<PAGE>   1
                                                                      EXHIBIT 13

Dear Shareholders, Customers, and Employees:

1998 was the second year of our "200 IN 2000" strategic plan, that is, reaching
$200 million in assets by the end of the year 2000. We are pleased that our
strategy of creative service to local business allowed us to meet our goal two
years early. Suburban Bancshares had a 36% increase in assets for 1998, reaching
$238.6 million at year's end. Our plan to maximize the efficiency of the
Company's assets through this targeted growth strategy is working. Our net
income increased 26% to $1,426,000 from $1,131,000 in 1997, and diluted earnings
per common share rose to $0.13 in 1998 from $0.10 in 1997.

We continued to expand our distribution system in 1998 by opening our seventh
branch, Rockville/White Flint, our third Montgomery County branch. Our strategy
is to place branches in key business centers in the two counties in which we
operate. We have identified an eighth branch site in Beltsville, Maryland, which
we plan to open by summer 1999, bringing our Prince George's branch total to
five. Our current expansion plans will be complete when we locate a final site
in northern Montgomery County, most likely in late 2000.

1999 will be a year of systems improvements at Suburban Bank of Maryland. During
the year, we will be making a significant investment of both time and money to
bring enhanced capabilities to our customers through new avenues: a wide-area
network linking all of our locations and a new computer services provider. These
new capacities will enable the Company to continue to grow, while offering more
sophisticated products and services to our customers. Throughout the year, we
will also continue our progress toward Year 2000 compliance.

We believe the investments we are making will enable us to be the finest
independent bank for small- to mid-size businesses in the Greater Washington
marketplace. Increased asset size and efficiency will lead to increased earnings
per share for our shareholders.

Thank you for your continuing support.

         /s/                                                     /s/

Winfield M. Kelly, Jr.                                     Stephen A. Horvath
Chairman of the Board and                                       President and
Chief Executive Officer                               Chief Operating Officer

A picture of the Chairman and the President, with the Company's headquarters
building in the background, appears in the upper right-hand corner of this page,
above the letter. Facing this page are three (3) bar charts showing the
following data:

<TABLE>
<CAPTION>

                                       1994                1995               1996               1997                1998
                                       ----                ----               ----               ----                ----
<S>                                   <C>                 <C>                <C>                <C>                 <C>
Total Assets (in millions)             $ 114              $ 115              $ 126              $ 176               $ 239

Total Loans (in millions)              $  67              $  66              $  79              $ 114               $ 132

Book Value (in dollars)                $0.95              $1.20              $1.63              $1.75               $1.89
</TABLE>



                                       1
<PAGE>   2


                            SUBURBAN BANCSHARES, INC.
                            Annual Report Photo Text


                                 IT TAKES A TEAM

Successful business banking is a team sport. From bank directors to lending
officers, from branch staff to operations personnel, providing desirable
business banking is a mutual endeavor. At Suburban, we team up to do it right!

We begin with a simple mission: To enhance shareholder value through consistent
earnings, quality loan and investment portfolios, and our leadership position in
the small- to middle-market business communities.

We study the Prince George's and Montgomery Counties' business markets. Our
market knowledge is enhanced through our board of directors. Being local
business people, their industry expertise guides us in identifying local
business requirements. As our 1998 director advertisements confirm: "It takes
one to know one. Suburban Bank does it right. As directors, we make sure of it!"

The average age of a Suburban Banker is 42. The average manager has 19 years of
experience with senior management exceeding 25. It is this quality banking
personnel, coupled with our local board of directors, that has allowed us to
grow 35% in assets and 26% in earnings in 1998! It takes a team!

The above text appears on the left side of a two-page spread. Accompanying the
text is a collage of pictures of directors and officers with filler in the
background. The following captions are associated with team members shown:

"Financing commercial and government receivables requires expertise.  Suburban 
bankers do it right."
                  Bob Depew
                  President, Robert G. Depew and Associates, Inc.

"Accountants know the value a community-based banker offers to small
business owners." 
                  Barbara DiNenna-Corboy 
                  Retired Chairman, DiNenna & Associates, CPA

"Competition is vital. So is cooperation.  Our lenders and branch managers work
in concert to meet the requirements of every customer."
                  Harry Koch, Senior Credit Officer
                  Joe Burnett, Senior Lending Officer
                  Cesar Cabrejas, Senior Branch Administrator

"Having started a small business, I know that bank financing can be formidable.
Suburban's experience as a Preferred Lender for the SBA makes the process run 
smoothly."
                  Sam Botts
                  Partner, Jordan, Keys, Jessamy & Botts, LLP

                                CREATING A NICHE

We team with our enterprising business customers to provide new products and
services to help them become more successful Our credit products are designed
for small- to mid-sized businesses. In addition to traditional lines of credit
and term loans, we are one of Maryland's leading Preferred Lenders for the U.S.
Small Business Administration. We also specialize in lending to smaller
government contractors. Our real estate team has both commercial and residential
experience.

We offer our corporate customers cash management and electronic banking services
specially designed for businesses. Their receivables can be collected faster
through our wholesale mail lockbox. Any idle cash can be reduced through our
end-of-the-day sweep accounts. Our PC banking service, Suburban OnLine, enables
our business customers to monitor their commercial account activity and transfer
balances directly from their computer.


                                       2
<PAGE>   3


As with the previous page, the text above appears on the left with another
collage featuring directors and employees with the following captions:

"Finding a bank that understands medical practice financing can be a challenge.
Suburban's small business focus enables them to excel."
                  Vince Palumbo, DDS

"Real estate sales and property management need a banker who knows the business
and the community.  Suburban's bankers know both."
                  Ken Michael
                  Chairman, The Michael Companies, Inc.

"Small businesses rely on us for government guaranteed lending and financing of
government receivables.  Our lenders work together to deliver the product that
fits the customers best."
                  Bobbie Hart, Lee Reed, Chad Smith, Derek Whitwer and Joe Ruth

"Financing single family home builders and buyers requires expertise and
functional coordination.  Suburban does it well."
                  Bob Long
                  Chairman, Long Fence

                                WORKING AS A TEAM

Our personal banking services are offered to business owners and their
employees, as well as to all individuals who bank with Suburban. Checking and
investment products are available. Home equity lines and installment loans, as
well as ATM machines, provide more options for personal banking relationships.
Suburban's branch team provides these convenient personal banking services from
seven offices in our two county market.

Suburban's growth is possible because of our quality operations and financial
personnel. The technical expertise of the back room has enabled Suburban to grow
assets $100 million in two years. Customers know their questions will be
answered. People actually answer telephones at Suburban Bank of Maryland!

The collage opposite the above text features officers of Suburban Bank
accompanied by the following captions:

"Our business customers use lending, deposit and cash management services.  
We work together to make banking at Suburban enjoyable."
                  Jeff Franklin, Branch Manager
                  Jerome Smallwood, Lender
                  Annette Pointer, Cash Management Officer

"Managing multiple escrow deposits requires time and attention.  Our team of
specialists has a product that does the accounting and banking for our customers
so that they can concentrate on other tasks."
                  Lee Waltz, Branch Manager
                  Charlie Carns, Controller
                  Mary Smith, Operations Officer

"Individual retirement accounts and 401(k) plans help our small business
customers meet the need of their employees.  Our team of bankers are ready to
offer any assistance."
                  Ed Shaffer, Branch Manager
                  Yolanda Stahura, Human Resources

"Home builders and home buyers alike expect the lending and mortgage process to
go smoothly.  Suburban's lenders meet those expectations."
                  Jeff Wagner, Commercial Lender
                  Rich Lichty, Mortgage Lender


                                       3
<PAGE>   4


SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>

in thousands, except per share data              1998          1997          1996          1995          1994

Results of Operations
---------------------
<S>                                               <C>           <C>            <C>           <C>            <C>   
  Interest income                                 $14,246       $11,363        $9,176        $8,358         $7,156
  Interest expense                                  6,337         4,570         3,362         3,119          2,377
  Net interest income                               7,909         6,793         5,814         5,239          4,779
  Provision (recovery) for loan losses                415           254          (227)         (260)            39
  Noninterest income                                1,088           774           517         1,599            787
  Noninterest expense                               6,359         5,511         5,614         5,551          5,308
  Income tax expense (benefit)                        797           671        (4,058)            6             --
  Net income                                        1,426         1,131         5,002         1,541            219

Per Share Data
--------------
  Net income:
     Basic                                          $0.13         $0.10         $0.46         $0.17          $0.02
     Diluted                                         0.13          0.10          0.44          0.15           0.02
  Book value per share                               1.89          1.75          1.63          1.20           0.95

Financial Condition (December 31)
---------------------------------
  Total assets                                   $238,566      $175,666      $126,085      $115,431       $114,229
  Net loans                                       128,361       112,070        71,940        61,555         61,775
  Total deposits                                  207,380       152,802       107,573       101,889        104,402
  Total equity                                     20,712        19,182        17,831        13,096          8,587

Ratios
------
  Return on average assets                           0.72%         0.76%         4.42%         1.49%          0.21%
  Return on average equity                           7.14          6.14         36.35         15.29           2.51
  Net yield on earning assets                        4.33          5.02          5.57          5.50           5.05
  Average equity to average assets                  10.06         12.42         12.15          9.75           8.31
  Average loans to average deposits                 70.00         72.13         74.75         69.87          63.74

Average Balances
----------------
  Assets                                         $198,581      $148,281      $113,272      $103,377       $105,137
  Loans                                           119,623        92,200        74,014        64,616         60,577
  Earning assets                                  182,707       135,401       104,356        95,228         94,664
  Deposits                                        170,901       127,829        99,017        92,483         95,035
  Equity                                           19,971        18,412        13,760        10,080          8,734
</TABLE>



PORTIONS OF THIS ANNUAL REPORT CONTAIN FORWARD-LOOKING STATEMENTS, INCLUDING
STATEMENTS OF GOALS, INTENTIONS, AND EXPECTATIONS, REGARDING OR BASED UPON
GENERAL ECONOMIC CONDITIONS, INTEREST RATES, DEVELOPMENTS IN NATIONAL AND LOCAL
MARKETS, THE COMPANY'S ABILITY TO ADDRESS THE YEAR 2000 ISSUE AND THE ABILITY OF
THIRD PARTIES TO EFFECTIVELY ADDRESS THEIR YEAR 2000 ISSUES, AND OTHER MATTERS,
WHICH, BY THEIR NATURE, ARE SUBJECT TO SIGNIFICANT UNCERTAINTIES. BECAUSE OF
THESE UNCERTAINTIES AND THE ASSUMPTIONS ON WHICH STATEMENTS IN THIS REPORT ARE
BASED, THE ACTUAL FUTURE RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN
THIS REPORT.


                                       4
<PAGE>   5


Management's Discussion and Analysis
of Financial Condition and Results of Operations
Suburban Bancshares, Inc. and Subsidiary

Suburban Bancshares, Inc. and its subsidiary, Suburban Bank of Maryland (the
"Company" or "Suburban"), provide a variety of banking services to businesses,
professionals and individuals through seven branches located in Prince George's
and Montgomery Counties in Maryland. In addition to commercial and personal
depository services and cash management services, Suburban Bank of Maryland (the
"Bank") offers lending products such as commercial loans, commercial real estate
loans, Small Business Administration loans, asset-based loans, government
contract loans and consumer loan products, including vehicle, home equity,
mortgage and personal loans.

FORWARD LOOKING STATEMENTS

This management's discussion and analysis of financial condition and results of
operations includes forward looking statements, such as: statements of the
Company's goals, intentions and expectations; estimates of risks and of future
costs and benefits; and statements of the Company's ability to achieve financial
and other goals. These forward looking statements are subject to significant
uncertainties because they are based upon: future interest rates and other
economic conditions; statements by suppliers of data processing equipment and
services, government agencies, and other third parties as to year 2000
compliance and costs; future laws and regulations; and a variety of other
matters. Because of these uncertainties, the actual future results may be
materially different from the results indicated by these forward looking
statements. In addition, the Company's past growth and performance do not
necessarily indicate its future results.

RESULTS OF OPERATIONS

Overview

Net income increased from $1,131,000 in 1997 to $1,426,000 in 1998, representing
a 26.1% increase. Both basic and diluted earnings per common share for 1998 were
$0.13 as compared to $0.10 per share for 1997. Book value per share was $1.89 at
December 31, 1998, marking the fifth consecutive year for which an improvement
in shareholders' equity was recorded. Return on average assets and return on
average equity for 1998 were 0.72% and 7.14%, respectively.

The year 1998 reflected a continuation of the Company's aggressive growth
strategy. Asset growth was 35.8%, a $62.9 million increase from $175.7 million
in 1997 to $238.6 million in 1998. This asset growth in 1998 enabled the Company
to exceed its goal of $200 million by 2000, two years early. Average assets rose
$50.3 million, or 33.9%, reaching $198.6 million in 1998 from $148.3 million in
1997.

Key factors which influenced Suburban's performance in 1998 and factors which
may influence future performance include:

-      Loan growth of 16.0% to $131.7 million in 1998 from $113.5 million in
       1997.

-      Growth in deposits of 35.7%, reaching $207.4 million in 1998 from $152.8
       million at the end of 1997.

-      The opening of our seventh branch in Rockville/White Flint in January
       1998, continuing our expansion program.

-      Establishment of a mortgage loan division, offering a new product line to
       our consumer customer base.

-      Improving asset quality as nonperforming assets (impaired loans plus
       foreclosed real estate) declined from $2.1 million or 1.2% of assets in
       1997 to $1.7 million or 0.7% of assets in 1998.

-      A declining net interest margin, as market rates declined in late 1998,
       and deposit growth outpaced loan growth.

The discussion which follows provides further detailed analysis regarding the
financial condition and results of operations of Suburban Bancshares, Inc. and
its subsidiary, Suburban Bank of Maryland, for the years 1996 through 1998. It
is intended to assist readers in their analysis of the accompanying consolidated
financial statements and notes.

Distribution of Assets, Liabilities and Shareholders' Equity

The following table provides certain information regarding the Company's average
balances of assets and liability categories, interest income and expense,
percentage distribution of earning assets and funding sources, and average rates
and yields for the years ended December 31, 1998, 1997 and 1996. These yields
and costs are derived by dividing income or expense by the average daily balance
of the related asset or liability for the relevant period. Nonaccrual loans are
included in average loans as earning assets.


                                       5
<PAGE>   6
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(in thousands)

<TABLE>
<CAPTION>

Years ended
December 31,                                  1998                                     1997


                           Average    % of      Interest  Average    Average    % of      Interest   Average
                            Balance   Earning             Yield       Balance   Earning              Yield
                                      Assets              or Rate               Assets               or Rate
                                      &                                         &
                                      Funding                                   Funding
ASSETS                                Sources                                   Sources

<S>                      <C>          <C>       <C>       <C>         <C>       <C>       <C>       <C>
Interest-earning assets:
Loans                    $119,623     65.5%     $10,529    8.80%      $92,200   68.1%     $8,752     9.49%
Investment securities      34,712     19.0%       2,193    6.32%       27,471   20.3%      1,746     6.35%

Federal funds sold
and other deposits         28,372     15.5%       1,524    5.37%       15,730   11.6%        865     5.50%
                           ------                 -----                ------                ---


Total interest-earning
assets                    182,707    100.0%      14,246    7.80%      135,401  100.0%     11,363     8.39%


Noninterest-earning
assets:

Cash and due from          10,200                                       7,517
banks

Premises and
equipment                   1,716                                       1,591
                                                                        5,302
Other assets                5,441

Less:  Allowance for
loan losses                (1,483)                                     (1,530)
                           ------                                      ------

Total noninterest-
earning assets             15,874                                      12,880


TOTAL ASSETS             $198,581                                    $148,281

LIABILITIES AND
SHAREHOLDERS' EQUITY

Interest-bearing
liabilities:
Checking and money
market deposits           $68,645     38.7%      $2,432    3.54%      $52,389    40.6%    $1,886      3.60%
Savings deposits           25,779     14.5%       1,139    4.42%       23,887    18.5%     1,144      4.79%
Time deposits              45,513     25.7%       2,512    5.52%       27,111    21.0%     1,490      5.50%
Securities sold under
repurchase agreements       6,549      3.7%         254    3.87%        1,220     1.0%        50      4.08%
                            -----                   ---                 -----                 --

Total interest-bearing
liabilities               146,486     82.6%       6,337    4.33%      104,607    81.1%     4,570      4.37%


Noninterest-bearing
deposits                   30,964     17.4%                            24,442    18.9%
                           ------                                      ------

Total funding sources     177,450    100.0%       6,337    3.57%      129,049   100.0%     4,570      3.54%

Other liabilities           1,160                                         820
                            -----                                         ---


TOTAL
LIABILITIES               178,610                                     129,869


Shareholders' equity       19,971                                      18,412
                           ------                                      ------

TOTAL
LIABILITIES AND
SHAREHOLDERS'
EQUITY                   $198,581                                    $148,281

Net interest income                              $7,909                                   $6,793

                                                                                                      4.85%
Net interest spread                                        4.23%

Net interest margin                                        4.33%                                      5.02%
</TABLE>



<TABLE>
<CAPTION>

Years ended
December 31,                                1996


                           Average     % of      Interest  Average
                            Balance    Earning             Yield or
                                       Assets              Rate
                                       &
                                       Funding
ASSETS                                 Sources

<S>                       <C>          <C>      <C>       <C>
Interest-earning assets:
Loans                     $74,014      70.9%    $7,409    10.01%
Investment securities      17,325      16.6%     1,080     6.23%

Federal funds sold
and other deposits         13,017      12.5%       687     5.28%
                           ------      ----        ---


Total interest-earning
assets                    104,356     100.0%     9,176     8.79%


Noninterest-earning
assets:

Cash and due from           7,073
banks

Premises and
equipment                   1,213
                            2,155
Other assets

Less:  Allowance for
loan losses                (1,525)
                           ------

Total noninterest-
earning assets              8,916


TOTAL ASSETS             $113,272

LIABILITIES AND
SHAREHOLDERS' EQUITY

Interest-bearing
liabilities:
Checking and money
market deposits           $47,337      47.8%    $1,625     3.43%
Savings deposits            8,849       9.0%       405     4.58%
Time deposits              23,499      23.7%     1,332     5.67%
Securities sold under
repurchase agreements          --        --       --         --
                           ------               -------

Total interest-bearing
liabilities                79,685      80.5%     3,362     4.22%


Noninterest-bearing
deposits                   19,332      19.5%
                           ------

Total funding sources      99,017     100.0%     3,362     3.39%

Other liabilities             495
                              ---


TOTAL
LIABILITIES                99,512


Shareholders' equity       13,760
                           ------

TOTAL
LIABILITIES AND
SHAREHOLDERS'
EQUITY                   $113,272

Net interest income                             $5,814

                                                           5.40%
Net interest spread

Net interest margin                                        5.57%
</TABLE>


                                       6
<PAGE>   7
Net Interest Income and Net Interest Margin

The principal source of the Company's earnings, net interest income, is defined
as the difference between income on assets and the cost of funds supporting
those assets. Earning assets are composed primarily of loans and investment
securities while deposits and short-term borrowings, in the form of securities
sold under repurchase agreements, comprise interest-bearing liabilities.
Noninterest-bearing checking deposits are another component of funding sources.
Variations in the volume and mix of these assets and liabilities, as well as
changes in the yields earned and rates paid, impact the level of net interest
income.

Net interest income rose $1,116,000, or 16.4%, in 1998 to $7,909,000 from
$6,793,000 in 1997, the result of the significant growth in both loan and
deposit volume. In 1997, net interest income rose 16.8%, or $979,000, for the
same reason.

The net interest margin represents the Company's net yield on its earning assets
and is calculated as net interest income divided by average earning assets. In
1998, the net interest margin fell to 4.33%, a 69 basis point decrease from
5.02% for the prior year. Negative influences on the margin include a lower loan
yield, a higher cost of funds and a lower ratio of loans to earning assets.
These negative factors were mitigated by the increase in volume on both sides of
the balance sheet. In 1997, the net interest margin fell 55 basis points from
5.57%, the result of a change in the mix of earning assets toward a lower
percentage of loans, which traditionally provide a higher return than other
earning assets, and a higher cost of funds; these negative factors were somewhat
mitigated by a higher yield on the investment portfolio.

Changes in the volume of earning assets and interest-bearing liabilities impact
both interest income and interest expense. Average earning assets rose
$47,306,000, or 34.9%, to $182,707,000 in 1998 from $135,401,000 in 1997. Total
average funding sources rose $48,401,000, or 37.5%, during the same period, with
$41,879,000, of those funds, or 86.5% of the growth, in interest-bearing
accounts. Because this growth resulted in an increase in the percentage of
interest-bearing funds to total funds, the cost of funds rose, producing a
negative impact on net interest income. In 1997, earning assets grew
$31,045,000, or 29.7%, from $104,356,000 in 1996, with $24,922,000, or 83.0% of
the growth in funding sources, provided by interest-bearing sources of funds.

Changes in the composition of earning assets and of funding sources also impact
the level of net interest income. In 1998 as in 1997, the growth in loans did
not keep pace with deposit or funding growth and resulted in a decrease in the
ratio of loans to earning assets, while interest-bearing funds increased as a
percentage of funding sources, both factors providing a negative influence on
the margin. In 1997, average loans were 68.1% of total earning assets and in
1998, the ratio decreased to 65.5%. As the loan mix declined, the mix of
investment securities and overnight investments increased from 31.9% in 1997 to
34.5% in 1998. On the liability side of the balance sheet, the composition of
interest-bearing funding sources shifted toward a higher percentage of funds in
higher cost sources. This shift added to the negative effect of a higher ratio
of interest-bearing sources as a percentage of total sources of funds. As total
interest-bearing funds increased to 82.6% of total funding sources in 1998 from
81.1% in 1997, the percentage of funds deposited in higher cost time deposit and
repurchase agreements increased to 29.4% in 1998 from 22.0% in 1997 and the
percentage of lower-cost checking, money market, and savings deposits decreased
to 53.2% from 59.1%.

Both changes in interest rates received on earning assets and changes in rates
paid on funding sources negatively affected the net interest margin in 1998. The
yield on earning assets fell in 1998 to 7.80% from 8.39% in 1997, as loan yields
dropped to 8.80% from 9.49%. The lower yield on loans was the combined effect of
competitive factors in our market, a declining interest rate environment with
three (3) prime lending rate changes in the fourth quarter of 1998, and a lower
rate earned on a portfolio of the guaranteed portion of SBA loans, which were
purchased during the last half of 1997 and early 1998. This pool, totaling
$19,198,000, represents 16.0% of the average loan portfolio, and because of the
reduced risk associated with the pool, the yield at 7.15% is less than loans
without the backing of a government guarantee. The yield on the investment
portfolio remained relatively stable as we extended the overall maturity of the
portfolio, and the return on federal funds fell only 13 basis points on average
for the year.

A relatively small increase in the cost of funds also reduced the margin, as
rates paid for funds rose to 3.57% for 1998 from 3.54% in 1997, a 3 basis point
increase. As competition for funds increased in late 1996 and early 1997, the
Company offered a special rate on savings accounts, a typically stable source of
funds, which brought in new funds and also resulted in some shifts within the
deposit base. Savings accounts rose to an average of $23,887,000, an increase of
$15,038,000, with an average cost of 4.79% in 1997. In 1998, that growth
subsided with savings rising only $1,892,000, to $25,779,000, and the savings
rate fell 37 basis points to 4.42%. Growth in time deposits, however, was
$18,402,000, or 67.9%, from an average of $27,111,000 in 1997 to $45,513,000 in
1998, at a slightly higher rate. Rates paid on other interest-bearing funds fell
but the decline did not offset the effect of the drop in the loan yield.

Provision for Loan Losses

The Company makes provisions for loan losses in order to maintain an allowance,
or reserve, for losses on loans at a level deemed appropriate. The allowance for
loan losses reflects management's judgment as to the level considered
appropriate to absorb such losses based upon a review of many factors, including
historical loss experience, adverse situations that may affect the borrower's
ability to repay 

                                       7
<PAGE>   8
(including the timing of future payments), economic conditions and trends, loan
portfolio volume mix, loan performance trends, the value and adequacy of
collateral, and the Company's internal credit review process. Based on this
ongoing evaluation, management determines the provision or reversal necessary to
maintain an appropriate allowance.

In 1998, the Company recorded a provision for loan losses of $415,000, as loan
volume increased; loan charge-offs totaled $470,000, an increase of $52,000 from
$418,000 in 1997, and recoveries declined to $106,000 from $129,000 in 1997.

In 1997, the Company recognized a provision for loan losses of $254,000, also
the result of increasing loan volume. In 1996, a reverse provision of $227,000
was recorded to reduce an excess in the allowance for loan losses created by
recoveries on loans previously charged off and the disposition of nonperforming
loans.

Noninterest Income

In 1998, noninterest income rose 40.6% to $1,088,000 from $774,000 in 1997, the
result of $205,000 of income generated by a newly created mortgage loan
division, the recognition of a premium on the sale of SBA loans of $39,000 and a
gain of $12,000 on the sale of securities.

Noninterest income increased 49.7% in 1997 from $517,000 in 1996. The increase
was primarily in deposit account service charges, the result of both deposit
account growth and new deposit-related services being offered. Fees for other
services rose, as well, as the growing customer base utilized multiple services
within the expanded product line.

Noninterest Expenses

Noninterest expenses rose 15.4%, or $848,000, in 1998 to $6,359,000 from
$5,511,000 in 1997. This increase was primarily the result of the start-up costs
for the mortgage division, the costs associated with the opening of our seventh
branch early in 1998, and higher data processing costs.

Noninterest expenses declined 1.8% in 1997 from $5,614,000 in 1996. The
comparability of results for 1997 and 1996 are impacted by nonrecurring events
in 1996 which precipitated the recognition of additional expenses as the Company
disposed of nonperforming assets and recognized a loss on the transactions
totaling $611,000, and expenses associated with a corporate reorganization were
$151,000. The reduction of expenses in 1997 resulting from these nonrecurring
expenses in 1996 was partially offset by rising costs associated with a new
branch opening in late 1996 and the renovation of our Greenbelt headquarters in
1997.

The Bank opened a new full-service banking office in Bethesda, Maryland in
November 1996, and a full-service branch in Rockville/White Flint, Maryland in
January 1998. The increased operating expenses of new offices are not
immediately offset by income until the offices become established, which, though
not assured, often occurs after approximately three to four years.

Please reference Note I to the Consolidated Financial Statement for a breakdown
of Other Expenses.

Deferred Income Taxes

Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires the recognition of income tax benefits of loss carryforwards and
temporary differences when it is "more likely than not" that they will be
realized from the Company's future earnings capacity. At December 31, 1996, the
Company recognized net deferred tax assets of $4,058,000 including approximately
$3,930,000 relating to tax loss carryforwards, which expire in varying amounts
between 2003 and 2008. Realization of these benefits depends on generating
sufficient taxable income before the expiration of the loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that the net deferred tax asset will be realized. The amount of the net
deferred tax asset considered realizable, however, could be reduced if estimates
of future taxable income during the carryforward period are reduced. The amount
of loss carryforward available for any one year may be limited if the Company is
subject to the alternative minimum tax. In 1998, the net deferred tax asset was
reduced by the income tax expense of $797,000 and the change in the tax on the
unrealized gain on securities available for sale of $66,000, net of the
estimated tax payments of $38,000. In 1997, the net deferred tax asset was
reduced by the income tax expense of $671,000 and the tax on the unrealized gain
on securities available for sale of $119,000, net of the estimated alternative
minimum tax of $32,000. At December 31, 1998, the net deferred tax asset was
$2,474,000, including approximately $2,154,000 relating to tax loss
carryforwards.

ASSET QUALITY

Loan impairment applies to loans for which it is probable that the creditor will
not collect all principal and interest payments according to the loan's
contractual terms. The impairment of a loan is measured at the present value of
expected future cash flows using the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is 



                                       8
<PAGE>   9
collateral dependent. Interest income on impaired loans is recognized on a cash
basis. Nonaccrual loans are those loans on which the accrual of interest is
discontinued when the full collection of principal or interest is in doubt, or
when the payment of principal or interest has become contractually 90 days past
due, unless the obligation is both well secured and in the process of
collection. Loans may be placed on nonaccrual status when past due less than 90
days if collection becomes uncertain based upon an evaluation of the fair value
of the collateral and the financial strength of the borrower. When a loan is
placed on nonaccrual status, interest income in the current period is reduced by
the amount of any accrued and uncollected interest. Subsequent payments of
interest are applied as a reduction of principal when concern exists as to the
ultimate collection of principal; otherwise such payments are recognized as
interest income. Loans are removed from nonaccrual status when they have
demonstrated a period of performance and when concern no longer exists as to the
collectibility of principal or interest.

The recorded investment in loans that were considered impaired was $1,160,000
and $1,763,000 at December 31, 1998 and 1997, respectively, a decrease of
$603,000, as one large loan moved to foreclosed real estate and was subsequently
sold.

Real estate acquired through foreclosure is carried at fair value less estimated
selling costs, based upon current market conditions and expected cash flows.
Foreclosed real estate rose $186,000, or 53.3% to $535,000 at December 31, 1998
from $349,000 at December 31, 1997. This increase was the result of the addition
of two properties to foreclosed real estate in 1998.

The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.

The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance. The allowance for loan losses related to loans that are
identified as impaired is based on discounted cash flows using the loan's
initial effective interest rate or the fair value of the collateral for certain
collateral dependent loans.

At December 31, 1998, the allowance for loan losses was $1,524,000, and at the
end of 1997 it was $1,473,000. The combined effect of substantial loan growth
and higher net charge-offs, offset by the low risk factor of a portfolio of
government guaranteed loans which comprise 15.8% of the total loan portfolio at
year end and a decrease in loans that were considered impaired, was an increase
of $51,000 in the allowance for loan losses in 1998. The activity in the
allowance for loan losses is shown in the following schedule:

<TABLE>
<CAPTION>
                                      Years ended December 31,

in thousands                              1998           1997           1996
<S>                                        <C>            <C>            <C>    
Balance at beginning of year               $ 1,473        $ 1,508        $ 1,467
Provision (recovery) for loan losses           415            254           (227)
Loans charged off                             (470)          (418)          (444)
Recoveries                                     106            129            712
                                           -------        -------        -------
Balance at end of year                     $ 1,524        $ 1,473        $ 1,508
</TABLE>


The allowance for loan losses fell to $1,473,000 at the end of 1997 from
$1,508,000 at December 31, 1996. During 1997, 51.8% of the loan growth of
$34,162,000 was in loans with a low risk factor because of the government
guarantee on SBA loans purchased. The effect of this lower risk factor plus the
effect of the disposition of nonperforming loans in 1996 was a reduction of
$35,000 in the reserve.

LIQUIDITY AND INTEREST SENSITIVITY

Liquidity is the ability to generate and maintain sufficient cash flows to fund
operations and to meet financial obligations to depositors and borrowers
promptly and in a cost-effective manner. Liquidity is provided through readily
marketable assets, maturing loans and investments, and the ability to generate
new deposits or borrowings as needed. The Company's liquidity position is
monitored and managed by the Asset/Liability Management Committee, which has the
overall objective of optimizing income while minimizing and controlling
liquidity and interest rate risk, and maintaining capital adequacy.

Core deposits normally provide a stable source of liquidity for the Company.
These core deposits are composed of noninterest checking accounts, interest
checking and money market accounts, and savings and individual retirement
accounts. This core deposit base represented 


                                       9
<PAGE>   10
73.4% of total funding sources at December 31, 1998, compared to 77.6% at the
end of 1997. Offsetting this decrease is an increase in the level of readily
marketable assets, which is another indicator of adequate liquidity. These
liquid assets, securities available for sale, overnight federal funds and the
guaranteed portion of SBA loans in the loan portfolio, were 49.4% of total
assets at December 31, 1998 and 40.5% at December 31, 1997.

As a supplementary source of short-term liquidity, the Bank maintains $6,000,000
of reverse repurchase lines of credit and unsecured lines of credit totaling
$4,500,000 with correspondent banks. These correspondents meet regulatory
capital requirements for well capitalized financial institutions, thereby
minimizing the risk that might be associated with this level of interbank
exposure. The Bank has not needed to utilize these backup lines as internally
generated liquidity has provided ample resources.

Interest sensitivity pertains to the volatility of earnings resulting from
interest rate fluctuations. The management of interest rate risk has two goals:
to minimize fluctuations in net interest income and net income, and to identify
the potential change in the Company's market value of portfolio equity. Interest
rate risk can be defined or measured as either the change in earnings that
results from changes in interest rates (earnings at risk) or a change in the
theoretical market value of the Company (economic value at risk). Economic value
at risk is essentially the value of equity at risk. The Company recognizes that
with return, there must be risk; however, the levels of risk must be contained
within tolerable limits as established by the Asset/Liability Management
Committee and the Investment Committee.

One method of measuring the Company's interest rate sensitivity is the "gap"
report, which measures the mismatch in repricing between interest-sensitive
assets and liabilities and provides a general indication of the interest
sensitivity of the balance sheet at a point in time. By limiting the size of the
gap position, the Company can limit the net interest income at risk arising from
pricing imbalances. The gap schedule shown below reflects the earlier of the
maturity or repricing dates for various interest-earning assets and
interest-bearing liabilities at December 31, 1998.


                       Interest Rate Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                Over 3  
                                             3 months or        months to    Over 1 year     Over 5
in thousands                                    less             1 year       to 5 years      years            Total

Interest-earning assets:
<S>                                           <C>             <C>              <C>        <C>        
   Federal funds sold                         $ 43,093        $      --        $     --   $        --        $ 43,093
   Investments                                   5,647           15,516          13,578        11,102          45,843
   Loans (1)                                    78,376           16,160          28,624         6,747         129,907
      Total interest-earning assets            127,116           31,676          42,202        17,849         218,843
Cumulative rate sensitive assets               127,116          158,792         200,994       218,843                

Interest-bearing liabilities:
   Interest checking deposits                 $ 14,650        $      --        $     --   $        --        $ 14,650  
   Money market deposits                      $ 76,844               --              --            --          76,844 
   Savings deposits                             25,999               --              --            --          25,999 
   Time deposits                                 4,890           22,526          24,964            --          52,380 
   Securities sold under repurchase                                                                            
agreements                                       9,523               --              --            --           9,523
      Total interest-bearing liabilities       131,906           22,526          24,964            --         179,396
Cumulative rate sensitive liabilities          131,906          154,432         179,396       179,396                

GAP $                                         $(4,790)        $   9,150       $  17,238       $17,849
CUMULATIVE GAP                                 (4,790)            4,360          21,598        39,447        $ 39,447
CUMULATIVE GAP TO TOTAL ASSETS                  -2.01%            1.83%           9.05%        16.54%
</TABLE>

(1) Excludes net deferred fees of ($22).


The amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual terms of the asset or liability. The Company has
assumed that its savings, interest checking and money market accounts reprice
daily and that investments with call options will be called. At December 31,
1998, the Company's one-year interest sensitivity gap (the difference between
the amount of interest-earning assets anticipated by the Company, based on
certain assumptions, to mature or reprice within one year and the amount of
interest-bearing liabilities anticipated by the Company, based on certain
assumptions, to mature or reprice within one year) as a percentage to total
assets was positive 1.83%. This slightly positive gap position means that the


                                       10
<PAGE>   11
Company had $4,360,000 more assets than liabilities repricing within one year.
This generally indicates that in a period of rising interest rates, the
Company's net interest income may improve. Conversely, in a declining interest
rate environment, the Company's net interest income may be adversely affected.

Another tool used to assess interest rate risk reflects the adverse changes that
would occur assuming an instantaneous, parallel shift of 200 basis points in the
Treasury Yield Curve is introduced over a one-year forecast horizon. This
interest shock simulation measures the potential changes in simulated earnings
and the potential changes in market value of portfolio equity as rates are
shifted at each point on the yield curve upward and downward. The methodology is
based upon an initial forecast assumption of a constant balance sheet and
constant market interest rates and utilizes present value computations on cash
flows as well as duration analysis to produce measurements of earnings and
economic value at risk. The analyses are prepared using current call report data
from the Bank and incorporate both management assumptions and trend analyses
based upon the Company's historical data as well as market trends in pricing
spreads, prepayment patterns and other rate-driven parameters which affect the
level and timing of cash flows. Finally, the impact of planned growth is
factored into the simulation model.

The Asset/Liability Committee has established limits or guidelines on earnings
and economic value at risk and monitors the Company's performance against these
guidelines, as well as peer results, on a quarterly basis. The Company's policy
is to limit the percentage change in annual net interest income to -15% and in
economic value to -20% from an immediate and sustained parallel shift in
interest rates of 200 basis points. As of December 31, 1998, the estimated
sensitivity profile for the Company was as follows:

<TABLE>
<CAPTION>
                                        Immediate Change in Rates          Policy Limitation

                                            +200 BP          -200 BP
                                            -------          -------
<S>                                           <C>               <C>            <C>
Net interest income at risk                   10.00%             -9.9%          -15%

Economic value at risk                         9.56%            -13.8%          -20%
</TABLE>


Both of the above tools used to assess interest rate risk have strengths and
weaknesses. Because the gap reflects a static position at a single point in
time, it is limited in quantifying the total impact of market rate changes which
do not affect all earning assets and interest-bearing liabilities equally or
simultaneously. In addition, gap reports depict the existing structure,
excluding exposure arising from new business. While the simulation process is a
powerful tool in analyzing interest rate sensitivity, many of the assumptions
used in the process are both highly qualitative and subjective and subject to
the risk that past historical activity may not generate accurate predictions of
the future. Both measurement tools, however, provide a comprehensive evaluation
of the exposure to changes in interest rates, assisting the Company in its
efforts to manage the volatility of earnings.

CAPITAL RESOURCES AND ADEQUACY

Shareholders' equity was $20,712,000 at December 31, 1998 representing an 8.0%
increase from $19,182,000 at the end of 1997. Equity growth in 1998 was
primarily attributable to the earnings of the Company of $1,426,000. Also
contributing to the increase was the impact of the change in unrealized gains on
securities available for sale of $104,000, net of taxes.

In 1997, shareholders' equity increased $1,351,000, or 7.6%, from $17,831,000 at
December 31, 1996. Earnings of $1,131,000, and an increase in the market value
of the Company's available for sale securities of $220,000, were the components
of this rise in equity.

A combination of the leverage capital ratio and the risk-based capital ratios is
used to categorize banks as well capitalized, adequately capitalized, or under
capitalized financial institutions under the guidelines established by the
Federal Deposit Insurance Corporation Improvement Act of 1991. A financial
institution is considered "well capitalized" if it has a total risk-based
capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%,
and a leverage ratio of 5% or greater, and it is not subject to a written
agreement, order, or directive. At December 31, 1998 and 1997, the Company was
considered to be a well capitalized financial institution for regulatory
purposes.

One measure of capital adequacy is the risk-based capital ratio or the ratio of
total capital to risk-adjusted assets. Total capital is composed of both core
capital (Tier 1) and supplemental capital (Tier 2). Tier 1 capital consists of
common equity, excluding unrealized gains or losses on available for sale
securities and a disallowed portion of the deferred tax asset. Tier 2 capital
consists of a qualifying portion of the allowance for loan losses. Assets, both
on- and off-balance-sheet items, are weighted according to the underlying risk
associated with the item and are assigned a risk weighting ranging from 0 to
100%. Financial institutions are expected to meet a minimum ratio of total
qualifying capital to risk-weighted assets of 8%, with at least half of that
percentage (4%) in the form of core capital. At December 31, 1998, the Company
reported a Tier 1 risk-based capital ratio of 15.47% and a ratio of 16.65% based
on total capital. Both ratios were well above the general regulatory minimums of
4% and 8%, respectively.


                                       11
<PAGE>   12


Another capital adequacy measure is the leverage capital ratio, which is
calculated by dividing average total assets for the most recent quarter into
core (Tier 1) capital. The regulatory minimum for this ratio is 3%, with most
financial institutions required to maintain a ratio of a least 4% to 5%,
depending upon risk profiles and other factors. At December 31, 1998, the
leverage capital ratio for the Company was 9.13%.

YEAR 2000 PROJECT

Many computer programs now in use have not been designed to properly recognize
years after 1999. If not corrected, these programs could fail or create
erroneous results. This Year 2000 ("Y2K") issue affects the entire banking
industry because of its reliance on computers and other equipment that use
computer chips. This problem is not limited to computer systems. Y2K issues may
affect every system that has an embedded microchip, such as automated teller
machines, elevators, vaults, heating, air conditioning, and security systems.
Y2K issues may also affect the operation of third parties with whom the Company
does business such as vendors, suppliers, utility companies, and customers.

Risks Related to Year 2000

The Y2K issue poses certain risks to the Company and its operations. Some of
these risks are present because the Company purchases technology and information
system applications from other parties who also face Y2K challenges. Other risks
are specific to the banking industry.

Commercial banks may experience a deposit base reduction if customers withdraw
significant amounts of cash in anticipation of Y2K. Such a deposit contraction
could cause an increase in interest rates, require the Company to locate
alternative sources of funding or sell investment securities or other liquid
assets to meet liquidity needs, and may reduce future earnings. To reduce
customer concerns regarding Y2K noncompliance, a customer awareness plan has
been implemented which is directed towards making deposit customers
knowledgeable about the Company's Y2K compliance efforts.

The Company lends significant amounts to businesses and individuals in its
marketing areas. If these borrowers are adversely affected by Y2K problems, they
may not be able to repay their loans in a timely manner. This increased credit
risk could adversely affect the Company's financial performance. In an effort to
identify any potential loan loss risk because of borrower Y2K noncompliance, all
loan customers with loans or commitments exceeding $250,000 have been visited by
calling officers for the purpose of discussing their Y2K plans and for the
completion of a Y2K questionnaire.

The Company's operations, like those of many other companies, can be adversely
affected by Y2K triggered failures which may be experienced by third parties
upon whom the Company relies for processing transactions. The Company has
identified all critical third-party service providers and vendors and is
monitoring their Y2K compliance programs. The Company's primary supplier of data
processing services has adopted a Y2K compliance plan which includes a timetable
for making changes necessary to be able to provide services in the Y2K. That
supplier has provided written assurances to the Company regarding its progress
toward Y2K compliance and has been examined for Y2K readiness by federal bank
examiners.

The Company's operations may also be adversely affected by Y2K related failures
of third party providers of electricity, telecommunications services and other
utility services. The Y2K compliance of these providers is largely beyond the
control of the Company.

The Company's State of Readiness

The Company has created a task force to establish a Y2K plan to prevent or
mitigate the adverse effects of the Y2K issue on the Company and its customers.
Goals of the Y2K plan include identifying Y2K risks, information systems and
equipment used by the Company, informing customers of Y2K issues and risks,
establishing a contingency plan for operating if Y2K issues cause important
systems or equipment to fail, implementing changes necessary to achieve Y2K
compliance, and verifying that these changes are effective. The Federal Deposit
Insurance Corporation has examined the Company's Y2K compliance plan and the
Company's progress in its implementation. In addition, the Board of Directors is
carefully monitoring progress under the plan on a monthly basis.

The assessment phase included an inventory and physical date rollover testing of
all computer hardware, and an identification of other systems or functions that
may be impacted by the date change. The Company has moved aggressively to verify
with third-party vendors and service providers that software and non-IT systems
are, or will be, Year 2000 compliant, and will complete the process of internal
testing of critical systems by March 31, 1999. Critical systems include
communication with the Federal Reserve via Fedline, the computer system and item
processing system, both of which are provided by the third party servicers, and
the wide-area network supporting communications between offices. Non-critical
systems that have been tested for date transition include ATMs, payroll,
accounts payable, internal telephone systems and general operational hardware
such as fax machines, postage meters, and copiers, some of which required
software enhancements and some, replacements.


                                       12
<PAGE>   13


As a result of the Company's planned migration to new data processing and item
processing providers in May 1999, and the planned enhancement of our
inter-branch communication network through a wide-area network, the hardware
replacement costs resulting from date recognition failure have been replaced by
equipment costs for support of the new network environment. Costs related to the
migration will approximate $260,000, to be amortized over the life of each of
the contracts, and costs associated with the installation of the wide-area
network will total approximately $380,000, which will be depreciated over its
useful life. A one-time de-conversion charge plus annual costs of the new
systems will result in a charge to income of approximately $120,000 in 1999, and
will not materially impact the results of operations in those or future years.
The Company has been assured that the new systems are Year 2000 compliant and
will test the wide-area network and use proxy-testing for the systems provided
by third party servicers to verify their readiness prior to March 31, 1999.

In addition, an ongoing awareness campaign has been implemented to inform
customers and shareholders of the potential problem and its implications, and
our employees are kept informed of the issue and of our progress toward
minimizing its impact.

While management currently believes that its Year 2000 plans for monitoring
third-party progress and subsequent systems testing will mitigate the Year 2000
problem, if the service providers and customers, upon whom we rely, are not in
compliance, the Year 2000 issue may have a material adverse impact on the
operation of the Bank. The Company has established contingency plans in case of
failure resulting from the date change issue, and will be prepared to function
on a limited basis until such failure is corrected. Because the Bank is a
relatively small financial institution, daily transactions, deposits,
withdrawals and payments, can be processed normally, and accounts can be updated
manually until computer connectivity is re-established. Delays in processing
transactions may result in the event that the Company is forced to process
transactions manually and may disrupt normal business activities of the Company
and its customers.


                                       13
<PAGE>   14


SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                     Years ended December 31,

in thousands                                                                       1998                 1997

ASSETS
<S>                                                                               <C>                 <C>
 Cash and due from banks                                                          $   12,280          $   10,759
 Federal funds sold                                                                   43,093              15,569
 Investment securities available for sale                                             45,843              30,360
 Loans held for sale                                                                   1,814                  --
 Loans                                                                               129,885             113,543
   Less: Allowance for loan losses                                                    (1,524)             (1,473)
 Loans, net                                                                          128,361             112,070
 Premises and equipment, net                                                           1,683               1,658
 Foreclosed real estate                                                                  535                 349
 Accrued interest receivable                                                           1,387               1,172
 Deferred income taxes                                                                 2,474               3,299
 Other assets                                                                          1,096                 430

TOTAL ASSETS                                                                        $238,566            $175,666

LIABILITIES AND SHAREHOLDERS' EQUITY

  Deposits:
    Noninterest-bearing deposits                                                  $   37,507           $  28,856   
    Interest-bearing deposits                                                        169,873             123,946   
        Total deposits                                                               207,380             152,802   
  Securities sold under repurchase agreements                                          9,523               3,049   
  Accrued expenses and other liabilities                                                 951                 633   
        Total liabilities                                                            217,854             156,484   
                                                                                                                   
Commitments and contingent liabilities                                                                             
                                                                                          --                  --   
                                                                                  
Shareholders' equity
  Preferred stock, $.01 par value, 1,000,000 shares authorized; no
  shares issued or outstanding                                                            --                  --
  Common stock, $.01 par value, 20,000,000 shares authorized;
  10,951,218 shares issued and outstanding at December 31, 1998
  and December 31, 1997                                                                  109                 109
  Paid-in capital -- stock options                                                       534                 534
  Additional paid-in capital                                                          25,259              25,259
  Accumulated deficit                                                                 (5,484)             (6,910)
  Accumulated other comprehensive income                                                 294                 190
      Total shareholders' equity                                                      20,712              19,182

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                          $238,566            $175,666
</TABLE>

See accompanying notes to consolidated financial statements.


                                       14
<PAGE>   15


SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                     Years ended December 31,

in thousands, except per share data                                              1998          1997         1996

<S>                                                                               <C>          <C>           <C>
INTEREST INCOME
Interest and fees on loans                                                        $10,529      $ 8,752       $7,409
Taxable interest on securities                                                      2,193        1,746        1,080
Interest on federal funds sold and deposits with other banks                        1,524          865          687
    Total interest income                                                          14,246       11,363        9,176

INTEREST EXPENSE
Interest on deposits                                                                6,083        4,520        3,362
Interest on short-term borrowings                                                     254           50           --
    Total interest expense                                                          6,337        4,570        3,362

NET INTEREST INCOME                                                                 7,909        6,793        5,814
Provision for loan losses                                                             415          254         (227)
Net interest income after provision for loan losses                                 7,494        6,539        6,041

NONINTEREST INCOME
Service charges on deposit accounts                                                   645          612          394
Gain on sale of investment securities                                                  12           --           --
Other income                                                                          431          162          123
    Total noninterest income                                                        1,088          774          517

NONINTEREST EXPENSE
Salaries and employee benefits                                                      3,411        2,873        2,743
Occupancy expense                                                                     741          673          518
Furniture and equipment expense                                                       264          222          153
(Gain) loss on sale of loans and foreclosed assets                                   (20)           --          611
Other expense                                                                       1,963        1,743        1,589
    Total noninterest expense                                                       6,359        5,511        5,614

Income before income taxes                                                          2,223        1,802          944
    Income tax expense (benefit)                                                      797          671       (4,058)

NET INCOME                                                                         $1,426       $1,131       $5,002
Basic earnings per common share                                                     $0.13        $0.10        $0.46
Diluted earnings per common share                                                    0.13         0.10         0.44
</TABLE>


See accompanying notes to consolidated financial statements.

                                       15
<PAGE>   16
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                          Years ended December 31,

in thousands                                                                         1998            1997           1996
<S>                                                                                   <C>             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income
 Adjustments to reconcile net income to net cash provided (used) by operating           $1,426          $1,131         $5,002
 activities:
    Depreciation                                                                           247             194            129
    Provision (recovery) for loan losses                                                   415             254           (227)
    Provision for losses on foreclosed real estate                                          34              --             --
    Deferred income tax expense (benefit)                                                  760             639         (4,058)
    Originations of loans held for sale                                                 (5,834)             --         (2,641)
    Proceeds from loan sales                                                             4,614              --            382
    (Gain) loss on sale of loans                                                                            --            434
    Net realized gains on investment securities                                                             --             --
    Net accretion on securities                                                           (117)            (87)           (55)
    (Decrease) increase in net deferred loan fees                                          (69)            (41)            24
    Net increase in premium on loans purchased                                            (308)         (1,513)            --
    (Increase) decrease in accrued income and other assets                                (882)           (327)           259
    Increase (decrease) in accrued expenses and other liabilities                          318             (48)           235
    (Gain) loss on sale of foreclosed real estate                                          (15)             --            177

Net cash provided (used) by operating activities                                           529             202           (339)

CASH FLOWS FROM INVESTING ACTIVITIES:
    Net decrease in deposits with other banks                                               --              --          2,220
    (Increase) decrease in federal funds sold                                          (27,524)         (3,354)         4,275
    Purchases of available for sale securities                                         (25,511)        (17,438)       (11,819)
    Proceeds from maturities of available for sale securities                            9,250           8,775          8,235
    Proceeds from prepayments of principal on securities                                   125             110            150
    Proceeds from sales of available for sale securities                                 1,031              --             --
    Net increase in other securities                                                       (80)            (91)            --
    Net increase in loans                                                              (12,227)        (14,713)       (11,014)
    Purchases of loans                                                                  (5,607)        (18,320)            --
    Net purchases of premises and equipment                                               (272)           (538)          (252)
    Proceeds from sale of foreclosed real estate                                           755              --            777

Net cash used in investing activities                                                   (60,060)        (45,569)        (7,428)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net increase in total deposits                                                      54,578          45,229          5,684
    Net increase in securities sold under agreements to repurchase                       6,474           3,049             --

    Net cash provided by financing activities                                           61,052          48,278          5,684

Net increase (decrease) in cash and due from banks                                       1,521           2,911         (2,083)
Cash and due from banks at beginning of period                                          10,759           7,848          9,931

Cash and due from banks at end of period                                               $12,280         $10,759         $7,848

Interest paid                                                                           $6,283          $4,523         $3,378
Income taxes paid                                                                           38              --             --
Loans transferred to foreclosed real estate                                                961             136             15
Loans transferred to loans held for sale                                                   545              --             --
</TABLE>

See accompanying notes to consolidated financial statements.


                                       16
<PAGE>   17


SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                          Accumulated
                                                                                             Other
                                                       Comprehensive     Accumulated     Comprehensive    Common        Paid-in
in thousands                                Total          Income          Deficit           Income         Stock       Capital

Year ended December 31, 1996

<S>                                         <C>            <C>            <C>                <C>            <C>         <C>
Beginning balance                           $13,096                       $(13,043)          $ 237          $109        $25,793
Comprehensive income:
  Net income                                  5,002         $5,002           5,002
  Other comprehensive income, net of tax:
     Unrealized losses on securities           (267)          (267)                           (267)
                                                            ------
Comprehensive income                                        $4,735
                                            -------         ======        ---------          ------         ----        -------
Ending balance                              $17,831                       $ (8,041)          $ (30)         $109        $25,793
                                            =======                       =========          ======         ====        =======

Year ended December 31, 1997

Beginning balance                           $17,831                       $ (8,041)          $ (30)         $109        $25,793
Comprehensive income:
  Net income                                  1,131         $1,131           1,131
  Other comprehensive income, net of tax:
     Unrealized gains on securities             220            220                             220
                                                            ------
Comprehensive income                                        $1,351
                                                            ======
                                            -------                       ---------          -----          ----        -------
Ending balance                              $19,182                       $ (6,910)          $ 190          $109        $25,793
                                            =======                       =========          =====          ====        =======


Year ended December 31, 1998


Beginning balance                           $19,182                       $ (6,910)          $ 190          $109        $25,793
Comprehensive income:
   Net income                                 1,426         $1,426           1,426
   Other comprehensive income, net of tax:
     Unrealized gains on securities of $104
net of reclassification adjustment for
gains included in net income of $0              104            104                             104
                                                            ------
Comprehensive income                                        $1,530
                                            -------         ======        ---------          -----          ----        -------
Ending balance                              $20,712                       $ (5,484)          $ 294          $109        $25,793
                                            =======                       =========          =====          ====        =======
</TABLE>


See accompanying notes to consolidated financial statements.


                                       17
<PAGE>   18


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Suburban Bancshares, Inc. and its subsidiary, Suburban Bank of Maryland, provide
a variety of banking services to businesses, professionals and individuals
through seven branches located in Prince George's and Montgomery Counties in
Maryland. In addition to commercial and personal depository services and cash
management services, Suburban Bank of Maryland offers lending products such as
commercial loans, commercial real estate loans, Small Business Administration
loans, asset based lending, government contract loans and consumer loan
products, including vehicle, home equity, mortgage and personal loans.

NOTE A ACCOUNTING POLICIES

The accounting and reporting policies of Suburban Bancshares, Inc. and its
subsidiary (the "Company") are in conformity with generally accepted accounting
principles and conform to general practices within the banking industry. Certain
reclassifications have been made to conform the prior year's financial
statements to the 1998 presentation. The following is a summary of the
significant policies:

(1)      PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of Suburban Bancshares, Inc. include the
accounts of Suburban Bancshares, Inc. and its wholly-owned banking subsidiary,
Suburban Bank of Maryland ("Suburban Maryland" or the "Bank"). All significant
intercompany balances and transactions have been eliminated in consolidation. In
the condensed financial statements of Suburban Bancshares, Inc. ("Parent") (Note
Q), the investment in the subsidiary is stated as equity in the net assets of
such subsidiary.

(2)      BASIS OF PRESENTATION

The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and of revenues and expenses for the period. Material estimates that
are particularly susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses and the evaluation of real
estate acquired in connection with foreclosures or in satisfaction of loans.
Actual results could differ from those estimates.

(3)      CASH AND DUE FROM BANKS

The Bank is required to maintain reserves against its deposits with the Federal
Reserve Bank. The balances of such reserves at December 31, 1998 and 1997 were
$1,039,000 and $1,212,000, respectively. At December 31, 1998, Suburban Maryland
had secured reverse repurchase lines of credit aggregating $6,000,000 and
unsecured lines of credit totaling $4,500,000 for short-term financing, all of
which was available at that date. None of these financing arrangements required
compensating balances. For purposes of the Consolidated Statements of Cash
Flows, the Company considers cash and due from banks to be cash and cash
equivalents.

(4)      INVESTMENT SECURITIES

The Company classifies its securities in one of three categories: trading, held
to maturity or available for sale. Management determines the appropriate
classification of securities at the time of purchase. Held to maturity
securities are those securities in which the Company has the ability and the
intent to hold until maturity and are reported at cost, adjusted for
amortization of premium and accretion of discounts using a method which
approximates the interest method over the term of the securities. All other
securities not included in trading or held to maturity are classified as
available for sale and are reported at fair value, with unrealized gains and
losses, net of taxes, reported as a separate component of shareholders' equity.
Securities available for sale will be used as part of the Company's interest
rate risk management strategy and may be sold in response to changes in interest
rates, changes in prepayment risk and other factors.

Realized gains or losses on securities are recognized at the time of sale using
the specific identification method and are classified as securities gains or
losses in the accompanying Consolidated Statements of Operations.

(5)      LOANS HELD FOR SALE

The Company originates loans to customers under the Small Business
Administration ("SBA") program that generally provides for SBA guarantees of 75%
to 90% of each loan. The Company may sell the guaranteed portion of each loan to
a third party and retain the unguaranteed portion in its own portfolio. Those
loans to be sold are classified as loans held for sale and are carried at the
lower of aggregate cost or market. A gain is recognized on the sale of these
loans through collection of a premium over the adjusted carrying value, and
through retention of an ongoing rate differential as a normal servicing fee
between the rate paid


                                       18
<PAGE>   19
by the borrower to the Company and the rate paid by the Company to the purchaser
(excess servicing fee). The Company's investment in an SBA loan is based upon a
relative fair market value allocation between the portion of the loan sold, the
portion of the loan retained and any excess servicing retained. The gain on the
sold portion of the loan is recognized, the carrying value of the retained
portion of the loan is reduced, thereby increasing the future yield, and any
excess servicing is recorded as an asset and subsequently amortized to servicing
income. The Company utilizes a 1% normal servicing fee and has not recorded any
excess servicing assets.

(6)      LOANS

Loans generally are stated at their outstanding, unpaid principal balances net
of any deferred fees or costs, or unamortized premiums or discounts on purchased
loans. Interest income is accrued on the unpaid principal balance. Discounts and
premiums are amortized to income using the interest method. Loan origination
fees net of certain direct origination costs are deferred and recognized as an
adjustment of the yield (interest income) of the related loans.

Nonaccrual loans -- Generally, a loan is classified as nonaccrual and the
accrual of interest on such loan is discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan currently is performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest credited to income is reversed
and the recognition of deferred fees or costs is discontinued. Interest received
on nonaccrual loans generally is either applied against principal or reported as
interest income, according to management's judgment as to the collectibility of
principal. Generally, loans are restored to accrual status when the obligation
is brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.

Impaired Loans -- Loans are considered impaired when, based on current
information, it is probable that the Company will not collect all principal and
interest payments according to contractual terms. Generally, loans are
considered impaired once principal or interest payments become 90 days or more
past due and they are placed on nonaccrual. Management also considers the
financial condition of the borrower, cash flows of the loan and the value of the
related collateral. Loans specifically reviewed for impairment are not
considered impaired during periods of "minimal delay" in payment (90 days or
less) provided eventual collection of all amounts due is expected. The
impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral if repayment is expected to be provided by the collateral.
Generally, the Company's impairment on such loans is measured by reference to
the fair value of the collateral. Interest income on impaired loans is
recognized on the cash basis.

Allowance for Loan Losses -- The allowance for loan losses is increased through
provisions for credit losses charged against income and reduced by reversals of
previous years' provisions. Loans deemed to be uncollectible are charged against
the allowance for loan losses, and subsequent recoveries, if any, are credited
to the allowance.

The allowance for loan losses related to loans that are identified as impaired
is based on discounted cash flows using the loan's initial effective interest
rate or the fair value of the collateral for certain collateral dependent loans.

The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on loans
that may be susceptible to significant change.

(7)      FORECLOSED REAL ESTATE

Foreclosed real estate is comprised of property acquired through foreclosure
proceedings or acceptance of a deed-in-lieu of foreclosure.

Foreclosed assets initially are recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management, and the real estate is carried at the
lower of cost or fair value minus estimated costs to sell. Costs relating to
property improvements are capitalized to the extent that they are recoverable
and costs relating to holding property are expensed when incurred. Gains or
losses on the sale of foreclosed real estate are recognized upon disposition of
the property.

(8)      LONG-LIVED ASSETS

Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method and are included in noninterest expense in the accompanying Consolidated
Statements of Operations.


                                       19
<PAGE>   20
Premises and equipment are depreciated over the estimated useful lives of the
assets (generally five to ten years), except for leasehold improvements which
are amortized over the terms of the respective leases or the estimated useful
lives of the improvements, whichever is shorter.

Long-lived assets are evaluated regularly for other-than-temporary impairment.
If circumstances suggest that their value may be impaired and the write-down
would be material, an assessment of recoverability is performed prior to any
write-down of the assets.

(9)      INCOME TAXES

Under the asset and liability method of accounting for income taxes, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are recognized for future deductible
temporary differences and tax loss carryforwards if their realization is "more
than likely".

(10)     NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted net income per common share is computed by
dividing net income available to common shareholders by the weighted average
number of common shares outstanding during the year including any dilutive
potential common shares outstanding, such as options and warrants.

(11)     STOCK-BASED COMPENSATION

Stock-based compensation is recognized using the intrinsic value method. For
disclosure purposes, pro forma net income and earnings per share impacts are
provided as if the fair value method had been applied.

(12)     COMPREHENSIVE INCOME

In June 1997, Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"), was issued and establishes standards for
reporting and displaying comprehensive income and its components. SFAS 130
requires comprehensive income and its components, as recognized under the
accounting standard, to be displayed in a financial statement with the same
prominence as other financial statements. The Company adopted the standard, as
required, beginning in 1998; adoption of this disclosure requirement had no
impact on the financial position or results of operations of the Company.

(13)     NEW ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 131, Disclosures About Segments
of an Enterprise and Related Information ("SFAS 131"), which was issued in June
1997 established new standards for reporting information about operating
segments in annual and interim financial statements. The standard requires
descriptive information about the way that operating segments are determined,
the products and services provided by the segments and the nature of differences
between reportable years beginning after December 15, 1997. Operating segments
are defined under the Standard based on the availability and utilization of
discrete financial information as well as the necessity for this discrete
financial information to meet certain quantitative thresholds. Management
believes that it has no components that qualify as an operating segment under
SFAS 131 for the year ended December 31, 1998.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"). The provisions of this statement require that
derivative instruments be carried at fair value on the balance sheet. The
statement allows derivative instruments to be used to hedge various risks and
sets forth specific criteria to be used to determine when hedge accounting can
be used. The statement also provides for offsetting changes in fair value or
cash flows of both the derivative and the hedged asset or liability to be
recognized in earnings in the same period; however, any changes in fair value or
cash flow that represent the ineffective portion of a hedge are required to be
recognized in earnings and cannot be deferred. For derivative instruments not
accounted for as hedges, changes in fair value are required to be recognized in
earnings. The provisions of this statement become effective for quarterly and
annual reporting beginning January 1, 2000, and allow for early adoption in any
quarterly period after June 1998. The Company will adopt SFAS 133 as required in
2000. It is expected that adoption of this standard will have no material
impact.


                                       20
<PAGE>   21
NOTE B INVESTMENTS

The following table shows the amortized cost and estimated fair value of
investment securities classified as available for sale at December 31, 1998:

<TABLE>
<CAPTION>

                                                               Gross           Gross        Estimated
                                            Amortized       Unrealized      Unrealized         Fair
in thousands                                  Cost             Gains          Losses          Value


<S>                                          <C>               <C>              <C>         <C>
U.S. Treasury notes                          $ 1,448           $ 30             $  0        $  1,478
Federal agencies                              38,381            512              (77)         38,816
Mortgage-backed obligations of
federal agencies                               4,267              8              (14)          4,261
Other                                          1,268             21               (1)          1,288
                                             -------           ----             ----         -------
Total                                        $45,364           $571             $(92)        $45,843
</TABLE>


The schedule below shows the amortized cost and estimated fair value of
investment securities classified as available for sale at December 31, 1997:

<TABLE>
<CAPTION>

                                                               Gross           Gross        Estimated
                                            Amortized       Unrealized      Unrealized         Fair
in thousands                                   Cost            Gains          Losses          Value
<S>                                          <C>              <C>               <C>           <C>
U.S. Treasury notes                          $ 4,384          $ 21              $(1)          $ 4,404
Federal agencies                              24,695           285               (4)           24,976
Mortgage-backed obligations of
federal agencies                                  89             2               --                91
Other                                            883             7               (1)              889
                                             -------          ----              ---           -------
Total                                        $30,051          $315              $(6)          $30,360
</TABLE>


The amortized cost and estimated fair value for securities available for sale at
December 31, 1998, by contractual maturity are shown in the following table.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay certain obligations with or without call
premiums or prepayment penalties.

<TABLE>
<CAPTION>

in thousands                                      Amortized Cost          Estimated Fair Value

<S>                                                 <C>                        <C>
Due in one year or less                             $  6,319                   $  6,363
Due after 1 year through 5 years                      27,040                     27,491
Due after 5 years through 10 years                     7,738                      7,728
Mortgage-backed securities                             4,267                      4,261
                                                    --------                   --------
Total                                               $ 45,364                   $ 45,843
</TABLE>


The amortized cost and estimated fair value of securities pledged as collateral
to secure certain deposits and short-term borrowings were $16,020,000 and
$16,364,000, respectively at December 31, 1998, as compared to $9,344,000 and
$9,549,000, respectively, at December 31, 1997.

Proceeds from the sale of available for sale securities in 1998 were $1,031,000,
which included gross gains of $12,000.  There were no sales of securities in
1997 or 1996.


                                       21
<PAGE>   22
NOTE C LOANS

Loans, net of amortized deferred fees, are summarized by type as follows:

<TABLE>
<CAPTION>

in thousands                                                    December 31,

                                                         1998                1997
<S>                                                    <C>                 <C>
Commercial                                              $57,970             $49,644
Real estate                                              48,871              44,181
Construction                                             12,024              12,071
Individual                                                4,560               5,069
Other                                                     6,460              2,578
                                                       --------            --------
Total loans                                             129,885             113,543
   Less: Allowance for loan losses                       (1,524)             (1,473)
                                                       --------            --------
Loans, net                                             $128,361            $112,070
</TABLE>


NOTE D   IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES

Impaired loans are those loans for which it is probable that the creditor will
not collect all principal and interest payments according to the loan's
contractual terms. The impairment of a loan is measured at the present value of
expected future cash flows using the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. Interest income on impaired
loans is recognized on a cash basis.

Information with respect to impaired loans at December 31 is as follows:

<TABLE>
<CAPTION>

in thousands                                                                        1998        1997
                                                                                    ----        ----
<S>                                                                                <C>         <C>
Impaired loans with a valuation allowance                                          $1,160      $1,763
Impaired loans without a valuation allowance                                           --          --
                                                                                   ------      ------
    Total impaired loans                                                           $1,160      $1,763

Allowance for credit losses related to impaired loans                              $  135      $  274
Allowance for credit losses related to other than impaired loans                    1,389       1,199
                                                                                   ------      ------
    Total allowance for credit losses                                              $1,524      $1,473

Average impaired loans for the year                                                $1,569      $1,633

Interest income on impaired loans recognized on the cash basis                         --          --
</TABLE>


The provision for loan losses is determined by analyzing the status of
individual loans, reviewing historical loss experience and reviewing the
delinquency of principal and interest payments where pertinent. Management
believes that uncollectible amounts have been charged off and that the allowance
is adequate to cover losses inherent in the portfolio at December 31, 1998.
Increases and decreases in the allowance include changes in the measurement of
impaired loans.

Activity in the allowance for loan losses is summarized as follows:

<TABLE>
<CAPTION>
in thousands                                                Years ended December 31,

                                                        1998           1997         1996
<S>                                                   <C>          <C>            <C>
Balance at beginning of year                          $1,473       $ 1,508        $1,467
Provision (recovery) for loan losses                     415           254          (227)
Loans charged off                                       (470)         (418)         (444)
Recoveries                                               106           129           712
                                                      ------       -------        ------
Balance at end of year                                $1,524       $ 1,473        $1,508
</TABLE>



                                       22
<PAGE>   23



NOTE E FORECLOSED REAL ESTATE

Foreclosed real estate is carried at the lower of cost or fair value less
estimated selling costs, based upon current market conditions and expected cash
flows.

The following schedule presents a breakdown by type of property of foreclosed
real estate:

<TABLE>
<CAPTION>
                                                      December 31,

in thousands                                      1998           1997

<S>                                               <C>           <C>
                                                  $ 60          $ --
Commercial land                                    562           402
                                                  ----          ----
Commercial property                                622           402

Less: Valuation allowance                          (87)          (53)
                                                  ----          ----
Total estimated fair value                        $535          $349
</TABLE>


Activity in the valuation allowance on foreclosed real estate is as follows:

<TABLE>
<CAPTION>

in thousands                                 1998        1997        1996

<S>                                          <C>        <C>         <C>
Balance at beginning of year                 $53        $ 53        $ 362
Provision for losses                          34          --           --
Dispositions, net                             --          --         (309)
Charge-offs, net of recoveries                --          --           --
                                             ---        ----        -----
Balance at end of year                       $87        $ 53        $  53
</TABLE>


NOTE F PREMISES AND EQUIPMENT

Premises and equipment include the following:

<TABLE>
<CAPTION>
                                                                         December 31,

in thousands                                                          1998          1997

<S>                                                                 <C>           <C>
Land                                                                $   231       $   231
Buildings and improvements                                              630           630
Leasehold improvements                                                  953           904
Furniture and equipment                                               1,540         1,254
Branch in construction                                                    1            66
Less: Accumulated depreciation and amortization                      (1,672)       (1,427)
                                                                    -------       -------
Total premises and equipment                                        $ 1,683       $ 1,658
</TABLE>



                                       23
<PAGE>   24


The Company occupies banking and office space in seven locations under
noncancellable lease arrangements accounted for as operating leases. The initial
lease periods range from three to ten years and provide for one or more
five-year renewal options. The leases provide for percentage annual rent
escalations and require that the lessee pay certain operating expenses
applicable to the leased space. Rent expense applicable to operating leases
amounted to $505,000, $441,000 and $329,000 in 1998, 1997 and 1996,
respectively. At December 31, 1998, future minimum lease payments under
noncancellable operating leases having an initial term in excess of one year are
as follows (in thousands):

<TABLE>
<CAPTION>

Years ending December 31,
       <S>                                     <C>
       1999                                     $ 519
       2000                                       530
       2001                                       533
       2002                                       536
       2003                                       547
       Thereafter                               2,067
                                                -----

Total minimum lease payments                   $4,732
</TABLE>


NOTE G DEPOSITS

Total deposits are summarized by type as follows:

<TABLE>
<CAPTION>
                                                                      December 31,

in thousands                                                       1998          1997

<S>                                                            <C>            <C>
Noninterest-bearing deposits                                    $37,507        $28,856
Interest-bearing:
   Interest checking deposits                                    14,650         12,461
   Money market deposits                                         76,844         50,987
   Savings deposits                                              25,999         24,607
   Certificates of deposit of $100,000 or more                   17,713         11,259
   Other time deposits                                           34,667         24,632
                                                                 ------         ------
Total interest-bearing deposits                                 169,873        123,946
                                                                -------        -------
Total deposits                                                 $207,380       $152,802
</TABLE>


NOTE H SHORT-TERM BORROWINGS

Short-term borrowings consist of securities sold under repurchase agreements,
which are securities sold to the Bank's customers, at the customer's request,
under a continuing "roll-over" contract that matures in one business day. The
underlying securities sold are U.S. Treasury notes or Federal agencies which are
segregated in the Bank's Federal Reserve Bank account from the Company's other
investment securities. The following table presents certain information for
short-term borrowings:

<TABLE>
<CAPTION>
                                                                       1998                       1997

in thousands                                                     Amount        Rate         Amount        Rate

Securities sold under repurchase agreements:
<S>                                                              <C>            <C>          <C>           <C>
   At year end                                                   $ 9,523        3.58%        $3,049        4.15%
   Average for the year                                            6,549        3.87%         1,220        4.08%
   Maximum month-end balance                                      12,403                      4,259
</TABLE>



                                       24
<PAGE>   25


NOTE I            OTHER EXPENSE

Other expense in the Consolidated Statements of Operations include the
following:

<TABLE>
<CAPTION>
in thousands                                                         Years ended December 31,

                                                                  1998         1997         1996
<S>                                                            <C>        <C>            <C>
Outside data service fees                                       $  529      $  434        $  321
Printing and office expenses                                       339         267           202
Director fees                                                      201         210           146
Bank operations                                                    225         179           163
Loan and foreclosed real estate expenses                           201         139           206
Professional fees and services                                      94         127           163
Marketing and advertising                                          144         118           147
Insurance                                                           58          60            87
Franchise taxes, filing fees and assessments                        49          55            23
Other                                                              123         154           131
                                                                ------      ------        ------
Total other expenses                                            $1,963      $1,743        $1,589
</TABLE>


NOTE J INCOME TAXES

Federal and state income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>

in thousands                                                 Years ended December 31,

                                                       1998          1997          1996
<S>                                                  <C>           <C>          <C>
Current federal income tax                           $   --        $   --       $    --
Current state income tax                                 --            --            --
Deferred federal income tax expense (benefit)           742           614        (3,322)
Deferred state income tax expense (benefit)              55            57          (736)
                                                     ------        ------       -------
Total income tax expense (benefit)                   $  797        $  671       $(4,058)
</TABLE>



                                       25
<PAGE>   26


The following chart is a summary of the tax effects of temporary differences
that give rise to significant portions of deferred tax assets:

<TABLE>
<CAPTION>
in thousands                                                                         Years ended December 31,

                                                                                    1998        1997         1996
<S>                                                                                 <C>       <C>             <C>
Deferred tax assets:
   Allowance for loan losses                                                         $236     $    76          $ --
   Deferred loan fees and costs                                                        54          60            51
   Allowance for losses on foreclosed real estate                                      34          20            21
   Deferred rent                                                                       16          14             9
   Deferred compensation                                                               51          22            72
   Deferred gain on sale of loans                                                      22          22            28
   Loan interest                                                                        5          11             8
   Alternative minimum tax                                                             97          32            --
   Net operating loss carryforwards                                                 2,154       3,199         3,930
                                                                                    -----       -----         -----
Gross deferred tax assets                                                           2,669       3,456         4,119
   Less valuation allowance                                                           --          --             --
                                                                                    -----       -----         -----
Total deferred tax assets                                                           2,669       3,456         4,119

Deferred tax liabilities:

   Allowance for loan losses                                                           --          --           (22)
   Tax on unrealized gain on securities available for sale                           (185)       (119)            --
   Premises and equipment                                                             (10)        (38)          (39)
                                                                                    ------      ------        ------
Net deferred income taxes                                                          $2,474      $3,299        $4,058
</TABLE>


A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate follows:

<TABLE>
<CAPTION>

                                                                                  Years ended December 31,

                                                                             1998          1997           1996
<S>                                                                         <C>            <C>           <C>
Statutory federal income tax rate                                            34.0%          34.0%          34.0%
State income taxes, net of federal income tax benefit                         1.6            2.1            4.6
Elimination of valuation allowance on deferred tax assets                      --             --         (468.4)
Other, net                                                                    0.2            1.1            --
                                                                            -----          -----         -------
Effective tax rates                                                          35.8%          37.2%        (429.8)%
</TABLE>


At December 31, 1998 the Company reported a net deferred tax asset of $2,154,000
reflecting the benefit of $5,576,000 in tax loss carryforwards, which expire in
varying amounts between 2003 and 2008. Realization depends on generating
sufficient taxable income before the expiration of the loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced. The amount of loss carryforward available for any one year may be
limited if the Company is subject to the alternative minimum tax.


                                       26
<PAGE>   27


NOTE K EARNINGS PER COMMON SHARE

The weighted average number of shares outstanding used in the determination of
basic and diluted income per share are shown in the following table:

<TABLE>
<CAPTION>
For the Year Ended                                                                      1998
                                                                 ----------------------------------------------
                                                                      Income            Shares        Per Share
dollars in thousands                                               (numerator)       (denominator)     Amount
<S>                                                              <C>               <C>               <C>
Basic earnings per share:

Income available to common shareholders                              $1,426         10,951,218          $0.13

Effect of dilutive securities (assuming conversion)                                    439,871

Diluted earnings per share:
Income available to common shareholders plus
assumed conversions of options outstanding                           $1,426         11,391,089          $0.13
---------------------------------------------------------------------------------------------------------------
For the Year Ended                                                                       1997
                                                                 ----------------------------------------------
                                                                      Income            Shares       Per Share
dollars in thousands                                               (numerator)       (denominator)     Amount

Basic earnings per share:
Income available to common shareholders                              $1,131         10,951,218          $0.10

Effect of dilutive securities (assuming conversion)                                    338,004

Diluted earnings per share:
Income available to common shareholders plus
assumed conversions of options outstanding                           $1,131         11,289,222          $0.10
---------------------------------------------------------------------------------------------------------------
For the Year Ended                                                                      1996
                                                                 ----------------------------------------------
                                                                      Income            Shares       Per Share
dollars in thousands                                               (numerator)       (denominator)     Amount

Basic earnings per share:
Income available to common shareholders                              $5,002         10,951,218          $0.46

Effect of dilutive securities (assuming conversion)                                    333,344

Diluted earnings per share:
Income available to common shareholders plus
    assumed conversions of options outstanding                       $5,002         11,284,562          $0.44
---------------------------------------------------------------------------------------------------------------
</TABLE>


Options to purchase 178,000 shares of common stock at $3.625 were outstanding
during 1998 but were not included in the computation of diluted EPS in the last
two quarters because the options' exercise price was greater than the average
market price of the common shares. Likewise, 80,000 options outstanding during
the entire year were exercisable at $5.625 and were not included in the
computation because they do not have a dilutive effect.

In January 1998, under the 1997 Stock Option Plan, the Company awarded 385,950
options to employees and directors, 207,950 of which vest at 20% per year over a
period of five years. The exercise price of the options granted was equal to the
market price on the date of grant at $3.625. In January 1999, 16,868 options
were granted under the 1997 Stock Option Plan to employees. These options also
vest at 20% per year over five years and were awarded at an exercise price of
$2.59, the market price on the date of grant.

NOTE L RELATED PARTY TRANSACTIONS

Certain directors, officers and principal shareholders of the Company and its
subsidiary, including their immediate families and companies in which they have
significant ownership, were loan customers during 1998 and 1997. Such loans were
made in the ordinary course of


                                       27
<PAGE>   28
business and on substantially the same credit terms, including interest rates,
maturities and collateralization, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than normal risk of
collectibility or present other unfavorable features. At December 31, 1998, all
of the loans were current and performing according to agreement.

Total loans outstanding for each year indicated and activity in those loans are
shown below:

<TABLE>
<CAPTION>
in thousands                                                     Years ended December 31,

                                                                  1998              1997
<S>                                                              <C>                 <C>
Outstanding at beginning of year                                 $   962             $  870
New loans and principal advances                                   1,968                524
Repayments                                                          (899)              (432)
                                                                   -----              -----
Outstanding at end of year                                       $ 2,031             $  962
</TABLE>


An individual who was a director of the Company's subsidiary during 1998 is a
general partner in a partnership which leases a branch facility to the Bank. The
lease term expired June 30, 1997, and was renewed under the second of three
five-year renewal options at a minimum annual rate of approximately $75,600. A
director of the Company and its subsidiary is the Chairman of the Board of a
company that provided services associated with the disposition of certain
properties obtained through foreclosure. Fees and commissions for these services
were approximately $85,000 in 1998; no fees were paid in 1997. Management
believes that the services provided and the terms of the foregoing lease are no
more and no less favorable to the Company than those which could have been
received from unaffiliated parties.

NOTE M   EMPLOYEE BENEFIT PLANS

The Company has a 401(k) plan covering all employees who have reached the age of
21 and have completed at least one year of service as defined by the plan. The
Company made contributions to the plan of approximately $77,000, $67,000 and
$55,000 in 1998, 1997 and 1996, respectively. These amounts are included in
salaries and employee benefits in the accompanying Consolidated Statements of
Operations.

In 1993, upon the successful completion of a stock offering, 350,000 Management
Stock Options were granted to the Chairman of the Board, the Vice Chairman and a
major stockholder under the terms of the Plan of Reorganization and
Recapitalization. These options are exercisable at a purchase price of $0.10 per
share and have a term of five years, expiring in March of 2001. Deferred
compensation expense has been recognized and the offset, recorded to paid-in
capital - stock options.

An Incentive Stock Option ("ISO") Plan in place since 1987 allowed the Company
to grant options to officers and key employees for up to 404,235 shares of
common stock. There were 80,000 options outstanding under the ISO Plan at the
beginning of 1995. No options were granted under this plan during 1996. In
January 1997, seven officers and key employees were granted 12,600 options. The
exercise price of the options, which have a term of ten years from the date of
the grant, equals the market price of the Company's stock on the date of grant.

At the 1997 Annual Shareholders Meeting, a combined stock option plan for both
employees and directors was approved to replace the original ISO Plan, with a
total of 500,000 shares of common stock available for grant. Awards under the
1997 Stock Option Plan (the "1997 Plan") may be granted in the form of incentive
stock options for employees or non-incentive stock options for either employees
or directors, and have a maximum duration of ten years from the date of grant.
The exercise price of any option granted under the plan may not be less than the
market price of the optioned shares on the date of grant. In January 1998,
178,000 options were granted under the 1997 Plan to directors, and 207,950
incentive stock options, which vest at 20% per year over a five year period,
were granted to employees; in January 1999, 16,868 options, which also vest at
20% per year over a five-year period, were granted to employees.


                                       28
<PAGE>   29


Under the provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), the Company had the option
of accruing a compensation expense for stock options granted to employees or
applying the provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). The Company has elected to continue to account for the
above fixed stock option plans under APB 25, which does not require compensation
expense to be recognized in the Consolidated Statements of Operations. Had
compensation cost for the plan been determined based on the fair value of the
options at the grant date consistent with the method of SFAS 123, the Company's
net income and earnings per share in 1997 would have been:

<TABLE>
<CAPTION>
                                                   Basic          Diluted
                               Net income          Earnings Per   Earnings Per
                               (in thousands)      Share          Share
<S>                                    <C>             <C>             <C>
As reported                            $1,131          $0.10           $0.10
Pro forma                               1,112           0.10            0.10
</TABLE>


No pro forma information is provided for 1998, because options granted during
the year and vested at December 31, 1998, were to non-employee directors. No
options were granted in 1996.

The fair value of each option granted is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 0%, expected volatility
of 30%, risk-free interest rate of 6.41%, and expected life of 10 years.

A summary of the status of the Company's fixed stock option plans at December
31, 1998, 1997 and 1996 and changes during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>
                                             Years ended December 31,

                                         1998                         1997                         1996

                                          Weighted                      Weighted                    Weighted
                              Number      Average         Number        Average         Number      Average
                              of Shares   Exercise Price  of Shares     Exercise Price  of Shares   Exercise Price
<S>                            <C>            <C>           <C>             <C>          <C>             <C>
Beginning of year              442,600        $1.17         430,000         $1.13        430,000         $1.13
Granted                        385,950        $3.625         12,600          2.63           --            --
Exercised                         --            --             --             --            --            --
Forfeited                         --            --             --             --            --            --
End of year                    828,550        $2.31         442,600         $1.17        430,000         $1.13


Weighted average fair value of
options granted during the year               $1.97                         $1.50                         --
-------------------------------------------------------------------------------------------------------------------
</TABLE>

At December 31, 1998, 620,600 options were exercisable; at December 31, 1997 and
1996, all options outstanding were exercisable.

The following information applies to options outstanding at December 31, 1998:

<TABLE>
<CAPTION>
<S>                                                         <C>
Number outstanding                                          828,550
Range of exercise prices                                    $0.10 to $5.625
Weighted average exercise price                             $2.31
Weighted average remaining contractual life                 5.7 years
</TABLE>

NOTE N REGULATORY MATTERS

The Company is subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.


                                       29
<PAGE>   30


Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the
Company meets all capital adequacy requirements to which it is subject.

As of December 31, 1998 the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.

The actual capital amounts and ratios for the Company and the Bank are presented
in the table below:

<TABLE>
<CAPTION>
                                                                          FOR CAPITAL              TO BE WELL
                                                     ACTUAL             ADEQUACY PURPOSES         CAPITALIZED

in thousands                                    AMOUNT      RATIO      AMOUNT       RATIO      AMOUNT      RATIO
<S>                                              <C>          <C>        <C>          <C>       <C>          <C>
As of December 31, 1998:
   Total capital (to risk-weighted assets):
          Company                                $21,583      16.65%     $10,371       8.00%    $12,964       10.00%
          Suburban Bank of Maryland               16,914      13.23       10,226       8.00      12,783       10.00
   Tier 1 capital (to risk-weighted assets):
          Company                                 20,058      15.47        5,186       4.00       7,779        6.00
          Suburban Bank of Maryland               15,390      12.04        5,113       4.00       7,670        6.00
   Tier 1 capital (to average assets):
          Company                                 20,058       9.13        8,791       4.00      10,988        5.00
          Suburban Bank of Maryland               15,390       7.05        8,738       4.00      10,922        5.00


As of December 31, 1997:
   Total capital (to risk-weighted assets):
          Company                                $18,959      18.74%      $8,094       8.00%    $10,118       10.00%
          Suburban Bank of Maryland               14,415      14.48        7,966       8.00       9,958       10.00
   Tier 1 capital (to risk-weighted assets):
          Company                                 17,692      17.49        4,047       4.00       6,071        6.00
          Suburban Bank of Maryland               13,168      13.22        3,983       4.00       5,975        6.00
   Tier 1 capital (to average assets):
          Company                                 17,692      10.82        6,542       4.00       8,178        5.00
          Suburban Bank of Maryland               13,168       8.25        6,383       4.00       7,979        5.00
</TABLE>


NOTE O COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company incurs certain commitments and
contingent liabilities, that are not reflected in the accompanying Consolidated
Financial Statements. These off-balance-sheet items include various commitments
to extend credit and standby letters of credit. No material losses are expected
to result from these transactions. At December 31, 1998 and 1997, commitments
under standby letters of credit totaled approximately $744,000 and $954,000,
respectively. Unfunded loan commitments totaled approximately $18,817,000 and
$15,000,000 at December 31, 1998 and 1997, respectively.

The Company's subsidiary is, at times, and in the ordinary course of banking
business, subject to legal actions. Management is of the opinion that losses, if
any, resulting from current legal actions will not have a material adverse
effect on the financial condition of the Company.

Because most of the Company's business activity is with customers located in the
Washington, D.C. metropolitan area, a geographic concentration of credit risk
exists within the loan portfolio, and, as such, its performance will be
influenced by the economy of the region. In addition, foreclosed real estate is
located in the same market or its surrounding areas; accordingly, the recovery
of a substantial portion of the carrying amount of foreclosed real estate is
susceptible to changes in market conditions in the Washington metropolitan area.
The loan portfolio is diversified with no single industry or customer comprising
more than 7.3% of the total portfolio. The largest concentration of borrowers
within general types of industries, as classified by Standard Industrial Codes
("SIC"), is in the Finance/Insurance/Real Estate group, which is 17.4% of the
total portfolio.

The Company sells excess funds overnight (Federal funds sold) to correspondent
banks. At December 31, 1998, a total of $43.1 million was invested with three
banks, the largest exposure being $22.8 million. All of these correspondent
banks are considered well capitalized under regulatory guidelines, and,
therefore, little, if any, credit risk is present.


                                       30
<PAGE>   31


NOTE P FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS 107"), requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
that value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating the
fair value for its financial instruments as defined by SFAS 107.

CASH AND DUE FROM BANKS: The carrying amount approximates fair value.

INTEREST-BEARING DEPOSITS WITH BANKS AND FEDERAL FUNDS SOLD: The carrying amount
approximates fair value.

INVESTMENT SECURITIES AVAILABLE FOR SALE: Fair values are based on published
market prices or dealer quotes.

LOANS: For loans with short-term or variable characteristics, such as home
equity or personal lines of credit and variable-rate commercial and real estate
loans, the carrying value approximates fair value. This amount excludes any
value related to account relationships. The fair value of other types of loans
is estimated by discounting the future cash flows using the comparable risk-free
rate, adjusted for credit risk and operating expenses.

INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount approximates fair
value.

NONINTEREST-BEARING DEPOSITS: The fair value of these instruments, by the SFAS
107 definition, is the amount payable at the reporting date.

INTEREST-BEARING DEPOSITS: The fair value of demand deposits, savings accounts
and money market deposits with no defined maturity, by SFAS 107 definition, is
the amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated by discounting the future cash flows using
the current rates at which similar deposits would be made.

At December 31, 1997, the Company had outstanding letters of credit and
commitments to extend credit of $954,000 and $15,000,000, respectively; at
December 31, 1998, outstanding letters of credit totaled $744,000 and
commitments to extend credit were $18,817,000. The fair value of these
off-balance-sheet financial instruments, based on fees that would be charged to
enter similar arrangements, is immaterial.

The estimated fair values of the Company's financial instruments required to be
disclosed under SFAS 107 are as follows:

<TABLE>
<CAPTION>
                                                                       1998                        1997

                                                              Carrying        Fair        Carrying         Fair
in thousands                                                   Amount        Value         Amount         Value

Assets:
<S>                                                            <C>           <C>            <C>           <C>
   Cash and due from banks                                       $12,280       $12,280        $10,759       $10,759
   Federal funds sold                                             43,093        43,093         15,569        15,569
   Investment securities available for sale                       45,843        45,843         30,360        30,360
   Net loans (including loans held for sale)                     130,175       133,706        112,070       113,671
   Interest receivable                                             1,387         1,387          1,172         1,172

Liabilities:
   Noninterest-bearing deposits                                  $37,507       $37,507        $28,856       $28,856
   Interest-bearing deposits                                     169,873       170,177        123,946       123,981
   Securities sold under repurchase agreements                     9,523         9,523          3,049         3,049
   Interest payable                                                  154           154            100           100
</TABLE>




                                       31
<PAGE>   32


NOTE Q PARENT COMPANY CONDENSED FINANCIAL STATEMENTS

In 1998 and 1997, all costs of operating the Bank were allocated directly to the
Bank. Condensed financial statements of Suburban Bancshares, Inc. only (the
"Parent") follow:

CONDENSED BALANCE SHEETS
Parent Company

<TABLE>
<CAPTION>
                                                                             Years ended December 31,

in thousands                                                                   1998           1997

ASSETS
<S>                                                                            <C>          <C>
   Cash and due from banks                                                     $ 1,449      $     773
   Investment securities available for sale                                      2,784          3,300
   Investment in subsidiary                                                     16,127         14,789
   Deferred income taxes                                                            40             96
                                                                                                     
   Other assets                                                                     48             46  
                                                                               -------        -------
Total Assets                                                                   $20,448        $19,004


LIABILITIES AND SHAREHOLDERS' EQUITY                                           $     6      $       5
   Liabilities
   Shareholders' equity:
      Common stock                                                                 109            109
      Paid-in capital -- stock options                                             534            534
      Additional paid-in capital                                                25,259         25,259
      Accumulated deficit                                                       (5,484)        (6,910)
      Accumulated other comprehensive income                                        24              7
                                                                                ------         ------
   Total shareholders' equity                                                   20,442         18,999
                                                                                ------         ------
Total Liabilities and Shareholders' Equity                                     $20,448        $19,004
</TABLE>



CONDENSED STATEMENTS OF OPERATIONS
Parent Company

<TABLE>
<CAPTION>
                                                                               Years ended December 31,

in thousands                                                         1998               1997               1996
<S>                                                                   <C>                <C>               <C>
Interest on deposits                                                  $    55            $    33           $    64
Interest on investments                                                   172                197               148
                                                                          ---                ---               ---
Total income                                                              227                230               212

Total expenses                                                             92                 91               111

Income before income taxes and equity in

undistributed income of subsidiaries                                      135                139               101
Income tax expense (benefit)                                               47                 54              (152)
                                                                        -----              -----            -------
Income before equity in undistributed
income of subsidiaries                                                     88                 85               253
Equity in undistributed income of subsidiaries                          1,338              1,046             4,749
Net income                                                              -----              -----            ------
                                                                       $1,426             $1,131            $5,002
</TABLE>



                                       32
<PAGE>   33


CONDENSED STATEMENTS OF CASH FLOWS
Parent Company

<TABLE>
<CAPTION>

                                                                               Years ended December 31,

in thousands                                                                1998          1997          1996

Cash flows from operating activities:
<S>                                                                      <C>             <C>          <C>
   Net income                                                            $ 1,426         $ 1,131      $ 5,002
   Adjustments to reconcile net income to net cash
provided (used) by operating activities:
         Equity in income of subsidiaries                                 (1,338)         (1,046)      (4,749)
         Accretion on securities                                              (4)             (6)          (3)
         Deferred income tax expense (benefit)                                44              51         (152)
        (Increase) decrease in other assets                                   (2)              5          (34)
         Increase (decrease) in other liabilities                              1               3           (3)
                                                                         -------         -------      -------
Net cash provided by operating activities                                    127             138           61

Net cash provided by investing activities                                    549              --          526

Net cash provided by financing activities                                     --              --           --

Net increase in cash and cash equivalents                                    676             138          587
Cash and cash equivalents at beginning of year                               773             635           48
                                                                         -------         -------      -------
Cash and cash equivalents at end of year                                 $ 1,449         $   773      $   635
</TABLE>


                                       33
<PAGE>   34


NOTE R SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)

<TABLE>
<CAPTION>

                                                                               1998

Dollars in thousands                                  First           Second           Third           Fourth
except per share data                                Quarter         Quarter          Quarter          Quarter

<S>                                                 <C>                   <C>              <C>              <C>
Income from earning assets                          $3,220                $3,475           $3,696           $3,855
Interest expense                                     1,370                 1,564            1,665            1,738
Net interest income                                  1,850                 1,911            2,031            2,117
Provision for loan losses                              100                    95              120              100
Noninterest income                                     208                   244              270              366
Noninterest expense                                  1,500                 1,536            1,616            1,707
Income before income taxes                             458                   524              565              676
Income tax expense                                     163                   188              203              243
Net income                                            $295                  $336             $362             $433
------------------------------------------------------------------------------------------------------------------

Basic:
   Earnings per share                                $0.03                 $0.03            $0.03            $0.04
   Average shares outstanding                   10,951,218            10,951,218       10,951,218       10,951,218
Diluted:
   Earnings per share                                $0.03                 $0.03            $0.04            $0.03
   Average shares outstanding                   11,295,171            11,297,762       11,294,318       11,289,433
Dividends declared per common share                     --                    --               --               --
------------------------------------------------------------------------------------------------------------------

Market price per common share
   High for the period                            $ 4                  $ 4  9/16        $  4  1/8        $       3
   Low for the period                               3  3/8               3   7/8           2  7/8          2 11/32
==================================================================================================================
<CAPTION>
                                                                               1997

Dollars in thousands                                  First           Second           Third           Fourth
except per share data                                Quarter         Quarter          Quarter          Quarter


Income from earning assets                         $ 2,491                $2,762           $2,956           $3,154
Interest expense                                       935                 1,081            1,228            1,326
Net interest income                                  1,556                 1,681            1,728            1,828
Provision for loan losses                               35                    80               80               59
Noninterest income                                     171                   193              224              186
Noninterest expense                                  1,390                 1,437            1,325            1,359
Income before income taxes                             302                   357              547              596
Income tax benefit                                     106                   130              194              241
Net income                                          $  196                  $227             $353             $355
------------------------------------------------------------------------------------------------------------------
Basic:

   Earnings per share                               $ 0.02                 $0.02            $0.03            $0.03
   Average shares outstanding                   10,951,218            10,951,218       10,951,218       10,951,218
Diluted:

   Earnings per share                          $      0.02                 $0.02            $0.03            $0.03
   Average shares outstanding                   11,286,791            11,285,713       11,286,622       11,295,202
Dividends declared per common share                     --                    --               --               --
------------------------------------------------------------------------------------------------------------------

Market price per common share
   High for the period                         $   2   5/8              $  2 1/2       $  3  9/16             $  4
   Low for the period                              2  3/16                 2              2   1/8             $  3
==================================================================================================================
</TABLE>



                                       34
<PAGE>   35


MARKET FOR COMMON STOCK

Suburban Bancshares, Inc.'s common stock is traded on the NASDAQ Stock Market
under the symbol "SBNK". The approximate number of Suburban Bancshares, Inc.
shareholders of record as of March 1, 1999 was 883.

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Suburban Bancshares, Inc.

         We have audited the accompanying consolidated balance sheets of
Suburban Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Suburban Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and
the results of their operations and cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.

                                       /s/

                                Stegman & Company

                                Baltimore, Maryland
                                January 8, 1999


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<PAGE>   36


BOARD OF DIRECTORS

Suburban Bancshares, Inc. (1)
Suburban Bank of Maryland (2)

SAMUEL Y. BOTTS (1,2)
Partner, Jordan, Keys, Jessamy & Botts, L.L.P.
(law firm)

ALBERT G. DeCESARIS (2)
Vice President, Vendemia & DeCesaris Builders, Inc.

ROBERT G. DEPEW (2)
President, Robert G. Depew & Associates, Inc.
(real estate leasing and management)

BARBARA M. DiNENNA-CORBOY (1,2)
Retired Chairman, DiNenna & Associates, C.P.A.

FRANK K. HALLEY, JR. (2)
President, Carrollton Realty, Inc.
(real estate sales and management)

STEPHEN A. HORVATH (1,2)
PRESIDENT

MARLIN K. HUSTED (1,2)
VICE CHAIRMAN (1)

WINFIELD M. KELLY, JR. (1,2)
CHAIRMAN
President & CEO, Dimensions Health Corporation
(health care management)

RAYMOND G. LaPLACA (1,2)
VICE CHAIRMAN (2)
Partner, Knight, Manzi, Nussbaum & LaPlaca, P. A.
(law firm)

ROBERT L. LONG (2)
Chairman, Long Fence Company
(commercial and residential fencing)

FRANK LUCENTE, JR. (2)
President, Lucente Enterprises
(real estate development)

KENNETH H. MICHAEL (1,2)
Chairman, The Michael Companies, Inc.
(real estate sales and management)

ATA O. MOSHYEDI, M.D. (2)
Physician, Gastroenterology

VINCENT D. PALUMBO, D.D.S. (1,2)
President, V.D. Palumbo, P.A.
(oral and maxillofacial surgery)


                                       36
<PAGE>   37


LAWRENCE A. SHULMAN (1,2)
Partner, Shulman, Rogers, Gandal, Pordy & Ecker, P.A.
(law firm)

CAROL A. TRAWICK (2)
CEO, Trawick & Associates
(computer consulting firm)

ALBERT W. TURNER (1,2)
Senior Partner, Carrollton Enterprises
(real estate development and management)

OFFICERS

Suburban Bancshares, Inc.

WINFIELD M. KELLY, JR.
Chairman and Chief Executive Officer

MARLIN K. HUSTED
Vice Chairman

STEPHEN A. HORVATH
President and Chief Operating Officer

SIBYL S. MALATRAS
Senior Vice President and Chief Financial Officer

SUSAN J. HANSEN
Corporate Secretary

Suburban Bank of Maryland

WINFIELD M. KELLY, JR.
Chairman

RAYMOND G. LaPLACA
Vice Chairman

STEPHEN A. HORVATH
President and Chief Executive Officer

JOSEPH E. BURNETT
Senior Vice President and Senior Lending Officer

CESAR O. CABREJAS
Senior Vice President and Senior Branch Administrator

HAROLD J. KOCH
Senior Vice President and Senior Credit Officer

SIBYL S. MALATRAS
Senior Vice President and Chief Operating Officer

MICHAEL A. AHEARN
Vice President


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<PAGE>   38


ENNIA C. ANDERSEN
Vice President

STEVEN M. BRUNN
Vice President

CHARLES E. CARNS
Vice President and Controller

VERNA P. CIARAVELLA
Vice President

JEFFREY D. FRANKLIN
Vice President

BARBARA M. HART
Vice President

DOROTHY H. HOLLAND
Vice President

RICHARD A. LICHTY
Vice President

JAMES M. LYON
Vice President

JOSEPH A. RUTH
Vice President

EDSEL G. SHAFFER
Vice President

JEROME D. SMALLWOOD
Vice President

PATRICK van der HAM
Vice President

JEFFREY S. WAGNER
Vice President

N. LEE WALTZ, JR.
Vice President


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<PAGE>   39


BRANCH LOCATIONS AND GENERAL INFORMATION

<TABLE>
<CAPTION>

                                        Suburban Bank of Maryland

<S>                           <C>                                        <C>               <C>
Bethesda                      7900 Wisconsin Avenue                      Lobby:  M-F        9 am - 4 pm
                              Bethesda, MD 20814-3601                    Drive-in: M-F      8 am - 6:30 pm
with ATM                      (301) 654-2200
                              fax: (301) 654-1040

Capitol Heights               8703 Central Avenue                        Lobby: M-F         9 am - 2 pm
                              Capitol Heights, MD 20743-3689             Drive-in: M-F      8 am - 6 pm
with ATM                      (301) 350-8100                             Drive-in: Sat      9 am - 12 noon
                              fax: (301) 499-2597

Clinton                       7600 Old Branch Avenue                     Lobby: M-F         9 am - 2 pm
                              Clinton, MD 20735-1603                     Drive-in: M-F      8 am - 6 pm
with ATM                      (301) 868-1215                             Drive-in: Sat      9 am - 12 noon
                              fax: (301) 868-0363

Greenbelt                     7505 Greenway Center Drive                 Lobby: M-F         9 am - 4 pm
                              P. O. Box 298
                              Greenbelt, MD 20768-0298
                              (301) 220-0733
                              fax: (301) 220-2410

Oxon Hill                     6196 Oxon Hill Road                        Lobby: M-F         9 am - 2 pm
                              Oxon Hill, MD 20745-3130                   Drive-in: M-F      8 am - 6 pm
                              (301) 567-2650
                              fax: (301) 567-2479

Rockville                     30 West Gude Drive                         Lobby: M-F         9 am - 4 pm
                              Rockville, MD 20850-1170                   Walk-up: M-Th      8 am - 4 pm
                              (301) 309-1771                             Walk-up: Fri       8 am - 6 pm
                              fax: (301) 309-6785

White Flint                   11414 Rockville Pike                       Lobby:  M-F        9 am - 4 pm
                              Rockville, MD  20852-3001                  Drive-in: M-F      8 am - 6:30 pm
with ATM                      (301) 770-6625                             Drive-in: Sat      9 am - 12 noon
                              fax: (301) 770-6658

Opening in mid 1999


Beltsville                    10421 Baltimore Boulevard                  Lobby:  M-F         9 am - 4 pm
                              Beltsville, MD   20705                     Drive-in:  M-F      8 am - 6 pm
with ATM                      (301) 931-2330                             Drive-in:  Sat      9 am - 12 noon
                              fax: (301) 931-2333
</TABLE>


General Information

Corporate Office
7505 Greenway Center Drive
P. O. Box 298
Greenbelt, MD 20768-0298
(301) 474-6694
(301) 474-9103 fax

                                       39
<PAGE>   40


Corporate Publications

Suburban Bancshares, Inc.'s Form 10-K and quarterly reports are available upon
request at no charge by writing or calling the Corporate Office.

Registrar
American Stock Transfer and Trust Company
40 Wall Street, 46th Floor
New York, New York   10005


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