<PAGE>
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, 1999
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, 1999 were $10,432,111.
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 $4,517,308 and is based upon the last sales price as quoted on The
Nasdaq Stock Market for March 17, 2000.
The Registrant had 2,323,506 shares of Common Stock outstanding as of March 17,
2000.
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,
1999, ARE INCORPORATED BY REFERENCE INTO PART I AND PART II OF THIS FORM 10-KSB.
PORTIONS OF THE PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I PAGE
<S> <C>
Item 1. Description of Business...................................................... 2
Item 2. Properties................................................................... 2-3
Item 3. Legal Proceedings............................................................ 3
Item 4. Submission of Matters to a Vote of Security Holders.......................... 3
Additional Items Executive Officers of the Registrant......................................... 3-4
Recent Developments.......................................................... 4
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters.................................................. 4
Item 6. Management's Discussion and Analysis......................................... 4
Item 7. Financial Statements......................................................... 4
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.......................................... 4
PART III
Item 9. Directors, Officers, Promoters and Control Persons;
Compliance with Section 16 of the Exchange Act............................... 4
Item 10. Executive Compensation....................................................... 5
Item 11. Security Ownership of Certain Beneficial Owners
and Management............................................................... 5
Item 12. Certain Relationships and Related Transactions............................... 5
Item 13. Exhibits and Reports on Form 8-K............................................. 5
SIGNATURES........................................................................................ 6-7
</TABLE>
This Report contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the securities exchange Act of 1934. These statements appear in a number of
places in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy; and (iv) the declaration and payment of dividends. Investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors discussed herein and those factors discussed in the
Company's filings with the Securities and Exchange Commission.
2
<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,
1999.
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY OR
ORIGINAL YEAR LEASEHOLD
LEASED/ LEASED OR YEAR OF LEASE IMPROVEMENTS AT
OWNED LOCATION ACQUIRED EXPIRATION DECEMBER 31, 1999
<S> <C> <C> <C> <C>
Administration Leased 1995 2005 (2) $ 36,519
Bestgate Leased 1997 2001 15,675
Edgewater Land Leased 1996 2006 (1) 386,674
Cape St. Claire Leased 1995 2000 (1) 60,799
Kent Island Leased 1990 2001 (1) 203
Severna Park Leased 1996 2006 (1) 17,415
</TABLE>
(1) These leases may be extended at the option of the Company for periods
ranging from three to twenty years.
(2) Lease early buy-out option exercised in 1999 at a cost of $36,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be immaterial
to the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ADDITIONAL ITEMS.
Executive Officers of the Registrant
The information relating to directors and named executive officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 27, 2000 at
pages 4 through 7. In addition, information concerning Executive Officers who
are not directors is set forth below:
AGE AT POSITION WITH THE COMPANY AND BANK
NAME 12/31/99 AND PAST FIVE YEARS EXPERIENCE
- ---- -------- ------------------------------
Margaret Theiss Faison 41 Chief Financial Officer and Treasurer of
the Company and Senior Vice President,
Chief Financial Officer and Treasurer of
the Bank. Prior to joining the Company
in 1999, Ms. Faison was Senior Vice
President and Chief Financial Officer of
Sterling Bank & Trust Co. of Baltimore.
Ms. Faison was previously Vice President
and Chief Financial Officer with Mellon
Bank (MD).
3
<PAGE>
Robert E. Kendrick, III 54 Senior Vice President and Chief Credit
Officer.
Prior to joining the Company in 1999,
Mr. Kendrick held similar positions with
Citizens National Bank of Laurel, Bank
of Maryland, Sterling Bank & Trust Co.
of Baltimore and NationsBank.
Lori J. Mueller 36 Secretary of the Company and Senior Vice
President, Branch Banking. Ms. Mueller
has been an officer of the Bank since
1990 and is responsible for retail
banking, deposit account administration
and marketing.
Kevin J. Barron 44 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.
Recent Developments
The Bank entered into a Formal Agreement with the Office of the Comptroller of
the Currency ("OCC") effective September 30, 1999, whereby the Bank is required
to improve the Bank's management and policies and procedures. This agreement in
no way restricts or impedes the Bank's ability to conduct normal banking and
business transactions.
The Bank has developed a detailed action plan to ensure prompt compliance with
the Formal Agreement and is on schedule to meet all deadlines imposed by the
agreement. The Bank has recently hired a new Chief Executive Officer, Mark H.
Anders, a new Chief Financial Officer, Margaret Theiss Faison and a new Senior
Credit Officer, Robert E. Kendrick, III. In addition, the Bank has engaged
outside firms to perform loan and compliance reviews and has engaged Keller
Bruner & Company, LLP to perform internal audit functions. The Bank is also in
the process of developing, updating and implementing policies and procedures to
address specific concerns of the OCC, including policies and procedures related
to lending, risk management, and asset diversification.
The Bank is committed to complying with the provisions of the agreement and
believes that the changes it is making will have a positive impact on future
operations.
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 1999 Annual Report to
Stockholders on page 22, and is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The above-captioned information appears under Management's Discussion and
Analysis of Results of Operations and Financial Condition in the Registrant's
1999 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 1999 appears in the Registrant's 1999 Annual Report
to Stockholders on pages 23 through 44 and are incorporated herein by reference.
4
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has selected Stegman & Company to perform the 2000 annual audit and
tax return. The change in accountants was not the result of any disagreement
with the prior accountants Rowles and Company on any accounting or financial
disclosure issue.
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 27, 2000.
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 27, 2000.
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 27, 2000.
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 27, 2000.
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 1999 Annual Report
to Stockholders:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report................................... 25
Consolidated Balance Sheets as of
December 31, 1999, 1998 and 1997............................... 26
Consolidated Statements of Income for the
years ended December 31, 1999, 1998 and 1997................... 27
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997........... 28
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997................... 29-30
Notes to Consolidated Financial Statements..................... 31-46
</TABLE>
5
<PAGE>
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.*
4.0 Stock Certificate of Annapolis National Bancorp, Inc.*
10.1 Employment Agreement between Annapolis National Bancorp,
Inc. and Mark H. Anders**
10.2 Annapolis National Bancorp, Inc. Employee Stock Option Plan*
11.0 Computation of earnings per share (filed herewith)
13.0 Portions of 1999 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 1999 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 Company's Proxy Statement
for its Annual Meeting of Stockholders, which will be filed with
the Commission within 120 days of the end of the Company's fiscal
year.
(b) Reports on Form 8-K:
The Company filed a Form 8-K on October 7, 1999 announcing its
appointment on October 4, 1999 of Mark H. Anders as President and Chief
Executive Officer of the Bank. Mr. Anders succeeded Bank Chairman of the
Board Richard M. Lerner who had served on an interim basis as President
and Chief Executive Officer of the Bank for the preceding five months.
The Company filed a Form 8-K on May 18, 1999 announcing that it needed to
increase its allowance for loan losses for the first quarter ended March
31, 1999. The increase resulted in a decrease to earnings reported on
April 19, 1999, and thus required adjustments to the Company's financial
condition and results of operations. At the time of filing the 8-K, the
Company had not determined the extent of the adjustments required and
therefore was unable to file the Form 10-Q for the fiscal quarter ended
March 31, 1999 on the due date. The Company's previously declared cash
dividend of one-cent per share was paid as scheduled on May 14, 1999.
CONFORMED SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
ANNAPOLIS NATIONAL BANCORP, INC.
By: /s/ Richard M. Lerner
---------------------
Richard M. Lerner
President, Chief Executive Officer
and Director
Date: March 29, 2000
6
<PAGE>
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> <C>
/s/ Richard M. Lerner President, Chief Executive Officer and March 29, 2000
- ---------------------------- Director (principal executive officer)
Richard M. Lerner
/s/ Margaret Theiss Faison Senior Vice President, Treasurer and March 29, 2000
- ---------------------------- Chief Financial Officer (principal
Margaret Theiss Faison accounting and financial officer)
/s/ Mark H. Anders Director March 29, 2000
- ----------------------------
Mark H. Anders
/s/ Stanley J. Klos, Jr. Director March 29, 2000
- ----------------------------
Stanley J. Klos, Jr.
/s/ Lawrence E. Lerner Director March 29, 2000
- ----------------------------
Lawrence E. Lerner
/s/ Dimitri P. Mallios Director March 29, 2000
- ----------------------------
Dimitri P. Mallios
/s/ Albert Phillips Chairman March 29, 2000
- ----------------------------
Albert Phillips
/s/ Lawrence W. Schwartz Director March 29, 2000
- ----------------------------
Lawrence W. Schwartz
</TABLE>
7
<PAGE>
Exhibit 11.0
Calculation of Earnings per Share
<TABLE>
<CAPTION>
December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted Average shares Outstanding 2,319,588 2,312,422 1,691,301
Common Stock Equivalents -- 6,731 16,865
Average Common Shares and Equivalents, Fully Diluted 2,319,588 2,319,153 1,708,166
Net income $ 690,295 $1,002,844 $1,084,197
Basic Earnings per Share $ 0.30 $ 0.43 $ 0.64
Diluted Earnings per Share $ 0.30 $ 0.43 $ 0.63
</TABLE>
8
<PAGE>
Exhibit 13.0
ANNAPOLIS NATIONAL BANCORP, INC.
Corporate Profile
ANNAPOLIS NATIONAL BANCORP, INC., formerly Maryland Publick Banks, Inc., is a
bank holding company, incorporated in May, 1988 for the purpose of acquiring and
holding all of the outstanding stock of 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, 1999.
The Bank continually evaluates new products, and implements such new products as
deemed appropriate by management.
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 1999 of $690,295, a 31.17% decrease from
1998 earnings of $1,002,844. The decrease in 1999 earnings was primarily due to
higher expenses associated with the Company's conversion to a new data
processing provider and the system upgrades needed to comply with the Year 2000
date change requirements. Basic earnings per share decreased to $0.30 per share
in 1999 compared to $0.43 per share in 1998.
The primary source of income of the Bank is interest on its loan and investment
portfolios. The principal expense of the Bank is interest on its deposit
accounts and borrowings. The difference between interest income on interest
earning assets and interest expense on interest bearing liabilities is referred
to as net interest income. Net interest income was $6.1 million for 1999, an
increase of $214,000 or 3.62% compared to $5.9 million in 1998. Total assets
were $126.7 million as of December 31, 1999, a 5.21% increase over the December
31, 1998 total assets of $120.5 million. The Company's return on average assets
was 0.55% and 0.82% at December 31, 1999, and 1998 respectively. The Company's
return on average equity was 5.69% and 8.64% at December 31, 1999, and 1998
respectively.
At December 31, 1999 the Bank's gross loan portfolio totaled $82.9 million. Of
this amount, $19.3 million or 23.23% were commercial loans, $35.0 million or
42.26% were commercial real estate loans, $15.0 million or 18.13% were
construction loans, $7.3 ANNAPOLIS NATIONAL BANCORP, INC.
9
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC;
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
million or 8.84% were one- to four-family residential mortgage loans, and $3.7
million or 4.45% were home equity loans, and $2.6 million or 3.09% were consumer
and other loans.
The following table shows selected consolidated financial highlights for the
Company at and for the five years ended December 31, 1995, through December 31,
1999.
Selected Consolidated Financial Data at and for years ended December 31,
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Selected Financial Data 1999 1998 1997 1996 1995
- ----------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets $ 126,733 $ 120,457 $ 120,827 $ 100,227 $ 95,296
Total loans, net 81,198 86,924 70,985 68,800 56,036
Total deposits 105,094 100,742 96,062 87,106 82,096
Securities sold under agreement to repurchase 8,497 7,174 13,306 6,345 6,970
Notes payable -- -- -- 1,004 925
Stockholder's equity 12,727 12,091 11,087 5,471 5,046
Selected Operating Data
- -----------------------
Interest income $ 9,612 $ 9,813 $ 9,161 $ 8,021 $ 7,651
Interest expense 3,475 3,890 3,630 3,362 3,099
---------- ---------- ---------- ---------- ----------
Net interest income 6,137 5,923 5,531 4,659 4,552
Provision for credit losses 432 300 748 452 318
---------- ---------- ---------- ---------- ----------
Net interest income after provision for credit 5,705 5,623 4,783 4,207 4,234
losses
Restructuring expense -- -- 796 -- --
Noninterest income 849 867 762 587 521
Noninterest expense 5,488 4,965 4,434 4,371 3,957
---------- ---------- ---------- ---------- ----------
Income before income taxes 1,066 1,525 315 423 798
Income tax benefit (expense) (376) (522) 769 -- (6)
---------- ---------- ---------- ---------- ----------
Net income $ 690 $ 1,003 $ 1,084 $ 423 $ 792
---------- ---------- ---------- ---------- ----------
Key Financial Ratios and Other Data
- -----------------------------------
Return on average assets 0.55% 0.82% 0.99% 0.44% 0.94%
Net income divided by average assets
Return on average equity 5.69% 8.64% 14.83% 7.98% 19.26%
Net income divided by average equity
Equity to asset ratio (1) 9.69% 9.54% 6.70% 5.46% 4.88%
Average equity divided by average assets
Basic earnings per share $ 0.30 $ 0.43 $ 0.64 $ 0.29 $ 0.57
Book value per share $ 5.48 $ 5.23 $ 4.79 $ 3.70 $ 3.41
Tangible book value per share $ 5.46 $ 5.17 $ 4.70 $ 3.17 $ 2.78
Number of shares outstanding 2,323,506 2,313,506 2,312,306 1,478,972 1,478,972
Efficiency ratio (2) 78.55% 73.19% 83.11% 83.34% 78.00%
Interest rate spread 4.76% 4.52% 4.88% 4.68% 5.29%
Net interest margin 5.26% 5.11% 5.37% 5.10% 5.73%
Risk based capital ratio - Tier 1 13.70% 12.70% 15.16% 7.46% 7.68%
Risk based capital ratio - Total 15.00% 14.00% 16.42% 8.68% 8.83%
</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.
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, 1999, 1998 and 1997. 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, increased to 4.76% for the
year ended December 31, 1999, compared to 4.52% at December 31, 1998.
10
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
Consolidated Average Balances, Yields and Rates
(Balances in thousands)
<TABLE>
<CAPTION>
Years ended
December 31, 1999 December 31, 1998
----------------- -----------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest Earning Assets:
Federal funds sold and other overnight
investments $ 9,456 $ 462 4.89% $ 21,999 $1,195 5.43%
Investment Securities 20,042 1,090 5.44% 16,644 963 5.79%
Loans 87,126 8,060 9.25% 77,245 7,655 9.91%
-------- ------ ------ -------- ------ ------
Total interest-earning assets 116,624 9,612 8.24% 115,888 9,813 8.47%
-------- ------ ------ -------- ------ ------
Noninterest Earning Assets
Cash and due from banks 4,196 3,612
Other assets 4,455 2,186
-------- --------
Total Assets $125,275 $121,686
-------- --------
Liabilities and Stockholders' Equity
Interest Bearing Deposits
NOW accounts $ 19,810 $ 269 1.36% $ 18,488 $ 361 1.95%
Money market accounts 11,960 334 2.79% 14,427 496 3.44%
Savings accounts 14,634 341 2.33% 13,374 392 2.93%
Certificates of deposit 43,236 2,191 5.07% 40,844 2,272 5.56%
Repurchase agreements 9,970 323 3.24% 11,330 369 3.26%
Notes payable 105 17 16.19% -- -- --
-------- ------ ------ -------- ------ ------
Total interest bearing liabilities 99,715 3,475 3.48% 98,463 3,890 3.95%
------ ------ ------ ------
Noninterest Bearing Liabilities
Demand deposit accounts 12,646 11,118
Other liabilities 772 500
Stockholders' Equity 12,142 11,605
Total Liabilities and Stockholders' Equity $125,275 $121,686
-------- --------
Interest rate spread 4.76% 4.52%
------ ------
Ratio of interest earning assets to interest bearing
liabilities 116.96% 117.70%
Net interest income and net interest margin $6,137 5.26% $5,923 5.11%
------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Average Yield/
Balance Interest Rate
------- -------- ------
<S> <C> <C> <C>
Assets
Interest Earning Assets:
Federal funds sold and other overnight
investments $ 14,447 $ 776 5.37%
Investment Securities 16,253 937 5.77%
Loans 72,385 7,448 10.29%
-------- ------ ------
Total interest-earning assets 103,085 9,161 8.89%
-------- ------ ------
Noninterest Earning Assets
Cash and due from banks 3,830
Other assets 2,176
--------
Total Assets $109,091
--------
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C>
Liabilities and Stockholders' Equity
Interest Bearing Deposits
NOW accounts $ 15,475 $ 324 2.09%
Money market accounts 14,088 484 3.44%
Savings accounts 12,005 367 3.06%
Certificates of deposit 37,829 2,080 5.50%
Repurchase agreements 10,570 315 2.98%
Notes payable 632 60 9.49%
-------- ------ ------
Total interest bearing liabilities 90,599 3,630 4.01%
------ ------
Noninterest Bearing Liabilities
Demand deposit accounts 10,510
Other liabilities 668
Stockholders' Equity 7,314
--------
Total Liabilities and Stockholders' Equity $109,091
--------
Interest rate spread 4.88%
------
Ratio of interest earning assets to interest bearing
liabilities 113.78%
Net interest income and net interest margin $5,531 5.36%
- ------------------------------------------- ------ ------
</TABLE>
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 increased by 5.21% during 1999 to $126.7 million from $120.5
million at December 31, 1998. Total deposits and securities sold under
agreements to repurchase, the Company's primary source of funds, increased $5.7
million or 5.26% from $107.9 million at December 31, 1998. Time deposits
comprise the largest portion of the Bank's total deposits, totaling $45.6
million or 43.40% of the Bank's total deposits at December 31, 1999, compared to
$37.6 million or 37.34% in 1998. Savings and Money Market accounts totaled $25.4
million or 24.18% of the Bank's total deposits at December 31, 1999, compared to
$30.8 million or 30.54% in 1998. NOW accounts total $20.8 million or 19.74% and
$21.0 million or 20.90% of total deposits at December 31, 1999 and 1998,
respectively. Demand, noninterest bearing accounts total $13.3 million or 12.68%
of total deposits at December 31, 1999 and $11.3 million or 11.22% at December
31, 1998. Securities sold under agreements to repurchase increased $1.3 million
to $8.5 million from $7.2 million at December 31, 1998, 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, decreased by $5.7
million or 6.59% to $81.2 million at December 31, 1999 from $86.9 million a year
earlier. The reduction in loan balances occurred primarily in the commercial
sector which decreased $7.6 million or 28.27% from 1998 and was partially offset
by an increase of $4.8 million or 11.73% in real estate loans.
Operating Results
The following discussion outlines some of the more important factors and trends
affecting the earnings of the Company, as presented in its consolidated
statements of income.
Net Interest Income
Net interest income is the difference between interest revenue and interest
expense and is generally impacted by increases or decreases in the amount of
outstanding interest earning assets and interest bearing liabilities (volume
variance). This volume variance coupled with changes in interest rates on these
same assets and liabilities (rate variance) equates to the total change in net
interest income in any given period. The table 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
12
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
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, 1999, was $6.1 million,
representing an increase of $214,000 or 3.62% from net interest income of $5.9
million for the year ended December 31, 1998. The increase in net interest
income is due primarily to a decrease in the Bank's overall cost of funds. The
net yield on interest earning assets was 5.26% and 5.11% for the years ended
December 31, 1999 and 1998 respectively. Net interest income for 1999 includes
$195,000 of interest collected on the cash basis related to loans on a
nonaccrual status, compared to $18,000 of interest collected on various
nonaccrual loans in 1998.
Rate/Volume Analysis
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 v 1998 1999 v 1998
----------- -----------
Increase or Due to Change in Rate/ Increase or Due to Change in
Decrease) Volume Rate Volume (Decrease) Volume Rate Volume
------ ---- ------- ---------- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans $ 405 $1,130 $(632) $(93) $207 $500 $(275) $(18)
Investment securities 127 197 (58) (12) 26 23 3 --
Federal funds sold and other
(733) (578) (300) 145 419 406 9 4
overnight investments ----- ------ ----- ---- ---- ---- ----- ----
Total interest income (201) 749 (990) 40 652 929 (263) (14)
Interest expense on:
NOW accounts (92) 26 (110) (8) 37 63 (22) (4)
Money market accounts (162) (85) (93) 16 12 12 -- --
Savings accounts (51) 38 (81) (8) 25 42 (15) (2)
Certificates of deposit (81) 133 (202) (12) 192 166 24 2
Repurchase agreements (46) (44) (2) -- 54 23 29 2
Notes payable 17 -- -- 17 (60) (60) -- --
----- ------ ----- ---- ---- ---- ----- ----
Total interest expense (415) 68 (488) 5 260 246 16 (2)
----- ------ ----- ---- ---- ---- ----- ----
Net interest income $ 214 $ 681 $(502) $ 35 $392 $683 $(279) $(12)
----- ------ ----- ---- ---- ---- ----- ----
</TABLE>
Interest Income
The Company's interest income decreased $201,000 or 2.04% to $9.6 million at
December 31, 1999, compared to $9.8 million at December 31, 1998. The decrease
in interest income can be attributed to a decrease in the average yield on
earning assets, partially offset by an increase in average loans. Average loans
increased $9.9 million or 12.79%. Average federal funds and other overnight
investments decreased $12.5 million or 57.02% which contributed to the decrease
in interest income.
Interest Expense
The Company's interest expense decreased $415,000 or 10.67% to $3.5 million at
December 31, 1999, compared to $3.9 million at December 31, 1998. The decrease
in interest expense can be attributed to a decrease in the cost of interest
bearing liabilities to 3.48% at December 31, 1999, compared to 3.95% in 1998.
The decrease in rate was partially offset by an increase in certificate of
deposit balances of $8.0 million or 21.24%. 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. Noninterest income, excluding the one time gain of $125,000 in 1998
relating to the Company waiving its exclusive right to operate its branch office
in the Edgewater Shopping Center increased $77,000 or 10.44% to $820,000 at
December 31, 1999, as compared to $742,000 in 1998. The growth in noninterest
income was primarily due to an increase in mortgage broker fees.
13
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
Noninterest Expense
Noninterest expense increased $493,000 or 9.93% to $5.5 million at December 31,
1999, compared to $5.0 million at December 31, 1998. The increase in noninterest
expense was primarily due to costs associated with the Bank's conversion to a
new data processing provider of $210,000, costs related to the Year 2000 date
change and legal and consulting expenses associated with the Formal Agreement
with the OCC.
Personnel expense increased $24,000 or 0.98% due primarily to vacation accruals
required due to excess carryover days caused by Y2K and the data processing
conversion.
Occupancy and equipment expense increased $105,000 or 12.87% due to depreciation
expense on equipment purchased in 1997, 1998 and 1999 for the Bank's local area
network (LAN) and equipment upgrades necessary for Y2K.
Other expense increased $135,000 or 14.63% due mainly to legal and consulting
expenses related to the OCC Formal Agreement.
Provision for Income Taxes
The Company and the Bank file consolidated federal income tax returns and
separate Maryland income tax returns. The Company paid $530,000 in federal
income tax in 1999 and paid state income tax of $32,000 in 1999.
Financial Analysis For The Years Ended December 31, 1998 and 1997
Net income for the year ended December 31, 1998, totaled $1,002,844 or $0.43 per
basic share compared to $1,084,197 or $0.64 per basic share for the year ended
December 31, 1997.
Net interest income increased $393,000 or 7.10% at December 31, 1998, to $5.9
million from $5.5 million at December 31, 1997. This increase was the result of
an increase in interest income of $652,000 that was partially offset by an
increase in interest expense of $259,000.
Interest income increased $652,000 or 7.11% in 1998 compared to 1997, primarily
due to an increase in the average balance of loans outstanding. Average loans
outstanding, net of unearned income, increased $4.9 million or 6.71% during
1998. In addition, the average yield on loans decreased to 9.91% in 1998 from
10.29% in 1997.
Interest expense increased $259,000 in 1998 as compared to 1997. The increase
generally reflected an increase in the average balance of interest bearing
liabilities to $98.5 million from $90.6 million at December 31, 1997. During
this period the average cost of interest bearing liabilities decreased to 3.95%
at December 31, 1998, from 4.01% at December 31, 1997.
Noninterest income increased $105,000 or 13.81% during 1998 as compared to 1997.
The increase was attributable to a one-time gain of $125,000 relating to the
Company's waiving of its exclusive right to operate its branch office in the
Edgewater Shopping Center.
Noninterest expense decreased $264,000 or 5.05% to $5.0 million at December 31,
1998, from $5.2 million at December 31, 1997. The primary reason for the
decrease 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.
Personnel expense increased $370,000 or 17.54% due to increasing staff to
required levels.
Occupancy and equipment expense decreased $20,000 or 2.43% due to lower
maintenance costs.
Other expense increased $56,000 or 6.42% due mainly to additional marketing
expense of approximately $87,000.
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
14
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
investment maturities can be considered a relatively stable funding source,
while deposit activity is greatly influenced by interest rates, general market
conditions and competition.
The Bank offers a variety of retail deposit account products to both consumer
and commercial deposit customers. The Bank's deposit accounts consist of
savings, NOW accounts, checking accounts, money market accounts and certificate
of deposit accounts. The Bank also offers individual retirement accounts. Time
deposits comprised 43.40% of the deposit portfolio at December 31, 1999. Core
deposits, considered to be noninterest bearing and interest bearing demand
deposit accounts, savings deposits and money market accounts accounted for
56.60% of the deposit portfolio at December 31, 1999. This represents a 5.76%
reduction in core deposits of 62.66% at December 31, 1998.
The Bank intends to continue to emphasize retail deposit accounts as its primary
source of funds. Deposit products are promoted in periodic newspaper
advertisements, along with notices provided in customer account statements. The
Bank does not pay a fee for brokered deposits. The Bank's market strategy is
based on its reputation as a community bank that provides quality products and
personal customer service.
The Bank pays interest rates on its interest bearing deposit products that are
competitive with rates offered by other financial institutions in its market
area, and in certain deposit categories may lead the market. Interest rates on
deposits are reviewed by management who consider a number of factors including:
(1) the Bank's internal cost of funds; (2) rates offered by competing financial
institutions; (3) investing and lending opportunities; and (4) the Bank's
liquidity position.
Jumbo certificates of deposit are accounts of $100,000 or more. These accounts
totaled $6.8 million at December 31, 1999 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, 1999:
Dollars in (thousands)
<TABLE>
<CAPTION>
Greater than Three Greater than Six Greater than
Three Months or Less Months to Six Months to One Year One Year Total
<S> <C> <C> <C> <C>
$1,111 $2,811 $2,021 $852 $6,795
------ ------ ------ ---- ------
</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, 1999, and 1998, the average cost of
these borrowings were 3.24% and 3.25% respectively.
The Bank maintains a secured borrowing line with the Federal Home Loan Bank
(FHLB) with the ability to draw up to $12.7 million, and may borrow up to $7.3
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, 1999, 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.
15
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
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, 1999, and the Company's interest sensitivity gap (i.e., interest
earning assets less interest bearing liabilities). A positive gap for any time
period indicates that more interest earning assets will mature or reprice during
that period than interest bearing liabilities. Based on the composition of
deposits the Company's goal is to maintain a cumulative gap position for the
period of one year or less of plus or minus fifteen percent in order to mitigate
the impact of changes in interest rates on liquidity, interest margins and
operating results.
The analysis presented below represents a static gap position for interest
sensitive assets and liabilities at December 31, 1999, and does not give effect
to prepayment or extension of loans as a result of changes in general market
rates.
Interest Sensitivity Gap Analysis
(Dollars in thousands)
December 31, 1999
<TABLE>
<CAPTION>
After three but After one but
within three within twelve within five After five
months months years years Total
<S> ------ ------ ----- ----- -----
Assets <C> <C> <C> <C> <C>
Federal funds sold and other overnight investments $ 11,432 $ -- $ -- $ -- $ 11,432
Investment securities (1) 7,818 4,509 10,776 -- 23,103
Loans (2), (3) 32,436 18,179 23,407 7,382 81,404
-------- -------- ------- ------- --------
$ 51,686 $ 22,688 $34,183 $ 7,382 $115,939
-------- -------- ------- ------- --------
Liabilities
Interest bearing liabilities
NOW accounts $ 20,750 $ -- $ -- $ -- $ 20,750
Money market accounts 14,623 -- -- -- 14,623
Savings accounts 10,790 -- -- -- 10,790
Certificates of deposit (4) 8,289 29,866 7,406 49 45,610
Repurchase agreements 8,497 -- -- -- 8,497
-------- -------- ------- ------- --------
$ 62,949 $ 29,866 $ 7,406 $ 49 $100,270
-------- -------- ------- ------- --------
Interest sensitivity gap (11,263) (7,178) 26,777 7,333 15,669
Cumulative interest sensitivity gap (11,263) (18,441) 8,336 15,669
Cumulative interest sensitivity gap as a percentage of
total assets (9.71%) (15.91)% 7.19% 13.51% 13.51%
------------ -------- -------- ------- ------- --------
</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 $1,499,460.
(4) Certificates of deposits scheduled by contractual maturities.
Investment Portfolio
At December 31, 1999, the Bank's investment portfolio, which totaled $23.8
million, consisted of U.S. government agency securities. The Company invests
primarily in state tax exempt U.S. Government Agency securities in order to
minimize its state income tax liability. The Company did not pay state income
tax in 1998 or 1997. Additionally, the Company owns $360,700 in stock of the
Federal Reserve Bank of Richmond and $360,400 in stock of the Federal Home Loan
Bank of Atlanta (FHLB). Management generally maintains an investment portfolio
with relatively short maturities to minimize overall interest rate risk. At
December 31, 1999, approximately 53.36% of the investment securities portfolio
had maturities of one year or less.
16
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
Investment decisions are made within policy guidelines established by the Board
of Directors. It is the Bank's policy to invest in non-speculative debt
instruments, particularly debt instruments that are guaranteed by the U.S.
Government or an agency thereof, to maintain a diversified investment portfolio
which complements the overall asset/liability and liquidity objectives of the
Bank, while limiting the related credit risk to an acceptable level. To meet the
credit risk objectives, non-government debt instruments must have a rating of
"B" or better to be held in the portfolio. The Bank's investment policy
designates the investment portfolio to be classified as "available-for-sale",
unless otherwise designated. At December 31, 1999, 100% of the investment
portfolio was classified available-for-sale. The composition of securities at
December 31, for each of the past five fiscal years was:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Available for Sale
U. S. Treasury $ -- $ -- $ 1,974 $ 9,157 $16,186
U. S. Agency 23,103 13,511 12,991 996 978
Mortgage-backed -- 980 980 987 984
Equity Securities 721 699 620 194 175
------- ------- ------- ------- -------
Total 23,824 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 $23,824 $15,190 $20,540 $13,327 $18,323
- ---------------- ------- ------- ------- ------- -------
</TABLE>
The following table presents maturities and weighted average yields for
investments in available for sale and held to maturity securities.
December 31, 1999
(Dollars in thousands)
YEARS TO MATURITY
<TABLE>
<CAPTION>
WITHIN 5
WITHIN WITHIN 1 TO 10
ONE YEAR TO 5 YEARS YEARS
AMOUNT/ YIELD AMOUNT/ YIELD AMOUNT/ YIELD
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Available for Sale
U. S. Treasury $ -- --% $ -- --% $ -- --%
U. S. Agency 12,327 5.41% 10,776 5.16% -- --%
------------ ------ ---- ------ ---- -------- ---
Total Debt Securities $12,327 5.41% $10,776 5.16% -- --%
Held to Maturity
U. S. Treasury $ -- --% $ -- --% $ -- --%
U. S. Agency -- --% -- --% -- --%
------------ ------ ---- ------ ---- -------- ---
Total $ -- --% $ -- --% $ -- --%
</TABLE>
<TABLE>
<CAPTION>
GREATER
THAN TEN
YEARS
AMOUNT/ YIELD TOTAL
------- ----- -----
<S> <C> <C> <C>
Available for Sale
U. S. Treasury $ -- --% $ --
U. S. Agency -- --% 23,103
------------ ------ ---- ------
Total Debt Securities $ -- --% $23,103
Held to Maturity
U. S. Treasury $ -- --% $ --
U. S. Agency -- --% --
------------ ------ ---- ------
Total $ -- --% $ --
</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.
17
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
These factors are, in turn, affected by, among other things, economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, and legislative tax policies.
Analysis of Loans
The following table presents the composition of the loan portfolio over the
previous five years:
Years ended December 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans $19,261 23.23% $26,895 30.43% $30,860 42.61% $30,801 43.80% $27,917 48.94%
Real estate loans:
Commercial 35,032 42.26% 29,373 33.25% 20,448 28.34% 17,845 25.65% 13,553 23.92%
Construction 15,030 18.13% 17,875 20.22% 10,191 13.91% 10,173 14.62% 7,937 14.01%
One-to four-family 7,329 8.84% 8,620 9.75% 5,232 7.25% 7,002 10.07% 4,391 7.75%
Home equity 3,686 4.45% 3,219 3.64% 3,393 4.70% 1,744 2.51% 1,197 2.11%
Consumer loans 2,565 3.09% 2,400 2.71% 2,305 3.19% 2,332 3.35% 1,848 3.27%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans 82,903 100.00% 88,382 100.00% 72,429 100.00% 69,897 100.00% 56,843 100.00%
Less:
Unearned income (222) (299) (267) (332) (190)
Allowance for loan losses (1,483) (1,159) (1,177) (765) (617)
------- ------- ------- ------- -------
Net loans receivable $81,198 $86,924 $70,985 $68,800 $56,036
------- ------- ------- ------- -------
</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, 1999 the Bank's loan portfolio totaled $82.9
million, of which $19.3 million, or 23.23%, were commercial loans; $35.0
million, or 42.26%, were commercial real estate loans; $15.0 million, or 18.13%,
were construction loans; $7.3 million, or 8.84%, were one- to four-family
residential mortgage loans; $3.7 million, or 4.45% were home equity loans and
$2.6 million, or 3.09%, were consumer and other loans. All of the loans in the
Bank's portfolio are either adjustable-rate or short term fixed-rate loans with
terms to maturity of 30 days to 30 years.
The Bank does not engage in longer term fixed-rate portfolio lending. Any long
term fixed-rate loans made by the Bank are sold in the secondary market.
Commercial Lending. The Bank offers commercial business loans to businesses
operating in the Bank's primary market area. These loans consist of lines of
credit which typically require an annual repayment, adjustable-rate loans with
terms of five to seven years, and short term fixed-rate loans with terms of up
to five years. Such loans are generally secured by receivables, inventories,
equipment and other assets of the business. The Bank generally requires personal
guarantees on its commercial loans. The Bank also offers unsecured commercial
loans to businesses on a selective basis. These types of loans are made to
existing customers and are of a short duration, generally one year or less. The
Bank also originates commercial loans which are guaranteed by the Small Business
Administration. The Bank has been an active participant in a variety of SBA loan
programs.
Year Ended December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
DUE AFTER
DUE IN ONE YEAR
ONE BUT NON
YEAR OR BEFORE DUE AFTER ACCRUAL 90 DAYS
LESS FIVE YEARS FIVE YEARS LOANS PAST DUE TOTAL
---- ---------- ---------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
Construction $14,990 $ -- $ -- $ 40 $ -- $15,030
Mortgage 2,372 2,867 2,090 -- -- 7,329
Commercial 14,097 14,597 4,879 1,459 -- 35,032
Commercial loans 16,101 2,887 273 -- -- 19,261
Home equity loans 3,686 -- -- -- -- 3,686
Consumer loans 1,361 1,064 140 -- -- 2,565
- -------------- ------- ------- ------ ------ -------- -------
Total loans $52,607 $21,415 $7,382 $1,499 $ -- $82,903
- ----------- ======= ======= ====== ====== ======== =======
</TABLE>
18
<PAGE>
DUE AFTER ONE YEAR
<TABLE>
<CAPTION>
FIXED VARIABLE
RATE RATE TOTAL
---- ---- -----
<S> <C> <C> <C>
Real estate loans
Construction $ -- $ -- $ --
Mortgage 2,130 2,827 4,957
Commercial 421 19,055 19,476
Commercial loans 1,333 1,827 3,160
Home equity loans -- -- --
Consumer loans 929 275 1,204
- -------------- --------- --------- ---------
Total loans $ 4,813 $ 23,984 $ 28,797
- ----------- ========= ========= =========
</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, 1999, was $2.0 million. These loans may be made with terms
up to 25 years and are generally offered at interest rates which adjust annually
or annually after an initial three year period in accordance with the prime rate
as reported in the Wall Street Journal. In reaching a decision as to whether or
not to make a commercial real estate loan, the Bank considers the value of the
real estate to be financed and the credit strength of the borrower and/or the
lessee of the real estate project. The Bank has generally required that the
properties securing commercial real estate loans have debt service coverage
ratios of at least 1.2:1.
Loans secured by commercial real estate properties generally involve larger
principal amounts and a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's value, debt service ratio and, under certain
circumstances, additional collateral. The Bank generally requires personal
guarantees on its commercial real estate loans.
Construction Lending. The Bank originates construction loans on both one- to
four-family residences and on commercial real estate properties. The Bank
originates two types of residential construction loans, consumer and builder.
The Bank originates consumer construction loans to build a primary residence, a
secondary residence, or an investment or rental property. The Bank will
originate builder construction loans to companies engaged in the business of
constructing homes for resale. These loans may be for homes currently under
contract for sale, model homes from which other homes will be marketed within a
subdivision or, on a very limited basis, homes built for speculative purposes to
be marketed for sale during construction. Although the Bank attempts to procure
permanent end-financing, many of the Bank's construction loans, at the time
entered into with the Bank, have permanent end-financing committed by other
financial institutions.
The Bank originates land acquisition and development loans with the source of
repayment being either the sale of finished lots or the sale of homes to be
constructed on the finished lots. The Bank will originate land acquisition,
development, and construction loans on a revolving line of credit basis for
subdivisions whereby the borrower may draw upon such line of credit as lots are
sold for the purpose of improving additional lots. Construction loans are
generally offered with terms up to twelve months for consumer and builder loans,
and up to twenty-four months for land development loans.
Construction loans are generally made in amounts up to 80% of the value of the
security property. During construction, loan proceeds are disbursed in draws as
construction progresses based upon inspections of work in place by independent
construction inspectors.
At December 31, 1999, the Bank had construction loans, including land
acquisition and development loans totaling $15.0 million, or 18.13% of the
Bank's total loan portfolio, of which $1.0 million consisted of one- to four-
family residential construction loans, $10.1 million consisted of commercial
real estate construction loans and $3.9 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 that is insufficient to assure full repayment.
19
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
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, 1999, one- to four-family residential mortgage loans totaled
$7.3 million, or 8.84%, of total loans. Of the one-to four-family mortgage loans
outstanding at that date, $2.3 million were fixed-rate loans with terms of up to
three years with a balloon payment at the end of the term and $5.0 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.
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, 1999, home equity loans totaled $3.7
million, or 4.45% of the Bank's total loan portfolio. Fixed-rate, fixed-term
home equity loans and adjustable rate home equity lines of credit are offered in
amounts up to 100% of the appraised value with a maximum loan amount of
$100,000. Fixed-rate, fixed-term home equity loans are offered with terms up to
five years and home equity lines of credit are offered with terms up to twenty
years. Substantially all of the Bank's home equity loans are adjustable rate and
reprice with changes in the Wall Street Journal prime rate.
Consumer Lending. The Bank's portfolio of consumer loans primarily consists of
adjustable rate, personal lines of credit and installment loans secured by new
or used automobiles, new or used boats, and loans secured by deposit accounts.
Unsecured consumer loans are made with a maximum term of three years and a
maximum loan amount based on a borrower's financial condition. At December 31,
1999, consumer loans totaled $2.6 million or 3.09% to total loans outstanding.
Consumer loans are generally originated in the Bank's primary market area.
Credit Risk Management
The Bank's allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. The allowance for loan losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and estimable based on information
currently known to management. The Bank estimates a range of acceptable
allowance for credit loss based upon loan risk ratings, prior periods'
chargeoffs and specific loss reserves. This methodology is appropriate as the
Bank has ten years of loan loss history.
20
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
has a sufficient number of loans for broader base estimation processes to be
meaningful and has a risk rating review system established for the purpose of
maintaining accurate risk ratings on loans. Management believes this approach
effectively measures the associated risk with any particular loan or group of
loans. Management also considers other factors including current economic
conditions, actual loss experience and industry trends. Management has also
instituted a policy to engage an independent loan review consultant to evaluate
the adequacy of the Bank's allowance for loan losses. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for estimated loan losses based
upon judgments different from those of management. As of December 31, 1999, the
Bank's allowance for loan losses was $1.5 million or 1.79% of total loans and
98.98% of non-performing loans as compared to $1.2 million, or 1.32% of total
loans and 229.02% of non-performing loans as of December 31, 1998. The Bank had
total non-performing loans of $1,499,000 and $506,000 at December 31, 1999 and
December 31, 1998, respectively, and non-performing loans to total loans of
1.81% and 0.57%, at December 31, 1999, and December 31, 1998, respectively.
The Bank places loans on a nonaccrual status after 90 days of not having
received contractual principal or interest paymentsunless the loan is in the
process of collection. In addition the Bank maintains a watch list of loans on a
monthly basis that warrant more than the normal level of management supervision.
At December 31, 1999 the Bank had approximately $4.4 million in watch list
loans.
The Bank continues to monitor and modify its allowances for loan losses as
conditions dictate. While management believes that, based on information
currently available, the Bank's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurances can be given
that the Bank's level of allowance for loan losses will be sufficient to cover
future loan losses incurred by the Bank or that future adjustments to the
allowance for loan losses will not be necessary if economic and other conditions
differ substantially from the economic and other conditions at the time
management determined the current level of the allowance for loan losses.
Management may in the future increase its level of loan loss allowances as a
percentage of total loans and non-performing loans as its loan portfolio
increases or as circumstances dictate.
Analysis of Credit Risk
Activity in the allowance for loan losses for the preceding three years ended
December 31 is shown below:
At December 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total loans outstanding $82,681 $88,083 $72,162
Average loans outstanding $87,126 $77,245 $72,385
Allowance for loan losses at beginning of period $ 1,159 $ 1,177 $ 765
Provision charged to expense 432 300 748
------- ------- -------
Chargeoffs:
Commercial loans 202 354 362
Consumer and other loans 8 9 6
------- ------- -------
Total 210 363 368
Recoveries:
Residential/commercial real estate loans 31 24 9
Commercial loans 71 21 21
Consumer and other loans -- -- 2
------- ------- -------
Total 102 45 32
----- ------- ------- -------
Net chargeoffs 108 318 336
Allowance for loan losses at end of period $ 1,483 $ 1,159 $ 1,177
------- ------- -------
Allowance for loan losses as a percent of total loans 1.79% 1.31% 1.63%
------- ------- -------
Net chargeoffs as a percent of average loans 0.12% 0.41% 0.46%
------- ------- -------
</TABLE>
21
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
Capital Management
During 1999, Stockholders' Equity increased $637,000 or 5.26% to $12.7 million
from $12.1 million at December 31, 1998. The increase was primarily due to net
income of $690,000. Additionally, the Company's common shares outstanding
increased by 10,000 to 2,323,506 at December 31, 1999, from 2,313,506 at
December 31, 1998, due to exercising 10,000 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 1999, 58,000 shares of common stock were granted under the plan, 30,100
shares were forfeited and 10,000 were exercised. At December 31, 1999, the
company had 86,500 shares granted and outstanding.
See Note 11 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 4% Tier 1 capital to total adjusted assets ratio for the most
highly rated banks (at least 100 to 200 basis points more for other national
banks) (the "leverage" ratio) and an 8% risk-based capital ratio. Tier 1 capital
is defined as common stockholders' equity (including retained earnings), certain
non-cumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights and credit card relationships.
The risk-based capital standard requires the maintenance of Tier 1 and total
capital (which is defined as Tier 1 capital plus Tier 2 capital) to risk-
weighted assets of at least 4% and 8%, respectively. In determining the amount
of risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OCC
capital regulation based on the risks the agency believes are inherent in the
type of asset. The regulators have recently added a market risk adjustment to
cover a bank's trading account, foreign exchange and commodity positions. The
components of Tier 1 capital are equivalent to those discussed above. Tier 2
capital may include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital included
as part of total capital cannot exceed 100% of Tier 1 capital.
At December 31, 1999, the Bank's Tier 1 and total risk-based capital ratio were
13.70% and 15.00% respectively. The Bank was considered well capitalized for
regulatory purposes. See Note 16 of the Consolidated Financial Statements for
more information on the Bank's risk-based capital ratios.
Regulation and Supervision
The Company, by virtue of its control of the Bank, is a registered bank holding
company as amended under the Bank Holding Company Act of 1956 ("the Act"). As a
bank holding company, the Company is required to file certain reports with, and
otherwise comply with the rules and regulations of, the Federal Reserve Board
("FRB") under the Act.
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
22
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
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.
On November 12, 1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999
became law. The Modernization Act contains new financial privacy provisions will
generally prohibit financial institutions, including the Company, from
disclosing nonpublic personal financial information to third parties unless
customers have the opportunity to "opt out" of the disclosure. The
Modernization Act also allows, among other things, for bank holding companies
meeting certain management, capital and CRA standards to engage in a
substantially broader range of nonbanking activities than were previously
permissible, including insurance underwriting and making merchant banking
investments in commercial and financial companies. The Modernization Act
further allows insurers and other financial services companies to acquire banks;
removes various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
Because the Modernization Act permits banks, securities firms and insurers to
combine and to offer a wide variety of financial products and services, many of
these resulting companies will be larger and have more resources than the
Company. Should these companies choose to compete directly with the Company in
its target markets, the Company's results of operations could be adversely
impacted.
Market Value and Dividend Information
The Company's Common stock is listed on "The NASDAQ Stock Market(R) SmallCap
Market" under the symbol "ANNB". The Company's stock began trading on October 1,
1997. The Company has traded an average daily volume of 3,258 shares during
1999. At December 31, 1999 the closing price was $4.06 per share.
The Company's high and low stock price during the last quarter of 1999 was $4.88
and $4.00, respectively.
As of March 24, 2000 the Company has outstanding 2,323,506 shares of common
stock and no preferred stock issued or outstanding. The Company paid dividends
for the first time to its stockholders during 1999. Annual Dividends paid to
the stockholders equaled $0.04 per share.
23
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
[ROWLES & COMPANY, LLP 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, 1999, 1998 and 1997,
and the related consolidated 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.
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, 1999, 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
-------------------------
Salisbury, Maryland
January 28, 2000
24
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Consolidated Balance Sheets
December 31,
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Assets
Cash and due from banks $ 5,665,014 $ 3,845,793 $ 5,611,407
Federal funds sold and other overnight investments 11,432,282 10,284,419 20,743,973
Investment securities available for sale 23,768,975 15,190,949 16,565,290
Investment securities held to maturity (market value of
$3,891,830) -- -- 3,975,296
Loans, less allowance for credit losses of $1,482,704,
$1,158,863 and $1,177,437 81,198,152 86,924,416 70,985,232
Premises and equipment 2,741,376 2,678,786 1,238,887
Core deposit premium and other intangibles 43,263 129,789 216,315
Accrued interest receivable 821,662 590,159 515,549
Other real estate owned 57,143 90,539 42,637
Deferred income taxes 341,306 319,863 765,868
Other assets 664,187 402,202 166,848
------------ ------------ ------------
Total assets $126,733,360 $120,456,915 $120,827,302
------------ ------------ ------------
Liabilities and Stockholders' Equity
Deposits $105,093,606 $100,742,243 $ 96,061,762
Securities sold under agreements to repurchase 8,497,067 7,173,980 13,305,780
Accrued interest payable and other liabilities 415,198 449,726 372,446
------------ ------------ ------------
Total liabilities 114,005,871 108,365,949 109,739,988
------------ ------------ ------------
Stockholders' Equity
Common stock, par value $0.01 per share; authorized
10,000,000 shares; issued and outstanding 2,323,506
shares in 1999, 2,313,506 shares in 1998, and
2,312,306 shares in 1997 23,235 23,135 23,123
Capital surplus 13,192,408 13,142,508 13,135,320
Retained earnings (deficit) (454,311) (1,075,000) (2,077,844)
------------ ------------ ------------
12,761,332 12,090,643 11,080,599
------------ ------------ ------------
Accumulated other comprehensive income (33,843) 323 6,715
------------ ------------
Total stockholders' equity 12,727,489 12,090,966 11,087,314
------------ ------------ ------------
Total liabilities and stockholders' equity $126,733,360 $120,456,915 $120,827,302
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Interest Income
Loans, including fees $8,059,766 $7,655,050 $7,447,970
Federal funds sold and securities purchased under
agreements to resell 461,909 1,194,758 776,452
U.S. Treasury securities and obligations of other
U.S. Government agencies 1,090,646 963,154 937,019
---------- ---------- ----------
Total interest income 9,612,321 9,812,962 9,161,441
---------- ---------- ----------
Interest Expense
Certificates of deposit, $100,000 or more 324,182 300,714 283,053
Other deposits 2,810,234 3,220,267 2,973,123
Securities sold under agreements to repurchase 322,996 368,609 314,943
Interest on borrowed funds 17,352 -- 59,574
---------- ---------- ----------
Total interest expense 3,474,764 3,889,590 3,630,693
---------- ---------- ----------
Net interest income 6,137,557 5,923,372 5,530,748
Provision for Credit Losses 431,879 300,000 747,908
- ---------------------------------------------------------- ---------- ---------- ----------
Net interest income after provision for credit losses 5,705,678 5,623,372 4,782,840
---------- ---------- ----------
Noninterest Income
Gain (loss) on sale of loans, securities, equipment,
intangibles, and other real estate (24,966) 122,534 17,000
Service charges and other 844,756 744,770 745,064
---------- ---------- ----------
Total noninterest income 819,790 867,304 762,064
---------- ---------- ----------
Noninterest Expense
Personnel 2,505,786 2,481,507 2,111,176
Occupancy and equipment 919,466 814,625 834,943
Data Processing 697,293 487,761 434,211
Marketing and advertising 194,221 174,727 88,142
Other operating 1,055,497 920,757 865,187
Restructuring -- -- 795,570
Amortization of intangible assets acquired 86,526 86,526 100,805
---------- ---------- ----------
Total noninterest expense 5,458,789 4,965,903 5,230,034
---------- ---------- ----------
Income before income taxes 1,066,679 1,524,773 314,870
Income tax expense (benefit) 376,384 521,929 (769,327)
---------- ---------- ----------
Net income $ 690,295 $1,002,844 $1,084,197
---------- ---------- ----------
Basic earnings per share $ 0.30 $ 0.43 $ 0.64
---------- ---------- ----------
Diluted earnings per share $ 0.30 $ 0.43 $ 0.63
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK
------------ UNDIVIDED
SHARES PAR VALUE SURPLUS PROFITS
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 1,478,972 $ 14,789 $ 8,633,560 $(3,162,041)
Net income -- -- -- 1,084,197
Sale of stock, net of costs 833,334 8,334 4,501,760 --
Unrealized gain (loss) on
investment securities available
for sale net of income taxes -- -- -- --
--------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1997 2,312,306 23,123 13,135,320 (2,077,844)
Net income -- -- -- 1,002,844
Stock options exercised 1,200 12 7,188 --
Unrealized gain (loss) on
investment securities available
for sale net of income taxes -- -- -- --
--------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1998 2,313,506 23,135 13,142,508 (1,075,000)
Net income -- -- -- 690,295
Stock options exercised 10,000 100 49,900 --
Dividends paid -- -- -- (69,606)
Unrealized gain (loss) on
investment securities available
for sale net of income taxes -- -- -- --
--------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1999 2,323,506 $ 23,235 $13,192,408 $ (454,311)
- -------------------------- --------- -------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
INCOME EQUITY INCOME
------ ------ ------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $(15,539) $ 5,470,769
Net income -- 1,084,197 $ 1,084,197
Sale of stock, net of costs -- 4,510,094
Unrealized gain (loss) on
investment securities available
for sale net of income taxes 22,254 22,254 22,254
-------- ----------- -----------
BALANCE, DECEMBER 31, 1997 6,715 11,087,314 1,106,451
Net income -- 1,002,844 1,002,844
Stock options exercised -- 7,200
Unrealized gain (loss) on
investment securities available
for sale net of income taxes (6,392) (6,392) (6,392)
-------- ----------- -----------
BALANCE, DECEMBER 31, 1998 323 12,090,966 996,452
Net income -- 690,295 690,295
Stock options exercised -- 50,000
Dividends paid -- (69,606)
Unrealized gain (loss) on
investment securities available
for sale net of income taxes (34,166) (34,166) (34,166)
-------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $(33,843) $12,727,489 $ 656,129
-------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 690,295 $ 1,002,844 $ 1,084,197
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 308,367 196,580 197,955
Provision for credit losses 431,879 300,000 747,908
Deferred income taxes (152,895) 449,297 (769,327)
Amortization of premiums and accretion of discounts, net (507,926) (257,550) (453,932)
Amortization of intangible assets 86,526 102,770 571,986
Loss on sales of loans, securities,
equipment, and other real estate owned 24,966 2,466 43,826
Decrease (increase) in
Accrued interest receivable (231,503) (74,610) (78,827)
Other assets (30,920) (210,053) 71,461
Increase (decrease) in
Accrued interest payable (6,169) (7,539) (155,441)
Accrued income taxes, net of taxes refundable (272) (22,402) (7,487)
Deferred loan origination fees (77,462) 32,754 (65,463)
Other liabilities (33,398) 84,819 70,829
------------ ------------ ------------
Net cash provided from operations 501,488 1,599,376 1,257,685
------------ ------------ ------------
Cash Flows from Investing Activities
Proceeds from maturities of securities held to maturity -- 4,000,000 --
Purchase of securities held to maturity -- -- (1,890,901)
Proceeds from sales and maturities of securities
available for sale 84,897,446 62,954,062 52,960,000
Purchase of securities available for sale (93,031,822) (61,356,247) (57,802,932)
Net decrease (increase) in federal funds (1,147,863) 10,459,554 (16,365,243)
Loans made, net of principal collected 5,371,847 (16,319,840) (2,867,280)
Purchases of and deposits on premises, equipment,
and software (464,615) (1,671,512) (206,121)
Proceeds from sale of equipment 4,500 13,112 17,000
Acquisition of other real estate owned -- -- (11,325)
Proceeds from sale of other real estate owned 33,396 -- 108,688
Net decrease in securities purchased under
agreements to resell -- -- 4,750,000
------------ ------------ ------------
Net cash used by investing activities $ (4,337,111) $ (1,920,871) $(21,308,114)
------------ ------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in
Time deposits $ 7,989,162 $ (4,108,419) $ 13,052,660
Other deposits (3,637,799) 8,788,900 (4,096,893)
Securities sold under agreements to repurchase 1,323,087 (6,131,800) 6,960,821
Repayment of long-term debt principal -- -- (848,400)
Payment of Dividends (69,606) -- --
Proceeds from sale of stock and options exercised 50,000 7,200 4,510,094
------------ ------------ ------------
Net cash provided by financing activities 5,654,844 (1,444,119) 19,578,282
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,819,221 (1,765,614) (472,147)
Cash and cash equivalents at beginning of year 3,845,793 5,611,407 6,083,554
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,665,014 $ 3,845,793 $ 5,611,407
------------ ------------ ------------
Supplemental Cash Flow Information
Interest paid, including interest credited to accounts $ 3,480,934 $ 3,897,129 $ 3,786,134
Income taxes paid 566,351 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, 1999
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.
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.
Premises and equipment
Premises and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed over the estimated
useful lives using the straight-line method. Leasehold improvements are
amortized over the terms of the leases or the estimated useful lives of the
improvements, whichever is shorter.
Loans 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
29
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes To Consolidated Financial Statements, continued
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.
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.
Dilutive common equivalent shares consist of stock options, calculated using
the treasury stock method.
2. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
- ----------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale
U.S. Government agency $23,102,994 $20,325 $75,444 $23,047,875
Federal Home Loan Bank stock 360,400 -- -- 360,400
Federal Reserve Bank stock 360,700 -- -- 360,700
----------- ---------- ------- -----------
$23,824,094 $20,325 $75,444 $23,768,975
----------- ---------- ------- -----------
</TABLE>
DECEMBER 31, 1998
- -----------------
Available for sale
30
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
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
----------- ---------- ------- -----------
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
----------- ---------- --------- -----------
</TABLE>
Proceeds from sale of securities during 1999 were $1,856,696 with a realized
loss of $8,771 as compared to 1998 with proceeds of $2,484,062 and realized
gains of $312 on those sales. The unrealized gains and losses on investment
securities included in comprehensive income are reported net of these realized
gains.
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, 1999 VALUE COST VALUE COST
- ----------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Due within one year $ -- $ -- $12,327,427 $12,345,315
Due after one through five years -- -- 10,775,567 10,702,560
Mortgage-backed securities -- -- -- --
Equity securities -- -- 721,100 721,100
---------- ---------- ----------- -----------
$ -- $ -- $23,824,094 $23,768,975
---------- ---------- ----------- -----------
DECEMBER 31, 1998
- -----------------
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
---------- ---------- ----------- -----------
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
---------- ---------- ----------- -----------
</TABLE>
Securities were sold to commercial customers of the Bank under agreements for
the Bank to repurchase the securities as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cost at December 31 $ 8,507,651 $14,491,259 $13,459,429
Fair value at December 31 8,492,944 14,491,749 13,508,000
Repurchase price 8,497,067 7,173,980 13,305,780
Average balance during the year 9,969,548 11,330,409 10,570,086
Average interest rate during the year 3.24% 3.25% 2.98%
Maximum month-end balance $13,026,580 $14,846,219 $14,666,790
----------- ----------- -----------
</TABLE>
31
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
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.
The Bank normally carries balances with other banks that exceed the
federally insured limit. The average balance carried in excess of the limit,
including federal funds sold to the same bank, was approximately $3,055,497.
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Real estate
Commercial $38,461,203 $38,000,834 $20,447,677
Residential 22,614,877 21,086,312 18,816,566
Commercial 19,261,184 26,895,218 30,860,360
Consumer 2,565,432 2,400,217 2,304,614
----------- ----------- -----------
82,902,696 88,382,581 72,429,217
----------- ----------- -----------
Less
Deferred loan origination fees 221,840 299,302 266,548
Allowance for loan losses 1,482,704 1,158,863 1,177,437
----------- ----------- -----------
1,704,544 1,458,165 1,443,985
----------- ----------- -----------
Loans, net $81,198,152 $86,924,416 $70,985,232
----------- ----------- -----------
</TABLE>
The maturity and rate repricing distribution of the loan portfolio is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Repricing or maturing within one year $52,114,600 $63,899,468 $55,913,146
Maturing over one to five years 23,406,247 19,357,456 14,618,447
Maturing over five years 7,381,849 5,125,657 1,897,624
----------- ----------- -----------
$82,902,696 88,382,581 $72,429,217
----------- ----------- -----------
Transactions in the allowance for credit losses were as follows:
1999 1998 1997
----------- ----------- -----------
Balance, beginning of year $ 1,158,863 $ 1,177,437 $ 765,000
Provisions charged to operations 431,879 300,000 747,908
Recoveries 101,641 44,853 32,943
----------- ----------- -----------
1,692,383 1,522,290 1,545,851
Charge-offs 209,679 363,427 368,414
----------- ----------- -----------
Balance, end of year $ 1,482,704 $ 1,158,863 $ 1,177,437
----------- ----------- -----------
</TABLE>
The balance of nonaccrual and impaired loans is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total guaranteed by the Small Business
Administration $ 718,499 $ 101,089 $ 531,722
Other nonaccrual loans 780,961 404,487 245,954
----------- ----------- -----------
Total nonaccrual loans 1,499,460 505,576 777,676
Average impaired loans 1,690,411 1,109,333 1,271,093
Related allowance for credit losses 271,249 179,217 171,923
Interest collected 195,483 18,439 98,000
Balance of accrued interest not recorded 118,937 52,747 73,864
----------- ----------- -----------
</TABLE>
32
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
Loans which were 90 days or more past due, including nonaccrual loans,
amounted to $72,615, $717,169, and $371,000 at December 31, 1999, 1998, and
1997, 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 2,752,733 $ 2,229,589 $ 3,071,471
Advances 243,259 1,099,920 1,058,813
Repayments (172,300) (576,776) (240,899)
Change in officers and directors -- -- (1,659,796)
----------- ----------- -----------
Ending balance $ 2,823,692 $ 2,752,733 $ 2,229,589
----------- ----------- -----------
</TABLE>
5. CREDIT COMMITMENTS
Outstanding loan commitments, unused lines of credit, and letters of credit
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Loan commitments
Construction $13,764,407 $ 4,220,628 $ 4,319,479
Other 9,739,410 14,284,008 10,799,497
----------- ----------- -----------
$23,503,817 $18,504,636 $15,118,976
----------- ----------- -----------
Letters of credit
Deposit secured $ 329,670 $ 591,862 $ 591,711
Other 1,275,908 570,366 472,979
----------- ----------- -----------
$ 1,605,578 $ 1,162,228 $ 1,064,690
----------- ----------- -----------
</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.
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 1999, 1998, and
1997.
33
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
7. PREMISES AND EQUIPMENT
A summary of premises and equipment and the related depreciation is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Land and construction projects $1,517,045 $1,399,862 $ --
Leasehold improvements 658,175 658,175 658,175
Furniture, fixtures, and equipment 1,519,545 1,306,962 1,077,546
---------- ---------- ----------
3,694,765 3,364,999 1,735,721
Accumulated depreciation 953,389 686,213 496,834
---------- ---------- ----------
Net premises and equipment $2,741,376 $2,678,786 $1,238,887
---------- ---------- ----------
Depreciation and amortization expense $ 303,367 $ 196,580 $ 197,955
---------- ---------- ----------
</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
$178,000.
8. LEASE COMMITMENTS
The Company leases facilities under the following terms:
<TABLE>
<CAPTION>
CURRENT ANNUAL
RENTAL EXPIRATION DATE RENEWAL OPTIONS
-------- --------------- ---------------
<S> <C> <C> <C>
Bestgate Branch $129,946 January, 2001 None
Cape St. Claire Branch 16,713 February, 2000 3 terms of 5 years
Edgewater Branch 40,000 February, 2006 2 terms of 10 years
Kent Island Branch 32,406 August, 2001 1 term of 3 years, 2 terms of 5 years
Severna Park Branch 40,354 August, 2006 2 terms of 10 years
Administrative offices, Annapolis 133,722 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. The Company
exercised its option to terminate the lease on the administration office by
paying a one-time fee of $36,000. All renewal options are exercisable at
increased rates.
Lease obligations will require rent payments as follows:
<TABLE>
<CAPTION>
PERIOD MINIMUM RENTALS
------ ---------------
<S> <C>
2000 $387,975
2001 119,073
2002 85,354
2003 85,354
2004 85,354
Remaining years 118,129
--------
Total $881,239
--------
</TABLE>
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 $461,659, $454,411, and $463,900 for 1999, 1998, and 1997,
respectively.
In January, 1999, the Company negotiated a two-year extension on its
Bestgate Branch location. 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.
34
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
9. DEPOSITS
Major classifications of deposits are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Demand, noninterest bearing $ 13,320,678 $ 11,304,382 $10,330,153
NOW accounts 20,750,063 21,050,434 19,272,587
Savings and money market accounts 25,413,357 30,767,081 24,730,257
Time deposits, $100,000 and over 6,794,832 7,229,126 5,897,484
Other time 38,814,676 30,391,220 35,831,281
------------ ------------ -----------
$105,093,606 $100,742,243 $96,061,762
------------ ------------ -----------
</TABLE>
Time deposits mature as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Three months or less $ 8,289,073 $12,516,492 $10,308,033
Four months to one year 29,865,401 21,180,825 28,127,664
Over one year 7,455,034 3,923,029 3,293,068
----------- ----------- -----------
$45,609,508 $37,620,346 $41,728,765
----------- ----------- -----------
</TABLE>
At December 31, 1999, 1998, and 1997, time deposits with maturities in
excess of five years totaled $109,210, $104,151, and $127,064.
10. 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 $35,116 in 1999, $24,612 in 1998, and $25,874 in 1997.
11. 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:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ----------
<S> <C> <C> <C>
Outstanding, beginning of year 68,600 57,500 --
Granted 58,000 24,600 64,000
Exercised (10,000) (1,200) --
Forfeited (30,100) (12,300) (6,500)
------- ------
Outstanding, end of year 86,500 68,600 57,500
-------- ------- ------
</TABLE>
These options expire as follows:
<TABLE>
<CAPTION>
OPTIONS
-------
EXERCISE
PRICE VESTED NONVESTED
----- ------- ---------
<S> <C> <C> <C>
October, 2000 $ 4.94 20,000 --
July, 2007 $ 6.00 4,200 6,300
September, 2007 $ 6.00 400 600
November, 2007 $ 9.88 1,600 2,400
December, 2007 $ 9.75 2,000 4,000
January, 2008 $ 10.63 200 800
February, 2008 $ 11.00 500 2,000
June, 2008 $ 10.63 400 1,600
September, 2008 $ 7.82 200 800
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C> <C>
October, 2008 $ 7.75 500 2,000
September, 2009 $ 4.94 -- 1,000
October, 2009 $ 4.94 -- 10,000
October, 2009 $ 4.88 -- 7,500
October, 2009 $ 4.78 -- 7,500
December, 2009 $ 5.46 -- 7,000
December, 2009 $ 4.56 -- 3,000
-------- ------- ------
Total 30,000 56,500
------- ------
</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.
The weighted average fair value of options granted during 1999, 1998, and
1997 has been estimated using the Black-Scholes option-pricing model with the
following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 6.13% 4.50% 5.75%
Expected volatility 22.00% 30.00% 10.00%
Expected life in years 6 10 10
----- ----- -----
</TABLE>
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income
As reported $690,295 $1,002,844 $1,084,197
Pro forma $670,719 $ 946,667 $ 975,489
Basic earnings per share
As reported $ 0.30 $ 0.43 $ 0.64
Pro forma $ 0.29 $ 0.41 $ 0.58
Diluted earnings per share
As reported $ 0.30 $ 0.43 $ 0.63
Pro forma $ 0.29 $ 0.41 $ 0.57
---------- ----------
</TABLE>
12. LINES OF CREDIT
The Bank is a member of the Federal Home Loan Bank system and may borrow up
to $12,673,000. 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 $7,250,000.
13. 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.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In Thousands except Per Share Amounts)
THREE MONTHS ENDED
- ------------------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ -------------- -------- ----------
<S> <C> <C> <C> <C>
1999
Interest revenue $2,392 $ 2,481 $ 2,407 $ 2,332
Interest expense 881 932 873 789
Net interest income 1,511 1,549 1,534 1,543
Provision for loan losses -- -- 27 405
Net income 185 227 218 60
Comprehensive income 175 224 215 42
Earnings per share-basic 0.08 0.10 0.09 0.03
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Earnings per share-diluted 0.08 0.10 0.09 0.03
--------- --------- -------- ---------
1998
Interest revenue $2,434 $ 2,497 $ 2,473 $ 2,409
Interest expense 909 989 1,006 986
Net interest income 1,525 1,508 1,467 1,423
Provision for loan losses 75 75 75 75
Net income 204 245 300 254
Comprehensive income 189 274 285 248
Earnings per share-basic 0.08 0.11 0.13 0.11
Earnings per share-diluted 0.08 0.11 0.13 0.11
------ --------- -------- ---------
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>
15. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current
Federal $ 492,441 $ 72,632 $ --
State 36,838 -- --
--------- -------- ---------
529,279 72,632 --
--------- -------- ---------
Deferred (152,895) 449,297 (769,327)
--------- -------- ---------
$ 376,384 $521,929 $(769,327)
--------- -------- ---------
</TABLE>
The components of the deferred taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- -- -----
<S> <C> <C> <C>
Recognition of the benefit of the net
operating loss carryover $ 4,726 $ 467,202 $ 449,614
Provision for credit losses (141,539) 34,367 (101,996)
Revenues taxed not earned 6,330 (23,787) (9,770)
Expenses deducted, incurred in prior years -- -- 65,000
Depreciation expense 7,007 934 34,878
Amortization and write down of intangible assets (29,419) (29,419) (84,053)
Elimination of the valuation allowance -- -- (1,123,000)
---------- ---------- -----------
Deferred tax benefit $ (152,895) $ 449,297 $ (769,327)
---------- ---------- -----------
</TABLE>
The components of the net deferred tax assets are as follows:
[CAPTION]
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets
Allowance for credit losses $ 394,168 $ 252,629 $ 286,996
Revenue taxed not earned 118,227 124,557 100,770
Net operating loss and alternative minimum
tax credit carryforward 20,458 25,184 492,386
Unrealized loss on securities available for sale 21,276 -- --
---------- ---------- -----------
Total deferred tax assets 554,129 402,370 880,152
---------- ---------- -----------
Deferred tax liabilities
Depreciation 45,219 38,212 37,278
Intangible assets 14,709 44,128 73,547
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C> <C>
Unrealized gain on securities available for sale -- 167 3,459
---------- ---------- -----------
Total deferred tax liabilities 59,928 82,507 114,284
---------- ---------- -----------
Valuation allowance -- -- $(1,123,000)
---------- ---------- -----------
Net deferred tax asset $ 494,201 $ 319,863 $ 765,868
---------- ---------- -----------
</TABLE>
The differences between federal income taxes and the amount reported by the
Company follow:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income before income taxes $1,066,679 $1,524,773 $ 314,870
---------- ---------- -----------
Taxes computed at the federal income tax rate 362,671 518,423 107,056
Increases (decreases) resulting from
State income taxes, net of federal benefit 4,151 -- 14,547
Nondeductible expenses 2,040 3,506 1,720
Net operating loss carryforward 7,522 -- (892,650)
---------- ---------- -----------
Income tax expense $ 376,384 $ 521,929 $ (769,327)
---------- ---------- -----------
</TABLE>
16. 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, 1999, 1998, and 1997, are as follows:
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
ACTUAL CAPITAL ADEQUACY CAPITALIZED
------ ---------------- -----------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
- -----------------
Total capital
(to risk-weighted assets) $13,486,864 15.0% $7,208,231 8.0% $9,010,289 10.0%
Tier 1 capital
(to risk-weighted assets) $12,356,712 13.7% $3,604,115 4.0% $5,406,173 6.0%
Tier 1 capital
(to average assets) $12,356,712 9.8% $5,034,788 4.0% $6,293,485 5.0%
DECEMBER 31, 1998
- -----------------
Total capital
(to risk-weighted assets) $12,176,375 14.0% $7,272,681 8.0% $9,090,851 10.0%
Tier 1 capital
(to risk-weighted assets) $11,579,741 12.7% $3,636,341 4.0% $5,454,511 6.0%
Tier 1 capital
(to average assets) $11,579,741 9.5% $4,852,527 4.0% $6,065,658 5.0%
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%
</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.
38
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
17. 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.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
CARRYING FAIR CARRYING FAIR CARRYING FAIR
DECEMBER 31, AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------ ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 5,665,014 $ 5,665,014 $ 3,845,793 $ 3,845,793 $ 5,611,407 $ 5,611,407
Federal funds sold 11,432,282 11,432,282 10,284,419 10,284,419 20,743,973 20,743,973
Investment securities (total) 23,768,975 23,768,975 15,190,459 15,190,459 20,540,586 20,457,120
Loans, net 81,198,156 81,001,205 86,924,416 86,992,223 70,985,232 70,793,572
Accrued interest receivable 821,662 821,662 590,159 590,159 515,549 515,549
Financial liabilities
Noninterest-bearing deposits $13,320,678 $13,320,678 $11,304,382 $11,304,382 $10,330,153 $10,330,153
Interest-bearing deposits 91,772,928 92,190,948 89,437,861 89,766,553 85,731,609 85,869,314
Securities sold under agreements
to repurchase 8,497,067 8,497,067 7,173,980 7,173,980 13,305,780 13,305,780
Accrued interest payable 22,406 22,406 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. 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.
18. EARNINGS PER SHARE
A summary of shares outstanding for basic and fully diluted earnings per
share is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average shares outstanding, basic 2,319,588 2,312,422 1,691,301
Common stock equivalents -- 6,731 16,865
--------- --------- ---------
Average common shares and equivalents, full diluted 2,319,588 2,319,153 1,708,166
--------- --------- ---------
Stock options outstanding that were antidilutive
at December 31 86,500 35,100 6,500
--------- --------- ---------
</TABLE>
39
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued
19. PARENT COMPANY FINANCIAL INFORMATION
The balance sheet and statements of income and cash flows for Annapolis
National Bancorp, Inc. (Parent Company only) follow:
<TABLE>
<CAPTION>
Balance Sheets
DECEMBER 31, 1999 1998 1997
- ------------ ---- ---- ----
<S> <C> <C> <C>
Assets
Cash and due from banks $ 361,407 $ 7,391 $ 191
Investment in Annapolis National Bank 12,366,082 11,709,853 10,713,401
Deferred income taxes and other assets -- 373,722 373,722
----------- ----------- -----------
Total assets $12,727,489 $12,090,966 $11,087,314
----------- ----------- -----------
Liabilities and Stockholders' Equity
Stockholders' equity
Common stock 23,235 23,135 23,123
Capital surplus 13,192,408 13,142,508 13,135,320
Retained earnings (deficit) (454,311) (1,075,000) (2,077,844)
Accumulated other comprehensive income (33,843) 323 6,715
----------- ----------- -----------
Total stockholders' equity 12,727,489 12,090,966 11,087,314
----------- ----------- -----------
Total liabilities and stockholders' equity $12,727,489 $12,090,966 $11,087,314
----------- ----------- -----------
<CAPTION>
Statements of Income
YEARS ENDED DECEMBER 31, 1999 1998 1997
------------------------ ----------- ----------- -----------
Interest revenue $ -- $ -- $ 8,257
Interest expense -- -- 59,575
---------------- ----------- ----------- -----------
Net interest income (expense) -- -- (51,318)
----------------------------- ----------- ----------- -----------
Equity in undistributed income of subsidiary 690,395 1,002,844 761,893
Expenses
Other operating 100 -- 100
--------------- ----------- ----------- -----------
Income before income taxes 690,295 1,002,844 710,475
Income taxes -- -- (373,722)
------------ ----------- ----------- -----------
Net income $ 690,295 $ 1,002,844 $ 1,084,197
---------- ----------- ----------- -----------
<CAPTION>
Statements of Cash Flows
YEARS ENDED DECEMBER 31, 1999 1998 1997
------------------------ ----------- ----------- -----------
Cash flows from operating activities
Interest received $ -- $ -- $ 8,257
Interest paid -- -- (214,836)
Tax benefit received 373,722 -- --
Cash paid for operating expenses (100) -- (100)
----------- ----------- -----------
373,622 -- (206,679)
----------- ----------- -----------
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
Dividends paid (69,606) -- --
Proceeds from stock options exercised 50,000 7,200 --
Repayment of stockholder loan -- -- (848,400)
----------- ----------- -----------
(19,606) 7,200 3,661,694
----------- ----------- -----------
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net (decrease) in cash 354,016 7,200 (20,574)
Cash and equivalents at beginning of year 7,391 191 20,765
----------- ----------- -----------
Cash and equivalents at end of year $ 361,407 $ 7,391 $ 191
----------- ----------- -----------
Reconciliation of net income to net cash provided by operating activities
Net income $ 690,295 $ 1,002,844 $ 1,084,197
Adjustments to reconcile net income to net
cash used in operating activities
Undistributed net income of subsidiary (690,395) (1,002,844) (761,893)
Increase in deferred tax assets 373,722 -- (373,722)
Increase (decrease) in accrued interest expense -- -- (155,261)
----------- ----------- -----------
$ 373,622 $ -- (206,679)
----------- ----------- -----------
</TABLE>
20. REGULATORY MATTERS
The Bank has entered into a formal agreement with the Office of the
Comptroller of the Currency ("OCC") whereby the Bank is required to improve the
Bank's management and policies and procedures. This agreement in no way
restricts or impedes the Bank's ability to conduct normal banking and business
transactions. The Bank is committed to complying with the provisions of the
agreement.
41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,665,014
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,432,282
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,768,975
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 81,198,152
<ALLOWANCE> 1,482,704
<TOTAL-ASSETS> 126,733,360
<DEPOSITS> 105,093,606
<SHORT-TERM> 8,497,067
<LIABILITIES-OTHER> 415,198
<LONG-TERM> 0
0
0
<COMMON> 23,235
<OTHER-SE> 12,704,254
<TOTAL-LIABILITIES-AND-EQUITY> 126,733,360
<INTEREST-LOAN> 8,059,766
<INTEREST-INVEST> 1,090,646
<INTEREST-OTHER> 461,909
<INTEREST-TOTAL> 9,612,321
<INTEREST-DEPOSIT> 3,134,416
<INTEREST-EXPENSE> 3,474,764
<INTEREST-INCOME-NET> 6,137,557
<LOAN-LOSSES> 431,879
<SECURITIES-GAINS> (8,771)
<EXPENSE-OTHER> 5,458,789
<INCOME-PRETAX> 1,066,679
<INCOME-PRE-EXTRAORDINARY> 1,066,679
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 690,295
<EPS-BASIC> $0.30
<EPS-DILUTED> $0.30
<YIELD-ACTUAL> 8.24
<LOANS-NON> 1,499,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,348,000
<ALLOWANCE-OPEN> 1,158,863
<CHARGE-OFFS> 209,679
<RECOVERIES> 101,641
<ALLOWANCE-CLOSE> 1,482,704
<ALLOWANCE-DOMESTIC> 1,482,704
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,211,455
</TABLE>
