4th Quarter Earnings Up 155% at Annapolis Bancorp

Annapolis Bancorp, Inc. (NASDAQ: ANNB), parent company of BankAnnapolis, today announced net income of $668,000 for the fourth quarter of 2011, an increase of $406,000 or 155.0% compared to net income of $262,000 in the final quarter of 2010.

Fourth quarter net income available to common shareholders after accruing for preferred stock dividends was $546,000 ($0.14 per basic and diluted common share), an increase of 287.2% compared to net income available to common shareholders of $141,000 ($0.04 per basic and diluted common share) in the fourth quarter of 2010.

Net income for the year ended December 31, 2011 increased by 34.3% to $2,171,000 from $1,616,000 in the prior year. Full year net income available to common shareholders totaled $1,681,000 ($0.43 per basic and $0.39 per diluted common share) compared to $1,131,000 ($0.29 per basic and diluted common share) in 2010.

Return on average assets and return on average equity climbed to 0.60% and 7.18%, respectively, in the fourth quarter of 2011 compared to 0.24% and 2.93% in the same period of 2010. The full year 2011 return on average assets and return on average equity improved to 0.50% and 6.05%, respectively, compared to 0.37% and 4.68% in 2010.

“Over the years we’ve often repeated the belief that what’s good for our customers and our community is also good for business,” said Chairman and CEO Richard M. Lerner. “The strong earnings and improved returns to shareholders we are reporting today certainly validate that central tenet of our community banking philosophy. This is a fitting end to a year in which BankAnnapolis received special recognition from local business and community organizations for its customer and community service.”

Total assets of $441.6 million at December 31, 2011 increased 2.2% or $9.4 million compared to $432.1 million at December 31, 2010. Gross loans improved by $10.6 million or 3.8% to $290.5 million at December 31, 2011 from $279.9 million at year-end 2010. Investment security balances contracted during the year, as proceeds from matured and called securities flowed into federal funds sold and interest-bearing balances with banks.

Deposits of $350.4 million at December 31, 2011 increased $9.5 million or 2.8% compared to $340.9 million reported at year-end 2010. Noninterest-bearing demand deposit account balances grew to $56.7 million, up $11.2 million or 24.5% compared to $45.5 million at December 31, 2010. This increase was partially offset by a $1.7 million or 0.6% decrease in interest-bearing deposit balances over the same twelve month period.

“The significant growth in demand deposit account balances was driven by our continued success in developing complete relationships with local businesses,” said Lerner. “Our Private Business Banking team has consistently delivered radically superior customer service and attention, helping to distinguish BankAnnapolis from larger institutions.”

Nonperforming assets at December 31, 2011 amounted to $8.3 million or 1.88% of total assets, a reduction of $1.8 million from $10.1 million or 2.35% of total assets at December 31, 2010.

As of December 31, 2011, the Company’s allowance for credit losses was $7.2 million or 2.47% of total loans compared to $6.9 million or 2.45% of total loans at December 31, 2010.

The Company recorded net charge-offs on loans deemed uncollectible of $1.9 million or 0.64% of average loans for the full year 2011 compared to $3.2 million or 1.16% of average loans for the same period in 2010.

Stockholders’ equity increased to $37.4 million at December 31, 2011 from $34.8 million at December 31, 2010. At the end of the year, Annapolis Bancorp, Inc. exceeded all federal regulatory requirements for a well-capitalized institution, with a Tier 1 capital ratio of 12.8%, a total capital ratio of 14.0%, and a Tier 1 leverage ratio of 9.4%. Book value per common share at December 31, 2011 was $7.38 compared to $6.81 at December 31, 2010. The Company’s common stock closed at a market price of $3.89 on December 31, 2011.

In the quarter just ended, net interest income increased by $314,000 or 8.2% and the net interest margin widened to 3.89%, a 21 basis point improvement compared to the same period one year ago.

Fourth quarter interest income totaled $4,966,000, an improvement of $149,000 or 3.1% compared to the same period in 2010. Interest income on loans increased $270,000, benefiting from a $15.9 million increase in average loans outstanding and an improvement to 5.89% from 5.84% in the yield earned on the loan portfolio. Income on investment securities declined $125,000 for the quarter ended December 31, 2011 compared to the final quarter of 2010 due to a $10.3 million reduction in average balances and a 22 basis point drop in the yield on the investment portfolio to 2.66% from 2.88%.

Interest expense decreased by $165,000 or 16.5% due to a fall in the overall cost of interest-bearing liabilities to 0.96% in the quarter just ended from 1.13% in the fourth quarter of 2010, coupled with a $4.7 million decrease in average interest-bearing balances. The Company’s overall cost of funds improved to 0.82% for the fourth quarter of 2011 compared to 1.00% for the same period of 2010. The Company’s lower funding cost resulted from a $9.4 million increase in average noninterest-bearing liabilities, as well as a general decrease in deposit offering rates.

The Company lowered its provision for credit losses to $616,000 in the fourth quarter of 2011 from $927,000 in the same period of 2010.

Noninterest income totaled $459,000 in the three months ended December 31, 2011 compared to $453,000 in the fourth quarter of 2010. In last three months of 2010, the Company realized $69,000 in losses on the sale of foreclosed assets. The absence of similar losses in the fourth quarter of 2011 more than offset lower fee income in 2011, resulting in the 1.3% increase in total noninterest income over the prior year’s linked quarter.

Noninterest expense improved slightly to $2,909,000 in the quarter just ended compared to $2,948,000 in the last three months of 2010. Increased personnel and data processing costs were more than offset by reductions in a number of expense categories including professional fees, marketing, FDIC charges, and occupancy and equipment expense. The Bank’s efficiency ratio improved to 63.38% in the fourth quarter of the year just ended compared to 69.05% in the fourth quarter of 2010.

Full year net interest income increased by $1,040,000 or 6.8% compared to 2010, and the net interest margin improved to 3.93% from 3.66%. Interest Income held steady at approximately $19.9 million as increased income on the loan portfolio was offset by a reduction in investment income. Interest expense decreased $1,036,000 or 22.4% year-over-year, reflecting the repricing of deposit liabilities at lower market rates. A $2,190,000 provision for credit losses was recorded in 2011 compared to $2,148,000 for the full year 2010. Noninterest income totaled $1,842,000 for 2011, up 1.5% from 2010, while noninterest expense increased by 1.4% over the same period. The efficiency ratio improved to 69.40% in 2011 from 72.70% in 2010.

BankAnnapolis serves the banking needs of small businesses, professional concerns, and individuals through seven community banking offices located in Anne Arundel and Queen Anne’s Counties in Maryland. The Bank was named 2011 Corporate Philanthropist of the Year by the Community Foundation of Anne Arundel County based on its direct support of local nonprofits, the impact of that support, success in motivating employees to make charitable contributions, and the CEO’s philanthropic leadership and ability to encourage and motivate others to give back. BankAnnapolis also received the 2011 Financial Services Award from the Annapolis and Anne Arundel County Chamber of Commerce for its innovation and leadership in the identification of financial products and services that best fit the needs of the community.

This press release may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management’s current expectations and involve certain risks and uncertainties which could cause actual results to differ materially from those expressed in forward-looking statements. Factors that might cause such a difference include, but are not limited to: (i) the rate of declining growth in the economy and employment levels, as well as general business and economic conditions; (ii) changes in interest rates, as well as the magnitude of such changes; (iii) the fiscal and monetary policies of the federal government and its agencies; (iv) changes in federal bank regulatory and supervisory policies, including required levels of capital; (v) the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market; (vi) the performance of the stock and bond markets; (vii) competition in the financial services industry; (viii) possible legislative, tax or regulatory changes, and; (ix) such other risks and uncertainties as set forth in the Company’s filings with the Securities and Exchange Commission. Other than to the extent required by applicable law, including the requirements of applicable securities laws, the Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

The Company is not responsible for changes made to this press release by wire services, Internet service providers or other media.