As filed with Securities and Exchange Commission on July 3, 1996
Registration Statement No. 33-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------------
Sandy Spring Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland 6021 52-1532952
(State or Other Jurisdiction (Primary Standard (IRS Employer I.D. Number)
of Incorporation or Organization) Industrial Classification Code Number)
17801 Georgia Avenue
Olney, Maryland 20832
(301) 774-6400
(Address, including ZIP Code and Telephone Number, including Area Code
of Registrant's Principal Executive Offices)
Hunter R. Hollar
President and Chief Executive Officer
Sandy Spring Bancorp, Inc.
17801 Georgia Avenue
Olney, Maryland 20832
(301) 774-6400
(Name, Address, including ZIP Code and Telephone Number,
including Area Code, of Agent for Service)
Copies to:
James I. Lundy, III, Esquire John Bruno, Esquire
Noel M. Gruber, Esquire Muldoon Murphy & Faucette
Kennedy & Baris, L.L.P. 5101 Wisconsin Avenue
4719 Hampden Lane, Suite 300 Washington, DC 20016
Bethesda, MD 20814 (202) 362-0840
(301) 654-6040
This Registration Statement, including exhibits
(see Exhibit Index on page ___), consists of
___ sequentially numbered pages.
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box.______
CALCULATION OF REGISTRATION FEE
===========================================================================================================
TITLE OF EACH PROPOSED PROPOSED
CLASS OF AMOUNT TO BE MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE AGGREGATE REGISTRATION FEE
REGISTERED PER UNIT(1) OFFERING PRICE(1)
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Common Stock, par
value $1.00 per share 556,705 $22.375 $19,902,971 $6,865.00
===========================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(1) under the Securities Act of 1933, as amended,
based upon the average of the bid and asked price for the common stock of
Annapolis Bancshares, Inc., as of June 28, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
CROSS REFERENCE SHEET PURSUANT TO
ITEM 501 OF REGULATION S-K
ITEM OF FORM S-4 LOCATION IN PROSPECTUS
---------------- ----------------------
1. Forepart of Registration Statement and Facing page of Registration Statement; Cross
Outside Front Cover Page of Prospectus Reference Sheet; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages AVAILABLE INFORMATION; DOCUMENTS
of Prospectus INCORPORATED BY REFERENCE
3. Risk Factors, Ratio of Earnings to Fixed SUMMARY INFORMATION; SELECTED
Charges and Other Information CONSOLIDATED FINANCIAL AND OTHER
DATA
4. Terms of the Transaction SUMMARY INFORMATION; THE MERGER;
SANDY SPRING BANCORP, INC. -- Description of
Sandy Spring Capital Stock; COMPARISON OF
SHAREHOLDER RIGHTS AND CERTAIN
PROVISIONS OF THE ARTICLES OF
INCORPORATION OF SANDY SPRING
5. Pro Forma Financial Information UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
6. Material Contacts with the Company Being THE MERGER -- Conditions to the Merger
Acquired
7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties Deemed to
Be Underwriters
8. Interests of Named Experts and Counsel Not Applicable
9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
10. Information with Respect to S-3 Registrants SANDY SPRING BANCORP, INC.
11. Incorporation of Certain Information by DOCUMENTS INCORPORATED BY REFERENCE
Reference
12. Information with Respect to S-2 or S-3 Not Applicable
Registrants
13. Incorporation of Certain Information by Not Applicable
Reference
14. Information with Respect to Registrants Not Applicable
Other Than S-3 or S-2 Registrants
15. Information with Respect to S-3 Companies Not Applicable
16. Information with Respect to S-2 or S-3 Not Applicable
Companies
17. Information with Respect to Companies ANNAPOLIS BANCSHARES, INC.
Other Than S-3 or S-2 Companies
18. Information if Proxies, Consents or SUMMARY INFORMATION; THE MEETING
Authorizations are to Be Solicited
19. Information if Proxies, Consent or Not Applicable
Authorizations Are Not to Be Solicited or in
an Exchange Offer
ANNAPOLIS BANCSHARES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
__________, 1996
TO THE SHAREHOLDERS OF ANNAPOLIS BANCSHARES, INC.:
Notice is hereby given that a Special Meeting of Shareholders (the "Meeting") of
Annapolis Bancshares, Inc., a Maryland corporation, will be held on
____________________, 1996 at ____ _.M. local time, at
__________________________________________________________, Maryland, for the
following purposes:
(1) To consider and vote upon a proposal to approve the merger of
Annapolis Bancshares, Inc., ("ABI") and Sandy Spring Bancorp, Inc., ("Sandy
Spring") pursuant to the Agreement and Plan of Reorganization, dated as of April
16, 1996 (the "Agreement"), a copy of which is attached as Appendix A to the
accompanying Proxy Statement, whereby (i) ABI will be merged with and into Sandy
Spring (the "Merger"); and (ii) each outstanding share of common stock, par
value $1.00 per share of ABI (the "ABI Common Stock") will be automatically
converted into 0.62585 shares of the common stock, par value $1.00 per share, of
Sandy Spring (the "Sandy Spring Common Stock"), subject to adjustment as
described in the Agreement. Cash will be paid in lieu of fractional shares.
(2) To transact such other business as may properly come before the
Meeting or any adjournment or postponement thereof.
The Board of Directors of ABI has fixed the close of business on
__________, 1996 as the record date for determining shareholders entitled to
notice of, and vote at, the Meeting and any adjournments or postponements
thereof.
A combined Proxy Statement and Prospectus is set forth on the following
pages and a proxy card is enclosed herewith. To ensure that your vote is
counted, please complete, sign, date and return the proxy card in the enclosed,
postage-paid return envelope, whether or not you plan to attend the Meeting in
person. If you attend the Meeting, you may revoke your proxy and vote your
shares in person. However, attendance at the Meeting will not of itself
constitute revocation of a proxy. If your shares are not registered in your own
name, you will need additional documentation from your recordholder in order to
vote personally at the Meeting.
The Board of Directors has unanimously approved the Merger and the
Agreement and urges shareholders to vote FOR the Merger at the Meeting.
By Order of the Board of Directors
Michael Weinberg, Secretary
__________, 1996
================================================================================
PLEASE COMPLETE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE
ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
===============================================================================
COMBINED PROXY STATEMENT/PROSPECTUS
Proxy Statement
for
Special Meeting of Shareholders of
ANNAPOLIS BANCSHARES, INC.
To be held on
__________, 1996
Prospectus
Relating to 556,705 Shares of Common Stock, $1.00 par value
of
Sandy Spring Bancorp, Inc.
----------------------------------------
This combined Proxy Statement and Prospectus (the "Proxy Statement") is
being furnished to the holders of the common stock, par value $1.00 per share
(the "ABI Common Stock"), of Annapolis Bancshares, Inc., a Maryland corporation
("ABI"), in connection with the solicitation of proxies by the Board of
Directors of ABI for use at the Special Meeting of Shareholders of ABI (the
"Meeting") to be held on __________, 1996, or at any postponement or adjournment
thereof, and is initially being mailed to holders of ABI Common Stock on or
about __________, 1996.
The purposes of the Meeting are to: (1) consider and vote upon the
proposal to approve the Agreement and Plan of Reorganization (the "Agreement")
by and between ABI and Sandy Spring Bancorp, Inc., a Maryland corporation
("Sandy Spring"), pursuant to which ABI will be merged with and into Sandy
Spring (the "Merger"), and each outstanding share of ABI Common Stock (other
than shares of ABI Common Stock held by Sandy Spring or any of its subsidiaries
other than in a fiduciary capacity, and shares as to which the holders have
validly exercised dissenter's rights under Maryland law ("dissenting shares"))
will be converted into 0.62585 shares of the common stock, par value $1.00 per
share, of Sandy Spring (the "Sandy Spring Common Stock") subject to adjustment
as set forth in the Agreement; and (2) transact such other business as may
properly come before the Meeting or any adjournment or postponement thereof.
Holders of ABI Common Stock will have dissenter's rights under Maryland
law. Such rights will entitle shareholders to receive the "fair value" of their
shares of ABI Common Stock in cash instead of receiving the shares of Sandy
Spring Common Stock into which such shares have been converted in the event the
Merger is approved and consummated. Any right of any ABI shareholder to receive
such payment is contingent upon strict compliance with the requirements set
forth in Title 3, Subtitle 2 of the Maryland General Corporation Law (the
"MGCL"), a copy of which is included as Appendix E hereto. See "The
Merger--Dissenter's Rights."
This Proxy Statement also constitutes the Prospectus relating to the
issuance of up to 556,705 shares of the Sandy Spring Common Stock to holders of
ABI Common Stock, pursuant to the Agreement.
The date of this Proxy Statement is ___________, 1996.
NEITHER THE SECURITIES NOR THE TRANSACTION DESCRIBED HEREIN HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE
OFFICE OF THE COMPTROLLER OF THE CURRENCY OR ANY OTHER FEDERAL
REGULATORY AGENCY, NOR HAS THE COMMISSION, THE OCC, OR ANY SUCH AGENCY
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE FAIRNESS
OR MERITS OF THE TRANSACTION. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE MARYLAND STATE BANK COMMISSIONER OR ANY
OTHER REGULATORY AGENCY OF ANY STATE, NOR HAS THE STATE BANK
COMMISSIONER OR ANY SUCH AGENCY PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR GIVE ANY
INFORMATION NOT CONTAINED IN THIS PROXY STATEMENT AND, IF MADE OR
GIVEN, SUCH REPRESENTATION OR INFORMATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY ABI OR SANDY SPRING.
UNDER THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE
COMMISSION, THE PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF
REORGANIZATION CONSTITUTES AN OFFER OF THE SANDY SPRING COMMON STOCK TO
HOLDERS OF ABI COMMON STOCK. THE DELIVERY OF THIS PROXY STATEMENT DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT NOR THE ISSUANCE OF ANY
SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF ABI OR
SANDY SPRING SINCE THE DATE HEREOF.
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AVAILABLE INFORMATION
Sandy Spring and ABI are subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file periodic reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission, 450
Fifth Street, NW, Washington, DC 20549, and at the regional offices of the
Commission located at Seven World Trade Center, Suite 1300, New York, NY 10048,
and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, NW, Washington, DC 20549, at the prescribed rates.
In addition, copies of such materials filed by Sandy Spring and ABI may be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, NW, Washington, DC 20006. Sandy Spring Common Stock is
traded and quoted on the Nasdaq National Market under the symbol "SASR." ABI
Common Stock is traded and quoted on the Nasdaq Small-Cap Market under the
symbol "ANNB."
No person has been authorized to give any information or make any
representation other than those contained in this Proxy Statement and, if given
or made, such information or representations must not be relied upon as having
been authorized by Sandy Spring or ABI. Neither the delivery of this Proxy
Statement nor any sale made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of Sandy Spring or ABI
since the date of this Proxy Statement. This Proxy Statement does not constitute
an offer to sell or a solicitation of an offer to buy any securities offered
hereby in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make such offer or solicitation.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by Sandy Spring with the Commission are
incorporated herein by reference:
(1) Sandy Spring's Annual Report on Form 10-K for the year ended
December 31, 1995;
(2) Sandy Spring's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996;
(3) Sandy Spring's Current Report on Form 8-K dated April 16, 1996;
and
(4) The description of Sandy Spring Common Stock containing Sandy
Spring's Notice of Annual Meeting and Proxy Statement dated March
24, 1992 and Current Report on Form 8-K, dated May 13, 1992.
All documents subsequently filed pursuant to Section 13(a), 13(c), 14,
or 15(d) of the Exchange Act by Sandy Spring prior to the Meeting shall be
deemed to be incorporated by reference herein.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement herein or in
any supplement hereto, modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed to constitute a part hereof,
except as so modified or superseded.
Sandy Spring will provide copies of any of the Sandy Spring documents
incorporated by reference herein and not delivered herewith (not including
exhibits unless such exhibits are specifically incorporated by reference
therein), to any person receiving a copy of this Proxy Statement, without
charge, upon written or oral request directed to Marjorie S. Cook, Corporate
Secretary, Sandy Spring Bancorp, Inc., 17801 Georgia Avenue, Olney, Maryland
20832, (301) 774-6400. In order to ensure timely delivery of documents
incorporated by reference, any request should be received by Sandy Spring no
later than __________, 1996.
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Table of Contents
Page
----
Available Information.............................................................................
Documents Incorporated by Reference...............................................................
Summary Information...............................................................................
Selected Consolidated Financial and Other Data....................................................
The Meeting.......................................................................................
The Merger........................................................................................
Unaudited Pro Forma Combined Financial Information................................................
Sandy Spring Bancorp, Inc.........................................................................
Comparison of Shareholder Rights and Certain Provisions of the
Articles of Incorporation of Sandy Spring.......................................................
Annapolis Bancshares, Inc.........................................................................
Legal Matters.....................................................................................
Experts...........................................................................................
Appendix A - Agreement and Plan of Reorganization..................................................A-1
Appendix B - Fairness Opinion of Ferris Baker Watts, Inc...........................................B-1
Appendix C - Annual Report to Shareholders of Annapolis Bancshares, Inc. for the
year ended December 31, 1995.........................................................C-1
Appendix D - Quarterly Report on Form 10-QSB of Annapolis Bancshares, Inc. for the
quarter ended March 31, 1996.........................................................D-1
Appendix E - Title 3, Subtitle 2 of the Maryland General Corporation Law...........................E-1
-4-
SUMMARY INFORMATION
The following summary information does not purport to be complete and is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Proxy Statement, including the exhibits hereto and
the documents incorporated by reference herein. Shareholders of ABI are urged to
carefully read this Proxy Statement in its entirety.
The Parties to the Merger
Sandy Spring. Sandy Spring is a one-bank holding company registered
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and as of
March 31, 1996, had approximately $818.6 million in total assets and $79.9
million of shareholders' equity. Its principal subsidiary, Sandy Spring National
Bank of Maryland, Olney, Maryland ("Sandy Spring National Bank"), currently
operates seventeen offices in Montgomery and Howard counties, Maryland. Sandy
Spring's principal executive offices are located at 17801 Georgia Avenue, Olney,
Maryland 20832, and its telephone number is (301) 774-6400.
For additional information concerning Sandy Spring, its business,
financial condition, and results of operations, see "Available Information,"
"Documents Incorporated by Reference," and "Selected Consolidated Financial and
Other Data."
As of May 31, 1996, there were 4,373,749 shares of Sandy Spring Common
Stock outstanding. Sandy Spring Common Stock has been quoted on the Nasdaq
National Market under the symbol "SASR" since April 17, 1996.
ABI. ABI is a one-bank holding company registered under the BHCA, and
as of March 31, 1996, had approximately $81.0 million in total assets and $9.2
million of shareholders' equity. Its sole subsidiary, Bank of Annapolis,
Annapolis, Maryland (the "Bank of Annapolis") operates one office in Annapolis,
Maryland. ABI's principal executive offices are located at 2024 West Street,
Annapolis, Maryland 21401, and its telephone number is (410) 266-3000.
For additional information concerning ABI, its business, financial
condition, and results of operations, see "Available Information," "Selected
Consolidated Financial and Other Data," and "Annapolis Bancshares, Inc."
As of the Record Date, there were 792,575 shares of ABI Common Stock
outstanding. ABI Common Stock is quoted on the Nasdaq Small Cap Market under the
symbol "ANNB."
The Merger
General. ABI and Sandy Spring, together with their respective wholly
owned subsidiaries, Bank of Annapolis and Sandy Spring National Bank, have
entered into an Agreement and Plan of Reorganization (the "Agreement") pursuant
to which ABI will be merged with and into Sandy Spring (the "Merger"). In
connection with the Merger, each outstanding share of ABI Common Stock will
automatically, and without further action, be converted into 0.62585 shares of
Sandy Spring Common Stock (the "Conversion Ratio"), subject to adjustments and
limitations set forth in the Agreement and as described herein.
ABI is entitled to terminate the Agreement and abandon the Merger, upon
the vote of at least two-thirds of its full Board of Directors, if the average
closing price of Sandy Spring Common Stock (the "Average Closing Price") during
the period beginning on the date the joint conditions to the obligations of both
ABI and Sandy Spring to consummate the Merger are met and ending at midnight on
the fourth business day thereafter (the "Adjustment Notice Period") is less than
$33.00 per share, unless during the Adjustment Notice Period the Board of
Directors of Sandy Spring agrees to adjust the Conversion Ratio to increase the
number of shares of Sandy Spring Common Stock into which each share of ABI
Common Stock shall be converted to the number of shares determined by dividing
20.65 by the Average Closing Price.
-5-
Sandy Spring is entitled to terminate the Agreement and abandon the
Merger upon the vote of at least two-thirds of its full Board of Directors if
the Average Closing Price during the Adjustment Notice Period exceeds $40.375
per share, unless during the Adjustment Notice Period the Board of Directors of
ABI agrees to adjust the Conversion Ratio to decrease the number of shares of
Sandy Spring Common Stock into which each share of ABI Common Stock shall be
converted to the number of shares determined by dividing 25.27 by the Average
Closing Price. By voting to approve the Merger, shareholders of ABI are
authorizing the Board of Directors to agree to the reduction in the Conversion
Ratio under the circumstances described above.
For example, if the Average Closing Price during the Adjustment Notice
Period were $30.00 per share, then subject to the agreement of the Board of
Directors of Sandy Spring, the Conversion Ratio would be 0.68833 shares of Sandy
Spring Common Stock for each share of ABI Common Stock. If the Average Closing
Price during the Adjustment Notice Period were $43.375, then, subject to the
agreement of the Board of Directors of ABI, the Conversion Ratio would be
0.58259 shares of Sandy Spring Common Stock for each share of ABI Common Stock.
There can be no assurance as to the Average Closing Price or the actual
Conversion Ratio.
The number of shares of Sandy Spring Common Stock issuable to holders
of ABI Common Stock (assuming no adjustment of the Conversion Ratio and the
conversion of all outstanding options and warrants to acquire ABI Common Stock
into proportionately adjusted options or warrants to acquire Sandy Spring Common
Stock) is approximately 496,033 shares, or approximately 10.19% of the shares of
Sandy Spring Common Stock outstanding following the Merger.
Each share of Sandy Spring Common Stock outstanding immediately prior
to the Merger will be unchanged by the Merger, and will continue to represent
one share of Sandy Spring Common Stock. See "The Merger -- Consideration to be
Received by ABI Shareholders," "Description of Sandy Spring Common Stock." It is
not anticipated that holders of Sandy Spring Common Stock will experience any
dilution in per share book value of Sandy Spring Common Stock. See "Unaudited
Pro Forma Combined Financial Information". Sandy Spring shareholders will,
however, experience dilution of their percentage ownership interest in Sandy
Spring, and in their relative voting power.
The Agreement permits ABI to pay a quarterly cash dividend of not more
than $.0625 per share pending consummation of the Merger.
It is anticipated that simultaneously with the effectiveness of the
Merger, Bank of Annapolis will be merged with and into Sandy Spring National
Bank.
Closing Date. Under the Agreement, the Closing of the Merger will occur
on a date specified in writing by the parties to the Agreement (the "Closing
Date"), which date shall be as soon as practicable, but not more than fifteen
(15) days after, the last condition precedent to the consummation of the Merger
set forth in the Agreement has been fulfilled or waived. See "The Merger --
Conditions to the Merger."
Reasons for the Merger. The Board of Directors of ABI is in unanimous
agreement that the proposed merger of ABI with and into Sandy Spring is in the
best interests of ABI and its shareholders. In considering the terms and
conditions of the Merger, ABI's Board of Directors considered, among other
things: the financial terms of the Merger; the financial condition and
historical performance of Sandy Spring; the opinion of its financial advisor as
to the fairness, from a financial point of view, of the terms of the Merger to
the ABI shareholders; and the operational and competitive benefits of the
Merger. See "The Merger -- Reasons for the Merger," "-- Background of the
Merger, and "-- Opinion of ABI Financial Advisor."
Recommendations of the Board of Directors. The Board of Directors of
ABI has unanimously approved the proposed Merger and recommends that the holders
of ABI Common Stock vote "FOR" the proposed Merger.
Opinion of Financial Advisor. ABI has received the opinion of Ferris
Baker Watts, Inc. ("Ferris Baker"), an investment banking firm experienced in
the valuation of banking, thrift, and financial services companies in
-6-
connection with the merger of such institutions. The opinion of Ferris Baker, a
copy of which is attached hereto as Appendix B, and which shareholders of ABI
are urged to read in its entirety, is that, as of the date of the Proxy
Statement, and based upon the assumptions contained in the opinion, the Merger
is fair to all the holders of ABI Common Stock from a financial point of view.
See "The Merger -- Opinion of ABI Financial Advisor."
Special Meeting and Vote Required. The Special Meeting at which the
Merger will be considered will be held on ____________________, 1996 at ____
_.M. local time, at ________________________________________. Holders of record
on ____________, 1996 (the "Record Date") will be entitled to notice of and to
vote at the Special Meeting. The presence, in person or by proxy, of at least a
majority of the total number of shares of ABI Common Stock entitled to vote is
necessary to constitute a quorum at the Meeting.
The affirmative vote of at least two-thirds of all votes entitled to be
cast at the Special Meeting is required to approve the Merger. Each share of ABI
Common Stock is entitled to one vote. See "The Meeting."
As of the Record Date, there were 792,575 shares of ABI Common Stock
outstanding and entitled to vote. As of June 25, 1996, the directors and
executive officers of ABI beneficially owned an aggregate of 174,346 shares
(22.0%) of the issued and outstanding ABI Common Stock. Such persons have
indicated their intention to vote in favor of the Merger.
Voting and Revocation of Proxies. Shares of ABI Common Stock
represented by properly executed proxies received at or prior to the Meeting and
not subsequently revoked will be voted as directed by shareholders. Shares as to
which the "ABSTAIN" box has been marked, and shares held in street name by
brokers for which no voting instructions are given ("broker non-votes"), will be
treated as shares present and entitled to vote for quorum purposes, but will
have the effect of a vote against the Merger. In the absence of specific
instructions, properly executed proxies received by ABI will be voted FOR the
proposal to approve the Merger.
Any holder of ABI Common Stock who has delivered a proxy may revoke it
at any time prior to the exercise of the authority granted thereby by delivering
written notice of such revocation to Michael Weinberg, Secretary of ABI, prior
to the Meeting, by granting and delivering a later dated proxy, or by attending
the Meeting and voting the shares in person.
Conditions to the Merger. The consummation of the Merger is subject to
numerous conditions, including but not limited to, obtaining the approval by the
requisite vote of the shareholders of ABI, receipt of certain regulatory
approvals, the receipt of certain tax, accounting and legal opinions and
letters, and the absence of any material adverse change in the condition of ABI.
See "The Merger -- Conditions to the Merger."
Dissenters' Rights. Under the Maryland General Corporation Law (the
"MGCL"), the relevant sections of which are attached as Appendix E hereto, any
holder of ABI Common Stock entitled to vote at the Meeting who objects to the
Merger and complies with certain procedural requirements, will have the right to
dissent and obtain the payment of the fair value of such holder's shares of ABI
Common Stock as determined in a judicial proceeding. In order to be entitled to
appraisal rights, an ABI shareholder must (a) deliver to ABI at or prior to the
Meeting a written objection to the Merger, (b) ensure that his or her shares are
not voted (or deemed to have been voted) to approve the Merger, and (c) after
the Merger is consummated, make timely written demand for payment in accordance
with the MGCL. If a judicial determination of the fair value of ABI Common Stock
held by such ABI shareholder is necessary, such determination may result in a
value that is more than, less than, or equal to the value of the consideration
which would have been paid by Sandy Spring pursuant to the Agreement. It is a
condition to Sandy Spring's consummation of the Merger that holders of not more
than 5% of the outstanding shares of ABI Common Stock dissent from the Merger.
See "The Merger--Dissenters' Rights," "-- Conditions to the Merger."
Termination of the Merger. The Merger Agreement may be terminated at
any time before the effective time of the Merger, whether before or after
approval by shareholders, in a number of circumstances, including, by mutual
consent of the parties; by either party if the closing of the Merger shall not
have occurred on or before December 31, 1996 (except under certain
circumstances); by either party upon the occurrence of an event which renders
satisfaction
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of one or more of the conditions to the obligations of the other party
impossible; by ABI, if the Average Closing Price of Sandy Spring Common Stock
during the Adjustment Notice Period is less than $33.00, unless a Conversion
Ratio adjustment is agreed to; by Sandy Spring, if the Average Closing Price of
Sandy Spring Common Stock during the Adjustment Notice Period exceeds $40.375,
unless a Conversion Ratio Adjustment is agreed to; and by Sandy Spring, if ABI
or Bank of Annapolis take certain actions with respect to a takeover proposal
other than the Merger, or if the Board of Directors of ABI fails to recommend
the Merger to the shareholders of ABI or withdraws any such recommendation,
fails to solicit proxies in favor of the Merger, or otherwise fails to take
action necessary to obtain approval of the Merger.
Certain Federal Income Tax Consequences
It is anticipated that the Merger will constitute a tax free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended, and that shareholders of ABI will not recognize gain or loss as a
result of the conversion of their shares of ABI Common Stock into shares of
Sandy Spring Common Stock, except to the extent they receive cash in lieu of
fractional shares of Sandy Spring Common Stock. ABI and Sandy Spring have
received an opinion of Stegman & Company as to certain anticipated federal
income tax consequences of the Merger. For a more extensive discussion of the
anticipated federal income tax consequences of the Merger to shareholders of ABI
and to ABI and Sandy Spring, see "The Merger -- Certain Federal Income Tax
Consequences."
Interests of Certain Persons in the Merger
Certain members of the management and Board of Directors of ABI have
interests in the Merger that are in addition to their interests as shareholders
of ABI. See "The Merger -- Interests of Certain Persons."
Accounting Treatment
It is anticipated that the Merger will be accounted for as a pooling of
interests under generally accepted accounting principles. See "The Merger --
Accounting Treatment."
Comparison of Shareholder Rights
Upon consummation of the Merger, holders of ABI Common Stock, whose
rights are presently governed by the MGCL and ABI's Articles of Incorporation,
as amended, and Bylaws, will become shareholders of Sandy Spring, a Maryland
business corporation. Accordingly, their rights will be governed by the MGCL and
the Articles of Incorporation, as amended, and Bylaws of Sandy Spring. Certain
differences in shareholders' rights arise from differences between the Articles
of Incorporation and Bylaws of ABI and Sandy Spring, including, among other
things, the number of authorized shares of capital stock, the notice
requirements for nominations of directors and presentation of new business at
meetings of shareholders, approval requirements for certain business
combinations and amendments to the Articles of Incorporation, the number and
term of directors, and removal and vacancies on the Boards of Directors. See
"Comparison of Shareholder Rights and Certain Provisions of the Articles of
Incorporation of Sandy Spring."
Exchange of ABI Stock Certificates
The conversion of ABI Common Stock into Sandy Spring Common Stock will
occur automatically upon effectiveness of the Merger, except that until
exchanged for Sandy Spring Common Stock certificates, the holders of ABI Common
Stock certificates will not be entitled to vote or to receive dividends or other
distributions on Sandy Spring Common Stock. Promptly after the effectiveness of
the Merger, Sandy Spring's transfer agent (the "Exchange Agent") will mail each
ABI shareholder information regarding the exchange of his or her shares of ABI
Common Stock.
Holders of ABI Common Stock should not surrender their stock
certificates until they receive written instructions from the Exchange Agent.
-8-
Market for Common Stock
The Sandy Spring Common Stock is traded by four market makers and has
been quoted on the Nasdaq National Market System since April 17, 1996. The ABI
Common Stock is traded in the Nasdaq Small-Cap Market by two market makers.
The following table sets forth the last trade prices per share of Sandy
Spring Common Stock and ABI Common Stock as reported on the Nasdaq Bulletin
Board in the case of Sandy Spring and on the Nasdaq Small Cap Market in the case
of ABI on the date indicated, the last business day preceding the public
announcement of the Merger for which trades were reported. Based upon the last
trade price of Sandy Spring Common Stock shown below, each share of ABI Common
Stock would be converted into 0.62585 shares of Sandy Spring Common Stock. The
equivalent per share price shown below is the product of multiplying the assumed
Conversion Ratio of 0.62585 shares by the last trade price of Sandy Spring
Common Stock on April 16, 1996.
Sandy Spring Equivalent
Common Stock ABI Common Stock Per Share Price
------------ ---------------- ---------------
Price at April 16, 1996 $36.625 $20.00(1) $22.92
(1) Reflects the last trade in ABI Common Stock prior to announcement of the
Merger.
The Conversion Ratio is subject to increase or decrease in the event
that the Average Closing Price of Sandy Spring Common Stock is less than $33.00
or exceeds $40.375 during the Adjustment Notice Period. Any decrease in the
Conversion Ratio would be subject to the discretion of the Board of Directors of
ABI. By approving the Merger, ABI shareholders are authorizing the Board of
Directors to exercise their discretion and judgment in this regard. See, "The
Merger -- Consideration to be Received by ABI Shareholders."
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated financial data for
Sandy Spring and ABI for the five years ended December 31, 1995, and the three
month periods ended March 31, 1996 and March 31, 1995 and unaudited pro forma
consolidated information reflecting the consolidation of ABI and Sandy Spring.
The data presented for the three month periods for ABI and Sandy Spring are
derived from unaudited financial statements and includes, in the opinion of
management, all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the data for such period. The results for the period
ended March 31, 1996 are not necessarily indicative of the results which may be
expected for any other interim period or for the full year. The selected
consolidated financial and other data of Sandy Spring and ABI set forth below
does not purport to be complete and should be read in conjunction with, and is
qualified in its entirety by, the more detailed information, including the
consolidated financial statements of Sandy Spring and related notes included in
its 1995 Annual Report to Shareholders, incorporated by reference herein, and
the consolidated financial statements of ABI and related notes included herein.
-9-
SELECTED HISTORICAL OPERATING AND PER SHARE DATA OF
SANDY SPRING BANCORP, INC.
The following table sets forth certain historical operating and per
share financial data for Sandy Spring at and for the periods indicated. For
additional information, see Sandy Spring's Annual Report on Form 10-K for the
year ended December 31, 1995 and Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.
Three Months Ended
March 31,
(Unaudited) Years Ended December 31,
----------------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------------------------------------------------------------------------------------
Operating Data: (Dollars in thousands, except per share data)
------------------------------------------------------------------------------------
Interest income $ 14,217 $ 13,143 $ 55,241 $ 46,264 $ 41,674 $ 44,520 $ 47,448
Interest expense 6,553 6,092 25,998 19,179 17,695 21,188 28,471
------------------------------------------------------------------------------------
Net interest income 7,664 7,051 29,243 27,085 23,979 23,332 18,977
Provision for credit losses 150 - - 160 950 1,750 835
------------------------------------------------------------------------------------
Net interest income after provision for
credit losses 7,514 7,051 29,243 26,925 23,029 21,582 18,142
Net securities gains (losses) (3) (6) (240) (84) 257 507 (363)
Noninterest income (excluding net securities
gains (losses)) 1,499 1,038 4,686 4,213 4,551 4,066 3,087
Noninterest expenses 5,323 5,091 20,787 19,895 16,942 15,269 13,477
------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change 3,687 2,992 12,902 11,159 10,895 10,886 7,389
Provision for income taxes 1,171 889 3,979 3,139 2,888 2,981 1,994
------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 2,516 2,103 8,923 8,020 8,007 7,905 5,395
Cumulative effect of accounting change - - - - - 744 -
------------------------------------------------------------------------------------
Net income $ 2,516 $ 2,103 $ 8,923 $ 8,020 $ 8,007 $ 8,649 $ 5,395
====================================================================================
Per Share Data (1):
Income before cumulative effect of
accounting change $ 0.58 $ 0.49 $ 2.07 $ 1.89 $ 1.95 $ 2.07 $ 1.51
Cumulative effect of accounting change - - - - - 0.20 -
Net income 0.58 0.49 2.07 1.89 1.95 2.27 1.51
Cash dividends declared 0.18 0.15 0.64 0.54 0.49 0.43 0.38
Book value at period-end $ 18.27 $ 16.34 $ 18.04 $ 15.65 $ 15.73 $ 13.38 $ 10.99
Weighted average number of shares
outstanding 4,341,933 4,285,918 4,303,287 4,248,186 4,117,220 3,817,262 3,587,378
- -------------------------------------
(1) Per share data has been retroactively restated to reflect a two-for-one
stock split in the form of a dividend declared and paid in March 1995.
-10-
SELECTED HISTORICAL DATA AND CONSOLIDATED RATIOS OF
SANDY SPRING BANCORP, INC.
The following table sets forth certain historical data and consolidated
financial ratios for Sandy Spring at and for the periods indicated. For
additional information, see Sandy Spring's Annual Report on Form 10-K for the
year ended December 31, 1995 and Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.
Three Months Ended
March 31,
(Unaudited) Years Ended December 31,
--------------------------- -------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------
Other Data: (Dollars in thousands)
------------------------------------------------------------------------------------------
Total loans, net of unearned income $ 426,140 $ 415,255 $ 424,626 $ 401,524 $ 324,372 $ 274,189 $ 313,315
Total assets 818,586 776,296 794,319 764,135 722,465 626,084 573,812
Total deposits 696,091 649,097 679,587 645,619 622,056 557,958 517,110
Federal funds purchased and securities
sold under agreements to repurchase 33,795 24,018 29,629 21,724 13,684 6,169 7,693
Other short-term borrowings 437 26,517 150 23,519 13,623 3,595 3,360
Long-term debt 5,144 3,173 3,151 3,180 2,206 210 231
Total shareholders' equity $ 79,918 $ 70,209 $ 78,091 $ 66,956 $ 66,391 $ 54,668 $ 39,501
Consolidated Ratios:
Return on average assets 1.27% 1.12% 1.16% 1.11% 1.24% 1.44% 1.00%
Return on average shareholders' equity 13.02% 12.21% 12.24% 12.12% 13.74% 19.31% 14.75%
Average equity to average assets 9.76% 9.21% 9.46% 9.19% 9.06% 7.45% 6.79%
Cash dividends declared to net income 31.24% 30.58% 30.88% 28.34% 25.14% 18.94% 24.94%
- ------------------------------------------
-11-
SELECTED HISTORICAL OPERATING AND PER SHARE DATA OF
ANNAPOLIS BANCSHARES, INC.
The following table sets forth certain historical operating and per
share financial data for ABI at and for the periods indicated. For additional
information, see ABI's Annual Report to Shareholders for the year ended December
31, 1995 and Quarterly Report for the quarter ended March 31, 1996, which are
attached as Appendices C and D, respectively.
Three Months Ended
March 31,
(Unaudited) Years Ended December 31,
-------------------------- -------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------
rating Data: (Dollars in thousands, except per share data)
-----------------------------------------------------------------------------------------
Interest income $ 1,946 $ 1,507 $ 6,874 $ 5,314 $ 4,515 $ 3,657 $ 2,702
Interest expense 906 729 3,344 2,317 2,098 1,941 1,596
-----------------------------------------------------------------------------------------
Net interest income 1,040 778 3,530 2,997 2,417 1,716 1,106
Provision for credit losses 33 50 180 52 106 130 105
-----------------------------------------------------------------------------------------
Net interest income after provision for
credit losses 1,007 728 3,350 2,945 2,311 1,586 1,001
Net securities gains (losses) (51) - (39) - - - -
Noninterest income (excluding net
securities gains (losses)) 56 (1) 71 60 62 83 59
Noninterest expenses 425 386 1,637 1,567 1,398 974 761
-----------------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 587 341 1,745 1,438 975 695 299
Provision for income taxes 227 132 674 555 373 271 114
-----------------------------------------------------------------------------------------
Income before extraordinary item 360 209 1,071 883 602 424 185
Extraordinary item - tax benefit of
net operating loss carryforward - - - - - - 60
-----------------------------------------------------------------------------------------
Net income $ 360 $ 209 $ 1,071 $ 883 $ 602 $ 424 $ 245
=========================================================================================
Per Share Data(1):
Income before extraordinary item $ 0.46 $ 0.30 $ 1.42 $ 1.32 $ 1.05 $ 0.79 $ 0.35
Extraordinary item - tax benefit of
net operating loss carryforward - - - - - - 0.11
Net income 0.46 0.30 1.42 1.32 1.05 0.79 0.46
Cash dividends declared 0.06 0.04 0.19 0.15 0.12 0.02 -
Book value at period-end $ 11.72 $ 10.58 $ 11.29 $ 10.33 $ 9.15 $ 8.48 $ 7.70
Weighted average number of shares
outstanding 784,241 703,232 748,709 700,240 572,536 535,283 535,283
- ------------------------------------------
(1) Per share data has been retroactively restated to reflect a 20% stock
dividend declared and paid in the fourth quarter of 1995.
-12-
SELECTED HISTORICAL DATA AND CONSOLIDATED RATIOS OF
ANNAPOLIS BANCSHARES, INC.
The following table sets forth certain historical data and consolidated
ratios for ABI at and for the periods indicated. For additional information, see
ABI's Annual Report to Shareholders for the year ended December 31, 1995 and
Quarterly Report for the quarter ended March 31, 1996, which are attached as
Appendices C and D, respectively.
Three Months Ended
March 31,
(Unaudited) Years Ended December 31,
---------------------- --------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------------------------------------------------------------------------------------
Other Data: (Dollars in thousands)
----------------------------------------------------------------------------------------
Total loans, net of unearned income $ 71,525 $ 57,184 $ 67,914 $ 55,528 $ 50,368 $ 39,735 $ 26,503
Total assets 81,036 67,822 81,885 66,699 61,809 49,334 33,213
Total deposits 65,857 57,506 64,005 54,721 54,366 44,115 28,764
Federal funds purchased and securities
sold under agreements to repurchase - - 1,025 - - - -
Other short-term borrowings 5,000 3,000 4,000 2,000 - - -
Long-term debt - - 2,000 3,000 1,000 - -
Total shareholders' equity $ 9,206 $ 7,105 $ 8,850 $ 6,810 $ 6,029 $ 4,537 $ 4,124
Consolidated Ratios:
Return on average assets 1.82% 1.23% 1.46% 1.37% 1.10% 1.03% 0.89%
Return on average shareholders' equity 15.95% 12.03% 13.60% 13.36% 11.39% 9.76% 6.13%
Average equity to average assets 11.44% 10.48% 10.77% 10.28% 9.63% 10.56% 14.56%
Cash dividends declared to net income 13.04% 13.33% 13.38% 11.51% 11.78% 2.63% 0.00%
- --------------------------------------------
-13-
SELECTED PRO FORMA COMBINED OPERATING AND PER SHARE DATA
FOR SANDY SPRING BANCORP, INC.
(Unaudited)
The following table sets forth certain unaudited pro forma operating
and per share financial data reflecting the consolidation of Sandy Spring and
ABI at and for the periods indicated. For additional information, see "Unaudited
Pro Forma Combined Financial Information."
Three Months Ended
March 31 Years Ended December 31
------------------------ -----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------
Operating Data: (In thousands, except per share data)
------------------------------------------------------------------------------------------
Interest income $ 16,163 $ 14,650 $ 62,115 $ 51,578 $ 46,189 $ 48,177 $ 50,150
Interest expense 7,459 6,821 29,342 21,496 19,793 23,129 30,067
------------------------------------------------------------------------------------------
Net interest income 8,704 7,829 32,773 30,082 26,396 25,048 20,083
Provision for credit losses 183 50 180 212 1,056 1,880 940
------------------------------------------------------------------------------------------
Net interest income after provision for
credit losses 8,521 7,779 32,593 29,870 25,340 23,168 19,143
Net securities gains (losses) (54) (6) (279) (84) 257 507 (363)
Noninterest income (excluding net
securities gains (losses)) 1,555 1,037 4,757 4,273 4,613 4,149 3,146
Noninterest expenses 5,748 5,477 22,424 21,462 18,340 16,243 14,238
------------------------------------------------------------------------------------------
Income before income taxes, cumulative
effect of accounting change and
extraordinary item 4,274 3,333 14,647 12,597 11,870 11,581 7,688
Provision for income taxes 1,398 1,021 4,653 3,694 3,261 3,252 2,108
------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change and
extraordinary item 2,876 2,312 9,994 8,903 8,609 8,329 5,580
Cumulative effect of accounting change - - - - - 744 -
Extraordinary item - tax benefit of net
operating loss carryforward - - - - - - 60
------------------------------------------------------------------------------------------
Net income(1) $ 2,876 $ 2,312 $ 9,994 $ 8,903 $ 8,609 $ 9,073 $ 5,640
==========================================================================================
Per Share Data:
Income before cumulative effect of
accounting change and
extraordinary item(2) $ 0.60 $ 0.49 $ 2.09 $ 1.90 $ 1.92 $ 2.01 $ 1.42
Cumulative effect of accounting change(2) - - - - - 0.18 -
Extraordinary item(2) - - - - - - 0.02
Net income(2) 0.60 0.49 2.09 1.90 1.92 2.19 1.44
Cash dividends declared(3) 0.18 0.15 0.64 0.54 0.49 0.43 0.38
Book value at period-end(4) $ 18.21 $ 16.39 $ 18.04 $ 15.72 $ 15.63 $ 13.39 $ 11.10
Weighted average number of shares
outstanding(5) 4,832,750 4,726,036 4,771,867 4,686,431 4,475,542 4,152,269 3,922,385
- -------------------------------------
(1) Calculated by adding the indicated components of income and expense of Sandy
Spring and ABI. Pro forma operating and per share data have not been reduced
by the estimated non-recurring expenses to effect the Merger of
approximately $541,000, net of related tax effects, except with respect to
pro forma book value at March 31, 1996.
(2) Calculated by adding the indicated components of net income of Sandy Spring
and ABI and dividing the resulting sum by the total pro forma weighted
average number of common shares outstanding shown.
(3) Represent historical dividends per share declared by Sandy Spring.
(4) Based upon combined shareholders' equity of Sandy Spring and ABI divided by
the total pro forma number of common shares outstanding at each period-end,
based upon the Conversion Ratio of 0.62585 shares of Sandy Spring Common
Stock for each share of ABI Common Stock.
(5) Based upon the Conversion Ratio of 0.62585 shares of Sandy Spring Common
Stock for each share of ABI Common Stock for the periods indicated.
-14-
SELECTED PRO FORMA COMBINED DATA AND CONSOLIDATED RATIOS OF
SANDY SPRING BANCORP, INC.
(Unaudited)
The following table sets forth certain historical data and consolidated
ratios reflecting the consolidation of Sandy Spring and ABI at and for the
periods indicated. For additional information, see "Unaudited Pro Forma Combined
Financial Information."
Three Months Ended
March 31 Years Ended December 31
----------------------- -----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------
Other Data: (In thousands, except per share data)
-----------------------------------------------------------------------------------------
Total loans, net of unearned income $ 497,665 $ 472,439 $ 492,540 $ 457,052 $ 374,740 $ 313,924 $ 339,818
Total assets 899,622 844,118 876,204 830,834 784,274 675,418 607,025
Total deposits 761,948 706,603 743,592 700,340 676,422 602,073 545,874
Federal funds purchased and securities
sold under agreements to repurchase 33,795 24,018 30,654 21,724 13,684 6,169 7,693
Other short-term borrowings 5,437 26,517 3,150 25,519 13,623 3,595 3,360
Long-term debt 5,144 3,173 5,151 6,180 3,206 210 231
Total shareholders' equity(1) 88,583 77,314 86,941 73,766 72,420 59,205 43,625
Consolidated Ratios(2):
Return on average assets 1.31% 1.12% 1.18% 1.14% 1.23% 1.41% 1.00%
Return on average shareholders' equity 13.26% 12.04% 12.37% 12.24% 13.55% 18.46% 13.90%
Average equity to average assets 9.91% 9.28% 9.57% 9.28% 9.10% 7.65% 7.16%
Cash dividends declared to net income 30.00% 30.61% 30.62% 28.42% 25.52% 19.63% 26.39%
- -------------------------------------------
(1) Based upon combined shareholders' equity of Sandy Spring and ABI at each
period end. Pro forma shareholders' equity at March 31, 1996 has been
reduced by the estimated non-recurring expenses to effect the Merger of
approximately $541,000, net of related tax effects.
(2) Does not reflect the estimated non-recurring expenses to effect the Merger
of approximately $541,000, net of related tax effects, except as indicated
with respect to pro forma book value at March 31, 1996.
-15-
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
(Unaudited)
The following table presents selected comparative unaudited per share
data for Sandy Spring and ABI on a historical and pro forma basis, giving effect
to the Merger, using the pooling of interests method of accounting. The
information is derived from the historical financial statements of Sandy Spring
and ABI and the pro forma combined financial information appearing elsewhere
herein. This information should be read in conjunction with such historical and
pro forma combined financial statements and related notes thereto. See
"Unaudited Pro Forma Combined Financial Information."
The per share data shown below are not necessarily indicative of the
results of the future operations of Sandy Spring after the Merger or the actual
results that would have been achieved had the Merger been consummated prior to
the periods indicated.
Three Months Ended
March 31 Years Ended December 31,
------------------- ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------------------------------------------------------------------
Sandy Spring Common Stock
Earnings per Common Share:
Historical:
Income before cumulative effect of accounting
change $ 0.58 $ 0.49 $ 2.07 $ 1.89 $ 1.95 $ 2.07 $ 1.51
Cumulative effect of accounting change - - - - - 0.20 -
Net income 0.58 0.49 2.07 1.89 1.95 2.27 1.51
Dividends per Common Share(1) 0.18 0.15 0.64 0.54 0.49 0.43 0.38
Book value per Common Share (period end)(2) 18.27 16.34 18.04 15.65 15.73 13.38 10.99
Pro forma combined:
Income before cumulative effect of accounting
change and extraordinary item $ 0.60 $ 0.49 $ 2.09 $ 1.90 $ 1.92 $ 2.01 $ 1.42
Cumulative effect of accounting change - - - - - 0.18 -
Extraordinary item - - - - - - 0.02
Net Income 0.60 0.49 2.09 1.90 1.92 2.19 1.44
Dividends per Common Share(1) 0.18 0.15 0.64 0.54 0.49 0.43 0.38
Book value per Common Share (period end)(2) 18.21 16.39 18.04 15.72 15.63 13.39 11.10
ABI Common Stock
Earnings per Common Share:
Historical:
Income before extraordinary item $ 0.46 $ 0.30 $ 1.42 $ 1.32 $ 1.05 $ 0.79 $0.35
Extraordinary item - tax benefit of net
operating loss carryforward - - - - - - 0.11
Net income 0.46 0.30 1.42 1.32 1.05 0.79 0.46
Dividends per Common Share 0.06 0.04 0.19 0.15 0.12 0.02 0.00
Book value per Common Share (period end) 11.72 10.58 11.29 10.33 9.15 8.48 7.70
Pro forma equivalent(3):
Income before cumulative effect of accounting $ 0.38 $ 0.31 $ 1.31 $ 1.19 $ 1.20 $ 1.26 $ 0.89
change nd extraordinary item
Cumulative effect of accounting change - - - - - 0.11 -
Extraordinary item - - - - - - 0.01
Net income 0.38 0.31 1.31 1.19 1.20 1.37 0.90
Dividends per Common Share equivalent 0.11 0.09 0.40 0.34 0.31 0.27 0.24
Book Value Per Common Share equivalent
(period end) 11.40 10.26 11.29 9.84 9.78 8.38 6.95
- --------------------------------------------
(1) Pro forma combined book value at March 31, 1996 reflects combined common
shareholder's equity amounts less approximately $541,000 of expenses to
effect the Merger, net of related tax effects.
(2) Pro forma combined dividends per share represents historical dividends per
share declared by Sandy Spring.
(3) Pro forma equivalent amounts for ABI have been calculated by multiplying pro
forma combined amounts shown for Sandy Spring by the Conversion Ratio of
0.62585 shares of Sandy Spring Common Stock per share of ABI Common Stock.
-16-
THE MEETING
General. The Special Meeting of Shareholders, (the "Meeting") of
Annapolis Bancshares, Inc. ("ABI") will be held at
_________________________________________________________________, on
____________________________________, at ____ _.M. local time.
The Board of Directors of ABI has chosen the close of business on
________________ as the record date (the "Record Date") for purposes of
determining the shareholders entitled to notice of, and to vote at, the Meeting.
As of the Record Date, 792,575 shares of ABI Common Stock were issued and
outstanding. Shareholders of ABI are entitled to one vote on all matters to be
acted on at the Meeting for each share of ABI Common Stock held of record by
them on the Record Date. The presence at the Meeting, in person or by proxy, of
the holders of a majority of the total number of outstanding shares of ABI
Common Stock is necessary to constitute a quorum. In the event that there are
not sufficient votes for a quorum or to approve the Merger at the Meeting, the
Meeting may be adjourned in order to permit further solicitation of proxies.
Purpose of the Meeting and Vote Required. The purpose of the Meeting is
to consider and vote on the proposal to approve the Merger pursuant to which ABI
will be merged with and into Sandy Spring and shares of ABI Common Stock will
automatically, and without further action, be converted into 0.62585 shares of
Sandy Spring Common Stock, subject to limitation and adjustment as set forth in
the Agreement; and to transact such other business as may properly come before
the Meeting or any adjournment or postponement thereof.
The affirmative vote of two-thirds of the votes entitled to be cast at
the Meeting is required to approve the Merger. Directors and executive officers
of ABI owning or having the power to vote or direct the voting of 174,346 shares
of ABI Common Stock, or 22.0% of the ABI Common Stock outstanding as of the
Record Date, have indicated their intentions to vote in favor of the Merger.
The Board of Directors of ABI has unanimously approved the Merger and
unanimously recommends a vote FOR approval and adoption of the Merger.
Voting and Revocation of Proxies. If the enclosed form of proxy is
properly executed and returned in time to be voted at the Meeting, the shares
represented thereby will be voted as specified by the shareholder executing the
proxy. In the absence of specific instructions, proxies received will be voted
in favor of the proposal to approve the Merger. Management does not know of any
matters that will be brought before the Meeting, other than as described herein.
If other matters are properly brought before the Meeting, the persons named in
the proxy intend to vote such shares to which the proxies relate in accordance
with their best judgment, unless such authority is withheld. A proxy may be
revoked at any time prior to the exercise of the authority granted thereby by
delivering written notice of such revocation to Michael Weinberg, Secretary of
ABI, prior to the Meeting, by granting and delivering a later dated proxy with
respect to such shares, or by attending the Meeting in person and voting the
shares.
Votes cast by proxy or in person at the Meeting will be tabulated by
the election inspectors appointed for the meeting who will determine whether or
not a quorum is present. Where, as to any matter submitted to the shareholders
for a vote, proxies are marked as abstentions (or shareholders appear in person
but abstain from voting), such abstentions will be treated as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum. Broker non-votes will also be considered present for purposes of
determining a quorum. Since approval of the Merger requires a two-thirds
majority of the votes entitled to be cast, an abstention or broker non-vote will
have the effect of a vote against the Merger.
The enclosed proxy is being solicited on behalf of the Board of
Directors of ABI, and ABI will bear the entire cost of such solicitation except
that Sandy Spring has agreed to bear the cost of printing and mailing this Proxy
Statement. In addition to solicitation by mail, officers, directors and
employees of ABI may solicit proxies by
-17-
telecopier, telegram, in person or otherwise. Such persons will not receive any
additional or special remuneration or payment for such solicitation. ABI will
also request registered owners of shares which are beneficially owned by others
to send proxy statements to, and obtain proxies from, such beneficial owners,
and ABI will reimburse shareholders for out-of-pocket expenses incurred in
connection therewith.
THE MERGER
ABI and Sandy Spring entered into the Agreement together with their
respective wholly owned subsidiaries, Bank of Annapolis and Sandy Spring
National Bank, as of April 16, 1996. Following approval of the Merger by ABI
shareholders, and the satisfaction or waiver of certain other conditions to the
Merger, ABI will be merged into Sandy Spring. The following brief description of
the Merger and the Agreement does not purport to be a comprehensive description
of all facets of the Merger or the transactional or other documents prepared in
connection therewith, and is qualified in its entirety by reference to the
Agreement in the form of Appendix A attached hereto and made a part hereof, to
which ABI shareholders are urged to refer, and the other documents referred to
herein.
The Agreement
The Agreement provides that ABI will be merged with and into Sandy
Spring, a Maryland corporation, with Sandy Spring surviving the Merger. Pursuant
to the Agreement, upon effectiveness of the Merger, each of the outstanding
shares of ABI Common Stock (other than shares of ABI Common Stock held by Sandy
Spring or any of its subsidiaries other than in a fiduciary capacity and
dissenting shares) will automatically be converted into 0.62585 shares of Sandy
Spring Common Stock, subject to adjustment as set forth in the Agreement and as
described below. See "The Merger -- Consideration to be Received by ABI
Shareholders," and "Sandy Spring Bancorp, Inc. - - Description of Sandy Spring
Capital Stock." Each of the shares of Sandy Spring Common Stock outstanding
prior to the effectiveness of the Merger will be unchanged, and will continue to
represent shares of Sandy Spring Common Stock.
The Board of Directors of ABI has unanimously approved the Merger and
the Agreement and recommends that the shareholders vote "FOR" the Merger.
Consideration to be Received by ABI Shareholders
Conversion of ABI Common Stock. Pursuant to the Agreement, upon
effectiveness of the Merger, each share of ABI Common Stock (except for shares
held by Sandy Spring or any of its subsidiaries other than in a fiduciary
capacity and dissenting shareholders) will automatically and without further
action be converted into the 0.62585 shares of Sandy Spring Common Stock (the
"Conversion Ratio"), subject to adjustment as set forth in the Agreement and as
described below. The Agreement may be terminated and the Merger abandoned by
ABI, upon the vote of two-thirds of its Board of Directors, if the average
closing price of Sandy Spring Common Stock on Nasdaq (the "Average Closing
Price") during the period beginning on the date on which the joint conditions to
the obligations of both ABI and Sandy Spring to consummate the Merger are met
and ending at midnight on the fourth business day thereafter (the "Adjustment
Notice Period") is less than $33.00 per share, unless during the Adjustment
Notice Period the Board of Directors of Sandy Spring agrees to adjust the
Conversion Ratio to increase the number of shares of Sandy Spring Common Stock
into which each share of ABI Common Stock shall be converted to the number of
shares determined by dividing 20.65 by the Average Closing Price.
The Agreement may be terminated and the Merger abandoned by Sandy
Spring, upon the vote of two-thirds of its Board of Directors, if the Average
Closing Price during the Adjustment Notice Period is greater than $40.375,
unless during the Adjustment Notice Period the Board of Directors of ABI agrees
to adjust the Conversion Ratio to decrease the number of shares of Sandy Spring
Common Stock into which each share of ABI Common Stock shall be converted to the
number of shares determined by dividing 25.27 by the Average Closing Price.
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If the Average Closing Price during the Adjustment Notice Period were
$30.00 per share, and if the Board of Directors of Sandy Spring agreed to
increase the Conversion Ratio at which shares of ABI Common Stock are converted,
then the Conversion Ratio at which shares of ABI Common Stock are converted
would be 0.68833 shares of Sandy Spring Common Stock for each share of ABI
Common Stock. If the Average Closing Price during the Adjustment Notice Period
were $43.375 per share, and if the Board of Directors of ABI agreed to reduce
the Conversion Ratio at which shares of ABI Common Stock are converted, then the
Conversion Ratio would be 0.58259 shares of Sandy Spring Common Stock for each
share of ABI Common Stock.
By approving the Merger and the Agreement, holders of ABI Common Stock
will authorize the Board of Directors to agree to a reduction in the Conversion
Ratio in the circumstances described above, without additional shareholder
approval. There can be no assurance as to the Average Closing Price of Sandy
Spring Common Stock during the Adjustment Notice Period or as to the actual
Conversion Ratio at which shares of ABI Common Stock will be converted.
The Conversion Ratio will be proportionately adjusted to reflect any
dividend on the Sandy Spring Common Stock payable in shares of Sandy Spring
Common Stock, or other subdivision or combination of the Sandy Spring Common
Stock prior to the Closing Date.
No fractional shares of Sandy Spring Common Stock will be issued in
connection with the Merger. Holders of ABI Common Stock entitled to receive
fractional shares of Sandy Spring Common Stock will receive cash in lieu of such
fractional shares, without interest, based upon the value of $36.75 per share of
Sandy Spring Common Stock.
The approximate number of shares of Sandy Spring Common Stock which
will be issued to holders of ABI Common Stock, based upon the number of shares
outstanding as of the Record Date and assuming no adjustment of the Conversion
Ratio and the conversion of all outstanding options and warrants to acquire ABI
Common Stock into proportionately adjusted options or warrants to acquire Sandy
Spring Common Stock, is approximately 496,033 shares, or approximately 10.19% of
the issued and outstanding shares of Sandy Spring Common Stock following the
Merger, or approximately 10.31% of the shares of Sandy Spring Common Stock
following the Merger assuming the exercise of all options and warrants to
acquire Sandy Spring Common Stock and ABI Common Stock.
There can be no assurance as to the market, trading or intrinsic value
of shares of Sandy Spring Common Stock received by shareholders of ABI in
exchange for each share of ABI Common Stock at or after the effectiveness of the
Merger. Additionally, Sandy Spring Common Stock has been listed for quotation on
the Nasdaq National Market only since April 17, 1996, and to date, significant
daily trading volume has not developed. While four market makers currently offer
to make a market in the Sandy Spring Common Stock on a regular basis, there can
be no assurance as to the level at which shares of Sandy Spring Common Stock can
be sold, or as to whether an active and liquid market in Sandy Spring Common
Stock will develop, or if one develops, whether it can be maintained.
Options and Warrants to Acquire ABI Common Stock. Pursuant to the
Agreement, each of the 10,200 incentive stock options to acquire ABI Common
Stock issued pursuant to the ABI Incentive Option Plan (the "Option Plan") and
each of the 6,000 warrants to acquire shares of ABI Common Stock held by Mr.
Marhefka which have not been exercised or expired as of the effectiveness of the
Merger, will automatically be converted into a proportionately adjusted
incentive stock options or warrants to acquire, for the same aggregate exercise
price, that number of shares of Sandy Spring Common Stock determined by
multiplying the number of shares of ABI Common Stock by the Conversion Ratio.
Following the Merger, holders of ABI warrants and options will have no rights as
a shareholder of Sandy Spring until such warrants or options shall have been
exercised.
Background of the Merger
Bank of Annapolis was originally chartered in 1925 as Ozark Permanent
Building Association of Baltimore City, Inc. (hereinafter "Ozark"), a Maryland
chartered mutual savings and loan association headquartered in
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Baltimore, Maryland. In April 1988, Ozark was converted to a stock savings and
loan association and in June 1988, Ozark's charter was amended to reflect the
change of its name to Annapolis Community Savings Association, Inc. ("ACSA"). On
June 12, 1989, ACSA completed its conversion to a trust company, changed its
name to Bank of Annapolis, and was acquired by a newly formed holding company,
ABI. Bank of Annapolis thereafter began operating as a Maryland chartered
Federal Reserve System member trust company whose deposit accounts are insured
by the FDIC.
The period subsequent to ABI's acquisition of Bank of Annapolis has
been one of continued and substantial change in the banking industry,
characterized by heightened regulatory scrutiny and intensifying competition and
consolidation. Management of ABI and the ABI Board focused on these changes and
sought to best position ABI and its shareholders to enhance the value of ABI
Common Stock, including exploring the possibilities of remaining independent,
being acquired or making acquisitions.
In the fall of 1995, ABI management received several unsolicited
preliminary indications of interest to acquire ABI and Bank of Annapolis. One
such indication of interest came from First Mariner Bancorp, Inc. ("First
Mariner"). Following preliminary discussions with First Mariner, on November 30,
1995, ABI entered into a non-binding letter of intent to be acquired by First
Mariner in a transaction whereby each share of ABI Common Stock would be
exchanged for $15.50 in cash and 2/3 of a share of First Mariner. During the
next several weeks both parties conducted due diligence and continued to
negotiate toward a definitive agreement. On December 21, 1995, following several
weeks of negotiations, ABI terminated the non-binding letter of intent to be
acquired by First Mariner after it was unable to come to terms to reach a
definitive agreement with First Mariner.
From February 1996 through mid March 1996, ABI received a number of
preliminary indications of interest and informal discussions were held with
several of these parties. In late February, management of ABI held discussions
with representatives of Sandy Spring regarding a possible acquisition of ABI and
Bank of Annapolis. In mid March, ABI received written indications of interest
from two parties. One indication of interest was from Sandy Spring, proposing to
acquire all of the outstanding shares of ABI with an exchange ratio of one share
of ABI Common Stock for 0.62585 shares of Sandy Spring Common Stock
(approximately $23.00 per share at the time), subject to a satisfactory due
diligence review by Sandy Spring, negotiation and execution of a definitive
agreement and receipt of necessary corporate and regulatory approvals. The other
indication of interest was from a Maryland based bank holding company proposing
a stock deal with ABI in the range of 1.9x the book value of ABI Common Stock.
At that time, ABI consulted with Ferris, Baker Watts, Inc. ("Ferris Baker"), an
investment banking firm with whom it had maintained an informal relationship
during the previous three years. Ferris Baker was also a market maker in ABI
stock. On March 19, 1996, the ABI Board of Directors met to consider both
proposals. At the meeting, a presentation was made by ABI's counsel regarding
the fiduciary duties of the Board and by Ferris Baker regarding the financial
terms of each of the written proposals. Following the presentations and a
lengthy discussion, the Board decided to move forward with the Sandy Spring
proposal.
During the next several weeks ABI and Sandy Spring conducted due
diligence and continued discussions of terms to be included in a possible
definitive agreement. Additionally, Ferris Baker was formally retained to act as
an investment advisor for ABI in the proposed transaction. During such time, ABI
also received two additional unsolicited written indications of interest. One
such indication of interest came from a Maryland based bank holding company
offering to acquire ABI in a cash or stock deal valued at $25.80 per share.
Management of ABI met with this party, and began the process of due diligence
and negotiating a definitive agreement. However, the offer was subsequently
withdrawn by the Maryland based holding company. The other indication of
interest was from a Virginia based bank holding company which proposed a merger
of equals with ABI whereby each outstanding share of ABI stock would be
exchanged for $24.44 in stock of the Virginia based bank holding company. The
offer was subject to a due diligence examination and the commitment of directors
and officers of ABI for continued service with the Virginia based bank holding
company.
On April 16, 1996, the ABI Board of Directors met to consider approval
of the definitive agreement with Sandy Spring and the indication of interest
from the Virginia based bank holding company. The ABI Board was
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presented with the ABI-Sandy Spring Agreement and related exhibits which set
forth the terms and conditions of the Merger. Ferris Baker made a presentation
regarding their financial analyses of the Merger, including: a financial summary
of the proposed transaction, an intrinsic value analysis of ABI Common Stock, a
comparable financial analysis of ABI with other Maryland and Virginia based
financial institutions, and a comparison of the Sandy Spring proposal to
numerous other recent transactions involving Maryland and Virginia based
commercial banks and bank holding companies. ABI's counsel reviewed the material
terms and conditions of the Merger with the ABI Board and answered specific
questions from the directors. Finally, Ferris Baker gave its oral and written
opinion that the consideration to be received by shareholders of ABI as a result
of the Agreement was fair, from a financial point of view. The ABI Board then
considered the offer from the Virginia based bank holding company. In
considering such offer, the ABI Board noted the relatively small asset size of
the Virginia based bank holding company as compared to the asset size of Sandy
Spring, and the illiquidity of the Virginia based bank holding company's stock
as compared to the potential liquidity of Sandy Spring's stock once it began
trading on the Nasdaq Stock Market. The ABI Board further noted the proposed
merger of equals structure of the other transaction made that proposal far less
desirable to ABI shareholders than the merger with Sandy Spring in that the
resulting entity in the merger of equals transaction would not provide the
potential for stockholder value provided by the Sandy Spring transaction.
Finally, the ABI Board considered that the indication of interest by the
Virginia based bank holding company was still subject to due diligence and that
a definitive agreement with it had not been negotiated. For all these reasons,
the Board ultimately determined that a possible transaction with the Virginia
based holding company was too tenuous and conditional in nature and decided not
to pursue such a potential transaction further. Following a lengthy discussion,
the ABI Board then determined the acceptance of the Sandy Spring proposal was in
the best interests of the ABI shareholders and unanimously approved the
Agreement and related exhibits and authorized their execution.
Subsequently, the Agreement was executed.
ABI's Reasons for the Merger
The ABI Board, with the assistance of outside financial and legal
advisors, has evaluated the financial, legal and market conditions bearing on
the decision to recommend the Merger. The terms of the Merger, including the
price, are a result of arm's length negotiations between representatives of ABI
and Sandy Spring. In reaching its determination that the Agreement is fair to,
and in the best interests of ABI and holders of ABI Common Stock, the ABI Board
considered a number of factors, both from a short and long term perspective,
including without limitation, the following:
(i) the ABI Board's familiarity with and review of ABI's business,
financial condition, results of operations, management,
prospects, including, but not limited to, its potential
growth, development, productivity and profitability, and the
business risks associated therewith;
(ii) the current and prospective environment in which ABI operates,
including national and local economic conditions, the
competitive environment for financial institutions generally,
the increased regulatory burden on financial institutions
generally and the trend toward consolidation in the financial
services industry;
(iii) information concerning the business, operations, asset quality
and prospects of Sandy Spring, including the recent
performance of Sandy Spring Common Stock;
(iv) the oral and written presentations and the oral and written
opinions of ABI's financial advisor, Ferris Baker, that the
consideration was fair to the holders of ABI Common Stock from
a financial point of view;
(v) the ABI Board's belief that the terms of the proposed form of
Agreement with Sandy Spring were attractive in that it would
allow ABI shareholders to receive stock in the Merger, thus
permitting shareholders to defer any tax liability associated
with the increase in the value of their stock as a
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result of the Merger, and to become shareholders in Sandy
Spring, an institution with strong operations, management and
earnings performance;
(vi) the expectation that Sandy Spring will continue to provide
quality service to the community and customers served by ABI;
(vii) the compatibility of the respective businesses of ABI and
Sandy Spring;
(viii) the addition of products and services, as well as greater
convenience through additional locations, which will be
afforded ABI customers as a result of the Merger; and
(ix) the alternative strategic courses available to ABI, including
remaining independent or exploring other indications of
interest from other potential acquirors.
THE IMPORTANCE OF THESE FACTORS RELATIVE TO ONE ANOTHER CANNOT BE
PRECISELY DETERMINED OR STATED HEREIN. THE ABI BOARD UNANIMOUSLY APPROVED THE
AGREEMENT AND RECOMMENDS THAT ABI SHAREHOLDERS VOTE FOR APPROVAL OF THE
AGREEMENT.
The ABI Board of Directors believes that the Merger is in the best
interests of ABI and ABI shareholders. The ABI Board of Directors unanimously
recommends that ABI shareholders vote "FOR" the Merger.
Opinion of ABI Financial Advisor
THE FULL TEXT OPINION OF FERRIS BAKER DATED AS OF THE DATE OF THIS
PROXY STATEMENT IS ATTACHED HERETO AS APPENDIX B. THE OPINION OF FERRIS BAKER
RELATES ONLY TO WHETHER THE CONSIDERATION TO BE RECEIVED BY THE SHAREHOLDERS OF
ABI IS FAIR FROM A FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER OF ABI AS TO HOW SUCH SHAREHOLDER SHOULD VOTE
AT THE MEETING. THE SUMMARY OF THE OPINION OF FERRIS BAKER SET FORTH IN THIS
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
SUCH OPINION.
ABI retained Ferris Baker to analyze the transaction proposed by Sandy
Spring and provide an opinion as to the fairness, from a financial point of
view, to the ABI shareholders of the consideration to be paid in the Merger.
Ferris Baker periodically publishes research reports on the banking industry and
ABI. Ferris Baker makes a market in the common stock of ABI and Sandy Spring.
ABI requested Ferris Baker to undertake the assignment because Ferris Baker is
familiar with the Mid-Atlantic banking industry, is a primary market maker for
ABI stock and provides investment research on ABI to investors.
On April 16, 1996, Ferris Baker delivered an opinion (the "Opinion") to
the Board of Directors of ABI that, based upon and subject to the considerations
set forth therein, as of such date the consideration to be received by the
shareholders of ABI pursuant to the Agreement was fair from a financial point of
view. The Opinion was based upon economic, market and other conditions in effect
as of the date of the letter. No limitations were imposed by the Board of
Directors of ABI upon Ferris Baker with respect to the investigations made or
procedures followed by them in rendering the Opinion. The Opinion was updated as
of the date of this Proxy Statement. The Opinion, which sets forth assumptions
made, material reviewed, matters considered and limits on the review, is
attached hereto as Appendix B to this Proxy Statement and is incorporated herein
by reference.
The following is a summary of the Opinion which is attached hereto as
Appendix B; however, ABI shareholders are urged to read the Opinion in its
entirety.
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In connection with the Opinion, Ferris Baker reviewed, among other
things, (i) drafts of the Agreement; (ii) annual reports for ABI for the four
fiscal years ending December 31, 1995; and (iii) annual reports on Form 10-K for
ABI for the four fiscal years ending December 31, 1995; (iv) projected financial
results for the years 1996 through 1998 provided by management of ABI. Ferris
Baker also held discussions with management of ABI regarding its past and
current business operations, financial conditions and future prospects. Ferris
Baker reviewed the reported price and trading activity of the shares of both
Sandy Spring and ABI, compared certain financial and stock market information
concerning ABI with similar information for other regional community banks,
securities of which are publicly traded, reviewed and compared the terms of the
proposed Merger to the terms of recent banking combinations and performed other
studies and analyses which Ferris Baker deemed appropriate.
Ferris Baker assumed and relied upon the accuracy and completeness of
all financial and other information reviewed for purposes of the Opinion,
whether publicly available or provided to Ferris Baker by ABI or Sandy Spring
and did not independently verify such information or make an independent
evaluation or appraisal of assets or liabilities of ABI or Sandy Spring. Ferris
Baker did not recommend the level of consideration to be paid to ABI
shareholders in connection with the Merger, which level was determined as a
result of the negotiations of the parties to the Merger.
The preparation of a fairness opinion involves determinations as to the
appropriate and relevant method(s) of financial analysis and, therefore,
reference should be made to the Opinion in its entirety and not to a summary
description. In performing its analyses, Ferris Baker made numerous assumptions
with respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of ABI or Sandy Spring. The
analyses performed by Ferris Baker are not necessarily indicative of future
results and do not purport to be appraisals or to reflect the prices at which
businesses actually may be sold.
Ferris Baker considered several valuation methods to evaluate the
effect of the transaction on shareholders of ABI including: (1) the discounted
future free cash flow of ABI; (2) the earnings and book multiple comparisons to
publicly-traded companies engaged in the banking business; (3) the merger and
acquisition activity of companies engaged in the banking business; (4) the
control premiums paid by acquirors of banks during the fourth quarter of 1995;
and (5) a liquidation analysis of ABI. Ferris Baker relied most heavily upon the
discounted future cash flow of ABI and comparable merger and acquisition
transactions in the banking industry. From management's estimates of future
performance, Ferris Baker determined the intrinsic economic value of ABI as a
stand alone entity and compared this value to the consideration to be paid by
Sandy Spring. Ferris Baker further compared the consideration to be paid by
Sandy Spring to recent bank merger transactions and determined that the
consideration to be received by ABI was fair from a financial point of view to
the shareholders of ABI.
The free cash flow is premised on the assumption that a buyer purchases
a time series of free cash flows that are generated by the assets of a business.
The free cash flow analysis ascribes value only to the cash flows that can
ultimately be taken out of the business. These free cash flows are then
discounted to the present at the firm's weighted average cost of the capital.
The weighted average cost of capital can be described as the average price a
company must pay to attract both debt and equity to properly capitalize the
firm's growth. It is these series of free cash flows that, when discounted to
the present and after subtracting claims by debtholders and others, represents
the economic value of a firm to its shareholders. The accuracy of this method of
valuation depends largely on the integrity of the projections. ABI management
projections through 1998 assumed 20% annual growth in assets and net interest
margins equal to historical levels. Ferris Baker assumed that such projections
were reasonably prepared by ABI management on bases reflecting the best
currently available estimates and judgments of ABI management as to ABI's future
financial performance.
In reviewing merger and acquisition transactions in the banking
industry, Ferris Baker reviewed publicly available records of forty-six
transactions which have been announced. No company or transaction was identical
to ABI, Sandy Spring or the Agreement. Accordingly, an analysis of the result of
this review is not mathematical. Indeed, it involves complex judgments
concerning differences among the operations of the companies involved and other
factors affecting the public-trading prices of the companies which are being
compared.
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Ferris Baker concluded:
1. Based upon the free cash flow analysis of ABI's projections for
income and cash flow and modest improvements which may arise from
improved market conditions, the transaction value of $23.00 per share
exceeds the intrinsic value of ABI Common Shares.
2. Using comparable merger and acquisition transactions in the banking
industry, the transaction value compares favorably with the transaction
multiples of other regional community banks, particularly when
considering the purchase premiums typically associated with banking
institutions.
Pursuant to the terms of an engagement letter dated March 25, 1996, ABI
agreed to pay Ferris Baker in connection with its investigation and opinions
concerning the Merger. Whether or not the Merger is effective, ABI has agreed to
indemnify and hold harmless Ferris Baker and certain related persons from and
against certain losses claimed and liabilities resulting from or arising out of
its engagement, except for the negligence, fraud or willful misconduct of Ferris
Baker.
Conditions to the Merger
The obligation of ABI to consummate the Merger is subject to various
conditions, including the following: (i) the continued accuracy of the
representations and warranties of Sandy Spring; (ii) the performance, in all
material respects, of all of the obligations, covenants and agreements of Sandy
Spring under the Agreement; (iii) the approval of the Merger by the shareholders
of ABI; (iv) the effectiveness of the Registration Statement (of which this
Proxy Statement forms a part) on Form S-4 relating to the Sandy Spring Common
Stock; (v) the receipt of all required governmental approvals and third-party
consents; (vi) the absence of any material adverse change in the financial
condition, business or results of operations of Sandy Spring and its
subsidiaries, taken as a whole; (vii) the absence of any order restraining or
prohibiting consummation of the Merger and the transactions contemplated by the
Agreement; and (viii) the absence of any litigation against Sandy Spring and its
subsidiaries which, if adversely determined, would have a material adverse
effect on Sandy Spring.
The obligation of Sandy Spring to consummate the Merger is subject to
various conditions, including the following: (i) the continued accuracy of the
representations and warranties of ABI; (ii) the performance, in all material
respects, of the obligations, covenants and agreements of ABI under the
Agreement; (iii) the receipt of all requisite regulatory approvals, which
approvals shall not contain conditions which are, in the reasonable and good
faith opinion of Sandy Spring, materially burdensome; (iv) the approval of the
Merger by the shareholders of ABI; (v) the receipt of an opinion of Sandy
Spring's independent accountants that the Merger can be accounted for as a
pooling of interests; (vi) the absence of any material adverse change in the
financial condition, business or results of operations of ABI; (vii) the absence
of any order restraining or prohibiting consummation of the Merger and the
transactions contemplated by the Agreement; (viii) the absence of litigation
which, if successful, would have a material adverse effect on the business,
financial condition or results of operations of ABI; (ix) the receipt of a
satisfactory opinion as to the federal income tax consequences of the Merger;
(x) the receipt of all required third-party consents; (xi) the compliance of
certain financial statements of ABI with generally accepted accounting
principles; and (xii) dissenting shares constituting not more than 5% of the
outstanding ABI Common Stock. See "The Merger -- Termination," "-- Accounting
Treatment," and "-- Certain Federal Income Tax Consequences."
Pending effectiveness of the Merger, ABI and Bank of Annapolis are
required to maintain their respective books and records in accordance with past
practices. Additionally, ABI has agreed that it will conduct its business only
in the ordinary course, and that, without the prior written consent of Sandy
Spring, it will not: (i) declare, set aside or pay any dividend or make any
other distribution with respect to its capital stock or reacquire any shares of
ABI Common Stock, except that ABI may declare and pay a cash dividend of $.0625
per share during each completed quarter prior to effectiveness of the Merger;
(ii) issue or sell any shares of capital stock of ABI except pursuant to
outstanding options and warrants; (iii) effect any stock split, stock dividend
or other reclassification of ABI's Common Stock; or (iv) grant any options or
issue any warrants exercisable for, or securities convertible or
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exchangeable into, capital stock of ABI or grant any stock appreciation or other
rights with respect to shares of capital stock of ABI.
In addition, ABI has agreed that it will not, without the prior written
consent of Sandy Spring: (i) sell or dispose of any significant assets of ABI or
any ABI subsidiary; (ii) merge or consolidate ABI or any ABI subsidiary with or
otherwise acquire any other entity or file any applications or make any contract
with respect to branching by Bank of Annapolis; (iii) change the articles of
incorporation, charter documents or other governing instruments of ABI or any
ABI subsidiary; (iv) grant to any officer, director or employee of ABI any
increase in compensation or benefits except for customary increases in
compensation for non-officer employees in the ordinary course of business, and
bonuses to officers and employees and 401(k) contributions consistent with past
practice; (v) adopt any new employee plan or arrangement of any type; (vi)
authorize severance pay or other benefits for any officer or director of ABI or
any ABI subsidiary; (vii) incur any material obligation or enter into or extend
any material agreement or lease; (viii) engage in any lending activities other
than in the ordinary course of business consistent with past practices; (ix)
form any new subsidiary or cause or permit a material change in the activities
presently conducted by ABI; (x) purchase any debt securities or derivative
securities, including collateralized mortgage obligations or real estate
mortgage investment conduit products, other than certain liquidity investments;
(xi) purchase any equity securities; or (xii) make any commitment with respect
to any of the matters set forth in this paragraph.
Pursuant to the Agreement, ABI and Bank of Annapolis have agreed that
they will not authorize or permit any representative of ABI or Bank of
Annapolis, directly or indirectly, to initiate contact with any person or entity
in an effort to solicit, initiate or encourage any "takeover proposal"
(generally, any proposal other than as contemplated by the Agreement, for a
merger or other business combination involving ABI or Bank of Annapolis, for the
acquisition of a substantial equity interest in ABI or Bank of Annapolis or for
the acquisition of a substantial portion of the assets of ABI or Bank of
Annapolis) without the prior written consent of Sandy Spring or, except as the
fiduciary duties of ABI's Board of Directors may otherwise require, cooperate
with, negotiate with or enter into an agreement with any party relating to a
takeover proposal. Further, ABI has agreed to give prompt written notice to
Sandy Spring upon becoming aware of any takeover proposal. Finally, ABI has
further agreed that it shall be a condition precedent to ABI's entering into a
letter of intent, agreement in principle or definitive agreement with any
third-party with respect to a takeover proposal, or supporting or indicating an
intent to support a takeover proposal, that ABI or such third-party which is a
party to the takeover proposal shall have paid Sandy Spring the sum of $650,000.
On payment of such amount to Sandy Spring, Sandy Spring shall have no cause of
action or claim against ABI or Bank of Annapolis or any officer or director of
ABI or Bank of Annapolis, or the third party, with respect to or in connection
with such takeover proposal or the Agreement.
Termination
The Agreement may be terminated, and the Merger abandoned, at any time
prior to the effectiveness of the Merger, whether or not such termination occurs
before or after approval of the Merger by the shareholders of ABI, and without
further action by shareholders of ABI, in the following circumstances: (i) by
mutual consent of the parties; (ii) unilaterally by either ABI or Sandy Spring
at any time after December 31, 1996 or such later date as may be agreed to,
except that if the failure to close by that date is the result of the failure of
one party to perform an obligation, that party may not terminate under this
provision; (iii) unilaterally by ABI upon notice to Sandy Spring if a condition
to the obligation of ABI to consummate the Merger becomes impossible of
satisfaction and is not waived, if such condition is not cured within 30 days;
or (iv) unilaterally by Sandy Spring upon notice to ABI if a condition to the
obligation of Sandy Spring to consummate the Merger becomes impossible of
satisfaction and is not waived, if such condition is not cured within 30 days.
Additionally, the Agreement may be terminated and the Merger abandoned
unilaterally, by ABI, if the Average Closing Price of Sandy Spring Common Stock
during the Adjustment Notice Period is less than $33.00 per share or by Sandy
Spring, if the Average Closing Price of Sandy Spring Common Stock during the
Adjustment Notice Period is greater than $40.375 per share, subject in each case
to the ability of the non-terminating party to
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agree to an adjustment to the Conversion Ratio as set forth above. See "The
Merger -- Consideration to Be Received by ABI Shareholders."
Sandy Spring may also terminate the Agreement and abandon the Merger if
(i) ABI or Bank of Annapolis enters into any agreement, letter of intent or
agreement in principle with the intent to pursue or effect a "takeover
proposal," (ii) the ABI Board of Directors fails to recommend approval of the
Agreement and the Merger to the ABI Shareholders, or withdraws such a
recommendation; or (iii) the ABI Board of Directors fails to solicit proxies
from the ABI shareholders to approve the Merger or to take all other action
necessary to obtain approval of the Agreement and the Merger.
In the event of any termination, no party shall have any further
obligation to the other, except that if a termination results from (i) a
material breach by Sandy Spring or Sandy Spring National Bank, Sandy Spring and
Sandy Spring National Bank shall reimburse ABI and Bank of Annapolis for
out-of-pocket expenses incurred in connection with the Merger and the Agreement,
up to $150,000; or (ii) a material breach by ABI or Bank of Annapolis, including
a termination by Sandy Spring pursuant to the termination provision relating to
pursuit of other takeover proposals by ABI and Bank of Annapolis, ABI and Bank
of Annapolis shall pay Sandy Spring $650,000 as liquidated damages.
Prospects of Sandy Spring after the Merger
Sandy Spring and its banking subsidiaries operate in a very competitive
banking environment. Sandy Spring National Bank competes for deposit and lending
business with numerous other commercial banks and savings and loan associations.
Competition also comes from other providers of financial services, including
consumer finance companies, credit unions, insurance companies, mutual funds,
securities brokerage firms and private lenders. As a result of recently enacted
changes in federal and state statutes relating to interstate branching and bank
acquisitions, additional institutions not currently in competition with Sandy
Spring may enter the market. Many of these competitors may have the advantage of
greater size, capital and managerial resources and consequently higher lending
limits and a wider range of services than Sandy Spring currently offers.
The continued success and profitability of Sandy Spring after the
Merger are dependent on the ability of Sandy Spring to continue to compete
successfully in this environment. While Sandy Spring believes that it is able to
compete effectively in its primary market area, there can be no assurance that
Sandy Spring will continue to be able to meet the competitive challenges in its
market, or to retain or further develop the market already developed by ABI.
Amendment and Waiver
Any of the terms and conditions of the Agreement may be amended or
modified by the parties in writing, at any time before or after approval by the
shareholders of ABI, except that no amendment or modification after approval by
the shareholders of ABI may reduce or change the amount or form of consideration
to be received by shareholders of ABI or change any other terms or conditions of
the Agreement if such changes, individually or in the aggregate, would
materially, adversely affect the shareholders of ABI. Any term or condition of
the Agreement may be waived at any time, in writing, by the party which, or the
shareholders of which, is entitled to the benefit of such waived term or
condition. By approving the Merger and the Agreement, holders of ABI Common
Stock will authorize the Board of Directors to agree to a reduction in the
Conversion Ratio in the circumstances described above, without additional
shareholder approval. See "The Merger -- Consideration to be Received by ABI
Shareholders."
Effectiveness of the Merger
The Closing Date of the Merger shall take place within 15 days of the
receipt of all required approvals and authorizations of government and
regulatory authorities and the expiration of all applicable waiting periods, and
the
-26-
satisfaction or waiver of all conditions to the Merger. The Merger shall become
effective upon the later of the filing of Articles of Merger with the Maryland
Department of Assessments and Taxation or the time indicated in such Articles of
Merger. It is expected that the Merger will become effective within one day of
the Closing.
Surrender of Certificates
Upon effectiveness of the Merger, certificates which formerly
represented shares of ABI Common Stock will represent the number of shares of
Sandy Spring Common Stock into which shares shall have been converted, except
that until exchanged for Sandy Spring Common Stock certificates, the holders of
ABI Common Stock certificates will not be entitled to vote or to receive
dividends or other distributions or payments on Sandy Spring Common Stock.
Promptly following effectiveness of the Merger, Sandy Spring National
Bank, acting as exchange agent (the "Exchange Agent"), will mail to each ABI
shareholder information regarding the exchange of his or her shares of ABI
Common Stock. ABI shareholders should not deliver certificates representing ABI
Common Stock to ABI or the Exchange Agent until they have received transmittal
forms, and should not return certificates for ABI Common Stock with the enclosed
form of proxy. Upon surrender of certificates representing shares of ABI Common
Stock, the Exchange Agent will issue to such shareholder one or more
certificates representing the number of whole shares of Sandy Spring Common
Stock into which such shareholder's shares shall have been converted, together
with a check representing payment, without interest, of cash in lieu of any
fractional share of Sandy Spring Common Stock to which such shareholder may be
entitled, and, if appropriate, a check representing payment, without interest,
of any dividend or other cash payment or distribution on such shareholder's
shares of Sandy Spring Common Stock which may have been withheld as a result of
such shareholder's failure to earlier surrender his or her ABI share
certificates for redemption.
Certain Federal Income Tax Consequences
Sandy Spring has received an opinion from Stegman & Company, its tax
advisor in respect of the Merger, as to certain federal income tax consequences
of the Merger. The opinion provides that the Merger of ABI with and into Sandy
Spring pursuant to the Agreement will qualify as a tax free reorganization under
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended. The
following is a description of the expected federal income tax consequences of
the Merger to Sandy Spring, ABI and the shareholders of ABI.
No gain or loss will be recognized by ABI upon consummation of the
Merger.
No gain or loss will be recognized by Sandy Spring upon the receipt of
ABI assets in exchange for Sandy Spring Common Stock, cash and the assumption of
ABI's liabilities. The federal income tax basis of the assets of ABI in the
hands of Sandy Spring will be the same as the tax basis of such assets in the
hands of ABI immediately prior to the effective time of the Merger. The holding
period of the assets of ABI transferred to Sandy Spring will include the period
during which such assets were held by ABI prior to the effective time of the
Merger.
No gain or loss will be recognized by the shareholders of ABI on the
receipt of shares of Sandy Spring Common Stock pursuant to the Merger. The
federal income tax basis of the shares of Sandy Spring Common Stock received by
a shareholder of ABI will be the same as the basis of the ABI Common Stock
surrendered in exchange therefor. The holding period of the Sandy Spring Common
Stock received by a shareholder of ABI will be the same as the holding period of
the ABI Common Stock surrendered in exchange therefor provided the stock was
held by the shareholder as a capital asset.
Cash received by shareholders of ABI in lieu of fractional shares of
Sandy Spring Common Stock will be treated as received by such shareholders as
distributions in redemption of such shares in full payment in exchange for the
stock redeemed.
-27-
Cash received in exchange for ABI Common Stock by shareholders of ABI
who exercise their dissenters' rights will be treated as received by such
shareholders as distributions in redemption of such shares subject to the
limitations and conditions of Section 302 of the Code. A shareholder will be
required to recognize gain to the extent of the lesser of the shareholder's gain
realized on the transaction or the amount of cash received by the shareholder. A
dissenting shareholder's realized gain will be equal to the difference between
the fair market value of the Sandy Spring Common Stock and the cash received by
the shareholder and the shareholder's basis in the ABI Common Stock surrendered.
The opinion of Stegman & Company is not binding on the IRS and the IRS
could disagree with the conclusions reached therein. In the event of such
disagreement, there is no assurance that the IRS would not prevail in a judicial
or administrative proceeding.
As a result of the complexity of the tax laws and the impact of each
shareholder's particular circumstances upon the tax consequences of the Merger,
the information set forth above regarding the federal income tax consequences of
the Merger is not intended to be individualized tax or legal advice to the
shareholders of ABI. Each shareholder should consult his or her own tax or
financial counsel as to the specific federal, state, and local tax consequences
of the Merger, if any, to such shareholder.
Accounting Treatment
It is anticipated that the Merger will be accounted for as a pooling of
interests under generally accepted accounting principles. The obligation of
Sandy Spring to consummate the Merger is conditioned upon the receipt by Sandy
Spring of an opinion of its independent accountants that the Merger can be
accounted for as a pooling of interests, under generally accepted accounting
principles, if consummated in accordance with the Agreement. Under the pooling
of interests method of accounting, the historical basis of the assets and
liabilities of Sandy Spring and ABI will be combined at the Closing and carried
forward at their previously recorded amounts and the shareholders' equity
accounts of Sandy Spring and ABI will be combined on Sandy Spring's consolidated
balance sheet. Income and other financial statements of Sandy Spring issued
after consummation of the Merger will be restated retroactively to reflect the
consolidated operations of Sandy Spring and ABI as if the Merger had taken place
prior to the periods covered by such financial statements.
In order for the Merger to qualify for pooling of interests accounting
treatment, substantially all of the outstanding ABI Common Stock must be
exchanged for Sandy Spring Common Stock. In the event that any of the conditions
to the pooling of interests method of accounting treatment are not satisfied,
the Merger would not qualify for the pooling of interests method of accounting,
and a condition to the consummation of the Merger would not be fulfilled. See
"The Merger -- Conditions to the Merger." Under generally accepted accounting
principles, all costs incurred to effect a combination accounted for as a
pooling of interests are expenses of the combined enterprise rather than
additions to assets or reductions to shareholders' equity. Accordingly, the
costs incurred in connection with the Merger will be charged to expense and
deducted in determining the results of operations of the combined entity.
Expenses of a pooling of interests typically include, but are not
limited to, registration fees and expenses, proxy solicitation costs, legal and
accounting fees, salaries and other expenses related to services of employees,
and costs of combining operations of the previously separate companies. In
connection with the Merger of ABI and Sandy Spring, accounting adjustments and
accruals will be required to recognize the specific one-time costs associated
with the Merger. These adjustments and accruals will cause significant
reductions to the combined entity's results of operations for the initial period
following consummation of the Merger.
ABI and Bank of Annapolis have employment and other agreements with an
executive officer and a director. See "The Merger -- Interests of Certain
Persons." These agreements provide for change in control payments to such
executive officer and director upon a change in control of ABI, which will occur
upon consummation of the Merger. This liability will be recognized through a
charge to expense of approximately $90,000. The after-tax effect of recognizing
this liability will reduce the combined entity's results of operations by
approximately $55,000 in the
-28-
initial period following consummation of the Merger. Additionally the aggregate
transactional expenses of ABI and Sandy Spring to effect the Merger and combine
operations of the two companies will have an after tax cost of approximately
$486,000, which will be recognized in the initial period following consummation
of the Merger.
Interests of Certain Persons
Management and Operations of Sandy Spring Following the Merger.
Following effectiveness of the Merger, the officers and directors of Sandy
Spring and Sandy Spring National Bank as of the effectiveness of the Merger will
continue to serve as the officers and directors of Sandy Spring and Sandy Spring
National Bank. It is anticipated that, subject to review, substantially all of
the non-executive officer employees, and the chief accounting officer, of ABI
and Bank of Annapolis will become employees of Sandy Spring. Sandy Spring
National Bank has agreed to provide cash severance benefits to employees other
than Mr. Marhefka and Mr. Katsef. The estimated after-tax cost of these benefits
is $5,171.
ABI Options and Warrants. ABI maintains an incentive stock option plan
which provides for the grant to employees and officers, including officers who
are directors, of options to purchase ABI Common Stock. As of the date hereof,
presently exercisable options to acquire an aggregate of 10,200 shares of ABI
Common Stock at exercise prices ranging from $8.33 to $8.75 per share were held
by two current and former executive officers of ABI or Bank of Annapolis.
Options which are not exercised prior to Closing will be converted into
proportionately adjusted options to acquire Sandy Spring Common Stock. Holders
of options to acquire ABI Common Stock will not be entitled to vote the shares
underlying the options at the Meeting except to the extent that such options
have been exercised prior to the Record Date.
Additionally, ABI has issued nontransferable warrants to acquire 6,000
share of ABI Common Stock to Mr. Marhefka. The warrants are exercisable at $8.33
per share through March 31, 1998, and in connection with the Merger will be
converted into proportionately adjusted warrants to acquire Sandy Spring Common
Stock.
Employment Agreements. The Bank of Annapolis has entered into an
employment agreement with Mr. Marhefka (the "Employment Agreement"). Mr.
Marhefka's current aggregate base salary under the Employment Agreement is
$128,274. Upon the occurrence of a change in control of Bank of Annapolis (as
defined in the Employment Agreement), Mr. Marhefka would receive a lump sum
severance payment equal to six months' salary at the current rate, or $64,137.
The Merger constitutes a change in control of Bank of Annapolis for purposes of
the Employment Agreement, entitling Mr. Marhefka to the described payment.
Additionally, the Board of Directors of Bank of Annapolis has
authorized a cash bonus payment in the amount of $25,000 to Stanley Katsef,
Chairman of the Board of ABI and Bank of Annapolis, immediately prior to
consummation of the Merger.
Restrictions on Resale of Sandy Spring Common Stock by Controlling Persons
The Sandy Spring Common Stock issued in connection with the Merger will
be freely transferable under the Securities Act of 1933 as amended (the
"Securities Act"), except for shares issued to any ABI shareholders who may be
deemed to be affiliates of ABI under Rule 145 promulgated pursuant to the
Securities Act. Such persons may not sell their shares of Sandy Spring Common
Stock except pursuant to an effective registration statement under the
Securities Act or pursuant to an available exemption from registration under the
Securities Act. To the best knowledge of Sandy Spring and ABI, the only ABI
shareholders who may be deemed affiliates subject to these limitations are the
current executive officers and directors of ABI, who have been advised of these
restrictions.
-29-
Dissenters' Rights
Any shareholder of ABI who does not vote in favor of the Merger and the
transactions contemplated by the Agreement and who has given prior written
notice to ABI of such shareholder's objection to the proposed transaction and
who otherwise complies with the procedures set forth in Section 3, Subtitle 2 of
the Maryland General Corporation Law (the "MGCL"), shall be entitled to receive
payment in cash of the fair value of such shareholder's shares of ABI Common
Stock. A copy of Section 3, Subtitle 2 of the MGCL is attached hereto as
Appendix E.
An ABI shareholder wishing to demand payment of the fair value of any
part or all of his or her shares of ABI Common Stock must submit a written
notice to the Secretary of ABI at or prior to the Meeting, stating that such
shareholder objects to the proposed Merger. The shareholder must then not vote
those shares in favor of the Merger. Merely voting against the Merger or not
voting in favor of the Merger will not constitute notice of objection or dissent
and will not entitle a shareholder to payment in cash of the value of his or her
shares. Promptly following the effectiveness of the Merger, Sandy Spring, as the
successor to ABI, will notify in writing each shareholder of ABI who filed a
notice of objection to the Merger, of the date on which the Articles of Merger
were accepted for record. Within twenty (20) days of the date on which the
Articles of Merger were accepted for record, an objecting shareholder must make
a written demand for payment of the fair value of his or her stock, stating the
number and class of shares for which payment is demanded. The notice of
objection should be sent to ABI at 2024 West Street, Annapolis, Maryland 21401,
Attn: Michael Weinberg, Secretary.
Sandy Spring's notice of the date on which the Articles of Merger were
accepted may contain an offer of payment and certain financial disclosures. If
an objecting shareholder who has followed all of the procedural steps required
to demand payment of fair value has not received payment for his or her shares,
he or she may, or Sandy Spring may, within fifty (50) days of the acceptance of
the Articles of Merger, petition the court of equity in Montgomery County for
appraisal of the fair value of his or her shares of ABI Common Stock as of the
date of the Meeting, without including any appreciation or depreciation
resulting directly or indirectly from the Merger or its proposal. Any
shareholder who filed a notice of objection, but fails to file a written demand
for payment of the fair value in a timely manner will be bound by the
shareholder vote and will not be entitled to receive payment in cash as a holder
of dissenting shares. A shareholder who demands payment for his or her stock as
a dissenting shareholder has no right to receive any dividends or other
distributions on such shares (or the shares of Sandy Spring Common Stock into
which such dissenting shares would be converted), after close of business on the
date of the Meeting at which the Merger is approved, and has no other rights,
including voting rights, with respect to such shares, except the payment of fair
value. The rights of a shareholder who demands payment will be restored if the
demand for payment is withdrawn, a petition of appraisal is not filed within the
time required, a court determines that the shareholder is not entitled to
relief, or the Merger is abandoned or rescinded.
If the court finds that the objecting shareholder is entitled to an
appraisal of his or her stock, the court shall appoint three disinterested
appraisers to determine the fair value of the stock. Within sixty (60) days
after appointment (or such longer period as the court may direct), the
appraisers shall file with the court and mail to each dissenting shareholder
their report stating their conclusion as to the fair value of the stock. Within
fifteen (15) days after the filing of the report, any party may object to the
report and request a rehearing. The court, upon motion of any party, will enter
an order either confirming, modifying or rejecting the report and, if confirmed
or modified, enter judgement directing the time within which payment must be
made. If the report is rejected, the court may determine the fair value or remit
the proceeding to the same or other appraisers. Any judgement entered pursuant
to a court proceeding will include interest from the date of the shareholders'
vote at the Meeting, unless the court finds that the shareholder's refusal to
accept a written offer to purchase the shares was arbitrary, vexatious or not in
good faith.
The expenses of the appraisal proceedings, not including fees and
expenses of counsel, and not including fees or expenses of experts if Sandy
Spring made an offer for dissenting shareholders' stock or if the fair value of
the stock as determined in the proceeding materially exceeds the amount of the
offer, will be the responsibility of Sandy Spring, except that all or any part
of such expenses may be assessed against any or all of the dissenting
-30-
shareholders to whom an offer to pay for such shareholder's shares has been
made, if the court finds the failure to accept such offer was arbitrary,
vexatious or not in good faith.
The Agreement gives Sandy Spring the ability to terminate the Agreement
should dissenters' rights be perfected in respect of more than 5% of the
outstanding ABI Common Stock. Dissenting shareholders will not be entitled to
receive any payment for their shares in the event that the Merger is not
effected after receiving shareholder approval for any reason, including, but not
limited to termination due to the number of shares with respect to which
dissenters' rights have been perfected.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined balance sheets and the unaudited pro
forma combined statements of income of Sandy Spring set forth below give effect,
using the pooling of interests method of accounting, to the proposed Merger of
ABI with and into Sandy Spring based upon an exchange ratio of 0.62585 shares of
Sandy Spring Common Stock for each share of ABI Common Stock outstanding as of
each respective period end. See "The Merger -- Consideration to be Received by
ABI Shareholders." The unaudited pro forma balance sheets are presented as
though the proposed Merger had occurred on March 31, 1996. The unaudited pro
forma combined income statements are presented as though the proposed Merger had
occurred on January 1, 1993.
The unaudited pro forma financial information set forth below is for
illustrative purposes only, and therefore is not necessarily indicative of the
financial condition or results of operations of Sandy Spring as they would have
been had the proposed Merger occurred during the periods presented or as they
may be in the future. The unaudited pro forma financial information set forth
below is derived from and should be read in conjunction with the historical
financial statements of Sandy Spring, including the notes thereto, which are
included in Sandy Spring's Annual Report on Form 10-K for the year ended
December 31, 1995 and Quarterly Report on Form 10-Q for the quarter ended March
31, 1996, incorporated by reference herein, and the historical financial
statements of ABI, including the notes thereto, which are included in ABI's
Annual Report to Shareholders for the year ended December 31, 1995 and Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1996, which are included
as Appendices C and D hereto, and incorporated by reference herein.
Under generally accepted accounting principles, all costs incurred to
effect a combination accounted for as a pooling of interests are expenses of the
combined enterprise and, accordingly, are charged to expense and deducted in
determining the results of operations of the combined entity. Specific one-time
costs associated with the Merger that will cause significant reductions to the
combined entity's results of operations in the initial period following
consummation of the Merger include change in control and severance payments,
registration and application fees, legal, accounting and advisory fees and
expenses, and costs of combining the operations of ABI and Sandy Spring, which
are estimated to amount to approximately $663,000 on a pretax basis, and
$541,000 net of related tax effects. See "The Merger -- Accounting Treatment."
The amounts shown on the Unaudited Pro Forma Combined Balance Sheets of Sandy
Spring and ABI have been calculated by adding the balances from the historical
unaudited consolidated balance sheets of Sandy Spring and ABI as of March 31,
1996, and adjusting for the specific one time costs associated with the Merger
and the effects of the issuance of Sandy Spring Common Stock and the
cancellation of ABI Common Stock in the Merger. The amounts shown on the
Unaudited Pro Forma Combined Statements of Income have been calculated by adding
the amounts from the historical statements of income of Sandy Spring and ABI for
the indicated periods, without reduction for the specific one time costs of the
Merger. Earnings per share amounts have been based upon the pro forma weighted
average number of common shares outstanding assuming a Conversion Ratio of
0.62585 shares of Sandy Spring Common Stock for each share of ABI Common Stock.
-31-
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
at March 31, 1996
(Dollars in thousands)
Pro Forma
Pro Forma
Sandy Spring ABI Adjustments Combined
--------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 29,845 $ 81 $ - $ 29,926
Interest-bearing deposits with banks 5,491 30 5,521
Federal funds sold 16,048 4,345 20,393
Residential mortgage loans held for sale 3,416 474 3,890
Investments available for sale (at fair value) 184,201 - 184,201
Investments held to maturity 120,573 975 121,548
Other equity securities 3,965 982 4,947
Total loans (net of unearned income) 426,140 71,525 497,665
Less: Allowance for credit losses (6,060) (720) (6,780)
--------- --------- ---------
Net loans 420,080 70,805 - 490,885
Premises and equipment 18,111 1,928 20,039
Accrued interest receivable 5,827 657 6,484
Other real estate owned, net of allowance - - -
Other assets 11,029 759 - 11,788
-------- -------- -------- --------
Total assets $818,586 $ 81,036 $ - $899,622
======== ======== ======== ========
LIABILITIES:
Noninterest-bearing deposits $ 92,427 $ 2,226 $ - $ 94,653
Interest-bearing deposits 603,664 63,631 667,295
-------- -------- --------
Total deposits 696,091 65,857 761,948
Short-term borrowings 34,232 5,000 39,232
Long-term borrowings 5,144 - 5,144
Accrued interest and other liabilities 3,201 973 541(1) 4,715
-------- -------- -------- --------
Total liabilities 738,668 71,830 541 811,039
-------- -------- -------- --------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, authorized 15,000,000 shares;
outstanding 4,373,749 actual shares and 4,865,279
pro forma combined shares 4,374 491(2) 4,865
Common stock, $1 par value, authorized
5,000,000 shares; outstanding 785,375 shares - 785 (785)(2) -
Surplus 26,796 5,354 294 (2) 32,444
Retained earnings 48,868 3,067 (541)(1) 51,394
Net unrealized gain (loss) on investments available
for sale (120) - - (120)
-------- -------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 79,918 9,206 (541) 88,583
-------- -------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $818,586 $ 81,036 $ - $899,622
======== ======== ======== ========
See Notes to Pro Forma Combined Financial Information.
-32-
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
Three Months Ended March 31, 1996
(Dollars in thousands, except for per share data)
Pro Forma
Sandy Spring ABI Combined
----------------------------------------------------------------
Interest income:
Interest and fees on loans $ 9,495 $ 1,856 $ 11,351
Interest on loans held for sale 33 - 33
Interest on deposits with banks 23 - 23
Interest and dividends on securities:
Taxable 3,469 38 3,507
Nontaxable 845 - 845
Interest on federal funds sold 352 52 404
-------- -------- --------
Total interest income 14,217 1,946 16,163
Interest expense:
Interest on deposits 6,134 838 6,972
Interest on short-term borrowings 356 42 398
Interest on long-term borrowings 63 26 89
-------- -------- --------
Total interest expense 6,553 906 7,459
-------- -------- --------
Net interest income 7,664 1,040 8,704
Provision for credit losses 150 33 183
Net interest income after provision
for credit losses 7,514 1,007 8,521
-------- -------- --------
Noninterest income:
Securities gains (losses) (3) (51) (54)
Service charges on deposit accounts 638 10 648
Gains on mortgage sales 153 44 197
Other income 708 2 710
-------- -------- --------
Total noninterest income 1,496 5 1,501
Noninterest expenses:
Salaries and employee benefits 3,071 323 3,394
Occupancy expense of premises 549 (12) 537
Equipment expenses 503 22 525
FDIC insurance expense 1 1 2
Outside data services 212 16 228
Other expenses 987 75 1,062
-------- -------- --------
Total noninterest expenses 5,323 425 5,748
-------- -------- --------
Income before income taxes 3,687 587 4,274
Income tax expense 1,171 227 1,398
-------- -------- --------
Net income $ 2,516 $ 360 $ 2,876
======== ======== ========
Net income per common share $ 0.58 $ 0.46 $ 0.60(2)
======== ======== ========
Weighted average shares outstanding 4,341,933 784,241 4,832,750(2)
See Notes to Pro Forma Combined Financial Information.
-33-
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
Three Months Ended March 31, 1995
(Dollars in thousands, except for per share data)
Pro Forma
Sandy Spring ABI Combined
----------------------------------------------------------------
Interest income:
Interest and fees on loans $ 8,756 $ 1,370 $ 10,126
Interest on loans held for sale - - -
Interest on deposits with banks - - -
Interest and dividends on securities:
Taxable 3,396 76 3,472
Nontaxable 902 1 903
Interest on federal funds sold 89 60 149
-------- -------- --------
Total interest income 13,143 1,507 14,650
Interest expense:
Interest on deposits 5,250 664 5,914
Interest on short-term borrowings 787 29 816
Interest on long-term borrowings 55 36 91
-------- -------- --------
Total interest expense 6,092 729 6,821
-------- -------- --------
Net interest income 7,051 778 7,829
Provision for credit losses - 50 50
-------- -------- --------
Net interest income after provision
for credit losses 7,051 728 7,779
-------- -------- --------
Noninterest income:
Securities gains (losses) (6) - (6)
Service charges on deposit accounts 579 9 588
Losses on mortgage sales - (12) (12)
Other income 459 2 461
-------- -------- --------
Total noninterest income 1,032 (1) 1,031
Noninterest expenses:
Salaries and employee benefits 2,692 228 2,920
Occupancy expense of premises 459 (7) 452
Equipment expenses 438 21 459
FDIC insurance expense 361 32 393
Outside data services 163 14 177
Other expenses 978 98 1,076
-------- -------- --------
Total noninterest expenses 5,091 386 5,477
-------- -------- --------
Income before income taxes 2,992 341 3,333
Income tax expense 889 132 1,021
-------- -------- --------
Net income $ 2,103 $ 209 $ 2,312
======== ======== ========
Net income per common share $ 0.49 $ 0.30 $ 0.49(2)
======== ======== ========
Weighted average shares outstanding 4,285,918 703,232 4,726,036(2)
---------
See Notes to Pro Forma Combined Financial Information.
-34-
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
Year Ended December 31, 1995
(Dollars in thousands, except for per share data)
Pro Forma
Sandy Spring ABI Combined
----------------------------------------------------------------
Interest income:
Interest and fees on loans $ 37,576 $ 6,350 $ 43,926
Interest on loans held for sale 55 - 55
Interest on deposits with banks 35 4 39
Interest and dividends on securities:
Taxable 13,471 298 13,769
Nontaxable 3,450 4 3,454
Interest on federal funds sold 654 218 872
-------- ------- --------
Total interest income 55,241 6,874 62,115
Interest expense:
Interest on deposits 23,604 3,101 26,705
Interest on short-term borrowings 2,175 111 2,286
Interest on long-term borrowings 219 132 351
-------- -------- --------
Total interest expense 25,998 3,344 29,342
-------- -------- --------
Net interest income 29,243 3,530 32,773
Provision for credit losses - 180 180
Net interest income after provision
for credit losses 29,243 3,350 32,593
-------- -------- --------
Noninterest income:
Securities losses (240) (39) (279)
Service charges on deposit accounts 2,533 36 2,569
Gains on mortgage sales 232 12 244
Other income 1,921 23 1,944
-------- -------- --------
Total noninterest income 4,446 32 4,478
Noninterest expenses:
Salaries and employee benefits 11,630 1,096 12,726
Occupancy expense of premises 1,881 (67) 1,814
Equipment expenses 1,867 76 1,943
FDIC insurance expense 752 66 818
Outside data services 737 48 785
Other expenses 3,920 418 4,338
-------- -------- --------
Total noninterest expenses 20,787 1,637 22,424
-------- -------- --------
Income before income taxes 12,902 1,745 14,647
Income tax expense 3,979 674 4,653
-------- -------- --------
Net income $ 8,923 $ 1,071 $ 9,994
======== ======== ========
Net income per common share $ 2.07 $ 1.42 $ 2.09(2)
======== ======== ========
Weighted average shares outstanding 4,303,287 748,709 4,771,867(2)
See Notes to Pro Forma Combined Financial Information.
-35-
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
Year Ended December 31, 1994
(Dollars in thousands, except for per share data)
Pro Forma
Sandy Spring ABI Combined
----------------------------------------------------------------
Interest income:
Interest and fees on loans $ 27,672 $ 4,922 $ 32,594
Interest on loans held for sale 57 - 57
Interest on deposits with banks 37 1 38
Interest and dividends on securities:
Taxable 14,030 269 14,299
Nontaxable 4,037 4 4,041
Interest on federal funds sold 431 118 549
-------- -------- --------
Total interest income 46,264 5,314 51,578
Interest expense:
Interest on deposits 17,864 2,168 20,032
Interest on short-term borrowings 1,165 149 1,314
Interest on long-term borrowings 150 - 150
-------- -------- --------
Total interest expense 19,179 2,317 21,496
-------- -------- --------
Net interest income 27,085 2,997 30,082
Provision for credit losses 160 52 212
-------- -------- --------
Net interest income after provision
for credit losses 26,925 2,945 29,870
-------- -------- --------
Noninterest income:
Securities losses (84) - (84)
Service charges on deposit accounts 2,308 40 2,348
Gains on mortgage sales 164 11 175
Other income 1,741 9 1,750
-------- -------- --------
Total noninterest income 4,129 60 4,189
Noninterest expenses:
Salaries and employee benefits 11,060 899 11,959
Occupancy expense of premises 1,828 77 1,905
Equipment expenses 1,545 72 1,617
FDIC insurance expense 1,388 122 1,510
Outside data services 582 48 630
Other expenses 3,492 349 3,841
-------- -------- --------
Total noninterest expenses 19,895 1,567 21,462
-------- -------- --------
Income before income taxes 11,159 1,438 12,597
Income tax expense 3,139 555 3,694
-------- -------- --------
Net income $ 8,020 $ 883 $ 8,903
======== ======== ========
Net income per common share $ 1.89 $ 1.32 $ 1.90(2)
======== ======== ========
Weighted average shares outstanding 4,248,186 700,240 4,686,431(2)
See Notes to Pro Forma Combined Financial Information.
-36-
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
Year Ended December 31, 1993
(Dollars in thousands, except for per share data)
Pro Forma
Sandy Spring ABI Combined
----------------------------------------------------------------
Interest income:
Interest and fees on loans $ 23,695 $ 4,220 $ 27,915
Interest on loans held for sale 300 - 300
Interest on deposits with banks 399 - 399
Interest and dividends on securities:
Taxable 12,350 115 12,465
Nontaxable 4,247 - 4,247
Interest on federal funds sold 683 180 863
-------- ------- --------
Total interest income 41,674 4,515 46,189
Interest expense:
Interest on deposits 16,990 2,082 19,072
Interest on short-term borrowings 641 - 641
Interest on long-term borrowings 64 16 80
-------- -------- --------
Total interest expense 17,695 2,098 19,793
-------- -------- --------
Net interest income 23,979 2,417 26,396
Provision for credit losses 950 106 1,056
-------- -------- --------
Net interest income after provision
for credit losses 23,029 2,311 25,340
-------- -------- --------
Noninterest income:
Securities gains 257 - 257
Service charges on deposit accounts 2,028 24 2,052
Gains on mortgage sales 976 29 1,005
Other income 1,547 9 1,556
-------- -------- --------
Total noninterest income 4,808 62 4,870
Noninterest expenses:
Salaries and employee benefits 9,066 673 9,739
Occupancy expense of premises 1,598 162 1,760
Equipment expenses 1,252 56 1,308
FDIC insurance expense 1,275 104 1,379
Outside data services 519 42 561
Other expenses 3,232 361 3,593
-------- -------- --------
Total noninterest expenses 16,942 1,398 18,340
-------- -------- --------
Income before income taxes 10,895 975 11,870
Income tax expense 2,888 373 3,261
-------- -------- --------
Net income $ 8,007 $ 602 $ 8,609
======== ======== ========
Net income per common share $ 1.95 $ 1.05 $ 1.92(2)
======== ======== ========
Weighted average shares outstanding 4,117,220 572,536 4,475,542(2)
See Notes to Pro Forma Combined Financial Information.
-37-
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(Unaudited)
(1) Specific, one time expenses to effect the Merger of approximately $541,000,
net of related tax effects, have been reflected in the Pro Forma Combined
Balance Sheets as of March 31, 1996.
(2) Based on an Exchange Ratio of 0.62585 shares of Sandy Spring Common Stock
for each share of ABI Common Stock.
-38-
SANDY SPRING BANCORP, INC.
Financial and other information relating to Sandy Spring is set forth
in Sandy Spring's Annual Report on Form 10-K for the year ended December 31,
1995, and its Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, incorporated by reference herein. Additional financial and other
information relating to Sandy Spring, including information relating to Sandy
Spring's directors and executive officers, is included in Sandy Spring's Annual
Report to Shareholders and Sandy Spring's Proxy Statement relating to its Annual
Meeting of Shareholders held on April 17, 1996, copies of which may be obtained
without cost from Sandy Spring. See "Available Information" and "Documents
Incorporated by Reference."
History and Business
Sandy Spring was organized in 1988 to serve as the holding company for
Sandy Spring National Bank, its principal operating subsidiary. Sandy Spring
National Bank traces its origins to 1868, and is the oldest banking business
based in Montgomery County. Sandy Spring National Bank is an independent,
community oriented institution engaged in a full service commercial banking
business through seventeen community offices in Montgomery and Howard counties
in Maryland. It is anticipated that Bank of Annapolis will be merged into Sandy
Spring National Bank in connection with the Merger.
At March 31, 1996, Sandy Spring had total assets of approximately
$818.6 and total deposits of approximately $696.1 million.
Description of Sandy Spring Capital Stock
Sandy Spring is authorized to issue an aggregate of fifteen million
(15,000,000) shares of capital stock, par value $1.00 per share, all of the
outstanding shares of which are designated as Common Stock, and the remainder of
which is initially classified as Common Stock, but may be classified or
reclassified by the Board of Directors prior to issuance. The Board of Directors
may set the rights, preferences, privileges, voting and other powers and
restrictions or limitations of the unissued capital stock, and issue such shares
in one or more classes or series without further shareholder action. As of May
31, 1996, 4,373,749 shares of Sandy Spring Common Stock were held by
approximately 2,000 shareholders of record. As of that date, there were options
to purchase 30,000 shares of Sandy Spring Common Stock issued and outstanding.
No shares of any other class of stock were outstanding as of that date.
Sandy Spring Common Stock. Each share of Sandy Spring Common Stock is
entitled to one noncumulative vote on all matters to be submitted to a vote of
shareholders. The holders of Sandy Spring Common Stock are not entitled to any
preemptive or preferential right to acquire any shares of any class of capital
stock or other securities of Sandy Spring, except as the Board of Directors may
expressly provide in connection with any offering of capital stock or other
securities. Holders of Sandy Spring Common Stock are entitled to receive
dividends as and when declared by the Board of Directors.
Sandy Spring maintains a Dividend Reinvestment and Stock Purchase Plan
(the "DRI Plan") providing for the purchase of additional shares of Sandy Spring
Common Stock by reinvestment of cash dividends paid on outstanding shares of
Sandy Spring Common Stock without commissions or other fees.
Upon liquidation, dissolution or winding up of Sandy Spring, the
holders of Sandy Spring Common Stock would be entitled to ratably receive all of
the assets of Sandy Spring available for distribution after payment of all debts
and liabilities of Sandy Spring, subject to the rights, if any, of the holders
of any class of stock which may be issued with a priority in liquidation or
dissolution over the holders of Sandy Spring Common Stock.
-39-
Market for Sandy Spring Common Stock and Dividends
Market for Common Stock. Sandy Spring Common Stock is listed for
quotation on the Nasdaq National Market under the symbol "SASR." Four brokerage
firms, Ferris, Baker Watts, Inc., Hill Thompson & Magid, Inc., Koonce
Securities, Inc. and Ryan Beck & Co., Inc., currently offer to make a market in
Sandy Spring Common Stock on a regular basis. Sandy Spring Common Stock has been
listed on the Nasdaq National Market only since April 17, 1996, and to date,
significant daily trading volume has not developed. Prior to April 17, 1996,
Sandy Spring Common Stock was traded over the counter, was not listed for
quotation on any organized market.
Dividends. Holders of Sandy Spring Common Stock are entitled to receive
dividends as and when declared by the Board of Directors. Historically, Sandy
Spring has paid quarterly cash dividends every quarter since its organization,
and prior to the organization of Sandy Spring, Sandy Spring National Bank paid
regular dividends since 1901. Funds for the payment of dividends will, for the
foreseeable future, be obtained from dividends paid to Sandy Spring by Sandy
Spring National Bank, which dividends are subject to statutory limitations.
In addition, Sandy Spring and Sandy Spring National Bank are subject to
capital ratio requirements imposed by the Board of Governors of the Federal
Reserve System and the Comptroller of the Currency. The effect of the payment of
dividends on Sandy Spring's or Sandy Spring National Bank's capital ratios may
be a factor in the determination of the Board of Directors, or the ability of
Sandy Spring, to pay dividends. To the extent that such ratios are inadequate
for regulatory purposes or would be if dividends were paid by its banking
subsidiaries to Sandy Spring, or by Sandy Spring to its shareholders, Sandy
Spring would be precluded from paying dividends. Although the management of
Sandy Spring believes that sufficient funds for the payment of dividends will be
available, there can be no assurance that funds for the payment of dividends
will continue to be available in sufficient amounts to pay dividends in
accordance with Sandy Spring's past practice, or even if available, that the
Board of Directors of Sandy Spring will elect to expend resources in the payment
of dividends, as opposed to retaining earnings to fund growth or expansion, or
for other corporate purposes.
Set forth below are the high and low sales prices for Sandy Spring
Common Stock for each quarter since January 1, 1994, as well as the amount of
cash dividends declared in each quarter. The sales prices and dividend
information have been adjusted retroactively to reflect a two-for-one stock
split declared in March 1995.
Quarter Ended Low High Dividends Declared
------------- --- ---- ------------------
March 31, 1996 $35.00 $38.75 $0.18
December 31, 1995 $35.00 $39.00 $0.18
September 30, 1995 $29.25 $39.00 $0.16
June 30, 1995 $25.38 $32.00 $0.15
March 31, 1995 $24.50 $26.25 $0.15
December 31, 1994 $23.75 $26.25 $0.14
September 30, 1994 $23.50 $27.00 $0.14
June 30, 1994 $22.50 $24.32 $0.13
March 31, 1994 $23.00 $23.50 $0.13
-40-
COMPARISON OF SHAREHOLDER RIGHTS AND CERTAIN PROVISIONS OF
THE ARTICLES OF INCORPORATION OF SANDY SPRING
Following effectiveness of the Merger of ABI with and into Sandy
Spring, the former holders of ABI Common Stock will become holders of Sandy
Spring Common Stock, and the rights of such holders will be determined by
reference to the Articles of Incorporation, as amended ("Articles"), and bylaws
of Sandy Spring, rather than the Articles of Incorporation, as amended
("Articles"), and bylaws of ABI. As both ABI and Sandy Spring are organized
under the laws of the State of Maryland, the governing law applicable to ABI and
Sandy Spring is the same, except as provided herein.
Authorized Shares. The Articles of Sandy Spring authorize the Board of
Directors to issue, without further authorization by shareholders, up to fifteen
million (15,000,000) shares of capital stock. The shares of capital stock may be
issued by the Board of Directors as one or more classes of stock having such
rights as the Board in its discretion may determine. See "Description of Sandy
Spring Capital Stock." ABI's Articles authorize the issuance of five million
(5,000,000) shares of ABI Common Stock and one million (1,000,000) shares of
preferred stock, the terms and rights of which may be determined by the Board of
Directors of ABI. The existence of a class of authorized stock which may be
classified in the discretion of the Board of Directors could have the effect of
discouraging or rendering more difficult an attempted takeover of Sandy Spring,
or, alternatively, of facilitating a negotiated acquisition. The availability of
additional shares of capital stock for issuance could have the effect of
diluting the ownership interest of holders of Sandy Spring Common Stock.
Nomination Procedures. Under Sandy Spring's bylaws, the Board of
Directors shall act as a nominating committee for selecting the management
nominees for election as directors. Except in the case of a nominee substituted
as a result of the death or other incapacity of a management nominee, the
nominating committee must deliver written nominations to the Secretary at least
20 days prior to the date of the annual meeting. Shareholder nominations for
directors must be made pursuant to timely notice in writing to the Secretary. To
be timely, notice must be delivered to the Secretary not later than 90 days
prior to the month and day one year subsequent to the date that proxy materials
regarding the last election of directors were mailed to shareholders. A
shareholder's notice of nomination also must set forth certain information
specified in the bylaws concerning each person the shareholder proposes to
nominate for election. Shareholder nominations may be made by any shareholder
eligible to vote at an annual meeting. ABI's bylaws similarly provide that the
Board of Directors shall act as nominating committee. ABI's bylaws further
provide that if the nominating committee makes nominations for elections as
director, no nomination for director except those made by the nominating
committee shall be voted on at the annual meeting.
New Business at Annual Meeting. Under Sandy Spring's bylaws, to be
properly brought before an annual meeting, shareholder proposals for new
business must be delivered to or mailed and received by Sandy Spring not less
than 30 nor more than 90 days prior to the date of the meeting; provided,
however, that if less than 45 days notice of the date of the meeting is given to
shareholders, such notice by a shareholder must be received not later than the
15th day following the day on which notice of the date of the meeting was mailed
to shareholders or two days before the date of the meeting, whichever is
earlier. Each such notice given by a shareholder must set forth specified
information concerning the shareholder and the business proposed to be brought
before the meeting. All business to be voted upon at ABI's annual meeting of
shareholders must be presented in writing to the Secretary at least 30 days
before the meeting.
Approval of Certain Transactions. Sandy Spring's Articles require the
affirmative vote of the holders of not less than 80% of the outstanding shares
of voting stock to authorize a merger or consolidation of Sandy Spring with, or
a sale, exchange or lease of all or substantially all of the assets of Sandy
Spring to, any person or entity unless approval of any such transaction is
recommended by at least a majority of the entire Board of Directors. For
purposes of this provision, "substantially all of the assets" is defined to mean
assets having a fair market value or book value, whichever is greater, of 25% or
more of the total assets of Sandy Spring. Sandy Spring also requires a
supermajority vote of all shares and of all shares not owned by a "Controlling
Party" when a "Business
-41-
Combination" (generally, a merger or consolidation of Sandy Spring, a
disposition of substantially all of the assets of Sandy Spring and a reverse
stock split) is with a "Controlling Party" (generally, a person that owns or
controls 20% or more of the outstanding voting stock). ABI's Articles of
Incorporation do not include any supermajority voting requirements. The MGCL,
however, requires a vote of at least two-thirds of the outstanding stock to
approve a merger, consolidation or similar extraordinary transaction and
comparable special voting provisions with respect to business combinations with
interested shareholders. While the special voting provision applies to ABI, it
is not applicable to the Merger.
Directors. Under Sandy Spring's Articles, the maximum number of
directors (exclusive of directors, if any, to be elected by the holders of
preferred stock) is 15 and shall never be less than the number required by
applicable law. Under ABI's Articles, the maximum number of directors is 15 and
the minimum number is 6. The power to determine the number of directors within
these numerical limitations is vested in the Boards of Directors. Sandy Spring's
Articles divide the Board of Directors into three classes which shall be as
nearly equal in number as possible, and the members of each class serve for
three years with terms staggered so that only one class is elected each year.
Under ABI's bylaws, all directors serve for one year terms.
Under Sandy Spring's Articles, subject to the rights, if any, of the
holders of shares of preferred stock then outstanding, a director may be removed
only for "cause" (generally, final conviction of a felony, unsound mind,
adjudication of bankruptcy, non-acceptance of office or conduct prejudicial to
the interests of Sandy Spring) and only upon the affirmative vote of a majority
of the outstanding shares entitled to vote in the election of directors. Under
ABI's bylaws, a director may be removed for cause (which is not defined in the
bylaws) by the affirmative vote of a majority of the shares entitled to vote in
the election of directors. Where less than all of the directors are to be
removed, no one of the directors may be removed if the votes cast against
removal would be sufficient to elect a director if cumulatively voted at an
election of directors.
Sandy Spring's Articles provide that, subject to the rights of the
holders of any class separately entitled to elect one or more directors, any
vacancy occurring in the Board of Directors may be filled by a majority of the
directors then in office, whether or not a quorum, or by the affirmative vote of
the holders of a majority of the outstanding shares of capital stock of Sandy
Spring entitled to vote generally in the election of directors. A director so
chosen by the shareholders shall hold office for the remainder of the term of
the class to which the director is assigned. A director elected by the Board of
Directors to fill a vacancy resulting from the removal of a director shall hold
office for the remainder of the term of the removed director. A director elected
by the Board of Directors to fill a vacancy resulting from any cause other than
removal of a director shall hold office for a term expiring at the following
annual meeting of shareholders. Under ABI's bylaws, any vacancy occurring in the
Board of Directors may be filled by a majority of the remaining directors to
serve until the next election of directors.
Limitation on Liability. Sandy Spring's Articles protect directors from
liability to the extent permissible under Maryland law. Sandy Spring's directors
are protected against claims for monetary damages from Sandy Spring and its
shareholders for certain breaches of their fiduciary duty. Sandy Spring's
Articles do not protect directors against claims for equitable relief, such as
an injunction or rescission based upon a breach of the duty of care. The
limitation of liability afforded by Maryland law affects only actions brought by
Sandy Spring or its shareholders and does not preclude or limit recovery of
damages by third parties, such as creditors. Sandy Spring's Articles do not
protect directors against claims arising out of their responsibilities under the
federal banking and securities laws.
Under Sandy Spring's Articles, a shareholder will be able to recover
money damages against a director of Sandy Spring only if he is able to prove
that (a) the director actually received an improper benefit or profit in money,
property or services (in which case recovery is limited to the actual amount of
such improper benefit or profit) or (b) the action, or failure to act, by the
director, was the result of active and deliberate dishonesty and was material to
the cause of action adjudicated in the proceeding. The Articles also protect
officers of Sandy Spring against liability to the same extent that they protect
directors. The Articles also provide that any subsequent repeal or modification
of any provision shall not adversely affect any right or protection of an
officer or director of Sandy
-42-
Spring existing at the time of such repeal or modification. The Articles also
provide that if Maryland law is subsequently amended so as to permit further
limitation or elimination of the personal liability of officers and directors,
then such liability shall be eliminated or limited to the fullest extent so
permitted without further action by Sandy Spring's shareholders.
ABI's Articles of Incorporation limit the liability of officers and
directors to ABI and its shareholders to the fullest extent permitted by
Maryland law. Maryland law permits such a limitation generally, except to the
extent there was an improper benefit or profit received by the officer or
director, or that a final adjudication or judgment against the officer or
director was based on a finding that the action of such person was a result of
active and deliberate dishonesty and that such action was material to the
result.
Special Voting and Quorum Requirements for Certain Business
Combinations. Sandy Spring's Articles provide for special voting procedures that
apply to certain business combinations between a corporation and interested
shareholders. The purpose of such procedures is to protect Sandy Spring and its
shareholders against hostile takeovers by requiring that certain criteria are
satisfied. The articles require that "Business Combinations" (generally, a
merger or consolidation of Sandy Spring, a disposition of substantially all of
the assets of Sandy Spring and a reverse stock split) with a "Controlling Party"
(generally, a person that owns or controls 20% or more of the outstanding voting
stock) must be approved by the holders of (a) at least 80% of the outstanding
shares of voting stock and (b) at least 67% of the outstanding shares of voting
stock held by shareholders other than the Controlling Party. However, a Business
Combination requires only such affirmative vote as is required by any other
provision of the articles, any provision of law or any agreement with any
regulatory agency or national securities exchange, if either the Business
Combination has been approved by a majority of the "Continuing Directors"
(generally, any member of the Board of Directors who is not a Controlling Party
or an affiliate thereof and was a member of the Board of Directors prior to the
time that the Controlling Party became a Controlling Party) or specified "fair
price" and procedural requirements are met. ABI's articles of incorporation do
not contain a comparable provision. However, provisions of the MGCL which
provide for comparable special voting requirements are applicable to ABI.
Sandy Spring's Articles also require that the presence in person or by
proxy of 80% of the outstanding shares is required to constitute a quorum at any
meeting at which a vote in favor of a reverse stock split or merger or
consolidation of Sandy Spring with, or a sale, exchange or lease of
substantially all of the assets of Sandy Spring to, any person or entity that is
not recommended by the Board of Directors by the required vote applicable to the
proposed transaction under the Articles of Sandy Spring will be considered. Such
a meeting may not be adjourned with notice if a quorum is not present.
Amendment of Articles and Bylaws. Sandy Spring's Articles of
Incorporation provide that specified provisions of the Articles and bylaws may
not be repealed or amended except upon the affirmative vote of the holders of
not less than 80% of the outstanding shares of the stock entitled to vote
generally in the election of directors (considered for that purpose as a single
class). These requirements exceed the required votes of the outstanding stock
that would otherwise be required by Maryland law for the repeal or amendment of
Sandy Spring's Articles of Incorporation. The provisions to which this
supermajority vote applies include, among others, the authorization of issuance
of stock, the number of directors and the classification of the Board of
Directors, shareholder approval of certain transactions, Business Combinations
with Controlling Parties and the amendment of the Articles. Sandy Spring's
Articles also provide that notwithstanding that some lesser percentage may be
specified by law, the bylaws may not be made, repealed, altered, amended or
rescinded by the shareholders except by the vote of the holders of not less than
80% of the outstanding shares entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
shareholders called for that purpose.
ABI's Articles of Incorporation and bylaws do not contain comparable
provisions.
-43-
ANNAPOLIS BANCSHARES, INC.
General. Annapolis Bancshares, Inc. ("ABI") was organized as a Maryland
corporation in 1988 to acquire and serve as the holding company for Bank of
Annapolis, a Maryland chartered trust company (the "Bank of Annapolis"). Bank of
Annapolis was originally chartered in 1925 as Ozark Permanent Building
Association of Baltimore City, Inc. ("Ozark"), a Maryland chartered mutual
savings and loan association. In April 1988, Ozark was converted to a stock
savings and loan association, and in June 1988, Ozark's charter was amended to
reflect the change of its name to Annapolis Community Savings Association, Inc.
("ASCA"). In June 1989, ASCA converted to Bank of Annapolis, and Bank of
Annapolis was acquired by ABI. BoA thereafter began operating as a Maryland
chartered, Federal Reserve member trust company whose deposit accounts are
insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation (the "FDIC"). Bank of Annapolis currently operates one retail branch
location, which also serves as corporate headquarters for ABI. The only material
activity of ABI is the operation of Bank of Annapolis.
Business of Bank of Annapolis. Bank of Annapolis offers a full range of
commercial banking services. It's primary market area is in Anne Arundel County,
Maryland, although business development efforts generate business outside of the
area. The principal business of Bank of Annapolis is to accept time and demand
deposits, and to make loans and other investments. Bank of Annapolis 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, and electronic banking services, and other banking
services.
Bank of Annapolis grants a variety of loan types including, but not
limited to, commercial and residential real estate loans, (including
construction and land loans), commercial term loans and lines of credit,
consumer loans, (including home equity lines of credit), and letters of credit,
primarily to a customer base consisting of individuals and small businesses.
Bank of Annapolis emphasizes origination of adjustable rate and/or short term
loans for its portfolio and sells its long-term fixed rate originations in the
secondary market. Bank of Annapolis generally does not engage in long term fixed
rate portfolio lending activities. While it has primarily focused its lending
activities on the origination of loans, Bank of Annapolis has also taken
advantage of opportunities to purchase loans originated by others which have
similar characteristics to the loans which it originates. The business of ABI
and Bank of Annapolis is not dependent on any one customer or on a very few
customers, and the loss of any one or a few customers would not have a material
adverse effect on the business of ABI and Bank of Annapolis.
Bank of Annapolis' investment portfolio consists of fixed and variable
rate securities. The Bank holds its investment securities as "available for
sale" or "held to maturity" in accordance with the provisions of Financial
Accounting Standard No. 115, Accounting for certain Investments in Debt and
Equity Securities. The Bank does not engage in trading activities. The
investment portfolio enhances the net interest rate margin and provides
liquidity. Reference is made to Note 3 on page 20 of ABI's Annual Report to
Shareholders for the year ended December 31, 1995 ("ABI's 1995 Annual Report")
and to ABI's Quarterly Report on Form 10-QSB for the quarter ended March 31,
1996 ("ABI's Quarterly Report"), copies of which are included herewith as
Appendix C and D, respectively, for a discussion and analysis of the investment
portfolio.
Reference is made to pages 4 through 7 of the Management Discussion and
Analysis of Financial Condition and Results of Operations in ABI's 1995 Annual
Report, to pages 7 through 10 of ABI's Quarterly Report, and to "Financial
Information" below, for additional information on ABI's deposit, lending and
investment activities.
Branches and Employees. Bank of Annapolis currently operates one retail
branch location, which also serves as corporate headquarters for ABI. At March
8, 1996, ABI and Bank of Annapolis had a total of twenty-five (25) employees.
The employees are not represented by a collective bargaining agreement, and
relationships with employees are considered to be satisfactory.
-44-
Competition. The business of Bank of Annapolis is highly competitive,
and it is subject to increasing competition in all aspects of its commercial
banking business. The major banking competition in Anne Arundel County has
historically come from other depository institutions, including commercial
banks, savings and loan associations, and credit unions. However, deregulation
of the financial services industry as well as changing market demands in recent
years have eroded distinctions among providers of financial services. In
addition, depository and non-depository companies, both from within and outside
Bank of Annapolis' market area, have gained greater access to Bank of Annapolis'
market area than they have had in past years.
Bank of Annapolis competes with regional financial institutions and
national providers of investment alternatives, many of which have many offices
operating over wide geographic areas and many of which have greater amounts of
assets and capital than Bank of Annapolis. Competition may also increase as a
result of the lifting of restrictions on the interstate operations of financial
institutions. See "Supervision and Regulation -- Interstate Banking and
Branching Legislation." In order to compete with other providers of financial
services in its primary market area, Bank of Annapolis relies upon local
promotional activity, personal contacts by its directors, officers, and
employees, and quality personal service. Bank of Annapolis' promotional
activities emphasize the advantages of dealing with a locally owned and
headquartered institution attuned to the particular needs of the community.
Properties. In January 1993 Bank of Annapolis purchased a four story,
36,000 square feet (including a basement) office facility located at 2024 West
Street, Annapolis, Maryland, along with an adjacent property known as 1 Hudson
Street that includes additional parking spaces and a 2,400 square foot, single
story block building. On August 2, 1993, ABI and Bank of Annapolis relocated
into the new facility, which is now ABI's principal office. This facility
functions as the main office operations and administrative headquarters of Bank
of Annapolis, and includes a full service retail bank. Bank of Annapolis
occupies portions of the first and second levels, as well as portions of the
lower level. At March 31, 1996, the remainder of the building as well as the
property on 1 Hudson Street was fully leased to others. The properties' cost,
net of accumulated depreciation as of December 31, 1995, was $1,744,878. See
Note 6 Premises and Equipment on page 22 of ABI's 1995 Annual Report.
In October 1989, Bank of Annapolis purchased a .904 acre parcel of
undeveloped, commercially zoned land located at 2065 General's Highway,
Annapolis, Maryland. The land was purchased with the intent of constructing a
main office headquarters and retail banking facility thereon. Bank of Annapolis
is currently marketing the property for sale, having abandoned its intended
development of the property upon contracting to purchase the West Street
facility described above. At March 31, 1996, the property was under a contract
of sale which permits the contract purchaser to conduct a feasibility study of
the land and proceed with the option to purchase the property.
At March 31, 1996, ABI owned no real estate acquired through
foreclosure or by deed in lieu thereof.
Legal Proceedings. Neither ABI nor Bank of Annapolis are party to any
material legal proceedings. However, ABI and Bank of Annapolis may be party to
routine legal proceedings occurring in the normal course of business.
Supervision and Regulation. ABI is a bank holding company within the
meaning of the BHCA, and is registered as such with the Board of Governors of
the Federal Reserve System (the Federal Reserve"). ABI is required to file with
the Federal Reserve an annual report and such other information as the Federal
Reserve may require pursuant to the BHCA. ABI is subject to regulation and
examination by the Federal Reserve, which may also examine any of ABI's
subsidiaries.
The BHCA generally restricts activities of all bank holding companies
and their subsidiaries to banking, and the business of managing and controlling
banks, and to other activities which are determined by the Federal Reserve to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. The BHCA generally requires prior approval by the Federal
Reserve of the acquisition by a bank holding company of more than five percent
of the voting shares of any additional bank. With certain exceptions, the BHCA
prohibits a bank holding
-45-
company from acquiring direct or indirect ownership or control of more than five
percent of the voting shares of any company which is not a bank or bank holding
company, unless the Federal Reserve determines by order or regulation that the
activities of the company whose shares are to be acquired are so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities that the Federal Reserve has determined by
regulation to be so closely related to banking are: (i) making or servicing
loans; (ii) performing certain data processing services; (iii) providing
discount brokerage services; (iv) acting as fiduciary, investment or financial
advisor; (v) leasing personal or real property; (vi) making investments in
corporations or projects designed primarily to promote community welfare; and
(vii) acquiring a savings and loan association.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of the bank holding company or its subsidiaries, and on the investment in
or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and Federal Reserve regulations limit the amounts of, and establish
required procedures and credit standards with respect to, loans and other
extensions of credit to officers, directors and principal shareholders of Bank
of Annapolis, ABI, any subsidiary of ABI and related interests of such persons.
Moreover, subsidiaries of bank holding companies are prohibited from engaging in
certain tie-in arrangements (with the holding company or any of its
subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
As a state chartered trust company, Bank of Annapolis is subject to
regulation and examination primarily by the Maryland State Bank Commissioner
(hereinafter "the Commissioner"). As a member of the Federal Reserve System
whose deposits are insured by the FDIC (a "member bank"), Bank of Annapolis is
subject to regulation by the FDIC and the Federal Reserve.
These agencies, as well as Federal and State law, extensively regulate
various aspects of Bank of Annapolis' business including permissible types and
amounts of loans, investments and other activities, capital adequacy (by
requiring minimum capital ratios), branching, and the safety and soundness of
banking practices. Banking regulations restrict transactions by banks owned by a
bank holding company, including (1) loans to and certain purchases from the
parent holding company, principal shareholders, officers, directors and their
affiliates, (2) investments by the subsidiary bank in the shares or securities
of the parent bank holding company (or any other nonbank affiliates), and (3)
acceptance of such shares or securities as collateral for loans to any borrower.
The regulators also may review other transactions, such as payments of
management fees by subsidiary banks to affiliated companies. Bank of Annapolis
is subject to legal limitations on the frequency and amount of dividends that
can be paid to ABI. Under Maryland banking regulations, Bank of Annapolis may
not declare a cash dividend except out of undivided profits, or from its surplus
in excess of 100% of its required capital stock with the prior approval of the
Commissioner, both after providing for due and accrued expenses, losses,
interest and taxes. In addition, the Federal Reserve may restrict the ability of
Bank of Annapolis to pay dividends if such payments would constitute an unsafe
or unsound banking practice. Also, federal law generally restricts Bank of
Annapolis from paying any capital distribution, including dividends, if Bank of
Annapolis would not comply with applicable capital requirements after the
payment. State and federal laws regulate the amount of voting stock of a bank or
bank holding company that a person may acquire without prior approval.
Under Federal Reserve regulations, Bank of Annapolis is required to
maintain non-interest-earning reserves against its transaction accounts
(primarily Now and regular checking accounts). The Federal Reserve regulations
generally require that reserves of 3% must be maintained against aggregate
transaction accounts of $52.0 million or less (subject to adjustment by the
Federal Reserve) and an initial reserve of $1.6 million plus 10% (subject to
adjustment by the Federal Reserve between 8% and 14% and was reduced to 10%
effective April 1, 1992) against that portion of total transaction accounts in
excess of $52.0 million. The first $4.3 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve) are exempted from the reserve
requirements. Since the amount of Bank of Annapolis's transaction accounts are
below the minimum, Bank of Annapolis is currently exempt from maintaining
reserves. Because required reserves must be maintained in the form of either
vault cash, a non-
-46-
interest-bearing account at a Federal Reserve Bank or a pass-through account as
defined by the Federal Reserve, the effect of this reserve requirement would be
to reduce Bank of Annapolis's interest-earning assets.
Effect of Governmental Action. Operating results of ABI and Bank of
Annapolis are affected by the policies of various regulatory, fiscal and
monetary authorities including the Federal Reserve. Major functions of the
Federal Reserve, in addition to those set out above, are to regulate the supply
of bank credit and to deal generally with economic conditions within the United
States, including efforts to combat recessionary economic conditions and to curb
inflationary pressures. The instruments of monetary policy employed by the
Federal Reserve for these purposes influence in various ways the overall levels
of bank loans and extensions of credit, investments and deposits as well as the
interest rate paid on liabilities and received on earning assets. The
implementation of these policies has had a significant effect on the operating
results of bank holding companies and banks in the past and will continue to do
so in the future.
In view of changing conditions within the national economy as well as
the uncertain effects of actions by regulatory, fiscal and monetary authorities,
no prediction can be made as to possible future changes in interest rates,
deposit levels or loan demand, or their effect on the business and earnings of
ABI and Bank of Annapolis. Also, it cannot be predicted whether or in what
manner the operation of ABI and Bank of Annapolis may be effected by any pending
or future Federal or state legislative actions.
Capital Maintenance. The Federal Reserve has issued regulations that
require member banks, such as Bank of Annapolis, to maintain minimum levels of
capital. The regulations establish a minimum leverage capital requirement of not
less than 3% core capital to total average assets for banks in the strongest
financial and managerial condition, with a CAMEL Rating of 1 (the highest
examination rating of the Federal Reserve for member banks). For all other
banks, the minimum leverage capital requirement is 3% plus an additional cushion
of at least 100 to 200 basis points. Core capital is comprised of the sum of
common stockholders' equity, noncumulative perpetual preferred stock (including
any related surplus) and minority interests in consolidated subsidiaries, minus
all intangible assets (other than qualifying servicing rights).
At March 31, 1996 and December 31, 1995, respectively, Bank of
Annapolis' ratio of core capital to total average assets equalled 11.6% and
12.1%, which exceeded the minimum leverage requirement. The Federal Reserve also
requires that banks meet a risk-based capital standard. The risk-based capital
standard requires the maintenance of total capital (which is defined as core
capital and supplementary capital) to risk weighted assets of 8% and core
capital to risk-weighted assets of 4%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet items, are
multiplied by a risk-weight of 0% to 100%, based on the risks the Federal
Reserve believes are inherent in the type of asset or item. The components of
core capital are equivalent to those discussed earlier under the 3% leverage
requirement. The components of supplementary capital currently include
cumulative perpetual preferred stock, perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock and
allowance for loan and lease losses. Allowance for loan and lease losses
includable in supplementary capital is limited to maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
At March 31, 1996 and December 31, 1995, respectively, Bank of
Annapolis' total capital to risk-weighted assets was 14.45% and 14.2% and Bank
of Annapolis' core capital to risk-weighted assets was 13.4% and 13.2%, both
exceeding the Federal Reserve's risk-based capital requirements.
Prompt Corrective Action. Under the prompt corrective action provisions
of the Federal Deposit Insurance Act and related regulations, the Federal
Reserve and the FDIC are required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the category
into which that institution falls. The categories are "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized",
and "critically undercapitalized". Regulatory action taken will depend on the
level of capitalization of the institution and may range from restrictions on
capital distributions and dividends to seizure of the institution. Generally, an
insured
-47-
institution that has total risk-based capital of less than 8%, core capital to
risk based assets of less than 4% or a leverage ratio that is less than 4% would
be considered to be "undercapitalized", an insured institution that has total
risk-based capital less than 6%, core capital to risk based assets of less than
3% or a leverage ratio that is less than 3% would be considered to be
"significantly undercapitalized" and an insured institution that has a tangible
capital to assets ratio equal to or less than 2% would be deemed to be
"critically undercapitalized". Generally, under the rule, an insured institution
that is "undercapitalized", "significantly undercapitalized", or "critically
undercapitalized" becomes immediately subject to certain regulatory
restrictions, including, but not limited to, restrictions on growth, investment
activities, capital distributions and affiliate transactions.
The filing of a capital restoration plan, which must be guaranteed by
any parent holding company, is also required. In addition, "critically
undercapitalized" institutions must receive prior written approval from the FDIC
to engage in any material transaction other than the normal course of business
and are subject to the appointment of a receiver within 90 days of becoming
undercapitalized unless the FDIC determines that other action is more
appropriate.
Insurance of Deposit Accounts. Effective January 1, 1994, a permanent
risk-based deposit insurance premium structure was implemented by the FDIC.
Under the risk-based premium structure, insured institutions will pay a premium
depending on the institution's FDIC risk classification. Under the rule, the
FDIC will assign an institution to one of three capital categories consisting of
(1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and to
one of three supervisory categories. An institution's assessment rate will
depend on the capital category and supervisory category to which it is assigned.
During 1995 the BIF became fully capitalized at 1.25%. Bank of Annapolis paid
$66,014 in federal deposit insurance premiums to the BIF in 1995. In 1995 the
FDIC enacted a reduction in the premium schedule with the lowest payments
dropping from 23 to 4 basis points. Later the FDIC reduced the minimum BIF
premiums to zero subject to a statutory required annual payment of $2,000, which
is the rate currently paid by Bank of Annapolis. The FDIC is authorized to raise
deposit insurance premiums as necessary to keep the BIF at required levels, so
there is no assurance that existing rates will not be changed.
Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC. The management of Bank
of Annapolis does not know of any practice, condition or violation that might
lead to termination of deposit insurance.
Interstate Banking and Branching Legislation. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act")
authorizes (i) interstate acquisitions of banks by bank holding companies
without geographic limitation beginning September 29, 1995, (ii) interstate
mergers between insured banks with different home states, subject to the ability
of states to opt-out, and (iii) any state to enact laws permitting de novo
branching by banks with a home state other than such state. Specifically,
beginning June 1, 1997, a bank may merge with a bank with a different home state
so long as neither of the home states have opted out of interstate branching
between the date of enactment of the Interstate Act and May 31, 1997.
Once a bank has established branches in a state through an interstate
merger transaction, such bank may establish and acquire additional branches at
any location in that state where any bank involved in the interstate merger
transaction could have established or acquired branches under applicable Federal
or state law. The Interstate Act further provides that states may enact laws
permitting interstate merger transactions prior to June 1, 1997. If a state opts
out of interstate branching within the specified time period, no bank in any
other state may establish a branch in that state, either through an acquisition
or de novo.
In 1995, the State of Maryland adopted legislation allowing out of
state financial institutions to merge with Maryland banks and to establish
branches in Maryland, subject to certain limitations. The effect of the federal
and Maryland legislation may be to increase competition within the State of
Maryland among banking and thrift
-48-
institutions located in Maryland and from the major regional bank holding
companies that acquire institutions in Maryland.
Financial Information. Audited consolidated financial statements for
ABI for the year ended December 31, 1995, including audited balance sheets,
statements of income, statements of changes in stockholders' equity and
statements of cash flows for each of the three years ended December 31, 1995,
1994 and 1993, and the notes thereto, are included in the ABI 1995 Annual
Report, included as a part of this Proxy Statement. Unaudited consolidated
balance sheets and income statements for ABI for the three months ended March
31, 1996 are included in the ABI Quarterly Report included as part of this Proxy
Statement. During the period from January 1, 1994 to the date hereof, neither
ABI nor Bank of Annapolis has had any change in or disagreement with its
accountants on accounting or financial disclosure matters. Shareholders are
advised to carefully review and consider the financial information provided, and
the other information, including the Management Discussion and Analysis,
contained in the ABI 1995 Annual Report and ABI Quarterly Report. Reference is
made to Table II on page 5 of ABI's 1995 Annual Report and to page 6 of ABI's
Quarterly Report for the average balances of each principal category of assets,
liabilities, and stockholders' equity of ABI, as well as the interest and rates
earned on major categories of interest-earning assets and the interest and rates
paid on major categories of interest-bearing liabilities. Average balances are
derived from average weekly balances. Management does not believe that the use
of average weekly balances instead of average daily balances has caused any
material differences in the information presented.
Reference is made to Table IV on page 10 of ABI's 1995 Annual Report
which sets forth certain information regarding changes in interest income and
interest expense attributable to (1) changes in volume (change of volume
multiplied by old rate); (2) changes in rates (change in rate multiplied by old
volume); and (3) changes in rate/volume (change in rate multiplied by change in
volume).
Reference is made to the following table and Note 3 on pages 19 and 20
of ABI's 1995 Annual Report which summarizes the maturities and yields of the
investment debt securities portfolio. At December 31, 1995, $398,162 of the
portfolio balance was comprised of a mortgage related security. These types of
securities generally experience principal repayments sooner than contractual
maturities as the underlying assets prepayments are remitted to security
holders. Maturities on these securities were estimated based on historical
prepayment trends.
The yield on a $90,000 tax-exempt City of Annapolis General Obligation
Bond has a tax equivalent yield of 6.55%. In addition, the investment portfolio
includes $982,200 of equity securities with the Federal Reserve and Federal Home
Loan Bank of Atlanta ("FHLB"). The dividend yield on FHLB stock is 7.25% and is
6.0% on the Federal Reserve stock.
Analysis of Investment Debt Securities Portfolio
The following table sets forth the maturity schedule of the Bank of
Annapolis' investment debt securities portfolio at March 31, 1996.
Within 1 Year 1-5 Years 5-10 Years After 10 Years
------------- --------- ---------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
------ ----- ------ ----- ------ ----- ------ ----- ----- -----
US Treasury and Govt.
Agency $ 499,807 4.50% $ 385,558 5.50% $ - - $ - - $ 885,365 4.94%
States and political
subdivisions - - - - - - 90,000 6.55% 90,000 6.55%
------------- ------------- -------- --------- -----------
Total $ 499,807 4.50% $ 385,558 5.50% $ - - $ 90,000 6.55% $ 975,365 5.09%
============= ============= ========= ========= ===========
-49-
Loan Portfolio Composition
The following table sets forth the composition of Bank of Annapolis's loan
portfolio in dollar amounts and in percentage at the dates indicated:
Three Months Ended Year Ended Year Ended
March 31, 1996 December 31, 1995 December 31, 1994
---------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------------------------------------------
Commercial $ 6,624,829 9.19% $ 6,788,803 9.92% $ 7,759,006 13.85%
Commercial real estate 38,113,871 52.87% 36,530,994 53.38% 32,853,800 58.65%
Residential real estate 16,926,642 23.48% 15,697,951 22.94% 10,674,811 19.06%
Construction 8,505,098 11.80% 7,148,297 10.44% 2,449,724 4.37%
Home equity 1,058,582 1.47% 1,099,699 1.60% 1,233,600 2.20%
Consumer 862,109 1.19% 1,174,729 1.72% 1,048,438 1.87%
---------------------------------------------------------------------------------------------------
72,091,131 100.00% 68,440,473 100.00% 56,019,379 100.00%
---------------------------------------------------------------------------------------------------
Less
Deferred loan origination
fees, net of costs 470,366 429,390 356,913
Discount on loans purchased 95,836 97,465 134,323
Allowance for loan losses 719,993 686,636 555,281
---------------------------------------------------------------------------------------------------
1,286,195 1,213,491 1,046,517
---------------------------------------------------------------------------------------------------
Loans, net $ 70,804,936 $ 67,226,982 $ 54,972,862
===================================================================================================
Maturity Data for Loans
The following table shows the contractual maturity of Bank of Annapolis's
loan portfolio. In addition, the table reflects those loans due after one year
which (a) have predetermined interest rates, and (b) have adjustable interest
rates. The table does not reflect prepayments or scheduled amortization of
loans.
Interest Sensitivity on
Remaining Maturity on Loan Categories Loans Due after One Year
--------------------------------------------------------------------------------------------------------------
One Year One to Five Over Fixed Variable
or Less Years Five Years Total Rate Rate
--------------------------------------------------------------------------------------------------------------
MARCH 31, 1996
Commercial $ 3,728,028 $ 2,213,880 $ 682,921 $ 6,624,829 $ 134,059 $ 2,762,742
Real estate(1) 7,023,627 32,091,205 15,925,681 55,040,513 2,150,726 45,866,160
Construction 8,505,098 - - 8,505,098 - -
Home equity 1,058,582 - - 1,058,582 - -
Consumer 259,393 415,559 187,157 862,109 191,012 411,704
-------------------------------------------------------------------------------------------------------------
$ 20,574,728 $ 34,720,644 $ 16,795,759 $ 72,091,131 $ 2,475,797 $ 49,040,606
=============================================================================================================
(1) Includes commercial and residential real estate loans.
-50-
Interest Sensitivity on
Remaining Maturity on Loan Categories Loans Due after One Year
---------------------------------------------------------------------------------------------------------------
One Year One to Five Over Fixed Variable
or Less Years Five Years Total Rate Rate
---------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
Commercial $ 3,587,128 $ 2,381,229 $ 820,446 $ 6,788,803 $ 173,921 $ 3,027,754
Real estate(1) 8,128,755 29,487,851 14,612,339 52,228,945 2,148,590 41,951,600
Construction 7,148,297 - - 7,148,297 - -
Home equity 1,099,699 - - 1,099,699 - -
Consumer 194,226 779,087 201,416 1,174,729 214,532 765,971
-------------------------------------------------------------------------------------------------------------
$ 20,158,105 $ 32,648,167 $ 15,634,201 $ 68,440,473 $ 2,537,043 $ 45,745,325
=============================================================================================================
DECEMBER 31, 1994
Commercial $ 3,368,701 $ 3,298,488 $ 1,091,817 $ 7,759,006 $ 592,032 $ 3,798,273
Real estate(1) 6,016,731 21,597,038 15,914,842 43,528,611 2,709,911 34,801,969
Construction 2,449,724 - - 2,449,724 - -
Home equity 1,233,600 - - 1,233,600 - -
Consumer 342,799 705,639 - 1,048,438 272,520 433,119
-------------------------------------------------------------------------------------------------------------
$ 13,411,555 $ 25,601,165 $ 17,006,659 $ 56,019,379 $ 3,574,463 $ 39,033,361
=============================================================================================================
(1) Includes commercial and residential real estate loans.
Allocation of the Allowance for Loan Losses
The allowance for possible loan losses at March 31, 1996, and December 31,
1995 and 1994 is allocated as follows:
Three Months Ended Year Ended Year Ended
March 31, 1996 December 31, 1995 December 31, 1994
----------------------------------------------------------------------------------------------------
Percent of Loans Percent of Loans Percent of Loans
Amount in Category Amount in Category Amount in Category
----------------------------------------------------------------------------------------------------
Commercial $ 66,167 9.19% $ 45,884 9.92% $ 77,096 13.85%
Commercial real estate 380,660 52.87% 397,115 53.83% 321,015 58.65%
Residential real estate 169,054 23.48% 170,646 22.94% 109,277 19.06%
Construction 84,959 11.80% 50,316 10.44% 25,218 4.37%
Home equity 10,584 1.47% 10,963 1.60% 11,400 2.20%
Consumer 8,569 1.19% 11,712 1.72% 11,275 1.87%
---------------------------------------------------------------------------------------------------
Total $ 719,993 100.00% $ 686,636 100.00% $ 555,281 100.00%
====================================================================================================
Analysis of the Allowance for Loan Losses
The following table sets forth activity in the Bank of Annapolis allowance
for possible loan losses for the periods indicated. The balances below represent
general loan loss reserves and are not allocable to specific loans in Bank of
Annapolis' portfolio.
-51-
Year Ended December 31
Three Months Ended ------------------------------------------------------
March 31, 1996 1995 1994 1993
--------------------------------------------------------------------------
Beginning of year $686,636 $555,281 $503,679 $397,352
--------------------------------------------------------------------------
Charge offs:
Commercial - (316,829) - -
Real estate - - - -
Construction - - - -
Home equity - - - -
Consumer - - - -
Recoveries:
Commercial - 267,931 - -
Real estate - - - -
Construction - - - -
Home equity - - - -
Consumer - - - -
--------------------------------------------------------------------------
Net charge offs - (48,898) - -
--------------------------------------------------------------------------
Additions charged to operations 33,357 180,253 51,602 106,327
--------------------------------------------------------------------------
End of year $719,993 $686,636 $555,281 $503,679
==========================================================================
Ratio of net charge-offs during
the year to average loans
outstanding during the year N/A .08% N/A N/A
Reference is made to Note 4, Loans and the Allowance for Loan Losses,
on page 21 of ABI's 1995 Annual Report and to page 13 of ABI's Quarterly Report,
for additional information on nonaccrual, past due and restructured loans.
As of March 31, 1996, Bank of Annapolis had one loan that was 90 days
or more past due.
Deposit Composition
Bank of Annapolis offers a variety of deposit accounts having a range
of interest rates and terms. Bank of Annapolis' deposits principally consist of
savings, NOW, demand, money market and certificate accounts and individual
retirement account ("IRA's"). The flow of deposits is influenced significantly
by general economic conditions, changes in prevailing interest rates and
competition. Bank of Annapolis relies primarily on customer service and
long-standing relationships with customers to attract and retain these deposits.
Bank of Annapolis has no brokered deposits.
The following table sets forth the distribution of Bank of Annapolis's
deposit accounts at the dates indicated and the cost of funds on each category
of deposits presented at each period end. Management does not believe that the
use of period end balances instead of average balances resulted in any material
difference in the information presented.
-52-
Three Months Ended March 31, 1996 Year Ended December 31, 1995 Year Ended December 31, 1994
--------------------------------------------------------------------------------------------------------------
Cost of Cost of Cost of
Amount Percent Funds Amount Percent Funds Amount Percent Funds
---------------------------------------------------------------------------------------------------------------
Demand $ 2,226,444 3.38% 0.00% $ 2,082,290 3.25% 0.00% $ 2,660,732 4.86% 0.00%
-------------------------- ----------------------------- ---------------------------
NOW accounts 1,778,160 2.70% 3.16% 2,361,376 3.69% 3.24% 1,269,599 2.32% 3.19%
-------------------------- ----------------------------- ---------------------------
Savings and money 12,427,089 18.87% 3.78% 14,507,526 22.67% 4.19% 14,355,101 26.24% 4.08%
market -------------------------- ----------------------------- ---------------------------
Certificate accounts:
3 Months 718,712 1.09% 4.75% 718,702 1.12% 5.01% 273,017 .50% 4.16%
6 Months 3,724,257 5.66% 5.24% 4,196,500 6.56% 5.55% 1,195,670 2.19% 4.30%
12 Months 30,316,982 46.03% 6.02% 27,153,847 42.42% 6.28% 26,801,984 48.98% 5.21%
18 Months 2,665,578 4.05% 6.13% 2,085,430 3.26% 6.22% 217,968 .40% 4.47%
24 Months 4,364,467 6.63% 6.22% 3,874,120 6.05% 6.13% 2,547,450 4.66% 4.84%
36 Months 943,811 1.43% 6.40% 816,373 1.28% 5.65% 546,895 1.00% 5.65%
48 Months 359,079 0.55% 5.77% 307,169 0.48% 6.41% 170,608 .31% 4.94%
60 Months 2,858,491 4.34% 7.86% 2,645,201 4.13% 7.94% 1,771,540 3.24% 6.87%
IRA accounts 3,473,639 5.27% 5.85% 3,256,781 5.09% 6.14% 2,910,167 5.32% 5.57%
-------------------------- ----------------------------- ---------------------------
Total certificate
accounts 49,425,016 75.05% 6.06 %45,054,123 70.39% 6.17% 36,435,299 66.58% 5.26%
-------------------------- ----------------------------- ---------------------------
Total deposits $ 65,856,709 100.00% 5.36% $ 64,005,315 100.00% 5.41% $ 54,720,731 100.00% 4.62%
========================== ============================= ===========================
Reference is made to Note 8, Deposits, on page 23 of ABI's Annual
Report, which presents the maturities of time deposits $100,000 and greater.
As of March 31, 1996, Bank of Annapolis had $5,000,000 of short-term
borrowings and no long-term borrowings from the FHLB. At December 31, 1995, Bank
of Annapolis had $4,000,000 of short-term borrowings and $2,000,000 of long-term
borrowings from the FHLB. Reference is made to Note 10 on page 24 of ABI's 1995
Annual Report and page 8 of ABI's Quarterly Report which reflects the borrowings
outstanding and available lines of credit.
Market for Common Equity and Related Stockholder Matters
ABI Common Stock has been quoted on the "Nasdaq Small Cap Market" since
March 27, 1995. Prior to that time, there was no organized trading market for
the ABI Common Stock. ABI Common Stock trades under the symbol "ANNB". There are
regularly quoted bid and asked prices for the common stock. The following table
sets forth the range of high and low bid prices and last trade prices in the
Common Stock for each quarter since the January 1, 1994. Such information does
not necessarily reflect the actual market or intrinsic value of ABI Common
Stock, due to the thinness of the market for ABI Common Stock.
Holders of ABI Common Stock are entitled to receive dividends as and
when declared by the Board of Directors of ABI. Generally, declaration of cash
dividends by the Board of Directors depends on a number of factors, including
capital requirements, regulatory limitations, the operating results and
financial condition of Bank of Annapolis, and economic conditions generally. As
the principal asset of ABI, Bank of Annapolis is the only significant source of
funds for the payment of cash dividends by ABI. As indicated above, the payment
of dividends by Bank of Annapolis is subject to significant legal restrictions.
See "Annapolis Bancshares, Inc. -- Supervision and
-53-
Regulation." The following table also sets forth the cash dividends declared by
ABI during each quarter since January 1, 1994. The information set forth below
has been adjusted to reflect the 20% stock dividend declared and paid by ABI in
the fourth quarter of 1995.
Dividends
Quarter Ended High Low Last Declared
------------- ---- --- ---- --------
March 31, 1996 $20.50 $18.00 $20.00 $0.0625
March 31, 1995 $12.92 $12.70 $12.92 $0.0417
June 30, 1995 $12.92 $12.92 $12.92 $0.0438
September 30, 1995 $16.25 $14.17 $16.25 $0.0458
December 31, 1995 $20.50 $17.50 $17.50 $0.0575
March 31, 1994 $8.95 $8.65 $8.65 $0.0354
June 30, 1994 $9.58 $9.17 $9.58 $0.0375
September 30, 1994 $12.08 $9.67 $12.08 $0.0396
December 31, 1994 $12.92 $12.92 $12.92 $0.0417
LEGAL MATTERS
The validity of the issuance of the shares of Sandy Spring Common Stock
offered hereby will be passed upon for Sandy Spring by Kennedy & Baris, L.L.P.,
Washington, D.C. Certain legal matters relating to the Merger will be passed
upon for ABI by Muldoon, Murphy & Faucette L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements of ABI included herein have been
audited by Rowles & Company, L.L.P., independent certified public accountants,
as indicated in their report dated February 7, 1996 with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Sandy Spring incorporated by
reference herein have been audited by Stegman & Company, independent certified
public accountants, as indicated in their reports dated February 8, 1996 with
respect thereto, and are incorporated by reference and included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
-54-
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Sandy Spring's Articles of Incorporation generally provide for
indemnification to the extent authorized by applicable law. Section 2-418 of the
Maryland General Corporation Law sets forth circumstances under which directors,
officers, employees and agents of Sandy Spring may be insured or indemnified
against liability which they may incur in their capacities:
2-418 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. --
(a) In this section the following words have the meanings indicated.
(1) "Director" means any person who is or was a director of a
corporation and any person who, while a director of a corporation, is or was
serving at the request of the corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, other enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or foreign predecessor entity
of a corporation in a merger, consolidation, or other transaction in which the
predecessor's existence ceased upon consummation of the transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
(i) When used with respect to a director, the office of director in the
corporation; and (ii) When used with respect to a person other than a director
as contemplated in sub-section (j), the elective or appointive office in the
corporation held by the officer, or the employment or agency relationship
undertaken by the employee or agent on behalf of the corporation.
(iii) "Official capacity" does not include service for any other
foreign or domestic corporation or any partnership, joint venture, trust, other
enterprise, or employee benefit plan.
(5) "Party" includes a person who was, is, or is threatened to be made
a named defendant or respondent in a proceeding.
(6) "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, or investigative.
(b)(1) A corporation may indemnify any director made a party to any
proceeding by reason of service in that capacity unless it is established that:
(i) The act or omission of the director was material to the matter
giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The director actually received an improper personal benefit in
money, property, or services; or
(iii) In the case of any criminal proceeding, the director had
reasonable cause to believe that the act or omission was unlawful.
(2)(i) Indemnification may be against judgments, penalties, fines,
settlements, and reasonable expenses actually incurred by the director in
connection with the proceeding.
(ii) However, if the proceeding was one by or in the right of the
corporation, indemnification may not be made in respect of any proceeding in
which the director shall have been adjudged to be liable to the corporation.
(3)(i) The termination of any proceeding by judgment, order, or
settlement does not create a presumption that the director did not meet the
requisite standard of conduct set forth in this subsection.
(ii) The termination of any proceeding by conviction, or a plea of nolo
contendere or its equivalent, or an entry of an order of probation prior to
judgment, creates a rebuttal presumption that the director did not meet that
standard of conduct.
(c) A director may not be indemnified under subsection (B) of this
section in respect of any proceeding charging improper personal benefit to the
director, whether or not involving action in the director's
-55-
official capacity, in which the director was adjudged to be liable on the basis
that personal benefit was improperly received.
(d) Unless limited by the charter:
(1) A director who has been successful, on the merits or otherwise, in
the defense of any proceeding referred to in subsection (B) of this section
shall be indemnified against reasonable expenses incurred by the director in
connection with the proceeding.
(2) A court of appropriate jurisdiction upon application of a director
and such notice as the court shall require, may order indemnification in the
following circumstances:
(i) If it determines a director is entitled to reimbursement under
paragraph (1) of this subsection, the court shall order indemnification, in
which case the director shall be entitled to recover the expenses of securing
such reimbursement; or
(ii) If it determines that the director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances, whether
or not the director has met the standards of conduct set forth in subsection (b)
of this section or has been adjudged liable under the circumstances described in
subsection (c) of this section, the court may order such indemnification as the
court shall deem proper. However, indemnification with respect to any proceeding
by or in the right of the corporation or in which liability shall have been
adjudged in the circumstances described in subsection (c) shall be limited to
expenses.
(3) A court of appropriate jurisdiction may be the same court in which
the proceeding involving the director's liability took place.
(e)(1) Indemnification under subsection (b) of this section may not be
made by the corporation unless authorized for a specific proceeding after a
determination has been made that indemnification of the director is permissible
in the circumstances because the director has met the standard of conduct set
forth in subsection (b) of this section.
(2) Such determination shall be made:
(i) By the board of directors by a majority vote of a quorum consisting
of directors not, at the time, parties to the proceeding, or, if such a quorum
cannot be obtained, then by a majority vote of a committee of the board
consisting solely of two or more directors not, at the time, parties to such
proceeding and who were duly designated to act in the matter by a majority vote
of the full board in which the designated directors who are parties may
participate;
(ii) By special legal counsel selected by the board of directors or a
committee of the board by vote as set forth in subparagraph (I) of this
paragraph, or, if the requisite quorum of the full board cannot be obtained
therefor and the committee cannot be established, by a majority vote of the full
board in which directors who are parties may participate; or
(iii) By the shareholders.
(3) Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as the determination
that indemnification is permissible. However, if the determination that
indemnification is permissible is made by special legal counsel, authorization
of indemnification and determination as to reasonableness of expenses shall be
made in the manner specified in subparagraph (ii) of paragraph (2) of this
subsection for selection of such counsel.
(4) Shares held by directors who are parties to the proceeding may not
be voted on the subject matter under this subsection.
(f)(1) Reasonable expenses incurred by a director who is a party to a
proceeding may be paid or reimbursed by the corporation in advance of the final
disposition of the proceeding upon receipt by the corporation of: (i) A written
affirmation by the director of the director's good faith belief that the
standard of conduct necessary for indemnification by the corporation as
authorized in this section has been met; and
(ii) A written undertaking by or on behalf of the director to repay the
amount if it shall ultimately be determined that the standard of conduct has not
been met.
(2) The undertaking required by subparagraph (ii) of paragraph (1) of
this subsection shall be an unlimited general obligation of the director but
need not be secured and may be accepted without reference to financial ability
to make the repayment.
-56-
(3) Payments under this subsection shall be made as provided by the
charter, bylaws or contract or as specified in subsection (e) of this section.
(g) The indemnification and advancement of expenses provided or
authorized by this section may not be deemed exclusive of any other rights, by
indemnification or otherwise, to which a director may be entitled under the
charter, the bylaws, a resolution of shareholders of directors, an agreement or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office.
(h) This section does not limit the corporation's power to pay or
reimburse expenses incurred by a director in connection with an appearance as a
witness in a proceeding at a time when the director has not been made a named
defendant or respondent in the proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to have requested a director to
serve an employee benefit plan where the performance of the director's duties to
the corporation also imposes duties on, or otherwise involves services by, the
director to the plan or participants or beneficiaries of the plan:
(2) Excise taxes assessed on a director with respect to an employee
benefit plan pursuant to applicable law shall be deemed fined; and
(3) Action taken or omitted by the director with respect to an employee
benefit plan in the performance of the director's duties for a purpose
reasonably believed by the director to be in the interest of the participants
and beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of the corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall be indemnified as and to the
extent provided in subsection (d) of this section for a director and shall be
entitled, to the same extent as a director, to seek indemnification pursuant to
the provisions of subsection (d);
(2) A corporation may indemnify and advance expenses to an officer,
employee, or agent of the corporation to the same extent that it may indemnify
directors under this section; and
(3) A corporation, in addition, may indemnify and advance expenses to
an officer, employee, or agent who is not a director to such further extent,
consistent with law, as may be provided by its charter, bylaws, general or
specific action of its board of directors or contract.
(k)(1) A corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of the
corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise, or employee
benefit plan against any liability asserted against and incurred by such person
in any such capacity or arising out of such person's position, whether or not
the corporation would have the power to indemnify against liability under the
provisions of this section.
(2) A corporation may provide similar protection, including a trust
fund, letter of credit, or surety bond, not inconsistent with this section.
(3) The insurance or similar protection may be provided by a subsidiary
or an affiliate of the corporation.
(l) Any indemnification of, or advance of expenses to, a director in
accordance with this section, if arising out of a proceeding by or in the right
of the corporation, shall be reported in writing to the shareholders with the
notice of the next shareholders' meeting or prior to the meeting.
Sandy Spring has purchased director and officer liability insurance
that insures directors and officers against certain liabilities in connection
with the performance of their duties as directors and officers, and that
provides for payment to Sandy Spring of costs incurred by it in indemnifying its
directors and officers.
-57-
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Number Description
2 Agreement and Plan of Reorganization dated as of April 16, 1996
among Sandy Spring Bancorp, Inc., Sandy Spring National Bank of
Maryland, Annapolis Bancshares, Inc. and The Bank of Annapolis,
included as Appendix A to the combined Proxy
Statement/Prospectus.
5 Opinion of Kennedy & Baris, L.L.P.
8 Opinion of Stegman & Company
23(a) Consent of Stegman & Company, independent certified public
accountants to Sandy Spring Bancorp, Inc.
23(b) Consent of Rowles & Company, L.L.P., independent certified
public accountants to Annapolis Bancshares, Inc.
23(c) Consent of Kennedy & Baris, L.L.P., included in Exhibit 5
23(d) Consent of Ferris Baker Watts, Inc., included in Appendix B to
the combined Proxy Statement/Prospectus
27 Financial Data Schedule
99(a) Form of Proxy for Special Meeting of Shareholders of Annapolis
Bancshares, Inc.
(b) Financial Statement Schedules
Not Applicable
(c) The opinion of Ferris Baker Watts, Inc. is provided as Appendix B to
the combined Proxy Statement/Prospectus which forms a part of this
Registration Statement.
Item 22. Undertakings
The Registrant hereby undertakes that it will:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by section 10(a)(3) of the Securities Act of 1933 (the
"Act"); (ii) reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information in the registration statement; and (iii)
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) for determining liability under the Act, treat each post-effective
amendment as a new registration statement relating to the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
-58-
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the Registrant's annual
report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act") (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to section 15(d) of the Exchange Act) that
is incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
-59-
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Olney,
State of Maryland on July 1, 1996.
SANDY SPRING BANCORP, INC.
By: /s/ Hunter R. Hollar
-----------------------------
Hunter R. Hollar, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
We, the undersigned directors and officers of the registrant, hereby
severally constitute and appoint Marjorie S. Cook and Hunter R. Hollar, and each
of them, our true and lawful attorneys and agents, to do any and all things in
our names in the capacities indicated below which said person and/or persons may
deem necessary or advisable to enable the registrant to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with the registration
statement on Form S-4 relating to the offering of the registrant's Common Stock,
including specifically, but not limited to, power and authority to sign for us
in our names in the capacities indicated below the registration statement and
any all amendments (including post-effective amendments) thereto; and we hereby
approve, ratify and confirm all that said person and/or persons shall do or
cause to be done by virtue thereof.
- ------------------------- Director
Andrew N. Adams, Jr. July 1, 1996
/s/ John Chirtea
- -------------------------
John Chirtea Director July 1, 1996
/s/ Willard H. Derrick
- ------------------------- Chairman of the
Willard H. Derrick Board of Directors July 1, 1996
/s/Susan D. Goff
- -------------------------
Susan D. Goff Director July 1, 1996
/s/ Solomon Graham, Jr.
- --------------------------
Solomon Graham, Jr. Director July 1, 1996
/s/ Joyce R. Hawkins
- --------------------------
Joyce R. Hawkins Director July 1, 1996
/s/ Hunter R. Hollar
- -------------------------- President, Chief Executive
Hunter R. Hollar Officer and Director July 1, 1996
/s/ Thomas O. Keech
- --------------------------
Thomas O. Keech Director July 1, 1996
/s/ Charles F. Mess
- --------------------------
Charles F. Mess Director July 1, 1996
- --------------------------
Robert L. Mitchell Director July 1, 1996
/s/ Robert L. Orndorff, Jr.
- ---------------------------
Robert L. Orndorff, Jr. Director July 1, 1996
/s/ Lewis R. Schumann
- ---------------------------
Lewis R. Schumann Director July 1, 1996
/s/ W. Drew Stabler
- ---------------------------
W. Drew Stabler Director July 1, 1996
/s/ James H. Langmead Vice President, Treasurer
- ----------------------------- and Principal Financial
James H. Langmead and Accounting Officer July 1, 1996
Appendix A
Agreement and Plan of Reorganization
------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
By and Among
SANDY SPRING BANCORP, INC.
SANDY SPRING NATIONAL BANK OF MARYLAND
ANNAPOLIS BANCSHARES, INC.
And
BANK OF ANNAPOLIS
Dated as of April 16, 1996
--------------------------------------------------------
TABLE OF CONTENTS
Article I - Definitions ...............................................1
Article II - The Merger and Related Matters..............................5
Article III - Representations and Warranties
of ABI......................................................7
Article IV - Representations and Warranties of ABI and BOA...............13
Article V - Representations and Warranties of
Bancorp....................................................15
Article VI - Covenants...................................................19
Article VII - Conditions of the Merger; Federal Tax Treatment
of the Merger; Termination of Agreement...................................27
Article VIII - Termination of Obligations;
Payment of Expenses.......................................................33
Article IX - Closing; Assets and Liabilities of
Surviving Corporation....................................................34
Article X - General.....................................................36
Exhibits and Schedules
Exhibits:
Exhibit A Form of Articles of Merger
Exhibit B Form of Bank Merger Agreement
Exhibit C Form of Opinion of Counsel for ABI
Exhibit D Form of Opinion of Counsel for Bancorp
Schedules:
Schedule I Disclosure Schedule for ABI and BOA
Schedule II Disclosure Schedule for Bancorp and the Bank
i
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION is dated as of April 16, 1996 by
and among Sandy Spring Bancorp, Inc., ("Bancorp") a Maryland corporation, Sandy
Spring National Bank of Maryland (the "Bank"), a national banking organization
with its main office in Olney, Maryland, Annapolis Bancshares, Inc. ("ABI") a
Maryland corporation, and Bank of Annapolis ("BOA"), a trust company chartered
under the laws of the State of Maryland with its principal banking office in
Annapolis, Maryland.
WHEREAS, Bancorp is a registered bank holding company that controls the
Bank;
WHEREAS, ABI is a registered bank holding company that controls BOA;
WHEREAS, Bancorp and ABI desire that ABI be merged with and into the Bancorp
in a transaction effected by means of a stock-for-stock exchange in which common
shares of Bancorp would be exchanged for the outstanding shares of ABI;
WHEREAS, Bancorp and ABI also desire that BOA be merged with and into the
Bank;
WHEREAS, the Boards of Directors of Bancorp, the Bank and ABI each believe
that it is in the best interests of their respective shareholders to enter such
a transaction;
WHEREAS, the Board of Directors of ABI believes that the shareholder value
of ABI can be maximized over time through this stock-for-stock exchange; and
WHEREAS, the Boards of Directors of Bancorp, the Bank, ABI and BOA each
believe that such a merger will be in the best interests of the communities
served by them and of their employees.
NOW THEREFORE, in consideration of the premises and mutual promises
hereinafter set forth and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Parties hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms have the
definitions indicated.
"ABI" means Annapolis Bancshares, Inc.
1
The "ABI Options" shall have the meaning set forth in Section 3.2.
The "ABI Shareholders Meeting" means that meeting of ABI shareholders to be
held to submit for shareholder approval the Agreement and the Merger.
The "ABI Subsidiaries" shall have the meaning set forth in Section 3.1.
The "ABI Warrants" shall have the meaning set forth in Section 3.2.
The "Adjustment Notice Period" shall have the meaning set forth in Section
7.4(f) and (g).
The "Agreement" means this Agreement.
The "Articles of Merger" means articles of merger conforming with the MGCL
substantially in the Form of Exhibit A to this Agreement.
The "Average Closing Price" shall mean the volume-weighted average price for
the common stock of Bancorp as reported on the NASDAQ National Market for the
ten trading days immediately preceding the satisfaction of the conditions set
forth in Section 7.1 of this Agreement, without regard to any waiting period
required thereby, or, if Bancorp common stock is not listed on the NASDAQ
National Market during such ten trading days, the average of the bid and asked
quotations for such days. Bancorp shall notify ABI and BOA promptly of the
satisfaction of the conditions set forth in Section 7.1.
"Bancorp" means Sandy Spring Bancorp, Inc.
The "Bancorp Subsidiaries" shall have the meaning set forth in Section 5.1.
The "Bank" means Sandy Spring National Bank of Maryland.
The "Bank Merger" means the merger of BOA with the Bank pursuant to the Bank
Merger Agreement.
The "Bank Merger Agreement" means that agreement in the Form of Exhibit B
hereto by and between the Bank and BOA.
"BOA" means Bank of Annapolis.
"Business Day" means any Monday, Tuesday, Wednesday, Thursday, or Friday
that is not a Federal or State holiday generally recognized by banks in the
State of Maryland.
"Closing" shall have the meaning assigned to it in Section 9.3 of the
Agreement.
The "Code" means the Internal Revenue Code of 1986, as amended.
2
The "Commissioner" means the Maryland Bank Commissioner.
"Dissenters' Shares" means shares as to which an ABI shareholder has
perfected Dissenters' Rights.
"Dissenters' Rights" means dissenters appraisal rights as described under
Section 2.6 of the Agreement.
The "Effective Time" shall have the meaning set forth in Section 9.4 of the
Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
The "FDIA" means the Federal Deposit Insurance Act, as amended.
The "FDIC" means the Federal Deposit Insurance Corporation.
The "Federal Reserve" means the Board of Governors of the Federal Reserve
System.
"Government Approvals" means all approvals, consents, notices and filings
with any governmental authority, including the Federal Reserve, the OCC, the
FDIC, the Department of Justice, the SEC, the Commissioner, other regulatory
authorities, and any other persons as are necessary under applicable law or
regulation to consummate the transactions contemplated by this Agreement and the
Bank Merger Agreement.
"Liquidity Investments" means federal funds sold, U.S. Treasury securities,
and U.S. Treasury securities purchased under agreements to resell, undertaken in
the ordinary course of business and with a maturity of one-hundred and eighty
(180) days or less.
The "Merger" means the merger of ABI with and into Bancorp as contemplated
by this Agreement.
The "MGCL" means the Maryland General Corporation Law, as amended.
The "OCC" means the United States Comptroller of the Currency.
The "Parties" means Bancorp, the Bank, ABI and BOA.
The "Prospectus/Proxy Statement" shall have the meaning set forth in Section
2.4.
The "Registration Statement" shall have the meaning set forth in Section
2.4.
"SEC" means the United States Securities and Exchange Commission.
The Surviving Corporation" means Bancorp following the Merger.
3
The "Surviving Bank" means the Bank following the Bank Merger.
The "1933 Act" means the Securities Act of 1933, as amended.
The "1934 Act" means the Securities Exchange Act of 1934, as amended.
4
ARTICLE II
THE MERGER AND RELATED MATTERS
2.1 The Merger. Subject to approval by the shareholders of ABI and upon the
other terms and conditions contained in this Agreement, ABI shall be merged with
and into Bancorp at the Effective Time in accordance with the applicable
provisions of the MGCL.
(a) Name. The name of the Surviving Corporation shall be "Sandy Spring
Bancorp, Inc.".
(b) Certificate of Incorporation; Bylaws. The Articles of Incorporation
and Bylaws of Bancorp in effect at the Effective Time shall be the
Articles of Incorporation and Bylaws of the Surviving Corporation.
(c) Board of Directors. The Board of Directors of Bancorp at the
Effective Time shall serve as the Board of Directors of the Surviving
Corporation until the successors of the members thereof are duly
elected and qualified.
(d) Officers. The Officers of Bancorp at the Effective Time shall serve
as the officers of the Surviving Corporation until their successors are
duly appointed by the Board of Directors of Bancorp.
2.2 Conversion of Shares, Options and Warrants. At the Effective Time, by
virtue of the Merger and without any action on the part of Bancorp, ABI, or the
holders of shares of ABI common stock, each outstanding share of ABI common
stock then issued and outstanding, (other than Dissenters' Shares and shares
held by Bancorp or any Bancorp Subsidiary other than in a trust or similar
arrangement) shall be converted into and represent 0.62585 shares of Bancorp
common stock, and shall no longer be a share of common stock of ABI, provided
that, until exchanged in accordance with the provisions of Section 9.1 hereof,
the holders of ABI common stock shall not be entitled to vote in respect of any
matter submitted for the consideration of holders of Bancorp common stock, or to
receive dividends or other distributions or payments in respect of Bancorp
common stock. At the Effective Time each outstanding ABI Option and each
outstanding ABI Warrant shall continue in place as an option or warrant to
purchase, in place of the purchase of each share of ABI common stock, the number
of shares (calculated to four decimal places and then rounded up or down to the
nearest whole share) of Bancorp common stock that would have been received by
the holder of such ABI Option or ABI Warrant in the Merger had the option or
warrant been exercised in full for shares of ABI common stock immediately prior
to the Effective Time, except for appropriate pro rata adjustments as to the
relevant option price for shares of Bancorp common stock substituted therefor so
that the aggregate exercise price of shares subject to such ABI Options or ABI
Warrants immediately following the Effective Time shall be the same as the
aggregate exercise price for such shares immediately prior to the Effective
Time. Bancorp and ABI agree to take such actions as are
5
necessary to give effect to the foregoing. (For reference, see Section 2.2 of
Schedule I.) The number of shares (or fraction thereof) of Bancorp common stock
into which each share of ABI common stock shall be so converted shall be
increased or decreased proportionally to reflect any stock split, stock
dividend, or reclassification of Bancorp common stock made or declared between
the date of this Agreement and the Effective Time, and shall be subject to
adjustment as set forth in paragraphs (f) and (g) of Section 7.4 of this
Agreement; and the number of shares of Bancorp common stock issuable upon the
exercise of the ABI Options and ABI Warrants converted into options and warrants
for shares of Bancorp, and the exercise price therefor, shall similarly be
adjusted.
2.3 Shareholders' Meeting. At the earliest practicable date, ABI shall hold
the ABI Shareholders Meeting to submit for shareholder approval this Agreement
and the Merger. The affirmative vote of the holders of at least two-thirds of
the issued and outstanding shares of ABI common stock shall be required for
approval of this Agreement and the Merger.
2.4 Registration Statement; Prospectus/Proxy Statement.
(a) For the purposes of (i) registering Bancorp common stock to be
issued to holders of ABI common stock in connection with the Merger with the SEC
and with applicable state securities authorities, and (ii) holding the ABI
Shareholders Meeting, the Parties shall cooperate in the preparation of an
appropriate registration statement (such registration statement, together with
all and any amendments and supplements thereto, being herein referred to as the
"Registration Statement"), including a prospectus/proxy statement satisfying all
applicable requirements of applicable state laws, and of the Securities Act of
1933 (the "1933 Act") and the Securities Exchange Act of 1934 (the "1934 Act")
and the rules and regulations thereunder (such prospectus/proxy statement in the
form mailed to the ABI shareholders, together with any and all amendments or
supplements thereto, being herein referred to as the "Prospectus/Proxy
Statement").
(b) Bancorp shall promptly file the Registration Statement and the
Prospectus/Proxy Statement with the SEC and applicable state securities
agencies. Bancorp shall use all reasonable efforts to cause the Registration
Statement and the Prospectus/Proxy Statement to become effective under the 1933
Act and applicable state securities laws at the earliest practicable date.
2.5 Regulatory and Other Approvals. The Parties shall cooperate in the
preparation and submission by them, as promptly as reasonably practicable, of
such applications, petitions, and other documents and materials as any of them
may reasonably deem necessary or desirable to obtain or make the Government
Approvals. Prior to the making of any such filings with any regulatory authority
or any third persons, Bancorp and ABI shall submit to each other the materials
to be filed, mailed or released. Any such materials must be acceptable to both
Bancorp and ABI prior to the filings with any regulatory authorities or any
third persons, except to the extent that Bancorp or ABI is legally required to
proceed prior to obtaining the acceptance of the other.
6
2.6 Dissenters' Rights. Shareholders of ABI may exercise Dissenters' Rights
if applicable pursuant to Section 3-202 of the MGCL.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ABI
ABI represents and warrants to Bancorp that, except as disclosed in
Schedule I delivered by ABI to Bancorp concurrently with the execution of this
Agreement:
3.1 Organization, Good Standing, Authority, Insurance, Etc. ABI is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Maryland. Each of the "subsidiaries" of ABI within the
meaning of Section 3(w) of the FDIA (individually a "ABI Subsidiary" and
collectively the "ABI Subsidiaries") is duly organized, validly existing, and in
good standing under the laws of the respective jurisdiction under which it is
organized. ABI and each ABI Subsidiary has all requisite power and authority and
is duly qualified and licensed to own, lease and operate its properties and
conduct its business as it is now being conducted in all material respects. ABI
and each ABI Subsidiary is qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which qualification is necessary
under applicable law, except to the extent that any failures to so qualify would
not, in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of ABI and the ABI Subsidiaries, taken as a
whole. BOA is a member of the Federal Reserve Bank of Richmond, the Federal Home
Loan Bank of Atlanta, and the BIF, and all eligible accounts issued by BOA are
insured by the BIF up to applicable limits. The minute books of ABI contain
complete and accurate records of all meetings and other corporate actions held
or taken since January 1, 1993 by its shareholders and Board of Directors
(including the committees of such Board).
3.2 Capitalization. The authorized capital stock of ABI consists of
5,000,000 shares of common stock, par value $1.00 per share, of which 785,375
shares of ABI common stock were issued and outstanding as of the date of this
Agreement, and 1,000,000 shares of Preferred Stock, par value $1.00 per share,
none of which were issued or outstanding as of the date of this Agreement. All
outstanding shares of ABI common stock are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. ABI's Incentive Stock
Option Plan authorizes the issuance of up to [25,000] shares of ABI common
stock. Options (the "ABI Options") to purchase 11,400 shares of ABI common stock
are outstanding, all of which were granted under ABI's Stock Option Plan. In
addition, ABI has outstanding warrants (the "ABI Warrants") for the purchase of
12,000 shares of ABI common stock as of the date of this Agreement. Except for
obligations under options granted under ABI's Stock Option Plan and the
Warrants, there are no options, convertible securities, warrants, or other
rights (preemptive or otherwise) to purchase or acquire any of ABI's capital
stock from ABI and no contracts to which ABI or any of its affiliates are
subject with respect to the issuance, voting or sale of issued or unissued
shares of ABI's capital stock. ABI has issued no "Limited Rights" as defined
under the ABI Option Plan or any stock appreciation rights or similar rights.
7
3.3 Ownership of Subsidiaries. All the outstanding shares of the capital
stock of the ABI Subsidiaries are validly issued, fully paid, nonassessable and
owned beneficially and of record by ABI or a ABI Subsidiary free and clear of
any Encumbrance.
3.4 Financial Statements and Reports. No registration statement, proxy
statement, schedule or report filed by ABI or any ABI Subsidiary with the SEC
under the 1933 Act, or the 1934 Act, on the date of effectiveness in the case of
such registration statements, or on the date of filing in the case of such
reports or schedules, or on the date of mailing in the case of such proxy
statements, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. ABI and the ABI Subsidiaries have filed all documents required
to be filed by them with the SEC, the Federal Reserve, the FDIC, the
Commissioner or state securities authorities under various securities and
financial institution laws and regulations, except to the extent that all
failures to so file, in the aggregate, would not have a material adverse effect
on the business, financial condition or results of operations of ABI and the ABI
Subsidiaries, taken as a whole; and all such documents, as finally amended,
complied in all material respects as to form with applicable requirements of law
and, as of their respective date or the date as amended, did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except to the extent
stated therein, all financial statements and schedules included in the documents
referred to in the preceding sentences were prepared in accordance with
generally accepted accounting principles or such other regulatory accounting
requirements as were applicable thereto (except for the omission of notes to
unaudited statements and year end adjustments to interim results), applied on a
consistent basis with all prior periods and fairly presented the information
purported to be shown therein. The audited consolidated financial statements of
ABI at December 31, 1995 and for the year then ended disclose all liabilities
(including contingent liabilities) of ABI and the ABI Subsidiaries, other than
liabilities which are not, in the aggregate, material to ABI and the ABI
Subsidiaries, taken as a whole, and contain adequate reserves for loan losses,
taxes and all other material accrued liabilities and for all reasonably
anticipated material losses, if any. A true and complete copy of such financial
statements has been delivered by ABI to Bancorp.
3.5 Absence of Changes. Since December 31, 1995, there has been no material
adverse change in the business, financial condition or results of operations of
ABI and the ABI Subsidiaries, taken as a whole, except as disclosed in Section
3.5 of Schedule I or in the statements or reports filed by ABI with the SEC
prior to the date of this Agreement, copies of which have been provided to
Bancorp.
3.6 Prospectus/Proxy Statement. At the time the Registration Statement
becomes effective and at the time the Prospectus/Proxy Statement is mailed to
the shareholders of ABI for the solicitation of proxies for the approval
referred to in Section 2.3 hereof and at all times subsequent to such mailings
up to and including the times of such approvals, such Registration Statement and
Prospectus/Proxy Statement (including any amendments or supplements thereto),
with respect to all information set forth therein relating to ABI and its
shareholders and ABI
8
common stock, this Agreement, the Merger and all other transactions contemplated
hereby that has been furnished in writing by ABI expressly for inclusion
therein, will:
(a) comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act, and the rules and regulations under such Acts; and
(b) not contain any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statement therein not false or misleading, or
necessary to correct any statement in an earlier communication with respect to
the solicitation of a proxy for the same meeting or subject matter which has
become false or misleading.
3.7 Litigation and Other Proceedings. Except as set forth in Section 3.7 of
Schedule I and except for matters which would not have a material adverse effect
on the business, financial condition or results of operations of ABI and the ABI
Subsidiaries taken as a whole, neither ABI nor any ABI Subsidiary is a defendant
in, nor is any of its property subject to, any pending, or, to the best
knowledge of the management of ABI, threatened claim, action, suit,
investigation or proceeding, or subject to any judicial order, judgment or
decree.
3.8 Compliance With Law. ABI and the ABI Subsidiaries are in compliance in
all material respects with all laws and regulations applicable to their
respective operations or with respect to which compliance is a condition of
engaging in the business thereof, except for failures to comply, which, in the
aggregate, would not have a material adverse effect on the business, financial
condition or results of operation of ABI and the ABI Subsidiaries, taken as a
whole, and neither ABI nor any ABI Subsidiary has received notice of violation
of, and does not know of any material violations of, any of the above.
3.9 Corporate Actions. The Board of Directors of ABI has duly authorized its
officers to execute and deliver this Agreement, the Bank Merger Agreement, and
the Articles of Merger and to take all action necessary to consummate the Merger
and the other transactions contemplated hereby to which ABI is a party. All
corporate authorizations of the Board of Directors of ABI required for the
consummation of the Merger have been obtained.
3.10 Authority. The execution, delivery and performance of this Agreement
and the Bank Merger Agreement do not violate any of the provisions of, or
constitute a default under or give any person the right to accelerate payment or
performance under the articles of incorporation or bylaws of ABI, the charter or
bylaws of BOA, the articles of incorporation or regulations of any other ABI
Subsidiary, or any other material agreement or instrument to which ABI or any of
the ABI Subsidiaries is a party or is subject or by which any of their
properties or assets is bound. ABI has all requisite corporate power and
authority to enter into this Agreement and to perform its obligations hereunder
and thereunder. Other than the receipt of Governmental Approvals and approval of
ABI shareholders referred to in Section 2.3 hereof, no consents or approvals are
required on behalf of ABI in connection with the consummation of the
transactions contemplated
9
by this Agreement. This Agreement constitutes the valid and binding obligation
of ABI and BOA, and is enforceable in accordance with its terms, except as
enforceability may be limited by applicable laws relating to bankruptcy,
insolvency or creditors' rights generally or the exercise of judicial discretion
in accordance with general principles of equity.
3.11 Information Furnished. No statement contained in any schedule,
certificate or other document furnished or to be furnished in writing by or on
behalf of ABI or any ABI Subsidiary to Bancorp pursuant to this Agreement
contains or will contain any untrue statement of a material fact or any material
omission. No information material to the Merger and which is necessary to make
the representations and warranties not misleading has been withheld from
Bancorp.
3.12 Tax Matters. ABI and each ABI Subsidiary has duly and properly filed
all federal, state, local and other tax returns required to be filed by it and
has made timely payments of all taxes shown by such returns to be due and
payable, or which are otherwise due and payable, whether disputed or not; the
current status of audits of such returns by the Internal Revenue Service ("IRS")
and other applicable agencies is as set forth in Section 3.12 of Schedule I; and
there is no agreement by ABI or any ABI Subsidiary for the extension of time or
for the assessment or payment of any taxes payable. Neither the IRS nor any
other taxing authority is now asserting or, to the best knowledge of ABI or any
ABI Subsidiary, threatening to assert any deficiency or claim for additional
taxes (or interest thereon or penalties in connection therewith), nor is ABI or
any ABI Subsidiary aware of any basis for any such assertion or claim, except as
set forth in Section 3.12 of Schedule I.
3.13 Property and Assets. Except as disclosed in Section 3.13 of Schedule I,
ABI and the ABI Subsidiaries have good and marketable title to all of the real
property reflected in the financial statements at December 31, 1995 referred to
in Section 3.4 hereof, free and clear of all encumbrances, except for (a) such
items shown in such financial statements or in the notes thereto, (b) liens for
current real estate taxes not yet delinquent, (c) customary title exceptions
that have no material adverse effect upon the value of such property, (d)
property sold or transferred in the ordinary course of business since the date
of such financial statements, and (e) as otherwise specifically indicated in
Section 3.13 of Schedule I. All leases for the use of real property under which
ABI or any ABI Subsidiary is the lessee are valid and binding and in full force
and effect and neither ABI nor any ABI Subsidiary is in default under any such
lease. Except as set forth in Section 3.13 of Schedule I, no consent of the
lessor of any such lease is required for consummation of the Merger or the Bank
Merger. There has been no material physical loss, damage or destruction, whether
or not covered by insurance, affecting the real properties of ABI or any ABI
Subsidiary since December 31, 1995. All property and assets material to their
business and currently used by ABI and each of the ABI Subsidiaries are, in all
material respects, in good operating condition and repair, normal wear and tear
excepted.
3.14 Employment Arrangements. Except as set forth in Section 3.14 of
Schedule I, there are no employment, severance or other agreements or
arrangements with any current or former directors, officers or employees of ABI
or any ABI Subsidiary which may not be terminated
10
without penalty (or any augmentation or acceleration of benefits or payment of
or agreement to pay any termination or severance payment) on 30 days or less
notice to such person. No payments to directors, officers or employees of ABI or
any ABI Subsidiary resulting from the transactions contemplated hereby will
cause the imposition of excise taxes under Section 4999 of the Code or the
disallowance of a deduction to ABI or any ABI Subsidiary pursuant to Section
280G(a) of the Code.
3.15 Employee Benefits. Except as disclosed in Section 3.15 of Schedule I,
neither ABI nor any ABI Subsidiary maintains any funded deferred compensation
plans (including profit sharing, pension, savings or stock bonus plans),
unfunded deferred compensation arrangements or employee benefit plans as defined
in Section 3(3) of ERISA. Neither ABI nor any ABI Subsidiary has incurred or
reasonably expects to incur any liability to the Pension Benefit Guaranty
Corporation. Any plans of ABI or any ABI Subsidiary intended to be qualified
under Section 401(a) of the Code are so qualified, and neither ABI nor any ABI
Subsidiary is aware of any fact which would adversely affect the qualified
status of such plans. Neither ABI nor any ABI Subsidiary has engaged in a
"prohibited transaction" as defined in Section 406 of ERISA and Section 4975 of
the Code. Except as set forth in Section 3.15 of Schedule I, ABI does not (a)
provide health, medical, death or survivor benefits to any former employee or
beneficiary thereof, or (b) maintain any form of current (exclusive of base
salary and base wages) or deferred compensation, bonus, stock option, stock
appreciation right, benefit, severance pay, retirement, incentive, group or
individual health insurance, welfare or similar plan or arrangement for the
benefit of any single or class of directors, officers or employees, whether
active or retired.
3.16 Agreements and Instruments. Section 3.16 of Schedule I sets forth as of
the date of this Agreement a list of all of the following agreements and
instruments (including a summary description of the material terms of any
agreement not committed to writing):
(a) every agreement (other than this Agreement, the Bank Merger
Agreement, and agreements with respect to deposits received, loans originated or
purchased, or Liquidity Investments) of ABI or any ABI Subsidiary which is to be
performed in whole or in part after the date of this Agreement and which (i)
involves aggregate future payments by or to ABI or any ABI Subsidiary of more
than $5,000, (ii) involves material obligations to be performed later than one
year from the date of this Agreement, or (iii) was not entered into in the
ordinary course of business;
(b) each instrument to which ABI or any ABI Subsidiary is a party
defining the terms on which it (i) has borrowed or is committed or entitled to
borrow money (other than by receipt of a deposit), (ii) has, either outside of
the ordinary course of its business or in an amount exceeding $50,000, loaned or
committed to loan money, or (iii) has given or committed to give a guarantee of
(or otherwise to incur primary or secondary liability in respect of) any
obligation of any other party (other than by certification of checks in the
ordinary course of business);
11
(c) all agreements of ABI or any ABI Subsidiary for the grant of any
preferential rights, or which require the consent of any third party to the
transfer or assignment of any assets, properties or rights of ABI or any ABI
Subsidiary to secure the benefits thereof to any successor;
(d) all agreements for the sale of property held or acquired by ABI or
any ABI Subsidiary as a result of security interests in connection with loans
having an unpaid principal amount exceeding $50,000;
(e) all loans contractually delinquent for more than 30 days;
(f) all agreements for loans or the provision, purchase or sale of
goods, services or property between ABI or any ABI Subsidiary and any director
or officer of ABI or any ABI Subsidiary or any member of the immediate family or
affiliate of any of the foregoing;
(g) all agreements with or concerning any labor or employee
organization to which ABI or any ABI Subsidiary is a party;
(h) all agreements between ABI or any ABI Subsidiary and any five
percent (5%) or more shareholder of ABI; and
(i) any and all proposed, threatened, temporary, or final agreements,
orders, directives, memorandums, resolutions, or evidence of formal or informal
agency action of which ABI is aware (i) between ABI or any ABI Subsidiary or any
officer or director of ABI or any ABI Subsidiary and any state or federal
regulatory authority, or (ii) issued, delivered, or described by any such
authority to ABI or any ABI Subsidiary or any officer or director of ABI or any
ABI Subsidiary.
3.17 Environmental Matters. Except as set forth in Section 3.17 of Schedule
I, to the best knowledge of ABI or any ABI Subsidiary, neither ABI nor any ABI
Subsidiary owns, controls, or leases any properties affected by toxic waste,
radon gas or other hazardous conditions or constructed in part with the use of
asbestos. Neither ABI nor any ABI Subsidiary is aware of, nor has ABI or any ABI
Subsidiary received written notice from any governmental or regulatory body of,
any past, present or future conditions, activities, practices or incidents which
may interfere with or prevent compliance or continued compliance with those laws
or any regulation, order, decree, judgment or injunction, issued, entered,
promulgated or approved thereunder, or which may give rise to any common law or
legal liability, or otherwise form the basis of any claim, action, suit,
proceeding, hearing or investigation based on or related to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling, or the emission, discharge, release or threatened release into the
environment, of any pollutant, contaminant or chemical, or industrial, toxic or
hazardous substance or waste. There is no civil, criminal or administrative
claim, action, suit, proceeding, hearing or investigation pending or, to the
knowledge of ABI or BOA, threatened against ABI or BOA or any property serving
as collateral for any extension of credit made by ABI or any ABI Subsidiary
relating in any way to those laws or
12
any regulation, order, decree, judgment or injunction issued, entered,
promulgated or approved thereunder.
3.18 Brokers; Certain Fees. Neither ABI nor BOA, nor any of their respective
officers, directors, or employees, has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commission, or
finder's fees in connection with the Agreement, the Merger, the Bank Merger, or
any of the transactions contemplated herein or therein, except that ABI has
retained Ferris Baker Watts to perform various investment banking and financial
advisory services in connection with the Merger. Section 3.18 of Schedule I
contains a copy of all written agreements, and a statement of all oral
agreements, between ABI or its affiliates and Ferris Baker Watts, and any
agreements thereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ABI and BOA
ABI and BOA jointly and severally represent and warrant to Bancorp that,
except as disclosed in Schedule I delivered by ABI to Bancorp concurrently with
the execution of this Agreement:
4.1 Organization, Good Standing, Authority, Insurance, Etc. BOA is a trust
company duly organized, validly existing and in good standing under the laws of
the State of Maryland. BOA has no "subsidiaries" within the meaning of Section
3(w) of the FDIA. BOA has all requisite power and authority and is duly
qualified and licensed to own, lease and operate its properties and conduct its
business as it is now being conducted. BOA has delivered to Bancorp a true,
complete and correct copy of the articles of incorporation, charter, or other
organizing document and of the bylaws, as in effect on the date of this
Agreement, of BOA. BOA is qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which qualification is necessary
under applicable law, except to the extent that any failures to so qualify would
not, in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of BOA. BOA is a member in good standing of
the Federal Reserve Bank of Richmond and the Bank Insurance Fund ("BIF"), and
all eligible accounts issued by ABI are insured by BIF. The Bank is a not a
"domestic building and loan association" as defined in Section 7701(a)(19) of
the Code.
The minute books of BOA contain complete and accurate records of all
meetings and other corporate actions held or taken since January 1, 1993 by its
shareholders and Board of Directors (including the committees of such Board).
4.2 Capitalization. The authorized capital stock of BOA consists of
1,000,000 shares of common stock, par value $10.00 per share, of which 150,000
were issued and outstanding as of the date of this Agreement. All outstanding
shares of BOA common stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Except as set forth in Section 4.2
of Schedule I, there are no options, convertible securities, warrants, or other
rights (preemptive or otherwise) to purchase or acquire any of BOA's capital
stock from BOA and no oral or written agreement, contract, arrangement,
understanding, plan or instrument of any kind
13
(collectively, "Contract") to which BOA or any of its affiliates is subject with
respect to the issuance, voting or sale of issued or unissued shares of BOA's
capital stock.
4.3 Absence of Changes. Since December 31, 1995, there has been no material
adverse change in the business, financial condition, results of operations, or
prospects of BOA except as disclosed in Section 4.3 of Schedule I or in the
statements or reports filed by ABI with the SEC or by BOA with the FFIEC or
Federal Reserve prior to the date of this Agreement, copies of which have been
provided to Bancorp.
4.4 Prospectus/Proxy Statement. At the time the Prospectus/ Proxy Statement
is mailed to the shareholders of ABI for the solicitation of proxies for the
approvals referred to in Section 2.3 hereof and at all times subsequent to such
mailings up to and including the times of such approvals, such Prospectus/Proxy
Statement (including any supplements thereto), with respect to all information
set forth therein relating to BOA, this Agreement, the Bank Merger Agreement,
the Merger and all other transactions contemplated hereby that has been
furnished in writing by BOA expressly for inclusion therein, will:
(a) comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act and the rules and regulations under such Acts; and
(b) not contain any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not false or misleading, or
necessary to correct any statement in an earlier communication with respect to
the solicitation of a proxy for the same meeting or subject matter which has
become false or misleading.
4.5 Litigation and Other Proceedings. Except as set forth in Section 4.5 of
Schedule I, and except for matters which would not have a material adverse
effect on the business, financial condition or results of operations of BOA, BOA
is not a defendant in, nor is any of its property subject to, any pending, or,
to the best knowledge of the management of BOA, threatened, claim, action, suit,
investigation or proceeding, or subject to any judicial order, judgment or
decree.
4.6 Compliance with Law. Except as disclosed in Section 4.6 of Schedule I,
BOA is in compliance in all material respects with all laws and regulations
applicable to its operations or with respect to which compliance is a condition
of engaging in the business thereof, and BOA has not received notice of
violation of, and does not know of any material violations of, any of the above.
4.7 Corporate Actions. The Board of Directors of BOA has duly authorized its
officers to execute and deliver this Agreement and the Bank Merger Agreement and
to take all action necessary to consummate the Merger and the other transactions
contemplated hereby to which BOA is a party. All corporate authorization of the
Board of Directors of BOA required for the consummation of the Bank Merger has
been obtained.
14
4.8 Authority. Except as set forth in Section 4.8 of Schedule I, the
execution, delivery and performance of this Agreement and the Bank Merger
Agreement do not violate any of the provisions of, or constitute a default under
or give any person the right to accelerate payment or performance under the
charter or bylaws of BOA, any regulatory order to which BOA is subject, or any
other agreement or instrument to which BOA is a party or is subject or by which
any of their properties or assets is bound. BOA has all requisite corporate
power and authority to enter into this Agreement and to perform its obligations
hereunder. Other than the receipt of Governmental Approvals, no consents or
approvals are required on behalf of BOA in connection with the consummation of
the transactions contemplated by this Agreement. This Agreement constitutes the
valid and binding obligation of BOA and is enforceable in accordance with its
terms, except as enforceability may be limited by applicable laws relating to
bankruptcy, insolvency or creditors rights generally or the exercise of judicial
discretion in accordance with general principles of equity.
4.9 Information Furnished. No statement contained in any schedule,
certificate or other document furnished or to be furnished in writing by or on
behalf of BOA to Bancorp or the Bank pursuant to this Agreement contains or will
contain any untrue statement of a material fact or any material omission.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BANCORP
Bancorp represents and warrants that, except as disclosed in Schedule II
delivered by Bancorp to ABI concurrently with the execution of this Agreement:
5.1 Organization, Good Standing, Authority, Insurance, Etc. Bancorp is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Maryland. Each of the "subsidiaries" of Bancorp within the
meaning of Section 3(w) the FDIA (individually a "Bancorp Subsidiary" and
collectively the "Bancorp Subsidiaries") is duly organized, validly existing,
and in good standing under the laws of the respective jurisdiction under which
it is organized. Bancorp and each Bancorp Subsidiary has all requisite power and
authority and is duly qualified and licensed to own, lease and operate its
properties and conduct its business as it is now being conducted. Bancorp and
each Bancorp Subsidiary is qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which qualification is necessary
under applicable law, except to the extent that any failures to so qualify would
not, in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of Bancorp and the Bancorp Subsidiaries,
taken as a whole. The Bank is a member in good standing of the Federal Reserve
Bank of Richmond, the Federal Home Loan Bank of Atlanta, and the BIF, and all
eligible accounts issued by the Bank are insured by the BIF.
5.2 Capitalization. The authorized capital stock of Bancorp consists of
6,000,000 shares of capital stock, par value $1.00 per share, of which 4,364,284
shares of Bancorp common stock were issued and outstanding as of the date of
this Agreement. Authorized but unissued capital stock of Bancorp may be
designated as preferred stock. No shares of capital stock of Bancorp
15
have been designated as preferred stock and no shares of preferred stock of
Bancorp were outstanding as of the date of this Agreement. All outstanding
shares of Bancorp common stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Bancorp's 1992 Stock Option Plan
authorizes the issuance of up to 270,000 shares of Bancorp common stock. Options
to purchase 69,050 shares of Bancorp common stock are outstanding, 40,200 of
which were granted under Bancorp's 1982 Stock Option Plan. Bancorp has reserved
200,000 shares of Bancorp's common stock for issuance under Bancorp's Dividend
Reinvestment Plan and 132,000 shares of Bancorp's common stock for issuance
under Bancorp's Deferred Profit Sharing Plan and Trust. Except for obligations
under Bancorp's Dividend Reinvestment Plan and Deferred Profit Sharing Plan and
Trust and options granted under Bancorp's 1982 and 1992 Stock Option Plans there
are no options, convertible securities, warrants, or other rights (preemptive or
otherwise) to purchase or acquire any of Bancorp's capital stock from Bancorp
and no contracts to which Bancorp or any of its affiliates are subject with
respect to the issuance, voting or sale of issued or unissued shares of
Bancorp's capital stock.
5.3 Ownership of Subsidiaries. All the outstanding shares of the capital
stock of the Bancorp Subsidiaries are validly issued, fully paid, nonassessable
and owned beneficially and of record by Bancorp or a Bancorp Subsidiary free and
clear of any encumbrance.
5.4 Financial Statements and Reports. No registration statement, proxy
statement, schedule or report filed by Bancorp or any Bancorp Subsidiary with
the SEC or the OCC under the 1933 Act, or the 1934 Act, on the date of
effectiveness in the case of such registration statements, or on the date of
filing in the case of such reports or schedules, or on the date of mailing in
the case of such proxy statements, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Bancorp and the Bancorp Subsidiaries have
filed all documents required to be filed by them with the SEC, the Federal
Reserve, the OCC, the FDIC, the Commissioner or state securities authorities
under various securities and financial institution laws and regulations, except
to the extent that all failures to so file, in the aggregate, would not have a
material adverse effect on the business, financial condition or results of
operations of Bancorp and the Bancorp Subsidiaries, taken as a whole; and all
such documents, as finally amended, complied in all material respects as to form
with applicable requirements of law and, as of their respective dates or the
dates as amended, did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Except to the extent stated therein, all financial
statements and schedules included in the documents referred to in the preceding
sentences were prepared in accordance with generally accepted accounting
principles or such other regulatory accounting requirements as were applicable
thereto (except for the omission of notes to unaudited statements and year end
adjustments to interim results), applied on a consistent basis with all prior
periods and fairly presented the information purported to be shown therein. The
audited consolidated financial statements of Bancorp at December 31, 1995 and
for the year then ended disclose all liabilities (including contingent
liabilities) of Bancorp and the Bancorp Subsidiaries, other than liabilities
which are not, in the aggregate, material to Bancorp and the Bancorp
16
Subsidiaries, taken as a whole, and contain adequate reserves for loan losses,
taxes and all other material accrued liabilities and for all reasonably
anticipated material losses, if any. A true and complete copy of such financial
statements has been delivered by Bancorp to ABI.
5.5 Absence of Changes. Since December 31, 1995, there has been no material
adverse change in the business, financial condition or results of operations of
Bancorp and the Bancorp Subsidiaries, taken as a whole, except as disclosed in
Section 5.5 of Schedule II or in the statements or reports filed by Bancorp with
the SEC prior to the date of this Agreement, copies of which have been provided
to ABI.
5.6 Prospectus/Proxy Statement. At the time the Registration Statement
becomes effective and at the time the Prospectus/Proxy Statement is mailed to
the shareholders of ABI for the solicitation of proxies for the approval
referred to in Section 2.3 hereof and at all times subsequent to such mailings
up to and including the times of such approvals, such Registration Statement and
Prospectus/Proxy Statement (including any amendments or supplements thereto),
with respect to all information set forth therein relating to Bancorp and its
shareholders and Bancorp common stock, this Agreement, the Merger and all other
transactions contemplated hereby that has been furnished in writing by Bancorp
expressly for inclusion therein, will:
(a) comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act, and the rules and regulations under such Acts; and
(b) not contain any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statement therein not false or misleading, or
necessary to correct any statement in an earlier communication with respect to
the solicitation of a proxy for the same meeting or subject matter which has
become false or misleading.
5.7 Litigation and Other Proceedings. Except as set forth in Section 5.7 of
Schedule II, and except for matters which would not have a material adverse
effect on the business, financial condition or results of operations of Bancorp
and the Bancorp Subsidiaries taken as a whole, neither Bancorp nor any Bancorp
Subsidiary is a defendant in, nor is any of its property subject to, any
pending, or, to the best knowledge of the management of Bancorp, threatened
claim, action, suit, investigation or proceeding, or subject to any judicial
order, judgment or decree.
5.8 Compliance With Law. Bancorp and the Bancorp Subsidiaries are in
compliance in all material respects with all laws and regulations applicable to
their respective operations or with respect to which compliance is a condition
of engaging in the business thereof, except for failures to comply, which, in
the aggregate, would not have a material adverse effect on the business,
financial condition or results of operations of Bancorp and the Bancorp
Subsidiaries, taken as a whole, and Bancorp has not received notice of violation
of, and does not know of any material violations of, any of the above.
17
5.9 Corporate Actions. The Board of Directors of Bancorp has duly authorized
its officers to execute and deliver this Agreement, the Bank Merger Agreement,
and the Articles of Merger and to take all action necessary to consummate the
Merger and the other transactions contemplated hereby to which Bancorp is a
party. All corporate authorizations of the Board of Directors of Bancorp
required for the consummation of the Merger have been obtained.
5.10 Authority. The execution, delivery and performance of this Agreement
and the Bank Merger Agreement do not violate any of the provisions of, or
constitute a default under or give any person the right to accelerate payment or
performance under the articles of incorporation or bylaws of Bancorp, the
charter or bylaws of the Bank, the articles of incorporation or regulations of
any other Bancorp Subsidiary, or any other agreement or instrument to which
Bancorp or any of the Bancorp Subsidiaries is a party or is subject or by which
any of their properties or assets is bound. Bancorp has all requisite corporate
power and authority to enter into this Agreement and to perform its obligations
hereunder and thereunder. Other than the receipt of Governmental Approvals, no
consents or approvals are required on behalf of Bancorp in connection with the
consummation of the transactions contemplated by this Agreement. This Agreement
constitutes the valid and binding obligation of Bancorp and the Bank, and is
enforceable in accordance with its terms, except as enforceability may be
limited by applicable laws relating to bankruptcy, insolvency or creditors'
rights generally or the exercise of judicial discretion in accordance with
general principles of equity.
5.11 Information Furnished. No statement contained in any schedule,
certificate or other document furnished or to be furnished in writing by or on
behalf of Bancorp to ABI pursuant to this Agreement contains or will contain any
untrue statement of a material fact or any material omission. No information
material to the Merger and which is necessary to make the representations and
warranties not misleading has been withheld from ABI.
5.12 Tax Matters. Bancorp and each of the Bancorp Subsidiaries have duly and
properly filed all federal, state, local and other tax returns required to be
filed by them and have made timely payments of all taxes shown by such returns
to be due and payable, or which are otherwise due and payable, whether disputed
or not. Neither the IRS nor any other taxing authority is now asserting or, to
the best knowledge of Bancorp, threatening to assert any deficiency or claim for
additional taxes (or interest thereon or penalties in connection therewith), nor
is Bancorp aware of any basis for any such assertion or claim, which would
exceed that amount of reserves established therefor by Bancorp and the Bancorp
Subsidiaries in an amount which would be material to Bancorp and the Bancorp
Subsidiaries taken as a whole.
5.13 Brokers; Certain Fees. Neither Bancorp nor the Bank, nor any of their
respective officers, directors, or employees, has employed any broker or finder
or incurred any liability for any financial advisory fees, brokerage fees,
commission, or finder's fees in connection with the Agreement, the Merger, the
Bank Merger, or any of the transactions contemplated herein or therein.
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5.14 Environmental Matters. Except as set forth in Section 5.14 of Schedule
II, to the best knowledge of Bancorp or any Bancorp Subsidiary, neither Bancorp
nor any Bancorp Subsidiary owns, controls, or leases any properties affected by
toxic waste, radon gas or other hazardous conditions or constructed in part with
the use of asbestos. Neither Bancorp nor any Bancorp Subsidiary is aware of, nor
has Bancorp or any Bancorp Subsidiary received written notice from any
governmental or regulatory body of, any past, present or future conditions,
activities, practices or incidents which may interfere with or prevent
compliance or continued compliance with those laws or any regulation, order,
decree, judgment or injunction, issued, entered, promulgated or approved
thereunder, or which may give rise to any common law or legal liability, or
otherwise form the basis of any claim, action, suit, proceeding, hearing or
investigation based on or related to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment, of any pollutant,
contaminant or chemical, or industrial, toxic or hazardous substance or waste.
Except as set forth in Section 5.14 of Schedule II, there is no civil, criminal
or administrative claim, action, suit, proceeding, hearing or investigation
pending or, to the knowledge of Bancorp or any Bancorp Subsidiary, threatened
against Bancorp or any Bancorp Subsidiary, or any property serving as collateral
for any extension of credit made by Bancorp or any Bancorp Subsidiary relating
in any way to those laws or any regulation, order, decree, judgment or
injunction issued, entered, promulgated or approved thereunder.
ARTICLE VI
COVENANTS
6.1 Investigations; Access and Copies. Between the date of this Agreement
and the Effective Time, ABI agrees to give to Bancorp and its representatives
and agents full access (to the extent lawful) to all of the premises, books,
records and employees of it and its subsidiaries at all reasonable times, and to
furnish promptly to Bancorp and its agents or representatives access to and true
and complete copies of such financial and operating data, all documents with
respect to matters to which reference is made in Article II, III or IV of this
Agreement or on any list, schedule or certificate delivered or to be delivered
in connection herewith, and such other documents, records, or information with
respect to the business and properties of ABI as Bancorp or its agents or
representatives shall from time to time reasonably request (including, without
limitation, copies of monthly financial reports, other reports furnished to the
Board of Directors of ABI and committees thereof, and minutes of meetings of the
Board of Directors of ABI and committees thereof); provided, however, that any
such inspection (a) shall be conducted in such manner as not to interfere
unreasonably with the operation of the business of ABI and (b) shall not affect
any of the representations and warranties hereunder. Each Party will also give
prompt written notice to the other Party of any event or development (x) which,
had it existed or been known on the date of this Agreement, would have been
required to be disclosed under this Agreement, (y) which would cause any of its
representations and warranties contained herein to be inaccurate or otherwise
materially misleading, or (z) which materially relate to the satisfaction of the
conditions set forth in Article VII of this Agreement.
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6.2 Conduct of Business of ABI. With respect to the conduct of the business
of ABI and the ABI Subsidiaries between the date of this Agreement and the
Effective Time, ABI agrees as follows:
(a) That ABI and each ABI Subsidiary shall conduct its respective
business only in the ordinary course, and maintain its books and records in
accordance with past practices except as required by law or regulations or
generally accepted accounting principles and shall properly pay or accrue all
expenses incurred by them in connection with this Agreement or the Merger;
(b) That ABI shall not, without the prior written consent of Bancorp:
(i) declare, set aside or pay any dividend or make any other distribution with
respect to ABI's capital stock or reacquire any of ABI's outstanding shares,
except that ABI may pay a first quarter 1996 cash dividend of $.0625 per share
and may pay a cash dividend of no greater than $0.0625 per share for each
completed quarter prior to the Effective Time; (ii) issue or sell any shares of
capital stock of ABI or any ABI Subsidiary, other than upon the exercise of ABI
Options or ABI Warrants; (iii) effect any stock split, stock dividend or other
reclassification of ABI's common stock; or (iv) grant any options or issue any
warrants exercisable for or securities convertible or exchangeable into capital
stock of ABI, grant any stock appreciation or other rights with respect to
shares of capital stock of ABI, or grant any Limited Right, as such term is
defined in the ABI Option Plan; and
(c) Subject to Section 6.3 below, that neither ABI nor any ABI
Subsidiary shall, without the prior written consent of Bancorp: (i) sell or
dispose of any significant assets of ABI or any ABI Subsidiary; (ii) merge or
consolidate ABI or any ABI Subsidiary with or otherwise acquire any other entity
or file any applications or make any contract with respect to branching by BOA
(whether de novo, purchase, sale or relocation); (iii) change the articles of
incorporation, charter documents or other governing instruments of ABI or any
ABI Subsidiary, except as provided in this Agreement; (iv) grant to any officer,
director, or employee of ABI or any ABI Subsidiary any increase in compensation
or benefits, other than customary increases in the compensation of non-officer
employees made in the ordinary course of business; (v) adopt any new employee
benefit plan or arrangement of any type; (vi) authorize severance pay or other
benefits for any officer or director of ABI or any ABI Subsidiary; (vii) incur
any material obligation or enter into or extend any material agreement or lease;
(viii) engage in any lending activities other than in the ordinary course of
business consistent with past practices; (ix) form any subsidiary or cause or
permit a material change in the activities presently conducted by ABI or BOA;
(x) purchase any debt securities or derivative securities, including CMO or
REMIC products, other than Liquidity Investments; or (xi) purchase any equity
securities. The limitations contained in this Section 6.2(c) shall also be
deemed to constitute limitations as to the making of any commitment with respect
to any of the matters set forth in this Section 6.2(c). Notwithstanding the
above, ABI or BOA may pay bonuses to officers and employees and make regular
contributions to the BOA 401(k) plan in each case consistent with past practice
and prorated for the period beginning January 1, 1996 and ending on the
Effective Time, provided that (i) such bonuses shall not exceed the total
bonuses paid during 1995, multiplied by a fraction, the numerator of which is
the number of whole months in 1996 prior to the Effective Time and the
denominator is twelve,
20
and (ii) ABI or BOA may make matching contributions to the BOA 401(k) plan of up
to 60% of the first 4% of compensation contributed by an employee under such
plan.
6.3 Takeover Proposals as to ABI.
(a) Neither ABI nor BOA will authorize any officer, director, employee,
investment banker, financial consultant, attorney, accountant or other
representative of ABI or BOA, directly or indirectly, to initiate contact with
any person or entity in an effort to solicit, initiate or encourage any
"Takeover Proposal" (as such term is defined below) without the prior written
consent of Bancorp. Except as the fiduciary duties of the ABI or BOA Board of
Directors may otherwise require, neither ABI nor BOA, without the prior written
consent of Bancorp, will authorize any officer, director, employee, investment
banker, financial consultant, attorney, accountant or other representative of
ABI or BOA, directly or indirectly, (A) to cooperate with, or furnish or cause
to be furnished any non-public information concerning its business, properties
or assets to, any person or entity in connection with any Takeover Proposal; (B)
to negotiate any Takeover Proposal with any person or entity; or (C) to enter
into any agreement, letter of intent or agreement in principle as to any
Takeover Proposal. ABI will promptly give written notice to Bancorp upon
becoming aware of any Takeover Proposal. As used in this Agreement with respect
to ABI or BOA, "Takeover Proposal" shall mean any proposal, other than as
contemplated by this Agreement, for a merger or other business combination
involving ABI or BOA or for the acquisition of a substantial equity interest in
ABI or BOA, or for the acquisition of a substantial portion of the assets of ABI
or BOA, by a person other than the FDIC. Bancorp may require as a condition of
any consent provided pursuant to this paragraph 6.3(a) that ABI or BOA promptly
forward to Bancorp copies of any materials provided to any such third party. Any
consent under this paragraph shall not serve as a waiver of the requirement for
payment of the amount set forth in paragraph 6.3(b) unless such waiver is
specifically set forth in such consent.
(b) As a condition of Bancorp's entering into this Agreement, ABI and
BOA each covenants, acknowledges and agrees that it shall be a specific,
absolute, and unconditionally binding condition precedent to ABI's or BOA's
entering into a letter of intent, agreement in principle, or definitive
agreement (whether or not considered binding, non-binding, conditional or
unconditional) with any third-party with respect to a Takeover Proposal, or
supporting or indicating an intent to support a Takeover Proposal, other than
this Agreement and the transactions contemplated in this Agreement, regardless
of whether ABI and BOA has otherwise complied with the provisions of Section
6.3(a) hereof, that ABI, BOA or such third-party which is a party to the
Takeover Proposal shall have paid Bancorp the sum of $650,000 unless Bancorp
specifically has waived the payment of such sum in writing. Accordingly, ABI or
BOA, respectively, stipulates and covenants that prior to ABI's or BOA's
entering into a letter of intent, agreement in principle, or definitive
agreement (whether binding or non-binding, conditional or unconditional) with
any third-party with respect to a Takeover Proposal or supporting or indicating
an intent to support a Takeover Proposal, ABI, BOA or such third-party shall
have paid to Bancorp the amount set forth above in immediately available funds
to satisfy the specific, absolute, and unconditionally binding condition
precedent imposed by this Section 6.3(b). On payment of such amount to Bancorp,
Bancorp shall have no cause of action or claim (either in
21
law or equity) whatsoever against ABI, BOA or any officer or director of ABI,
BOA or the third party, with respect to or in connection with such Takeover
Proposal or this Agreement.
The requirements, conditions, and obligations imposed by this Section 6.3(b)
shall continue in effect from the date of this Agreement until the earliest of
(i) the Effective Time, (ii) December 31, 1998, or (iii) the termination of this
Agreement: (w) by ABI and Bancorp pursuant to Section 7.4(a); (x) by ABI or
Bancorp pursuant to Section 7.4(b), provided that ABI also would have been
entitled to terminate this Agreement pursuant to such Section 7.4(b) at the time
of such termination by Bancorp; (y) by Bancorp pursuant to Section 7.4(c),
provided that such termination is based upon failure of one or more of the
conditions of either Section 7.1 or Section 7.2(b),(h),(i),(m) or (o); or (z) by
ABI pursuant to Section 7.4(d) or (f) of this Agreement; in any of which events,
thereafter neither ABI nor any third party that is involved in a Takeover
Proposal shall be obligated to pay the amount required by this paragraph (b) of
Section 6.3 as a condition precedent to such transaction.
6.4 Conduct of Business of Bancorp and the Bank. Between the date of this
Agreement and the Effective Time Bancorp agrees that Bancorp and the Bancorp
Subsidiaries shall maintain their books and records in accordance with past
practices except as required by law or regulations or as permitted by generally
accepted accounting principles.
6.5 Shareholder Approvals. ABI shall call the ABI Shareholders Meeting as
referred to in Section 2.3 hereof. In connection with such meeting, the ABI
Board of Directors shall recommend approval of the Agreement, the Bank Merger
Agreement, and the Merger, subject to its fiduciary duties. ABI shall use its
best efforts to solicit proxies in favor of approval from its shareholders and
to take all other action necessary or helpful to secure a vote of the holders of
the shares of its common stock in favor of the Agreement and the Merger, except
as the fiduciary duties of the ABI Board of Directors may otherwise require.
6.6 Information for Prospectus/Proxy Statement.
(a) ABI shall furnish such information concerning ABI and the ABI
Subsidiaries as is necessary in order to cause the Prospectus/Proxy Statement,
insofar as it relates to ABI and the ABI Subsidiaries, to comply with Sections
2.4, 3.6 and 4.4 hereof. ABI agrees promptly to advise Bancorp if at any time
prior to the ABI or ABI Shareholders Meeting any information provided by ABI in
the Prospectus/Proxy Statement becomes incorrect or incomplete in any material
respect and to provide the information needed to correct such inaccuracy or
omission. ABI shall furnish such supplemental information as may be necessary in
order to cause such Prospectus/Proxy Statement, insofar as it relates to ABI and
the ABI Subsidiaries, to comply with Sections 2.4, 3.6 and 4.4 after the mailing
thereof to ABI shareholders.
(b) Bancorp shall furnish such information concerning Bancorp and the
Bancorp Subsidiaries as is necessary in order to cause the Prospectus/Proxy
Statement, insofar as it relates to such corporations, to comply with Sections
2.4 and 5.6 hereof. Bancorp agrees promptly to advise ABI if at any time prior
to the ABI Shareholders Meeting any information provided by
22
Bancorp in the Prospectus/Proxy Statement becomes incorrect or incomplete in any
material respect and to provide the information needed to correct such
inaccuracy or omission. Bancorp shall furnish such supplemental information as
may be necessary in order to cause the Prospectus/Proxy Statement, insofar as it
relates to Bancorp and the Bancorp Subsidiaries, to comply with Sections 2.4 and
5.6 hereof after the mailing thereof to ABI shareholders.
6.7 Cooperation to Remove Conditions. In the event of the imposition of a
condition to any Governmental Approval which Bancorp, the Bank, ABI or BOA deems
to be materially burdensome, Bancorp, the Bank, ABI and BOA agree to take such
action as they may mutually deem appropriate for the purpose of obtaining the
removal or modification of such condition; provided, however, that nothing in
this Section 6.7 shall require Bancorp, the Bank, ABI or BOA to institute any
litigation in connection therewith, to continue any actions subsequent to any
termination of this Agreement, or to assume any obligation which it deems not to
be in its best interest.
6.8 Filing of Applications. Bancorp, the Bank, ABI and BOA shall use their
respective best efforts promptly to prepare, submit and file regulatory
applications required by law or regulations with respect to the consummation of
the transactions contemplated hereby.
6.9 Advice Regarding Regulatory Approvals. Each party agrees to provide to
the other prompt advice of any material comments received from any regulatory
agency which relate to the Merger and, upon request, copies of all documents and
correspondences sent to or received from any regulatory agency which relate in
any manner to the Merger or the other transactions contemplated by this
Agreement.
6.10 Consents. Each of Bancorp, the Bank, ABI and BOA will use its best
efforts to obtain the consent or approval of each person whose consent or
approval shall be required in order to permit Bancorp, the Bank, ABI or BOA as
the case may be, to consummate the Merger and the other transactions
contemplated by this Agreement.
6.11 Publicity. Between the date of this Agreement and the Effective Time,
neither Bancorp, ABI, nor any of their subsidiaries shall, without the prior
approval of the other (which approval shall not be unreasonably withheld), issue
or make, or permit any of its directors, employees, officers or agents to issue
or make, any press release, disclosure or statement to the press or any third
party with respect to the Merger or the transactions contemplated hereto, except
as required by law. The Parties shall cooperate when issuing or making any press
release, disclosure or statement with respect to Merger or the transactions
contemplated hereby.
6.12 Actions to Obtain Insurance. Bancorp acknowledges that, by operation of
law, at the Effective Time, Bancorp will assume any and all legally enforceable
obligations of ABI to indemnify and defend the directors and officers of ABI
pursuant to, to the extent of, and in accordance with the terms and conditions
of any such obligations that ABI had to indemnify and defend such persons in
effect immediately prior to the Effective Time, in connection with such persons'
status or services as directors and officers of ABI, whether by contractual
right or by
24
provision of the articles of incorporation of ABI, with respect to any claim
asserted or made prior to or at any time after the Effective Time. All such
rights to indemnification will continue until the final disposition of such
claim regardless of when such claim was made or asserted; provided, however,
that nothing contained herein shall increase or lengthen the duration of
Bancorp's obligations with respect to such indemnification over that to which
ABI would have been subject had the Merger not been consummated. Bancorp and the
Bank will use their best efforts to maintain in effect for six (6) years from
the Effective Time, if available, the current directors' and officers' liability
insurance policy maintained by ABI and BOA (provided that Bancorp may substitute
therefor policies of at least the same coverage containing terms and conditions
which are not materially less favorable) with respect to matters occurring prior
to the Effective Time; provided, however, that in no event shall Bancorp be
required to expend pursuant to this Section 6.12 more than the amount per year
equal to 150% of the current annual amount expended by ABI and BOA to maintain
or procure such insurance coverage.
6.13 Employees; Severance; Retention Bonuses.
(a) Bancorp or the Bank may interview employees of ABI or BOA, with the
permission of such employees, provided that such interview shall be conducted in
a manner that shall not unreasonably interfere with the operations of ABI or
BOA. Bancorp may, but is not required hereby to, seek to continue the employment
of all or some employees of ABI or BOA. Bancorp or the Bank, as the case may be,
would intend to offer any employees of ABI or BOA which accepted offers of
employment by Bancorp or the Bank the compensation and benefits customarily
offered by the Bank to its employees as provided in this Section 6.13.
(b) The Bank shall be obligated to provide cash severance benefits
hereunder to each employee of ABI or BOA at the Effective Time (other than those
officers or employees listed in Sections 6.13 (a) or (b) of Schedule I) who
either (i) is not offered employment by Bancorp or the Bank at compensation,
including salary and benefits, at least approximately equal to that paid to the
employee prior to the effective time, or (ii) is dismissed, other than for cause
(which shall mean commission of a crime, other than a minor traffic offence,
incompetence, or failure to follow supervisor's lawful instructions) within the
365 days following the Closing Date, at a rate of two weeks cash base salary (or
hourly rate based upon average weekly hours worked during the two months
immediately preceding termination of employment) for each full year of
employment with ABI, BOA, Bancorp or the Bank, provided, however, that no
payment will be made for any accrued but unpaid vacation pay, and provided
further that the minimum severance payment to any of such employee who is so
terminated shall be six weeks base salary, and provided further that the
severance payment for the employee listed in Section 6.13(c) of Schedule I shall
be $5,800. Officers listed in Section 6.13(b) of Schedule I shall, in lieu of
the above severance benefit, be entitled to employment by Bancorp or the Bank,
at their respective rates of compensation in effect immediately prior to the
Effective Time, for a period of at least sixty days after the Effective Time,
subject to earlier dismissal for cause, as defined above, and any such officer
who is employed for such sixty-day period after the Effective Time who is
dismissed within the year following the Effective Time, other than for cause,
shall be entitled to a severance payment equal to three months base compensation
at the rate paid immediately prior
24
to the Effective Time. Any severance payments due to the persons listed on
Schedule 6.13(a) shall be payable upon the Closing.
(c) Bancorp shall provide for continuation of benefits under Section
4980B of the Internal Revenue Code ("COBRA") for all applicable employees as
required by law. Bancorp shall provide such COBRA continuation coverage for the
officers listed on Schedule 6.13(a) of Schedule I without a requirement for
payment by such officers or their covered dependents (other than in respect of
satisfaction of deductibles, co-payments, and the like) for a period of twelve
months following the Effective Time or until earlier termination of the rights
of such officer and his or her covered dependents to continuation coverage under
COBRA.
(d) In addition to the other payments allowed or permitted hereby,
Bancorp shall pay or cause to be paid to each officer and employee, other than
any officer listed in Section 6.13(a) of Schedule I, who is continuously
employed by ABI or BOA from the date of this Agreement until the Effective Time,
an amount equal to one (1) month's base salary, upon the first regular pay date
for such officer or employee following the Effective Time (whether or not such
officer or Employee continues to be employed on such pay date.
(e) As soon as practicable after the Effective Time and subject to
applicable law, Bancorp shall cause the Bank to provide the employees of ABI or
BOA immediately prior to the Effective Time who continue in the employ of
Bancorp or the Bank (the "Continuing Employees") with the same health, dental,
pension, life insurance, disability and other benefits, if any, which the Bank
provides generally to the employees of Bancorp or the Bank. With respect to the
provision of such benefits to the Continuing Employees hereunder, to the extent
such employees participate after the Effective Time in employee benefit plans
other than plans maintained by BOA or ABI, all prior service of such employees
with ABI and BOA shall be credited under such plans for purposes of eligibility
and vesting, but excluding benefit accrual under any qualified defined benefit
pension plan maintained by Bancorp or the Bank.
(f) Subject to applicable law and the provisions of the applicable
plans, at the Closing, or as soon as practicable thereafter, ABI's 401(k) plan
shall be merged with and into Bancorp's Cash and Deferred Profit Sharing Plan,
the participant's account balances in such ABI 401(k) plan, regardless of the
employee's contributions or previous vesting schedule, shall be deemed to be
100% vested, and, if it is not feasible to merge the ABI 401(k) plan with and
into Bancorp's Cash and Deferred Profit Sharing Plan because of applicable law,
regulation or the terms of either of such plans, the ABI 401(k) plan shall be
promptly terminated, and such account balances distributed, in accordance with
law and such plan, provided that neither Bancorp nor any Bancorp Affiliate shall
be required to make any contribution to, or make any payment to any ABI or
Bancorp employee in respect of, the ABI Benefit Plan in excess of the account
balance therein or otherwise other than from the assets of such plan.
6.14 Tax Representations. ABI and BOA shall furnish letters to Stegman &
Company, or other tax advisor selected by Bancorp, in such form as may be
reasonably requested by such
25
advisor, containing representations sufficient to enable such advisor to render
the tax opinion referred to in Section 7.2(m) hereof.
6.15 ABI Options and ABI Warrants. The ABI Option Plan shall continue in
effect but no additional options shall be available for grant thereunder after
the Effective Time. From time to time after the Effective Time, Bancorp shall
reserve for issuance such number of shares of Bancorp common stock as necessary
to permit the exercise of the ABI Options and the ABI Warrants that have been
converted into options or warrants for the purchase of Bancorp common stock
pursuant to this Agreement. Bancorp shall make all filings required under
federal and state securities laws so as to permit the exercise of the ABI
Options so converted and the sale of shares received by the optionees upon
exercise as contemplated by the ABI Option Plan. Neither the Merger nor the
terms of this Agreement shall limit any periods in which the ABI Options and ABI
Warrants may be exercised.
6.16 Cooperation Generally. Between the date of this Agreement and the
Effective Time, Bancorp, the Bank, ABI and BOA shall use their best efforts, and
take all actions necessary or appropriate, to consummate the Merger and the
other transactions contemplated by this Agreement and the Bank Merger Agreement
at the earliest practicable date.
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ARTICLE VII
CONDITIONS OF THE MERGER;
FEDERAL TAX TREATMENT OF THE MERGER:
TERMINATION OF AGREEMENT
7.1 General Conditions. The obligations of Bancorp and ABI to effect the
Merger shall be subject to the following conditions:
(a) Stockholder Approval. The holders of the outstanding shares of ABI
common stock shall have approved this Agreement, the Bank Merger Agreement, and
the Merger as specified in Section 2.3 hereof or as otherwise required by
applicable law.
(b) No Proceedings. No order shall have been entered and remain in force
restraining or prohibiting the Merger or the Bank Merger in any legal,
administrative, arbitration, investigatory or other proceedings (collectively,
"Proceedings") by any governmental or judicial or other authority.
(c) Government Approvals. All Governmental Approvals shall have been
obtained or made and any waiting periods shall have expired in connection with
the consummation of the Merger and the Bank Merger. All other statutory or
regulatory requirements for the valid consummation of the Merger, the Bank
Merger, and related transactions shall have been satisfied.
(d) Registration Statement. The Registration Statement shall have been
declared effective and shall not be subject to a stop order of the SEC and, if
the offer and sale of Bancorp's common stock in the Merger pursuant to this
Agreement is subject to the Blue Sky laws of any state, shall not be subject to
a stop order of any state securities commissioner.
7.2 Conditions to Obligations of Bancorp. The obligations of Bancorp to
effect the Merger shall be subject to the fulfillment of each of the following
additional conditions:
(a) Opinion of Counsel for ABI. Bancorp shall have received from
Muldoon, Murphy & Faucette, special counsel to ABI, an opinion dated as of the
Closing covering the matters set forth in Exhibit C.
(b) Required Consents. In addition to Governmental Approvals, Bancorp
and the Bank shall have obtained all necessary third party consents or approvals
in connection with the Merger, the absence of which could adversely and
significantly affect Bancorp or the Bancorp Subsidiaries or the value of the
Merger to them.
(c) ABI Accountants' Letter. Bancorp shall have received from Rowles &
Company, independent accountants as to ABI, letters dated the date of mailing of
the Prospectus/Proxy Statement and the date of the Closing to the effect that:
(i) with respect to ABI they are independent accountants within the meaning of
the 1933 Act and 1934 Act and the applicable
27
rules and regulations thereunder, (ii) it is their opinion that the audited
financial statements of ABI included in the Prospectus/Proxy Statement comply as
to form in all material respects with the applicable accounting requirements of
the 1933 Act and 1934 Act and the applicable published accounting rules and
regulations thereunder, (iii) on the basis of such procedures as are set forth
therein but without performing an examination in accordance with generally
accepted auditing standards nothing has come to their attention which would
cause them to believe that (A) any unaudited interim financial statements
appearing in the Prospectus/Proxy Statement do not comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and 1934 Act and the published rules and regulations thereunder; (B) said
financial statements are not stated on a basis substantially consistent with
that of the audited financial statements; (C) (1) at the date of the latest
available quarter-end financial statements of ABI and at a specific date not
more than five business days prior to the date of each such letter there has
been, except as specified in such letter, any increase in the outstanding
capital stock (other than shares of ABI common stock issued upon the exercise of
ABI Options of ABI Warrants), or indebtedness for borrowed money of ABI (other
than deposits) or any decrease in the stockholders' equity thereof as compared
with amounts shown in the latest statement of financial condition included in
the Prospectus/Proxy Statement, or (2) for the period from the date of the
latest audited financial statements of ABI included in the Prospectus/Proxy
Statement to a specific date not more than five business days prior to the date
of each such letter, there were, except as specified in such letter, any
decreases, as compared with the corresponding period in the preceding year, in
net income for ABI or any increase, as compared with the corresponding period in
the preceding year, in the provision for loan losses for ABI, (iv) they have
performed certain specific procedures as a result of which they determined that
certain information of an accounting, financial or statistical nature included
in the Prospectus/Proxy Statement and requested by ABI and agreed upon by such
accountants, which is expressed in dollars (or percentages obtained from such
dollar amounts) and obtained from accounting records which are subject to the
internal controls of ABI's accounting system or which has been derived directly
from such accounting records by analysis or computation is in agreement with
such records or computations made therefrom (excluding any questions of legal
interpretation), and (v) on the basis of such procedures as are set forth in
such letter, nothing came to their attention which would cause them to believe
that the pro forma financial statements had not been properly compiled on the
pro forma basis described therein. The letters required hereby shall be prepared
in accordance with auditing standards applicable to "Special Reports - Applying
Agreed-Upon Procedures" and shall not be deemed "cold comfort" letters of the
type provided to underwriters as defined in the 1933 Act.
(d) No Material Adverse Change. Between December 31, 1995 and the date
of Closing, there shall not have occurred any material adverse change in the
financial condition, business, or results of operations of ABI, except as
disclosed at or prior to the date of this Agreement pursuant to Section 3.5
hereof.
(e) Adequate Allowance for Loan Losses. The allowance for loan losses
recorded by ABI in its interim or annual financial statements as of the end of
the last two calendar quarters prior to the Closing (i) shall have been prepared
in accordance with generally accepted accounting
28
principles, and (ii) shall have been sufficient to absorb all reasonably
anticipated losses on loans or leases at the date thereof based upon generally
accepted accounting principles.
(f) Nonaccruing and other Problem Assets. All past due, nonaccruing, and
restructured loans and leases, and all nonperforming assets and other real
estate shall have been recorded by ABI in its interim or annual financial
statements as of the end of the last two calendar quarters prior to the Closing
as required by generally accepted accounting principles.
(g) Representations and Warranties to be True; Fulfillment of Covenants
and Conditions. The representations and warranties of ABI and BOA shall be true
in all material respects at the Effective Time with the same effect as though
made at the Effective Time (except with respect to those representations and
warranties made as of a certain date, which need be true and correct only as of
such date); ABI and BOA each shall have performed all obligations and complied
with each covenant, in all material respects, and all conditions under this
Agreement on its part to be performed or complied with at or prior to the
Effective Time; and ABI and BOA shall have delivered to Bancorp a certificate,
dated the Effective Time and signed by their chief executive officers and chief
financial officers, to such effect.
(h) Bancorp Accountants' Letter. Bancorp shall have received from
Stegman & Company, or other independent accountants acceptable to Bancorp, a
letter dated the Effective Time, in substance reasonably acceptable to Bancorp,
stating its opinion that, based upon the information furnished to it, the Merger
should be accounted for by Bancorp as a pooling of interests for financial
statement purposes and that such accounting treatment is in accordance with
generally accepted accounting principles.
(i) Conditions to Regulatory Approvals. The Governmental Approvals shall
have been granted to Bancorp, the Bank, ABI or BOA, as the case may be, without
the imposition of any condition that Bancorp, reasonably and in good faith, has
determined to be materially burdensome to Bancorp or the Surviving Bank.
(j) No Litigation. Neither ABI nor any ABI Subsidiary shall be a party
to any pending litigation which, if determined adversely to ABI or any ABI
Subsidiary, would have a material adverse effect on the business, financial
condition or results of operations of ABI or BOA, taken as a whole.
(k) Stock Options, Etc. No securities shall have been issued by ABI or
BOA since the date of the Agreement except pursuant to the exercise of options
and warrants described in Section 3.2 hereof. No options, convertible
securities, warrants, or other rights to purchase or acquire any security of ABI
or any ABI Subsidiary from ABI or any ABI Subsidiary shall have been issued
since the date of this Agreement. ABI shall not have purchased, repurchased, or
redeemed any outstanding shares of ABI common stock after the date of this
Agreement.
(l) Compliance with Regulatory Requirements. ABI and each ABI Subsidiary
shall have complied in all material respects, including, without limitation,
time limits for submissions,
29
required by any and all agreements, notices, orders, directives, memorandums or
supervisory resolutions which are or have been binding upon ABI or any ABI
Subsidiary at any time.
(m) Tax Opinion. Bancorp shall have received an opinion from Stegman &
Company, or other tax advisor satisfactory to it, or shall have received a
private letter ruling from the Internal Revenue Service, in either case in a
form reasonably satisfactory to Bancorp and to the effect that:
(i) The Merger and the Bank Merger each will qualify as a "reorganization"
under Section 368(a)(i)(A) of the Internal Revenue Code of 1986, as
amended;
(ii) No gain or loss will be recognized by Bancorp, the Bank, ABI or BOA by
reason of the Merger or the Bank Merger;
(iii) No gain or loss will be recognized by any ABI shareholder (except in
connection with the receipt of cash in lieu of a fractional share of
Bancorp common stock or upon the exercise of Dissenters' Rights) upon
the exchange of ABI common stock for Bancorp common stock in the
merger;
(iv) The basis of the Bancorp common stock received by an ABI shareholder
who exchanges ABI common stock for Bancorp common stock will be the
same as the basis of the ABI stock surrendered in exchange therefor
(subject to adjustments required as the result of receipt of cash in
lieu of a fractional share of Bancorp common stock);
(v) The holding period of the Bancorp common stock received by an ABI
shareholder receiving Bancorp common stock will include the period
during which the ABI common stock surrendered in exchange therefor was
held (provided that such common stock of such ABI shareholder was held
as a capital asset at the Effective Time); and
(vi) Cash received by an ABI shareholder in lieu of a fractional share
interest of Bancorp common stock will be treated as having been
received as a distribution in redemption of the fractional share
interest of Bancorp common stock which he would otherwise be entitled
to receive, subject to the provisions and limitations of Section 302 of
the Code.
(n) Affiliate Letters. Each director, officer and other person who is an
affiliate , and their affiliates, for purposes of Rule 145 under the 1933 Act,
shall have delivered to Bancorp, prior to the Effective Date, a written
agreement, in form satisfactory to counsel for Bancorp, providing that such
person will not sell, pledge, transfer, or otherwise dispose of the shares of
Bancorp common stock to be received by such person in the Merger unless such
sales are pursuant to an effective registration statement under the 1933 Act or
pursuant to Rule 145 of the SEC or another exemption from the registration
requirements under the 1933 Act, and will comply with the restrictions on
transfer of such shares imposed by Topic 2-E of the SEC's Accounting Series
Releases relating to pooling of interests accounting treatment.
(o) Dissenting Shares. The total number of shares of ABI common stock, if
any, as to which Dissenters' Rights have been asserted shall not exceed 5% of
the total number of outstanding shares of ABI common stock.
7.3 Conditions to Obligations of ABI. The obligations of ABI to effect the
Merger shall be subject to fulfillment of each of the following conditions:
30
(a) Opinion of Counsel for Bancorp. ABI shall have received from Kennedy
& Baris, L.L.P., special counsel to Bancorp, an opinion dated as of the Closing
covering the matters set forth in Exhibit D.
(b) Required Consents. In addition to Governmental Approvals, Bancorp
and the Bank shall have obtained all necessary third party consents or approvals
in connection with the Merger, the absence of which would materially and
adversely effect Bancorp and the Bancorp Subsidiaries, taken as a whole.
(c) No Material Adverse Change. Between December 31, 1995 and the date
of Closing, there shall not have occurred any material adverse change in the
financial condition, business or results of operations of Bancorp and the
Bancorp Subsidiaries, taken as a whole, except as disclosed at or prior to the
date of this Agreement pursuant to Section 5.5 hereof.
(d) Fairness Opinion. ABI shall have received a fairness opinion from
Ferris Baker Watts dated as of the date of this Agreement and updated as of the
date of the proxy statement related to the Merger stating that the financial
consideration to be paid to the shareholders of ABI in the Merger is fair from a
financial point of view.
(e) Representations and Warranties to be True; Fulfillment of Covenants
and Conditions. The representations and warranties of Bancorp shall be true at
the Effective Time with the same effect as though made at the Effective Time
(except with respect to those representations and warranties made as of a
certain date, which need be true and correct only as of such date); Bancorp
shall have performed all obligations and complied with each covenant, in all
material respects, and all conditions under this Agreement on its part to be
performed or complied with at or prior to the Effective Time; and Bancorp shall
have delivered to ABI a certificate, dated the Effective Time and signed by its
chief executive officer and chief financial officer, to such effect.
(f) No Litigation. Neither Bancorp nor any Bancorp Subsidiary shall be a
party to any pending litigation which, if determined adversely to Bancorp or any
Bancorp Subsidiary, would have a material adverse effect on the business,
financial condition or results of operations of Bancorp and the Bancorp
Subsidiaries, taken as a whole.
(g) Affiliate Purchases. Neither Bancorp, Bank nor any Affiliate of
Bancorp or the Bank shall have purchased shares of Bancorp in the thirty (30)
days prior to the Effective Time.
7.4 Termination of Agreement and Abandonment of Merger. This Agreement may
be terminated at any time before the Effective Time, whether before or after
approval thereof by shareholders of ABI, as provided below:
(a) Mutual Consent. By mutual consent of the Parties, evidenced by their
written agreement.
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(b) Closing Delay. At the election of Bancorp or ABI, evidenced by
written notice, if the Closing shall not have occurred on or before December 31,
1996, or such later date as shall have been agreed to in writing by the Parties;
provided, however, that the right to terminate under this Section 7.4(b) shall
not be available to any Party whose failure to perform an obligation hereunder
has been the cause of, or has resulted in, the failure of the Closing to occur
on or before such date.
(c) Conditions to Bancorp Performance Not Met. By Bancorp upon delivery
of written notice of termination to ABI if any event occurs which renders
impossible of satisfaction in any material respect one or more of the conditions
to the obligations of Bancorp to effect the Merger set forth in Sections 7.1 and
7.2, and noncompliance is not waived by Bancorp, provided that Bancorp has
previously provided proper notice in accordance with this Agreement to ABI
regarding the failure of such condition and such condition has not been cured
within 30 days of such notice;
(d) Conditions to ABI Performance Not Met. By ABI upon delivery of
written notice of termination to Bancorp if any event occurs which renders
impossible of satisfaction in any material respect one or more of the conditions
to the obligations of ABI to effect the Merger set forth in Sections 7.1 and 7.3
and noncompliance is not waived by ABI, provided that ABI has previously
provided proper notice in accordance with this Agreement to Bancorp regarding
the failure of such condition and such condition has not been cured within 30
days of such notice;
(e) Pursuit of Other Offers. By Bancorp if (A) ABI or BOA enters into
any agreement, letter of intent or agreement in principle with the intent to
pursue or effect a Takeover Proposal, (B) the ABI Board of Directors fails to
recommend to the ABI shareholders approval of this Agreement or the Merger or
withdraws such recommendation to the ABI shareholders, or (C) the ABI Board of
Directors fails to solicit ABI shareholders' proxies to approve the Merger, or
to take all other action (such as ensuring proper conduct of the meeting
referred to in Section 2.3 hereof) necessary to secure a vote in favor of this
Agreement, the Merger and the Bank Merger.
(f) Decline in Price of Bancorp Common Stock. By ABI, if its Board of
Directors so determines by a two-thirds or greater majority vote of the members
of its entire Board, on a day during the period beginning upon the date on which
all General Conditions set forth in Section 7.1 of this Agreement (without
regard to any waiting periods required thereby) first have been satisfied and
ending at midnight of the fourth business day after the date that such
conditions are so satisfied (such period, the "Adjustment Notice Period"),
provided that the Average Closing Price shall be less than $33.00, unless,
during the Adjustment Notice Period, the Board of Bancorp shall have determined
by majority vote to increase the number of shares of Bancorp common stock to be
exchanged for each share of ABI common stock under this Agreement to equal the
quotient, expressed to five decimal places, of 20.65 divided by the Average
Closing Price, and shall have given notice of such decision to ABI pursuant to
Section 10.4 hereof. All such per share amounts are subject to adjustment for
stock splits, stock dividends and reclassifications as provided in Section 2.2
hereof.
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(g) Increase in Price of Bancorp Common Stock. By Bancorp, if its Board
of Directors so determines by a two-thirds or greater majority vote of the
members of its entire Board, on a day during the period beginning upon the date
on which all General Conditions set forth in Section 7.1 of this Agreement
(without regard to any waiting periods required thereby) first have been
satisfied and ending at midnight of the fourth business day after the date that
such conditions are so satisfied (such period, the "Adjustment Notice Period"),
provided that the Average Closing Price shall be greater than $40.375, unless,
during the Adjustment Notice Period, the Board of ABI shall have determined by
majority vote to decrease the number of shares of Bancorp common stock to be
exchanged for each share of ABI common stock under this Agreement to equal the
quotient, expressed to five decimal places, of 25.27 divided by the Average
Closing Price, and shall have given notice of such decision to Bancorp pursuant
to Section 10.4 hereof. All such per share amounts are subject to adjustment for
stock splits, stock dividends and reclassifications as provided in Section 2.2
hereof.
ARTICLE VIII
TERMINATION OF OBLIGATIONS; PAYMENT OF EXPENSES
8.1 Termination; Lack of Survival of Representations and Warranties. In the
event that this Agreement is terminated, the Parties shall have no further
obligations hereunder except as to the obligations contained in Sections 6.3,
8.2, 8.3 and 10.2 hereof.
8.2 Payment of Expenses. Except as provided in Sections 8.2(f) or 8.3
hereof, the Parties agree that fees and out-of-pocket expenses incurred in
connection with this Agreement, the Merger and the transactions contemplated
hereby, shall be paid as follows:
(a) all fees and disbursements of legal counsel, consultants, and
accountants (including fees and disbursements in connection with the
accountants' letter required by Section 7.2(c)) shall be paid by the party
employing such persons;
(b) all expenses in connection with the printing and mailing of the
Prospectus/Proxy Statement, and submission of such Prospectus to the SEC and
state securities authorities shall be paid by Bancorp;
(c) all proxy solicitation costs and related fees and expenses other
than those described in Section 8.2(b) shall be paid by ABI;
(d) all fees and other expenses in connection with the preparation and
filing of applications and reports to the Federal Reserve, the OCC, the FDIC,
the United States Department of Justice, the FTC, the Commissioner, and other
federal or state authorities in connection with the Merger shall be paid by the
party incurring such fees and expenses; and
(e) all other fees and out-of-pocket expenses incurred in connection
with the Merger shall be paid by the party incurring such fees and expenses.
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(f) Notwithstanding the above, in the event the Merger is not
consummated by reason of a material breach of this Agreement by Bancorp or Bank,
Bancorp and Bank agree to pay or reimburse ABI or BOA, as the case might be, for
all out-of-pocket expenses incurred by ABI or BOA in connection with the Merger,
including fees and expenses of attorneys, accountants, investment bankers and
other professionals, up to a maximum of $150,000.00.
8.3 Liquidated Damages In the event the Merger is not consummated by reason
of a material breach of this Agreement by ABI or BOA, or, without limitation, a
termination pursuant to Section 7.4(e), the Parties agree that the actual
damages which might be sustained by Bancorp are uncertain and difficult of
ascertainment and that the following payment would be reasonable and just
compensation for such breach, and ABI shall pay to Bancorp $650,000 as a
break-up fee. Payment under this section shall be in full satisfaction of any
payment due to Bancorp under Section 6.3(b), and payment under Section 6.3(b)
shall be in full satisfaction of any payments due to Bancorp pursuant to this
section 8.3. This payment shall constitute liquidated damages, and not a penalty
and upon payment thereof ABI shall have no further liability under this
Agreement to Bancorp.
ARTICLE IX
CLOSING; ASSETS AND LIABILITIES OF SURVIVING CORPORATION
9.1 Exchange of Certificates.
(a) After the Effective Time, holders of certificates theretofore
evidencing outstanding shares of ABI common stock, upon surrender of such
certificates to an exchange agent appointed by Bancorp (the "Exchange Agent"),
shall be entitled to receive certificates representing the number of whole
shares of Bancorp common stock into which shares of Bancorp common stock
theretofore represented by the certificates so surrendered shall have been
converted, as provided in Section 2.2 hereof, and cash payments in lieu of
fractional shares, if any, as provided in Section 9.2 hereof. Within three
Business Days after the Effective Time, the Exchange Agent will send a notice
and transmittal form to each ABI shareholder of record at the Effective Time
("Record Holder") whose Bancorp stock shall have been converted into Bancorp
common stock advising such shareholder of the effectiveness of the Merger and
the procedure for surrendering to the Exchange Agent outstanding certificates
formerly evidencing ABI common stock in exchange for new certificates for
Bancorp common stock. Upon surrender, each certificate evidencing ABI common
stock shall be cancelled.
(b) Until surrendered as provided in Section 9.1(a) hereof, each
outstanding certificate which, prior to the Effective Time, represented ABI
common stock (other than shares cancelled at the Effective Time pursuant to
Section 9.1(d) hereof and Dissenters' Shares) will be deemed for all corporate
purposes to evidence ownership of the number of whole shares of Bancorp common
stock into which the shares of ABI common stock formerly represented thereby
were converted. However, until such outstanding certificates formerly
representing ABI common stock
34
are so surrendered, no dividend payable to holders of record of Bancorp common
stock shall be paid to any holder of such outstanding certificates, but upon
surrender of such outstanding certificates by such holder there shall be paid to
such holder the amount of any dividends, without interest, theretofore paid with
respect to such whole shares of Bancorp common stock, but not paid to such
holder, and which dividends had a record date occurring on or subsequent to the
Effective Time and the amount of any cash, without interest, payable to such
holder in lieu of fractional shares pursuant to Section 9.2 hereof. After the
Effective Time, there shall be no further registration of transfers on the
records of ABI of outstanding certificates formerly representing shares of ABI
common stock and, if a certificate formerly representing such shares is
presented to ABI or ABI, it shall be forwarded to the Exchange Agent for
cancellation and exchange for certificates representing shares of Bancorp common
stock as herein provided.
(c) If any new certificate for Bancorp common stock is to be issued in
the name other than that in which the certificate surrendered in exchange
therefor is registered, it shall be a condition of the issuance therefor that
the certificate surrendered in exchange shall be properly endorsed and otherwise
in proper form for transfer and that the person requesting such transfer pay to
the Exchange Agent any transfer or other taxes required by reason of the
issuance of a new certificate for shares of Bancorp common stock in any name
other than that of the registered holder of the certificate surrendered, or
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
(d) ABI Shares Held by Bancorp. Any shares of ABI common stock which are
owned or held by Bancorp or any Bancorp Subsidiary at the Effective Time (other
than shares held in trust or similar capacity) shall cease to exist, and the
certificates for such shares shall as promptly as practicable be cancelled and
no shares of capital stock of Bancorp shall be issued or exchanged therefor.
9.2 No Fractional Shares. Notwithstanding any term or provision hereof, no
fractional shares of Bancorp common stock, and no certificates or script
therefor, or other evidence of ownership thereof, will be issued in exchange for
any shares of Bancorp common stock; no dividend or distribution with respect to
Bancorp common stock shall be payable on or with respect to any fractional share
interests; and no fractional share interest shall entitle the owner thereof to
vote or to any other rights of a shareholder of Bancorp. In lieu of such
fractional share interest, any holder of ABI common stock who would otherwise be
entitled to a fractional share of Bancorp common stock will, upon surrender of
his certificate or certificates representing ABI common stock outstanding
immediately prior to the Effective Time, be paid the cash value of such
fractional share interest, which shall be equal to the product of the fraction
multiplied by the "Market Value," as hereinafter defined, of one share of
Bancorp common stock. For the purposes of determining any such fractional share
interests, all shares of ABI common stock owned by a ABI shareholder shall be
combined so as to calculate the maximum number of whole shares of Bancorp common
stock issuable to such Bancorp shareholder. "Market Value" shall be $36.75, as
adjusted for any stock splits, dividends or reclassifications effected after the
date hereof.
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9.3 Closing. The closing of the Merger (the "Closing") shall occur at the
principal offices of Bancorp, at a time and on a date specified in writing by
the parties, which date shall be as soon as practicable, but not more than
fifteen (15) days, after the receipt of all requisite approvals and
authorizations of regulatory and governmental authorities, the expiration of all
applicable waiting periods and the satisfaction or waiver of all conditions
hereto. The date at which the Closing occurs is occasionally referred to herein
as the "Closing Date."
9.4 The Effective Time. The Merger shall become effective upon the later of
(i) the filing of the Articles of Merger in substantially the form attached
hereto as Exhibit A with the Maryland State Department of Taxation and
Assessments (the "Department") or (ii) the time set forth in the Articles of
Merger filed with the Department (the "Effective Time"). Except as otherwise
agreed in writing, the Effective Time shall be within one business day of the
Closing.
9.5 Closing of Transfer Books. At the Effective Time, the transfer books for
ABI common stock shall be closed, and no transfer of shares of ABI common stock
shall thereafter be made on such books.
9.6 Effect of the Merger. At the Effective Time, the separate corporate
existence of ABI shall cease and Bancorp as the Surviving Corporation shall
succeed to and possess all of the properties, rights, powers, privileges,
franchises, patents, trademarks, licenses, registrations, and other assets of
every kind and description of ABI, and shall be subject to, and be responsible
for, all debts, liabilities, and obligations of ABI, all without further act or
deed, and in accordance with the applicable provisions of the MGCL.
ARTICLE X
GENERAL
10.1 Amendments. Subject to applicable law, this Agreement may be amended,
whether before or after any relevant approval of the ABI shareholders, by an
agreement in writing executed in the same manner as this Agreement and
authorized or ratified by the Boards of Directors of the Parties, provided that,
after the adoption of the Agreement by the shareholders of ABI, no such
amendment without further shareholder approval may (i) change the amount or form
of the consideration to be received by the ABI shareholders in the Merger, or
(ii) change any other terms or conditions of the Agreement if any of the
changes, alone or in the aggregate, would materially adversely affect the
shareholders of ABI; and further provided that no such amendment may be made
after the filing of the Articles of Merger pursuant to Section 9.4 hereof.
10.2 Confidentiality.
(a) All information disclosed hereafter by any party to this Agreement to
any other party to this Agreement shall be kept confidential by such other party
and shall not be used by such other party otherwise than as herein contemplated
except to the extent that (i) it was known by such other party when received,
(ii) it is or hereafter becomes lawfully obtainable from other
36
sources other than as a result of disclosure contrary to this paragraph, (iii)
it is necessary or appropriate to disclose to the Federal Reserve, the OCC, the
FDIC, the Commissioner, or any other regulatory authority having jurisdiction
over the Parties or their subsidiaries or as may otherwise be required by law,
or (iv) to the extent such duty as to confidentiality is waived by the other
party. In the event of the termination of this Agreement, each party shall use
all reasonable efforts to return upon request to the other Parties all documents
(and reproductions thereof) received from such other Parties (and, in the case
of reproductions, all such reproductions made by the receiving party) that
include information not within the exceptions contained in the first sentence of
this Section 10.2.
(b) Each party to this Agreement will insure that its respective officers,
directors, investment bankers and other representatives who are given access to
information which is required to be kept confidential hereunder on behalf of
such party will be bound by and will conduct their investigation in accordance
with the terms of this Agreement. If Bancorp and the Bank on the one hand, or
ABI, on the other hand, is required by legal process or by operation of
applicable law to disclose any information supplied pursuant to this Agreement,
it is agreed that such party will provide the other with prompt notice of such
request(s) (except to the extent such notice is prohibited by law) so that
Bancorp, the Bank or ABI, as applicable, may seek an appropriate protective
order and/or waive compliance with the provisions regarding confidentiality of
this Agreement with respect to such information. It is further agreed that, if
after compliance with the foregoing requirement, a party is, in the opinion of
its counsel, compelled to disclose information concerning the other to any
tribunal, governmental agency or person or else stand liable for contempt or
suffer other censure or penalty, such party may disclose such information to
such tribunal, agency or person without liability hereunder.
10.3 Governing Law. This Agreement and the legal relations between the
Parties shall be governed by and construed in accordance with the laws of the
State of Maryland without taking into account any provision regarding choice of
law, except to the extent certain matters may be governed by federal law by
reason of preemption.
10.4 Notices. Any notices or other communications required or permitted
hereunder shall be sufficiently given if sent by registered mail or certified
mail, postage prepaid, addressed:
If to Bancorp or Bancorp, to:
Hunter R. Hollar
President and Chief Executive Officer
Sandy Spring Bancorp, Inc.
Sandy Spring National Bank of Maryland
17801 Georgia Avenue
Olney, Maryland 20832
37
with a copy to:
James I. Lundy, III, Esquire
Kennedy & Baris, L.L.P.
4719 Hampden Lane
Bethesda, Maryland 20814
If to ABI or BOA:
John W. Marhefka, Jr.
President and Chief Executive Officer
Annapolis Bancshares, Inc.
Bank of Annapolis
2024 West Street
Annapolis, Maryland 21401
with a copy to:
John Bruno, Esquire
Muldoon Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
or such other address as shall be furnished in writing by any such party, and
any such notice or communication shall be deemed to have been given two business
days after the date of such mailing (except that the notice of change of address
shall not be deemed to have been given until received by the addressee). Notices
also may be sent by telegram, telex, facsimile transmission or hand delivery and
in such event shall be deemed to have been given as of the date received.
10.5 No Assignment. This Agreement may not be assigned by any of the
Parties, by operation of law or otherwise, except as contemplated hereby and
except that all of the terms and provisions hereof shall be binding upon Bancorp
as the Surviving Corporation and the Bank as the Surviving Bank.
10.6 Headings. The description heading of the several Articles and Sections
of this Agreement are inserted for convenience only and do not constitute a part
of this Agreement.
10.7 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the Parties and delivered to each of the other Parties.
10.8 Construction and Interpretation. Except as the context otherwise
requires, (a) all references herein to any state or federal regulatory agency
shall also be deemed to refer to any predecessor or successor agency, and (b)
all references to state and federal statutes or regulations shall also be deemed
to refer to any successor statute or regulation.
38
10.9 Entire Agreement. This Agreement, together with the schedules, lists,
exhibits and certificates required to be delivered hereunder, and any amendment
hereafter executed and delivered in accordance with Section 10.1, constitutes
the entire agreement of the Parties, and supersedes any prior written or oral
agreement or understanding among any of the Parties pertaining to the Merger.
This Agreement is not intended to confer upon any other persons any rights or
remedies hereunder except as expressly set forth herein.
10.10 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of the Agreement.
39
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf by its officer thereunder duly authorized, all as of the
date set forth above.
[SEAL] ANNAPOLIS BANCSHARES, INC.
By: /s/ John W. Marhefka Jr.
/s/ Russell J. Grimes, Jr. --------------------------------
- --------------------------------
ATTEST Name: John W. Marhefka Jr.
Title: President and Chief Executive
Officer
[SEAL] BANK OF ANNAPOLIS
/s/ Russell J. Grimes, Jr.
- -------------------------------- By: /s/ John W. Marhefka Jr.
ATTEST --------------------------------
Name: John W. Marhefka Jr.
Title: President and Chief Executive
Officer
[SEAL] SANDY SPRING NATIONAL
BANK OF MARYLAND
/s/ Marjorie S. Cook
- ------------------------------- By: /s/ Hunter R. Hollar
ATTEST ---------------------------------
Name: Hunter R. Hollar
Title: President and
Chief Executive Officer
[SEAL] SANDY SPRING BANCORP, INC.
By: /s/ Hunter R. Hollar
/s/ Marjorie S. Cook ---------------------------------
- -------------------------------
ATTEST Name: Hunter R. Hollar
Title: President and
Chief Executive Officer
40
Appendix B
Fairness Opinion of Ferris Baker Watts, Inc.
[FERRIS BAKER WATTS LETTERHEAD]
April 16, 1996
The Board of Directors
Annapolis Bancshares, Inc.
2024 West Street
Annapolis, MD 21401
Gentlemen:
You have requested an opinion as to the fairness, from a financial point of
view, to the holders of the outstanding Common Stock of Annapolis Bancshares,
Inc. (the "Company") of the proposed consideration offered by Sandy Spring
Bancorp, Inc. ("Sandy Spring") described in the draft Agreement and Plan of
Reorganization as of April 12, 1996 by and among Sandy Spring Bancorp, Sandy
Spring National Bank of Maryland, Bank of Annapolis, and the Company (the
"Agreement"). We were retained by the Board of Directors of the Company and
commenced our investigation of the Company on March 25, 1996.
Pursuant to the Agreement, each shareholder of the Company will receive
0.62585 shares of Sandy Spring for each share of the Company provided the
weighted average per share price of Sandy Spring, as defined in the Agreement,
is between $32.125 and $41.25. If the share price of Sandy Spring is outside of
this range, the exchange ratio shall be adjusted so that the consideration shall
be equal to approximately $23.00 per share.
In connection with this opinion, we have reviewed, among other things, (i)
the letter of intent, (ii) drafts of the Agreement, (iii) annual reports for the
four fiscal years ended December 31, 1995 and annual reports on form 10-K of the
Company for the four fiscal years ended December 31, 1995, (iv) quarterly
reports on form 10-Q for the past three years, (v) expected financial results
for the current fiscal year and (vi) projected financial results for the years
1996 through 1998. We have held discussions with the members of the management
of the Company regarding its past and current business operations, financial
condition and future prospects. We have reviewed the reported price and trading
activity for the shares of both Sandy Spring and the Company; compared certain
financial and stock market information concerning the Company with similar
information for certain other regional community banks, the securities of which
are publicly traded; reviewed the terms of recent banking combinations; and have
performed such other studies and analysis as we considered appropriate.
Currently, we make a market in the Company's common stock and we
periodically prepare research reports on the banking industry. Ferris, Baker
Watts, Incorporated, its clients, its officers or its employees, in the normal
course of business, may have a position in the common stock of the Company and
Sandy Spring.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all financial and other information reviewed by us for purposes
of this opinion whether publicly available or provided to us by the Company and
Sandy Spring, and we have not assumed any responsibility for independent
verification of such information. We express no opinion as to the consideration
to be received by holders of shares who may perfect dissenters' statutory fair
appraisal remedies. Based upon the foregoing and based upon such other matters
that we consider relevant, it is our opinion that as of the date hereof, the
consideration to be received by the shareholders of the Company as a result of
the Agreement (as outlined in draft of the Agreement as of April 12, 1996) is
fair from a financial point of view.
Very truly yours,
FERRIS, BAKER WATTS, INC.
Appendix C
Annual Report to Shareholders of Annapolis Bancshares, Inc.
for the year ended December 31, 1995
DEAR STOCKHOLDER
- --------------------------------------------------------------------------------
WE ARE PLEASED AND PROUD to present our seventh Annual Report to
Stockholders, which provides details of another record year of growth and
earnings performance for Annapolis Bancshares, Inc. and its wholly-owned
subsidiary, Bank of Annapolis. While achieving 22.8% Asset growth to $81.9
Million and 23.7% Loan growth to $68.0 Million, the Company accomplished its
first million dollar earnings year during 1995. The Company's 1995 Net Income of
$1,071,347, or $1.42 per share, represented a 1.46% return on average assets, a
13.6% return on average equity, and a 21.4% increase over 1994 earnings.
During 1995, we also took significant steps to further enhance the
liquidity and market value of the stock, as well as to increase substantially
our capitalization so as to provide additional reserves to support our future
growth. The Company's shares were listed on the NASDAQ Small Cap Market in
March, and we have seen the market price rise steadily since that time. Your
Board of Directors declared a 20% stock dividend which was paid to all
stockholders in December as part of a strategy to increase your stock's trading
volume and liquidity. Both the amount of cash dividends paid and the market
price of the stock increased significantly during 1995. Also, the Company raised
an additional $1,142,743 of equity capital during 1995 from the sale of common
stock resulting from the exercise of previously issued stock warrants and
options. This new capital, combined with our strong earnings, resulted in a
29.9% increase in Total Stockholder Equity during 1995.
As we move into 1996, we are proud of our past accomplishments and well
positioned for even greater future success. We have carved a niche in the highly
competitive local banking market by adhering to a philosophy of providing
quality financial products and first rate personal service to our increasing
customer base. We made significant inroads into the mortgage banking business
during 1995 by establishing a full line of competitively priced home loan
products, which we expect to contribute substantially to earnings in 1996 and
beyond. Consolidation within the banking industry has created a wealth of
opportunity for us to continue to grow and prosper as a locally owned and
managed community bank. We are succeeding in attracting many new customers who
prefer to bank with one of the few remaining hometown banks, giving added
meaning to our slogan, "If you live or work in our Hometown. . . . we want to be
your Bank".
Our goal is to continue building financial strength through controlled
growth. Leadership at Annapolis Bancshares, Inc. remains the cornerstone of our
success to date. We have been fortunate to attract many capable, experienced,
and motivated employees who serve the Company with pride and efficiency. We
deeply appreciate the support of our stockholders, who provide the backbone of
our community support, and the advice and energy of our Board of Directors. At
Annapolis Bancshares, Inc., we have continued to build on our commitment to our
most important assets . . . our customers and our community. We remain committed
to building value in your stock while adding value to our local community.
Very truly yours,
/s/ Stanley H. Katsef /s/ John W. Marhefka, Jr.
Stanley H. Katsef John W. Marhefka, Jr.
Chairman of the Board President & Chief Executive Officer
March 8, 1996
BUSINESS
- --------------------------------------------------------------------------------
General
Annapolis Bancshares, Inc. (hereinafter referred to as "the Company") was
organized as a Maryland corporation on October 24, 1988. On January 12, 1989,
the Company's S-1 registration statement became effective, and the Company
thereby proceeded to sell 336,069 shares of $1.00 par value common stock at a
price of $10.00 per share. The public offering was completed on May 30, 1989. On
June 12, 1989, the Company acquired 100% of the outstanding shares of capital
stock of Bank of Annapolis (hereinafter "the Bank"), a Maryland chartered,
Federal Reserve System member trust company whose deposit accounts are insured
by the Federal Deposit Insurance Corporation (hereinafter "the FDIC"). The
acquisition was accomplished by issuing 100,000 shares of the Company's common
stock, in exchange for all the 100,000 outstanding shares of common stock of the
Bank. The Company has since operated as a one-bank holding company, registered
under the Bank Holding Company Act of 1956. The Bank currently operates one
retail branch location, which also serves as corporate headquarters for the
Company. At March 8, 1996, the Company and the Bank have a total of twenty-five
(25) employees. The only material activity of the Company is the operation of
the Bank.
As of March 8, 1996, 784,175 shares of the Company's $1.00 par value common
stock are outstanding and held by approximately 400 shareholders; all 150,000
shares of the Bank's $10.00 par value common stock are held by the Company. On
November 5, 1993, the Company concluded a stock offering during which 103,203
shares of common stock and 103,203 warrants, giving the holder thereof the right
to purchase one share of common stock, were issued. The Company was offering up
to 250,000 Units at a price of $10.50 per Unit. Each Unit consisted of one share
of common stock and one warrant to purchase one share of common stock. In 1995,
98,113 warrants were exercised resulting in additional capital of $1,079,243.
Effective March 27, 1995, the Company's stock was listed on the NASDAQ
Small Cap Market under the symbol "ANNB".
Business of the Bank
The principal business of the Bank is to accept time and demand deposits,
and to make loans and other investments. 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, the MOST automated teller product, and other banking
services.
The Bank grants a variety of loan types including, but not limited to,
commercial and residential real estate loans, (including construction and land
loans), commercial term loans and lines of credit, consumer loans, (including
home equity lines of credit), and letters of credit. The Bank's customers are
primarily individuals and small businesses. The Bank emphasizes origination of
adjustable rate and/or short term loans for its portfolio and sells its long
term fixed rate originations in the secondary market. The Bank generally does
not engage in long term fixed-rate portfolio lending activities. While the Bank
has primarily focused its lending activities on the origination of loans, the
Bank has also taken advantage of opportunities to purchase loans originated by
others, which have similar characteristics to the loans the Bank originates.
Purchased loans are underwritten by the Bank in accordance with the standards
utilized for originated loans. During 1995 the Bank originated loans totalling
$34,655,453 and purchased loans totalling $2,826,469.
At December 31, 1995, the Bank holds an investment portfolio of $3,392,492.
The Bank adopted Statement of Financial Accounting Standards No. 115 ("SFAS
115") in 1994, which addresses the accounting and reporting for investments. The
Bank's investments are classified as held-to-maturity and available for sale.
The Bank does not engage in trading activities. The investment portfolio
enhances the net interest margin and provides liquidity.
The Bank continually evaluates potential new products, and implements such
new products as deemed appropriate by management. The Bank has no plans to begin
exercising its trust powers in the near future.
2 ANNAPOLIS BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Introduction
The following is management's discussion and analysis of the historical
financial condition and results of operations of Annapolis Bancshares, Inc.
("the Company") on a consolidated basis with its wholly-owned subsidiary, Bank
of Annapolis, (the "Bank") for the periods presented. The purpose of this
discussion is to focus on those trends and information about the Company which
are not otherwise apparent in the accompanying consolidated Financial Statements
presented in the Annual Report. Those statements should be read in conjunction
with this discussion and analysis.
Table I shows selected consolidated financial highlights for the Company at
and for the five years ended December 31, 1991 through 1995. A more detailed
discussion of the Company's Financial Condition and factors affecting its 1995
earnings performance follows.
Table I
SELECTED CONSOLIDATED FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------------------
At and for the year ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA:
Interest--bearing deposits in other banks $ 27,082 $ 48,913 $ 4,659 $ -- $ --
Federal funds sold 5,964,730 2,590,203 3,644,870 8,633,908 5,704,252
Loans, net(1) 67,976,982 54,972,862 49,864,189 39,337,856 26,236,050
Total assets 81,884,543 66,698,954 61,809,445 49,334,225 33,213,082
Deposits 64,005,315 54,720,731 54,366,487 44,114,707 28,764,427
Borrowings 7,025,000 5,000,000 1,000,000 -- --
Stockholders' equity 8,850,038 6,810,400 6,029,019 4,537,024 4,123,837
- --------------------------------------
(1) Includes loans available for sale
SELECTED OPERATING DATA:
Interest income $ 6,873,544 $ 5,313,753 $ 4,514,371 $ 3,656,973 $ 2,701,856
Interest expense 3,343,965 2,317,573 2,097,656 1,941,408 1,595,885
Net interest income 3,529,579 2,996,180 2,416,715 1,715,565 1,105,971
Provision for loan losses 180,253 51,602 106,327 130,446 104,877
Rental income 247,221 82,983 5,988 -- --
Gain on sale of loans, net 11,988 10,808 28,581 55,517 33,225
Loss on sale of investments 38,543 -- -- -- --
Other income 58,350 49,269 33,646 27,666 25,967
General and administrative expenses 1,883,014 1,649,781 1,404,336 972,654 761,516
Provision for income taxes 673,981 555,301 372,528 271,310 113,796
Income before extraordinary item 1,071,347 882,556 601,739 424,338 184,974
Tax benefit of net operating loss carryforward -- -- -- -- 60,265
Net income 1,071,347 882,556 601,739 424,338 245,239
KEY FINANCIAL RATIOS AND OTHER DATA:
Return on assets
Net income divided by average assets 1.46% 1.37% 1.10% 1.03% 0.89%
Return on equity
Net income divided by average equity 13.60% 13.36% 11.39% 9.76% 6.13%
Equity to assets ratio
Average equity divided by average assets 10.77% 10.28% 9.63% 10.56% 14.56%
Dividend payout ratio
Cash dividends divided by net income 13.38% 11.51% 11.78% 2.63% N/A
Earnings Per Share $1.42 $1.32 $1.05 $.79 $.46
Risk based capital ratio -- Tier 1 13.23% 12.10% 11.80% 11.20% 15.20%
Risk based capital ratio -- Total 14.24% 13.10% 12.70% 12.20% 15.20%
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
- --------------------------------------------------------------------------------
Summary
The consolidated earnings of the Company are derived primarily from the
operations of its wholly-owned subsidiary, the Bank. The Bank reported net
income for 1995 of $1,071,347, a 21.4% increase over the 1994 earnings of
$882,556. Earnings per share increased to $1.42 per share in 1995 compared to
$1.32 per share in 1994. 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
$3,529,579 for 1995 compared to $2,996,180 for 1994. Total assets grew to
$81,884,543 as of December 31, 1995, an increase of 22.8% over the December 31,
1994 total assets of $66,698,954. The Company's December 31, 1995 and 1994
return on average assets was 1.46% and 1.37%, respectively. The Company's
December 31, 1995 and 1994 return on average equity was 13.60% and 13.36%,
respectively.
Since its organization, the Company has employed a "controlled growth
strategy," which provides for the Company's growth at a rate at which the Bank
can originate or purchase loans meeting the Bank's underwriting standards, while
providing adequate liquidity to meet its funding obligations through
corresponding increases in deposits, and maintaining a high capital ratio. This
strategy has resulted in increased earnings in each of the past five fiscal
years. The Company has experienced steady and consistent balance sheet growth
throughout the years presented, and that growth has contributed to steady and
consistent improvement in the Company's operating results. No assurance,
however, can be made that such growth in assets or income will continue or that
if continued, will be maintained at the same rate experienced during this
period.
Table II on page 5 presents a condensed average balance sheet as well as
income/expense and yields/cost of funds thereon for the years ended December 31,
1995, 1994 and 1993. The yields and cost 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 weekly balances. Management does not
believe that the use of average weekly balances instead of average daily
balances has caused any material differences in the information presented. The
yields and costs include loan fees, which are considered adjustments to yields.
Loan fees for the years ended December 31, 1995, 1994, and 1993 were $321,650,
$208,841, and, $190,664, respectively. Net interest spread, the difference
between the average rate on total interest bearing assets and the average rate
on total interest bearing liabilities, decreased to 4.42% for the year ended
December 31, 1995 compared to 4.45% for the year ended December 31, 1994. Net
yield on average earning assets increased to 5.01% at December 31, 1995 compared
to 4.88% at December 31, 1994.
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 under these changing
conditions.
Total assets increased by 22.8% during 1995 to $81,884,543 at December 31,
1995 from $66,698,954 at December 31, 1994. Total deposits, the Company's
primary source of funds, increased by 17.0% during 1995 to $64,005,315 on
December 31, 1995 from $54,720,731 on December 31, 1994. Time deposits comprise
the largest portion of the Bank's total deposits, totalling $45,054,123 or 70.4%
of the Bank's total deposits as of December 31, 1995. Savings and money market
accounts total $14,507,526 or 22.7% of the Bank's total deposits as of December
31, 1995. NOW accounts total $2,361,376 or 3.7% of the Bank's total deposits as
of December 31, 1995. Demand accounts total $2,082,290 or 3.2% of the Bank's
total deposits as of December 31, 1995. Other Borrowings increased 40.5% to
$7,025,000 from $5,000,000 at December 31, 1994. The Bank has $2,000,000 of
long-term borrowings and $3,000,000 of short term borrowings from the Federal
Home Loan Bank, of which $2,000,000 is due on June 28, 1996, $1,000,000 is due
on August 30, 1996 and $2,000,000 is due on February 7, 1997. In addition the
Bank has $2,025,000 in other borrowings outstanding to a commercial Bank , of
which $1,000,000 is unsecured and $1,025,000 is secured by certain investment
securities.
The Company's primary uses of funds are for loans and investments. Loans,
less deferred fees and discounts and the allowance for loan losses, increased by
23.7% during 1995 to $67,976,982 on December 31, 1995 from $54,972,862 on
December 31, 1994. As shown under Note 4 to the Company's Consolidated Financial
Statements, the Company had total loans outstanding of $68,440,673 as of
December 31, 1995, before deducting deferred fees, deferred discounts, and the
allowance for loan losses and net of loan participation sold to others without
recourse. A detailed description of the Bank's lending activities is as follows:
Commercial Real Estate Loans
Commercial real estate loans are generally granted up to 80% of the
appraised value of the property, as determined by an independent appraiser
previously approved by the Bank. The Bank generally requires the borrowers to
provide their personal guarantees for loans secured by commercial real estate.
Loans secured by commercial real estate are generally larger and involve a
greater degree of risk than residential real estate loans. Because payments on
loans secured by commercial real estate 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 by lending primarily on existing income producing
properties and/or owner-occupied properties. The Bank analyzes the financial
condition of the borrower and guarantors and the reliability and predictability
of the net income generated by the security property in determining whether to
extend credit. In addition, the Bank generally requires a net operating income
to debt service ratio of at least 1.15 times. Commercial real estate loans
comprise the largest portion of the Bank's loan portfolio, totalling $36,530,994
or 53.4% of the Bank's total loans as of December 31, 1995. A loan with an
outstanding balance of $1,185,796 at December 31, 1995, represents the Bank's
largest
- --------------------------------------------------------------------------------
4 ANNAPOLIS BANCSHARES, INC.
- --------------------------------------------------------------------------------
Table II
AVERAGE BALANCES AND YIELDS
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, Year ended December 31,
1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
INTEREST-EARNING ASSETS
Interest-bearing deposits in
other banks $ 89,204 $ 3,715 4.16% $ 23,781 $ 947 3.98%
Federal funds sold 3,885,816 217,915 5.61% 2,878,457 118,158 4.10%
Investments 5,360,318 301,510 5.62% 5,410,876 272,728 5.04%
Loans receivable 61,056,792 6,350,404 10.40% 53,108,539 4,921,920 9.27%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 70,392,130 6,873,544 9.76% 61,421,653 5,313,753 8.65%
NONEARNING ASSETS
Cash and due from banks 72,769 248,684
Premises and equipment 1,971,863 1,819,431
Other assets 1,350,515 1,320,557
Allowance for loan losses (598,050) (531,566)
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $73,189,227 $6,873,544 9.39% $64,278,759 $5,313,753 8.27%
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING
LIABILITIES
Interest bearing deposits
NOW accounts $ 1,786,369 $ 51,902 2.91% $ 1,692,798 $ 40,102 2.37%
Savings and money market 15,105,332 589,142 3.90% 17,297,015 602,042 3.48%
Time deposits 41,131,474 2,460,408 5.98% 33,056,461 1,525,976 4.62%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 58,023,175 3,101,452 5.35% 52,046,274 2,168,120 4.17%
Borrowings 4,550,584 242,513 5.33% 3,117,445 149,453 4.79%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 62,573,759 3,343,965 5.34% 55,163,719 2,317,573 4.20%
NONINTEREST BEARING
LIABILITIES
Demand deposits 1,923,703 2,358,261
Other liabilities 812,233 151,957
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 65,309,695 3,343,965 5.12% 57,673,937 2,317,573 4.02%
Stockholders' equity 7,879,532 6,604,822
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $73,189,227 $3,343,965 4.57% $64,278,759 $2,317,573 3.61%
=============================================================================================================================
Net interest spread 4.42% 4.45%
Net yield on earning assets $70,392,130 $3,529,579 5.01% $61,421,653 $2,996,180 4.88%
=============================================================================================================================
- --------------------------------------------------------------------------
Year Ended December 31,
1993
- --------------------------------------------------------------------------
Average Average
Balance Interest Rate
- --------------------------------------------------------------------------
ASSETS
INTEREST-EARNING ASSETS
Interest-bearing deposits in
other banks $ 2,839 $ 80 2.82%
Federal funds sold 5,970,723 179,812 3.01%
Investments 2,351,580 114,572 4.87%
Loans receivable 44,107,599 4,219,907 9.57%
- --------------------------------------------------------------------------
Total interest-earning assets 52,432,741 4,514,371 8.61%
NONEARNING ASSETS
Cash and due from banks 152,258
Premises and equipment 1,558,289
Other assets 1,120,950
Allowance for loan losses (439,825)
- --------------------------------------------------------------------------
Total assets $54,824,413 $4,514,371 8.23%
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING
LIABILITIES
Interest bearing deposits
NOW accounts $ 2,199,647 $ 63,827 2.90%
Savings and money market 15,980,365 602,922 3.77%
Time deposits 29,748,467 1,415,546 4.76%
- -------------------------------------------------------------------------------
Total interest-bearing
deposits 47,928,479 2,082,295 4.34%
Borrowings 346,154 15,361 4.44%
- -------------------------------------------------------------------------------
Total interest bearing
liabilities 48,274,633 2,097,656 4.35%
NONINTEREST BEARING
LIABILITIES
Demand deposits 1,175,667
Other liabilities 93,360
- -------------------------------------------------------------------------------
Total liabilities 49,543,660 2,097,656 4.23%
Stockholders' equity 5,280,753
- -------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $54,824,413 $2,097,656 3.83%
===============================================================================
Net interest spread 4.26%
Net yield on earning assets $52,432,741 $2,416,715 4.61%
===============================================================================
commercial real estate loan to one borrower. The loan is secured by a church,
school, dormitory, and a $147,000 certificate of deposit assigned to the Bank as
additional collateral. The loan is current as to the payment of principal and
interest.
At December 31, 1995, the Bank had one Commercial real estate loan that was
90 days or more past due totaling $210,694. The real estate securing said loan
was sold at public auction during November, 1995 for a price sufficient to repay
the Bank in full during the first quarter of 1996.
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
- --------------------------------------------------------------------------------
Residential Loans
The Bank originates loans secured by first and second mortgages on owner
occupied, one-to-four family residences, with terms to maturity of 10, 15, 20,
and 30 years. The Bank generally originates its residential mortgage loans in a
form consistent with secondary market standards. All fixed rate loans are sold
into the secondary mortgage market, while most adjustable rate loans are held in
the Bank's portfolio. During 1995, the Bank generated $86,336 of fee income by
selling loans, servicing released, into the secondary mortgage market. A loan
with a December 31, 1995 balance of $330,764 represents the Bank's largest
residential loan to one borrower. The loan is secured by first deed of trust on
a residential home. As of December 31, 1995, the Bank has $13,212,229, or 19.3%
of its total loan portfolio, in residential loans.
Construction and Land Lending
The Bank originates loans to finance the construction of residential and
commercial properties, primarily in its market area. At December 31, 1995, the
Bank had $7,148,297 of construction loans outstanding, representing 10.4% of its
loan portfolio. Construction loans are structured either to convert to permanent
loans at the end of the construction phase or to be paid off upon receiving
financing from another financial institution. To the extent that construction
loans are secured by commercial or non-homeowner residential properties, such
loans are approved based upon the appraised value of the property, as determined
by an independent appraiser, and an analysis of the potential marketability and
profitability of the project. Construction loans generally have terms up to 12
months, with extensions as needed. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. Loans with aggregate
December 31, 1995 balances of $439,500 represent the Bank's largest construction
loans to one borrower.
Land loans include loans to developers for the development of subdivisions
and loans on improved lots to builders and individuals. Such loans are approved
based upon the appraised value of the property, as determined by an independent
appraiser, as well as the financial strength of the borrower and guarantors.
Land loans are generally made up to 75% on the value of the security property
and for terms up to three years. At December 31, 1995, the Bank had $2,485,722
of land loans outstanding, representing 3.6% of its loan portfolio. A loan with
a December 31, 1995 balance of $476,843 represent the Bank's largest land loan
to one borrower.
Construction and land loans afford the Bank the opportunity to increase the
interest rate sensitivity of its loan portfolio and to receive yields generally
higher than those obtainable on loans secured by existing properties. These
higher yields correspond to higher risks associated with these loans
attributable to the fact that loan funds are advanced upon the security of the
project under construction, which is of uncertain value prior to its completion.
If the Bank is forced to foreclose on a project prior to completion, the Bank
may be required to fund additional amounts to complete the project and may have
to hold the property for an unspecified period of time. The Bank attempts to
minimize these risks through its underwriting and funds disbursement procedures.
Commercial Non-Real Estate Loans
The Bank grants commercial term loans and lines of credit primarily to
small businesses and individuals within its market area. Commercial lines of
credit are intended to assist borrowers in managing their short term cash needs
due to seasonality, accounts receivable collection, or large orders. Commercial
term loans are intended to fund borrowers' longer term needs such as equipment
purchases or capital expansion. Such loans require personal guarantees and are
generally secured by real or personal property of the borrower and/or guarantor.
Commercial loans are underwritten based upon the financial strength and business
acumen of the borrower and guarantors, as well as the value and marketability of
collateral. Commercial non-real estate loans totaled $6,788,803 or 9.9% of total
loans, as of December 31, 1995. A loan with a December 31, 1995 balance of
$541,580 represents the Bank's largest commercial non-real estate loan to one
borrower, which is secured by subordinate liens on various parcels of
residential real estate.
Consumer Lending
The Bank grants consumer loans primarily within its market area. Such loans
consist primarily of home equity lines of credit, but also include automobile
loans, boat loans, savings account loans, and personal loans. As of December 31,
1995, outstanding balances on home equity lines of credit represented
$1,099,699, or 1.7% of the Bank's total loan portfolio, all of which are current
as to the payment of principal and interest. Home equity lines of credit are
generally extended up to 80% of the appraised value of the security property,
less existing liens, at an interest rate of prime rate plus 1.5%. The Bank uses
the same underwriting standards for home equity lines of credit as it does for
residential mortgage loans. Other consumer loans totaled $1,174,729, or 1.7% of
total loans, as of December 31, 1995. The Bank's largest consumer loan has a
balance of $295,527 as of December 31, 1995, and is secured by a yacht. The Bank
also offers credit cards to its customers as an agent for another lender; the
Bank generates fee income from this activity but assumes no credit risk therein.
Letters of Credit
The Bank issues trade, standby, and performance letters of credit for
customers requiring credit support for purchases or to serve as guaranty of
performance. The Bank generally requires a 2% annual fee for such letters.
Letters of credit are underwritten similar to commercial loans, involve similar
risk as commercial loans, and require personal guarantees by the borrowers. The
Bank's off balance sheet obligations under letters of credit total $247,640 as
of December 31, 1995. The Bank's largest obligation outstanding under a letter
of credit to one borrower as of December 31, 1995, totals $35,000. As of
December 31, 1995, none of the Bank's outstanding letters of credit have been
drawn upon.
- --------------------------------------------------------------------------------
6 ANNAPOLIS BANCSHARES, INC.
- --------------------------------------------------------------------------------
Investment Securities
At December 31, 1995, the Bank's investment portfolio totalled $3,392,492
of fixed and variable rate securities. The portfolio enhances the net interest
margin while providing additional liquidity. The portfolio is comprised of debt
securities, which include U.S. Treasury and Agency Notes, a Mortgage-Backed
Security, Certificate of Deposit and a tax-exempt City of Annapolis General
Obligation Bond. In addition, the portfolio includes equity securities with the
Federal Reserve Bank, and Federal Home Loan Bank of Atlanta ("FHLB"). The FHLB
stock is a requirement of membership in the Federal Home Loan Bank System, which
expands the Bank's access to additional borrowings. Further advances from the
FHLB may require additional purchases of FHLB stock. The Bank adopted SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities during
1994, which addresses the accounting and reporting for investments. The Bank's
investment securities are classified as held-to-maturity and available for sale.
The Bank adopted a transition provision in accordance with SFAS No. 115 and
established an available for sale portfolio on December 19, 1995. Subsequent to
that date, Collateralized Mortgage Obligations (CMO'S) were sold resulting in
proceeds of $644,149 and a net loss of $38,543. The Bank does not engage in any
trading activities.
Other Assets
The Bank also has two types of investments in real property at December 31,
1995. In January, 1993 the Bank purchased a four story, 36,000 sq. ft. office
facility located at 2024 West Street, Annapolis, MD along with an adjacent
property known as 1 Hudson Street that includes additional parking spaces and a
2,400 sq. ft. single story block building. The Company and the Bank relocated
into the new facility, which is now the Company's principal office. This
facility functions as the main office operations and administration headquarters
of the Bank, which includes a full service retail bank. The Bank occupies
portions of the first and second levels, as well as a portion of the lower
level. At December 31, 1995, the remainder of the building, as well as the
property on 1 Hudson Street, is fully leased to others. The Bank's largest lease
became effective on October 1, 1994. The Bank contracted to lease 16,480 sq ft.,
which represents 14,280 sq ft. on the third and fourth floors and 2,200 sq ft.
on the lower level. The contract is a five year lease with an additional five
year option. The properties' cost, net of accumulated depreciation, is
$1,744,878, and is included in Premises and Equipment on the December 31, 1995
Consolidated Balance Sheets.
The second investment is real estate located in Annapolis, MD, which the
Bank purchased in 1989 for future expansion of the Bank's facilities. The site's
cost of $472,476 is included in Other Assets on the December 31, 1995
Consolidated Balance Sheets. The Bank is currently marketing the property for
sale, having abandoned its intended development of the property upon contracting
to purchase the West Street facility described above. At December 31, 1995 the
property is under a contract of sale which permits the contract purchaser to
conduct a feasibility study of the land and proceed with the option to purchase
the property.
At December 31, 1995, neither the Company nor the Bank own any real estate
acquired through foreclosure or by deed in lieu thereof.
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset / liability management are to assure
adequate liquidity and carefully manage interest rate risk. Liquidity management
involves the ability to meet the cash flow requirements of customers who may be
either depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity refers to the change in earnings which results from changes in the
level of interest rates. To the extent that interest income and interest expense
do not respond equally to changes in interest rate levels, or that all rates do
not change uniformly, earnings will be affected.
Sources of asset liquidity for the Bank include federal funds sold,
amortization, prepayment and maturities of loans, and investments. Cash and
federal funds sold totalled $6,099,052 as of December 31, 1995, and $2,808,128
at December 31, 1994. Principal repayments on investment securities totaled
$141,109 for the year ended December 31, 1995, and $285,701 for the year ended
December 31, 1994. Loan prepayments and amortization totaled $23,376,700 for the
year ended December 31, 1995 and $15,404,906 for the year ended December 31,
1994. Liability liquidity is measured by the Bank's ability to obtain deposits
and borrowed monies at favorable rates. Total deposits increased to $64,005,315
at December 31, 1995 from $54,720,731 at December 31, 1994. Access to savings
deposits may be restricted by excessive interest rates paid by competitors,
adverse publicity about the banking industry, and similar matters. The Bank also
has available several credit facilities. The Bank is a member of the Federal
Home Loan Bank System. The Federal Home Loan Bank of Atlanta approved a Credit
Availability for Bank of Annapolis of $8,000,000 secured by a blanket floating
lien on all of the Bank's amortizing loans which are first liens on 1-4 family
residential properties, and a credit availability of $1,985,000, secured by
certain commercial real estate loans. The ability to draw on these funds is
subject to the availability of sufficient eligible collateral. As of December
31, 1995, the Bank has approximately $13,212,229 of 1-4 family residential loans
secured by first liens. The Bank currently has outstanding $5,000,000 of
advances from the Federal Home Loan Bank. Further advances may require
additional purchases of FHLB stock. In addition, the Bank has available a
$1,000,000 unsecured line of credit and a Reverse Repurchase Line of Credit
secured by certain investment securities. The availability of these credit
facilities allows the Bank greater flexibility in its financing activities. In
addition, the Bank has the ability to increase it's liquidity by borrowing money
through the Federal Reserve discount window, by selling loans, and/or by
curtailing its loan origination volume.
The Bank's objective of asset/liability management is to enhance long term
profitability and reduce exposure to interest rate fluctuations through its
management of rate sensitive assets and liabilities. An asset or liability is
interest rate sensitive within a specific time period if it will mature or
reprice within that time period. Since most of the Bank's deposit liabilities
are interest rate sensitive during any upcoming annual period, the Bank seeks to
have the majority of its loan portfolio products at adjustable rates, thereby
decreasing the possible adverse
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
- --------------------------------------------------------------------------------
effect of interest rate swings. Adjustable rate loans generally have interest
rates that adjust periodically in accordance with market interest rates, and are
intended to provide a positive margin over the cost of interest bearing
liabilities. In addition, debt securities totalling $1,804,812 have adjustable
rates.
Table III presents the Company's interest sensitivity gap position at
December 31, 1995. Gap analysis, a traditional measure of interest rate risk,
quantifies the relationship of rate sensitive assets to rate sensitive
liabilities at a point in time. Rate sensitive assets and liabilities are
defined by those balances contractually maturing or subject to repricing.
Table III
INTEREST SENSITIVITY GAP ANALYSIS
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
December 31, 1995
After three
Within but within After one
three twelve but within After
months months years five years five Total
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing balances $ 27 $ -- $ -- $ -- $ 27
Federal funds sold 5,965 -- -- -- 5,965
Investment securities 2,304 600 398 90 3,392
Loans 25,649 26,208 16,026 94 67,977
- ----------------------------------------------------------------------------------------------------------------------------------
$33,945 $26,808 $16,424 $ 184 $77,361
==================================================================================================================================
LIABILITIES
Interest-bearing deposits
NOW $ 2,361 $ -- $ -- $ -- $ 2,361
Savings and money market 14,508 -- -- -- 14,508
Time 13,222 24,999 6,833 -- 45,054
Borrowings 2,025 3,000 2,000 -- 7,025
- ----------------------------------------------------------------------------------------------------------------------------------
$32,116 $27,999 $ 8,833 $ -- $68,948
==================================================================================================================================
Interest sensitivity gap $ 1,829 $(1,191) $ 7,591 $ 184 $ 8,413
==================================================================================================================================
Cumulative interest sensitivity gap $ 1,829 $ 638 $ 8,229 $8,413
==================================================================================================================================
Cumulative interest sensitivity gap as a
percentage of total assets 3.24% 1.79% 11.06% 11.51%
==================================================================================================================================
Capital Resources
At December 31, 1995, the Company's total stockholders' equity was
$8,850,038 representing 10.8% of total assets. At December 31, 1995, the Company
has 784,175 shares of Common Stock outstanding. As a result of a public offering
that was conducted during 1993, the Company issued 98,113 shares of common
stock, pursuant to previously issued common stock warrants at $11.00 per share
during 1995, resulting in additional capital of $1,079,243. The Company also has
outstanding additional warrants to purchase up to 12,000 shares of Common Stock
any time before March 31, 1998. At December 31, 1995, a total of 19,800 options
have been granted under the Company's Incentive Stock Option Plan, and 7,200
shares were exercised in 1995, resulting in additional capital of $63,500. The
Option Plan authorizes the grant of nonqualified and incentive stock options for
30,000 shares of Common Stock.
At December 31, 1995, the Company's Tier 1 capital ratio was 13.2%,
compared to 12.1% at December 31, 1994. The total risk based capital ratio was
14.2% at December 31, 1995, compared to 13.1% at December 31, 1994. The
Company's capital ratios far exceed the regulatory minimums of 4.0% for Tier 1
and 8.0% for total capital. The Company's leverage ratio was 12.1% at December
31, 1995 compared to 10.6% at December 31, 1994, which exceeds the 3.0%
regulatory minimum.
- --------------------------------------------------------------------------------
8 ANNAPOLIS BANCSHARES, INC.
- --------------------------------------------------------------------------------
Market value and Dividend information
The Company's common stock trades on the NASDAQ Small Cap Market under the
symbol "ANNB." As of March 8, 1996, the Bank has outstanding 784,175 shares of
common stock. The Company declared its thirteenth consecutive quarterly cash
dividend to stockholders of record on December 29, 1995, payable on January 12,
1996. The Company declared a 20% stock dividend paid on December 4, 1995,
increasing the number of shares outstanding by 130,690 to 784,175.
The following table sets forth the high and low trading prices and cash
dividends declared during each respective quarter. The market prices and cash
dividends declared have been restated to reflect the 20% stock dividend.
MARKET VALUE AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------------
Cash
dividend
Three months ended High Low declared
- --------------------------------------------------------------------------------
December 31, 1995 $20.50 $17.50 $0.0575
September 30, 1995 16.25 14.17 0.0458
June 30, 1995 12.92 12.92 0.0438
March 31, 1995 12.92 12.70 0.0417
December 31, 1994 12.92 12.92 0.0417
September 30, 1994 12.08 9.67 0.0396
June 30, 1994 9.58 9.17 0.0375
March 31, 1994 8.95 8.65 0.0354
December 31, 1993 8.33 8.33 0.0333
September 30, 1993 -- -- 0.0333
June 30, 1993 -- -- 0.0292
March 31, 1993 8.75 7.50 0.0250
December 31, 1992 7.92 6.46 0.0208
There were no trades during the second and third quarters of 1993 of which the
company is aware.
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, the difference between interest income and interest
expense is an effective measurement of how well management has balanced the
Company's interest rate sensitive assets and liabilities while maintaining
appropriate interest margins. Net interest income 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 for any given
period. Table IV on page 10 sets forth certain information regarding changes in
interest income and interest expense attributable to (1) changes in volume
(change of volume multiplied by old rate); (2) changes in rates (change in rate
multiplied by old volume); and (3) changes in rate/volume (change in rate
multiplied by change in volume).
Net interest income was $3,529,579 and $2,996,180 for the years ended
December 31, 1995 and 1994, respectively. The increase in net interest income
during the periods presented resulted primarily from corresponding increases in
the amounts of interest earning assets and interest bearing liabilities, and is
largely responsible for the Company's profitability. The net yield on interest
earning assets was 5.01% and 4.88% for the years ended December 31, 1995 and
1994, respectively.
Total interest income was $6,873,544 and $5,313,753 for the years ended
December 31, 1995 and 1994, respectively. Total interest income is comprised
primarily of interest earned on the loan and investment portfolio, and on
federal funds sold. The increase in interest income during the periods presented
primarily resulted from increases in the size of the loan portfolio and an
increase in interest on federal funds sold. Net loans receivable are $67,976,982
at December 31, 1995, compared to $54,972,862 at December 31, 1994. Investment
securities totalled $3,392,492 at December 31, 1995, compared to $4,667,800 at
December 31, 1994. Federal funds sold totalled $5,964,730 and $2,590,203 as of
December 31, 1995 and 1994, respectively. The weighted average yield on interest
earning assets was 9.76% and 8.65% for the years ended December 31, 1995 and
1994, respectively.
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
- --------------------------------------------------------------------------------
Interest expense on deposits was the major component of interest expense
for the periods presented. Total interest expense was $3,343,965 and $2,317,573
for the years ended December 31, 1995 and 1994, respectively. The increase in
interest expense in the periods presented is primarily attributable to the
increasing size of the deposit portfolio and an increase in borrowings from the
Federal Home Loan Bank. Total deposit accounts increased to $64,005,315 as of
December 31, 1995 from $54,720,731 as of December 31, 1994. During the year, the
Bank borrowed an additional $2,000,000 from the Federal Home Loan Bank and
repaid a $2,000,000 maturing advance on March 23, 1995. See Note 10 to the
Consolidated Financial Statements. Total borrowings outstanding were $7,025,000
and $5,000,000 at December 31, 1995 and December 31, 1994 respectively. The
weighted average cost of interest bearing liabilities was 5.34% and 4.20% for
the years ended December 31, 1995 and 1994, respectively.
Table IV
RATE AND VOLUME VARIANCES
INCREASE/(DECREASE) DUE TO VARIANCE IN
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Rate / Increase
Volume Rate Volume (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
1995 COMPARED TO 1994
Interest earned on
Interest-bearing deposits
in other banks $ 2,605 $ 43 $ 120 $ 2,768
Federal funds sold 41,351 43,265 15,141 99,757
Investments (2,548) 31,626 (296) 28,782
Loans receivable 736,617 601,801 90,066 1,428,484
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earned 778,025 676,735 105,031 1,559,791
====================================================================================================================================
Interest expense on
NOW accounts 2,217 9,081 502 11,800
Savings and money market (76,284) 72,581 (9,197) (12,900)
Time deposits 372,765 451,400 110,267 934,432
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense
on deposits 298,698 533,062 101,572 933,332
Borrowings 68,706 16,684 7,670 93,060
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 367,404 549,746 109,242 1,026,392
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $410,621 $ 126,989 $ (4,211) $ 533,399
====================================================================================================================================
1994 COMPARED TO 1993
Interest earned on
Interest-bearing deposits
in other banks $ 591 $ 33 $ 243 $ 867
Federal funds sold (93,126) 65,281 (33,809) (61,654)
Investments 149,053 3,956 5,147 158,156
Loans receivable 861,147 (132,164) (26,970) 702,013
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earned 917,665 (62,894) (55,389) 799,382
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense on
NOW accounts (14,707) (11,718) 2,700 (23,725)
Savings and money market 49,676 (46,708) (3,848) (880)
Time deposits 157,407 (42,276) (4,701) 110,430
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense
on deposits 192,376 (100,702) (5,849) 85,825
Borrowings 122,979 1,234 9,879 134,092
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 315,355 (99,468) 4,030 219,917
====================================================================================================================================
Change in net interest income $602,310 $ 36,574 $(59,419) $ 579,465
====================================================================================================================================
- --------------------------------------------------------------------------------
10 ANNAPOLIS BANCSHARES, INC.
- --------------------------------------------------------------------------------
Allowance for Loan Losses
In recognition of the inherent risks which the Bank assumes in connection
with the business of extending credit, the Bank maintains an allowance for loan
losses. The loan loss allowance is maintained through a periodic provision for
loan losses, based on Management's evaluation of the collectibility of loans,
prior loan loss experience, and other factors such 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 a borrower's
ability to repay. Management's policy is to maintain the allowance at a level
considered adequate based on the above factors. The loan loss provision is
general, rather than specific, in that it does not relate to any specific
anticipated losses on loans in the loan portfolio. Management believes that the
current allowance is adequate to absorb possible losses on existing loans that
may become uncollectible, based upon management's evaluation of the above
factors. Management will continue to evaluate the loan loss allowance on an
ongoing basis. The allowance for loan losses is based upon estimates, and
ultimate losses may vary from the current estimates. Estimates are reviewed
monthly and, as adjustments may become necessary, they will be reported in
earnings in the period in which they become known. The allowance for loan losses
is increased by provisions charged to operating expense and reduced by net
charge-offs.
As shown in Note 4 to the Consolidated Financial Statements, the Allowance
for Loan Losses was $686,636 and $555,281 as of December 31, 1995 and 1994,
respectively. Of this amount, $180,253 and $51,602 were charged to expense
during the years ended December 31, 1995 and 1994, respectively. The amounts
charged to Provision for Loan Losses reduce the profitability of the Company
during the periods presented.
General and Administrative Expenses
Compensation and related expenses were $1,096,297 and $898,994 for the
years ended December 31, 1995 and 1994, respectively. The increase in
compensation and related expenses during the periods presented were attributable
to the expansion of the Bank's staff as bank operations continue to grow. In
accordance with Statement of Financial Standards No. 91, direct salary costs of
originating loans are netted against compensation and related expense in the
period during which the loan is made, then amortized to income over the life of
the loan. Compensation and related expenses will continue to increase due to
further expansion of operations, competitive salary pressures, and rising health
care and other benefit costs.
Occupancy expenses were $179,663 and $159,914 for the years ended December
31, 1995 and 1994, respectively. The increase is attributable to additional
expenses relating to the maintenance of the building. The Bank's facility is
fully leased, and rental income from tenants is supplementing the core earnings
of the bank. The bank received $247,221 in rental income during the year ended
December 31, 1995 and $82,983 for 1994. See Note 7 to the Consolidated Financial
Statements detailing the future rental lease payments.
Other operating expenses reflect increases throughout the periods presented
as a result of the Bank's continually expanding operations. Legal expenses
increased to $53,658 from $32,863 for the years ended December 31, 1995 and 1994
respectively. The increase is attributed primarily to fees incurred in
connection with a proposed business combination that was terminated by the
Company on December 21, 1995, application and legal fees associated with
becoming a member of the NASDAQ stock market, and the disposition of certain
non-mortgage commercial loans in 1995. Other increases in general and
administrative expenses resulted from an increase in organization dues and
subscriptions, telephone, and postage expense. FDIC insurance premiums decreased
to $66,014 from $121,731 for the years ended December 31, 1995 and 1994
respectively. The FDIC insurance premiums were reduced to $.04 per $100 of
deposits from $.23 per $100 in 1995. This resulted in substantial cost savings
for the Bank. See Note 13 to the Consolidated Financial Statements.
Income Taxes
The Company and the Bank file consolidated Federal income tax returns and
separate Maryland income tax returns. The provision for income taxes of the
Company and the Bank, on a consolidated basis, was $673,981 and $555,301 for the
years ended December 31, 1995 and 1994, respectively. The Company and the Bank
paid income taxes totaling $702,345 in 1995.
See Note 11 to the Consolidated Financial Statements for an analysis of the
Company's income tax provision and deferred income taxes.
Impact of Inflation
The Financial Statements have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Bank's operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods.
Impact of New Accounting Standard
Effective for fiscal years beginning after December 15, 1993, the FASB
issued Statement of Financial Accounting Standards No. 115 ("SFAS 115"), which
addresses the accounting and reporting for investments. Investments are to be
classified in three categories and accounted for as follows: (1) Held-to-
Maturity and reported at amortized cost, (2) Trading and reported at fair value,
with unrealized gains and losses included in earnings, and (3) Available-for-
Sale and reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders' equity. The Bank
adopted SFAS No. 115 in 1994. The Bank's investments are classified as held-to-
maturity and available for sale.
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
- --------------------------------------------------------------------------------
In May 1993 the FASB issued SFAS No. 114 Accounting by Creditors for
Impairment of a Loan which is effective for fiscal years beginning after
December 15, 1994. The statement addresses the accounting by creditors for
impaired or restructured loans. It is generally applicable for all loans except
large groups of smaller-balance homogenous loans that are collectively evaluated
for impairment including residential mortgage loans and consumer installment
loans. Statement 114 requires that impaired loans be measured on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or at the loans observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. In 1995 the Bank adopted SFAS No. 114 and SFAS No. 118
Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosure. Management has reviewed the loan portfolio and determined that there
are no loans which management considers impaired.
Financial Analysis 1994-1993
Net income for the year ended December 31, 1994 was $882,556 or $1.32 per
share compared to $601,739 or $1.05 per share for the year ended December 31,
1993, an increase of 46.7% in net income and 25.7% in earnings per share.
Total assets increased by 7.9% during 1994 to $66,698,954 at December 31,
1994 from $61,809,445 at December 31, 1993. The Company's primary source of
funds, total deposits, grew to $54,720,731 during 1994 from $54,366,487 at
December 31, 1993, an increase of .65%. The Company's primary use of funds is
for loans. Net loans increased by 10.2% during 1994 to $54,972,862 at December
31, 1994 from $49,864,189 at December 31, 1993. Cash and Federal funds sold were
the Bank's principal source of asset liquidity. Such liquid assets totalled
$2,808,128 as of December 31, 1994 compared to $3,712,268 as of December 31,
1993. At December 31, 1994 the Company's total stockholders' equity was
$6,810,400, representing 10.2% of its total assets. At December 31, 1993, the
Company's total stockholders' equity was $6,029,019, representing 9.8% of its
total assets.
Net interest income was $2,996,180 for the year ended December 31, 1994
compared to $2,416,715 for the year ended December 31, 1993. The net yield on
interest earning assets was 4.88% and 4.61% for the years ended December 31,
1994 and 1993, respectively. The provision for loan loss for the years ended
December 31, 1994 and 1993 were $51,602 and $106,327 respectively. The allowance
for loan losses totalled $555,281 and $503,679 for the years ended December 31,
1994 and 1993, respectively.
Total operating expenses increased 17.4% to $1,649,781 for the year ended
December 31, 1994 from $1,404,336 for the year ended December 31, 1993. The
increase is the result of the Company's relocation into a new facility on August
2, 1993 and due to the Bank's continually expanding operations.
- --------------------------------------------------------------------------------
12 ANNAPOLIS BANCSHARES, INC.
[ROWLES & COMPANY CERTIFIED PUBLIC
ACCOUNTANTS LOGO APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Annapolis Bancshares, Inc. and Subsidiary
Annapolis, Maryland
We have audited the consolidated balance sheets of Annapolis Bancshares,
Inc. and Subsidiary as of December 31, 1995, 1994, and 1993, 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
Bancshares, Inc. and Subsidiary as of December 31, 1995, 1994, and 1993, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Rowles & Company LLP
Baltimore, Maryland
February 7, 1996
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 13
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
At December 31,
ASSETS
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 107,240 $ 169,012 $ 62,739
Interest bearing deposits in other banks 27,082 48,913 4,659
Federal funds sold 5,964,730 2,590,203 3,644,870
Investment securities available for sale 1,804,812 -- --
Investment securities held to maturity
(market value $1,580,458, $4,260,442,
and $4,934,212) 1,587,680 4,667,800 4,956,785
Other securities 982,200 950,100 313,000
Loans available for sale 750,000 -- --
Loans, less allowance for loan losses of
$686,636, $555,281, and $503,679 67,226,982 54,972,862 49,864,189
Premises and equipment 1,943,994 2,003,530 1,720,291
Accrued interest receivable 647,355 468,785 401,860
Deferred income taxes 192,841 160,562 249,629
Other assets 649,627 667,187 591,423
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $81,884,543 $66,698,954 $61,809,445
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $64,005,315 $54,720,731 $54,366,487
Borrowings 7,025,000 5,000,000 1,000,000
Due to banks 1,733,090 -- 247,524
Accrued interest payable 62,967 47,197 30,665
Income taxes payable -- -- 53,737
Dividend payable 45,090 27,469 21,971
Other liabilities 163,043 93,157 60,042
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 73,034,505 59,888,554 55,780,426
====================================================================================================================================
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share;
authorized 5,000,000 shares; issued and
outstanding 784,175, 549,372, and 549,272 shares 784,175 549,372 549,272
Additional paid-in capital 5,341,728 4,433,893 4,433,543
Retained earnings 2,755,180 1,827,135 1,046,204
- ------------------------------------------------------------------------------------------------------------------------------------
8,881,083 6,810,400 6,029,019
Unrealized gain (loss) on investment securities
available for sale (31,045) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,850,038 6,810,400 6,029,019
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $81,884,543 $66,698,954 $61,809,445
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
14 ANNAPOLIS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Years Ended December 31,
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $6,350,404 $4,921,920 $4,219,907
Deposits in banks 3,715 947 80
Federal funds sold 217,915 118,158 179,812
Investment securities 301,510 272,728 114,572
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 6,873,544 5,313,753 4,514,371
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 3,101,452 2,168,120 2,082,295
Interest on borrowed funds 242,513 149,453 15,361
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,343,965 2,317,573 2,097,656
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,529,579 2,996,180 2,416,715
PROVISION FOR LOAN LOSSES 180,253 51,602 106,327
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 3,349,326 2,944,578 2,310,388
- --------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Rental income 247,221 82,983 5,988
Gain on sale of loans, net 11,988 10,808 28,581
Other 58,350 49,269 33,646
Loss on sale of investments (38,543) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 279,016 143,060 68,215
- --------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Compensation and related expenses 1,096,297 898,994 672,510
Occupancy 179,663 159,914 168,052
Furniture and equipment 75,640 72,543 56,469
Other operating 531,414 518,330 507,305
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,883,014 1,649,781 1,404,336
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,745,328 1,437,857 974,267
INCOME TAXES 673,981 555,301 372,528
- --------------------------------------------------------------------------------------------------------------------------------
Net income $1,071,347 $ 882,556 $ 601,739
================================================================================================================================
EARNINGS PER COMMON SHARE $ 1.42 $ 1.32 $ 1.05
================================================================================================================================
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 15
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock Unrealized Total
------------------------ Capital Retained gains (losses) stockholders'
Shares Par value surplus earnings on securities equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 446,069 $446,069 $3,575,609 $ 515,346 $ -- $4,537,024
Cash dividend $.12 per share -- -- -- (70,881) -- (70,881)
Sale of stock 103,203 103,203 980,429 -- -- 1,083,632
Cost of stock offering -- -- (122,495) -- -- (122,495)
Net income -- -- -- 601,739 -- 601,739
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 549,272 549,272 4,433,543 1,046,204 -- 6,029,019
Cash dividend $.15 per share -- -- -- (101,625) -- (101,625)
Sale of stock 100 100 1,000 -- -- 1,100
Cost of stock offering -- -- (650) -- -- (650)
Net income -- -- -- 882,556 -- 882,556
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 549,372 549,372 4,433,893 1,827,135 -- 6,810,400
Cash dividend $.19 per share -- -- -- (143,302) -- (143,302)
Exercise of warrants 98,113 98,113 981,130 -- -- 1,079,243
Exercise of options 6,000 6,000 57,500 -- -- 63,500
Stock split effected in the form
of a 20% stock dividend 130,690 130,690 (130,795) -- -- (105)
Net income -- -- -- 1,071,347 -- 1,071,347
Change in unrealized gains
(losses) on securities -- -- -- -- (31,045) (31,045)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 784,175 $784,175 $5,341,728 $2,755,180 $(31,045) $8,850,038
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
16 ANNAPOLIS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,071,347 $ 882,556 $ 601,739
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 180,253 51,602 106,327
Depreciation and amortization 102,077 91,690 65,305
Amortization of premiums and accretion
of discounts, net 928 3,284 1,368
Net loss on sales of assets 17,634 -- --
Loans originated for sale (3,173,600) -- --
Proceeds from sale of loans 2,423,600 -- --
(Increase) decrease in
Accrued interest receivable (178,570) (66,925) (95,156)
Deferred income tax (12,746) 89,067 (42,370)
Other assets (19,475) (88,976) (95,499)
Increase (decrease) in
Deferred loan fees and discounts 35,619 33,807 59,919
Accrued interest payable 15,770 16,532 (7,727)
Income taxes payable -- (53,737) (141,197)
Other liabilities 69,886 33,115 16,792
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 532,723 992,015 469,501
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investment securities available for sale 644,149 -- --
Purchase of investment securities (1,373,100) (637,100) (5,241,689)
Principal repayments on investment securities 1,928,723 285,701 91,086
Loans originated (34,655,453) (20,965,013) (18,310,192)
Principal repayments on loans 23,376,700 15,404,906 8,542,387
Loans purchased (2,826,469) (549,881) (1,451,113)
Loans sold 1,619,507 915,906 526,340
Proceeds from sale of other real estate 434,725 -- --
Purchases of other real estate (419,003) -- --
Sale of premises and equipment 676 -- --
Purchase of premises and equipment (31,885) (361,717) (1,588,488)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (11,301,430) (5,907,198) (17,431,669)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 9,284,584 354,244 10,251,780
Proceeds from stock issued, net 1,142,638 450 961,137
Proceeds from borrowings 2,025,000 4,000,000 1,000,000
Net increase (decrease) in balance due to banks 1,733,090 (247,524) (147,244)
Dividends paid (125,681) (96,127) (60,061)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,059,631 4,011,043 12,005,612
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,290,924 (904,140) (4,956,556)
Cash and cash equivalents at beginning of year 2,808,128 3,712,268 8,668,824
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,099,052 $ 2,808,128 $ 3,712,268
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies in the financial statements conform to
generally accepted accounting principles and to general practices within the
banking industry.
The principal business of the Bank of Annapolis is to accept time and demand
deposits, and to make loans and other investments. 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, the MOST automated teller product, and other
banking services.
The Bank grants 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements. These
estimates and assumptions may affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Principles of consolidation
The consolidated financial statements include the accounts of Annapolis
Bancshares, Inc. and its wholly-owned subsidiary, Bank of Annapolis.
Intercompany accounts and transactions have been eliminated.
Cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold.
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.
Loans and allowance for loan losses
Loans are stated at face value, plus deferred origination costs, less unearned
discounts, deferred origination fees, and the allowance for loan losses.
Interest on loans is credited to income based on the principal amounts
outstanding. Origination fees and costs are amortized to income over the
contractual life of the related loans as an adjustment of yield. Discounts on
the purchase of mortgage loans are amortized to income over the contractual
lives of the loans. Accrual of interest on a loan is discontinued when
management believes, after considering economic and business conditions and
collection efforts, that collection is doubtful.
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.
Management classifies loans as impaired when the collection of the contractual
obligations, including principal and interest, is doubtful.
Loans available for sale
Loans available for sale are carried at the lower of cost or fair value. Loans
are sold without recourse.
Bank premises and equipment
Bank 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.
Real estate owned
Real estate acquired in satisfaction of a debt is carried at the lower of cost
or net realizable value.
- --------------------------------------------------------------------------------
18 ANNAPOLIS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
December 31, 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Earnings per share
Earnings per common share are determined by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding giving retroactive effect to stock dividends paid. Weighted average
shares were 748,709, 700,240, and 572,536 for 1995, 1994, and 1993,
respectively.
NOTE 2. CASH AND EQUIVALENTS
The Bank normally carries balances with another bank that exceed the federally
insured limit. The average balance carried in excess of the limit, including
unsecured federal funds sold to the same bank, was $3,885,816 and $3,264,500 for
1995 and 1994, respectively.
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.
NOTE 3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
Amortized Unrealized Unrealized Market
December 31, 1995 cost gains losses value
- --------------------------------------------------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury securities $ 499,518 $ -- $ (1,471) $ 498,047
U.S. Government agencies 500,000 1,000 -- 501,000
Obligations of states and
political subdivisions 90,000 -- (30) 89,970
Mortgage-backed securities 398,162 -- (6,721) 391,441
Certificates of deposit 100,000 -- -- 100,000
- --------------------------------------------------------------------------------------------------------------------------------
$1,587,680 $1,000 $ (8,222) $1,580,458
================================================================================================================================
Available for sale
U.S. Government agencies $1,855,391 $ -- $ (50,579) $1,804,812
================================================================================================================================
December 31, 1994
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $1,498,705 $ -- $ (26,986) $1,471,719
U.S. Government agencies 1,856,994 -- (208,544) 1,648,450
Obligations of states and
political subdivisions 90,000 -- (9,900) 80,100
Mortgage-backed securities 1,222,101 -- (161,928) 1,060,173
- --------------------------------------------------------------------------------------------------------------------------------
$4,667,800 $ -- $(407,358) $4,260,442
================================================================================================================================
December 31, 1993
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $1,500,235 $1,324 $ (308) $1,501,251
U.S. Government agencies 1,858,597 -- (9,972) 1,848,625
Obligations of states and
political subdivisions 90,000 -- -- 90,000
Mortgage-backed securities 1,507,953 -- (13,617) 1,494,336
- --------------------------------------------------------------------------------------------------------------------------------
$4,956,785 $1,324 $ (23,897) $4,934,212
================================================================================================================================
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
December 31, 1995
NOTE 3. INVESTMENT SECURITIES (continued)
The amortized cost and market value of debt securities by contractual
maturities are shown below. Mortgage-backed securities are allocated based on
their weighted average life. Actual maturities of these securities may differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without call or repayment penalties.
December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Held to maturity Available for sale
------------------------------------ ------------------------------------
Amortized Market Amortized Market
cost value cost value
- ----------------------------------------------------------------------------------------------------------------------------------
Due within one year $1,099,518 $1,099,047 $ -- $ --
Due after one through five years 398,162 391,441 1,855,391 1,804,812
Due after five years 90,000 89,970 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
$1,587,680 $1,580,458 $1,855,391 $1,804,812
==================================================================================================================================
December 31, 1994 December 31, 1993
------------------------------------ ------------------------------------
Amortized Market Amortized Market
cost value cost value
- ----------------------------------------------------------------------------------------------------------------------------------
Due within one year $1,000,342 $ 992,656 $ -- $ --
Due after one through five years 1,554,596 1,437,602 3,611,443 3,594,837
Due after five years 2,112,862 1,830,184 1,345,342 1,339,375
- ----------------------------------------------------------------------------------------------------------------------------------
$4,667,800 $4,260,442 $4,956,785 $4,934,212
==================================================================================================================================
In accordance with the transition provisions of Statements of Financial
Accounting Standards No. 115, Accounting for Certain Debt and Equity Securities,
the Bank transferred investment securities from held to maturity to available
for sale. The amortized cost and gross unrealized losses on the date of transfer
were $2,532,542 and $102,830, respectively.
Proceeds from available for sale securities during 1995 were $644,149 and
realized losses on those sales were $38,543.
In January, 1996, the investment securities available for sale were sold.
Proceeds from the sale were $1,804,812, resulting in a realized loss of $50,578.
Other securities are as follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Federal Reserve Bank stock $180,900 $148,800 $148,800
Federal Home Loan Bank stock 801,300 801,300 164,200
- --------------------------------------------------------------------------------
$982,200 $950,100 $313,000
================================================================================
- --------------------------------------------------------------------------------
20 ANNAPOLIS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
December 31, 1995
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial $ 6,788,803 $ 7,759,006 $ 7,608,757
Real estate
Commercial 36,530,994 32,853,800 28,728,488
Residential 13,212,229 8,886,843 9,351,368
Land 2,485,722 1,787,968 701,448
Construction 7,148,297 2,449,724 1,995,672
Home equity 1,099,699 1,233,600 1,231,368
Consumer 1,174,729 1,048,438 1,208,196
- ------------------------------------------------------------------------------------------------------------------------------------
68,440,473 56,019,379 50,825,297
- ------------------------------------------------------------------------------------------------------------------------------------
Less
Deferred loan origination fees, net of costs 429,390 356,913 296,727
Discount on loans purchased 97,465 134,323 160,702
Allowance for loan losses 686,636 555,281 503,679
- ------------------------------------------------------------------------------------------------------------------------------------
1,213,491 1,046,517 961,108
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net $67,226,982 $54,972,862 $49,864,189
====================================================================================================================================
Transactions in the allowance for loan losses were as follows:
Consumer
Real and home
Commercial estate Construction equity Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 $ 60,073 $283,510 $25,798 $27,971 $ 397,352
Provision charged to operations 15,956 99,736 (6,015) (3,350) 106,327
Charge-offs -- -- -- -- --
Recoveries -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 76,029 383,246 19,783 24,621 503,679
Provision charged to operations 1,067 47,046 5,435 (1,946) 51,602
Charge-offs -- -- -- -- --
Recoveries -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 77,096 430,292 25,218 22,675 555,281
Provision charged to operations 17,686 137,469 25,098 -- 180,253
Charge-offs (316,829) -- -- -- (316,829)
Recoveries 267,931 -- -- -- 267,931
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 45,884 $567,761 $50,316 $22,675 $ 686,636
====================================================================================================================================
There were no loans on which the accrual of interest had been discontinued at
December 31, 1995 or 1994. At December 31, 1993, loans on which the accrual of
interest had been discontinued amounted to $35,573. Interest that would have
been recorded was $2,059 for 1993. Loans which were 90 days or more past due
amounted to $210,694 and $160,967 at December 31, 1995 and 1994. There were no
other loans 90 days or more past due at December 31, 1993. No loans are
classified as impaired at December 31, 1995.
The Bank provides loan collection and accounting services for others on loans
of $4,522,780, $4,337,287, and $4,396,990 at December 31, 1995, 1994, and 1993,
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.
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
December 31, 1995
NOTE 5. CREDIT COMMITMENTS
Outstanding loan commitments, unused lines of credit, and letters of credit
were as follows:
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Loan commitments
Commercial $ 80,000 $ 718,200 $ 105,000
Real estate 5,617,374 2,055,000 3,507,000
Construction 1,770,000 5,083,400 940,536
Home equity -- -- 100,000
Consumer 15,000 25,875 --
- ------------------------------------------------------------------------------------------------------------------------------------
$7,482,374 $7,882,475 $4,652,536
====================================================================================================================================
Unused lines of credit
Commercial $2,142,704 $2,395,909 $1,609,118
Construction 1,019,965 2,180,598 1,103,761
Home equity 1,011,301 935,400 1,085,232
Consumer 130,352 86,000 131,789
- ------------------------------------------------------------------------------------------------------------------------------------
$4,304,322 $5,597,907 $3,929,900
====================================================================================================================================
Letters of credit $ 247,640 $ 438,858 $ 543 ,654
====================================================================================================================================
Loan commitments and 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. No amount has been recognized by the
Bank as an allowance for losses related to these financial instruments with off-
balance sheet risk.
NOTE 6. PREMISES AND EQUIPMENT
A summary of premises and equipment and the related depreciation is as
follows:
Estimated
useful lives 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Land $ 310,252 $ 310,252 $ 310,252
Building and improvements 5-40 years 1,532,833 1,531,906 1,237,995
Furniture, fixtures, and equipment 5-7 years 336,892 308,502 246,294
- ------------------------------------------------------------------------------------------------------------------------------------
2,179,977 2,150,660 1,794,541
Accumulated depreciation 235,983 147,130 74,250
- ------------------------------------------------------------------------------------------------------------------------------------
Net premises and equipment $1,943,994 $2,003,530 $1,720,291
====================================================================================================================================
Depreciation expense $ 89,516 $ 78,478 $ 58,817
====================================================================================================================================
In 1989, the Bank purchased land on General's Highway, Annapolis, for the
purpose of developing a future site for the Bank. Included in other assets at
December 31, 1995, 1994, and 1993, is $472,476, the cost of the General's
Highway property which the Bank is marketing for sale. At December 31, 1995, the
Bank had a contract of sale which permitted a third party to conduct a
feasibility study of the land and provided for the option to purchase the
property.
- --------------------------------------------------------------------------------
22 ANNAPOLIS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
December 31, 1995
NOTE 7. LEASE COMMITMENTS
The Bank leases excess office space in its building and the building located
on an adjoining property at 1 Hudson Street. At December 31, 1995, future
minimum rentals receivable under the leases are as follows:
Period Minimum rentals receivable
------------------------------------------------------------------
1996 $243,512
1997 231,712
1998 229,537
1999 163,996
The rental amounts are comprised of base rent plus a fixed allocation of the
landlord's expenses as specified in the lease. The total rental income collected
under these leases was $247,221 for 1995, $82,983 for 1994, and $5,988 for 1993.
NOTE 8. DEPOSITS
Major classifications of deposits as of December 31, are as follows:
1995 1994 1993
- ------------------------------------------------------------------------------------------
Demand $ 2,082,290 $ 2,660,732 $ 939,575
NOW accounts 2,361,376 1,269,599 2,016,756
Savings and money market 14,507,526 14,355,101 19,442,045
Other time 45,054,123 36,435,299 31,968,111
- ------------------------------------------------------------------------------------------
$64,005,315 $54,720,731 $54,366,487
==========================================================================================
Time deposits, $100,000 and over, mature as follows:
Three months or less $ 2,337,948 $ 1,050,810 $ 1,152,702
Over three months through six months 2,284,910 1,354,161 1,542,692
Over six months through one year 2,581,403 3,356,268 2,425,061
Over one year through five years 736,034 617,802 694,747
- ------------------------------------------------------------------------------------------
$ 7,940,295 $ 6,379,041 $ 5,815,202
==========================================================================================
Related interest expense $ 376,335 $ 213,723 $ 187,785
==========================================================================================
Interest paid on all deposit accounts was $3,104,428, $2,175,937, and
$2,095,745 for the years ended December 31, 1995, 1994, and 1993, respectively.
NOTE 9. RELATED PARTY TRANSACTIONS
The Bank's current policy precludes the granting of loans to Directors or
Officers of the Bank. This policy is periodically reviewed by the Bank's Board
of Directors. Some of the Directors and Officers of the Company and the Bank are
customers of, and/or had transactions with, the Bank in the ordinary course of
business. Such transactions were routine. There have been no material
transactions between the Company or the Bank and any Director or Officer
thereof, nor have any material transactions been proposed.
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
December 31, 1994
NOTE 10. BORROWINGS
The Bank may borrow up to $9,985,000 under a line of credit with The Federal
Home Loan Bank (FHLB). At December 31, 1995, 1994, and 1993, the Bank had the
following advances outstanding:
Original Interest Balance
Date of advance amount rate Due date 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
August 30, 1993 $1,000,000 4.55% August 30, 1996 $1,000,000 $1,000,000 $1,000,000
February 7, 1994 2,000,000 5.21% February 7, 1997 2,000,000 2,000,000 --
December 23, 1994 2,000,000 6.52% March 23, 1995 -- 2,000,000 --
June 28, 1995 2,000,000 6.05% June 28, 1996 2,000,000 -- --
- -------------------------------------------------------------------------------------------------------------------------------
$5,000,000 $5,000,000 $1,000,000
===============================================================================================================================
The line of credit is secured by a floating lien on all of the Bank's
amortizing 1-4 family residential first mortgage loans and certain commercial
mortgage loans.
The Bank was required to purchase shares of the capital stock in the FHLB as a
condition to obtaining the line of credit.
In addition to the line of credit available from the FHLB, the Bank has two
lines of credit with its correspondent bank which includes a $5,000,000 reverse
repurchase line of credit and an additional $1,000,000 unsecured line of credit.
At December 31, 1995, the Bank had outstanding unsecured borrowings of
$1,000,000 and secured borrowings of $1,025,000. The secured borrowings are
collateralized by investment securities whose amortized cost and market value at
December 31, 1995, were $1,152,337 and $1,131,797, respectively.
NOTE 11. INCOME TAXES
The components of income tax expense are as follows:
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Current
Federal $561,658 $381,728 $339,323
State 125,069 84,506 72,202
- ------------------------------------------------------------------------------------------------------------------------------------
686,727 466,234 411,525
Deferred (12,746) 89,067 (38,997)
- ------------------------------------------------------------------------------------------------------------------------------------
$673,981 $555,301 $372,528
====================================================================================================================================
The components of the deferred tax expense (benefits) are as follows:
Provision for credit losses $(50,729) $(19,929) $(41,063)
Deferred loan origination fees 19,616 91,358 (29,739)
Depreciation 18,367 17,638 31,805
- ------------------------------------------------------------------------------------------------------------------------------------
$(12,746) $ 89,067 $(38,997)
====================================================================================================================================
The components of the net deferred tax asset as of December 31, are as
follows:
Assets
Allowance for credit losses $234,012 $183,283 $163,354
Deferred loan origination fees and costs 3,622 23,238 114,596
Unrealized loss on securities available
for sale 19,533 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
257,167 206,521 277,950
Liabilities
Depreciation 64,326 45,959 28,321
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $192,841 $160,562 $249,629
====================================================================================================================================
- --------------------------------------------------------------------------------
24 ANNAPOLIS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
December 31, 1995
NOTE 11. INCOME TAXES (continued)
The differences between income taxes computed at the statutory federal rate
and income tax expense shown in the consolidated statements of income are
reconciled as follows:
Income before income taxes $1,745,328 $1,437,857 $974,267
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes at statutory rate of 34% $ 593,412 $ 488,871 $331,251
State income taxes, net of federal benefit 80,634 66,429 45,011
Tax exempt income (1,146) (1,186) --
Nondeductible expenses and other 1,081 1,187 (3,734)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 673,981 $ 555,301 $372,528
====================================================================================================================================
Income taxes paid $ 702,345 $ 574,333 $555,996
====================================================================================================================================
NOTE 12. STOCKHOLDERS' EQUITY
Preferred stock
The Company is authorized to issue up to 1,000,000 shares of Preferred Stock
with a par value of $1.00 per share.
Warrants
The Company granted nontransferable stock warrants to two stockholders, one of
whom is the President of the Company and the Bank, to purchase up to an
additional 6,000 shares of common stock each. The purchase price of the stock is
$8.33 per share and must be exercised by March 31, 1998, the expiration date.
The warrants are currently exercisable.
In a stock offering concluded on November 5, 1993, the Company offered up to
250,000 units at a price of $10.50 per unit. A unit consisted of one share of
common stock, par value $1.00 per share, and one warrant to purchase one share
of common stock. The shares of common stock and the warrants are separately
transferrable. The warrants were exercisable immediately upon their issuance and
could be exercised at a price of $11.00 per share on or before June 30, 1995. In
1995, 98,113 warrants were exercised resulting in additional capital of
$1,079,243.
Stock options
The Company has a stock option plan which provides for the granting of both
nonqualified options and incentive stock options for eligible employees.
Generally, the exercise price of any stock options granted is 100 percent of the
fair market value of the Company's common stock as of the grant date. If an
option is granted to an employee who owns more than 10 percent of the combined
voting power of all classes of stock, the option price is 110 percent of the
fair market value.
During 1995, 5,000 shares and 1,000 shares were issued at $10 and $13.50,
respectively.
A summary of changes in the outstanding options under the plan as restated for
the effect of the 20% stock dividend is as follows:
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Beginning of year 19,800 17,400 15,000
Options granted -- 2,400 2,400
Options exercised 7,200 -- --
Options expired -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
End of year 12,600 19,800 17,400
===================================================================================================================================
Options for 9,000 shares are exercisable at $8.33 per share, and will expire
on July 5, 1999; options for 2,400 are exercisable at $8.75 per share, and will
expire October 19, 2003; and options for 1,200 are exercisable at $11.25 per
share, and will expire September 20, 2004.
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
December 31, 1995
NOTE 13. OTHER OPERATING EXPENSES
Other operating expenses include the following:
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
FDIC assessment $ 66,014 $121,731 $103,815
Directors' fees 78,500 79,650 63,500
Advertising and public relations 32,866 32,858 51,781
Stationery and supplies 34,520 33,162 44,063
Data processing 47,535 47,503 42,077
Telephone and postage 46,258 34,904 32,706
Liability insurance 29,330 33,811 32,418
Audit 25,105 26,515 25,956
Organizational dues and subscriptions 20,023 13,756 12,281
Legal 53,658 32,863 44,222
Other 97,605 61,577 54,486
- ---------------------------------------------------------------------------------------------------------------------------
$531,414 $518,330 $507,305
===========================================================================================================================
NOTE 14. RETIREMENT PLAN
The Bank has a contributory thrift plan qualifying under section 401(k) of the
Internal Revenue Code. Employees are eligible to participate in the plan after
one year of service. The Bank's matching contributions to the plan, included in
expenses, were $10,501 for 1995, $7,562 for 1994, and $5,291 for 1993.
NOTE 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations:
Three months ended
- ---------------------------------------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
- ---------------------------------------------------------------------------------------------------------------------------
1995
Interest income $1,943,676 $1,819,598 $1,603,502 $1,506,768
Interest expense 922,624 906,637 785,261 729,443
Net interest income 1,021,052 912,961 818,241 777,325
Provision for loan losses 52,324 30,164 47,551 50,214
Net income 319,947 308,372 233,953 209,075
Earnings per share .40 .39 .33 .30
Dividends per share .0575 .0458 .0438 .0417
1994
Interest income $1,388,933 $1,331,336 $1,322,835 $1,270,649
Interest expense 630,718 579,501 560,046 547,308
Net interest income 758,215 751,835 762,789 723,341
Provision for loan losses 16,575 7,414 -- 27,613
Net income 215,931 225,458 235,815 205,352
Earnings per share .31 .34 .36 .31
Dividends per share .0417 .0396 .0375 .0354
1993
Interest income $1,216,824 $1,178,404 $1,089,869 $1,029,274
Interest expense 546,940 515,771 508,621 526,324
Net interest income 669,884 662,633 581,248 502,950
Provision for loan losses 36,423 29,515 22,762 17,627
Net income 150,255 153,441 164,627 133,416
Earnings per share .22 .27 .31 .25
Dividends per share .0333 .0333 .0292 .0250
- --------------------------------------------------------------------------------
26 ANNAPOLIS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
December 31, 1995
NOTE 16. CAPITAL STANDARDS
The Federal Deposit Insurance Company has adopted risk-based capital standards
for banks. These standards require minimum ratios of capital to risk-based
assets of 4 percent for Tier 1 capital and 8 percent for total capital. Tier 1
capital consists of stockholders' equity less certain intangible assets, and
total capital includes a limited amount of the allowance for loan losses. In
calculating risk-weighted assets, specified risk percentages are applied to each
category of asset and off-balance sheet items.
The bank must also maintain a minimum capital leverage ratio of 3 to 5 percent
of Tier 1 capital to average total assets. The standard is based on a
discretionary evaluation of the Bank's risk profile by the FDIC.
A bank is considered well capitalized if it has minimum Tier 1 and total risk-
based capital ratios of 6 percent and 10 percent, respectively, and a minimum
leverage ratio of 5 percent.
Summarized below are the capital ratios, and related components, of the Bank
at December 31:
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 capital ratio 13.2% 12.1% 11.8%
Total capital ratio 14.2% 13.1% 12.7%
Leverage ratio using annual average assets 12.1% 10.6% 11.0%
Tier 1 capital $ 8,880,070 $ 6,809,723 $ 6,026,059
Total capital $ 9,566,706 $ 7,365,004 $ 6,529,738
Risk-weighted assets $67,138,531 $56,247,382 $51,249,304
NOTE 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 prescribed by the FASB 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.
December 31, 1995 Carrying amount Fair value
- ------------------------------------------------------------------------------
Financial assets
Cash and due from banks $ 107,240 $ 107,240
Federal funds sold 5,964,730 5,964,730
Interest-bearing deposits 27,082 27,082
Investment securities (total) 3,392,492 3,385,270
Other securities 982,200 982,200
Loans, net 67,226,982 67,279,195
Accrued interest receivable 647,355 647,355
Financial liabilities
Noninterest-bearing deposits $ 2,082,290 $ 2,082,290
Interest-bearing deposits 61,923,025 62,034,902
FHLB Advances and Other Borrowings 7,025,000 7,032,000
Due to banks 1,733,090 1,733,090
Accrued interest payable 62,967 62,967
Dividend payable 45,090 45,090
The fair value of interest-bearing deposits with other financial institutions
is estimated based on quoted interest rates for deposits with similar terms.
The fair values of U.S. Treasury and Government agency securities are
determined using market quotations. For state and municipal securities, the fair
values are estimated using a matrix that considers yield to maturity, credit
quality, and marketability.
The fair value of fixed-rate loans is estimated to be the present value of
scheduled payments discounted using interest rates currently in effect for loans
of the same class and term. The fair value of variable-rate loans, including
loans with a demand feature, is estimated to equal the carrying amount. The
valuation of loans is adjusted for possible loan 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.
The fair value of long-term debt is estimated based on interest rates
currently offered for long-term debt of similar terms.
It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
December 31, 1995
NOTE 18. PARENT COMPANY FINANCIAL INFORMATION
The balance sheets and statements of income and cash flows for Annapolis
Bancshares, Inc. (Parent Only) follow:
ASSETS
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Cash $ 1,185 $ 396 $ 1,573
Investment in Bank of Annapolis 8,849,025 6,809,723 6,027,667
Due from subsidiary 45,000 27,750 21,750
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $8,895,210 $6,837,869 $6,050,990
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dividend payable $ 45,090 $ 27,469 $ 21,971
Other 82 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
45,172 27,469 21,971
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock, par value $1.00 per share; authorized 5,000,000 shares; issued
and outstanding, 784,175, 549,372, and 549,272
shares 784,175 549,372 549,272
Additional paid-in capital 5,341,728 4,433,893 4,433,543
Retained earnings 2,755,180 1,827,135 1,046,204
Unrealized gains (losses) on securities (31,045) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,850,038 6,810,400 6,029,019
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $8,895,210 $6,837,869 $6,050,990
==================================================================================================================================
- --------------------------------------------------------------------------------
28 ANNAPOLIS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
Years Ended December 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
Dividends from subsidiary $ 71,000 $ 100,500 $ 27,000
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed net income of subsidiary 71,000 100,500 27,000
Income taxes -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
71,000 100,500 27,000
Equity in undistributed net
income of subsidiary 1,000,347 782,056 574,739
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,071,347 $ 882,556 $ 601,739
====================================================================================================================================
STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income $ 1,071,347 $ 882,556 $ 601,739
Equity in undistributed net income of subsidiary (1,000,347) (782,056) (574,739)
Increase in other assets (17,250) (6,000) (21,750)
Increase in other liabilities 82 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 53,832 94,500 5,250
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital contributed to subsidiary (1,070,000) -- (941,136)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from stock issued, net 1,142,743 450 961,137
Dividends paid (125,786) (96,127) (60,061)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (applied to) financing
activities 1,016,957 (95,677) 901,076
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 789 (1,177) (34,810)
Cash at beginning of year 396 1,573 36,383
- ------------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 1,185 $ 396 $ 1,573
====================================================================================================================================
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 29
[ROWLES & COMPANY CERTIFIED PUBLIC
ACCOUNTANTS LOGO APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTARY INFORMATION
Our audits of the consolidated financial statements presented in the
preceding section of this report were made primarily to form an opinion on such
financial statements taken as a whole. Supplementary information, contained in
the following pages, is not considered essential for the fair presentation of
the financial position of Annapolis Bancshares, Inc. and Subsidiary and the
results of its operations, changes in stockholders' equity, and cash flows in
conformity with generally accepted accounting principles. However, the following
data were subjected to the audit procedures applied in the audits of the
consolidated financial statements and, in our opinion, are fairly stated in all
material respects in relation to the consolidated financial statements taken as
a whole.
/s/ Rowles & Company LLP
Baltimore, Maryland
February 7, 1996
- --------------------------------------------------------------------------------
30 ANNAPOLIS BANCSHARES, INC.
Bank of Annapolis
BALANCE SHEETS
- -------------------------------------------------------------------------------
At December 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 107,240 $ 169,012 $ 62,739
Interest bearing deposits in other banks 27,082 48,913 4,659
Federal funds sold 5,964,730 2,590,203 3,644,870
Investment securities available for sale 1,804,812 -- --
Investment securities held to maturity
(market value $1,580,858, $4,260,442,
and $4,934,212) 1,587,680 4,667,800 4,956,785
Other securities 982,200 950,100 313,000
Loans available for sale 750,000 -- --
Loans, less allowance for credit losses of
$686,636, $555,281, and $503,679 67,226,982 54,972,862 49,864,189
Premises and equipment 1,943,994 2,003,530 1,720,291
Accrued interest receivable 647,355 468,785 401,860
Deferred income taxes 192,841 160,562 249,629
Other assets 649,627 667,187 591,423
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $81,884,543 $66,698,954 $61,809,445
====================================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
DEPOSITS
Demand $ 2,083,475 $ 2,661,128 $ 941,148
NOW accounts 2,361,376 1,269,599 2,016,756
Savings and money market 14,507,526 14,355,101 19,442,045
Other time 45,054,123 36,435,299 31,968,111
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 64,006,500 54,721,127 54,368,060
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings 7,025,000 5,000,000 1,000,000
Due to banks 1,733,090 -- 247,524
Accrued interest payable 62,967 47,197 30,665
Income taxes payable -- -- 53,737
Dividend payable 45,000 27,750 21,750
Other liabilities 162,961 93,157 60,042
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 73,035,518 59,889,231 55,781,778
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Common stock, par value $10.00 per share;
authorized 1,000,000 shares; issued and
outstanding 150,000 shares 1,500,000 1,500,000 1,500,000
Additional paid-in capital 4,529,432 3,459,432 3,459,257
Retained earnings 2,850,638 1,850,291 1,068,410
- ------------------------------------------------------------------------------------------------------------------------------------
8,880,070 6,809,723 6,027,667
Unrealized gain (loss) on investment securities
available for sale (31,045) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 8,849,025 6,809,723 6,027,667
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $81,884,543 $66,698,954 $61,809,445
====================================================================================================================================
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 31
Bank of Annapolis
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Years Ended December 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $6,350,404 $4,921,920 $4,219,907
Deposits in banks 3,715 947 80
Federal funds sold 217,915 118,158 179,812
Investment securities 301,510 272,728 114,572
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 6,873,544 5,313,753 4,514,371
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 3,101,452 2,168,120 2,082,295
Interest on borrowed funds 242,513 149,453 15,361
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,343,965 2,317,573 2,097,656
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,529,579 2,996,180 2,416,715
PROVISION FOR CREDIT LOSSES 180,253 51,602 106,327
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for credit losses 3,349,326 2,944,578 2,310,388
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Rental income 247,221 82,983 5,988
Gain on sale of loans, net 11,988 10,808 28,581
Other 58,350 49,269 33,646
Loss on sale of investments (38,543) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 279,016 143,060 68,215
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Compensation and related expenses 1,096,297 898,994 672,510
Occupancy 179,663 159,914 168,052
Furniture and equipment 75,640 72,543 56,469
Other operating 531,414 518,330 507,305
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,883,014 1,649,781 1,404,336
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,745,328 1,437,857 974,267
INCOME TAXES 673,981 555,301 372,528
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $1,071,347 $ 882,556 $ 601,739
====================================================================================================================================
- --------------------------------------------------------------------------------
32 ANNAPOLIS BANCSHARES, INC.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS:
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS OF ANNAPOLIS BANCSHARES, INC. AND BANK OF ANNAPOLIS
Louis H. Berman
Endodontist
Michael J. Bermel
Optometrist
Gerald Kadonoff
President of Reprographic Products Group
Stanley H. Katsef
Chairman of the Board of Directors of
Annapolis Bancshares, Inc. and Bank of
Annapolis
John W. Marhefka, Jr.
President & Chief Executive Officer of
Annapolis Bancshares, Inc. and of
Bank of Annapolis
Michael B. Monias
Physician (Retired)
Richard E. Polm
Real Estate Developer and Home Builder
J. Michael Swift
Restaurateur
Michael Weinberg
Podiatrist
EXECUTIVE OFFICERS OF ANNAPOLIS BANCSHARES, INC.
Russell J. Grimes, Jr.
Vice President, Chief Financial Officer &
Treasurer
John W. Marhefka, Jr.
President & Chief Executive Officer
Michael Weinberg
Secretary
EXECUTIVE OFFICERS OF BANK OF ANNAPOLIS
Harriet B. Argentiere
Vice President, Operations and
Administration
David R. Chisholm
Vice President and Senior Loan Officer
Elva J. Chisholm
Vice President, Retail Banking
Russell J. Grimes, Jr.
Vice President, Chief Financial Officer &
Treasurer
John W. Marhefka, Jr.
President & Chief Executive Officer
William A. Murphy
Vice President, Business Development
Michael Weinberg
Secretary
- --------------------------------------------------------------------------------
ANNAPOLIS BANCSHARES, INC. 33
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Address of Principal Office:
Annapolis Bancshares, Inc.
2024 West Street
Annapolis, MD 21401
Stock Transfer Agent:
The registrar and transfer agent for Annapolis Bancshares, Inc. common
stock is:
Annapolis Bancshares, Inc.
2024 West Street
Annapolis, MD 21401
Independent Audit Firm:
Rowles & Company
101 East Chesapeake Avenue
Baltimore, MD 21286
Securities Counsel:
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Annual Meeting:
The Annual Meeting of the stockholders of Annapolis Bancshares, Inc. will
be held at the Bank of Annapolis Building, 2024 West Street, Annapolis, MD 21401
at 5:00 PM on Wednesday, April 24, 1996.
Form 10-K:
A copy of Form 10-K, as filed with the Securities and Exchange Commission,
Washington, D.C., may be obtained without charge by written request to Russell
J. Grimes, Jr., Vice President, Chief Financial Officer & Treasurer, Annapolis
Bancshares, Inc., 2024 West Street, Annapolis, MD 21401.
The Company's common stock trades on the NASDAQ Small Cap Market under the
symbol "ANNB."
- --------------------------------------------------------------------------------
34 ANNAPOLIS BANCSHARES, INC.
Appendix D
Quarterly Report on Form 10-QSB of Annapolis Bancshares, Inc.,
for the quarter ended March 31, 1996
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH
31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _________________ TO __________________
Commission File No. 0-25710
ANNAPOLIS BANCSHARES, INC.
------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 52-1606384
----------- -------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2024 West Street, Annapolis, Maryland 21401
-------------------------------------------
(address of principal executive offices and zip code)
(410) 266-3000
------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 the past 90 days. YES [X] NO [ ]
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
The registrant has 785,375 shares of common stock outstanding as of March 31,
1996.
D-1
PART I - FINANCIAL INFORMATION - Item 1. Financial Statements
Annapolis Bancshares, Inc.
Consolidated Balance Sheets
As of As of
March 31,1996 December 31, 1995
------------- -----------------
ASSETS (Unaudited) (Audited)
Cash and federal fund sold $ 4,455,551 $ 6,099,052
Investment securities available for sale - 1,804,812
Investment securities held to maturity 975,365 1,587,680
Other securities 982,200 982,200
Loans available for sale 474,400 750,000
Loans, less allowance for loan
losses of $719,993 and $686,636 70,804,936 67,226,982
Premises and equipment (net) 1,927,612 1,943,994
Accrued interest receivable 656,958 647,355
Deferred income taxes 173,308 192,841
Other assets 585,483 649,627
------- -------
TOTAL ASSETS $ 81,035,813 $ 81,884,543
============== ===============
LIABILITIES
Deposits
Demand $ 2,226,444 $ 2,082,290
Now accounts 1,778,160 2,361,376
Savings and Money Market 12,427,088 14,507,526
Time, $100,000 and over 8,601,390 7,940,295
Other time 40,823,626 37,113,828
---------- ----------
Total Deposits 65,856,709 64,005,315
Borrowings 5,000,000 7,025,000
Due to banks 541,829 1,733,090
Accrued interest payable 62,057 62,967
Income taxes payable 195,902 -
Other liabilities 124,212 163,043
Dividends payable 49,086 45,090
------ ------
TOTAL LIABILITIES 71,829,795 73,034,505
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share 785,375 784,175
Authorized 5,000,000 shares; issued
and outstanding 785,375 and 784,175
Additional paid-in capital 5,354,028 5,341,728
Retained earnings 3,066,615 2,755,180
--------- ---------
9,206,018 8,881,083
Unrealized gain(loss) on investment
securities available for sale - (31,045)
------- -------
TOTAL STOCKHOLDERS' EQUITY 9,206,018 8,850,038
--------- ---------
TOTAL LIABILITIES
& STOCKHOLDERS' EQUITY $ 81,035,813 $ 81,884,543
============= ===============
D-2
Annapolis Bancshares, Inc.
Consolidated Statements of Income
(unaudited)
Three Three
Months Ended Months Ended
March. 31, 1996 March. 31, 1995
--------------- ---------------
INTEREST INCOME
Loans, including fees $ 1,856,321 $ 1,369,514
Deposits in banks and federal
fund sold 51,605 59,605
Investments securities 37,892 77,649
------ ------
Total interest income 1,945,818 1,506,768
--------- ---------
INTEREST EXPENSE
Interest on deposits 837,770 663,996
Interest on borrowed funds 67,713 65,447
------ ------
Total interest expense 905,483 729,443
------- -------
Net interest income 1,040,335 777,325
Provision for loan losses 33,357 50,214
------ ------
Net interest income after
provision for loan losses 1,006,978 727,111
--------- -------
NON INTEREST INCOME
Rental income 63,021 61,422
Gain(loss) on sale of loans, net 43,831 (12,302)
Gain(loss) on sale of investments (50,579) -
Other 11,994 11,167
------ ------
Total noninterest income 68,267 60,287
------ ------
NON INTEREST EXPENSE
Compensation and related expenses 323,010 228,242
Occupancy expense 50,730 54,281
Directors fees 18,750 18,750
Stationary, printing and postage 15,601 16,058
Data processing expense 15,537 14,380
Equipment repairs and depreciation 21,579 20,695
Advertising 5,801 12,878
Accounting and legal 9,115 23,534
Insurance expense 6,974 39,513
Dues and subscriptions 2,651 3,403
Education, seminars and travel 7,798 5,564
Other expense 10,272 9,525
------ -----
Total noninterest expense 487,818 446,823
------- -------
Income before income taxes 587,427 340,575
Income taxes 226,907 131,500
------- -------
Net income $ 360,520 $ 209,075
================ ================
EARNINGS PER COMMON SHARE $0.46 $0.30
D-3
Annapolis Bancshares, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Three
Months Ended Months Ended
March 31, 1996 March 31, 1995
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $360,520 $209,075
Adjustments to reconcile income to
cash provided by operating activities:
Provision for loan losses 33,357 50,214
Loss on sale of investments 50,579 -
Gain on Sale of Loans (43,831) -
Loans originated for sale (2,350,000) -
Sales of loans originated for sale 2,669,830 -
Depreciation and Amortization 22,793 26,175
Amortization of premiums and acretion
of discounts, net (289) -
(Increase) Decrease in
Accrued interest receivable (9,603) (13,883)
deferred income tax - -
Other assets 64,144 35,022
Increase (Decrease) in
Deferred loan fees & discounts 82,319 12,820
Accrued interest payable (910) (259)
Income taxes payable 195,902 59,337
Other liabilities (38,831) (16,236)
------- -------
Net cash provided by operations (1,035,580) 362,265
---------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Investment Securities 0 (700,000)
Sale of investment securities available
for sale 1,804,812 -
Maturity, Repayment of Investment
Securities 612,604 859,226
Loans originated (11,922,160) (5,932,034)
Principal repayments on loans 8,228,530 4,249,144
Loans purchased 0 (1,639,295)
Loans sold 0 1,619,507
Purchase of premises and equipment (6,410) (1,698)
------ ------
Net cash used in investing
activities (1,282,624) (1,545,150)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 1,851,394 2,785,294
Net Proceeds from Issuance of
Common Stock 13,500 113,490
Proceeds from Long-Term Borrowing (2,025,000) (2,000,000)
Net increase (decrease) in due to banks (1,191,261) 0
Cash dividend paid on common stock (45,090) (27,469)
------- -------
Net cash provided by financing
activities (1,396,457) 871,315
---------- -------
NET INCREASE (DECREASE) IN CASH
& CASH EQUIVALENTS (1,643,501) (311,570)
CASH & EQUIVALENTS AT BEGINNING
OF PERIOD 6,099,052 2,808,128
--------- ---------
CASH & EQUIVALENTS AT END OF PERIOD $4,455,551 $2,496,558
========== ==========
D-4
Annapolis Bancshares, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Common Stock Unrealized Total
------------------------ Capital Retained Gains(Losses) Stockholders'
Three Months Ended March 31, 1995 Shares Par value Surplus Earnings on Securities Equity
------ --------- ------- -------- ------------- ------
Balance December 31, 1994 549,372 $549,372 $4,433,893 $1,827,135 - $6,810,400
Cash Dividend $.0417 per share - - - (27,973) - (27,973)
Sale of stock 10,090 10,090 103,400 - - 113,490
Net Income - - - 209,075 - 209,075
Balance March 31, 1995 559,462 $559,462 $4,537,293 $2,008,237 - 7,104,992
======= ======== ========== ========== === =========
Common Stock Unrealized Total
------------------------ Capital Retained Gains(Losses) Stockholders'
Three Months Ended March 31, 1996 Shares Par value Surplus Earnings on Securities Equity
------ --------- ------- -------- ------------- ------
Balance December 31, 1995 784,175 $784,175 $5,341,728 .$2,755,180 (31,045) $8,850,038
Cash Dividend $.0625 per share - - - (49,085) - (49,085)
Exercise of Options 1,200 1,200 12,300 - - 13,500
Net Income - - - 360,520 - 360,520
Change in unrealized gains
(losses) on securities - - - - 31,045 31,045
Balance March 31, 1996 785,375 $785,375 $5,354,028 $3,066,615 $0 $9,206,018
======= ======== ========== ========== == ==========
D-5
Annapolis Bancshares, Inc.
Average Balances and Yields
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
---------------------------------- -------------------------------------------
ASSETS Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest earning assets
Interest bearing deposits
in other banks $25,499 $327 5.13% $57,797 $848 5.87%
Federal funds sold 3,833,551 51,605 5.38% 4,129,900 59,605 5.77%
Investments 2,866,829 37,565 5.24% 5,516,728 76,801 5.57%
Loans receivable 69,423,455 1,856,321 10.70% 55,698,481 1,369,514 9.84%
---------- --------- ---------- ---------
Total Interest Earning Assets 76,149,334 1,945,818 10.22% 65,402,906 1,506,768 9.22%
Non earning Assets
Cash and due from banks 80,141 251,023
Premises and equipment 1,937,990 1,996,047
Other assets 1,638,723 1,337,232
Allowance for loan loss (690,610) (533,683)
Total Assets $79,115,578 $1,945,818 3.28% $68,453,525 $1,506,768 8.80%
========== ========= ========== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities
Interest bearing deposits
NOW accounts $1,943,206 $14,046 2.89% $1,627,333 $9,819 2.41%
Savings and money market 13,494,553 126,974 3.76% 14,001,809 149,840 4.28%
Time deposits 45,985,555 696,749 6.06% 37,851,041 504,337 5.33%
---------- ------- ---------- -------
Total interest bearing
deposits 61,423,315 837,770 5.46% 53,480,183 663,996 4.97%
Borrowings 5,181,499 67,713 5.23% 4,846,154 65,447 5.40%
--------- ------ --------- ------
Total interest bearing
liabilities 66,604,814 905,483 5.44% 58,326,337 729,443 5.00%
Non interest bearing liabilities
Demand deposits 2,367,897 2,812,200
Other liabilities 1,099,937 365,803
Total Liabilities 70,072,647 905,483 5.17% 61,504,340 729,443 4.74%
Stockholders' equity 9,042,931 6,949,185
Total liabilities and
stockholders' equity $79,115,578 $905,483 4.58% $68,453,525 $729,443 4.26%
=========== ======== =========== ========
Net interest spread 4.78% 4.21%
Net yield on earning assets 76,149,334 1,040,335 5.46% 65,402,906 777,325 4.75%
---------- --------- ---------- -------
D-6
PART I - FINANCIAL INFORMATION - Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations
General
The following is management's discussion and analysis of the historical
financial condition and results of operations of Annapolis Bancshares, Inc.
("the Company") on a consolidated basis with its wholly owned subsidiary, Bank
of Annapolis, (the Bank") for the periods presented. The purpose of this
discussion is to focus on those trends and information about the Company which
are not otherwise apparent in the accompanying consolidated Financial Statements
presented in Part I, Item 1., above. Those statements should be read in
conjunction with this discussion and analysis. All adjustments for a fair
presentation are reflected in the Consolidated Financial Statements. All
adjustments are of normal recurring nature.
Recent Developments
On April 16, 1996, Annapolis Bancshares, Inc.(the "Company") entered into a
definitive merger agreement (the "Merger Agreement") with Sandy Spring Bancorp,
Inc. ("Sandy Spring"). Pursuant to the Merger Agreement each share of the
Company's common stock will be exchanged for .62585 shares of Sandy Spring
common stock, subject to certain adjustments based upon the market value of
Sandy Spring stock at the time of the closing. The consummation of the
transaction is subject to approval by the shareholders of the Company,
regulatory approvals, and various other conditions.
Summary
The consolidated earnings of the Company are derived primarily from the
operations of its wholly-owned subsidiary, the Bank. The Company reported net
income for the three months ended March 31, 1996 of $360,520 a 72.4% increase
over the $209,075 net income for the three months ended March 31, 1995. Earnings
per share were $0.46 for the three month period ended March 31, 1996 and $0.30
for the three month period ended March 31, 1995. The increase in net income and
earnings per share is primarily due to a 33.8% increase in net interest income
to $1,040,335 as of March 31, 1996 compared to $777,325 as of March 31, 1995.
The provision for loan loss for the three month period ended March 31, 1996
decreased $16,857. The decrease was mainly due to an addition provision of
$33,827 relating to the disposition of commercial non real estate loans in the
period ended March 31, 1995.
D-7
The Company's return on average assets for the periods ended March 31, 1996 and
March 31, 1995 was 1.82% and 1.23%, respectively. The Company's return on equity
for the periods ended March 31, 1996 and March 31, 1995 was 15.95% and 12.03%
respectively. The increase in the return on average assets is primarily due to
the growth of the Companys average interest bearing assets and liabilities
during the period. The increase in the return on equity is due to the increase
in the net interest spread and the additional new capital from the exercise of
common stock warrants.
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 factors, such as changing economic conditions, regulatory changes and
competition, and also internal factors such as management's evaluation as to the
best use of funds under these changing conditions.
The Company's primary source of funds is through the Bank's deposit accounts.
The Bank offers a full line of business and personal savings and checking
accounts, money market demand accounts, individual retirement accounts and
certificates of deposit. As shown on the Consolidated Balance Sheets, total
deposits increased $1.9 million or 2.9% to $65.9 million as of March 31,1996
from $64.0 million as of December 31, 1995. An additional source of funds is
through the Bank's borrowings. At March 31, 1995, the Bank has a total of $5.0
million of borrowings from the Federal Home Loan Bank of Atlanta.
The Company's primary uses of funds are for loans and investments. The Bank
offers a variety of credit products, including but not limited to commercial and
residential real estate loans, commercial term loans and lines of credit,
consumer loans (including home equity lines of credit), and letters of credit.
Net loans receivable increased $3.6 million or 5.3% for the three months ended
March 31, 1996, to $70.8 million from $67.2 million as of December 31, 1995.
Real estate loans, both commercial and residential, comprise the largest portion
of the Bank's loan portfolio, totalling $65.0 million or 90.3% of the Bank's
total loans at March 31, 1996. As of March 31, 1996, the Bank has $6.6 million
or 9.2% of its total loan portfolio, in commercial non mortgage loans and $1.0
million or .50% of its total loan portfolio, in consumer loans.
D-8
The Bank established a Mortgage Loans available for sale portfolio. Loans
designated available for sale are primarily residential single family mortgage
loans with fixed rate characteristics. In addition, the Bank has established
relationships with other lenders in the secondary market to purchase the loans
originated for this portfolio. The Bank expects this activity to significantly
increase the non interest income. At March 31, 1996 the bank held $474,400 of
loans in the available for sale portfolio.
The Bank holds $2.0 million of fixed and variable rate investment securities.
The portfolio is comprised of a U.S. Treasury Note, Mortgage-Backed Security, a
tax exempt bond and stock with the Federal Reserve Bank and Federal Home Loan
Bank ("FHLB").
The bank sold $1.8 million of variable rate U.S. Government Agency securities
designated as investments available for sale. As a result of these sales, the
bank incurred a loss of $50,579 in the quarter ended March 31, 1996. The Bank
did not purchase investment securities for the held to maturity or available for
sale portfolio's in the quarter ended March 31, 1996. At March 31, 1996 the
market value of the investment portfolio totalled $2.0 million. All of the
Bank's investments are classified as held until maturity. The Bank's Cash and
Federal Funds Sold decreased to $4.5 million at March 31, 1996 from $6.1 million
at December 31, 1995. The primary objective of the investment portfolio is to
provide liquidity, while enhancing the net interest margin.
The Bank has two investments in real property at March 31, 1996. In 1993 the
Bank purchased a four story 36,000 sq. ft. office facility located at 2024 West
St., Annapolis, MD, and an adjacent property on 1 Hudson Street. The Company and
the Bank relocated into the new facility, which is now the Company's principal
office. This facility functions as the main office operations and administration
headquarters of the Bank, which includes a full service retail bank. The Bank
occupies portions of the first and second levels, as well as a portion of the
lower level.
The Bank has contracted to lease 14,280 sq. ft., which is the entire third and
fourth floors, as well as 2,200 sq ft. of the lower level, to one tenant. The
contract is a five year lease with an additional five year option. At March 31,
1996 the building and the property on 1 Hudson Street is fully leased to others.
The properties are included in Premises and Equipment on the March 31, 1996
Consolidated Balance Sheets for a total of $1.9 million net of accumulated
depreciation.
The second investment is real estate located in Annapolis, MD, which the Bank
purchased in 1989 for future expansion of the Bank's facilities. The site's cost
of $464,976 is included in Other Assets on the March 31, 1996 Consolidated
Balance Sheets.
D-9
The Bank is currently marketing the property for sale, having abandoned its
intended development of the property upon contracting to purchase the West
Street facility described above. At March 31, 1996, the property is under a
contract of sale which permits the contract purchaser to conduct a feasibility
study of the land and proceed with the option to purchase the property.
Liquidity and Interest Rate Sensitivity Management The primary functions of
asset / liability management are to assure adequate liquidity and carefully
manage interest rate risk. Liquidity management involves the ability to meet the
cash flow requirements of customers who may be either depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs. Interest rate sensitivity refers to the
change in earnings which results from changes in the level of interest rates. To
the extent that interest income and interest expense do not respond equally to
changes in interest rate levels, or that all rates do not change uniformly,
earnings will be affected.
Sources of liquidity for the Bank include cash, federal funds sold, loan and
investment repayments. Cash and federal funds sold totalled $4.5 million or 5.5%
of total assets as of March 31, 1996. Loan repayments totalled $8.2 million for
the three months ended March 31, 1996. Liquidity is also measured by the ability
to obtain deposits and borrowed monies at market rates.
Total deposits increased to $65.9 million at March 31, 1996 from $64.0 million
at December 31, 1995. Access to savings deposits may be restricted by excessive
interest rates paid by competitors, adverse publicity about the banking
industry, and similar matters. The Bank is a member of the Federal Home Loan
Bank System. As of March 31, 1996, the Bank had a Credit Availability of $8.0
million secured by a blanket floating lien on all of the Bank's amortizing loans
which are first liens on 1-4 family residential properties, and a credit
availability of $1,985,000, secured by certain commercial real estate loans. The
ability to draw on these funds is subject to the availability of sufficient
eligible collateral. As of March 31, 1996 the Bank has approximately $15.6
million of 1-4 family residential loans secured by first liens. The Bank
currently has outstanding $5.0 million of advances from the Federal Home Loan
Bank of Atlanta. Further advances may require additional purchases of FHLB
stock.
D-10
In addition, the Bank has available a $1,000,000 unsecured line of credit and a
$5.0 million Reverse Repurchase Line of Credit with correspondent bank secured
by a portion of the Bank's investment portfolio. The establishment of these
credit facilities allows the Bank greater flexibility in its financing
activities. In addition, the Bank has the ability to increase it's liquidity by
borrowing money through the Federal Reserve discount window, by selling loans,
and/or by curtailing its loan origination volume.
The Bank's objective of asset/liability management is to enhance long term
profitability and reduce exposure to interest rate risks through its management
of interest rate sensitive assets and liabilities. An asset or liability is
interest rate sensitive within a specific time period if it will mature or
reprice within that time period. Since most of the Bank's deposit liabilities
are interest rate sensitive during any upcoming annual period, the Bank seeks to
have the majority of its portfolio loan products at adjustable rates, thereby
decreasing the possible adverse effect of interest rate swings. Adjustable rate
loans generally have interest rates that adjust periodically in accordance with
market interest rates, and are intended to provide a positive margin over the
cost of interest bearing liabilities.
Capital Resources and Capital Adequacy At March 31, 1996 the Company's total
stockholders equity was $9.2 million representing 11.36% of total assets. At
March 31, 1996 the Company has 785,375 shares of Common Stock outstanding. The
Company also has outstanding additional warrants to purchase up to 12,000 shares
of Common Stock.
The Company has an Incentive Stock Option Plan (the"Option Plan"). The Option
Plan authorizes the grant of nonqualified and incentive stock options for 30,000
shares of Common Stock, to such officers and certain other employees of the
Company and/or the Bank as the Company's board of directors may determine. In
the quarter ended March 31, 1996, 1,200 employee stock options were exercised at
$8.75 per share, resulting in additional capital of $13,500. At March 31, 1996
19,800 options have been granted and 8,400 options have been exercised.
The Company declared its fourteenth consecutive quarterly cash dividend to
stockholders of record on March 29, 1996 paid on April 12, 1996 in the amount of
$0.0625 per share for a total of $49,085.
The risk based capital ratios at March 31, 1996 were 13.40% for Tier I and
14.45% for Tier I & II, which exceed the regulatory minimums of 4% and 8%,
respectively. The leverage ratio at March 31, 1996 was 11.64% compared to the 3%
regulatory minimum.
D-11
Results of Operations
Interest Income. Interest income totalled $1.9 million for the three month
period ended March 31, 1996 an increase of $439,050 or 29.1% from interest
income of $1.5 million for the three month period ended March 31, 1995. The
increase is attributable to the increase in average interest earning assets of
$10.1 million or 16.4% to $76.1 million at March 31, 1996 from $65.4 million at
March 31, 1995 and an increase in the yield on interest earning assets to 10.22%
at March 31, 1996 from 9.22% in 1995. Average loans receivable increased $13.7
million or 24.6% to $69.4 million at March 31, 1996 from $55.7 million at March
31, 1995. The yield on average loans receivable increased to 10.70% for the
period ended March 31, 1996 compared to 9.84% for the period ended March 31,
1995.
Investments decreased $2.6 million or 48.0% to $2.9 million at March 31, 1996
from $5.5 million at March 31,1995. The decrease was primarily due to the sale
of $2.5 million of investment securities available for sale, amortization and
maturity of investment securities held to maturity.
Interest Expense. Interest expense totalled $905,483 for the three month period
ended March 31, 1996 an increase of $176,040 or 24.1% from interest expense of
$729,443 for the period ended March 31, 1995. The increase was attributable to
an increase in average interest bearing liabilities of $8.3 million or 14.2% to
$66.6 million from $ 58.3 million at March 31, 1995, and an increase in the cost
on interest bearing liabilities to 5.44% at March 31, 1996 from 5.00% in 1995.
The increase in interest expense on deposits is primarily attributable to the
increase in time deposit accounts. The increase in total interest expense is
also due to additional interest expense on borrowings. Average borrowings
increased $335,345 or 6.92% to $5.2 million at March 31, 1996 from $4.8 million
for the period ended March 31, 1995.
Net Interest Income Net interest income is the difference between interest
income and interest expense. Net interest income totalled $1.0 million for the
three months ended March 31, 1996 an increase of $263,010 or 33.8% from net
interest income of $777,325 for the period ended March 31, 1995. The increase in
net interest income is primarily due to an increase in the volume of interest
earning assets and liabilities during the period and an increase in the net
interest spread to 4.78% at March 31, 1996 from 4.21% at March 31, 1995.
D-12
Provision for Loan Losses In recognition of the inherent risks which the Bank
assumes in connection with the business of extending credit, the Bank maintains
an allowance for loan losses. The loan loss allowance is maintained through a
periodic provision for loan losses, based on Management's evaluation of the
collectibility of loans, prior loan loss experience, and other factors such 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 a borrower's ability to repay. Management's policy is to maintain the
allowance at a level considered adequate based on the above factors.
Consequently, the loan loss provision is general, rather than specific, in that
it does not relate to any specific anticipated losses on loans in the loan
portfolio. Although management believes that the current allowance is adequate
to absorb possible losses on existing loans that may become uncollectible,
actual loan losses are dependent on future events and, as such, future additions
to the provision may be necessary.
The allowance for loan losses is based upon estimates, and ultimate losses may
vary from the current estimates. Estimates are reviewed monthly and, as
adjustments become necessary, they will be reported in earnings in the period in
which they become known. The allowance for loan losses is increased by
provisions charged to operating expense and reduced by net charge-offs. The
allowance for loan losses was $719,993 or 1.0% of net loans receivable at March
31, 1996 compared to $686,636 or 1.0% of net loans receivable at December 31,
1995.
The provision for loan losses decreased $16,857 for the three month period ended
March 31, 1996 to $33,357 from $ 50,214 for the period ended March 31, 1995. The
decrease is primarily a result the disposition of certain commercial non real
estate loans in the period ended March 31, 1995. As of March 31,, 1996 the Bank
had no non-accruing loans.
Non Interest Income
Gain(Loss) on Sale of Loans increased $56,133 for the period ended March 31,
1996 from the period ended March 31, 1995. The increase was primarily due to the
sale of a mortgage loans originated for sale in the secondary market.
The loss on investment securities was $50,579 for the period ended March 31,
1996 due to the sale of certain U.S. Government Agency securities held in the
investments available for sale portfolio. Proceed from the sale of these
investments totalled $1,804,812.
D-13
Non Interest Expense Compensation and related expenses totalled $323,010 and
$228,242 for the three month periods ended March 31, 1996 and 1995,
respectively. The increase is attributable to expansion of the Bank's staff as
operations continued to expand throughout the periods presented. Compensation
and related expenses will continue to increase due to further expansion of
operations, competitive salary pressures, and rising health care and other
benefit costs. In accordance with Statement of Financial Accounting Standards
No. 91, certain direct salary costs of originating loans are netted against
salaries expenses in the period during which the loan is made, then amortized to
expense over the life of the loan.
Accounting & Legal expenses totalled $9,115 and $23,534 for the three month
period ended March 31, 1996 and 1995 respectively. The decrease of $14,419 was
due primarily to expenses incurred in becoming a member of The Nasdaq Stock
Market, Inc., and legal expense incurred with the disposition of certain
commercial non real estate loans in the quarter ended March 31, 1995.
Insurance Expense totalled $6,974 and $39,513 for the three month period ended
March 31, 1996 and 1995 respectively. In 1995 the BIF enacted a reduction in the
annual insurance assessment that commercial banks must pay on federally insured
bank deposits. The reduction in the premium schedule from 23 to 4 basis points
was later reduced to zero subject to a statutory required annual payment of
$2,000. The FDIC is authorized to raise deposit insurance premiums as necessary
to keep the BIF at required levels, so there is no assurance that existing rates
will not be changed. The Bank's insurance premium was reduced to zero.
Income Taxes The Company and the Bank file consolidated Federal Income Tax
returns and separate Maryland Income and Franchise Tax returns. The provision
for income taxes of the Company and the Bank, on a consolidated basis, was
$226,907 and $131,500 for the three months ended March 31, 1996 and 1995.
Impact of Inflation The Financial Statements have been prepared in accordance
with Generally Accepted Accounting Principles (GAAP), which require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Bank are monetary in nature. As a
result, interest rates have a greater impact on the Bank's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods.
D-14
Item No. 11 - Computation of Earnings per Share:
Three Months Ended
March 31,
---------
1996 1995
Average Shares Outstanding 784,241 703,232
Net Income 360,520 209,075
Earnings per Share $0.46 $0.30
Common Stock Warrants Outstanding 12,000
Stock Options Outstanding 11,400
D-15
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any legal proceedings of a material
nature at this time other than those occurring in the ordinary course of
business which in the aggregate involves amounts which are believed by
management to be immaterial to the financial condition of the company.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K filed
herewith:
Exhibit 11 - Computation of Earnings per Share
(b) Reports on Form 8-K.
None
D-16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Annapolis Bancshares, Inc.
-------------------------------------
(Registrant)
May 14, 1996 By:
---------------------------------------
John W. Marhefka, Jr.
President and
Chief Executive Officer
-----------------------------------------
Russell J. Grimes Jr.
Chief Financial Officer
and Treasurer
D-17
Appendix E
Title 3, Subtitle 2 of the Maryland General Corporation Law
ANNOTATED CODE OF MARYLAND
CORPORATIONS AND ASSOCIATIONS.
TITLE 3. CORPORATIONS IN GENERAL -- EXTRAORDINARY ACTIONS.
Subtitle 2. Rights of Objecting Stockholders.
ss.3-201 "Successor" defined.
(a) Corporation amending charter. -- In this subtitle, except as
provided in subsection (b) of this section, "successor" includes a corporation
which amends its charter in a way which alters the contract rights, as expressly
set forth in the charter, of any outstanding stock, unless the right to do so is
reserved by the charter of the corporation.
(b) Corporation whose stock is acquired. -- When used with reference
to a share exchange, "successor" means the corporation the stock of which was
acquired in the share exchange.
ss.3-202 Right to fair value of stock.
(a) General rule. -- Except as provided in subsection (c) of this
section, a stockholder of a Maryland corporation has the right to demand and
receive payment of the fair value of the stockholder's stock from the successor
if:
(1) The corporation consolidates or merges with another corporation;
(2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring
corporate action under s 3-105 of this title;
(4) The corporation amends its charter in a way which alters the
contract rights, as expressly set forth in the charter, of any outstanding stock
and substantially adversely affects the stockholder's rights, unless the right
to do so is reserved by the charter of the corporation; or
(5) The transaction is governed by s 3-602 of this title or exempted by
s 3- 603 (b) of this title.
(b) Basis of fair value. -- (1) Fair value is determined as of the
close of business:
(i) With respect to a merger under s 3-106 of this title of a 90
percent or more owned subsidiary into its parent, on the day notice is given or
waived under s 3-106; or
(ii) With respect to any other transaction, on the day the stockholders
voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair value
may not include any appreciation or depreciation which directly or indirectly
results from the transaction objected to or from its proposal.
(3) In any transaction governed by s 3-602 of this title or exempted by
s 3- 603 (b) of this title, fair value shall be value determined in accordance
with the requirements of s 3-603 (b) of this title.
(c) When right to fair value does not apply. -- Unless the transaction
is governed by s 3-602 of this title or is exempted by s 3-603 (b) of this
title, a stockholder may not demand the fair value of his stock and is bound by
the terms of the transaction if:
(1) The stock is listed on a national securities exchange or is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.:
(i) With respect to a merger under s 3-106 of this title of a 90
percent or more owned subsidiary into its parent, on the date notice is given or
waived under s 3-106; or
(ii) With respect to any other transaction, on the record date for
determining stockholders entitled to vote on the transaction objected to;
(2) The stock is that of the successor in a merger, unless:
(i) The merger alters the contract rights of the stock as expressly set
forth in the charter, and the charter does not reserve the right to do so; or
(ii) The stock is to be changed or converted in whole or in part in the
merger into something other than either stock in the successor or cash, scrip,
or other rights or interests arising out of provisions for the treatment of
fractional shares of stock in the successor; or
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(3) The stock is that of an open-end investment company registered with
the Securities and Exchange Commission under the Investment Company Act of 1940
and the value placed on the stock in the transaction is its net asset value.
ss.3-203 Procedure by stockholder.
(a) Specific duties. -- A stockholder of a corporation who desires to
receive payment of the fair value of his stock under this subtitle:
(1) Shall file with the corporation a written objection to the proposed
transaction:
(i) With respect to a merger under s 3-106 of this title of a 90
percent or more owned subsidiary into its parent, within 30 days after notice is
given or waived under s 3-106; or
(ii) With respect to any other transaction, at or before the
stockholders' meeting at which the transaction will be considered;
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for
record, shall make a written demand on the successor for payment for his stock,
stating the number and class of shares for which he demands payment.
(b) Failure to comply with section. -- A stockholder who fails to
comply with this section is bound by the terms of the consolidation, merger,
share exchange, transfer of assets, or charter amendment.
ss.3-204 Effect of demand on dividend and other rights.
A stockholder who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to
holders of record of that stock on a record date after the close of business on
the day as at which fair value is to be determined under s 3-202 of this
subtitle; and
(2) Ceases to have any rights of a stockholder with respect to that
stock, except the right to receive payment of its fair value.
ss.3-205 Withdrawal of demand.
A demand for payment may be withdrawn only with the consent of the
successor.
ss.3-206 Restoration of dividend and other rights.
(a) When rights restored. -- The rights of a stockholder who demands
payment are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required
by this subtitle;
(3) A court determines that the stockholder is not entitled to relief;
or
(4) The transaction objected to is abandoned or rescinded.
(b) Effect of restoration. -- The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he would
have received if he had not demanded payment for his stock. However, the
restoration does not prejudice any corporate proceedings taken before the
restoration.
ss.3-207 Notice and offer to stockholders.
(a) Duty of successor. -- (1) The successor promptly shall notify each
objecting stockholder in writing of the date the articles are accepted for
record by the Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each offer
shall be accompanied by the following information relating to the corporation
which issued the stock:
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(i) A balance sheet as of a date not more than six months before the
date of the offer;
(ii) A profit and loss statement for the 12 months ending on the date
of the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) Manner of sending notice. -- The successor shall deliver the notice
and offer to each objecting stockholder personally or mail them to him by
certified mail, return receipt requested, bearing a postmark from the United
States Postal Service, at the address he gives the successor in writing, or, if
none, at his address as it appears on the records of the corporation which
issued the stock.
ss.3-208 Petition for appraisal; consolidation of proceedings; joinder of
objectors.
(a) Petition for appraisal. -- Within 50 days after the Department
accepts the articles for record, the successor or an objecting stockholder who
has not received payment for his stock may petition a court of equity in the
county where the principal office of the successor is located or, if it does not
have a principal office in this State, where the resident agent of the successor
is located, for an appraisal to determine the fair value of the stock.
(b) Consolidation of suits; joinder of objectors. -- (1) If more than
one appraisal proceeding is instituted, the court shall direct the consolidation
of all the proceedings on terms and conditions it considers proper.
(2) Two or more objecting stockholders may join or be joined in an
appraisal proceeding.
ss.3-209 Notation on stock certificate.
(a) Submission of certificate. -- At any time after a petition for
appraisal is filed, the court may require the objecting stockholders parties to
the proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) Transfer of stock bearing notation. -- If any stock represented by
a certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name of
the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to the stock other than the rights
of the original objecting stockholder.
ss.3-210 Appraisal of fair value.
(a) Court to appoint appraisers. -- If the court finds that the
objecting stockholder is entitled to an appraisal of his stock, it shall appoint
three disinterested appraisers to determine the fair value of the stock on terms
and conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
(b) Report of appraisers -- Filing. -- Within 60 days after their
appointment, unless the court sets a longer time, the appraisers shall determine
the fair value of the stock as of the appropriate date and file a report stating
the conclusion of the majority as to the fair value of the stock.
(c) Same -- Contents. -- The report shall state the reasons for the
conclusion and shall include a transcript of all testimony and exhibits offered.
(d) Same -- Service; objection. -- (1) On the same day that the report
is filed, the appraisers shall mail a copy of it to each party to the
proceedings.
(2) Within 15 days after the report is filed, any party may object to
it and request a hearing.
ss.3-211 Action by court on appraisers' report.
E-4
(a) Order of court. -- The court shall consider the report and, on
motion of any party to the proceeding, enter an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b) Procedure after order. -- (1) If the appraisers' report is
confirmed or modified by the order, judgment shall be entered against the
successor and in favor of each objecting stockholder party to the proceeding for
the appraised fair value of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter judgment for the
stockholder; or (ii) Remit the proceedings to the same or other
appraisers on terms and conditions it considers proper.
(c) Judgment includes interest. -- (1) Except as provided in paragraph
(2) of this subsection, a judgment for the stockholder shall award the value of
the stock and interest from the date as at which fair value is to be determined
under s 3-202 of this subtitle.
(2) The court may not allow interest if it finds that the failure of
the stockholder to accept an offer for the stock made under s 3-207 of this
subtitle was arbitrary and vexatious or not in good faith. In making this
finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and (iii) Any other circumstances it considers relevant.
(d) Costs of proceedings. -- (1) The costs of the proceedings,
including reasonable compensation and expenses of the appraisers, shall be set
by the court and assessed against the successor. However, the court may direct
the costs to be apportioned and assessed against any objecting stockholder if
the court finds that the failure of the stockholder to accept an offer for the
stock made under s 3-207 of this subtitle was arbitrary and vexatious or not in
good faith. In making this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The reasonable
fees and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under s 3-207 of
this subtitle; or
(ii) The value of the stock determined in the proceeding materially
exceeds the amount offered by the successor.
(e) Effect of judgment. -- The judgment is final and conclusive on all
parties and has the same force and effect as other decrees in equity. The
judgment constitutes a lien on the assets of the successor with priority over
any mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment.
ss.3-212 Surrender of stock.
The successor is not required to pay for the stock of an objecting
stockholder or to pay a judgment rendered against it in a proceeding for an
appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to it,
indorsed in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the
certificates and sufficient indemnity bond are furnished.
ss.3-213 Rights of successor with respect to stock.
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(a) General rule. -- A successor which acquires the stock of an
objecting stockholder is entitled to any dividends or distributions payable to
holders of record of that stock on a record date after the close of business on
the day as at which fair value is to be determined under s 3-202 of this
subtitle.
(b) Successor in transfer of assets. -- After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all the
rights of an owner of the stock.
(c) Successor in consolidation, merger, or share exchange. -- Unless
the articles provide otherwise, stock in the successor of a consolidation,
merger, or share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of the
successor. However, a proceeding for reduction of the capital of the successor
is not necessary to retire the stock or to reduce the capital of the successor
represented by the stock.
E-6
INDEX TO EXHIBITS
Number Description
2 Agreement and Plan of Reorganization dated
as of April 16, 1996 among Sandy Spring
Bancorp, Inc., Sandy Spring National Bank of
Maryland, Annapolis Bancshares, Inc. and The
Bank of Annapolis, included as Appendix A to
the combined Proxy Statement/Prospectus.
5 Opinion of Kennedy & Baris, L.L.P.
8 Opinion of Stegman & Company
23(a) Consent of Stegman & Company, independent
certified public accountants to Sandy Spring
Bancorp, Inc.
23(b) Consent of Rowles & Company, L.L.P.,
independent certified public accountants to
Annapolis Bancshares, Inc.
23(c) Consent of Kennedy & Baris, L.L.P., included
in Exhibit 5
23(d) Consent of Ferris, Baker Watts, Inc.
27 Financial Data Schedule
99(a) Form of Proxy for Special Meeting of Share-
holders of Annapolis Bancshares, Inc.