SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1998
Commission File No.: 0-22961
ANNAPOLIS NATIONAL BANCORP, INC.
(Name of small business issuer in its charter)
MARYLAND 52-1648903
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
108 ADMIRAL COCHRANE DRIVE, SUITE 300, ANNAPOLIS, MARYLAND 21401
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (410) 224-4455
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of class)
THE NASDAQ SMALLCAP MARKET
(Name of exchange on which registered)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for past 90 days.
Yes: X No:
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB Yes: X No:
Issuer's revenues for its fiscal year ended December 31, 1998 were
$1,002,844.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, I.E., persons other than directors and executive officers of the
registrant is $7,644,564 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for March 26, 1999.
The Registrant had 2,313,506 shares of Common Stock outstanding as of
March 26, 1999.
Transitional Small Business Disclosure Format. Yes: NO: X
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 1998, ARE INCORPORATED BY REFERENCE INTO PART I AND PART II OF THIS
FORM 10-KSB.
PORTIONS OF THE PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB.
<PAGE>
INDEX
PART I PAGE
Item 1. Description of Business.............................. 3
Item 2. Properties .......................................... 3
Item 3. Legal Proceedings.................................... 4
Item 4. Submission of Matters to a Vote of Security Holders.. 4
Additional
Item. Executive Officers of the Registrant................. 5
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters.......................... 6
Item 6. Management's Discussion and Analysis
or Plan of Operation................................. 6
Item 7. Financial Statements................................. 6
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.................. 6
PART III
Item 9. Directors, Officers, Promoters and Control Persons;
Compliance with Section 16 of the Exchange Act....... 7
Item 10. Executive Compensation............................... 7
Item 11. Security Ownership of Certain Beneficial Owners
and Management....................................... 7
Item 12. Certain Relationships and Related Transactions....... 7
Item 13. Exhibits and Reports on Form 8-K..................... 8
SIGNATURES
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The information relating to the description of business of the
Registrant is incorporated herein by reference on page 29 of the Registrant's
Annual Report to Shareholders.
ITEM 2. 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 December 31,
1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED YEAR OF LEASEHOLD
LEASED/ OR LEASE IMPROVEMENTS AT
OWNED LOCATIOACQUIRED EXPIRATION DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------
<S><C>
Administration Leased 1995 2005 $ 49,963
Bestgate Leased 1997 2001 18,975
Edgewater Land Leased 1996 2006(1) 419,057
Cape St. Claire Leased 1995 2000(1) 50,480
Kent Island Leased 1990 1998(1) 0
Severna Park Leased 1996 2006(1) 18,067
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) These leases may be extended at the option of the Company for periods
ranging from three to twenty years.
3
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ADDITIONAL ITEM.
The information relating to directors and named executive officers of
the Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 29, 1999 at
pages 4 through 7. In addition, information concerning Executive Officers who
are not directors is set forth below:
<TABLE>
<CAPTION>
NAME AGE AT POSITION WITH THE COMPANY AND BANK
- ---- 12/31/98 AND PAST FIVE YEARS EXPERIENCE
-------- -------------------------------------------------
<S><C>
Russell J. Grimes, Jr. 42 Chief Financial Officer and Treasurer of the
Company and Senior Vice President, Chief
Financial Officer and Treasurer of the Bank.
Prior to joining the Company in 1997, Mr.
Grimes was Vice President, Treasurer and Chief
Financial Officer of Annapolis Bancshares,
Inc. and Bank of Annapolis from 1994 to 1996.
Mr. Grimes held similar positions with First
Virginia Banks, Inc. and American National
Savings Bank, F.S.B. prior to 1994.
Lori J. Mueller 35 Secretary of the Company and Senior Vice
President, Administration and Marketing and
Secretary of the Company. Ms. Mueller has
been an officer of the Bank since 1990 and is
responsible for retail banking, deposit
account administration, marketing, employee
benefits and general bank administration.
</TABLE>
4
<PAGE>
<TABLE>
<S><C>
Robert E.Mann 40 Senior Vice President, Business Banking of the
Bank. Mr. Mann has been an officer of the Bank
since 1997 and is primarily responsible for
business development and relationship
management. He has held similar positions
with Key Federal Savings Bank.
Michael L. Irwin 39 Senior Vice President, Credit Administration of
the Bank. Mr. Irwin has been an officer of the Bank
since February 1997 and is primarily
responsible for the administration of credit
standards for the Bank. He held similar
positions with Taneytown Bank and Trust.
Kevin J. Barron 43 Senior Vice President, Real Estate
Lending, of the Bank. Mr. Barron has
been an officer of the Bank since December
1997, and is primarily responsible for the
Bank's Commercial and Residential
real estate lending activities and the Bank's
Mortgage banking division. His prior
thirteen years of related experience
included ten years with Signet Bank,
culminating as Senior Vice President in
charge of real estate lending for the
Baltimore and Washington regions. Prior
to joining Signet, Mr. Barron served as a
real estate lender at a Mellon Bank
subsidiary for three years.
</TABLE>
5
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity and
related stockholder matters appears in the Registrant's 1998 Annual Report to
Stockholders on page 22, and is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The above-captioned information appears under Management's Discussion
and Analysis of Results of Operations and Financial Condition in the
Registrant's 1998 Annual Report to Stockholders on pages 5 through 22 and is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Annapolis National Bancorp,
Inc. and its subsidiary, together with the report thereon by Rowles & Company,
LLP for the year ended December 31 1998 appears in the Registrant's 1998 Annual
Report to Stockholders on pages 23 through 44 and are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
6
<PAGE>
PART III
ITEM 9. DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 OF THE EXCHANGE ACT
The information relating to directors, officers, promoters and control
persons is incorporated herein by reference to the Registrant's Proxy Statement
for the Annual Meeting of Shareholders to be held on April 29, 1999 at pages 4
through 7. In addition, the information concerning director Stanley J. Klos Jr.
is set forth below.
Stanley J. Klos Jr........ Mr. Klos, age 47, 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 & Selle,
P.A. He has been a Director of the Company and the Bank since April
1997. Mr. Klos is active in community affairs and serves on the Boards
of Directors of Leadership Anne Arundel, the American Heart
Association, Anne Arundel County Chapter and the Anne Arundel County
WMCA.
ITEM 10. EXECUTIVE COMPENSATION
The information relating to directors' and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 29, 1999 at pages 7 through
10.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on April 29,
1999 on pages 2 through pages 4.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 29, 1999 at
page 11.
7
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements
Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1998 Annual Report to
Stockholders
PAGE
Independent Auditors' Report.................................. 23
Consolidated Balance Sheet as of
December 31, 1998 ............................................ 24
Consolidated Statements of Income for the
years ended December 31, 1998 and 1997 ....................... 25
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998 and 1997................ 26
Consolidated Statements of Cash Flows for the
years ended December 31, 1998 and 1997 ....................... 27-28
Notes to Consolidated Financial Statements.................... 29-44
The remaining information appearing in the Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly
provided herein.
(2) Exhibits
The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of Annapolis National Bancorp, Inc.*
3.2 Bylaws of Annapolis National Bancorp, Inc.*
8
<PAGE>
4.0 Stock Certificate of Annapolis National Bancorp, Inc.*
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*
11.0 Computation of earnings per share (filed herewith)
13.0 Portions of 1998 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by reference
to "Part I - Subsidiaries"
27.0 Financial Data Schedule (filed herewith)
99.0 1998 Proxy Statement**
* Incorporated herein by reference to the Exhibits to Form SB-2,
Registration Statement, filed on June 23, 1997 and any
amendments thereto, Registration No. 333-29841.
** Incorporated herein by reference to the Form DEF 14A, Proxy
Statement, filed on March 30, 1999, File Number 000-22961.
(b) Reports on Form 8-K:
None.
9
<PAGE>
CONFORMED SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
ANNAPOLIS NATIONAL BANCORP, INC.
By: /s/ John W. Marhefka, Jr.
__________________________________
John W. Marhefka, Jr.
President, Chief Executive Officer
and Director
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates stated.
<TABLE>
<CAPTION>
NAME Title Date
---- ----- ----
<S><C>
/s/ John W. Marhefka, Jr. President, Chief Executive Officer and March 30, 1999
________________________ Director (principal executive officer)
John W. Marhefka, Jr.
/s/ Russell J. Grimes, Jr. Senior Vice President, Treasurer and March 30, 1999
__________________________ Chief Financial Officer (principal
Russell J. Grimes, Jr. accounting and financial officer)
/s/ Albert Phillips Director March 30,1999
________________________
Albert Phillips
/s/ Stanley H. Katsef Director March 30, 1999
________________________
Stanley H. Katsef
/s/ Ronald E. Gardner Director March 30, 1999
________________________
Ronald E. Gardner
/s/ Stanley J. Klos, Jr. Director March 30, 1999
________________________
Stanley J. Klos, Jr.
/s/ Lawrence E. Lerner Director March 30, 1999
________________________
Lawrence E. Lerner
/s/ Richard M. Lerner Director March 30, 1999
________________________
Richard M. Lerner
/s/ Dimitri P. Mallios Director March 30, 1999
________________________
Dimitri P. Mallios
/s/ Lawrence M. Schwartz Director March 30, 1999
________________________
Lawrence M. Schwartz
</TABLE>
12
Exhibit 11
Calculation of Earnings per Share
<TABLE>
<CAPTION>
December 31
1998 1997 1996
-----------------------------------------
<S><C>
Weighted Average Shares Outstanding 2,312,422 1,691,301 1,478,972
Common Stock Equivalents 6,731 16,865 -0-
Average Common Shares and Equivalents,
Fully diluted 2,319,153 1,708,166 1,478,972
Net income $1,002,844 $1,084,197 $422,540
Basic Earnings per Share $0.43 $0.64 $0.29
Diluted Earnings per Share $0.43 $0.63 $0.29
</TABLE>
13
[ANNAPOLIS NATIONAL BANCORP, INC. LOGO]
Annual Report 1998
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
A Year of Climbing the Ladder
The process of restructuring Annapolis National Bancorp, Inc. (the
"Company") and Annapolis National Bank (the "Bank") has been similar to climbing
a tall ladder, with each step a milestone of accomplishment resulting from
persistence, effort, and commitment. The year of 1998 will be remembered as a
time when we climbed to new heights by making great strides toward reaching the
top of the performance ladder. Following 1997's year of restructuring virtually
every area of the Company and the Bank, 1998 was highlighted by record loan
growth, record core earnings, a second consecutive million-dollar net income
year, improved asset quality, efforts to enhance shareholder value, undertaking
new initiatives, and a commitment to our future.
Loan Growth
Net Loans Receivable grew by 22.4% during the year to $86.9 Million
as of December 31, 1998 from $71.0 Million at December 31, 1997. Loan growth was
and continues to be a priority of ours because current period loan growth is
what fuels future period earnings growth. We improved our balance sheet during
1998 by investing our excess liquidity in higher yielding loans. Net Loans
Receivable grew to 72.2% of Total Assets as of December 31, 1998, up from only
58.7% of Total Assets a year earlier. As the only independent commercial bank
headquartered in Annapolis, we attribute our loan growth to more and more
customers seeing us as the preferred alternative to large, impersonal
out-of-town banks.
Earnings
The Company's core earnings also rose to record levels. Income
Before Taxes for the year ended December 31, 1998 rose by 384.1% to $1,525,000
from $315,000 in 1997. Additionally, the 1998 Income Before Taxes is nearly
double the Company's previous best year, when it recorded $798,000 of pre-tax
earnings in 1995. We are also pleased with the increasing 1998 core earnings
trends of Total Interest Income (up 7.1% from 1997), Net Interest Income (up
7.1%), and Non Interest Income (up 13.8%).
The Company's 1997 Net Income figures do not lend themselves to
direct comparison because they include both $796,000 of one-time restructuring
expenses related to a revised business strategy implemented by the Company, and
a one-time tax benefit of $769,000 attributable to net operating loss
carryforwards. As a result, Net Income of $1,003,000, or $0.43 per basic share,
for the year ended December 31, 1998 decreased slightly from $1,084,000, or
$0.64 per basic share, for the year ended December 31, 1997. The decrease in
earnings per share was attributable in part to an additional 833,334 shares of
common stock being issued in September, 1997 as a result of the successful
completion of the Company's initial public stock offering. We are pleased that
the Company was able to record its second consecutive million-dollar earnings
year in 1998.
1
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Asset Quality
The quality of the Company's assets continued to climb up the
performance ladder during 1998 as Non-Performing Assets were reduced to
$808,000, or 0.67% of Total Assets as of December 31, 1998, down from
$1,200,000, or 0.99% of Total Assets a year earlier. As a result of improving
asset quality, the Provision for Credit Losses was reduced to $300,000 during
1998, down from $748,000 in 1997. Non-Performing Assets have now been reduced to
their lowest level since the Company's inception, having been 2.13% of Assets at
December 31, 1996, 2.32% at December 31, 1995, and 1.57% at December 31, 1994.
Improving asset quality was a large part of the revised business strategy we
began implementing more than two years ago and continues to be a top management
priority.
Shareholder Value
We have continued to pursue initiatives designed to enhance
shareholder value. Since our debut on the NASDAQ Stock Market in October of
1997, we have worked to ensure that our investors have liquidity in their
shares. First and foremost, we have improved the fundamental operations of the
Company, as noted above. Additionally, we have recruited additional market
makers for our shares. The number of investment firms making a market in our
stock by posting daily "bid" and "ask" prices for our shares increased from five
at December 31, 1997 to eight at December 31, 1998. As a result, the trading
volume of our shares reached an all-time high of 2,997 shares per day on average
during 1998, assuring most of our investors the opportunity to divest of their
shares with only a telephone call. Please be assured that our goal of building
shareholder value remains at the forefront of our decision making.
New Initiatives & Our Commitment to the Future
We have continued to undertake new initiatives designed to improve
the Company now and position it to attain higher rungs on the ladder in the
future.
We strengthened our management team during 1998 by adding Robert E.
Mann as Senior Vice President of Business Banking and Jo Ann Pyles as Vice
President of Mortgage Banking. . . both seasoned local market professionals who
have added experienced leadership to the solid nucleus which we built in 1997.
We have assembled a dedicated and enthusiastic management team which serves the
Company with pride and efficiency.
During 1998, we reinforced our commitment to the local community by
purchasing a premier parcel of land on Bestgate Road, directly across from the
Annapolis Mall, which will become home to our new corporate headquarters and a
full-service, state-of-the-art banking facility. We expect to begin construction
in the spring of 1999. When completed, this new headquarters facility will
accomplish multiple goals of greatly increasing our market presence in
Annapolis, lowering our operating expenses, and joining our executive offices
with a retail banking operation, allowing our customers to gain easier access to
senior management decision makers.
2
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
We invested considerable time and effort during 1998 conducting a
major computer system conversion which was completed in January of 1999.
Annapolis National Bank's customers now benefit from an enhanced level of
personal service and an array of state-of-the-art products which we were simply
unable to offer with our prior system, including home based PC banking, Visa
Check Cards, and a new line of checking account products. Additionally, this
conversion has been instrumental in preparing the Bank for Year 2000 issues. We
anticipate that our system's Year 2000 compliance will be fully tested and
operational by June 30, 1999. Experts rank the financial services industry as
"Number One" for Year 2000 readiness. You may be assured that Annapolis National
Bank will continue to operate as an efficient and profitable provider of
financial services. That is our commitment to you as our valued shareholder.
Further up the Ladder
1998 was a year when we climbed to new heights in many areas. We
have carved a niche in the highly competitive local banking market by adhering
to a philosophy of providing quality financial products and first rate personal
service to our increasing customer base. Consolidation within the banking
industry has created a wealth of opportunity for us to continue to grow and
prosper as a locally owned and managed community bank. We are succeeding in
attracting many new customers who prefer to bank with one of the few remaining
local banks, giving added meaning to our slogan "Your Hometown Bank".
However, we still have much work to do before we feel that we have
reached the top of the ladder. . . a place where we can feel that we have been
successful in completing the repositioning of the Company which we began in
1997. . . a place where we become recognized as the premier community bank in
our market in terms of both shareholder returns and customer satisfaction.
Although we became a better Company in 1998 than we were in 1997, we remain
focused on stepping up to the top of the ladder one rung at a time during 1999
and beyond. We are committed to building Annapolis National into a market force
which is a valuable asset to its stockholders, its customers, and its local
community. We appreciate your confidence and support.
/s/ John W. Marhefka, Jr. /s/ Albert Phillips
_________________________ _____________________
John W. Marhefka, Jr. Albert Phillips
Chief Executive Officer Chairman of the Board
March 26, 1999
This document constitutes a Year 2000 Readiness Disclosure Document.
3
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Corporate Profile
ANNAPOLIS NATIONAL BANCORP, INC., formerly Maryland Publick Banks,
Inc., is a bank holding company, incorporated in May 1988 for the purpose of
acquiring and holding all of the outstanding stock of Annapolis National Bank, a
federally insured community oriented bank and the only independent commercial
bank headquartered in Annapolis, Maryland. The Bank currently operates as a full
service commercial bank from its headquarters in Annapolis, and its four
branches located in Anne Arundel County, Maryland, and one branch located on
Kent Island in Queen Anne's County, Maryland. The Bank's principal business
consists of originating loans and attracting deposits. The Bank originates
commercial loans, commercial real estate loans, construction loans, one- to
four-family real estate loans, home equity and consumer loans. The Bank also
invests in U.S. Treasury and U.S. Government agency securities and other
securities issued by or guaranteed by the federal government.
The Bank conducts a general commercial and retail banking business
in its market area, emphasizing the banking needs of small businesses,
professional concerns and individuals. The Bank draws most of its customer
deposits from Anne Arundel County, Maryland, and to a lesser extent, Queen
Anne's County, Maryland. The Bank's lending operations are centered in Anne
Arundel County, but extend throughout Central Maryland.
The Bank competes with numerous other financial intermediaries,
commercial banks, savings and loan associations, credit unions, mortgage banking
firms, consumer finance companies, securities brokerage firms, insurance
companies, money market mutual funds and other financial institutions operating
in Anne Arundel County and elsewhere.
The Bank's Anne Arundel County service area is a highly
concentrated, highly branched banking market. Competition in Anne Arundel County
for loans to small businesses and professionals, the Bank's target market, is
intense and pricing, service and access to decision makers are important.
Deposit competition among institutions in Anne Arundel County also is strong.
The Bank employed 59 full time and 5 part time individuals at
December 31, 1998.
The Bank continually evaluates new products, and implements such new
products as deemed appropriate by management.
4
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The following is management's discussion and analysis of the
historical financial condition and results of operations of Annapolis National
Bancorp, Inc. on a consolidated basis with its wholly owned subsidiary,
Annapolis National Bank, for the periods presented, and should be read in
conjunction with the consolidated statements and the related notes thereto
appearing elsewhere in this annual report.
The Company reported net income for 1998 of $1,002,844, a 7.50%
decrease over 1997 earnings of $1,084,197. The decrease in 1998 earnings was
primarily due to the Company recording federal income tax expense of $522,000,
compared to an income tax benefit in 1997 of $769,000, which was partially
offset by restructuring expenses of $796,000. Basic earnings per share decreased
to $0.43 per share compared to $0.64 per share in 1997. The decrease in earnings
per share was due in part to an additional 833.334 shares issued as a result of
the Company's stock offering that closed in September 1997.
The primary source of income of the Bank is interest on its loan and
investment portfolios. The principal expense of the Bank is interest on its
deposit accounts and borrowings. The difference between interest income on
interest earning assets and interest expense on interest bearing liabilities is
referred to as net interest income. Net interest income was $5.9 million for
1998, an increase of $393,000 or 7.10% compared to $5.5 million in 1997.
Total assets were $120.5 million as of December 31, 1998, a .30%
decrease over the December 31, 1997 total assets of $120.8 million. The
Company's return on average assets was 0.82% and 0.99% at December 31, 1998, and
1997 respectively. The Company's return on average equity was 8.64% and 14.83%
at December 31, 1998, and 1997 respectively. The decrease in the return on
average equity for 1998 was mainly due to the $4.3 million average increase in
stockholder's equity from 1997 due to net proceeds from the stock offering of
$3.5 million and $1.0 million of net earnings for 1998.
At December 31, 1998, the Bank's loan portfolio totaled $88.4
million. Of this amount, $26.9 million or 30.43% were commercial loans, $29.4
million or 33.25% were commercial real estate loans, $17.9 million or 20.22%
were construction loans, $8.6 million or 9.75% were one- to four-family
residential mortgage loans, and $3.2 million or 3.64% were home equity loans,
and $2.4 million or 2.71% were consumer and other loans.
5
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
The following table shows selected consolidated financial highlights for the
Company at and for the five years ended December 31, 1994, through December 31,
1998.
Selected Consolidated Financial Data
At and for year ended December 31,
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Selected Financial Data 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Total assets $ 120,457 $ 120,827 $ 100,227 $ 95,296 $ 75,859
Total loans, net 86,924 70,985 68,800 56,036 56,650
Total deposits 100,742 96,062 87,106 82,096 66,118
Securities sold under agreement to repurchase 7,174 13,306 6,345 6,970 4,741
Note payable -- -- 1,004 925 4,004
Stockholders' equity 12,091 11,087 5,471 5,046 760
Selected Operating Data
Interest income $ 9,813 $ 9,161 $ 8,021 $ 7,651 $ 5,552
Interest expense 3,890 3,630 3,362 3,099 2,260
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 5,923 5,531 4,659 4,552 3,292
Provision for credit losses 300 748 452 318 300
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 5,623 4,783 4,207 4,234 2,992
Restructuring expense -- 796 -- -- --
Non-interest income 867 762 587 521 394
Non-interest expense 4,965 4,434 4,371 3,957 3,313
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,525 315 423 798 73
Income tax benefit (expense) (522) 769 -- (6) --
Net income before minority interest in
earnings of consolidated subsidiary 1,003 1,084 423 792 73
Minority interest in earnings of
consolidated subsidiary -- -- -- -- 55
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,003 $ 1,084 $ 423 $ 792 $ 18
- ----------------------------------------------------------------------------------------------------------------------------------
Key Financial Ratios and Other Data
Return on average assets 0.82% 0.99% 0.44% 0.94% 0.03%
Net income divided by average assets
Return on average equity 8.64% 14.83% 7.98% 19.26% 1.97%
Net income divided by average equity
Equity to asset ratio (1) 9.54% 6.70% 5.46% 4.88% 1.30%
Average equity divided by average assets
Basic earnings per share $0.43 $0.64 $0.29 $0.57 $0.03
Book value per share $5.23 $4.79 $3.70 $3.41 $1.40
Tangible book value per share $5.17 $4.70 $3.17 $2.78 $(0.58)
Number of shares outstanding 2,313,506 2,312,306 1,478,972 1,478,972 541,300
Efficiency ratio (2) 73.19% 83.11% 83.34% 78.00% 89.88%
Interest rate spread 4.52% 4.88% 4.68% 5.29% 4.74%
Net interest margin 5.11% 5.37% 5.10% 5.73% 4.98%
Risk based capital ratio--Tier 1 12.70% 15.16% 7.46% 7.68% (0.12%)
Risk based capital ratio--Total 14.00% 16.42% 8.68% 8.83% 1.13%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company's initial public stock offering closed on September 30, 1997
with net proceeds of $3.5 million. The average capital used to calculate
this ratio reflects the increase in capital for the last quarter of 1997.
(2) Includes restructuring expense of $796,000 for the year ended December 31,
1997.
6
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
The following table presents a condensed average balance sheet as
well as income/expense and yields/costs of funds thereon for the
years ended December 31, 1998, 1997 and 1996. The yields and costs
are derived by dividing income or expense by the average balance of
assets or liabilities for the periods shown. Average balances are
derived from average daily balances. The yields and costs include
loan fees which are considered adjustments to yields. Net interest
spread, the difference between the average rate on interest bearing
assets and the average rate on interest bearing liabilities,
decreased to 4.52% for the year ended December 31, 1998, compared to
4.88% at December 31, 1997.
Consolidated Average Balances, Yields and Rates
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended
December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
balance Interest RATE balance Interest rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S><C>
Assets
Interest Earning Assets:
Federal Funds Sold and
other overnight
investments $ 21,999 $ 1,195 5.43% $ 14,447 $ 776 5.37%
Investment Securities 16,644 963 5.79% 16,253 937 5.77%
Loans 77,245 7,655 9.91% 72,385 7,448 10.29%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 115,888 9,813 8.47% 103,085 9,161 8.89%
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest Earning Assets
Cash and Due From Banks 3,612 3,830
Other Asets 2,186 2,176
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets 121,686 $109,091
Liabilities and Stockholders' Equity
Interest Bearing Deposits
Now Accounts $ 18,488 $ 361 1.95% $15,475 $ 324 2.09%
Money Market Accounts 14,427 496 3.44% 14,088 484 3.44%
Savings Accounts 13,374 392 2.93% 12,005 367 3.06%
Certificates of Deposit 40,844 2,272 5.56% 37,829 2,081 5.51%
Repurchase Agreements 11,330 369 3.26% 10,570 315 2.98%
Note Payable 0 0 0% 632 60 9.49%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities 98,463 3,890 3.95% 90,599 3,631 4.01%
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest Bearing Liabilities
Demand deposit accounts 11,118 10,510
Other Liabilities 500 668
Stockholders' Equity 11,605 7,314
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity 121,686 $109,091
- ---------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 4.52% 4.88%
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of interest earning assets
to interest bearing liabilities 117.70% 113.78%
Net interest income and net
interest margin $ 5,923 5.11% $5,531 5.37%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------------------------------
Average Yield/
balance Interest rate
- -------------------------------------------------------------------------------------
<S><C>
Assets
Interest Earning Assets:
Federal Funds Sold and
other overnight
investments $10,935 $ 565 5.17%
Investment Securities 18,339 975 5.32%
Loans 62,144 6,481 10.43%
- -------------------------------------------------------------------------------------
Total interest-earning assets 91,418 8,021 8.77%
- -------------------------------------------------------------------------------------
Noninterest Earning Assets
Cash and Due From Banks 3,210
Other Asets 2,424
- -------------------------------------------------------------------------------------
Total Assets $97,052
Liabilities and Stockholders' Equity
Interest Bearing Deposits
Now Accounts $14,583 $ 363 2.49%
Money Market Accounts 15,819 558 3.53%
Savings Accounts 10,995 354 3.22%
Certificates of Deposit 32,207 1,776 5.51%
Repurchase Agreements 7,762 232 2.99%
Note Payable 848 79 9.32%
- -------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities 82,214 3,362 4.09%
- -------------------------------------------------------------------------------------
Noninterest Bearing Liabilities
Demand deposit accounts 9,158
Other Liabilities 383
Stockholders' Equity 5,297
- -------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $97,052
- -------------------------------------------------------------------------------------
Interest rate spread 4.68%
- -------------------------------------------------------------------------------------
Ratio of interest earning assets
to interest bearing liabilities 111.20%
Net interest income and net
interest margin $4,659 5.10%
- -------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Financial Condition
The Company, through its Bank subsidiary, functions as a financial
intermediary, and as such its financial condition can be examined in terms of
developing trends in its sources and uses of funds. These trends are the result
of both external environmental factors, such as changing economic conditions,
regulatory changes and competition, and also internal environmental factors such
as management's evaluation as to the best use of funds in these changing
conditions.
Total assets decreased by .30% during 1998 to $120.5 million from
$120.8 million at December 31, 1997. Total deposits and securities sold under
agreements to repurchase, the Company's primary source of funds, decreased $1.5
million or 1.35% to $107.9 million at December 31, 1998, from $109.4 million at
December 31, 1997. Time deposits comprise the largest portion of the Bank's
total deposits, totaling $37.6 million or 37.3% of the Bank's total deposits at
December 31, 1998, compared to $41.7 million or 43.4% in 1997. Savings and Money
Market accounts totaled $30.8 million or 30.5% of the Bank's total deposits at
December 31, 1998, compared to $24.7 million or 25.7% in 1997. NOW accounts
total $21.1 million or 20.9% and $19.3 million or 20.1% of total deposits at
December 31, 1998 and 1997, respectively. Demand, non interest bearing accounts
total $11.3 million or 11.2% of total deposits at December 31, 1998 and $10.3
million or 10.8% at December 31, 1997. Securities sold under agreements to
repurchase decreased $6.1 million to $7.2 million from $13.3 million at December
31, 1997, respectively.
The Company's primary use of funds are for loans and investments.
Loans, less deferred fees and discounts and the allowance for loan losses,
increased by $15.9 million or 22.4% to $86.9 million at December 31, 1998, from
$71.0 million a year earlier. The loan growth was mainly concentrated in real
estate related loans which increased 51.1% over 1997 and was partially offset by
a decrease of 12.8% in commerical loans as the Company continues to benefit from
the revised business strategy implemented in 1997.
Operating Results
The following discussion outlines some of the more important
factors and trends affecting the earnings of the Company, as presented in its
consolidated statements of income.
Net Interest Income
Net interest income is the difference between interest income and
interest expense and is generally impacted by increases or decreases in the
amount of outstanding interest earning assets and interest bearing liabilities
(volume variance). This volume variance coupled with changes in interest rates
on these same assets and liabilities (rate variance) equates to the total change
in net interest income in any given period. The table found on page 9 sets forth
certain information regarding changes in interest income and interest expense
attributable to (1) changes in volume (change in volume multiplied by the old
rate); (2) changes in rates (change in rate multiplied by the old volume); and
(3) changes in rate/volume (change in rate multiplied by change in volume).
Net interest income for the year ended December 31, 1998, was $5.9
million, representing an increase of $392,000 or 7.08% from net interest income
of $5.5 million for the year ended December 31, 1997. The increase in net
interest income is due primarily to an increase in the balance of interest
earning assets, offset in part by an increase in interest bearing liabilities,
and is largely responsible for the Company's profitability. The net yield on
interest earning assets was 5.11% and 5.37% for the years ended December 31,
1998, and 1997 respectively. Net interest income for 1998 includes $18,439 of
interest collected on cash basis related to loans on a non accrual status,
compared to $98,000 of interest collected on various non accrual loans in 1997.
8
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Rate/Volume Analysis
(Dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1998 vs 1997 1997 vs 1996
- --------------------------------------------------------------------------------------------------------------------------------
Increase or Due to Change in rate/ Increase or Due to Change in rate/
(decrease) Volume Rate volume (decrease) Volume Rate volume
- --------------------------------------------------------------------------------------------------------------------------------
<S><C>
Interest Income On:
Loans $207 $500 $(275) (18) $ 967 $1,068 $(87) (14)
Investment Securities 26 23 3 -- (38) (111) 82 (9)
Federal Funds Sold and other
overnight investments 419 406 9 4 211 181 22 7
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 652 929 (263) (14) 1,140 1,138 17 (16)
Interest Expense On:
Now Accounts 37 63 (22) (4) (39) 22 (58) (1)
Money Market Accounts 12 12 -- -- (74) (61) (15) 2
Savings Accounts 25 42 (15) (2) 13 33 (18) (2)
Certificates of Deposit 192 166 24 2 304 310 (5) (1)
Repurchase Agreements 54 23 29 2 83 84 (1) --
Note Payable (60) (60) -- -- (19) (20) -- 1
- --------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 260 246 16 (2) 268 368 (97) (3)
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $392 $683 $(279) (12) $ 872 $ 770 $114 (13)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest Income
The Company's interest income increased $652,000 or 7.12% to $9.8
million at December 31, 1998, compared to $9.2 million at December 31, 1997. The
increase in interest income can be attributed to an increase of $12.8 million in
average earning assets, and was partially offset by a decrease in the average
yield on earning assets to 8.47% in 1998 compared to 8.89% in 1997. Average
loans increased $4.9 million or 6.71%, and average federal funds and other
overnight investments increased $7.6 million or 52.2% which contributed to the
increase in interest income.
Interest Expense
The Company's interest expense increased $260,000 or 7.16% to $3.9
million at December 31, 1998, compared to $3.6 million at December 31, 1997. The
increase in interest expense can be attributed to an increase of $7.9 million in
average interest bearing liabilities offset by a decrease in the cost of
interest bearing liabilities to 3.95% at December 31, 1998, compared to 4.01% in
1997. The increased growth in deposits were used to fund loan growth and for
general liquidity purposes.
Noninterest Income
The Company's primary source of non-interest income are fees
charged for services and gains and fees recognized on the sale of residential
mortgage loans. Non-interest income increased $105,000 or 13.78% to $867,000 at
December 31, 1998, as compared to $762,000 in 1997. The growth in non-interest
income was primarily the result of a one time gain of $125,000 relating to the
Company's waiving its exclusive right to operate its branch office in the
Edgewater Shopping Center.
9
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Noninterest Expense
Noninterest expense decreased $264,000 or 5.04% to $5.0 million at
December 31, 1998, compared to $5.2 million at December 31, 1997. The decrease
in noninterest expense was primarily due to a one time restructuring expense of
$796,000 during 1997, resulting from implementation of a revised business
strategy by the Board of Directors and senior management in February 1997. The
decrease in expense includes a reduction of approximately $471,000 relating to
intangible assets acquired in the June 1990 acquisition of a failed savings and
loan association, severance payments and benefits of $102,000, branch
consolidation expense of $119,000, and $50,000 of other expense.
Personnel expense increased $371,000 or 17.57% due primarily to
incentive compensation paid to originate loans and additional staff relating to
the mortgage banking and commercial real estate departments.The increase in
compensation expense corresponds to the increase in net loan growth of 22.45% in
1998 as the Company implements the revised business strategy that began in 1997.
Occupancy expense decreased $20,000 or 2.4% due to the
consolidation of two branch locations to a single Annapolis branch in the third
quarter of 1997.
Other expense increased $109,000 or 8.39% due mainly to additional
data processing expense of approximately $98,000 or 18.7%. This was the result
of a higher volume of transaction accounts and additional expense related to the
conversion of the bank's core data processing that was completed in January
1999.
Amortization of intangible assets decreased $15,000 or 14.85% due to
the accelerated write off of the intangible assets related to the restructuring
expenses incurred in 1997. The amortization recorded for the year ended December
31, 1998, reflects a lower intangible asset balance amortized in 1997 and
subsequent years. The remaining intangible asset balance of $130,000 relates to
the core deposit premium paid for deposits and still retained by the Bank at
December 31, 1998.
Provision for Income Taxes
The Company and the Bank file consolidated federal income tax
returns and separate Maryland income tax returns. The Company paid $522,000 in
federal income tax in 1998 and paid no state income tax in 1998.
Financial Analysis For The Years Ended December 31, 1997 and 1996
Net income for the year ended December 31, 1997, totaled $1,084,197
or $0.64 per basic share compared to $422,540 or $0.29 per basic share for the
year ended December 31, 1996.
Net interest income increased $871,000 or 18.69% at December 31,
1997, to $5.5 million from $4.7 million at December 31, 1996. This increase was
the result of an increase in interest income of $1.2 million which was partially
offset by an increase in interest expense of $269,000.
Interest income increased $1.2 million or 15.0% in 1997 compared to
1996, primarily due to an increase in the average balance of loans outstanding.
Average loans outstanding, net of unearned income, increased $10.2 million or
16.48% during 1997. In addition, the average yield on loans decreased to 10.29%
in 1997 from 10.43% in 1996.
Interest expense increased $269,000 in 1997 as compared to 1996.
The increase generally reflected an increase in the balance of interest bearing
liabilities to $90.6 million from $82.2 million at December 31, 1996. During
this period the average cost of interest bearing liabilities decreased to 4.01%
at December 31, 1997, from 4.09% at December 31, 1996.
Non-interest income increased $175,000 or 29.81% during 1997 as
compared to 1996. The increase was attributable to an increase in service fees
and other charges of $127,000 or 21.60% due to growth in the Bank's deposit
base.
Non-interest expense increased $858,000 or 19.62% to $5.2 million
at December 31, 1997,
10
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
from 4.4 million at December 31, 1997. The primary reason for the increase
relates to a one time restructuring expense of $796,000 during 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 $471,0000 relating to intangible assets acquired in the June
1990 acquision of a failed savings and loan association, severence payments and
benefits of $102,000, branch consolidation expense of $119,000 and $50,000 of
other expense.
Personnel expense decreased $108,000 or 4.88% due to general staff
reductions.
Occupancy expense increased $104,000 or 14.23% due to scheduled
rate increases, the opening of the Bank's Severna Park branch Office in
September 1996 and additional maintenance expenses.
Other expense increased $127,000 or 10.83% due mainly to additional
data processing expense of approximately $111,000 or 26.6%.
Year 2000 Issues
As a financial institution, the Company is dependent on computer
systems and applications to conduct its business. The year 2000 (Y2K) issue is
the result of computer programs being written using two digits rather than four
digits to define the applicable year. Many of the Company's computer programs
that are date sensitive may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
causing disruption of operations, including among other things, a temporary
inability to process transactions or engage in normal business activities for
both the Company and its customers who rely on its financial products and
services.
The Company is actively engaged and is currently executing certain
critical steps designed to make its computer systems, applications and
facilities Y2K ready. The steps include: (i) awareness; (ii) assessment (iii)
renovation (iv) validation and (v) implementation. During the awareness phase,
the Company identified the project team and responsibilities, prepared and
allocated the project budget, defined the project scope and established program
and management policies. This phase although complete continues to be reviewed.
The assessment phase which entailed an inventory of software, hardware, vendors,
material customers, and facilities has been completed. The renovation phase was
completed and the Company used internal resources to test all major mission
critical systems (deposits, loans, general ledger) which are provided by an
outside service bureau. The Company completed the process of converting these
mission critical systems to a new service bureau on January 25, 1999. In
conjunction with the conversion, the bank has implemented a new year 2000 ready
system.
This new service bureau platform is currently in the testing phase,
and was approximately 50% complete as of December 31, 1998, with testing
targeted to be completed by March 31, 1999. Completion of the renovation process
for the Bank's new internal systems was completed by January 31, 1999. Another
mission critical system is the Federal Reserve software system, which was tested
in November 1998. The hardware and telecommunications software supporting this
software system was renovated in October 1998. The validation phase will use
test strategies that include testing of internal systems as they relate to each
other, and testing external interfaces with business partners. The final phase
is implementation which involves the replacement of the hardware or software
that is not compliant or requires updates. The bank anticipates completing this
phase by June 30, 1999.
An institution wide contingency plan has been developed with Y2K
issues incorporated as part of the business contingency planning. These plans,
which are intended to enable the Company to continue to operate to the extent
they can safely, include performing certain processes manually, repairing or
obtaining replacement systems, and changing suppliers. The Company believes,
however, that due to the widespread nature of the potential Y2K issues, the
contingency planning process is an ongoing one which will require further
modification as the Company obtains additional information regarding the
Company's internal systems and equipment during the renovation and testing
phases of its Y2K program and the status of third party Y2K readiness.
The Company budgeted $675,000 for the costs to convert the third
party data processing system and internal data processing systems including
expenses relating to the Y2K effort. To date, the
11
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Company has incurred approximately $625,000 towards this project. All costs to
date and any remaining costs related to Y2K will be funded through operating
cash flows. The Company does not expect these costs to have a material effect on
its operations.
The Company believes that conversions, renovations and modifications
of its internal systems and equipment will allow it to be Y2K ready in a timely
manner. There can be no assurances however, that the Company's internal systems
or equipment or those of third parties on which the Company relies will be Y2K
ready in a timely manner or that the Company's or third parties contingency
plans will mitigate the effects of non-compliance. The Company is part of a
regulated industry which has issued standards for Y2K and is conducting audits
to ensure compliance with Y2K guidelines. The Company believes its most likely
worst case scenario is that customers could experience some manual processes or
an inability to access their cash immediately. Although, there can be no
assurances, the Company does not believe this scenario will occur, and is
assessing the effect of such scenarios. The Company does not expect that this
would have a material averse effect on the Company's financial position,
liquidity and results of operations.
The preceding Y2K issue discussion contains various forward looking
statements which represent the Company's belief or expectations regarding future
events. When used in the Y2K discussion, the words "believes," "expects,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Forward looking statements include, without limitation, the
Company's expectations as to when it will complete the renovation and testing
phase of its Y2K program as well as its Y2K contingency plans, its estimated
cost of achieving Y2K readiness; and the Company's belief that its internal
systems and equipment will be Y2K compliant in a timely manner.
Liquidity and Capital Resources
Deposits, commercial reverse repurchase agreements, and lines of
credit are the primary source of the Bank's funds for lending and investing
activities. Secondary sources of funds are derived from loan repayments and
investment maturities. Loan repayments and investment maturities can be
considered a relatively stable funding source, while deposit activity is greatly
influenced by interest rates, general market conditions and competition.
The Bank offers a variety of retail deposit account products to both
consumer and commercial deposit customers. The Bank's deposit accounts consist
of savings, NOW accounts, checking accounts, money market accounts and
certificate of deposit accounts. The Bank also offers individual retirement
accounts. Time deposits comprised 37.35% of the deposit portfolio at December
31, 1998. Core deposits, considered to be non-interest bearing and interest
bearing demand deposit accounts, savings deposits and money market accounts
accounted for 62.65% of the deposit portfolio at December 31, 1998. This
represents a 6.09% increase over the core deposits of 56.56% at December 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 December 31,
1998. 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 who consider a
number of factors including: (1) the Bank's internal cost of funds; (2) rates
offered by competing financial institutions; (3) investing and lending
opportunities; and (4) the Bank's liquidity position.
Jumbo Certificates of Deposits. Jumbo certificates of deposit are
accounts of $100,000 or more. These accounts totaled $4.7 million at December
31, 1998 and consisted principally of time certificates of deposit. The
following table sets forth the amount and maturity of jumbo certificates of
deposit at December 31, 1998.
12
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Greater Than Greater Than
Three Months Three Months Six Months to Greater Than
or Less to six months one year one Year Total
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S><C>
$1,335 $1,357 1,843 $202 $4,737
- --------------------------------------------------------------------------------------------------------
</TABLE>
Commercial reverse repurchase agreements represent transactions with
customers for correspondent or commercial account cash management services.
These are overnight borrowing arrangements with interest rates discounted from
the federal funds sold rate. Securities underlying the repurchase agreements are
maintained in the Company's control. At December 31, 1998, and 1997, the average
cost of these borrowings were 3.26% and 2.98% respectively.
The Bank maintains a borrowing line with the Federal Home Loan Bank
(FHLB), and may borrow up to $5.0 million under a reverse repurchase line
established with a local correspondent commercial bank. In addition, the Bank
has the ability to borrow directly from the Federal Reserve Bank discount
window. At December 31, 1998, there were no outstanding advances under these
lines of credit.
Potential adverse impacts on liquidity can occur as a result of
changes in the estimated cash flows from investment, loan, and deposit
portfolios. The Bank manages this inherent risk by maintaining a portfolio of
available for sale investments, and secondary sources of liquidity from FHLB
advances and reverse repurchase agreements. In addition, the Bank has the
ability to increase its liquidity by raising interest rates on deposit accounts,
selling loans in the secondary market or curtailing the volume of loan
originations.
The Bank maintains the majority of the assets held for liquidity
purposes in overnight federal funds.
Interest Rate Risk Sensitivity
Interest rate sensitivity is an important factor in the management
of the composition and maturity configurations of the Company's interest earning
assets and funding sources. Additionally, the Bank's profitability is dependent
to a large extent upon its net interest income, which is the difference between
its interest income on interest bearing assets, such as loans and investments,
and its interest expense on its funding sources, such as deposits and
borrowings. Accordingly, the Bank's results of operations and financial
condition are largely dependent on movements in market interest rates and its
ability to manage its assets in response to such movements.
The Bank attempts to manage fluctuations in interest rates by
matching the maturities of its interest earning assets and interest bearing
liabilities. The Bank's current strategy to manage its sensitivity to interest
rate fluctuations is to emphasize short term and adjustable rate loans and to
invest in short term U.S. Government agency securities with maturities or call
dates of two years or less. Additionally, all of the loans in the Bank's
portfolio are either adjustable or short term fixed rate loans with terms to
maturity of 30 days to 30 years. The Bank does not engage in long term fixed
rate portfolio lending. Any long term fixed rate loans made by the Bank are sold
in the secondary market.
The following table summarizes the anticipated maturities or
repricing of the Company's interest earning assets and interest bearing
liabilities as of December 31, 1998, and the Company's interest sensitivity gap
(i.e., interest earning assets less interest bearing liabilities). A positive
gap for any time period indicates that more interest earning assets will mature
or reprice during that period than interest bearing liabilities. The Company's
goal is generally to maintain a balanced cumulative gap position for the period
of one year or less in order to mitigate the impact of changes in interest rates
on liquidity, interest margins and operating results.
The analysis presented below represents a static gap position for
interest sensitive assets and liabilities at December 31, 1998, and does not
give effect to prepayment or extension of loans as a result of changes in
general market rates.
13
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Interest Sensitivity Gap Analysis
(Dollars in thousands)
December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
After three
Within but within After one
three twelve but within After
months months five years five years Total
- --------------------------------------------------------------------------------------------------------------------------------
<S><C>
Assets
Interest sensitivity gap analysis
Federal funds sold and other
overnight investments $10,284 $ -- $ -- $ -- $ 10,284
Investment securities (1) 6,491 5,018 2,002 980 14,491
Loans (2), (3) 50,594 12,799 19,357 5,126 87,876
- --------------------------------------------------------------------------------------------------------------------------------
$67,369 $17,817 $21,359 $ 6,106 $112,651
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities
Interest-bearing deposits
NOW Accounts $21,050 $ -- $-- $ -- $ 21,050
Savings Accounts 14,330 -- -- -- 14,330
Money Market Accounts 16,437 -- -- -- 16,437
Certificate of deposits (4) 12,516 21,181 3,819 104 37,620
Repurchase Agreements 7,174 -- -- -- 7,174
- --------------------------------------------------------------------------------------------------------------------------------
$71,507 $21,181 $ 3,819 $ 104 $ 96,611
- --------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $(4,138) $(3,364) $17,540 $ 6,002 $ 16,040
Cumulative interest sensitivity gap $(4,138) $(7,502) $10,038 $16,040
Cumulative interest sensitivity gap as a
percentage of total assets (3.44)% (6.23)% 8.33% 13.32% 13.74%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of Federal Reserve Bank and Federal Home Loan Bank stock.
(2) Loans scheduled by contractual maturities.
(3) Net of non-accrual loans of $505,576.
(4) Certificates of deposits scheduled by contractual maturities.
Investment Portfolio
At December 31, 1998, the Bank's investment portfolio, which totaled
$15.2 million, consisted of U.S. government agency securities and one
mortgage-backed security. Of this amount, $13.5 million, or 88.9%, were U.S.
government agency obligations. The Company invests primarily in state tax exempt
U.S. Government Agency securities in order to minimize its state income tax
liability. The company did not pay state income tax in 1998 or 1997. The
mortgage-backed security totaled $980,000 which was issued by Freddie Mac.
Additionally, the Company owns $337,800 in stock of the Federal Reserve Bank of
Richmond and $361,400 in stock of the Federal Home Loan Bank of Atlanta (FHLB).
Management generally maintains an investment portfolio with relatively short
maturities to minimize overall interest rate risk. At December 31, 1998,
approximately 75.8% 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
14
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
instruments must have a rating of "B" or better to be held in the portfolio. The
Bank's investment policy designates the investment portfolio to be classified as
"available-for-sale", unless otherwise designated. At December 31, 1998, 100% of
the investment portfolio was classified available-for-sale. The composition of
securities at December 31, for each of the past four fiscal years was:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S><C>
Available-for-Sale
U.S. Treasury $-- $ 1,974 $ 9,157 $16,186
U.S. Agency 13,511 12,991 996 978
Mortgage-backed 980 980 987 984
Equity securities 699 620 194 175
- -------------------------------------------------------------------------------------------------
Total 15,190 16,565 11,334 18,323
Held-to-Maturity
U.S. Treasury -- 3,975 1,993 --
- -------------------------------------------------------------------------------------------------
Total -- 3,975 1,993 --
- -------------------------------------------------------------------------------------------------
Total Securities $15,190 $20,540 $13,327 $18,323
- -------------------------------------------------------------------------------------------------
</TABLE>
The following table presents maturties and weighted average yields
for investments in available for sale and held to maturity securities.
<TABLE>
<CAPTION>
December 31, 1998
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
YEARS TO MATURITY
WITHIN WITHIN
WITHIN 1 TO 5 5 TO 10
ONE YEAR YEARS YEARS
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ------------------------------------------------------------------------------------------------------------------------
<S><C>
Available-For-Sale
U.S. Treasury $11,509 5.50% $2,002 5.64% $ -- --%
U.S. Government Agency -- -- -- -- -- --%
Mortgage-backed Securities -- -- -- -- 980 5.80%
Total Debit Securities $11,509 5.49% $2,002 5.33% $980 5.80%
- ------------------------------------------------------------------------------------------------------------------------
Held-To-Maturity
U.S. Treasury $ -- --% $ -- --% $ -- --%
U.S. Government Agency $ -- --% $ -- --% $ -- --%
Mortgage-backed Securities
Total $ -- --% $ -- --% $ -- --%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
(Dollars in thousands)
- ------------------------------------------------------------------------------------
GREATER
THAN
TEN
YEARS YIELD TOTAL
- ------------------------------------------------------------------------------------
<S><C>
Available-For-Sale
U.S. Treasury $1--11 --% $13,511
U.S. Government Agency 1--11 --% --
Mortgage-backed Securities 1--11 --% 980
Total Debit Securities $1--11 .80--% $14,491
- ------------------------------------------------------------------------------------
Held-To-Maturity
U.S. Treasury $1--11 .80--% $--
U.S. Government Agency $1--11 .8--% $--
Mortgage-backed Securities
Total $1--11 .8--% $--
- ------------------------------------------------------------------------------------
</TABLE>
Lending Activities
The types of loans that the Bank may originate are subject to
federal laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board, and legislative tax
policies.
15
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Analysis of Loans
The following table presents the composition of the loan portfolio
over the previous five years.
<TABLE>
<CAPTION>
years ended December 31,
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Commercial loans $26,895 30.43% $30,860 42.61% $30,801 43.80% $27,917 48.94% $27,025 47.14%
Real estate:
Commercial 29,373 33.25% 20,448 28.34% 17,845 25.65% 13,553 23.92% 5,601 9.77%
Construction 17,875 20.22% 10,191 13.91% 10,173 14.62% 7,937 14.01% 8,672 15.12%
One-to four-family 8,620 9.75% 5,232 7.25% 7,002 10.07% 4,391 7.75% 13,027 22.32%
Home equity 3,219 3.64% 3,393 4.70% 1,744 2.51% 1,197 2.11% 1,016 1.77%
Consumer loans 2,400 2.71% 2,305 3.19% 2,332 3.35% 1,848 3.27% 2,226 3.88%
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 88,382 100.00% 72,429 100.00% 69,897 100.00% 56,843 100.00% 57,567 100.00%
Less:
Unearned income (299) (267) (332) (190) (230)
Allowance for loan losses (1,159) (1,177) (765) (617) (687)
- ----------------------------------------------------------------------------------------------------------------------------------
Net loans receivable $86,924 $70,985 $68,800 $56,036 $56,650
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank's loan portfolio consists of commercial, commercial real
estate, residential construction, one- to four-family residential mortgage, home
equity and consumer loans. At December 31, 1998, the Bank's loan portfolio
totaled $88.4 million, of which $26.9 million, or 30.43%, were commercial loans;
$29.4 million, or 33.25%, were commercial real estate loans; $17.8 million, or
20.22%, were construction loans; $8.6 million, or 9.75%, were one- to
four-family residential mortgage loans; $3.2 million, or 3.64% were home equity
loans and $2.4 million, or 2.71%, were consumer and other loans. All of the
loans in the Bank's portfolio are either adjustable-rate or short term
fixed-rate loans with terms to maturity of 30 days to 30 years.
The Bank does not engage in longer term fixed-rate portfolio
lending. Any long term fixed-rate loans made by the Bank are sold in the
secondary market.
Commercial Lending. The Bank offers commercial business loans to
businesses operating in the Bank's primary market area. These loans consist of
lines of credit which 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 receivable, 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 Small Business
Administration. The Bank has been an active participant in a variety of SBA loan
programs.
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 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.
16
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
YEARS ENDED DECEMBER 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DUE AFTER
DUE IN ONE YEAR NON 90 DAYS
ONE YEAR BUT BEFORE DUE AFTER ACCRUAL PAST
OR LESS FIVE YEARS FIVE YEARS LOANS DUE TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S><C>
Real estate:
Construction $16,748 $ 411 $ 284 $221 $211 $17,875
Mortgage 3,471 3,880 1,269 -- -- 8,620
Commercial 14,935 10,935 3,218 285 -- 29,373
Commercial loans 22,967 3,633 295 -- -- 26,895
Home equity loans 3,219 -- -- -- -- 3,219
Consumer loans 1,842 498 60 -- -- 2,400
- ------------------------------------------------------------------------------------------------------------------------
Total loans $63,182 $19,357 $5,126 $506 $211 $88,382
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
DUE AFTER
DECEMBER 31, 1998
-----------------
FIXED VARIABLE
RATE RATE TOTAL
- -----------------------------------------------------------------------------
<S><C>
Real estate:
Construction $ 761 $ 155 $ 916
Mortgage 1,049 4,100 5,149
Commercial 2,730 11,708 14,438
Commercial loans 1,456 2,472 3,928
Home equity loans -- -- --
Consumer loans 531 27 558
- -----------------------------------------------------------------------------
Total loans $6,527 $18,462 $24,989
- -----------------------------------------------------------------------------
</TABLE>
Commercial Real Estate Lending. The Bank originates adjustable-rate
commercial real estate loans that are generally secured by properties used for
business purposes such as small office buildings or a combination of residential
and retail facilities located in the Bank's primary market area. The Bank's
underwriting procedures provide that commercial real estate loans may generally
be made in amounts up to 80% of the lower of the appraised value or sales price
of the property, subject to the Bank's current loans-to-one-borrower limit,
which at December 31, 1998, was $1.9 million. These loans may be made with terms
up to 25 years and are generally offered at interest rates which adjust annually
or annually after an initial three year period in accordance with the prime rate
as reported in the Wall Street Journal. In reaching a decision as to whether or
not to make a commercial real estate loan, the Bank considers the value of the
real estate to be financed and the credit strength of the borrower and/or the
lessee of the real estate project. The Bank has generally required that the
properties securing commercial real estate loans have debt service coverage
ratios of at least 1.2 times.
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.
Construction Lending. The Bank originates construction loans on both
one- to four-family residences and on commercial real estate properties. The
Bank originates two types of residential construction loans, consumer and
builder. The Bank originates consumer construction loans to build a primary
residence, a secondary residence, or an investment or rental property. The Bank
will originate builder construction loans to companies engaged in the business
of constructing homes for resale. These loans may be for homes currently under
contract for sale, model homes from which other homes will be marketed within a
subdivision or, on a very limited basis, homes built for speculative purposes to
be marketed for sale during construction. Although the Bank attempts to procure
permanent end financing, many of the Bank's construction loans, at the time
entered into with the Bank, have permanent end financing committed by other
financial institutions.
The Bank originates land acquisition and development loans with the
source of repayment being either the sale of finished lots or the sale of homes
to be constructed on the finished lots. The Bank will originate land
acquisition, development, and construction loans on a revolving line of credit
basis for subdivisions whereby the borrower may draw upon such line of credit as
lots are sold for the purpose of improving additional lots. Construction loans
are generally offered with terms up
17
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
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.
At December 31, 1998, the Bank had construction loans, including
land acquisition and development loans totaling $17.9 million, or 20.22% of the
Bank's total loan portfolio, of which $11.6 million consisted of one- to
four-family residential construction loans, $3.3 million consisted of commercial
real estate construction loans and $3.0 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 Fannie Mae, and Freddie Mac, and to
originate for investment adjustable rate one- to four-family residential
mortgage loans. The Bank generally does not retain the servicing rights of loans
it sells and sells such loans without recourse, with the exception of a recourse
in the event of breaches for any representations or warranties made by the Bank.
The Bank recognizes, at the time of sale, the cash gain or loss on the sale of
the loans based on the difference between the net cash proceeds received and the
carrying value of the loans sold. One- to four-family mortgage loan originations
are generally obtained from the Bank's loan representatives and their contacts
with the local real estate industry, direct contacts made by the Bank's and the
Company's directors, existing or past customers, and members of the local
communities.
At December 31, 1998, one- to four-family residential mortgage loans
totaled $8.6 million, or 9.75%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, $1.0 million were fixed-rate loans with
terms of up to three years with a balloon payment at the end of the term and
$7.6 million 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 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.
18
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
The Bank currently originates one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan. Mortgage loans originated by
the Bank generally include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Bank's consent.
Due-on-sale clauses are an important means of adjusting the yields on the Bank's
fixed-rate mortgage loan portfolio and the Bank has generally exercised its
rights under these clauses.
Home Equity Lending. As of December 31, 1998, home equity loans
totaled $3.2 million, or 3.64% 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
December 31, 1998, consumer loans totaled $2.4 million or 2.71% to total loans
outstanding. Consumer loans are generally originated in the Bank's primary
market area.
Credit Risk Management
The Bank's allowance for loan losses is established through a
provision for loan losses based on management's evaluation of the risks inherent
in its loan portfolio and the general economy. The allowance for loan losses is
maintained at an amount management considers adequate to cover estimated losses
in loans receivable which are deemed probable and estimable based on information
currently known to management. The Bank estimates a range of acceptable
allowance for credit loss amounts primarily based upon loan risk ratings, prior
periods' chargeoffs and specific loss reserves. The adequacy of the allowance
for credit lossesis evaluated based on the estimated range of acceptable
allowance amounts established.This methodology is appropriate as the Bank has
nine years of loan loss history, has sufficient number of loans for broader base
estimation processes to be meaningful and has a risk rating review system
established for the purpose of maintaining accurate risk ratings on loans. The
high and low loss ranges by risk rating are estimated based upon previous losses
incurred. Management believes this approach effectively measures the associated
risk with any particular loan or group of loans. Management also considers other
factors including current economic conditions, actual loss experience and
industry trends. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to make additional provisions for
estimated loan losses based upon judgments different from those of management.
As of December 31, 1998, the Bank's allowance for loan losses was $1.2 million
or 1.31% of total loans and 161.51% of non-performing loans as compared to $1.2
million, or 1.63% of total loans and 102.44% of non-performing loans as of
December 31, 1997. The Bank had total non-performing loans of $808,000 and $1.2
million at December 31, 1998 and December 31, 1997, respectively, and
non-performing loans to total loans of 0.81% and 1.66%, at December 31, 1998,
and December 31, 1997, respectively.
The Bank places loans on a non accrual status after 90 days of not
having received contractual principal or interest payments. In addition the Bank
maintains a watch list of loans on a monthly basis that warrant more than the
normal level of management supervision. At December 31, 1998 the Bank had
approximately $3.9 million in watch list loans.
The Bank continues to monitor and modify its allowances for loan
losses as conditions dictate. While management believes that, based on
information currently available, the Bank's allowance for
19
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
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.
Analysis of Credit Risk
Activity in the allowance for loan losses for the preceding three
years ended December 31 is shown below:
<TABLE>
<CAPTION>
At December 31,
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S><C>
Total loans outstanding $88,382 $72,162 $69,565
Average loans outstanding 77,245 72,385 62,144
Allowance for loan losses at beginning of period 1,177 765 617
Provision charged to expense 300 748 452
- --------------------------------------------------------------------------------------------------------------------------
Chargeoffs:
Residential/commercial real estate -- -- 15
Commercial loans 354 362 279
Consumer and other loans 9 6 28
- --------------------------------------------------------------------------------------------------------------------------
Total 363 368 322
- --------------------------------------------------------------------------------------------------------------------------
Recoveries:
Residential/commercial real estate 24 9 8
Commercial loans 21 21 10
Consumer and other loans -- 2 --
- --------------------------------------------------------------------------------------------------------------------------
Total 45 32 18
- --------------------------------------------------------------------------------------------------------------------------
Net chargeoffs 318 336 304
Allowance for loan losses at end of period $ 1,159 $ 1,177 $ 765
- --------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percent of total loans 1.31% 1.63% 1.10%
Net chargeoffs as a percent of average loans .41% .46% .49%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Capital Management
During 1998 Stockholders' Equity increased $1.0 million or 9.04% to
$12.1 million from 11.1 million at December 31, 1997. The increase was due to
net income of $1.0 million. Additionally, the Company's common shares
outstanding increased by 1,200 to 2,313,506 at December 31, 1998, from 2,312,306
at December 31, 1997, due to exercising 1,200 shares of employee stock options.
In April, 1997, the Company's employee incentive stock option plan
was approved by shareholders at the annual meeting. Under the plan, up to
100,000 shares of the Company's common stock may be awarded under the direction
of the Company's compensation committee. Incentive stock options vest over a
five year period. During 1998, 24,600 shares of common stock were granted under
the plan, 12,300 shares were forfeited and 1,200 were exercised. At December 31,
1998, the company had 68,800 shares granted and outstanding.
20
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
See Note 12 to the Consolidated Financial Statements for more
information on the Company's stock option plan.
Regulatory 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. Tier
1 capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships.
The risk-based capital standard requires the maintenance of Tier 1
and total capital (which is defined as Tier 1 capital plus Tier 2 capital) to
risk-weighted assets of at least 4% and 8%, respectively. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the
OCC capital regulation based on the risks the agency believes are inherent in
the type of asset. The regulators have recently added a market risk adjustment
to cover a bank's trading account, foreign exchange and commodity positions. The
components of Tier 1 capital are equivalent to those discussed above. Tier 2
capital may include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital included
as part of total capital cannot exceed 100% of Tier 1 capital.
At December 31, 1998, the Bank's tier 1 and total risk based capital
ratio were 12.70% and 14.00% respectively. The Bank was considered well
capitalized for regulatory purposes. See Note 18 of the Consolidated Financial
Statements for more information on the Bank's risk based capital ratios.
Regulation and Supervision
The Company, by virtue of its control of the Bank, is a registered
bank holding company as amended under the Bank Holding Company Act of 1956 ("the
Act"). As a bank holding company, the Company is required to file certain
reports with, and otherwise comply with the rules and regulations of, the
Federal Reserve Board ("FRB") under the BHCA.
The activities of national banks, such as the Bank, are generally
governed by the National Bank Act and the Federal Deposit Insurance Act. The
Bank is subject to extensive regulation, examination and supervision by the
Office of the Comptroller of the Currency (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.
21
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Market Value and Dividend Information
The Company's Common stock is listed on "The NASDAQ Stock Market(R)"
under the symbol "ANNB". The Company's stock began trading on October 1, 1997.
The Company has traded an average daily volume of 2,997 shares during 1998. At
December 31, 1998 the closing price was $7.00 per share.
The Company's high and low stock price during the last quarter of
1998 was $7.625 and $6.06, respectively.
As of March 19, 1999 the Company has outstanding 2,313,506 shares of
common stock and no preferred stock issued or outstanding. The Company has not
paid a dividend to stockholders in the past and does not anticipate paying
dividends in the near future. The Company intends to retain its capital to allow
for balance sheet growth while maintaining adequate capital reserves.
"The Nasdaq Stock Market(R), which began operation in 1971, is the
world's first electronic securities market and the fastest growing stock market
in the U.S. Nasdaq utilizes today's information technologies--computers and
telecommunications--to unite its participants in a screen-based market. It
enables market participants to compete with each other for investor orders in
each Nasdaq security and, through the use of Nasdaq Workstation II(R) and other
automated systems, it facilitates the trading and surveillance of thousands of
securities. This competitive marketplace, along with the many products and
services available to issuers and their shareholders, attracts today's largest
and fastest growing companies to Nasdaq. These include industry leaders in
computers, pharmaceuticals, telecommunications, biotechnology, and financial
services. More domestic and foreign companies list on Nasdaq than on all other
U.S. stock markets combined."
22
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
[ROWLES & COMPANY Logo]
Report of Independent Auditors
The Board of Directors and Stockholders
Annapolis National Bancorp, Inc. and Subsidiary
Annapolis, Maryland
We have audited the accompanying consolidated balance sheets of
Annapolis National Bancorp, Inc. and Subsidiary as of December 31, 1998 and
1997, and the related statements of income, changes in stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The consolidated
financial statements of Annapolis National Bancorp, Inc. and Subsidiary for the
year ended December 31, 1996, were audited by other auditors whose report dated
January 23, 1997, expressed an unqualified opinion on those statements.
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 Subsidiary as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Rowles & Company, LLP
_________________________
Baltimore, Maryland
February 18, 1999
23
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Consolidated Balance Sheets
December 31,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S><C>
Assets
Cash and due from banks $ 3,845,793 $ 5,611,407 $ 6,083,554
Federal funds sold and other overnight investments 10,284,419 20,743,973 4,378,730
Securities purchased under agreements to resell -- -- 4,750,000
Investment securities available for sale 15,190,949 16,565,290 11,334,273
Investment securities held to maturity (market value of
$3,891,830 and $1,985,625) -- 3,975,296 1,992,835
Loans, less allowance for credit losses of $1,158,863
$1,177,437 and $765,000 86,924,416 70,985,232 68,800,397
Premises and equipment 2,678,786 1,238,887 1,334,825
Core deposit premium and other intangibles 129,789 216,315 788,301
Accrued interest receivable 590,159 515,549 436,722
Other real estate owned 90,539 42,637 140,000
Deferred income taxes 319,863 765,868 --
Other assets 402,202 166,848 187,544
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $120,456,915 $120,827,302 $100,227,181
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits $100,742,243 $ 96,061,762 $ 87,105,995
Securities sold under agreements to repurchase 7,173,980 13,305,780 6,344,959
Accrued interest payable and other liabilities 449,726 372,446 301,797
Note and accrued interest payable to stockholder -- -- 1,003,661
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 108,365,949 109,739,988 94,756,412
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Commonstock, par value $.01 per share; authorized
10,000,000 shares; issued and outstanding 2,313,506
shares in 1998, 2,312,306 shares in 1997, and
1,478,972 shares in 1996 23,135 23,123 14,789
Capital surplus 13,142,508 13,135,320 8,633,560
Retained earnings (deficit) (1,075,000) (2,077,844) (3,162,041)
- ---------------------------------------------------------------------------------------------------------------------------------
12,090,643 11,080,599 5,486,308
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income 323 6,715 (15,539)
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,090,966 11,087,314 5,470,769
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $120,456,915 $120,827,302 $100,227,181
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Consolidated Statements Of Income
Years Ended December 31,
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S><C>
Interest Income
Loans, including fees $7,655,050 $7,447,970 $6,481,532
Federal funds sold and securities purchased under
agreements to resell 1,194,758 776,452 564,873
U.S. Treasury securities and obligations of other
U.S. Government agencies 963,154 937,019 974,939
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 9,812,962 9,161,441 8,021,344
- --------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Certificates of deposit, $100,000 or more 300,714 283,053 237,863
Other deposits 3,220,267 2,973,123 2,813,535
Securities sold under agreements to repurchase 368,609 314,943 231,514
Interest on borrowed funds -- 59,574 78,759
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,889,590 3,630,693 3,361,671
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 5,923,372 5,530,748 4,659,673
Provision for Credit Losses 300,000 747,908 452,190
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 5,623,372 4,782,840 4,207,483
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Gain (loss) on sale of loans, securities, equipment,
intangibles, and other real estate 122,534 17,000 (31,696)
Service charges and other 744,770 745,064 618,501
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 867,304 762,064 586,805
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Expense
Personnel 2,481,507 2,111,176 2,219,380
Occupancy and equipment 814,625 834,943 730,927
Marketing and advertising 174,727 88,142 104,947
Other operating 1,408,518 1,299,398 1,172,854
Restructuring -- 795,570 --
Amortization of intangible assets acquired 86,526 100,805 143,640
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 4,965,903 5,230,034 4,371,748
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,524,773 314,870 422,540
Income tax expense (benefit) 521,929 (769,327) --
- --------------------------------------------------------------------------------------------------------------------------------
Net income $1,002,844 $1,084,197 $ 422,540
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.43 $ 0.64 $ 0.29
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.43 $ 0.63 $ 0.29
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
COMMON STOCK
----------------------- UNDIVIDED
SHARES PAR VALUE SURPLUS PROFITS
- ---------------------------------------------------------------------------------------------------------
<S><C>
Balance, December 31, 1995 1,478,972 $14,789 $ 8,633,560 $(3,584,581)
Net income -- -- -- 422,540
Unrealized gain (loss) on
investment securities available
for sale net of income taxes -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,478,972 14,789 8,633,560 (3,162,041)
Net income -- -- -- 1,084,197
Unrealized gain (loss) on
investment securities available
for sale net of income taxes -- -- -- --
Sale of stock, net of costs 833,334 8,334 4,501,760 --
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,312,306 23,123 13,135,320 (2,077,844)
Net income -- -- -- 1,002,844
Unrealized gain (loss) on
investment securities available
for sale net of income taxes -- -- -- --
Stock options exercised 1,200 12 7,188 --
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 2,313,506 $23,135 $13,142,508 $(1,075,000)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
INCOME EQUITY INCOME
- -------------------------------------------------------------------------------------------------
<S><C>
Balance, December 31, 1995 $ (17,946) $ 5,045,822
Net income -- 422,540 $ 422,540
Unrealized gain (loss) on
investment securities available
for sale net of income taxes 2,407 2,407 2,407
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1996 (15,539) 5,470,769 $ 424,947
Net income -- 1,084,197 $1,084,197
Unrealized gain (loss) on
investment securities available
for sale net of income taxes 22,254 22,254 22,254
Sale of stock, net of costs -- 4,510,094
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1997 6,715 11,087,314 $1,106,451
Net income -- 1,002,844 $1,002,844
Unrealized gain (loss) on
investment securities available
for sale net of income taxes (6,392) (6,392) (6,392)
Stock options exercised -- 7,200
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 323 $12,090,966 $ 996,452
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Consolidated Statements Of Cash Flows
Years Ended December 31,
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S><C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 1,002,844 $ 1,084,197 $ 422,540
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 196,580 197,955 187,311
Provision for credit losses 300,000 747,908 452,190
Deferred income taxes 449,297 (769,327) --
Amortization of premiums and accretion of discounts, net (257,550) (453,932) 10,152
Amortization of intangible assets 102,770 571,986 143,640
Loss on sales of loans, securities,
equipment, and other real estate owned 2,466 43,826 31,696
Decrease (increase) in
Accrued interest receivable (74,610) (78,827) (16,544)
Other assets (210,053) 71,461 (203,523)
Increase (decrease) in
Accrued interest payable (7,539) (155,441) (16,787)
Accrued income taxes, net of taxes refundable (22,402) (7,487) --
Deferred loan origination fees 32,754 (65,463) 141,367
Other liabilities 84,819 70,829 138,992
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided from operations 1,599,376 1,257,685 1,291,034
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from maturities of securities held to maturity 4,000,000 -- 22,642,605
Purchase of securities held to maturity -- (1,890,901) (1,946,528)
Proceeds from sales and maturities of securities
available for sale 62,954,062 52,960,000 1,979,884
Purchase of securities available for sale (61,356,247) (57,802,932) (17,687,193)
Net decrease (increase) in federal funds 10,459,554 (16,365,243) 844,428
Loans made, net of principal collected (16,319,840) (2,867,280) (13,216,953)
Purchases of and deposits on premises, equipment,
and software (1,671,512) (206,121) (524,964)
Proceeds from sale of equipment 13,112 17,000 --
Acquisition of other real estate owned -- (11,325) (140,000)
Proceeds from sale of other real estate owned -- 108,688 463,523
Net decrease in securities purchased under
agreements to resell -- 4,750,000 3,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities $(1,920,871) $ (21,308,114) $ (4,585,198)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Consolidated Statements Of Cash Flows
Years Ended December 31,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S><C>
Cash Flows from Financing Activities
Net increase (decrease) in
Time deposits $(4,108,419) $ 13,052,660 $ (4,235,342)
Other deposits 8,788,900 (4,096,893) 9,245,080
Securities sold under repurchase agreements (6,131,800) 6,960,821 (625,264)
Repayment of long-term debt principal -- (848,400) --
Proceeds from sale of stock and options exercised 7,200 4,510,094 --
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities (1,444,119) 19,578,282 4,384,474
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,765,614) (472,147) 1,090,310
Cash and cash equivalents at beginning of year 5,611,407 6,083,554 4,993,244
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,845,793 $ 5,611,407 $ 6,083,554
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid, including interest credited to accounts $ 3,897,129 $ 3,786,134 $ 3,282,912
Income taxes paid 95,034 7,487 --
Noncash Activities
Other real estate reclassified from loans 47,902 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements
December 31, 1998
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies in the financial statements
conform to generally accepted accounting principles and to general practices
within the banking industry. Management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements. These
estimates and assumptions may affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Business
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
operations are consolidated on the accompanying financial statements. This
company was liquidated in 1997.
The principal business of Annapolis National Bank is to make loans
and other investments and to accept time and demand deposits. The Bank's primary
market area is in Anne Arundel County, Maryland, although the Bank's business
development efforts generate business outside of the area. The Bank offers a
broad range of banking products, including a full line of business and personal
savings and checking accounts, money market demand accounts, certificates of
deposit, travelers checks, certified checks, U.S. Savings Bond application and
redemption, Mastercard/VISA/American Express credit card and merchant deposit
services, federal tax depository services, individual retirement accounts, money
orders, money wire transfers, automated teller product, and other banking
services.
The Bank funds a variety of loan types including commercial and
residential real estate loans, commercial term loans and lines of credit,
consumer loans, and letters of credit. The Bank's customers are primarily
individuals and small businesses.
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Annapolis National Bank. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and amounts due from banks.
Investment securities
As securities are purchased, management determines if the securities
should be classified as held to maturity or available for sale. Securities which
management has the intent and ability to hold to maturity are recorded at
amortized cost which is cost adjusted for amortization of premiums and accretion
of discounts to maturity, or over the expected life of mortgage-backed
securities. Securities which may be sold before maturity are classified as
available for sale and carried at fair value with unrealized gains and losses
included in stockholders' equity on an after-tax basis. Investments in Federal
Home Loan Bank and Federal Reserve stock are included with securities classified
as available for sale and carried at cost.
29
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
December 31, 1998
Loans and allowance for credit losses
Loans are stated at face value, plus deferred origination costs,
less unearned discounts, deferred origination fees, and the allowance for credit
losses.
Interest on loans is credited to income based on the principal
amounts outstanding. Origination fees and costs are amortized to income over
the contractual life of the related loans as an adjustment of yield. Discounts
on the purchase of mortgage loans are amortized to income over the contractual
lives of the loans.
Accrual of interest on a loan is discontinued when the loan is
delinquent more than ninety days unless the collateral securing the loan is
sufficient to liquidate the loan. Management considers all loans where the
accrual of interest has been discontinued to be impaired.
The allowance for loan losses represents an amount which, in
management's judgment, will be adequate to absorb possible losses on existing
loans that may become uncollectible. Management's judgment in determining the
adequacy of the allowance is based on evaluations of the collectibility of
loans. These evaluations take into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans, and current economic conditions that may affect the
borrowers' ability to pay. If the current economy or real estate market were to
suffer a severe downturn, the estimate for uncollectible accounts would need to
be increased. Loans which are deemed uncollectible are charged off and deducted
from the allowance. The provision for loan losses and recoveries on loans
previously charged off are added to the allowance.
Premises and equipment
Premises and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed over
the estimated useful lives using the straight-line method. Leasehold
improvements are amortized over the terms of the leases or the estimated useful
lives of the improvements, whichever is shorter.
Intangible assets
Net assets acquired in purchase transactions are recorded at fair
value at the date of acquisition. Core deposit premiums are amortized on a
straight line basis over the estimated period benefited.
Real estate owned
Real estate acquired in satisfaction of a debt is carried at the
lower of cost or net realizable value. Costs incurred in maintaining foreclosed
real estate and write-downs to reflect declines in the fair value of the
properties after acquisition are included in operating expenses.
Income taxes
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Prior to
1997, no deferred tax asset was recognized since the Company did not have a
sustained history of profits and taxable income.
Stock options
The Company accounts for stock options under Accounting Principles
Board Option No. 25, Accounting for Stock Issued to Employees.
Earnings per share
Basic earnings per common share are determined by dividing net
income by the weighted average number of shares of common stock outstanding.
Diluted earnings per share are calculated including the average dilutive common
stock equivalents outstanding during the period.
30
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Dilutive common equivalent shares consist of stock options,
calculated using the treasury stock method.
Comprehensive income
The Company adopted Statement No. 130 of the Financial Accounting
Standards Board, Reporting Comprehensive Income, in 1998. Comprehensive income
includes net income and the unrealized gain and loss on investment securities
available for sale. The statements of changes in stockholders' equity have been
restated to include comprehensive income for the years ended December 31, 1997
and 1996.
Note 2. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S><C>
Available for sale
U.S. Government agency $13,491,259 $ 21,301 $ 811 $13,511,749
Mortgage-backed securities 1,000,000 -- 20,000 980,000
Federal Home Loan Bank stock 361,400 -- -- 361,400
Federal Reserve Bank stock 337,800 -- -- 337,800
- --------------------------------------------------------------------------------------------------------------------
$15,190,459 $ 21,301 $20,811 $15,190,949
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury securities $ 3,975,296 $-- $ 83,466 $ 3,891,830
- --------------------------------------------------------------------------------------------------------------------
Available for sale
U.S. Treasury securities $ 1,970,565 $ 3,435 $-- $ 1,974,000
U.S. Government agency 12,964,401 27,088 349 12,991,140
Mortgage-backed securities 1,000,000 -- 20,000 980,000
Federal Home Loan Bank stock 292,900 -- -- 292,900
Federal Reserve Bank stock 327,250 -- -- 327,250
- --------------------------------------------------------------------------------------------------------------------
$16,555,116 $ 30,523 $20,349 $16,565,290
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1996
- --------------------------------------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury securities $ 1,992,835 $-- $ 7,210 $ 1,985,625
- --------------------------------------------------------------------------------------------------------------------
Available for sale
U.S. Treasury securities $ 9,155,662 $ 2,211 $ 875 $ 9,156,998
U.S. Government agency 1,000,000 -- 3,750 996,250
Mortgage-backed securities 1,000,000 -- 13,125 986,875
Federal Reserve Bank stock 194,150 -- -- 194,150
- --------------------------------------------------------------------------------------------------------------------
$11,349,812 $ 2,211 $17,750 $11,334,273
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
December 31, 1998
The amortized cost and market value of debt securities by
contractual maturities are shown below. Actual maturities of these securities
may differ from contractual maturities because borrowers may have the right to
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
- --------------------------------------------------------------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
DECEMBER 31, 1998 COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S><C>
Due within one year $ -- $ -- $11,491,111 $11,509,350
Due after one through five years -- -- 2,000,148 2,002,399
Mortgage-backed securities -- -- 1,000,000 980,000
Equity securities -- -- 699,200 699,200
- --------------------------------------------------------------------------------------------------------------------------------
$ -- $ -- $15,190,459 $15,190,949
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------------
Due within one year 3,975,296 $3,891,830 $ 9,936,710 $ 9,942,937
Due after one through five years -- -- 4,998,256 5,022,203
Mortgage-backed securities -- -- 1,000,000 980,000
Equity securities -- -- 620,150 620,150
- --------------------------------------------------------------------------------------------------------------------------------
$3,975,296 $3,891,830 $16,555,116 $16,565,290
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1996
- --------------------------------------------------------------------------------------------------------------------------------
Due within one year $ -- $ -- $10,155,662 $10,153,248
Due after one through five years 1,992,835 1,985,625 -- --
Mortgage-backed securities -- -- 1,000,000 986,875
Equity securities -- -- 194,150 194,150
- --------------------------------------------------------------------------------------------------------------------------------
$1,992,835 $1,985,625 $11,349,812 $11,334,273
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sale of securities during 1998 and 1996 were
$2,484,062 and $1,979,884, respectively with realized gains of $312 and $304 on
those sales. The unrealized gains and losses on investment securities included
in comprehensive income are reported net of these realized gains.
Securities were sold to commercial customers of the Bank under
agreements for the Bank to repurchase the securities as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Cost at December 31 $14,491,259 $13,459,429 $6,367,028
Fair value at December 31 14,491,749 13,508,000 6,352,152
Repurchase price 7,173,980 13,305,780 6,344,959
Average balance during the year 11,330,409 10,570,086 7,761,702
Average interest rate during the year 3.25% 2.98% 2.97%
Maximum month-end balance $14,846,219 $14,666,790 $9,591,298
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 3. CASH AND DUE FROM BANKS
Banks are required to carry cash reserves of specified percentages
of deposit balances. The Bank's normal balances of cash on hand and on deposit
with other banks are sufficient to satisfy these reserve requirements.
32
<PAGE>
Note 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S><C>
Real estate
Commercial $38,000,834 $20,447,677 $17,844,638
Residential 21,086,312 18,816,566 18,919,242
Commercial 26,895,218 30,860,360 30,801,220
Consumer 2,400,217 2,304,614 2,332,308
- -----------------------------------------------------------------------------------------------------------
88,382,581 72,429,217 69,897,408
- -----------------------------------------------------------------------------------------------------------
Less
Unearned income 299,302 266,548 332,011
Allowance for loan losses 1,158,863 1,177,437 765,000
- -----------------------------------------------------------------------------------------------------------
1,458,165 1,443,985 1,097,011
Loans, net $86,924,416 $70,985,232 $68,800,397
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The maturity and rate repricing distribution of the loan portfolio
is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S><C>
Repricing or maturing within one year $63,899,468 $55,913,146 $61,862,644
Maturing over one to five years 19,357,456 14,618,447 6,927,761
Maturing over five years 5,125,657 1,897,624 1,107,003
- ---------------------------------------------------------------------------------------------------------
$88,382,581 $72,429,217 $69,897,408
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Transactions in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S><C>
Balance, beginning of year $1,177,437 $ 765,000 $ 617,000
Provisions charged to operations 300,000 747,908 452,190
Recoveries 44,853 32,943 18,126
- ---------------------------------------------------------------------------------------------------
1,522,290 1,545,851 1,087,316
Charge-offs 363,427 368,414 322,316
- ---------------------------------------------------------------------------------------------------
Balance, end of year $1,158,863 $1,177,437 $ 765,000
- ---------------------------------------------------------------------------------------------------
</TABLE>
The balance of nonaccrual and impaired loans is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S><C>
Total guaranteed by the Small Business
Administration $ 101,089 $ 531,722 $1,076,000
Other nonaccrual loans 404,487 245,954 817,677
- -------------------------------------------------------------------------------------------------------
Total nonaccrual loans 505,576 777,676 1,893,677
Average impaired loans 1,109,333 1,271,093 1,276,500
Related allowance for credit losses 179,217 171,923 183,000
Interest collected 18,439 98,000 56,000
Balance of accrued interest not recorded 52,747 73,864 78,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
December 31, 1998
Loans which were 90 days or more past due amounted to $717,169,
$371,000, and $101,000 at December 31, 1998, 1997, and 1996, respectively.
The Bank lends to customers located primarily in Annapolis,
Baltimore, and surrounding areas of central Maryland. Although the loan
portfolio is diversified, its performance will be influenced by the economy of
the region.
Certain officers and directors (and companies which have a 10% or
more beneficial ownership) have loans with the Bank. Such loans were made in the
ordinary course of business on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated parties and are being
repaid as agreed. A summary of the activity of these loans follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S><C>
Beginning balance $2,229,589 $ 3,071,471 $2,153,082
Advances 253,186 1,058,813 1,764,445
Repayments (576,776) (240,899) (846,056)
Change in officers and directors -- (1,659,796) --
- ------------------------------------------------------------------------------------------------------
Ending balance $1,905,999 $ 2,229,589 $3,071,471
- ------------------------------------------------------------------------------------------------------
</TABLE>
Note 5. CREDIT COMMITMENTS
Outstanding loan commitments, unused lines of credit, and letters of
credit are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S><C>
Loan commitments
Construction $ 4,220,628 $ 4,319
Other 14,284,008 10,800
- ----------------------------------------------------------------------------------------------------------------
$18,504,636 $15,119
- ----------------------------------------------------------------------------------------------------------------
Letters of credit
Deposit secured $ 591,862 $ 592
Other 570,366 473
- ----------------------------------------------------------------------------------------------------------------
$ 1,162,228 $ 1,065
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Loan commitments including lines of credit are agreements to lend to
a customer as long as there is no violation of any condition to the contract.
Loan commitments generally have variable interest rates, fixed expiration dates,
and may require payment of a fee. Lines of credit generally have variable
interest rates. Such lines do not represent future cash requirements because it
is unlikely that all customers will draw upon their lines in full at any time.
Letters of credit are commitments issued to guarantee the
performance of a customer to a third party.
Loan commitments and lines and letters of credit are made on the
same terms, including collateral, as outstanding loans. Management is not aware
of any accounting loss the Company will incur by the funding of these
commitments.
Note 6. INTANGIBLE ASSETS
In 1997, the intangible assets acquired in 1990 were evaluated for
impairment. Except for the core deposit premium, the various other intangible
assets were written off as part of the restructuring expense. The core deposit
premium is being amortized over a period expiring in the year 2000. Amortization
expense relating to the core deposit premium was $86,526 in 1998 and $87,527 in
1997 and 1996.
34
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Note 7. PREMISES AND EQUIPMENT
A summary of premises and equipment and the related depreciation is
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Land and construction projects $1,399,862 $ -- $ --
Leasehold improvements 658,175 658,175 805,067
Furniture, fixtures, and equipment 1,306,962 1,077,546 1,046,101
- ------------------------------------------------------------------------------------------------------------------
3,364,999 1,735,721 1,851,168
Accumulated depreciation 686,213 496,834 516,343
- ------------------------------------------------------------------------------------------------------------------
Net premises and equipment $2,678,786 $1,238,887 $1,334,825
Depreciation and amortization expense $ 196,580 $ 197,955 $ 187,311
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has purchased land on which it plans to construct a new
branch and administrative facility. Preliminary site and planning costs have
been capitalized. The Company has signed contracts related to this project
totaling $160,000.
Note 8. LEASE COMMITMENTS
The Company leases facilities under the following terms:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
CURRENT
ANNUAL
RENTAL EXPIRATION DATE RENEWAL OPTIONS
- -------------------------------------------------------------------------------------------------------------------
<S><C>
Bestgate Branch $96,286 January, 1999 None
Cape St. Claire Branch 13,200 February, 1999 3 terms of 5 years
Edgewater Branch 40,000 April, 2005 2 terms of 10 years
Kent Island Branch 31,073 August, 1998 1 year, 2 year terms
Severna Park Branch 40,354 August, 2006 1 term of 10 years
Administrative offices, Annapolis 131,800 September, 2005 None, early buyout 2000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Some of the leases provide for increases in the rental rates at
specified times during the lease terms, prior to the expiration dates. All
renewal options are exercisable at increased rates.
Lease obligations will require rent payments as follows:
- ------------------------------------------------------------------------------
PERIOD MINIMUM RENTALS
- ------------------------------------------------------------------------------
1999 $242,094
2000 205,502
2001 85,354
2002 85,354
2003 85,354
Remaining years 164,658
- ------------------------------------------------------------------------------
$868,315
- ------------------------------------------------------------------------------
The leases generally provide for payment of property taxes,
insurance, and maintenance costs by the Company. The total rental expense for
all real property leases was $454,411, $463,900, and $402,105 for 1998, 1997,
and 1996, respectively.
In January, 1999, the Company negotiated a two-year extension on its
Bestgate Branch loca-
35
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
December 31, 1998
tion. The new annual rent will be $176,800. Part of the space will be sublet,
reducing the annual rent by $51,450.
During 1998, the Company waived a clause in one of its contracts
prohibiting other financial institutions from locating in the same shopping
center. The Company was paid $125,000, which is included in gain on sale of
loans, securities, equipment, intangibles, and other real estate.
Note 9. DEPOSITS
Major classifications of deposits are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S><C>
Demand, non-interest bearing $ 11,304,382 $10,330,153 $10,051,957
- --------------------------------------------------------------------------------------------------------------------
NOW accounts 21,050,434 19,272,587 20,759,310
Savings and money market 30,767,081 24,730,257 27,618,623
Time deposits, $100,000 and over 4,737,379 5,897,484 3,617,185
Other time 32,882,967 35,831,281 25,058,920
- --------------------------------------------------------------------------------------------------------------------
$100,742,243 $96,061,762 $87,105,995
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Time deposits mature as follows:
<TABLE>
- ------------------------------------------------------------------------------------
<S><C>
Three months or less $ 12,516,492 $10,308,033
Four months to one year 21,180,825 28,127,664
Over one year 3,923,029 3,293,068
- ------------------------------------------------------------------------------------
$ 37,620,346 $41,728,765
- ------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, time deposits with maturities in
excess of five years totaled $104,151 and $127,064.
Note 10. DUE 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 the assets and liabilities
of Gibraltar Savings & Loan Association. 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 for $3,175,000 due
him in a stock offering which terminated in January 1995. The Company issued a
new note for $848,400 for the remaining amount owed the stockholder. Interest
accrued on the note at an annual rate equal to the prime rate published in the
Wall Street Journal plus 1%. The principal and interest, totaling $1,062,836, on
the note were paid off in 1997. Interest expensed under this note was $59,574
and $78,759 for 1997 and 1996, respectively.
Note 11. PROFIT SHARING PLAN
The Company has a profit sharing plan, qualifying under Section
401(k) of the Internal Revenue Code, for those employees who meet the
eligibility requirements set forth in the plan. The plan does not require the
Company to match the participants' contributions. The Company contributions to
the plan were $24,612 in 1998, $25,874 in 1997, and $19,596 in 1996.
36
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Note 12. STOCK OPTIONS
The Company has adopted a stock option plan, covering 100,000 shares
of common stock, intended to qualify as incentive stock options under Section
422 of the Internal Revenue Code. The plan provides for granting options to
purchase shares of the common stock to the officers and other key employees of
the Company and the Bank. Options granted have ten year expiration dates with
vesting periods from immediate to five years. No options shall be granted under
the plan after March 28, 2007.
A summary of the status of the Company's performance-based stock
option plans follows:
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Outstanding, beginning of year 57,500 --
Granted 24,600 64,000
Exercised (1,200) --
Forfeited (12,300) (6,500)
- -----------------------------------------------------------------------------
Outstanding, end of year 68,600 57,500
- -----------------------------------------------------------------------------
These options expire as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
OPTIONS
EXERCISE ----------------------------------
PRICE VESTED NONVESTED
- ------------------------------------------------------------------------------------------------------------
<S><C>
April, 2007 $ 5.00 10,000 --
July, 2007 $ 6.00 4,300 17,200
September, 2007 $ 6.00 200 800
November, 2007 $ 9.88 800 3,200
December, 2007 $ 9.75 2,000 8,000
January, 2008 $10.38 6,600 --
January, 20008 $10.63 -- 2,000
February, 20008 $11.00 -- 2,500
June, 2008 $10.63 -- 3,000
August, 2008 $ 8.50 -- 3,500
September, 2008 $ 7.85 -- 1,000
October, 2008 $ 7.75 -- 2,500
January, 2009 $ 6.69 -- 1,000
- ------------------------------------------------------------------------------------------------------------
Total 23,900 44,700
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies APB No. 25 in accounting for the stock option
plan. Accordingly, the Company does not recognize compensation expense for
stock options granted. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), established new
accounting and reporting standards for stock-based employee compensation plans.
This standard defines a fair value based method for measuring compensation
expense for stock-based plans to be recognized in the statement of income or
disclosed in the notes to the financial statements.
37
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
December 31, 1998
The weighted average fair value of options granted during 1998 and
1997 has been estimated using the Black-Scholes option-pricing model with the
following assumptions:
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
Dividend yield 0.00% 0.00%
Risk-free interest rate 4.50% 5.75%
Expected volatility 30.00% 10.00%
Expected life in years 10 10
- ----------------------------------------------------------------------------
Had compensation been determined in accordance with the provisions
of SFAS No. 123, the Company's net income and earning per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------
<S><C>
Net income
As reported $1,002,844 $1,084,197
Pro forma $ 946,667 $ 943,715
Basic earnings per share
As reported $ 0.43 $ 0.64
Pro forma $ 0.41 $ 0.58
Diluted earnings per share
As reported $ 0.43 $ 0.63
Pro forma $ 0.41 $ 0.57
- ---------------------------------------------------------------------------------------
</TABLE>
Note 13. LINES OF CREDIT
The Bank is a member of Federal Home Loan Bank system and may borrow
up to $5,000,000. If funded, this line is secured by one to four family
residential mortgage loans held in the Bank's portfolio. In addition, the Bank
has available secured lines of credit of $5,000,000 and unsecured lines of
$2,000,000 from other banks.
Note 14. PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of
preferred stock with a par value of $.01 per share.
Note 15. YEAR 2000
The Company has determined the scope of the Year 2000 issue as it
relates to the operation of the Bank. The internal systems are being tested and
those found not to be compliant will be compliant before the end of 1999. During
1998 and through the end of January, 1999, the Company spent approximately
$675,000 upgrading its computer system as part of a conversion from one data
processing vendor to another. Although the primary reason for the conversion was
not to remedy noncompliant systems, the upgrade was to a Year 2000 compliant
system. Management has budgeted $50,000 for 1999 to test and correct the system
and to educate its customers about Year 2000.
38
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Note 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------------------------------
<S><C>
1998
Interest revenue $2,434 $2,497 $2,473 $2,409
Interest expense 909 989 1,006 986
Net interest income 1,525 1,508 1,467 1,423
Provision for loan losses 75 75 75 75
Net income 204 245 300 254
Comprehensive income 189 274 285 248
Earnings per share-basic 0.08 0.11 0.13 0.11
Earnings per share-diluted 0.08 0.11 0.13 0.11
- ----------------------------------------------------------------------------------------------------------------------------
1997
Interest revenue $2,492 $2,422 $2,260 $1,987
Interest expense 976 1,008 893 754
Net interest income 1,516 1,414 1,367 1,233
Provision for loan losses 354 75 82 237
Net income 92 335 274 383
Comprehensive income 82 352 281 391
Earnings per share-basic 0.04 0.23 0.19 0.26
Earnings per share-diluted 0.04 0.23 0.19 0.26
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 17. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S><C>
Current
Federal $ 72,632 $ -- $ --
State -- -- --
- ----------------------------------------------------------------------------------------------------
72,632 -- --
- ----------------------------------------------------------------------------------------------------
Deferred 449,297 (769,327) --
- ----------------------------------------------------------------------------------------------------
$521,929 $(769,327) $ --
- ----------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
December 31, 1998
The components of the deferred taxes are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S><C>
Recognition of the benefit of the net
operating loss carryover $467,202 $449,614 $ --
Provision for credit losses 34,367 (101,996) --
Revenues taxed not earned (23,787) (9,770) --
Expenses deducted, incurred in prior years -- 65,000 --
Depreciation expense 934 34,878 --
Amortization and write down of intangible assets (29,419) (84,053) --
Elimination of the valuation allowance -- (1,123,000) --
- -----------------------------------------------------------------------------------------------------------------------------
Deferred tax benefit $449,297 $(769,327) $ --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S><C>
Deferred tax assets
Allowance for credit losses $252,629 $286,996 $ 185,000
Revenue taxed not earned 124,557 100,770 91,000
Expenses incurred not deducted -- -- 65,000
Net operating loss and alternative minimum
tax credit carryforward 25,184 492,386 942,000
- --------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 402,370 880,152 1,283,000
- --------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Depreciation 38,212 37,278 2,400
Intangible assets 44,128 73,547 157,600
Unrealized gain on securities available for sale 167 3,459 --
- --------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 82,507 114,284 160,000
- --------------------------------------------------------------------------------------------------------------------------------
Valuation allowance -- $(1,123,000)
- --------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $319,863 $765,868 $ --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The differences between federal income taxes and the amount reported
by the Company follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S><C>
Income before income taxes $1,524,773 $314,870 $422,540
Taxes computed at the federal income tax rate 518,423 107,056 143,664
Increases (decreases) resulting from
State income taxes, net of federal benefit -- 14,547 19,521
Nondeductible expenses 3,506 1,720 14,856
Net operating loss carryforward -- (892,650) (178,041
- --------------------------------------------------------------------------------------------------------------------
Income tax expense $ 521,929 $(769,327) $ --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Note 18. CAPITAL STANDARDS
The Federal Reserve Board and the Federal Deposit Insurance
Corporation have adopted risk-based capital standards for banking organizations.
These standards require ratios of capital to assets for minimum capital adequacy
and to be classified as well capitalized under prompt corrective action
provisions. The capital ratios, and minimum capital requirements of the Bank, as
of December 31, 1998, 1997, and 1996, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MINIMUM TO BE WELL
ACTUAL CAPITAL ADEQUACY CAPITALIZED
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S><C>
Total capital
(to risk-weighted assets) $12,176,375 14.0% $7,272,681 8.0% $9,090,851 10.0%
Tier 1 capital
(to risk-weighted assets) $11,579,741 12.7% $3,636,341 4.0% $5,454,511 6.0%
Tier 1 capital
(to average assets) $11,579,741 9.5% $4,852,527 4.0% $6,065,658 5.0%
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------------
Total capital
(to risk-weighted assets) $11,393,091 15.8% $5,772,738 8.0% $7,215,923 10.0%
Tier 1 capital
(to risk-weighted assets) $10,490,371 14.5% $2,886,369 4.0% $4,329,554 6.0%
Tier 1 capital
(to average assets) $10,490,371 8.8% $4,767,360 4.0% $5,959,200 5.0%
<CAPTION>
December 31, 1996
- --------------------------------------------------------------------------------------------------------------------------------
Total capital
(to risk-weighted assets) $6,445,903 10.2% $5,035,177 8.0% $6,293,972 10.0%
Tier 1 capital
(to risk-weighted assets) $5,680,903 9.0% $2,517,589 4.0% $3,776,383 6.0%
Tier 1 capital
(to average assets) $5,680,903 5.8% $3,898,339 4.0% $4,879,324 5.0%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Tier 1 capital consists of capital stock, surplus, and undivided
profits. Total capital includes a limited amount of the allowance for credit
losses. In calculating risk-weighted assets, specified risk percentages are
applied to each category of asset and off-balance sheet items.
Failure to meet the capital requirements could affect the Bank's
ability to pay dividends and accept deposits and may significantly affect the
operations of the Bank.
Note 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments are
summarized below. The fair values of a significant portion of these financial
instruments are estimates derived using present value techniques and may not be
indicative of the net realizable or liquidation values. Also, the calculation of
estimated fair values is based on market conditions at a specific point in time
and may not reflect current or future fair values.
41
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31, AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S><C>
Financial assets
Cash and due from banks $ 3,845,793 $ 3,845,793 $ 5,611,407 $ 5,611,407
Federal funds sold 10,284,419 10,284,419 20,743,973 20,743,973
Investment securities (total) 15,190,949 15,190,949 20,540,586 20,457,120
Loans, net 86,924,416 86,992,223 70,985,232 70,793,572
Accrued interest receivable 590,159 590,159 515,549 515,549
Refundable income taxes 28,611 28,611 -- --
Financial liabilities
Noninterest-bearing deposits $11,304,382 $11,304,382 $10,330,153 $10,330,153
Interest-bearing deposits 89,437,861 89,766,553 85,731,609 85,869,314
Securities sold under agreements
to repurchase 7,173,980 7,173,980 13,305,780 13,305,780
Accrued interest payable 28,574 28,574 36,113 36,113
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair values of U.S. Treasury and Government agency securities
are determined using market quotations.
The fair value of fixed-rate loans is estimated to be the present
value of scheduled payments discounted using interest rates currently in effect
for loans of the same class and term. The fair value of variable-rate loans,
including loans with a demand feature, is estimated to equal the carrying
amount. The valuation of loans is adjusted for possible credit losses.
The fair value of interest-bearing checking, savings, and money
market deposit accounts is equal to the carrying amount. The fair value of
fixed-maturity time deposits is estimated based on interest rates currently
offered for deposits of similar remaining maturities.
It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.
In 1996, the Company considered disclosure of the fair value of its
financial instruments, including off-balance sheet items and determined that the
difference between its assets and liabilities and their carrying values was
insignificant. The Company reached this conclusion after evaluating the
repricing and terms of its financial instruments. A substantial portion of such
instruments repriced annually and were short term in nature. As a result, the
fair values approximated the value reported in the financial statements at
December 31, 1996.
Note 20. EARNINGS PER SHARE
A summary of shares outstanding for basic and fully diluted earnings
per share is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S><C>
Weighted average shares outstanding, basic 2,312,422 1,691,301
Common stock equivalents 6,731 16,865
- ----------------------------------------------------------------------------------------------------------------
Average common shares and equivalents, full diluted 2,319,153 1,708,166
- ----------------------------------------------------------------------------------------------------------------
Stock options outstanding that were antidilutive
at December 31 35,100 6,500
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Note 21. PARENT COMPANY FINANCIAL INFORMATION
The balance sheet and statements of income and cash flows for
Annapolis National Bancorp, Inc. (Parent Company only) follow:
Balance Sheets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S><C>
Assets
Cash and due from banks $ 7,391 $ 191 $ 20,765
Investment in Annapolis National Bank 11,790,853 10,713,401 6,453,665
Deferred income taxes and other assets 373,722 373,722 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $12,090,966 $11,087,314 $6,474,430
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Due to stockholder $ -- $ -- $1,003,661
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Commonstock, par value $.01 per share; authorized 10,000,000 shares;
issued and outstanding 2,313,506 shares
in 1998, 2,312,306 shares in 1997,
1,478,972 shares in 1996 23,135 23,123 14,789
Capital surplus 13,142,508 13,135,320 8,633,560
Retained earnings (deficit) (1,075,000) (2,077,844) (3,162,041)
Accumulated other comprehensive income 323 6,715 (15,539)
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,090,966 11,087,314 5,470,769
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $12,090,966 $11,087,314 $6,474,430
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S><C>
Interest revenue $ -- $ 8,257 $ --
Interest expense -- 59,575 78,759
- ----------------------------------------------------------------------------------------------------------------------
Net interest income (expense) -- (51,318) (78,759)
- ----------------------------------------------------------------------------------------------------------------------
Equity in undistributed income of subsidiary 1,002,844 761,893 501,399
Expenses
Other operating -- 100 100
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,002,844 710,475 422,540
Income taxes -- (373,722) --
- ----------------------------------------------------------------------------------------------------------------------
Net income $1,002,844 $1,084,197 $ 422,540
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S><C>
Cash flows from operating activities
- ----------------------------------------------------------------------------------------------------------------------------
Interest received $ -- $ 8,257 $ --
Interest paid -- (214,836) (19,044)
Cash paid for operating expenses -- (100) (100)
- ----------------------------------------------------------------------------------------------------------------------------
-- (206,679) (19,144)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital contributed to Annapolis National Bank -- (3,475,589) --
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from stock offering -- 4,510,094 --
Proceeds from stock options exercised 7,200 -- --
Repayment of stockholder loan -- (848,400) --
- ----------------------------------------------------------------------------------------------------------------------------
7,200 3,661,694 --
- ----------------------------------------------------------------------------------------------------------------------------
Net (decrease) in cash 7,200 (20,574) (19,144)
Cash and equivalents at beginning of year 191 20,765 39,909
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 7,391 $191 $ 20,765
- ----------------------------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash
provided by operating activities
Net income $1,002,844 $ 1,084,197 $422,540
Adjustments to reconcile net income to net
cash used in operating activities
Undistributed net income of subsidiary (1,002,844) (761,893) (501,399)
Increase in deferred tax assets -- (373,722) --
Increase (decrease) in accrued interest expense -- (155,261) 59,715
- ----------------------------------------------------------------------------------------------------------------------------
$ -- (206,679) $(19,144)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Officers and Directors
[PHOTO of Officers and Directors HERE]
Seated Ronald E. Gardner, John W. Marhefka Jr., Standing (left to right)
Lawrence W. Schwartz, Stanley H. Katsef, Richard M. Lerner, Stanley J.
Klos Jr., Dimitri P. Mallios, Albert Phillips and Lawrence E. Lerner.
Board of Directors Executive Officers
of Annapolis National of Annapolis National
Bancorp, Inc. and Bancorp, Inc.
Annapolis National
Bank Russell J. Grimes Jr.
Chief Financial Officer & Treasurer
Ronald E. Gardner John W. Marhefka Jr.
Stanley H. Katsef Chief Executive Officer &
Vice Chairman of the Board Vice President
Stanley J. Klos Jr. Lori J. Mueller
Lawrence E. Lerner Secretary
Richard M. Lerner Albert Phillips
Dimitri P. Mallios President
John W. Marhefka Jr.
Chief Executive Officer
Albert Phillips Officers of Annapolis National Bank
Chairman of the Board Executive Officers
Lawrence W. Schwartz
Kevin J. Barron
Senior Vice President,
Real Estate Lending
Russell J. Grimes Jr.
Senior Vice President,
Chief Financial Officer & Treasurer
Michael L. Irwin, CPA
Senior Vice President,
Credit Administration
Robert E. Mann
Senior Vice President,
Business Banking
John W. Marhefka Jr.
President &
Chief Executive Officer
Lori J. Mueller
Senior Vice President, Administration & Marketing
Vice Presidents
Tianne Baker
Real Estate Lending
Tamara S. Cleaver
Loan Servicing
Jo Ann Pyles
Mortgage Banking
Michele Stachura
Real Estate Lending
Assistant Vice presidents
Judith A. Atkins
Construction Loan Administration
Deborah L. Cobb
Relationship Manager
Cherylann C. Conte
Real Estate Portfolio Manager
Mary A. Fitzpatrick
Mortgage Loan Officer
Linda W. Friday
Relationship Manager
Janice A. Korvin
Accounting Manager
Michelle L. Lechowicz
Relationship Manager
Matthew B. Pipken
Commercial Lending
Mary L. Queen
Operations Manager
Susan F. Smith
Relationship Manager
Sharon M. Sturm
Loan Processing
45
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Corporate Information
Executive Offices
180 Admiral Cochrane Drive
Suite 300
Annapolis, Maryland 21401
410-224-4455
Community Offices
Annapolis
900 Bestgate Road
Suite 100
Annapolis, Maryland 21401
410-224-4483
Cape St. Claire
1372-B Cape St. Claire Road
Annapolis, Maryland 21401
410-974-1515
Edgewater
120 Central Avenue
Edgewater, Maryland 21037
410-956-2900
Kent Island
Route 50 and 18
Kent Island Shopping Center
Stevensville, Maryland 21666
410-643-4191
Severna Park
50 West McKinsey Road
Severna Park, Maryland 21146
410-518-6885
Address of Principal Office
Annapolis National Bancorp, Inc.
180 Admiral Cochrane Dr.,
Suite 300
Annapolis, Maryland 21401
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Independent Audit Firm
Rowles & Company, L.L.P.
101 East Chesapeake Avenue
Baltimore, Maryland 21286
Securities Counsel
Patton Boggs, L.L.P.
2550 MStreet, N.W.
Washington, D.C. 20037
Annual Meeting
The Annual Meeting of the
stockholders of Annapolis
National Bancorp, Inc. will be
held at the Annapolis Holiday
Inn, 210 Holiday Ct., Annapolis,
MD 21401 at 6:00 PM on
Thursday, April 29, 1999.
Investor Information
Analysts, stockholders and others
seeking information about
Annapolis National Bancorp, Inc.
are invited to contact:
John W. Marhefka Jr.
Chief Executive Officer
or
Russell J. Grimes Jr.
Chief Financial Officer & Treasurer
Annapolis National Bancorp, Inc.
180 Admiral Cochrane Drive
Suite 300
Annapolis, Maryland 21401
(410) 224-4455
Securities Listing
The Company's shares are
listed on The NASDAQ Stock
Market(R). Ticker Symbol:
ANNB
Member Federal Deposit Insurance Corporation
Member Federal Reserve System
46
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1998
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,854,793
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,284,419
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,190,949
<INVESTMENTS-CARRYING> 15,190,949
<INVESTMENTS-MARKET> 15,190,949
<LOANS> 86,924,416
<ALLOWANCE> 1,177,437
<TOTAL-ASSETS> 120,456,915
<DEPOSITS> 100,742,243
<SHORT-TERM> 7,143,980
<LIABILITIES-OTHER> 449,726
<LONG-TERM> 0
0
0
<COMMON> 23,135
<OTHER-SE> 12,067,508
<TOTAL-LIABILITIES-AND-EQUITY> 120,456,915
<INTEREST-LOAN> 7,655,050
<INTEREST-INVEST> 963,154
<INTEREST-OTHER> 1,194,758
<INTEREST-TOTAL> 9,812,962
<INTEREST-DEPOSIT> 3,520,981
<INTEREST-EXPENSE> 3,889,590
<INTEREST-INCOME-NET> 5,923,372
<LOAN-LOSSES> 300,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,965,903
<INCOME-PRETAX> 1,524,773
<INCOME-PRE-EXTRAORDINARY> 1,524,773
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,002,844
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 9.91
<LOANS-NON> 505,576
<LOANS-PAST> 717,169
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,922,751
<ALLOWANCE-OPEN> 1,177,437
<CHARGE-OFFS> 363,427
<RECOVERIES> 44,853
<ALLOWANCE-CLOSE> 1,158,863
<ALLOWANCE-DOMESTIC> 1,158,863
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 979,646
</TABLE>
