As filed with the Securities and Exchange Commission on June 23, 1997
Registration No. 333-__________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ANNAPOLIS NATIONAL BANCORP, INC.
(exact name of registrant as specified in its certificate of incorporation
<TABLE>
<S> <C>
MARYLAND 6712 52-1648903
(State or other jurisdiction (Primary Standard (IRS Employer Identification No.)
of incorporation or organization) Classification Code Number)
</TABLE>
Annapolis National Bancorp, Inc.
180 Admiral Cochrane Drive, Suite 300
Annapolis, Maryland 21401
(410) 224-4455
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
John W. Marhefka, Jr.
Chief Executive Officer
Annapolis National Bancorp, Inc.
180 Admiral Cochrane Drive, Suite 300
Annapolis, Maryland 21401
(410) 224-4455
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Mary M. Sjoquist, Esquire
Philip G. Feigen, Esquire
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
(202) 362-0840
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
<CAPTION>
================================================================================================================================
Title of each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price per Unit Aggregate Offering Price (1) Registration Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stock 833,334
$0.01 par Value Shares $6.00 $5,000,004 $1,563
================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Cross Reference Sheet Showing Location in the Subscription and Community
Offering Prospectus ("Prospectus") of Information Required by Items of Form
SB-2:
<TABLE>
<CAPTION>
Registration Statement Item and Caption Prospectus Headings
--------------------------------------- -------------------
<S> <C>
l. Front of Registration Statement and Outside Front Cover Page
Cover of Prospectus
2. Inside Front and Outside Back Cover Page of Inside Front and Outside Back Cover Pages
Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Risk Factors
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Front Cover Page; The Offering
9. Legal Proceedings Business -- Legal Proceedings
10. Directors, Executive Officers, Promoters and The Board of Directors and Management of the
Control Persons Company; The Board of Directors and Management of
the Bank
11. Security Ownership of Certain Beneficial The Board of Directors and Management of the Bank -
Owners and Management - Security Ownership of Management
12. Description of Securities Dividends; Description of Capital Stock of the
Company
13. Interests of Named Experts and Counsel Not Applicable
14. Disclosure of Commission Position on The Board of Directors and Management of the Bank -
Indemnification for Securities Act Liabilities Liability and Indemnification of Directors and Officers
15. Organization Within Last Five Years The Board of Directors and Management of the Bank -
- Transactions with Certain Related Persons
16. Description of Business Prospectus Summary; Business; Regulation and
Supervision
17. Management's Discussion and Analysis or Business; Management's Discussion and Analysis of
Plan of Operation Financial Condition and Results of Operations
18. Description of Property Business -- Properties
19. Certain Relationships and Related The Board of Directors and Management of the Bank -
Transactions - Transactions with Certain Related Persons
20. Market for Common Equity and Related Risk Factors -- Absence of Market for Common Stock;
Stockholder Matters Market for Common Stock
21. Executive Compensation The Board of Directors and Management of the Bank
22. Financial Statements Consolidated Financial Statements of Annapolis
National Bancorp, Inc.
23. Changes In and Disagreements With Change in Accountants
Accountants on Accounting and Financial
Disclosure
</TABLE>
<PAGE>
PROSPECTUS
833,334 Shares
ANNAPOLIS NATIONAL BANCORP, INC.
Common Stock
$6.00 per share
Annapolis National Bancorp, Inc. (the "Company"), a Maryland
corporation and holding company for Annapolis National Bank, a
federally-chartered commercial bank (the "Bank"), is hereby offering (the
"Offering") a minimum of 333,334 shares and a maximum of 833,334 shares of its
common stock, par value $.01 per share (the "Common Stock") at $6.00 per share
(the "Offering Price"). Prior to this Offering there has been no public market
for the Common Stock. The Company has applied for quotation of its Common Stock
on The Nasdaq SmallCap Market, subject to notice of issuance, under the symbol
"ANNB".
The Common Stock offered hereby involves a high degree of risk. See
Risk Factors at pages ____ to ____ for a discussion of certain factors that
should be considered by each prospective investor.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION"), THE OFFICE OF THE COMPTROLLER OF THE
CURRENCY ("OCC"), OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE COMMISSION, THE OCC OR ANY OTHER AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Fees Proceeds to
Price to Public(1) and Offering Expenses(2) Company
<S> <C>
Per Share at Minimum............ $6.00 $0.88 $5.12
Per Share at Maximum............ $6.00 $0.53 $5.47
Total Minimum................... $2,000,004 $293,000 $1,707,004
Total Maximum................... $5,000,004 $443,000 $4,557,004
</TABLE>
(1) See "The Offering" for information concerning indemnification of the Agent
and other matters.
(2) Includes commissions to be paid to the Agent and Selected Dealers of
$93,000 at the Total Minimum and $243,000 at the Total Maximum, and
expenses related to the Offering of $200,000 at both the Total Minimum and
Total Maximum.
The Common Stock is being offered by the Company through Charles Webb &
Company, A Division of Keefe, Bruyette & Woods, Inc. (the "Agent") and selected
broker/dealers (the "Selected Dealers") that are registered broker/dealers and
members of the National Association of Securities Dealers, Inc., on a "best
efforts" agency basis. The Agent and the Selected Dealers have no obligation
or commitment to purchase any of the shares offered or to assure the sale of
the minimum or maximum number of shares offered hereby.
-----------------------------------------------
CHARLES WEBB & COMPANY
A Division of Keefe, Bruyette & Woods
The date of this Prospectus is ________ ____, 1997
<PAGE>
The Offering will commence on or about _______, 1997 and will be
terminated by the Company upon the sale of 833,334 shares or on ______, 1997
(the "Expiration Date") whichever occurs first, unless the Offering is extended,
at the sole discretion of the Company, for additional periods ending no later
than ________, 1997. The Company reserves the right to terminate the Offering at
any time.
The Company has established a minimum subscription of 200 shares and a
maximum subscription of 5% of the shares of Common Stock sold in the Offering;
however, the Company reserves the right to waive these limits without notice to
any subscriber. Subscriptions are binding on subscribers and may not be revoked
except with the consent of the Company. The Company may reject or cancel any
subscription in whole or in part. If the Company does not sell the minimum
number of shares, the Offering is not completed by the Expiration Date, or the
Offering is otherwise terminated by the Company, all subscription funds will be
refunded in full with interest, at an annual rate of 3%. See "The Offering -
General".
Subscription proceeds will be deposited in an interest bearing escrow
account at First National Bank of Maryland (the "Escrow Account"), pending
receipt of subscriptions for not less than 333,334 shares or before _______,
1997, unless the Offering is earlier terminated or extended. Notwithstanding the
foregoing, the Agent shall have the right, in its sole discretion, to permit
investors to submit irrevocable orders together with legally binding commitments
for payment for the Common Stock for which they subscribe at any time prior to
the Expiration Date with payment to be received at any time prior to 24 hours
before completion of the Offering. Any subscription proceeds accepted after
satisfaction of the above conditions and release of the subscription amounts
from the Escrow Account, but before termination of the Offering, will not be
deposited in the Escrow Account but will be available for immediate use by the
Company, subject to satisfaction of the conditions of closing set forth in the
Agency Agreement between the Company and the Agent. See "Use of Proceeds" and
"The Offering".
[INSERT MAP]
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated all references to the Company shall
be deemed to include the Company and the Bank.
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective purchasers of the shares of Common Stock offered hereby are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, prospective
purchasers of the shares of Common Stock should specifically consider the
various factors identified in this Prospectus, including the matters set forth
under "Risk Factors," which would cause actual results to differ materially from
those indicated by such forward-looking statements.
ANNAPOLIS NATIONAL BANCORP, INC.
Annapolis National Bancorp, Inc.
Annapolis National Bancorp, Inc., formerly Maryland Publick Banks,
Inc., was incorporated in May 1988 in Maryland for the purpose of acquiring and
holding all of the outstanding stock of Annapolis National Bank (the "Bank").
The Company is a registered Bank Holding Company pursuant to the Bank Holding
Company Act of 1956, as amended ("BHCA"). The Company was capitalized by an
initial offering of common stock which was sold at $10.00 per share in June 1989
and, subsequent to January 1990, an offering at $12.50 per share. The Company's
only significant activity is the operation of the Bank. On a consolidated basis
at March 31, 1997, the Company's total assets were $98.1 million, total
liabilities were $92.2 million and stockholders' equity was $5.9 million.
Annapolis National Bank
The Bank is a commercial bank organized under the laws of the United
States. The Bank is a community oriented bank and the only commercial bank
headquartered in Annapolis, Maryland. As the Company's only subsidiary, the Bank
currently operates as a full service commercial bank through its five 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
(including Small Business Administration ("SBA") loans), commercial real estate
loans, construction loans, one- to four-family residential mortgage loans and,
to a lesser extent 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. At March 31, 1997, the Bank's loan
portfolio totalled $69.6 million. Of this amount, $31.3 million or 44.98% were
commercial loans, $18.5 million or 26.59% were commercial real estate loans,
$8.2 million or 11.77% were construction loans, $7.2 million or 10.33% were one-
to four-family residential mortgage loans, $2.1 million or 3.01% were home
equity loans and $2.3 million or 3.32% were consumer and other loans.
Background
The Bank was formed as a de novo bank and commenced operations from a
single Annapolis location in January 1990. In June 1990, the Company acquired
most of the assets and liabilities of Gibraltar Savings and Loan, F.A.
("Gibraltar") from the Resolution Trust Corporation as receiver for Gibraltar,
expanding its branch network to five branches. This acquisition was funded, in
part, through a $3.2 million
3
<PAGE>
unsecured loan to the Company from a director who is the principal stockholder
of the Company (the "Principal Stockholder"), which bore interest at the Bank's
prime rate less 2.0%. The acquisition was accounted for as a purchase and
resulted in a premium paid for the core deposits and other intangible assets in
the amount of $2.2 million, which initially was to be amortized over a 15 year
period. At December 31, 1990, the fiscal year end following this acquisition,
the Company's assets totalled $43.6 million.
From June 1990 through December 31, 1996, management of the Company
concentrated its efforts on growing the Bank by developing loan and deposit
portfolios primarily in Anne Arundel County, Maryland and the surrounding
counties. The Bank experienced steady growth in assets and deposits while its
earnings consistently trailed its peers due to a high level of operating
expenses and loan losses.
In December 1994, the Company conducted a rights offering through which
it offered its stockholders, at the price of $3.50 per share, the right to
purchase 2.5 shares of its Common Stock for each share of common stock owned.
The primary purpose of this offering was to convert the $3.2 million of debt
accumulated in the Gibraltar acquisition into capital to reduce the Company's
interest expense and increase its capitalization. A total of 937,672 shares were
sold, of which 907,143 were sold to the Principal Stockholder in exchange for
retirement of the principal portion of the debt. A new note was issued to the
Principal Stockholder in the amount of $848,400 to cover the portion of the loan
that remained outstanding, which note matures on December 31, 1997 and bears
interest at the Wall Street Journal ("WSJ") prime rate plus 1.0%.
The Company's operating expenses continued to increase as the Bank
opened a sixth branch office and relocated its administrative office in 1996. At
December 31, 1996, the Company's operating expenses as a percentage of average
assets was 4.50%. In addition, the Company's return on average assets has been
consistently below that of its peers. At December 31, 1996, the Company's return
on average assets was .44%
Revised Business Strategy
During the fourth quarter of 1996, the Board of Directors determined
that there was a need to implement a revised business strategy to improve the
Company's financial performance. Several members of senior management were
relieved of their responsibilities in late 1996 and early in 1997 and certain
other members of senior management resigned during this same period. In February
1997, the Board of Directors engaged John W. Marhefka, Jr. as President and
Chief Executive Officer of the Bank and as Vice President and Chief Executive
Officer of the Company. The Board of Directors believes that Mr. Marhefka's
management skills and local market experience will enable him to guide the
Company and the Bank through a reorganization process which will improve
operating results through implementation of a revised business plan. As
President and Chief Executive Officer of Annapolis Bancshares, Inc. and Bank of
Annapolis, he successfully guided those companies from their inception in 1988
through more than eight years of steady growth and strong continually increasing
earnings performance before they merged with Sandy Spring Bancorp, Inc. In March
1997, Mr. Marhefka hired Russell J. Grimes, Jr., who was appointed as Senior
Vice President, Chief Financial Officer and Treasurer of the Bank and Chief
Financial Officer and Treasurer of the Company. Mr. Grimes was formerly Vice
President, Chief Financial Officer and Treasurer of Annapolis Bancshares, Inc.
and Bank of Annapolis and was instrumental in implementing several successful
financial strategies with those firms. In April 1997, the Board appointed
Stanley H. Katsef as a Director and Vice Chairman of the Board. In addition to
his role as a Director, Mr. Katsef is an employee who assists the Board and Mr.
Marhefka with business development, public relations, and management strategy
issues. Mr. Katsef was formerly Chairman of the Board of Annapolis Bancshares,
Inc. and Bank of Annapolis. For additional information on these officers, see
"The Board of Directors and Management of the Bank -- Biographical
4
<PAGE>
Information." Additionally, the Board of Directors adopted a requirement that,
in order to assure a high level of commitment to the Company and the Bank, all
Directors must own at least $100,000 of the Company's common stock. Following
the imposition of this requirement, the composition of the Board of Directors
changed during April 1997. In addition to Messrs. Marhefka and Katsef, two
additional Directors who also have long-standing ties to Anne Arundel County
were added.
The reconstituted Board of Directors and senior management team are in
the process of implementing a revised business strategy designed to enhance
stockholder value. This strategy includes the following components:
o Consolidating the Bank's branch network to include fewer branch
locations and to reduce operating expenses.
o Reducing non-performing assets by implementing more stringent
underwriting criteria and more aggressive collection
procedures, and increasing secured real estate lending.
o Reducing interest expense by retiring $1.1 million of Company
debt with a portion of the Offering proceeds.
o Fostering support for the Bank by increasing the local
ownership of the Company by marketing the Offering to a large
number of buyers within the Bank's local community.
o Restructuring internal bank operations to attain operating
efficiencies and cost reductions.
o Increasing net interest income by expanding the loan and
deposit portfolios; the additional capital provided by the
Offering will support such growth by enabling the Bank to
continue to comply with regulatory capital requirements.
o Increasing non-interest income though expanding origination
and sale of fixed-rate one- to four-family residential
mortgage loans and other fee income.
In implementing its revised business strategy, the Company recorded a
one-time restructuring expense of $830,000 for the three months ended March 31,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Comparison of Operating Results for the Three Months
Ended March 31, 1997 and 1996."
The Company's principal executive office is located at 180 Admiral
Cochrane Drive, Suite 300, Annapolis, Maryland 21401 and its telephone number is
(410) 224-4455.
5
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered.................................................. A minimum of 333,334 shares.
A maximum of 833,334 shares.
Common Stock to be outstanding after the Offerings..................... 1,812,306 shares at the minimum.
2,312,306 shares at the maximum.
Use of Proceeds........................................................ To make a capital contribution to
the Bank, to increase the Bank's tier
1 capital and thereby support
managed and controlled growth, to
retire Company debt of $1.1
million, and for general corporate
purposes. See "Use of Proceeds."
Dilution............................................................... Upon completion of the Offering,
there will be an immediate dilution
to investors in the Offering of the
net tangible book value per share of
Common Stock. See "Dilution."
Risk Factors........................................................... Prospective investors in the
Common Stock should read
carefully the information discussed
under the heading "Risk Factors."
Reserved Nasdaq SmallCap Market Symbol................................. "ANNB"
Subscription Procedures................................................ Shares may be subscribed for by
delivering the Stock Order Form
attached hereto as Exhibit A,
completed and executed, to the
Stock Information Center,
established by the Agent, on or
before the Expiration Date. The
address of the Stock Information
Center is 180 Admiral Cochrane
Drive, Suite 300, Annapolis,
Maryland 21401. See "The
Offering -- How to Subscribe."
</TABLE>
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The selected financial and other data of the Company, at or for the
years ended December 31, 1996, 1995, 1994, and at or for the three months ended
March 31, 1997 and 1996, set forth below is derived in part from, and should be
read in conjunction with, the Financial Statements of the Company and Notes
thereto as of December 31, 1996, and for each of the two years in the period
ended December 31, 1996 presented elsewhere in this Prospectus. Financial
information at March 31, 1997, and for the three month periods ended March 31,
1997 and 1996 is derived from unaudited financial data, but in the opinion of
management, reflects all adjustments (including a one time charge related to
certain restructuring expenses) which are necessary to present fairly the
results for such interim periods. Interim results at and for the three months
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. The Company did not pay any cash
dividends in any of the periods set forth.
<TABLE>
<CAPTION>
At March 31, Years Ended December 31,
---------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
------------- ------------ ------------ ------------- -------------
(Dollars in thousands)
<S> <C>
Selected Financial Condition Data:
Total assets................................ $98,139 $95,871 $100,227 $95,296 $75,859
Total loans, net of deferred fees and costs. 69,604 59,015 69,565 56,653 57,337
Total deposits.............................. 83,557 83,574 87,106 82,096 66,118
Securities sold under agreements to
repurchase................................ 7,142 6,011 6,345 6,970 4,741
Note payable(1)............................. 1,023 945 1,003 925 4,004
Total stockholders' equity.................. 5,863 5,133 5,471 5,046 760
At or for the At or for the Years
Three Months Ended Ended December 31,
---------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
------------- ------------ ------------ ------------- -------------
(Dollars in thousands)
Selected Operating Data:
Interest income................................. $1,987 $1,947 $8,021 $7,651 $5,552
Interest expense................................ 754 855 3,362 3,099 2,260
------- ------- ----- ----- -----
Net interest income............................. 1,233 1,092 4,659 4,552 3,292
Provision for loan losses....................... 237 50 452 318 300
------- ------- ------- ------- ------
Net interest income after
provision for loan losses.................... 996 1,042 4,207 4,234 2,992
Restructuring expense(2)........................ 830 - - - -
Other income.................................... 165 124 588 521 394
Other expense................................... 1,067 1,052 4,372 3,957 3,313
------ ----- ----- ----- -----
Income (loss) before income taxes............... (736) 114 423 798 73
Income tax benefit (expense)(3)................. 1,120 - - (6) -
-------- ------ ------ ------ ------
Net income before minority interest in
earnings of consolidated subsidiary.......... 384 114 423 792 73
Minority interest in earnings of
consolidated subsidiary....................... - - - - 55
-------- ------- ------- ------- ---------
Net income...................................... $ 384 $ 114 $ 423 $ 792 $ 18
====== ====== ====== ====== =======
(Footnotes on page 9)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
At or for the At or for the Years
Three Months Ended Ended December 31,
---------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
------------- ------------ ------------ ------------- -------------
<S> <C>
Per Common Share Data:
Earnings per share................................. $0.26 $0.08 $0.29 $0.57 $0.03
Tangible book value per share...................... 3.78 2.87 3.17 2.78 (0.58)
Book value per share............................... 3.96 3.47 3.70 3.41 1.40
Number of shares of Common Stock
outstanding, at period-end....................... 1,478,972 1,478,972 1,478,972 1,478,972 541,300
Ratios:
Return on average assets (4)....................... 1.61% 0.49% 0.44% 0.94% 0.03%
Return on average stockholders' equity (4)......... 27.38% 8.94% 7.98% 19.26% 1.97%
Average stockholders' equity to
average total assets............................. 5.87% 5.44% 5.46% 4.88% 1.30%
Other income to average assets..................... 0.69% 0.53% 0.60% 0.62% 0.56%
Operating expenses to average assets (5)........... 7.94% 4.49% 4.50% 4.70% 4.71%
Efficiency ratio (6)............................... 135.69% 86.51% 83.34% 78.00% 89.88%
Interest rate spread............................... 4.98% 4.48% 4.68% 5.29% 4.74%
Net interest margin................................ 5.47% 4.94% 5.10% 5.73% 4.98%
Ratio of interest-earning assets to interest-
bearing liabilities................................ 113.10% 110.57% 111.20% 111.05% 106.89%
Non-performing loans to total loans................ 3.74% 1.39% 2.87% 3.03% 1.26%
Non-performing loans less SBA guarantees to total
loans.............................................. 1.95% 1.39% 1.20% 3.03% 1.26%
Allowance for loan losses to non-performing loans.. 38.76% 70.29% 38.35% 35.98% 95.15%
Allowance for loan losses to non-performing loans
less SBA guarantees................................ 74.46% 70.29% 91.84% 35.98% 95.15%
Non-performing loans to total assets............... 2.65% 0.85% 1.99% 1.80% 0.95%
Non-performing loans less SBA guarantees to total
assets............................................. 1.38% 0.85% 0.83% 1.80% 0.95%
Total non-performing assets to total assets........ 2.80% 1.37% 2.13% 2.32% 1.57%
Total non-performing assets less SBA guarantees
to total assets.................................... 1.52% 1.37% 0.97% 2.32% 1.57%
Total non-performing assets to total loans......... 3.94% 2.23% 3.07% 3.90% 2.08%
Total non-performing assets less SBA guarantees
to total loans..................................... 2.15% 2.23% 1.40% 3.90% 2.08%
Capital ratios(7)(8):
Tier 1 risk-based capital........................ 7.33% 7.71% 7.46% 7.68% (0.12)%
Total risk-based capital......................... 8.56% 8.74% 8.68% 8.83% 1.13%
</TABLE>
(Footnotes on next page)
8
<PAGE>
- --------------------------------
(1) Includes accrued interest payable.
(2) The Company recorded a one time restructuring expense of $830,000 for the
three months ended March 31, 1997 resulting from implementation of a
revised business strategy by the Board of Directors and senior management
in February 1997. The increase in expense includes a reduction of
approximately $471,000 relating to the value of the core deposit premium
and other intangibles acquired in the June 1990 acquisition of Gibraltar,
severance payments and benefits of $136,000, branch consolidation expense
of $119,000, expense of $50,000 related to the termination of a planned
de novo bank organization in accordance with Mr. Marhefka's employment
agreement and various other expenses of $54,000.
(3) The benefit is attributable to a one time recognition of a deferred tax
adjustment in the amount of $1.1 million as a result of the Company
recording the tax effect of approximately $2.4 million of net operating
loss carryforwards and other deferred tax assets.
(4) At March 31, 1997, the return on average assets and the return on average
stockholders' equity increased mainly due to a one time adjustment to
record the tax benefit of $1.1 million relating to the deferred tax
asset.
(5) The increase in the operating expenses to average assets ratio for the
period ended March 31, 1997 was due to $830,000 of restructuring costs
incurred in this period.
(6) The efficiency ratio represents noninterest expense less (gain) loss on
foreclosed real estate divided by noninterest income plus net interest
income before provision for estimated loan losses. The increase in the
efficiency ratio for the period ended March 31, 1997 was due to $830,000
of restructuring costs incurred in this period. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Operating Results for the Three Months Ended
March 31, 1997 and 1996."
(7) Ratios are for the Company and reflect debt owed by the Company to the
Principal Stockholder. The capital of the Company and the capital of the
Bank differ by the amount of the debt at the Company level. The Company
intends to retire this debt using a portion of proceeds of the Offering.
See "Use of Proceeds. For a discussion of the Bank capital ratios, see
"Regulation and Supervision - Federal Banking Regulations - Capital
Requirements."
(8) In 1994, Tier 1 risk-based capital and total risk-based capital were
reduced due to debt in an aggregate amount of $4.0 million (including
accrued interest) due to the Principal Stockholder from the Company that
did not count towards capital at the Company level. In 1995, $3.2 million
of this debt was converted to equity representing 907,143 shares of
stock. See "Business - Background.".
9
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock offered hereby.
Dependence on Key Personnel
The Company depends to a considerable degree on the contributions of a
limited number of key management personnel who have had, and will continue to
have, a significant role in the development and management of the Company. In
that regard, Mr. Marhefka was hired as President and Chief Executive Officer of
the Bank and as Vice President and Chief Executive Officer of the Company in
February 1997 to implement a revised business strategy for the Company and Bank.
Shortly thereafter, Mr. Grimes was hired as Senior Vice President, Chief
Financial Officer and Treasurer of the Bank and Chief Financial Officer and
Treasurer of the Company and Mr. Katsef was hired as Vice Chairman of the Bank
and Company. The continued development of the Company and Bank's business
strategy depends to a large extent upon the continued employment of key
management personnel. The Bank has entered into a five year employment agreement
with Mr. Marhefka. See "- Revised Business Strategy of the Bank," "The Board of
Directors and Management of the Bank - Executive Compensation - Employment
Agreement."
Revised Business Strategy of the Bank
Commencing in the fourth quarter of 1996, the Board of Directors
initiated a revised business strategy in order to improve the Company's
financial performance. The Board relieved certain members of senior management
of their responsibilities while certain other members of senior management
resigned and the Board hired key management personnel to implement its revised
business strategy. The key elements of the revised strategy are: (i)
consolidating the Bank's branch network and reducing operating expenses; (ii)
reducing non-performing assets; (iii) reducing interest expense at the Company
level; (iv) increasing local ownership of the Company; (v) increasing operating
efficiencies; (vi) expanding loan and deposit portfolios to increase net
interest income; and (vii) increasing non-interest income. The Bank's failure to
achieve any of these elements could impair its ability to successfully implement
its business strategy, which could have a material adverse effect on the Bank's
results of operations and financial condition. See "Business - Revised Business
Strategy."
Diversified Lending Risks
Commercial real estate, construction and consumer lending generally are
viewed as exposing the lender to a greater risk of loss than one- to four-family
residential mortgage lending. Commercial real estate lending typically involves
higher loan principal amounts and the repayment of the loans generally is
dependent, in large part, on sufficient income from the properties securing such
loans to cover operating expenses and debt service. Market values may vary as a
result of economic events or governmental regulations outside of the control of
the borrower or lender which could negatively impact the future cash flow of the
affected properties. Construction and land acquisition and development lending
involve additional risks attributable to the fact that funds are advanced upon
the security of the project, which is of uncertain value prior to its
completion. Because of the uncertainties inherent in estimating construction
costs, as well as the market value of the completed project and the effects of
governmental regulation of real property, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related
loan-to-value ratio. As a result of the foregoing, construction loans often
involve the disbursement of substantial funds with repayment dependent, in part,
on the success of the ultimate project rather than the ability of the borrower
or guarantor to repay principal and interest. Consumer loans typically have
shorter
10
<PAGE>
terms and lower balances with higher yields as compared to one- to four-family
residential mortgage loans, but generally carry higher risks of default.
Consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. At March 31, 1997, $18.5 million or 26.59%, $8.2
million or 11.77% and $2.3 million or 3.32% of the Bank's total loan portfolio
consisted of commercial real estate loans, construction loans and consumer
loans, respectively.
Competition
The Company faces substantial competition for deposits and loans
throughout its market area. Competition for deposits comes primarily from other
commercial banks, savings associations, credit unions, money market and mutual
funds and other investment alternatives. Competition for loans comes primarily
from other commercial banks, savings associations, mortgage banking firms,
credit unions and other financial intermediaries. The Company faces competition
for deposits and loans throughout its market area not only from local
institutions but also from institutions with a regional, and in some cases,
national presence. Many of these institutions are significantly larger than the
Bank, and therefore have greater financial and marketing resources than those of
the Bank. See "Business - Market Area and Competition."
Regulation
The Company and the Bank operate in a highly regulated environment and
are subject to supervision by several governmental regulatory agencies,
including the Office of the Comptroller of the Currency (the "OCC"), the Federal
Deposit Insurance Corp. (the "FDIC"), the Board of Governors of the Federal
Reserve System (the "FRB") and the Securities and Exchange Commission ("SEC").
Laws and regulations currently applicable to the Company and the Bank may
change, and there is no assurance that such changes will not adversely affect
the business of the Company and the Bank. See "Regulation and Supervision."
Economic Conditions
The success of the Company and the Bank will depend, to a certain
extent, upon economic and political conditions, both local and national, as well
as governmental monetary policies. Conditions such as inflation, recession,
unemployment, changes in interest rates, reductions in the money supply and
other factors beyond the control of the Company and the Bank may adversely
affect the Bank's deposit levels and loan demand and, therefore, the earnings of
the Bank and the Company. Although the Board of Directors believes that the
diversified economy of Central Maryland provides the opportunity for favorable
economic development in the Bank's market area, there is no assurance that
favorable economic development will occur or that the Bank's expectation of
corresponding growth will be achieved. A decline in the Maryland economy, and
particularly the Anne Arundel County economy, could have an adverse effect on
the Bank's business, including the demand for new loans, refinancing activity,
the ability of borrowers to repay outstanding loans and the value of the Bank's
collateral. The Bank could be adversely affected by a decline in economic
conditions or real estate values in its primary service area even if conditions
or values elsewhere in the United States or in Maryland remain stable or
improve. See "Business -- Market Area and Competition."
Interest Rate Risk
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such
11
<PAGE>
as loans and investments, and its interest expense on interest-bearing
liabilities, 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 reduce its sensitivity to interest rate
fluctuations is to avoid the risk of concentration in its investment portfolio
except as to investments in the U.S. Government or its agencies and fully
insured deposits in financial institutions. The Bank intends to maintain the
majority of the assets held for liquidity purposes in overnight Federal funds.
The Federal funds investment is the primary source for clearing customer checks
and funding loan advances and serves as the initial investment of excess funds.
As such, the Bank's investment in Federal funds will fluctuate for daily cash
movements and expected loan fundings. 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.
Significant fluctuations in the level of interest rates also may
adversely affect the fair value of the Bank's securities and other
interest-earning assets. Generally, the value of fixed-rate instruments
fluctuates inversely with changes in interest rates. As a result, increases in
interest rates could result in decreases in the carrying value of
interest-earning assets which could adversely affect the Bank's results of
operations if sold or, in the case of interest-earning assets classified as
available for sale, the Bank's equity. Increases in interest rates also can
affect the type (fixed-rate or adjustable-rate) and amount of loans originated
by the Bank and the average life of loans and securities, which can adversely
impact the yields earned on the Bank's loan and securities portfolio. In periods
of decreasing interest rates, the average life of loans held by the Bank may be
shortened to the extent increased prepayment activity occurs during such periods
which, in turn, may result in the Bank investing funds from such prepayments in
lower yielding assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Management of Interest Rate Risk."
Absence of Market for Common Stock
There is currently no established active public trading market for the
Company's Common Stock. As of June 19, 1997, the Company's Common Stock was held
by approximately 86 holders of record. The Company has received conditional
approval to have its Common Stock quoted on The Nasdaq SmallCap Market under the
symbol "ANNB" upon completion of the Offering. However, there can be no
assurance that an active and liquid trading market for the Common Stock will
develop, or, once developed, will continue, nor can there be any assurances that
holders of the Common Stock will be able to sell their shares at or above the
price per share in the Offering. Due to the relatively small size of the
Offering, a stockkholder base sufficiently large enough to create an active
trading market may not develop and, if developed, may not be maintained. The
absence or discontinuance of a market for the Common Stock may have an adverse
impact on both the price and liquidity of the Common Stock. In addition, the
stock market has on occasion experienced extreme price and volume fluctuation.
These broad market fluctuations may adversely affect the market price for the
Company's Common Stock and could result in losses to investors. See "Market for
Common Stock."
Determination of Offering Price
The Offering Price has been determined by the Company with the
assistance of the Agent based on certain factors including recent prices of
trades for the Common Stock, an evaluation of the financial
12
<PAGE>
condition and performance of the Company, and comparisons of the relationships
between market prices, book values, and earnings per share of other financial
institutions of a similar size and asset quality. The Offering Price is not
based solely on recent sales prices for the Common Stock since the Common Stock
is thinly traded. Accordingly, there can be no assurance that the Common Stock
may be resold at or above the Offering Price. See "Market for Common Stock" and
"The Offering."
Voting Control of Officers and Directors
Directors and executive officers of the Company currently own
approximately 1,169,443 shares or 79.07% of the issued and outstanding shares of
Common Stock. This includes 10,000 shares of the Common Stock attributable to
Mr. Marhefka through stock options. In addition, directors and executive
officers of the Company expect to purchase approximately 25,000 shares or 7.5%
of the shares at the minimum or 3.0% at the maximum of Common Stock to be issued
in the Offering. In particular, the Principal Stockholder currently owns 68.93%
of the outstanding shares of Common Stock, and will own 56.25% or 44.08% of such
shares upon completion of the Offering based upon the sale of 333,334 shares and
833,334 shares, respectively. Accordingly, management's potential voting
control, including the voting control of the Principal Stockholder, will
continue to have a significant influence over the affairs of the Company and the
Bank. Such concentration of ownership may have the effect of delaying, deferring
or preventing takeover attempts that certain stockholders deem to be in their
best interest and may tend to perpetuate existing management. See "The Board of
Directors and Management of the Bank - Security Ownership of Management." In
addition, the Company's Amended Articles of Incorporation do not permit
stockholders to cumulate their votes in the election of directors, which could
impair stockholders holding a small number of shares from effectively
participating in the election of the Company's directors. See "The Board of
Directors and Management of the Bank - Security Ownership of Management."
Dilution
Upon completion of the Offering, there will be an immediate dilution to
investors in the Offering of the net tangible book value per share of Common
Stock of $1.97 per share based on the sale of a minimum of 333,334 shares at
$6.00 per share and of $1.61 per share based on the sale of a maximum of 833,334
shares at $6.00 per share. The offering price is substantially greater than the
price of the Common Stock sold in the last stock offering by the Company in
January 1995, which included the sale of 907,143 shares of Common Stock to the
Principal Stockholder in exchange for a portion of a $3.2 million debt owed to
the Principal Stockholder by the Company. The average price per share paid by
existing stockholders was $5.95. See "Dilution" and "Business - Background."
Adequacy of Allowance for Loan Losses
In originating loans, there is a substantial likelihood that loan
losses will be experienced. The risk of loss varies with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the quality of the collateral for the loan. Management maintains an
allowance for loan losses based on, among other things, industry standards,
management's experience, historical experience, an evaluation of economic
conditions, and regular reviews of delinquencies and loan portfolio quality.
Based upon such factors, management makes various assumptions and judgments
about the ultimate collectability of the loan portfolio and provides for loan
losses based upon a percentage of the outstanding balances and for specific
loans when their ultimate collectability is considered questionable.
13
<PAGE>
As of March 31, 1997, the allowance for loan losses was $1.0 million,
which represented 1.45% of total loans and 38.76% of non-performing loans.
Non-performing loans totaled $2.6 million as of March 31, 1997, including $1.2
million of SBA guaranteed loans. Of this amount, approximately $701,000
represents the guaranteed portion of an SBA guaranteed commercial loan which was
repaid in full in April 1997. The Company reviews the allowance for loan losses
on a monthly basis and provides increases in the allowance, if necessary.
The Bank actively manages past due and non-performing loans in an
effort to minimize credit losses and monitor asset quality to maintain an
adequate loan loss allowance. Although management believes the Bank's allowance
for loan losses is adequate, there can be no assurance the allowance will prove
sufficient to cover future loan losses. Further, future adjustments may be
necessary if economic conditions differ substantially from the assumptions used
or adverse developments arise with respect to the Bank's non-performing or
performing loans. 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
loan losses based upon judgments different from those of management.
Accordingly, there can be no assurance that the allowance for loan losses will
be adequate to cover loan losses or that significant increases to the allowance
will not be required in the future. Material additions to the Bank's allowance
for loan losses would negatively affect the Company's earnings. See
"Business-Lending Activities --Allowance for Loan Losses."
Dividends on Common Stock
The Company has not paid any cash dividends on its Common Stock and
does not presently anticipate paying cash dividends in the foreseeable future.
The availability of funds for distribution to stockholders will depend
substantially on the earnings of the Bank and its ability to pay dividends to
the Company. Even if earnings are available, the Bank's payment of dividends is
restricted by federal regulations. See "Dividends" and "Regulation and
Supervision--Holding Company Regulation--Federal Regulation" and "- Federal
Banking Regulations - Limitations on Capital Distributions".
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock
offered hereby are estimated to be approximately $1.7 million at the minimum and
$4.6 million at the maximum after deducting the Underwriting fees and estimated
expenses of the Offering of $293,000 at the minimum and $443,000 at the maximum
at the initial public offering price of $6.00 per share.
The Company intends to use the net proceeds of this offering as
follows: (i) to make a capital contribution to the Bank to increase the Bank's
tier 1 capital and support managed and controlled growth, (ii) to repay a $1.1
million Company debt owed to the Principal Stockholder which matures on December
31, 1997 and bears interest at the WSJ prime rate plus 1.0%, and (iii) for
general corporate purposes.
MARKET FOR COMMON STOCK
Prior to this Offering, there has been no established active public
trading market for the Common Stock. The Company anticipates that, following the
Offering, the Common Stock will be traded on the Nasdaq SmallCap Market under
the symbol "ANNB." As of June 19, 1997, there were 1,478,972 shares of Common
Stock outstanding held by 86 stockholders of record. Although under no
obligation to do so, Keefe, Bruyette & Woods, Inc. has advised the Company that,
upon completion of the Offering, it intends
14
<PAGE>
to make a market in the Common Stock, subject to market conditions. However, an
active public trading market will depend upon the presence in the marketplace of
both willing buyers and willing sellers at any given time. Due to the relatively
small size of the Offering, it is unlikely that a stockholder base sufficiently
large to create an active trading market will develop and, if developed, be
maintained. Therefore, a purchaser of the Common Stock should have a long-term
investment intent and should recognize that the absence or discontinuance of an
active trading market may make it difficult to sell the Common Stock after the
Offering and may have an adverse effect on the price of the Common Stock.
Additionally, the development of a liquid public market depends on the existence
of willing buyers and sellers, the presence of which is not within the control
of the Company or any market maker. The number of active buyers and sellers of
the Common Stock at any particular time may be limited. Under such
circumstances, investors in the Common Stock could have difficulty disposing of
their shares on short notice and should not view the Common Stock as a
short-term investment.
See "The Offering" for information concerning the factors considered in
determining the Offering Price. There can be no assurance that the Common Stock
will trade at higher than the Offering Price subsequent to the Offering.
There has been limited trading of the Common Stock. Management has
reviewed available Company records of purchases and sales of Common Stock and,
according to such records, there have been four trades since January 1997
involving, in the aggregate, 87,690 shares of Common Stock, all of which traded
at $5.00 per share. Each of the four trades involved directors or officers of
the Company. Management is aware of one additional trade of 10,000 shares since
January 1997, the terms of which are unavailable, which did not involve a
director or officer of the Company.
DIVIDENDS
The holders of Common Stock are entitled to receive cash dividends when
and if declared by the Board of Directors of the Company out of funds legally
available therefor. The Company has not declared or paid cash dividends in the
past and expects that in the foreseeable future it will retain all future
earnings for the growth and development of its business. The primary source of
funds available to the Company is the payment of dividends by the Bank.
Regulations limit the amount of dividends that may be paid by the Bank to the
Company and by the Company to its stockholders without the prior approval of the
OCC and the FRB, respectively. See "Regulation and Supervision - Holding Company
Regulation - Federal Regulation" and "--Federal Banking Regulations--Limitation
on Capital Distributions."
DILUTION
The net tangible pro forma book value of the Common Stock at March 31,
1997 was $3.78 per share. Net tangible book value per share represents the
amount of total tangible assets less total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the Offering at an
initial public offering price of $6.00 per share, and the application of the net
proceeds therefrom, the pro forma net tangible book value of the Company at
March 31, 1997 would have been $7.6 million, or $4.03 per share of Common Stock
in the event that 333,334 shares are sold or $10.4 million, or $4.39 per share
of Common Stock in the event that 833,334 shares are sold. This would represent
an immediate increase in net tangible book value per share of $0.25 at the
minimum and $0.61 at the maximum to the existing stockholders of the Company and
an immediate dilution in net tangible book value per share of $1.97 at the
minimum and $1.61 per share at the maximum to new investors at the assumed
initial public offering price. The following illustrates this dilution per
share:
15
<PAGE>
<TABLE>
<CAPTION>
Minimum Maximum
----------------- ---------------------
<S> <C>
Initial public offering price per share............................... $6.00 $6.00
Pro forma net tangible book value as of March 31, 1997........... $3.78 $3.78
Increase in net tangible book value per share attributable
to new investors.............................................. $0.25 $0.61
Pro forma net tangible book value after the Public Offering........... $4.03 $4.39
Dilution to new investors............................................. $1.97 $1.61
</TABLE>
The following table summarizes, on a pro forma basis, as of March 31,
1997, the relative investments of the existing stockholders of the Company and
new investors in the Company, after giving effect to an offering of a minimum of
333,334 shares and a maximum of 833,334 shares at $6.00 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
-------------------------- ------------------------------
Average Price
Number Percent Amount Percent Per Share
------------- ---------- ---------------- ----------- -----------------
(Dollars in thousands, except per share amounts)
<S> <C>
Existing stockholders............. 1,478,972 81.61% $8,795,852 (1) 81.47% $5.95
New investors (at minimum)........ 333,334 18.39 2,000,004 18.53 6.00
--------- ------ --------- ------ -----
Total (at minimum)........... 1,812,306 100.00% $10,795,856 100.00% $5.96
Existing stockholders............. 1,478,972 63.96% $8,795,852 (1) 63.76% $5.95
New investors (at maximum)........ 833,334 36.04 5,000,004 36.24 6.00
--------- ------ --------- ------ -----
Total (at maximum)........... 2,312,306 100.00% $13,795,856 100.00% $5.97
</TABLE>
- ----------------------
(1) Includes non-cash consideration of $3,175,000 in which shares issued to the
Principal Stockholder were exchanged for retirement of a principal portion
of debt owed to the stockholder by the Company. See "Business Background."
16
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company
at March 31, 1997 and as adjusted as of that date to give effect to sale by the
Company of a minimum of 333,334 shares and a maximum of 833,334 shares of Common
Stock at the Offering Price of $6.00 per share offered hereby. The information
below should be read in conjunction with the Financial Statements and the Notes
thereto, which are included elsewhere herein.
<TABLE>
<CAPTION>
At March 31, 1997
------------------------------------------------------------
As Adjusted As Adjusted
Based on Sale of Based on Sale of
a Minimum of a Maximum of
Actual 333,334 Shares at 833,334 Shares at
$6.00 Per Share $6.00 Per Share
--------------- ------------------ ----------------------
<S> <C>
Common stock of the Company, $0.01 par value
(10,000,000 shares authorized, 1,478,972
shares issued and outstanding, a minimum of
1,812,306 and a maximum of 2,312,306 shares
issued and outstanding,
as adjusted)..................................... $ 15 $ 18 $ 23
Additional paid-in capital.......................... 8,634 10,338 13,183
Retained earnings (deficit)......................... (2,778) (2,778) (2,778)
Unrealized loss on investments in available
for sale securities................................ (8) (8) (8)
--------------- ------------------ -------------------
Total stockholders' equity.......................... $5,863 $7,570 $10,420
Bank Regulatory Capital Ratios(1):
Tier 1 risk-based capital......................... 9.00% 10.01% 14.49%
Total risk-based capital.......................... 10.25% 11.26% 15.74%
Leverage capital.................................. 5.99% 6.66% 9.65%
Stockholders' equity to total assets................ 5.97% 7.71% 10.62%
</TABLE>
(1) Bank regulatory ratios assume repayment of approximately $1,064 million
of debt at the Company level, estimated commissions to be paid to the
agents of $93,000 and $243,000 at the minimum and maximum, and offering
expenses of approximately $200,000.
17
<PAGE>
Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
For the Years Ended December 31, 1996 and 1995
and the Three Month Periods Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
Unaudited
March 31, December 31
1997 1996 1996 1995
--------- -------------- ------------ -------------
(Dollars in thousands)
<S> <C>
Interest income
Loans......................................................... $1,716 $1,539 $6,481 $6,380
Investment securities......................................... 150 237 975 714
Federal funds sold and securities purchased
under agreement to resell................................... 121 171 565 577
------ ------ ------ ------
Total interest income..................................... 1,987 1,947 8,021 7,651
------ ------ ------ ------
Interest expense
Certificates of deposit, $100,000 or more.................... 47 68 238 207
Other deposits............................................... 634 715 2,814 2,582
Securities sold under agreements to repurchase............... 54 52 231 214
Interest on borrowed funds .................................. 19 20 79 96
------ ------ ------ ------
Total interest expense .............................. 754 855 3,362 3,099
------ ------ ------ ------
Net interest income................................. 1,233 1,092 4,659 4,552
Provision for credit loses (Note 3)........................... 237 50 452 318
------ ------ ------ ------
Net interest income after provision for credit losses..... 996 1,042 4,207 4,234
------ ------ ------ ------
Other income
Gain (loss) on sale of loans, securities, equipment,
and other real estate owned, net........................... 95 82 (31) 104
Service charges and other..................................... 70 42 619 417
------ ------ ------ ------
165 124 588 521
------ ------ ------ ------
Operating expenses
Personnel..................................................... 517 557 2,219 1,939
Occupancy and equipment (Note 9).............................. 204 179 731 719
Restructuring................................................. 830 - - -
Other operating expenses...................................... 310 280 1,278 1,156
Amortization of intangible assets acquired (Note 5)........... 36 36 144 143
------ ------ ------ ------
1,897 1,052 4,372 3,957
------ ------ ------ ------
Net income, before income taxes (Note 11).............. (736) 114 423 798
Income tax expense............................................ 1,120 - - (6)
------ ------ ------ -------
Net income............................................ $ 384 $ 114 $ 423 $ 792
------ ------ ------ ------
Earnings per common share..................................... $ 0.26 $ 0.08 $ 0.29 $ 0.57
------ ------ ------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements and
can be found attached to the audited financial statements located elsewhere in
this document.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide
information about the financial condition and results of operation of the
Company and should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto appearing elsewhere in this prospectus.
General
The Company's results of operations are dependent on the operations of
the Bank. The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between interest income earned on its
loan and investment securities portfolios and other interest-earning assets, and
its cost of funds consisting of interest expense paid on its deposits and other
interest-bearing liabilities. Net interest income is also affected by the
relative amounts (volume) of interest-earning assets and liabilities. The Bank's
net income is also impacted by its provision for loan losses, as well as other
income and other expense. Other income consists principally of gain on sale of
loans, securities, equipment, other real estate owned ("OREO") and service
charges on deposit accounts, while other expense is comprised of personnel
expenses, occupancy and equipment expenses, and other operating expenses.
Earnings of the Bank are also impacted by general economic, competitive, and
regulatory conditions, particularly changes in market interest rates, government
policy, and actions of regulatory agencies.
Asset/Liability Management
The Company's earnings are primarily dependent on its net interest
income. Net interest income is affected by (1) the amount of interest-earning
assets and interest-bearing liabilities, (2) rates of interest earned on
interest-bearing assets and rates paid on interest-bearing liabilities, and (3)
the difference ("interest rate spread") between rates of interest earned on
interest-bearing assets and rates paid on interest-bearing liabilities. To
measure the relationship of interest-earning assets and interest-bearing
liabilities and their impact on net interest income, the Company maintains an
asset/liability management program.
One of the principal functions of the Company's asset/liability
management program is to monitor the level to which the balance sheet is subject
to interest rate risk. The goal of this program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize the
fluctuations in the net interest spread and achieve consistent growth in net
interest income during periods of changing interest rates.
Interest rate sensitivity is the relationship of differences in the
amounts and repricing dates of interest-earning assets and interest-bearing
liabilities. These differences, or interest rate repricing "gap," provide an
indication of the extent to which net interest income could be affected by
changes in interest rates. During a period of rising interest rates, a positive
gap (when interest-earning assets are greater than interest-bearing liabilities)
is desirable. A falling interest rate environment would favor a negative gap
position (when interest-earning assets are less than interest-bearing
liabilities). However, not all assets and liabilities with similar maturities
and repricing opportunities will reprice at the same time or to the same degree.
As a result, the Company's gap position is an indicator of the Company's
interest rate risk position, but does not necessarily predict the impact on net
interest income given a change in interest rate levels.
19
<PAGE>
The following table sets forth the Bank's gap position for March 31,
1997, based upon contractual repricing opportunities or maturities, with
variable rate products measured to the date of the next repricing opportunity as
opposed to contractual maturities. Fixed rate products are measured to
contractual maturity without considering scheduled payment amortization for
fixed rate loans. Interest bearing deposits are assumed to reprice in the
following manner: Money Market accounts reprice 100% in 0 to 90 days; Savings
accounts balances reprice 75% from 0 to 90 days and 25% from 91 days to one
year; interest bearing NOW accounts reprice 75% in 0 to 90 days, 10% in 91 days
to one year and 15% reprice in one to five years.
<TABLE>
<CAPTION>
At March 31, 1997
-----------------------------------------------------------------------
0-90 91 Days - 1 - 5 Over Five
Days 1 Year Years Years Total
----------- ------------ ----------- ----------- ------------
<S> <C>
Assets:
Investments, Federal Funds and securities
purchased under agreements to resell (1).. $18,266 $ 2,188 $ 1,993 $ - $22,447
Loans(2)(3)............................... 48,442 8,268 10,723 231 67,664
------- ------ ------- ---- -------
Total Earning Assets...................... $66,708 $10,456 $12,716 $231 $90,111
======= ======= ======= ==== =======
Liabilities:
Interest-bearing deposits(4)......... $34,413 $ 4,538 $ 2,376 $ - $41,327
Certificates of deposit(5)........... 10,934 17,303 3,198 - 31,435
Repurchase Agreements................ 7,142 - - - 7,142
------- ------ ------ ----- -------
$52,489 $21,841 $5,574 $ - $79,904
======= ======= ====== ======= =======
Interest sensitivity gap............. $14,219 $(11,385) $ 7,142 $ 231 $10,207
Cumulative rate sensitivity gap...... 14,219 2,834 9,976 10,207 -
Rate sensitive assets/rate
sensitive liabilities for period... 127.09% 47.87% 228.13% 100.00% -
Percent of total assets:
By period............................ 14.49% (11.60)% 7.28% 0.24% -
Cumulative........................... 14.49% 2.89% 10.17% 10.40% -
</TABLE>
- ----------------------
(1) Net of Federal Reserve Bank stock.
(2) Loans scheduled by contractual maturities, repricing.
(3) Net of nonaccrual loans of $1.940 million.
(4) Savings, Money Market, Now Accounts.
(5) Certificates of Deposit scheduled by contractual maturities.
20
<PAGE>
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase, thereby causing an increase in nonperforming loans and ultimately
loan losses.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them.
Average Balance Sheet. The following tables set forth for the periods
indicated information regarding the total dollar amounts of interest income from
interest-earning assets and the resulting average yields, the total dollar
amount of interest expense on interest-bearing liabilities and the resulting
average costs, net interest income, and the net yield on interest-earning
assets.
21
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
------------------------------------- --------------------------------------
Average Average
Volume Interest Yield Volume Interest Yield
----------- --------- ---------- ----------- ----------- ---------
(Dollars in thousands)
<S> <C>
Assets:
Interest Earning Assets:
Federal Funds sold and securities
purchased under agreements
to resell........................... $ 9,612 $ 121 5.04% $13,189 $ 171 5.19%
Investment Securities................. 11,134 150 5.39 18,197 237 5.21
Loans(1)(2)........................... 69,349 1,716 9.90 56,960 1,539 10.81
------- ------ ------ ------- ------ ------
Total interest-earning assets....... 90,095 $1,987 8.82 $88,346 $1,947 8.82
====== ======
Noninterest-Earning Assets:
Cash and Due from Banks............... 3,554 2,882
Other Assets.......................... 1,965 2,410
------ ------
Total Assets........................ $95,614 $93,638
======= =======
Liabilities and Stockholders' Equity:
Interest Bearing Deposits:
NOW Accounts.......................... $16,265 $ 91 2.27% $13,833 $ 85 2.49%
Money Market Accounts................. 14,019 119 3.44 14,603 131 3.64
Savings Accounts...................... 11,845 91 3.11 9,759 81 3.37
Certificates of Deposit............... 29,266 380 5.27 33,855 486 5.82
Repurchase Agreements................. 7,420 54 2.95 7,003 52 3.01
Note payable.......................... 848 19 9.09 848 20 9.56
------ --- ---- ----- --- -----
Total Interest-Bearing Liabilities.. 79,663 $754 3.84 79,901 $855 4.34
==== ====
Noninterest-Bearing Liabilities:
Demand Deposit Accounts............... $ 9,839 $ 8,319
Other liabilities..................... 502 320
Capital............................... 5,610 5,098
------- -------
Total liabilities and
stockholders' equity............ $95,614 $93,638
======= =======
Interest Rate Spread...................... 4.98% 4.48%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities......... 113.10% 110.57%
Net interest income and net interest
margin.................................. $1,233 5.47% $1,092 4.94%
====== ==== ====== ====
</TABLE>
- --------------------
(1) Includes loan fees.
(2) Includes non accrual loans.
22
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------
1996 1995
-------------------------------------- -----------------------------------
Average Average
Volume Interest Yield Volume Interest Yield
------------ ----------- --------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C>
Assets:
Interest Earning Assets:
Federal Funds sold and securities
purchased under agreements to resell.. $10,935 $ 565 5.17% $ 9,859 $ 557 5.65%
Investment Securities................... 18,339 975 5.32 12,727 714 5.61
Loans(1)(2)............................. 62,144 6,481 10.43 56,905 6,380 11.21
------- ------ ------ ------- ------ ------
Total interest-earning assets......... 91,418 $8,021 8.77 79,491 $7,651 9.62
====== ======
Noninterest-Earning Assets:
Cash and Due From Banks............... 3,210 2,851
Other Assets.......................... 2,424 1,882
-------- --------
Total Assets........................ $97,052 $84,224
======= =======
Liabilities and Stockholders' Equity:
Interest Bearing Deposits:
NOW Accounts.......................... $14,583 $ 363 2.49% $11,532 $ 284 2.46%
Money Market accounts................. 15,819 558 3.53 13,688 528 3.86
Savings Accounts...................... 10,995 354 3.22 9,537 339 3.55
Certificates of Deposit............... 32,207 1,776 5.51 29,095 1,638 5.63
Repurchase Agreements................. 7,762 232 2.99 6,715 214 3.19
Note Payable.......................... 848 79 9.32 1,014 96 9.47
------ ---- ----- ------- ----- -----
Total Interest-Bearing Liabilities.. 82,214 $3,362 4.09 71,581 $3,099 4.33
====== ======
Noninterest-Bearing Liabilities:
Demand Deposit Accounts................. $ 9,158 $ 7,908
Other Liabilities....................... 383 623
Capital................................. 5,297 4,112
------- -------
Total Liabilities and
Stockholders' Equity.............. $97,052 $84,224
======= =======
Interest Rate Spread...................... 4.68% 5.29%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities......... 111.20% 111.05%
Net interest income and net interest
margin.................................. $4,659 5.10% $4,552 5.73%
====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1994
--------------------------------------
Average
Volume Interest Yield
----------- -------- -----------
(Dollars in thousands)
<S> <C>
Assets:
Interest Earning Assets:
Federal Funds sold and securities
purchased under agreements to resell.. $ 7,423 $ 290 3.91%
Investment Securities................... 11,190 512 4.58
Loans(1)(2)............................. 47,475 4,750 10.01
------- ------ ------
Total interest-earning assets......... 66,088 $5,552 8.40
======
Noninterest-Earning Assets:
Cash and Due From Banks............... 2,649
Other Assets.......................... 1,644
--------
Total Assets........................ $70,381
=======
Liabilities and Stockholders' Equity:
Interest Bearing Deposits:
NOW Accounts.......................... $10,346 $ 252 2.44%
Money Market accounts................. 10,388 335 3.22
Savings Accounts...................... 10,258 336 3.28
Certificates of Deposit............... 22,260 1,001 4.50
Repurchase Agreements................. 5,577 155 2.78
Note Payable.......................... 3,000 181 6.03
------ ------ -----
Total Interest-Bearing Liabilities.. 61,829 $2,260 3.66
======
Noninterest-Bearing Liabilities:
Demand Deposit Accounts................. $ 6,600
Other Liabilities....................... 1,039
Capital................................. 913
-----
Total Liabilities and
Stockholders' Equity.............. $70,381
=======
Interest Rate Spread...................... 4.74%
====
Ratio of interest-earning assets
to interest-bearing liabilities......... 106.89%
Net interest income and net interest
margin.................................. $3,292 4.98%
====== ====
</TABLE>
- -------------------
(1) Includes loan fees.
(2) Includes nonaccrual loans.
23
<PAGE>
Rate/Volume Analysis. Changes in net interest income are attributable
to three factors: (1) a change in the volume of an interest earning asset or
interest-bearing liability, (2) a change in interest rates, or (3) a change
attributable to a combination of changes in volume and rate. The following table
sets forth certain information regarding changes in interest income and interest
expense of the Company for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to (a) changes in volume (changes in volume multiplied
by the old interest rate); and (b) changes in interest rates multiplied by the
old average volume.
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
----------------------------------------- -----------------------------------------
1997 vs. 1996 1996 vs. 1995
----------------------------------------- -----------------------------------------
Total Change due Change due Total Change due Change due
Change to Volume to Rate Change to Volume to Rate
----------- ------------- ------------ ------------ ----------- ------------
(Dollars in thousands)
<S> <C>
Rate/Volume Analysis:
Interest Income On:
Federal funds and securities purchased under
agreements to resell...................... $ (50) $ (46) $ (4) $ 8 $ 61 $ (53)
Investments............................... (87) (92) 5 261 315 (54)
Loans..................................... 177 335 (158) 101 587 (486)
----- ----- ------ ----- ----- ------
Total interest income........................ 40 197 (157) 370 963 (593)
Interest Expense On:
Now accounts.............................. 6 15 (9) 79 75 4
Money market accounts..................... (12) (5) (7) 30 82 (52)
Savings accounts.......................... 10 18 (8) 15 52 (37)
Certificates of deposit................... (106) (67) (39) 138 175 (37)
Repurchase Agreements..................... 2 3 (1) 18 33 (15)
Note payable.............................. (1) - (1) (17) (16) (1)
------ ----- ------ ------- ------- ------
Total interest expense....................... (101) (36) (65) 263 401 (138)
Net interest income.......................... $ 141 $ 233 $ (92) $ 107 $ 562 $ (455)
====== ====== ======= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 vs. 1994
-----------------------------------------
Total Change due Change due
Change to Volume to Rate
----------- ------------- ------------
(Dollars in thousands)
<S> <C>
Rate/Volume Analysis:
Interest Income On:
Federal funds and securities purchased under
agreements to resell...................... $ 267 $ 95 $ 172
Investments............................... 202 70 132
Loans..................................... 1,630 944 686
------ ------ ------
Total interest income........................ 2,099 1,109 990
Interest Expense On:
Now accounts.............................. 32 29 3
Money market accounts..................... 193 106 87
Savings accounts.......................... 3 (24) 27
Certificates of deposit................... 637 308 329
Repurchase Agreements..................... 59 32 27
Note payable.............................. (85) (120) 35
------ ------- -----
Total interest expense....................... 839 331 508
Net interest income.......................... $1,260 $ 778 $ 482
====== ===== =====
</TABLE>
24
<PAGE>
Comparison of Financial Condition at March 31, 1997 and December 31, 1996.
Total assets at March 31, 1997 were $98.1 million, a decrease of $2.1
million or 2.10% from December 31, 1996. The decrease was primarily due to a
$2.6 million decrease in cash and due from banks and a decrease of $3.0 million
or 22.81% in investment securities. This was offset, in part, by an increase of
$3.2 million or 34.75% in federal funds sold, and securities purchased under
agreements to resell.
Net loans receivable at March 31, 1997 totaled $68.6 million, a
decrease of $205,000 or .03% from December 31, 1996. This decline was the result
of relatively flat loan demand combined with normal amortization and repayments
of existing loans. Management monitors current and expected loan growth and is
implementing strategies to increase loan production. Such strategies may include
hiring additional loan originators, increased marketing efforts, and purchasing
loan participations secured by property in the Bank's market area from other
financial institutions.
Deferred income taxes at March 31, 1997 increased to $1.1 million from
zero at December 31, 1996, as a result of the Company recording the tax effect
of approximately $2.4 million of net operating loss carryforwards and other
deferred tax assets. The Company will record a federal income tax liability of
approximately 34% of taxable income in all future periods.
Core deposits and other intangible assets acquired at March 31, 1997
decreased $507,000, or 64.34%, to $281,000 from $788,000 at December 31, 1996.
The decrease was mainly due to accelerated amortization resulting from a
specific analysis by management of the value of the intangible assets purchased
in the June 1990 acquisition of Gibraltar. Management believes as a result of
the analysis, the asset balance at March 31, 1997 reflects the remaining value
of the core deposits purchased.
Deposits of $83.6 million at March 31, 1997, represented a decrease of
$3.5 million or 4.02% from December 31, 1996. The decrease in deposits was
principally related to lower levels of NOW and Money Market accounts. Total
liabilities at March 31, 1997 were $92.2 million, a decrease of $2.5 million or
2.64% from December 31, 1996. This decrease was primarily due to a decrease in
deposits offset by a $797,000 increase in securities sold under agreements to
repurchase.
Stockholders' equity increased $392,000 or 7.16% during the first three
months of 1997, as a result of net retained earnings, and included a decrease in
the net unrealized loss on investments in available-forsale securities, of
$8,000.
Comparison of Operating Results for the Three Months Ended March 31, 1997 and
1996.
General. Net income for the three months ended March 31, 1997 totaled
$384,000 or $0.26 per share as compared to $114,000 or $0.08 per share for the
three months ended March 31, 1996. The increase in net income can be attributed
mainly to a one time recognition of a deferred tax adjustment in the amount of
$1.1 million as a result of the Company recording the tax effect of
approximately $2.4 million of net operating loss carryforwards and other
deferred tax assets. This increase was offset by a $830,000 one time
restructuring expense resulting from the implementation of the revised business
strategy. See "--Other Operating Expenses." At March 31, 1997, the net interest
margin increased to 5.47% from 4.94% at March 31, 1996. The increase in the net
interest margin was the result of an increase in the average balance of loans
25
<PAGE>
receivable, offset by a decrease in the average balance of federal funds sold
and securities purchased under agreements to resell, combined with a decrease in
the average interest rate paid on interest bearing deposits.
Net Interest Income. Net interest income increased $141,000 or 12.91%
for the three months ended March 31, 1997 to $1.2 million from $1.1 million for
the three months ended March 31, 1996 due principally to an increase in total
interest income of $40,000 and a $101,000 decrease in total interest expense.
The increase in interest income was derived primarily from interest
income on loans receivable which increased by $177,000 from $1.5 million for the
three months ended March 31, 1996 to $1.7 million for the three months ended
March 31, 1997 due primarily to an increase in the average balance from $57.0
million at March 31, 1996 to $69.3 million at March 31, 1997, offset by a
decrease in the net yield on loans of 0.91% which was primarily due to an
increase during the period of non-performing loans. The 21.58% increase in
interest income was funded principally by proceeds received from $7.1
million of investment securities maturing during the period and a $3.6
million decrease in Federal funds sold and securities purchased under
agreements to resell.
Interest expense decreased $101,000 or 11.81% during the three months
ended March 31, 1997, as compared to the three months ended March 31, 1996 due
primarily to the decrease in the average cost of deposits from 4.34% at March
31, 1996 to 3.84% for the three months ended March 31, 1997.
Provision for Loan Losses. The provision for loan losses for the three
months ended March 31,1997 and 1996 totalled $237,000 and $50,000 respectively.
The increase in the provision for loan losses at March 31, 1997 was attributable
to additional specific reserves on certain commercial loans that management
believes may become non-performing. See "Business - Lending Activities -
Non-Performing Assets." Management makes periodic provisions to the allowance
for loan losses to maintain the allowance at an acceptable level commensurate
with management's assessment of the credit risk inherent in the loan portfolio.
See "Business - Lending Activities - Allowance for Loan Losses" for a discussion
of management's procedures in monitoring the adequacy of the allowance for loan
losses.
Other Income. Other income, which is comprised principally of fees and
charges on customer deposit accounts, increased by $41,000 or 33.06% from
$124,000 for the three months ended March 31, 1996 to $165,000 for the three
months ended March 31, 1997. Service charges on customer accounts increased
$11,000 or 12.79%, due largely to an increase in the number of deposit accounts.
Gain on sale of loans, securities, equipment and OREO, net, increased $13,000
during the same period due to a higher volume of loans sold in the secondary
market.
Operating Expenses. Operating expenses increased $845,000 or 80.32% for
the three months ended March 31, 1997 from $1.1 million for the three months
ended March 31, 1996 to $1.9 million for the three months ended March 31, 1997.
The increase in operating expense was due to a one time restructuring expense of
$830,000 for the three months ended March 31, 1997 resulting from implementation
of a revised business strategy by the Board of Directors and senior management
in February 1997. The increase in expense includes a reduction of approximately
$471,000 relating to the value of the core deposit premium and other intangibles
acquired in the June 1990 acquisition of Gibraltar, severance payments and
benefits of $136,000, branch consolidation expense of $119,000, $50,000 related
to reimbursing Mr. Marhefka for expenses related to the termination of a planned
de novo bank organization in accordance with his employment agreement, and
various other expenses of $54,000.
26
<PAGE>
Occupancy and equipment expense increased $25,000 or 13.97% for the
three months ended March 31, 1997 as compared to the three month period ended
March 31, 1996 due mainly to costs related to the operation of the Severna Park
office that opened in September 1996. Data processing expense increased by
$24,000 for the three months ended March 31, 1997 as compared to the three month
period ended March 31, 1996 due to expenses related to the opening of the new
branch and implementation of a check image product for the Bank's checking
account customers.
Income Tax Expense. The Company has approximately $2.4 million of net
operating loss carry forwards at March 31, 1997. As a result, the Company has
recorded an income tax benefit for the three month period ended March 31, 1997
of $1.1 million.
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995.
General. Net income for the year ended December 31, 1996 totaled
$423,000 or $0.29 per share compared to $792,000 or $0.57 per share for the year
ended December 31, 1995. This decrease in net income was attributable to a
$134,000 increase in the provision for loan losses and a $415,000 increase in
operating expenses.
Net Interest Income. Net interest income increased $107,000 or 2.35% at
December 1996 to $4.7 million from $4.6 million at December 31, 1995. This
increase was the result of an increase in interest income of $370,000, which was
partially offset by an increase in interest expense of $263,000.
Interest income increased primarily because of an increase in the
average balances of loans and investment securities which was partially offset
by a .78% decrease in the yield earned on loans. This increase in interest
earned on loans is the result of an increase in the average balance to $62.1
million at December 1996 from $56.9 million at December 31, 1995. Income on
investment securities increased $261,000 or 36.55% to $975,000 at December 31,
1996 from $714,000 at December 31, 1995 due to an increase in the average
balance to $18.3 million at December 31, 1996 from $12.7 million at December 31,
1995.
The increase in interest income was partially offset by an increase in
interest expense of $263,000 or 8.49% in 1996, resulting principally from a
$138,000 increase in interest paid on certificates of deposits. This increase
resulted from an increase in the average balance of certificates of deposits of
$3.1 million or 10.65% to $32.2 million at December 31, 1996 from $29.1 million
at December 31, 1995. The increase in the average balance of certificates of
deposits was partially offset by a decrease in the average interest rate paid to
5.51% at December 31, 1996 from 5.63% at December 31, 1995.
As a result of the above listed factors, the net yield on earning
assets decreased to 5.10% at December 31, 1996 from 5.73% at December 31, 1995.
Provisions for loan losses. The provision for loan losses at December
31, 1996 was $452,000, a $134,000 or 42.14% increase over the $318,000 at
December 31, 1995. The increase in the provision for loan losses was the result
of management's analysis of specifically identified loans in the portfolio that
resulted in additional reserves of $107,000. See "Business - Lending Activities
- - Allowance for Loan Losses" for a discussion of management's practices in
monitoring the adequacy of the allowance for loan losses.
27
<PAGE>
Other Income. Other income increased $67,000 or 12.86% to $588,000 at
December 31, 1996 from $521,000 at December 31, 1995. The increase was
primarily due to an increase in service fees on deposit accounts of $80,000
or 26.76% to $379,000 at December 31, 1996 from $299,000 at December 31, 1995.
Gain on sale of loans, securities equipment and OREO, net, decreased from
$104,000 to ($31,000). This decrease was primarily the result of a decrease in
gain on sale of loans of $113,000 or 100% to zero at December 31, 1996, offset
by an increase of $23,000 or 255.56% on gain on sale of OREO to $32,000 at
December 31, 1996 from $9,000 at December 31, 1995. Mortgage banking fees
increased $38,000 or 100% at December 31, 1996 from zero at December 31, 1995
from the sale of loans in the secondary market.
Operating Expenses. Operating expenses increased $415,000 or 10.49% to
$4.4 million at December 31, 1996 from $4.0 million at December 31, 1995. The
primary reason for the increase was the $280,000 or 14.44% increase in personnel
expenses to $2.2 million at December 31, 1996 from $1.9 million at December 31,
1995, and an $122,000 or 10.55% increase in other operating expenses to $1.2
million at December 31, 1996 from $1.1 million at December 31, 1995. The
increase in personnel expense was due to the opening of the new Severna Park
branch office in September 1996, and the hiring of additional personnel for the
loan origination department. Other operating expenses increased due to
additional expense related to the bank's implementation of a check image product
for its checking account customers, and increased volumes of transaction and
other savings accounts during the year.
Income Tax Expense. Income tax expense decreased $6,000 or 100.00% to
zero at December 31, 1996. The Company had approximately $2.4 million in net
operating loss carryforwards at December 31, 1996. As a result, the Company had
recorded no income tax expense for the year ended December 31, 1996.
Liquidity and Capital Resources
Liquidity. Liquidity represents the Company's ability to meet the
normal cash flow requirements of its customers for the funding of loans and
repayment of deposits. The Bank's primary sources of funds are deposits,
principal and interest payments on loans, principal and interest payments on
investment securities and proceeds from the maturation of investment securities
and, to a lesser extent, commercial reverse repurchase agreements. Management
monitors liquidity daily, and on a monthly basis incorporates liquidity
management into its asset/liability management program.
The Bank's cash flows are comprised of three primary classifications:
cash flows from operating activities, cash flows from investing activities and
cash flows from financing activities. Operating activities, as presented in the
statement of cash flows in the accompanying financial statements presented
elsewhere herein, provided $340,000 in cash for the three months ended March 31,
1997, generated principally from net income, as compared to the $15,000 provided
for the three months ended March 31, 1996. Operating activities provided $1.3
million in cash for each of the years ending December 31, 1996 and 1995
generated principally from net income of $423,000 for the year ended December
31, 1996 and net income of $792,000 for the year ended December 31, 1995.
Investing activities consist primarily of loan originations and
repayments, and investment purchases, maturities and sales. These activities
used $220,000 in funds for the three months ended March 31, 1997, principally
for the purchase of investment securities and Federal Funds sold offset by
proceeds from the maturity of, and principal repayments on, investments. For the
three months ended March 31, 1996, investing activities used $3.7 million,
resulting from $1.2 million in Federal Funds sold and securities
28
<PAGE>
purchased under agreements to resell and $2.4 million of net loan originations.
For the year ended December 31, 1996, these activities used $4.6 million
principally for net loans of $13.2 million and investment purchases of $19.6
million offset by proceeds from the sale and redemption of investments of $24.6
million and repayments of securities purchased under agreements to resell of
$3.0 million. During the year ended December 31, 1995, investing activities used
$17.9 million principally for net increases in investment securities of $11.4
million, net loans of $2.2 million and $5.3 million for securities purchased
under agreements to resell.
Financing activities consist of the solicitation and repayment of
customer deposits, borrowings and repayments. During the three months ended
March 31, 1997, financing activities utilized $2.8 million in funds, principally
as a result of a decrease in deposit accounts, offset by a $797,000 increase in
securities sold under agreements to repurchase. During the three months ended
March 31, 1996, investing activities provided $519,000 from an increase in
deposits of $1.5 million and for securities sold under agreements to repurchase
of $959,000. For the year ended December 31, 1996, financing activities provided
$4.4 million in cash, principally from increases in deposit accounts of $5.0
million offset by a decrease of $625,000 in securities sold under agreements to
repurchase. During the year ended December 31, 1995, financing activities
provided $18.3 million in cash, principally from a $16.0 million increase in
deposit accounts and a $2.2 million increase in securities sold under agreements
to repurchase.
The Company expects to have sufficient funds available to meet the
short-term liquidity needs of its customers for deposit repayments and loan
fundings. At March 31, 1997, loan and letter of credit commitments totaled $15.4
million. Many of these commitments are in the form of lines of credit and
letters of credit that are available for use by the borrower, but are generally
not drawn upon. Certificates of deposit and other time deposits scheduled to
mature in one year or less totaled $28.2 million at March 31, 1997
Capital Resources. Capital adequacy is the ability of the Company and
the Bank to support growth while protecting the interests of depositors and the
deposit insurance fund. Bank regulatory agencies have developed certain capital
ratio requirements, which are used to assist them in monitoring the safety and
soundness of financial institutions. At March 31, 1997 the Bank was considered
well capitalized for regulatory purposes. Management continually monitors these
capital requirements and believes the Bank to be in compliance with these
regulations at March 31, 1997. See "Regulations and Supervision - Federal
Banking Regulations -- Capital Requirements."
Impact of Inflation and Changing Prices
The financial statements of the Company and the notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost and
income associated with the Company's operations. Unlike most industrial
companies, nearly all of the Company's assets and liabilities are monetary. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
29
<PAGE>
Impact of Recent Accounting Standards
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB encouraged all entities to adopt the fair value
based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Under the intrinsic value based method, compensation cost is the
excess of the market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of the APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method has been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
years beginning after December 15, 1995. Pro forma disclosures must include the
effects of all awards granted in years beginning after December 15, 1994. The
Company currently has a stock-based compensation plan. See "The Board of
Directors and Management of the Bank--Executive Compensation--Benefits."
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. In June 1996, the FASB issued SFAS
No. 125, which was amended by SFAS No. 127. This Statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it no
longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with a pledge of collateral. The Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996. Retroactive application of this Statement is not permitted.
Management has concluded there is no effect on the Company's financial
statements.
FASB Statement on Accounting for Earnings Per Share. In February 1997,
the FASB issued SFAS No. 128 which is effective for financial statements issued
for periods ending after December 15, 1997. It replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires the presentation of diluted earnings per share for entities with
complex capital structures. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock, such as options, were exercised or converted into common stock.
The Company does not believe that SFAS No. 128 will have a material impact on
its financial statements.
30
<PAGE>
BUSINESS
Annapolis National Bancorp, Inc.
Annapolis National Bancorp, Inc., formerly Maryland Publick Banks, Inc.
was incorporated in May 1988 in Maryland for the purpose of acquiring and
holding all of the outstanding stock of Annapolis National Bank. The Company is
a registered Bank Holding Company pursuant to the BHCA. The Company was
capitalized by an initial offering of common stock which was sold at $10.00 per
share in June 1989 and, subsequent to January 1990, an offering at $12.50. The
Company's only significant activity is the operation of the Bank. On a
consolidated basis at March 31, 1997, the Company's total assets were $98.1
million, total liabilities were $92.2 million and stockholders' equity was $5.9
million.
Annapolis National Bank
The Bank is a commercial bank organized under the laws of the United
States. The Bank is a community oriented bank and the only independent
commercial bank headquartered in Annapolis, Maryland. As the Company's only
subsidiary, the Bank currently operates as a full service commercial bank
through its five 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 (including SBA loans), commercial real estate
loans, construction loans, one- to four-family real estate loans and, to a
lesser extent 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. At March 31, 1997, the Bank's loan
portfolio totalled $69.6 million. Of this amount, $31.3 million or 44.98% were
commercial loans, $18.5 million or 26.59% were commercial real estate loans,
$8.2 million or 11.77% were construction loans, $7.2 million or 10.33% were one-
to four-family residential mortgage loans, $2.1 million or 3.01% were home
equity loans and $2.3 million or 3.32% were consumer and other loans.
Background
The Bank was formed as a de novo bank and commenced operations from a
single Annapolis location in January 1990. In June 1990, the Company acquired
most of the assets and liabilities of Gibraltar Savings and Loan, F.A.
(Gibraltar") from the Resolution Trust Corporation as receiver for Gibraltar,
expanding its branch network to five branches. This acquisition was funded, in
part through a $3.2 million unsecured loan from the Principal Stockholder which
bore interest at the Bank's prime rate less 2.0%. The acquisition was accounted
for as a purchase and resulted in a premium paid for the core deposits and other
intangible assets in the amount of $2.2 million to be amortized over a 15 year
period. At December 31, 1990, the fiscal year end following this acquisition,
the Company's assets totalled $43.6 million.
From June 1990 through December 31, 1996, management of the Company
concentrated its efforts on growing the Bank by developing loan and deposit
portfolios primarily in Anne Arundel County, Maryland and the surrounding
counties. The Bank experienced steady growth in assets and deposits while its
earnings consistently trailed its peers due to a high level of operating
expenses and loan losses.
In December 1994, the Company conducted a rights offering through which
it offered its stockholders, at the price of $3.50 per share, the right to
purchase 2.5 shares of its Common Stock for each
31
<PAGE>
share of common stock owned. The primary purpose of this offering was to convert
the $3.2 million of debt accumulated in the Gibraltar acquisition into capital
to reduce the Company's interest expense and increase its capitalization. A
total of 937,672 shares were sold, of which 907,143 were sold to the Principal
Stockholder in exchange for retirement of the principal portion of the debt. A
new note, which matures on December 31, 1997, was issued to the Principal
Stockholder in the amount of $848,400 to cover the portion of the loan that
remained outstanding, which note matures on December 31, 1997 and bears interest
at the WSJ prime rate plus 1.0%.
The Company's operating expense continued to increase as the Bank
opened a sixth branch office and relocated its administrative office in 1996. At
December 31, 1996, the Company's operating expenses as a percentage of average
assets was 4.50% on an annualized basis. In addition, the Company's return on
average assets has been consistently below that of its peers. At December 31,
1996, the Company's return on average assets was .44%
Revised Business Strategy
During the fourth quarter of 1996, the Board of Directors determined
that there was a need to implement a revised business strategy improve the
Company's financial performance. Several members of senior management were
relieved of their responsibilities late in 1996 and early in 1997 and certain
other members of senior management resigned during this same period. In February
1997, the Board of Directors engaged Mr. Marhefka as President and Chief
Executive Officer of the Bank and as Vice President and Chief Executive Officer
of the Company. The Board of Directors believes that Mr. Marhefka's management
skills and local market experience will enable him to guide the Company and the
Bank through a reorganization process which will improve operating results
through implementation of a revised business plan. As President and Chief
Executive Officer of Annapolis Bancshares, Inc. and Bank of Annapolis, he
successfully guided those companies from their inception in 1988 through more
than eight years of steady growth and strong continually increasing earnings
performance before they merged with Sandy Springs Bancorp, Inc. In March 1997,
Mr. Marhefka hired Mr. Grimes, who was appointed as Senior Vice President, Chief
Financial Officer and Treasurer of the Bank and Chief Financial Officer and
Treasurer of the Company. Mr. Grimes was formerly Vice President, Chief
Financial Officer and Treasurer of Annapolis Bancshares, Inc. and Bank of
Annapolis and was instrumental in implementing several successful financial
strategies with those firms. In April 1997, the Board appointed Mr. Katsef as a
Director and Vice Chairman of the Board. In addition to his role as a Director,
Mr. Katsef is an employee who assists the Board and Mr. Marhefka with business
development, public relations, and management strategy issues. Mr. Katsef was
formerly Chairman of the Board of Annapolis Bancshares, Inc. and Bank of
Annapolis. For additional information on these officers, see "The Board of
Directors and Management of the Bank -- Biographical Information." Additionally,
the Board of Directors adopted a requirement that, in order to assure a high
level of commitment to the Company and the Bank, all Directors must own at least
$100,000 of the Company's common stock. Following the imposition of this
requirement, the composition of the Board of Directors changed during April
1997. In addition to Messrs. Marhefka and Katsef, two additional Directors were
added who also have long-standing ties to Anne Arundel County.
The reconstituted Board of Directors and senior management team are in
the process of implementing a revised business strategy designed to enhance
stockholder value.This strategy includes the following components:
32
<PAGE>
Consolidating the Bank's branch network to include fewer branch
locations and to reduce operating expenses. The Bank currently operates seven
facilities, six branch offices and a separate 9,500 square foot administrative
and operations headquarters facility. As a result, the Bank's historical
operating expenses have been considerably higher than its peers that, at a
comparable asset size, operate from fewer locations. New management has
undertaken a strategy of reducing the number of locations from which the Bank
operates. Toward that end, the Bank has entered into a lease for a location in
Annapolis where it intends to consolidate its two existing Annapolis branch
office locations. Since the new site is located between the Bank's existing
Annapolis branches, management anticipates that it will retain most of its
current customers following the consolidation. In addition, management believes
that the new location is superior in amenities to both of the Bank's current
Annapolis locations and will allow the Bank to better serve both current and new
Annapolis customers. The new Annapolis location is a "turn-key" existing banking
location which requires minimal expense to be ready for occupancy. By reducing
the number of branch offices from six to five, management expects to
significantly reduce operating expenses following the consolidation, which is
expected to occur in October 1997. Management is evaluating other branch network
consolidation options. Also being evaluated is the feasibility of relocating the
Bank administrative and operations headquarters to a lower cost and more highly
visible location which may be combined with a branch location to further reduce
the total number of facilities which the Bank operates.
Reducing non-performing assets by implementing more stringent
underwriting criteria and more aggressive collection procedures, and by
increasing secured real estate lending. The Bank has historically had a high
level of non-performing assets and loan losses in relation to its peers. New
management has made a priority of emphasizing the resolution of problem assets
by aggressively pursuing the Bank's default remedies. In doing so, management
expects to reduce the amount of the Bank's existing non-performing assets.
During the first quarter of 1997, management has conducted an evaluation of the
loan portfolio and has provided for specific loan loss reserves for those assets
for which losses are expected. Additionally, new lending standards are being
implemented in an effort to improve asset quality. Such standards include an
increased emphasis on readily marketable collateral for new loans and a
de-emphasis on certain SBA loan programs.
Reducing interest expense by retiring $1.1 million of Company debt with
a portion of the Offering proceeds. At March 31, 1997, the Company has an
unsecured loan from the Principal Stockholder with a principal balance of
$848,000, excluding accrued interest payable which continues to accrue at a rate
of 1.0% above the WSJ prime rate. Accrued interest on this debt totalled $96,000
in 1995 and $79,000 in 1996. Given the current prime rate of 8.5%, annual
interest on the debt is expected to be $81,000 for the year ended December 31,
1997. The Company intends to retire this debt using a portion of the Offering
proceeds, thereby eliminating this interest expense.
Fostering support for the Bank by increasing the local ownership of the
Company by marketing the Offering to a large number of buyers with the Bank's
local community. Management believes that those persons within the Bank's market
area who become stockholders of the Company are likely to become customers,
supporters and business referral sources of the Bank. Consequently, the Company
intends to market the Offering primarily within the Bank's market area to build
a backbone of community support. Also, the Company has strategically established
a low minimum subscription amount to encourage many small investors to become
owners of the Company and have a vested interest in the Bank.
33
<PAGE>
Restructuring internal bank operations to attain operating efficiencies
and cost reductions. Certain of the Bank's systems of processing data and items
are inefficient and expensive. Management is evaluating alternative systems
which are expected to significantly reduce operating expenses. Additionally,
management is re-evaluating expenses bank-wide with a goal of making cost
conscious decisions about whether to continue purchasing certain goods and
services and, if they are to continue being purchased, soliciting competing bids
for such goods and services so as to assure optimum value for dollars spent.
Also, management has recently made an evaluation of its staffing eliminating
several employment positions and reassigning those duties to other existing
personnel.
Increasing net interest income by expanding the loan and deposit
portfolios; the additional capital provided by the Offering will support such
growth enabling the Bank to continue to comply with regulatory capital
requirements. The Bank intends to pursue growth in its loan and deposit
portfolios which it expects will add to net interest income. Growth in the loan
portfolio is intended to be accomplished by utilizing the substantial contacts
of new officers and directors of the Bank, adding additional loan personnel,
aggressively promoting competitively priced products, developing new customer
relationships based upon the Bank's position as the only independent commercial
bank headquartered in Annapolis, and by placing a greater emphasis on real
estate loans whose principal is expected to repay less quickly than commercial
loans. Growth in the deposit portfolio is intended to be accomplished by
aggressively promoting competitively priced products. The increased capital
expected to be realized from the proceeds of the Offering will allow the Bank to
grow while continuing to comply with regulatory capital requirements.
Additionally, such new capital will provide a low cost source of funds to
enhance the Bank's net interest income.
Increasing non-interest income through expanding one- to four-family
residential mortgage sales and other fee income opportunities. Management
expects to increase non-interest income in several areas. The Bank will add
additional home loan originators, expand its array of home loan products, and
seek to build relationships with builders which are intended to increase
opportunities to originate one- to four-family residential mortgage loans for
sale. In doing so, management expects that gains on sales of loans into the
secondary home loan market will increase. The Bank also expects to increase fee
income from operation of its automated teller machine (ATM) network and from
other sources of fee income.
Market Area and Competition
The Bank conducts a general commercial and retail banking business in
its service 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.
Anne Arundel County is centrally located at the heart of a mid-Atlantic
metropolitan area bounded to the north by Baltimore, to the east by the
Chesapeake Bay, and to the southwest by the suburbs of Washington, DC.
Annapolis, which serves as both the Anne Arundel County seat and the Maryland
State capital, is located only 24 highway miles from Baltimore, MD and 33
highway miles from Washington, DC. The county has experienced rapid population
growth, with total population having increased from 370,775 in 1980 to 427,239
in 1990 to 459,700 in 1995 (according to the Anne Arundel County Department of
Planning, Maryland Office of Planning, and U.S. Bureau of the Census). The
population of Anne Arundel County is relatively young (42.4% between the ages of
20 and 44 and 20.6% between 45 and 64 with only
34
<PAGE>
9.7% being 65 and over as of 1993 as estimated by the Maryland Department of
Health & Mental Hygiene) and affluent (1994 median household disposable personal
income of $49,671 as compared to $44,439 for Maryland and $37,070 for the entire
United States of America according to the Office of Business and Economic
Research).
The local economy in Anne Arundel County has historically been strong
and its strength is based upon its diversity. As the state capital and county
seat, Annapolis serves as a major government center. Annapolis is home to the
United States Naval Academy which, in addition to enrolling approximately 4,000
students from every state in the country, serves as a significant employer and a
major tourist attraction. Anne Arundel County is home to the
Baltimore-Washington International Airport ("BWI"), one of the fastest growing
airports in the country, whose surrounding supporting business district includes
more than 30 business parks with over 11 million square feet of commercial space
to meet the needs of manufacturers, distributors, high-tech and service
companies, and specialized firms. As a 300 year old colonial sea town on the
Chesapeake Bay, Annapolis serves as a major tourist attraction. Tourism is a
strong and growing industry which adds approximately $1.0 billion a year into
the county economy. The tourism industry is one of the largest sources of
employment in Anne Arundel County, with over 12,000 people employed by
visitor-related businesses. The hospitality industry is vital to the local
economy, where hotels at BWI and Annapolis attract not only tourists but also
business travelers and conferences. In addition to fostering a large
recreational boating industry, the Chesapeake Bay also supports a significant
waterman's industry for many people who earn their living working the bay. Other
major Anne Arundel County employers (with number of employees) include the
National Security Agency (35,000), Ft. George C. Meade defense facility
(14,000), State of Maryland (8,725), Northrop Grumman (7,000), Anne Arundel
County Public School System (7,651), Anne Arundel County (3,500), U.S. Naval
Academy (2,510), USAirways (2,400), Anne Arundel Health System, Inc. (1,800),
North Arundel Hospital (1,700), Baltimore Gas & Electric (1,372), McDonald's
Corporation (1,300), Giant Food Company (1,281), ARINC (1,100), Wal-Mart Stores
(1,050), International Paper (892), IIT Research Institute (660), and Lockheed
Martin (630). Additionally, in 1995, Potomac Electric Power Company and
Baltimore Gas & Electric announced merger plans, to be completed in 1997, that
will create Constellation Energy Corporation, a major power company to be
headquartered in Annapolis. No assurances can be given that growth in population
and number of businesses and increases or improvement in income levels, housing
values and other economic indicators will occur or continue in the future.
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'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-making are important. Most of the Bank's
competitors have substantially greater resources and lending limits than the
Bank and offer certain services, such as extensive and established branch
networks and trust services, that the Bank does not provide. Deposit competition
among institutions in Anne Arundel County also is strong.
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
35
<PAGE>
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.
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 March 31, 1997, the Bank's loan portfolio totalled
$69.6 million, of which $31.3 million, or 44.98%, were commercial loans; $18.5
million, or 26.59%, were commercial real estate loans; $8.2 million, or 11.77%,
were construction loans; $7.2 million, or 10.33%, were one- to four-family
residential mortgage loans $2.1 million, or 3.01% were home equity loans and
$2.3 million, or 3.32%, 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.
36
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------
1997 1996
----------------------------- --------------------------
Amount Percent Amount Percent
------------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C>
Commercial loans..................... $31,306 44.98% $28,979 49.10%
Real estate:
Commercial....................... 18,507 26.59 13,743 23.29
Construction..................... 8,194 11.77 9,182 15.56
One- to four-family.............. 7,187 10.33 4,028 6.83
Home equity loans................ 2,092 3.01 1,315 2.22
Consumer loans....................... 2,318 3.32 1,768 3.00
------- ----- ------ -----
Total loans................. 69,604 100.00% 59,015 100.00%
====== ======
Less:
Allowance for loan losses........ (1,009) (575)
------- -----
Net loans receivable................. $68,595 $58,440
======= =======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1996 1995
--------------------------- ----------------------------
Amount Percent Amount Percent
------------- ----------- ------------ ------------
(Dollars in thousands)
<S> <C>
Commercial loans..................... $30,469 43.80% $27,727 48.94%
Real estate:
Commercial....................... 17,845 25.65 13,553 23.92
Construction..................... 10,173 14.62 7,937 14.01
One- to four-family.............. 7,002 10.07 4,391 7.75
Home equity loans................ 1,744 2.51 1,197 2.11
Consumer loans....................... 2,332 3.35 1,848 3.27
------ ----- ------ -----
Total loans................. 69,565 100.00% 56,653 100.00%
====== ======
Less:
Allowance for loan losses........ (765) (617)
------ -----
Net loans receivable................. $68,800 $56,036
======= =======
</TABLE>
37
<PAGE>
Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's loans at March 31, 1997. The table does not include the
effect of future principal prepayments.
<TABLE>
<CAPTION>
At March 31, 1997
------------------------------------------------------------------------------
Due after one
Due in one year but before Due after Non accrual
year or less five years five years Loans Total
------------------------------------------------------------------------------
<S> <C>
Commercial loans............. $28,359 $ 1,511 $ 0 $ 1,436 $ 31,306
Real Estate:
Commercial................. 11,396 6,600 61 450 18,507
Construction............... 7,121 1,073 0 0 8,194
One- to four-family........ 6,091 955 141 0 7,187
Home equity loans.......... 2,092 0 0 0 2,092
Consumer loans............... 1,651 584 29 54 2,318
------- ------ ----- ----- -------
Total Loans......... $56,710 $10,723 $ 231 $1,940 $69,604
======= ======= ===== ====== =======
</TABLE>
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 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 three years. Such loans are offered in amounts up to $750,000 and 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, up to $500,000. The Bank also
originates commercial loans which are guaranteed by the SBA. The Bank has been
an active participant in a variety of SBA loan programs. As of March 31, 1997,
SBA guaranteed loans total $6.7 million, or 9.63% of total loans. Each of these
loans is guaranteed between a range of 75 - 90% by the SBA. In order to generate
income, during 1995 the Bank sold participation interests in the insured portion
of 12 SBA loans totalling $2.6 million. The Bank continues to be a minority
participant in the uninsured portion of these loans totalling $421,000 which it
continues to service for a third party. At March 31, 1997, the Bank's commercial
loan portfolio totalled $31.3 million, or 44.98% of total loans, of which $4.0
million, or 12.78%, were unsecured. The largest commercial loan at March 31,
1997 was a $1.0 million loan to a manufacturer and importer of leather goods to
provide permanent working capital secured by an indemnity deed of trust on a
personal residence, a perfected security interest in corporate assets and a 75%
SBA guarantee.
Commercial business loans are generally of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the
38
<PAGE>
availability of funds for the repayment of commercial business loans may be
substantially dependent on the success of the business itself. Further, the
collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. In
order to reduce the overall risk and cost of its loan portfolio, the Bank
intends to reduce the ratio of commercial loans to total loans and may reduce
the level of its SBA loans.
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-toone-borrower limit, which
at March 31, 1997, was $1.0 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 WSJ. 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 times. At March 31, 1997, the Bank's commercial real estate loan
portfolio totalled approximately $18.5 million, or 26.59% of total loans. The
largest commercial real estate loan in the Bank's portfolio at March 31, 1997,
was a $1.4 million loan secured by a commercial building of which $700,000 was
sold in a loan participation to another financial institution.
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. See "Risk Factors -- Diversified Lending
Risks."
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. At March 31, 1997, $5.3 million, or 64.68% of the Bank's
residential construction loans had 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
39
<PAGE>
to six months for consumer loans, up to twelve months for builder loans, and up
to eighteen 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. The largest one- to four-family residential
construction loan in the Bank's portfolio as of March 31, 1997 was a $612,000
loan originated in January 1997. The largest commercial real estate construction
loan at this same date was a $1.5 million loan to construct a commercial
building of which $688,000 was sold in a loan participation to another financial
institution. The largest land acquisition and development loan at March 31, 1997
was a $600,000 loan to a corporation, originated in May 1996 for the purpose of
developing a 17 lot single family home subdivision, secured by a first lien on
said lots, including a $150,000 lead participation with another lender. At March
31, 1997, the Bank had construction loans, including land acquisition and
development loans totalling $8.2 million, or 11.77% of the Bank's total loan
portfolio, of which $3.8 million consisted of one- to four-family residential
construction loans, $2.3 million consisted of commercial real estate
construction loans and $2.1 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
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 which 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 the Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") 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 March 31, 1997, one- to four-family residential mortgage loans
totalled $7.2 million, or 10.33%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, 23.01% were short term fixed-rate loans
with terms of up to three years with a balloon payment at the end of the term
and 76.99% were adjustable-rate mortgage loans. The Bank currently offers a
number of adjustable-rate mortgage loans with terms of up to 30 years and
interest rates which adjust annually from the outset of the loan or which
40
<PAGE>
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 March 31, 1997, home equity loans totalled
$2.1 million, or 3.01% 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 WSJ 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
March 31, 1997, unsecured consumer loans totalled $938,000, of which there were
only four loans over $80,000, the largest of which was $130,000. As of March 31,
1997, consumer loans totalled $2.3 million or 3.32% of the Bank's total loan
portfolio. Consumer loans are generally originated in the Bank's primary market
area.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies and loan approval limits of the Bank. The Board
of Directors has established an Executive Committee, comprised of seven
directors, and an Officers' Loan Committee, comprised of the Vice-Chairman of
the Board, the President and the Senior Vice President - Chief Lending Officer.
The Executive Committee may approve loans up to the Bank's legal lending limit.
Additionally, the Board of Directors has authorized the following persons to
approve loans up to the amounts indicated: commercial and consumer loans in the
amount of up to $250,000 and residential construction loans in the amount of up
to $400,000 by the Officers' Loan Committee; $150,000 for all types of loans by
the President of the Bank; $100,000 for all types of loans by the Senior Vice
President - Chief Lending Officer; $75,000 for all types of loans by the Senior
Vice
41
<PAGE>
President - Loan Officer; and $10,000 for consumer loans by the Senior Vice
President - Administration and Marketing.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and certain
other information is verified by an independent credit agency. If necessary,
additional financial information may be required. An appraisal of real estate
intended to secure a proposed loan generally is required to be performed by an
appraiser designated and approved by the Bank. For proposed mortgage loans, the
Board annually approves independent appraisers used by the Bank and approves the
Bank's appraisal policy. The Bank's policy is to obtain title and hazard
insurance on all mortgage loans and the Bank may require borrowers to make
payments to a mortgage escrow account for the payment of property taxes.
Non-Performing Assets. The Bank's general collection policy is to
provide a late notice to commercial and consumer accounts at five and 15 days
past due. Late charges are assessed on consumer loans after 15 days past due.
Delinquent accounts are contacted by phone at 30 days past due, and a collection
letter is issued on the 45th day. In general, personal property securing
consumer loans is subject to repossession at 60 days past due. Commercial loans
are subject to call at 30 days past due. Notice of intent to foreclose is
provided to consumer mortgage customers at 90 days past due. At 120 days past
due, foreclosure proceedings are initiated on real estate securing mortgage
loans.
Loans are continually monitored by management and the Board of
Directors. Loans are placed on nonaccrual status when, in the opinion of
management, the collection of additional interest is doubtful. Nonreal estate
loans 90 days past due and real estate loans 120 days past due are automatically
placed on nonaccrual status. When a loan is placed on non-accrual status, any
previously accrued and uncollected interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received. At March
31, 1997, the Bank had $663,000 in loans greater than 90 days past due and still
accruing interest, and $1.9 million in loans on non-accrual status of which
approximately $1.2 million was guaranteed by the SBA and which management
believes is collectible.
At March 31, 1997, 59.46% of the nonperforming assets of the Company
were represented by three individual borrowers. At that date, the Bank had an
$801,000 nonperforming commercial loan on a restaurant of which $100,000 had
been previously charged off in 1996 and the balance of which was guaranteed by
the SBA. Since March 31, 1997 the guaranteed portion of the loan, approximately
$701,000, has been repaid to the bank by the SBA. In addition, the Bank had a
$450,000 nonperforming commercial real estate loan on an office building at that
date which is currently under contract of sale which will result in repayment to
the Bank the full amount of principal and accrued interest. Finally, the Bank
had two commercial loans totalling $380,000 to a moving company for which the
Bank had a $101,000 reserve at March 31, 1997. The balance of these loans was
guaranteed by the SBA. The Bank had no other non-performing loans in excess of
$200,000 at March 31, 1997.
42
<PAGE>
The following table sets forth non-performing loans and other real
estate owned at March 31, 1997 and December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
At March 31, At December 31,
---------------- ---------------------------------------------------------
1997 1996 1995 1994
---------------- --------------- ---------------- ----------------
(Dollars in thousands)
<S> <C>
Loans past due 90 days or more and
still accruing........................ $ 663 $ 101 $ 300 $ -
Nonaccrual loans...................... 1,940 1,894 1,415 722
----- ----- ----- ---
Total non-performing loans............ 2,603 1,995 1,715 722
----- ----- ----- ---
Less SBA guarantees................... 1,248 1,162 - -
----- ----- ------- ------
Total non-performing loans less
SBA guarantees........................ 1,355 833 1,715 722
Other real estate owned............... 140 140 496 470
----- ----- ----- -----
Total non-performing assets........... $2,743 $2,135 $2,211 $1,192
====== ====== ====== ======
Total non-performing assets less
SBA guarantees........................ $1,495 $ 973 $2,211 $1,192
====== ====== ====== ======
Non-performing loans to total loans... 3.74% 2.87% 3.03% 1.26%
Non-performing loans less SBA
guarantees to total loans(1).......... 1.95% 1.20% 3.03% 1.26%
Allowance for loan losses to non-
performing loans...................... 38.76% 38.35% 35.98% 95.15%
Allowance for loan losses to non-
performing loans less SBA
guarantees(1)......................... 74.46% 91.84% 35.98% 95.15%
Non-performing loans to total assets.. 2.65% 1.99% 1.80% 0.95%
Non-performing loans less SBA
guarantees to total assets(1)......... 1.38% 0.83% 1.80% 0.95%
Total non-performing assets to total
assets................................ 2.80% 2.13% 2.32% 1.57%
Total non-performing assets less
SBA guarantees to total assets(1) .... 1.52% 0.97% 2.32% 1.57%
Total non-performing assets to total
loans................................. 3.94% 3.07% 3.90% 2.08%
Total non-performing assets less
SBA guarantees to total loans(1)...... 2.15% 1.40% 3.90% 2.08%
</TABLE>
- ---------------------
(1) Prior to 1996 there were no non-performing SBA guaranteed loans.
In addition to non-performing loans, at March 31, 1997, there were $3.3
million of loans which are currently performing, but about which management has
doubts as to the ability of the borrowers to comply with the present loan
repayment terms. These loans are therefore on the Bank's "watch list." Of this
amount, $2.4 million are commercial loans, including $440,000 of SBA loans, of
which 75% to 90% is guaranteed.
43
<PAGE>
In addition, a $280,000 commercial real estate loan, which management believes
is adequately collateralized, is on the "watch list," as is a $577,000 one- to
four-family residential construction loan.
Allowance for Loan Losses. 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 allowance
is based upon a number of factors, including current economic conditions, actual
loss experience and industry trends. 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 March 31, 1997, the Bank's allowance for loan losses was
$1.0 million or 1.45% of total loans and 38.76% of non-performing loans as
compared to $765,000, or 1.1% of total loans and 38.35% of non-performing loans
as of December 31, 1996. The Bank had total non-performing loans of $2.6 million
and $2.0 million at March 31, 1997 and December 31, 1996, respectively, and
non-performing loans to total loans of 3.74% and 2.87%, respectively. The Bank
will continue 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.
The following table sets forth activity in the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
-------------------- -------------------------------------------
1997 1996 1995 1994
-------------------- ------------ ------------ -----------
(Dollars in thousands)
<S> <C>
Total loans outstanding........................ $69,604 $69,565 $56,653 $57,337
Average loans outstanding...................... 69,349 62,144 56,905 47,475
Allowance for loan losses at beginning of
period...................................... $ 765 $ 617 $ 687 $ 574
Provision charged to expense................... 237 452 318 300
Chargeoffs:
Residential/commercial real estate......... - 15 104 101
Commercial loans........................... - 279 291 95
Consumer and other loans................... 5 28 1 2
------- ------ ------- ------
Total................................... 5 322 396 198
Recoveries:
Residential/commercial real estate......... 12 8 8 3
Commercial loans........................... - 10 - 3
Consumer and other loans................... - - - 5
------- ------ ------ ------
Total................................... 12 18 8 11
------- ------ ------ ------
Net chargeoffs................................. (7) 304 388 187
Allowance for loan losses at end of period..... $1,009 $765 $617 $687
====== ==== ==== ====
Allowance for loan losses as a percent of
total loans................................. 1.45% 1.10% 1.09% 1.20%
Net chargeoffs as a percent of average loans... (0.01)% 0.49% 0.68% 0.39%
</TABLE>
44
<PAGE>
The following table set forth the Bank's allocation of the allowance
for loan losses and the percent of loans to total loans in each of the
categories listed at the dates indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
------------------------ --------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -----------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Total Total Total
Amount Loans Amount Loans Amount Loans
--------- ------------ --------- ------------ -------- ------------
(Dollars in thousands)
<S> <C>
Commercial loans.................... $ 647 44.98% $504 49.10% $362 48.94%
Real estate:
Commercial....................... 139 26.59 124 23.29 118 23.92
Construction..................... 61 11.77 77 15.56 78 14.01
One- to four -family............. 129 10.33 34 6.83 35 7.75
Home equity loans................ 16 3.01 11 2.22 9 2.11
Consumer loans...................... 17 3.32 15 3.00 15 3.26
---- ---- ----
Total allowance for loan losses.. $1,009 $765 $617
====== ==== ====
</TABLE>
Investment Portfolio
At March 31, 1997, the Bank's investment portfolio, which totalled
$10.1 million, consisted primarily of U.S. treasury and government agency
securities and a mortgage-backed security. Of this amount, $9.1 million, or
88.35%, were U.S. treasury securities and U.S. government agency obligations.
The mortgage-backed security totalled $991,000, which was issued by the FHLMC.
Additionally, the Company owns $194,000 in stock of the Federal Reserve Bank
of Richmond. Management generally maintains an investment portfolio with
relatively short maturities to minimize overall interest rate risk. At March
31, 1997, approximately 70.56% 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, nongovernment 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 March 31, 1997, approximately $6.2 million, or 61.61%
of the investment portfolio was classified available-for-sale.
45
<PAGE>
The following table sets forth the carrying value of the Bank's
investment portfolio. At March 31, 1997 the market value of the Bank's
investment portfolio totaled $10.1 million.
<TABLE>
<CAPTION>
At March 31, At December 31,
------------------------- --------------------------------------------------------
1997 1996 1995
------------------------- --------------------------- --------------------------
Available Held to Available Held to Available Held to
for Sale Maturity for Sale Maturity for Sale Maturity
----------- ----------- ----------- ------------ ----------- ------------
(Dollars in thousands)
<S> <C>
U.S. Treasury................... $5,255 $3,892 $9,157 $1,993 $16,186 $ -
U.S. Government agency.......... - - 996 - 978 -
Mortgage-backed securities...... 991 - 987 - 984 -
------ ------ ------- ------ ------- ------
Total............. $6,246 $3,892 $11,140 $1,993 $18,148 $ -
====== ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information regarding the
amortized cost, weighted average yields, and maturities of the Bank's investment
securities portfolio at March 31, 1997.
<TABLE>
<CAPTION>
Greater than 90
Days
But Within One After One Year But
Within 90 Days Year Within Five Years
--------------------- ------------------------ ------------------------
Amount Yield Amount Yield Amount Yield
---------- -------- ----------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C>
Available for sale:
U.S. Treasury................... $4,965 5.49% $290 5.33% $ - -%
U.S. Government agency.......... - - - - - -
Mortgage-backed securities...... - - - - 991 5.79
----- ---- ----- ---- ------ ----
Total...................... $4,965 5.49% $290 5.33% $991 5.79%
------ ---- ---- ---- ---- ----
Held to maturity:
U.S. Treasury................... $ - -% $1,898 5.64% $1,994 5.63%
U.S. Government agency.......... - - - - - -
Mortgage-backed securities...... - - - - - -
----- ---- ----- ---- ------ ----
Total...................... $ - -% $1,898 5.64% $1,994 5.63%
----- ---- ------ ---- ------ ----
Total............. $4,965 5.49% $2,188 5.60% $2,985 5.68%
====== ====== ======
</TABLE>
46
<PAGE>
Sources of Funds
General. Deposits and commercial reverse repurchase agreements 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.
Deposits. 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 36.03% of the deposit portfolio at March 31,
1997. Core deposits considered to be noninterest bearing and interest bearing
demand deposit accounts, savings deposits, and money market accounts accounted
for 63.97% of the deposit portfolio at March 31, 1997.
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 accept brokered deposits and held no such deposits at March 31,
1997. 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 weekly by management considering 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.
47
<PAGE>
The following table sets forth the types of deposits at the periods
indicated.
At March 31,
-------------------------------------
1997
-------------------------------------
Average Average Percent
Balance Rate of Total
---------- ----------- ----------
(Dollars in thousands)
Deposit Types:
Noninterest-bearing demand.......... $9,839 -% 12.11%
NOW accounts........................ 16,265 2.27 20.02
Money markets....................... 14,019 3.44 17.26
Savings accounts.................... 11,845 3.11 14.58
Certificates of deposit............. 29,266 5.27 36.03
------- ------
Total...................... $81,234 3.40% 100.00%
======= ======
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------
1996 1995
-------------------------------------- --------------------------------------
Average Average Percent Average Average Percent
Balance Rate of Total Balance Rate of Total
---------- ---------- ----------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C>
Deposit Types:
Noninterest-bearing demand.......... $9,158 -% 11.07% $ 7,908 -% 11.02%
NOW accounts........................ 14,583 2.49 17.62 11,532 2.46 16.07
Money markets....................... 15,819 3.53 19.11 13,688 3.86 19.07
Savings accounts.................... 10,995 3.22 13.28 9,537 3.55 13.30
Certificates of deposit............. 32,207 5.51 38.92 29,095 5.63 40.54
------- ------- ------- -------
Total...................... $82,762 3.69% 100.00% $71,760 3.89% 100.00%
======= ====== ======= ======
</TABLE>
48
<PAGE>
Jumbo Certificates of Deposits. Jumbo certificates of deposit are
accounts of $100,000 or more. These accounts totaled $4.2 million at March 31,
1997 and consisted principally of time certificates of deposit. The following
table sets forth the amount and maturity of jumbo certificates of deposit at
March 31, 1997.
<TABLE>
<CAPTION>
Greater Than One Year
Three Months Three Months to Greater Than
or Less to One Year Five Years Five Years Total
- -------------------- ------------------ ------------------- ---------------------- -----------------------
(Dollars in thousands)
<S> <C>
$1,480 $2,487 $228 $ - $4,195
</TABLE>
At March 31, 1997, the Bank had no short-term borrowing facilities in
place. The Bank anticipates having access to funds through credit facilities
made available by the FHLB and secured lines of credit with various other
commercial banks, as well as access to the Federal Reserve Bank discount window.
Commercial Reverse Repurchase Agreements. 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
March 31, 1997, the average cost of these borrowings were 2.95%. At December 31,
1996 and 1995, the average cost was 2.97% and 3.19%, respectively.
<TABLE>
<CAPTION>
At or for At or for
March 31, December 31,
-------------------- ----------------------------------------
1997 1996 1995
-------------------- ----------------- --------------------
(Dollars in thousands)
<S> <C>
Commercial reverse repurchase
agreements outstanding........................ $7,142 $6,345 $6,970
Average amount outstanding at
the end of period.............................. 7,420 7,762 6,715
Maximum amount outstanding at
the end of any month........................... 9,980 9,591 8,364
Weighted average interest rate
for the period................................. 2.95% 2.97% 3.19%
</TABLE>
49
<PAGE>
Subsidiaries
As of March 31, 1997, the Bank was the only subsidiary of the Company.
As of March 31, 1997, the Bank had one subsidiary, ANB Mortgage Services, LLC
("ANB Mortgage"), a dormant limited liability company which had previously
originated and serviced residential construction loans. On June 2, 1997, ANB
Mortgage was dissolved and is no longer an existing entity.
Personnel
As of March 31, 1997, the Bank had 53 full-time employees and 13
part-time employees. The employees are not represented by a collective
bargaining unit. The Company believes its relationship with its employees is
good.
Properties
The executive offices of the Company and the Bank are located at 180
Admiral Cochrane Drive, Suite 300, 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 March 31, 1997.
<TABLE>
<CAPTION>
Original Net Book Value
Year of Property or
Leased Year of Leasehold
Leased/ or Lease Improvements at
Location Owned Acquired Expiration March 31, 1997
- ----------------------------- ------------- ------------------- --------------------- -------------------
<S> <C>
Administration Leased 1995 2005 $ 54,241
West Street Leased 1989 2000(1) 46,554
Edgewater Land Leased 1996 2006(1) 430,108
Cape St. Claire Leased 1995 2000(1) 26,367
Kent Island Leased 1990 1998(1) 2,606
Taylor Avenue Leased 1990 1998(1) 287
Severna Park Leased 1996 2006(1) 19,206
</TABLE>
- -----------------
(1) These leases may be extended at the option of the Company for periods
ranging from three to twenty years.
50
<PAGE>
The Bank anticipates consolidating its West Street and Taylor Avenue
Branches in Annapolis in one new location in Annapolis for which the Bank has
already entered a lease. Costs of terminating the leases on these two locations
have been factored into the one-time restructuring charge. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Comparison of Operating Results for the Three Months Ended March 31, 1997 and
1996 - Operating Expenses."
Legal Proceedings
The Company is not involved in any pending legal proceedings other than
legal proceedings occurring in the ordinary course of business. Management
believes that none of these legal proceedings, individually or in the aggregate,
will have a material adverse impact on the results of operations or financial
condition of the Company.
REGULATION AND SUPERVISION
General
The Company, by virtue of its control of the Bank, is a registered bank
holding company. 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 BHCA.
The activities of National Banks, such as the Bank, are generally
governed by the National Bank Act and the FDI Act. The Bank is subject to
extensive regulation, examination and supervision by the OCC, as its primary
federal 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 OCC 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 OCC and/or the FDIC 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 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 OCC, the FDIC or the Congress, could have a material adverse impact on the
Company or the Bank and their operations.
Certain of the regulatory requirements applicable to the Bank and to
the Company are referred to below or elsewhere herein. This description of
statutory provisions and regulations applicable to national banks and their
holding companies does not purport to be a complete description of such statutes
and regulations and their effects on the Bank and the Company.
Holding Company Regulation
Federal Regulation. Due to its control of the Bank, the Company is
subject to examination, regulation, and periodic reporting under the BHCA, as
administered by the FRB.
51
<PAGE>
The Company is required to obtain the prior approval of the FRB to
acquire all, or substantially all, of the assets of any bank or bank holding
company or merge with another bank holding company. Prior FRB approval will also
be required for the Company to acquire direct or indirect ownership or control
of any voting securities of any bank or bank holding company if, after giving
effect to such acquisition, it would, directly or indirectly, own or control
more than 5% of any class of voting shares of such bank or bank holding company.
Bank holding companies may acquire additional banks as separate subsidiaries in
any state, subject to certain conditions set forth in the BHCA, such as deposit
concentration limits. In addition to the approval of the FRB before any bank
acquisition can be completed, prior approval may also be required to be obtained
from other agencies having supervisory jurisdiction over the bank to be
acquired.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting securities of
any company engaged in non-banking activities. One of the principal exceptions
to this prohibition is for activities found by the FRB to be so closely related
to banking or managing or controlling banks to be a proper incident thereto.
Some of the principal activities that the FRB has determined by regulation to be
closely related to banking are: (i) making or servicing loans; (ii) performing
certain data processing services; (iii) providing discount brokerage services;
(iv) acting as fiduciary, investment or financial advisor; (v) finance leasing
personal or real property; (vi) making investments in corporations or projects
designed primarily to promote community welfare; and (vii) acquiring a savings
association, provided that the savings association only engages in activities
permitted bank holding companies.
The FRB has adopted capital adequacy guidelines for bank holding
companies (on a consolidated basis) substantially similar to those of the OCC
for the Bank. See "--Federal Banking Regulations--Capital Requirements." The
Company's total and Tier 1 capital exceeds these requirements.
Bank holding companies are generally required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the Company's
consolidated net worth. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe and unsound practice,
or would violate any law, regulation, FRB order or directive, or any condition
imposed by, or written agreement with, the FRB. The FRB has recently adopted an
exception to this approval requirement for wellcapitalized bank holding
companies that meet certain other conditions.
The FRB has issued a policy statement regarding the payment of
dividends by bank holding companies. In general, the FRB's policies provide that
dividends should be paid only out of current earnings and only if the
prospective rate of earnings retention by the bank holding company appears
consistent with the organization's capital needs, asset quality, and overall
financial condition. The FRB's policies also require that a bank holding company
serve as a source of financial strength to its subsidiary banks by standing
ready to use available resources to provide adequate capital funds to those
banks during periods of financial stress or adversity and by maintaining the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks where necessary. These regulatory
policies could affect the ability of the Company to pay dividends or otherwise
engage in capital distributions.
The FRB has general authority to enforce the BHCA as to the Company and
also may require a bank holding company to cease any activity or terminate
control of any subsidiary engaged in an activity that the FRB believes
constitutes a serious risk to the safety, soundness or stability of its bank
subsidiaries.
52
<PAGE>
The status of the Company as a registered bank holding company under
the BHCA does not exempt it from certain Federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the Federal securities laws.
The Company and its subsidiaries will be affected by the monetary and
fiscal policies of various agencies of the United States Government, including
the Federal Reserve System. In view of changing conditions in the national
economy and in the money markets, it is impossible for the management of the
Company to accurately predict future changes in monetary policy or the effect of
such changes on the business or financial condition of the Company or the Bank.
State Regulation. The Company is also a "bank holding company" within
the meaning of the Maryland bank holding company laws. The prior approval of the
Maryland Commissioner of Financial Regulation is required before the Company may
acquire all or substantially all of the assets of any bank (or holding company
thereof), merge with a holding company of a bank or acquire more than 5% of the
voting stock of a bank or holding company thereof.
Acquisition of the Company
Federal Regulation. Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the FRB if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's outstanding voting stock, unless the FRB has found that the
acquisition will not result in a change in control of the Company. Under the
CIBCA, the FRB has 60 days from the filing of a complete notice to act, taking
into consideration certain factors, including the financial and managerial
resources of the acquirer, the convenience and needs of the communities served
by the Company and the Bank, and the effects of the acquisition on competition.
Under the BHCA, any company would be required to obtain prior approval
from the FRB before it may obtain "control" of the Company within the meaning of
the BHCA. Control generally is defined to mean the ownership or power to vote 25
percent or more of any class of voting securities of the Company or the ability
to control in any manner the election of a majority of the Company's directors.
An existing bank holding company would be required to obtain the FRB's prior
approval under the BHCA before acquiring more than 5% of a class of the
Company's voting securities. A Change of Control is not contemplated by and will
not occur as a result of this Offering. See "Holding Company Regulation."
Approval of the Maryland Commissioner of Financial Regulation may also be
required for acquisition of the Company under some circumstances.
Federal Banking Regulations
Capital Requirements. The OCC's capital regulations require national
banks to meet two minimum capital standards: a 3% 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. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital to
total assets standard, a 4% leverage ratio (3% for institutions receiving the
highest rating on the financial institution examination rating system), and,
together with the risk-based capital standard itself, a 4% Tier 1 capital to
risk-based assets standard. Tier 1 capital is defined as common stockholders'
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related
53
<PAGE>
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 March 31, 1997 the Bank was considered well capitalized for
regulatory purposes. The following table presents the Bank's capital position at
March 31, 1997 relative to the applicable regulatory requirements.
At March 31, 1997
------------------------------------
Amount Percentage
-------------- ---------------
(Dollars in thousands)
Tier 1 risk-based capital:
Actual.......................... $5,729 9.00%
Regulatory requirement.......... 2,546 4.00
------ ----
Excess...................... $3,183 5.00%
====== ====
Total risk-based capital:
Actual.......................... $6,525 10.25%
Regulatory requirement.......... 5,092 8.00
------ ----
Excess...................... $1,433 2.25%
====== ====
Leverage capital:
Actual.......................... $5,729 5.99%
Regulatory requirement.......... 3,825 4.00
------ ----
Excess...................... $1,904 1.99%
====== ====
Prompt Corrective Regulatory Action. Under the prompt corrective action
regulations, the OCC is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a depository institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is
at least 6%, its leverage ratio is at least 5%, and it is not subject to any
order or
54
<PAGE>
directive by the appropriate regulator to meet a specific capital level. An
institution generally is considered "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8%, its ratio of Tier 1
capital to risk-weighted assets is at least 4%, and its leverage ratio is at
least 4% (3% if the institution receives the highest examination rating). An
institution that has a ratio of total capital to risk weighted assets of less
than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a
leverage ratio of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." An institution that
has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of
less than 3% or a leverage ratio that is less than 3% is considered to be
"significantly undercapitalized" and an institution that has a tangible capital
to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The OCC has discretion to assign a bank to the next lower
capital category if it determines, subject to a notice and opportunity for
hearing process, that such action is warranted due to unsafe or unsound
conditions or practices. The regulation also provides that a capital restoration
plan must be filed with the OCC within 45 days of the date an institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. Such capital restoration plan is subject to OCC
approval.
Insurance of Deposit Accounts. Deposits of the Bank are insured by the
BIF. The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary regulator and such other information that the
FDIC deems relevant with respect to the institution's financial condition and
the risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for BIF deposits currently range from 0 basis points
for well-capitalized institutions in the highest supervisory category to 27
basis points for the weakest institutions. The FDIC is authorized to raise the
assessment rates in certain circumstances, including to maintain or achieve the
designated reserve ratio of 1.25%, which requirement the BIF currently meets.
The FDIC has exercised its authority to raise rates in the past and may raise
insurance premiums in the future. If such action is taken by the FDIC, it could
have an adverse effect on the earnings of the Bank.
Both the BIF and the Savings Association Insurance Fund ("SAIF") (the
deposit insurance fund that covers most savings association deposits) are
statutorily required to be capitalized to at least a 1.25% of insured reserve
deposits ratio. Until recently, members of the SAIF and BIF were paying average
deposit insurance premiums of between 24 and 25 basis points. The BIF met the
required reserve in 1995, whereas the SAIF was not expected to meet or exceed
the required level until 2002 at the earliest. This situation was primarily due
to the statutory requirement that SAIF members make payments on bonds issued in
the late 1980s by the Financing Corporation ("FICO") to recapitalize the
predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of from 0 to 27 basis points under which
92% of BIF members paid an annual administration fee of only $2,000. With
respect to SAIF member institutions, the FDIC adopted a final rule retaining the
previously existing assessment rate schedule applicable to SAIF member
institutions of 23 to 31 basis points. As long as the premium differential
continued, it may have had adverse consequences for SAIF members, including
reduced earnings and an impaired ability to raise funds in the capital markets.
55
<PAGE>
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed
a special one-time assessment on SAIF member institutions to recapitalize the
SAIF. As required by the Funds Act, the FDIC imposed a special assessment of
65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable
November 27, 1996 (the "SAIF Special Assessment"). The Funds Act also spread the
obligations for payment of the FICO bonds across all SAIF and BIF members.
Beginning on January 1, 1997, BIF deposits, including those held by the Bank,
were assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay
6.48 basis points. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.
Management cannot predict the level of FDIC insurance assessments on an
on-going basis or whether the BIF and SAIF will eventually be merged.
The Bank's assessed premium for the year ended December 31, 1996 was
$13,000. During 1996, the FDIC reduced deposit premiums and, as a result, the
Bank paid an administration fee for the third and fourth quarters of $500. FDIC
premiums for the first and second quarters of 1996 were $12,000. A significant
increase in FDIC insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the regulators.
The management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Loans to One Borrower. National banks are subject to limits on the
amount that they may lend to single borrowers. Generally, banks may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of its capital and surplus (including Tier 1 capital, Tier 2 capital and the
amount of the allowance for loan and lease losses not includable in Tier 2
capital). An additional amount may be lent, equal to 10% of capital and surplus,
if such loan is secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. At March 31, 1997, the Bank's
limit on loans to one borrower was $1.0 million. At March 31, 1997, the Bank's
largest aggregate outstanding balance of loans to one borrower, net of loan
participations sold and cash collateral, was $1.0 million.
Limitation on Capital Distributions. National banks may not pay
dividends out of its permanent capital and may not, without OCC approval, pay
dividends in excess of the total of the bank's retained net income for the year
combined with retained net income for the prior two years less any transfers to
surplus. A national bank may not pay a dividend that would cause it to fall
below any applicable regulatory capital standard.
Assessments. National banks are required to pay assessments to the OCC
to fund the agency's operations. The general assessments, paid on a semi-annual
basis, are computed according to the bank's asset size, including consolidated
subsidiaries. The assessments paid by the Bank for the fiscal year ended
December 31, 1996, totalled $38,000.
56
<PAGE>
Branching. National banks are authorized to establish branches within
the state in which they are headquartered but only to the extent state law
allows branching by state banks. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Act") provides for interstate branching
for national banks, effective June 1, 1997. Under the Act, interstate branching
by merger is authorized on June 1, 1997 unless the state in which the bank is to
branch has enacted a law opting out of interstate branching or expedites the
effective date by passing legislation. De novo interstate branching will be
permitted by the Act to the extent the state into which the bank is to branch
has enacted a law authorizing out-of-state banks to establish de novo branches.
The State of Maryland has adopted legislation authorizing interstate bank
mergers, and permitting interstate de novo branching, under certain conditions.
Transactions with Related Parties. The authority of a depository
institution to engage in transactions with related parties or "affiliates"
(e.g., any company that controls or is under common control with an institution,
including the Company) is limited by Sections 23A and 23B of the Federal Reserve
Act ("FRA"). Section 23A limits the aggregate amount of covered transactions
with any individual affiliate to 10% of the capital and surplus of the savings
institution. The aggregate amount of covered transactions with all affiliates is
limited to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B generally provides
that certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.
The authority of the Bank to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception to this requirement for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees.
Regulation O also places individual and aggregate limits on the amount of loans
that institutions may make to insiders based, in part, on the institution's
capital position and requires certain board approval procedures to be followed.
Enforcement. Under the FDI Act, the OCC has primary enforcement
responsibility over national banks and has the authority to bring actions
against such banks and all institution-affiliated parties, including directors,
officers, stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
and/or directors to institution of receivership or conservatorship. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. Under the FDI Act, the
FDIC has the authority to recommend to the OCC that it take enforcement action
with respect to a national bank. If action is not taken by the agency, the FDIC
has authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
The FRB has generally similar enforcement authority with respect to the
Company.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement
57
<PAGE>
safety and soundness standards required under the FDI Act. The Guidelines set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. The standards set forth in the Guidelines address
internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
Proposed Legislation. Congress is currently considering various
legislative proposals that would restructure the regulation of bank holding
companies, expand the activities in which companies controlling banks may
engage, eliminate the federal savings association charter and merge the BIF and
SAIF funds. The Company is unable to predict whether such legislation will be
enacted, or, if enacted, the extent to which the legislation would restrict or
disrupt its operations or those of the Bank.
Community Reinvestment Act. Under the Community Reinvestment act, as
amended ("CRA"), as implemented by OCC regulations, a national bank has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OCC, in connection with its examination of a bank, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain corporate
applications by such institution, such as mergers and branching. The Bank's most
recent rating was "outstanding."
Federal Reserve System
The Federal Reserve Board regulations require depository institutions
to maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). Federal Reserve Board regulations
currently require that reserves be maintained against aggregate transaction
accounts as follows: for accounts aggregating $49.3 million or less (subject to
adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for
accounts aggregating greater than $49.3 million, the reserve requirement is
$1.479 million plus 10% (subject to adjustment by the Federal Reserve Board
between 8% and 14%) against that portion of total transaction accounts in excess
of $49.3 million. The first $4.4 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements.
58
<PAGE>
THE BOARD OF DIRECTORS AND MANAGEMENT OF THE COMPANY
The following table sets forth certain information regarding executive
officers and directors of the Company.
Name Position(s) Held With Company
- ---------------------------------- ------------------------------------------
Albert Phillips Chairman of the Board and President
Stanley H. Katsef Vice Chairman of the Board
John W. Marhefka, Jr. Director, Chief Executive Officer, Vice
President and Assistant Secretary
Ronald E. Gardner Director
Stanley J. Klos, Jr. Director
Lawrence E. Lerner Director
Richard M. Lerner Director
Dimitri P. Mallios Director
Lawrence W. Schwartz Director
Russell J. Grimes, Jr. Chief Financial Officer and Treasurer
Lori J. Mueller Secretary
The Board of Directors of the Company is divided into three classes,
each of which contains approximately one-third of the Board. The directors are
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. A class of directors,
consisting of Messrs. Klos, R. Lerner and Marhefka, has a term of office
expiring at the 1998 annual meeting of stockholders; another class, consisting
of Messrs. Gardner, L. Lerner and Schwartz, has a term of office expiring at the
1999 annual meeting of stockholders; and a class, consisting of Messrs. Katsef,
Mallios and Phillips, has a term of office expiring at the 2000 annual meeting
of stockholders, although Mr. Katsef will stand for election before the
stockholders at the 1998 annual meeting of stockholders, as he was appointed to
the Board following the 1997 annual meeting of stockholders.
Committees of the Board of Directors of the Company
The Company has established an Audit Committee consisting of Messrs.
Katsef and Schwartz, a Capital Planning Committee consisting of Messrs. Katsef,
R. Lerner, Marhefka and Schwartz, and a Compensation Committee consisting of
Messrs. Gardner, Klos, R. Lerner and Mallios, and Mr. Marhefka as a non-voting
member. The Audit and Compensation Committees are joint committees with the
Bank. The Company's nominating committee consists of the full Board of
Directors.
59
<PAGE>
Directors' Compensation
The directors of the Company do not receive fees for attendance at
meetings or for services rendered to the Company.
THE BOARD OF DIRECTORS AND MANAGEMENT OF THE BANK
Directors
The following table sets forth certain information regarding the Board
of Directors of the Bank.
<TABLE>
<CAPTION>
Positions Held With the Director Term
Name Age(1) Bank Since Expires
- ---------------------------- --------- ------------------------------------ ----------- -----------
<S> <C>
Albert Phillips 70 Chairman of the Board 1990 1998
Stanley H. Katsef 53 Vice Chairman of the Board 1997 1998
John W. Marhefka, Jr. 42 Director, President and 1997 1998
Chief Executive Officer
Ronald E. Gardner 43 Director 1997 1998
Stanley J. Klos, Jr. 45 Director 1997 1998
Lawrence E. Lerner 64 Director 1990 1998
Richard M. Lerner 37 Director 1990 1998
Dimitri P. Mallios 64 Director 1990 1998
Lawrence W. Schwartz 42 Director 1990 1998
</TABLE>
- -----------------------------
(1) As of March 31, 1997.
60
<PAGE>
Executive Officers who are not Directors
The following table sets forth certain information regarding the
executive officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
Name Age(1) Position Held with the Bank
- ---------------------------- -------- ------------------------------------------------------------------
<S> <C>
Jeffrey Armiger 41 Senior Vice President and Loan Officer
Russell J. Grimes, Jr. 40 Senior Vice President, Chief Financial Officer and Treasurer
M. John Miller, Jr. 46 Senior Vice President and Chief Lending Officer
Lori J. Mueller 34 Senior Vice President, Administration and Marketing, and Secretary
</TABLE>
- ------------------------
(1) As of March 31, 1997.
Biographical Information
Presented below is biographical information regarding directors and
executive officers of the Company and executive officers of the Bank who are not
also directors or executive officers of the Company.
Albert Phillips. Mr. Phillips has been the Chairman of the Board of
The Phillips Corporation, a manufacturer and supplier of manufacturing
technology products headquartered in Columbia, Maryland since 1963. He has been
a Director of the Company and the Bank since their inception. Mr. Phillips
serves as Chairman of the Board of the Company and the Bank as well as President
of the Company.
Stanley H. Katsef. Mr. Katsef became a Director and Vice Chairman of
the Board of the Company and the Bank in April 1997. He was previously a
founding Director of Annapolis Bancshares, Inc. and Bank of Annapolis in 1988,
where he served as Chairman of the Board and a full-time employee of both
companies from 1992 to 1996. He was the owner of Katsef Sales, Inc., an
Annapolis based distributor of janitorial supply products until July 1, 1990.
John W. Marhefka, Jr. Mr. Marhefka is Chief Executive Officer and Vice
President of the Company and President and Chief Executive Officer of the Bank.
He has held high level positions in the Maryland financial institution industry
since 1978. Most recently, he was a founder of Annapolis Bancshares, Inc. and
Bank of Annapolis in 1988. As President and Chief Executive Officer of those
companies, he led them through more than seven years of earnings and asset
growth before they merged with Sandy Spring Bancorp, Inc. in 1996. Mr. Marhefka
also served as Chairman of the Board of both companies from 1988 to 1992. Under
Mr. Marhefka's leadership, the Bank of Annapolis went from a start-up bank with
$1.1 million in assets to $81.1 million at June 30, 1996, immediately prior to
the time it was acquired. At that date, the Bank had a return on assets of
1.85% and a return on equity of 16.53%. There can be no assurances that the
financial
61
<PAGE>
success of these companies can be repeated. He is active in community affairs
and serves on the Board of Directors of Leadership Anne Arundel.
Ronald E. Gardner. Mr. Gardner was an owner, Director and Vice
President of E.L. Gardner, Inc. from 1969 to 1996, at which time he sold his
interest in the company and resigned. He was responsible for day to day
operations of E.L. Gardner, Inc., which is a producer of ready mix concrete in
Anne Arundel County. He has been a Director of the Company and the Bank since
April 1997. Mr. Gardner is also an Officer and Director of Arundel Management
Corporation located in Annapolis, Maryland, a real estate and management company
and President and principal owner of Washington Street Pub located in Easton,
Maryland.
Stanley J. Klos, Jr. Mr. Klos has been a practicing attorney in Anne
Arundel and Prince George's Counties since 1977. He is currently a principal of
the Annapolis law firm of Klos & Hackner, P.A. He is a member of the Maryland,
District of Columbia, Anne Arundel County, and Prince George's County Bar
Associations. He has been a Director of the Company and the Bank since April
1997.
Lawrence E. Lerner. Mr. Lerner has been active in real estate
development in the Washington, D.C. metropolitan area for 30 years. He has been
involved in the development and construction of two regional shopping centers,
several other commercial developments, and more than 2,800 apartment units. Mr.
Lerner manages his real estate investments, comprised of various partnership
interests in entities which own real estate. He has been a Director of the
Company and the Bank since their inception.
Richard M. Lerner. Mr. Lerner has been President of White Flint
Builders, Inc. since 1984. White Flint Builders, Inc. is located in Bethesda,
Maryland and is engaged in high-end residential development and construction.
He has been a Director of the Company and the Bank since their inception.
Dimitri P. Mallios. Mr. Mallios is an attorney who has practiced law
since 1960, and is a member of the Bars of the State of Maryland and the
District of Columbia. He is presently a senior partner of the law firm of
Margolius, Mallios, Davis, Rider & Tomar, located in Washington, D.C. Mr.
Mallios has been a Director of the Company and the Bank since their inception.
Lawrence W. Schwartz. Mr. Schwartz is a certified public accountant
who has operated CPA firms since 1984 and is currently Managing Partner of
Schwartz, Albert & Company, Chartered, a CPA firm based in Bethesda, Maryland.
Additionally, he was Executive Vice President and Chief Financial Officer of
Federal Supply Contracts Group, Inc., a reseller of furniture to the government,
from 1993 to 1995. Mr. Schwartz has been a Director of the Company since April
1997 and a Director of the Bank since its inception.
Jeffrey Armiger. Mr. Armiger has been an officer of the Bank since
1990. As Senior Vice President and Loan Officer, he is primarily responsible
for business development and relationship management of commercial accounts.
His eighteen years of banking experience include similar positions with First
American Bank in Anne Arundel County.
Russell J. Grimes, Jr. Mr. Grimes became Chief Financial Officer and
Treasurer of the Company and Senior Vice President, Chief Financial Officer and
Treasurer of the Bank in March 1997. His eighteen years of related prior
banking experience include having served as Vice President, Treasurer, and Chief
62
<PAGE>
Financial Officer of Annapolis Bancshares, Inc. and Bank of Annapolis from 1994
to 1996 and similar positions with First Virginia Banks, Inc. and American
National Savings Bank, F.S.B.
M. John Miller, Jr. Mr. Miller has been Senior Vice President and
Chief Lending Officer of the Bank since 1994. In this capacity, he is primarily
responsible for all areas of the Bank's lending function, including origination,
servicing, and credit quality. Previously, he joined Second National FSB in
1988, and in December 1991 became Senior Vice President responsible for the
bank's Credit and Commercial Real Estate Departments. Mr. Miller continued in
the same capacity with Second National/RTC and had the additional management
responsibilities necessary to effect the resolution of the institution until
June 1994. From 1974 to 1988 he held various management positions with Maryland
National Bank.
Lori J. Mueller. Ms. Mueller has been an officer of the Bank since
1990. As Senior Vice President Administration and Marketing, she is primarily
responsible for retail banking, deposit account administration, marketing,
employee benefits, and general bank administration. Her fifteen years of related
banking experience include similar positions with Bay National Bank in
Annapolis.
Committees and Meetings of the Board of Directors of the Bank
As of February 1997, the Board of Directors meets on a monthly basis
and may have additional special meetings upon the request of the Chairman of the
Board. During the year ended December 31, 1996, the Board of Directors met on a
quarterly basis. No director attended fewer than 75% of the total number of
Board meetings held during this period.
The Board of Directors of the Bank has established the following Board
and management committees:
The Audit Committee consists of Messrs. Katsef and Schwartz. The Bank's
Certified Public Accountants report to this committee. The purpose of this
committee is to review the audit function and management actions regarding the
implementation of audit findings. The committee also maintains a liaison with
the outside auditors and reviews the adequacy of internal controls. The
committee meets as needed.
The Executive Committee consists of Messrs. Katsef, L. Lerner, R.
Lerner, Marhefka, Mallios, Phillips and Schwartz. This Committee has delegated
authority to approve loans up to the Bank's legal lending limit. The Executive
Committee also may act in lieu of the full board and on matters of urgency
between Board Meetings. The Executive Committee meets weekly.
The Compensation Committee consists of Messrs. Gardner, Klos, R. Lerner
and Mallios, and Mr. Marhefka is a non-voting member. This Committee manages
and sets policy with respect to executive compensation and employee benefits at
the Bank level and manages the Stock Option Plan at the Company level. The
Compensation Committee meets as needed.
The Marketing Committee consists of Messrs. Gardner, Katsef, Klos, L.
Lerner, Marhefka and Phillips. This Committee assists management in developing
and implementing marketing strategies, advertising campaigns, and new products.
63
<PAGE>
Directors' Compensation
Directors' Fees. Directors of the Bank are not compensated for
attendance at monthly meetings of the Board or for service to the Bank. Members
of the Executive Committee, except for Mr. Marhefka, are paid $400 per month for
service on that Committee.
Executive Compensation
Summary Compensation Table. The following table shows for the fiscal
years ending December 31, 1996, 1995 and 1994, the cash compensation paid by the
Company and the Bank as well as certain other compensation paid or accrued for
those years, to the Chief Executive Officer. Mr. Morgan resigned from his
positions with the Company and Bank effective February 20, 1997. Mr. Morgan will
receive a bi-weekly severance payment of $4,038, as well as health insurance,
through August 20, 1997. Mr. Marhefka was subsequently appointed as Chief
Executive Officer of the Company and President and Chief Executive Officer of
the Bank on February 21, 1997. See "The Board of Directors and Management of the
Bank -- Employment Agreement." No other executive officers of the Company or the
Bank received total salary and bonus in excess of $100,000 in 1996 (the "Named
Executive Officer").
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------------- ----------------------------------
Annual Compensation Awards Payouts
---------------------------------- ------------------------ -------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Award(s) Options Payouts Compensation
Principal Officer Year ($) ($) ($)(1) ($) SARs(#) ($)(2) ($)
- -------------------- ------ --------- -------- ------------- ---------- ------------ ------- ---------------
<S> <C>
Richard J. Morgan 1996 $105,000 - - - - - 2,307(3)
Vice President and 1995 100,000 30,000 - - - - -
Chief Executive 1994 89,250 - - - - - -
Officer of the
Company and
President and Chief
Executive Officer of
the Bank
</TABLE>
- ---------------------------
(1) For 1996, 1995 and 1994, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the years;
(b) payments of above market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long term incentive
plans prior to settlement or maturation; (d) tax payment reimbursements; or
(e) preferential discounts on stock.
(2) The Bank does not maintain a long-term incentive plan and therefore, there
were no payouts or awards under such plan.
(3) Represents amounts contributed to Mr. Morgan by the Bank pursuant to the
Bank's 401(k) plan.
64
<PAGE>
Employment Agreement
On February 21, 1997, the Bank and Mr. Marhefka entered into a five
year employment agreement (the "Employment Agreement"). Pursuant to the
Employment Agreement, Mr. Marhefka receives a base salary of $132,500 per year,
and such base salary increases on each anniversary of the Employment Agreement
by an amount determined by multiplying the then base salary by the annual
percentage increase of the most recently released Consumer Price Index for Urban
Consumers. Additionally, the Bank provides and maintains an automobile for Mr.
Marhefka's use and provides family health insurance.
Pursuant to the Employment Agreement, on April 25, 1997, Mr. Marhefka
was granted incentive stock options to purchase 10,000 shares of Company Common
Stock at an exercise price of $5.00 per share. In addition, Mr. Marhefka will
have an opportunity to be granted additional options at the close of each
calendar year during the term of the Employment Agreement (the "Annual
Options"). The exercise price of the Annual Options will be calculated as
133.334% of the book value per share of the Company's Common Stock at the close
of the calendar year and the number of Annual Options will be determined as a
function of the Company's return on average equity ("ROE") for the calendar
year. Should the Company's ROE for the calendar year be calculated at 15% or
greater, the amount of Annual Options to be granted will be 1,000 plus 10
additional options for each 0.01% by which the Company's ROE exceeds 15% for
that calendar year.
Pursuant to the Employment Agreement, the Bank will also pay a bonus to
Mr. Marhefka following the close of each calendar year during the term of the
Employment Agreement (the "Annual Bonus"). The amount of each Annual Bonus will
be calculated as 5% of the amount by which the Company's ROE exceeds 15% during
that calendar year.
No Annual Options or Annual Bonus will be paid for any calendar year in
which (i) the Company's ROE is less than 15% during that year, or (ii) the
amount of the Bank's non-performing assets, as defined in the contract, exceeds
0.75% of its total assets at the end of the calendar year just completed, or
(iii) the amount of the Bank's allowance for loan losses is less than 150% of
its non-accrual loans after deducting any portion thereof which are government
guaranteed.
If the Company increases its stockholder equity by virtue of selling
new shares of Common Stock, as is the case with the Offering, or another method
of external recapitalization, the Annual Options and Annual Bonus incentive
calculations will be adjusted to account for the dilutive effect of such
recapitalization on the Company's ROE.
Pursuant to the Employment Agreement, the Bank has reimbursed State
Capital Bancorp, Inc. $50,000 in expenses related to a public offering of State
Capital Bancorp, Inc. which was abandoned by Mr. Marhefka in order to accept
employment with the Bank.
The Employment Agreement may be terminated by either party with or
without "cause". The Employment Agreement provides that, except in certain
circumstances, if Mr. Marhefka terminates the Employment Agreement by voluntary
resignation, or his employment is terminated without cause, Mr. Marhefka will
not, without the Bank's written consent, participate or be connected with any
competing institution that has offices or does business in Anne Arundel County,
Maryland for the remaining term of the Employment Agreement, not to exceed one
year in the case of resignation, or eight months if employment is terminated
without cause. The Employment Agreement further provides that if the Bank
terminates the Employment Agreement for any reason, other than for "cause" or
due to Mr. Marhefka's death, disability or
65
<PAGE>
resignation, Mr. Marhefka will be paid an amount equal to his base salary for
the twelve months immediately preceding termination of the Employment Agreement.
Notwithstanding the above, in the event of a "change in control" of the
Companies (as defined in the Employment Agreement), Mr. Marhefka will have the
option within six months of the "change in control" to continue under the terms
of the Employment Agreement with the consent of the Bank, enter into a new
employment agreement with the Bank, on mutually agreeable terms, or receive a
payment equal to one and one-half (1.5) times the base salary and bonus earned
during the preceding twelve month period. The Employment Agreement does not
provide benefits to Mr. Marhefka in the event of his death or disability, his
discharge by the Companies for "cause", or his resignation.
Benefits
Insurance Plans. All full-time employees are covered as a group for
comprehensive hospitalization, including major medical, long-term disability,
accidental death and dismemberment insurance and group term life insurance.
Stock Option Plan. The Company maintains an Employee Stock Option Plan
(the "Option Plan") which provides for discretionary awards of up to an
aggregate of 100,000 options to purchase Company Common Stock to officers and
key employees of the Company and Bank as determined by a committee of
disinterested directors at the fair market value of the Common Stock on the date
of grant. The Option Plan is not qualified under Section 401(a) of the Internal
Revenue Code and is not subject to any provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The Option Plan was approved
by the Company's stockholders on April 25, 1997, therefore, no grants were made
in 1996. Pursuant to an Employment Agreement dated February 21, 1997, the
Company granted Mr. Marhefka options to purchase 10,000 shares of Company Common
Stock at an exercise price of $5.00 per share on April 25, 1997. The Company
intends to grant additional options to certain key Bank employees in the future,
however, the timing and amount of such grants has yet to be determined. All such
options will be granted at not less than the fair market value of the Common
Stock at the time of the grant.
Transactions with Certain Related Persons
The Bank has adopted a policy which requires that all loans or
extensions of credit to executive officers and directors must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the general public and
must not involve more than the normal risk of repayment or present other
unfavorable features.
Mr. L. Lerner has a $200,000 participation interest in a $600,000 line
of credit which a local businessman maintains with the Bank at a rate of WSJ
prime +1.0%. The Bank was unable to fund the entire line of credit, as it would
have exceeded its loan-to-one-borrower limit.
66
<PAGE>
Security Ownership of Management
At June 20, 1997, the Company had 1,478,972 shares of common stock
outstanding. The following table sets forth, as of June 20, 1997, on an
historical and on a pro forma basis, giving effect to the sale of a minimum of
333,334 and a maximum of 833,334 shares in the Offering, certain information as
to those persons who were known by management to be beneficial owners of more
than 5% of the Company's outstanding shares of Common Stock, each director, each
Named Executive Officer and the shares of Common Stock beneficially owned by all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Before Offering After Offering
Name and Address -------------------------------- -----------------------------------------------
of Beneficial Owner Shares Percent Shares Percent
- ------------------------------------- --------------- -------------- --------------- -----------------------------
Minimum Maximum
<S> <C>
Albert Phillips 17,500 1.18% 18,500 1.02% *
Stanley H. Katsef 20,800 1.41% 25,800 1.42% 1.12%
John W. Marhefka, Jr. 37,690 2.55% 42,690 2.36% 1.85%
Ronald E. Gardner 20,000 1.35% 20,000 1.10% *
Stanley J. Klos, Jr. 20,000 1.35% 20,000 1.10% *
Lawrence E. Lerner 1,019,453 68.93% 1,019,453 56.25% 44.08%
Richard M. Lerner 12,000 * 12,000 * *
Dimitri Mallios 10,000 * 10,000 * *
Lawrence W. Schwartz 12,000 * 17,300 * *
Jeffrey Armiger - * - * *
Russell J. Grimes, Jr. - * 1,000 * *
M. John Miller, Jr. - * 4,250 * *
Lori J. Mueller - * - * *
--------- ------ --------- ------ ------
All Executive Officers 1,169,443 79.07% 1,190,993 65.72% 51.51%
and Directors as a
Group (13 persons)
</TABLE>
- --------------------
* Less than one percent
67
<PAGE>
RESTRICTIONS ON ACQUISITION OF THE COMPANY
General
Certain provisions in the Company's Amended Articles of Incorporation
and Bylaws and in its management remuneration together with provisions of
Maryland corporate law, may have anti-takeover effects.
Restrictions in the Company's Amended Articles of Incorporation and Bylaws
A number of provisions of the Company's Amended Articles of
Incorporation (the "Articles of Incorporation") and Bylaws deal with matters of
corporate governance and certain rights of stockholders. The following
discussion is a general summary of the provisions of the Articles of
Incorporation and Bylaws which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt that is not approved by the Board of Directors, but
which individual Company stockholders may deem to be in their best interests or
in which stockholders may receive a substantial premium for their shares over
then current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors or
management of the Company more difficult. The following description of certain
of the provisions of the Articles of Incorporation and Bylaws of the Company is
necessarily general and reference should be made in each case to such Articles
of Incorporation and Bylaws, which are incorporated herein by reference. See
"Additional Information" as to how to obtain a copy of these documents.
Board of Directors. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected each
year. The Articles of Incorporation and Bylaws provide that the size of the
Board shall be determined by a two thirds vote of directors then in office. The
Articles of Incorporation and the Bylaws provide that any vacancy occurring in
the Board, including a vacancy created by an increase in the number of directors
or resulting from death, resignation, retirement, disqualification, removal from
office or other cause, may be filled for the remainder of the unexpired term
exclusively by a two-thirds vote of the directors then in office whether or not
a quorum. The classified Board is intended to provide for continuity of the
Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the
Company. The Articles of Incorporation of the Company provides that a director
may be removed from the Board of Directors prior to the expiration of his term
only for cause, upon the vote of at least two-thirds of the outstanding shares
of voting stock. In the absence of these provisions, the vote of the holders of
a majority of the shares could remove the entire Board, with or without cause,
and replace it with persons of such holders' choice. The provisions can only be
amended by the shareholders with the affirmative vote of holders of at least 80%
of the shares of common stock entitled to vote.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Articles of Incorporation do not provide for cumulative voting for any purpose.
Moreover, special meetings of stockholders of the Company may be called only by
the Board of Directors of the Company, an appropriate committee designated by
the Board of Directors or the written request of not less than 25 percent of all
votes entitled to be cast at the meeting. The Bylaws also provide that any
action required or permitted to be taken by the stockholders
68
<PAGE>
of the Company may be taken only at an annual or special meeting and prohibits
stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Articles of Incorporation authorizes the
issuance of 10,000,000 shares of Common Stock and 5,000,000 shares of serial
preferred stock. The shares of Common Stock and Preferred Stock were authorized
in an amount greater than that to be issued in the Offering to provide the
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and employee stock options. However, these additional authorized shares
may also be used by the Board of Directors consistent with its fiduciary duty to
deter future attempts to gain control of the Company. The Board of Directors
also has sole authority to determine the terms of any one or more series of
Preferred Stock, including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a series of
Preferred Stock, the Board has the power, to the extent consistent with its
fiduciary duty, to issue a series of Preferred Stock to persons friendly to
management in order to attempt to block a post-tender offer merger or other
transaction by which a third party seeks control, and thereby assist management
to retain its position. The Company's Board of Directors currently has no plans
for the issuance of additional shares.
Certain Bylaw Provisions. The Articles of Incorporation and Bylaws of
the Company also require a stockholder who intends to nominate a candidate for
election to the Board of Directors, or to raise new business at a stockholder
meeting to give not less than 30 nor more than 60 days notice to the Secretary
of the Company. The notice provision requires a stockholder who desires to raise
new business to provide certain information to the Company concerning the nature
of the new business, the stockholder and the stockholder's interest in the
business matter. Similarly, a stockholder wishing to nominate any person for
election as a director must provide the Company with certain information
concerning the nominee and the proposing stockholder.
Anti-Takeover Effects of the Company's Certificate of Incorporation and Bylaws
and Management Remuneration
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions that have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the employment agreement with Mr. Marhefka may also discourage
takeover attempts by increasing the costs to be incurred by the Bank and the
Company in the event of a takeover. See "The Board of Directors and Management
of the Bank - Employment Agreement."
The Company's Board of Directors believes that the provisions of the
Articles of Incorporation, Bylaws and Mr. Marhefka's employment agreement are in
the best interest of the Company and its stockholders. An unsolicited
non-negotiated proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Accordingly, the Board of Directors
believes it is in the best interests of the Company and its stockholders to
encourage potential acquirors to negotiate directly with management and that
these provisions will encourage such negotiations and discourage non-negotiated
takeover attempts. It is also the Board of Directors' view that these provisions
should not discourage persons from proposing a merger or other transaction at a
price that reflects the true value of the Company and that otherwise is in the
best interest of all stockholders.
69
<PAGE>
Business Combinations
Under the Maryland General Corporation Law, certain "business
combinations" (including any merger or similar transaction subject to a
statutory stockholder vote and additional transactions involving transfers of
assets or securities in specific amounts) between a Maryland corporation and any
person who, after the date on which the corporation has 100 or more beneficial
owners of its stock, beneficially owns 10% or more of the voting power of the
corporation's shares or any affiliate of the corporation who, at any time within
the two year period prior to the date in question and after the date on which
the corporation has 100 or more beneficial owners of its stock, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder"), or an affiliate
thereof, are prohibited for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder unless an exemption is
available. Thereafter, any such business combination must be recommended by the
board of directors of the corporation and approved by the affirmative vote of at
least: (i) 80% of the votes entitled to be cast by holders of outstanding voting
shares of the corporation; and (ii) two-thirds of the votes entitled to be cast
by holders of outstanding voting shares of the corporation other than shares
held by the Interested Stockholder with whom the business combination is to be
effected, unless the corporation's stockholders receive a minimum price (as
described in the Maryland General Corporation Law) for their shares and the
consideration is received in cash or in the same form a previously paid by the
Interested Stockholder for its shares. These provisions of Maryland law do not
apply, however, to business combinations that are approved or exempted by
resolution of the board of directors prior to the time that the Interested
Stockholder becomes an Interested Stockholder. In order to amend the Company's
charter to elect not to be subject to the foregoing requirements with respect to
Interested Stockholders, an affirmative vote of at least 80% of the votes
entitled to be cast by all holders of outstanding shares of voting stock and
two-thirds of the votes entitled to be cast by holders of outstanding shares of
voting stock who are not Interested Stockholders is required under the Maryland
General Corporation Law. Such an amendment to the Company's charter shall not
become effective until 18 months after the vote of stockholders and shall not
apply to any business combination between the Company and an Interested
Stockholder, or any affiliate of the Interested Stockholder, who became an
Interested Stockholder on or before the date of the stockholder vote.
Control Share Acquisitions
The Maryland General Corporation Law provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the shares
entitled to be voted on the matter, excluding shares of stock owned by the
acquiror or by officers or directors who are employees of the corporation.
"Control shares" are voting shares of stock which, if aggregated with all other
such shares of stock previously acquired by the acquiror, or in respect of which
the acquiror is able to exercise or direct the exercise of voting power except
solely by virtue of a revocable proxy, would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third; (ii) one-third or more but
less than a majority; or (iii) a majority of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses and delivery of an "acquiring person statement"), may compel the
corporation's board of directors to call a special meeting of stockholders to be
held within 50 days
70
<PAGE>
of demand to consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question at any
stockholders' meeting.
Unless the charter or bylaws provide otherwise, if voting rights are
not approved at the meeting or if the acquiring person does not deliver an
acquiring person statement within 10 days following a control share acquisition
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. Moreover, unless the
charter or bylaws provide otherwise, if voting rights for control shares are
approved at a stockholders' meeting and the acquiror becomes entitled to
exercise or direct the exercise of a majority or more of all voting power, other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
Common Stock
The Company is authorized to issue 15,000,000 shares of stock, of which
10,000,000 shares are designated Common Stock and 5,000,000 shares are
designated Serial Preferred Stock. Currently, there are 1,478,972 shares of
Common Stock issued and outstanding, and no shares of serial preferred stock are
issued or outstanding. The Company expects to issue a minimum of 333,334 and a
maximum of 833,334 shares of Common Stock and no shares of serial preferred
stock in connection with the Offering.
Voting Rights. The holders of Company Common Stock possess exclusive
voting rights in the Company, except to the extent that shares of serial
preferred stock issued in the future may have voting rights, if any. Each holder
of Common Stock will be entitled to one vote for each share held of record on
all matters submitted to a vote of holders of the Common Stock.
Dividends. Subject to such preferences as may be applicable to any
shares of preferred stock which may be issued in the future, the holders of
Common Stock are entitled to such dividends as the Board of Directors may
declare from time to time out of funds legally available therefore and are
entitled to share pro rata in liquidating and other distributions to
shareholders. For information pertaining to cash dividends, see "Dividends."
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of Common Stock which
may be issued. Therefore, the Board of Directors may sell shares of capital
stock of the Company without first offering it to existing stockholders. The
Common Stock is not subject to call for redemption and the outstanding shares of
Common Stock when issued and upon receipt by the Company of the offering price
will be fully paid and non-assessable.
71
<PAGE>
Serial Preferred Stock
None of the 5,000,000 authorized shares of serial preferred stock of
the Company will be issued in the Offering. The Board of Directors of the
Company is authorized to issue serial preferred stock and to fix and state
voting powers, designations, preferences or other special rights of such shares
and the qualifications, limitations and restrictions thereof. If and when
issued, the serial preferred stock is likely to rank prior to the Common Stock
as to dividend rights, liquidation preferences, or both, and may have full or
limited voting rights. The Board of Directors has no present intention to issue
any of the serial preferred stock.
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Amended Articles of Incorporation authorizes the issuance
of 10,000,000 shares of Common Stock. Upon completion of the Offering, there
will be outstanding a minimum of 333,334 and a maximum of 833,334 shares of
Common Stock.
All shares of Common Stock issued in the Offering will be available for
resale in the public market without restriction or further registration under
the Securities Act, except for shares purchased by affiliates of the Company (in
general, any person who has a control relationship with the Company) or shares
exchanged by affiliates in the Reorganization, which shares will be subject to
the resale limitations of Rule 144. After the Offering, 1,180,993 shares of
Common Stock held by affiliates will be considered to be "control shares" and
10,000 shares of Common Stock issuable upon the exercise of options that
the Company has granted or agreed to grant will be "restricted securities"
within the meaning of Rule 144, and are eligible for sale in the public market
in compliance with Rule 144. The Company intends to file a registration
statement on Form S-8 under the Securities Act registering approximately
100,000 shares of Common Stock issuable upon the exercise of options granted
or to be granted pursuant to the Stock Option Plan. Upon effectiveness of the
registration statement, shares issued to nonaffiliates upon the exercise of the
options generally will be freely tradeable without restriction or further
registration under the Securities Act. All officers and directors of the Company
have agreed, subject to certain exceptions, that they will not offer, sell or
otherwise dispose of any shares of Common Stock owned by them for a period of
____ days after the date of this Prospectus without the prior written consent of
the Representatives of the Agents. The Company has agreed, subject to certain
exceptions, that it will not offer, sell or otherwise dispose of any shares of
Common Stock for a period of ___ days after the date of this Prospectus without
the prior written consent of the Representative of the Agents.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of restricted shares
as to which at least two years have elapsed from the later of the acquisition of
such shares from the Company or an affiliate of the Company in an amount that
does not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (18,123 and 23,123 shares based upon 1,812,306 and 2,312,306 shares
to be outstanding at the minimum and the maximum immediately after the
Offering), or (ii) if the Common Stock is quoted on the National Market System
of the Nasdaq Stock Market or a stock exchange, the average weekly trading
volume of the Common Stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice, and the availability of current public information
about the Company. However, a person who is not deemed to have been an affiliate
of the Company during the 90 days preceding a sale by such person and who
72
<PAGE>
has beneficially owned shares as to which at least three years has elapsed from
the later of the acquisition of such shares from the Company or an affiliate of
the Company is entitled to sell them without regard to the volume, manner of
sale, or notice requirements of Rule 144.
THE OFFERING
General
The Company is offering for sale a minimum of 333,334 and a maximum of
833,334 shares of its Common Stock at a price of $6.00 per share to raise gross
proceeds of between $2.0 million and $5 million for the Company. The minimum
purchase for any investor is 200 shares and the maximum purchase is 5% of the
Common Stock sold in the Offering, unless the Company, in its sole discretion,
accepts a subscription for a lesser or greater number of shares. Subscribers
should be aware that beneficial ownership of more than 5% of the outstanding
shares could obligate the beneficial owner to comply with certain reporting and
disclosure requirements of federal and state banking and securities laws.
Subscriptions to purchase shares will be received until 5:00 p.m.,
Annapolis, Maryland time on _______, 1997, unless all of the shares are earlier
sold or the offering is earlier terminated or extended by the Company. See
"--Conditions to the Offering and Release of Funds" below. The Company reserves
the right to terminate the Offering at any time or to extend the expiration date
for additional periods not to extend beyond_______, 1997. The date the Offering
terminates is referred to herein as the "Expiration Date". Written notice of an
extension of the offering period shall be given prior to the commencement of
each extended offering period to all persons who are already subscribers at the
time of the extension but such notice will not alter the binding nature of
subscriptions already accepted by the Company. Extension of the Expiration Date
might cause an increase in the Company's expenses.
Following acceptance by the Company, subscriptions are binding on
subscribers and may not be revoked by subscribers except with the consent of the
Company. In addition, the Company reserves the right to cancel subscriptions
received at any time and for any reason until the proceeds of the Offering are
released from the Escrow Account (as discussed in greater detail in
"--Conditions to the Offering and Release of Funds" below), and the Company
reserves the right to reject, in whole or in part and in its sole discretion,
any subscription. The Company may, in its sole discretion, allocate shares among
subscribers in the event of an over-subscription for the shares of Common Stock.
In determining which subscriptions to accept, in whole or in part, the Company
may take into account the order in which subscriptions are received, a
subscriber's potential to do business with, or to direct customers to, the Bank,
and the Company's desire to have a broad distribution of stock ownership, and
other considerations.
In the event the Company rejects all, or accepts less than all, of any
subscription, the Company will refund promptly without interest the amount
remitted that corresponds to $6.00 multiplied by the number of shares as to
which the subscription is not accepted. If the Company accepts a subscription
but in its discretion subsequently elects to cancel all or part of such
subscription, the Company will refund promptly the amount remitted which
corresponds to $6.00 multiplied by the number of shares as to which the
subscription is canceled, together with any interest earned thereon.
Certificates representing shares duly subscribed and paid for will be
issued by the Company promptly after the Offering conditions are satisfied and
escrowed funds are delivered to the Company.
73
<PAGE>
Conditions to the Offering and Release of Funds
Subscription proceeds accepted by the Company for the initial 333,334
shares subscribed for in this offering will be promptly deposited in an escrow
account with First National Bank of Maryland (the "Escrow Agent"), until the
conditions to the Offering have been satisfied and the Company has requested
such funds, or until the earlier termination of the Offering. The Escrow Agent
has not investigated the desirability or advisability of an investment in the
shares by prospective investors and has not approved, endorsed, or passed upon
the merits of an investment in the shares of Common Stock. Subscription proceeds
held in the Escrow Account will be invested in one or more interest bearing bank
money-market accounts secured by U.S. Government securities. In no event will
the subscription proceeds held in the Escrow be invested in instruments that
would mature after the date on which escrowed funds may be required to be paid
to the Company or returned to investors. The Offering will be terminated, no
shares will be issued, and no subscription proceeds will be released from the
Escrow Account by the Escrow Agent to the Company unless on or before the
Expiration Date the Company has accepted subscriptions for and payment in full
for at least 333,334 shares. The Escrow Agent is not affiliated with the
Company, the Agent, or any Selected Dealers.
If the above conditions are not satisfied by the Expiration Date or if
the Offering is otherwise earlier terminated, accepted subscription agreements
will be of no further force or effect and the full amount of subscription funds
will be returned promptly to subscribers, together with the full amount of
interest earned thereon in the Escrow Account, without deduction of any fees,
commissions, or expenses. In such event, organizational, offering, and
pre-opening costs and expenses will be paid by the Organizers.
If the above conditions are satisfied, the Escrow Account will be
terminated by the Company, in which event the subscription amounts held in
Escrow Account, and any interest earned thereon, will be paid to the Company.
Thereafter, any subscription proceeds accepted by the Company will not be
deposited in the Escrow Account, but will be available for immediate use by the
Company, subject to satisfaction of the conditions of closing set forth in the
Agency Agreement between the Company and the Agent, to fund, offering expenses
of the Company and the Bank and for working capital.
How to Subscribe
Shares may be subscribed for by delivering the Stock Order Form
attached hereto as Exhibit A, completed and executed, to the Stock Information
Center, established by the Agent, on or before the Expiration Date. The address
of the Stock Information Center is 180 Admiral Cochrane Drive, Suite 300,
Annapolis, Maryland 21401. Subscribers should retain a copy of the completed
Stock Order Form for their records. The subscription price is due and payable
when the Stock Order Form is delivered. Payment must be made in United States
dollars by check, bank draft or money order drawn to the order of "First
National Bank of Maryland, as Escrow Agent for Annapolis National Bancorp,
Inc.", in the amount of $6.00 multiplied by the number of shares subscribed for.
Funds also may be delivered to the Escrow Agent by wire transfer. Please call
the Stock Information Center at __________ for further information on wire
transfer instructions.
Notwithstanding the foregoing, the Marketing Agent shall have the
right, in its sole discretion, to permit investors to submit irrevocable orders
together with legally binding commitments for payment for the Common Stock for
which they subscribe at any time prior to the Expiration Date with payment to be
received at any time prior to 24 hours before completion of the Offering.
74
<PAGE>
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date, or Extended Expiration Date, in accordance with
Rule 15c2-8 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), no Prospectus will be mailed any later than five days prior to the
Expiration Date, or Extended Expiration Date, or hand delivered any later than
two days prior to such date. Order forms will only be distributed with a
Prospectus. Execution of the order form will confirm receipt of the Prospectus
in accordance with Rule 15c2-8. The Company is not obligated to accept orders
not submitted on original order forms. Order forms unaccompanied by an executed
acknowledgment form will not be accepted. Payment by check, money order,
bank-draft, cash, or wire transfer must accompany the order and acknowledgment
forms.
Selling Arrangements
The Company has engaged Charles Webb & Company, A Division of Keefe,
Bruyette, & Woods, Inc., (the "Agent") as financial and marketing advisor to
advise the Company with respect to the Offering. The Agent is a member of the
National Association of Securities Dealers, Inc. (the "NASD"). The Agent will
assist the Company in the Offering by, among other things, (i) developing
marketing materials; (ii) targeting potential investors in the Offering; (iii)
soliciting potential investors by phone or in person; and (iv) managing the
subscription campaign.
The Company will pay the Agent a fee equal to 5% of the dollar value of
all stock sold in the Offering, excluding shares sold to the directors and
executive officers of the Company and Bank and members of their immediate
families. Such fees will be paid upon the sale of a minimum of 333,334 shares of
Common Stock, the termination of the Escrow Account, the release of funds to the
Company, and the issuance of shares to subscribers whose subscriptions have been
accepted (the "Closing"). If the shares continue to be sold after the Closing,
the fees due to the Agent will be paid at the termination of the Offering. The
Agent shall be reimbursed for its expenses, including its legal fees, in an
amount not to exceed $______. The Agent has not prepared any report or opinion
constituting a recommendation or advice to the Company or to persons who
subscribe in the Offering, nor has it prepared an opinion as to the fairness to
the Company of the Offering Price or the terms of the Offering. The Agent
expresses no opinion as to the price at which the Common Stock to be issued in
the Offering may trade after the Offering. The Company has agreed to indemnify
the Agent against certain liabilities, including certain liabilities under the
Securities Act relating to the Agreement with the Agent.
The Agent may seek to form a syndicate of registered broker-dealers
(the "Selected Dealers") to assist in the sale of such Common Stock on a best
efforts basis, subject to the terms and conditions set forth in an agreement
with Selected Dealers. The Agent will endeavor to distribute the Common Stock
among Selected Dealers in a fashion which best meets the distribution objectives
of the Company. The Agent will be paid a fee not to exceed 5% of the aggregate
purchase price of the shares of Common Stock sold by them. The Agent will pass
onto Selected Dealers, who assist in the Offering, an amount competitive with
gross underwriting discounts charged at such time for comparable amounts of
stock sold at a comparable price per share in a similar market environment. Fees
with respect to purchases effected with the assistance of Selected Dealers other
than the Agent shall be transmitted by the Agent to such Selected Dealers. Total
marketing fees are expected to be $93,000 and $243,000 at the minimum and
maximum of the Offering, respectively.
75
<PAGE>
Directors and executive officers of the Company may participate in the
solicitation of offers to purchase Common Stock. The Company will rely on Rule
3a4-1 under the Exchange Act, and sales of Common Stock will be conducted within
the requirements of Rule 3a4-1, so as to permit directors and executive officers
of the Company to participate in the sale of Common Stock. No director, officer,
or employee of the Company will be compensated in connection with his/her
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.
TRANSFER AGENT AND REGISTRAR
Annapolis National Bancorp, Inc. is the transfer agent and registrar
for the Company's Common Stock.
EXPERTS
The financial statements of the Company and its subsidiaries as of
December 31, 1996 and for each of the two years in the period ended December 31,
1996, included elsewhere herein have been audited by C.W. Amos & Company,
independent certified public accountants, as stated in their report appearing
elsewhere herein. On April 25, 1996, the Board of Directors of the Company
approved a change in independent certified public accountants to Rowles &
Company, LLP in anticipation of this public offering.
LEGAL MATTERS
The legality of the Common Stock will be passed upon for the Company by
Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the Company.
Certain legal matters will be passed upon for Charles Webb by Silver, Freedman
and Taff, L.L.P. (a partnership including professional corporations) Washington,
D.C.
CHANGE IN ACCOUNTANTS
For the year ended December 31, 1996 the Company's financial statements
were audited by C.W. Amos & Company. C.W. Amos and Company was replaced on April
25, 1996 and Rowles & Company, LLP was engaged and continues as the independent
auditors of the Company. The decision to change auditors was approved by the
Board of Directors of the Company and Bank. The financial statements of the
Company and its subsidiaries as of December 31, 1996 and for each of the two
years in the period ended December 31, 1996, and included in this Prospectus,
were audited by C.W. Amos & Company.
For the year ended December 31, 1996 and up to the date of replacement
of C.W. Amos and Company, there were no disagreements with C.W. Amos & Company
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, not resolved to the
satisfaction of C.W. Amos & Company, would have caused it to make reference to
the subject matter of the disagreement in connection with its report. The
independent auditors' report on the financial statements for the year ended
December 31, 1996 did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope or accounting
principles.
76
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Company and the Common Stock, reference is hereby made to
the Registration Statement and the exhibits thereto. The Registration Statement
may be examined at the public reference facilities maintained by the SEC at 450
Fifth Street, N.W., Washington, DC 20549, and at the following Regional Office
of the SEC: New York Regional Office, 7 World Trade Center, New York, NY 12048.
Copies of the Registration Statement may be obtained at prescribed rates from
the Public Reference Section of the SEC, Room 1024, 450 Fifth Street, N.W.,
Washington, DC 20549. In addition, the SEC maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the SEC.
REPORTS TO SHAREHOLDERS
In connection with the Offering, the Company intends to register the
Common Stock with the SEC under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). The Company will be required to file
electronically annual reports on Form 10-KSB and quarterly reports on Form
10-QSB with the SEC containing consolidated financial statements and other
information concerning the consolidated financial conditions and operations of
the Company and its subsidiaries. Pursuant to the proxy soliciting rules of the
SEC, the Company will also furnish its stockholders with annual reports
containing audited financial information for each fiscal year and will
distribute quarterly reports for the first three quarters of each of the fiscal
years containing unaudited summary financial information. The Company's fiscal
year ends on December 31.
77
<PAGE>
C. W. AMOS & COMPANY, LLC
170 Jennifer Road
Suite 320
Annapolis, Maryland 21401-3064
Independent Auditors' Report
----------------------------
Board of Directors
Annapolis National Bancorp, Inc.
Formerly Maryland Publick Banks, Inc.
Annapolis, Maryland
We have audited the accompanying consolidated balance sheet of Annapolis
National Bancorp, Inc. and its subsidiary, Annapolis National Bank, as of
December 31, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide 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 its subsidiary as of December 31, 1996, and the results of
their operations and their cash flows for the two years then ended in conformity
with generally accepted accounting principles.
Annapolis, Maryland
January 23, 1997
<PAGE>
Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
Unaudited
March 31, December 31,
1997 1996 1996
--------- -------- ------------
<S><C>
Assets
Cash and due from banks $ 3,452 $ 1,787 $ 6,084
Federal funds sold 8,038 5,939 4,379
Securities purchased under agreement to resell 4,263 8,232 4,750
Federal Reserve Bank stock, at cost 194 179 194
Investment securities available-for-sale (Note 2) 6,246 17,980 11,140
Investment securities held-to-maturity (Note 2) 3,892 - 1,993
Loans, less allowance for credit losses (Note 3) 68,595 58,440 68,800
Premises and equipment (Note 4) 1,283 1,271 1,335
Core deposits and other intangible assets acquired (Note 5) 281 896 788
Accrued interest receivable 437 409 437
Deferred income taxes 1,120 - -
Other real estate owned 140 496 140
Other assets 198 242 187
--------- -------- ---------
Total assets $ 98,139 $ 95,871 $ 100,227
========= ======== =========
Liabilities and Stockholders' Equity
Deposits (Note 6)
Noninterest-bearing $ 10,795 $ 8,595 $ 10,052
Interest-bearing 72,762 74,979 77,054
--------- -------- ---------
83,557 83,574 87,106
Securities sold under agreements to repurchase (Note 2) 7,142 6,011 6,345
Accrued interest and other liabilities 554 208 302
Note and accrued interest payable to stockholder (Note 7 & 12) 1,023 945 1,003
--------- -------- ---------
Total liabilities 92,276 90,738 94,756
--------- -------- ---------
Commitments (Notes 9 and 10)
Stockholders' equity (Notes 8, 10, and 12)
Preferred stock - $.01 par value - - -
Common stock - $.01 par value 15 15 15
Capital surplus 8,634 8,634 8,634
Accumulated deficit (2,778) (3,471) (3,162)
Unrealized losses on investments in available for sale securities (Note 2) (8) (45) (16)
--------- -------- ---------
Total stockholders' equity 5,863 5,133 5,471
--------- -------- ---------
Total liabilities and stockholders' equity $ 98,139 $ 95,871 $ 100,227
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
For the Years Ended December 31, 1996 and 1995
and the Three Month Periods Ended March 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Unaudited
March 31, December 31,
---------------------- ----------------------------
1997 1996 1996 1995
--------- --------- ------------ ------------
<S><C>
Interest income
Loans $ 1,716 $ 1,539 $ 6,481 $ 6,380
Investment securities 150 237 975 714
Federal funds sold and securities purchased
under agreement to resell 121 171 565 557
--------- --------- ------------ ------------
Total interest income 1,987 1,947 8,021 7,651
--------- --------- ------------ ------------
Interest expense
Certificates of deposit, $100,000 or more 47 68 238 207
Other deposits 634 715 2,814 2,582
Securities sold under agreements to repurchase 54 52 231 214
Interest on borrowed funds 19 20 79 96
--------- --------- ------------ ------------
Total interest expense 754 855 3,362 3,099
--------- --------- ------------ ------------
Net interest income 1,233 1,092 4,659 4,552
Provision for credit losses (Note 3) 237 50 452 318
--------- --------- ------------ ------------
Net interest income after provision for credit losses 996 1,042 4,207 4,234
--------- --------- ------------ ------------
Other income
Gain (loss) on sale of loans, securities, equipment,
and other real estate owned, net 95 82 (31) 104
Service charges and other 70 42 619 417
--------- --------- ------------ ------------
165 124 588 521
--------- --------- ------------ ------------
Operating expenses
Personnel 517 557 2,219 1,939
Occupancy and equipment (Note 9) 204 179 731 719
Restructuring 830 - - -
Other operating expenses 310 280 1,278 1,156
Amortization of intangible assets acquired (Note 5) 36 36 144 143
--------- --------- ------------ ------------
1,897 1,052 4,372 3,957
--------- --------- ------------ ------------
Net income, before income taxes (736) 114 423 798
Income tax expense (Note 11) 1,120 - - (6)
--------- --------- ------------ ------------
Net income $ 384 $ 114 $ 423 $ 792
========= ========= ============ ============
Earnings per common share $ 0.26 $ 0.08 $ 0.29 $ 0.57
========= ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1996 and 1995
and the Three Month Periods Ended March 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
loss on
Common stock Accumulated investment
Shares Par value Surplus deficit securities Total
------ --------- ------- ----------- ---------- -----
<S><C>
Balance, December 31, 1994 541,300 $ 6 $ 5,380 $ (4,377) $ (249) $ 760
Sale of common stock (Note 12) 937,672 9 3,254 - - 3,263
Net income - - - 792 - 792
Change in unrealized loss - - - - 231 231
--------- ------------ ---------- -------------- ---------- ---------
Balance, December 31, 1995 1,478,972 15 8,634 (3,585) (18) 5,046
Net income - - - 423 - 423
Change in unrealized loss - - - - 2 2
--------- ------------ ---------- -------------- ---------- ---------
Balance, December 31, 1996 1,478,972 15 8,634 (3,162) (16) 5,471
Net income - - - 384 - 384
Change in unrealized loss - - - - 8 8
--------- ------------ ---------- -------------- ---------- ---------
Balance,
March 31, 1997 (unaudited) 1,478,972 $ 15 $ 8,634 $ (2,778) $ (8) $ 5,863
========= ============ ========== ============== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Annapolis National Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995
and the Three Month Periods Ended March 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996 1996 1995
---- ---- ---- ----
<S><C>
Cash flows from operating activities
Net income $ 384 $ 114 $ 423 $ 792
Adjustments to reconcile net income to net cash provided
by operating activities
Deferred income taxes (1,120) - - -
Write-off of intangibles 471 - - -
Depreciation and amortization of furniture, equipment,
and leasehold improvements 50 42 187 148
Amortization of discounts and premiums - - 10 (137)
Amortization of intangible assets acquired 36 36 144 144
Decrease (increase) in accrued interest receivable - 11 (17) (29)
Accrued interest on note to stockholder 19 20 79 96
Provision for credit losses 237 50 452 318
Net loss (gain) on sale of loans, securities,
equipment, and other real estate owned - - 32 (104)
Other 263 (258) (19) 36
------- ------- -------- --------
Net cash provided by operating activities 340 15 1,291 1,264
------- ------- -------- --------
Cash flows from investing activities
Net increase in loans (32) (2,363) (13,217) (2,211)
Investment in securities -- held-to-maturity (1,899) - (1,946) -
Investment in securities -- available-for-sale - - (17,687) (24,776)
Proceeds from sale and redemption of securities
and principal repayments 4,886 137 24,622 13,333
Other real estate owned:
Acquired - - (140) (16)
Sold - - 464 -
Proceeds from sale of loans - - - 2,620
Net decrease (increase) in federal funds sold (3,659) (716) 844 (898)
Net decrease (increase) in securities purchased
under agreements to resell 487 (482) 3,000 (5,250)
Purchase of furniture, equipment, and leasehold improvements (3) (316) (525) (720)
------- ------- -------- --------
Net cash used in investing activities (220) (3,740) (4,585) (17,918)
------- ------- -------- --------
</TABLE>
(Continued)
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996 1996 1995
---- ---- ---- ----
<S><C>
Cash flows from financing activities
Net increase (decrease) in deposits $(3,549) $ 1,478 $5,010 $15,978
Net increase (decrease) in securities sold
under agreements to repurchase 797 (959) (625) 2,229
Proceeds from sale of common stock - - - 88
------- ------- ------ -------
Net cash provided by financing activities (2,752) 519 4,385 18,295
------- ------- ------ -------
Net increase (decrease) in cash (2,632) (3,206) 1,091 1,641
Cash, beginning of period 6,084 4,993 4,993 3,352
------- ------- ------ -------
Cash, end of period $ 3,452 $ 1,787 $6,084 $ 4,993
======= ======= ====== =======
Supplemental cash flows information
Interest paid on deposits and repurchase agreements $ 739 $ 835 $3,283 $ 3,003
======= ======= ====== =======
Income taxes paid $ - $ - $ - $ 6
======= ======= ====== =======
Supplemental Non-Cash financing activity
Conversion of stockholder note to common stock $ - $ - $ - $ 3,175
======= ======= ====== =======
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
1. The Company and its Significant Accounting Policies
The Company was incorporated on May 26, 1988 under the laws of the State
of Maryland to serve as a bank holding company and formed Annapolis
National Bank (the Bank) as a wholly owned subsidiary. The Company is
registered as a bank holding company and the Bank is chartered as a
national bank. The Company (as a bank holding company) and the Bank (as a
nationally chartered bank) are subject to governmental supervision,
regulation, and control.
In late 1993, the Bank formed a new company, ANB Mortgage Services, LLC
(ANB Mortgage), for the purpose of originating and servicing residential
construction loans. ANB Mortgage assets and liabilities and its results
of operation are consolidated in the accompanying financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary, Annapolis National Bank and the
Bank's subsidiary, ANB Mortgage Services, LLC. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Securities Held-to-Maturity
Debt securities for which the company has the positive intent and ability
to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest
method over the period of maturity.
Securities Available-for-Sale
Available-for sale securities consist of bonds, notes, and debentures not
classified as trading securities nor as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of
stockholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary would result in write-downs of the individual securities to
their fair value. The related write-downs would be included in earnings
as realized losses.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
Loans and allowance for loan losses
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the related
loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.
F-6
<PAGE>
Notes to Consolidated Financial Statements
1. The Company and its Significant Accounting Policies
Loans and allowance for loan losses (Continued)
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic
conditions.
Furniture, equipment, and leasehold improvements
Furniture, equipment, and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation is charged to
operations over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized over the
shorter of the lease term or the life of the improvement.
Purchase method of accounting
Net assets acquired in purchase transactions are recorded at their face
value at the date of acquisition. Core deposits and other intangible
assets are amortized on either an accelerated or straight line basis over
the estimated periods benefited.
Securities sold under agreements to repurchase
Securities sold under agreements to repurchase are accounted for as
borrowings and recorded as a liability of the Company at the amount of
the repurchase obligation. These agreements mature the day following the
transaction.
Securities purchased under agreements to resell
Securities purchased under agreements to resell are accounted for as
investments and recorded as an asset of the Company at cost. They are
collateralized by securities held by a third party custodian, with a fair
value of $4,857,000 at December 31, 1996. The agreements mature the day
following the transaction. Securities purchased under agreements to
resell averaged approximately $5,821,000 during 1996, and the maximum
amount outstanding at any month-end during 1996 was $8,750,000.
Other real estate owned
Other real estate owned includes formally foreclosed property and is
recorded at the lower of the Company's cost or the asset's fair value,
less estimated costs to sell, at the time of acquisition. Any write-downs
based on the asset's fair value at date of acquisition are charged to the
allowance for loan losses. Costs incurred in maintaining foreclosed real
estate and subsequent write-downs to reflect declines in the fair value
of the property are included in operating expenses. Such costs and
write-downs were $41,000 in 1996.
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents is
composed of cash on hand and amounts due from correspondent banks and the
Federal Reserve Bank.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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 and the reported amounts of revenue and expenses
during the reporting period.
F-7
<PAGE>
Notes to Consolidated Financial Statements
2. Investment Securities
The amortized cost and fair value of investment securities are as
follows:
Available-for-sale securities
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
(Dollars in thousands) cost gains losses value
------------------------------------------- --------- ---------- ---------- ---------
<S><C>
December 31, 1996:
U.S. Treasury $ 9,156 $ 2 $ 1 $ 9,157
U.S. Government agency notes 1,000 - 4 996
Mortgage-backed securities (including REMIC's)
issued by FHLMC 1,000 - 13 987
--------- ------- -------- --------
$ 11,156 $ 2 $ 18 $ 11,140
========= ======= ======== ========
Held-to-maturity securities
December 31, 1996:
U.S. Treasury securities $ 1,993 $ - $ 7 $ 1,986
========= ======= ======== ========
</TABLE>
Securities with a cost of $6,367,000 (fair value of $6,352,000) were sold
to commercial customers of the Bank under agreements for the Bank to
repurchase the securities in the amount of $6,345,000 at December 31,
1996. Information concerning securities sold under agreement to
repurchase is summarized as follows:
(Dollars in thousands) 1996
------------------------------------------ --------
Average balance during the year $ 7,762
Average interest rate during the year 2.97%
Maximum month-end balance during the year $ 9,591
Proceeds from the sales of securities during 1996 were $1,980,000.
Securities held at December 31, 1996, mature as follows:
<TABLE>
<CAPTION>
Estimated
Amortized fair
(Dollars in thousands) cost value
------------------------------------ --------- ---------
<S><C>
Within one year $ 10,155 $ 10,153
After one year through five years (held-to-maturity security) 1,993 1,986
Mortgage backed securities with varying maturity dates 1,000 987
--------- ---------
$ 13,148 $ 13,126
========= =========
</TABLE>
F-8
<PAGE>
Notes to Consolidated Financial Statements
3. Loans and Allowance for Loan Losses
The Company grants commercial and consumer loans to customers primarily
in its market area of Anne Arundel and Queen Anne's Counties in Maryland.
The principal categories of the loan portfolio of the Company, as of
December 31, 1996, are as follows:
(Dollars in thousands)
-------------------------------
Commercial $ 30,801
Real estate
Commercial 17,845
Construction 10,173
Residential 1-4 family 7,002
Home equity 1,744
Consumer 2,332
--------
69,897
Unearned income (332)
Allowance for loan losses (765)
--------
$ 68,800
========
The allowance for loan losses is summarized as follows:
December 31,
(Dollars in thousands) 1996 1995
------------------------------- ------- -------
Balance, beginning of year $ 617 $ 687
Provision charged to operations 452 318
Loans charged off (322) (395)
Recoveries 18 7
------- -------
Balance, end of year $ 765 $ 617
======= =======
F-9
<PAGE>
Notes to Consolidated Financial Statements
3. Loans and Allowance for Loan Losses (Continued)
Loans on which the accrual of interest has been discontinued amounted to
$1,894,000, and the related allowance for loan losses was $183,000 at
December 31, 1996. The impairment of these loans has been recognized in
conformity with FASB Statement No. 114, as amended by FASB Statement No.
118. Of the nonaccrued loans outstanding at December 31, 1996, $1,076,000
are guaranteed by the SBA, $136,000 of principal was collected through
January 23, 1997 and the Bank has cash collateral relating to the loans
of $20,000. If interest on nonaccrual loans had been accrued, such income
would have approximated $78,000 during 1996. Payments totaling
approximately $56,000 were received on these loans during 1996 and were
applied to the interest of these loans. It is the Bank's policy to
examine these loans on a case by case basis to determine if payments
received will be applied to principal or past interest. The average
balance of impaired loans was $1,276,000 for the year ended December 31,
1996.
Certain officers and directors (and companies in which they 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. Such loans were $3,071,000 at
December 31, 1996. Activity during 1996 follows:
(Dollars in thousands)
------------------------------------
Balance, beginning of year $ 2,153
New loans 1,764
Repayments (846)
-------
Balance, end of year $ 3,071
=======
4. Premises and Equipment
Furniture, equipment, and leasehold improvements are as follows:
(Dollars in thousands)
--------------------------------------
Furniture and equipment $ 1,046
Leasehold improvements 805
---------
1,851
Less: accumulated depreciation and amortization (516)
---------
$ 1,335
=========
F-10
<PAGE>
Notes to Consolidated Financial Statements
5. Purchase and Assumption Agreement
In June, 1990 the Company acquired most of the assets and assumed most of
the deposit liabilities of a failed savings and loan, Gibraltar Savings
and Loan Association, F.A. from the Resolution Trust Corporation under a
Purchase and Assumption Agreement. The acquisition was recorded as a
purchase of assets and assumption of liabilities at their fair value of
the date of acquisition using the purchase method of accounting. The
excess of the purchase price and related costs over the fair value of the
net tangible assets acquired represented a premium paid for the core
deposit base and other intangible assets in the amount of $2,127,000. The
premium is being amortized over a period expiring in 2005.
6. Interest-bearing Deposits
Deposit balances and rates at December 31, 1996, are summarized as
follows:
Weighted
average
(Dollars in thousands) Amount rate
---------------------------------- ------- --------
Time deposit accounts:
Less than $100,000 $25,059 5.27%
$100,000 or greater 3,617 5.25%
Money market accounts 14,401 3.66%
NOW accounts 20,759 2.48%
Other savings accounts 13,218 3.36%
------- ----
$77,054 3.44%
======= ====
The time deposit accounts mature and/or reprice as follows: in three
months or less - $12,687,000; four months to one year - $13,884,000; and
over one year - $2,105,000.
7. Note and accrued interest payable to stockholder
In, June, 1990 the Company borrowed $3,000,000 under an unsecured
promissory note to a stockholder of the Company to provide sufficient
regulatory capital to allow the Company to purchase and assume
Gibraltar's assets and liabilities (Note 5). Interest accrued, but not
paid, on the note was at an annual rate equal to the Bank's prime rate
less 2%. In December, 1989, this same stockholder advanced funds to the
Company to provide sufficient funds to start banking operations in
January, 1990.
The stockholder acquired 907,143 shares of stock in exchange for
$3,175,000 due him in a stock offering which terminated in January, 1995
(see Note 12). The Company issued a new note for the remaining amount
owed the stockholder ($848,400). Interest accrues on the note at an
annual rate of the prime rate published in the Wall Street Journal plus
1%. The principal and interest on the note are due December 31, 1997.
Interest expense accrued, but not paid on the notes was $79,000 in 1996.
8. Common Stock Warrants
The Company had issued warrants to purchase 6,900 shares of its common
stock at a price of $10.00 per share. The warrants expired in April, 1996
without any of the warrants being exercised.
F-11
<PAGE>
Notes to Consolidated Financial Statements
9. Commitments
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by
the Company upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include
accounts receivable; inventory, property, plan, and equipment; and income
producing commercial properties.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Company to guarantee the
performance of the customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company holds collateral
supporting those commitments for which collateral is deemed necessary.
The Company has not been required to perform on any financial guarantees
during the past two years. The Company has not incurred any losses on its
commitments in either 1996 or 1995.
At December 31, 1996, a summary of the Company's commitments is as
follows:
Commitments to extend credit $ 14,762,000
Standby letters of credit of which $746,000 are
secured by funds deposited in Bank $ 1,250,000
The above commitments to extend credit include $6,106,000 of undisbursed
funds under residential construction/development mortgage loans.
The Company has either entered into or assumed leases for its branches
and office space. Some of the leases contain renewal options. The minimum
noncancelable future rental commitments at December 31, 1996 are as
follows:
Year ending
December 31, (in thousands)
------------ --------------
1997 $ 429
1998 415
1999 386
2000 312
2001 85
Thereafter 372
The related rent expense was $402,000 in 1996 and $430,000 in 1995.
F-12
<PAGE>
Notes to Consolidated Financial Statements
10. Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined). Management believes,
as of December 31, 1996, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios at December 31, 1996
are presented in the following table:
<TABLE>
<CAPTION>
To be "Adequately To be "Well
Actual capitalized" capitalized"
-------------------------- -------------------------- ----------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------------------------ ---------- ------- ---------- ------- ---------- --------
<S><C>
Total capital
(to risk-weighted assets) $ 6,446 10.2% > $ 5,035 > 8.0% > $ 6,294 > 10.0%
- - - -
Tier 1 capital
(to risk-weighted assets) $ 5,681 9.0% > $ 2,518 > 4.0% > $ 3,776 > 6.0%
- - - -
Tier 1 capital
(to average assets) $ 5,681 5.8% > $ 3,898 > 4.0% > $ 4,879 > 5.0%
- - - -
</TABLE>
At December 31, 1996, no retained earnings were available for dividend
declaration without prior regulatory approval.
11. Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes.
SFAS No. 109 uses an asset and liability approach for the recognition of
deferred tax liabilities and assets based on the expected future tax
consequences of temporary differences between the carrying amounts and
the tax bases of certain assets and liabilities.
F-13
<PAGE>
Notes to Consolidated Financial Statements
11. Income Taxes (Continued)
Temporary differences consist primarily of net operating loss carryovers,
allowance for loan losses, depreciation and amortization, and income on
loans. Since the utilization of these benefits is dependent on future
taxable earnings of the Company, a valuation allowance for deferred taxes
of $1,123,000 has been recognized.
December 31,
(Dollars in thousands) 1996
----------------------------------- ------------
Deferred tax assets $ 1,283
Deferred tax liabilities (160)
Valuation allowance (1,123)
---------
Net deferred tax assets recognized $ -
=========
The Company has a net tax operating loss (NOL) carryforward at December
31, 1996 of approximately $2,400,000 available to reduce future taxable
income. The carryforward periods expire through the year 2009.
Book income was increased (reduced) by the following to arrive at taxable
income.
(Dollars in thousands) 1996
------------------------------------ ------
Book income $ 422
Permanent differences 44
Temporary differences 171
------
Taxable income, before NOL $ 637
======
Net operating loss used $ 637
======
12. Capital Stock and Sale of Common Stock
During 1995, the Company amended its articles of incorporation to
increase its preferred stock and common stock shares authorized from
1,000,000 and 2,000,000 shares to 5,000,000 and 10,000,000 shares,
respectively. There were no shares of preferred stock issued in 1996 and
1,478,972 shares of common stock issued and outstanding at December 31,
1996.
During December, 1994, the Company offered to its stockholders of record
(December 10, 1994, record date) the right to acquire 2.5 shares of stock
(basic subscription) for each share of stock owned at the price of $3.50
per share. Additionally, to the extent that all options to purchase
shares were not exercised, each stockholder who purchased all of the
shares pursuant to the basic subscription had the supplemental right to
subscribe to any unpurchased shares (over-subscription right). The
offering terminated on January 31, 1995. As a result of this offering,
937,672 shares were purchased. The Company's principal stockholder
acquired 907,143 shares in exchange for $3,175,000 of the amount due to
him by the Company.
F-14
<PAGE>
Notes to Consolidated Financial Statements
13. Profit Sharing Plan
The Company has a profit sharing plan with a 401(k) feature 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's contributions to the plan were $19,596 in
1996 and $15,000 in 1995.
14. Fair Value of Financial Instruments
The Company has considered disclosure of the fair value of its financial
instruments, including those off balance sheet items disclosed in Note 9,
as required by Financial Accounting Standards Board Statement No. 107,
and determined that the differences between the fair value of its assets
and liabilities and their carrying values are insignificant. The Company
has reached this conclusion after evaluating the repricing and terms of
its financial instruments. A substantial portion of such instruments
reprice annually and are short-term in nature. As a result, the related
fair values approximate the value reported in the financial statements at
December 31, 1996.
15. Parent Company Financial Information
The balance sheet and statements of income and cash flows for Annapolis
National Bancorp, Inc. (Parent Only) follows:
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1996
----------------------------------------------------------------------------------------------
<S><C>
Balance Sheet
Assets
Cash $ 21
Investment in Annapolis National Bank 6,454
--------
Total assets $ 6,475
========
Liabilities and Stockholders' Equity
Note payable $ 848
Accrued interest expense 156
--------
Total liabilities 1,004
--------
Stockholders' equity
Common stock, par value $.01 per share; authorized
10,000,000 shares; issued and outstanding 1,478,972 shares 15
Additional paid-in capital 8,634
Retained earnings (deficit) (3,162)
Net unrealized loss on securities available for sale (16)
--------
Total stockholders' equity 5,471
--------
Total liabilities and stockholders' equity $ 6,475
========
</TABLE>
F-15
<PAGE>
Notes to Consolidated Financial Statements
15. Parent Company Financial Information (Continued)
Year ended
(Dollars in thousands) December 31, 1996
-------------------------------------------------------------------------
Statement of Income
Equity in undistributed income of subsidiary $ 502
Interest expense 79
-------
Net income $ 423
=======
(Dollars in thousands)
-------------------------------------------------------------------------
Statement of Cash Flows
Cash and equivalents at beginning of year $ 23
-------
Cash and equivalents at end of year $ 23
=======
Cash flows from operating activities
Net income $ 423
Adjustments to reconcile net income to net cash used in
operating activities
Undistributed net income of subsidiary (502)
Interest accrued, not paid 79
-------
Net change in cash $ -
=======
F-16
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
=================================================================== ==========================================================
No dealer, salesman or any other person has been
authorized to give any information or to make any
representation other than as contained in this Prospectus in
connection with the offering made hereby, and, if given or
made, such other information or representation must not be
relied upon as having been authorized by the Company, Inc.,
the Bank or Charles Webb & Co, Inc., A Division of Keefe, _________ Shares
Bruyette & Woods. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in
which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to [LOGO]
do so, or to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction. Neither the delivery
of this Prospectus nor any sale hereunder shall under any ANNAPOLIS NATIONAL
circumstances create any implication that there has been no BANCORP, INC.
change in the affairs of the Company or the Bank since any of
the dates as of which information is furnished herein or since
the date hereof.
------------------------------
TABLE OF CONTENTS
COMMON STOCK
Summary
Summary Consolidated Financial and Other Data
Risk Factors __________
Use of Proceeds
Market for Common Stock PROSPECTUS
Dividends __________
Dilution
Capitalization CHARLES WEBB & CO., INC.
Consolidated Statements of Income A DIVISION OF KEEFE, BRUYETTE & WOODS
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business _______________ ___, 1997
Regulation and Supervision
The Board of Directors and Management of the Company
The Board of Directors and Management of the Bank
Restrictions on Acquisition of the Company
Description of Capital Stock of the Company
Shares Eligible for Future Use
The Offering
Transfer Agent and Registrar
Experts
Legal matters
Additional Information
Reports to Shareholders
------------------------------
Until __________, 1997 or 25 days after commencement
of the Offering, if any, whichever is later, all dealers effecting
transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
=================================================================== ==========================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
In accordance with Section 2-418 of the Corporations and Associations Article of
the Annotated Code of Maryland, Articles Ninth and Tenth of the Registrant's
Articles of Incorporation provide as follows:
ARTICLE XII
Indemnification
The Corporation shall indemnify to the fullest extent permissible under the
Maryland General Corporation Law any individual who is or was a director,
officer, employee, or agent of the Corporation, and any individual who serves or
served at the Corporation's request as a director, officer, partner, trustee,
employee, or agent of another corporation, partnership, joint venture, trust or
other enterprise, in any proceeding in which the individual is made a party as a
result of his service in such capacity. An individual will not be indemnified if
it is proved that the act or omission at issue was material to the cause of
action adjudicated in the subject proceeding and that (i) it was committed in
bad faith, or (ii) it was the result of active and deliberate dishonesty, or
(iii) the individual actually received an improper personal benefit in money,
property, or services, or (iv) in the case of a criminal proceeding, the
individual had reasonable cause to believe that the act or omission was
unlawful.
ARTICLE XIII
Limitations on Liability of Officers and Directors
An officer or director of the Corporation shall not be personally liable to
the Corporation or its shareholders for monetary damages for breach of their
fiduciary duty as an officer or director, unless: (i) it is proved that the
individual officer or director actually received an improper benefit or profit
in money, property or services from the Corporation; or (ii) a judgment or other
final adjudication adverse to the individual officer or director is entered in a
proceeding based on a finding in the proceeding that the individual's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. If the Maryland
General Corporation Law is amended to further eliminate or limit the personal
liability of officers and directors, then the liability of officers and
directors of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Maryland General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the shareholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
SEC filing fee(1).................................... $ 1,563
Printing, postage and mailing........................ 12,000
Legal fees and expenses.............................. 75,000
Selling commissions(1) and expenses.................. 300,000
Marketing expenses................................... 10,000
Accounting fees and expenses......................... 10,000
Blue Sky fees and expenses .......................... 10,000
Bank Escrow Agreement................................ 5,000
Miscellaneous........................................ 16,437
--------
TOTAL................................................ $440,000
========
(1) Actual expenses based upon the registration of 833,334 shares at $6.00
per share. All other expenses are estimated.
Item 26. Recent Sales of Unregistered Securities
In December 1994, the Company offered certain existing stockholders the
right to purchase 2.5 shares of Company Common Stock for each share of Common
Stock owned at the price of $3.50 per share. A total 937,672 shares were sold to
14 stockholders of which 30,529 were sold for $3.50 per share. The balance,
907,143 shares, were sold to one stockholder in exchange for the retirement of
$3.175 million, the principal portion of a debt owed to the principal
stockholder by the Company. Each purchaser in the offering was either an
accredited investor or, if not an accredited investor, either alone or with his
or her purchaser representative, had such knowledge and experience in financial
and business matters that he or she was capable of evaluating the merits and
risks of the investment. The offering was made in reliance upon Section 4(2) of
the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated
thereunder.
<PAGE>
Item 27. Exhibits
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Annapolis National Bancorp and Charles Webb &
Company, A Division of Keefe, Bruyette & Woods, Inc.
1.2 Draft Form of Underwriting Agreement between Annapolis National Bancorp
and Charles Webb & Company, A Division of Keefe, Bruyette & Woods, Inc.*
3.1 Amended and Restated Articles of Incorporation of Annapolis National
Bancorp, Inc.
3.2 Bylaws of Annapolis National Bancorp, Inc.
3.3 Articles of Incorporation of Annapolis National Bank
3.4 Bylaws of Annapolis National Bank
4.0 Draft Stock Certificate of Annapolis National Bancorp, Inc.
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
10.1 Employment Agreement between Annapolis National Bancorp, Inc. and John W.
Marhefka, Jr.
10.2 Promissory Note Between Annapolis National Bancorp, Inc. and Lawrence E.
Lerner dated January 31, 1995.
10.3 Annapolis National Bancorp, Inc. Employee Stock Option Plan
10.4 Form of Escrow Agreement between Annapolis National Bancorp, Inc. and
the First National Bank of Maryland
23.1 Consent of Muldoon, Murphy & Faucette
23.2 Consent of Rowles & Company, LLP
23.3 Consent of C.W. Amos & Company
24.1 Powers of Attorney
27.0 Financial Data Schedule
- ----------
*To be filed by amendment.
<PAGE>
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration
Statement:
(i) To include any Prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
which, individually or together, represent a
fundamental change in the information set forth in
the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement; and
(iii) To include any additional or changed information on
the plan of distribution;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, treat each post-effective amendment as
a new Registration Statement of the securities offered, and
the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain
unsold at the end of the offering.
The undersigned Registrant hereby undertakes to furnish stock
certificates to or in accordance with the instructions of the respective
purchasers of the Common Stock, so as to make delivery to each purchaser
promptly following the closing.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 will be governed by the final
adjudication of such issue.
<PAGE>
CONFORMED
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certified that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Annapolis, State of Maryland, on June 23, 1997.
Annapolis National Bancorp, Inc.
By: /s/ John W. Marhefka, Jr.
---------------------------------------
John W. Marhefka, Jr.
Director, Chief Executive Officer, Vice
President and Assistant Secretary
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
Name Title Date
---- ----- ----
/s/ John W. Marhefka, Jr. Director, Chief Executive June 23, 1997
- -------------------------- Officer, Vice President and
John W. Marhefka, Jr. Assistant Secretary (principal
executive officer)
/s/ Albert Phillips Chairman of the Board and June 23, 1997
- -------------------------- President
Albert Phillips
/s/ Stanley H. Katsef Vice Chairman of the Board June 23, 1997
- --------------------------
Stanley H. Katsef
/s/ Russell J. Grimes, Jr. Chief Financial Officer and June 23, 1997
- -------------------------- Treasurer (principal accounting
Russell J. Grimes, Jr. and financial officer)
/s/ Ronald E. Gardner Director June 23, 1997
- --------------------------
Ronald E. Gardner
/s/ Stanley J. Klos, Jr. Director June 23, 1997
- --------------------------
Stanley J. Klos, Jr.
/s/ Lawrence E. Lerner Director June 23, 1997
- --------------------------
Lawrence E. Lerner
/s/ Richard M. Lerner Director June 23, 1997
- --------------------------
Richard M. Lerner
<PAGE>
/s/ Dimitri P. Mallios Director June 23, 1997
- --------------------------
Dimitri P. Mallios
/s/ Lawrence W. Schwartz Director June 23, 1997
- --------------------------
Lawrence W. Schwartz
<PAGE>
LIST OF EXHIBITS
List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Annapolis National Bancorp, Inc. and Charles
Webb & Company, A Division of Keefe, Bruyette & Woods, Inc.
1.2 Draft Form of Underwriting Agreement between Annapolis National
Bancorp, Inc. and Charles Webb & Company, A Division of Keefe, Bruyette
& Woods, Inc.*
3.1 Amended and Restated Articles of Incorporation of Annapolis National
Bancorp, Inc.
3.2 Bylaws of Annapolis National Bancorp, Inc.
3.3 Articles of Incorporation of Annapolis National Bank
3.4 Bylaws of Annapolis National Bank
4.0 Draft Stock Certificate of Annapolis National Bancorp, Inc.
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
10.1 Employment Agreement between Annapolis National Bancorp, Inc. and John
W. Marhefka, Jr.
10.2 Promissory Note between Annapolis National Bancorp, Inc. and Lawrence
E. Lerner dated January 31, 1995
10.3 Annapolis National Bancorp, Inc. Employee Stock Option Plan
10.4 Form of Escrow Agreement between Annapolis National Bancorp, Inc. and
the First National Bank of Maryland
23.1 Consent of Muldoon, Murphy & Faucette
23.2 Consent of Rowles & Company, LLP
23.3 Consent of C.W. Amos & Company
24.1 Powers of Attorney
27.0 Financial Data Schedule
- ----------
*To be filed by amendment.
Exhibit 1.1 Engagement Letter between Annapolis National Bancorp, Inc. and
Charles Webb & Company, A Division of Keefe, Bruyette & Woods,
Inc.
<PAGE>
[KBW LOGO] Charles Webb & Company [LOGO]
A Division of
KEEFE, BRUYETTE & WOODS, INC.
May 2, 1997
Mr. John W. Marhefka, Jr.
President and Chief Executive Officer
Annapolis National Bank
180 Admiral Cochrane Drive
Suite 300
Annapolis, Maryland 21401
Dear Mr. Marhefka:
This is in connection with the your proposal to recapitalize Annapolis National
Bank, (the "Bank") through a public offering of stock (the "Offering") of the
Bank's holding company, Maryland Publick Banks (the "Company"). Charles Webb
& Company, a Division of Keefe Bruyette & Woods, Inc. ("Webb" and "KBW") will
act as the Bank's and the Company's exclusive financial advisor and marketing
agent/managing dealer in connection with the Offering. This letter sets forth
selected terms and conditions of our engagement.
1. Advisory/Offering Services. As the Bank's and Company's financial advisor and
marketing agent, Webb will provide the Bank and the Company with a comprehensive
program of services designed to promote an orderly, efficient, cost-effective
and long-term stock distribution. Webb will provide financial and logistical
advice to the Bank and the Company concerning the offering and related issues,
including methods to best accomplish the goal of a broad local distribution of
the stock. Webb will provide services intended to maximize stock sales to
residents of the Bank's market area. This will be accomplished through direct
solicitation of orders by Webb and through selected local brokers. If necessary,
Webb will assist in placing any remaining shares through a syndicate to be
managed by Webb. KBW may participate in such syndicated offering.
Webb shall provide financial advisory services to the Bank which are typical in
connection with an equity offering and include, but are not limited to, overall
financial analysis of the client with a focus on identifying factors which
impact the valuation of an equity security and provide the appropriate
recommendations for the betterment of the equity valuation. Webb will use its
best efforts to price the sale of the stock in the offering at a price of $5.50
to $6.00 per share. The final price will depend upon, among other things, the
financial condition, operations and
- ------------------Investment Bankers and Financial Advisors---------------------
211 Bradenton o Dublin, Ohio 43017-3541 o 614-766-8400 o Fax: 614-766-8406
<PAGE>
Mr. John W. Marhefka, Jr.
May 2, 1997
Page 2 of 6
prospects of the Company as well as economic, financial and market conditions
affecting the market for financial institutions' stock and the economy in
general.
Additionally, post Offering financial advisory services will include advice on
shareholder relations, NASDAQ listing, dividend policy, capital management
strategy and communication with market makers. Prior to the closing of the
offering, Webb shall furnish to client a Post-Offering reference manual which
will include specifics relative to these items.
2. Preparation of Offering Documents. The Bank, the Company and their counsel
will draft the Registration Statement, Prospectus and other documents to be used
in connection with the offering. Webb will attend meetings to review these
documents and advise you on their form and content. Webb and their counsel will
draft appropriate agency agreement and related documents as well as marketing
materials other than the Prospectus.
3. Due Diligence Review. Prior to filing the Registration Statement or any
offering or other documents naming Webb as the Bank's and the Company's
financial advisor and marketing agent, Webb and their representatives will
undertake necessary investigations to learn about the Bank's proposed business
and operations ("due diligence review") in order to confirm information provided
to us and to evaluate information to be contained in the Bank's and/or the
Company's offering documents. The Bank agrees that it will make available to
Webb all relevant information, whether or not publicly available, which Webb
shall reasonably request, and will permit Webb to discuss personnel and the
operations and prospects of the Bank with management. Webb will treat all
material non-public information as confidential. The Bank acknowledges that Webb
will rely upon the accuracy and completeness of all information received from
the Bank, its officers, directors, employees, agents and representatives,
accountants and counsel including this letter of intent to serve as the Bank's
and the Company's financial advisor and marketing agent.
4. Regulatory Filings. The Bank and/or the Company will cause appropriate
offering documents to be filed with all regulatory agencies including, the
Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD"), and such state securities commissioners as may be
determined by the Bank.
5. Agency Agreement. The specific terms of Webb's services, including offering
enhancement and syndicated offering services contemplated in this letter, shall
be set forth in an Agency Agreement between Webb and the Bank and the Company to
be executed prior to commencement of the offering, and dated the date that the
Company's Prospectus is declared effective and/or authorized to be disseminated
by the appropriate regulatory agencies, the SEC, the NASD and such state
securities commissioners and other regulatory agencies as required by applicable
law.
<PAGE>
Mr. John W. Marhefka, Jr.
May 2, 1997
Page 3 of 6
6. Representations, Warranties and Covenants. The Agency Agreement will provide
for customary representations, warranties and covenants by the Bank and Webb,
and for the Company to indemnify Webb and their controlling persons (and, if
applicable, the members of the selling group and their controlling persons), and
for Webb to indemnify the Bank and the Company against certain liabilities,
including, without limitation, liabilities under the Securities Act of 1933.
7. Fees. For the services hereunder, the Bank and/or Company shall pay the
following fees to Webb at closing unless stated otherwise:
(a) A Management Fee of $25,000 payable in four consecutive monthly
installments of $6,250 commencing with the signing of this letter. Such fees
shall be deemed to have been earned when due. Should the Offering be terminated
for any reason not attributable to the action or inaction of Webb, Webb shall
have earned and be entitled to be paid fees accruing through the stage at which
point the termination occurred.
(b) A Success Fee of 5.0% of the aggregate Purchase Price of Common Stock
sold in the Offering excluding shares purchased by the Bank's officers,
directors, or employees (or members of their immediate families).
(c) During the initial offering period, stock may be offered through local
brokers/dealers selected and agreed upon by the Bank and Webb. The Bank, in
consultation with Webb, shall determine the number of shares which any such
broker/dealer shall be allotted. Webb will be paid a fee not to exceed 5.0% of
the aggregate Purchase Price of the shares of common stock sold by local
broker/dealers. Webb will pass onto such selected local broker-dealers an amount
competitive with gross underwriting discounts charged at such time for
comparable amounts of stock sold at a comparable price per share in a similar
market environment. Fees with respect to purchases affected with the assistance
of a selected local broker/dealers other than Webb shall be transmitted by Webb
to such broker/dealer. The decision to utilize selected broker-dealers will be
made by the Bank upon consultation with Webb. In the event, with respect to any
stock purchases, fees are paid pursuant to this subparagraph 7(c), such fees
shall be in lieu of, and not in addition to, payment pursuant to subparagraph
7(b).
(d) If any shares of the Company's stock remain available, Webb, at the
request of the Bank, will seek to form a syndicate of registered broker-dealers
to assist in the sale of such common stock on a best efforts basis, subject to
the terms and
<PAGE>
Mr. John W. Marhefka, Jr.
May 2, 1997
Page 4 of 6
conditions set forth in the selected dealers agreement. Webb will endeavor to
distribute the common stock among dealers in a fashion which best meets the
distribution objectives of the Bank. Webb will be paid a fee not to exceed 5.0%
of the aggregate Purchase Price of the shares of common stock sold by them. Webb
will pass onto selected broker-dealers, who assist in the syndicated community,
an amount competitive with gross underwriting discounts charged at such time for
comparable amounts of stock sold at a comparable price per share in a similar
market environment. Fees with respect to purchases affected with the assistance
of a broker/dealer other than Webb shall be transmitted by Webb to such
broker/dealer. The decision to utilize selected broker-dealers will be made by
the Bank upon consultation with Webb. In the event, with respect to any stock
purchases, fees are paid pursuant to this subparagraph 7(d), such fees shall be
in lieu of, and not in addition to, payment pursuant to subparagraph 7(b).
8. Expenses. The Bank will bear those expenses of the proposed offering
customarily borne by issuers, including, without limitation, regulatory filing
fees, SEC, "Blue Sky," and NASD filing and registration fees; the fees of the
Bank's accountants, attorneys, appraiser, transfer agent and registrar,
printing, mailing and marketing and syndicate expenses associated with the
Offering; the fees set forth in Section 7; and fees for "Blue Sky" legal work.
The Bank shall reimburse Webb for its reasonable out-of-pocket expenses,
including meals, travel, lodging, and communication, in an amount not to exceed
$10,000. In addition, the Bank shall reimburse Webb for the fees and expenses of
its counsel in an amount to be agreed upon by Webb and the Bank.
9. Conditions. Webb's willingness and obligation to proceed hereunder shall be
subject to, among other things, satisfaction of the following conditions in
Webb's opinion, which opinion shall have been formed in good faith by Webb after
reasonable determination and consideration of all relevant factors: (a) full and
satisfactory disclosure of all relevant material, financial and other
information in the disclosure documents and a determination by Webb, in its sole
discretion, that the sale of stock on the terms proposed is reasonable given
such disclosures; (b) no material adverse change in the proposed condition or
operations of the Bank subsequent to the execution of the agreement; and (c) no
market conditions at the time of offering which in Webb's opinion make the sale
of the shares by the Company inadvisable.
10. Benefit. This Agreement shall inure to the benefit of the parties hereto and
their respective successors and to the parties indemnified hereunder and their
successors, and the obligations and liabilities assumed hereunder by the parties
hereto shall be binding upon their respective successors provided, however, that
this Agreement shall not be assignable by Webb.
<PAGE>
Mr. John W. Marhefka, Jr.
May 2, 1997
Page 5 of 6
11. Definitive Agreement. This letter reflects Webb's present intention of
proceeding to work with the Company on its proposed Offering. It does not create
a binding obligation on the part of the Bank, the Company or Webb except as set
forth below and except as to the agreement to maintain the confidentiality of
non-public information set forth in Section 3, the payment of certain fees as
set forth in Section 7(a) and 7(b) and the assumption of expenses as set forth
in Section 8, all of which shall constitute the binding obligations of the
parties hereto and which shall survive the termination of this Agreement or the
completion of the services furnished hereunder and shall remain operative and in
full force and effect. You acknowledge that any report or analysis rendered by
Webb pursuant to this engagement is rendered for use solely by the management of
the Bank and its agents in connection with the Offering. Accordingly, you agree
that you will not provide any such information to any other person without our
prior written consent.
Webb acknowledges that in offering the Company's stock no person will be
authorized to give any information or to make any representation not contained
in the offering prospectus and related offering materials filed as part of a
registration statement to be declared effective in connection with the offering.
Accordingly, Webb agrees that in connection with the offering it will not give
any unauthorized information or make any unauthorized representation. We will be
pleased to elaborate on any of the matters discussed in this letter at your
convenience.
If the foregoing correctly sets forth our mutual understanding, please so
indicate by signing and returning the original copy of this letter to the
undersigned.
Very truly yours,
CHARLES WEBB & COMPANY,
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
By: /s/ John Bruno
--------------------------------
John Bruno
Senior Vice President
Agreed to: MARYLAND PUBLICK BANKS
By: /s/ John W. Marhefka, Jr. 5/8/97
-------------------------------- ---------------
John W. Marhefka, Jr. Date
Vice President & Chief Executive Officer
Exhibit 1.2 Draft Form of Underwriting Agreement between Annapolis
National Bancorp, Inc. and Charles Webb & Company, A Division
of Keefe, Bruyette & Woods, Inc.*
Exhibit 3.1 Amended and Restated Articles of Incorporation of Annapolis
National Bancorp, Inc.
<PAGE>
MARYLAND PUBLICK BANKS, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT OF CHARTER
(Under Section 2-609 of the Corporations and Associations Article)
Maryland Publick Banks, Inc., a Maryland corporation having its
principal office in Anne Arundel County, Maryland (the "Corporation") hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Article I of the Corporation's Charter is hereby amended to read
as follows:
ARTICLE I
Name
The name of the corporation is Annapolis National Bancorp, Inc.
SECOND: Article II of the Corporation's Charter is hereby amended to
read as follows:
ARTICLE II
Principal Office
The address of the Corporation's initial principal office in the State
of Maryland is 180 Admiral Cochrane Drive, Suite 300, Annapolis, Maryland 21401.
THIRD: Article IV of the Corporation's Charter is hereby amended to
read as follows:
ARTICLE IV
Resident Agent
The name of the initial resident agent of the Corporation in the State
of Maryland is John W. Marhefka, Jr., whose address is the same as that of the
Corporation's principal office. The resident agent is a citizen of the State of
Maryland and actually resides therein.
FOURTH: Article VI of the Corporation's Charter is hereby renumbered as
Article V and amended by striking out the first sentence and inserting in its
place the following:
<PAGE>
ARTICLE V
Capital Stock
The aggregate number of shares of all classes of capital stock which
the Corporation has authority to issue is 15,000,000, of which 10,000,000 are to
be shares of common stock, $.01 par value per share, and of which 5,000,000 are
to be shares of serial preferred stock, $.01 par value per share.
FIFTH: The total number of shares of stock of all classes that the
Corporation had authority to issue immediately before the foregoing amendment
was 3,000,000, of which 2,000,000 shares were Common Stock, par value $.01 per
share, and 1,000,000 shares were Serial Preferred Stock, par value $.01 per
share. The aggregate par value of all shares of stock of all classes was
$30,000.
SIXTH: The total number of shares of stock of all classes that the
Corporation has authority to issue, as amended, is 15,000,000, of which
10,000,000 shares shall be Common Stock, par value $.01 per share, and 5,000,000
shares shall be Serial Preferred Stock, par value $.01 per share. The aggregate
par value of all shares of stock of all classes is $150,000.
SEVENTH: The preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption of each class of stock of the Corporation were not
changed by the foregoing amendment.
EIGHTH: All of the foregoing amendments to the Corporation's Charter
were advised by the Board of Directors and approved by the stockholders of the
Corporation.
<PAGE>
NINTH: The Charter of the Corporation is hereby restated to read as
follows:
AMENDED ARTICLES OF INCORPORATION
OF
ANNAPOLIS NATIONAL BANCORP, INC.
ARTICLE I
Name
The name of the corporation is Annapolis National Bancorp, Inc.
ARTICLE II
Principal Office
The address of the Corporation's initial principal office in the State
of Maryland is 180 Admiral Cochrane Drive, Suite 300, Annapolis, Maryland 21401.
ARTICLE III
Powers
The purpose for which the Corporation is organized is to act as a bank
holding company and to transact all other lawful business for which corporations
may be incorporated pursuant to the General Laws of the State of Maryland. The
Corporation shall have all the powers of a corporation organized under the
General Laws of the State of Maryland.
ARTICLE IV
Resident Agent
The name of the initial resident agent of the Corporation in the State
of Maryland is John W. Marhefka, Jr., whose address is the same as that of the
Corporation's principal office. The resident agent is a citizen of the State of
Maryland and actually resides therein.
<PAGE>
ARTICLE V
Capital Stock
The aggregate number of shares of all classes of capital stock which
the Corporation has authority to issue is 15,000,000, of which 10,000,000 are to
be shares of common stock, $.01 par value per share, and of which 5,000,000 are
to be shares of serial preferred stock, $.01 par value per share. The shares may
be issued by the Corporation from time to time as approved by the board of
directors of the Corporation without the approval of the shareholders except as
otherwise provided in this Article VI or the rules of a national securities
exchange, if applicable. The consideration for the issuance of the shares shall
be paid to or received by Corporation in full before their issuance and shall
not be less than the par value per share. The consideration for the issuance of
the shares, other than cash, shall be determined by the board of directors in
accordance with the General Laws of the State of Maryland. In the absence of
actual fraud in the transaction, the judgment of the board of directors as to
the value of such consideration shall be conclusive. Upon payment of such
consideration such shares shall be deemed to be fully paid and nonassessable. In
the case of a stock dividend, the part of the surplus of the Corporation which
is transferred to stated capital upon the issuance of shares as a stock dividend
shall be deemed to be the consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
A. Common Stock. Except as provided in these Articles, the holders of
the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by such
holders.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and sinking fund or retirement fund or other retirements payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock, and on any class
or series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when as declared
by the board of directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any such event, the full preferential amounts to which
they are respectively entitled, the holders of the common stock and of any class
or series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers,
preferences and rights as, and shall be identical in all respects with, all the
other shares of common stock of the Corporation.
B. Serial Preferred Stock. Except as provided in these Articles, the
board of directors of the Corporation is authorized, by resolution or
resolutions from time to time adopted, to provide for
<PAGE>
the issuance of serial preferred stock in series and to fix and state the
powers, designations, preferences and relative, participating, optional or other
special rights of the shares of each such series, and the qualifications,
limitations or restrictions thereof, including, but not limited to determination
of any of the following:
1. the distinctive serial designation and the number of shares
constituting such series;
2. the dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to dividends;
3. the voting powers, full or limited, if any, of the shares of such
series;
4. whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions upon which such
shares may be redeemed;
5. the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation;
6. whether the shares of such series shall be entitled to the benefits
of a sinking or retirement fund to be applied to the purchase or redemption of
such shares, and, if so entitled, the amount of such fund and the manner of its
application, including the price or prices at which such shares may be redeemed
or purchased through the application of such funds;
7. whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other series of
the same or any other class of classes of stock of the Corporation and, if so
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such conversion
or exchange may be made, and any other terms and conditions of such conversion
or exchange;
8. the subscription or purchase price and form of consideration for
which the shares of such series shall be issued; and
9. whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series.
-5-
<PAGE>
ARTICLE VI
Preemptive Rights
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or series; but any such unissued stock,
bonds, certificates or indebtedness, debentures or other securities convertible
into or exchangeable for stock or carrying any right to purchase stock may be
issued pursuant to resolution of the board of directors of the Corporation to
such persons, firms, corporations or associations, whether or not holders
thereof, and upon such terms as may be deemed advisable by the board of
directors in the exercise of its sole discretion.
ARTICLE VII
Repurchase of Shares
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the shareholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
ARTICLE VIII
Cumulative Voting
There shall be no cumulative voting by shareholders of any class or
series in the election of directors of the Corporation.
ARTICLE IX
Notice for Nominations and Proposals
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of shareholders may be
made by the board of directors of the Corporation or by any shareholder of the
Corporation entitled to vote generally in the election of directors. In order
for a shareholder of the Corporation to make any such nominations and/or
-6-
<PAGE>
proposals, he or she shall give notice thereof in writing, delivered or mailed
by first class United States mail, postage prepaid, to the Secretary of the
Corporation not less than thirty days nor more than sixty days prior to any such
meeting; provided, however, that if less than forty days notice of the meeting
is given to shareholders, such written notice shall be delivered or mailed, as
prescribed, to the Secretary of the Corporation not later than the close of the
tenth day following the day on which notice of the meeting was mailed to
shareholders. Each such notice given by a shareholder with respect to
nominations for the election of directors shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed in
such notice, (ii) the principal occupation or employment of each such nominee,
and (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee. In addition, the shareholder making
such nomination shall promptly provide any other information reasonably
requested by the Corporation.
B. Each such notice given by a shareholder to the Secretary with
respect to business proposals to bring before a meeting shall set forth in
writing as to each matter: (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting; (ii) the name and address, as they appear on the Corporation's books,
of the shareholder proposing such business; (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the shareholder in such business. Notwithstanding anything
in these Articles to the contrary, no business shall be conducted at the meeting
except in accordance with the procedures set forth in this Article.
C. The Chairman of the annual or special meeting of shareholders may,
if the facts warrant, determine and declare to such meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid over for action at the next
succeeding adjourned, special or annual meeting of the shareholders taking place
thirty days or more thereafter. This provision shall not require the holding of
any adjourned or special meeting of shareholders for the purpose of considering
such defective nomination or proposal.
ARTICLE X
Directors
A. Number; Vacancies. The number of directors of the Corporation shall
be such number, not less than three nor more than fifteen (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be provided from time to
time in or in accordance with the bylaws, provided that no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director, and provided further that no action shall be taken to
decrease or increase the number of directors from time to time unless at least
two-thirds of the directors then in office shall concur in said action.
Vacancies in the board of directors of the Corporation, however caused, and
newly created directorships shall be filled by a vote of two-thirds of the
directors then in office, whether or not a quorum, and any director so chosen
shall hold office for a term expiring at the annual meeting of shareholders at
which the term of the class to which the director has been chosen expires and
when the director's successor is elected and qualified.
-7-
<PAGE>
B. Classified Board. At the first annual meeting of shareholders of the
Corporation, the board of directors of the Corporation shall be divided into
three classes of directors which shall be designated Class I, Class II and Class
III. The members of each shall be elected for a term of three years and until
their successors are elected and qualified. Such classes shall be as nearly
equal in number as the then total number of directors constituting the entire
board of directors shall permit, with the terms of office of all members of one
class expiring each year. Should the number of directors not be equally
divisible by three, the excess director or directors shall be assigned to
Classes I or III as follows: (i) if there shall be an excess of one directorship
over a number equally divisible by three, such extra directorship shall be
classified in Class I; and (ii) if there be an excess of two directorships over
a number equally divisible by three, one shall be classified in Class I and the
other in Class II. At the first annual meeting of shareholders, directors of
Class I shall be elected to hold office for a term expiring at the first
succeeding annual meeting thereafter, directors of Class II shall be elected to
hold office for a term expiring at the second succeeding annual meeting
thereafter, and directors of Class III shall be elected to hold office for a
term expiring at the third succeeding annual meeting thereafter. Thereafter, at
each succeeding annual meeting, directors of each class shall be elected for
three-year terms. Notwithstanding the foregoing, the director whose term shall
expire at any annual meeting shall continue to serve until such time as his
successor shall have been duly elected and shall have qualified unless his
position on the board of directors shall have been abolished by action taken to
reduce the size of the board of directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the board of directors shall consist of
said directors so elected in addition to the number of directors fixed as
provided above in this Article X. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
of preferred stock of the Corporation shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding meeting of shareholders.
ARTICLE XI
Removal of Directors
Notwithstanding any other provision of these Articles or the bylaws of
the Corporation, any director or the entire board of directors of the
Corporation may be removed, at any time, but only
-8-
<PAGE>
for cause and only by the affirmative vote of the holders of at least two-thirds
of the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the shareholders called for that purpose.
Notwithstanding the foregoing, whenever the holders of any one or more series of
preferred stock of the Corporation shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the preceding
provisions of this Article XI shall not apply with respect to the director or
directors elected by such holders of preferred stock.
ARTICLE XII
Indemnification
The Corporation shall indemnify to the fullest extent permissible under
the Maryland General Corporation Law any individual who is or was a director,
officer, employee, or agent of the Corporation, and any individual who serves or
served at the Corporation's request as a director, officer, partner, trustee,
employee, or agent of another corporation, partnership, joint venture, trust or
other enterprise, in any proceeding in which the individual is made a party as a
result of his service in such capacity. An individual will not be indemnified if
it is proved that the act or omission at issue was material to the cause of
action adjudicated in the subject proceeding and that (i) it was committed in
bad faith, or (ii) it was the result of active and deliberate dishonesty, or
(iii) the individual actually received an improper personal benefit in money,
property, or services, or (iv) in the case of a criminal proceeding, the
individual had reasonable cause to believe that the act or omission was
unlawful.
ARTICLE XIII
Limitations on Liability of Officers and Directors
An officer or director of the Corporation shall not be personally
liable to the Corporation or its shareholders for monetary damages for breach of
their fiduciary duty as an officer or director, unless: (i) it is proved that
the individual officer or director actually received an improper benefit or
profit in money, property or services from the Corporation; or (ii) a judgment
or other final adjudication adverse to the individual officer or director is
entered in a proceeding based on a finding in the proceeding that the
individual's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. If the Maryland General Corporation Law is amended to further
eliminate or limit the personal liability of officers and directors, then the
liability of officers and directors of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Maryland General Corporation Law,
as so amended.
Any repeal or modification of the foregoing paragraph by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
-9-
<PAGE>
ARTICLE XIV
Amendment of Bylaws
In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the Corporation is expressly authorized to
make, repeal, alter, amend and rescind the bylaws of the Corporation.
Notwithstanding any other provision of these Articles or the bylaws of the
Corporation (and notwithstanding the fact that some lesser percentage may be
specified by law), the bylaws shall not be made, repealed, altered, amended or
rescinded by the shareholders of the Corporation except by the vote of the
holders of not less than 80% of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (considered
for this purpose as one class) cast at a meeting of the shareholders called for
that purpose (provided that notice of such proposed adoption, repeal,
alteration, amendment or rescission is included in the notice of such meeting),
or, as set forth above, by the board of directors.
ARTICLE XV
Amendment of Articles of Incorporation
The Corporation reserves the right to repeal, alter, amend or rescind
any provision contained in these Articles in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles VIII, IX, X, XI, XII, XIII, XIV and this Article XV of these
Articles may not be repealed, altered, amended or rescinded in any respect
unless the same is approved by the affirmative vote of the holders of not less
than 80% of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as a
single class) cast at a meeting of the shareholders called for that purpose
(provided that notice of such proposed adoption, repeal, alteration, amendment
or rescission is included in the notice of such meeting).
-10-
<PAGE>
IN WITNESS WHEREOF, Annapolis National Bancorp, Inc. has caused these
Articles of Amendment and Restatement of Charter to be signed in its name and on
its behalf by its President and Chief Executive Officer and attested by its
Secretary on June __, 1997.
ANNAPOLIS NATIONAL BANCORP, INC.
By:
-------------------------------------
John W. Marhefka
President and Chief Executive Officer
Attest:
- --------------------------------
Lori J. Mueller
Secretary
-11-
<PAGE>
THE UNDERSIGNED, President and Chief Executive Officer of Maryland
Publick Banks, Inc., who executed on behalf of said corporation the foregoing
Articles of Amendment and Restatement of Charter, of which this certificate is
made a part, hereby acknowledges, in the name on behalf of said corporation, the
foregoing Articles of Amendment and Restatement of Charter to be the corporate
act of said corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects, under the
penalties of perjury.
-------------------------------------
John W. Marhefka, Jr.
President and Chief Executive Officer
-12-
Exhibit 3.2 Bylaws of Annapolis National Bancorp, Inc.
<PAGE>
BYLAWS
OF
ANNAPOLIS NATIONAL BANCORP, INC.
ARTICLE I
Home Office
The home office of Annapolis National Bancorp, Inc. (herein the
"Corporation") shall be at 180 Admiral Cochrane Drive, in Annapolis, Anne
Arundel County, in the State of Maryland.
ARTICLE II
Shareholders
SECTION 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Corporation or at such
other place within or without the State of Maryland as the board of directors
may determine and as designated in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the shareholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. Special Meetings. Special meetings of the shareholders for
any purpose or purposes may be called at any time by the majority of the board
of directors or by a committee of the board of directors in accordance with the
provisions of the Corporation's Articles of Incorporation or a special meeting
shall be called by the Secretary of the Corporation upon the written request of
the holders of not less than a majority of all votes entitled to be cast at the
meeting. Such written request shall state the purpose or purposes of the meeting
and the matters proposed to be acted on at the meeting and shall be delivered at
the home office of the Corporation addressed to the chairman of the board, the
president or the secretary. The secretary shall inform the shareholders who make
the request of the reasonably estimated cost of preparing and mailing a notice
of the meeting and upon payment of these costs to the Corporation, the secretary
shall then notify each shareholder entitled to notice of the meeting.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the rules and procedures established 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.
-1-
<PAGE>
SECTION 5. Notice of Meeting. Written notice stating the place, day and
hour of the meeting and the purpose or purposes for which the meeting is called
shall be mailed by the secretary or the officer performing his duties, not less
than ten days nor more than ninety days before the meeting to each shareholder
of record entitled to vote at such meeting and to each other shareholder
entitled to notice of the meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail, addressed to the shareholder
at his address as it appears on the stock transfer books or records of the
Corporation as of the record date prescribed in Section 6 of this Article II,
with postage thereon prepaid. If a shareholder be present at a meeting, or in
writing waive notice thereof before or after the meeting and such waiver is
filed with the records of the shareholders meeting, notice of the meeting to
such shareholder shall be unnecessary. When any shareholders' meeting, either
annual or special, is adjourned for thirty days, notice of the adjourned meeting
shall be given as in the case of an original meeting. It shall not be necessary
to give any notice of the time and place of any meeting adjourned for less than
thirty days or of the business to be transacted at such adjourned meeting, other
than an announcement at the meeting at which such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders, or
any adjournment thereof, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of shareholders. Such date in any case shall be
not more than ninety days, and in case of a meeting of shareholders, not less
than ten days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
SECTION 7. Voting Lists. The officer or agent having charge of the
stock transfer books for shares of a Corporation shall make, at least ten days
before each meeting of shareholders, a complete record of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each.
The record, for a period of ten days before such meeting, shall be kept on file
at the principal office of the Corporation, and shall be subject to inspection
by any shareholder for any purpose germane to the meeting at any time during
usual business hours. Such record shall also be produced and kept open at the
time and place of the meeting and shall be subject to the inspection of any
shareholder for any purpose germane to the meeting during the whole time of the
meeting. The original stock transfer books shall be prima facie evidence as to
who are the shareholders entitled to examine such record or transfer books or to
vote at any meeting of shareholders.
SECTION 8. Quorum. The presence in person or by proxy of shareholders
entitled to cast a majority of all the votes entitled to be cast at the meeting
shall constitute a quorum at a meeting of shareholders. If less than a majority
of the outstanding shares entitled to be voted at the meeting are represented at
a meeting, a majority of the shares so represented may adjourn the meeting from
time to time without further notice. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been transacted at the meeting as originally notified. The shareholders present
at a duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
-2-
<PAGE>
SECTION 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after eleven months from the date of its execution unless otherwise provided in
the proxy.
Any facsimile telecommunication or other reliable reproduction of the
writing or transmission created pursuant to this Section 9 may be substituted or
used in lieu of the original writing or transmission for any and all purposes
for which the original writing or transmission could be used, provided that such
copy, facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission.
SECTION 10. Voting. At each election for directors every shareholder
entitled to vote at such election shall be entitled to one vote for each share
of stock held by him. All voting, including on the election of Directors but
excepting where otherwise required by law or by the governing documents of the
Corporation, may be made by a voice vote; provided, however, that upon demand
therefor by a stockholder entitled to vote or his or her proxy, a stock vote
shall be taken. Every stock vote shall be taken by ballot, each of which shall
state the name of the stockholder or proxy voting and such other information as
may be required under the procedures established for the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or the Articles of Incorporation, all other
matters shall be determined by a majority of the votes cast.
SECTION 11. Voting of Shares in the Name of Two or More Persons. When
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
shareholders of the Corporation any one or more of such shareholders 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 name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock 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 by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent or proxy as the
bylaws 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 him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, 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 his 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 thereof into his
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 shareholder 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.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another
-3-
<PAGE>
corporation, if a majority of the shares entitled to vote for the election of
directors of such other corporation are held by the Corporation, shall 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. Informal Action by Shareholders. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of the shareholders, may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter thereof and
filed with the secretary of the Corporation as part of the Corporation's
records.
SECTION 14. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three. If
the board of directors so appoints either one or three inspectors, that
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment by
the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all shareholders.
SECTION 15. 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 of the Corporation at least twenty
days prior to the date of the annual meeting. Provided 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
shareholders are made in writing and delivered to the secretary of the
Corporation in accordance with the provisions of the Corporation's Articles of
Incorporation.
SECTION 16. Organization. Such person as the board of directors may
have designated or, in the absence of such a person, the chairman of the board
of the Corporation or, in his or her absence, such person as may be chosen by
the holders of a majority of the shares entitled to vote who are present, in
person or by proxy, shall call to order any meeting of the stockholders and act
as chairman of the meeting. In the absence of the secretary of the Corporation,
the secretary of the meeting shall be such person as the chairman appoints.
SECTION 17. New Business. The chairman of any meeting of stockholders
shall determine the order of business and the procedures at the meeting,
including such regulation of the manner of voting and the conduct of discussion
as seem to him or her in order. The date and time of the opening and closing of
the polls for each matter upon which the stockholders will vote at the meeting
shall be announced at the meeting.
-4-
<PAGE>
At any annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting: (i) by or at the
direction of the board of directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who files a
statement in writing with the secretary of the Corporation in accordance with
the Corporation's Articles of Incorporation. The officer of the Corporation or
other person presiding over the annual meeting shall, if the facts so warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of the Corporation's
Articles of Incorporation and, if he should so determine, he shall so declare to
the meeting and any such business so determined to be not properly brought
before the meeting shall not be transacted. 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
provided in the Corporation's Articles of Incorporation.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
SECTION 2. Number, Term and Election. The number of directors who shall
constitute the Whole board shall be such number as the board of directors shall
from time to time have designated, except that in the absence of such
designation shall be three. The board of directors shall be divided into three
classes as nearly equal in number as possible and shall be elected for terms of
three years and until their successors are elected or qualified. The board of
directors shall be classified in accordance with the provisions of the
Corporation's Articles of Incorporation.
SECTION 3. 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 shareholders. 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.
SECTION 4. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board or the
president, or by one-third 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.
Members of the board of directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such participation
shall constitute presence in person.
SECTION 5. Notice. Notice of the place, date, and time of each such
special meeting shall be given each director by whom it is not waived by mailing
written notice not less than five (5) days before the meeting or by telegraphing
or telexing or by facsimile transmission of the same not less than twenty-four
(24) hours before the meeting. 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
-5-
<PAGE>
of such meeting. Unless otherwise indicated in the notice thereof, any and all
business may be transacted at a special meeting.
SECTION 6. Quorum. A majority of the number of directors fixed in
accordance with 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 5 of this Article III.
SECTION 7. 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 these Bylaws, the
Articles of Incorporation, or the General Laws of the State of Maryland.
SECTION 8. 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 and filed with the minutes of the proceedings of
the board.
SECTION 9. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the Corporation
addressed to the chairman of the board or the president. Unless otherwise
specified herein such resignation shall take effect upon receipt thereof by the
chairman of the board or the president.
SECTION 10. Vacancies. Vacancies occurring in the board of directors
and newly created directorships shall be filled in accordance with the
provisions of the Corporation's Articles of Incorporation.
SECTION 11. Removal of Directors. Any director or the entire board of
directors may be removed only in accordance with the provisions of the
Corporation's Articles of Incorporation.
SECTION 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the board of directors.
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. Nothing herein shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
remuneration therefor.
SECTION 13. Presumption of Assent. A director of the Corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who votes in favor of such action.
SECTION 14. Advisory Directors. The board of directors may by
resolution appoint advisory directors to the board, who may also serve as
directors emeriti, and shall have such authority and receive such compensation
and reimbursement as the board of directors shall provide. Advisory directors or
directors emeriti shall not have the authority to participate by vote in the
transaction of business.
-6-
<PAGE>
ARTICLE IV
Committees of the Board of Directors
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation, and
may prescribe the duties, constitution and procedures thereof. Each committee
shall consist of one or more directors of the Corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
The board of directors shall have power, by the affirmative vote of a
majority of the authorized number of directors, at any time to change the
members of, to fill vacancies in, and to discharge any committee of the board.
Any member of any such committee may resign at any time by giving notice to the
Corporation; provided, however, that notice to the board, the chairman of the
board, the chief executive officer, the chairman of such committee, or the
secretary shall be deemed to constitute notice to the Corporation. Such
resignation shall take effect upon receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, acceptance of such
resignation shall not be necessary to make it effective. Any member of any such
committee may be removed at any time, either with or without cause, by the
affirmative vote of a majority of the authorized number of directors at any
meeting of the board called for that purpose.
ARTICLE V
Officers
SECTION 1. Positions. The officers of the Corporation 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 another person
as the chief executive officer. The offices of the secretary and treasurer may
be held by the same person and a vice president may also be either the secretary
or the treasurer. 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 Corporation 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 Corporation
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of shareholders. 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 his successor
shall have been duly elected and qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided. Election
or appointment of an officer, employee or agent shall not of itself create
contract rights. The board of directors may authorize the Corporation to enter
into an employment contract with any officer in accordance with state law; 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. The board of directors may, except as otherwise
required by law, remove any officer of the Corporation with or without cause,
and from time to time, devolve the powers and duties
-7-
<PAGE>
of any officer upon any other person for the time being, and to confer upon any
officer of the Corporation the power to appoint, remove or suspend subordinate
officers, employees and agents.
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. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors and no officer shall be
prevented from receiving such salary by reason of the fact that he is also a
director of the Corporation.
SECTION 6. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the board of directors, the president or any
officer of the Corporation authorized by the president shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE VI
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Corporation's Articles of Incorporation or
these Bylaws with respect to certificates for shares, the board of directors may
authorize any officer, employee, or agent of the Corporation to enter into any
contract or execute and deliver any instrument in the name of and on behalf of
the Corporation. Such authority may be general or confined to specific
instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
Corporation 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 Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in any of its duly authorized depositories as the board of directors may select.
ARTICLE VII
Certificates for Shares and Their Transfer
SECTION 1. Certificates for Shares. The shares of the Corporation shall
be represented by certificates signed by the chairman or vice chairman of the
board of directors or by the president or a vice president and by the treasurer
or an assistant treasurer or by the secretary or an assistant secretary of the
Corporation, and may be sealed with the seal of the Corporation or a facsimile
thereof. Any or all of the signatures upon a certificate may be facsimiles if
the certificate is contersigned by a transfer agent, or registered by a
registrar, other than the Corporation itself of an employee of the Corporation.
If any officer
-8-
<PAGE>
who has signed or whose facsimile signature has been placed upon such
certificate shall have ceased to be such officer before the certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer at the date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any shareholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued, the variations in
the relative rights and preferences between the shares of each such series so
far as the same have been fixed and determined, and the authority of the board
of directors to fix and determine the relative rights and preferences of
subsequent series.
Each certificate representing shares shall state upon the face thereof:
that the Corporation is organized under the laws of the State of Maryland; the
name of the person to whom issued; the number and class of shares; the date of
issue; the designation of the series, if any, which such certificate represents;
the par value of each share represented by such certificate, or a statement that
the shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
shares until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the
issuance of shares shall be paid in accordance with the provisions of the
Corporation's Articles of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of
the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of such authority, or by
his attorney thereunto authorized by power of attorney duly executed and filed
with the Corporation. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name shares
of capital stock stand on the books of the Corporation shall be deemed by the
Corporation to be the owner thereof for all purposes.
SECTION 6. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the shareholders entitled to examine the stock
ledger, the list required by Section 7 of Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of shareholders.
SECTION 7. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his legal representative, to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
SECTION 8. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not the Corporation shall have express
or other notice thereof, except as otherwise provided by law.
-9-
<PAGE>
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the Corporation shall end on the last day of
December of each year. Following the commencement of operations by the
Corporation, the Corporation shall be subject to an annual audit by independent
public accountants appointed by and responsible to the board of directors.
ARTICLE IX
Dividends
Subject to the provisions of the Articles of Incorporation and
applicable law, the board of directors may, at any regular or special meeting,
declare dividends on the Corporation's outstanding capital stock. Dividends may
be paid in cash, in property or in the Corporation's own stock.
ARTICLE X
Corporate Seal
The corporate seal of the Corporation shall be in such form as the
board of directors shall prescribe.
ARTICLE XI
Amendments
In accordance with the Corporation's Articles of Incorporation, these
Bylaws may be repealed, altered, amended or rescinded by the shareholders of the
Corporation only by vote of not less than 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
shareholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or rescission is included in the notice of such
meeting). In addition, the board of directors may repeal, alter, amend or
rescind these Bylaws at a legal meeting held in accordance with the provisions
of these Bylaws.
-10-
Exhibit 3.3 Articles of Incorporation of Annapolis National Bank
<PAGE>
Articles of Association
OF
ANNAPOLIS NATIONAL BANK
ANNAPOLIS, MARYLAND
Organized ______________, 1990
(Chartered under the National Bank Act,
_____________, 1990)
ARTICLE FIRST
-------------
The title of this Association will be "ANNAPOLIS NATIONAL BANK".
ARTICLE SECOND
--------------
The main office shall be in Annapolis, Maryland. The general business of
the Association shall be conducted at its main office and its legally
established branches.
ARTICLE THIRD
-------------
The Board of Directors of this Association shall consist of not less than
five nor more than twenty-five members. A majority of the Board of Directors
shall be necessary to constitute a quorum for the transaction of business at any
Directors' meeting. Each director shall own common or preferred stock of the
Association with an aggregate par value of not less than $1,000, or common or
preferred stock of a bank holding company owning the Association with an
aggregate par, fair market
<PAGE>
- 2 -
or equity value of not less than $1,000, as of either (i) the date of purchase,
(ii) the date the person became a director, or (iii) the date of that person's
most recent election to the Board of Directors, whichever is greater. Any
combination of preferred stock of the Association or the holding company may be
used.
Any vacancy in the Board of Directors may be filled by action of a majority
of the remaining directors between meetings of shareholders. The Board of
Directors may not increase the number of directors between meetings of
shareholders to a number which (i) exceeds by more than two the number of
directors last elected by shareholders where the number was 15 or less; and (ii)
exceeds by more than four the number of directors last elected by shareholders
where the number was 16 or more, but in no event shall the number of directors
exceed 25.
Terms of directors, including directors selected to fill vacancies, shall
expire at the next regular meeting of shareholders at which directors are
elected, unless the directors resign or are removed from office.
Despite the expiration of a director's term, the director shall continue to
serve until his or her successor is elected and qualifies, or until there is a
decrease in the number of directors and his or her position is eliminated.
Honorary or advisory members of the Board of Directors, without voting
power or power of final decision in matters concerning the business of the
Association, may be appointed by
<PAGE>
- 3 -
resolution of a majority of the full Board of Directors, or by resolution of
shareholders at any annual or special meeting. Honorary or advisory directors
shall not be counted for purposes of determining the number of directors of the
Association or the presence of a quorum in connection with any board action, and
shall not be required to own qualifying shares.
ARTICLE FOURTH
--------------
There shall be an annual meeting of the shareholders to elect directors and
transact whatever other business may be brought before the meeting. It shall be
held at the main office or any other convenient place the Board of Directors may
designate, on the day of each year specified therefore in the Bylaws, or if that
day falls on a legal holiday in the state in which the Association is located,
on the next following banking day. If no election is held on the day fixed or in
event of a legal holiday, an election may be held on any subsequent day within
60 days of the day fixed, to be designated by the Board of Directors, or, if the
directors fail to fix the day, by shareholders representing two-thirds of the
shares issued and outstanding. In all cases at least 10 days' advance notice of
the meeting shall be given to the shareholders by first class mail.
In all elections of directors, the number of votes each common shareholder
may cast will be determined by multiplying the
<PAGE>
- 4 -
number of shares he or she owns by the number of directors to be elected. Those
votes may be cumulated and cast for a single candidate or may be distributed
among two or more candidates in the manner selected by the shareholder. On all
other questions, each common shareholder shall be entitled to one vote for each
share of stock held by him or her.
Nominations for election to the Board of Directors may be made by the Board
of Directors or by any stockholder of any outstanding class of capital stock of
the Association entitled to vote for election of directors, in a manner
described in the Bylaws of the Association. No bylaw may unreasonably restrict
the nomination of directors by shareholders.
A director may resign at any time by delivering written notice to the Board
of Directors, its chairperson, or to the Association, which resignation shall be
effective when the notice is delivered unless the notice specifies a later
effective date.
A director may be removed by shareholders at a meeting called to remove him
or her, when notice of the meeting stating that the purpose or one of the
purposes is to remove him or her is provided, if there is a failure to fulfill
one of the affirmative requirements for qualification, or for cause, provided,
however, that a director may not be removed if the number of votes sufficient to
elect him or her under cumulative voting is voted against his or her removal.
<PAGE>
- 5 -
ARTICLE FIFTH
-------------
The authorized amount of capital stock of this Association shall be
1,500,000 shares of common stock at a price of $5.00 par value each, but said
capital stock may be increased or decreased from time to time according to the
provisions of the laws of the United States.
In the event of any increase in common stock of this Association by the
sale of additional shares and each shareholder shall be entitled to subscribe to
such additional shares of common stock in proportion to the number of shares of
common stock owned at the time the increase is authorized by the shareholders,
unless another time subsequent to the date of the shareholders' meeting is
specified in a resolution adopted by the shareholders at the time the increase
is authorized, except that the holders of the common stock shall not have any
preemptive rights to purchase or subscribe for any shares of common stock for
all or any part of shares of authorized but unissued common stock to be issued
from time to time by this Association to be used exclusively for the
implementation of any Employee Compensation Program. The Board of Directors
shall have the power to prescribe a reasonable period of time within which the
preemptive rights to subscribe to the new shares of capital stock must be
exercised.
Unless otherwise specified in the Articles of Association or required by
law, (i) all matters requiring
<PAGE>
- 6 -
shareholder action, including amendments to the Articles of Association must be
approved by shareholders owning a majority voting interest in the outstanding
shares of voting common stock, and (ii) each shareholder shall be entitled to
one vote per share of common stock.
Unless otherwise specified in the Articles of Association or required by
law, all shares of voting stock shall be voted together as a class, on any
matters requiring shareholder approval. If a proposed amendment would affect two
or more classes or series in the same or a substantially similar way, all of the
classes or series so affected, must vote together as a single voting group on
the proposed amendment.
If the capital stock is increased by a stock dividend, each shareholder
shall be entitled to his or her proportionate amount of such increase in
accordance with the number of shares of capital stock owned by him or her at the
time the increase is authorized by the shareholders, unless another time
subsequent to the date of the shareholders' meeting is specified in a resolution
adopted by the shareholders at the time the increase is authorized.
Unless otherwise provided in the Bylaws, the record date for determining
shareholders entitled to notice of and to vote at any meeting is the close of
business on the day before the first notice is mailed or otherwise sent to the
shareholders,
<PAGE>
- 7 -
provided that in no event may a record date be more than 70 days before the
meeting.
If a shareholder is entitled to fractional shares pursuant to preemptive
rights, a stock dividend, consolidations or merger, reverse stock split or
otherwise, the Association may: (i) issue fractional shares; (ii) in lieu of the
issuance of fractional shares, issue script warrants entitling the holder to
receive a full share upon surrendering enough script or warrants to equal a full
share; (iii) if there is an established and active market in the Association's
stock, make reasonable arrangements to provide the shareholder with an
opportunity to realize a fair price through sale of the fraction, or purchase of
the additional fraction required for a full share; (iv) remit the cash
equivalent of the fraction to the shareholder; or (v) sell full shares
representing all the fractions at public auction or to the highest bidder after
having solicited and received sealed bids from at least three licensed stock
brokers and distribute the proceeds pro rata to shareholders who otherwise would
be entitled to the fractional shares. The holder of a fractional share is
entitled to exercise the rights of a shareholder, including the right to vote,
to receive dividends, and to participate in the assets of the Association upon
liquidation, in proportion to the fractional interest. The holder of script or
warrants is not entitled to any of these rights unless the script or warrants
explicitly provide for such right. The script or
<PAGE>
- 8 -
warrants may be subject to such additional conditions as: (i) that the script or
warrants will become void if not exchanged for full shares before a specified
date; and (ii) that the shares for which the script or warrants are exchangeable
may be sold at the option of the Association and the proceeds paid to
scriptholders.
The Association, at any time and from time to time, may authorize and issue
debt obligations, whether or not subordinated, without the approval of the
shareholders. Obligations classified as debt, whether or not subordinated, which
may be issued by the Association without the approval of shareholders, do not
carry voting rights on any issue, including an increase or decrease in the
aggregate number of the securities, or the exchange or reclassification of all
or part of securities into securities of another class or series.
ARTICLE SIXTH
-------------
The Board of Directors shall appoint one of its members president of this
Association, and one of its members chairperson of the Board and shall have the
power to appoint one or more vice presidents, a secretary who shall keep minutes
of the directors' and shareholders' meetings and be responsible for
authenticating the records of the Association, and such other officers and
employees as may be required to transact the business of this Association. A
duly appointed officer may appoint one or more
<PAGE>
- 9 -
officers or assistant officers if authorized by the Board of Directors in
accordance with the Bylaws.
The Board of Directors shall have the power to:
(1) Define the duties of the officers, employees and agents of the
Association.
(2) Delegate the performance of its duties, but not the responsibility for
its duties, to the officers, employees, and agents of the Association.
(3) Fix the compensation and enter into employment contracts with its
officers and employees upon reasonable terms and conditions consistent
with applicable law.
(4) Dismiss officers and employees.
(5) Require bonds from officers and employees and to fix the penalty
thereof.
(6) Ratify written policies authorized by the Association's management or
committees of the board.
(7) Regulate the manner in which any increase or decrease of the capital
of the Association shall be made, provided that nothing herein shall
restrict the power of the shareholders to increase or decrease the
capital of the Association in accordance with law, and nothing shall
raise or
<PAGE>
- 10 -
lower from two-thirds the percentage required for shareholder approval
to increase or reduce the capital.
(8) Manage and administer the business and affairs of the Association.
(9) Adopt initial Bylaws, not inconsistent with law or the Articles of
Association, for managing the business and regulating the affairs of
the Association.
(10) Amend or repeat Bylaws, except to the extent that the Articles of
Association reserve this power in whole or in part to shareholders.
(11) Make contracts.
(12) Generally to perform all acts that are legal for a Board of Directors
to perform.
ARTICLE SEVENTH
---------------
The Board of Directors shall have the power to change the location of the
main office to any other place within the limits of Anne Arundel County without
the approval of the shareholders, and shall have the power to establish or
change the location of any branch or branches of the Association to any other
location permitted under applicable law, without the approval of the
shareholders subject to approval by the Office of the Comptroller of the
Currency.
<PAGE>
- 11 -
ARTICLE EIGHTH
--------------
The corporate existence of this Association shall continue until terminated
according to the laws of the United States.
ARTICLE NINTH
-------------
The Board of Directors of this Association may call a special meeting of
the shareholders at any time. Unless otherwise provided by the bylaws or the
laws of the United States, or waived by shareholders, notice shall be given by
first class mail, postage prepaid, mailed at least 10, and not more than 60,
days prior to the date of the meeting to each shareholder of record at his/her
address as shown upon the books of this Association. Unless otherwise provided
by the Bylaws, any action requiring approval of shareholders must be effected at
a duly called annual or special meeting.
ARTICLE TENTH
-------------
Any person, his/her heirs, executors, or administrators may be indemnified
or reimbursed by the Association for reasonable expenses actually incurred in
connection with any action to which directors, officers or employees are parties
or potential parties by reason of the performance of their official duties, in
accordance with the relevant provisions of the Model
<PAGE>
- 12 -
Business Corporation Act, as amended, 26 Bus. Law 103 (1980), as it may be
amended from time to time in the future.
PROVIDED HOWEVER, that directors, officers, or employees shall not be
indemnified against expenses, penalties, or other payments incurred in an
administrative proceeding or action instituted by an appropriate bank regulatory
agency which proceeding or action results in a final order assessing civil money
penalties or requiring affirmative action by an individual or individuals in the
form of payments to the Association. The Association may, upon the affirmative
vote of a majority of its Board of Directors, purchase insurance for the purpose
of indemnifying its directors, officers and employees to the extent such
indemnification is permissible by this Article.
ARTICLE ELEVENTH
----------------
These Articles of Association may be amended at any regular or special
meeting of the shareholders by the affirmative vote of the holders of a majority
of the stock of this Association, unless the vote of the holders of a greater
amount of stock is required by law, and in that case by the vote of the holders
of such greater amount. The Association's Board of Directors may propose one or
more amendments to the Articles of Association for submission to the
shareholders.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands this 12 day of Dec.,
1987.
(To be signed by all organizers currently uniting to form the Association)
/s/ Charles T. Adkins /s/ Richard M. Lerner
- ----------------------------------- -------------------------------------
CHARLES T. ADKINS RICHARD M. LERNER
/s/ Lawrence E. Lerner /s/ Richard J. Morgan
- ----------------------------------- -------------------------------------
LAWRENCE E. LERNER RICHARD J. MORGAN
/s/ J. Kent McNew /s/ Lawrence W. Schwartz
- ----------------------------------- -------------------------------------
J. KENT McNEW LAWRENCE W. SCHWARTZ
Exhibit 3.4 Bylaws of Annapolis National Bank
<PAGE>
BYLAWS
OF
ANNAPOLIS NATIONAL BANK
ARTICLE I
---------
Meetings of Shareholders
Section 1.1. Annual Meeting. The regular annual meeting of the shareholders
to elect directors and transact whatever other business may properly come before
the meeting, shall be held at the main office of the association (2083 West
Street, Annapolis, Maryland 21401) county of Anne Arundel, state of Maryland or
such other places as the Board of Directors may designate, at 2:00 o'clock p.m.,
on the third Wednesday of April of each year, of if that date falls on a legal
holiday in the State in which the association is located, on the next following
banking day. Notice of the meeting shall be mailed, postage prepaid, at least 10
days and no more than 60 days prior to the date thereof, addressed to each
shareholder at his/her address appearing on the books of the association. If,
for any cause, an election of directors is not made on that date, or in the
event of a legal holiday, on the next following banking day, an election may be
held on any subsequent day within 60 days of the date fixed, to be designated by
the Board of Directors, or, if
<PAGE>
- 2 -
the directors fail to fix the date, by shareholders representing two-thirds of
the shares.
Section 1.2. Special Meetings. Except as otherwise specifically provided by
statute, special meetings of the shareholders may be called for any purpose at
any time by the Board of Directors in accordance with the Articles of
Association.
Unless otherwise required by the Articles of Association, if an annual or
special shareholders' meeting is adjourned to a different date, time, or place,
notice need not be given of the new date, time or place, if the new date, time
or place is announced at the meeting before adjournment, unless any additional
items of business are to be considered, or the association becomes aware of an
intervening event materially affecting any matter to be voted on more than 30
days prior to the date to which the meeting is adjourned. If a new record date
for the adjourned meeting is fixed, however, notice of the adjourned meeting
must be given to persons who are shareholders as of the new record date.
Section 1.3. Nominations of Directors. Nominations for election to the
Board of Directors may be made by the Board of Directors or by any stockholder
of any outstanding class of capital stock of the association entitled to vote
for election of directors. Nominations, other than those made by or on behalf of
the existing management of the association, shall be made in
<PAGE>
- 3 -
writing and be delivered or mailed to the president of the association and to
the Comptroller of the Currency, Washington, D.C., not less than 14 days nor
more than 50 days prior to any meeting of shareholders called for the election
of directors, provided, however, that if less than 21 days' notice of the
meeting is given to shareholders, such nomination shall be mailed or delivered
to the president of the association and to the Comptroller of the Currency not
later than the close of business on the seventh day following the day on which
the notice of meeting was mailed. Such notification shall contain the following
information to the extent known to the notifying shareholder:
(1) The name and address of each proposed nominee.
(2) The principal occupation of each proposed nominee.
(3) The total number of shares of capital stock of the association
that will be voted for each proposed nominee.
(4) The name and residence address of the notifying shareholder.
(5) The number of shares of capital stock of the association owned by
the notifying shareholder.
Nominations not made in accordance herewith may, in his/her discretion, be
disregarded by the chairperson of the meeting, and upon his/her instructions,
the vote tellers may disregard all votes cast for each such nominee.
<PAGE>
- 4 -
Section 1.4. Judges of Election. Every election of directors shall be
managed by three judges, who shall be appointed from among the shareholders of
the association or of its holding company by the Board of Directors. The judges
of election shall hold and conduct the election at which they are appointed to
serve. After the election, they shall file with the cashier a certified report
signed by them, certifying the result thereof and the names of the directors
elected. The judges of election, at the request of the chairperson of the
meeting, shall act as tellers of any other vote by ballot taken at such meeting,
and shall certify the result thereof.
Section 1.5. Proxies. Shareholders may vote at any meeting of the
shareholders by proxies duly authorized in writing, but no officer or employee
of this association shall act as proxy. Proxies shall be valid only for one
meeting, to be specified therein, and any adjournments of such meeting. Proxies
shall be dated and filed with the records of the meeting. Proxies with rubber
stamped facsimile signatures may be used and unexecuted proxies may be counted
upon receipt of a confirming telegram from the shareholder. Proxies meeting the
above requirements submitted at any time during a meeting shall be accepted.
Section 1.6. Quorum. A majority of the outstanding stock, represented in
person or by proxy, shall constitute a quorum at any meeting of shareholders,
unless otherwise provided
<PAGE>
- 5 -
by law, or by the shareholders or directors pursuant to Section 8.2, but less
than a quorum may adjourn any meeting, from time to time, and the meeting may be
held, as adjourned, without further notice. A majority of the votes cast shall
decide every question or matter submitted to the shareholders at any meeting,
unless otherwise provided by law or by the articles of association, or by the
shareholders or directors pursuant to Section 8.2.
ARTICLE II
----------
DIRECTORS
Section 2.1. Board of Directors. The Board of Directors shall have the
power to manage and administer the business and affairs of the association.
Except as expressly limited by law, all corporate powers of the association
shall be vested in and may be exercised by the Board.
Section 2.2. Number. The Board shall consist of not less than five nor more
than twenty-five shareholders, the exact number within such minimum and maximum
limits to be fixed and determined from time to time by resolution of a majority
of the full board or by resolution of a majority of the shareholders at any
meeting thereof.
Section 2.3. Organization Meeting. The secretary, upon receiving the
certificate of the judges of the result of any election, shall notify the
directors-elect of their election and of the time at which they are required to
meet at the main office
<PAGE>
- 6 -
of the association to organize the new Board and elect and appoint officers of
the association for the succeeding year. Such meeting shall be held on the day
of the election or as soon thereafter as practicable, and, in any event, within
30 days thereof. If, at the time fixed for such meeting, there shall not be a
quorum, the directors present may adjourn the meeting, from time to time, until
a quorum is obtained.
AMENDMENT TO BY-LAWS
EFFECTIVE: APRIL 21, 1993
RESOLVED: That Section 2.4 of Article III of the By-Laws is hereby deleted in
its entirety and the following inserted in its place:
"Section 2.4 REGULAR MEETINGS. The regular
meetings of the Board of Directors shall be held,
without notice, on the third Wednesday of January,
April, July and October of each year at the main
office of the Bank or on such other date as the
Board of Directors shall, by resolution, direct.
When any regular meeting of the Board falls upon a
holiday, the meeting shall be held on the next
banking business day thereafter, unless the Board
shall designate by resolution another day for such
meeting."
Section 2.5. Special Meetings. Special meetings of the Board of Directors
may be called by the President of the association, or at the request of three
(3) or more directors. Each member of the Board of Directors shall be given
notice stating the time and place by telegram, letter, or in person, of each
special meeting.
Special 2.6. Telephonic Meetings, Action by Unanimous Consent in Writing.
Unless otherwise restricted by the Articles of Association or these Bylaws,
members of the Board of Directors, or any committee of the Board of Directors,
may participate in a meeting of the Board of Directors, or any
<PAGE>
- 7 -
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
Any action required or permitted to be taken at any meeting of the Board of
Directors or any committee thereof may be taken without a meeting, if all
members of the Board or Committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or Committee. For purposes of this section, written consent may be
transmitted by facsimile signature and later confirmed by original signature.
Section 2.7. Quorum. A majority of the directors presently serving on the
Board shall constitute a quorum at any meeting of the Board, except when
otherwise provided by law, or the bylaws, provided that a quorum may not be
reduced to below one-third of the number of director positions as fixed by the
shareholders in any year, but a lesser number may adjourn any meeting from time
to time, and the meeting may be held, as adjourned, without further notice. If
the number of directors is reduced below the number that would constitute a
quorum, no business may be transacted, except selecting directors to fill
vacancies in conformance with these Bylaws.
<PAGE>
If a quorum is present, the Board of Directors may take action through the
vote of a majority of the directors who are in attendance.
Section 2.8. Vacancies. When any vacancy occurs among the directors, a
majority of the remaining members of the Board, according to the laws of the
United States, may appoint a director to fill such vacancy at any regular
meeting of the Board, or at a special meeting called for that purpose at which a
quorum is present, or if the directors remaining in office constitute fewer than
a quorum of the Board, by the affirmative vote of a majority of all the
directors remaining in office, or by shareholders at a special meeting called
for that purpose, in conformance with these Bylaws. At any such shareholder
meeting, each shareholder entitled to vote shall have the right to multiply the
number of votes he or she is entitled to cast by the number of vacancies being
filled and cast the product for a single candidate or distribute the product
among two or more candidates.
A vacancy that will occur at a specific later date (by reason of a
resignation effective at a later date) may be filled before the vacancy occurs
but the new director may not take office until the vacancy occurs.
<PAGE>
- 9 -
ARTICLE III
-----------
Committees of the Board
AMENDMENT TO BY-LAWS
EFFECTIVE APRIL 21, 1993
RESOLVED: That the first two paragraphs of Article III of the By-Laws are hereby
deleted in their entirety and the following inserted in their place:
"The Board of Directors shall at its first
meeting of each year, appoint an Executive
Committee consisting of no less than five (5)
members; a Compensation Committee consisting of no
less than three (3) members; and an Audit
Committee consisting of no less than three (3)
members, none of whom may be officers of the Bank.
The President/Chief Executive Officer will be a
standing member of the Executive Committee. The
Board shall have the authority to appoint, from
time to time, in its discretion, such other
Committees as in its judgment, may be required for
the efficient transaction of the Bank's business,
or as may be required by law."
<PAGE>
- 10 -
AMENDMENT TO BY-LAWS
EFFECTIVE APRIL 21, 1993
RESOLVED: That Section 3.1 of Article III of the By-Laws shall be deleted in its
entirety and the following inserted in its place:
"Section 3.1. EXECUTIVE COMMITTEE. The
Executive Committee shall be comprised of no less
than five (5) members and shall meet weekly or as
needed, but in no event less than every other
week. The Executive Committee shall serve in an
advisory capacity to the Bank's Chief Executive
Officer, and be responsible, in consultation with
management, for the development of the Bank's
long-range strategic plan and performance
standards. The Executive Committee shall be
responsible for the general supervision of the
affairs of the Bank, but the Executive Committee
shall not countermand any action taken by the
Board when meeting as a whole.
The Executive Committee shall be responsible
for marketing and asset, liability, liquidity and
capital management issues. The Executive Committee
shall also undertake such other additional
activities with regard to these matters as they
deem appropriate, or which may otherwise be
specifically delegated or assigned to such
Committee by the Board of Directors.
The Executive Committee shall keep minutes of
its proceedings, and submit the same for
ratification at each regular meeting of the Board
of Directors."
<PAGE>
- 11 -
AMENDMENT TO BY-LAWS
EFFECTIVE APRIL 21, 1993
RESOLVED: That Section 3.2 of Article III of the By-Laws shall be deleted in its
entirety and the following inserted in its place:
"Section 3.2. AUDIT COMMITTEE. The Audit
Committee shall be comprised of not less than
three (3) members of the Board, exclusive of any
active officers. The duties of the Audit Committee
shall be to examine the affairs of the Bank at
least one time during each calendar year and
within 15 months of the last examination or cause
suitable examinations to be made by auditors
responsible only to the Board of Directors and to
report the result of such examination in writing
to the Board at the next regular meeting
thereafter. Such report shall describe the
condition the Bank is in and whether adequate
internal controls and procedures are being
maintained and shall recommend to the Board such
changes in the manner of conducting the affairs of
the Bank as shall be deemed advisable by such
Committee. The Audit Committee shall also be
responsible for determining whether the Bank is in
compliance with all applicable rules and
regulations and shall evaluate the condition and
management of the Bank's loan portfolio. No
director who has outstanding loans or other
extensions of credit from the Bank that has been
identified as classified by the Bank or by the
Comptroller to Currency may, during the period
during which such loan or extension of credit is
classified, serve as a member of the Audit
Committee."
Section 3.3. Other Committees. The Board of Directors may appoint, from
time to time, from its own members, committees of one or more persons, for such
purposes and with such powers as the Board may determine.
However a Committee may not:
(1) Authorize distributions of assets or dividends.
(2) Approve action required to be approved by shareholders.
(3) Fill vacancies on the Board of Directors or any of its committees.
(4) Amend Articles of Association.
<PAGE>
- 12 -
(5) Adopt, amend or repeal Bylaws.
(6) Authorize or approve issuance or sale or contract for sale of shares,
or determine the designation and relative rights, preferences and
limitations of a class or series of shares.
ARTICLE IV
----------
Officers and Employees
Section 4.1. Chairperson of the Board. The Board of Directors shall appoint
one of its members to be the chairperson of the Board to serve at its pleasure.
Such person shall preside at all meetings of the Board of Directors. The
chairperson of the Board shall supervise the carrying out of the policies
adopted or approved by the Board, shall also have and may exercise such further
powers and duties as from time to time may be conferred upon, or assigned by the
Board of Directors.
Section 4.2. President. The Board of Directors shall appoint one of its
members to be the president of the association. In the absence of the
chairperson, the president shall preside at any meeting of the Board. The
president shall have general executive powers, and shall have and may exercise
any and all other powers and duties pertaining by law, regulation, or practice,
to the office of the president, or imposed by these Bylaws. The president shall
also have and may
<PAGE>
- 13 -
exercise such further powers and duties as from time to time may be conferred,
or assigned by the Board of Directors.
Section 4.3. Vice President. The Board of Directors may appoint one or more
vice presidents. Each vice president shall have such powers and duties as may be
assigned by the Board of Directors. One vice president shall be designated by
the Board of Directors, in the absence of the president, to perform all the
duties of the president.
Section 4.4. Secretary. The Board of Directors shall appoint a secretary,
cashier, or other designated officer who shall be secretary of the Board and of
the association, and shall keep accurate minutes of all meetings. The secretary
shall attend to the giving of all notices required by these Bylaws; shall be
custodian of the corporate seal, records, documents and papers of the
association; shall provide for the keeping of proper records of all transactions
of the association, shall have and may exercise any and all other powers and
duties pertaining by law, regulation, or practice, to the office of cashier, or
imposed by these Bylaws, and shall also perform such other duties as may be
assigned from time to time by the Board of Directors.
Section 4.5. Other Officers. The Board of Directors may appoint one or more
assistant vice presidents, one or more trust officers, one or more assistant
secretaries, one or more assistant cashiers, one or more managers and assistant
managers of branches and such other officers and attorneys in fact as from
<PAGE>
- 14 -
time to time may appear to the Board of Directors to be required or desirable to
transact the business of the association. Such officers shall respectively
exercise such powers and perform such duties as pertain to their several
offices, or as may be conferred upon, or assigned to, them by the Board of
Directors, the chairperson of the Board, or the president. The Board of
Directors may authorize an officer to appoint one or more officers of assistant
officers.
Section 4.6. Tenure of Office. The president and all other officers shall
hold office for the current year for which the Board was elected, unless they
shall resign, become disqualified, or be removed, and any vacancy occurring in
the office of the president shall be filled promptly by the Board of Directors.
Section 4.7. Resignation. An officer may resign at any time by delivering
notice to the association. A resignation is effective when the notice is given
unless the notice specifies a later effective date.
ARTICLE V
---------
Stock and Stock Certificates
Section 5.1. Transfers. Shares of stock shall be transferable on the books
of the association, and a transfer book shall be kept in which all transfers of
stock shall be recorded. Every person becoming a shareholder by such transfer
<PAGE>
- 15 -
shall in proportion to his or her shares, succeed to all rights of the prior
holder of such shares. The Board of Directors may impose conditions upon the
transfer of the stock reasonably calculated to simplify the work of the
association with respect to stock transfers, voting at shareholder meetings, and
related matters and to protect it against fraudulent transfers.
Section 5.2. Stock Certificates. Certificates of stock shall bear the
signature of the president (which may be engraved, printed or impressed), and
shall be signed manually or by facsimile process by the secretary, assistant
secretary, cashier, assistant cashier, or any other officer appointed by the
Board of Directors for that purpose, to be known as an authorized officer, and
the seal of the association shall be engraved thereon. Each certificate shall
recite on its fact that the stock represented thereby is transferable only upon
the books of the association properly endorsed.
The Board of Directors may adopt or utilize procedures for replacing lost,
stolen, or destroyed stock certificates as permitted by law.
The association may establish a procedure through which the beneficial
owner of shares that are registered in the name of a nominee may be recognized
by the association as the shareholder. The procedure may set forth:
(1) The types of nominees to which it applies.
<PAGE>
- 16 -
(2) The rights and privileges that the association recognizes in a
beneficial owner.
(3) How the nominee may request the association to recognize the
beneficial owner as the shareholder.
(4) The information that must be provided when the procedure is selected.
(5) The period over which the association will continue to recognize the
beneficial owner as the shareholder.
(6) Other aspects of the rights and duties created.
ARTICLE VI
----------
Corporate Seal
The president, the cashier, the secretary or any assistant cashier or
assistant secretary, or other officer thereunto designated by the Board of
Directors, shall have authority to affix the corporate seal to any document
requiring such seal, and to attest the same. Such seal shall be substantially in
the following form:
( Impression )
( of )
( Seal )
<PAGE>
- 17 -
ARTICLE VII
-----------
Miscellaneous Provisions
Section 7.1. Fiscal Year. The fiscal year of the association shall be the
calendar year.
Section 7.2. Execution of Instruments. All agreements, indentures,
mortgages, deeds, conveyances, transfers, certificates, declarations, receipts,
discharges, releases, satisfactions, settlements, petitions, schedules,
accounts, affidavits, bonds, undertakings, proxies, and other instruments or
documents may be signed, executed, acknowledged, verified, delivered or accepted
on behalf of the association by the chairperson of the Board, or the president.
Any such instruments may also be executed, acknowledged, verified, delivered, or
accepted on behalf of the association in such other manner and by such other
officers as the Board of Directors may from time to time direct. The provisions
of this section 7.2 are supplementary to any other provision of these Bylaws.
Section 7.3. Records. The Articles of Association, the Bylaws and the
proceedings of all meetings of the shareholders, the Board of Directors, and
standing committees of the Board, shall be recorded, in appropriate minute books
provided for that purpose. The minutes of each meeting shall be signed by the
secretary, cashier or other officer appointed to act as secretary of the
meeting.
<PAGE>
- 18 -
ARTICLE VIII
------------
Bylaws
Section 8.1. Inspection. A copy of the Bylaws, with all amendments, shall
at all times be kept in a convenient place at the main office of the
association, and shall be open for inspection to all shareholders during banking
hours.
Section 8.2. Amendment. The Bylaws may be amended, altered or repealed, at
any regular meeting of the Board of Directors, by a vote of a majority of the
total number of the directors except as provided below. The association's
shareholders may amend or repeal the Bylaws even though the Bylaws also may be
amended or repealed by its Board of Directors.
ARTICLE IX
----------
Roberts Rules of Order
In the event a matter pertaining to corporate governance of the association
is not otherwise covered by the Articles of Association or these Bylaws, Roberts
Rules of Order shall determine the appropriate procedure.
Exhibit 4.0 Draft Stock Certificate of Annapolis National Bancorp, Inc.
<PAGE>
COMMON STOCK COMMON STOCK
PAR VALUE $.01 SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP
ANNAPOLIS NATIONAL BANCORP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS CERTIFIES THAT
S P E C I M E N
is the owner of:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK $.01 PAR VALUE PER SHARE OF
ANNAPOLIS NATIONAL BANCORP, INC.
The shares represented by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, or by his duly
authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the
Certificate of Incorporation of the Corporation and any amendments thereto
(copies of which are on file with the Transfer Agent), to all of which
provisions the holder by acceptance hereof, assents.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar. The shares represented by this Certificate are not
insured by the Federal Deposit Insurance Corporation or any other government
agency.
IN WITNESS THEREOF, Annapolis National Bancorp, Inc. has
caused this certificate to be executed by the facsimile signatures of its duly
authorized officers and has caused a facsimile of its corporate seal to be
hereunto affixed.
Dated: [SEAL]
President Secretary
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
The Board of Directors of the Corporation is authorized by
resolution(s), from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences and relative, participating, optional, or other special rights of
the shares of each such series and the qualifications, limitations and
restrictions thereof. The Corporation will furnish to any shareholder upon
request and without charge a full description of each class of stock and any
series thereof.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFTS MIN ACT - __________ custodian __________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act
_____________________
(State)
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, __________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF ASSIGNEE
________________________________________________________________________________
Please print or typewrite name and address including postal zip code of assignee
_______________________________________________ shares of the common stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint ________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
DATED ________________________ ______________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
SIGNATURE GUARANTEED: __________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15
Exhibit 5.0 Opinion of Muldoon, Murphy & Faucette re: legality
<PAGE>
[DRAFT FORM OF LEGAL OPINION]
_______________, 1997
Board of Directors
Annapolis National Bancorp, Inc.
Annapolis, Maryland 21404
Re: The offering of up to 33,334 shares of Annapolis National
Bancorp, Inc. Common Stock
Gentlemen:
You have requested our opinion concerning certain matters of Maryland
law in connection with the offering (the "Offering") by Annapolis National
Bancorp, Inc., a Maryland corporation (the "Company"), of up to 33,334 shares of
its common stock, par value $.01 per share, ("Common Stock").
In connection with your request for our opinion, you have provided to
us and we have reviewed the Company's amended and restated articles of
incorporation filed with the Maryland Department of Assessment and Taxation on
June 23, 1997 (the "Certificate of Incorporation"); the Company's amended and
restated Bylaws; the Company's Registration Statement on Form SB-2, as filed
with the Securities and Exchange Commission initially on June 23, 1997 and as
amended on _______________ (the "Registration Statement"); resolutions of the
Board of Directors of the Company (the "Board") concerning the organization of
the Company, the Offering and designation of a Pricing Committee of the Board,
and the form of stock certificate approved by the Board to represent shares of
Common Stock. We have also been furnished a certificate of the Maryland
Department of Assessment and Taxation certifying the Company's good standing
as a Maryland corporation. Capitalized terms used but not defined herein shall
have the meaning given them in the Certificate of Incorporation.
-1-
<PAGE>
Board of Directors
Annapolis National Bancorp, Inc.
_________, 1997
Page 2
Based upon and subject to the foregoing, and limited in all respects to
matters of Maryland law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Maryland.
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common stock to be sold in the Offering, the
Common Stock to be issued in the Offering will be duly authorized and, when such
shares are sold and paid for in accordance with the terms set forth in the
Prospectus and such resolution of the Pricing Committee, and certificates
representing such shares in the form provided to us are duly and properly
issued, will be validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement on Form SB-2 and to the use of the name of our firm where
it appears in the Registration Statement and in the Prospectus.
Very truly yours,
MULDOON, MURPHY & FAUCETTE
-2-
Exhibit 10.1 Employment Agreement between Annapolis National Bancorp, Inc.
and John W. Marhefka, Jr.
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This agreement ("Agreement") is made this 21st day of February 1997,
between John W. Marhefka, Jr.("Mr. Marhefka") and Annapolis National
Bank, its successors, and assigns ("the Bank").
1. The Bank is a nationally chartered banking company engaged in the
business of a full service commercial bank, whose principal office is located
in Annapolis, Maryland. The Bank is wholly owned by a bank holding company,
Maryland Publick Banks, Inc. ("the Company").
2. Mr. Marhefka is willing to be employed by the Bank, and the Bank is
willing to employ Mr. Marhefka on the terms, covenants, and conditions
hereinafter set forth.
For the reasons set forth above and in consideration of the mutual
promises and agreements set forth below, the Bank and Mr. Marhefka agree as
follows:
SECTION ONE -- EMPLOYMENT
The Bank employs Mr. Marhefka as its President & Chief Executive
Officer, and Mr. Marhefka accepts such employment subject to the general
supervision, advice, and direction of the Board of Directors of the Bank. Mr.
Marhefka will perform such duties as are customarily performed by persons
holding such positions in the banking industry, including but not
limited to management of and responsibility for investments, loans,
marketing, sales, regulatory compliance, and personnel matters, and will render
such other services and perform duties as may be assigned to him by the Board of
Directors of the Bank. At the discretion of the Board of Directors of the
Company, Mr. Marhefka will serve, during the term of his employment, as a
member of the Board of Directors of the Bank, but will not participate in any
decisions concerning his employment relationship with the Bank.
SECTION TWO -- BEST EFFORTS
Mr. Marhefka agrees to use his best efforts to perform all duties
required of and from him by the Bank, pursuant to the express and implicit
terms hereof, to the Bank's reasonable satisfaction. Such duties will be
rendered at the Bank's principal office or other places as the interests,
needs, business, or opportunity of the Bank require. Mr. Marhefka warrants
and represents that he has the training, experience, and knowledge to
perform the duties of his position, and that he is not restricted or
limited in doing so by any contractual obligations, conflicts of interest,
or otherwise.
SECTION THREE -- TERM OF EMPLOYMENT
This Agreement is effective beginning on the date of its execution
by both parties (the "Effective Date") and for five (5) years thereafter,
unless sooner terminated by either party pursuant to Sections 6-8.
SECTION FOUR -- COMPENSATION AND BENEFITS
The Bank will compensate Mr. Marhefka for all his services
hereunder at an initial minimum salary of One Hundred Thirty-two-Thousand
Five-Hundred Dollars ($132,500.00) per annum, payable
1
<PAGE>
biweekly so long as he is employed hereunder. This amount will increase on each
anniversary of the Effective Date by an amount determined by multiplying the
then current salary by the annual percentage increase of the most recently
released Consumer Price Index for Urban Consumers ("CPI-U"). The Bank will
provide Mr. Marhefka with an automobile, and pay all expenses pertaining to
the business use, repair, and maintenance thereof. The Bank will provide Mr.
Marhefka with non-contributory family health insurance, reimbursement of
reasonable business expenses, group benefits as provided to its other executive
officers, and twenty (20) working days paid vacation annually.
As soon as practicable following the Effective Date, the Bank will
provide Mr. Marhefka non-transferable incentive stock options to purchase up to
ten thousand (10,000) shares of the Company's common stock at an exercise
price of five dollars ($5.00) per share (the "Initial Options"). The Bank
will provide additional non-transferable incentive stock options to Mr. Marhefka
annually (the "Annual Options") as soon as practicable following the close
of the calendar year. The exercise price per share of all Annual Options
granted will be calculated as 133.334% of the book value per share of the
Company's common stock as of the end of the calendar year just completed. The
number of Annual Options so provided will be calculated as a function of the
Company's return on average equity for the calendar year ("ROE"). ROE is
calculated by dividing net income of the Company for the calendar year, on a
consolidated basis with the Bank, by average stockholders' equity of the
Company for the calendar year. Should the Company's ROE for the calendar year
then ended be calculated at fifteen percent (15.0%) or higher, the amount of
Annual Options to be granted will be calculated as one thousand (1,000) plus
ten (10) additional for each one-hundredth of one percent (0.01%) by which the
Company's ROE exceeds fifteen percent (15.0%) for a said calendar year.
For the calendar year ending December 31, 1997, ROE will be
calculated by dividing the Net Income of the Company during March 1, 1997
through year-end, on a consolidated basis with the Bank, by the average
stockholders' equity of the Company for that period and then annualized for
purposes of determining Mr. Marhefka's entitlement to Annual Options. The
Initial Options and Annual Options will be exercisable upon receipt by Mr.
Marhefka and for ten years thereafter, subject to any applicable incentive
stock option plan.
The Bank will pay an incentive cash bonus to Mr. Marhefka annually (the
"Annual Bonus") as soon as practicable following the close of calendar year
1997 and each calendar year thereafter, subject to the following conditions.
The amount of each Annual Bonus will be calculated as five percent (5.0%) of
that amount by which the Company's ROE exceeds fifteen percent (15.0%)
during each calendar year. For the calendar year ending December 31, 1997,
ROE, for purposes of determining any entitlement to Annual Bonus, will be
calculated for the period from March 1, 1997 through year-end and annualized as
set forth above.
No Annual Options will be provided and no Annual Bonus will be paid or
due for any calendar year if (i) the Company's ROE is less than fifteen percent
(15.0%) during that year, or (ii) the amount of the Bank's non-performing
assets ((the sum of other real estate owned (at book value) and non-accrual
loans)) exceeds seventy-five hundredths of one percent (0.75%) of its total
assets at the end of the calendar year just completed, or (iii) the amount of
the Bank's allowance for loan losses is less than one hundred and fifty
percent (150%) of its non-accrual loans after deducting any portions thereof
which are government guaranteed. For the calendar year ending December 31,
1997, the net income figure used for determining ROE will be adjusted by
adding back any loan losses or specific reserves for impending loan losses
relative to loans which were in the Bank's loan portfolio prior to March 1,
1997.
2
<PAGE>
The Annual Options And Annual Bonus ROE calculations presume that
increases in the Company's stockholders' equity will result from net income
and not from an external recapitalization of the Company. If the Company
increases its stockholders' equity by virtue of selling new shares of capital
stock or another method of external recapitalization, the Annual Options
and Annual Bonus incentive calculations will be adjusted to account for the
dilutive effect of such recapitalization on the Company's ROE. All
determinations and valuations under this section will be mutually agreed upon
by the parties, or otherwise made by the respective certified public
accounting firms of the Bank and Company, in accordance with generally
accepted industry guidelines.
SECTION FIVE -- OTHER EMPLOYMENT
In consideration for Mr. Marhefka having resigned his positions as
Chairman of the Board, President, and Chief Executive Officer of State Capital
Bancorp, Inc. to accept employment by the Bank, the Bank agrees to promptly
reimburse State Capital Bancorp for all documented expenses associated with
its formation and operation up to a maximum of Fifty Thousand Dollars
($50,000.00).
The Bank will be entitled to all benefits, profits, or other issues
arising from or incident to all work, services, and advice of Mr. Marhefka. Mr.
Marhefka will devote his full business and productive time, ability, and
attention to his duties for the Bank. Mr. Marhefka will not, during the term
hereof, be interested directly or indirectly, in any manner, as a compensated
partner, officer, director, advisor, employee, or in any other similar
capacity, in any other business. This provision does not prohibit Mr.
Marhefka from:
a. making passive investments;
b. engaging in religious, charitable or other community or nonprofit activities
that do not impair his ability to fulfill his duties and responsibilities
under this Agreement; and
c. serving with the Bank's approval, on the board of directors of a company,
subject to the prohibitions set forth in Sections 9 and 10, and provided that
Mr. Marhefka will not render any material services with respect to the
operations or affairs of any such company.
SECTION SIX -- TERMINATION
Either party may terminate the employment relationship at any time
with or without cause. For the purposes of this Agreement, "cause" will be
defined as:
a. personal dishonesty or misappropriation in connection with the Bank or Bank
duties;
b. possession, use, or being under the influence of illegal drugs on Bank
property or on Bank business;
c. being under the influence of alcohol on Bank property or on Bank business;
d. conviction of a felony, crime of moral turpitude, or of violating banking
regulations;
e. breach of Sections 9 or 10 of this Agreement;
f. sexual or other harassment of employees or other employment discrimination
prohibited by law; and
g. failure to perform material duties or responsibilities after written notice
thereof and failure to remedy within thirty (30) days.
Mr. Marhefka may terminate his employment relationship upon providing
thirty (30) days
3
<PAGE>
advance written notice of resignation to the Bank. In the event that Mr.
Marhefka resigns or is terminated for cause within the first year of employment,
he will be required to promptly pay the Bank an amount equal to that paid by the
Bank under Section 5 to reimburse State Capital Bancorp, and Mr. Marhefka hereby
authorizes the Bank to deduct up to said amount from any moneys due Mr. Marhefka
upon his resignation.
This Agreement may be terminated by the Bank with no liability to Mr.
Marhefka except for rights earned through the date of termination upon: (i) his
discharge for cause (as defined herein), or (ii) his death or resignation.
Unless termination is for cause, or due to Mr. Marhefka's death,
disability, or resignation, the Bank agrees to pay him an amount equal to the
base salary which was paid to him during the twelve (12) month period
immediately preceding termination of this Agreement by the Bank. Said
amount will be paid in equal monthly payments over the subsequent twelve (12)
month period.
SECTION SEVEN -- CHANGE OF CONTROL
In the event of a change of control of the Company (as herein
defined), Mr. Marhefka will have the option, exercisable within six (6)
months from the date of said change of control, to elect either (i) to continue
his employment under the terms of this Agreement with the consent of the Bank,
(ii) to execute a new employment agreement as President or Chief Executive
Officer of the Bank on terms mutually agreeable, or (iii) to resign his
employment with thirty (30) days written notice and receive equal monthly
payments over the subsequent twelve (12) month period totaling one and
one-half (1.5) times the base salary and cash bonus paid to Mr. Marhefka
during the twelve (12) month period immediately preceding said change of
control of the Company ("Change of Control Payments"). If the Bank terminates
Mr. Marhefka without cause within six (6) months from a change of control of
the Company, the Bank will provide him with Change of Control Payments. If
Mr. Marhefka's termination of employment within six (6) months of a change of
control of the Company is for cause, or due to his death, the Bank will have
no obligation to him under the terms of this Agreement.
In the event that Mr. Marhefka remains employed by the Bank under the
terms of this Agreement for more than six (6) months following a change of
control of the Company, the provisions of Section 6 will apply to any
subsequent termination. This section does not apply in the event that Mr.
Marhefka becomes disabled and therefore subject to the terms of Section 8.
For purposes of this Agreement, a "change of control of the Company" is
defined as (i) a transaction or series of transactions in which any one
person (other than Lawrence E. Lerner or any member or members of his family),
or more than one person acting as a group (excluding for this purpose Lawrence
E. Lerner or any member or members of his family, to the extent they
participate in such a group), acquires during any twelve (12) month period
more than fifty percent (50%) of the total voting power of the Company's
stock, or (ii) a merger, consolidation, or other reorganization where the
Company is not the surviving entity and Lawrence E. Lerner or any member or
members of his family do not individually or as a group own more than fifty
percent (50%) of the total voting power of the surviving entity's stock.
4
<PAGE>
SECTION EIGHT -- TERMINATION FOR DISABILITY
Notwithstanding anything in this Agreement to the contrary, the
Bank may terminate Mr. Marhefka's employment if he becomes disabled, as
determined by a licensed physician in accordance with the definition of
that term under the Bank's long term disability insurance policy. The
parties will cooperate in obtaining a physician's determination. During the
first ninety (90) days of Mr. Marhefka's disability and after he has fully
utilized and exhausted all accrued vacation and sick leave, the Bank will
continue to compensate Mr. Marhefka at his full base salary level with
benefits (excluding unearned Annual Options and Annual Bonus). Thereafter,
Mr. Marhefka will be entitled to any disability benefits for which he
qualifies under the Bank's disability insurance policy and the Bank will have no
further obligation to him.
SECTION NINE -- CONFIDENTIAL INFORMATION
Without the Bank's written consent, Mr. Marhefka will not disclose or
use at any time during or after his employment confidential and proprietary
information of which he is informed during employment, whether or not
developed by him, including but not limited to research and plans for new
business development, new products or acquisitions, customer lists, pricing
information, non-public financial statements and data, employee lists,
compensation data, personnel file data, and any other information not
generally known outside the Bank and which would provide an economic advantage
if known by its competitors. Provided, however, that this paragraph will not
restrict such disclosures or use as is required in the performance of Mr.
Marhefka's duties hereunder.
Upon termination of his employment, Mr. Marhefka will promptly deliver
to the Bank all software, process documentation, manuals, customer lists,
employee lists, agent lists, letters, notes, notebooks, reports, and any other
materials containing confidential and/or proprietary information and which
are in his possession or control.
SECTION TEN -- NON-COMPETITION
If Mr. Marhefka resigns his employment or is terminated without cause
during the five (5) year term of this Agreement, he will not without the
Bank's written consent, participate in or be connected with, as an officer,
employee, partner, agent, sole proprietor, owner, consultant, licensor, or
otherwise, any bank, savings and loan association, credit union, lending
institution, or similar competitive entity that has offices or is actively
doing business in Anne Arundel County, Maryland. Said restriction will be
in effect only during the remaining period of the five (5) year term, not to
exceed one (1) year if he resigns, and not to exceed eight (8) months if he is
terminated without cause, except that if Mr. Marhefka resigns within the six
(6) month period following a change in control under Section 7, or resigns due
to a constructive termination, the non-competition restriction will not apply.
For purposes of this Agreement, "constructive termination" is defined as (i) a
failure to nominate Mr. Marhefka to the Board of Directors of the Bank, or
(ii) a material change in the functions or duties of his position to
materially and substantially diminish its responsibilities in importance or
scope from the position described in Section 1. In the event that Mr.
Marhefka intends to resign due to a constructive termination, he must give
the Bank thirty (30) days prior notice specifying the particular reasons
5
<PAGE>
therefor and a reasonable opportunity to rectify the situation.
Mr. Marhefka will be permitted to engage in such employment or
activity described above if he furnishes to the Bank evidence, including
assurances from him and his new employer, that the fulfillment of his duties in
such proposed employment or activity would not cause him to compete with the
Bank in Anne Arundel County, and such evidence is found satisfactory by the Bank
in its sole judgment and discretion.
SECTION ELEVEN -- INJUNCTIVE RELIEF AND DAMAGES
Mr. Marhefka recognizes that if he breaches Section 9 or 10 of this
Agreement, it will not be possible to calculate resulting damages and the Bank
will suffer immediate, substantial, and irreparable harm. Therefore, in such
a case, the Bank will be entitled to obtain an injunction in any competent court
restraining his further breach of said Sections, and will be entitled to
collect from Mr. Marhefka its reasonable attorneys' fees and costs if it
is successful in obtaining any injunctive relief. The parties agree to
jurisdiction and venue in and service by the Federal District Court of
Maryland and the Circuit Court of Anne Arundel County, Maryland.
SECTION TWELVE -- ARBITRATION OF DISPUTES
a. Except as provided in Sections 9-11, any and all disputes arising under this
Agreement, or concerning the application or interpretation of its terms,
or related to Mr. Marhefka's employment, including all statutory claims, are
subject to exclusive and binding arbitration in Annapolis, Maryland under
the applicable procedures of the American Arbitration Association. Either
party must file its arbitration claim within one year after the dispute
arises or cause of action occurs. Failure to do so will cause the party to
relinquish its right to challenge the disputed action in any manner or
forum;
b. Arbitration Remedies -- the arbitrator's authority as to claims or disputes
for which remedies are specified herein is exclusively limited to awarding
or not awarding the compensation, benefits, or moneys owed as provided for
in this Agreement, plus reasonable attorneys' fees and all costs, including
arbitration expenses, to the prevailing party as determined by the
arbitrator;
c. All arbitration decisions will be confidential.
SECTION THIRTEEN -- INDEMNIFICATION
The Bank will provide Mr. Marhefka with coverage under a standard
directors' and officers' liability insurance policy at its expense, or in lieu
thereof, will indemnify Mr. Marhefka to the fullest extent permitted under
Maryland law against all expenses and liabilities reasonably incurred by him
in connection with or arising out of any action, suit, or proceeding in
which he may be involved by reason of having been a director or officer of the
Bank (whether or not he continues to be a director or officer at the time
of incurring such expenses or liabilities), such expenses and liabilities
to include, but not limited to, judgments, court costs and attorneys'
fees, and the cost of reasonable settlements.
6
<PAGE>
SECTION FOURTEEN -- ENFORCEABILITY
If any portion or provision of this Agreement is declared illegal,
invalid, overbroad or unenforceable by a court of competent jurisdiction,
then the remainder of this Agreement will not be affected thereby, and each
portion and provision of this Agreement will be valid and enforceable to the
fullest extent permitted by law. In addition, if any portion or provision,
including but not limited to Section 12, is found to be illegal,
invalid, overbroad, or unenforceable by a court, it will be reformed to the
least extent possible in order to correct the defect. Sections 9- 11 remain in
effect regardless of any claimed breach of this Agreement and survive its
termination.
SECTION FIFTEEN -- WAIVER AND AMENDMENTS
No waiver of any provision hereof will be effective unless made in
writing and signed by the waiving party. The failure of either party to
require the performance of any term or obligation of this Agreement, or the
waiver by either party of any breach of this Agreement, will not prevent
any subsequent enforcement of such term or obligation or be deemed a waiver of
any subsequent breach. This Agreement may be amended or modified only by a
written instrument signed by both parties.
SECTION SIXTEEN -- GOVERNING LAW
This Agreement will be construed under and be governed in all
respects by the laws of Maryland, including but not limited to the
Arbitration and Award provisions of the Maryland Code, Courts and Judicial
Proceedings.
7
<PAGE>
SECTION SEVENTEEN -- ENTIRE AGREEMENT
This Agreement may be executed in counterparts and supersedes
all prior agreements and understandings between the parties. It constitutes
the entire agreement between the parties, and may not be modified or
terminated orally; provided that Mr. Marhefka is subject to the Bank's
written policies and procedures which are in effect and may be modified at
its discretion to the extent they do not materially diminish his rights
hereunder.
In witness whereof, the parties hereto have set their hands and seals on
this 21 day of February 1997.
Attest: Annapolis National Bank
/s/ Barbara J. Ward By: /s/ Albert Phillips
- ------------------------------ --------------------------
Corporate Seal Albert Phillips
Chairman
Date: Feb. 21, 1997
-------------
Witness:
/s/ Richard M. Lerner /s/ John W. Marhefka, Jr.
- ------------------------------ ------------------------------
John W. Marhefka, Jr.
Date: 2/21/97
-------
8
Exhibit 10.2 Promissory Note Between Annapolis National Bancorp, Inc. and
Lawrence E. Lerner dated January 31, 1995
<PAGE>
PROMISSORY NOTE
$848,400 January 31, 1995
Maryland Publick Banks, Inc., a Maryland corporation (the "Maker"),
promises to pay to the order of Lawrence E. Lerner (the "Payee") the principal
sum of Eight Hundred and Forty-Eight Thousand and Four Hundred Dollars
("Principal Sum") on December 31, 1997. Contemporaneously with the execution
hereof, the Payee shall mark cancelled and satisfied the $3,000,000 promissory
note between Maker and Payee dated June 6, 1990 (the "Prior Note"). The
principal amount of this note reflects the unpaid interest balance of the
Prior Note.
Additionally, the Maker promises to pay to the order of the Payee
interest on the Principal Sum from the date hereof until paid in full at a per
annum rate of interest which is at all times equal to Wall Street's Prime Rate
plus 1% per annum. The term Wall Street's Prime Rate as used in this Note
means the fluctuating prime rate of interest established and declared in The
Wall Street Journal from time to time. Accrued interest shall be paid on
December 31, 1997.
This Note may be prepaid in whole at any time or in part from time to
time without penalty. All payments of the principal of and interest on this
Note shall be paid in lawful money of the United States of America at such
place in the United States as the holder of this Note may at any time and from
time to time designate in writing to the Maker. In addition, all payments of
the principal of this Note shall only be paid out of the proceeds received by
the Maker from the sale of equity securities of the Maker.
The Maker hereby waives demand, presentment for payment, protest, notice
of dishonor and of protest.
The occurrence of any one or more of the following events shall constitute
a default under this Note: (a) the failure of the Maker to pay when due any
principal of or interest on this Note (subject to the restrictions set forth
above); (b) the failure of the Maker to perform or comply with any of the
provisions hereof; (c) the filing of any petition under the Bankruptcy Act or
any similar Federal or State statute against the Maker; or (d) an application
for the appointment of a receiver for, the making of a general assignment for
the benefit of creditors by, or the insolvency of, the Maker. Whenever there is
a default under this Note, the Payee may, at its option, (a) declare the unpaid
balance of the Principal Sum, together with all unpaid and accrued interest
thereon, to be immediately due and payable, and (b) exercise any or all rights
and remedies available to it hereunder, under applicable laws.
No failure or delay by the Payee to insist upon the strict performance of
any one or more provisions of this Note or to exercise any right, power or
remedy consequent upon a breach thereof or default hereunder shall constitute
a waiver thereof, or preclude the Payee from exercising any such right, power or
remedy. By accepting full or partial payment after the due date of any amount of
principal of or interest on this Note, the Payee shall not be deemed to have
waived the right either to require payment when due and payable of all other
amounts of principal of or interest on this Note or to exercise any rights and
remedies available to the Payee in order to collect all such other amounts due
and payable under this Note. No modification, change, waiver or amendment of
this Note shall be deemed to be made by the Payee unless in writing signed by
the Payee, and each such waiver, if any, shall apply only with respect to the
specific instance involved. This Note shall be governed by the laws of the
State of Maryland.
IN WITNESS WHEREOF the signature and seal of the Maker has been affixed
hereto as of the day and year first above written.
ATTEST: MARYLAND PUBLICK BANKS, INC.
/s/ Nancy E. Sheehan By /s/ Richard J. Morgan (SEAL)
- --------------------------- --------------------------
Secretary Vice President
- 2 -
Exhibit 10.3 Annapolis National Bancorp, Inc. Employee Stock Option Plan
<PAGE>
MARYLAND PUBLICK BANKS, INC.
EMPLOYEE STOCK OPTION PLAN
<PAGE>
MARYLAND PUBLICK BANKS, INC.
EMPLOYEE STOCK OPTION PLAN
1. Purpose
The proper execution of the duties and responsibilities of the
executives and key employees of Maryland Publick Banks, Inc. (the "Corporation")
and its subsidiaries is a vital factor in the continued growth and success of
the Corporation. Toward this end, it is necessary to attract and retain
effective and capable individuals to assume positions that contribute materially
to the successful operation of the business of the Corporation and its
subsidiaries. It will benefit the Corporation, therefore, to bind the interests
of these persons more closely to its own interests by offering them an
attractive opportunity to acquire a proprietary interest in the Corporation and
thereby provide them with added incentive to remain in the service of the
Corporation and its subsidiaries and to increase the prosperity, growth, and
earnings of the Corporation. This stock option plan is intended to serve these
purposes.
2. Definitions
The following terms wherever used herein shall have the meanings set
forth below.
(a) The term "Board of Directors" shall mean the Board of Directors of
the Corporation
(b) The term "Change in Control of the Corporation" shall mean a change
in control of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act,
whether or not the Corporation is in fact required to comply therewith, provided
that, without limitation, such a change in control shall be deemed to have
occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Corporation or any of its subsidiaries or
a corporation owned, directly or indirectly, by the stockholders of the
Corporation in substantially the same proportions as the ownership of Common
Stock of the Corporation, and other than Lawrence E. Lerner or any member or
members of his family, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 20% or more of the combined voting power of the
Corporation's then outstanding securities; (B) during any period of two
consecutive years (not including any period prior to the adoption of the Plan),
individuals who at the beginning of such period constitute the Board and any new
director (other than a director designated by a person who has entered into an
agreement with the Corporation to effect a transaction described in clauses (A)
or (D) of this definition) whose election by the Board or nomination for
election by the Corporation's stockholders was approved by a vote of at least
two-thirds of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority of the
Board; (C) the Corporation enters into an agreement, the consummation of which
would result in the occurrence of a Change in Control of the Corporation; or (D)
the stockholders of the Corporation approve a
<PAGE>
merger, share exchange or consolidation of the Corporation with any other
corporation, other than a merger, share exchange or consolidation that would
result in the voting securities of the Corporation outstanding immediately prior
thereto held by Lawrence E. Lerner or any member or members of his family
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 50% of the combined
voting power of the voting securities of the Corporation or such surviving
entity outstanding immediately after such merger, share exchange or
consolidation, or the stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale or disposition by
the Corporation of all or substantially all the Corporation's assets.
(c) The term "Code" shall mean the Internal Revenue Code of 1986, as
amended, and any regulations promulgated thereunder.
(d) The term "Committee" shall mean a committee to be appointed by the
Board of Directors to consist of three or more members, all of whom are members
of the Board of Directors.
(e) The term "Common Stock" shall mean the shares of common stock, par
value $0.01 per share, of the Corporation.
(f) The term "Corporation" shall mean Maryland Publick Banks, Inc., a
Maryland corporation.
(g) The term "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(h) The term "Fair Market Value" shall mean the then current fair market
value of Common Stock, as determined in good faith by the Committee and in a
manner consistent with the rules set forth in Treas. Reg. Section 20.2031-2.
(i) The term "Incentive Stock Option" shall mean any Option granted
pursuant to the Plan that is designated as an Incentive Stock Option and which
satisfies the requirements of Section 422(b) of the Code.
(j) The term "Nonqualified Stock Option" shall mean any Option granted
pursuant to the Plan that is not an Incentive Stock Option.
(k) The term "Option" or "Stock Option" shall mean a right granted
pursuant to the Plan to purchase shares of Common Stock, and shall include the
terms Incentive Stock Option and Nonqualified Stock Option.
(l) The term "Option Agreement" shall mean the written agreement
representing Options granted pursuant to the Plan as contemplated by Paragraph 7
of the Plan.
-2-
<PAGE>
(m) The term "Plan" shall mean the Maryland Publick Banks, Inc. Employee
Stock Option Plan as approved by the Board of Directors on March 28, 1997, as
the same may be amended from time to time.
(n) The term "subsidiary" or "subsidiaries" shall mean a corporation of
which capital stock possessing 50% or more of the total combined voting power of
all classes of its capital stock entitled to vote generally in the election of
directors is owned in the aggregate by the Corporation directly or indirectly
through one or more subsidiaries.
3. Effective Date of the Plan
The Plan shall become effective upon stockholder approval, provided that
such approval is received before March 28, 1998, and provided further that the
Board of Directors may grant Options pursuant to the Plan prior to stockholder
approval if such Options by their terms are contingent upon subsequent
stockholder approval of the Plan.
4. Administration
(a) The Plan shall be administered by the Committee.
(b) The Committee may establish, from time to time and at any time,
subject to the approval of the Board of Directors and subject to the limitations
of the Plan as set forth herein, such rules and regulations and amendments and
supplements thereto, as it deems necessary to comply with applicable law and
regulation and for the proper administration of the Plan. A majority of the
members of the Committee shall constitute a quorum. The vote of a majority of a
quorum shall constitute action by the Committee.
(c) The Committee shall from time to time submit to the Board of
Directors for its approval the names of those executives and key employees who,
in its opinion, should receive Options, and shall recommend the numbers of
shares on which Options should be granted to each such person and the nature of
the Options to be granted.
(d) Options shall be granted by the Corporation and shall become
effective only after prior approval of the Board of Directors, and upon the
execution of an Option Agreement between the Corporation and the Option holder.
(e) The Committee's interpretation and construction of the provisions of
the Plan and the rules and regulations adopted by the Committee shall be final,
unless otherwise determined by the Board of Directors. No member of the
Committee or the Board of Directors shall be liable for any action taken or
determination made, in respect of the Plan, in good faith.
-3-
<PAGE>
5. Participation in the Plan
(a) Participation in the Plan shall be limited to the key employees of
the Corporation and its subsidiaries who shall be designated by the Committee
and approved by the Board of Directors.
(b) No member of the Board of Directors who is not also an officer of
the Corporation shall be eligible to participate in the Plan.
6. Stock Subject to the Plan
(a) There shall be reserved for the granting of Options pursuant to the
Plan and for issuance and sale pursuant to such Options one hundred thousand
(100,000) shares of Common Stock. To determine the number of shares of Common
Stock available at any time for the granting of Options, there shall be deducted
from the total number of reserved shares of Common Stock, the number of shares
of Common Stock in respect of which Options have been granted pursuant to the
Plan that are still outstanding or have been exercised. The shares of Common
Stock to be issued upon the exercise of Options granted pursuant to the Plan
shall be made available from the authorized and unissued shares of Common Stock.
If for any reason shares of Common Stock as to which an Option has been granted
cease to be subject to purchase thereunder, then such shares of Common Stock
again shall be available for issuance pursuant to the exercise of Options
pursuant to the Plan.
(b) Proceeds from the purchase of shares of Common Stock upon the
exercise of Options granted pursuant to the Plan shall be used for the general
business purposes of the Corporation.
(c) In the event of reorganization, recapitalization, stock split, stock
dividend, combination of shares of Common Stock, merger, consolidation, share
exchange, acquisition of property or stock, or any change in the capital
structure of the Corporation, the Committee shall make such adjustments as may
be appropriate in the number and kind of shares reserved for purchase by
executives or other key employees, in the number, kind and price of shares
covered by Options granted pursuant to the Plan but not then exercised.
7. Terms and Conditions of Options
(a) Each Option granted pursuant to the Plan shall be evidenced by an
Option Agreement in such form as the Committee from time to time may determine.
(b) The exercise price per share for Options shall be established by the
Board of Directors upon the recommendation of the Committee at the time of the
grant of Options pursuant to the Plan and shall not be less than the Fair Market
Value of a share of Common Stock on the date on which the Option is granted. If
the Board of Directors does not establish a specific exercise price per share at
the time of grant, the exercise price per share shall be equal to the Fair
Market Value of a share of Common Stock on the date of grant of the Options.
-4-
<PAGE>
(c) Each Option, subject to the other limitations set forth in the Plan,
may extend for a period of up to 10 years from the date on which it is granted.
The term of each Option shall be determined by the Board of Directors at the
time of grant of the Option, provided that if no term is established by the
Board of Directors the term of the Option shall be 10 years from the date on
which it is granted.
(d) The Board of Directors, upon recommendation of the Committee, may
provide in the Option Agreement that the right to exercise each Option for the
number of shares subject to each Option shall vest in the Option holder over
such period of time as the Committee, in its discretion, shall determine for
each Option holder. Notwithstanding the foregoing, each Option Agreement shall
provide that, upon the occurrence of a Change in Control of the Corporation, all
Options then outstanding shall become immediately exercisable.
(e) Options shall be nontransferable and nonassignable, except that
Options may be transferred by testamentary instrument or by the laws of descent
and distribution.
(f) Upon voluntary or involuntary termination of an Option holder's
employment, his Option and all rights thereunder shall terminate effective at
the close of business on the date the Option holder ceases to be a regular,
full-time employee of the Corporation or any of its subsidiaries, except (i) to
the extent previously exercised and (ii) as provided in subparagraphs (g), (h)
and (i) of this Paragraph 7.
(g) In the event an Option holder (i) takes a leave of absence from the
Corporation or any of its subsidiaries for personal reasons or as a result of
entry into the armed forces of the United States, or any of the departments or
agencies of the United States government, or (ii) terminates his employment, or
ceases providing services to the Corporation or any of its subsidiaries, by
reason of illness, disability, voluntary termination with the consent of the
Committee, or other special circumstance, the Committee may consider his case
and may take such action in respect of the related Option Agreement as it may
deem appropriate under the circumstances, including accelerating the time
previously granted Options may be exercised and extending the time following the
Option holder's termination of active employment during which the Option holder
is entitled to purchase the shares of Common Stock subject to such Options,
provided that in no event may any Option be exercised after the expiration of
the term of the Option.
(h) If an Option holder dies during the term of his Option without
having fully exercised his Option, the executor or administrator of his estate
or the person who inherits the right to exercise the Option by bequest or
inheritance shall have the right within ninety (90) days of the Option holder's
death to purchase the number of shares of Common Stock that the deceased Option
holder was entitled to purchase at the date of his death, after which the Option
shall lapse, provided that in no event may any Option be exercised after the
expiration of the term of the Option.
-5-
<PAGE>
(i) If an Option holder terminates employment without his having fully
exercised his Option due to his retirement with the consent of the Corporation,
then such Option holder shall have the right within ninety (90) days of the
Option holder's termination of employment to purchase the number of shares of
Common Stock that the Option holder was entitled to purchase at the date of his
termination, after which the Option shall lapse, provided that in no event may
any Option be exercised after the expiration of the term of the Option. The
Committee may cancel an Option during the ninety day period referred to in this
paragraph, if the Participant engages in employment or activities contrary, in
the opinion of the Committee, to the best interests of the Corporation. The
Committee shall determine in each case whether a termination of employment shall
be considered a retirement with the consent of the Corporation, and, subject to
applicable law, whether a leave of absence shall constitute a termination of
employment. Any such determination of the Committee shall be final and
conclusive, unless overruled by the Board.
(j) The granting of an Option pursuant to the Plan shall not constitute
or be evidence of any agreement or understanding, express or implied, on the
part of the Corporation or any of its subsidiaries to retain or employ the
Option holder for any specified period.
(k) In addition to the general terms and conditions set forth in this
Paragraph 7 in respect of Options granted pursuant to the Plan, Incentive Stock
Options granted pursuant to the Plan shall be subject to the following
additional terms and conditions:
(i) "Incentive stock options" shall be granted only to
individuals who, at the date of grant of the Option, are
regular, full-time employees of the Corporation or any of
its subsidiaries;
(ii) No employee who owns beneficially more than 10% of the
total combined voting power of all classes of stock of the
Corporation shall be eligible to be granted an "incentive
stock option;"
(iii) The aggregate fair market value (determined at the time
the Incentive Stock Option is granted) of the shares of
Common Stock in respect of which "incentive stock options"
are exercisable for the first time by the Option holder
during any calendar year (under all such plans of the
Corporation and its subsidiaries) shall not exceed
$100,000; and
(iv) Any other terms and conditions specified by the Board of
Directors that are not inconsistent with the Plan, except
that such terms and conditions must be consistent with the
requirements for "incentive stock options" under Section
422 of the Code.
-6-
<PAGE>
8. Methods of Exercise of Options
(a) An Option holder (or other person or persons, if any, entitled to
exercise an Option hereunder) desiring to exercise an Option granted pursuant to
the Plan as to all or part of the shares of Common Stock covered by the Option
shall (i) notify the Corporation in writing at its principal office at 180
Admiral Cochrane Drive, Annapolis, Maryland 21401-7394, to that effect,
specifying the number of shares of Common Stock to be purchased and the method
of payment therefor, and (ii) make payment or provision for payment for the
shares of Common Stock so purchased in accordance with this Paragraph 8. Such
written notice may be given by means of a facsimile transmission. If a facsimile
transmission is used, the Option holder should mail the original executed copy
of the written notice to the Corporation promptly thereafter.
(b) Payment or provision for payment shall be made as follows:
(i) The Option holder shall deliver to the Corporation at the
address set forth in subparagraph 8(a) United States
currency in an amount equal to the aggregate purchase
price of the shares of Common Stock as to which such
exercise relates; or
(ii) The Option holder shall tender to the Corporation shares
of Common Stock already owned by the Option holder that,
together with any cash tendered therewith, have an
aggregate fair market value (determined based on the Fair
Market Value of a share of Common Stock on the date the
notice set forth in subparagraph 8(a) is received by the
Corporation) equal to the aggregate purchase price of the
shares of Common Stock as to which such exercise relates;
or
(iii) The Option holder shall deliver to the Corporation an
exercise notice together with irrevocable instructions to
a broker to deliver promptly to the Corporation the amount
of sale or loan proceeds necessary to pay the aggregate
purchase price of the shares of Common Stock as to which
such exercise relates and to sell the shares of Common
Stock to be issued upon exercise of the Option and deliver
the cash proceeds, less commissions and brokerage fees to
the Option holder or to deliver the remaining shares of
Common Stock to the Option holder.
Notwithstanding the foregoing provisions, the Committee and the Board of
Directors, in granting Options pursuant to the Plan, may limit the
methods in which an Option may be exercised by any person and, in
processing any purported exercise of an Option granted pursuant to the
Plan, may refuse to recognize the method of exercise selected by the
Option holder (other than the method of exercise set forth in
subparagraph 8(b)(i)).
-7-
<PAGE>
(c) In addition to the alternative methods of exercise set forth in
subparagraph 8(b), holders of Nonqualified Stock Options shall be entitled, at
or prior to the time the written notice provided for in subparagraph 8(a) is
delivered to the Corporation, to elect to have the Corporation withhold from the
shares of Common Stock to be delivered upon exercise of the Nonqualified Stock
Option that number of shares of Common Stock (determined based on the Fair
Market Value of a share of Common Stock on the date the notice set forth in
subparagraph 8(a) is received by the Corporation) necessary to satisfy any
withholding taxes attributable to the exercise of the Nonqualified Stock Option.
Alternatively, such holder of a Nonqualified Stock Option may elect to deliver
previously owned shares of Common Stock upon exercise of the Nonqualified Stock
Option to satisfy any withholding taxes attributable to the exercise of the
Nonqualified Stock Option. If the Board of Directors does not include any
provisions relating to this withholding feature in its resolutions granting the
Nonqualified Stock Option or in the Option Agreement, however, the maximum
amount that an Option holder may elect to have withheld from the shares of
Common Stock otherwise deliverable upon exercise or the maximum number of
previously owned shares an Option holder may deliver shall be equal to the
minimum federal and state withholding. Notwithstanding the foregoing provisions,
the Committee or the Board of Directors may include in the Option Agreement
relating to any such Nonqualified Stock Option provisions limiting or
eliminating the Option holder's ability to pay his withholding tax obligation
with shares of Common Stock or, if no such provisions are included in the Option
Agreement but in the opinion of the Committee or the Board of Directors such
withholding would have an adverse tax or accounting effect to the Corporation,
at or prior to exercise of the Nonqualified Stock Option the Committee or the
Board of Directors may so limit or eliminate the Option holder's ability to pay
his withholding tax obligation with shares of Common Stock. Notwithstanding the
foregoing provisions, a holder of a Nonqualified Stock Option may not elect any
of the methods of satisfying his withholding tax obligation in respect of any
exercise if, in the opinion of counsel to the Corporation, there is a
substantial likelihood that the election or timing of the election would subject
the holder to a substantial risk of liability under Section 16 of the Exchange
Act.
(d) An Option holder at any time may elect in writing to abandon an
Option in respect of all of part of the number of shares of Common Stock as to
which the Option shall not have been exercised.
(e) An Option holder shall have none of the rights of a stockholder of
the Corporation until the shares of Common Stock covered by the Option are
issued to him upon exercise of the Option.
9. Amendments and Discontinuance of the Plan
(a) The Board of Directors shall have the right at any time and from
time to time to amend, modify, or discontinue the Plan provided that, except as
provided in subparagraph 6(c), no such amendment, modification, or
discontinuance of the Plan shall (i) revoke or alter the terms of any valid
Option previously granted pursuant to the Plan, (ii) increase the number of
shares of Common Stock to be reserved for issuance and sale pursuant to Options
granted pursuant to the Plan, (iii)
-8-
<PAGE>
change the maximum aggregate number of shares of Common Stock that may be issued
upon the exercise of Options granted pursuant to the Plan to any single
individual, (iv) decrease the price determined pursuant to the provisions of
subparagraph 7(b), (v) change the class of persons to whom Options may be
granted pursuant to the Plan, or (vi) provide for Options exercisable more than
10 years after the date granted.
10. Plan Subject to Governmental Laws and Regulations
The Plan and the grant and exercise of Options pursuant to the Plan
shall be subject to all applicable governmental laws and regulations.
Notwithstanding any other provision of the Plan to the contrary, the Board of
Directors may in its sole and absolute discretion make such changes in the Plan
as may be required to conform the Plan to such laws and regulations.
11. Duration of the Plan
No Option shall be granted pursuant to the Plan after the close of
business on March 28, 2007.
-9-
Exhibit 10.4 Form of Escrow Agreement between Annapolis National Bancorp, Inc.
and the First National Bank of Maryland
<PAGE>
FORM OF ESCROW AGREEMENT
----------------
THIS ESCROW AGREEMENT (the "Escrow Agreement") is made and entered into
as of this __ day of ___________________ by and between ANNAPOLIS NATIONAL
BANCORP, INC. (THE "Company"), a Maryland banking corporation and FMB TRUST
COMPANY, NATIONAL ASSOCIATION, a national banking association ("FMB").
RECITALS
--------
WHEREAS, the Company is engaged in the offering for sale of a minimum of
$2,000,004 and a maximum of $5,000,004 through the sale of shares of common
stock of the Company, at $6.00 per share (the "Shares");
WHEREAS, the offering is conditioned upon the sale of $2,000,004 through
the sale of common shares (the "Minimum Amount") on or before _______ or such
later dates as may be extended one or more times by the Company, pursuant to an
extension notice as provided in section 5.2 (the "Extension Notice"), (the
"Minimum Subscription Termination Date");
WHEREAS, the Company may offer for sale up to $5,000,004 of common
shares (the "Maximum Amount") on or before _______ or such later date as may be
extended one or more times by the Company pursuant to the Extension Notice, (the
"Termination Date");
WHEREAS, the Company has engaged Keefe, Bruyette & Woods, Inc. to act as
agent in offering the Units; and
WHEREAS, each interested party desiring to purchase shares (a
"Subscriber") will be required to forward to the Company a check payable to the
order of "FMB Trust Company" in an amount equal to his/his/their subscription
computed on the basis of $6.00 per Share (the "Escrow Funds and the Minimum
Amount when actually collected by the Escrow Agent shall hereinafter be referred
to as the "Minimum Escrow Funds" while any amount in excess of the Minimum
Escrow Funds actually collected by the Escrow Agent shall be referred to as
Excess Escrow Funds"); and
<PAGE>
WHEREAS, the Company proposes to establish an Escrow Account and desires
that FMB act as escrow agent (the "Escrow Agent") for the sole purpose of
depositing, holding and disbursing the Escrow Funds in accordance with the terms
and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the foregoing recitals, the mutual
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. ESTABLISHMENT OF ESCROW ACCOUNT
-------------------------------
1.1 FMB hereby accepts appointment as Escrow Agent, to deposit, hold,
invest, and disburse the Escrow Funds as provided herein.
1.2 Upon the execution of this Escrow Agreement by the parties hereto,
the Escrow Agent shall establish a separate escrow account (the "Escrow
Account") to be designated substantially as follows: Annapolis National Bancorp
Escrow Account, FMB Trust Company, Escrow Agent.
2. DEPOSIT OF FUNDS
----------------
2.1 The Escrow Agent shall receive checks made payable to FMB Trust
Company along with a copy of the subscription agreement from the Company. The
Escrow Agent shall present the checks for payment and upon receipt of the
proceeds the ("Proceeds") shall hold such Proceeds in escrow. The Escrow Agent
shall notify the Company of all dishonored checks immediately following the
Escrow Agent's notification of same.
2.2 The Escrow Agent shall deliver to the Company when requested the
date and amounts of each deposit.
3. INVESTMENT OF FUNDS
-------------------
-2-
<PAGE>
3.1 The Escrow Agent at the direction of the Company shall invest the
Escrow Funds in ARK U.S. Treasury Money Market Portfolio or ARK U.S. Government
Money Market Portfolio which are proprietary money market funds of the Escrow
Agent for which the Escrow Agent or an affiliate is investment advisor or
provides other services to such money market funds and receives reasonable
compensation for such services, until otherwise directed by the Company in
writing. The ARK Funds seek to maintain a constant net asset value of $1.00 per
share. Shares can be redeemed each day the fund is open.
3.2 The Escrow Agent shall not be allowed to invest the Escrow Funds
until the next banking day after receipt of the Proceeds.
4. DISBURSEMENT OF ESCROW FUNDS
----------------------------
4.1 Unless the Escrow Agreement has terminated pursuant to Section 5, at
such time as the Company determines that the funds representing the sale of the
Minimum Amount have been deposited in the Escrow Account, the Company shall
notify the Escrow Agent, in writing, that the Minimum Amount of subscriptions
has been accepted. Such written notification also shall instruct the Escrow
Agent to release and disburse the Escrow Funds to the Company, within ten (10)
banking days after receipt of such notice, but only after the Escrow Agent has
verified the Minimum Amount of subscriptions has been accepted and that the
Escrow Funds are collected.
4.2 Following receipt and disbursement of the Minimum Amount, the Escrow
Agent shall disburse the Excess Escrow Funds to the Company on a weekly basis
unless directed by the company in writing to disburse on a less frequent
schedule.
4.3 The Company is entitled to withdraw any interest earned on invested
funds when the Company has determined the Minimum Amount of subscriptions has
been deposited in the Escrow Account.
-3-
<PAGE>
5. TERMINATION OF ESCROW AGREEMENT
-------------------------------
5.1 The Escrow Agreement shall terminate upon the final disbursement of
all funds held by the Escrow Agent hereunder, but not later than the Termination
Date. If the funds have not been disbused pursuant to Section 4 on or before the
close of business on the Termination Date, the Escrow Agent shall, without
demand or direction from the Company, return the Escrow Funds (upon verification
that such funds have been collected), with interest, to the Subscribers whose
names have previously been provided to the Escrow Agent within fifteen (15)
banking days after such date. Said disbursement to Subscribers shall be of their
original capital investment with interest at 3% per annum calculated on an
actual over 365 day basis, but without penalty or deduction. The Escrow Agent
will not under any circumstances be required to risk or pay out any of its own
money while carrying out its duties under the Escrow Agreement.
5.2 The Company shall have the option to extend the Minimum Subscription
Termination Date and the Termination Date and the term of this Escrow Agreement
one or more times by providing Minimum Subscription Termination Date or the
Extension Notice in substantially the form attached hereto as Exhibit A. The
Extension Notice shall state that the Termination Date has been extended
consistent with the terms and conditions of the offering and shall specify the
period of time for which the extension is effective. The Minimum Subscription
Termination Date and the Termination Date may not be extended by the Company
beyond ____________, 1999.
6. REJECTED SUBSCRIPTIONS
----------------------
The Company shall notify the Escrow Agent in writing of any Subscription
Agreement rejected by the Company. The Company may reject any Subscription
Agreement in whole or in part. Upon the receipt of a notice of rejection, the
Escrow Agent shall return to the Subscriber signing the rejected Subscription
Agreement within fifteen (15) banking days after receipt of such notice, the
amount tendered therewith, (upon verification that such funds have been
collected) or in the case of a partial rejection, the appropriate portion of the
original deposit
-4-
<PAGE>
without interest.
7. RETURN OF ESCROW FUNDS TO SUBSCRIBERS
-------------------------------------
All returns and deliveries to a Subscriber hereunder shall be mailed by
a regular first class mail to the residential or business address of such
Subscriber appearing in his Subscription Agreement. Any payment to a Subscriber
may be made by a check or draft drawn on FMB.
8. COMPENSATION
------------
8.1 The Company agrees to pay to the Escrow Agent as compensation for
performing its duties, a $1,000.00 Acceptance fee, an Annual Administrative fee
of $2,500.00, plus $10.00 for each subscription received in excess of 150
subscriptions and $15.00 for each subscription returned in whole or in part, and
$20.00 for each payment of interest, by check or wire. A transaction fee of
$20.00 per investment will be assessed for any investment other than in ARK
Money Market Funds. The Company will be assessed a $10.00 fee for each returned
check. Any out-of-pocket expenses will be reimbursed to the Escrow Agent by the
Company for all expenses paid or incurred by it in the performance of Escrow
Agent duties hereunder. In the event that the Minimum Amount is not achieved and
the Escrow Agreement is terminated on the Minimum Amount Termination Date, the
Escrow Agent will invoice the Company for all the above described fees due at
that time. If the Minimum Amount is received, then the Escrow Agent will deduct
all fees resulting from the receipt of the Minimum Amount from the disbursement
of the Minimum Amount to the Company. All fees resulting from any Excess Escrow
Funds disbursed to the Company shall be remitted to the Escrow Agent by the
company by the termination date, but not less frequently than annually from the
effective date of the Escrow Agreement.
9. STANDARD OF CARE FOR ESCROW AGREEMENT
-------------------------------------
9.1 The Escrow Agent shall be responsible only for performance of its
duties as
-5-
<PAGE>
specified in the Escrow Agreement, and no implied covenants, duties, or
obligations shall bind or be enforceable against the Escrow Agent by any person.
The Escrow Agent shall be held free from all liability to the Company except for
any act or failure to act constituting gross negligence or willful misconduct.
It is expressly understood by the parties hereto that the Escrow Agent's
obligations under this Section 9.1, however, shall survive the termination of
this Escrow Agreement.
9.2 The Escrow Agent may rely conclusively and shall be protected in
acting upon any order, notice, demand, certificate, opinion of counsel, other
advice of counsel (including counsel selected by the Escrow Agent), statement,
instrument, report, or other document (not only as to its due execution and
validity and effectiveness thereof, but also as to the truth and acceptability
of any information therein contained) that is reasonably believed by the Escrow
Agent to be genuine and to be signed by the proper person or persons. The Vice
President of the Company has been designated as the authorized representative of
the Company to act on behalf of the Company in respect of this Escrow Agreement,
and is authorized to take all actions and do all things as the authorized
representative of the Company required or permitted under the terms of this
Escrow Agreement by the Company and his true and genuine specimen signature
appears below.
9.3 The Escrow Agent shall not be bound by any modification,
termination, or rescission of the Escrow Agreement, or any of the terms hereof,
unless executed in writing by the Company and the Escrow Agent and delivered to
the Escrow Agent.
9.4 The Company shall indemnify the Escrow Agent and hold it harmless
from any and all claims, liabilities, losses, or any other expenses, fees, or
charges of any character or nature, that it may incur or with which it may be
threatened by reason of its acting as Escrow Agent under the Escrow Agreement,
including, but not limited to, any and all damages, direct, indirect,
consequential, special or punitive, costs, losses, and other expenses, including
reasonable attorney's fees and expenses, resulting from or arising in connection
with any action, suit, or proceeding incident to the Escrow Agent's acting as
such hereunder.
-6-
<PAGE>
10. DISAGREEMENTS
-------------
In the event of any dispute in respect of the disbursement of all or any
portion of the Escrow Funds, or if any disagreements arise among the parties
hereto in respect of the interpretation of this Escrow Agreement, or concerning
their rights and obligations hereunder, or the propriety of any action
contemplated by the Escrow Agent hereunder, or if the Escrow Agent in good faith
is in doubt as to what action should be taken hereunder, the Escrow Agent shall
not be obligated to resolve the dispute or disagreement or to make any
disbursement of all or any portion of the Escrow Funds, but may commence an
action in the nature of an interpleader and seek to deposit such funds in a
court of competent jurisdiction, and thereby shall be discharged from any
further duty or obligation in respect to the Escrow Funds. The Escrow Agent, in
its sole discretion, may elect in lieu of filing such action in interpleader to
cease to perform under the Escrow Agreement and all instructions received in
connection herewith until the Escrow Agent has received a written notice of
resolution of such dispute or disagreement signed by the parties to such dispute
or disagreement.
11. RESIGNATION OF ESCROW AGENT
---------------------------
The Escrow Agent or any successor to the Escrow Agent ("Successor Escrow
Agent") may at any time resign and be discharged of the escrow hereby created by
giving written notice to the Company specifying the date upon which it desires
that such resignation shall take effect. Such resignation shall take effect on
the earlier of (a) the date specified in such notice, which date shall not be
earlier than thirty (30) banking days after giving such notice, or (b) the date
upon which the Company shall have appointed the Successor Escrow Agent. If no
Successor Escrow Agent shall have been appointed as of the effective date of the
resignation of the Escrow Agent as set forth above, the Escrow Agent may
petition, but shall not be required to petition, a court of competent
jurisdiction for the appointment of a Successor Escrow Agent.
The Escrow Agent's sole duty shall be to hold, invest in permitted money
market funds and retain the Escrow Funds absent written notice by the Company or
a court of competent
-7-
<PAGE>
jurisdiction to release of funds to a Successor Escrow Agent or directed
recipient. All outstanding fees and expenses of the Escrow Agent shall be
deducted prior to the release of Escrow Funds to the Successor Escrow Agent or
the directed recipient of the Escrow Funds.
12. NOTICES
-------
12.1 All notices and communications hereunder shall be in writing and
shall be deemed to be duly given if sent by first class mail, or by an overnight
delivery service, to the respective addresses hereafter set forth.
(a) To the Company: Annapolis National Bancorp, Inc.
180 Admiral Cochrane Dr., Suite 300
Annapolis, Maryland 21401
Attn: John Marhefka, Vice President
(b) To Escrow Agent: FMB Trust Company, N.A.
Suite 1601 BANC 101-591
25 South Charles Street
Baltimore, Maryland 21201
Attention: Annapolis National Bancorp,
Escrow Account.
12.2 The Company and Escrow Agent shall each have the right to change
the addresses to which notices shall be delivered upon notice thereof to the
other party sent pursuant to the provisions of this Section 12.
13. GENERAL
-------
13.1 The rights under this Escrow Agreement shall inure to the benefit
of, and the obligations created hereby shall be binding upon, the parties hereto
and their respective successors and assigns.
-8-
<PAGE>
13.2 This Escrow Agreement shall be construed, governed, and enforced
according to the laws of the State of Maryland.
13.3 This Escrow Agreement constitutes the entire agreement and
understanding of the parties hereto in respect of the matters herein set forth,
and all prior negotiations, writings and understanding relating to the subject
matter of the Escrow Agreement are merged herein and are superseded and
cancelled by this Escrow Agreement. The Company agrees to execute any and all
additional documents reasonably required by the Escrow Agent to carry into
effect the intent of this Escrow Agreement.
IN WITNESS WHEREOF, each party has caused this Escrow Agreements to be
signed and executed in its name by its proper and duly authorized officer or
officers on the day and year first above written.
ATTEST: ANNAPOLIS NATIONAL BANCORP, INC.
By: ______________________
Vice President
ATTEST: FMB TRUST COMPANY, NATIONAL
ASSOCIATION, Escrow Agent
By: ______________________ By: ______________________
Authorized Officer Vice President
-9-
<PAGE>
EXHIBIT "A"
FMB Trust Company, N.A.
Suite 1601 BAN 101-591
25 South Charles Street
Baltimore, Maryland 21201
ATTN: Corporate Trust Dept.
Gentlemen:
Under the terms and conditions of the Prospectus dated ________, 1997,
and the Escrow Agreement between Annapolis National Bancorp and FMB Trust
Company, N.A. dated ___________, 1997, you are hereby notified that the Minimum
Subscription Termination Date or Termination Date has been extended as indicated
below. Official documentation confirming the change noted below is attached.
The Minimum Subscription Termination Date or the Termination Date
applicable to the Prospectus noted above is extended to ____________, 19__.
Sincerely,
Vice President
-10-
Exhibit 23.1 Consent of Muldoon, Murphy & Faucette
<PAGE>
CONSENT
We hereby consent to the references to this firm in the Registration
Statement on Form SB-2 filed by Annapolis National Bancorp, Inc. and all
amendments.
MULDOON, MURPHY & FAUCETTE
Dated this ____ day of
____________, 1997
Exhibit 23.2 Consent of Rowles & Company, LLP
<PAGE>
[Letterhead of Rowles & Company, LLP]
Consent of Independent Accountants
We consent to the use of our name as it appears under the caption
"Experts" and "Change in Accountants" in the Registration Statement on Form SB-2
and the Prospectus included therein.
/s/ Rowles & Company
--------------------
Rowles & Company, LLP
Exhibit 23.3 Consent of C.W. Amos & Company
<PAGE>
[Letterhead of C.W. Amos & Company, LLC]
June 23, 1997
Consent Of Certified Public Accountants
---------------------------------------
Annapolis National Bancorp, Inc.
Annapolis, Maryland
We consent to the use in this registration statement on Form SB-2 of our report
dated January 23, 1997 on the financial statements of Annapolis National
Bancorp, Inc. (Formerly Maryland Public Banks, Inc.) appearing in the
registration statement and to the reference made to us under the caption
"Experts" in the prospectus.
/s/ C. W. Amos & Company, LLC
-----------------------------
C. W. AMOS & COMPANY, LLC
Annapolis, Maryland
Exhibit 24.1 Powers of Attorney (appears on the signature pages to the
Registration Statement on Form SB-2).
<PAGE>
CONFORMED
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints John W. Marhefka, Jr. as the true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
or all amendments to the Form SB-2 Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
U.S. Securities and Exchange Commission granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and things
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
and any rules and regulations promulgated thereunder, the foregoing Power of
Attorney prepared in conjunction with the Registration Statement has been duly
signed by the following persons in the capacities and on the dates indicated.
NAME DATE
---- ----
/s/ John W. Marhefka, Jr. June 23, 1997
- ---------------------------------------------
John W. Marhefka, Jr.
Director, Chief Executive Officer,
Vice President and Assistant Secretary
(principal executive officer officer)
Annapolis National Bancorp, Inc.
/s/ Albert Phillips June 23, 1997
- ---------------------------------------------
Albert Phillips
Chairman of the Board and President
Annapolis National Bancorp, Inc.
/s/ Stanley H. Katsef June 23, 1997
- ---------------------------------------------
Stanley H. Katsef
Vice Chairman of the Board
Annapolis National Bancorp, Inc.
/s/ Russell J. Grimes, Jr. June 23, 1997
- ---------------------------------------------
Russell J. Grimes, Jr.
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
Annapolis National Bancorp, Inc.
/s/ Ronald E. Gardner June 23, 1997
- ---------------------------------------------
Ronald E. Gardner
Director
Annapolis National Bancorp, Inc.
<PAGE>
/s/ Stanley J. Klos, Jr. June 23, 1997
- ---------------------------------------------
Stanley J. Klos, Jr.
Director
Annapolis National Bancorp, Inc.
/s/ Lawrence E. Lerner June 23, 1997
- ---------------------------------------------
Lawrence E. Lerner
Director
Annapolis National Bancorp, Inc.
/s/ Richard M. Lerner June 23, 1997
- ---------------------------------------------
Richard M. Lerner
Director
Annapolis National Bancorp, Inc.
/s/ Dimitri P. Mallios June 23, 1997
- ---------------------------------------------
Dimitri P. Mallios
Director
Annapolis National Bancorp, Inc.
/s/ Lawrence W. Schwartz June 23, 1997
- ---------------------------------------------
Lawrence W. Schwartz
Director
Annapolis National Bancorp, Inc.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,452
<INT-BEARING-DEPOSITS> 4,263
<FED-FUNDS-SOLD> 8,038
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,246
<INVESTMENTS-CARRYING> 3,892
<INVESTMENTS-MARKET> 3,892
<LOANS> 69,604
<ALLOWANCE> 1,009
<TOTAL-ASSETS> 98,139
<DEPOSITS> 83,557
<SHORT-TERM> 7,142
<LIABILITIES-OTHER> 1,577
<LONG-TERM> 0
0
0
<COMMON> 15
<OTHER-SE> 5,848
<TOTAL-LIABILITIES-AND-EQUITY> 92,276
<INTEREST-LOAN> 1,716
<INTEREST-INVEST> 150
<INTEREST-OTHER> 121
<INTEREST-TOTAL> 1,987
<INTEREST-DEPOSIT> 735
<INTEREST-EXPENSE> 754
<INTEREST-INCOME-NET> 1,233
<LOAN-LOSSES> 237
<SECURITIES-GAINS> 165
<EXPENSE-OTHER> 1,897
<INCOME-PRETAX> (736)
<INCOME-PRE-EXTRAORDINARY> (736)
<EXTRAORDINARY> 1,120
<CHANGES> 0
<NET-INCOME> 384
<EPS-PRIMARY> 26
<EPS-DILUTED> 26
<YIELD-ACTUAL> 5.47
<LOANS-NON> 1,940
<LOANS-PAST> 663
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,300
<ALLOWANCE-OPEN> 765
<CHARGE-OFFS> 5
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 1,009
<ALLOWANCE-DOMESTIC> 1,009
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 509
</TABLE>
