein by reference. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS The above-captioned information appears under Management's Discussion and Analysis of Results of Operations and Financial Condition in the Registrant's 2000 Annual Report to Stockholders on pages 8 through 20 and is incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS The Consolidated Financial Statements of Annapolis National Bancorp, Inc. and its subsidiary, together with the report thereon by Stegman & Company for the year ended December 31, 2000 appears in the Registrant's 2000 Annual Report to Stockholders on pages 22 through 38 and are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 OF THE EXCHANGE ACT The information relating to directors, officers, promoters and control persons is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2001. ITEM 10. EXECUTIVE COMPENSATION The information relating to directors' and executive compensation is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2001. 4 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2001. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2001. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) Financial Statements Consolidated Financial Statements of the Company are incorporated by reference to the following indicated pages of the 2000 Annual Report to Stockholders:
PAGE Independent Auditors' Report.................................................................. 31 Consolidated Balance Sheets as of December 31, 2000, 1999 and 1998.............................................................. 32 Consolidated Statements of Income for the Years ended December 31, 2000, 1999 and 1998.................................................. 33 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998.......................................... 34 Consolidated Statements of Cash Flows for the Years ended December 31, 2000, 1999 and 1998.................................................. 35 Notes to Consolidated Financial Statements.................................................... 36-47
The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) Exhibits The following exhibits are filed as part of this report. 3.1 Articles of Incorporation of Annapolis National Bancorp, Inc.* 3.2 Bylaws of Annapolis National Bancorp, Inc.* 3.3 Articles of Incorporation of BankAnnapolis 3.4 Bylaws of BankAnnapolis 4.0 Stock Certificate of Annapolis National Bancorp, Inc.* 10.1 Employment Agreement between Annapolis National Bancorp, Inc. and Mark H. Anders** 10.2 Annapolis National Bancorp, Inc. Employee Stock Option Plan* 11.0 Computation of earnings per share (filed herewith) 13.0 Portions of 2000 Annual Report to Stockholders (filed herewith) 21.0 Subsidiary information is incorporated herein by reference to Part I - "Subsidiaries" 23.0 Consent of Independent Auditors 23.1 Consent of Independent Auditors 99.0 2000 Proxy Statement** * Incorporated herein by reference to the Exhibits to Form SB-2, Registration Statement, filed on June 23, 1997 and any Amendments thereto, Registration No. 333-29841. 5 ** Incorporated herein by reference to the Company's Proxy Statement for its Annual Meeting of Stockholders, which will be filed with the Commission Within 120 days of the end of the Company's fiscal year. (b) Reports on Form 8-K: None CONFORMED SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. ANNAPOLIS NATIONAL BANCORP, INC. By: /s/ Richard M. Lerner --------------------- Richard M. Lerner President, Chief Executive Officer and Director Date: March 23, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates stated.
NAME Title Date ---- ----- ---- /s/ Richard M. Lerner President, Chief Executive Officer and March 23, 2001 - -------------------------- Director (principal executive officer) Richard M. Lerner /s/ Margaret Theiss Faison Senior Vice President, Treasurer and March 23, 2001 - -------------------------- Chief Financial Officer (principal Margaret Theiss Faison accounting and financial officer) /s/ Mark H. Anders Director March 23, 2001 - -------------------------- Mark H. Anders /s/ F. Carter Heim Director March 23, 2001 - -------------------------- F. Carter Heim /s/ Stanley J. Klos, Jr. Director March 23, 2001 - -------------------------- Stanley J. Klos, Jr. /s/ Lawrence E. Lerner Director March 23, 2001 - -------------------------- Lawrence E. Lerner /s/ Dimitri P. Mallios Director March 23, 2001 - -------------------------- Dimitri P. Mallios /s/ Albert Phillips Chairman March 23, 2001 - -------------------------- Albert Phillips /s/ Lawrence W. Schwartz Director March 23, 2001 - -------------------------- Lawrence W. Schwartz /s/ Ermis Sfakiyanudis Director March 23, 2001 - -------------------------- Ermis Sfakiyanudis
6 EX-3.3 2 0002.txt ARTICLES OF INCORPORATION Exhibit 3.3 Articles of Incorporation of BankAnnapolis THIS IS TO CERTIFY THAT: THE UNDERSIGNED, whose names appear in Article FIRST hereof, each of whom is a citizen of the State of Maryland and the United States, and each of whom is eighteen years old or older, acting as incorporators, do hereby associate to form a Maryland trust company under subtitle 2 of Title 3 of the Financial Institutions Article of the Annotated Code of Maryland. FIRST: Those nine persons whose names and addresses appear below, each of ----- whom is a citizen of the State of Maryland and the United States, and each of whom is eighteen years old or older, acting as incorporators, do hereby associate to form a state chartered trust company under Subtitle 2 of Title 3 of the Financial Institutions Article of the Annotated Code of Maryland, as amended: Name Address ---- ------- Richard M. Lerner 900 Bestgate Rd. Annapolis, MD 21401 Mark H. Anders 900 Bestgate Rd. Annapolis, MD 21401 F. Carter Heim 900 Bestgate Rd. Annapolis, MD 21401 Stanley J. Klos, Jr. 900 Bestgate Rd. Annapolis, MD 21401 Lawrence E. Lerner 900 Bestgate Rd. Annapolis, MD 21401 Dimitri P. Mallios 900 Bestgate Rd. Annapolis, MD 21401 Albert Phillips 900 Bestgate Rd. Annapolis, MD 21401 Lawrence W. Schwartz 900 Bestgate Rd. Annapolis, MD 21401 Ermis Sfakiyanudis 900 Bestgate Rd. Annapolis, MD 21401 SECOND: The name of the trust company (which is hereinafter called the ------ "Bank") is: BankAnnapolis THIRD: The post office address of the principal banking office of the Bank ----- is in 900 Bestgate Road, Annapolis, Maryland 21401. FOURTH: The Resident Agent of the Bank is Margaret Theiss Faison. Said ------ Resident Agent of the Bank is a citizen of the State of Maryland and actually resides there. FIFTH: The number of directors of the Bank shall be not less than 5 and ----- no more than 25. The number of directors may be increased or decreased pursuant to the Bylaws of the Bank, but shall never be less, nor more than the number permitted by Subtitle 4 of Title 3 of the Financial Institutions Article of the Annotated Code of Maryland now or hereafter in force. The names and residence addresses of those who will serve as directors of the Bank until their successors are elected and qualify are as follows: 7 Name Address ---- ------- Richard M. Lerner 900 Bestgate Rd. Annapolis, MD 21401 Mark H. Anders 900 Bestgate Rd. Annapolis, MD 21401 F. Carter Heim 900 Bestgate Rd. Annapolis, MD 21401 Stanley J. Klos, Jr. 900 Bestgate Rd. Annapolis, MD 21401 Lawrence E. Lerner 900 Bestgate Rd. Annapolis, MD 21401 Dimitri P. Mallios 900 Bestgate Rd. Annapolis, MD 21401 Albert Phillips 900 Bestgate Rd. Annapolis, MD 21401 Lawrence W. Schwartz 900 Bestgate Rd. Annapolis, MD 21401 Ermis Sfakiyanudis 900 Bestgate Rd. Annapolis, MD 21401 SIXTH: The total number of shares of stock which the Bank has authority to ----- issue is 10,000,000 shares, at the par value of Ten Dollars ($10.00) per share, all of which shares are of one class and designated as shares of common stock. The aggregate par value of all authorized shares is $100,000,000. SEVENTH: The Board of Directors of the Bank, subject to Subtitle 3 of ------- Title 3 of the Financial Institutions Article of the Annotated Code of Maryland, as amended, is hereby empowered to authorize the issuance from time to time of shares of its stock of any class, whether now or hereafter authorized, or securities convertible into shares of its stock of any class or classes, whether now or hereafter authorized. EIGHTH: The Board of Directors may classify or reclassify any unissued ------ shares by fixing or altering in any one or more respects, from time to time before issuance of such shares, the preferences, rights, voting powers, restrictions and qualifications of, the dividends on, the times and prices of redemption of, and the conversion rights of, such shares. NINTH: The Bank reserves the right to amend its Charter so that such ----- amendment may alter the contract rights, as expressly set forth in the Charter, of any outstanding stock, and any objecting adversely affected Shareholder shall not be entitled to the same rights as an objecting stockholder in the case of a consolidation, merger, share exchange, or transfer of all, or substantially all, of the assets of the Corporation. TENTH: The enumeration and definition of a particular power of the Board ----- of Directors included in ARTICLES SEVENTH, EIGHTH or NINTH shall in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other article of the Charter of the Bank or be construed as or deemed by inference or otherwise in any manner to exclude or limit any powers conferred upon the Board of Directors under Subtitle 4 of Title 3 of the Financial Institutions Article of the Annotated Code of Maryland, as amended, the Maryland General Corporation Law of the State of Maryland. ELEVENTH: With respect to: -------- (a) the amendment of the Charter of the Bank; (b) the consolidation of the Bank with one or more corporations to form a new consolidated corporation; (c) the merger of the Bank into another corporation or the merger of one or more other corporations into the Bank; 8 (d) the sale, lease, exchange or other transfer of all, or substantially all, of the property and assets of the Bank, including its goodwill and franchises; (e) the participation by the Bank in a share exchange (as defined in the Maryland General Corporation Law) as the corporation the stock of which is to be acquired; (f) the voluntary or involuntary liquidation, dissolution or winding-up of the Bank; (g) the issuance of shares of stock of any class now or hereafter authorized, or any securities exchangeable for, or convertible into, such shares, or warrants or other instruments evidencing rights or options to subscribe for, or otherwise acquire such shares; such action shall be effective and valid if taken or approved by an affirmative vote of a majority of the shares entitled to be cast thereon, after due authorization and/or approval and/or advice of such action by the Board of Directors as required by law, notwithstanding any provision of law requiring any action to be taken or authorized other than as provided in ARTICLES SEVENTH, EIGHTH, NINTH and TENTH. TWELFTH: Except as may otherwise be provided by the Board of Directors, ------- no holder of any shares of the stock of the Bank shall have any pre-emptive right to purchase, subscribe for, or otherwise acquire any shares of stock of the Corporation of any class now or hereafter authorized, or any securities exchangeable for or convertible into such shares, or any warrants or other instruments evidencing rights or options to subscribe for, purchase or otherwise acquire such shares. THIRTEENTH: (1) To the maximum extent permitted by Maryland law, the Bank ---------- shall indemnify its currently acting and its former directors against any and all liabilities and expenses incurred in connection with their services in such capacities, and shall indemnify its currently acting and its former officers to the full extent that indemnification shall be provided to directors, and served, at its request as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture or other enterprise. The Bank shall advance expenses to its directors and officers and other persons referred to above to the extent permitted by Maryland law. This indemnification of directors and officers shall also apply to directors and officers and other persons referred to above to the extent permitted by Maryland law. This indemnification of directors and officers shall also apply to directors and officers who are also employees, in their capacity as employees. The Board of Directors may by Bylaw, resolution, or agreement make further provisions for indemnification of employees and agents to the extent permitted by Maryland law. (2) References to Maryland law shall include the Maryland Banking Law and the Maryland General Corporation Law as from time to time amended. Neither the repeal nor amendment of this Article THIRTEENTH nor any other amendment to these ---------- Articles of Incorporation, shall eliminate or reduce the protection afforded with respect to any person by the foregoing provisions of this Article THIRTEENTH with respect to any act or omission which shall have occurred prior - ---------- to such repeal or amendment. FOURTEENTH: The stockholders, in accordance with applicable federal law, ---------- have approved the plan of conversion by which the national bank will convert to a Maryland chartered trust company with commercial banking powers. IN WITNESS WHEREOF, we have signed these Articles of Incorporation, hereby acknowledging the same to be our act and deed, on August 13, 2000. /s/ Richard M. Lerner --------------------- Richard M. Lerner /s/ Mark H. Anders ------------------ Mark H. Anders /s/ F. Carter Heim ------------------ F. Carter Heim /s/ Stanley J. Klos, Jr. ------------------------ Stanley J. Klos, Jr. /s/ Lawrence E. Lerner ---------------------- Lawrence E. Lerner 9 /s/ Dimitri P. Mallios ---------------------- Dimitri P. Mallios /s/ Albert Phillips ------------------- Albert Phillips /s/ Lawrence W. Schwartz ------------------------ Lawrence W. Schwartz /s/ Ermis Sfakiyanudis ---------------------- Ermis Sfakiyanudis CERTIFICATE OF APPROVAL ----------------------- The foregoing Articles of Incorporation of BankAnnapolis, effecting the incorporation of that corporation as a Maryland trust company, are hereby approved this 29th day of August, 2000. ---- ------ Commissioner of Financial Regulation of the State of Maryland By: /s/ Mary Louise Preis --------------------- Mary Louise Preis 10 EX-3.4 3 0003.txt BY LAWS EXHIBIT 3.4 Exhibit 3.4 Bylaws of BankAnnapolis ARTICLE I - Principal Office The principal banking office of BankAnnapolis (the "Bank") shall be located at 900 Bestgate Road, Annapolis, Maryland 21401, Anne Arundel County, in the State of Maryland. ARTICLE II - Stockholders Section 1. Place of Meetings. All annual and special meetings of stockholders shall be held at the home office of the Bank or at such other place in the United States as the board of directors may determine from time to time. Section 2. Annual Meeting. The Bank shall hold an annual meeting of its stockholders in May of each year for the election of directors and for the transaction of any other business of the Bank or at such date and time as shall be set by resolution of the board of directors. Section 3. Special Meetings. Special meetings of the stockholders for any purpose or purposes may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request of the holders of not less than 25 percent of all of the outstanding capital stock of the Bank entitled to vote at the meeting. Section 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with rules and procedures adopted by the board of directors. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings. Section 5. Notice of Meetings. Written notice stating the place, day, and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 10 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, or the secretary, or the directors calling the meeting, to each stockholder of record entitled to vote at, or entitled to notice of, such meeting. The notice shall state the time and place of the meeting and, if the meeting is a special meeting or notice of the purpose is required by statute, the purpose of the meeting. Notice is given to a stockholder when it is personally delivered to him, left at his residence or usual place of business, or mailed to him at his address as it appears on the records of the Bank. In addition to the notice given to the stockholders, the Bank shall publish notice of the annual meeting at least 10 days prior to the date of such meeting in a newspaper published in Annapolis, unless, prior to the date set for publication, each stockholder entitled to vote at the meeting executes a waiver of such notice. Section 6. Fixing of Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of stockholders. Such date shall be not less than 20 days prior to the date on which the particular action, requiring such determination of stockholders, is to be taken. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof. Section 7. Voting Lists. At each meeting of stockholders, a full, true and complete list of all stockholders entitled to vote at such meeting, showing the number and class of shares held by each and certified by the transfer agent for such class or by the secretary, shall be furnished by the secretary of the Bank. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any stockholder during the entire time of the meeting. The original stock ledger shall constitute prima facie evidence as to who are the stockholders entitled to examine such list or to vote at any meeting of stockholders. Section 8. Quorum; Voting. A majority of the outstanding shares of the Bank entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. A majority of all votes cast at a meeting, whether in person or by proxy, shall determine any question that properly comes before a meeting, unless otherwise provided by law. Section 9. Proxies. At all meetings of stockholders, a stockholder may vote by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management shall be voted as directed by the stockholder or, in the absence of such direction, as determined by a majority of the board of directors. Unless a proxy provides otherwise, it shall not be valid more than 11 months after its date. Section 10. Adjournments. Whether or not a quorum is present, an annual or special meeting of stockholders convened on the date for which it was called may be adjourned from time to time by a majority vote of the stockholders present in person or by proxy. Any business that might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum shall be present. No further notice of an adjourned meeting, other than by announcement at the meeting at which the adjournment is taken, shall be necessary if held on a date not more than 120 days after the original record date. Section 11. Voting Rights. Each holder of shares of capital stock shall be entitled to one vote for each share of capital stock that the members owns of record on each matter submitted to a vote at a meeting of stockholders. In all elections of directors, each share of stock eligible to vote in the election of directors may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. When ownership stands in the name of two or more persons, in the absence of written directions to the Bank to the contrary, at any meeting of the stockholders of the Bank, any one or more of such stockholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such shares and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. Section 12. Voting of Shares of Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the by-laws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by such person, either in person or by proxy, without a transfer of such shares into such person's name. Shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into the trustee's name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into the receiver's name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Bank, may not be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. Section 13. Nominating Committee. The board of directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Provided that such committee makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by stockholders, are made in writing and delivered to the secretary of the Bank at least five days prior to the date of the annual meeting. Section 14. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the Bank at least five days before the date of the annual meeting, and all other business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any stockholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least five days before the meeting, such proposal shall be laid over for action at an adjourned, special, or annual meeting of the stockholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors, and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. Section 15. Informal Action by Stockholders. Any action required to be taken at a meeting of the stockholders, or any other action which may be taken at a meeting of stockholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be signed by all of the stockholders entitled to vote with respect to the subject matter. Each such written consent of stockholders shall be filed with the Bank's records of stockholder meetings. ARTICLE III - Board of Directors Section 1. General Powers. The business and affairs of the Bank shall be under the direction of its board of directors. The board of directors may annually elect a chairman of the board from among its members. The chairman of the board or his or her designee shall preside at the meetings of the board of directors. Section 2. Number. The Bank shall have at least five and not more than 25 directors. The Bank shall have the number of directors provided in the Charter until changed as herein provided. A majority of the entire board of directors may alter the number of directors within the permissible range by fixing the number of directors to be elected at the next annual meeting of stockholders or, if vacant directorships are established by the stockholders under Section 3 of this Article III, by increasing the number of directors by not more than the number of additional directorships created by the stockholders and left vacant, but the action may not affect the tenure of office of any director. Section 3. Election and Tenure of Directors. The stockholders of the Bank shall elect directors at each annual meeting. If the election of directors is not held at the annual meeting, an election may be held at a later meeting called for that purpose. A director serves until the next annual meeting of stockholders and until a successor is elected and qualifies. At any meeting of stockholders, the stockholders may create up to two additional directorships. The stockholders may leave the additional directorships vacant. Section 4. Qualifications. Each person elected or appointed a director of the Bank shall take the oath of such office prescribed by the laws of the State of Maryland and shall own in good faith and in his or her name unencumbered shares of stock in the Bank or in a corporation that owns more than 80% of the capital stock of the Bank as prescribed by the laws of the State of Maryland. No person elected or appointed a director of the Bank shall exercise the functions of such office until such person has taken the prescribed oath and owns unencumbered the prescribed shares of stock. Any director who fails to attend at least one-half of the regularly scheduled meetings of the Board of Directors during their term of office shall be disqualified from serving for a succeeding term unless such disqualification is waived by the Commissioner of Financial Regulation. Section 5. Residence. A majority of the directors of the Bank shall be residents of the State of Maryland. Section 6. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw immediately after, and at the same place as, the annual meeting of stockholders. The board of directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. Each director of the Bank shall attend at least 50 percent of the regularly scheduled meetings of the board of directors during his or her term of office. Section 7. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president, or a majority of the directors. The persons authorized to call special meetings of the board of directors may fix any place as the place for holding any special meeting of the board of directors called by such persons. Section 8. Notice of Special Meetings. Written notice of any special meeting of the board of directors or of any committee designated thereby shall be given by mail or facsimile transmission to each director at least 24 hours prior thereto at the address at which the director is most likely to be reached. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 9. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors; but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 8 of this Article III. Section 10. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by applicable statute or by these By-laws. Section 11. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. Section 12. Meeting by Conference Telephone. Members of the board of directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Such participation shall constitute presence in person at a meeting. Section 13. Vacancies. A majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on the board of directors that results from any cause except an increase in the number of directors, and a majority of the entire board of directors may fill a vacancy that results from an increase in the number of directors. A director elected by the board of directors to fill a vacancy serves until the next annual meeting of stockholders and until his or her successor is elected and qualifies. Section 14. Compensation. Directors may receive such compensation for service on the board of directors as may be fixed by the board of directors by resolution. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine by resolution. Nothing herein shall be construed to preclude any director from serving the Bank in any other capacity and receiving compensation therefor. Section 15. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Bank, addressed to the president. Unless otherwise specified, such resignation shall take effect upon receipt by the president. Section 16. Removal of Directors. At a meeting of stockholders called expressly for that purpose, any director may be removed for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole. ARTICLE IV - Committees of the Board of Directors Section 1. Committees. The board of directors may, by resolution adopted by a majority of the full board, designate from among its members an executive committee and other committees composed of two or more directors and delegate to such committees any of the powers of the board of directors, except the power to declare dividends or other distributions on stock, elect directors, issue stock, recommend to the stockholders any action that requires stockholder approval, amend the By-Laws, or approve any merger or share exchange that does not require stockholder approval. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by statute or regulation. Section 2. Meetings. Regular meetings of a committee may be held without notice at such times and places as such committee may fix from time to time by resolution. Special meetings of a committee may be called by any member thereof upon not less than one day's notice stating the place, date, and hour of the meeting, which notice may be written or oral. Any member of a committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a committee meeting need not state the business proposed to be transacted at the meeting. Section 3. Quorum. A majority of the members of a committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of a committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. Section 4. Action Without a Meeting. Any action required or permitted to be taken by a committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the committee. Section 5. Vacancies. Any vacancy in a committee may be filled by a resolution adopted by a majority of the full board of directors. Section 6. Resignations and Removal. Any member of a committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of a committee may resign from such committee at any time by giving written notice to the president or secretary of the Bank. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. Section 7. Procedure. Each committee shall elect a presiding officer from its members and may fix its own rules of procedure, which shall not be inconsistent with these By-laws. ARTICLE V - Officers Section 1. Positions. The officers of the Bank shall be a president, one or more vice presidents, a secretary, and a treasurer, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The president shall be the chief executive officer, unless the board of directors designates the chairman of the board as chief executive officer. The president shall be a director of the Bank. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Bank may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. Section 2. Election and Term of Office. The officers of the Bank shall be elected annually by the board of directors at a meeting of the board of directors held not more than 15 days after the annual meeting of the stockholders and after the directors-elect shall have qualified. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer's death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contractual rights. The board of directors may authorize the Bank to enter into an employment contract with any officer in accordance with the laws of the State of Maryland; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. Section 3. Removal. Any officer may be removed by the board of directors whenever, in its judgment, the best interests of the Bank will be served thereby, but such removal, other than for cause, shall be without prejudice to any contractual rights, if any, of the officer so removed. Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the board of directors for the unexpired portion of the term. Section 5. Compensation. The compensation of the officers shall be fixed from time to time by the board of directors by employment contracts or otherwise. ARTICLE VI - Contracts, Loans, Checks, and Deposits Section 1. Contracts. To the extent permitted by the laws of the State of Maryland, and except as otherwise prescribed by these By-laws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Bank to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Bank. Such authority may be general or confined to specific instances. Section 2. Loans. No loans shall be contracted on behalf of the Bank and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Bank shall be signed by one or more officers, employees, or agents of the Bank in such manner as shall from time to time be determined by the board of directors. Section 4. Deposits. All funds of the Bank not otherwise employed shall be deposited from time to time to the credit of the Bank in any duly authorized depositories as the board of directors may select. ARTICLE VII - Certificates for Shares and Their Transfer Section 1. Certificates for Shares. Certificates representing shares of capital stock of the Bank shall be in such form as shall be determined by the board of directors in accordance with the laws of the State of Maryland and the regulations of the Maryland Commissioner of Financial Regulation. Such certificates shall be signed by the chairman of the board, the president or a vice president of the Bank and counter-signed by the secretary or an assistant secretary. The stock certificates may be sealed with the corporate seal or a facsimile thereof. Each certificate for shares of capital stock shall be consecutively numbered. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock ledger of the Bank. All certificates surrendered to the Bank for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall be surrendered and canceled, except that in case of a lost or destroyed certificate, a new certificate may be issued therefor upon such terms and indemnity to the Bank as the board of directors may prescribe. Section 2. Payment for Shares. No certificate shall be issued for any shares until the agreed upon consideration for such shares is fully paid. The consideration for the issuance of shares shall not be less than the par value per share. Section 3. Transfer of Shares. The board of directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock; and may appoint transfer agents and registrars thereof. The duties of the transfer agent and registrar may be combined. Section 4. Stock Ledger. The Bank shall maintain a stock ledger that contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Any stockholder, director or officer of the Bank may inspect the stock ledger during usual business hours. ARTICLE VIII - Fiscal Year The fiscal year of the Bank shall end on the 31st day of December of each year. ARTICLE IX - Dividends If declared by the board of directors at any meeting thereof, the Bank may pay dividends on its shares in cash, property, or in shares of the capital stock of the Bank unless such dividend is contrary to law or to a restriction contained in the Charter. ARTICLE X - Corporate Seal The corporate seal of the Bank shall be in such form as the board of directors shall prescribe by resolution. ARTICLE XI - Amendments These By-laws may be amended at any time by a majority vote of the full board of directors. In addition, these By-laws may be amended by vote of a majority of the outstanding shares of capital stock of the Bank entitled to vote generally in the election of directors cast at a duly called and held meeting of the stockholders. EX-11 4 0004.txt CALCULATION OF EARNINGS PER SHARE Exhibit 11.0 Calculation of Earnings per Share
December 31 2000 1999 1998 ---- ---- ---- Weighted Average shares Outstanding 2,302,443 2,319,588 2,312,422 Common Stock Equivalents -- -- 6,731 Average Common Shares and Equivalents, Fully Diluted 2,302,443 2,319,588 2,319,153 Net income $ 971,617 $ 690,295 $1,002,844 Basic Earnings per Share $ 0.42 $ 0.30 $ 0.43 Diluted Earnings per Share $ 0.42 $ 0.30 $ 0.43
EX-13 5 0005.txt ANNUAL REPORT - CORPORATE PROFILE Exhibit 13.0 ANNAPOLIS NATIONAL BANCORP, INC. Corporate Profile ANNAPOLIS NATIONAL BANCORP, INC., formerly Maryland Publick Banks, Inc., is a bank holding company, incorporated in May 1988 for the purpose of acquiring and holding all of the outstanding stock of BankAnnapolis (formerly Annapolis National Bank), a federally insured community oriented bank and the only independent commercial bank headquartered in Annapolis, Maryland. The Bank currently operates as a full service commercial bank from its headquarters in Annapolis, and its four branches located in Anne Arundel County, Maryland and one branch located on Kent Island in Queen Anne's County, Maryland. The Bank's principal business consists of originating loans and attracting deposits. The Bank originates commercial loans, commercial real estate loans, construction loans, one- to four-family real estate loans, home equity and consumer loans. The Bank also invests in U.S. Treasury and U.S. Government agency securities and other securities issued by or guaranteed by the federal government. The Bank conducts a general commercial and retail banking business in its market area, emphasizing the banking needs of small businesses, professional concerns and individuals. The Bank draws most of its customer deposits from Anne Arundel County, Maryland, and to a lesser extent, Queen Anne's County, Maryland. The Bank's lending operations are centered in Anne Arundel County, but extend throughout Central Maryland. The Bank competes with numerous other financial intermediaries, commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in Anne Arundel County and elsewhere. The Bank continually evaluates new products, and implements such new products as deemed appropriate by management. The Bank's Anne Arundel County service area is a highly concentrated, highly branched banking market. Competition in Anne Arundel County for loans to small businesses and professionals, the Bank's target market, is intense and pricing, service and access to decision-makers are important. Deposit competition among institutions in Anne Arundel County also is strong. The Bank employed 64 full time and 11 part time individuals at December 31, 2000. Overview The following is management's discussion and analysis of the historical financial condition and results of operations of Annapolis National Bancorp, Inc. on a consolidated basis with its wholly owned subsidiary, BankAnnapolis, for the periods presented, and should be read in conjunction with the consolidated statements and the related notes thereto appearing elsewhere in this annual report. ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company reported net income for 2000 of $971,617, a 40.75% increase from 1999 earnings of $690,295. The increase in 2000 earnings was primarily due to higher net interest and noninterest income. Basic earnings per share increased to $0.42 per share in 2000 compared to $0.30 per share in 1999. The primary source of income of the Bank is interest on its loan and investment portfolios. The principal expense of the Bank is interest on its deposit accounts and borrowings. The difference between interest income on interest earning assets and interest expense on interest bearing liabilities is referred to as net interest income. Net interest income was $6.8 million for 2000, an increase of $638,000 or 10.46% compared to $6.1 million in 1999. Total assets were $137.0 million as of December 31, 2000, an 8.13% increase over the December 31, 1999 total assets of $126.7 million. The Company's return on average assets was 0.75% and 0.55% at December 31, 2000, and 1999 respectively. The Company's return on average equity was 7.59% and 5.69% at December 31, 2000, and 1999 respectively. At December 31, 2000 the Bank's gross loan portfolio totaled $89.2 million. Of this amount, $19.3 million or 21.64% were commercial loans, $33.4 million or 37.44% were commercial real estate loans, $16.9 million or 18.95% were construction loans, $11.1 million or 12.44% were one- to four-family residential mortgage loans, and $4.4 million or 4.93% were home equity loans, and $4.1 million or 4.60% were consumer and other loans. The following table shows selected consolidated financial highlights for the Company at and for the five years ended December 31, 1996, through December 31, 2000. Selected Consolidated Financial Data at and for years ended December 31, (Dollars in thousands, except per share data) Selected Financial Data 2000 1999 1998 1997 1996 - ----------------------- ----- ---- ---- ---- ---- Total assets $ 137,040 $ 126,733 $ 120,457 $ 120,827 $ 100,227 Total loans, net 87,411 81,198 86,924 70,985 68,800 Total deposits 118,020 105,094 100,742 96,062 87,106 Securities sold under agreement to repurchase 5,369 8,497 7,174 13,306 6,345 Notes payable -- -- -- -- 1,004 Stockholder's equity 13,362 12,727 12,091 11,087 5,471 Selected Operating Data - ----------------------- Interest income $ 10,454 $ 9,612 $ 9,813 $ 9,161 $ 8,021 Interest expense 3,679 3,475 3,890 3,630 3,362 ---------- ---------- ---------- ---------- ---------- Net interest income 6,775 6,137 5,923 5,531 4,659 Provision for credit losses 36 432 300 748 452 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for credit 6,739 5,705 5,623 4,783 4,207 losses Restructuring expense -- -- -- 796 -- Noninterest income 884 849 867 762 587 Noninterest expense 6,147 5,488 4,965 4,434 4,371 ---------- ---------- ---------- ---------- ---------- Income before income taxes 1,475 1,066 1,525 315 423 Income tax benefit (expense) (504) (376) (522) 769 -- ---------- ---------- ---------- ---------- ---------- Net income $ 972 $ 690 $ 1,003 $ 1,084 $ 423 ---------- ---------- ---------- ---------- ---------- Key Financial Ratios and Other Data - ----------------------------------- Return on average assets 0.75% 0.55% 0.82% 0.99% 0.44% Net income divided by average assets Return on average equity 7.59% 5.69% 8.64% 14.83% 7.98% Net income divided by average equity Equity to asset ratio (1) 9.93% 9.69% 9.54% 6.70% 5.46% Average equity divided by average assets Basic earnings per share $ 0.42 $ 0.30 $ 0.43 $ 0.64 $ 0.29 Book value per share $ 5.91 $ 5.48 $ 5.23 $ 4.79 $ 3.70 Tangible book value per share $ 5.91 $ 5.46 $ 5.17 $ 4.70 $ 3.17 Number of shares outstanding 2,262,406 2,323,506 2,313,506 2,312,306 1,478,972 Efficiency ratio (2) 80.26% 78.55% 73.19% 83.11% 83.34% Interest rate spread 5.03% 4.76% 4.52% 4.88% 4.68% Net interest margin 5.57% 5.26% 5.11% 5.37% 5.10% Risk based capital ratio - Tier 1 13.60% 13.70% 12.70% 15.16% 7.46% Risk based capital ratio - Total 14.80% 15.00% 14.00% 16.42% 8.68%
(1) The Company's initial public stock offering closed on September 30, 1997 with net proceeds of $3.5 million. The average capital used to calculate this ratio reflects the increase in capital for the last quarter of 1997. 17 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (2) Includes restructuring expense of $796,000 for the year ended December 31, 1997. The following table presents a condensed average balance sheet as well as income/expense and yields/costs of funds thereon for the years ended December 31, 2000, 1999 and 1998. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities for the periods shown. Average balances are derived from average daily balances. The yields and costs include loan fees that are considered adjustments to yields. Net interest spread the difference between the average rate on interest bearing assets and the average rate on interest bearing liabilities, increased to 5.03% for the year ended December 31, 2000, compared to 4.76% at December 31, 1999. Consolidated Average Balances, Yields and Rates (Balances in thousands)
Years ended December 31, 2000 December 31, 1999 ----------------- ----------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ------- -------- ------ ------- -------- ---- Assets Interest Earning Assets: Federal funds sold and other overnight investments $ 8,229 $ 509 6.19% $ 9,456 $ 462 4.89% Investment Securities 31,789 2,020 6.35% 20,042 1,090 5.44% Loans 81,544 7,925 9.72% 87,126 8,060 9.25% -------- ------- ------ -------- ------ ------ Total interest-earning assets 121,562 10,454 8.60% 116,624 9,612 8.24% -------- ------- ------ -------- ------ ------ Noninterest Earning Assets Cash and due from banks 3,647 4,196 Other assets 3,793 4,455 -------- -------- Total Assets $129,002 $125,275 -------- -------- Liabilities and Stockholders' Equity Interest Bearing Deposits NOW accounts $ 19,952 $ 228 1.14% $ 19,810 $ 269 1.36% Money market accounts 12,984 438 3.37% 11,960 334 2.79% Savings accounts 16,149 377 2.33% 14,634 341 2.33% Certificates of deposit 44,055 2,301 5.22% 43,236 2,191 5.07% Repurchase agreements 9,851 335 3.40% 9,970 323 3.24% Notes payable -- -- 0.00% 105 17 16.19% -------- ------- ------ -------- ------ ------ Total interest bearing liabilities 102,991 3,679 3.57% 99,715 3,475 3.48% -------- ------- ------ ------ ------ Noninterest Bearing Liabilities Demand deposit accounts 12,715 12,646 Other liabilities 489 772 Stockholders' Equity 12,807 12,142 -------- -------- Total Liabilities and Stockholders' Equity $129,002 $125,275 -------- -------- Interest rate spread 5.03% 4.76% ------ ------ Ratio of interest earning assets to interest bearing liabilities 118.03% 116.96% Net interest income and net interest margin $ 6,775 5.57% $6,137 5.26% ------- ------ ------ ------
18 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
December 31, 1998 ----------------- Average Yield/ Balance Interest Rate ------- -------- ---- Assets Interest Earning Assets: Federal funds sold and other overnight investments $ 21,999 $1,195 5.43% Investment Securities 16,644 963 5.79% Loans 77,245 7,655 9.91% -------- ------ ------ Total interest-earning assets 115,888 9,813 8.47% -------- ------ ------ Noninterest Earning Assets Cash and due from banks 3,612 Other assets 2,186 -------- Total Assets $121,686 -------- Liabilities and Stockholders' Equity Interest Bearing Deposits NOW accounts $ 18,488 $ 361 1.95% Money market accounts 14,427 496 3.44% Savings accounts 13,374 392 2.93% Certificates of deposit 40,844 2,272 5.56% Repurchase agreements 11,330 369 3.26% Notes payable -- -- -- -------- ------ ------ Total interest bearing liabilities 98,463 3,890 3.95% -------- ------ ------ Noninterest Bearing Liabilities Demand deposit accounts 11,118 Other liabilities 500 Stockholders' Equity 11,605 -------- Total Liabilities and Stockholders' Equity $121,686 -------- Interest rate spread 4.52% ------ Ratio of interest earning assets to interest bearing liabilities 117.70% Net interest income and net interest margin $5,923 5.11% - ------------------------------------------- ------ ------
Financial Condition The Company, through its Bank subsidiary, functions as a financial intermediary, and as such its financial condition can be examined in terms of developing trends in its sources and uses of funds. These trends are the result of both external environmental factors, such as changing economic conditions, regulatory changes and competition, and also internal environmental factors such as management's evaluation as to the best use of funds in these changing conditions. Total assets increased by 8.13% during 2000 to $137.0 million from $126.7 million at December 31, 1999. Total deposits and securities sold under agreements to repurchase, the Company's primary source of funds, increased $9.8 million or 8.63% to $123.4 from $113.6 million at December 31, 1999. Time deposits comprise the largest portion of the Bank's total deposits, totaling $51.2 million or 43.40% of the Bank's total deposits at December 31, 2000, compared to $45.6 million or 43.40% in 1999. Savings and money market accounts totaled $31.2 million or 26.40% of the Bank's total deposits at December 31, 2000, compared to $25.4 million or 24.18% in 1999. NOW accounts total $21.9 million or 18.55% and $20.8 million or 19.74% of total deposits at December 31, 2000 and 1999, respectively. Demand, noninterest bearing accounts total $13.7 million or 11.65% of total deposits at December 31, 2000 and $13.3 million or 12.68% at December 31, 1999. Securities sold under agreements to repurchase decreased $3.1 million to $5.4 million from $8.5 million at December 31, 1999, respectively. The Company's primary use of funds are for loans and investments. Loans, less deferred fees and discounts and the allowance for loan losses, increased by $6.2 million or 7.64% to $87.4 million at December 31, 2000 from $81.2 million a year earlier. The increase in loan balances occurred primarily in the real estate sector, which increased $2.8 million or 6.06% from 1999. 19 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Operating Results The following discussion outlines some of the more important factors and trends affecting the earnings of the Company, as presented in its consolidated statements of income. Net Interest Income Net interest income is the difference between interest revenue and interest expense and is generally impacted by increases or decreases in the amount of outstanding interest earning assets and interest bearing liabilities (volume variance). This volume variance coupled with changes in interest rates on these same assets and liabilities (rate variance) equates to the total change in net interest income in any given period. The table below, sets forth certain information regarding changes in interest income and interest expense attributable to (1) changes in volume (change in volume multiplied by the old rate); (2) changes in rates (change in rate multiplied by the old volume); and (3) changes in rate/volume (change in rate multiplied by change in volume). Net interest income for the year ended December 31, 2000, was $6.8 million, representing an increase of $638,000 or 10.46% from net interest income of $6.1 million for the year ended December 31, 1999. The increase in net interest income is due primarily to an increase in the Bank's overall yield on its investment and loans portfolios. The net yield on interest earning assets was 5.57% and 5.26% for the years ended December 31, 2000 and 1999 respectively. Net interest income for 2000 includes $145,000 of interest collected on the cash basis related to loans on a nonaccrual status, compared to $195,000 of interest collected on various nonaccrual loans in 1999. Rate/Volume Analysis (Dollars in thousands)
2000 v 1999 1999 v 1998 ----------- ------------ Increase or Due to Change in Rate/ Increase or Due to Change in Rate/ Decrease) Volume Rate Volume Decrease) Volume Rate Volume ------ ---- ------ -------- ---- ------ Interest income on: Loans $(134) $(633) $542 $(43) $ 405 $1,130 $(632) $(93) Investment securities 929 639 183 107 127 197 (58) (12) Federal funds sold and other overnight investments 47 (59) 122 (16) (733) (578) (300) 145 ----- ----- ---- ---- ----- ------ ----- ---- Total interest income 842 (53) 847 48 (201) 749 (990) 40 Interest expense on: NOW accounts (41) 2 (43) -- (92) 26 (110) (8) Money market accounts 104 28 70 6 (162) (85) (93) 16 Savings accounts 36 33 3 -- (51) 38 (81) (8) Certificates of deposit 110 41 68 1 (81) 133 (202) (12) Repurchase agreements 12 (4) 16 -- (46) (44) (2) -- Notes payable (17) (17) -- -- 17 -- -- 17 ----- ----- ---- ---- ----- ------ ----- ---- Total interest expense 204 83 114 7 (415) 68 (488) 5 ----- ----- ---- ---- ----- ------ ----- ---- Net interest income $ 638 $(136) $733 $ 41 $ 214 $ 681 $(502) $ 35 ----- ----- ---- ---- ----- ------ ----- ----
Interest Income The Company's interest income increased $842,000 or 8.76% to $10.4 million at December 31, 2000, compared to $9.6 million at December 31, 1999. The increase in interest income can be attributed to an increase in the average yield on earning assets. Average loans decreased $5.6 million or 6.43%. Average investments securities increased $11.7 million or 58.61%, which contributed to the increase in interest income as the effect of the increase in volume and yield on investments exceeded the negative impact of lower average loan volumes. Interest Expense The Company's interest expense increased $204,000 or 5.83% to $3.7 million at December 31, 2000, compared to $3.5 million at December 31, 1999. The increase in interest expense can be attributed to an increase in the cost of interest bearing liabilities to 3.57% at December 31, 2000, compared to 3.48% in 1999. The increase in rate was primarily due to an increase in certificate of deposit rates 20 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued to 5.22% in 2000 from 5.07% in 1999 and the introduction of a new indexed money market account that raised the average cost of money market accounts to 3.37% in 2000 from 2.79% in 1999. The increased growth in deposits were used to fund loan growth and for general liquidity purposes. Noninterest Income The Company's primary source of non-interest income is fees charged on deposit products and those generated by the Bank's VISA check card as well as fees recognized on the broker origination of residential mortgage loans. Noninterest income increased $64,000 to $884,000 or 7.80% from 1999 but was somewhat reduced by the loss of $51,000 taken on the disposal of equipment Noninterest Expense Noninterest expense increased $688,000 or 12.51% to $6.2 million at December 31, 2000, compared to $5.5 million at December 31, 1999. The increase in noninterest expense was primarily due to increases in compensation expense related to filling open staff positions, legal and consulting expense related to the change in charter. Advertising expense also increased as the launched a new media campaign emphasizing the Bank's convenience, flexibility, and commitment to customer service. Personnel expense increased $529,000 or 21.16% due to full year salaries for positions open for portions of 1999 as well as filling of open staff positions. Occupancy and equipment expense increased $39,000 or 4.24% due to increased maintenance costs at the branches and normal annual rental increases. Other expense increased $121,000 or 5.90% due mainly to legal and consulting expenses related to the OCC Formal Agreement, changing the Bank charter and marketing expenses related to a new advertisement campaign. Provision for Income Taxes The Company and the Bank file consolidated federal income tax returns and separate Maryland income tax returns. The Company recognized $504,000 in income tax expense for an effective tax rate of 34.1% in 2000. Financial Analysis For The Years Ended December 31, 1999 and 1998 The Bank entered into a Formal Agreement with the Office of the Comptroller of the Currency ("OCC") effective September 30, 1999, whereby the Bank was required to improve the Bank's management and policies and procedures. The Bank complied with all provisions of the Formal Agreement. Net income for the year ended December 31, 1999, totaled $690,000 or $0.30 per basic share compared to $1,003,000 or $0.43 per basic share for the year ended December 31, 1998. Net interest income increased $214,000 or 3.62% at December 31, 1999, to $6.1 million from $5.9 million at December 31, 1998. This increase was the result of an overall increase in the Bank's cost of funds. Interest income decreased $201,000 or 2.04% in 1999 compared to 1998, primarily due to a decrease in the yield on earning assets offset by an increase in the average balance of loans outstanding. Average loans outstanding, net of unearned income, increased $9.9 million or 12.79% during 1999. In addition, the average yield on loans decreased to 9.25% in 1999 from 9.91% in 1998. Interest expense decreased $415,000 in 1999 as compared to 1998. The decrease generally reflected a decrease in the average cost of certificates of deposit dropping to 5.07% in 1999 from 5.56% in 1998. During this period the average cost of interest bearing liabilities decreased to 3.48% at December 31, 1999, from 3.95% at December 31, 1998. Noninterest income exclusive of a one-time gain of $125,000 in 1998 relating to the Company waiving its exclusive right to operate its branch office in the Edgewater Shopping Center, increased $77,000 or 10.38% during 1999 as compared to 1998. The increase was attributable to fees generated by the broker origination of residential mortgage loans. Noninterest expense increased $493,000 or 9.93% to $5.5 million at December 31, 1999, from $5.0 million at December 31, 1998. 21 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Personnel expense increased $24,000 or 0.98% due to increasing staff to required levels. Occupancy and equipment expense increased $105,000 or 12.87% due to higher depreciation on local area network equipment and equipment required for Y2K upgrades. Data processing expense increased $210,000 or 43.03% due to the Bank's conversion to a new data processing provider and costs associated with Y2K. Other expense increased $135,000 or 14.63% due mainly to legal and consulting expense related to the OCC Formal Agreement. Liquidity and Capital Resources Deposits, commercial reverse repurchase agreements, and lines of credit are the primary source of the Bank's funds for lending and investing activities. Secondary sources of funds are derived from loan repayments and investment maturities. Loan repayments and investment maturities can be considered a relatively stable funding source, while deposit activity is greatly influenced by interest rates, general market conditions and competition. The Bank offers a variety of retail deposit account products to both consumer and commercial deposit customers. The Bank's deposit accounts consist of savings, NOW accounts, checking accounts, money market accounts and certificate of deposit accounts. The Bank also offers individual retirement accounts. Time deposits comprised 43.40% of the deposit portfolio at December 31, 2000. Core deposits, considered to be noninterest bearing and interest bearing demand deposit accounts, savings deposits and money market accounts accounted for 56.60% of the deposit portfolio at December 31, 2000. This represents a 12.30% increase in core deposits of 52.37% at December 31, 1999. The Bank intends to continue to emphasize retail deposit accounts as its primary source of funds. Deposit products are promoted in periodic newspaper advertisements, along with notices provided in customer account statements. The Bank does not pay a fee for brokered deposits. The Bank's market strategy is based on its reputation as a community bank that provides quality products and personal customer service. The Bank pays interest rates on its interest bearing deposit products that are competitive with rates offered by other financial institutions in its market area, and in certain deposit categories may lead the market. Interest rates on deposits are reviewed by management who consider a number of factors including: (1) the Bank's internal cost of funds; (2) rates offered by competing financial institutions; (3) investing and lending opportunities; and (4) the Bank's liquidity position. Jumbo certificates of deposit are accounts of $100,000 or more. These accounts totaled $9.9 million at December 31, 2000 and consisted principally of time certificates of deposit. The following table sets forth the amount and maturity of jumbo certificates of deposit at December 31, 2000: Dollars in (thousands)
Greater than Three Greater than Six Three Months or Months to Six Months to One Greater than Less Months Year One Year Total $964 $628 $5,274 $3,057 $9,923 ---- ---- ------ ------ ------
Commercial reverse repurchase agreements represent transactions with customers for correspondent or commercial account cash management services. These are overnight borrowing arrangements with interest rates discounted from the federal funds sold rate. Securities underlying the repurchase agreements are maintained in the Company's control. At December 31, 2000, and 1999, the average cost of these borrowings were 3.40% and 3.24% respectively. The Bank maintains a secured borrowing line with the Federal Home Loan Bank (FHLB) with the ability to draw up to $13.7 million, and may borrow up to $8.3 million under secured and unsecured lines established with correspondent commercial banks. In addition, the Bank has the ability to borrow directly from the Federal Reserve Bank discount window. At December 31, 2000, there were no outstanding advances under these lines of credit. Potential adverse impacts on liquidity can occur as a result of changes in the estimated cash flows from investment, loan, and deposit portfolios. The Bank manages this inherent risk by maintaining a portfolio of available for sale investments, and secondary sources of 22 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued liquidity from FHLB advances and reverse repurchase agreements. In addition, the Bank has the ability to increase its liquidity by raising interest rates on deposit accounts, selling loans in the secondary market or curtailing the volume of loan originations. The Bank maintains the majority of the assets held for liquidity purposes in overnight federal funds. Interest Rate Risk Sensitivity Interest rate sensitivity is an important factor in the management of the composition and maturity configurations of the Company's interest earning assets and funding sources. Additionally, the Bank's profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest bearing assets, such as loans and investments, and its interest expense on its funding sources, such as deposits and borrowings. Accordingly, the Bank's results of operations and financial condition are largely dependent on movements in market interest rates and its ability to manage its assets in response to such movements. The Bank attempts to manage fluctuations in interest rates by matching the maturities of its interest earning assets and interest bearing liabilities. The Bank's current strategy to manage its sensitivity to interest rate fluctuations is to emphasize short term and adjustable rate loans and to invest in short term U.S. Government agency securities with maturities or call dates of two years or less. Additionally, all of the loans in the Bank's portfolio are either adjustable or short term fixed rate loans with terms to maturity of 30 days to 30 years. The Bank does not engage in long term fixed rate portfolio lending. Any long term fixed rate loans made by the Bank are sold in the secondary market. The following table summarizes the anticipated maturities or repricing of the Company's interest earning assets and interest bearing liabilities as of December 31, 2000, and the Company's interest sensitivity gap (i.e., interest earning assets less interest bearing liabilities). A positive gap for any time period indicates that more interest earning assets will mature or reprice during that period than interest bearing liabilities. Based on the composition of deposits the Company's goal is to maintain a cumulative gap position for the period of one year or less of plus or minus fifteen percent in order to mitigate the impact of changes in interest rates on liquidity, interest margins and operating results. The analysis presented below represents a static gap position for interest sensitive assets and liabilities at December 31, 2000, and does not give effect to prepayment or extension of loans as a result of changes in general market rates. Interest Sensitivity Gap Analysis (Dollars in thousands) December 31, 2000
After three but After one but Within three within twelve within five After five months months years years Total ------ ------ ----- ----- ----- Assets Federal funds sold and other overnight investments $ 4,723 $ -- $ -- $ -- $ 4,723 Investment securities (1) 9,346 13,269 10,950 -- 33,565 Loans (2), (3) 33,464 17,545 26,685 11,224 88,918 -------- -------- ------- ------- -------- $ 47,533 $ 30,814 $37,635 $11,224 $127,206 -------- -------- ------- ------- -------- Liabilities Interest bearing liabilities NOW accounts $ 21,892 $ -- $ -- $ -- $ 21,892 Money market accounts 14,612 -- -- -- 14,612 Savings accounts 16,543 -- -- -- 16,543 Certificates of deposit (4) 7,568 32,998 10,548 107 51,221 Repurchase agreements 5,369 -- -- -- 5,369 -------- -------- ------- ------- -------- $ 65,984 $ 32,998 $10,548 $ 107 $109,637 -------- -------- ------- ------- -------- Interest sensitivity gap (18,451) (2,184) 27,087 11,117 17,569 Cumulative interest sensitivity gap (18,451) (20,635) 6,452 17,569 Cumulative interest sensitivity gap as a percentage of total assets (14.50%) (16.22)% 5.07% 13.81% 13.51% ------------ -------- -------- ------ ------ -------
(1) Net of Federal Reserve Bank and Federal Home Loan Bank stock. (2) Loans scheduled by contractual maturities. (3) Net of non-accrual loans of $299,365. (4) Certificates of deposits scheduled by contractual maturities. 23 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Investment Portfolio At December 31, 2000, the Bank's investment portfolio, which totaled $34.3 million, consisted of U.S. government agency securities. The Company invests primarily in state tax exempt U.S. Government Agency securities in order to minimize its state income tax liability. Additionally, the Company owns $357,950 in stock of the Federal Reserve Bank of Richmond and $360,400 in stock of the Federal Home Loan Bank of Atlanta (FHLB). Management generally maintains an investment portfolio with relatively short maturities to minimize overall interest rate risk. At December 31, 2000, approximately 65.96% of the investment securities portfolio had maturities of one year or less. Investment decisions are made within policy guidelines established by the Board of Directors. It is the Bank's policy to invest in non-speculative debt instruments, particularly debt instruments that are guaranteed by the U.S. Government or an agency thereof, to maintain a diversified investment portfolio which complements the overall asset/liability and liquidity objectives of the Bank, while limiting the related credit risk to an acceptable level. To meet the credit risk objectives, non-government debt instruments must have a rating of "B" or better to be held in the portfolio. The Bank's investment policy designates the investment portfolio to be classified as "available-for-sale", unless otherwise designated. At December 31, 2000, 100% of the investment portfolio was classified available-for-sale. The composition of securities at December 31, for each of the past five fiscal years was:
2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- Available for Sale U. S. Treasury $ -- $ -- $ -- $ 1,974 $ 9,157 U. S. Agency 33,565 23,103 13,511 12,991 996 Mortgage-backed -- -- 980 980 987 Equity Securities 718 721 699 620 194 ------- ------- ------- ------- ------- Total 34,283 23,824 15,190 16,565 11,334 Held to Maturity U. S. Treasury -- -- -- 3,975 1,993 ------- ------- ------- ------- ------- Total -- -- -- 3,975 1,993 ------- ------- ------- ------- ------- Total Securities $34,283 $23,824 $15,190 $20,540 $13,327 - ---------------- ------- ------- ------- ------- -------
The following table presents maturities and weighted average yields for investments in available for sale and held to maturity securities. December 31, 2000 (Dollars in thousands) YEARS TO MATURITY
WITHIN WITHIN 1 WITHIN 5 ONE YEAR TO 5 YEARS TO 10 YEARS AMOUNT/ YIELD AMOUNT/ YIELD AMOUNT/ YIELD ------- ----- ------- ----- ------- ----- Available for Sale U. S. Treasury $ -- --% $ -- --% $ -- --% U. S. Agency 22,614 6.19% 10,951 6.80% -- --% - ------------ ------- ----- ------- ------ ------- ----- Total Debt Securities $22,614 6.19% $10,951 6.80% -- --% Held to Maturity U. S. Treasury $ -- --% $ -- --% $ -- --% U. S. Agency -- --% -- --% -- --% ------------ ------- ----- ------- ----- ------- ----- Total $ -- --% $ -- --% $ -- --%
GREATER THAN TEN YEARS AMOUNT/ YIELD TOTAL ------- ----- ----- Available for Sale U. S. Treasury $ -- --% $ -- U. S. Agency -- --% 33,565 ------------ ------- ----- ------- Total Debt Securities $ -- --% $33,565 Held to Maturity U. S. Treasury $ -- --% $ -- U. S. Agency -- --% -- ------------ ------- ----- ------- Total $ -- --% $ --
24 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Lending Activities The types of loans that the Bank may originate are subject to federal laws and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board, and legislative tax policies. Analysis of Loans The following table presents the composition of the loan portfolio over the previous five years: Years ended December 31, (Dollars in thousands)
2000 1999 1998 1997 1996 ------- ------ ------ ------ ------ Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Commercial loans $19,323 21.64% $19,261 23.23% $26,895 30.43% $30,860 42.61% $30,801 43.80% Real estate loans: Commercial 33,434 37.44% 35,032 42.26% 29,373 33.25% 20,448 28.34% 17,845 25.65% Construction 16,945 18.95% 15,030 18.13% 17,875 20.22% 10,191 13.91% 10,173 14.62% One-to four-family 11,036 12.44% 7,329 8.84% 8,620 9.75% 5,232 7.25% 7,002 10.07% Home equity 4,372 4.93% 3,686 4.45% 3,219 3.64% 3,393 4.70% 1,744 2.51% Consumer loans 4,107 4.60% 2,565 3.09% 2,400 2.71% 2,305 3.19% 2,332 3.35% ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total loans 89,217 100.00% 82,903 100.00% 88,382 100.00% 72,429 100.00% 69,897 100.00% Less: Unearned income (250) (222) (299) (267) (332) Allowance for loan losses (1,556) (1,483) (1,159) (1,177) (765) ------- ------- ------- ------- ------- Net loans receivable $87,411 $81,198 $86,924 $70,985 $68,800 ------- ------- ------- ------- -------
The Bank's loan portfolio consists of commercial, commercial real estate, residential construction, one- to four-family residential mortgage, home equity and consumer loans. At December 31, 2000 the Bank's loan portfolio totaled $89.2 million, of which $19.3 million, or 21.64%, were commercial loans; $33.4 million, or 37.44%, were commercial real estate loans; $16.9 million, or 18.95%, were construction loans; $11.1 million, or 12.44%, were one- to four-family residential mortgage loans; $4.4 million, or 4.93% were home equity loans and $4.1 million, or 4.60%, were consumer and other loans. All of the loans in the Bank's portfolio are either adjustable-rate or short term fixed-rate loans with terms to maturity of 30 days to 30 years. The Bank does not engage in longer term fixed-rate portfolio lending. Any long- term fixed-rate loans made by the Bank are sold in the secondary market. Commercial Lending. The Bank offers commercial business loans to businesses operating in the Bank's primary market area. These loans consist of lines of credit, which typically require an annual repayment, adjustable-rate loans with terms of five to seven years, and short-term fixed-rate loans with terms of up to five years. Such loans are generally secured by receivables, inventories, equipment and other assets of the business. The Bank generally requires personal guarantees on its commercial loans. The Bank also offers unsecured commercial loans to businesses on a selective basis. These types of loans are made to existing customers and are of a short duration, generally one year or less. The Bank also originates commercial loans which are guaranteed by the Small Business Administration. The Bank has been an active participant in a variety of SBA loan programs. Year Ended December 31, 2000 (Dollars in thousands)
DUE AFTER DUE IN ONE YEAR ONE BUT NON YEAR OR BEFORE DUE AFTER ACCRUAL 90 DAYS LESS FIVE YEARS FIVE YEARS LOANS PAST DUE TOTAL ---- ------------- ----------- ----- -------- ----- Real estate loans Construction $16,800 $ 141 $ -- $ 4 -- $ 16,945 Mortgage 2,690 4,722 3,624 -- -- 11,036 Commercial 11,246 16,300 5,888 -- -- 33,434 Commercial loans 14,449 3,856 723 295 -- 19,323
25 Home equity loans 4,372 -- -- -- -- 4,372 Consumer loans 1,452 1,666 989 -- -- 4,107 - -------------- ------- ------- ------- ------- ------ -------- Total loans $51,009 $26,685 $11,224 $ 299 -- $ 89,217 - ----------- ------- ------- ------- ------- ------ --------
DUE AFTER ONE YEAR
FIXED VARIABLE RATE RATE TOTAL ----- ------ ----- Real estate loans Construction $ 141 $ -- $ 141 Mortgage 2,307 6,040 8,347 Commercial 574 21,613 22,187 Commercial loans 3,018 1,561 4,579 Home equity loans -- -- -- Consumer loans 2,273 382 2,655 - -------------- ------ ------- ------- Total loans $8,313 $29,596 $37,909 - ----------- ------ ------- -------
Commercial Real Estate Lending. The Bank originates adjustable-rate commercial real estate loans that are generally secured by properties used for business purposes such as small office buildings or a combination of residential and retail facilities located in the Bank's primary market area. The Bank's underwriting procedures provide that commercial real estate loans may generally be made in amounts up to 80% of the lower of the appraised value or sales price of the property, subject to the Bank's current loans-to-one-borrower limit, which at December 31, 2000, was $2.2 million. These loans may be made with terms up to 25 years and are generally offered at interest rates, which adjust annually or annually after an initial three-year period in accordance with the prime rate as reported in the Wall Street Journal. In reaching a decision as to whether or not to make a commercial real estate loan, the Bank considers the value of the real estate to be financed and the credit strength of the borrower and/or the lessee of the real estate project. The Bank has generally required that the properties securing commercial real estate loans have debt service coverage ratios of at least 1.2:1. Loans secured by commercial real estate properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting standards, which require such loans to be qualified on the basis of the property's value, debt service ratio and, under certain circumstances, additional collateral. The Bank generally requires personal guarantees on its commercial real estate loans. Construction Lending. The Bank originates construction loans on both one- to four-family residences and on commercial real estate properties. The Bank originates two types of residential construction loans, consumer and builder. The Bank originates consumer construction loans to build a primary residence, a secondary residence, or an investment or rental property. The Bank will originate builder construction loans to companies engaged in the business of constructing homes for resale. These loans may be for homes currently under contract for sale, model homes from which other homes will be marketed within a subdivision or, on a very limited basis, homes built for speculative purposes to be marketed for sale during construction. Although the Bank attempts to procure permanent end-financing, many of the Bank's construction loans, at the time entered into with the Bank, have permanent end-financing committed by other financial institutions. The Bank originates land acquisition and development loans with the source of repayment being either the sale of finished lots or the sale of homes to be constructed on the finished lots. The Bank will originate land acquisition, development, and construction loans on a revolving line of credit basis for subdivisions whereby the borrower may draw upon such line of credit as lots are sold for the purpose of improving additional lots. Construction loans are generally offered with terms up to twelve months for consumer and builder loans, and up to twenty-four months for land development loans. Construction loans are generally made in amounts up to 80% of the value of the security property. During construction, loan proceeds are disbursed in draws as construction progresses based upon inspections of work in place by independent construction inspectors. At December 31, 2000, the Bank had construction loans, including land acquisition and development loans totaling $16.9 million, or 18.95% of the Bank's total loan portfolio, of which $4.3 million consisted of one- to four- family residential construction loans, $7.3 million consisted of commercial real estate construction loans and $5.3 million consisted of land acquisition and development loans. Construction loans are generally considered to involve a higher degree of credit risk than long-term financing on improved, owner- occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the security property's value upon completion of construction as compared to the estimated costs of construction, including interest. Also, the Bank assumes certain risks associated with the borrowers' ability to complete construction timely and in a workmanlike manner. If the 26 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued estimate of value proves to be inaccurate, or if construction is not performed timely or accurately, the Bank may be confronted with a project which, when completed, has a value that is insufficient to assure full repayment. One- to Four-Family Residential Mortgage Lending. The Bank currently offers both fixed-rate and adjustable-rate mortgage loans, first and second mortgage loans secured by one- to four-family residences and lots for one- to four-family residences located throughout Central Maryland. It is currently the general policy of the Bank to originate for sale in the secondary market one- to four- family fixed-rate residential mortgage loans which conform, except as to size, to the underwriting standards of Fannie Mae, and Freddie Mac, and to originate for investment adjustable rate one- to four-family residential mortgage loans. The Bank generally does not retain the servicing rights of loans it sells and sells such loans without recourse, with the exception of a recourse in the event of breaches for any representations or warranties made by the Bank. The Bank recognizes, at the time of sale, the cash gain or loss on the sale of the loans based on the difference between the net cash proceeds received and the carrying value of the loans sold. One- to four-family mortgage loan originations are generally obtained from the Bank's loan representatives and their contacts with the local real estate industry, direct contacts made by the Bank's and the Company's directors, existing or past customers, and members of the local communities. At December 31, 2000, one- to four-family residential mortgage loans totaled $11.1 million, or 12.44%, of total loans. Of the one-to four-family mortgage loans outstanding at that date, $2.5 million were fixed-rate loans with terms of up to three years with a balloon payment at the end of the term and $8.6 of up to 30 years and interest rates which adjust annually from the outset of the loan or which adjust annually after a 1 or 3 year initial period in which the loan has a fixed rate. The interest rates for the majority of the Bank's adjustable- rate mortgage loans are indexed to the one-year Treasury Constant Maturity Index. Interest rate adjustments on such loans are limited to a 2% annual adjustment cap with a maximum adjustment of 6% over the life of the loan. The origination of adjustable-rate residential mortgage loans, as opposed to fixed-rate residential mortgage loans, helps to reduce the Bank's exposure to increases in interest rates. However, adjustable-rate loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. Although the Bank offers adjustable-rate loans at below market interest rates, all loans are underwritten to assure that the borrower is qualified on a fully indexed basis. Periodic and lifetime caps on interest rate increases help to reduce the risks associated with the Bank's adjustable-rate loans, but also limit the interest rate sensitivity of its adjustable-rate mortgage loans. The Bank currently originates one- to four-family residential mortgage loans in amounts up to 80% of the lower of the appraised value or the selling price of the property securing the loan. Mortgage loans originated by the Bank generally include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank's consent. Due-on-sale clauses are an important means of adjusting the yields on the Bank's fixed-rate mortgage loan portfolio and the Bank has generally exercised its rights under these clauses. Home Equity Lending. As of December 31, 2000, home equity loans totaled $4.4 million, or 4.93% of the Bank's total loan portfolio. Fixed-rate, fixed-term home equity loans and adjustable rate home equity lines of credit are offered in amounts up to 100% of the appraised value with a maximum loan amount of $100,000. Fixed-rate, fixed-term home equity loans are offered with terms up to five years and home equity lines of credit are offered with terms up to twenty years. Substantially all of the Bank's home equity loans are adjustable rate and reprice with changes in the Wall Street Journal prime rate. Consumer Lending. The Bank's portfolio of consumer loans primarily consists of adjustable rate, personal lines of credit and installment loans secured by new or used automobiles, new or used boats, and loans secured by deposit accounts. Unsecured consumer loans are made with a maximum term of three years and a maximum loan amount based on a borrower's financial condition. At December 31, 2000, consumer loans totaled $4.1 million or 4.60% to total loans outstanding. Consumer loans are generally originated in the Bank's primary market area. Credit Risk Management The Bank's allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for loan losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable based on information currently known to management. The Bank estimates a range of acceptable allowance for credit loss based upon loan risk ratings, prior periods' charge- offs and specific loss reserves. This methodology is appropriate as the Bank has ten years of loan loss history, 27 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued has a sufficient number of loans for broader base estimation processes to be meaningful and has a risk rating review system established for the purpose of maintaining accurate risk ratings on loans. Management believes this approach effectively measures the associated risk with any particular loan or group of loans. Management also considers other factors including current economic conditions, actual loss experience and industry trends. Management has also instituted a policy to engage an independent loan review consultant to evaluate the adequacy of the Bank's allowance for loan losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management. As of December 31, 2000, the Bank's allowance for loan losses was $1.6 million or 1.75% of total loans and 519.78% of non-performing loans as compared to $1.5 million, or 1.79% of total loans and 98.98% of non-performing loans as of December 31, 1999. The Bank had total non-performing loans of $299,000 and $1,499,000 at December 31, 2000 and December 31, 1999, respectively, and non-performing loans to total loans of 0.34% and 1.81%, at December 31, 2000, and December 31, 1999, respectively. The Bank places loans on a nonaccrual status after 90 days of not having received contractual principal or interest payments unless the loan is in the process of collection. In addition the Bank maintains a watch list of loans on a monthly basis that warrant more than the normal level of management supervision. At December 31, 2000 the Bank had approximately $6.5 million in watch list loans. The Bank continues to monitor and modify its allowances for loan losses as conditions dictate. While management believes that, based on information currently available, the Bank's allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time, no assurances can be given that the Bank's level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Bank or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions at the time management determined the current level of the allowance for loan losses. Management may in the future increase its level of loan loss allowances as a percentage of total loans and non-performing loans as its loan portfolio increases or as circumstances dictate. Analysis of Credit Risk Activity in the allowance for loan losses for the preceding three years ended December 31 is shown below: At December 31, (Dollars in thousands)
2000 1999 1998 ------- ------- ------- Total loans outstanding $88,967 $82,681 $88,083 Average loans outstanding $81,544 $87,126 $77,245 Allowance for loan losses at beginning of period $ 1,483 $ 1,159 $ 1,177 Provision charged to expense 36 432 300 ------- ------- ------- Chargeoffs: Commercial loans 0 202 354 Consumer and other loans 0 8 9 ------- ------- ------- Total 0 210 363 Recoveries: Residential/commercial real estate loans -- 31 24 Commercial loans 36 71 21 Consumer and other loans 1 -- -- ------- ------- ------- Total 37 102 45 ----- ------- ------- ------- Net chargeoffs (37) 108 318 Allowance for loan losses at end of period $ 1,556 $ 1,483 $ 1,159 ------- ------- ------- Allowance for loan losses as a percent of total loans 1.75% 1.79% 1.31% ------- ------- ------- Net chargeoffs as a percent of average loans (0.04)% 0.12% 0.41% ------- ------- -------
28 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Capital Management During 2000, Stockholders' Equity increased $635,000 or 5.00% to $13.4 million from $12.7 million at December 31, 1999. The increase was primarily due to net income of $972,000. Additionally, the Company's common shares outstanding decreased by 61,100 to 2,262,406 at December 31, 2000, from 2,323,506 at December 31, 1999, due to a stock repurchase program. In April 1997, the Company's employee incentive stock option plan was approved by shareholders at the annual meeting. Under the plan, up to 100,000 shares of the Company's common stock may be awarded under the direction of the Company's compensation committee. Incentive stock options vest over a five year period. During April 2000, a new Company's incentive stock option plan was approved by shareholders at the annual meeting. Under the plan, up to 200,000 shares of the Company's common stock may be awarded under the direction of the Company's compensation committee. Incentive stock options and grants vest over a five-year period. As of April 2000 no more shares may be awarded under the 1997 plan. During 2000 zero shares of common stock were granted under the 1997 plan. During 2000, 27,000 shares granted in prior years were forfeited and zero shares were exercised. Under the April 2000 plan 40,000 options and 13,250 restricted shares were granted. At December 31, 2000, the company had a total of 99,500 options and 13,250 restricted shares granted and outstanding. See Note 12 to the Consolidated Financial Statements for more information on the Company's stock option plan. Regulatory Capital Requirements The Federal Reserve's capital regulations require state member banks to meet two minimum capital standards: a 4% Tier 1 capital to total adjusted assets ratio for the most highly rated banks (at least 100 to 200 basis points more for other national banks) (the "leverage" ratio) and an 8% risk-based capital ratio. Tier 1 capital is defined as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The risk-based capital standard requires the maintenance of Tier 1 and total capital (which is defined as Tier 1 capital plus Tier 2 capital) to risk- weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OCC capital regulation based on the risks the agency believes are inherent in the type of asset. The regulators have recently added a market risk adjustment to cover a bank's trading account, foreign exchange and commodity positions. The components of Tier 1 capital are equivalent to those discussed above. Tier 2 capital may include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital included as part of total capital cannot exceed 100% of Tier 1 capital. At December 31, 2000, the Bank's Tier 1 and total risk-based capital ratio were 13.60% and 14.90% respectively. The Bank was considered well capitalized for regulatory purposes. See Note 17 of the Consolidated Financial Statements for more information on the Bank's risk-based capital ratios. Regulation and Supervision The Company, by virtue of its control of the Bank, is a registered bank holding company as amended under the Bank Holding Company Act of 1956 ("the Act"). As a bank holding company, the Company is required to file certain reports with, and otherwise comply with the rules and regulations of, the Federal Reserve Board ("FRB") under the Act. Effective November 1, 2000, the Company changed the Bank charter from a national charter to a state charter. As a result, the Bank is now regulated by the State of Maryland Department of Labor, Licensing and Regulation. The Bank is subject to extensive regulation, examination and supervision by the State of Maryland as its primary regulator, the Federal Reserve Bank of Richmond as its secondary regulator and the FDIC, as the deposit insurer. The Bank's deposit accounts are insured up to applicable limits by the FDIC's Bank Insurance Fund ("BIF"). The Bank must file reports with the Federal Reserve and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of other institutions. The state and the Federal Reserve conduct periodic examinations to test the Bank's safety and soundness and compliance with various regulatory requirements. Many aspects of the Bank's operations are regulated by federal law including allowable activities, reserves against deposits, branching, mergers and investments. This regulation and supervision 29 ANNAPOLIS NATIONAL BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the state of Maryland, the Federal Reserve, the FDIC or the Congress, could have a material adverse impact on the Company or the Bank and their operations. On November 12, 1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999 became law. The Modernization Act contains new financial privacy provisions will generally prohibit financial institutions, including the Company, from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to "opt out" of the disclosure. The Modernization Act also allows, among other things, for bank holding companies meeting certain management, capital and CRA standards to engage in a substantially broader range of nonbanking activities than were previously permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies. The Modernization Act further allows insurers and other financial services companies to acquire banks; removes various restrictions that currently apply to bank holding company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. Because the Modernization Act permits banks, securities firms and insurers to combine and to offer a wide variety of financial products and services, many of these resulting companies will be larger and have more resources than the Company. Should these companies choose to compete directly with the Company in its target markets, the Company's results of operations could be adversely impacted. Market Value and Dividend Information The Company's Common stock is listed on "The NASDAQ Stock Market SmallCap Market" under the symbol "ANNB". The Company's stock began trading on October 1, 1997. The Company has traded an average daily volume of 3,258 shares during 2000. At December 31, 2000 the closing price was $4.125 per share. The Company's high and low stock price during the last quarter of 2000 was $5.75 and $3.50, respectively. As of March 24, 2001 the Company has outstanding 2,262,406 shares of common stock and no preferred stock issued or outstanding. The Company paid dividends for the first time to its stockholders during 1999. Annual Dividends paid to the stockholders equaled $0.04 per share. 30 ANNAPOLIS NATIONAL BANCORP, INC. Report of Independent Auditors The Board of Directors and Stockholders Annapolis National Bancorp, Inc. and Subsidiary Annapolis, Maryland We have audited the accompanying consolidated balance sheet of Annapolis National Bancorp, Inc. and Subsidiary as of December 31, 2000 and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Annapolis National Bancorp, Inc. and Subsidiary for the years ended December 31, 1999 and 1998 were audited by other auditors whose report dated January 28, 2000 expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Annapolis National Bancorp, Inc. and Subsidiary as of December 31, 2000 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Stegman & Company --------------------- Baltimore, Maryland January 26, 2001 31 ANNAPOLIS NATIONAL BANCORP, INC. Consolidated Balance Sheets
December 31, 2000 1999 1998 Assets Cash and due from banks $ 3,176,745 $ 5,665,014 $ 3,845,793 Federal funds sold 4,723,428 11,432,282 10,284,419 Investment securities available for sale 34,283,448 23,768,975 15,190,949 Loans, less allowance for credit losses of $1,556,049; $1,482,704 and $1,158,863 87,410,671 81,198,152 86,924,416 Premises and equipment, net 5,302,385 2,741,376 2,678,786 Accrued interest receivable 1,152,284 821,662 590,159 Other real estate owned - 57,143 90,539 Deferred income taxes 461,362 494,201 319,863 Core deposit premium - 43,263 129,789 Other assets 529,420 511,292 402,202 Total assets $137,039,743 $126,733,360 $120,456,915 Liabilities and Stockholders' Equity Deposits Noninterest bearing 13,751,870 13,320,678 11,304,382 Interest bearing 104,267,784 91,772,928 89,437,861 Securities sold under agreements to repurchase 5,369,291 8,497,067 7,173,980 Accrued interest payable and other liabilities 288,808 415,198 449,726 Total liabilities 123,677,753 114,005,871 108,365,949 Stockholders' Equity Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 2,262,406 shares in 2000, 2,323,506 shares in 1999 and 2,313,506 shares in 1998 22,624 23,235 23,135 Capital surplus 12,881,175 13,192,408 13,142,508 Retained earnings (deficit) 424,937 (454,311) (1,075,000) 13,328,736 12,761,332 12,090,643 Accumulated other comprehensive income (loss) 33,254 (33,843) 323 Total stockholders' equity 13,361,990 12,727,489 12,090,966 Total liabilities and stockholders' equity $137,039,743 $126,733,360 $120,456,915
The accompanying notes are an integral part of these financial statements. 32 ANNAPOLIS NATIONAL BANCORP, INC. Consolidated Statements of Income
Years Ended December 31, 2000 1999 1998 Interest Income Loans, including fees $ 7,925,238 $ 8,059,766 $7,655,050 Federal funds sold 509,154 461,909 1,194,758 U.S. Treasury securities and obligations of other U.S. Government agencies 2,020,010 1,090,646 963,154 Total interest income 10,454,402 9,612,321 9,812,962 Interest Expense Certificates of deposit, $100,000 or more 393,781 324,182 300,714 Other deposits 2,950,792 2,810,234 3,220,267 Securities sold under agreements to repurchase 334,999 322,996 368,609 Interest on borrowed funds - 17,352 - Total interest expense 3,679,572 3,474,764 3,889,590 Net interest income 6,774,830 6,137,557 5,923,372 Provision for Credit Losses 36,000 431,879 300,000 Net interest income after provision for credit losses 6,738,830 5,705,678 5,623,372 Noninterest Income (Loss)/gain on disposal/sale of equipment (50,919 (16,195) (2,778) (Loss)/gain on sale of securities - (8,771) 312 Service charges and other 934,582 844,756 869,770 Total noninterest income 883,663 819,790 867,304 Noninterest Expense Personnel 3,034,399 2,505,786 2,481,507 Occupancy and equipment 958,623 919,466 814,625 Data processing 602,738 697,293 487,761 Marketing and advertising 391,003 194,221 174,727 Other operating 1,117,144 1,055,497 920,757 Amortization of core deposit premium 43,263 86,526 86,526 Total noninterest expense 6,147,170 5,458,789 4,965,903 Income before income taxes 1,475,323 1,066,679 1,524,773 Income tax expense 503,706 376,384 521,929 Net income $ 971,617 $ 690,295 $1,002,844 Basic earnings per share $ 0.42 $ 0.30 $ 0.43 Diluted earnings per share $ 0.42 $ 0.30 $ 0.43
The accompanying notes are an integral part of these financial statements. 33 ANNAPOLIS NATIONAL BANCORP, INC. Consolidated Statements of Changes in Stockholders' Equity
Accumulated Other Total Common Stock Retained Comprehensive Stockholders' Comprehensive Shares Par value Surplus Earnings Income Equity Income BALANCE, DECEMBER 31, 1997 2,312,306 $23,123 $13,135,320 $(2,077,844) $ 6,715 $11,087,314 $1,106,451 ========== Net income - - - 1,002,844 - 1,002,844 1,002,844 Stock options exercised 1,200 12 7,188 - - 7,200 Unrealized gain on investment securities available for sale net of income taxes - - - - (6,392) (6,392) (6,392) BALANCE, DECEMBER 31, 1998 2,313,506 23,135 13,142,508 (1,075,000) 323 12,090,966 996,452 ========== Net income - - - 690,295 - 690,295 690,295 Stock options exercised 10,000 100 49,900 - - 50,000 Dividends paid ($0.03 per share) - - - (69,606) - (69,606) Unrealized (loss) on investment securities available for sale net of income taxes - - - - (34,166) (34,166) (34,166) BALANCE, DECEMBER 31, 1999 2,323,506 23,235 13,192,408 (454,311) (33,843) 12,727,489 656,129 ========== Net income - - - 971,617 - 971,617 971,617 Dividends paid ($0.04 per share) - - - (92,369) - (92,369) Stock Repurchase (61,100) (611) (311,233) - - (311,844) Unrealized gain on investment securities available for sale net of income taxes - - - - 67,097 67,097 67,097 BALANCE, DECEMBER 31, 2000 2,262,406 $22,624 $12,881,175 $ 424,937 $ 33,254 $13,361,990 $1,038,714
The accompanying notes are an integral part of these financial statements. 34 ANNAPOLIS NATIONAL BANCORP, INC. Consolidated Statements of Cash Flows Years Ended December 31, 2000 1999 1998 Cash Flows from Operating Activities Net income $ 971,617 $ 690,295 $ 1,002,844 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 314,164 308,367 196,580 Provision for credit losses 36,000 431,879 300,000 Deferred income taxes (6,327) (152,895) 449,297 Amortization of premiums and accretion of discounts, net (173,977) (507,926) (257,550) Amortization of core deposit premium 43,263 86,526 102,770 Loss (gain) on: Sale or disposal of equipment 50,919 16,195 2,778 Sale of securities - 8,771 312 (Increase) decrease in: Accrued interest receivable (330,622) (231,503) (74,610) Other assets (40,337) (30,920) (210,053) Increase (decrease) in Accrued interest payable 26,068 (6,169) (7,539) Accrued income taxes, net of taxes refundable (53,962) (272) (22,402) Deferred loan origination fees 28,099 (77,462) 32,754 Other liabilities (98,496) (33,398) 84,819 Net cash provided from operations 766,409 501,488 1,599,376 Cash Flows from Investing Activities Proceeds from maturities of securities held to maturity - - 4,000,000 Proceeds from sales and maturities of securities available for sale 21,884,538 84,897,446 62,954,062 Purchase of securities available for sale (32,117,298) (93,031,822) (61,356,247) Net decrease (increase) in federal funds sold 6,708,854 (1,147,863) 10,459,554 Loans made, net of principal collected (6,276,618) 5,371,847 (16,319,840) Purchases of premises and equipment (2,904,226) (464,615) (1,671,512) Proceeds from sale and cost to dispose of equipment (1,130) 4,500 13,112 Proceeds from sale of other real estate owned 57,143 33,396 - Net cash used by investing activities $(12,648,737) $ (4,337,111) $ (1,920,871) Cash Flows from Financing Activities Net increase (decrease) in Time deposits $ 5,611,551 $ 7,989,162 $ (4,108,419) Other deposits 7,314,497 (3,637,799) 8,788,900 Securities sold under agreements to repurchase (3,127,776) 1,323,087 (6,131,800) Payment of dividends (92,369) (69,606) - Proceeds from sale of stock and options exercised - 50,000 7,200 Repurchase of common stock (311,844) - - Net cash provided/(used) by financing activities 9,394,059 5,654,844 (1,444,119) Net (decrease) increase in cash and cash equivalents (2,488,269) 1,819,221 (1,765,614) Cash and cash equivalents at beginning of year 5,665,014 3,845,793 5,611,407 Cash and cash equivalents at end of year $ 3,176,745 $ 5,665,014 $ 3,845,793 Supplemental Cash Flow Information Interest paid, including interest credited to accounts $ 3,792,545 $ 3,480,934 $ 3,897,129 Income taxes paid 557,214 529,551 95,034 Noncash Activities Other real estate reclassified from loans - - 47,902 The accompanying notes are an integral part of these financial statements.
35 ANNAPOLIS NATIONAL BANCORP, INC. Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies in the financial statements conform with accounting principles generally accepted in the United States and to general practices within the banking industry. Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain reclassifications have been made to the prior year's consolidated financial statements to conform with the 2000 presentation. Business The Company was incorporated on May 26, 1988, under the laws of the State of Maryland to serve as a bank holding company. The Company, registered as a bank holding company, formed Annapolis National Bank (the "Bank"), a nationally chartered financial institution. Effective November 1, 2000 the Bank changed its charter from a national charter to a state charter and joined the State of Maryland and the Federal Reserve banking systems. Also effective November 1, 2000 the Bank changed its name from Annapolis National Bank to BankAnnapolis. The Company (as a bank holding company) and the Bank are subject to governmental supervision, regulation, and control. The principal business of BankAnnapolis is to make loans and other investments and to accept time and demand deposits. The Bank's primary market area is in Anne Arundel County, Maryland, although the Bank's business development efforts generate business outside of the area. The Bank offers a broad range of banking products, including a full line of business and personal savings and checking accounts, money market demand accounts, certificates of deposit and other banking services. The Bank funds a variety of loan types including commercial and residential real estate loans, commercial term loans and lines of credit, consumer loans, and letters of credit. The Bank's customers are primarily individuals and small businesses. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, BankAnnapolis. All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements of Annapolis National Bancorp, Inc. (Parent only) include its investment in the Bank under the equity method of accounting. Cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. Investment securities As securities are purchased, management determines if the securities should be classified as held to maturity or available for sale. Securities which management has the intent and ability to hold to maturity are recorded at amortized cost. Securities which may be sold before maturity are classified as available for sale and carried at fair value with unrealized gains and losses included in accumulated other comprehensive income, a separate component of stockholders' equity, on an after-tax basis. Investments in Federal Home Loan Bank and Federal Reserve stock are included with securities classified as available for sale and carried at cost. Premises and equipment Premises and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed over the estimated useful lives using the straight-line method. Leasehold improvements are amortized over the terms of the leases or the estimated useful lives of the improvements, whichever is shorter. Loans Loans are stated at face value, plus deferred origination costs, less unearned discounts, deferred origination fees, and the allowance for credit losses. Interest on loans is credited to income based on the principal amounts outstanding. Origination fees and costs are amortized to income over the contractual life of the related loans as an adjustment of yield. Discounts on the purchase of mortgage loans are amortized to income over the contractual lives of the loans. Accrual of interest on a loan is discontinued when the loan is delinquent more than ninety days unless the collateral securing the loan is sufficient to liquidate the loan. Management considers all loans where the accrual of interest has been discontinued to be impaired. Allowance for Credit Losses The allowance for credit losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem 36 ANNAPOLIS NATIONAL BANCORP, INC. Notes to Consolidated Financial Statements, continued loans, actual and anticipated loss experience, current economic events and other pertinent factors including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience and consideration of economic trends, all of which may be susceptible to significant change. Credit losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors. The allowance for loan losses consists of an allocated component and an unallocated component. The components of allowance for loan losses represent an estimation done pursuant to either Statement of Financial Accounting Standards ("SFAS") No. 5 "Accounting for Contingencies", or SFAS No. 114 "Accounting for Creditors for Impairment of a Loan". The allocated component of the allowance for credit losses reflects expected losses resulting from analysis developed through specific credit allocations for individual loans and historical loss experience for each loan category. The specific credit allocations are based on a regular analysis of all loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The historical loan loss element is determined statistically using a loss migration analysis that examines loss experience and the related internal gradings of loans charged off. The loss migration analysis is performed quarterly and loss factors are updated regularly based on actual experience. The allocated component of the allowance for credit losses also includes management's determination of the amounts necessary for concentrations and changes in portfolio mix and volume. The unallocated portion of the allowance is determined based on management's assessment of general economic conditions, as well as specific economic factors in the individual markets in which BankAnnapolis operates. This determination inherently involves a higher risk of uncertainty and considers current risk factors that may not have yet manifested themselves in the Bank's historical loss factors used to determine the allocated component of the allowance and it recognizes knowledge of the portfolio may be incomplete. Intangible assets Net assets acquired in purchase transactions are recorded at fair value at the date of acquisition. Core deposit premiums are amortized on a straight-line basis over the estimated period benefited. When certain events or other changes occur, management evaluates intangible assets for recoverability. In circumstances that indicated the carrying value of these assets may not be recoverable, an impairment charge is recorded. Real estate owned Real estate acquired in satisfaction of a debt is carried at the lower of cost or net realizable value. Costs incurred in maintaining foreclosed real estate and write-downs to reflect declines in the fair value of the properties after acquisition are included in noninterest expenses. Income taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Stock based compensation The Company accounts for stock based compensation using the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. For disclosure purposes, pro forma net income and earnings per share are provided as if the fair value method has been applied. Earnings per share Basic earnings per common share are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share are calculated by including the average dilutive common stock equivalents outstanding during the period. Dilutive common equivalent shares consist of stock options, calculated using the treasury stock method. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) no. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Elective Date of SFAS Statement No. 133". The statement requires derivative 37 ANNAPOLIS NATIONAL BANCORP, INC. Notes to Consolidated Financial Statements, continued instruments be carried at fair value on the balance sheet. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be used. The statement also provides for offsetting changes in fair value or cash flows of both the derivative and the hedged asset or liability to be recognized in earnings for the same period; however, any changes in fair value or cash flow that represent ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The Company adopted the provisions of this statement as amended, for its quarterly and annual reporting beginning January 1, 2001, the statement's effective date. The impact of adopting the provisions of this statement had no effect on the Company's financial position, results of operations and cash flows because the Company did not participate in derivative instruments. 2. CASH AND DUE FROM BANKS Banks are required to carry cash reserves of specified percentages of deposit balances. The Bank's normal balances of cash on hand and on deposit with other banks are sufficient to satisfy these reserve requirements. The Bank normally carries balances with other banks that exceed the federally insured limit. The average balance carried in excess of the limit, including federal funds sold to the same bank, was approximately $8,084,310. 3. INVESTMENT SECURITIES Investment securities are summarized as follows:
Amortized Unrealized Unrealized Estimated Fair December 31, 2000 Cost Gains Losses Value Available for sale U.S. Government agency $33,512,480 $60,558 $ 7,940 $33,565,098 Federal Home Loan Bank stock 360,400 - - 360,400 Federal Reserve Bank stock 357,950 - - 357,950 $34,230,830 $60,558 $ 7,940 $34,283,448 December 31, 1999 Available for sale U.S. Government agency $23,102,994 $20,325 $75,444 $23,047,875 Federal Home Loan Bank stock 360,400 - - 360,400 Federal Reserve Bank stock 360,700 - - 360,700 $23,824,094 $20,325 $75,444 $23,768,975 December 31, 1998 Available for sale U.S. Government agency $13,491,259 $21,301 $ 811 $13,511,749 Mortgage-backed securities 1,000,000 - 20,000 980,000 Federal Home Loan Bank stock 361,400 - - 361,400 Federal Reserve Bank stock 337,800 - - 337,800 $15,190,459 $21,301 $20,811 $15,190,949
Proceeds from sale of securities during 2000 were zero, as compared to 1999 with proceeds of $1,856,696 and realized losses of $8,771 on those sales and proceeds of $2,484,062 and realized gains of $312 in 1998. Gains and losses are determined using the specific identification method. The amortized cost and estimated fair value of debt securities by contractual maturities are shown below. Actual maturities of these securities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
Available for sale Amortized Estimated Fair December 31, 2000 cost value - ----------------- Due within one year $22,592,234 $22,614,414 Due after one through five years 10,920,246 10,950,684 Equity securities 718,350 718,350 $34,230,830 $34,283,448 December 31, 1999 Due within one year $12,327,427 $12,345,315 Due after one through five years 10,775,567 10,702,560 Equity securities 721,100 721,100 $23,824,094 $23,768,975
38
Available for sale Amortized Estimated Fair December 31, 1998 cost value Due within one year $11,491,111 $11,509,350 Due after one through five years 2,000,148 2,002,399 Mortgage-backed securities 1,000,000 980,000 Equity securities 699,200 699,200 $15,190,459 $15,190,949
At December 31, 2000, 1999 and 1998, investments available for sale with a carrying value of $14,244,009, $8,507,651 and $11,001,719 respectively, were pledged as collateral for certain government deposits and for other purposes as required by law. 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES Major classifications of loans are as follows:
2000 1999 1998 Real estate Commercial $46,058,438 $38,461,203 $38,000,834 Residential 19,727,974 22,614,877 21,086,312 Commercial 19,323,109 19,261,184 26,895,218 Consumer 4,107,138 2,565,432 2,400,217 89,216,659 82,902,696 88,382,581 Less Deferred loan origination fees 249,939 221,840 299,302 Allowance for credit losses 1,556,049 1,482,704 1,158,863 1,805,988 1,704,544 1,458,165 Loans, net $87,410,671 $81,198,152 $86,924,416
The maturity and rate repricing distribution of the loan portfolio is as follows: Repricing or maturing within one year $51,307,382 $52,114,600 $63,899,468 Maturing over one to five years 26,685,204 23,406,247 19,357,456 Maturing over five years 11,224,073 7,381,849 5,125,657 $89,216,659 $82,902,696 $88,382,581
Transactions in the allowance for credit losses were as follows: Balance, beginning of year $ 1,482,704 $ 1,158,863 $ 1,177,437 Provisions charged to operations 36,000 431,879 300,000 Recoveries 37,831 101,641 44,853 1,556,535 1,692,383 1,522,290 Charge-offs 486 209,679 363,427 Balance, end of year $ 1,556,049 $ 1,482,704 $ 1,158,863
The balance of nonaccrual and impaired loans is as follows: Total guaranteed by the Small Business Administration $ 36,385 $ 718,499 $ 101,089 Other nonaccrual loans 262,980 780,961 404,487 Total nonaccrual and impaired loans 299,365 1,499,460 505,576 Average impaired loans 1,257,012 1,690,411 1,109,333 Related allowance for credit losses 170,847 271,249 179,217 Interest collected 144,801 195,483 18,439 Balance of accrued interest not recorded 98,309 118,937 52,747
The Bank lends to customers located primarily in Annapolis, Baltimore, and surrounding areas of central Maryland. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region. Loans that were 90 days or more past due, including nonaccrual loans amounted to zero at December 31, 2000 and $72,615, and $717,169 at December 31, 1999 and 1998. Certain officers and directors (and companies which have a 10% or more beneficial ownership) have loans with the Bank. Such loans were made in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties and are being repaid as agreed. 39 ANNAPOLIS NATIONAL BANCORP, INC. Notes to Consolidated Financial Statements, continued A summary of the activity of these loans follows:
2000 1999 1998 Beginning balance $ 2,823,692 $2,752,733 $2,229,589 Advances 125,307 243,259 1,099,920 Repayments (1,241,663) (172,300) (576,776) Change in officers and directors 193,880 - - Ending balance $ 1,901,216 $2,823,692 $2,752,733
5. CREDIT COMMITMENTS Outstanding loan commitments, unused lines of credit, and letters of credit are as follows:
2000 1999 1998 Loan commitments and lines of credit Construction $18,722,166 $13,764,407 $ 4,220,628 Other 14,270,534 9,739,410 14,284,008 $32,992,700 $23,503,817 $18,504,636 Letters of credit Deposit secured $ 240,378 $ 329,670 $ 591,862 Other 1,155,525 1,275,908 570,366 $ 1,395,903 $ 1,605,578 $ 1,162,228
Loan commitments including lines of credit are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have variable interest rates, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party. Loan commitments and lines and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss the Company will incur by the funding of these commitments. 6. INTANGIBLE ASSETS The core deposit premium was amortized over a period expiring in the year 2000. Amortization expense relating to the core deposit premium was $43,263 in 2000 and $86,526 in 1999, and 1998. As of December 31, 2000 the core deposit premium was fully amortized. 7. PREMISES AND EQUIPMENT A summary of premises and equipment and the related depreciation is as follows:
2000 1999 1998 Land and construction projects $4,315,690 $1,517,045 $1,399,862 Leasehold improvements 602,558 658,175 658,175 Furniture, fixtures, and equipment 1,564,182 1,519,545 1,306,962 6,482,430 3,694,765 3,364,999 Accumulated depreciation 1,180,045 953,389 686,213 Net premises and equipment $5,302,385 $2,741,376 $2,678,786 Depreciation and amortization expense $ 314,164 $ 308,367 $ 196,580
The Company is constructing a new branch and administrative facility on a tract of land owned by the Company. Preliminary site and planning costs have been capitalized. The company anticipates that the new facility will be completed in March 2001 at an estimated total project cost of $6 million. For the year ended December 31, 2001, $139,000 of interest was capitalized in association with the new facility. 40 ANNAPOLIS NATIONAL BANCORP, INC. Notes to Consolidated Financial Statements, continued 8. LEASE COMMITMENTS Lease obligations will require rent payments as follows:
Minimum Period rentals 2001 $ 164,033 2002 106,310 2003 106,310 2004 106,310 2005 106,310 Remaining years 38,108 --------- $ 627,381 ---------
The leases generally provide for payment of property taxes, insurance, and maintenance costs by the Company. The total rental expense for all real property leases was $479,675, $461,659 and $454,411, for 2000, 1999, and 1998, respectively. In September 2000 the Company negotiated a six-month extension on the lease for its headquarters space. The rental expense for that term is $116,274. The Company also negotiated an extension on the lease at the Bestgate branch through March 2001 at a cost of $30,646 During 1998, the Company waived a clause in one of its contracts prohibiting other financial institutions from locating in the same shopping center. The Company was paid $125,000, which is included in noninterest income. 9. DEPOSITS Major classifications of deposits are as follows:
2000 1999 1998 Demand, noninterest bearing $ 13,751,870 $ 13,320,678 $ 11,304,382 NOW accounts 21,892,164 20,750,063 21,050,434 Savings and money market accounts 31,154,560 25,413,357 30,767,081 Time deposits, $100,000 and over 9,923,008 6,794,832 7,229,126 Other time 41,298,052 38,814,676 30,391,220 ------------ ------------ ------------ $118,019,654 $105,093,606 $100,742,243 ------------ ------------ ------------
Time deposits mature as follows: Three months or less $ 7,567,595 $ 8,289,073 $12,516,492 Over three months to one year 32,997,932 29,865,401 21,180,825 Over one year 10,655,533 7,455,034 3,923,029 ----------- ----------- ----------- $51,221,060 $45,609,508 $37,620,346 ----------- ----------- -----------
At December 31, 2000, 1999, and 1998, time deposits with maturities in excess of five years totaled $106,639, $109,210, and $104,151. 10. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements are securities sold to the Bank's customers, at the customer's request, under a continuing "roll-over" contract that matures in one business day. The underlying securities sold are U.S. Treasury notes or Federal agencies that are segregated in the Bank's correspondent safekeeping account from the Company's other investment securities. The following table presents certain information for repurchase agreements:
2000 1999 1998 Balance outstanding, at year end 5,369,291 8,497,067 7,173,980 Average balance during the year 9,850,911 9,969,548 11,330,409 Average interest rate during the year 3.40% 3.24% 3.25% Maximum month-end balance $11,750,381 $13,026,580 $14,846,219
41 ANNAPOLIS NATIONAL BANCORP, INC. Notes to Consolidated Financial Statements, continued 11. PROFIT SHARING PLAN The Company has a profit sharing plan, qualifying under Section 401(k) of the Internal Revenue Code, for those employees who meet the eligibility requirements set forth in the plan. The plan does not require the Company to match the participants' contributions The Company contributions to the plan were $24,049 in 2000, $35,116 in 1999 and $24,612 in 1998. 12. STOCK OPTIONS AND RESTRICTED SHARES In April, 1997, the Company adopted a stock option plan, covering 100,000 shares of common stock, intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code. The plan provided for granting options to purchase shares of the common stock to the officers and other key employees of the Corporation and the Bank. Options granted under this plan have ten-year expiration dates with vesting periods from immediate to five years. As of April 2000 no additional options shall be granted under this plan. During April 2000, a new incentive stock option plan was approved by the shareholders at the annual meeting. Under this plan the Company's compensation committee has discretionary authority to grant stock options, restricted stock awards, and deferred share awards to such employees and directors, including members of the committee. Under this plan, up to 200,000 shares of Company stock may be awarded under the direction of the committee. The new plan provides for the awards to vest over a five-year period of time. Options have a ten-year expiration period. A summary of the status of the Company's performance-based stock option plans follows:
2000 1999 1998 Options Outstanding Outstanding, beginning of year 86,500 68,600 57,500 Granted 40,000 58,000 24,600 Exercised - (10,000) (1,200) Forfeited (27,000) (30,100) (12,300) -------- -------- -------- Outstanding, end of year 99,500 86,500 68,600
A summary of the status of the Company's restricted share awards follows:
2000 1999 1998 Restricted Shares Outstanding, beginning of year - - - Granted 13,250 - - Exercised - - - Forfeited - - - ------- ------- ------- Outstanding, end of year 13,250 - -
These options expire as follows:
Weighted Average Exercise Options Expiration Date Price Vested Nonvested 2007 $7.69 8,700 5,800 2008 $9.62 3,600 5,400 2009 $5.01 7,200 28,800 2010 $4.31 - 40,000 -------- ---------- Total 19,500 80,000
The Company applies APB No. 25 in accounting for the stock option plan. Accordingly, the Company does not recognize compensation expense for stock options granted. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), established new accounting and reporting standards for stock-based employee compensation plans. This standard defines a fair value based method for measuring compensation expense for stock- based plans to be recognized in the statement of income or disclosed in the notes to the financial statements. The weighted average fair value of options granted during 2000, 1999, and 1998 has been estimated using the Black-Scholes option-pricing model with the following assumptions: 42
2000 1999 1998 ---- ----- ----- Dividend yield 0.00% 0.00% 0.00% Risk-free interest rate 6.46% 6.13% 4.50% Expected volatility 30.0% 22.00% 30.00% Expected life in years 10 6 10
Had compensation been determined in accordance with the provisions of SFAS No. 123, the Company's net income and earning per share would have been reduced to the following pro forma amounts:
2000 1999 1998 -------- -------- ---------- Net income As reported $971,617 $690,295 $1,002,844 Pro forma 941,350 670,719 946,667 Basic earnings per share As reported $ 0.42 $ 0.30 $ 0.43 Pro forma 0.41 0.29 0.41 Diluted earnings per share As reported $ 0.42 $ 0.30 $ 0.43 Pro forma 0.41 0.29 0.41
13. LINES OF CREDIT The Bank is a member of the Federal Home Loan Bank system and may borrow up to $13,704,000. If funded, this line is secured by one to four family residential mortgage loans held in the Bank's portfolio. In addition, the Bank has available secured and unsecured lines of credit of $8,250,000. 14. PREFERRED STOCK The Company is authorized to issue up to 2,000,000 shares of preferred stock with a par value of $.01 per share. There were no preferred shares outstanding as December 31, 2000, 1999 or 1998. 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED - ------------------
(in thousands except per share amounts) December 31, September 30, June 30, March 31, 2000 Interest revenue $ 2,731 $ 2,718 $ 2,575 $ 2,431 Interest expense 938 934 908 900 Net interest income 1,793 1,784 1,667 1,531 Provision for loan losses - - - 36 Net income 303 311 216 142 Comprehensive income 345 353 215 126 Earnings per share-basic 0.13 0.14 0.09 0.06 Earnings per share-diluted 0.13 0.14 0.09 0.06 1999 Interest revenue $ 2,392 $ 2,481 $ 2,407 $ 2,332 Interest expense 881 932 873 789 Net interest income 1,511 1,549 1,534 1,543 Provision for loan losses - - 27 405 Net income 185 227 218 60 Comprehensive income 175 224 215 42 Earnings per share-basic 0.08 0.10 0.09 0.03 Earnings per share-diluted 0.08 0.10 0.09 0.03 1998 Interest revenue $ 2,434 $ 2,497 $ 2,473 $ 2,409 Interest expense 909 989 1,006 986 Net interest income 1,525 1,508 1,467 1,423 Provision for loan losses 75 75 75 75 Net income 204 245 300 254 Comprehensive income 189 274 285 248 Earnings per share-basic 0.08 0.11 0.13 0.11 Earnings per share-diluted 0.08 0.11 0.13 0.11
43 ANNAPOLIS NATIONAL BANCORP, INC. Notes to Consolidated Financial Statements, continued 16. INCOME TAXES The components of income tax expense are as follows:
2000 1999 1998 ---- ---- ---- Current Federal $510,033 $ 492,441 $ 72,632 State - 36,838 - 510,033 529,279 72,632 Deferred (6,327) (152,895) 449,297 $503,706 $ 376,384 $521,929
The components of the deferred taxes are as follows: Recognition of the benefit of the net operating loss carryover $ 20,458 $ 4,726 $467,202 Provision for credit losses (12,239) (141,539) 34,367 Revenues taxed not earned 558 6,330 (23,787) Depreciation expense (395) 7,007 934 Amortization and write down of intangible assets (14,709) (29,419) (29,419) Deferred tax benefit $ (6,327) $(152,895) $449,297
The components of the net deferred tax assets are as follows: Deferred tax assets Allowance for credit losses $406,407 $394,168 $252,629 Revenue taxed not earned 117,669 118,227 124,557 Net operating loss and alternative minimum tax credit carryforward - 20,458 25,184 Unrealized loss on securities available for sale - 21,276 - Total deferred tax assets 524,076 554,129 402,370 Deferred tax liabilities Depreciation 44,824 45,219 38,212 Intangible assets - 14,709 44,128 Unrealized gain on securities available for sale 17,890 - 167 Total deferred tax liabilities 62,714 59,928 82,507 Net deferred tax asset $461,362 $494,201 $319,863
The differences between federal income taxes and the amount reported by the Company follow:
2000 % 1999 % 1998 % Income before income taxes $1,475,323 $1,066,679 $1,524,773 Taxes computed at the federal income tax rate $ 501,610 34.0% $ 362,671 34.0% $ 518,423 34.0% Increases (decreases) resulting from State income taxes, net of federal benefit - - 4,151 0.4% - - Nondeductible expenses 2,096 0.1% 2,040 0.2% 3,506 0.2% Net operating loss carryforward - - 7,522 0.7% - - Income tax expense $ 503,706 34.1% $ 376,384 35.3% $ 521,929 34.2%
44 ANNAPOLIS NATIONAL BANCORP, INC. Notes to Consolidated Financial Statements, continued 17. CAPITAL STANDARDS The Federal Reserve Board and the Federal Deposit Insurance Corporation have adopted risk-based capital standards for banking organizations. These standards require ratios of capital to assets for minimum capital adequacy and to be classified as well capitalized under prompt corrective action provisions. The capital ratios, and minimum capital requirements of the Bank, as of December 31, 2000, 1999, and 1998, are as follows:
Minimum To be well Actual capital adequacy capitalized Amount Ratio Amount Ratio Amount Ratio December 31, 2000 Total capital (to risk-weighted assets) $14,501,416 14.9% $7,788,844 8.0% $9,736,056 10.0% Tier 1 capital (to risk-weighted assets) $13,280,223 13.6% $3,894,422 4.0% $5,841,633 6.0% Tier 1 capital (to average assets) $13,280,223 9.7% $5,470,545 4.0% $6,838,182 5.0% December 31, 1999 Total capital (to risk-weighted assets) $13,486,864 15.0% $7,208,231 8.0% $9,010,289 10.0% Tier 1 capital (to risk-weighted assets) $12,356,712 13.7% $3,604,115 4.0% $5,406,173 6.0% Tier 1 capital (to average assets) $12,356,712 9.8% $5,034,788 4.0% $6,293,485 5.0% December 31, 1998 Total capital (to risk-weighted assets) $12,176,375 14.0% $7,272,681 8.0% $9,090,851 10.0% Tier 1 capital (to risk-weighted assets) $11,579,741 12.7% $3,636,341 4.0% $5,454,511 6.0% Tier 1 capital (to average assets) $11,579,741 9.5% $4,852,527 4.0% $6,065,658 5.0%
Tier 1 capital consists of capital stock, surplus, and undivided profits. Total capital includes a limited amount of the allowance for credit losses. In calculating risk-weighted assets, specified risk percentages are applied to each category of asset and off-balance sheet items. Failure to meet the capital requirements could affect the Bank's ability to pay dividends and accept deposits and may significantly affect the operations of the Bank. 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Bank's financial instruments are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.
2000 1999 1998 Carrying Fair Carrying Fair Carrying Fair December 31, Amount Value Amount Value Amount Value -------------------------------------------------------------------------------------------------------------------------------- Financial assets Cash and due from banks $ 3,176,745 $ 3,176,745 $ 5,665,014 $ 5,665,014 $ 3,845,793 $ 3,845,793 Federal funds sold 4,723,428 4,723,428 11,432,282 11,432,282 10,284,419 10,284,419 Investment securities (total) 34,283,448 34,283,448 23,768,975 23,768,975 15,190,459 15,190,459 Loans, net 87,410,671 87,359,712 81,198,152 81,001,205 86,924,416 86,992,223 Accrued interest receivable 1,152,284 1,152,284 821,662 821,662 590,159 590,159
45
2000 1999 1998 Carrying Fair Carrying Fair Carrying Fair December 31, Amount Value Amount Value Amount Value - ------------------------------------------------------------------------------------------------------------------------------- Financial liabilities Noninterest-bearing deposits $ 13,751,870 $ 13,751,870 $13,320,678 $13,320,678 $11,304,382 $11,304,382 Interest-bearing deposits 104,267,784 104,266,152 91,772,928 92,190,948 89,437,861 89,766,553 Securities sold under agreements to repurchase 5,369,291 5,369,291 8,497,067 8,497,067 7,173,980 7,173,980 Accrued interest payable 48,473 48,473 22,406 22,406 28,574 28,574 - -------------------------------------------------------------------------------------------------------------------------------
The fair values of U.S. Treasury and Government agency securities are determined using market quotations. The fair value of fixed-rate loans is estimated to be the present value of scheduled payments discounted using interest rates currently in effect. The fair value of variable-rate loans, including loans with a demand feature, is estimated to equal the carrying amount. The valuation of loans is adjusted for possible credit losses. The fair value of interest-bearing checking, savings, and money market deposit accounts is equal to the carrying amount. The fair value of fixed- maturity time deposits is estimated based on interest rates currently offered for deposits of similar remaining maturities. 19. EARNINGS PER SHARE A summary of shares outstanding for basic and fully diluted earnings per share is as follows:
2000 1999 1998 --------- --------- --------- Weighted average shares outstanding, basic 2,302,443 2,319,588 2,312,422 Common stock equivalents - - 6,731 Average common shares and equivalents, fully diluted 2,302,443 2,319,588 2,319,153 Stock options outstanding that were antidilutive at December 31 99,500 86,500 35,100
20. PARENT COMPANY FINANCIAL INFORMATION The balance sheet and statements of income and cash flows for Annapolis National Bancorp, Inc. (Parent Company only) follow: Balance Sheets
December 31, 2000 1999 1998 ----------- ----------- ----------- Assets Cash and due from banks $ 19,013 $ 361,407 $ 7,391 Due from Bank 29,496 - - Investment in subsidiary 13,313,481 12,366,082 11,709,853 Deferred income taxes and other assets - - 373,722 ----------- ----------- ----------- Total assets $13,361,990 $12,727,489 $12,090,966 ----------- ----------- ----------- Liabilities and Stockholders' Equity Stockholders' equity Common stock $ 22,624 $ 23,235 $ 23,135 Capital surplus 12,881,175 13,192,408 13,142,508 Retained earnings (deficit) 424,937 (454,311) (1,075,000) Accumulated other comprehensive income 33,254 (33,843) 323 ----------- ----------- ----------- Total liabilities and stockholders' equity $13,361,990 $12,727,489 $12,090,966 ----------- ----------- -----------
46 ANNAPOLIS NATIONAL BANCORP, INC. Notes to Consolidated Financial Statements, continued Statements of Income
Years Ended December 31, 2000 1999 1998 ---- ---- ----- Interest income $ - $ - $ - Interest expense - - - Net interest income (expense) - - - Equity in undistributed income of subsidiary 880,302 690,395 1,002,844 Dividends from subsidiary 160,000 Expenses Compensation 54,578 Other operating 49,542 100 - ----------- --------- ----------- Income before income taxes 936,182 690,295 1,002,844 Income taxes (35,435) - - ----------- --------- ----------- Net income $ 971,617 $ 690,295 $ 1,002,844 ----------- --------- ----------- Statements of Cash Flows Years Ended December 31, 2000 1999 1998 ---- ---- ---- Cash flows from operating activities Net income $ 971,617 $ 690,295 $ 1,002,844 Due from Bank (29,496) - - Tax benefit received - 373,722 - Undistributed net income of subsidiary (1,040,302) (690,395) (1,002,844) ----------- --------- ----------- (98,181) 373,622 - Cash flows from financing activities Dividends paid (92,369) (69,606) - Dividends received from Bank 160,000 - - Proceeds from stock options exercised - 50,000 7,200 Repurchase of common stock (311,844) - - ----------- --------- ----------- (244,213) (19,606) 7,200 Net increase (decrease) in cash (342,394) 354,016 7,200 ----------- --------- ----------- Cash and equivalents at beginning of year 361,407 7,391 191 Cash and equivalents at end of year $ 19,013 $ 361,407 $ 7,391 ----------- --------- -----------
21. REGULATORY MATTERS During 1999, the Bank entered into a Formal Agreement with the Office of the Comptroller of the Currency ("OCC") whereby the Bank was required to improve the Bank's management and policies and procedures. The Bank complied with all the provisions of the Formal Agreement. The Bank is currently under no regulatory agreement or action. 47 EX-23 6 0006.txt EXHIBIT 23 Exhibit 23.0 [ROWLES LOGO] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Annapolis National Bancorp, Inc. Annapolis, Maryland We hereby consent to the incorporation by reference in this Registration Statement on Form 10-KSB of our report, dated January 20, 2001, appearing in the annual report on Form 10-KSB of Annapolis National Bancorp, Inc. and Subsidiary for the years ended December 31, 1999 and 1998. /s/ Rowles & Company -------------------- Baltimore, Maryland March 23, 2001 EX-23.1 7 0007.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Annapolis National Bancorp, Inc. Annapolis, Maryland We hereby consent to the inclusion in this Annual Report on Form 10-KSB of Annapolis National Bancorp, Inc. for the year ended December 31, 2000 of our report dated January 26, 2001 relating to the consolidated financial statements of Annapolis National Bancorp, Inc. /s/ Stegman & Company --------------------- Baltimore, Maryland March 23, 2001 -----END PRIVACY-ENHANCED MESSAGE-----