<PAGE>

                      SECURITIES AND EXCHANGE COMMISSIOn
                             Washington, DC 20549

                                  FORM 10-KSB

                Annual report under Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                  For the fiscal year ended DECEMBER 31, 1999
                         Commission File No.: 0-22961

                       ANNAPOLIS NATIONAL BANCORP, INC.
                (Name of small business issuer in its charter)

          MARYLAND                                          52-1648903
(State or other jurisdiction of                     (I.R.S. Employer I.D. No.)
 incorporation or organization)

       108 ADMIRAL COCHRANE DRIVE, SUITE 300, ANNAPOLIS, MARYLAND 21401
(Address of principal executive offices)                              (Zip Code)

                  Issuer's telephone number:  (410) 224-4455
       Securities registered pursuant to Section 12(b) of the Act:  NONE
          Securities registered pursuant to Section 12(g) of the Act:

                    COMMON STOCK PAR VALUE $0.01 PER SHARE
                               (Title of class)

                          THE NASDAQ SMALLCAP MARKET
                    (Name of exchange on which registered)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days. Yes: X
No:

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB Yes: X  No:

Issuer's revenues for its fiscal year ended December 31, 1999 were $10,432,111.

The aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant is $4,517,308 and is based upon the last sales price as quoted on The
Nasdaq Stock Market for March 17, 2000.

The Registrant had 2,323,506 shares of Common Stock outstanding as of March 17,
2000.

       Transitional Small Business Disclosure Format.  YES:  NO: X

                   DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31,
1999, ARE INCORPORATED BY REFERENCE INTO PART I AND PART II OF THIS FORM 10-KSB.

PORTIONS OF THE PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB.
<PAGE>

                                     INDEX

<TABLE>
<CAPTION>
PART I                                                                                             PAGE
<S>                                                                                                <C>
     Item 1.         Description of Business......................................................    2

     Item 2.         Properties...................................................................  2-3

     Item 3.         Legal Proceedings............................................................    3

     Item 4.         Submission of Matters to a Vote of Security Holders..........................    3

Additional Items     Executive Officers of the Registrant.........................................  3-4

                     Recent Developments..........................................................    4

PART II

     Item 5.         Market for Common Equity and
                     Related Stockholder Matters..................................................    4

     Item 6.         Management's Discussion and Analysis.........................................    4

     Item 7.         Financial Statements.........................................................    4

     Item 8.         Changes In and Disagreements With Accountants on
                     Accounting and Financial Disclosure..........................................    4

PART III

     Item 9.         Directors, Officers, Promoters and Control Persons;
                     Compliance with Section 16 of the Exchange Act...............................    4

     Item 10.        Executive Compensation.......................................................    5

     Item 11.        Security Ownership of Certain Beneficial Owners
                     and Management...............................................................    5

     Item 12.        Certain Relationships and Related Transactions...............................    5

     Item 13.        Exhibits and Reports on Form 8-K.............................................    5

SIGNATURES........................................................................................  6-7
</TABLE>

This Report contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the securities exchange Act of 1934.  These statements appear in a number of
places in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy; and (iv) the declaration and payment of dividends.  Investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors discussed herein and those factors discussed in the
Company's filings with the Securities and Exchange Commission.


                                       2
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

The information relating to the description of business of the Registrant is
incorporated herein by reference on page 29 of the Registrant's Annual Report to
Shareholders.

ITEM 2.  PROPERTIES

The executive offices of the Company and the Bank are located at 180 Admiral
Cochrane Drive, Suite 300, Annapolis, Maryland 21401.

The following table sets forth the location of and certain additional
information regarding the offices of the Company and the Bank at December 31,
1999.

<TABLE>
<CAPTION>
                                                                                                    NET BOOK VALUE OF
                                                                                                       PROPERTY OR
                                                         ORIGINAL YEAR                                  LEASEHOLD
                                        LEASED/            LEASED OR            YEAR OF LEASE        IMPROVEMENTS AT
                                         OWNED         LOCATION ACQUIRED         EXPIRATION         DECEMBER 31, 1999
<S>                                  <C>               <C>                      <C>                 <C>
Administration                          Leased               1995                 2005 (2)              $ 36,519
Bestgate                                Leased               1997                 2001                    15,675
Edgewater                            Land Leased             1996                 2006 (1)               386,674
Cape St. Claire                         Leased               1995                 2000 (1)                60,799
Kent Island                             Leased               1990                 2001 (1)                   203
Severna Park                            Leased               1996                 2006 (1)                17,415
</TABLE>

(1)  These leases may be extended at the option of the Company for periods
     ranging from three to twenty years.
(2)  Lease early buy-out option exercised in 1999 at a cost of $36,000.

ITEM 3.  LEGAL PROCEEDINGS

The Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be immaterial
to the Company's financial condition or results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ADDITIONAL ITEMS.

Executive Officers of the Registrant
The information relating to directors and named executive officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 27, 2000 at
pages 4 through 7. In addition, information concerning Executive Officers who
are not directors is set forth below:

                         AGE AT         POSITION WITH THE COMPANY AND BANK
NAME                     12/31/99       AND PAST FIVE YEARS EXPERIENCE
----                     --------       ------------------------------

Margaret Theiss Faison      41          Chief Financial Officer and Treasurer of
                                        the Company and Senior Vice President,
                                        Chief Financial Officer and Treasurer of
                                        the Bank. Prior to joining the Company
                                        in 1999, Ms. Faison was Senior Vice
                                        President and Chief Financial Officer of
                                        Sterling Bank & Trust Co. of Baltimore.
                                        Ms. Faison was previously Vice President
                                        and Chief Financial Officer with Mellon
                                        Bank (MD).

                                       3
<PAGE>

Robert E. Kendrick, III     54          Senior Vice President and Chief Credit
Officer.
                                        Prior to joining the Company in 1999,
                                        Mr. Kendrick held similar positions with
                                        Citizens National Bank of Laurel, Bank
                                        of Maryland, Sterling Bank & Trust Co.
                                        of Baltimore and NationsBank.

Lori J. Mueller             36          Secretary of the Company and Senior Vice
                                        President, Branch Banking. Ms. Mueller
                                        has been an officer of the Bank since
                                        1990 and is responsible for retail
                                        banking, deposit account administration
                                        and marketing.

Kevin J. Barron             44          Senior Vice President, Real Estate
                                        Lending, of the Bank. Mr. Barron has
                                        been an officer of the Bank since
                                        December 1997, and is primarily
                                        responsible for the Bank's Commercial
                                        and Residential Real Estate lending
                                        activities and the Bank's Mortgage
                                        Banking division. His prior thirteen
                                        years of related experience included ten
                                        years with Signet Bank, culminating as
                                        Senior Vice President in charge of real
                                        estate lending for the Baltimore and
                                        Washington regions. Prior to joining
                                        Signet, Mr. Barron served as a real
                                        estate lender at a Mellon Bank
                                        subsidiary for three years.

Recent Developments
The Bank entered into a Formal Agreement with the Office of the Comptroller of
the Currency ("OCC") effective September 30, 1999, whereby the Bank is required
to improve the Bank's management and policies and procedures.  This agreement in
no way restricts or impedes the Bank's ability to conduct normal banking and
business transactions.

The Bank has developed a detailed action plan to ensure prompt compliance with
the Formal Agreement and is on schedule to meet all deadlines imposed by the
agreement.  The Bank has recently hired a new Chief Executive Officer, Mark H.
Anders, a new Chief Financial Officer, Margaret Theiss Faison and a new Senior
Credit Officer, Robert E. Kendrick, III.  In addition, the Bank has engaged
outside firms to perform loan and compliance reviews and has engaged Keller
Bruner & Company, LLP to perform internal audit functions.  The Bank is also in
the process of developing, updating and implementing policies and procedures to
address specific concerns of the OCC, including policies and procedures related
to lending, risk management, and asset diversification.

The Bank is committed to complying with the provisions of the agreement and
believes that the changes it is making will have a positive impact on future
operations.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Information relating to the market for Registrant's common equity and related
stockholder matters appears in the Registrant's 1999 Annual Report to
Stockholders on page 22, and is incorporated herein by reference.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

The above-captioned information appears under Management's Discussion and
Analysis of Results of Operations and Financial Condition in the Registrant's
1999 Annual Report to Stockholders on pages 5 through 22 and is incorporated
herein by reference.

ITEM 7.  FINANCIAL STATEMENTS

The Consolidated Financial Statements of Annapolis National Bancorp, Inc. and
its subsidiary, together with the report thereon by Rowles & Company, LLP for
the year ended December 31 1999 appears in the Registrant's 1999 Annual Report
to Stockholders on pages 23 through 44 and are incorporated herein by reference.

                                       4
<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The Company has selected Stegman & Company to perform the 2000 annual audit and
tax return.  The change in accountants was not the result of any disagreement
with the prior accountants Rowles and Company on any accounting or financial
disclosure issue.

                                    PART III

ITEM 9.  DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16 OF THE EXCHANGE ACT

The information relating to directors, officers, promoters and control persons
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 27, 2000.

ITEM 10.  EXECUTIVE COMPENSATION

The information relating to directors' and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 27, 2000.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information relating to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 27, 2000.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information relating to certain relationships and related transactions is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 27, 2000.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  The following documents are filed as a part of this report:

     (1)  Financial Statements

          Consolidated Financial Statements of the Company are incorporated by
          reference to the following indicated pages of the 1999 Annual Report
          to Stockholders:

<TABLE>
<CAPTION>
                                                                            PAGE
          <S>                                                               <C>

          Independent Auditors' Report...................................     25

          Consolidated Balance Sheets as of
          December 31, 1999, 1998 and 1997...............................     26

          Consolidated Statements of Income for the
          years ended December 31, 1999, 1998 and 1997...................     27

          Consolidated Statements of Changes in Stockholders' Equity
          for the years ended December 31, 1999, 1998 and 1997...........     28

          Consolidated Statements of Cash Flows for the
          years ended December 31, 1999, 1998 and 1997...................  29-30

          Notes to Consolidated Financial Statements.....................  31-46
</TABLE>

                                       5
<PAGE>

     The remaining information appearing in the Annual Report to Stockholders is
     not deemed to be filed as part of this report, except as expressly provided
     herein.

(2)  Exhibits

     The following exhibits are filed as part of this report.

       3.1   Articles of Incorporation of Annapolis National Bancorp, Inc.*
       3.2   Bylaws of Annapolis National Bancorp, Inc.*
       4.0   Stock Certificate of Annapolis National Bancorp, Inc.*
      10.1   Employment Agreement between Annapolis National Bancorp,
             Inc. and Mark H. Anders**
      10.2   Annapolis National Bancorp, Inc. Employee Stock Option Plan*
      11.0   Computation of earnings per share (filed herewith)
      13.0   Portions of 1999 Annual Report to Stockholders (filed herewith)
      21.0   Subsidiary information is incorporated  herein by reference
             to Part I - "Subsidiaries"
      27.0   Financial Data Schedule (filed herewith)
      99.0   1999 Proxy Statement**

      *      Incorporated herein by reference to the Exhibits to Form SB-2,
             Registration Statement, filed on June 23, 1997 and any
             Amendments thereto, Registration No. 333-29841.

      **     Incorporated herein by reference to the Company's Proxy Statement
             for its Annual Meeting of Stockholders, which will be filed with
             the Commission within 120 days of the end of the Company's fiscal
             year.

(b)  Reports on Form 8-K:

       The Company filed a Form 8-K on October 7, 1999 announcing its
       appointment on October 4, 1999 of Mark H. Anders as President and Chief
       Executive Officer of the Bank. Mr. Anders succeeded Bank Chairman of the
       Board Richard M. Lerner who had served on an interim basis as President
       and Chief Executive Officer of the Bank for the preceding five months.

       The Company filed a Form 8-K on May 18, 1999 announcing that it needed to
       increase its allowance for loan losses for the first quarter ended March
       31, 1999. The increase resulted in a decrease to earnings reported on
       April 19, 1999, and thus required adjustments to the Company's financial
       condition and results of operations. At the time of filing the 8-K, the
       Company had not determined the extent of the adjustments required and
       therefore was unable to file the Form 10-Q for the fiscal quarter ended
       March 31, 1999 on the due date. The Company's previously declared cash
       dividend of one-cent per share was paid as scheduled on May 14, 1999.

CONFORMED SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.

ANNAPOLIS NATIONAL BANCORP, INC.

                                   By:   /s/ Richard M. Lerner
                                         ---------------------

                                         Richard M. Lerner
                                         President, Chief Executive Officer
                                         and Director

                                   Date: March 29, 2000

                                       6
<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
stated.

<TABLE>
<CAPTION>
           NAME                                         Title                             Date
           ----                                         -----                             ----
<S>                                     <C>                                          <C>
/s/ Richard M. Lerner                   President, Chief Executive Officer and       March 29, 2000
----------------------------            Director (principal executive officer)
Richard M. Lerner

/s/ Margaret Theiss Faison              Senior Vice President, Treasurer and         March 29, 2000
----------------------------            Chief Financial Officer (principal
Margaret Theiss Faison                  accounting and financial officer)

/s/ Mark H. Anders                      Director                                     March 29, 2000
----------------------------
Mark H. Anders

/s/ Stanley J. Klos, Jr.                Director                                     March 29, 2000
----------------------------
Stanley J. Klos, Jr.

/s/ Lawrence E. Lerner                  Director                                     March 29, 2000
----------------------------
Lawrence E. Lerner

/s/ Dimitri P. Mallios                  Director                                     March 29, 2000
----------------------------
Dimitri P. Mallios

/s/ Albert Phillips                     Chairman                                     March 29, 2000
----------------------------
Albert Phillips

/s/ Lawrence W. Schwartz                Director                                     March 29, 2000
----------------------------
Lawrence W. Schwartz
</TABLE>

                                       7
<PAGE>

                                  Exhibit 11.0
                       Calculation of Earnings per Share

<TABLE>
<CAPTION>
                                                                                                December 31
                                                                                  1999             1998             1997
                                                                                  ----             ----             ----
<S>                                                                             <C>              <C>              <C>
Weighted Average shares Outstanding                                             2,319,588        2,312,422        1,691,301

Common Stock Equivalents                                                               --            6,731           16,865

Average Common Shares and Equivalents, Fully Diluted                            2,319,588        2,319,153        1,708,166

Net income                                                                     $  690,295       $1,002,844       $1,084,197

Basic Earnings per Share                                                       $     0.30       $     0.43       $     0.64

Diluted Earnings per Share                                                     $     0.30       $     0.43       $     0.63
</TABLE>

                                       8
<PAGE>

                                 Exhibit 13.0

ANNAPOLIS NATIONAL BANCORP, INC.

Corporate Profile

ANNAPOLIS NATIONAL BANCORP, INC., formerly Maryland Publick Banks, Inc., is a
bank holding company, incorporated in May, 1988 for the purpose of acquiring and
holding all of the outstanding stock of Annapolis National Bank, a federally
insured community oriented bank and the only independent commercial bank
headquartered in Annapolis, Maryland. The Bank currently operates as a full
service commercial bank from its headquarters in Annapolis, and its four
branches located in Anne Arundel County, Maryland, and one branch located on
Kent Island in Queen Anne's County, Maryland. The Bank's principal business
consists of originating loans and attracting deposits. The Bank originates
commercial loans, commercial real estate loans, construction loans, one- to
four-family real estate loans, home equity and consumer loans. The Bank also
invests in U.S. Treasury and U.S. Government agency securities and other
securities issued by or guaranteed by the federal government.

The Bank conducts a general commercial and retail banking business in its market
area, emphasizing the banking needs of small businesses, professional concerns
and individuals. The Bank draws most of its customer deposits from Anne Arundel
County, Maryland, and to a lesser extent, Queen Anne's County, Maryland. The
Bank's lending operations are centered in Anne Arundel County, but extend
throughout Central Maryland.

The Bank competes with numerous other financial intermediaries, commercial
banks, savings and loan associations, credit unions, mortgage banking firms,
consumer finance companies, securities brokerage firms, insurance companies,
money market mutual funds and other financial institutions operating in Anne
Arundel County and elsewhere.

The Bank's Anne Arundel County service area is a highly concentrated, highly
branched banking market. Competition in Anne Arundel County for loans to small
businesses and professionals, the Bank's target market, is intense and pricing,
service and access to decision makers are important. Deposit competition among
institutions in Anne Arundel County also is strong.

The Bank employed 59 full time and 5 part time individuals at December 31, 1999.

The Bank continually evaluates new products, and implements such new products as
deemed appropriate by management.

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations

Overview

The following is management's discussion and analysis of the historical
financial condition and results of operations of Annapolis National Bancorp,
Inc. on a consolidated basis with its wholly owned subsidiary, Annapolis
National Bank, for the periods presented, and should be read in conjunction with
the consolidated statements and the related notes thereto appearing elsewhere in
this annual report.

The Company reported net income for 1999 of $690,295, a 31.17% decrease from
1998 earnings of $1,002,844. The decrease in 1999 earnings was primarily due to
higher expenses associated with the Company's conversion to a new data
processing provider and the system upgrades needed to comply with the Year 2000
date change requirements. Basic earnings per share decreased to $0.30 per share
in 1999 compared to $0.43 per share in 1998.

The primary source of income of the Bank is interest on its loan and investment
portfolios. The principal expense of the Bank is interest on its deposit
accounts and borrowings. The difference between interest income on interest
earning assets and interest expense on interest bearing liabilities is referred
to as net interest income. Net interest income was $6.1 million for 1999, an
increase of $214,000 or 3.62% compared to $5.9 million in 1998. Total assets
were $126.7 million as of December 31, 1999, a 5.21% increase over the December
31, 1998 total assets of $120.5 million. The Company's return on average assets
was 0.55% and 0.82% at December 31, 1999, and 1998 respectively. The Company's
return on average equity was 5.69% and 8.64% at December 31, 1999, and 1998
respectively.

At December 31, 1999 the Bank's gross loan portfolio totaled $82.9 million. Of
this amount, $19.3 million or 23.23% were commercial loans, $35.0 million or
42.26% were commercial real estate loans, $15.0 million or 18.13% were
construction loans, $7.3 ANNAPOLIS NATIONAL BANCORP, INC.

                                       9
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC;
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

million or 8.84% were one- to four-family residential mortgage loans, and $3.7
million or 4.45% were home equity loans, and $2.6 million or 3.09% were consumer
and other loans.

The following table shows selected consolidated financial highlights for the
Company at and for the five years ended December 31, 1995, through December 31,
1999.

Selected Consolidated Financial Data at and for years ended December 31,
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
Selected Financial Data                             1999         1998         1997         1996         1995
-----------------------                          ----------   ----------   ----------   ----------   ----------
<S>                                              <C>          <C>          <C>          <C>          <C>
Total assets                                     $  126,733   $  120,457   $  120,827   $  100,227   $   95,296
Total loans, net                                     81,198       86,924       70,985       68,800       56,036
Total deposits                                      105,094      100,742       96,062       87,106       82,096
Securities sold under agreement to repurchase         8,497        7,174       13,306        6,345        6,970
Notes payable                                            --           --           --        1,004          925
Stockholder's equity                                 12,727       12,091       11,087        5,471        5,046

Selected Operating Data
-----------------------
Interest income                                  $    9,612   $    9,813   $    9,161   $    8,021   $    7,651
Interest expense                                      3,475        3,890        3,630        3,362        3,099
                                                 ----------   ----------   ----------   ----------   ----------

Net interest income                                   6,137        5,923        5,531        4,659        4,552
Provision for credit losses                             432          300          748          452          318
                                                 ----------   ----------   ----------   ----------   ----------

Net interest income after provision for credit        5,705        5,623        4,783        4,207        4,234
  losses
Restructuring expense                                    --           --          796           --           --
Noninterest income                                      849          867          762          587          521
Noninterest expense                                   5,488        4,965        4,434        4,371        3,957
                                                 ----------   ----------   ----------   ----------   ----------

Income before income taxes                            1,066        1,525          315          423          798
Income tax benefit (expense)                           (376)        (522)         769           --           (6)
                                                 ----------   ----------   ----------   ----------   ----------
Net income                                       $      690   $    1,003   $    1,084   $      423   $      792
                                                 ----------   ----------   ----------   ----------   ----------
Key Financial Ratios and Other Data
-----------------------------------
Return on average assets                               0.55%        0.82%        0.99%        0.44%        0.94%
    Net income divided by average assets
Return on average equity                               5.69%        8.64%       14.83%        7.98%       19.26%
    Net income divided by average equity
Equity to asset ratio (1)                              9.69%        9.54%        6.70%        5.46%        4.88%
    Average equity divided by average assets
Basic earnings per share                         $     0.30   $     0.43   $     0.64   $     0.29   $     0.57
Book value per share                             $     5.48   $     5.23   $     4.79   $     3.70   $     3.41
Tangible book value per share                    $     5.46   $     5.17   $     4.70   $     3.17   $     2.78
Number of shares outstanding                      2,323,506    2,313,506    2,312,306    1,478,972    1,478,972
Efficiency ratio (2)                                  78.55%       73.19%       83.11%       83.34%       78.00%
Interest rate spread                                   4.76%        4.52%        4.88%        4.68%        5.29%
Net interest margin                                    5.26%        5.11%        5.37%        5.10%        5.73%
Risk based capital ratio - Tier 1                     13.70%       12.70%       15.16%        7.46%        7.68%
Risk based capital ratio - Total                      15.00%       14.00%       16.42%        8.68%        8.83%
</TABLE>


(1) The Company's initial public stock offering closed on September 30, 1997
    with net proceeds of $3.5 million. The average capital used to calculate
    this ratio reflects the increase in capital for the last quarter of 1997.

(2) Includes restructuring expense of $796,000 for the year ended December 31,
    1997.

The following table presents a condensed average balance sheet as well as
income/expense and yields/costs of funds thereon for the years ended December
31, 1999, 1998 and 1997. The yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities for the periods shown.
Average balances are derived from average daily balances. The yields and costs
include loan fees which are considered adjustments to yields. Net interest
spread, the difference between the average rate on interest bearing assets and
the average rate on interest bearing liabilities, increased to 4.76% for the
year ended December 31, 1999, compared to 4.52% at December 31, 1998.

                                       10
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

Consolidated Average Balances, Yields and Rates
(Balances in thousands)

<TABLE>
<CAPTION>
                                                                                        Years ended
                                                                December 31, 1999                     December 31, 1998
                                                                -----------------                     -----------------
                                                          Average                 Yield/       Average                 Yield/
                                                          Balance    Interest      Rate        Balance     Interest     Rate
                                                          -------    --------     ------       -------     ---------   ------

<S>                                                       <C>        <C>         <C>           <C>         <C>         <C>
Assets
Interest Earning Assets:
     Federal funds sold and other overnight
       investments                                        $  9,456     $  462      4.89%       $ 21,999      $1,195      5.43%
     Investment Securities                                  20,042      1,090      5.44%         16,644         963      5.79%
     Loans                                                  87,126      8,060      9.25%         77,245       7,655      9.91%
                                                          --------     ------    ------        --------      ------    ------

          Total interest-earning assets                    116,624      9,612      8.24%        115,888       9,813      8.47%
                                                          --------     ------    ------        --------      ------    ------

Noninterest Earning Assets
     Cash and due from banks                                 4,196                                3,612
     Other assets                                            4,455                                2,186
                                                          --------                             --------

          Total Assets                                    $125,275                             $121,686
                                                          --------                             --------

Liabilities and Stockholders' Equity
Interest Bearing Deposits
     NOW accounts                                         $ 19,810     $  269      1.36%       $ 18,488      $  361      1.95%
     Money market accounts                                  11,960        334      2.79%         14,427         496      3.44%
     Savings accounts                                       14,634        341      2.33%         13,374         392      2.93%
     Certificates of deposit                                43,236      2,191      5.07%         40,844       2,272      5.56%
     Repurchase agreements                                   9,970        323      3.24%         11,330         369      3.26%
     Notes payable                                             105         17     16.19%             --          --        --
                                                          --------     ------    ------        --------      ------    ------

          Total interest bearing liabilities                99,715      3,475      3.48%         98,463       3,890      3.95%
                                                                       ------    ------                      ------    ------

Noninterest Bearing Liabilities
     Demand deposit accounts                                12,646                               11,118
     Other liabilities                                         772                                  500

Stockholders' Equity                                        12,142                               11,605

          Total Liabilities and Stockholders' Equity      $125,275                             $121,686
                                                          --------                             --------

Interest rate spread                                                               4.76%                                 4.52%
                                                                                 ------                                ------

Ratio of interest earning assets to interest bearing
     liabilities                                                                 116.96%                               117.70%
Net interest income and net interest margin                            $6,137      5.26%                     $5,923      5.11%
                                                                       ------    ------                      ------    ------
</TABLE>

<TABLE>
<CAPTION>
                                                          December 31, 1997
                                                          -----------------
                                                  Average                  Yield/
                                                  Balance      Interest     Rate
                                                  -------      --------    ------
<S>                                               <C>          <C>         <C>
Assets
Interest Earning Assets:
    Federal funds sold and other overnight
    investments                                   $ 14,447     $  776        5.37%
    Investment Securities                           16,253        937        5.77%
    Loans                                           72,385      7,448       10.29%
                                                  --------     ------      ------

      Total interest-earning assets                103,085      9,161        8.89%
                                                  --------     ------      ------

Noninterest Earning Assets
    Cash and due from banks                          3,830
    Other assets                                     2,176
                                                  --------

      Total Assets                                $109,091
                                                  --------
</TABLE>

                                       11
<PAGE>

<TABLE>
<S>                                                          <C>            <C>     <C>
Liabilities and Stockholders' Equity
Interest Bearing Deposits
     NOW accounts                                            $ 15,475     $  324      2.09%
     Money market accounts                                     14,088        484      3.44%
     Savings accounts                                          12,005        367      3.06%
     Certificates of deposit                                   37,829      2,080      5.50%
     Repurchase agreements                                     10,570        315      2.98%
     Notes payable                                                632         60      9.49%
                                                             --------     ------    ------

          Total interest bearing liabilities                   90,599      3,630      4.01%
                                                                          ------    ------

Noninterest Bearing Liabilities
     Demand deposit accounts                                   10,510
     Other liabilities                                            668

Stockholders' Equity                                            7,314
                                                             --------

          Total Liabilities and Stockholders' Equity         $109,091
                                                             --------

Interest rate spread                                                                  4.88%
                                                                                    ------

Ratio of interest earning assets to interest bearing
     liabilities                                                                    113.78%
Net interest income and net interest margin                               $5,531      5.36%
-------------------------------------------                               ------    ------
</TABLE>


ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

Financial Condition

The Company, through its Bank subsidiary, functions as a financial intermediary,
and as such its financial condition can be examined in terms of developing
trends in its sources and uses of funds. These trends are the result of both
external environmental factors, such as changing economic conditions, regulatory
changes and competition, and also internal environmental factors such as
management's evaluation as to the best use of funds in these changing
conditions.

Total assets increased by 5.21% during 1999 to $126.7 million from $120.5
million at December 31, 1998. Total deposits and securities sold under
agreements to repurchase, the Company's primary source of funds, increased $5.7
million or 5.26% from $107.9 million at December 31, 1998. Time deposits
comprise the largest portion of the Bank's total deposits, totaling $45.6
million or 43.40% of the Bank's total deposits at December 31, 1999, compared to
$37.6 million or 37.34% in 1998. Savings and Money Market accounts totaled $25.4
million or 24.18% of the Bank's total deposits at December 31, 1999, compared to
$30.8 million or 30.54% in 1998. NOW accounts total $20.8 million or 19.74% and
$21.0 million or 20.90% of total deposits at December 31, 1999 and 1998,
respectively. Demand, noninterest bearing accounts total $13.3 million or 12.68%
of total deposits at December 31, 1999 and $11.3 million or 11.22% at December
31, 1998. Securities sold under agreements to repurchase increased $1.3 million
to $8.5 million from $7.2 million at December 31, 1998, respectively.

The Company's primary use of funds are for loans and investments. Loans, less
deferred fees and discounts and the allowance for loan losses, decreased by $5.7
million or 6.59% to $81.2 million at December 31, 1999 from $86.9 million a year
earlier. The reduction in  loan balances occurred primarily in the commercial
sector which decreased $7.6 million or 28.27% from 1998 and was partially offset
by an increase of $4.8 million or 11.73% in real estate loans.

Operating Results

The following discussion outlines some of the more important factors and trends
affecting the earnings of the Company, as presented in its consolidated
statements of income.

Net Interest Income

Net interest income is the difference between interest revenue and interest
expense and is generally impacted by increases or decreases in the amount of
outstanding interest earning assets and interest bearing liabilities (volume
variance). This volume variance coupled with changes in interest rates on these
same assets and liabilities (rate variance) equates to the total change in net
interest income in any given period. The table found on page 9 sets forth
certain information regarding changes in interest income and interest expense
attributable to (1) changes in volume (change in volume multiplied by the old
rate); (2) changes in rates (change in rate multiplied by

                                       12
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.

Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

the old volume); and (3) changes in rate/volume (change in rate multiplied by
change in volume).

Net interest income for the year ended December 31, 1999, was $6.1 million,
representing an increase of $214,000 or 3.62% from net interest income of $5.9
million for the year ended December 31, 1998. The increase in net interest
income is due primarily to a decrease in the Bank's overall cost of funds.  The
net yield on interest earning assets was 5.26% and 5.11% for the years ended
December 31, 1999 and 1998 respectively. Net interest income for 1999 includes
$195,000 of interest collected on the cash basis related to loans on a
nonaccrual status, compared to $18,000 of interest collected on various
nonaccrual loans in 1998.

Rate/Volume Analysis
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                       1999 v 1998                               1999 v 1998
                                                       -----------                               -----------

                                      Increase or    Due to Change in     Rate/    Increase or  Due to Change in
                                       Decrease)     Volume     Rate    Volume     (Decrease)     Volume     Rate     Volume
                                                     ------     ----    -------    ----------     ------     ----     ------
<S>                                   <C>            <C>        <C>     <C>        <C>          <C>          <C>      <C>
Interest income on:
    Loans                                $ 405        $1,130    $(632)    $(93)       $207         $500      $(275)    $(18)
    Investment securities                  127           197      (58)     (12)         26           23          3       --
    Federal funds sold and other
                                          (733)         (578)    (300)     145         419          406          9        4
      overnight investments              -----        ------    -----     ----        ----         ----      -----     ----


Total interest income                     (201)          749     (990)      40         652          929       (263)     (14)

Interest expense on:
    NOW accounts                           (92)           26     (110)      (8)         37           63        (22)      (4)
    Money market accounts                 (162)          (85)     (93)      16          12           12         --       --
    Savings accounts                       (51)           38      (81)      (8)         25           42        (15)      (2)
    Certificates of deposit                (81)          133     (202)     (12)        192          166         24        2
    Repurchase agreements                  (46)          (44)      (2)      --          54           23         29        2
    Notes payable                           17            --       --       17         (60)         (60)        --       --
                                         -----        ------    -----     ----        ----         ----      -----     ----

Total interest expense                    (415)           68     (488)       5         260          246         16       (2)
                                         -----        ------    -----     ----        ----         ----      -----     ----

Net interest income                      $ 214        $  681    $(502)    $ 35        $392         $683      $(279)    $(12)
                                         -----        ------    -----     ----        ----         ----      -----     ----
</TABLE>

Interest Income

The Company's interest income decreased $201,000 or 2.04% to $9.6 million at
December 31, 1999, compared to $9.8 million at December 31, 1998. The decrease
in interest income can be attributed to a decrease in the average yield on
earning assets, partially offset by an increase in average loans. Average loans
increased $9.9 million or 12.79%. Average federal funds and other overnight
investments decreased $12.5 million or 57.02% which contributed to the decrease
in interest income.

Interest Expense

The Company's interest expense decreased $415,000 or 10.67% to $3.5 million at
December 31, 1999, compared to $3.9 million at December 31, 1998. The decrease
in interest expense can be attributed to a decrease in the cost of interest
bearing liabilities to 3.48% at December 31, 1999, compared to 3.95% in 1998.
The decrease in rate was partially offset by an increase in certificate of
deposit balances of $8.0 million or 21.24%.  The increased growth in deposits
were used to fund loan growth and for general liquidity purposes.

Noninterest Income

The Company's primary source of non-interest income are fees charged for
services and gains and fees recognized on the sale of residential mortgage
loans. Noninterest income, excluding the one time gain of $125,000 in 1998
relating to the Company waiving its exclusive right to operate its branch office
in the Edgewater Shopping Center increased $77,000 or 10.44% to $820,000 at
December 31, 1999, as compared to $742,000 in 1998. The growth in noninterest
income was primarily due to an increase in mortgage broker fees.

                                       13
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

Noninterest Expense

Noninterest expense increased $493,000 or 9.93% to $5.5 million at December 31,
1999, compared to $5.0 million at December 31, 1998. The increase in noninterest
expense was primarily due to costs associated with the Bank's conversion to a
new data processing provider of $210,000, costs related to the Year 2000 date
change and legal and consulting expenses associated with the Formal Agreement
with the OCC.

Personnel expense increased $24,000 or 0.98% due primarily to vacation accruals
required due to excess carryover days caused by Y2K and the data processing
conversion.

Occupancy and equipment expense increased $105,000 or 12.87% due to depreciation
expense on equipment purchased in 1997, 1998 and 1999 for the Bank's local area
network (LAN) and equipment upgrades necessary for Y2K.

Other expense increased $135,000 or 14.63% due mainly to legal and consulting
expenses related to the OCC Formal Agreement.

Provision for Income Taxes

The Company and the Bank file consolidated federal income tax returns and
separate Maryland income tax returns. The Company paid $530,000 in federal
income tax in 1999 and paid state income tax of $32,000 in 1999.

Financial Analysis For The Years Ended December 31, 1998 and 1997

Net income for the year ended December 31, 1998, totaled $1,002,844 or $0.43 per
basic share compared to $1,084,197 or $0.64 per basic share for the year ended
December 31, 1997.

Net interest income increased $393,000 or 7.10% at December 31, 1998, to $5.9
million from $5.5 million at December 31, 1997. This increase was the result of
an increase in interest income of $652,000 that was partially offset by an
increase in interest expense of $259,000.

Interest income increased $652,000 or 7.11% in 1998 compared to 1997, primarily
due to an increase in the average balance of loans outstanding. Average loans
outstanding, net of unearned income, increased $4.9 million or 6.71% during
1998. In addition, the average yield on loans decreased to 9.91% in 1998 from
10.29% in 1997.

Interest expense increased $259,000 in 1998 as compared to 1997. The increase
generally reflected an increase in the average balance of interest bearing
liabilities to $98.5 million from $90.6 million at December 31, 1997. During
this period the average cost of interest bearing liabilities decreased to 3.95%
at December 31, 1998, from 4.01% at December 31, 1997.

Noninterest income increased $105,000 or 13.81% during 1998 as compared to 1997.
The increase was attributable to a one-time gain of $125,000 relating to the
Company's waiving of its exclusive right to operate its branch office in the
Edgewater Shopping Center.

Noninterest expense decreased $264,000 or 5.05% to $5.0 million at December 31,
1998, from $5.2 million at December 31, 1997. The primary reason for the
decrease relates to a one time restructuring expense of $796,000 during 1997,
resulting from implementation of a revised business strategy by the Board of
Directors and senior management in February 1997.

Personnel expense increased $370,000 or 17.54% due to increasing staff to
required levels.

Occupancy and equipment expense decreased $20,000 or 2.43% due to lower
maintenance costs.

Other expense increased $56,000 or 6.42% due mainly to additional marketing
expense of approximately $87,000.

Liquidity and Capital Resources

Deposits, commercial reverse repurchase agreements, and lines of credit are the
primary source of the Bank's funds for lending and investing activities.
Secondary sources of funds are derived from loan repayments and investment
maturities. Loan repayments and

                                       14
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

investment maturities can be considered a relatively stable funding source,
while deposit activity is greatly influenced by interest rates, general market
conditions and competition.

The Bank offers a variety of retail deposit account products to both consumer
and commercial deposit customers. The Bank's deposit accounts consist of
savings, NOW accounts, checking accounts, money market accounts and certificate
of deposit accounts. The Bank also offers individual retirement accounts. Time
deposits comprised 43.40% of the deposit portfolio at December 31, 1999. Core
deposits, considered to be noninterest bearing and interest bearing demand
deposit accounts, savings deposits and money market accounts accounted for
56.60% of the deposit portfolio at December 31, 1999. This represents a 5.76%
reduction in core deposits of 62.66% at December 31, 1998.

The Bank intends to continue to emphasize retail deposit accounts as its primary
source of funds. Deposit products are promoted in periodic newspaper
advertisements, along with notices provided in customer account statements. The
Bank does not pay a fee for brokered deposits. The Bank's market strategy is
based on its reputation as a community bank that provides quality products and
personal customer service.

The Bank pays interest rates on its interest bearing deposit products that are
competitive with rates offered by other financial institutions in its market
area, and in certain deposit categories may lead the market. Interest rates on
deposits are reviewed by management who consider a number of factors including:
(1) the Bank's internal cost of funds; (2) rates offered by competing financial
institutions; (3) investing and lending opportunities; and (4) the Bank's
liquidity position.

Jumbo certificates of deposit are accounts of $100,000 or more. These accounts
totaled $6.8 million at December 31, 1999 and consisted principally of time
certificates of deposit. The following table sets forth the amount and maturity
of jumbo certificates of deposit at December 31, 1999:

Dollars in (thousands)

<TABLE>
<CAPTION>
                                       Greater than Three   Greater than Six    Greater than
                 Three Months or Less    Months  to Six    Months to One Year     One Year     Total
                 <S>                   <C>                 <C>                  <C>            <C>
                       $1,111                $2,811             $2,021             $852        $6,795
                       ------                ------             ------             ----        ------
</TABLE>

Commercial reverse repurchase agreements represent transactions with customers
for correspondent or commercial account cash management services. These are
overnight borrowing arrangements with interest rates discounted from the federal
funds sold rate. Securities underlying the repurchase agreements are maintained
in the Company's control. At December 31, 1999, and 1998, the average cost of
these borrowings were 3.24% and 3.25% respectively.

The Bank maintains a secured borrowing line with the Federal Home Loan Bank
(FHLB) with the ability to draw up to $12.7 million, and may borrow up to $7.3
million under a reverse repurchase line established with a local correspondent
commercial bank. In addition, the Bank has the ability to borrow directly from
the Federal Reserve Bank discount window. At December 31, 1999, there were no
outstanding advances under these lines of credit.

Potential adverse impacts on liquidity can occur as a result of changes in the
estimated cash flows from investment, loan, and deposit portfolios. The Bank
manages this inherent risk by maintaining a portfolio of available for sale
investments, and secondary sources of liquidity from FHLB advances and reverse
repurchase agreements. In addition, the Bank has the ability to increase its
liquidity by raising interest rates on deposit accounts, selling loans in the
secondary market or curtailing the volume of loan originations.

The Bank maintains the majority of the assets held for liquidity purposes in
overnight federal funds.

Interest Rate Risk Sensitivity

Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of the Company's interest earning assets
and funding sources. Additionally, the Bank's profitability is dependent to a
large extent upon its net interest income, which is the difference between its
interest income on interest bearing assets, such as loans and investments, and
its interest expense on its funding sources, such as deposits and borrowings.
Accordingly, the Bank's results of operations and financial condition are
largely dependent on movements in market interest rates and its ability to
manage its assets in response to such movements.

                                       15
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

The Bank attempts to manage fluctuations in interest rates by matching the
maturities of its interest earning assets and interest bearing liabilities. The
Bank's current strategy to manage its sensitivity to interest rate fluctuations
is to emphasize short term and adjustable rate loans and to invest in short term
U.S. Government agency securities with maturities or call dates of two years or
less. Additionally, all of the loans in the Bank's portfolio are either
adjustable or short term fixed rate loans with terms to maturity of 30 days to
30 years. The Bank does not engage in long term fixed rate portfolio lending.
Any long term fixed rate loans made by the Bank are sold in the secondary
market.

The following table summarizes the anticipated maturities or repricing of the
Company's interest earning assets and interest bearing liabilities as of
December 31, 1999, and the Company's interest sensitivity gap (i.e., interest
earning assets less interest bearing liabilities). A positive gap for any time
period indicates that more interest earning assets will mature or reprice during
that period than interest bearing liabilities. Based on the composition of
deposits the Company's goal is to maintain a cumulative gap position for the
period of one year or less of plus or minus fifteen percent in order to mitigate
the impact of changes in interest rates on liquidity, interest margins and
operating results.

The analysis presented below represents a static gap position for interest
sensitive assets and liabilities at December 31, 1999, and does not give effect
to prepayment or extension of loans as a result of changes in general market
rates.

Interest Sensitivity Gap Analysis
(Dollars in thousands)
December 31, 1999

<TABLE>
<CAPTION>
                                                                           After three but  After one but
                                                            within three    within twelve    within five   After five
                                                               months          months          years         years     Total
<S>                                                            ------          ------          -----         -----     -----
Assets                                                      <C>            <C>              <C>           <C>       <C>
  Federal funds sold and other overnight investments          $ 11,432       $     --        $    --       $    --   $ 11,432
  Investment securities (1)                                      7,818          4,509         10,776            --     23,103
  Loans (2), (3)                                                32,436         18,179         23,407         7,382     81,404
                                                              --------       --------        -------       -------   --------

                                                              $ 51,686       $ 22,688        $34,183       $ 7,382   $115,939
                                                              --------       --------        -------       -------   --------

Liabilities
  Interest bearing liabilities
      NOW accounts                                            $ 20,750       $     --        $    --       $    --   $ 20,750
      Money market accounts                                     14,623             --             --            --     14,623
      Savings accounts                                          10,790             --             --            --     10,790
      Certificates of deposit (4)                                8,289         29,866          7,406            49     45,610
      Repurchase agreements                                      8,497             --             --            --      8,497
                                                              --------       --------        -------       -------   --------

                                                              $ 62,949       $ 29,866        $ 7,406       $    49   $100,270
                                                              --------       --------        -------       -------   --------


Interest sensitivity gap                                       (11,263)        (7,178)        26,777         7,333     15,669
Cumulative interest sensitivity gap                            (11,263)       (18,441)         8,336        15,669
Cumulative interest sensitivity gap as a percentage of
    total assets                                                 (9.71%)       (15.91)%         7.19%        13.51%     13.51%
    ------------                                              --------       --------        -------       -------   --------
</TABLE>

(1) Net of Federal Reserve Bank and Federal Home Loan Bank stock.
(2) Loans scheduled by contractual maturities.
(3) Net of non-accrual loans of $1,499,460.
(4) Certificates of deposits scheduled by contractual maturities.

Investment Portfolio

At December 31, 1999, the Bank's investment portfolio, which totaled $23.8
million, consisted of U.S. government agency securities. The Company invests
primarily in state tax exempt U.S. Government Agency securities in order to
minimize its state income tax liability. The Company did not pay state income
tax in 1998 or 1997. Additionally, the Company owns $360,700 in stock of the
Federal Reserve Bank of Richmond and $360,400 in stock of the Federal Home Loan
Bank of Atlanta (FHLB). Management generally maintains an investment portfolio
with relatively short maturities to minimize overall interest rate risk. At
December 31, 1999, approximately 53.36% of the investment securities portfolio
had maturities of one year or less.

                                       16
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

Investment decisions are made within policy guidelines established by the Board
of Directors. It is the Bank's policy to invest in non-speculative debt
instruments, particularly debt instruments that are guaranteed by the U.S.
Government or an agency thereof, to maintain a diversified investment portfolio
which complements the overall asset/liability and liquidity objectives of the
Bank, while limiting the related credit risk to an acceptable level. To meet the
credit risk objectives, non-government debt instruments must have a rating of
"B" or better to be held in the portfolio. The Bank's investment policy
designates the investment portfolio to be classified as "available-for-sale",
unless otherwise designated. At December 31, 1999, 100% of the investment
portfolio was classified available-for-sale. The composition of securities at
December 31, for each of the past five fiscal years was:

<TABLE>
<CAPTION>
                                                1999     1998     1997     1996     1995
                                               -------  -------  -------  -------  -------
<S>                                            <C>      <C>      <C>      <C>      <C>
Available for Sale
  U. S. Treasury                               $    --  $    --  $ 1,974  $ 9,157  $16,186
  U. S. Agency                                  23,103   13,511   12,991      996      978
  Mortgage-backed                                   --      980      980      987      984
  Equity Securities                                721      699      620      194      175
                                               -------  -------  -------  -------  -------

      Total                                     23,824   15,190   16,565   11,334   18,323

Held to Maturity
  U. S. Treasury                                    --       --    3,975    1,993       --
                                               -------  -------  -------  -------  -------

      Total                                         --       --    3,975    1,993       --
                                               -------  -------  -------  -------  -------

Total Securities                               $23,824  $15,190  $20,540  $13,327  $18,323
----------------                               -------  -------  -------  -------  -------
</TABLE>

The following table presents maturities and weighted average yields for
investments in available for sale and held to maturity securities.

December 31, 1999
(Dollars in thousands)

                               YEARS TO MATURITY

<TABLE>
<CAPTION>
                                                                                          WITHIN 5
                                             WITHIN                 WITHIN 1               TO 10
                                            ONE YEAR               TO 5 YEARS              YEARS
                                             AMOUNT/       YIELD     AMOUNT/    YIELD     AMOUNT/     YIELD
                                             -------       -----     -------    -----     -------     -----
<S>                                         <C>            <C>     <C>          <C>       <C>          <C>
Available for Sale
  U. S. Treasury                             $    --          --%     $    --       --%   $     --       --%
  U. S. Agency                                12,327        5.41%      10,776     5.16%         --       --%
  ------------                                ------        ----       ------     ----    --------      ---
      Total Debt Securities                  $12,327        5.41%     $10,776     5.16%         --       --%

Held to Maturity
  U. S. Treasury                             $    --          --%     $    --       --%   $     --       --%
  U. S. Agency                                    --          --%          --       --%         --       --%
  ------------                                ------        ----       ------     ----    --------      ---
      Total                                  $    --          --%     $    --       --%   $     --       --%
</TABLE>

<TABLE>
<CAPTION>
                                             GREATER
                                             THAN TEN
                                              YEARS
                                             AMOUNT/       YIELD       TOTAL
                                             -------       -----       -----
<S>                                         <C>          <C>          <C>
Available for Sale
  U. S. Treasury                             $    --          --%     $    --
  U. S. Agency                                    --          --%      23,103
  ------------                                ------        ----       ------
      Total Debt Securities                  $    --          --%     $23,103

Held to Maturity
  U. S. Treasury                             $    --          --%     $    --
  U. S. Agency                                    --          --%          --
  ------------                                ------        ----       ------
      Total                                  $    --          --%     $    --
</TABLE>

Lending Activities

The types of loans that the Bank may originate are subject to federal laws and
regulations. Interest rates charged by the Bank on loans are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors.

                                       17
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

These factors are, in turn, affected by, among other things, economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, and legislative tax policies.

Analysis of Loans

The following table presents the composition of the loan portfolio over the
previous five years:

Years ended December 31,
(Dollars in thousands)

<TABLE>
<CAPTION>
                                         1999               1998                1997                1996                1995
                                         ----               ----                ----                ----                ----
                                   Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent
<S>                               <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Commercial loans                  $19,261     23.23%  $26,895     30.43%  $30,860     42.61%  $30,801     43.80%  $27,917     48.94%
Real estate loans:
      Commercial                   35,032     42.26%   29,373     33.25%   20,448     28.34%   17,845     25.65%   13,553     23.92%
      Construction                 15,030     18.13%   17,875     20.22%   10,191     13.91%   10,173     14.62%    7,937     14.01%
      One-to four-family            7,329      8.84%    8,620      9.75%    5,232      7.25%    7,002     10.07%    4,391      7.75%
      Home equity                   3,686      4.45%    3,219      3.64%    3,393      4.70%    1,744      2.51%    1,197      2.11%
Consumer loans                      2,565      3.09%    2,400      2.71%    2,305      3.19%    2,332      3.35%    1,848      3.27%
                                  -------    ------   -------    ------   -------    ------   -------    ------   -------    ------

          Total loans              82,903    100.00%   88,382    100.00%   72,429    100.00%   69,897    100.00%   56,843    100.00%

Less:
      Unearned income                (222)               (299)               (267)               (332)               (190)
      Allowance for loan losses    (1,483)             (1,159)             (1,177)               (765)               (617)
                                  -------             -------             -------             -------             -------

Net loans receivable              $81,198             $86,924             $70,985             $68,800             $56,036
                                  -------             -------             -------             -------             -------
</TABLE>

The Bank's loan portfolio consists of commercial, commercial real estate,
residential construction, one- to four-family residential mortgage, home equity
and consumer loans. At December 31, 1999 the Bank's loan portfolio totaled $82.9
million, of which $19.3 million, or 23.23%, were commercial loans; $35.0
million, or 42.26%, were commercial real estate loans; $15.0 million, or 18.13%,
were construction loans; $7.3 million, or 8.84%, were one- to four-family
residential mortgage loans; $3.7 million, or 4.45% were home equity loans and
$2.6 million, or 3.09%, were consumer and other loans. All of the loans in the
Bank's portfolio are either adjustable-rate or short term fixed-rate loans with
terms to maturity of 30 days to 30 years.

The Bank does not engage in longer term fixed-rate portfolio lending. Any long
term fixed-rate loans made by the Bank are sold in the secondary market.

Commercial Lending. The Bank offers commercial business loans to businesses
operating in the Bank's primary market area. These loans consist of lines of
credit which typically require an annual repayment, adjustable-rate loans with
terms of five to seven years, and short term fixed-rate loans with terms of up
to five years. Such loans are generally secured by receivables, inventories,
equipment and other assets of the business. The Bank generally requires personal
guarantees on its commercial loans. The Bank also offers unsecured commercial
loans to businesses on a selective basis. These types of loans are made to
existing customers and are of a short duration, generally one year or less. The
Bank also originates commercial loans which are guaranteed by the Small Business
Administration. The Bank has been an active participant in a variety of SBA loan
programs.

Year Ended December 31, 1999
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                  DUE AFTER
                                   DUE IN          ONE YEAR
                                     ONE             BUT                         NON
                                   YEAR OR         BEFORE       DUE AFTER      ACCRUAL     90 DAYS
                                     LESS        FIVE YEARS     FIVE YEARS      LOANS      PAST DUE       TOTAL
                                     ----        ----------     ----------      -----      --------       -----
<S>                                <C>           <C>            <C>            <C>         <C>           <C>
Real estate loans
    Construction                   $14,990         $    --        $   --        $   40     $     --      $15,030
    Mortgage                         2,372           2,867         2,090            --           --        7,329
    Commercial                      14,097          14,597         4,879         1,459           --       35,032
Commercial loans                    16,101           2,887           273            --           --       19,261
Home equity loans                    3,686              --            --            --           --        3,686
Consumer loans                       1,361           1,064           140            --           --        2,565
--------------                     -------         -------        ------        ------     --------      -------

Total loans                        $52,607         $21,415        $7,382        $1,499     $     --      $82,903
-----------                        =======         =======        ======        ======     ========      =======
</TABLE>

                                       18
<PAGE>

DUE AFTER ONE YEAR

<TABLE>
<CAPTION>
                                                   FIXED       VARIABLE
                                                   RATE          RATE          TOTAL
                                                   ----          ----          -----
<S>                                             <C>           <C>            <C>
Real estate loans
    Construction                                $      --     $      --      $      --
    Mortgage                                        2,130         2,827          4,957
    Commercial                                        421        19,055         19,476
Commercial loans                                    1,333         1,827          3,160
Home equity loans                                      --            --             --
Consumer loans                                        929           275          1,204
--------------                                  ---------     ---------      ---------

Total loans                                     $   4,813     $  23,984      $  28,797
-----------                                     =========     =========      =========
</TABLE>

Commercial Real Estate Lending. The Bank originates adjustable-rate commercial
real estate loans that are generally secured by properties used for business
purposes such as small office buildings or a combination of residential and
retail facilities located in the Bank's primary market area. The Bank's
underwriting procedures provide that commercial real estate loans may generally
be made in amounts up to 80% of the lower of the appraised value or sales price
of the property, subject to the Bank's current loans-to-one-borrower limit,
which at December 31, 1999, was $2.0 million. These loans may be made with terms
up to 25 years and are generally offered at interest rates which adjust annually
or annually after an initial three year period in accordance with the prime rate
as reported in the Wall Street Journal. In reaching a decision as to whether or
not to make a commercial real estate loan, the Bank considers the value of the
real estate to be financed and the credit strength of the borrower and/or the
lessee of the real estate project. The Bank has generally required that the
properties securing commercial real estate loans have debt service coverage
ratios of at least 1.2:1.

Loans secured by commercial real estate properties generally involve larger
principal amounts and a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's value, debt service ratio and, under certain
circumstances, additional collateral. The Bank generally requires personal
guarantees on its commercial real estate loans.

Construction Lending. The Bank originates construction loans on both one- to
four-family residences and on commercial real estate properties. The Bank
originates two types of residential construction loans, consumer and builder.
The Bank originates consumer construction loans to build a primary residence, a
secondary residence, or an investment or rental property. The Bank will
originate builder construction loans to companies engaged in the business of
constructing homes for resale. These loans may be for homes currently under
contract for sale, model homes from which other homes will be marketed within a
subdivision or, on a very limited basis, homes built for speculative purposes to
be marketed for sale during construction. Although the Bank attempts to procure
permanent end-financing, many of the Bank's construction loans, at the time
entered into with the Bank, have permanent end-financing committed by other
financial institutions.

The Bank originates land acquisition and development loans with the source of
repayment being either the sale of finished lots or the sale of homes to be
constructed on the finished lots. The Bank will originate land acquisition,
development, and construction loans on a revolving line of credit basis for
subdivisions whereby the borrower may draw upon such line of credit as lots are
sold for the purpose of improving additional lots. Construction loans are
generally offered with terms up to twelve months for consumer and builder loans,
and up to twenty-four months for land development loans.

Construction loans are generally made in amounts up to 80% of the value of the
security property. During construction, loan proceeds are disbursed in draws as
construction progresses based upon inspections of work in place by independent
construction inspectors.

At December 31, 1999, the Bank had construction loans, including land
acquisition and development loans totaling $15.0 million, or 18.13% of the
Bank's total loan portfolio, of which $1.0 million consisted of one- to four-
family residential construction loans, $10.1 million consisted of commercial
real estate construction loans and $3.9 million consisted of land acquisition
and development loans. Construction loans are generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the security property's value upon
completion of construction as compared to the estimated costs of construction,
including interest. Also, the Bank assumes certain risks associated with the
borrowers' ability to complete construction timely and in a workmanlike manner.
If the estimate of value proves to be inaccurate, or if construction is not
performed timely or accurately, the Bank may be confronted with a project which,
when completed, has a value that is insufficient to assure full repayment.

                                       19
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

One- to Four-Family Residential Mortgage Lending. The Bank currently offers both
fixed-rate and adjustable-rate mortgage loans, first and second mortgage loans
secured by one- to four-family residences and lots for one- to four-family
residences located throughout Central Maryland. It is currently the general
policy of the Bank to originate for sale in the secondary market one- to four-
family fixed-rate residential mortgage loans which conform, except as to size,
to the underwriting standards of Fannie Mae, and Freddie Mac, and to originate
for investment adjustable rate one- to four-family residential mortgage loans.
The Bank generally does not retain the servicing rights of loans it sells and
sells such loans without recourse, with the exception of a recourse in the event
of breaches for any representations or warranties made by the Bank. The Bank
recognizes, at the time of sale, the cash gain or loss on the sale of the loans
based on the difference between the net cash proceeds received and the carrying
value of the loans sold. One- to four-family mortgage loan originations are
generally obtained from the Bank's loan representatives and their contacts with
the local real estate industry, direct contacts made by the Bank's and the
Company's directors, existing or past customers, and members of the local
communities.

At December 31, 1999, one- to four-family residential mortgage loans totaled
$7.3 million, or 8.84%, of total loans. Of the one-to four-family mortgage loans
outstanding at that date, $2.3 million were fixed-rate loans with terms of up to
three years with a balloon payment at the end of the term and $5.0 million were
adjustable-rate mortgage loans. The Bank currently offers a number of
adjustable-rate mortgage loans with terms of up to 30 years and interest rates
which adjust annually from the outset of the loan or which adjust annually after
a 1 or 3 year initial period in which the loan has a fixed rate. The interest
rates for the majority of the Bank's adjustable-rate mortgage loans are indexed
to the one year Treasury Constant Maturity Index. Interest rate adjustments on
such loans are limited to a 2% annual adjustment cap with a maximum adjustment
of 6% over the life of the loan.

The origination of adjustable-rate residential mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps to reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Although the Bank offers adjustable-rate loans at below
market interest rates, all loans are underwritten to assure that the borrower is
qualified on a fully-indexed basis.

Periodic and lifetime caps on interest rate increases help to reduce the risks
associated with the Bank's adjustable-rate loans, but also limit the interest
rate sensitivity of its adjustable-rate mortgage loans.

The Bank currently originates one- to four-family residential mortgage loans in
amounts up to 80% of the lower of the appraised value or the selling price of
the property securing the loan. Mortgage loans originated by the Bank generally
include due-on-sale clauses which provide the Bank with the contractual right to
deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.

Home Equity Lending. As of December 31, 1999, home equity loans totaled $3.7
million, or 4.45% of the Bank's total loan portfolio. Fixed-rate, fixed-term
home equity loans and adjustable rate home equity lines of credit are offered in
amounts up to 100% of the appraised value with a maximum loan amount of
$100,000. Fixed-rate, fixed-term home equity loans are offered with terms up to
five years and home equity lines of credit are offered with terms up to twenty
years. Substantially all of the Bank's home equity loans are adjustable rate and
reprice with changes in the Wall Street Journal prime rate.

Consumer Lending. The Bank's portfolio of consumer loans primarily consists of
adjustable rate, personal lines of credit and installment loans secured by new
or used automobiles, new or used boats, and loans secured by deposit accounts.
Unsecured consumer loans are made with a maximum term of three years and a
maximum loan amount based on a borrower's financial condition. At December 31,
1999, consumer loans totaled $2.6 million or 3.09% to total loans outstanding.
Consumer loans are generally originated in the Bank's primary market area.

Credit Risk Management

The Bank's allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. The allowance for loan losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and estimable based on information
currently known to management. The Bank estimates a range of acceptable
allowance for credit loss based upon loan risk ratings, prior periods'
chargeoffs and specific loss reserves. This methodology is appropriate as the
Bank has ten years of loan loss history.

                                       20
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

has a sufficient number of loans for broader base estimation processes to be
meaningful and has a risk rating review system established for the purpose of
maintaining accurate risk ratings on loans. Management believes this approach
effectively measures the associated risk with any particular loan or group of
loans. Management also considers other factors including current economic
conditions, actual loss experience and industry trends. Management has also
instituted a policy to engage an independent loan review consultant to evaluate
the adequacy of the Bank's allowance for loan losses. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for estimated loan losses based
upon judgments different from those of management. As of December 31, 1999, the
Bank's allowance for loan losses was $1.5 million or 1.79% of total loans and
98.98% of non-performing loans as compared to $1.2 million, or 1.32% of total
loans and 229.02% of non-performing loans as of December 31, 1998. The Bank had
total non-performing loans of $1,499,000 and $506,000 at December 31, 1999 and
December 31, 1998, respectively, and non-performing loans to total loans of
1.81% and 0.57%, at December 31, 1999, and December 31, 1998, respectively.

The Bank places loans on a nonaccrual status after 90 days of not having
received contractual principal or interest paymentsunless the loan is in the
process of collection. In addition the Bank maintains a watch list of loans on a
monthly basis that warrant more than the normal level of management supervision.
At December 31, 1999 the Bank had approximately $4.4 million in watch list
loans.

The Bank continues to monitor and modify its allowances for loan losses as
conditions dictate. While management believes that, based on information
currently available, the Bank's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurances can be given
that the Bank's level of allowance for loan losses will be sufficient to cover
future loan losses incurred by the Bank or that future adjustments to the
allowance for loan losses will not be necessary if economic and other conditions
differ substantially from the economic and other conditions at the time
management determined the current level of the allowance for loan losses.
Management may in the future increase its level of loan loss allowances as a
percentage of total loans and non-performing loans as its loan portfolio
increases or as circumstances dictate.

Analysis of Credit Risk

Activity in the allowance for loan losses for the preceding three years ended
December 31 is shown below:

At December 31,
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                             1999      1998      1997
                                                                             ----      ----      ----
     <S>                                                                   <C>       <C>       <C>
     Total loans outstanding                                               $82,681   $88,083   $72,162
     Average loans outstanding                                             $87,126   $77,245   $72,385

     Allowance for loan losses at beginning of period                      $ 1,159   $ 1,177   $   765
     Provision charged to expense                                              432       300       748
                                                                           -------   -------   -------
     Chargeoffs:
           Commercial loans                                                    202       354       362
           Consumer and other loans                                              8         9         6
                                                                           -------   -------   -------

                 Total                                                         210       363       368

     Recoveries:
           Residential/commercial real estate loans                             31        24         9
           Commercial loans                                                     71        21        21
           Consumer and other loans                                             --        --         2
                                                                           -------   -------   -------

                 Total                                                         102        45        32
                 -----                                                     -------   -------   -------

     Net chargeoffs                                                            108       318       336
     Allowance for loan losses at end of period                            $ 1,483   $ 1,159   $ 1,177
                                                                           -------   -------   -------

     Allowance for loan losses as a percent of total loans                    1.79%     1.31%     1.63%
                                                                           -------   -------   -------
     Net chargeoffs as a percent of average loans                             0.12%     0.41%     0.46%
                                                                           -------   -------   -------
</TABLE>

                                       21
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

Capital Management

During 1999, Stockholders' Equity increased $637,000 or 5.26% to $12.7 million
from $12.1 million at December 31, 1998. The increase was primarily due to net
income of $690,000. Additionally, the Company's common shares outstanding
increased by 10,000 to 2,323,506 at December 31, 1999, from 2,313,506 at
December 31, 1998, due to exercising 10,000 shares of employee stock options.

In April, 1997, the Company's employee incentive stock option plan was approved
by shareholders at the annual meeting. Under the plan, up to 100,000 shares of
the Company's common stock may be awarded under the direction of the Company's
compensation committee. Incentive stock options vest over a five year period.
During 1999, 58,000 shares of common stock were granted under the plan, 30,100
shares were forfeited and 10,000 were exercised. At December 31, 1999, the
company had 86,500 shares granted and outstanding.

See Note 11 to the Consolidated Financial Statements for more information on the
Company's stock option plan.

Regulatory Capital Requirements

The OCC's capital regulations require national banks to meet two minimum capital
standards: a 4% Tier 1 capital to total adjusted assets ratio for the most
highly rated banks (at least 100 to 200 basis points more for other national
banks) (the "leverage" ratio) and an 8% risk-based capital ratio. Tier 1 capital
is defined as common stockholders' equity (including retained earnings), certain
non-cumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights and credit card relationships.

The risk-based capital standard requires the maintenance of Tier 1 and total
capital (which is defined as Tier 1 capital plus Tier 2 capital) to risk-
weighted assets of at least 4% and 8%, respectively. In determining the amount
of risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OCC
capital regulation based on the risks the agency believes are inherent in the
type of asset. The regulators have recently added a market risk adjustment to
cover a bank's trading account, foreign exchange and commodity positions. The
components of Tier 1 capital are equivalent to those discussed above. Tier 2
capital may include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital included
as part of total capital cannot exceed 100% of Tier 1 capital.

At December 31, 1999, the Bank's Tier 1 and total risk-based capital ratio were
13.70% and 15.00% respectively. The Bank was considered well capitalized for
regulatory purposes. See Note 16 of the Consolidated Financial Statements for
more information on the Bank's risk-based capital ratios.

Regulation and Supervision

The Company, by virtue of its control of the Bank, is a registered bank holding
company as amended under the Bank Holding Company Act of 1956 ("the Act"). As a
bank holding company, the Company is required to file certain reports with, and
otherwise comply with the rules and regulations of, the Federal Reserve Board
("FRB") under the Act.

The activities of national banks, such as the Bank, are generally governed by
the National Bank Act and the Federal Deposit Insurance Act. The Bank is subject
to extensive regulation, examination and supervision by the Office of the
Comptroller of the Currency (the "OCC"), as its primary federal regulator, and
the FDIC, as the deposit insurer. The Bank's deposit accounts are insured up to
applicable limits by the FDIC's Bank Insurance Fund ("BIF"). The Bank must file
reports with the OCC and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of other
institutions. The OCC and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
Many aspects of the Bank's operations are regulated by federal law including
allowable activities, reserves against deposits, branching, mergers and
investments. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of

                                       22
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued

assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulatory requirements and policies, whether by
the OCC, the FDIC or the Congress, could have a material adverse impact on the
Company or the Bank and their operations.

On November 12, 1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999
became law. The Modernization Act contains new financial privacy provisions will
generally prohibit financial institutions, including the Company, from
disclosing nonpublic personal financial information to third parties unless
customers have the opportunity to "opt out" of the disclosure.  The
Modernization Act also allows, among other things, for bank holding companies
meeting certain management, capital and CRA standards to engage in a
substantially broader range of nonbanking activities than were previously
permissible, including insurance underwriting and making merchant banking
investments in commercial and financial companies.  The Modernization Act
further allows insurers and other financial services companies to acquire banks;
removes various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.

Because the Modernization Act permits banks, securities firms and insurers to
combine and to offer a wide variety of financial products and services, many of
these resulting companies will be larger and have more resources than the
Company.  Should these companies choose to compete directly with the Company in
its target markets, the Company's results of operations could be adversely
impacted.

Market Value and Dividend Information

The Company's Common stock is listed on "The NASDAQ Stock Market(R) SmallCap
Market" under the symbol "ANNB". The Company's stock began trading on October 1,
1997. The Company has traded an average daily volume of 3,258 shares during
1999. At December 31, 1999 the closing price was $4.06 per share.

The Company's high and low stock price during the last quarter of 1999 was $4.88
and $4.00, respectively.

As of March 24, 2000 the Company has outstanding 2,323,506 shares of common
stock and no preferred stock issued or outstanding. The Company paid dividends
for the first time to its stockholders during 1999.  Annual Dividends paid to
the stockholders equaled $0.04 per share.

                                       23
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.



                         [ROWLES & COMPANY, LLP Logo]



Report of Independent Auditors

The Board of Directors and Stockholders
Annapolis National Bancorp, Inc. and Subsidiary
Annapolis, Maryland

We have audited the accompanying consolidated balance sheets of Annapolis
National Bancorp, Inc. and Subsidiary as of December 31, 1999, 1998 and 1997,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Annapolis National
Bancorp, Inc. and Subsidiary as of December 31, 1999, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.


                                   /s/ Rowles & Company, LLP
                                   -------------------------

Salisbury, Maryland
January 28, 2000

                                       24
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.

Consolidated Balance Sheets

December 31,

<TABLE>
<CAPTION>
                                                               1999           1998           1997
                                                               ----           ----           ----
<S>                                                        <C>            <C>            <C>
Assets
Cash and due from banks                                    $  5,665,014   $  3,845,793   $  5,611,407
Federal funds sold and other overnight investments           11,432,282     10,284,419     20,743,973
Investment securities available for sale                     23,768,975     15,190,949     16,565,290
Investment securities held to maturity (market value of
 $3,891,830)                                                         --             --      3,975,296
Loans, less allowance for credit losses of $1,482,704,
 $1,158,863 and $1,177,437                                   81,198,152     86,924,416     70,985,232
Premises and equipment                                        2,741,376      2,678,786      1,238,887
Core deposit premium and other intangibles                       43,263        129,789        216,315
Accrued interest receivable                                     821,662        590,159        515,549
Other real estate owned                                          57,143         90,539         42,637
Deferred income taxes                                           341,306        319,863        765,868
Other assets                                                    664,187        402,202        166,848
                                                           ------------   ------------   ------------

       Total assets                                        $126,733,360   $120,456,915   $120,827,302
                                                           ------------   ------------   ------------

Liabilities and Stockholders' Equity
Deposits                                                   $105,093,606   $100,742,243   $ 96,061,762
Securities sold under agreements to repurchase                8,497,067      7,173,980     13,305,780
Accrued interest payable and other liabilities                  415,198        449,726        372,446
                                                           ------------   ------------   ------------
       Total liabilities                                    114,005,871    108,365,949    109,739,988
                                                           ------------   ------------   ------------

Stockholders' Equity
 Common stock, par value $0.01 per share; authorized
   10,000,000 shares; issued and outstanding 2,323,506
   shares in 1999, 2,313,506 shares in 1998, and
   2,312,306 shares in 1997                                      23,235         23,135         23,123
 Capital surplus                                             13,192,408     13,142,508     13,135,320
 Retained earnings (deficit)                                   (454,311)    (1,075,000)    (2,077,844)
                                                           ------------   ------------   ------------

                                                             12,761,332     12,090,643     11,080,599
                                                           ------------   ------------   ------------

   Accumulated other comprehensive income                       (33,843)           323          6,715
                                                                          ------------   ------------

      Total stockholders' equity                             12,727,489     12,090,966     11,087,314
                                                           ------------   ------------   ------------

      Total liabilities and stockholders' equity           $126,733,360   $120,456,915   $120,827,302
                                                           ------------   ------------   ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       25
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.

Consolidated Statements of Income

<TABLE>
<CAPTION>
Years Ended December 31,
                                                               1999         1998        1997
                                                            -----------  ----------  -----------
<S>                                                         <C>          <C>         <C>
Interest Income
 Loans, including fees                                      $8,059,766   $7,655,050  $7,447,970
 Federal funds sold and securities purchased under
  agreements to resell                                         461,909    1,194,758     776,452
 U.S. Treasury securities and obligations of other
  U.S. Government agencies                                   1,090,646      963,154     937,019
                                                            ----------   ----------  ----------

      Total interest income                                  9,612,321    9,812,962   9,161,441
                                                            ----------   ----------  ----------

Interest Expense
 Certificates of deposit, $100,000 or more                     324,182      300,714     283,053
 Other deposits                                              2,810,234    3,220,267   2,973,123
 Securities sold under agreements to repurchase                322,996      368,609     314,943
 Interest on borrowed funds                                     17,352           --      59,574
                                                            ----------   ----------  ----------

      Total interest expense                                 3,474,764    3,889,590   3,630,693
                                                            ----------   ----------  ----------

      Net interest income                                    6,137,557    5,923,372   5,530,748
Provision for Credit Losses                                    431,879      300,000     747,908
----------------------------------------------------------  ----------   ----------  ----------

   Net interest income after provision for credit losses     5,705,678    5,623,372   4,782,840
                                                            ----------   ----------  ----------

Noninterest Income
 Gain (loss) on sale of loans, securities, equipment,
  intangibles, and other real estate                           (24,966)     122,534      17,000
 Service charges and other                                     844,756      744,770     745,064
                                                            ----------   ----------  ----------

      Total noninterest income                                 819,790      867,304     762,064
                                                            ----------   ----------  ----------

Noninterest Expense
 Personnel                                                   2,505,786    2,481,507   2,111,176
 Occupancy and equipment                                       919,466      814,625     834,943
 Data Processing                                               697,293      487,761     434,211
 Marketing and advertising                                     194,221      174,727      88,142
 Other operating                                             1,055,497      920,757     865,187
 Restructuring                                                      --           --     795,570
 Amortization of intangible assets acquired                     86,526       86,526     100,805
                                                            ----------   ----------  ----------

      Total noninterest expense                              5,458,789    4,965,903   5,230,034
                                                            ----------   ----------  ----------

Income before income taxes                                   1,066,679    1,524,773     314,870
Income tax expense (benefit)                                   376,384      521,929    (769,327)
                                                            ----------   ----------  ----------

Net income                                                  $  690,295   $1,002,844  $1,084,197
                                                            ----------   ----------  ----------

Basic earnings per share                                    $     0.30   $     0.43  $     0.64
                                                            ----------   ----------  ----------

Diluted earnings per share                                  $     0.30   $     0.43  $     0.63
                                                            ----------   ----------  ----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       26
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.

Consolidated Statements of Changes in Stockholders' Equity

<TABLE>
<CAPTION>

                                           COMMON STOCK
                                           ------------                           UNDIVIDED
                                       SHARES        PAR VALUE       SURPLUS       PROFITS
                                    -------------  --------------  ------------  ------------
<S>                                 <C>            <C>             <C>           <C>
BALANCE, DECEMBER 31, 1996              1,478,972       $ 14,789   $ 8,633,560   $(3,162,041)
Net income                                     --             --            --     1,084,197
Sale of stock, net of costs               833,334          8,334     4,501,760            --

Unrealized gain (loss) on
 investment securities available
 for sale net of income taxes                  --             --            --            --
                                        ---------       --------   -----------   -----------

BALANCE, DECEMBER 31, 1997              2,312,306         23,123    13,135,320    (2,077,844)
Net income                                     --             --            --     1,002,844
Stock options exercised                     1,200             12         7,188            --
Unrealized gain (loss) on
 investment securities available
 for sale net of income taxes                  --             --            --            --
                                        ---------       --------   -----------   -----------

BALANCE, DECEMBER 31, 1998              2,313,506         23,135    13,142,508    (1,075,000)
Net income                                     --             --            --       690,295
Stock options exercised                    10,000            100        49,900            --
Dividends paid                                 --             --            --       (69,606)
Unrealized gain (loss) on
 investment securities available
 for sale net of income taxes                  --             --            --            --
                                        ---------       --------   -----------   -----------

BALANCE, DECEMBER 31, 1999              2,323,506       $ 23,235   $13,192,408   $  (454,311)
--------------------------              ---------       --------   -----------   -----------
</TABLE>

<TABLE>
<CAPTION>
                                                      ACCUMULATED
                                                         OTHER           TOTAL
                                                     COMPREHENSIVE    STOCKHOLDERS' COMPREHENSIVE
                                                         INCOME          EQUITY        INCOME
                                                         ------          ------        ------
<S>                                                <C>                <C>            <C>
BALANCE, DECEMBER 31, 1996                              $(15,539)     $ 5,470,769
Net income                                                    --        1,084,197    $ 1,084,197
Sale of stock, net of costs                                   --        4,510,094
Unrealized gain (loss) on
 investment securities available
 for sale net of income taxes                             22,254           22,254         22,254
                                                        --------      -----------    -----------


BALANCE, DECEMBER 31, 1997                                 6,715       11,087,314      1,106,451
Net income                                                    --        1,002,844      1,002,844
Stock options exercised                                       --            7,200
Unrealized gain (loss) on
 investment securities available
 for sale net of income taxes                             (6,392)          (6,392)        (6,392)
                                                        --------      -----------    -----------

BALANCE, DECEMBER 31, 1998                                   323       12,090,966        996,452
Net income                                                    --          690,295        690,295
Stock options exercised                                       --           50,000
Dividends paid                                                --          (69,606)
Unrealized gain (loss) on
 investment securities available
 for sale net of income taxes                            (34,166)         (34,166)       (34,166)
                                                        --------      -----------    -----------

BALANCE, DECEMBER 31, 1999                              $(33,843)     $12,727,489    $   656,129
                                                        --------      -----------    -----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       27
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Years Ended December 31,
                                                                     1999           1998           1997
                                                                 -------------  -------------  -------------
<S>                                                              <C>            <C>            <C>
Reconciliation of Net Income to Net Cash
 Provided by Operating Activities
  Net income                                                     $    690,295   $  1,002,844   $  1,084,197
  Adjustments to reconcile net income to net cash
   provided by operating activities
     Depreciation and amortization                                    308,367        196,580        197,955
     Provision for credit losses                                      431,879        300,000        747,908
     Deferred income taxes                                           (152,895)       449,297       (769,327)
     Amortization of premiums and accretion of discounts, net        (507,926)      (257,550)      (453,932)
     Amortization of intangible assets                                 86,526        102,770        571,986
     Loss on sales of loans, securities,
      equipment, and other real estate owned                           24,966          2,466         43,826
      Decrease (increase) in
       Accrued interest receivable                                   (231,503)       (74,610)       (78,827)
       Other assets                                                   (30,920)      (210,053)        71,461
      Increase (decrease) in
       Accrued interest payable                                        (6,169)        (7,539)      (155,441)
       Accrued income taxes, net of taxes refundable                     (272)       (22,402)        (7,487)
       Deferred loan origination fees                                 (77,462)        32,754        (65,463)
       Other liabilities                                              (33,398)        84,819         70,829
                                                                 ------------   ------------   ------------

          Net cash provided from operations                           501,488      1,599,376      1,257,685
                                                                 ------------   ------------   ------------

Cash Flows from Investing Activities
 Proceeds from maturities of securities held to maturity                   --      4,000,000             --
 Purchase of securities held to maturity                                   --             --     (1,890,901)
 Proceeds from sales and maturities of securities
  available for sale                                               84,897,446     62,954,062     52,960,000
 Purchase of securities available for sale                        (93,031,822)   (61,356,247)   (57,802,932)
 Net decrease (increase) in federal funds                          (1,147,863)    10,459,554    (16,365,243)
 Loans made, net of principal collected                             5,371,847    (16,319,840)    (2,867,280)
 Purchases of and deposits on premises, equipment,
  and software                                                       (464,615)    (1,671,512)      (206,121)
 Proceeds from sale of equipment                                        4,500         13,112         17,000
 Acquisition of other real estate owned                                    --             --        (11,325)
 Proceeds from sale of other real estate owned                         33,396             --        108,688
 Net decrease in securities purchased under
  agreements to resell                                                     --             --      4,750,000
                                                                 ------------   ------------   ------------

          Net cash used by investing activities                  $ (4,337,111)  $ (1,920,871)  $(21,308,114)
                                                                 ------------   ------------   ------------

Cash Flows from Financing Activities
 Net increase (decrease) in
  Time deposits                                                  $  7,989,162   $ (4,108,419)  $ 13,052,660
  Other deposits                                                   (3,637,799)     8,788,900     (4,096,893)
  Securities sold under agreements to repurchase                    1,323,087     (6,131,800)     6,960,821
  Repayment of long-term debt principal                                    --             --       (848,400)
  Payment of Dividends                                                (69,606)            --             --
  Proceeds from sale of stock and options exercised                    50,000          7,200      4,510,094
                                                                 ------------   ------------   ------------

          Net cash provided by financing activities                 5,654,844     (1,444,119)    19,578,282
                                                                 ------------   ------------   ------------

Net increase (decrease) in cash and cash equivalents                1,819,221     (1,765,614)      (472,147)
Cash and cash equivalents at beginning of year                      3,845,793      5,611,407      6,083,554
                                                                 ------------   ------------   ------------

Cash and cash equivalents at end of year                         $  5,665,014   $  3,845,793   $  5,611,407
                                                                 ------------   ------------   ------------

Supplemental Cash Flow Information
 Interest paid, including interest credited to accounts          $  3,480,934   $  3,897,129   $  3,786,134
 Income taxes paid                                                    566,351         95,034          7,487
Noncash Activities
 Other real estate reclassified from loans                                 --         47,902             --
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       28
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements

December 31, 1999

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  The accounting and reporting policies in the financial statements conform to
generally accepted accounting principles and to general practices within the
banking industry.  Management makes estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements.  These estimates and
assumptions may affect the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from these estimates.

Business
  The Company was incorporated on May 26, 1988, under the laws of the State of
Maryland to serve as a bank holding company and formed Annapolis National Bank
(the Bank) as a wholly owned subsidiary.  The Company is registered as a bank
holding company and the Bank is chartered as a national bank.  The Company (as a
bank holding company) and the Bank (as a nationally chartered bank) are subject
to governmental supervision, regulation, and control.

  The principal business of Annapolis National Bank is to make loans and other
investments and to accept time and demand deposits.  The Bank's primary market
area is in Anne Arundel County, Maryland, although the Bank's business
development efforts generate business outside of the area.  The Bank offers a
broad range of banking products, including a full line of business and personal
savings and checking accounts, money market demand accounts, certificates of
deposit, travelers checks, certified checks, U.S. Savings Bond application and
redemption, Mastercard/VISA/American Express credit card and merchant deposit
services, federal tax depository services, individual retirement accounts, money
orders, money wire transfers, automated teller product, and other banking
services.

  The Bank funds a variety of loan types including commercial and residential
real estate loans, commercial term loans and lines of credit, consumer loans,
and letters of credit.  The Bank's customers are primarily individuals and small
businesses.

Principles of consolidation
  The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Annapolis National Bank.  All significant
intercompany balances and transactions have been eliminated in consolidation.

Cash equivalents
  For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and amounts due from banks.

Investment securities
  As securities are purchased, management determines if the securities should be
classified as held to maturity or available for sale.  Securities which
management has the intent and ability to hold to maturity are recorded at
amortized cost which is cost adjusted for amortization of premiums and accretion
of discounts to maturity, or over the expected life of mortgage-backed
securities.  Securities which may be sold before maturity are classified as
available for sale and carried at fair value with unrealized gains and losses
included in stockholders' equity on an after-tax basis.  Investments in Federal
Home Loan Bank and Federal Reserve stock are included with securities classified
as available for sale and carried at cost.

Premises and equipment
  Premises and equipment are recorded at cost less accumulated depreciation and
amortization.  Depreciation and amortization are computed over the estimated
useful lives using the straight-line method.  Leasehold improvements are
amortized over the terms of the leases or the estimated useful lives of the
improvements, whichever is shorter.

Loans and allowance for credit losses
  Loans are stated at face value, plus deferred origination costs, less unearned
discounts, deferred origination fees, and the allowance for credit losses.
Interest on loans is credited to income based on the principal amounts
outstanding.  Origination fees and costs are amortized to income over the
contractual life of the related loans as an adjustment of yield.  Discounts on
the purchase of


                                       29
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Notes To Consolidated Financial Statements, continued

mortgage loans are amortized to income over the contractual lives of the loans.

  Accrual of interest on a loan is discontinued when the loan is delinquent more
than ninety days unless the collateral securing the loan is sufficient to
liquidate the loan.  Management considers all loans where the accrual of
interest has been discontinued to be impaired.

  The allowance for loan losses represents an amount which, in management's
judgment, will be adequate to absorb possible losses on existing loans that may
become uncollectible.  Management's judgment in determining the adequacy of the
allowance is based on evaluations of the collectibility of loans.  These
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrowers'
ability to pay.  If the current economy or real estate market were to suffer a
severe downturn, the estimate for uncollectible accounts would need to be
increased.  Loans which are deemed uncollectible are charged off and deducted
from the allowance.  The provision for loan losses and recoveries on loans
previously charged off are added to the allowance.

Intangible assets
  Net assets acquired in purchase transactions are recorded at fair value at the
date of acquisition.  Core deposit premiums are amortized on a straight line
basis over the estimated period benefited.

Real estate owned
  Real estate acquired in satisfaction of a debt is carried at the lower of cost
or net realizable value.  Costs incurred in maintaining foreclosed real estate
and write-downs to reflect declines in the fair value of the properties after
acquisition are included in operating expenses.

Income taxes
  The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns.  Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.  Prior to
1997, no deferred tax asset was recognized since the Company did not have a
sustained history of profits and taxable income.

Stock options
  The Company accounts for stock options under Accounting Principles Board
Option No. 25, Accounting for Stock Issued to Employees.

Earnings per share
  Basic earnings per common share are determined by dividing net income by the
weighted average number of shares of common stock outstanding.  Diluted earnings
per share are calculated including the average dilutive common stock equivalents
outstanding during the period.

  Dilutive common equivalent shares consist of stock options, calculated using
the treasury stock method.

2.  INVESTMENT SECURITIES

  Investment securities are summarized as follows:

<TABLE>
<CAPTION>
                                              AMORTIZED   UNREALIZED  UNREALIZED    MARKET
DECEMBER 31, 1999                               COST        GAINS       LOSSES       VALUE
-----------------                               ----        -----       ------       -----
<S>                                          <C>          <C>         <C>         <C>

Available for sale
 U.S. Government agency                      $23,102,994     $20,325     $75,444  $23,047,875
 Federal Home Loan Bank stock                    360,400          --          --      360,400
 Federal Reserve Bank stock                      360,700          --          --      360,700
                                             -----------  ----------     -------  -----------

                                             $23,824,094     $20,325     $75,444  $23,768,975
                                             -----------  ----------     -------  -----------
</TABLE>

DECEMBER 31, 1998
-----------------

Available for sale

                                       30
<PAGE>

<TABLE>
<S>                              <C>             <C>         <C>      <C>
 U.S. Government agency          $13,491,259     $21,301     $   811  $13,511,749
 Mortgage-backed securities        1,000,000          --      20,000      980,000
 Federal Home Loan Bank stock        361,400          --          --      361,400
 Federal Reserve Bank stock          337,800          --          --      337,800
                                 -----------  ----------     -------  -----------

                                 $15,190,459     $21,301     $20,811  $15,190,949
                                 -----------  ----------     -------  -----------
DECEMBER 31, 1997
-----------------

Held to maturity
U.S. Treasury securities         $ 3,975,296  $       --   $  83,466  $ 3,891,830
                                 -----------  ----------   ---------  -----------
Available for sale
 U.S. Treasury securities        $ 1,970,565     $ 3,435   $      --  $ 1,974,000
 U.S. Government agency           12,964,401      27,088         349   12,991,140
 Mortgage-backed securities        1,000,000          --      20,000      980,000
 Federal Home Loan Bank stock        292,900          --          --      292,900
 Federal Reserve Bank stock          327,250          --          --      327,250
                                 -----------  ----------   ---------  -----------

                                 $16,555,116     $30,523   $  20,349  $16,565,290
                                 -----------  ----------   ---------  -----------
</TABLE>

  Proceeds from sale of securities during 1999 were $1,856,696 with a realized
loss of $8,771 as compared to 1998 with proceeds of $2,484,062 and realized
gains of $312 on those sales.  The unrealized gains and losses on investment
securities included in comprehensive income are reported net of these realized
gains.

  The amortized cost and market value of debt securities by contractual
maturities are shown below.  Actual maturities of these securities may differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                      HELD TO MATURITY        AVAILABLE FOR SALE
                                      ----------------        ------------------
                                    AMORTIZED     MARKET     AMORTIZED     MARKET
DECEMBER 31, 1999                     VALUE        COST        VALUE        COST
-----------------                   ----------  ----------  -----------  -----------
<S>                                 <C>         <C>         <C>          <C>
Due within one year                 $       --  $       --  $12,327,427  $12,345,315
Due after one through five years            --          --   10,775,567   10,702,560
Mortgage-backed securities                  --          --           --           --
Equity securities                           --          --      721,100      721,100
                                    ----------  ----------  -----------  -----------

                                    $       --  $       --  $23,824,094  $23,768,975
                                    ----------  ----------  -----------  -----------

DECEMBER 31, 1998
-----------------

Due within one year                 $       --  $       --  $11,491,111  $11,509,350
Due after one through five years            --          --    2,000,148    2,002,399
Mortgage-backed securities                  --          --    1,000,000      980,000
Equity securities                           --          --      699,200      699,200
                                    ----------  ----------  -----------  -----------

                                    $       --  $       --  $15,190,459  $15,190,949
                                    ----------  ----------  -----------  -----------

DECEMBER 31, 1997
-----------------

Due within one year                  3,975,296  $3,891,830  $ 9,936,710  $ 9,942,937
Due after one through five years            --          --    4,998,256    5,022,203
Mortgage-backed securities                  --          --    1,000,000      980,000
Equity securities                           --          --      620,150      620,150
                                    ----------  ----------  -----------  -----------

                                    $3,975,296  $3,891,830  $16,555,116  $16,565,290
                                    ----------  ----------  -----------  -----------
</TABLE>

  Securities were sold to commercial customers of the Bank under agreements for
the Bank to repurchase the securities as follows:

<TABLE>
<CAPTION>
                                             1999          1998          1997
                                         ------------  ------------  ------------
<S>                                      <C>           <C>           <C>

Cost at December 31                      $ 8,507,651   $14,491,259   $13,459,429
Fair value at December 31                  8,492,944    14,491,749    13,508,000
Repurchase price                           8,497,067     7,173,980    13,305,780
Average balance during the year            9,969,548    11,330,409    10,570,086
Average interest rate during the year           3.24%         3.25%         2.98%
Maximum month-end balance                $13,026,580   $14,846,219   $14,666,790
                                         -----------   -----------   -----------
</TABLE>

                                       31
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued

3.  CASH AND DUE FROM BANKS

    Banks are required to carry cash reserves of specified percentages of
deposit balances. The Bank's normal balances of cash on hand and on deposit with
other banks are sufficient to satisfy these reserve requirements.

    The Bank normally carries balances with other banks that exceed the
federally insured limit. The average balance carried in excess of the limit,
including federal funds sold to the same bank, was approximately $3,055,497.

4.  LOANS AND ALLOWANCE FOR CREDIT LOSSES

    Major classifications of loans are as follows:

<TABLE>
<CAPTION>
                                                                                          1999         1998         1997
                                                                                          ----         ----         ----
<S>                                                                                    <C>          <C>          <C>
Real estate
 Commercial                                                                            $38,461,203  $38,000,834  $20,447,677
 Residential                                                                            22,614,877   21,086,312   18,816,566
Commercial                                                                              19,261,184   26,895,218   30,860,360
Consumer                                                                                 2,565,432    2,400,217    2,304,614
                                                                                       -----------  -----------  -----------

                                                                                        82,902,696   88,382,581   72,429,217
                                                                                       -----------  -----------  -----------

Less
 Deferred loan origination fees                                                            221,840      299,302      266,548
 Allowance for loan losses                                                               1,482,704    1,158,863    1,177,437
                                                                                       -----------  -----------  -----------

                                                                                         1,704,544    1,458,165    1,443,985
                                                                                       -----------  -----------  -----------
Loans, net                                                                             $81,198,152  $86,924,416  $70,985,232
                                                                                       -----------  -----------  -----------
</TABLE>

  The maturity and rate repricing distribution of the loan portfolio is as
 follows:

<TABLE>
<CAPTION>
                                                                                           1999         1998         1997
                                                                                           ----         ----         ----
<S>                                                                                    <C>          <C>          <C>
Repricing or maturing within one year                                                  $52,114,600  $63,899,468  $55,913,146
Maturing over one to five years                                                         23,406,247   19,357,456   14,618,447
Maturing over five years                                                                 7,381,849    5,125,657    1,897,624
                                                                                       -----------  -----------  -----------

                                                                                       $82,902,696   88,382,581  $72,429,217
                                                                                       -----------  -----------  -----------

  Transactions in the allowance for credit losses were as follows:

                                                                                              1999         1998         1997
                                                                                       -----------  -----------  -----------

Balance, beginning of year                                                             $ 1,158,863  $ 1,177,437  $   765,000
Provisions charged to operations                                                           431,879      300,000      747,908
Recoveries                                                                                 101,641       44,853       32,943
                                                                                       -----------  -----------  -----------

                                                                                         1,692,383    1,522,290    1,545,851
Charge-offs                                                                                209,679      363,427      368,414
                                                                                       -----------  -----------  -----------

Balance, end of year                                                                   $ 1,482,704  $ 1,158,863  $ 1,177,437
                                                                                       -----------  -----------  -----------
</TABLE>

  The balance of nonaccrual and impaired loans is as follows:

<TABLE>
<CAPTION>
                                                                                           1999         1998         1997
                                                                                           ----         ----         ----
<S>                                                                                    <C>          <C>          <C>
Total guaranteed by the Small Business
    Administration                                                                     $   718,499  $   101,089  $   531,722
Other nonaccrual loans                                                                     780,961      404,487      245,954
                                                                                       -----------  -----------  -----------

Total nonaccrual loans                                                                   1,499,460      505,576      777,676
Average impaired loans                                                                   1,690,411    1,109,333    1,271,093
Related allowance for credit losses                                                        271,249      179,217      171,923
Interest collected                                                                         195,483       18,439       98,000
Balance of accrued interest not recorded                                                   118,937       52,747       73,864
                                                                                       -----------  -----------  -----------
</TABLE>

                                       32
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued

     Loans which were 90 days or more past due, including nonaccrual loans,
amounted to $72,615, $717,169, and $371,000 at December 31, 1999, 1998, and
1997, respectively.

     The Bank lends to customers located primarily in Annapolis, Baltimore, and
surrounding areas of central Maryland.  Although the loan portfolio is
diversified, its performance will be influenced by the economy of the region.

     Certain officers and directors (and companies which have a 10% or more
beneficial ownership) have loans with the Bank.  Such loans were made in the
ordinary course of business on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated parties and are being
repaid as agreed.  A summary of the activity of these loans follows:

<TABLE>
<CAPTION>
                                                                                               1999          1998          1997
                                                                                               ----          ----          ----
<S>                                                                                        <C>           <C>           <C>
Beginning balance                                                                          $ 2,752,733   $ 2,229,589   $ 3,071,471
Advances                                                                                       243,259     1,099,920     1,058,813
Repayments                                                                                    (172,300)     (576,776)     (240,899)
Change in officers and directors                                                                    --            --    (1,659,796)
                                                                                           -----------   -----------   -----------

Ending balance                                                                             $ 2,823,692   $ 2,752,733   $ 2,229,589
                                                                                           -----------   -----------   -----------
</TABLE>

5.   CREDIT COMMITMENTS

     Outstanding loan commitments, unused lines of credit, and letters of credit
are as follows:

<TABLE>
<CAPTION>
                                                                                               1999          1998          1997
                                                                                               ----          ----          ----
<S>                                                                                        <C>           <C>           <C>
  Loan commitments
   Construction                                                                            $13,764,407   $ 4,220,628   $ 4,319,479
   Other                                                                                     9,739,410    14,284,008    10,799,497
                                                                                           -----------   -----------   -----------

                                                                                           $23,503,817   $18,504,636   $15,118,976
                                                                                           -----------   -----------   -----------

  Letters of credit
   Deposit secured                                                                         $   329,670   $   591,862   $   591,711
   Other                                                                                     1,275,908       570,366       472,979
                                                                                           -----------   -----------   -----------

                                                                                           $ 1,605,578   $ 1,162,228   $ 1,064,690
                                                                                           -----------   -----------   -----------
</TABLE>

     Loan commitments including lines of credit are agreements to lend to a
customer as long as there is no violation of any condition to the contract.
Loan commitments generally have variable interest rates, fixed expiration dates,
and may require payment of a fee.  Lines of credit generally have variable
interest rates.  Such lines do not represent future cash requirements because it
is unlikely that all customers will draw upon their lines in full at any time.

     Letters of credit are commitments issued to guarantee the performance of a
customer to a third party.

     Loan commitments and lines and letters of credit are made on the same
terms, including collateral, as outstanding loans. Management is not aware of
any accounting loss the Company will incur by the funding of these commitments.

6.   INTANGIBLE ASSETS

     In 1997, the intangible assets acquired in 1990 were evaluated for
impairment. Except for the core deposit premium, the various other intangible
assets were written off as part of the restructuring expense. The core deposit
premium is being amortized over a period expiring in the year 2000. Amortization
expense relating to the core deposit premium was $86,526 in 1999, 1998, and
1997.

                                       33
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued

7.  PREMISES AND EQUIPMENT

     A summary of premises and equipment and the related depreciation is as
follows:

<TABLE>
<CAPTION>
                                              1999        1998        1997
                                              ----        ----        ----
  <S>                                      <C>         <C>         <C>

  Land and construction projects           $1,517,045  $1,399,862  $       --
  Leasehold improvements                      658,175     658,175     658,175
  Furniture, fixtures, and equipment        1,519,545   1,306,962   1,077,546
                                           ----------  ----------  ----------

                                            3,694,765   3,364,999   1,735,721
  Accumulated depreciation                    953,389     686,213     496,834
                                           ----------  ----------  ----------

  Net premises and equipment               $2,741,376  $2,678,786  $1,238,887
                                           ----------  ----------  ----------
  Depreciation and amortization expense    $  303,367  $  196,580  $  197,955
                                           ----------  ----------  ----------
</TABLE>

     The Company has purchased land on which it plans to construct a new branch
and administrative facility. Preliminary site and planning costs have been
capitalized. The Company has signed contracts related to this project totaling
$178,000.


8.   LEASE COMMITMENTS

     The Company leases facilities under the following terms:

<TABLE>
<CAPTION>
                                                 CURRENT ANNUAL
                                        RENTAL         EXPIRATION DATE     RENEWAL OPTIONS
                                       --------        ---------------     ---------------
  <S>                                  <C>             <C>                 <C>
  Bestgate Branch                      $129,946        January, 2001       None
  Cape St. Claire Branch                 16,713        February, 2000      3 terms of 5 years
  Edgewater Branch                       40,000        February, 2006      2 terms of 10 years
  Kent Island Branch                     32,406        August, 2001        1 term of 3 years, 2 terms of 5 years
  Severna Park Branch                    40,354        August, 2006        2 terms of 10 years
  Administrative offices, Annapolis     133,722        September, 2005     None, early buyout 2000
</TABLE>

     Some of the leases provide for increases in the rental rates at specified
times during the lease terms, prior to the expiration dates.  The Company
exercised its option to terminate the lease on the administration office by
paying a one-time fee of $36,000.  All renewal options are exercisable at
increased rates.

     Lease obligations will require rent payments as follows:

<TABLE>
<CAPTION>
                      PERIOD             MINIMUM RENTALS
                      ------             ---------------
                      <S>                <C>

                       2000                 $387,975
                       2001                  119,073
                       2002                   85,354
                       2003                   85,354
                       2004                   85,354
            Remaining years                  118,129
                                            --------

            Total                           $881,239
                                            --------
</TABLE>

     The leases generally provide for payment of property taxes, insurance, and
maintenance costs by the Company.  The total rental expense for all real
property leases was $461,659, $454,411, and $463,900 for 1999, 1998, and 1997,
respectively.

     In January, 1999, the Company negotiated a two-year extension on its
Bestgate Branch location. The new annual rent will be $176,800. Part of the
space will be sublet, reducing the annual rent by $51,450.

     During 1998, the Company waived a clause in one of its contracts
prohibiting other financial institutions from locating in the same shopping
center. The Company was paid $125,000, which is included in gain on sale of
loans, securities, equipment, intangibles, and other real estate.

                                       34
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued

9.   DEPOSITS

     Major classifications of deposits are as follows:

<TABLE>
<CAPTION>
                                                                      1999          1998         1997
     <S>                                                          <C>           <C>           <C>
     Demand, noninterest bearing                                  $ 13,320,678  $ 11,304,382  $10,330,153
     NOW accounts                                                   20,750,063    21,050,434   19,272,587
     Savings and money market accounts                              25,413,357    30,767,081   24,730,257
     Time deposits, $100,000 and over                                6,794,832     7,229,126    5,897,484
     Other time                                                     38,814,676    30,391,220   35,831,281
                                                                  ------------  ------------  -----------
                                                                  $105,093,606  $100,742,243  $96,061,762
                                                                  ------------  ------------  -----------
</TABLE>


                        Time deposits mature as follows:

<TABLE>
<CAPTION>

     <S>                                                  <C>                 <C>                 <C>
     Three months or less                                 $ 8,289,073         $12,516,492         $10,308,033
     Four months to one year                               29,865,401          21,180,825          28,127,664
     Over one year                                          7,455,034           3,923,029           3,293,068
                                                          -----------         -----------         -----------

                                                          $45,609,508         $37,620,346         $41,728,765
                                                          -----------         -----------         -----------
</TABLE>

     At December 31, 1999, 1998, and 1997, time deposits with maturities in
excess of five years totaled $109,210, $104,151, and $127,064.

10.  PROFIT SHARING PLAN

     The Company has a profit sharing plan, qualifying under Section 401(k) of
the Internal Revenue Code, for those employees who meet the eligibility
requirements set forth in the plan. The plan does not require the Company to
match the participants' contributions. The Company contributions to the plan
were $35,116 in 1999, $24,612 in 1998, and $25,874 in 1997.

11.  STOCK OPTIONS

     The Company has adopted a stock option plan, covering 100,000 shares of
common stock, intended to qualify as incentive stock options under Section 422
of the Internal Revenue Code. The plan provides for granting options to purchase
shares of the common stock to the officers and other key employees of the
Company and the Bank. Options granted have ten year expiration dates with
vesting periods from immediate to five years. No options shall be granted under
the plan after March 28, 2007.

     A summary of the status of the Company's performance-based stock option
plans follows:

<TABLE>
<CAPTION>
                                               1999       1998       1997
                                             ---------  --------  ----------
<S>                                          <C>        <C>       <C>

     Outstanding, beginning of year            68,600    57,500          --
     Granted                                   58,000    24,600      64,000
     Exercised                                (10,000)   (1,200)         --
     Forfeited                                (30,100)  (12,300)     (6,500)
                                                        -------      ------

     Outstanding, end of year                  86,500    68,600      57,500
                                             --------   -------      ------
</TABLE>

     These options expire as follows:

<TABLE>
<CAPTION>
                                                                   OPTIONS
                                                                   -------
                                                  EXERCISE
                                                   PRICE     VESTED    NONVESTED
                                                   -----     -------   ---------
     <S>                                          <C>        <C>       <C>
     October, 2000                                $   4.94    20,000          --
     July, 2007                                   $   6.00     4,200       6,300
     September, 2007                              $   6.00       400         600
     November, 2007                               $   9.88     1,600       2,400
     December, 2007                               $   9.75     2,000       4,000
     January, 2008                                $  10.63       200         800
     February, 2008                               $  11.00       500       2,000
     June, 2008                                   $  10.63       400       1,600
     September, 2008                              $   7.82       200         800
</TABLE>

                                       35
<PAGE>

<TABLE>
     <S>                                          <C>        <C>          <C>
     October, 2008                                $   7.75       500       2,000
     September, 2009                              $   4.94        --       1,000
     October, 2009                                $   4.94        --      10,000
     October, 2009                                $   4.88        --       7,500
     October, 2009                                $   4.78        --       7,500
     December, 2009                               $   5.46        --       7,000
     December, 2009                               $   4.56        --       3,000
                                                  --------   -------      ------

          Total                                               30,000      56,500
                                                             -------      ------
</TABLE>

     The Company applies APB No. 25 in accounting for the stock option plan.
Accordingly, the Company does not recognize compensation expense for stock
options granted. Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123), established new accounting and
reporting standards for stock-based employee compensation plans. This standard
defines a fair value based method for measuring compensation expense for stock-
based plans to be recognized in the statement of income or disclosed in the
notes to the financial statements.

     The weighted average fair value of options granted during 1999, 1998, and
1997 has been estimated using the Black-Scholes option-pricing model with the
following assumptions:

<TABLE>
<CAPTION>


                                                          1999    1998    1997
                                                          ----    ----    ----
     <S>                                                   <C>     <C>     <C>

     Dividend yield                                       0.00%   0.00%   0.00%
     Risk-free interest rate                              6.13%   4.50%   5.75%
     Expected volatility                                 22.00%  30.00%  10.00%
     Expected life in years                                  6      10      10
                                                         -----   -----   -----
</TABLE>

     Had compensation been determined in accordance with the provisions of SFAS
No. 123, the Company's net income and earning per share would have been reduced
to the following pro forma amounts:

<TABLE>
<CAPTION>


                                               1999       1998        1997
                                               ----       ----        ----
     <S>                                     <C>       <C>         <C>
     Net income
      As reported                            $690,295  $1,002,844  $1,084,197
      Pro forma                              $670,719  $  946,667  $  975,489
     Basic earnings per share
      As reported                            $   0.30  $     0.43  $     0.64
      Pro forma                              $   0.29  $     0.41  $     0.58
     Diluted earnings per share
      As reported                            $   0.30  $     0.43  $     0.63
      Pro forma                              $   0.29  $     0.41  $     0.57
                                                       ----------  ----------
</TABLE>

12.  LINES OF CREDIT

     The Bank is a member of the Federal Home Loan Bank system and may borrow up
to $12,673,000. If funded, this line is secured by one to four family
residential mortgage loans held in the Bank's portfolio. In addition, the Bank
has available secured lines of credit of $7,250,000.

13.  PREFERRED STOCK

     The Company is authorized to issue up to 2,000,000 shares of preferred
stock with a par value of $.01 per share.

14.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

(In Thousands except Per Share Amounts)

THREE MONTHS ENDED
------------------

<TABLE>
<CAPTION>
                                                         DECEMBER 31,  SEPTEMBER 30,   JUNE 30,  MARCH 31,
                                                         ------------  --------------  --------  ----------
<S>                                                      <C>           <C>             <C>       <C>
1999
     Interest revenue                                       $2,392      $   2,481      $  2,407  $   2,332
     Interest expense                                          881            932           873        789
     Net interest income                                     1,511          1,549         1,534      1,543
     Provision for loan losses                                  --             --            27        405
     Net income                                                185            227           218         60
     Comprehensive income                                      175            224           215         42
     Earnings per share-basic                                 0.08           0.10          0.09       0.03
</TABLE>

                                       36
<PAGE>

<TABLE>
     <S>                                                 <C>            <C>            <C>       <C>
     Earnings per share-diluted                               0.08           0.10          0.09       0.03
                                                         ---------      ---------      --------  ---------

1998
     Interest revenue                                              $2,434      $   2,497   $  2,473  $   2,409
     Interest expense                                                 909            989      1,006        986
     Net interest income                                            1,525          1,508      1,467      1,423
     Provision for loan losses                                         75             75         75         75
     Net income                                                       204            245        300        254
     Comprehensive income                                             189            274        285        248
     Earnings per share-basic                                        0.08           0.11       0.13       0.11
     Earnings per share-diluted                                      0.08           0.11       0.13       0.11
                                                                   ------      ---------   --------  ---------

1997
     Interest revenue                                              $2,492      $   2,422   $  2,260  $   1,987
     Interest expense                                                 976          1,008        893        754
     Net interest income                                            1,516          1,414      1,367      1,233
     Provision for loan losses                                        354             75         82        237
     Net income                                                        92            335        274        383
     Comprehensive income                                              82            352        281        391
     Earnings per share-basic                                        0.04           0.23       0.19       0.26
     Earnings per share-diluted                                      0.04           0.23       0.19       0.26
                                                                   ------      ---------   --------  ---------
</TABLE>

15.  INCOME TAXES

     The components of income tax expense are as follows:

<TABLE>
 <CAPTION>
                                                                             1999       1998       1997
                                                                             ----       ----       ----
     <S>                                                                   <C>         <C>       <C>
     Current
      Federal                                                              $ 492,441   $ 72,632  $      --
      State                                                                   36,838         --         --
                                                                           ---------   --------  ---------

                                                                             529,279     72,632         --
                                                                           ---------   --------  ---------

 Deferred                                                                   (152,895)   449,297   (769,327)
                                                                           ---------   --------  ---------

                                                                           $ 376,384   $521,929  $(769,327)
                                                                           ---------   --------  ---------
</TABLE>

The components of the deferred taxes are as follows:

<TABLE>
<CAPTION>
                                                                                                1999         1998          1997
                                                                                                ----         ----  --      -----
     <S>                                                                                     <C>          <C>          <C>
       Recognition of the benefit of the net
        operating loss carryover                                                             $    4,726   $  467,202   $   449,614
       Provision for credit losses                                                             (141,539)      34,367      (101,996)
       Revenues taxed not earned                                                                  6,330      (23,787)       (9,770)
       Expenses deducted, incurred in prior years                                                    --           --        65,000
       Depreciation expense                                                                       7,007          934        34,878
       Amortization and write down of intangible assets                                         (29,419)     (29,419)      (84,053)
       Elimination of the valuation allowance                                                        --           --    (1,123,000)
                                                                                             ----------   ----------   -----------

  Deferred tax benefit                                                                       $ (152,895)  $  449,297   $  (769,327)
                                                                                             ----------   ----------   -----------

</TABLE>

  The components of the net deferred tax assets are as follows:

 [CAPTION]

<TABLE>
                                                                                                1999         1998           1997
                                                                                                ----         ----           ----
     <S>                                                                                    <C>            <C>         <C>
     Deferred tax assets
      Allowance for credit losses                                                            $  394,168   $  252,629   $   286,996
      Revenue taxed not earned                                                                  118,227      124,557       100,770
      Net operating loss and alternative minimum
         tax credit carryforward                                                                 20,458       25,184       492,386
      Unrealized loss on securities available for sale                                           21,276           --            --
                                                                                             ----------   ----------   -----------

             Total deferred tax assets                                                          554,129      402,370       880,152
                                                                                             ----------   ----------   -----------

     Deferred tax liabilities
      Depreciation                                                                               45,219       38,212        37,278
      Intangible assets                                                                          14,709       44,128        73,547
</TABLE>

                                       37
<PAGE>

<TABLE>
      <S>                                                                                    <C>          <C>          <C>
      Unrealized gain on securities available for sale                                               --          167         3,459
                                                                                             ----------   ----------   -----------

             Total deferred tax liabilities                                                      59,928       82,507       114,284
                                                                                             ----------   ----------   -----------

     Valuation allowance                                                                             --           --   $(1,123,000)
                                                                                             ----------   ----------   -----------

     Net deferred tax asset                                                                  $  494,201   $  319,863   $   765,868
                                                                                             ----------   ----------   -----------
</TABLE>

     The differences between federal income taxes and the amount reported by the
Company follow:

<TABLE>
<CAPTION>
                                                                                                1999         1998          1997
                                                                                                ----         ----          ----
     <S>                                                                                      <C>         <C>          <C>
     Income before income taxes                                                              $1,066,679   $1,524,773   $   314,870
                                                                                             ----------   ----------   -----------
     Taxes computed at the federal income tax rate                                              362,671      518,423       107,056
     Increases (decreases) resulting from
      State income taxes, net of federal benefit                                                  4,151           --        14,547
      Nondeductible expenses                                                                      2,040        3,506         1,720
      Net operating loss carryforward                                                             7,522           --      (892,650)
                                                                                             ----------   ----------   -----------

     Income tax expense                                                                      $  376,384   $  521,929   $  (769,327)
                                                                                             ----------   ----------   -----------
</TABLE>
16.  CAPITAL STANDARDS

     The Federal Reserve Board and the Federal Deposit Insurance Corporation
have adopted risk-based capital standards for banking organizations. These
standards require ratios of capital to assets for minimum capital adequacy and
to be classified as well capitalized under prompt corrective action provisions.
The capital ratios, and minimum capital requirements of the Bank, as of December
31, 1999, 1998, and 1997, are as follows:

<TABLE>
<CAPTION>
                                                          MINIMUM            TO BE WELL
                                      ACTUAL          CAPITAL ADEQUACY      CAPITALIZED
                                      ------          ----------------      -----------
                                AMOUNT       RATIO   AMOUNT      RATIO   AMOUNT      RATIO
<S>                             <C>          <C>     <C>         <C>     <C>         <C>
DECEMBER 31, 1999
-----------------

  Total capital
   (to risk-weighted assets)    $13,486,864   15.0%  $7,208,231    8.0%  $9,010,289   10.0%
  Tier 1 capital
   (to risk-weighted assets)    $12,356,712   13.7%  $3,604,115    4.0%  $5,406,173    6.0%
  Tier 1 capital
   (to average assets)          $12,356,712    9.8%  $5,034,788    4.0%  $6,293,485    5.0%

DECEMBER 31, 1998
-----------------

  Total capital
   (to risk-weighted assets)    $12,176,375   14.0%  $7,272,681    8.0%  $9,090,851   10.0%
  Tier 1 capital
   (to risk-weighted assets)    $11,579,741   12.7%  $3,636,341    4.0%  $5,454,511    6.0%
  Tier 1 capital
   (to average assets)          $11,579,741    9.5%  $4,852,527    4.0%  $6,065,658    5.0%

DECEMBER 31, 1997
-----------------

  Total capital
   (to risk-weighted assets)    $11,393,091   15.8%  $5,772,738    8.0%  $7,215,923   10.0%
  Tier 1 capital
   (to risk-weighted assets)    $10,490,371   14.5%  $2,886,369    4.0%  $4,329,554    6.0%
  Tier 1 capital
   (to average assets)          $10,490,371    8.8%  $4,767,360    4.0%  $5,959,200    5.0%
</TABLE>

     Tier 1 capital consists of capital stock, surplus, and undivided profits.
Total capital includes a limited amount of the allowance for credit losses.  In
calculating risk-weighted assets, specified risk percentages are applied to each
category of asset and off-balance sheet items.

     Failure to meet the capital requirements could affect the Bank's ability to
pay dividends and accept deposits and may significantly affect the operations of
the Bank.

                                       38
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued

17.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair values of the Bank's financial instruments are
summarized below. The fair values of a significant portion of these financial
instruments are estimates derived using present value techniques and may not be
indicative of the net realizable or liquidation values. Also, the calculation of
estimated fair values is based on market conditions at a specific point in time
and may not reflect current or future fair values.

<TABLE>
<CAPTION>
                                                1999                     1998                      1997
                                                ----                     ----                      ----
                                       CARRYING      FAIR        CARRYING      FAIR        CARRYING      FAIR
DECEMBER 31,                            AMOUNT       VALUE        AMOUNT       VALUE        AMOUNT       VALUE
------------                            ------       -----        ------       -----        ------       -----
<S>                                    <C>          <C>          <C>          <C>          <C>          <C>
  Financial assets
   Cash and due from banks             $ 5,665,014  $ 5,665,014  $ 3,845,793  $ 3,845,793  $ 5,611,407  $ 5,611,407
   Federal funds sold                   11,432,282   11,432,282   10,284,419   10,284,419   20,743,973   20,743,973
   Investment securities (total)        23,768,975   23,768,975   15,190,459   15,190,459   20,540,586   20,457,120
   Loans, net                           81,198,156   81,001,205   86,924,416   86,992,223   70,985,232   70,793,572
   Accrued interest receivable             821,662      821,662      590,159      590,159      515,549      515,549

  Financial liabilities
   Noninterest-bearing deposits        $13,320,678  $13,320,678  $11,304,382  $11,304,382  $10,330,153  $10,330,153
   Interest-bearing deposits            91,772,928   92,190,948   89,437,861   89,766,553   85,731,609   85,869,314
   Securities sold under agreements
      to repurchase                      8,497,067    8,497,067    7,173,980    7,173,980   13,305,780   13,305,780
   Accrued interest payable                 22,406       22,406       28,574       28,574       36,113       36,113
   ------------------------            -----------  -----------  -----------  -----------  -----------  -----------
</TABLE>

     The fair values of U.S. Treasury and Government agency securities are
determined using market quotations.

     The fair value of fixed-rate loans is estimated to be the present value of
scheduled payments discounted using interest rates currently in effect.  The
fair value of variable-rate loans, including loans with a demand feature, is
estimated to equal the carrying amount.  The valuation of loans is adjusted for
possible credit losses.

     The fair value of interest-bearing checking, savings, and money market
deposit accounts is equal to the carrying amount. The fair value of fixed-
maturity time deposits is estimated based on interest rates currently offered
for deposits of similar remaining maturities.

     It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.

18.  EARNINGS PER SHARE

     A summary of shares outstanding for basic and fully diluted earnings per
share is as follows:

<TABLE>
<CAPTION>

                                                           1999       1998       1997
                                                           ----       ----       ----
<S>                                                      <C>        <C>        <C>
  Weighted average shares outstanding, basic             2,319,588  2,312,422  1,691,301
  Common stock equivalents                                      --      6,731     16,865
                                                         ---------  ---------  ---------

  Average common shares and equivalents, full diluted    2,319,588  2,319,153  1,708,166
                                                         ---------  ---------  ---------

  Stock options outstanding that were antidilutive
    at December 31                                          86,500     35,100      6,500
                                                         ---------  ---------  ---------
</TABLE>

                                       39
<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.
Notes to Consolidated Financial Statements, continued

19.  PARENT COMPANY FINANCIAL INFORMATION

  The balance sheet and statements of income and cash flows for Annapolis
National Bancorp, Inc. (Parent Company only) follow:

<TABLE>
<CAPTION>
Balance Sheets
DECEMBER 31,                                                                       1999          1998          1997
------------                                                                       ----          ----          ----
<S>                                                                             <C>           <C>           <C>
   Assets
   Cash and due from banks                                                      $   361,407   $     7,391   $       191
   Investment in Annapolis National Bank                                         12,366,082    11,709,853    10,713,401
   Deferred income taxes and other assets                                                --       373,722       373,722
                                                                                -----------   -----------   -----------

     Total assets                                                               $12,727,489   $12,090,966   $11,087,314
                                                                                -----------   -----------   -----------

      Liabilities and Stockholders' Equity

   Stockholders' equity
   Common stock                                                                      23,235        23,135        23,123
   Capital surplus                                                               13,192,408    13,142,508    13,135,320
   Retained earnings (deficit)                                                     (454,311)   (1,075,000)   (2,077,844)
   Accumulated other comprehensive income                                           (33,843)          323         6,715
                                                                                -----------   -----------   -----------

     Total stockholders' equity                                                  12,727,489    12,090,966    11,087,314
                                                                                -----------   -----------   -----------

     Total liabilities and stockholders' equity                                 $12,727,489   $12,090,966   $11,087,314
                                                                                -----------   -----------   -----------

<CAPTION>
Statements of Income

  YEARS ENDED DECEMBER 31,                                                          1999          1998          1997
  ------------------------                                                      -----------   -----------   -----------

   Interest revenue                                                             $        --   $        --   $     8,257
   Interest expense                                                                      --            --        59,575
   ----------------                                                             -----------   -----------   -----------

   Net interest income (expense)                                                         --            --       (51,318)
   -----------------------------                                                -----------   -----------   -----------

   Equity in undistributed income of subsidiary                                     690,395     1,002,844       761,893
   Expenses
     Other operating                                                                    100            --           100
     ---------------                                                            -----------   -----------   -----------

   Income before income taxes                                                       690,295     1,002,844       710,475
   Income taxes                                                                          --            --      (373,722)
   ------------                                                                 -----------   -----------   -----------

   Net income                                                                   $   690,295   $ 1,002,844   $ 1,084,197
   ----------                                                                   -----------   -----------   -----------

<CAPTION>
Statements of Cash Flows

  YEARS ENDED DECEMBER 31,                                                         1999          1998          1997
  ------------------------                                                      -----------   -----------   -----------

   Cash flows from operating activities

     Interest received                                                          $        --   $        --   $     8,257
     Interest paid                                                                       --            --      (214,836)
     Tax benefit received                                                           373,722            --            --
     Cash paid for operating expenses                                                  (100)           --          (100)
                                                                                -----------   -----------   -----------

                                                                                    373,622            --      (206,679)
                                                                                -----------   -----------   -----------

   Cash flows from investing activities
     Capital contributed to Annapolis National Bank                                      --            --    (3,475,589)
                                                                                -----------   -----------   -----------

   Cash flows from financing activities
     Proceeds from stock offering                                                        --            --     4,510,094
     Dividends paid                                                                 (69,606)           --            --
     Proceeds from stock options exercised                                           50,000         7,200            --
     Repayment of stockholder loan                                                       --            --      (848,400)
                                                                                -----------   -----------   -----------

                                                                                    (19,606)        7,200     3,661,694
                                                                                -----------   -----------   -----------
</TABLE>


                                       40
<PAGE>

<TABLE>
   <S>                                                                          <C>           <C>           <C>
   Net (decrease) in cash                                                           354,016         7,200       (20,574)

   Cash and equivalents at beginning of year                                          7,391           191        20,765
                                                                                -----------   -----------   -----------

   Cash and equivalents at end of year                                          $   361,407   $     7,391   $       191
                                                                                -----------   -----------   -----------

   Reconciliation of net income to net cash provided by operating activities
   Net income                                                                   $   690,295   $ 1,002,844   $ 1,084,197
   Adjustments to reconcile net income to net
     cash used in operating activities
      Undistributed net income of subsidiary                                       (690,395)   (1,002,844)     (761,893)
      Increase in deferred tax assets                                               373,722            --      (373,722)
      Increase (decrease) in accrued interest expense                                    --            --      (155,261)
                                                                                -----------   -----------   -----------

                                                                                $   373,622   $        --      (206,679)
                                                                                -----------   -----------   -----------
</TABLE>

20.  REGULATORY MATTERS

     The Bank has entered into a formal agreement with the Office of the
Comptroller of the Currency ("OCC") whereby the Bank is required to improve the
Bank's management and policies and procedures.  This agreement in no way
restricts or impedes the Bank's ability to conduct normal banking and business
transactions.  The Bank is committed to complying with the provisions of the
agreement.

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