Exhibit 13.0



ANNAPOLIS BANCORP, INC.



Corporate Profile



Annapolis Bancorp, Inc., (the Company) formerly Annapolis National Bancorp, Inc. and 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 BankAnnapolis (the Bank) (formerly Annapolis National Bank), a federally insured community-oriented bank and one of two independent commercial banks headquartered in Annapolis, Maryland. The Bank
currently operates as a full service commercial bank from its headquarters in Annapolis, its five 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 loans and consumer loans. The Bank
also invests in U.S. Treasury and U.S. Government agency securities and other securities including mortgage backed 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 attracts 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 continually evaluates new products, and implements such new products as deemed appropriate by management.



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 75 full time and 10 part time individuals at December 31,
2003.



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 Bancorp, Inc. on a consolidated basis with its wholly owned subsidiary,
BankAnnapolis, for the periods presented, and should be read in conjunction with the consolidated financial statements and the related notes thereto appearing elsewhere in this annual report.



The Company reported net income for 2003 of $1.7 million, a 36.4% increase from 2002 net
income of $1.2 million. The increase in 2003 earnings was primarily due to increased loan volumes in all categories and higher noninterest income. Diluted earnings per share was $0.55 per share compared to $0.41 per share in 2002.



The primary source of income of the Bank is interest on its loan and investment portfolios,
while one of the principal expenses 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 $8.1 million for 2003, an increase of $765 thousand or 10.4% compared to $7.3 million in 2002. Total assets were $231.3 million as of December 31, 2003, a 15.6% increase over December 31, 2002 total assets of $200.1
million. The Companys return on average assets was 0.75% and 0.66% for the years ending December 31, 2003, and 2002, respectively. The Companys return on average equity was 10.60% and 8.57% for the years ending December 31, 2003, and
2002, respectively.



At December 31, 2003 the Banks gross loan portfolio
net of deferred fees and costs totaled $168.7 million. Of this amount, $41.1 million or 24.4% were commercial loans, $44.2 million or 26.2% were commercial real estate loans, $24.6 million or 14.6% were construction loans, $18.7 million or 11.1%
were one- to four-family residential mortgage loans, $20.3 million or 12.1% were home equity loans, and $19.8 million or 11.6% were consumer and other loans.



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Application of Critical Accounting Policies



The Companys consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United
States of America and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements
and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates,
assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally
reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment
write-down or valuation reserve to be established, or when an asset or liability must be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair
values and the information used to record valuation adjustments for certain assets and liabilities are either based on quoted market prices or are provided by other third-party sources, when available.



The most significant accounting policies followed by the Corporation are presented in Note 1
to the consolidated financial statements which can be found on page 33 and continuing to page 35. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how
significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates
underlying those amounts, management has identified the determination of the allowance for credit losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new
information becomes available.



The allowance for credit losses represents
managements estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant
judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and
conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the consolidated financial statements found on page 33 and continuing on page
34 describes the methodology used to determine the allowance for credit losses and a discussion of the factors driving changes in the amount of the allowance for credit losses is included in the Credit Risk Management section of this financial
analysis.



Financial Condition as of December 31, 2003 and
2002 and Results of Operations for the Years then Ended



The Company,
through its Bank subsidiary, functions as a financial intermediary, and as such its financial condition and results of operation 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 15.6% during 2003 to $231.3 million from $200.1
million at December 31, 2002. Total deposits and securities sold under agreements to repurchase, the Companys primary sources of funds, increased $24.8 million or 14.2% to $199.3 million from $174.5 million at December 31, 2002. Time deposits
comprise the largest portion of the Banks total deposits, totaling $73.6 million or 38.6% of the Banks total deposits at December 31, 2003, compared to $65.2 million or 39.7% in 2002. Savings and money market accounts totaled $52.7
million or 27.6% of the Banks total deposits at December 31, 2003, compared to $44.4 million or 27.1% in 2002. NOW accounts totaled $30.9 million or 16.2% and $24.9 million or 15.2% of total deposits at December 31, 2003 and 2002,
respectively. Demand, noninterest bearing accounts totaled $33.4 million or 17.5% of total deposits at December 31, 2003 and $29.5 million or 18.0% at December 31, 2002. Securities sold under agreements to repurchase decreased $1.8 million or 17.1%
to $8.7 million from $10.5 million at December 31, 2002. Long-term borrowings were $10.0 million at December 31, 2003 compared to $10.0 million at December 31, 2002.



On March 26, 2003, Annapolis Bancorp Statutory Trust I (Statutory Trust I), a Connecticut business trust formed, funded and
wholly owned by the Company, issued $5,000,000 of variable-rate capital securities to institutional investors. The proceeds of the securities were used provide funding for future growth and to improve the Companys capital ratios. The current
cost of these securities is 4.32%.



The Companys primary use of funds are
for loans and investments. Loans, less deferred fees and discounts and the allowance



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for credit losses, increased by $21.4 million or 14.7% to $167.1 million at December 31, 2003 from $145.7 million a year
earlier. Loan balances increased in all categories except construction loans, with commercial loans increasing $8.6 million or 26.5%; real estate loans increasing $7.7 million or 10.2%, and; installment and other consumer loans increasing $5.1
million or 35.7%. Construction loans fell by $182 thousand or 0.8%.



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 income and interest expense and is generally affected 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 on page 16 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 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, 2003, was $8.1 million, representing an increase of $765 thousand or 10.4% from net interest income of $7.3 million for the year ended December 31, 2002. The increase in net interest income is due primarily to
increased loan and investment volumes offset by lower investment and loan yields. The net interest margin was 3.95% and 4.30% for the years ended December 31, 2003 and 2002, respectively. Net interest income for 2003 includes $25 thousand of
interest collected on a cash basis related to loans on nonaccrual status, compared to $50 thousand of interest collected on nonaccrual loans in 2002.



Interest Income



The Companys interest income increased $619 thousand or 5.7% for the year ended December 31, 2003. The increase in interest income can be attributed to an increase in loan volume as average loans increased $22.0
million or 16.6%, offset by a decrease in loan yield to 6.48% for the year ended December 31, 2003 from 7.11% for the year ended December 31, 2002. Contributing to the increase in interest income is an increase in investments and federal funds sold
volume offset by a decrease in yield. Average federal funds sold, other overnight investments and investment securities increased $12.4 million or 32.8%, while the yield on federal funds sold, other investments and investment securities decreased to
2.84% for the year ended December 31, 2003 from 3.70% at December 31, 2002.



Interest Expense



The Companys interest expense
decreased $146 thousand or 4.2% to $3.4 million for 2003, compared to $3.5 million for 2002. The decrease in interest expense can be attributed to a decrease in the cost of interest bearing liabilities to 1.92% for the year ended December 31, 2003
compared to 2.44% in 2002. The decrease in cost was primarily due to a decrease in certificate of deposit rates to 2.88% in 2003 from 3.75% in 2002, offset by the cost of new long term borrowings in the form of junior subordinated debentures with an
average balance of $3.8 million for the year ended December 31, 2003 and a cost of 4.34%. Federal Home Loan Bank convertible advances totaled $10.0 million at December 31, 2003 and were at an average cost of 4.50%.



Provision for Credit Losses



The Company recorded a provision for credit losses of $50 thousand for the year ended
December 31, 2003 compared to $25 thousand for the year ended December 31, 2002. The increase in provision was the result of higher overall loan volumes. See the discussion under the heading Credit Risk Management for greater analysis
regarding the Allowance for Credit Losses and related provision.



Noninterest Income



The Companys primary sources of
noninterest income are fees charged on deposit products and those generated by the Banks VISA check card, fees recognized on the origination of brokered residential mortgage loans and rental income from leasing space at the Banks
headquarters building. Noninterest income increased $444 thousand or 27.1% to $2.1 million from $1.6 million in 2002. Fees charged on deposit products increased $220 thousand or 47.4%, while mortgage banking fees totaled $448 thousand for the year
ended December 31, 2003, a 42.2% increase over fees of $315 thousand for the year ended December 31, 2002. The Company does not fund mortgage loans sold in the secondary market, but receives commissions from investors who fund the loans.



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Noninterest Expense



Noninterest expense increased $455 thousand or 6.3% to $7.5 million at December 31, 2003, compared to $7.1 million at December 31, 2002. The increase in noninterest
expense was primarily due to increases in compensation expense, higher occupancy costs and higher data processing expenses.



Personnel expense increased $332 thousand or 8.5% to $4.2 million with $270 thousand related to salary increases, the addition of a new business development officer and
the addition of several support staff. The rest related to higher costs of employee benefit programs. Occupancy and equipment expense increased $16 thousand or 1.6% due to increased utility and maintenance costs associated with the heavy snowfall
and low temperatures recorded early in 2003.



Data processing expense increased
$61 thousand or 7.9% due to increased account volumes, especially in transaction-oriented accounts. Other expenses increased $13 thousand or 0.7% due in part to additional security personnel provided in the branch locations.



Provision for Income Taxes



The Company and the Bank file consolidated federal income tax returns and separate Maryland
income tax returns. The Company recognized $936 thousand and $644 thousand in income tax expense for the years ended December 31, 2003 and 2002, respectively, for an effective tax rate of 35.9% in 2003 and 34.4% in 2002.



Results of Operations for the Years Ended December 31, 2002 and 2001



Net Income



Net income for the year ended December 31, 2002, totaled $1.2 million, a 142.5% increase
from 2001 earnings of $506 thousand. Earnings per diluted share was $0.41 compared to $0.17 per diluted share for the year ended December 31, 2001.



Operating Results



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



Net Interest Income



Net interest income increased $1.0 million or 0.4% at December 31, 2002, to $7.3 million from $6.3 million at December 31, 2001. This
increase was primarily the result of increased loan volumes offset by lower investment and loan yields.



Interest Income



Interest income
decreased $43 thousand or 4.3% in 2002 compared to 2001, primarily due to a decrease in yield on loans to 7.11% in 2002 from 8.70% in 2001. Average loans outstanding increased $32.7 million or 32.6% during 2002 while average federal funds sold and
other overnight investments decreased $3.1 million or 19.3%. Average investment securities decreased $1.7 million or 6.4% with the yield on investment securities also decreasing to 4.76% for the year ended December 31, 2002 from 5.87% for the year
ended December 31, 2001.



Interest Expense



Interest expense decreased $1.1 million or 23.5% to $3.5 million in 2002 compared to $4.6
million in 2001. The decrease can be attributed to a decrease in the cost of interest bearing liabilities to 2.44% for 2002, down from 3.86% in 2001. Certificate of deposit rates decreased to 3.75% in 2002 from 5.65% in 2001.



Provision for Credit Losses



The Company recorded a provision for credit losses of $25 thousand for the year ended
December 31, 2002 compared to zero for the year ended December 31, 2001. See the discussion under the heading Credit Risk Management for greater analysis regarding the Allowance for Credit Losses and related provision.



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Noninterest Income



Noninterest income increased $478 thousand or 41.1% during 2002 as compared to 2001. The increase was attributable to higher fees charged on deposit products, fees
generated by the Banks VISA check card, fees generated by the origination of brokered residential mortgage loans and rental income from leasing space at the Banks headquarters building.



Noninterest Expense



Noninterest expense increased $390 thousand or 5.8% to $7.1 million in 2002, from $6.7 million in 2001. The increase in noninterest expense
was primarily due to increases in compensation expense, higher data processing expenses and full year depreciation expenses relating to the headquarters building.



Selected Consolidated Financial Highlights



Selected Consolidated Financial Data at and for years ended December 31,

(Dollars in thousands, except per share data)



|                                                              |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                              |  | 2003 |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|Selected Financial Data                                       |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                                              |  |      |           |   |     
|Total assets                                                  |  | $    | 231,338   |   |      | $ | 200,116   |      |  | $ | 166,681   |   |  | $    | 137,040   |   |  | $ | 126,733   |  
|Total loans, net                                              |  |      | 167,123   |   |      |   | 145,735   |      |  |   | 111,347   |   |  |      | 87,411    |   |  |   | 81,198    |  
|Total deposits                                                |  |      | 190,577   |   |      |   | 163,989   |      |  |   | 144,884   |   |  |      | 118,020   |   |  |   | 105,094   |  
|Securities sold under agreement to repurchase                 |  |      | 8,745     |   |      |   | 10,500    |      |  |   | 7,674     |   |  |      | 5,369     |   |  |   | 8,497     |  
|Long term debt                                                |  |      | 15,000    |   |      |   | 10,000    |      |  |   |          |   |  |      |          |   |  |   |          |  
|Stockholders equity                                          |  |      | 16,448    |   |      |   | 15,078    |      |  |   | 13,860    |   |  |      | 13,362    |   |  |   | 12,727    |  
|                                                              |  |      |           |   |     
|Selected Operating Data                                       |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                                              |  |      |           |   |     
|Interest income                                               |  | $    | 11,477    |   |      | $ | 10,858    |      |  | $ | 10,901    |   |  | $    | 10,454    |   |  | $ | 9,612     |  
|Interest expense                                              |  |      | 3,368     |   |      |   | 3,514     |      |  |   | 4,593     |   |  |      | 3,679     |   |  |   | 3,475     |  
|                                                              |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income                                           |  |      | 8,109     |   |      |   | 7,344     |      |  |   | 6,308     |   |  |      | 6,775     |   |  |   | 6,137     |  
|Provision for credit losses                                   |  |      | 50        |   |      |   | 25        |      |  |   |          |   |  |      | 36        |   |  |   | 432       |  
|                                                              |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income after provision for credit losses         |  |      | 8,059     |   |      |   | 7,319     |      |  |   | 6,308     |   |  |      | 6,739     |   |  |   | 5,705     |  
|Noninterest income                                            |  |      | 2,084     |   |      |   | 1,640     |      |  |   | 1,162     |   |  |      | 884       |   |  |   | 849       |  
|Noninterest expense                                           |  |      | 7,533     |   |      |   | 7,088     |      |  |   | 6,698     |   |  |      | 6,147     |   |  |   | 5,488     |  
|                                                              |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Income before income taxes                                    |  |      | 2,610     |   |      |   | 1,871     |      |  |   | 772       |   |  |      | 1,475     |   |  |   | 1,066     |  
|Income tax expense                                            |  |      | 936       |   |      |   | 644       |      |  |   | 266       |   |  |      | 504       |   |  |   | 376       |  
|                                                              |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income                                                    |  | $    | 1,674     |   |      | $ | 1,227     |      |  | $ | 506       |   |  | $    | 972       |   |  | $ | 690       |  
|                                                              |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Key Financial Ratios and Other Data                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                                              |  |      |           |   |     
|Return on average assetsNet income divided by average assets  |  |      | 0.75      | % |      |   | 0.66      | %    |  |   | 0.33      | % |  |      | 0.75      | % |  |   | 0.55      | %
|Return on average equityNet income divided by average equity  |  |      | 10.59     | % |      |   | 8.57      | %    |  |   | 3.70      | % |  |      | 7.59      | % |  |   | 5.69      | %
|Equity to asset ratioAverage equity divided by average assets |  |      | 7.11      | % |      |   | 7.69      | %    |  |   | 8.88      | % |  |      | 9.93      | % |  |   | 9.69      | %
|Diluted earnings per share (1)                                |  | $    | 0.55      |   |      | $ | 0.41      |      |  | $ | 0.17      |   |  | $    | 0.32      |   |  | $ | 0.22      |  
|Book value per share (1)                                      |  | $    | 5.45      |   |      | $ | 5.01      |      |  | $ | 4.62      |   |  | $    | 4.44      |   |  | $ | 4.15      |  
|Tangible book value per share (1)                             |  | $    | 5.45      |   |      | $ | 5.01      |      |  | $ | 4.62      |   |  | $    | 4.44      |   |  | $ | 4.13      |  
|Number of shares outstanding                                  |  |      | 3,019,378 |   |      |   | 3,010,393 |      |  |   | 2,996,629 |   |  |      | 2,262,406 |   |  |   | 2,323,506 |  
|Efficiency ratio                                              |  |      | 73.90     | % |      |   | 78.90     | %    |  |   | 89.67     | % |  |      | 80.26     | % |  |   | 78.55     | %
|Interest rate spread                                          |  |      | 3.67      | % |      |   | 3.92      | %    |  |   | 3.77      | % |  |      | 5.03      | % |  |   | 4.76      | %
|Net interest margin                                           |  |      | 3.95      | % |      |   | 4.30      | %    |  |   | 4.41      | % |  |      | 5.57      | % |  |   | 5.26      | %
|Risk based capital ratio  Tier 1                             |  |      | 12.17     | % |      |   | 9.72      | %    |  |   | 11.14     | % |  |      | 13.60     | % |  |   | 13.70     | %
|Risk based capital ratio  Total                              |  |      | 13.09     | % |      |   | 10.74     | %    |  |   | 12.64     | % |  |      | 14.80     | % |  |   | 15.00     | %

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|(1) | Adjusted to effect a four-for-three stock split in the form of a stock dividend issued on August 24, 2001.
|--- | ----------------------------------------------------------------------------------------------------------



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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, 2003, 2002 and 2001. 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 that 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, decreased to 3.67% for the year ended December 31, 2003 from 3.92% at December 31,
2002.



Consolidated Average Balances, Yields and Rates

(Balances in thousands)



|                                                                 |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|---------------------------------------------------------------- |  | ----------------- | ------- | -------- | ----------------- | ---------- |  | ----------------- | -------------- |  | -------- | ------- | ---------- | - | ------ | -------------- | ------ | -------- |  | ---------- | ------- |  | - | ------ |  | ------ | -
|                                                                 |  | Years Ended       |        
|                                                                 |  | December 31, 2003 |         |          | December 31, 2002 |            |  | December 31, 2001 |               
|                                                                 |  | AverageBalance    |         | Interest |                   | Yield/Rate |  |                   | AverageBalance |  | Interest |         | Yield/Rate |   |        | AverageBalance |        | Interest |  | Yield/Rate |        
|Assets                                                           |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Interest Earning Assets                                          |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Federal funds sold and other overnight investments               |  | $                 | 17,618  |          | $                 | 191        |  | 1.08              | %              |  | $        | 12,975  |            | $ | 217    |                | 1.67   | %        |  | $          | 16,088  |  | $ | 616    |  | 3.83   | %
|Investment securities                                            |  |                   | 32,599  |          |                   | 1,235      |  | 3.79              | %              |  |          | 24,845  |            |   | 1,183  |                | 4.76   | %        |  |            | 26,530  |  |   | 1,558  |  | 5.87   | %
|Loans                                                            |  |                   | 155,067 |          |                   | 10,051     |  | 6.48              | %              |  |          | 133,022 |            |   | 9,458  |                | 7.11   | %        |  |            | 100,341 |  |   | 8,727  |  | 8.70   | %
|                                                                 |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Total interest earning assets                                    |  |                   | 205,284 |          |                   | 11,477     |  | 5.59              | %              |  |          | 170,842 |            |   | 10,858 |                | 6.36   | %        |  |            | 142,959 |  |   | 10,901 |  | 7.63   | %
|Noninterest Earning Assets                                       |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Cash and due from banks                                          |  |                   | 6,540   |          |                   |            |  |                   |                |  |          | 5,827   |            |   |        |                |        |          |  |            | 4,065   |  |   |        |  |        |  
|Other assets                                                     |  |                   | 10,500  |          |                   |            |  |                   |                |  |          | 9,472   |            |   |        |                |        |          |  |            | 6,894   |  |   |        |  |        |  
|                                                                 |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Total Assets                                                     |  | $                 | 222,324 |          |                   |            |  |                   |                |  | $        | 186,141 |            |   |        |                |        |          |  | $          | 153,918 |  |   |        |  |        |  
|                                                                 |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Liabilities and Stockholders Equity                             |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Interest Bearing Deposits                                        |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|NOW accounts                                                     |  | $                 | 29,025  |          | $                 | 58         |  | 0.20              | %              |  | $        | 22,321  |            | $ | 62     |                | 0.28   | %        |  | $          | 17,367  |  | $ | 132    |  | 0.76   | %
|Money market accounts                                            |  |                   | 27,926  |          |                   | 273        |  | 0.98              | %              |  |          | 26,608  |            |   | 386    |                | 1.45   | %        |  |            | 19,567  |  |   | 583    |  | 2.98   | %
|Savings accounts                                                 |  |                   | 20,342  |          |                   | 112        |  | 0.55              | %              |  |          | 17,357  |            |   | 185    |                | 1.07   | %        |  |            | 15,166  |  |   | 283    |  | 1.87   | %
|Certificates of deposit                                          |  |                   | 73,390  |          |                   | 2,114      |  | 2.88              | %              |  |          | 62,571  |            |   | 2,344  |                | 3.75   | %        |  |            | 59,403  |  |   | 3,357  |  | 5.65   | %
|Repurchase agreements                                            |  |                   | 10,480  |          |                   | 188        |  | 1.79              | %              |  |          | 8,752   |            |   | 232    |                | 2.65   | %        |  |            | 7,395   |  |   | 238    |  | 3.22   | %
|Long term borrowing                                              |  |                   | 10,000  |          |                   | 456        |  | 4.50              | %              |  |          | 6,685   |            |   | 305    |                | 4.56   | %        |  |            |        |  |   |       |  | 0.00   | %
|Junior subordinated debt                                         |  |                   | 3,849   |          |                   | 167        |  | 4.34              | %              |  |          |        |            |   |       |                | 0.00   | %        |  |            |        |  |   |       |  | 0.00   | %
|                                                                 |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Total interest bearing liabilities                               |  |                   | 175,012 |          |                   | 3,368      |  | 1.92              | %              |  |          | 144,294 |            |   | 3,514  |                | 2.44   | %        |  |            | 118,898 |  |   | 4,593  |  | 3.86   | %
|                                                                 |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Noninterest Bearing Liabilities                                  |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Demand deposit accounts                                          |  |                   | 30,748  |          |                   |            |  |                   |                |  |          | 26,937  |            |   |        |                |        |          |  |            | 20,986  |  |   |        |  |        |  
|Other liabilities                                                |  |                   | 764     |          |                   |            |  |                   |                |  |          | 588     |            |   |        |                |        |          |  |            | 373     |  |   |        |  |        |  
|Stockholders Equity                                             |  |                   | 15,800  |          |                   |            |  |                   |                |  |          | 14,322  |            |   |        |                |        |          |  |            | 13,661  |  |   |        |  |        |  
|                                                                 |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Total Liabilities and Stockholders Equity                       |  | $                 | 222,324 |          |                   |            |  |                   |                |  | $        | 186,141 |            |   |        |                |        |          |  | $          | 153,918 |  |   |        |  |        |  
|                                                                 |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  
|Interest rate spread                                             |  |                   |         |          |                   |            |  | 3.67              | %              |  |          |         |            |   |        |                | 3.92   | %        |  |            |         |  |   |        |  | 3.77   | %
|Ratio of interest earning assets to interest bearing liabilities |  |                   |         |          |                   |            |  | 117.30            | %              |  |          |         |            |   |        |                | 118.40 | %        |  |            |         |  |   |        |  | 120.24 | %
|Net interest income and net interest margin                      |  |                   |         |          | $                 | 8,109      |  | 3.95              | %              |  |          |         |            | $ | 7,344  |                | 4.30   | %        |  |            |         |  | $ | 6,308  |  | 4.41   | %
|                                                                 |  |                   |         |          |                   |            |  |                   |                |  |          |         |            |   |        |                |        |          |  |            |         |  |   |        |  |        |  



---

Rate/Volume Analysis

(Dollars in thousands)



|                                                   |  |                       |        |   |                  |   |       |                       |    |        |                  |        |    |      |      |  |   |             |   |  |   |       |   |  |    |        |   |  |    |      |  
|-------------------------------------------------- |  | --------------------- | ------ | - | ---------------- | - | ----- | --------------------- | -- | ------ | ---------------- | ------ | -- | ---- | ---- |  | - | ----------- | - |  | - | ----- | - |  | -- | ------ | - |  | -- | ---- | -
|                                                   |  | 2003 vs. 2002         |        |   | 2002 vs. 2001    |  
|                                                   |  | Increase or(Decrease) |        |   | Due to Change in |   |       | Increase or(Decrease) |    |        | Due to Change in |       
|                                                   |  |                       | Volume |   | Rate             |   |       | Rate/Volume           |    |        |                  | Volume |    |      | Rate |  |   | Rate/Volume |  
|Interest income on:                                |  |                       |        |   |                  |   |       |                       |    |        |                  |        |    |      |      |  |   |             |   |  |   |       |   |  |    |        |   |  |    |      |  
|Loans                                              |  | $                     | 593    |   |                  | $ | 1,567 |                       | ($ | 836    | )                |        | ($ | 138  | )    |  | $ | 731         |   |  | $ | 2,842 |   |  | ($ | 1,592  | ) |  | ($ | 519  | )
|Investment securities                              |  |                       | 52     |   |                  |   | 369   |                       |    | (242   | )                |        |    | (75  | )    |  |   | (375        | ) |  |   | (99   | ) |  |    | (295   | ) |  |    | 19   |  
|Federal funds sold and other overnight investments |  |                       | (26    | ) |                  |   | 71    |                       |    | (73    | )                |        |    | (24  | )    |  |   | (399        | ) |  |   | (107  | ) |  |    | (353   | ) |  |    | 61   |  
|                                                   |  |                       |        |   |                  |   |       |                       |    |        |                  |        |    |      |      |  |   |             |   |  |   |       |   |  |    |        |   |  |    |      |  
|Total interest income                              |  |                       | 619    |   |                  |   | 2,007 |                       |    | (1,151 | )                |        |    | (237 | )    |  |   | (43         | ) |  |   | 2,636 |   |  |    | (2,240 | ) |  |    | (439 | )
|                                                   |  |                       |        |   |                  |   |       |                      
|Interest expense on:                               |  |                       |        |   |                  |   |       |                       |    |        |                  |        |    |      |      |  |   |             |   |  |   |       |   |  |    |        |   |  |    |      |  
|NOW accounts                                       |  |                       | (4     | ) |                  |   | 18    |                       |    | (17    | )                |        |    | (5   | )    |  |   | (70         | ) |  |   | 37    |   |  |    | (83    | ) |  |    | (24  | )
|Money market accounts                              |  |                       | (113   | ) |                  |   | 19    |                       |    | (126   | )                |        |    | (6   | )    |  |   | (197        | ) |  |   | 210   |   |  |    | (299   | ) |  |    | (108 | )
|Savings accounts                                   |  |                       | (73    | ) |                  |   | 32    |                       |    | (89    | )                |        |    | (16  | )    |  |   | (98         | ) |  |   | 40    |   |  |    | (121   | ) |  |    | (17  | )
|Certificates of deposit                            |  |                       | (230   | ) |                  |   | 405   |                       |    | (541   | )                |        |    | (94  | )    |  |   | (1,012      | ) |  |   | 179   |   |  |    | (1,131 | ) |  |    | (60  | )
|Repurchase agreements                              |  |                       | (44    | ) |                  |   | 46    |                       |    | (75    | )                |        |    | (15  | )    |  |   | (7          | ) |  |   | 44    |   |  |    | (43    | ) |  |    | (8   | )
|Long term-borrowings                               |  |                       | 151    |   |                  |   | 151   |                       |    |       |                  |        |    |     |      |  |   | 305         |   |  |   | 195   |   |  |    |       |   |  |    | 110  |  
|Junior subordinated debt                           |  |                       | 167    |   |                  |   |      |                       |    |       |                  |        |    | 167  |      |  |   |            |   |  |   |      |   |  |    |       |   |  |    |     |  
|                                                   |  |                       |        |   |                  |   |       |                       |    |        |                  |        |    |      |      |  |   |             |   |  |   |       |   |  |    |        |   |  |    |      |  
|Total interest expense                             |  |                       | (146   | ) |                  |   | 671   |                       |    | (848   | )                |        |    | 31   |      |  |   | (1,079      | ) |  |   | 705   |   |  |    | (1,677 | ) |  |    | (107 | )
|                                                   |  |                       |        |   |                  |   |       |                       |    |        |                  |        |    |      |      |  |   |             |   |  |   |       |   |  |    |        |   |  |    |      |  
|Net interest income                                |  | $                     | 765    |   |                  | $ | 1,336 |                       | ($ | 303    | )                |        | ($ | 268  | )    |  | $ | 1,036       |   |  | $ | 1,931 |   |  | ($ | 563    | ) |  | ($ | 332  | )
|                                                   |  |                       |        |   |                  |   |       |                       |    |        |                  |        |    |      |      |  |   |             |   |  |   |       |   |  |    |        |   |  |    |      |  



Risk Management



The Board of Directors is the foundation for effective corporate governance and risk
management. The Board demands accountability of management, keeps stockholders and other constituencies interests in focus, advocates the upholding of the Companys code of ethics, and fosters a strong internal control environment.
Through its Audit Committee, the Board actively reviews critical risk positions, including market, credit, liquidity, and operational risk. The Companys goal in managing risk is to reduce earnings volatility, control exposure to unnecessary
risk, and ensure appropriate returns for risk assumed. Senior management manages risk at the business line level, supplemented with corporate-level oversight through the Asset Liability Committee, internal audit and quality control functions.



Liquidity Risk Management and Capital Resources



The objective of liquidity management is to ensure that the cash flow requirements of
depositors and borrowers, as well as the operating cash needs of the Company are met, taking into account all on- and off-balance sheet funding demands. Liquidity management also includes ensuring that cash flow needs are met at a reasonable cost.
Liquidity risk arises from the possibility the Company may not be able to satisfy current or future financial commitments, or the Company may become unduly reliant on alternative funding sources. The Company maintains a liquidity risk management
policy to address and manage this risk. The policy identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements which comply with regulatory guidance. The
liquidity position is continually monitored and reported monthly to the Board of Directors.



Deposits, commercial reverse repurchase agreements, and lines of credit are the primary sources of the Banks funds for lending and investing activities. During 2003 the Company issued $5 million in junior
subordinated debentures. Secondary sources of funds are derived from loan repayments and investment maturities. Loan repayments and 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 38.6% of the deposit portfolio at December 31, 2003. Core deposits, considered to be noninterest bearing and interest bearing demand deposit accounts, savings
deposits and money market accounts, accounted for 61.4% of the deposit portfolio at December 31, 2003. This represents a 1.8% increase in core deposits, which accounted for 60.3% of the deposit portfolio at December 31, 2002.



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 providing quality products and personal customer service.



---

The Bank pays interest rates on interest bearing deposit products 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 which considers 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 $22.5 million at December 31, 2003 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, 2003:



(Dollars in thousands)



|                   |  |                                      |       |                                   |   |                      |  |       |        |  |   |       
|------------------ |  | ------------------------------------ | ----- | --------------------------------- | - | -------------------- |  | ----- | ------ |  | - | ------
|ThreeMonths orLess |  | Greater thanThreeMonths toSix Months |       | Greater thanSix Monthsto One Year |   | Greater thanOne Year |  | Total
|$1,782             |  | $                                    | 1,039 |                                   | $ | 5,772                |  | $     | 13,882 |  | $ | 22,475
|                   |  |                                      |       |                                   |   |                      |  |       |        |  |   |       



Securities sold under agreements to
repurchase 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. For the years ended December 31, 2003 and 2002, the average cost of these borrowings was 1.79% and 2.65%, respectively.



The Bank maintains a secured borrowing line with the Federal Home Loan Bank (FHLB) with the ability to draw up to $92.5 million, and may
borrow up to $8.3 million under secured and unsecured lines established with correspondent commercial banks. In addition, the Bank has the ability to borrow directly from the Federal Reserve Bank discount window. At December 31, 2003, the Bank had
advances outstanding of $10.0 million under the Federal Home Loan Banks convertible advance program.



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 through secondary sources of liquidity including 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.



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 adjustable rate loans and to invest in short term U.S. Government agency securities
with maturities or call dates of five years or less. Prior to the most recent Federal Reserve rate changes the Bank increased its activity in fixed rate loans to stabilize the net interest margin. To reduce the negative impact of engaging in
excessive fixed rate lending in a volatile rate environment, the Bank uses a third party for settlement of the majority of long-term fixed rate loans.



The following table summarizes the anticipated maturities or repricing of the Companys interest earning assets and interest bearing liabilities as of December 31,
2003, 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. 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, 2003, and does not give effect to prepayment or extension of loans as a result of changes in general market rates.



Interest Sensitivity Gap Analysis

December 31, 2003

($000)



|                                                                    |  |                   |         |    |                                   |   |        |                               |  |   |                 |    |  |       |        |   |  |   |        
|------------------------------------------------------------------- |  | ----------------- | ------- | -- | --------------------------------- | - | ------ | ----------------------------- |  | - | --------------- | -- |  | ----- | ------ | - |  | - | -------
|                                                                    |  | WithinThreeMonths |         |    | After Threebut withinTwelveMonths |   |        | After Onebut withinFive Years |  |   | AfterFive Years |    |  | Total
|Assets                                                              |  |                   |         |    |                                   |   |        |                               |  |   |                 |    |  |       |        |   |  |   |        
|Federal funds sold and other overnight investments                  |  | $                 | 8,014   |    |                                   | $ |       |                               |  | $ |                |    |  | $     |       |   |  | $ | 8,014  
|Investment securities (1)                                           |  |                   | 18,189  |    |                                   |   | 8,988  |                               |  |   | 1,776           |    |  |       | 8,012  |   |  |   | 36,965 
|Loans (2) (3)                                                       |  |                   | 74,060  |    |                                   |   | 17,167 |                               |  |   | 40,704          |    |  |       | 36,783 |   |  |   | 168,714
|                                                                    |  |                   |         |    |                                   |   |        |                               |  |   |                 |    |  |       |        |   |  |   |        
|                                                                    |  | $                 | 100,263 |    |                                   | $ | 26,155 |                               |  | $ | 42,480          |    |  | $     | 44,795 |   |  | $ | 213,693
|                                                                    |  |                   |         |    |                                   |   |        |                               |  |   |                 |    |  |       |        |   |  |   |        
|Liabilities                                                         |  |                   |         |    |                                   |   |        |                               |  |   |                 |    |  |       |        |   |  |   |        
|Interest bearing liabilities                                        |  |                   |         |    |                                   |   |        |                               |  |   |                 |    |  |       |        |   |  |   |        
|NOW accounts                                                        |  | $                 | 30,901  |    |                                   | $ |       |                               |  | $ |                |    |  | $     |       |   |  | $ | 30,901 
|Money market accounts                                               |  |                   | 21,336  |    |                                   |   |       |                               |  |   |                |    |  |       |       |   |  |   | 21,336 
|Savings accounts                                                    |  |                   | 31,363  |    |                                   |   |       |                               |  |   |                |    |  |       |       |   |  |   | 31,363 
|Certificates of deposit (4)                                         |  |                   | 8,858   |    |                                   |   | 33,023 |                               |  |   | 31,711          |    |  |       |       |   |  |   | 73,592 
|Commercial repurchase agreements                                    |  |                   | 8,745   |    |                                   |   |       |                               |  |   |                |    |  |       |       |   |  |   | 8,745  
|Long-term borrowings                                                |  |                   |        |    |                                   |   |       |                               |  |   | 5,000           |    |  |       | 5,000  |   |  |   | 10,000 
|Junior subordinated debt                                            |  |                   |        |    |                                   |   |       |                               |  |   |                |    |  |       | 5,000  |   |  |   | 5,000  
|                                                                    |  |                   |         |    |                                   |   |        |                               |  |   |                 |    |  |       |        |   |  |   |        
|                                                                    |  | $                 | 101,203 |    |                                   | $ | 33,023 |                               |  | $ | 36,711          |    |  | $     | 10,000 |   |  | $ | 180,937
|                                                                    |  |                   |         |    |                                   |   |        |                               |  |   |                 |    |  |       |        |   |  |   |        
|Interest sensitivity gap                                            |  |                   | (940    | )  |                                   |   | (6,868 | )                             |  |   | 5,769           |    |  |       | 39,795 |   |  |   | 32,756 
|Cumulative interest sensitivity gap                                 |  |                   | (940    | )  |                                   |   | (7,808 | )                             |  |   | (2,039          | )  |  |       | 32,756 |   |  |   |        
|Cumulative interest sensitivity gap as a percentage of total assets |  |                   | (0.44   | )% |                                   |   | (3.65  | )%                            |  |   | (0.95           | )% |  |       | 15.33  | % |  |   |        

---

|(1) | Net of Federal Reserve Bank and Federal Home Loan Bank stock, by call date.
|--- | ---------------------------------------------------------------------------

|(2) | Loans scheduled by contractual maturities.
|--- | ------------------------------------------

|(3) | Net of non-accrual loans of $27 thousand.
|--- | -----------------------------------------

|(4) | Certificates of deposits scheduled by contractual maturities.
|--- | -------------------------------------------------------------



Investment Portfolio



At December 31, 2003, the Banks investment portfolio, which totaled $38.0 million, consisted of U.S. Government Agency securities and mortgage-backed securities. The Company invests primarily in state tax exempt
U.S. Government Agency securities in order to minimize its state income tax liability. Additionally, the Company owns $504,200 in stock of the Federal Reserve Bank of Richmond and $500,000 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, 2003, approximately 56.9% of the investment securities portfolio had contractual maturities of five year
or less.



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, 2003, 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:



($000)



|                   |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|------------------ |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                   |  | 2003 |        | 2002 |   | 2001   |  | 2000 |        | 1999
|Available for Sale |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|U.S. Agency        |  | $    | 28,167 |      | $ | 14,657 |  | $    | 23,346 |      | $ | 33,565 |  | $ | 23,103
|Mortgage-backed    |  |      | 8,798  |      |   | 4,692  |  |      | 4,931  |      |   |       |  |   |      
|Equity Securities  |  |      | 1,004  |      |   | 858    |  |      | 718    |      |   | 718    |  |   | 721   
|                   |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|Total Securities   |  | $    | 37,969 |      | $ | 20,207 |  | $    | 28,995 |      | $ | 34,283 |  | $ | 23,824
|                   |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       



---

The following table presents maturities and weighted average yields for investments in available-for-sale securities net
of Federal Reserve Bank and Federal Home Loan Bank stock.



December 31, 2003

($000)



|                      |  |                   |     |       |                               |   |        |                          |        |  |      |        |  |       |       |  |      |  
|--------------------- |  | ----------------- | --- | ----- | ----------------------------- | - | ------ | ------------------------ | ------ |  | ---- | ------ |  | ----- | ----- |  | ---- | -
|                      |  | Years to Maturity |    
|                      |  | Within One Year   |     |       | Within One Year to Five Years |   |        | Within Five to Ten Years |       
|                      |  | Amount            |     | Yield |                               |   | Amount |                          | Yield  |  |      | Amount |  | Yield |      
|Available for Sale    |  |                   |     |       |                               |   |        |                          |        |  |      |        |  |       |       |  |      |  
|U.S. Agency           |  | $                 | 353 |       | 4.74                          | % |        | $                        | 19,904 |  | 3.05 | %      |  | $     | 7,910 |  | 3.81 | %
|Mortgage-backed       |  |                   |    |       | 0.00                          | % |        |                          | 785    |  | 5.55 | %      |  |       | 1,920 |  | 4.28 | %
|                      |  |                   |     |       |                               |   |        |                          |        |  |      |        |  |       |       |  |      |  
|Total Debt Securities |  | $                 | 353 |       | 4.74                          | % |        | $                        | 20,689 |  | 3.14 | %      |  | $     | 9,830 |  | 3.90 | %
|                      |  |                   |     |       |                               |   |        |                          |        |  |      |        |  |       |       |  |      |  



|                      |  |                        |       |       |      |   |       |   |       
|--------------------- |  | ---------------------- | ----- | ----- | ---- | - | ----- | - | ------
|                      |  | Greater than Ten Years |       |       |     
|                      |  | Amount                 |       | Yield |      |   | Total
|Available for Sale    |  |                        |       |       |      |   |       |   |       
|U.S. Agency           |  | $                      |      |       | 0.00 | % |       | $ | 28,167
|Mortgage-backed       |  |                        | 6,093 |       | 4.26 | % |       |   | 8,798 
|                      |  |                        |       |       |      |   |       |   |       
|Total Debt Securities |  | $                      | 6,093 |       | 4.32 | % |       | $ | 36,965
|                      |  |                        |       |       |      |   |       |   |       



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.



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,



|                                  |  |        |         |   |         |       |   |        |   |         |         |  |       |        |  |   |         |   |  |        |   |  |         |        |   |        |       |   |         |   |        |   |  |       |  
|--------------------------------- |  | ------ | ------- | - | ------- | ----- | - | ------ | - | ------- | ------- |  | ----- | ------ |  | - | ------- | - |  | ------ | - |  | ------- | ------ | - | ------ | ----- | - | ------- | - | ------ | - |  | ----- | -
|                                  |  | 2003   |         |   | 2002    |       |   | 2001   |   |         | 2000    |  |       | 1999   | 
|($000)                            |  | Amount |         |   | Percent |       |   | Amount |   |         | Percent |  |       | Amount |  |   | Percent |   |  | Amount |   |  | Percent |        |   | Amount |       |   | Percent |  
|Commercial loans                  |  | $      | 41,173  |   |         | 24.4  | % |        | $ | 32,445  |         |  | 22.0  | %      |  | $ | 24,368  |   |  | 21.5   | % |  | $       | 19,323 |   |        | 21.6  | % |         | $ | 19,261 |   |  | 30.4  | %
|Real estate loans                 |  |        |         |   |         |       |   |        |   |         |         |  |       |        |  |   |         |   |  |        |   |  |         |        |   |        |       |   |         |   |        |   |  |       |  
|Commercial                        |  |        | 44,214  |   |         | 26.2  | % |        |   | 41,219  |         |  | 28.0  | %      |  |   | 38,498  |   |  | 34.0   | % |  |         | 33,434 |   |        | 37.5  | % |         |   | 35,032 |   |  | 33.3  | %
|Construction                      |  |        | 24,713  |   |         | 14.6  | % |        |   | 25,060  |         |  | 17.0  | %      |  |   | 17,712  |   |  | 15.7   | % |  |         | 16,945 |   |        | 19.0  | % |         |   | 15,030 |   |  | 20.2  | %
|One-to four-family                |  |        | 18,869  |   |         | 11.2  | % |        |   | 20,233  |         |  | 13.7  | %      |  |   | 17,083  |   |  | 15.1   | % |  |         | 11,036 |   |        | 12.4  | % |         |   | 7,329  |   |  | 9.8   | %
|Home equity                       |  |        | 20,341  |   |         | 12.1  | % |        |   | 14,319  |         |  | 9.7   | %      |  |   | 6,568   |   |  | 5.8    | % |  |         | 4,372  |   |        | 4.9   | % |         |   | 3,686  |   |  | 3.6   | %
|Consumer loans                    |  |        | 19,431  |   |         | 11.5  | % |        |   | 14,140  |         |  | 9.6   | %      |  |   | 8,887   |   |  | 7.9    | % |  |         | 4,107  |   |        | 4.6   | % |         |   | 2,565  |   |  | 2.7   | %
|                                  |  |        |         |   |         |       |   |        |   |         |         |  |       |        |  |   |         |   |  |        |   |  |         |        |   |        |       |   |         |   |        |   |  |       |  
|Total loans                       |  |        | 168,741 |   |         | 100.0 | % |        |   | 147,416 |         |  | 100.0 | %      |  |   | 113,116 |   |  | 100.0  | % |  |         | 89,217 |   |        | 100.0 | % |         |   | 82,903 |   |  | 100.0 | %
|                                  |  |        |         |   |         |       |   |        |   |        
|Less:                             |  |        |         |   |         |       |   |        |   |         |         |  |       |        |  |   |         |   |  |        |   |  |         |        |   |        |       |   |         |   |        |   |  |       |  
|Deferred costs, (unearned income) |  |        | 14      |   |         |       |   |        |   | (103    | )       |  |       |        |  |   | (193    | ) |  |        |   |  |         | (250   | ) |        |       |   |         |   | (222   | ) |  |       |  
|Allowance for credit losses       |  |        | (1,632  | ) |         |       |   |        |   | (1,578  | )       |  |       |        |  |   | (1,576  | ) |  |        |   |  |         | (1,556 | ) |        |       |   |         |   | (1,483 | ) |  |       |  
|                                  |  |        |         |   |         |       |   |        |   |         |         |  |       |        |  |   |         |   |  |        |   |  |         |        |   |        |       |   |         |   |        |   |  |       |  
|Net loans receivable              |  | $      | 167,123 |   |         |       |   |        | $ | 145,735 |         |  |       |        |  | $ | 111,347 |   |  |        |   |  | $       | 87,411 |   |        |       |   |         | $ | 81,198 |   |  |       |  
|                                  |  |        |         |   |         |       |   |        |   |         |         |  |       |        |  |   |         |   |  |        |   |  |         |        |   |        |       |   |         |   |        |   |  |       |  



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, 2003 the Banks loan portfolio totaled $168.7 million, of which $41.2 million,
or 24.4%, was commercial loans; $44.2 million, or 26.2%, was commercial real estate loans; $24.7 million, or 14.6%, was construction loans; $18.9 million, or 11.2%, was one- to four-family residential mortgage loans;



---

$20.3 million, or 12.1% was home equity loans, and; $19.4 million, or 11.5%, was consumer and other loans. All of the
loans in the Banks portfolio are either adjustable-rate with terms to maturity of 30 days to 30 years or short term fixed-rate loans.



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, 2003



|                  |  |                       |        |                                       |   |                     |  |                 |        |                 |   |       |  |   |   |  |   |        
|----------------- |  | --------------------- | ------ | ------------------------------------- | - | ------------------- |  | --------------- | ------ | --------------- | - | ----- |  | - | - |  | - | -------
|($000)            |  | Due inOne Yearor Less |        | Due afterOne Yearbut beforeFive Years |   | Due afterFive Years |  | NonaccrualLoans |        | 90 DaysPast Due |   | Total
|Real estate loans |  |                       |        |                                       |   |                     |  |                 |        |                 |   |       |  |   |   |  |   |        
|Construction      |  | $                     | 24,240 |                                       | $ | 473                 |  | $               |       |                 | $ |      |  | $ |  |  | $ | 24,713 
|Mortgage          |  |                       | 1,667  |                                       |   | 8,738               |  |                 | 8,464  |                 |   |      |  |   |  |  |   | 18,869 
|Commercial        |  |                       | 14,368 |                                       |   | 17,878              |  |                 | 11,968 |                 |   |      |  |   |  |  |   | 44,214 
|Commercial loans  |  |                       | 27,980 |                                       |   | 10,172              |  |                 | 2,994  |                 |   | 27    |  |   |  |  |   | 41,173 
|Home equity loans |  |                       | 19,972 |                                       |   |                    |  |                 | 369    |                 |   |      |  |   |  |  |   | 20,341 
|Consumer loans    |  |                       | 2,821  |                                       |   | 3,443               |  |                 | 13,167 |                 |   |      |  |   |  |  |   | 19,431 
|                  |  |                       |        |                                       |   |                     |  |                 |        |                 |   |       |  |   |   |  |   |        
|Total loans       |  | $                     | 91,048 |                                       | $ | 40,704              |  | $               | 36,962 |                 | $ | 27    |  | $ |  |  | $ | 168,741
|                  |  |                       |        |                                       |   |                     |  |                 |        |                 |   |       |  |   |   |  |   |        



|                  |  |                    |        |              |   |        |  |   |       
|----------------- |  | ------------------ | ------ | ------------ | - | ------ |  | - | ------
|                  |  | Due After One Year
|($000)            |  | FixedRate          |        | VariableRate |   | Total 
|Real estate loans |  |                    |        |              |   |        |  |   |       
|Construction      |  | $                  | 473    |              | $ |       |  | $ | 473   
|Mortgage          |  |                    | 10,493 |              |   | 6,709  |  |   | 17,202
|Commercial        |  |                    | 10,428 |              |   | 19,418 |  |   | 29,846
|Commercial loans  |  |                    | 8,328  |              |   | 4,838  |  |   | 13,166
|Home equity loans |  |                    | 369    |              |   |       |  |   | 369   
|Consumer loans    |  |                    | 4,651  |              |   | 11,959 |  |   | 16,610
|                  |  |                    |        |              |   |        |  |   |       
|Total loans       |  | $                  | 34,742 |              | $ | 42,924 |  | $ | 77,666
|                  |  |                    |        |              |   |        |  |   |       



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 80-85% 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, 2003, was $3.4 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 five-year period in
accordance with the prime rate, or the 3 and 5 year U.S. Constant Maturity Indices as reported in the Wall Street Journal. In reaching a decision whether 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 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. The Bank offers permanent end-financing to the Banks construction loan customers generally on a 3/1 or 5/1 ARM basis.



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% to 90% of the appraised market 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, 2003, the Bank had construction loans, including land acquisition and
development loans, totaling $24.7 million, or 14.6% of the Banks total loan portfolio, of which $8.3 million consisted of one- to four-family residential construction loans, $6.1 million consisted of commercial real estate construction loans
and $10.3 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 in a timely and workmanlike manner. If the estimate of value proves to be inaccurate, or if construction is not performed timely or accurately, the Bank may be faced
with a project which, when completed, has a value that is insufficient to assure full repayment.



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 lot
loans for one- to four-family residences located throughout the Baltimore-Washington Metropolitan area. 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 recourse in the event of breaches in 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, 2003, one- to four-family residential mortgage loans totaled $18.9 million, or 11.2% of total loans. Of the one-to
four-family mortgage loans outstanding at that date, $1.5 million were fixed-rate loans with terms of up to three years with a balloon payment at the end of the term, and $5.4 million 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% (or higher with private mortgage insurance) 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, 2003, home equity loans totaled $20.3 million, or 12.1% of the Banks
total loan portfolio. Fixed-rate, fixed-term home equity loans and adjustable rate home equity lines of credit are generally offered in amounts up to 85% of the market value of the security property. Fixed-rate, fixed-term home equity loans are
offered with terms up to ten 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, 2003, consumer loans totaled $19.4 million or 11.5% of total loans outstanding. Consumer loans are generally originated in the Banks primary market area.



Provision for Credit Losses and Credit Risk Management



Originating loans involves a degree of risk that credit losses will occur in varying amounts
according to, among other factors, the type of loans being made, the credit-worthiness of the borrowers over the term of the loans, the quality of the collateral for the loan, if any, as well as general economic conditions.



The Banks allowance for credit 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 credit 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 an acceptable allowance for credit loss based upon loan risk ratings, prior periods charge-offs and specific loss reserves. This
methodology is appropriate as the Bank has ten years of loan loss history, 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 individual loans. The calculation of the allowance is based, in part, upon historical loss factors, as adjusted, for the major loan categories over the prior eight quarters. The factors used to adjust the historical loss
experience address various risk characteristics of the Banks loan portfolio including (1) trends in delinquencies and other nonperforming loans, (2) results of independent loan reviews, (3) changes in the categories of loans comprising the
loan portfolio, (4) concentrations of loans to specific industry segments, (5) changes in economic conditions on both a local and national level, (6) changes in the Banks credit administration and loan portfolio management processes, (7)
changes in the experience, ability and depth of lending management and staff, (8) the effect of the recent and rapid escalation of local real estate values on the level of potential credit losses in the banks portfolio and (9) the impact of
unresolved collateral and documentation exceptions on the potential credit losses in the banks portfolio.



Management believes this approach effectively measures the risk associated with any particular loan or group of loans. The Board of Directors engages an independent loan
review consultant to evaluate the adequacy of the Banks allowance for credit losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for credit losses.
Such agencies may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management. The Bank recorded a total provision for credit losses of $50 thousand for the year ended December 31
2003 and $25 thousand in 2002. The aggregate provision was based upon the results of quarterly evaluations using a combination of factors including the ratio of the allowance for credit losses to total gross loans, the Banks growth in total
gross loans and the Banks net loan loss experience. Total gross loans increased by $21.3 million for the year ended December 31, 2003. The Bank recorded charge-offs of $26 thousand on loans deemed uncollectible and recovered $30 thousand of
previously charged-off loans. For the third year in the last four years the Bank experienced net recoveries of previously charged-off loans. As of December 31, 2003, the Banks allowance for credit losses was $1.6 million or 0.97% of total
loans and 6,123.9% of non-performing loans as compared to $1.6 million, or 1.07% of total loans and 113.2% of non-performing loans as of December 31, 2002. The Bank had total non-performing loans of $27 thousand and $1.4 million at December 31, 2003
and December 31, 2002, respectively, and non-performing loans to total loans of 0.02% and 0.95%, at December 31, 2003, and December 31, 2002, respectively. The decrease in nonperforming assets from December 31, 2002 is attributable to documents
executed and received in January 2003 on a $1.3 million participation loan to a single borrower that matured on October 1, 2002 but remained current through December 31, 2002. Due to delays by the lead bank in obtaining executed renewal
documentation, the Bank was required to classify this loan as nonperforming at December 31, 2002. Excluding this loan, nonperforming assets at December 31, 2002 were $55,000 or 0.04% of total gross loans.



The Bank places loans on a nonaccrual status after 90 days of not having received contractual
principal or interest payments unless the loan is well secured and 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, 2003 the Bank had approximately $15.2 million in watch list loans.



---

The Bank continues to monitor and modify its allowances for credit losses as conditions dictate. While management
believes that, based on information currently available, the Banks allowance for credit 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
credit losses will be sufficient to cover future loan losses incurred by the Bank or that future adjustments to the allowance for credit 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 credit losses. Management may in the future increase the level of allowances as a percentage of total loans and non-performing loans as its loan portfolio increases
or as circumstances dictate.



The following table presents a three-year
history for the allocation of the allowance for credit losses, reflecting use of the methodology presented above, along with the percentage of total loans in each category.



At December 31,

(Dollars in thousands)



|                      |  |        |       |          |      |   |        |      |          |  |      |        |  |          |       |  |      |  
|--------------------- |  | ------ | ----- | -------- | ---- | - | ------ | ---- | -------- |  | ---- | ------ |  | -------- | ----- |  | ---- | -
|                      |  | 2003   |       |          | 2002 |   |        | 2001 |         
|                      |  | Amount |       | Loan Mix |      |   | Amount |      | Loan Mix |  |      | Amount |  | Loan Mix |      
|Amount applicable to: |  |        |       |          |      |   |        |      |          |  |      |        |  |          |       |  |      |  
|Commercial            |  | $      | 586   |          | 24.4 | % |        | $    | 509      |  | 22.0 | %      |  | $        | 475   |  | 21.5 | %
|Real estate           |  |        |       |          |      |   |        |      |          |  |      |        |  |          |       |  |      |  
|Commercial            |  |        | 629   |          | 26.2 | % |        |      | 567      |  | 28.0 | %      |  |          | 692   |  | 34.0 | %
|Residential           |  |        | 21    |          | 23.3 | % |        |      | 45       |  | 23.4 | %      |  |          | 103   |  | 20.9 | %
|Construction          |  |        | 246   |          | 14.6 | % |        |      | 250      |  | 17.0 | %      |  |          | 33    |  | 15.7 | %
|Consumer              |  |        | 66    |          | 11.5 | % |        |      | 83       |  | 9.6  | %      |  |          | 60    |  | 7.9  | %
|Non specific          |  |        | 84    |          |      |   |        |      | 124      |  |      |        |  |          | 213   |  |      |  
|                      |  |        |       |          |      |   |        |      |          |  |      |        |  |          |       |  |      |  
|Total allowance       |  | $      | 1,632 |          |      |   |        | $    | 1,578    |  |      |        |  | $        | 1,576 |  |      |  
|                      |  |        |       |          |      |   |        |      |          |  |      |        |  |          |       |  |      |  



Analysis of Credit Risk



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



(Dollars
in thousands)



|                                                          |  |      |         |   |      |   |         |      |  |   |         |   
|--------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | --
|                                                          |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Total loans outstanding - at December 31                  |  | $    | 168,755 |   |      | $ | 147,313 |      |  | $ | 112,923 |   
|Average loans outstanding for the year                    |  |      | 155,067 |   |      |   | 133,022 |      |  |   | 100,341 |   
|                                                          |  |      |        
|Allowance for credit losses at beginning of period        |  | $    | 1,578   |   |      | $ | 1,576   |      |  | $ | 1,556   |   
|Provision charged to expense                              |  |      | 50      |   |      |   | 25      |      |  |   |        |   
|Chargeoffs:                                               |  |      |         |   |      |   |         |      |  |   |         |   
|Commercial loans                                          |  |      | 8       |   |      |   | 53      |      |  |   | 4       |   
|Consumer and other loans                                  |  |      | 18      |   |      |   | 19      |      |  |   |        |   
|                                                          |  |      |         |   |      |   |         |      |  |   |         |   
|Total                                                     |  |      | 26      |   |      |   | 72      |      |  |   | 4       |   
|Recoveries:                                               |  |      |         |   |      |   |         |      |  |   |         |   
|Residential/commercial real estate loans                  |  |      |        |   |      |   |        |      |  |   |        |   
|Commercial loans                                          |  |      | 12      |   |      |   | 47      |      |  |   | 24      |   
|Consumer and other loans                                  |  |      | 18      |   |      |   | 2       |      |  |   |        |   
|                                                          |  |      |         |   |      |   |         |      |  |   |         |   
|Total                                                     |  |      | 30      |   |      |   | 49      |      |  |   | 24      |   
|                                                          |  |      |         |   |      |   |         |      |  |   |         |   
|Net (recoveries) chargeoffs                               |  |      | (4      | ) |      |   | 23      |      |  |   | (20     | ) 
|                                                          |  |      |         |   |      |   |         |      |  |   |         |   
|Allowance for credit losses at end of year                |  | $    | 1,632   |   |      | $ | 1,578   |      |  | $ | 1,576   |   
|                                                          |  |      |         |   |      |   |         |      |  |   |         |   
|Allowance for credit losses as a percent of total loans   |  |      | 0.97    | % |      |   | 1.07    | %    |  |   | 1.40    | % 
|Net (recoveries) chargeoffs as a percent of average loans |  |      | 0.00    | % |      |   | 0.02    | %    |  |   | (0.02   | %)



Contractual Obligations



The Bank has various financial obligations, including contractual
obligations and commitments that may require future cash payments.



The
following table presents, as of December 31, 2003, significant fixed and determinable contractual obligations to third parties by payment date.



---

(Dollars in thousands)



|                                     |  |       |        |                   |   |                   |  |                    |     |                     |   |       |  |   |       
|------------------------------------ |  | ----- | ------ | ----------------- | - | ----------------- |  | ------------------ | --- | ------------------- | - | ----- |  | - | ------
|Payments due by Period               |  | Total |        | Less thanone year |   | One to threeyears |  | Three tofive years |     | More than fiveyears
|Long-term debt obligations           |  | $     | 10,000 |                   | $ |                  |  | $                  |    |                     | $ | 5,000 |  | $ | 5,000 
|Junior subordinated debt obligations |  |       | 5,000  |                   |   |                  |  |                    |    |                     |   |      |  |   | 5,000 
|Operating lease obligations          |  |       | 1,243  |                   |   | 177               |  |                    | 258 |                     |   | 108   |  |   | 700   
|Data processing contracts            |  |       | 1,088  |                   |   | 202               |  |                    | 513 |                     |   | 319   |  |   | 54    
|                                     |  |       |        |                   |   |                   |  |                    |     |                     |   |       |  |   |       
|                                     |  | $     | 17,331 |                   | $ | 379               |  | $                  | 771 |                     | $ | 5,427 |  | $ | 10,754
|                                     |  |       |        |                   |   |                   |  |                    |     |                     |   |       |  |   |       



Capital Management



During 2003, Stockholders Equity increased $1.3 million or 8.6% to $16.4 million
from $15.1 million at December 31, 2002. The increase was primarily due to net income of $1.7 million offset by a reduction in accumulated other comprehensive income of $343 thousand.



In April 1997, the Companys employee incentive stock option plan was approved by shareholders at the annual meeting. Under the plan,
up to 133,333 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 April 2000, a new Company incentive stock option
plan was approved by shareholders at the annual meeting. Under the plan, up to 266,666 shares of the Companys common stock may be awarded under the direction of the Companys compensation committee. Incentive stock options and grants vest
over a five-year period. During 2003, 20,498 shares of common stock were granted under the 2000 Stock Incentive Plan. During 2003, no shares granted in prior years were forfeited and 6,784 shares were exercised. At December 31, 2003, the Company had
a total of 220,632 options and 4,402 restricted shares granted and outstanding.



See Note 15 to the Consolidated Financial Statements for more information on the Companys stock option plans.



A table of the Equity Compensation Plan Information is shown below:



|                                                           |  |                                                                                              |  |                                                                               |      |                                                                                                                                               |        
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------- | ---- | --------------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                              |  | Number of securities to be issued uponexercise ofoutstanding options,warrants and rights (a) |  | Weighted average exercise price ofoutstandingoptions, warrants and
rights (b) |      | Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)
(c)
|Equity compensation plans approved by security holders     |  | 225,034                                                                                      |  | $                                                                             | 4.48 |                                                                                                                                               | 124,953
|Equity compensation plans not approved by security holders |  |                                                                                             |  |                                                                               |     |                                                                                                                                               |       
|                                                           |  |                                                                                              |  |                                                                               |      |                                                                                                                                               |        
|Total                                                      |  | 225,034                                                                                      |  | $                                                                             | 4.48 |                                                                                                                                               | 124,953
|                                                           |  |                                                                                              |  |                                                                               |      |                                                                                                                                               |        



Regulatory Capital Requirements



The Federal Reserves capital regulations require state member banks
to meet two minimum capital standards: a 4% Tier 1 capital to total adjusted assets ratio for the most highly rated 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 paid in capital, 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 Federal Reserve capital regulations 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, and 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, intermediate preferred stock, and the allowance for credit 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.



---

Trust preferred securities are considered regulatory capital for purposes of determining the Companys Tier 1
capital ratios. The Company believes that the Board of Governors of the Federal Reserve System, which is the holding Companys banking regulator, may rule on continued inclusion of trust preferred securities in regulatory capital following the
issuance of FIN 46R. At this time, it is not possible to estimate the effect, if any, on the Companys Tier 1 regulatory capital as a result of any future action taken by the Board of Governors of the Federal Reserve System. However, as of
December 31, 2003, both the Company and the Bank met the criteria for classification as a well-capitalized institution under the prompt corrective action rules of the Federal Deposit Insurance Act and still would have been considered
well-capitalized if the trust preferred securities had been excluded from regulatory capital. Designation as a well-capitalized institution under these regulations is not a recommendation or endorsement of the Company or the Bank by
federal bank regulators.



At December 31, 2003, both the Companys and the
Banks Tier 1 and Total Risk-based capital ratios were 12.2% and 13.1%, respectively. The Bank was considered well capitalized for regulatory purposes. See Note 20 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.



Effective November 1, 2000, the Company
changed the Bank charter from a national charter to a state charter. As a result, the Bank is now regulated by the State of Maryland Department of Labor, Licensing and Regulation. The Bank is subject to extensive regulation, examination and
supervision by the State of Maryland as its primary regulator, the Federal Reserve Bank of Richmond as its secondary 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 Federal Reserve 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 state and the Federal Reserve 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 assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by
the state of Maryland, the Federal Reserve, the FDIC or the Congress, could have a material adverse impact on the Company or the Bank and their operations.



On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). Sarbanes-Oxley represents a comprehensive revision of laws
affecting corporate governance, accounting obligations and corporate reporting. It is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. The provisions of Sarbanes-Oxley took effect upon
passage and are subject to rulemaking by the Securities and Exchange Commission and the self-regulatory organizations. Some of the changes included in the new, amended and proposed regulations:



| |  | Require accelerated annual and quarterly reporting and require CEOs and CFOs to certify their companys financial reports, filings and control systems;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Require increased disclosure and reporting obligations for the company, its officers and directors, and its affiliates;
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | Require that the company comply with new audit committee independence and auditor independence requirements; and
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | Implement new corporate responsibility requirements and provide additional corporate and criminal fraud accountability.
| | - | -----------------------------------------------------------------------------------------------------------------------



The Company is continuing to monitor the passage of the new and amended regulations and is
taking appropriate measures to comply with them. Although the Company will incur additional expense in complying with the various provisions of Sarbanes-Oxley and the new and amended regulations, management does not expect that such compliance will
have a material impact on the Companys results of operations or financial condition.



The USA PATRIOT Act of 2001, as amended (the Patriot Act), has imposed substantial new record-keeping and due diligence obligations on banks and other financial institutions, with a particular focus on
detecting and reporting money-laundering transactions involving domestic or international customers. The U.S. Treasury Department has issued and will continue to issue regulations clarifying the Patriot Acts requirements. The Patriot Act
requires all financial institutions, as defined, to establish certain anti-money laundering compliance and due diligence programs.



---

Market Value and Dividend Information



The Companys common stock is listed on The NASDAQ Stock Market® 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 2,604 shares during 2003. At December 31, 2003 the closing price was $9.40 per share.



The Companys high and low stock price during the last quarter of 2003 was $9.90 and $8.76, respectively.



As of March 24, 2004 the Company has outstanding 3,025,859 shares of common stock and no
preferred stock issued or outstanding. The Company paid dividends for the first time to its stockholders during 1999. During 2003 no dividends were paid to stockholders.



The Company has not paid a cash dividend since the first quarter of 2002 and has no current plans to resume payments of cash dividends.
Management believes it is in the best interest of the Company to retain capital to support the growth of the Company.



The Company paid a four-for-three dividend in the form of a stock split on August 24, 2001. The split added 746,740 shares to those previously outstanding.



Quarterly Average Stock Information:



|        |  |                   |      |                    |   |                   |      |                    |        |                   |   |                    |  |     |      |  |   |        |  |   |      |  |   |      |  |   |       
|------- |  | ----------------- | ---- | ------------------ | - | ----------------- | ---- | ------------------ | ------ | ----------------- | - | ------------------ |  | --- | ---- |  | - | ------ |  | - | ---- |  | - | ---- |  | - | ------
|        |  | 2003              |      | 2002               |   | 2001             
|        |  | Stock Price Range |      | Per Share Dividend |   | Stock Price Range |      | Per Share Dividend |        | Stock Price Range |   | Per Share Dividend
|Quarter |  | High              |      | Low                |   |                   | High |                    | Low    |                   |   | High               |  | Low |     
|1st     |  | $                 | 6.29 |                    | $ | 5.59              |      | $                  | 0.0000 |                   | $ | 6.25               |  | $   | 4.35 |  | $ | 0.0100 |  | $ | 4.30 |  | $ | 3.23 |  | $ | 0.0075
|2nd     |  |                   | 7.45 |                    |   | 5.75              |      |                    | 0.0000 |                   |   | 6.10               |  |     | 5.50 |  |   | 0.0000 |  |   | 4.49 |  |   | 3.75 |  |   | 0.0150
|3rd     |  |                   | 9.19 |                    |   | 7.18              |      |                    | 0.0000 |                   |   | 5.85               |  |     | 5.30 |  |   | 0.0000 |  |   | 6.38 |  |   | 4.28 |  |   | *     
|4th     |  |                   | 9.90 |                    |   | 8.76              |      |                    | 0.0000 |                   |   | 5.60               |  |     | 4.90 |  |   | 0.0000 |  |   | 5.35 |  |   | 4.20 |  |   | 0.0100

---

|* | Four for three stock split in the form of a stock dividend
|- | ----------------------------------------------------------



---

ANNAPOLIS BANCORP, INC.



Report of Independent Auditors



Audit Committee of the

Board of Directors and Stockholders

Annapolis Bancorp, Inc. and Subsidiaries



We have audited the accompanying consolidated balance sheets of Annapolis
Bancorp, Inc. and Subsidiaries as of December 31, 2003, 2002 and 2001 and the related consolidated statements of income, changes in stockholders equity, and cash flows for each of the three 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 auditing standards generally accepted in the United States of America. 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 Bancorp, Inc. and Subsidiaries as of December 31, 2003, 2002 and 2001 and the results of their operations and their
cash flows for each of the three years then ended in conformity with accounting principles generally accepted in the United States of America.



/s/ Stegman & Company




Baltimore, Maryland

January 9, 2004



---

ANNAPOLIS BANCORP, INC.



Consolidated Balance Sheets ($000)



|                                                                                                                                                    |  |      |         |   |      |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------
|December 31,                                                                                                                                        |  | 2003 |         |   | 2002
|Assets                                                                                                                                              |  |      |         |   |      |   |        
|Cash and due from banks                                                                                                                             |  | $    | 6,033   |   |      | $ | 6,725  
|Federal funds sold                                                                                                                                  |  |      | 8,014   |   |      |   | 15,529 
|Investment securities available for sale                                                                                                            |  |      | 37,969  |   |      |   | 20,207 
|Loans, less allowance for credit losses of $1,632 and $1,578                                                                                        |  |      | 167,123 |   |      |   | 145,735
|Premises and equipment, net                                                                                                                         |  |      | 6,936   |   |      |   | 7,114  
|Accrued interest receivable                                                                                                                         |  |      | 869     |   |      |   | 732    
|Deferred income taxes                                                                                                                               |  |      | 477     |   |      |   | 363    
|Investment in bank owned life insurance                                                                                                             |  |      | 3,356   |   |      |   | 3,223  
|Other assets                                                                                                                                        |  |      | 561     |   |      |   | 488    
|                                                                                                                                                    |  |      |         |   |      |   |        
|Total assets                                                                                                                                        |  | $    | 231,338 |   |      | $ | 200,116
|                                                                                                                                                    |  |      |         |   |      |   |        
|Liabilities and Stockholders Equity                                                                                                                |  |      |         |   |      |   |        
|Deposits                                                                                                                                            |  |      |         |   |      |   |        
|Noninterest bearing                                                                                                                                 |  | $    | 33,385  |   |      | $ | 29,534 
|Interest bearing                                                                                                                                    |  |      | 157,192 |   |      |   | 134,455
|Securities sold under agreements to repurchase                                                                                                      |  |      | 8,745   |   |      |   | 10,500 
|Long-term borrowings                                                                                                                                |  |      | 10,000  |   |      |   | 10,000 
|Guaranteed preferred beneficial interests in junior subordinated debentures                                                                         |  |      | 5,000   |   |      |   |       
|Accrued interest payable and other liabilities                                                                                                      |  |      | 568     |   |      |   | 549    
|                                                                                                                                                    |  |      |         |   |      |   |        
|Total liabilities                                                                                                                                   |  |      | 214,890 |   |      |   | 185,038
|Stockholders Equity                                                                                                                                |  |      |         |   |      |   |        
|Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 3,019,378 shares in 2003 and 3,010,393 shares in
2002 |  |      | 30      |   |      |   | 30     
|Paid in capital                                                                                                                                     |  |      | 12,898  |   |      |   | 12,859 
|Retained earnings                                                                                                                                   |  |      | 3,704   |   |      |   | 2,030  
|Accumulated other comprehensive (loss) income                                                                                                       |  |      | (184    | ) |      |   | 159    
|                                                                                                                                                    |  |      |         |   |      |   |        
|Total stockholders equity                                                                                                                          |  |      | 16,448  |   |      |   | 15,078 
|                                                                                                                                                    |  |      |         |   |      |   |        
|Total liabilities and stockholders equity                                                                                                          |  | $    | 231,338 |   |      | $ | 200,116
|                                                                                                                                                    |  |      |         |   |      |   |        



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



---

ANNAPOLIS BANCORP, INC.



Consolidated Statements of Income ($000)



|                                                      |  |      |        |      |   |        |  |   |        |  
|----------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | -
|Years Ended December 31,                              |  | 2003 |        | 2002 |   | 2001   | 
|Interest Income                                       |  |      |        |      |   |        |  |   |        |  
|Loans, including fees                                 |  | $    | 10,051 |      | $ | 9,458  |  | $ | 8,727  |  
|Federal funds sold                                    |  |      | 191    |      |   | 217    |  |   | 616    |  
|Mortgage-backed securities                            |  |      | 331    |      |   | 257    |  |   | 69     |  
|U.S. Treasury securities and obligations of other     |  |      |        |      |   |        |  |   |        |  
|U.S. Government agencies                              |  |      | 904    |      |   | 926    |  |   | 1,489  |  
|                                                      |  |      |        |      |   |        |  |   |        |  
|Total interest income                                 |  |      | 11,477 |      |   | 10,858 |  |   | 10,901 |  
|Interest Expense                                      |  |      |        |      |   |        |  |   |        |  
|Certificates of deposit, $100,000 or more             |  |      | 689    |      |   | 627    |  |   | 744    |  
|Other deposits                                        |  |      | 1,868  |      |   | 2,350  |  |   | 3,610  |  
|Securities sold under agreements to repurchase        |  |      | 188    |      |   | 232    |  |   | 239    |  
|Interest on long term borrowings                      |  |      | 623    |      |   | 305    |  |   |       |  
|                                                      |  |      |        |      |   |        |  |   |        |  
|Total interest expense                                |  |      | 3,368  |      |   | 3,514  |  |   | 4,593  |  
|                                                      |  |      |        |      |   |        |  |   |        |  
|Net interest income                                   |  |      | 8,109  |      |   | 7,344  |  |   | 6,308  |  
|Provision for Credit Losses                           |  |      | 50     |      |   | 25     |  |   |       |  
|                                                      |  |      |        |      |   |        |  |   |        |  
|Net interest income after provision for credit losses |  |      | 8,059  |      |   | 7,319  |  |   | 6,308  |  
|Noninterest Income                                    |  |      |        |      |   |        |  |   |        |  
|Service charges and fees on deposits                  |  |      | 1,195  |      |   | 694    |  |   | 602    |  
|Mortgage banking fees                                 |  |      | 448    |      |   | 315    |  |   | 199    |  
|Rental income                                         |  |      | 170    |      |   | 167    |  |   | 77     |  
|Other income                                          |  |      | 271    |      |   | 464    |  |   | 308    |  
|Loss on disposal/sale of equipment                    |  |      |       |      |   |       |  |   | (24    | )
|                                                      |  |      |        |      |   |        |  |   |        |  
|Total noninterest income                              |  |      | 2,084  |      |   | 1,640  |  |   | 1,162  |  
|Noninterest Expense                                   |  |      |        |      |   |        |  |   |        |  
|Personnel                                             |  |      | 4,217  |      |   | 3,885  |  |   | 3,612  |  
|Occupancy and equipment                               |  |      | 984    |      |   | 968    |  |   | 845    |  
|Data processing                                       |  |      | 836    |      |   | 775    |  |   | 682    |  
|Marketing and advertising                             |  |      | 265    |      |   | 285    |  |   | 325    |  
|Other operating                                       |  |      | 1,231  |      |   | 1,175  |  |   | 1,234  |  
|                                                      |  |      |        |      |   |        |  |   |        |  
|Total noninterest expense                             |  |      | 7,533  |      |   | 7,088  |  |   | 6,698  |  
|                                                      |  |      |       
|Income Before Income Taxes                            |  |      | 2,610  |      |   | 1,871  |  |   | 772    |  
|Income Tax Expense                                    |  |      | 936    |      |   | 644    |  |   | 266    |  
|                                                      |  |      |        |      |   |        |  |   |        |  
|Net Income                                            |  | $    | 1,674  |      | $ | 1,227  |  | $ | 506    |  
|                                                      |  |      |        |      |   |        |  |   |        |  
|Basic Earnings per Share                              |  | $    | 0.56   |      | $ | 0.41   |  | $ | 0.17   |  
|Diluted Earnings per Share                            |  | $    | 0.55   |      | $ | 0.41   |  | $ | 0.17   |  



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



---

ANNAPOLIS BANCORP, INC.



Consolidated Statements of Changes in Stockholders Equity ($000) except share data



|                                                                                        |  |              |   |  |                |    |   |                  |   |        |                                     |  |   |                          |   |  |                     |      |   |  |   |        |   |  |   |       |  
|--------------------------------------------------------------------------------------- |  | ------------ | - |  | -------------- | -- | - | ---------------- | - | ------ | ----------------------------------- |  | - | ------------------------ | - |  | ------------------- | ---- | - |  | - | ------ | - |  | - | ----- | -
|                                                                                        |  | Common Stock |   |  | Paid inCapital |    |   | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome |  |   | TotalStockholdersEquity |   |  | ComprehensiveIncome |     
|                                                                                        |  | Shares       |   |  | Par Value      |    |   |                  |   |        |                                    
|BALANCE January 1, 2001                                                                 |  | 2,262,406    |   |  | $              | 23 |   |                  | $ | 12,881 |                                     |  | $ | 425                      |   |  | $                   | 33   |   |  | $ | 13,362 |   |  | $ | 1,039 |  
|Net income                                                                              |  |             |   |  |                |   |   |                  |   |       |                                     |  |   | 506                      |   |  |                     |     |   |  |   | 506    |   |  |   | 506   |  
|Dividends paid ($0.0325 per share)                                                      |  |             |   |  |                |   |   |                  |   |       |                                     |  |   | (98                      | ) |  |                     |     |   |  |   | (98    | ) |  |   |       |  
|4:3 stock split in the form of a stock dividend                                         |  | 745,860      |   |  |                | 8  |   |                  |   | (8     | )                                   |  |   |                         |   |  |                     |     |   |  |   |       |   |  |   |      |  
|Stock Repurchase                                                                        |  | (24,500      | ) |  |                | (1 | ) |                  |   | (127   | )                                   |  |   |                         |   |  |                     |     |   |  |   | (128   | ) |  |   |       |  
|Stock options exercised                                                                 |  | 6,666        |   |  |                |   |   |                  |   | 24     |                                     |  |   |                         |   |  |                     |     |   |  |   | 24     |   |  |   |       |  
|Issuance of restricted stock                                                            |  | 6,197        |   |  |                |   |   |                  |   | 26     |                                     |  |   |                         |   |  |                     |     |   |  |   | 26     |   |  |   |       |  
|Unrealized gain on investment securities available for sale net of income taxes         |  |             |   |  |                |   |   |                  |   |       |                                     |  |   |                         |   |  |                     | 168  |   |  |   | 168    |   |  |   | 168   |  
|                                                                                        |  |              |   |  |                |    |   |                  |   |        |                                     |  |   |                          |   |  |                     |      |   |  |   |        |   |  |   |       |  
|BALANCE DECEMBER 31, 2001                                                               |  | 2,996,629    |   |  |                | 30 |   |                  |   | 12,796 |                                     |  |   | 833                      |   |  |                     | 201  |   |  |   | 13,860 |   |  |   | 674   |  
|                                                                                        |  |              |   |  |                |    |   |                  |   |        |                                     |  |   |                          |   |  |                     |      |   |  |   |        |   |  |   |       |  
|Net income                                                                              |  |             |   |  |                |   |   |                  |   |       |                                     |  |   | 1,227                    |   |  |                     |     |   |  |   | 1,227  |   |  |   | 1,227 |  
|Dividends paid ($0.01 per share)                                                        |  |             |   |  |                |   |   |                  |   |       |                                     |  |   | (30                      | ) |  |                     |     |   |  |   | (30    | ) |  |   |       |  
|Stock options exercised                                                                 |  | 8,899        |   |  |                |   |   |                  |   | 35     |                                     |  |   |                         |   |  |                     |     |   |  |   | 35     |   |  |   |       |  
|Issuance of restricted stock                                                            |  | 4,865        |   |  |                |   |   |                  |   | 28     |                                     |  |   |                         |   |  |                     |     |   |  |   | 28     |   |  |   |       |  
|Unrealized gain or loss on investment securities available for sale net of income taxes |  |             |   |  |                |   |   |                  |   |       |                                     |  |   |                         |   |  |                     | (42  | ) |  |   | (42    | ) |  |   | (42   | )
|                                                                                        |  |              |   |  |                |    |   |                  |   |        |                                     |  |   |                          |   |  |                     |      |   |  |   |        |   |  |   |       |  
|BALANCE DECEMBER 31, 2002                                                               |  | 3,010,393    |   |  |                | 30 |   |                  |   | 12,859 |                                     |  |   | 2,030                    |   |  |                     | 159  |   |  |   | 15,078 |   |  |   | 1,185 |  
|                                                                                        |  |              |   |  |                |    |   |                  |   |        |                                     |  |   |                          |   |  |                     |      |   |  |   |        |   |  |   |       |  
|Net income                                                                              |  |             |   |  |                |   |   |                  |   |       |                                     |  |   | 1,674                    |   |  |                     |     |   |  |   | 1,674  |   |  |   | 1,674 |  
|Dividends paid ($0.00 per share)                                                        |  |             |   |  |                |   |   |                  |   |       |                                     |  |   |                         |   |  |                     |     |   |  |   |       |   |  |   |       |  
|Stock options exercised                                                                 |  | 6,784        |   |  |                |   |   |                  |   | 26     |                                     |  |   |                         |   |  |                     |     |   |  |   | 26     |   |  |   |       |  
|Issuance of restricted stock                                                            |  | 2,201        |   |  |                |   |   |                  |   | 13     |                                     |  |   |                         |   |  |                     |     |   |  |   | 13     |   |  |   |       |  
|Unrealized loss on investment securities available for sale net of income taxes         |  |             |   |  |                |   |   |                  |   |       |                                     |  |   |                         |   |  |                     | (343 | ) |  |   | (343   | ) |  |   | (343  | )
|                                                                                        |  |              |   |  |                |    |   |                  |   |        |                                     |  |   |                          |   |  |                     |      |   |  |   |        |   |  |   |       |  
|BALANCE DECEMBER 31, 2003                                                               |  | 3,019,378    |   |  | $              | 30 |   |                  | $ | 12,898 |                                     |  | $ | 3,704                    |   |  | $                   | (184 | ) |  | $ | 16,448 |   |  | $ | 1,331 |  
|                                                                                        |  |              |   |  |                |    |   |                  |   |        |                                     |  |   |                          |   |  |                     |      |   |  |   |        |   |  |   |       |  



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



---

ANNAPOLIS BANCORP, INC.



Consolidated Statements of Cash Flows ($000)



|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Years Ended December 31,                                                          |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Cash Flows from Operating Activities                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $    | 1,674   |   |      | $ | 1,227   |      |  | $ | 506     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                     |  |      | 467     |   |      |   | 448     |      |  |   | 424     |  
|Provision for credit losses                                                       |  |      | 50      |   |      |   | 25      |      |  |   |        |  
|Deferred income taxes                                                             |  |      | 63      |   |      |   | 1       |      |  |   | 42      |  
|Amortization of premiums and accretion of discounts, net                          |  |      | 9       |   |      |   | 24      |      |  |   | (24     | )
|Loss on sale or disposal of equipment                                             |  |      |        |   |      |   |        |      |  |   | 24      |  
|(Increase) decrease in:                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Accrued interest receivable                                                       |  |      | (137    | ) |      |   | 123     |      |  |   | 297     |  
|Other assets                                                                      |  |      | (233    | ) |      |   | (177    | )    |  |   | 97      |  
|(Decrease) increase in                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Accrued interest payable                                                          |  |      | (3      | ) |      |   | 62      |      |  |   | (16     | )
|Accrued income taxes, net of taxes refundable                                     |  |      | (31     | ) |      |   | (62     | )    |  |   | 49      |  
|Deferred loan origination fees                                                    |  |      | (117    | ) |      |   | 90      |      |  |   | (58     | )
|Other liabilities                                                                 |  |      | 54      |   |      |   | 284     |      |  |   | (57     | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided from operations                                                 |  |      | 1,796   |   |      |   | 2,045   |      |  |   | 1,284   |  
|                                                                                  |  |      |        
|Cash Flows from Investing Activities                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Proceeds from sales and maturities of securities available for sale               |  |      | 26,817  |   |      |   | 33,683  |      |  |   | 45,505  |  
|Purchase of securities available for sale                                         |  |      | (45,108 | ) |      |   | (24,982 | )    |  |   | (39,942 | )
|Net decrease (increase) in federal funds sold                                     |  |      | 7,515   |   |      |   | (819    | )    |  |   | (8,987  | )
|Loans made, net of principal collected                                            |  |      | (21,321 | ) |      |   | (34,503 | )    |  |   | (23,878 | )
|Purchase of bank owned life insurance                                             |  |      |        |   |      |   | (3,110  | )    |  |   |        |  
|Purchases of premises and equipment                                               |  |      | (262    | ) |      |   | (187    | )    |  |   | (2,521  | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used by investing activities                                             |  |      | (32,359 | ) |      |   | (29,918 | )    |  |   | (29,823 | )
|                                                                                  |  |      |        
|Cash Flows from Financing Activities                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Time deposits                                                                     |  |      | 8,434   |   |      |   | 3,179   |      |  |   | 10,757  |  
|Other deposits                                                                    |  |      | 18,153  |   |      |   | 15,928  |      |  |   | 16,106  |  
|Securities sold under agreements to repurchase                                    |  |      | (1,755  | ) |      |   | 2,826   |      |  |   | 2,305   |  
|Long term borrowings                                                              |  |      | 5,000   |   |      |   | 10,000  |      |  |   |        |  
|Payment of cash dividends                                                         |  |      |        |   |      |   | (30     | )    |  |   | (97     | )
|Proceeds from sale of stock and options exercised                                 |  |      | 26      |   |      |   | 35      |      |  |   | 14      |  
|Issuance of restricted stock                                                      |  |      | 13      |   |      |   | 28      |      |  |   | 36      |  
|Repurchase of common stock                                                        |  |      |        |   |      |   |        |      |  |   | (127    | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                         |  |      | 29,871  |   |      |   | 31,966  |      |  |   | 28,994  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                              |  |      | (692    | ) |      |   | 4,093   |      |  |   | 455     |  
|Cash and cash equivalents at beginning of year                                    |  |      | 6,725   |   |      |   | 3,632   |      |  |   | 3,177   |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                          |  | $    | 6,033   |   |      | $ | 6,725   |      |  | $ | 3,632   |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Supplemental Cash Flow Information                                                |  |      |         |   |      |   |         |      |  |   |         |  
|Interest paid, including interest credited to accounts                            |  | $    | 3,368   |   |      | $ | 3,452   |      |  | $ | 4,609   |  
|Income taxes paid                                                                 |  |      | 874     |   |      |   | 638     |      |  |   | 240     |  



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



---

ANNAPOLIS BANCORP, INC.



Notes to Consolidated Financial Statements ($000) except share data



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The accounting and reporting policies in the financial statements conform with accounting principles generally accepted in the United States of America
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. Certain reclassifications have been made to the 2002 and 2001 consolidated
financial statements to conform with the 2003 presentation.



Business



The Company was incorporated on May 26, 1988, under the
laws of the State of Maryland to serve as a bank holding company. The Company, registered as a bank holding company, formed Annapolis National Bank (the Bank), a nationally chartered financial institution. Effective June 1, 2001 the
Company changed its name to Annapolis Bancorp, Inc. Effective November 1, 2000 the Bank changed its charter from a national charter to a state charter and joined the State of Maryland and the Federal Reserve banking systems. Also effective November
1, 2000 the Bank changed its name from Annapolis National Bank to BankAnnapolis. The Company (as a bank holding company) and the Bank are subject to governmental supervision, regulation, and control.



The principal business of BankAnnapolis 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 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 subsidiaries, BankAnnapolis and Annapolis Bancorp Statutory
Trust I. All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements of Annapolis Bancorp, Inc. (Parent only) include its investment in the Bank under the equity method of accounting.



Cash equivalents



For purposes of reporting cash flows, cash and demand balances due from
banks are considered cash equivalents for financial reporting purposes.



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. 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 accumulated other comprehensive income, a separate component of 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.



Declines in the fair value of individual available for sale or held to maturity securities below their cost that are other than temporary result in
write-downs of the individual securities to their fair value. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by the rating agency, a significant deterioration in
the financial condition of the issuer, or that management would not have the ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value.



Premises and equipment



Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of the assets. Useful lives range from three to 10 years for furniture, fixtures, and equipment; three to five years for software, hardware, and data handling equipment; and
10 to 40 years for buildings and building improvements. Land improvements are amortized



---

over a period of 15 years; and leasehold improvements are amortized over the term of the respective lease plus the first
optional renewal period, if applicable. Maintenance and repairs are charged to expense as incurred, while improvements which extend the useful life are capitalized and depreciated over the estimated remaining life of the asset.



Loans



Loans are stated at their principal balance outstanding, 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
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.



Loans are considered impaired when, based on current information, it is probable that the Bank will not collect all principal and interest payments according to contractual terms. Generally, loans are considered impaired once principal and
interest payments are past due and they are placed on non-accrual. Management also considers the financial condition of the borrower, cash flows of the loan and the value of the related collateral. Impaired loans do not include large groups of
smaller balance homogeneous credits such as residential real estate and consumer installment loans, which are evaluated collectively for impairment. Loans specifically reviewed for impairment are not considered impaired during periods of
minimal delay in payment (usually ninety days or less) provided eventual collection of all amounts due is expected. Impaired loans are measured based on the present value of expected future cash flows discounted at the loans
effective interest rate, except that as a practical expedient, the Bank may measure impairment based on a loans observable market price or the fair value of the collateral, if the loan is collateral dependent. The Bank recognizes interest
income on impaired loans on a cash basis if the borrower demonstrates the ability to meet the contractual obligation and collateral is sufficient. If there is doubt regarding the borrowers ability to make payments or the collateral is not
sufficient, payments received are accounted for as a reduction in principal. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.



Allowance for Credit Losses



The allowance for credit losses is maintained at a level believed adequate
by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans, actual loss experience, current economic events in
specific industries and geographic areas including unemployment levels and other pertinent factors including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant
estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience and consideration of economic trends, all of which may be susceptible to
significant change. Credit losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on managements periodic
evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary.



The allowance for credit losses consists of a specific component and a nonspecific component. The components of the
allowance for credit losses represent an estimation done pursuant to either Statement of Financial Accounting Standards (SFAS) No. 5 Accounting for Contingencies, or SFAS No. 114 Accounting by Creditors for Impairment
of a Loan. The specific component of the allowance for credit losses reflects expected losses resulting from analysis developed through credit allocations for individual loans and historical loss experience for each loan category. The credit
allocations are based on a regular analysis of all loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The historical loan loss element is determined statistically using a loss migration
analysis that examines loss experience and the related internal gradings of loans charged off. The calculation of the allowance is based, in part, upon historical loss factors, as adjusted, for the major loan categories based upon adjusted
historical loss experience over the prior eight quarters. The factors used to adjust the historical loss experience address various risk characteristics of the Banks loan portfolio including (1) trends in delinquencies and other nonperforming
loans, (2) results of independent loan reviews, (3) changes in the categories of loans comprising the loan portfolio, (4) concentrations of loans to specific industry segments, (5) changes in economic conditions on both a local and national level,
(6) changes in the Banks credit administration and loan portfolio management processes, (7) changes in the experience, ability and depth of lending management and staff, (8) the effect of the recent and rapid escalation of local real estate
values on the level of potential credit losses in the banks portfolio and (9) the impact of unresolved collateral and documentation exceptions on the potential credit losses in the banks portfolio.



---

The nonspecific portion of the allowance is determined based on managements assessment of general
economic conditions, as well as economic factors in the individual markets in which BankAnnapolis operates including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. This
determination inherently involves a higher risk of uncertainty and considers current risk factors that may not have yet manifested themselves in the Banks historical loss factors used to determine the specific component of the allowance and it
recognizes knowledge of the portfolio may be incomplete.



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 noninterest expenses.



Advertising Costs



Advertising costs are generally expensed when incurred.



Income taxes



The Company and its subsidiaries file a consolidated federal income tax return. The provision for income taxes is based upon income in the financial
statements adjusted for permanent differences, rather than amounts reported on the Companys income tax return.



Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.



Stock based compensation



The Company accounts for stock based compensation using the intrinsic value method set forth in Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees. For disclosure purposes, pro forma net income and earnings per share are provided as if the fair value method has been applied, in accordance with SFAS No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure.



SFAS No. 123, Accounting for Stock-Based Compensation, 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 2003, 2002, and 2001 has been estimated using the Black-Scholes option-pricing model with the following assumptions:



|                        |  |       |   |  |       |   |  |       |  
|----------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                        |  | 2003  |   |  | 2002  |   |  | 2001  |  
|Dividend yield          |  | 0.00  | % |  | 0.00  | % |  | 0.80  | %
|Risk free interest rate |  | 3.77  | % |  | 4.66  | % |  | 5.32  | %
|Expected volatility     |  | 19.70 | % |  | 15.00 | % |  | 15.00 | %
|Expected life in years  |  | 7     |   |  | 10    |   |  | 10    |  



Had compensation been
determined in accordance with the provisions of SFAS No. 123 and SFAS No, 148, the Companys net income and earnings per share would have been reduced to the following pro forma amounts:



|                                                                                                |  |      |       |   |      |   |       |      |  |   |      |  
|----------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ---- | -
|                                                                                                |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Net income as reported                                                                          |  | $    | 1,674 |   |      | $ | 1,227 |      |  | $ | 506  |  
|Less proforma effect of stock-based compensation expense determined using the fair value method |  |      | (75   | ) |      |   | (64   | )    |  |   | (47  | )
|                                                                                                |  |      |       |   |      |   |       |      |  |   |      |  
|Proforma income                                                                                 |  | $    | 1,599 |   |      | $ | 1,163 |      |  | $ | 459  |  
|                                                                                                |  |      |       |   |      |   |       |      |  |   |      |  
|Basic earnings per share                                                                        |  |      |       |   |      |   |       |      |  |   |      |  
|As reported                                                                                     |  | $    | 0.56  |   |      | $ | 0.41  |      |  | $ | 0.17 |  
|Proforma                                                                                        |  | $    | 0.53  |   |      | $ | 0.39  |      |  | $ | 0.15 |  
|Diluted earnings per share                                                                      |  |      |       |   |      |   |       |      |  |   |      |  
|As reported                                                                                     |  | $    | 0.55  |   |      | $ | 0.41  |      |  | $ | 0.17 |  
|Proforma                                                                                        |  | $    | 0.52  |   |      | $ | 0.38  |      |  | $ | 0.15 |  



---

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 during the
year. Diluted earnings per share are calculated by 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.



New Accounting Pronouncements



In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), which covers guarantees such as standby letters of credit, performance guarantees, and
direct or indirect guarantees of the indebtedness of others, but not guarantees of funding. FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability in an amount equal to the fair value of the obligation undertaken in
issuing the guarantee, and requires disclosure about the maximum potential payments that might be required, as well as the collateral or other recourse obtainable. The recognition and measurement provisions of FIN 45 were effective on a prospective
basis after December 31, 2002, and its adoption by the Bank on January 1, 2003 has not had a significant effect on the Banks consolidated financial statements.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46), which explains identification of variable interest entities and the assessment of whether to consolidate these entities. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries
if the entities do not effectively disperse risks among the involved parties. The provisions of Interpretation No. 46 are effective for all financial statements issued after January 1, 2003. The potential deconsolidation of subsidiary trusts of bank
holding companies formed in connection with the issuance of trust preferred securities appears to be an unintended consequence of FIN 46. The Company has chosen to adopt FIN 46 as of December 31, 2003 which allows for the postponement of
de-consolidation of the trust preferred securities until December 31, 2004. The overall effect on the Companys financial position and operating results of this deconsolidation will not be material. The Company has no significant variable
interests in any entities which would require disclosure or consolidation.



In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. The Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. There was no material impact on the
Companys financial condition or results of operations upon adoption of this Statement.



In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of both a liability and equity. It requires that an issuer classify certain financial instruments as a liability, although the financial
instrument may previously have been classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June
15, 2003. There was no material impact on the Companys financial condition or results of operations upon adoption of this Statement.



2. 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 maintains balances with other banks that exceed the federally insured limit. The average balance maintained in excess of the limit, including federal funds sold to the same bank, was approximately $4.6 million.



---

3. INVESTMENT SECURITIES



Investment securities are summarized as follows:



|                             |  |               |        |                 |   |                  |  |                     |     |  |   |       
|---------------------------- |  | ------------- | ------ | --------------- | - | ---------------- |  | ------------------- | --- |  | - | ------
|                             |  | AmortizedCost |        | UnrealizedGains |   | UnrealizedLosses |  | Estimated FairValue
|December 31, 2003            |  |               |        |                 |   |                  |  |                     |     |  |   |       
|Available for sale           |  |               |        |                 |   |                  |  |                     |     |  |   |       
|U.S. Government agency       |  | $             | 28,343 |                 | $ | 42               |  | $                   | 218 |  | $ | 28,167
|Mortgage-backed securities   |  |               | 8,900  |                 |   | 48               |  |                     | 150 |  |   | 8,798 
|Federal Home Loan Bank stock |  |               | 500    |                 |   |                 |  |                     |    |  |   | 500   
|Federal Reserve Bank stock   |  |               | 504    |                 |   |                 |  |                     |    |  |   | 504   
|                             |  |               |        |                 |   |                  |  |                     |     |  |   |       
|                             |  | $             | 38,247 |                 | $ | 90               |  | $                   | 368 |  | $ | 37,969
|                             |  |               |        |                 |   |                  |  |                     |     |  |   |       
|December 31, 2002            |  |               |        |                 |   |                  |  |                     |     |  |   |       
|Available for sale           |  |               |        |                 |   |                  |  |                     |     |  |   |       
|U.S. Government agency       |  | $             | 14,503 |                 | $ | 154              |  | $                   |    |  | $ | 14,657
|Mortgage-backed securities   |  |               | 4,605  |                 |   | 87               |  |                     |    |  |   | 4,692 
|Federal Home Loan Bank stock |  |               | 500    |                 |   |                 |  |                     |    |  |   | 500   
|Federal Reserve Bank stock   |  |               | 358    |                 |   |                 |  |                     |    |  |   | 358   
|                             |  |               |        |                 |   |                  |  |                     |     |  |   |       
|                             |  | $             | 19,966 |                 | $ | 241              |  | $                   |    |  | $ | 20,207
|                             |  |               |        |                 |   |                  |  |                     |     |  |   |       



There were no proceeds
from the sale of securities during 2003, 2002 and 2001. Gains and losses are determined using the specific identification method.



Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized loss
position at December 31, 2003 are as follows:



|                           |  |           |                   |                                          |                   |                        |  |   |   |  |   |    
|-------------------------- |  | --------- | ----------------- | ---------------------------------------- | ----------------- | ---------------------- |  | - | - |  | - | ---
|                           |  | FairValue |                   | Continuous unrealized lossesexisting for |                   | Total UnrealizedLosses
|                           |  |           | Lessthan 12Months |                                          | Morethan 12Months |                       
|December 31, 2003          |  |           |                   |                                          |                   |                        |  |   |   |  |   |    
|Available for sale         |  |           |                   |                                          |                   |                        |  |   |   |  |   |    
|U.S. Government agency     |  | $         | 18,776            |                                          | $                 | 218                    |  | $ |  |  | $ | 218
|Mortgage-backed securities |  |           | 5,185             |                                          |                   | 150                    |  |   |  |  |   | 150
|                           |  |           |                   |                                          |                   |                        |  |   |   |  |   |    
|                           |  | $         | 23,961            |                                          | $                 | 368                    |  | $ |  |  | $ | 368
|                           |  |           |                   |                                          |                   |                        |  |   |   |  |   |    



The available-for-sale
investment portfolio has a fair value of approximately $38.0 million of which approximately $24.0 million of the securities have some unrealized losses from their purchase price. Of these securities, $18.8 million, or 78.4%, are government agency
bonds and $5.2 million, or 21.6% are mortgage-backed securities. The unrealized losses that exist are the result of market changes in interest rates since the original purchase. These factors coupled with the fact the Company has both the intent and
ability to hold these investments for a period of time sufficient to allow for any anticipated recovery in fair value substantiates that the unrealized losses in the available-for-sale portfolio are temporary.



The amortized cost and estimated fair value of 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.



|                                 |  |                    |        |                     |   |       
|-------------------------------- |  | ------------------ | ------ | ------------------- | - | ------
|                                 |  | Available for Sale
|                                 |  | AmortizedCost      |        | EstimatedFair Value
|December 31, 2003                |  |                    |        |                     |   |       
|Due within one year              |  | $                  | 351    |                     | $ | 353   
|Due after one through five years |  |                    | 20,763 |                     |   | 20,689
|Due after five years             |  |                    | 16,129 |                     |   | 15,923
|Equity securities                |  |                    | 1,004  |                     |   | 1,004 
|                                 |  |                    |        |                     |   |       
|                                 |  |                    | 38,247 |                     |   | 37,969
|                                 |  |                    |        |                     |   |       
|December 31, 2002                |  |                    |        |                     |   |       
|Due within one year              |  |                    |       |                     |   |      
|Due after one through five years |  |                    | 14,503 |                     |   | 14,657
|Due after five years             |  |                    | 4,605  |                     |   | 4,692 
|Equity securities                |  |                    | 858    |                     |   | 858   
|                                 |  |                    |        |                     |   |       
|                                 |  | $                  | 19,966 |                     | $ | 20,207
|                                 |  |                    |        |                     |   |       



---

At December 31, 2003, 2002 and 2001, investments available for sale with a carrying value of $10.3
million, $16.8 million and $10.9 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required by law.



4. LOANS AND ALLOWANCE FOR CREDIT LOSSES



Major classifications of loans are as follows:



|                                       |  |      |         |   |      |   |        
|-------------------------------------- |  | ---- | ------- | - | ---- | - | -------
|                                       |  | 2003 |         |   | 2002
|Real estate                            |  |      |         |   |      |   |        
|Commercial                             |  | $    | 60,572  |   |      | $ | 53,224 
|Residential                            |  |      | 47,565  |   |      |   | 47,607 
|Commercial                             |  |      | 41,173  |   |      |   | 32,445 
|Consumer                               |  |      | 19,431  |   |      |   | 14,140 
|                                       |  |      |         |   |      |   |        
|                                       |  |      | 168,741 |   |      |   | 147,416
|Less                                   |  |      |         |   |      |   |        
|Deferred loan origination fees (costs) |  |      | (14     | ) |      |   | 103    
|Allowance for credit losses            |  |      | 1,632   |   |      |   | 1,578  
|                                       |  |      |         |   |      |   |        
|                                       |  |      | 1,618   |   |      |   | 1,681  
|                                       |  |      |         |   |      |   |        
|Loans, net                             |  | $    | 167,123 |   |      | $ | 145,735
|                                       |  |      |         |   |      |   |        



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



|                                      |  |   |         |  |   |        
|------------------------------------- |  | - | ------- |  | - | -------
|Repricing or maturing within one year |  | $ | 91,075  |  | $ | 73,996 
|Maturing over one to five years       |  |   | 40,704  |  |   | 46,787 
|Maturing over five years              |  |   | 36,962  |  |   | 26,633 
|                                      |  |   |         |  |   |        
|                                      |  | $ | 168,741 |  | $ | 147,416
|                                      |  |   |         |  |   |        



Transactions in the
allowance for credit losses are as follows:



|                                |  |      |       |      |   |       |  |   |      
|------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                |  | 2003 |       | 2002 |   | 2001 
|Balance, beginning of the year  |  | $    | 1,578 |      | $ | 1,576 |  | $ | 1,556
|Provision charged to operations |  |      | 50    |      |   | 25    |  |   |     
|Recoveries                      |  |      | 30    |      |   | 49    |  |   | 24   
|Charge-offs                     |  |      | 26    |      |   | 72    |  |   | 4    
|                                |  |      |       |      |   |       |  |   |      
|Balance, end of year            |  | $    | 1,632 |      | $ | 1,578 |  | $ | 1,576
|                                |  |      |       |      |   |       |  |   |      



The balance of
nonaccrual and impaired loans is as follows:



|                                                      |  |      |    |      |   |      |  |   |    
|----------------------------------------------------- |  | ---- | -- | ---- | - | ---- |  | - | ---
|                                                      |  | 2003 |    | 2002 |   | 2001
|Total guaranteed by the Small Business Administration |  | $    |   |      | $ | 37   |  | $ | 25 
|Other nonaccrual loans                                |  |      | 27 |      |   | 18   |  |   | 75 
|Total nonaccrual loans and impaired loans             |  |      | 27 |      |   | 55   |  |   | 100
|Average impaired loans                                |  |      | 86 |      |   | 112  |  |   | 302
|Related allowance for credit losses                   |  |      |   |      |   | 17   |  |   | 33 
|Interest collected                                    |  |      | 25 |      |   | 50   |  |   | 45 
|Balance of accrued interest not recorded              |  |      |   |      |   | 25   |  |   | 68 



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



Loans that were 90 days or more past due, including nonaccrual loans were
zero at December 31, 2003, $1.3 million at December 31, 2002 and $24 thousand at December 31, 2001.



Certain officers and directors (and directors 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:



|                                 |  |      |       |   |      |   |       |  
|-------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                 |  | 2003 |       |   | 2002 |  
|Beginning balance                |  | $    | 2,329 |   |      | $ | 1,774 |  
|Advances                         |  |      | 129   |   |      |   | 300   |  
|Repayments                       |  |      | (492  | ) |      |   | (346  | )
|Change in officers and directors |  |      |      |   |      |   | 601   |  
|                                 |  |      |       |   |      |   |       |  
|Ending balance                   |  | $    | 1,966 |   |      | $ | 2,329 |  
|                                 |  |      |       |   |      |   |       |  



---

5. CREDIT COMMITMENTS



Loan commitments outstanding, unused lines of credit and letters of credit are as follows:



|                                     |  |      |        |      |   |       
|------------------------------------ |  | ---- | ------ | ---- | - | ------
|Dollars in thousands                 |  | 2003 |        | 2002
|Loan commitments and lines of credit |  |      |        |      |   |       
|Construction                         |  | $    | 26,639 |      | $ | 18,345
|Other                                |  |      | 33,783 |      |   | 24,407
|                                     |  |      |        |      |   |       
|                                     |  | $    | 60,422 |      | $ | 42,752
|                                     |  |      |        |      |   |       
|Letter of credit                     |  |      |        |      |   |       
|Deposit secured                      |  | $    | 351    |      | $ | 368   
|Other                                |  |      | 634    |      |   | 967   
|                                     |  |      |        |      |   |       
|                                     |  | $    | 985    |      | $ | 1,335 
|                                     |  |      |        |      |   |       



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. INVESTMENT IN BANK OWNED LIFE
INSURANCE



In 2002, the Bank purchased single premium
policies of Bank Owned Life Insurance (BOLI) amounting to $3,110,000. The increase in cash surrender value is recorded as other noninterest income. The Bank recorded $133,000 in BOLI income for 2003 and $113,000 in 2002.



7. PREMISES AND EQUIPMENT



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



|                                     |  |      |       |      |   |      
|------------------------------------ |  | ---- | ----- | ---- | - | -----
|                                     |  | 2003 |       | 2002
|Land, land improvements and building |  | $    | 6,067 |      | $ | 6,063
|Leasehold improvements               |  |      | 697   |      |   | 634  
|Furniture, fixtures, and equipment   |  |      | 2,057 |      |   | 2,364
|                                     |  |      |       |      |   |      
|                                     |  |      | 8,821 |      |   | 9,061
|Accumulated depreciation             |  |      | 1,885 |      |   | 1,947
|                                     |  |      |       |      |   |      
|Net premises and equipment           |  | $    | 6,936 |      | $ | 7,114
|                                     |  |      |       |      |   |      



Depreciation and
amortization expense was $467 thousand for 2003, $448 thousand for 2002 and $424 thousand for 2001.



9. LEASE COMMITMENTS



Lease obligations will require rent payments as follows:



|                |  |                      |      
|--------------- |  | -------------------- | -----
|Period          |  | MinimumRentals$(000)
|2004            |  | $                    | 177  
|2005            |  |                      | 161  
|2006            |  |                      | 97   
|2007            |  |                      | 58   
|2008            |  |                      | 50   
|Remaining years |  |                      | 700  
|                |  |                      |      
|                |  | $                    | 1,243
|                |  |                      |      



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 $168 thousand, $149 thousand and $205 thousand for 2003, 2002 and 2001, respectively.



---

10. DEPOSITS



Major classifications of deposits are as follows:



|                                  |  |      |         |      |   |        
|--------------------------------- |  | ---- | ------- | ---- | - | -------
|                                  |  | 2003 |         | 2002
|Demand, noninterest bearing       |  | $    | 33,385  |      | $ | 29,534 
|NOW accounts                      |  |      | 30,901  |      |   | 24,879 
|Savings and Money Market accounts |  |      | 52,554  |      |   | 44,419 
|Time deposits, $100,000 and over  |  |      | 22,475  |      |   | 17,757 
|Other time                        |  |      | 51,117  |      |   | 47,400 
|                                  |  |      |         |      |   |        
|                                  |  | $    | 190,432 |      | $ | 163,989
|                                  |  |      |         |      |   |        



Time deposits mature
as follows:



|                                      |  |   |        |  |   |       
|------------------------------------- |  | - | ------ |  | - | ------
|Repricing or maturing within one year |  | $ | 41,881 |  | $ | 10,690
|Maturing over one to three years      |  |   | 25,299 |  |   | 28,512
|Maturing over three to five years     |  |   | 6,412  |  |   | 25,955
|                                      |  |   |        |  |   |       
|                                      |  | $ | 73,592 |  | $ | 65,157
|                                      |  |   |        |  |   |       



At December 31, 2003
and 2002 there were no time deposits with maturities in excess of five years.



11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE



Securities sold under agreements to repurchase are securities sold to the Banks customers, at the customers request, under a continuing roll-over contract that matures in one business day. The underlying securities
sold are U.S. Treasury notes or Federal agencies that are segregated in the Banks correspondent safekeeping account from the Banks other investment securities.



The following table presents certain information for repurchase agreements:



|                                      |  |      |        |   |      |   |        |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                      |  | 2003 |        |   | 2002 |  
|Balance outstanding, at year end      |  | $    | 8,745  |   |      | $ | 10,500 |  
|Average balance during the year       |  |      | 9,780  |   |      |   | 8,752  |  
|Average interest rate during the year |  |      | 1.66   | % |      |   | 2.65   | %
|Maximum month-end balance             |  | $    | 14,141 |   |      | $ | 10,609 |  



12. LONG TERM BORROWINGS



The Company had other long term borrowings at December
31, 2003 and 2002 as follows:



|                                |  |   |       
|------------------------------- |  | - | ------
|FHLB 4.25% Advance due May 2007 |  | $ | 5,000 
|FHLB 4.75% Advance due May 2012 |  |   | 5,000 
|                                |  |   |       
|Total                           |  | $ | 10,000
|                                |  |   |       



Interest on these
instruments is paid quarterly. FHLB advances are fully collateralized by pledges of loans. The Company has pledged under a blanket lien, all qualifying residential and commercial mortgage loans under the borrowing agreement with the FHLB.



13. GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED
DEBENTURES



On March 26, 2003, Annapolis Bancorp Statutory
Trust I (Statutory Trust I), a Connecticut business trust formed, funded and wholly owned by the Company, issued $5,000,000 of variable-rate capital securities to institutional investors in a private pooled transaction. The variable rate
on these securities adjusts quarterly based on the 90-day LIBOR rate plus 3.15%. The current rate is 4.32%. The proceeds were up-streamed to the Company as junior subordinated debt under the same terms and conditions. The Company then down-streamed
$4,875,000 to the Bank in the form of additional capital. The Company has, through various contractual arrangements, fully and unconditionally guaranteed all of Statutory Trust Is obligations with respect to the capital securities. These
capital securities currently qualify as Tier I capital and are presented in the Consolidated Balance Sheets as Guaranteed



---

Preferred Beneficial Interests in Junior Subordinated Debentures. The sole asset of the Statutory Trust I is
$5,155,000 of junior subordinated debentures issued by the Company. These junior subordinated debentures carry a variable interest rate of 3.15% over the 90 day LIBOR, payable semiannually, with a non-call provision over the first five year period.
Both the capital securities of Statutory Trust I and the junior subordinated debentures are scheduled to mature on March 26, 2033, unless called by the Company not earlier than March 26, 2008. Interest expense on the trust preferred securities for
the year ended December 31, 2003 totaled $166 thousand.



Costs
associated with the issuance of the trust preferred securities totaling $125,000 were capitalized and are being amortized through 2008. Amortization for the year ended December 31, 2003 was $21 thousand.



14. PROFIT SHARING AND OTHER EMPLOYEE BENEFIT PLANS



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s contributions to the plan were $111
thousand in 2003, $95 thousand in 2002 and $78 thousand in 2001.



The Company has entered into individual Supplemental Executive Retirement Agreements (SERAs) with certain of its executives. The SERAs are designed to provide certain post-retirement benefits to enable a targeted level of covered retirement
income to be met and to provide certain death benefits. The Company is accruing the present value of these benefits over the remaining number of years to the executives retirement dates. Benefit accruals included in noninterest expense for
2003, 2002, and 2001 were $48.6 thousand, $17.6 thousand and zero, respectively.



15. STOCK OPTIONS AND RESTRICTED SHARES



In
April 1997, the Company adopted a stock option plan, authorizing the issuance of 133,333 shares of common stock, intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code. The plan provided 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 under this plan have ten-year expiration dates with vesting periods from immediate to five years. After April 2000 no additional
options could be granted under this plan.



In April 2000, a new
incentive stock option plan was approved by the shareholders at the annual meeting. Under this plan, the Companys compensation committee has discretionary authority to grant stock options, restricted stock awards, and deferred share awards to
employees and directors, including members of the committee. Under this plan, up to 266,666 shares of Company stock, as adjusted for the August 24, 2001 four-for-three stock split in the form of a stock dividend, may be awarded under the direction
of the committee. The plan provides for the awards to vest over a five-year period of time. Options have a ten-year expiration period.



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



|                                                       |  |                 |   |      |                              |      |                 |         |   |                              |   |                 |  |         |                               |  |   |     
|------------------------------------------------------ |  | --------------- | - | ---- | ---------------------------- | ---- | --------------- | ------- | - | ---------------------------- | - | --------------- |  | ------- | ----------------------------- |  | - | ----
|                                                       |  | 2003            |   | 2002 |                              | 2001
|                                                       |  | Number ofShares |   |      | WeightedAverageExercisePrice |      | Number ofShares |         |   | WeightedAverageExercisePrice |   | Number ofShares |  |         | WeightedAverageExercise Price
|Options Outstanding                                    |  |                 |   |      |                              |      |                 |         |   |                              |   |                 |  |         |                               |  |   |     
|Outstanding, beginning of year                         |  | 206,918         |   |      | $                            | 4.10 |                 | 249,315 |   |                              | $ | 3.79            |  | 99,500  |                               |  | $ | 3.98
|Granted                                                |  | 20,498          |   |      |                              | 8.06 |                 | 32,500  |   |                              |   | 5.50            |  | 107,331 |                               |  |   | 3.67
|Exercised                                              |  | (6,784          | ) |      |                              | 3.88 |                 | (8,899  | ) |                              |   | 3.28            |  | (6,666  | )                             |  |   | 3.23
|Forfeited                                              |  |                |   |      |                              |     |                 | (65,998 | ) |                              |   | 3.70            |  | (11,000 | )                             |  |   | 5.13
|Effect of Stock Split                                  |  |                |   |      |                              |     |                 |        |   |                              |   |                |  | 60,150  |                               |  |   | 3.74
|                                                       |  |                 |   |      |                              |      |                 |         |   |                              |   |                 |  |         |                               |  |   |     
|Outstanding, end of year                               |  | 220,632         |   |      | $                            | 4.48 |                 | 206,918 |   |                              | $ | 4.10            |  | 249,315 |                               |  | $ | 3.79
|                                                       |  |                 |   |      |                              |      |                 |         |   |                              |   |                 |  |         |                               |  |   |     
|Weighted fair value of options granted during the year |  |                 |   |      | $                            | 2.51 |                 |         |   |                              | $ | 2.22            |  |         |                               |  | $ | 1.63



---

These options expire as follows:



|                |  |                               |      |               |         |           |        
|--------------- |  | ----------------------------- | ---- | ------------- | ------- | --------- | -------
|Expiration Date |  | WeightedAverageExercise Price |      | OptionsVested |         | Nonvested
|2007            |  | $                             | 4.96 |               | 12,565  |           |       
|2008            |  |                               | 7.30 |               | 9,332   |           |       
|2009            |  |                               | 3.46 |               | 24,265  |           | 6,667  
|2010            |  |                               | 3.23 |               | 23,998  |           | 15,998 
|2011            |  |                               | 3.71 |               | 26,184  |           | 48,625 
|2012            |  |                               | 5.50 |               | 6,500   |           | 26,000 
|2013            |  | $                             | 8.06 |               |        |           | 20,498 
|                |  |                               |      |               |         |           |        
|                |  |                               |      |               | 102,844 |           | 117,788
|                |  |                               |      |               |         |           |        



A summary of the
status of the Companys restricted share awards follows:



|                               |  |                 |   |      |                               |      |                 |        |   |                               |   |     
|------------------------------ |  | --------------- | - | ---- | ----------------------------- | ---- | --------------- | ------ | - | ----------------------------- | - | ----
|                               |  | 2003            |   | 2002
|                               |  | Number ofShares |   |      | WeightedAverageExercise Price |      | Number ofShares |        |   | WeightedAverageExercise Price
|Restricted Shares              |  |                 |   |      |                               |      |                 |        |   |                               |   |     
|Outstanding, beginning of year |  | 6,603           |   |      | $                             | 3.23 |                 | 11,468 |   |                               | $ | 3.23
|Granted                        |  |                |   |      |                               |     |                 |       |   |                               |   |    
|Exercised                      |  | (2,201          | ) |      |                               | 3.23 |                 | (4,865 | ) |                               |   | 3.23
|Forfeited                      |  |                |   |      |                               |     |                 |       |   |                               |   |    
|                               |  |                 |   |      |                               |      |                 |        |   |                               |   |     
|Outstanding, end of year       |  | 4,402           |   |      | $                             | 3.23 |                 | 6,603  |   |                               | $ | 3.23
|                               |  |                 |   |      |                               |      |                 |        |   |                               |   |     



16. LINES OF CREDIT



The Bank is a member of the Federal Home Loan Bank system and may borrow
up to $92,555,000. 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 and unsecured lines of credit of $8,250,000.



17. 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. There were
no preferred shares outstanding as December 31, 2003 or 2002.



18. QUARTERLY
RESULTS OF OPERATIONS (UNAUDITED)



THREE MONTHS ENDED



|                             |  |              |       |               |   |          |  |           |       |  |   |      
|---------------------------- |  | ------------ | ----- | ------------- | - | -------- |  | --------- | ----- |  | - | -----
|                             |  | December 31, |       | September 30, |   | June 30, |  | March 31,
|2003                         |  |              |       |               |   |          |  |           |       |  |   |      
|Interest income              |  | $            | 2,947 |               | $ | 2,867    |  | $         | 2,894 |  | $ | 2,769
|Interest expense             |  |              | 821   |               |   | 848      |  |           | 880   |  |   | 819  
|Net interest income          |  |              | 2,126 |               |   | 2,019    |  |           | 2,014 |  |   | 1,950
|Provision for credit losses  |  |              | 25    |               |   |         |  |           |      |  |   | 25   
|Net income                   |  |              | 510   |               |   | 438      |  |           | 402   |  |   | 324  
|Comprehensive income         |  |              | 424   |               |   | 48       |  |           | 564   |  |   | 295  
|Earnings per share - basic   |  |              | 0.17  |               |   | 0.15     |  |           | 0.13  |  |   | 0.11 
|Earnings per share - diluted |  |              | 0.17  |               |   | 0.14     |  |           | 0.13  |  |   | 0.11 
|                             |  |              |       |              
|2002                         |  |              |       |               |   |          |  |           |       |  |   |      
|Interest income              |  | $            | 2,800 |               | $ | 2,853    |  | $         | 2,668 |  | $ | 2,537
|Interest expense             |  |              | 868   |               |   | 914      |  |           | 885   |  |   | 847  
|Net interest income          |  |              | 1,932 |               |   | 1,939    |  |           | 1,783 |  |   | 1,690
|Provision for credit losses  |  |              | 25    |               |   |         |  |           |      |  |   |     
|Net income                   |  |              | 429   |               |   | 423      |  |           | 230   |  |   | 145  
|Comprehensive income         |  |              | 424   |               |   | 480      |  |           | 135   |  |   | 144  
|Earnings per share - basic   |  |              | 0.15  |               |   | 0.15     |  |           | 0.07  |  |   | 0.05 
|Earnings per share - diluted |  |              | 0.15  |               |   | 0.15     |  |           | 0.07  |  |   | 0.05 
|                             |  |              |       |              
|2001                         |  |              |       |               |   |          |  |           |       |  |   |      
|Interest income              |  | $            | 2,626 |               | $ | 2,711    |  | $         | 2,789 |  | $ | 2,775
|Interest expense             |  |              | 1,032 |               |   | 1,215    |  |           | 1,219 |  |   | 1,127
|Net interest income          |  |              | 1,594 |               |   | 1,496    |  |           | 1,570 |  |   | 1,648
|Provision for credit losses  |  |              |      |               |   |         |  |           |      |  |   |     
|Net income                   |  |              | 185   |               |   | 121      |  |           | 48    |  |   | 152  
|Comprehensive income         |  |              | 231   |               |   | 539      |  |           | 129   |  |   | 281  
|Earnings per share - basic   |  |              | 0.06  |               |   | 0.04     |  |           | 0.07  |  |   | 0.05 
|Earnings per share - diluted |  |              | 0.06  |               |   | 0.04     |  |           | 0.07  |  |   | 0.05 



---

19. INCOME TAXES



The components of income tax expense are as follows:



|         |  |      |     |      |   |      |  |   |    
|-------- |  | ---- | --- | ---- | - | ---- |  | - | ---
|         |  | 2003 |     | 2002 |   | 2001
|Current  |  |      |     |      |   |      |  |   |    
|Federal  |  | $    | 715 |      | $ | 578  |  | $ | 223
|State    |  |      | 158 |      |   | 65   |  |   |   
|         |  |      |     |      |   |      |  |   |    
|         |  |      | 873 |      |   | 643  |  |   | 223
|Deferred |  |      | 63  |      |   | 1    |  |   | 43 
|         |  |      |     |      |   |      |  |   |    
|         |  | $    | 936 |      | $ | 644  |  |   | 266
|         |  |      |     |      |   |      |  |   |    



The components of the
deferred taxes are as follows:



|                            |  |      |     |   |      |   |     |      |  |   |   
|--------------------------- |  | ---- | --- | - | ---- | - | --- | ---- |  | - | --
|                            |  | 2003 |     |   | 2002 |   |     | 2001
|Provision for credit losses |  | $    | (17 | ) |      | $ | (1  | )    |  | $ |  
|Revenues taxed not earned   |  |      | 54  |   |      |   | 28  |      |  |   | 36
|Deferred compensation       |  |      | (22 | ) |      |   |    |      |  |   |  
|Accrued expenses            |  |      | 6   |   |      |   | (29 | )    |  |   |  
|Depreciation expense        |  |      | 37  |   |      |   | 3   |      |  |   | 7 
|Other                       |  |      | 5   |   |      |   |    |      |  |   |  
|                            |  |      |     |   |      |   |     |      |  |   |   
|Deferred tax benefit        |  | $    | 63  |   |      | $ | 1   |      |  | $ | 43
|                            |  |      |     |   |      |   |     |      |  |   |   



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



|                                                 |  |      |     |      |   |      |  |   |    
|------------------------------------------------ |  | ---- | --- | ---- | - | ---- |  | - | ---
|                                                 |  | 2003 |     | 2002 |   | 2001
|Deferred tax assets                              |  |      |     |      |   |      |  |   |    
|Allowance for credit losses                      |  | $    | 424 |      | $ | 407  |  | $ | 406
|Deferred compensation                            |  |      | 22  |      |   |     |  |   |   
|Revenue taxed not earned                         |  |      |    |      |   | 54   |  |   | 82 
|Unrealized loss on securities available for sale |  |      | 95  |      |   |     |  |   |   
|Accrued expenses                                 |  |      | 23  |      |   | 29   |  |   |   
|                                                 |  |      |     |      |   |      |  |   |    
|Total deferred tax assets                        |  |      | 564 |      |   | 490  |  |   | 488
|Deferred tax liabilities                         |  |      |     |      |   |      |  |   |    
|Depreciation                                     |  |      | 82  |      |   | 45   |  |   | 42 
|Other                                            |  |      | 5   |      |   |     |  |   |   
|Unrealized gain on securities available for sale |  |      |    |      |   | 82   |  |   | 111
|                                                 |  |      |     |      |   |      |  |   |    
|Total deferred tax liabilities                   |  |      | 87  |      |   | 127  |  |   | 153
|                                                 |  |      |     |      |   |      |  |   |    
|Net deferred tax asset                           |  | $    | 477 |      | $ | 363  |  | $ | 335
|                                                 |  |      |     |      |   |      |  |   |    



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



|                                              |  |      |       |   |   |      |    |      |   |       |   |  |      |      |  |   |     |  |      |  
|--------------------------------------------- |  | ---- | ----- | - | - | ---- | -- | ---- | - | ----- | - |  | ---- | ---- |  | - | --- |  | ---- | -
|                                              |  | 2003 |       |   | % |      |    | 2002 |   |       | % |  |      | 2001 |  | % |    
|Income before income taxes                    |  | $    | 2,610 |   |   |      |    |      | $ | 1,871 |   |  |      |      |  | $ | 722 |  |      |  
|                                              |  |      |       |   |   |     
|Taxes computed at the federal income tax rate |  | $    | 887   |   |   | 34.0 | %  |      | $ | 636   |   |  | 34.0 | %    |  | $ | 262 |  | 34.0 | %
|Increases (decreases) resulting from          |  |      |       |   |   |      |    |      |   |       |   |  |      |      |  |   |     |  |      |  
|State income taxes, net of federal benefit    |  |      | 90    |   |   | 3.4  | %  |      |   | 43    |   |  | 2.3  | %    |  |   |    |  |     |  
|Nondeductible expenses                        |  |      | 4     |   |   | 0.2  | %  |      |   | 4     |   |  | 0.2  | %    |  |   | 4   |  | 0.05 | %
|Nontaxable income                             |  |      | (45   | ) |   | (1.7 | )% |      |   | (39   | ) |  | (2.1 | )%   |  |   |    |  |     |  
|                                              |  |      |       |   |   |      |    |      |   |       |   |  |      |      |  |   |     |  |      |  
|Income tax expense                            |  | $    | 936   |   |   | 35.9 | %  |      | $ | 644   |   |  | 34.4 | %    |  | $ | 266 |  | 34.5 | %
|                                              |  |      |       |   |   |      |    |      |   |       |   |  |      |      |  |   |     |  |      |  



---

20. 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 Company and the Bank as of
December 31, 2003 and 2002 are as follows:



|                                         |  |              |        |       |      |   |                              |   |        |  |     |                             |  |       |        |  |      |  
|---------------------------------------- |  | ------------ | ------ | ----- | ---- | - | ---------------------------- | - | ------ |  | --- | --------------------------- |  | ----- | ------ |  | ---- | -
|                                         |  | ActualAmount |        | Ratio |      |   | MinimumCapitalAdequacyAmount |   | Ratio  |  |     | To be WellCapitalizedAmount |  | Ratio |       
|December 31, 2003                        |  |              |        |       |      |   |                              |   |        |  |     |                             |  |       |        |  |      |  
|Total capital (to risk-weighted assets)  |  |              |        |       |      |   |                              |   |        |  |     |                             |  |       |        |  |      |  
|Company                                  |  | $            | 23,264 |       | 13.1 | % |                              | $ | 14,217 |  | 8.0 | %                           |  |       |        |  |      |  
|Bank                                     |  | $            | 23,141 |       | 13.1 | % |                              | $ | 14,208 |  | 8.0 | %                           |  | $     | 17,760 |  | 10.0 | %
|Tier 1 capital (to risk-weighted assets) |  |              |        |       |      |   |                              |   |        |  |     |                             |  |       |        |  |      |  
|Company                                  |  | $            | 21,632 |       | 12.2 | % |                              | $ | 7,108  |  | 4.0 | %                           |  |       |        |  |      |  
|Bank                                     |  | $            | 21,509 |       | 12.2 | % |                              | $ | 7,104  |  | 4.0 | %                           |  | $     | 10,656 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |              |        |       |      |   |                              |   |        |  |     |                             |  |       |        |  |      |  
|Company                                  |  | $            | 21,632 |       | 9.4  | % |                              | $ | 9,241  |  | 4.0 | %                           |  |       |        |  |      |  
|Bank                                     |  | $            | 21,509 |       | 9.4  | % |                              | $ | 9,236  |  | 4.0 | %                           |  | $     | 11,545 |  | 5.0  | %
|                                         |  |              |        |       |      |  
|December 31, 2002                        |  |              |        |       |      |   |                              |   |        |  |     |                             |  |       |        |  |      |  
|Total capital (to risk-weighted assets)  |  |              |        |       |      |   |                              |   |        |  |     |                             |  |       |        |  |      |  
|Company                                  |  | $            | 16,497 |       | 10.7 | % |                              | $ | 12,295 |  | 8.0 | %                           |  |       |        |  |      |  
|Bank                                     |  | $            | 16,471 |       | 10.7 | % |                              | $ | 12,295 |  | 8.0 | %                           |  | $     | 15,369 |  | 10.0 | %
|Tier 1 capital (to risk-weighted assets) |  |              |        |       |      |   |                              |   |        |  |     |                             |  |       |        |  |      |  
|Company                                  |  | $            | 14,919 |       | 9.7  | % |                              | $ | 6,148  |  | 4.0 | %                           |  |       |        |  |      |  
|Bank                                     |  | $            | 14,893 |       | 9.7  | % |                              | $ | 6,148  |  | 4.0 | %                           |  | $     | 9,221  |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |              |        |       |      |   |                              |   |        |  |     |                             |  |       |        |  |      |  
|Company                                  |  | $            | 14,919 |       | 7.5  | % |                              | $ | 7,962  |  | 4.0 | %                           |  |       |        |  |      |  
|Bank                                     |  | $            | 14,983 |       | 7.5  | % |                              | $ | 7,962  |  | 4.0 | %                           |  | $     | 9,952  |  | 5.0  | %



Tier 1 capital
consists of capital stock, paid in capital, and retained earnings. 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.



21. 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.



|                                               |  |                |         |            |   |                |  |            |         |  |   |        
|---------------------------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                               |  | 2003           |         | 2002      
|December 31,                                   |  | CarryingAmount |         | Fair Value |   | CarryingAmount |  | Fair Value
|Financial assets                               |  |                |         |            |   |                |  |            |         |  |   |        
|Cash and due from banks                        |  | $              | 6,033   |            | $ | 6,033          |  | $          | 6,725   |  | $ | 6,725  
|Federal funds sold                             |  |                | 8,014   |            |   | 8,014          |  |            | 15,529  |  |   | 15,529 
|Investment securities (total)                  |  |                | 37,969  |            |   | 37,969         |  |            | 20,207  |  |   | 20,207 
|Loans, net                                     |  |                | 167,123 |            |   | 167,062        |  |            | 145,735 |  |   | 145,747
|Accrued interest receivable                    |  |                | 869     |            |   | 869            |  |            | 732     |  |   | 732    
|                                               |  |                |         |           
|Financial liabilities                          |  |                |         |            |   |                |  |            |         |  |   |        
|Noninterest-bearing deposits                   |  | $              | 33,385  |            | $ | 33,385         |  | $          | 29,534  |  | $ | 29,534 
|Interest-bearing deposits                      |  |                | 157,192 |            |   | 157,701        |  |            | 134,455 |  |   | 134,962
|Securities sold under agreements to repurchase |  |                | 8,745   |            |   | 8,745          |  |            | 10,500  |  |   | 10,500 
|Long term borrowings                           |  |                | 10,000  |            |   | 10,245         |  |            | 10,000  |  |   | 10,274 
|Junior subordinated debt                       |  |                | 5,000   |            |   | 5,000          |  |            |        |  |   |       
|Accrued interest payable                       |  |                | 94      |            |   | 94             |  |            | 94      |  |   | 94     



The fair values of
U.S. Treasury and Government agency securities and mortgage backed 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.



22. EARNINGS PER SHARE



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



|                                                                 |  |       |  |       |  |      
|---------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                                 |  | 2003  |  | 2002  |  | 2001 
|Weighted average shares outstanding, basic                       |  | 3,016 |  | 3,007 |  | 2,990
|Common stock equivalents                                         |  | 47    |  | 20    |  |     
|                                                                 |  |       |  |       |  |      
|Average common shares and equivalents, fully diluted             |  | 3,063 |  | 3,027 |  | 2,990
|                                                                 |  |       |  |       |  |      
|Stock options outstanding that were antidilutive at December 31, |  |      |  | 17    |  | 6    
|                                                                 |  |       |  |       |  |      



23. PARENT COMPANY FINANCIAL
INFORMATION



The balance sheet and statements of income
and cash flows for ANNAPOLIS BANCORP, INC. (Parent Company only) follow:



Balance Sheets



|                                              |  |      |        |   |      |   |       
|--------------------------------------------- |  | ---- | ------ | - | ---- | - | ------
|December 31,                                  |  | 2003 |        |   | 2002
|Assets                                        |  |      |        |   |      |   |       
|Cash and due from banks                       |  | $    | 17     |   |      | $ | 13    
|Due from subsidiaries                         |  |      |       |   |      |   | 13    
|Investment in subsidiaries                    |  |      | 21,481 |   |      |   | 15,052
|Deferred income taxes and other assets        |  |      | 110    |   |      |   |      
|                                              |  |      |        |   |      |   |       
|Total assets                                  |  | $    | 21,608 |   |      | $ | 15,078
|                                              |  |      |        |   |      |   |       
|Liabilities and Stockholders Equity          |  |      |        |   |      |   |       
|Junior subordinated debt                      |  | $    | 5,155  |   |      | $ |      
|Due to subsidiaries                           |  |      | 2      |   |      |   |      
|Other liabilities                             |  |      | 3      |   |      |   |      
|Stockholders Equity                          |  |      |        |   |      |   |       
|Common stock                                  |  |      | 30     |   |      |   | 30    
|Paid in capital                               |  |      | 12,898 |   |      |   | 12,859
|Retained earnings                             |  |      | 3,704  |   |      |   | 2,030 
|Accumulated other comprehensive (loss) income |  |      | (184   | ) |      |   | 159   
|                                              |  |      |        |   |      |   |       
|Total liabilities and stockholders equity    |  | $    | 21,608 |   |      | $ | 15,078
|                                              |  |      |        |   |      |   |       



Statement of
Income



|                                               |  |      |       |   |      |   |       |      |  |   |     |  
|---------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | --- | -
|Years Ended December 31,                       |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Interest income                                |  | $    |      |   |      | $ |      |      |  | $ |    |  
|Interest expense                               |  |      | 166   |   |      |   |      |      |  |   |    |  
|                                               |  |      |       |   |      |   |       |      |  |   |     |  
|Net interest income                            |  |      | (166  | ) |      |   |      |      |  |   |    |  
|Equity in undistributed income of subsidiaries |  |      | 1,741 |   |      |   | 1,305 |      |  |   | 308 |  
|Dividends from subsidiary                      |  |      | 145   |   |      |   | 25    |      |  |   | 330 |  
|                                               |  |      |       |   |      |   |       |      |  |   |     |  
|Total income                                   |  |      | 1,720 |   |      |   | 1,330 |      |  |   | 638 |  
|Noninterest expense                            |  |      |       |   |      |   |       |      |  |   |     |  
|Compensation                                   |  |      | 13    |   |      |   | 44    |      |  |   | 56  |  
|Legal                                          |  |      | 28    |   |      |   |      |      |  |   |    |  
|Shareholder communications                     |  |      | 114   |   |      |   | 112   |      |  |   | 144 |  
|                                               |  |      |       |   |      |   |       |      |  |   |     |  
|Total expense                                  |  |      | 155   |   |      |   | 156   |      |  |   | 200 |  
|                                               |  |      |       |   |      |   |       |      |  |   |     |  
|Income before income tax benefit               |  |      | 1,565 |   |      |   | 1,174 |      |  |   | 438 |  
|Income tax benefit                             |  |      | (109  | ) |      |   | (53   | )    |  |   | (68 | )
|                                               |  |      |       |   |      |   |       |      |  |   |     |  
|Net income                                     |  | $    | 1,674 |   |      | $ | 1,227 |      |  | $ | 506 |  
|                                               |  |      |       |   |      |   |       |      |  |   |     |  



Statements of Cash
Flows



|                                                                  |  |      |        |   |      |   |        |      |  |   |      |  
|----------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ---- | -
|Years Ended December 31,                                          |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Cash flows from operating activities                              |  |      |        |   |      |   |        |      |  |   |      |  
|Net income                                                        |  | $    | 1,674  |   |      | $ | 1,227  |      |  | $ | 506  |  
|Due from subsidiaries                                             |  |      | 13     |   |      |   | (13    | )    |  |   | 30   |  
|Tax benefit received                                              |  |      | (7     | ) |      |   | 70     |      |  |   | (70  | )
|Undistributed net income of subsidiary                            |  |      | (1,886 | ) |      |   | (1,330 | )    |  |   | (638 | )
|Net Increase in other assets and liabilities                      |  |      | (99    | ) |      |   |       |      |  |   |     |  
|                                                                  |  |      |        |   |      |   |        |      |  |   |      |  
|Net cash used for operations                                      |  |      | (305   | ) |      |   | (46    | )    |  |   | (172 | )
|                                                                  |  |      |       
|Cash flows from financing activities                              |  |      |        |   |      |   |        |      |  |   |      |  
|Proceeds from issuance of junior subordinated debentures          |  |      | 5,155  |   |      |   |       |      |  |   |     |  
|Downstream of capital to subsidiary                               |  |      | (4,875 | ) |      |   |       |      |  |   |     |  
|Investment in trust subsidiary                                    |  |      | (155   | ) |      |   |       |      |  |   |     |  
|Dividends paid                                                    |  |      |       |   |      |   | (30    | )    |  |   | (98  | )
|Dividends received from Bank                                      |  |      | 145    |   |      |   | 25     |      |  |   | 330  |  
|Proceeds from stock options exercised and restricted stock issued |  |      | 39     |   |      |   | 63     |      |  |   | 50   |  
|Repurchase of common stock                                        |  |      |       |   |      |   |       |      |  |   | (128 | )
|                                                                  |  |      |        |   |      |   |        |      |  |   |      |  
|Net cash provided by financing activities                         |  |      | 309    |   |      |   | 58     |      |  |   | 154  |  
|                                                                  |  |      |        |   |      |   |        |      |  |   |      |  
|Net increase (decrease) in cash                                   |  |      | 4      |   |      |   | 12     |      |  |   | (18  | )
|Cash and equivalents at beginning of year                         |  |      | 13     |   |      |   | 1      |      |  |   | 19   |  
|                                                                  |  |      |        |   |      |   |        |      |  |   |      |  
|Cash and equivalents at end of year                               |  | $    | 17     |   |      | $ | 13     |      |  | $ | 1    |  
|                                                                  |  |      |        |   |      |   |        |      |  |   |      |