FCNB CORP AND SUBSIDIARY

                                FINANCIAL REPORT

                                DECEMBER 31, 1998

<PAGE>
THE YEAR IN SUMMARY
FCNB CORP

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                     ---------------------------------------------
                                                                          1998            1997(1)          1996(1)
                                                                          ----            -------          -------
                                                                    (dollars in thousands, except per share data)
<S>                                                                    <C>             <C>               <C>   
Net income                                                            $ 8,061          $10,096           $6,876
Net income before merger-related expenses                              11,222           10,381            8,787
Per share data(2):
     Basic earnings                                                       .80             1.01              .69
     Diluted earnings                                                     .80             1.01              .69
     Basic earnings before merger-related expenses                       1.12             1.04              .88
     Diluted earnings before merger-related expenses                     1.11             1.03              .88
     Cash dividends declared                                             .436             .340             .301
     Book value at period-end                                            9.01             8.81             7.86
     Shares outstanding at period-end                              10,060,714        9,988,312        9,969,334
     Weighted average shares outstanding:
       Basic                                                       10,024,630        9,975,300        9,975,655
       Diluted                                                     10,114,648       10,042,062       10,010,407

Return on average assets                                                  .70%            1.04%             .84%
Return on average assets before merger-related expenses                   .98             1.06             1.07
Return on average shareholders' equity                                   8.80            12.35             9.24
Return on average shareholders' equity before
  merger-related expenses                                               12.25            12.70            11.81
</TABLE>


<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                     ------------------------------------------
                                                                       1998            1997(1)          1996(1)
                                                                       ----            -------          -------
                                                                                 (dollars in thousands)
<S>                                                                 <C>             <C>                <C>     
Total Assets                                                        $1,337,224      $1,083,898         $911,945
Loans, net of unearned income                                          727,566         674,568          583,826
Deposits                                                               851,819         745,486          690,710
Federal funds purchased and securities sold
 under agreements to repurchase                                         92,287          84,827           55,203
Other short-term borrowings                                            248,155         154,793           78,593
Long-term debt                                                          40,250              --               --
Shareholders' equity                                                    90,610          88,016           78,332

Banking facilities                                                          32              25               25
</TABLE>

--------
(1) The  financial  data for 1997 and 1996  has been  restated  to  include  the
    effects  of  the   acquisitions   of  Capital   Bank,   N.A.  and  Frederick
    Underwriters,  Inc. in 1998, accounted for as poolings of interests. 

(2) Per share data has been restated for the effects of a  four-for-three  stock
    split effected in the form of a 33% stock dividend declared in July 1998 and
    paid in August 1998.


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

This  section of the  report  contains  forward  looking  statements  within the
meaning of the  Private  Securities  Litigation  Reform  Act of 1995,  including
statements relating to FCNB Corp and its principal wholly-owned  subsidiary FCNB
Bank's (collectively,  the "Company") beliefs,  expectations,  anticipations and
plans regarding,  among other things,  general economic trends,  interest rates,
product  expansions and other matters.  Such  statements are subject to numerous
uncertainties,   such  as  federal  monetary  policy,   inflation,   employment,
profitability  and  consumer  confidence  levels,  both  nationally  and  in the
Company's market area, the health of the real estate and construction  market in
the  Company's  market  area,  the  Company's  ability to develop and market new
products  and to enter new  markets,  competitive  challenges  in the  Company's
market,  legislative  changes and other  factors,  and as such,  there can be no
assurance that future events will develop in accordance with the forward looking
statements contained herein.

Additionally,  the  Company's  future  financial  performance  may be  adversely
impacted  by  the   inability   of  the   Company  to  cause  its   information,
communications and environmental  systems to be capable of correctly recognizing
and  processing  dates after  December 31, 1999 ("Y2K  Compliant")  as currently
anticipated, and in any event, prior to January 1, 2000. Factors which may cause
actual  results to differ from current Y2K  Compliance  plans include  increased
costs of achieving Y2K  Compliance,  delayed  timeframes  for  implementing  and
testing Y2K Compliance measures, and delays by the Company's vendors in becoming
Y2K Compliant, or the inability of such vendors to become Y2K Compliant prior to
January  1, 2000.  Additionally,  the  Company's  performance  may be  adversely
affected by the failure of its customers or  governmental  authorities to become
Y2K Compliant prior to January 1, 2000.  Because of these  uncertainties and the
assumptions  on which  statements  in this  document  are based,  actual  future
results may differ materially from those contemplated by such statements.

The  following  paragraphs  provide an overview of the  financial  condition and
results of operations of the Company.  This discussion is intended to assist the
readers in their analysis of the accompanying  consolidated financial statements
and notes thereto.

In June 1998, the Company  assumed $44.80  million of deposit  liabilities,  and
purchased  $126,000  of loans,  $849,000 of fixed  assets,  and  recorded  $2.30
million of  intangible  assets,  relating  to four  branches  of First  Virginia
Bank-Maryland  located  in  Gaithersburg,  Germantown,  Poolesville  and  Silver
Spring,  Maryland,  and three  branches  of its sister  bank,  Farmers'  Bank of
Maryland, located in Catonsville, Pikesville and Reisterstown, Maryland.

In November  1998,  the Company  consummated  the  acquisition  of Capital Bank,
National  Association,  Rockville,  Maryland  ("Capital"),  in which Capital was
merged with and into FCNB Bank, Frederick,  Maryland, the Company's wholly owned
subsidiary  bank (the "Bank"),  with the Bank surviving the Merger.  The Company
issued 1,776,966 shares of its Common Stock in a tax-free transaction, which was
accounted for as a pooling of interests.  As of November 19, 1998, the effective
date of the  transaction,  Capital  had total  assets of  approximately  $165.96
million,  deposits of $136.07 million,  and total shareholders' equity of $12.36
million.  The Company incurred pretax one-time  charges of  approximately  $1.66
million  associated  with this  acquisition.  Capital  has  branches  located in
Rockville, Maryland, Tysons Corner,Virginia, and Friendship Heights and Farragut
Square in the District of Columbia.

In  December  1998,  the  Company   consummated  the  acquisition  of  Frederick
Underwriters,  Inc.  headquartered  in  Frederick,  Maryland and its  affiliated
agencies - Phillips Insurance Agency,  Inc. and Carroll County Insurance Agency,
Inc. (collectively, "Frederick Underwriters"). The Company issued 413,317 shares
of FCNB Common Stock in a tax-free  transaction,  which was  accounted  for as a
pooling of  interests.  With 1997  revenues  approaching  $6 million,  Frederick
Underwriters is one of the largest  independent  insurance agencies in the state
of Maryland.


<PAGE>
On July 20, 1998,  FCNB Capital Trust,  a  newly-formed  subsidiary the Company,
issued  1,610,000  of its  8.25%  Cumulative  Trust  Preferred  Securities  (the
"Preferred  Securities")  in an  underwritten  public  offering for an aggregate
price of $40.25 million.  Proceeds of the Preferred  Securities were invested in
the  8.25%  Subordinated  Debentures  (the  "Subordinated  Debentures")  of  the
Company.  After deducting  underwriter's  compensation and other expenses of the
offering,  net  proceeds  of $38.54  million  were  available  to the Company to
increase capital and for general corporate purposes, including use in investment
activities and the Bank's lending activities.

Throughout the discussion on the financial performance of the Company, the yield
on  interest-earning  assets,  the net interest spread, the net interest margin,
the  risk-based  capital  ratios,  and the leverage ratio exclude the effects of
applicable fair value  adjustments.  However,  the return on average assets, the
return on average equity, and the book value per share at period-end include the
effects of applicable fair value adjustments.

The  following  analysis of the  Company's  operating  results is presented on a
consolidated  basis.  Net income was $8.06  million in 1998  compared  to $10.10
million in 1997. Basic and diluted earnings per share were $.80 in 1998 compared
to $1.01 in 1997.  Net  income in 1998 was  reduced by one time  merger  related
charges.  The Company has been  notified by the  Internal  Revenue  Service (the
Service) that the Service has taken under review the  company's  treatment of an
income tax reserve for bad debts relating to the Company's  1996  acquisition of
Laurel  Bancorp,  Inc.  ("Laurel") and its subsidiary  thrift.  As a part of its
acquisition of Laurel, the Company assumed an unrecorded  deferred tax liability
of  approximately  $1.6 million  related to the special bad debt  deduction  for
years before December 1, 1988 which thrifts were allowed. The Company determined
that  recognition  of the deferred tax liability was not required as a result of
the merger of Laurel and its  subsidiary  into the  Company  and its  subsidiary
bank. The Service has raised issues related to the  availability of an exemption
from  recapture of the bad debt reserve.  The Company is reviewing the Service's
position.  The Company intends to vigorously contest the additional  assessment,
but has accrued $1.75  million as a reserve  against such  liability,  which has
been considered a merger-related  expense for financial reporting  purposes.  In
connection  with the  acquisition  of Capital Bank,  N.A.  ("Capital")  in 1998,
accounted  for as a pooling of interests,  certain costs  incurred to effect the
combination  were charged to expense and deducted in determining  the results of
operations.  The specific  one-time costs  associated with this merger that were
charged  to the  Company's  results of  operations  principally  reflected:  (1)
salaries  and  employee  benefits  associated  with  change-in-control  payments
totaling approximately $632,000; (2) legal, accounting,  financial advisor fees,
and other  conversion costs of  approximately  $1.03 million.  Net income before
these specific one-time  merger-related  costs was $11.22 million in 1998, while
earnings  per basic share were $1.12 and per diluted  share were $1.11 for 1998.
In connection  with the Elkridge Bank  consolidation  into the Bank in 1997, the
Company incurred $460,000 of merger-related  expenses. Net income in 1997 before
the one-time  merger-related  costs was $10.38 million, or $1.04 per basic share
and $1.03 per diluted share.

Return on average  assets and  return on  average  shareholders'  equity are key
measures of earnings performance.  Return on average assets measures the ability
of a bank to utilize its assets in generating  income.  Return on average assets
was .70% in 1998 and 1.04% in 1997.  Return  on  average  shareholders'  equity,
which  measures  the income  earned on the capital  invested,  was 8.80% in 1998
compared to 12.35% in 1997. However, before the specific one-time merger-related
costs the return on average  assets was .98% in 1998 and 1.06% in 1997,  and the
return on average shareholders' equity was 12.25% in 1998 and 12.70% in 1997.

During  1998,  the Company  experienced  modest  loan growth that  resulted in a
$53.00 million increase in loans, net of unearned income, or 7.9% over the level
at the end of 1997.

Noninterest  income increased $3.14 million (25.0%) from the level in 1997 while
noninterest  expenses  increased  $6.11 million  (17.7%) during the same period.
Included in the noninterest  expenses are merger-related  costs of $1.94 million
in 1998 and  $460,000  in 1997.  If these  amounts  were  excluded,  noninterest
expenses would have risen in 1998 by $4.63 million (13.6%).

The Company routinely explores opportunities for additional growth and expansion
of its core banking business and related  activities,  including the acquisition
of companies  engaged in banking or other  related  activities,  and  internally
generated growth. There can be no assurance,  however,  that the Company will be
able to grow, or if it does that any such growth or expansion  will result in an
increase in the Company's earnings, dividends, book value or market value of its
securities.
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL

Table 1, "Comparative  Statement  Analysis," shows average balances of asset and
liability categories,  interest income and interest paid, and average yields and
rates for the periods indicated.

NET INTEREST INCOME

Net  interest  income is generated  from the  Company's  lending and  investment
activities, and is the most significant component of the Company's earnings. Net
interest income is the difference  between  interest and rate-related fee income
on earning assets  (primarily loans and investment  securities) and the interest
paid on the funds  (primarily  deposits and  short-term  borrowings)  supporting
them.  To  facilitate   analysis,   net  interest   income  is  presented  on  a
taxable-equivalent  basis to adjust for the  tax-exempt  status of certain loans
and  investment  securities.  This  adjustment,  based on the statutory  federal
income tax rate of 35% in 1998 and 1997,  increases the tax-exempt  income to an
amount  representing  an  estimate of what would have been earned if that income
were fully taxable.

Taxable-equivalent  net interest  income was $41.91 million in 1998,  increasing
7.6% from the $38.95  million in 1997.  The Company's  average  interest-earning
assets  increased  17.6% to $1.05 billion during 1998.  This increase was funded
primarily  by an  18.7%  increase  in  the  Company's  average  interest-bearing
liabilities   and   by   an   18.6%   increase   in   the   Company's    average
noninterest-bearing deposits during the year.

The Company's net interest margin  (taxable-equivalent  net interest income as a
percent of average  interest-earning  assets) was 3.98% in 1998,  as compared to
4.35% in 1997.  This decrease in net interest  margin  principally  reflects the
impact of the change in the spread  between  yields on average  interest-earning
assets and rates paid on average  interest-bearing  liabilities  realized during
1998.  This spread  decreased by 35 basis points in 1998.  During the year,  the
rate paid on average  interest-bearing  liabilities  increased 13 basis  points,
while the yield on average interest-earning assets decreased 22 basis points.

The average yield on the  investment  portfolio  fell 6 basis points during 1998
compared to 1997. The average yield on the loan portfolio  decreased by 13 basis
points,  reflecting  the  impact of  competitive  pressures.  The rates  paid on
short-term  borrowings decreased by 16 basis points. The rate of interest earned
on interest-earning  assets and the rate paid on  interest-bearing  liabilities,
while  significantly  affected  by the actions  taken by the Federal  Reserve to
control  economic  growth,  are  influenced by  competitive  factors  within the
Company's market. Competitive pressures during 1998 in the Company's market area
for both loans and the funding  sources needed to satisfy loan demand caused its
net interest spread to narrow.  The Company's  management feels that competitive
pressures will cause the net interest  spread to continue to be under  pressure.
Therefore,  the Company is currently  pursuing  operating  efficiencies  through
improved technology and is adding new products and services to enhance its level
of  noninterest  income.  There can be no assurance  that these benefits will be
realized.

Changes in net  interest  income  between  periods is affected  primarily by the
volume of  interest-earning  assets  and the yield on those  assets,  and by the
volume of interest-bearing  deposits and other liabilities and the rates paid on
those deposits and liabilities.  Table 2, "Rate/Volume Analysis," reconciles the
impact of changes in average  balances and average  rates with the change in the
Company's net interest income for the periods indicated.


<PAGE>
Table 1: Comparative Statement Analysis

<TABLE>
<CAPTION>
                                                         Years ended December 31,
                               -----------------------------------------------------------------------------------------------------
                                               1998                                1997                         1996
                               ------------------------------   -------------------------------  -----------------------------------
                                Average    Interest   Average    Average     Interest   Average   Average      Interest    Average
                                daily      income(2)   yield/     daily      income(2)   yield/    daily       income(2)    yield/
                              balance(1)   /paid(2)     rate    balance(1)   / paid(2)    rate    balance(1)  /paid(2)(4)   rate  
                              ----------   --------     ----    ----------   ---------    ----    ----------  -----------   ----  
                                                                   (dollars in thousands)

<S>                          <C>           <C>          <C>     <C>          <C>          <C>    <C>           <C>        <C>  
ASSETS
Interestearning assets:
  Interestbearing
   deposits in
   other banks               $      844    $     76     9.01%   $   1,960    $    100     5.10%  $   2,763     $    174   6.30%
  Federal funds sold             28,637       1,590     5.55       21,620       1,196     5.53      24,136        1,243   5.15
  Loans held for sale             3,082         153     4.96        1,105          72     6.52       3,287          237   7.21
  Investment securities:
   Taxable                      322,098      20,535     6.38      238,993      15,292     6.40     180,905       11,539   6.38
   Nontaxable                     4,840         502    10.36        4,698         517    11.00       6,664          765  11.48
     Total invest-
      ment securities           326,938      21,037     6.43      243,691      15,809     6.49     187,569       12,304   6.56
  Loans(3), net of
    unearned income             694,237      62,891     9.06      627,955      57,723     9.19     535,778       49,334   9.21
     Total interest-earning
      assets                  1,053,738      85,747     8.14      896,331      74,900     8.36     753,533       63,292   8.40

Noninterest-earning
 assets                          91,244                            77,061                           64,412
Net effect of unrealized
 gain (loss) on securities
 available for sale               4,004                             1,528                              266
  Total assets               $1,148,986                          $974,920                         $818,211

LIABILITIES AND
 SHAREHOLDERS' EQUITY
Interest-bearing
 liabilities:
   NOW/SuperNOW accounts       $ 70,040    $  1,286     1.84%   $  63,173   $   1,198     1.90%   $ 64,532      $ 1,349   2.09%
   Savings accounts              80,677       1,979     2.45       82,423       2,124     2.58      86,198        2,643   3.07
  Money market accounts         129,267       4,504     3.48      106,015       3,311     3.12     102,255        3,273   3.20
  Certificates of deposit
    and other time deposits
    less than $100,000          307,207      16,725     5.44      295,839      16,022     5.42     246,671       13,021   5.28
   Certificates of deposit
    and other time deposits
    of $100,000 or more          84,131       4,783     5.69       63,095       3,556     5.64      56,936        2,994   5.26
   Federal funds purchased
    and securities sold
    under agreements to
    repurchase                   59,301       2,919     4.92       63,717       3,428     5.38      37,173        1,884   5.07
   Other short-term
    borrowings                  184,727      10,112     5.47      111,989       6,307     5.63      47,996        2,883   6.01
   Long-term debt                18,069       1,527     8.45           --          --    --          5,901          406   6.88

Total interest-bearing          -------      ------     ----      -------      ------     ----     -------       ------   ----
 liabilities                    933,419      43,835     4.70      786,251      35,946     4.57     647,662       28,453   4.39
                                -------      ------     ----      -------      ------     ----     -------       ------   ----


Noninterest-bearing
 deposits                       113,751                            95,879                           86,537
Noninterest-bearing
 liabilities                     10,241                            11,042                            9,622
     Total liabilities        1,057,411                           893,172                          743,821
Shareholders' equity             87,571                            80,220                           74,124
Net effect of unrealized
 gain (loss) on securities 
 available for sale               4,004                             1,528                              266
     Total shareholders'
      equity                     91,575                            81,748                           74,390
     Total liabilities
      and shareholders'
      equity                 $1,148,986                          $974,920                         $818,211
Net interest income                         $41,912                           $38,954                           $34,839
Net interest spread                                     3.44%                           3.79%                             4.01%
Net interest margin                                     3.98%                           4.35%                             4.62%
</TABLE>
----------
(1) The average daily balances for investment  securities exclude the effects of
    applicable fair value adjustments.

(2) Presented on a  taxable-equivalent  basis using the statutory federal income
    tax rate of 35%. The  statement  of income for 1996  includes the results of
    operations for Laurel for the thirteen month period from December 1, 1995 to
    December  31,  1996.  To  facilitate  the  analysis  in this table for 1996,
    Laurel's  interest  income  and  interest  expense,  totaling  $755,000  and
    $358,000, respectively, for the month of December 1995 have been eliminated.

(3) Nonaccruing loans, which include impaired loans, are included in the average
    balances.  Net loan fees  included in interest  income  totaled  $2,253,000,
    $1,663,000 and $1,344,000 for 1998, 1997 and 1996, respectively.

(4) The interest  paid in 1996  includes  $108,000 of  capitalized  construction
    period interest.

<PAGE>

Table 2: Rate/Volume Analysis

<TABLE>
<CAPTION>
                                   1998 compared to 1997              1997 compared to 1996                1996 compared to 1995
                                 ----------------------------      ------------------------------     -----------------------------
                                      Increase                          Increase                          Increase
                                     (decrease)            Net          (decrease)          Net          (decrease)         Net
                                      due to            increase          due to          increase         due to         increase
                                 -----------------     ----------    -----------------   ----------  -----------------   ----------
                                 Volume    Rate(1)     (decrease)    Volume    Rate(1 )  (decrease)   Volume   Rate(1)   (decrease)
                                 ------    -------     ----------    ------    --------  ----------   ------   -------   ----------
                                                                 (dollars in thousands)
<S>                              <C>        <C>          <C>      <C>        <C>         <C>       <C>        <C>          <C>     
Interest Income
Interestearning assets:
   Interestbearing deposits
    in other banks               $  (57)    $  33        $  (24)  $   (51)   $  (23)     $   (74)  $  (221)   $  (16)      $  (237)
   Federal funds sold               388         6           394      (130)       83          (47)      427      (184)          243
   Loans held for sale              129       (48)           81      (157)       (8)        (165)      133        22           155
   Investment securities:
     Taxable                      5,319       (76)        5,243     3,705        48        3,753       942      (199)          743
   Nontaxable(2)                     16       (31)          (15)     (226)      (22)        (248)     (988)      (82)       (1,070)
          Loans(3)                6,091      (923)        5,168     8,488       (99)       8,389     5,318      (937)        4,381
Total interest
 income(6)                       11,886    (1,039)       10,847    11,629       (21)      11,608     5,611    (1,396)        4,215

Interest Paid
Interestbearing
 liabilities:
   Savings deposits(4)         $    811  $    325     $   1,136  $    (24)$    (608)   $    (632)  $   179  $   (300)    $    (121)
   Time deposits                  1,801       129         1,930     2,919       644        3,563     1,921      (449)        1,472
   Federal funds purchased and
    securities sold under
    agreements to repurchase       (238)     (271)         (509)    1,345       199        1,544       557      (174)          383
   Other short-term
    borrowings                    4,096      (291)        3,805     3,844      (420)       3,424       849         7           856
   Long-term debt                 1,527        --         1,527      (406)       --         (406)     (124)       --          (124)
          Total interest
           paid(5) (6)            7,997      (108)        7,889     7,678      (185)       7,493     3,382      (916)        2,466
Net interest income             $ 3,889    $ (931)      $ 2,958   $ 3,951     $ 164      $ 4,115   $ 2,229    $ (480)      $ 1,749

</TABLE>
------------

(1) The volume/rate variance is allocated entirely to changes in rates.

(2) Taxable-equivalent  adjustments of $176,000 for 1998, $158,000 for 1997, and
    $171,000 for 1996 are included in the  calculation of nontaxable  investment
    securities rate variances.

(3) Taxable-equivalent adjustments of $150,000 for 1998 and $67,000 for 1997 are
    included in the calculation of loan rate variances.

(4) Savings  deposits include  NOW/SuperNOW,  savings and money market accounts.

(5) Total interest paid includes  capitalized  construction  period  interest of
    $108,000 for 1996.

(6) The  statement  of income for 1996  includes the results of  operations  for
    Laurel for the  thirteen-month  period from December 1, 1995 to December 31,
    1996. To facilitate the analysis in this table for 1996,  Laurel's  interest
    income and interest expense,  totaling $755,000 and $358,000,  respectively,
    for the month of December 1995, have been eliminated.

<PAGE>
NONINTEREST INCOME

Noninterest  income  increased by $3.14 million or 25.0% in 1998. Gains realized
from the sale of mortgage  loans in the  secondary  market were $751,000 in 1998
and  $407,000 in 1997.  Noninterest  income  from gains  realized on the sale of
mortgage  loans is directly  affected by the volume of mortgage  loans  settled,
which is  significantly  influenced  by increases  and decreases in the level of
interest rates.  In periods of rising  interest rates,  mortgage loan production
typically declines, whereas in periods of declining interest rates mortgage loan
production  increases.  As a result,  this source of noninterest  income will be
highly influenced by the level and direction of future interest rate changes. In
1998 and 1997, servicing fee income totaled $311,000 and $374,000, respectively.
Servicing income on mortgage loans  originated and sold however,  is expected to
make a smaller contribution to noninterest income since, currently,  the Company
is not  retaining  servicing  rights on  mortgages  sold.  The increase in other
operating  income includes  approximately  $1.22 million in 1998 and $600,000 in
1997  attributable to the  implementation of a bank-owned life insurance program
that  generates  tax-exempt  income  intended  to  partially  offset the cost of
employee benefit programs.

The increase in service fees on deposit  accounts is  attributable,  in part, to
price increases, but primarily to increases in account volume and activity.

The  Company is adding new  products  and  services to  strengthen  its ratio of
noninterest income to total revenue to mitigate the effect of its decreasing net
interest  spread.  Some of these  products are fee-based and,  accordingly,  the
income from these  products is less  sensitive to  fluctuations  in the level of
interest  rates.  The Company offers asset  management and trust services and in
December  1997,  the Company began to offer  Financial  Planning and  Investment
Services. This new division offers customers comprehensive financial planning as
well as  investment  and  insurance  products.  In 1998,  the  Company  acquired
Frederick  Underwriters as discussed in the "General" section above, to increase
its  noninterest  income  and to expand  its  revenue  sources.  The  Company is
actively   promoting  new  commercial  cash  management   services  to  increase
noninterest  income.  Additionally,  revenue  from  service  charges  on deposit
accounts will continue to increase as the volume of accounts maintained expands.

The Company's  management is committed to  developing  and offering  innovative,
market-driven  products and services  that will generate  additional  sources of
noninterest  income.  However,  the future  results of any of these  products or
services cannot be predicted at this time.

NONINTEREST EXPENSES

Noninterest  expenses  increased  $6.11  million in 1998.  However if the merger
related  costs of $1.94  million in 1998 and $460,000 in 1997 are excluded  from
this comparison,  noninterest  expenses for 1998 increased $4.63 million.  Total
salaries and employee  benefits  increased  $2.61 million or 13.9% in 1998.  The
increase in salaries  and benefits  reflects  general  merit and  cost-of-living
adjustments,  plus the cost of additional  staffing for the seven First Virginia
branches  acquired  in June 1998,  additional  mortgage  lending  staff hired in
August  1998,  and the opening of the  Financial  Planning  division in December
1997.

Net occupancy and equipment  expenses  increased  $650,000  (18.0%) and $752,000
(30.5%),  respectively,  compared to those incurred during 1997. The increase in
occupancy  expenses is primarily  attributable  to seven new branches  discussed
above. The increase in equipment expenses is primarily associated with increased
depreciation and higher ATM and communication expenses.

Other operating expenses increased $615,000 (6.7%) in 1998 compared to the prior
year.  See  Note 13 to the  consolidated  financial  statements  for a  schedule
showing a detailed  breakdown of the Company's more significant  other operating
expenses
<PAGE>
INCOME TAXES

Income tax expense from operating activities decreased to $5.03 million in 1998,
compared to $5.07 million in 1997,  reflecting the lower level of pre-tax income
in 1998. The Company's effective tax rate from operating activities was 33.9% in
1998,  compared to 33.4% in 1997. The Company's  income tax expense differs from
the amount computed at statutory  rates primarily due to tax-exempt  income from
certain loans,  investment securities and the bank-owned life insurance program.
Additionally,  the  Company  derives  income tax  benefits  from its  subsidiary
located  in the  state of  Delaware  that  holds and  manages  a portion  of its
investment  portfolio.   Note  12  to  the  consolidated   financial  statements
reconciles  expected  income taxes at  statutory  rates for the past three years
with income tax expense included in the consolidated statements of income. For a
discussion related to the thrift bad debt reserve  recapture,  see the "General"
section.

MARKET RISK, LIQUIDITY AND INTEREST RATE SENSITIVITY

Asset/liability  management  involves  the  funding  and  investment  strategies
necessary to maintain an appropriate  balance between interest  sensitive assets
and liabilities.  It also involves providing adequate liquidity while sustaining
stable growth in net interest income. Regular review and analysis of deposit and
loan  trends,  cash flows in various  categories  of loans,  and  monitoring  of
interest spread relationships are vital to this process.

The conduct of our banking business requires that we maintain adequate liquidity
to meet changes in the  composition  and volume of assets and liabilities due to
seasonal,  cyclical or other  reasons.  Liquidity  describes  the ability of the
Company to meet  financial  obligations  that arise during the normal  course of
business.  Liquidity  is  primarily  needed to meet the  borrowing  and  deposit
withdrawal  requirements of the customers of the Company, as well as for meeting
current and future planned expenditures. This liquidity is typically provided by
the funds  received  through  customer  deposits,  investment  maturities,  loan
repayments,  borrowings,  and income. Management considers the current liquidity
position to be adequate to meet the needs of the Company and its customers.

The Company seeks to limit the risks associated with interest rate  fluctuations
by managing  the balance  between  interest  sensitive  assets and  liabilities.
Managing to mitigate interest rate risk is, however,  not an exact science.  Not
only  does  the  interval  until  repricing  of  interest  rates on  assets  and
liabilities change from day to day as the assets and liabilities change, but for
some  assets and  liabilities,  contractual  maturity  and the  actual  maturity
experienced are not the same. For example,  mortgage-backed  securities may have
contractual  maturities  well in excess of five  years but,  depending  upon the
interest  rate  carried by the  specific  underlying  mortgages  and the current
prevailing  rate of interest,  these  securities may be repaid in a shorter time
period.  Accordingly,  mortgage-backed  securities and  collateralized  mortgage
obligations  that have  average  stated  maturities  in excess of five years are
evaluated as part of the asset/liability management process using their expected
average lives due to anticipated  prepayments.  Loans held for sale which have a
contracted maturity of five to thirty years are included in the one year or less
time frame  since they are  available  to be sold at any time and are carried at
the lower of cost or fair value. Similarly,  NOW/SuperNOW accounts, by contract,
may be  withdrawn  in their  entirety  upon demand and savings  deposits  may be
withdrawn on seven days notice. While these contracts are extremely short, it is
the Company's  belief that these  accounts turn over at the rate of five percent
(5%) per year. The Company therefore treats them as having maturities  staggered
over all periods. If all of the Company's NOW/SuperNOW and savings accounts were
treated as repricing  in one year or less,  the  cumulative  negative gap at one
year or less would be $(391.03) million or 29.24% of total assets.  Due to their
very liquid nature, the entire balance of money market accounts is assumed to be
repriced within one year.
<PAGE>

Interest  rate  sensitivity  is an  important  factor in the  management  of the
composition  and maturity  configurations  of the Company's  earning  assets and
funding  sources.  An  Asset/Liability   Committee  manages  the  interest  rate
sensitivity  position in order to maintain an  appropriate  balance  between the
maturity  and  repricing  characteristics  of  assets  and  liabilities  that is
consistent with the Company's liquidity  analysis,  growth, and capital adequacy
goals. The Company sells fixed-rate real estate loans in the secondary  mortgage
market. The Company believes that by selling certain loans rather than retaining
them in its portfolio, it is better able to match the maturities or repricing of
interest sensitive assets to interest sensitive liabilities. It is the objective
of the Asset/Liability Committee to maximize net interest margins during periods
of both volatile and stable interest rates,  to attain earnings  growth,  and to
maintain  sufficient  liquidity  to satisfy  depositors'  requirements  and meet
credit needs of customers.

As noted,  the Company  assumes a degree of interest  rate risk as a provider of
banking services to its customers.  This risk can be reduced through  derivative
interest rate contracts,  such as interest rate swaps. At December 31, 1998, the
Company  had one  outstanding  interest  rate swap  instrument  which is used to
convert certain fixed rate assets to variable rates as part of its interest rate
risk management strategy.  Because financial  derivatives  typically do not have
actual principal dollars  transferred  between the parties,  notional  principal
amounts  are used to  express  the  volume of such  transactions.  However,  the
notional  amount  of  derivative  contracts  does not  represent  direct  credit
exposure,  which the Company  believes is a combination  of current  replacement
cost of those  instruments  with a  positive  market  value  plus an amount  for
prospective  market  movement.  The Company has established  policies  governing
derivative activities, and the counterparties used by the Company are considered
high  quality  credit  risks.  There were no past due  amounts or  reserves  for
possible  derivative  credit  losses at December 31,  1998,  nor has the Company
experienced   any   charge-offs   related  to  the  credit  risk  of  derivative
transactions.

The notional  amount of the  Company's  interest  rate swap was $10.0 million at
December 31, 1998. This instrument matures in November 2004.

The following table,  "Interest Rate Sensitivity  Analysis,"  summarizes,  as of
December 31, 1998,  the  anticipated  maturities  or repricing of the  Company's
interest-earning assets and interest-bearing liabilities, the Company's interest
rate   sensitivity   gap   (interest-earning    assets   less   interest-bearing
liabilities),  the Company's  cumulative  interest rate sensitivity gap, and the
Company's  cumulative interest  sensitivity gap ratio (cumulative  interest rate
sensitivity  gap divided by total  assets).  A negative  gap for any time period
means that more interest-bearing  liabilities will reprice or mature during that
time period than  interest-earning  assets.  During  periods of rising  interest
rates, a negative gap position would  generally  decrease  earnings,  and during
periods of declining  interest  rates, a negative gap position  would  generally
increase  earnings.  The  converse  would be true for a positive  gap  position.
Therefore,  a positive gap for any time period means that more  interest-earning
assets will  reprice or mature  during  that time  period than  interest-bearing
liabilities.  During periods of rising  interest  rates, a positive gap position
would  generally  increase  earnings,  and during periods of declining  interest
rates, a positive gap position would generally decrease earnings.
<PAGE>
Interest Rate Sensitivity Analysis - December 31, 1998

<TABLE>
<CAPTION>
                                                                  Interest sensitivity period
                                            ---------------------------------------------------------------------------------------
                                                                                   After 1
                                               3 or less        4 to 12            through            After 5
                                                months           months            5 years             years              Total
                                                ------           ------            -------             -----              -----
                                                                      (dollars in thousands)
<S>                                        <C>                <C>               <C>               <C>                 <C>        
INTEREST-EARNING ASSETS
Interest-bearing deposits
 in other banks                            $     1,334         $      --        $        --       $        --         $     1,334
Federal funds sold                              47,262                --                 --                --              47,262
Loans held for sale:
   Fixed rate                                    5,087                --                 --                --               5,087
Investment securities:(1)
   Fixed rate                                   29,978                --            106,224           203,731             339,933
   Variable rate                                36,263            39,583                                   --              75,846
Loans:(2)
   Fixed rate                                  106,312            88,565            271,365            95,272             561,514
   Variable rate                               159,815                --                 --                --             159,815
    Total interest-earning
       assets                                 $386,051          $128,148           $377,589          $299,003          $1,190,791

INTEREST-BEARING LIABILITIES
Deposits:
   NOW/SuperNOW accounts
    and savings                               $  2,119         $   6,357          $  33,903          $127,136            $169,515
   Money market accounts                       149,450                --                 --                --             149,450
   Certificates of deposit and
    other time deposits:
     Fixed rate                                 80,795           191,087            107,634                82             379,598
     Variable rate                              13,936                --                 --                --              13,936
Federal funds purchased and securities
 sold under agreements to repurchase            92,287                --                 --                --              92,287
Other short-term borrowings:
     Fixed rate                                137,155            71,000             40,000                --             248,155
Long-term debt:
     Fixed rate                                     --                --                 --            40,250              40,250

       Total interest-bearing
             liabilities                      $475,742          $268,444           $181,537          $167,468          $1,093,191

Interest-earning assets less
 interest-bearing liabilities ("Gap")         $(89,691)        $(140,296)          $196,052          $131,535             $97,600
Cumulative Gap                                $(89,691)        $(229,987)         $ (33,935)          $97,600             $97,600
Cumulative Gap as a percentage of
 total assets                                    (6.71)%          (17.20)%             2.54%             7.30%               7.30%

</TABLE>
---------

(1) Excludes  non-rate   sensitive  equity   securities.   Reflects  fair  value
    adjustments for securities  available for sale.  

(2) Includes consumer loans net of unearned income,  and excludes nonaccrual and
    impaired loans.
<PAGE>
In addition  to the gap method of  monitoring  interest  rate  sensitivity,  the
Company also employs  computer  model  simulations.  Interest  rate risk ("IRR")
management  has various  sources and it is not simply the risk from rates rising
and falling. In fact, there are four sources of IRR: repricing risk, basis risk,
yield curve risk, and option risk. Gap modeling only focuses on repricing  risk.
Income simulations that incorporate cash flow analyses: (1) measure the size and
direction of interest rate  exposure  under a variety of interest rate and yield
curve shape  scenarios;  (2)  provides the  opportunity  to capture all critical
elements such as volume,  maturity dates,  repricing dates,  prepayment volumes,
and hidden options such as caps, floors,  puts, and calls; (3) utilizes the data
to clearly  focus  attention on critical  variables;  (4) are  dynamic;  and (5)
reflect changes in prevailing  interest rates which affect  different assets and
liabilities  in different  ways.  These  simulations  are run on a monthly basis
using an  interest  rate  ramping  technique  to  determine  the  effects on the
Company's  net  interest  income,  assuming a gradual  increase  or  decrease in
interest  rates.  The Company has an interest rate risk  management  policy that
limits the amount of deterioration  in net interest  income,  associated with an
assumed interest rate shock of +/-100, +/-200, and +/-300 basis points change in
interest  rates,  to no more  than  7.5%  (+/-100),  10.0%  (+/-200),  and 12.5%
(+/-300) of net interest  income.  The model results as of December 31, 1998 are
as follows:



<TABLE>
<CAPTION>
Change in Interest Rate Assumption            +100bp       +200bp       +300bp       -100bp       -200bp      -300bp
----------------------------------            ------       ------       ------       ------       ------      ------
                                                                      (dollars in thousands)
<S>                                          <C>          <C>          <C>           <C>          <C>         <C>   
Net interest income-increase (decrease)      $(1,107)     $(2,319)     $(3,357)      $1,088       $2,070      $2,471
Net interest income- % change                  (2.64)       (5.53)       (8.00)        2.59         4.93        5.89
</TABLE>



RISK MANAGEMENT INSTRUMENTS

Interest rate swaps used to achieve interest rate risk management objectives are
accounted for in a manner  consistent  with the accounting  basis of the related
asset or  liability.  An  instrument  designed  to  hedge an asset or  liability
carried at  historical  cost is accounted for on an accrual  basis,  whereby the
interest income or expense of the related asset or liability is adjusted for the
net amount of any  interest  receivable  or  payable  generated  by the  hedging
instrument during the reporting period.  For such instruments,  no amounts other
than any accrued interest receivable or payable are included in the accompanying
consolidated balance sheets.

Interest  rate swaps  involve the  exchange of payments  between  counterparties
based on the interest  differential between a fixed and a variable interest rate
applied  to  a  notional  balance.  Under  accrual  accounting,   this  interest
differential is recognized as an adjustment to the interest income or expense of
the related asset or liability in the accompanying statements of income.

Upon early termination of derivative instruments accounted for under the accrual
method,  the net proceeds  received or paid are  deferred,  if material,  in the
accompanying consolidated balance sheets and amortized to the interest income or
expense of the  related  asset or  liability  over the  lesser of the  remaining
contractual  life of the  instrument  or the  maturity of the  related  asset or
liability. At December 31, 1998 and 1997, there were no deferred gains or losses
arising from the  termination of instruments  qualifying for accrual  accounting
prior to maturity.

INVESTMENT PORTFOLIO

Investment  securities represent the second largest component of earning assets,
at 28% of  average  earning  assets  in 1998  and 25% in  1997.  The  investment
portfolio is used as a source of interest  income,  credit risk  diversification
and liquidity,  as well as to manage rate sensitivity and provide collateral for
secured public funds, repurchase agreements and other short-term borrowings. The
investment  portfolio  averaged  $326.94  million in 1998,  compared  to $243.69
million in 1997. The average  tax-equivalent  yield on the portfolio decreased 6
basis points to 6.43% in 1998. During 1998, the Company increased the investment
portfolio  by  approximately  $64.56  million  in  arbitrage  transactions.   An
arbitrage transaction is one in which the Company borrows funds from the Federal
Home Loan Bank of Atlanta and purchases investment securities.  The Company will
recognize the spread between the yield earned from the investment securities and
the rate paid on the borrowed funds. The investment portfolio also increased due
to the funds received from the Trust  Preferred  Securities  transaction in July
1998.

As of December 31, 1998, the gross unrealized losses in the Company's investment
portfolio were $46,000 in the  held-to-maturity  investment  portfolio and $2.17
million in the available-for-sale  investment portfolio compared to $212,000 and
$235,000,  respectively,  as of December 31, 1997. As of December 31, 1998,  the
gross  unrealized gains in the Company's  investment  portfolio were $470,000 in
the   held-to-maturity   investment   portfolio   and  $8.46   million   in  the
available-for-sale  investment portfolio compared to $553,000 and $5.80 million,
respectively,  as of December 31, 1997. The investment  portfolio had an average
life of 5.6 years, with an estimated average  tax-equivalent  yield of 6.12%, at
December 31, 1998.  Since the Company's  held-to-maturity  investment  portfolio
includes fixed rate investment securities that have below market interest rates,
the future operating  results of the Company would be negatively  impacted in an
increasing rate environment.  This reduction in net interest income would result
because the cost of funding the Company's operations increases, while the income
earned on the held-to-maturity portfolio remains constant.
<PAGE>
INVESTMENT PORTFOLIO DISTRIBUTION-BOOK VALUE (AMORTIZED COST)

<TABLE>
<CAPTION>
                                                      December 31,
                                               -------------------------------
                                               1998(1)      1997(1)    1996(1)
                                               -------      -------    -------
                                                   (dollars in thousands)
<S>                                           <C>          <C>          <C>     
U.S. Treasury and other U.S. government
 agencies and corporations                    $338,777     $235,080     $188,855
State and political subdivisions                 5,670        3,690        5,138
Other securities                               100,480       34,894       23,927
     Total                                    $444,927     $273,664     $217,920
</TABLE>

---------
(1) Reflects the cost of securities purchased, adjusted for premium amortization
    and discount  accretion,  which  differs  from the amounts  reflected in the
    consolidated balance sheets due to fair value adjustments.


ANALYSIS OF INVESTMENT PORTFOLIO (HELD-TO-MATURITY) - DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                          After 1                    After 5
                                   1 year                 through                    through                After 10
Maturing in:                      or less                 5 years                    10 years               years
                                  Average                 Average                    Average                Average 
                                   Amount     Yield       Amount         Yield       Amount     Yield       Amount      Yield
                                   ------     -----       ------         -----       ------     -----       ------      -----
                                                       (dollars in thousands)
<S>                             <C>           <C>        <C>            <C>        <C>         <C>         <C>         <C>       
U.S. Treasury and other
 U.S. government agencies
 and corporations               $10,006       6.37%      $14,370        5.94%      $   --         --%          --         --%
State and political
 subdivisions (1)                   706      14.60         2,392       11.72        1,385       7.75        1,186       7.22
     Total                      $10,712       6.92%      $16,762        6.76%      $1,385       7.75%      $1,186       7.22%
</TABLE>

---------------

(1) Yields,  calculated  using  amortized  cost book values,  are presented on a
    fully taxable  equivalent basis using the federal statutory rate of 35%. All
    of the  obligations  of states  and  political  subdivisions  are rated A or
    higher by either  Moody's  Investors  Service,  Inc.  or  Standard  & Poor's
    Corporation.


ANALYSIS OF INVESTMENT PORTFOLIO (AVAILABLE-FOR-SALE) - DECEMBER 31, 1998


<TABLE>
<CAPTION>
                                                          After 1                    After 5
                                   1 year                 through                    through               After 10
Maturing in:                      or less                 5 years                    10 years              years
                                  Average                 Average                    Average               Average 
                                   Amount     Yield       Amount         Yield       Amount     Yield      Amount      Yield
                                   ------     -----       ------         -----       ------     -----      ------      -----
                                                       (dollars in thousands)
<S>                          <C>               <C>       <C>             <C>      <C>            <C>       <C>           <C>  
U.S. Treasury and other
 U.S. government agencies
 and corporations            $   51,396        5.95%     $111,181        5.93%    $117,087       6.22%     $34,738       6.66%
Other securities                     --        --          10,509        6.41       35,940       6.89       54,031       5.16
     Total                   $   51,396        5.95%     $121,690        5.97%    $153,027       6.38%     $88,769       5.74%
</TABLE>


-----------

(1) Reflects the cost of securities purchased, adjusted for premium amortization
    and discount  accretion,  which  differs  from the amounts  reflected in the
    consolidated balance sheets due to fair value adjustments.

The Company had no investments that were  obligations of the issuer,  or payable
from or secured by a source of revenue or taxing authority of the issuer,  whose
aggregate book value exceeded 10% of shareholders' equity at December 31, 1998.
<PAGE>

LOAN PORTFOLIO

During 1998, the Company sold $49.54 million of conforming  residential mortgage
loans to Countrywide  Mortgage  (Countrywide) and other private  investors,  and
held  additional  loans totaling $5.09 million at December 31, 1998,  whereas in
1997, the Company sold loans totaling $15.10 million and held  additional  loans
for sale totaling  $909,000 at December 31, 1997.  The average  balance of loans
held for sale for 1998 was $3.08 million,  and in 1997 was $1.11 million,  which
generated average yields of 4.96% and 6.52%, respectively.

The Company makes real estate construction, real estate mortgage, commercial and
agricultural,  and  consumer  loans.  The real  estate  construction  loans  are
generally secured by the construction  project financed,  and have a term of one
year or less.  The real  estate  mortgage  loans are  generally  secured  by the
property and have a maximum  loan to value ratio of 75% and  generally a term of
one to five years. The commercial and agricultural  loans consist of secured and
unsecured loans. The unsecured  commercial loans are made based on the financial
strength  of the  borrower  and usually  require  personal  guarantees  from the
principals of the business.  The collateral for the secured commercial loans may
be  equipment,  accounts  receivable,  marketable  securities or deposits in the
subsidiary  bank of the Company.  These loans  typically  have a maximum loan to
value ratio of 75% and a term of one to five years.  The consumer  loan category
consists of secured and unsecured loans.  The unsecured  consumer loans are made
based on the financial strength of the individual  borrower.  The collateral for
secured consumer loans may be marketable securities,  automobiles,  recreational
vehicles or deposits in the Company's  subsidiary bank. The usual term for these
loans is three to five years.
<PAGE>
LOAN DISTRIBUTION

<TABLE>
<CAPTION>
                                                                   December 31,
                              ------------------------------------------------------------------------------------------------------
                                 1998      %          1997        %          1996      %          1995      %        1994     %
                                 ----      -          ----        -          ----      -          ----      -        ----     -
                                                               (dollars in thousands)

<S>                           <C>           <C>    <C>             <C>     <C>          <C>     <C>           <C>  <C>          <C>
Real estate-construction      $ 113,321     16%    $  80,076       12%     $ 56,931     10%     $ 39,159      8%   $ 26,652     6%
Real estate-mortgage            430,764     59       424,274       63       384,495     66       334,981     67     308,777    69
Commercial and agricultural     118,959     16       106,555       16        85,011     14        71,258     14      62,626    14
Consumer                         64,522      9        63,663        9        57,389     10        55,885     11      47,759    11
 Total loans, net of
    unearned income             727,566    100%      674,568      100%      583,826    100%      501,283    100%    445,814   100%
    Less: Allowance for
   credit losses                 (7,198)              (6,701)                (5,997)              (6,365)            (5,953)
Net loans                     $ 720,368            $ 667,867              $ 577,829            $ 494,918          $ 439,861

</TABLE>


MATURITY AND INTEREST RATE SENSITIVITY OF LOANS-DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S>                                   <C>        <C>         <C>         <C>          <C>       <C>          <C>
Maturing in:                       One year or less                 After 1 thru 5 years                After 5 years
------------------------------------------------------------------------------------------------------------------------------------
                                         Fixed      Variable    Fixed       Variable     Fixed    Variable
                                        interest    interest   interest     interest    interest  interest
                                         rates       rates      rates        rates       rates     rates           Total
-----------------------------------------------------------------------------------------------------------------------------------
                                                                      ( dollars in thousands)
Real estate - construction             $ 74,239   $  21,086   $  16,613   $    537     $    846    $   -        $ 113,321
Real estate - mortgage(1)                65,135      58,062     161,835     58,918       85,960      854        $ 430,764
Commercial and agricultural              45,754      27,791      39,773      2,261        3,323       57        $ 118,959
Consumer                                  4,232       6,008      49,139          -        5,143        -        $  64,522
------------------------------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned income                        $ 189,360   $ 112,947   $ 267,360   $ 61,716     $ 95,272    $ 911        $ 727,566
</TABLE>
---------

(1) The Company's  customary  business practice is to write real estate mortgage
    loans,  which will be retained in its loan  portfolio,  with repayment terms
    normally not  exceeding  five years.  Most loans mature in one year with the
    balance due at  maturity.  Assuming  that credit  standards  are met at each
    maturity,  the Company customarily extends its loans for successive one-year
    periods.  In recent  years,  the  Company  began to write  some real  estate
    mortgage loans with terms up to 15 years, of which the volume was minimal as
    of December 31, 1998.


ALLOWANCE FOR CREDIT LOSSES

The Company  follows the  guidance of FASB  Statement  No. 114,  "Accounting  by
Creditors  for  Impairment  of  a  Loan,"  as  amended  by  Statement  No.  118,
"Accounting  by Creditors  for  Impairment  of a Loan - Income  Recognition  and
Disclosures."  It requires that impaired  loans,  within its scope,  be 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, a creditor
may measure  impairment based on a loan's  observable  market price, or the fair
value of the collateral if the loan is collateral dependent. Since the Company's
allowance for credit  losses was  considered  adequate  when this  Statement was
adopted,  the  impact  on the  Company's  financial  condition  and  results  of
operations was not material.

Statement 114 excludes  smaller  balance and  homogeneous  loans from impairment
reporting.  Therefore,  the Company  has  designated  consumer,  credit card and
residential  mortgage loans to be excluded for this purpose.  From the remaining
loan portfolio, loans rated as doubtful, or worse, classified as nonaccrual, and
troubled  debt  restructurings  may  be  evaluated  to be  impaired.  Loans  are
evaluated for nonaccrual  status when principal or interest is delinquent for 90
days or more and are placed on  nonaccrual  status  when a loan is  specifically
determined to be impaired. Any unpaid interest previously accrued on those loans
is reversed from income. Interest income generally is not recognized on specific
impaired  loans  unless  the  likelihood  of further  loss is  remote.  Interest
payments received on such loans are applied as a reduction of the loan principal
balance.  Interest  income on other  nonaccrual  loans is recognized only to the
extent of interest payments  received.  Up to this point, slow payment on a loan
is considered,  by the Company,  to only be a minimum  delay.  See Note 5 to the
consolidated  financial  statements  for  selected  information  concerning  the
Company's recorded investment in impaired loans.


<PAGE>

The  Company  maintains  its  allowance  for  credit  losses  at a level  deemed
sufficient  to provide for  estimated  potential  losses  inherent in the credit
extension  process.  Management  reviews  the  adequacy  of the  allowance  each
quarter,  considering factors such as current and future economic conditions and
their anticipated  impact on specific  borrowers and industry groups, the growth
and  composition  of the loan  portfolio,  the level of  classified  and problem
assets,  historical loss experience,  and the  collectability of specific loans.
Allowances  for impaired  loans are  generally  determined  based on  collateral
values or the present value of estimated cash flows.

The provision  for credit losses is charged to income in an amount  necessary to
maintain the allowance at the level management believes is appropriate.

The allowance for credit losses was $7.20 million,  or 1.00% of total loans, net
of unearned income, at December 31, 1998,  compared to $6.70 million, or .99% as
of December_31, 1997. The allowance for credit losses to nonperforming loans was
90.1% and 115.3% as of December 31, 1998 and 1997, respectively.

The Company's  provision for credit losses in 1998 was $1.77 million compared to
$1.52  million in 1997.  Net credit  losses in 1998 were less than the provision
for credit  losses by  $497,000.  Net  credit  losses in 1997 were less than the
provision for credit losses by $704,000.

Total  nonperforming  assets as of December  31,  1998  totaled  $9.83  million,
reflecting a $411,000 increase from the $9.41 million in nonperforming assets as
of December 31, 1997. Total nonperforming assets,  including properties acquired
through foreclosure,  represent .73% and .87% of total assets as of December 31,
1998 and 1997 respectively.

Nonperforming  assets at December 31, 1998,  include $6.42 million of nonaccrual
loans,  $1.57  million  of  loans  past due 90 days or more,  $1.84  million  of
foreclosed properties, consisting principally of commercial properties.


<PAGE>

It is the  Company's  practice  to  continue  the  recognition  of  earnings  on
delinquent  consumer loans until the loans are  charged-off  after being 90 days
past due.

PROBLEM ASSETS

<TABLE>
<CAPTION>
                                                                 December 31,
                                      ----------------------------------------------------------------------
                                          1998           1997           1996           1995           1994
                                          ----           ----           ----           ----           ----
                                                                 (dollars in thousands)
<S>                                  <C>            <C>            <C>            <C>            <C>     
Nonperforming loans:
  Nonaccrual loans(1)                  $  6,419       $  4,646       $  5,838       $  4,396       $  4,578
  Restructured loans(2)                      --            128             31            505            136
  Past due loans(3)                       1,571          1,039          2,531            132            615
    Total nonperforming loans             7,990          5,813          8,400          5,033          5,329
Foreclosed properties(4)                  1,835          3,601          3,833          3,276          2,941
   Total nonperforming
    assets                             $  9,825       $  9,414      $  12,233       $  8,309       $  8,270

Nonperforming assets to
 total loans (net of
 unearned income) and foreclosed
 properties at period-end                  1.35%          1.39%          2.08%          1.34%          1.43%
Nonperforming assets to total
 assets at period-end                       .73%           .87%          1.35%          1.08%          1.16%
Allowance for credit losses
 to nonperforming loans at
 period-end                                90.1%         115.3%          71.4%         126.5%         111.7%
</TABLE>

-----------

(1) See  discussion at "Allowance for Credit Losses" for nonaccrual and impaired
    loans.

(2) Restructured  loans  are  "troubled  debt   restructurings"  as  defined  in
    Statement of Financial Accounting Standards No. 15. Nonaccrual loans are not
    included in these totals.

(3) Past due loans are loans that were contractually past due 90 days or more as
    to principal or interest  payments at the dates  indicated.  Nonaccrual  and
    restructured loans are not included in these totals.

(4) Foreclosed properties include facilities no longer used for banking purposes
    and properties  that have been acquired in complete or partial  satisfaction
    of debt.  These  properties,  which are held for resale,  are carried at the
    lower of fair value (net of estimated selling expenses) or cost.


The Company has loans  totaling  $17.33  million  that are now current for which
there are  concerns as to the ability of the  borrowers  to comply with  present
loan  repayment  terms.  While  management  does  not  anticipate  any  loss not
previously  provided for on these loans,  changes in the financial  condition of
these borrowers may  necessitate  future  modifications  in their loan repayment
terms.

At December  31,  1998,  the Company had no  concentrations  of loans in any one
industry exceeding 10% of its total loan portfolio. An industry for this purpose
is defined as a group of counterparties  that are engaged in similar  activities
and have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.


<PAGE>
There were no other interest-bearing  assets at December 31, 1998,  classifiable
as nonaccrual, past due, restructured or problem assets.

ALLOWANCE FOR CREDIT LOSSES

<TABLE>
<CAPTION>
                                                                              Years ended December 31,
                                                     -------------------------------------------------------------------------
                                                         1998            1997           1996            1995             1994
                                                         ----            ----           ----            ----             ----
                                                                             (dollars in thousands)
<S>                                                  <C>             <C>            <C>            <C>               <C>     
Average total loans outstanding during year          $694,237        $627,955       $535,778       $ 479,798         $412,631
Allowance at beginning
 of year                                             $  6,701        $  5,997       $  6,364        $  5,953         $  5,401
Chargeoffs:
  Real estateconstruction                                  --             588             --              --               --
  Real estatemortgage                                     177             213            249             451               48
  Commercial and agricultural                             625             306            858             302              217
  Consumer                                                878             292            317             174              129
     Total charge-offs                                  1,680           1,399          1,424             927              394

Recoveries:
   Real estateconstruction                                 --              24             --              --               --
   Real estatemortgage                                     50              24             34               5               --
   Commercial and agricultural                            113             464             70             202              169
   Consumer                                               244              67             83              51               72
     Total recoveries                                     407             579            187             258              241

Net chargeoffs                                          1,273             820          1,237             669              153
Additions to allowance charged
 to operating expenses                                  1,770           1,524            408           1,080              705
Other transfers and allowance on loans
  acquired with purchased entity                           --              --            462              --               --
Allowance at end of year                                7,198          $6,701         $5,997          $6,364           $5,953
Ratio of net chargeoffs
 to average total loans                                   .18%            .13%           .23%            .14%             .04%
</TABLE>


The  allocation of the  Allowance,  presented in the following  table,  is based
primarily  on the factors  discussed  above in  evaluating  the  adequacy of the
Allowance  as a whole.  Since all of those  factors are  subject to change,  the
allocation is not necessarily indicative of the category of future loan losses.


ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES

<TABLE>
<CAPTION>
                                                                              December 31,
                                     ----------------------------------------------------------------------------------------------
                                       1998    %(1)       1997   %(1)      1996      %(1)      1995     %(1)       1994     %(1)
                                       ----    ----       ----   ----      ----      ----      ----     ----       ----     ----
                                                                           (dollars in thousands)
<S>                                 <C>        <C>    <C>      <C>    <C>          <C>   <C>           <C>   <C>           <C>
Real estateconstruction             $   926     16%    $   557    12%    $1,059       10%   $   806       8%    $   743       6%
Real estatemortgage                   3,616     59       3,216    63      2,720       66      2,921      67       2,704      69
Commercial and agricultural           1,639     16       1,270    16      1,023       14      1,502      14       1,189      14
Consumer                                337      9         444     9        580       10        483      11         345      11
Unallocated                             680     --       1,214    --        615       --        652      --         972      --
Total Allowance                    $  7,198    100%     $6,701   100%    $5,997      100%    $6,364     100%     $5,953     100%
</TABLE>

------------

(1) Percent of loans in each category to total loans, net of unearned income.


<PAGE>
DEPOSITS

AVERAGE DEPOSITS AND AVERAGE RATES

<TABLE>
<CAPTION>
                                                                      Years ended December 31, 
                                        -------------------------------------------------------------------------------------------
                                                  1998                          1997                          1996
                                        ---------------------         ---------------------          ---------------------
                                        Average                       Average                        Average
                                         daily        Average          daily        Average           daily        Average
                                        balance         Rate          balance         Rate           balance         Rate
                                        -------         ----          -------         ----           -------         ----
                                                                             (dollars in thousands)
<S>                                    <C>            <C>            <C>            <C>            <C>             <C>   
Noninterestbearing
 demand deposits                       $113,751          --%         $ 95,879           --%         $ 86,537           --%
Interestbearing                                                                            
 demand deposits                        199,307        2.91           169,188         2.66           166,787         2.77
Savings  deposits                        80,677        2.45            82,423         2.58            86,198         3.07
Certificates of deposit                                                                    
 and other time deposits                391,338        5.50           358,934         5.46           303,607         5.28
     Total average deposits            $785,073        3.73%         $706,424         3.71%         $643,129         3.62%
                                                                                     
</TABLE>




MATURITIES OF TIME DEPOSITS-$100,000 OR MORE

                                                      December 31,
                                          -------------------------------------
                                            1998           1997          1996
                                            ----           ----          ----
                                                  (dollars in thousands)
Maturing in:
   3 months or less                        $45,500        $29,408       $35,331
   Over 3 months through 6 months           11,587         18,686        12,791
   Over 6 months through 12 months          12,817         21,227        11,681
   Over 12 months                           15,288         18,175        13,323
                                           $85,192        $87,496       $73,126


SHORTTERM BORROWINGS


FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE(1)


<TABLE>
<CAPTION>
                                                                December 31, 
                                                   ------------------------------------ 
                                                       1998          1997        1996
                                                       ----          ----        ----
                                                            (dollars in thousands)
<S>                                                 <C>           <C>         <C>    
Total outstanding at year-end                       $ 92,287      $84,827     $55,203
                                                    ========      =======     =======
Average amount outstanding during the year          $ 59,301      $63,717     $37,173
                                                    ========      =======     =======
Maximum amount outstanding at any month-end         $105,974      $86,896     $58,401
                                                    ========      =======     =======
Weighted-average interest rate at year-end              4.62%        5.46%       5.12%
                                                    ========      =======     =======
Weighted-average interest rate during the year          4.92%        5.38%       5.07%
                                                    ========      =======     =======
</TABLE>
----------

(1) Includes  securities  sold  under  agreements  to  repurchase  with  various
    counterparties.  Repurchase  agreements  mature primarily within 60 days and
    are collateralized with certain debt securities.


<PAGE>

OTHER SHORT-TERM BORROWINGS(2)


<TABLE>
<CAPTION>
                                                                 December 31, 
                                                     ------------------------------------- 
                                                        1998           1997          1996
                                                        ----           ----          ----
                                                              (dollars in thousands)
<S>                                                   <C>            <C>          <C>    
Total outstanding at year-end                         $248,155       $154,793     $78,593
                                                      ===================================
Average amount outstanding during the year            $184,727       $111,989     $47,996
                                                      ===================================
Maximum amount outstanding at any month-end           $248,155       $154,793     $78,593
                                                      ===================================
Weighted-average interest rate at year-end               5.17%          5.36%       6.01%
                                                      ===================================
Weighted-average interest rate during the year           5.47%          5.63%       6.01%
                                                      ===================================
</TABLE>

--------------

(2) Primarily reflects  borrowings under a secured lending  arrangement with the
    Federal Home Loan Bank of Atlanta.

A portion of the increase in other  short-term  borrowings  is  attributable  to
arbitrage  transactions.  For a discussion  about these arbitrage  transactions,
please see the "Investment Portfolio" section above.

Included in other short-term  borrowings at December 31, 1998, are the following
borrowings  from the Federal Home Loan Bank of Atlanta.  These  borrowings  have
scheduled maturity dates but the majority are callable at the sole discretion of
the  Federal  Home Loan Bank of  Atlanta  within one year from the date of their
initial funding.  The Company has the option to terminate the remainder of these
agreements upon the repricing  date. All of these  borrowings  reprice  monthly,
quarterly,  semi-annually,  or annually,  until the first call date and then are
repriced quarterly, thereafter.

<TABLE>
<CAPTION>
   December 31, 1998 
                    Due in        Interest rate range           Amount
                    ------        -------------------           ------
                                (dollars in thousands)
<S>                 <C>             <C>                     <C>       
                    2000                  5.28%              $   16,000
                    2002                  5.30%                  29,000
                    2003              5.01% - 5.26%              25,000
                    2004                  5.36%                  10,000
                    2007             5.03% - 5.27%               72,000
                    2008             4.19% - 5.37%               51,000
                                           Total               $203,000
</TABLE>

<PAGE>
CAPITAL RESOURCES

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital (as defined in the regulations) to  risk-weighted  assets (as
defined),  and of Tier I capital to  average  assets  (as  defined).  Management
believes,  as of  December  31, 1998 and 1997 that the Company and the Bank meet
all capital adequacy  requirements to which they are subject. See Note 14 to the
consolidated   financial  statements  for  a  table  depicting  compliance  with
regulatory capital requirements.

As of December 31, 1998, the most recent notification from the regulatory agency
categorized  the Bank as well  capitalized  under the  regulatory  framework for
prompt  corrective  action.  To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table in Note 14.  There are no  conditions  or events since
that notification which management believes have changed the Bank's category.

For a  discussion  related  to the  Trust  Preferred  Securities,  see  Note  9,
Long-term debt.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required for this section can be located in the "Risk Management
Instruments"   section,  the  "Market  Risk"  section,  and  the  Notes  to  the
Consolidated Financial Statements.

INFLATION

The effect of changing prices on financial  institutions is typically  different
than on  non-banking  companies  since  virtually  all of a  bank's  assets  and
liabilities  are  monetary  in  nature.   In  particular,   interest  rates  are
significantly affected by inflation, but neither the timing nor magnitude of the
changes are directly related to price level indices;  therefore, the Company can
best counter  inflation  over the long term by managing net interest  income and
controlling net increases in noninterest income and expenses.

YEAR 2000

The Year 2000 problem involves computer processing problems and failures arising
from the fact that some existing  computer programs use only the last two digits
to refer to a year,  and therefore do not properly  recognize a year that begins
with "20"  instead of "19".  This  section  will  highlight  how the  Company is
currently  addressing  its business areas which may be affected by the Year 2000
problem.

Year 2000 Readiness Planning

The Company has prepared a Year 2000 plan which  includes  contacting all of the
software  vendors that maintain the computer  programs  that the Company  relies
upon. As of December 31, 1998,  the Company has performed  risk  assessments  of
funds providers, funds takers, fiduciary activities and systems and has assessed
the Year 2000  preparedness  of  suppliers  of data  processing  services to the
Company.  The Company's  primary  supplier of data processing  services also has
adopted a Year 2000 readiness  plan and timetable to make the changes  necessary
for it to provide services in the Year 2000, and has provided written assurances
to the  Company  of its  progress.  That  supplier  has  been  examined  for Y2K
readiness by federal bank examiners. The Company is also monitoring the progress
of its other suppliers of data processing services.


<PAGE>
As of December  31, 1998,  the Company has  implemented  its customer  awareness
program which includes communications of Y2K readiness efforts through statement
stuffers, direct mailings,  brochures,  newspaper and television advertisements,
letters and our Internet  site. The Company has  additionally  assessed the Year
2000 preparedness of its large customers and has contacted large commercial loan
and deposit customers to determine their readiness.

As of  December  31,  1998,  the  Company  was in the  process  of  testing  and
implementing  necessary changes in hardware and software.  At this time, most of
these  changes in hardware  and  software  have been  tested.  The Company  will
continue to evaluate its systems throughout the remainder of 1999.

Additional steps must be taken to achieve Y2K compliance.

The  Company  is in the  banking  industry,  which  is  heavily  regulated.  The
Company's primary regulator is the Federal Reserve Bank. The Company is on track
to be in compliance  with all Federal  Reserve  regulations  related to the Year
2000 issue.

Year 2000 Related Costs

Since many of the programs used by the Company are  "off-the-shelf"  as compared
to "highly  customized",  the cost to address Year 2000 related issues for these
programs will not be as high as the costs for other  companies that rely more on
"highly customized"  software.  The Company has a budget for software,  hardware
and consulting  costs of  approximately  $500,000.  As of December 31, 1998, the
Company has expended  $142,000 for these  costs.  The Company  estimates it will
incur $250,000 in costs in 1999. The Company  estimates these costs will be made
up of hardware and software  upgrades,  consultant fees,  human  resources,  and
testing fees.  This area is changing very rapidly and the actual costs  incurred
by the Company may differ from what has been anticipated.

Year 2000 Related Risks

An estimation of the efforts of the Company in addressing the Year 2000 issue in
a successful  and timely manner  depends to a large  extent,  in addition to the
Company's own effort,  on the efforts of the Company's data  processing  service
provider as well as the technology and services of other service providers.  The
failure of the Company, its principal data processing  provider,  its customers,
or of other service providers,  including utilities and government agencies,  to
be Year 2000  compliant in a timely  manner could have a negative  impact on the
Company's  business,  including  but not  limited  to an  inability  to  provide
accurate  processing  of customer  transactions,  and delays in loan  collection
practices.  The  Company's  belief  that it, and its primary  suppliers  of data
processing services, will achieve Year 2000 compliance, are based on a number of
assumptions and on statements made by third parties,  involve events and actions
which may be beyond the control of the Company,  and are subject to uncertainty.
While the  Company  has been  making  efforts to prepare  those  items under its
control, it is not able to predict the effects, if any, of the public's reaction
to the Year 2000 on the Company, financial markets or society in general.

Contingency Planning

The Company has in place a Disaster  Recovery  Plan for its computer  operations
facility  and a  business  resumption  plan for its  various  departments.  This
Disaster Recovery Plan provides for  mission-critical  and support operations to
be conducted at our off-site disaster recovery  facility.  The  mission-critical
systems will have been tested at the Disaster Recovery site;  therefore,  in the
event the Company cannot perform its own core business  processes,  the existing
FCNB  Bank  Disaster  Recovery  Plan  would be  followed  in  order to  continue
operations.

WEB SITE

The  Securities  and  Exchange  Commission  maintains  a web site that  contains
reports,  proxy  and  information  statements  and other  information  regarding
registrants that file electronically with the Commission, including the Company;
that address is: http:\\www.sec.gov.
<PAGE>
FINANCIAL ANALYSIS 1997-1996

EARNINGS SUMMARY:

Net income was $10.10 million in 1997 compared to $6.88 million for 1996.  Basic
and diluted  earnings  per share were $1.01 in 1997  compared to $0.69 for 1996.
Net income before  merger-related  expenses was $10.38 million in 1997 and $8.79
million in 1996,  while  basic  earnings  per share were $1.04 in 1997,  diluted
earnings  per share were $1.03 in 1998 and basic and diluted  earnings per share
were $0.88 for 1996.

Return on average assets was 1.04% in 1997 compared to .84% for 1996.  Return on
average  shareholders'  equity  was  12.35% in 1997  compared  to 9.24% in 1996.
However,  before merger-related  expenses the return on average assets was 1.06%
in 1997 and 1.07% in 1996,  and the  return on average  shareholders  equity was
12.70% and 11.81% in 1997 and 1996, respectively.

NET INTEREST INCOME:  On a fully  taxable-equivalent  basis, net interest income
increased $4.12 million or 11.8% in 1997 and $1.75 million or 5.3% in 1996.

In 1997,  the net  interest  margin on  average  total  interest-earning  assets
decreased to 4.35% from 4.62% in 1996.  Changes in net interest  income  between
periods are affected  principally by the volume of  interest-earning  assets and
the yield on those assets,  and by the volume of  interest-bearing  deposits and
other liabilities and the rates paid on those deposits and liabilities. Table 2,
"Rate/Volume  Analysis,"  summarizes on a fully  taxable-equivalent  basis,  the
impact of changes in average  balances and average  rates on the  Company's  net
interest income for the periods indicated.

NONINTEREST  INCOME:  Noninterest  income increased by $1.58 million or 14.4% in
1997 and by $333,000 or 3.1% in 1996.

The Company  utilized the secondary  mortgage  market to satisfy its  customers'
demand for long-term  fixed-rate mortgage financing and, in so doing,  generated
gains in the amount of $407,000 from the sale of conforming  mortgage  loans and
generated  $374,000 in related  servicing fees in 1997. During 1996, the Company
realized  gains  from loan  sales and  servicing  fee  income  of  $305,000  and
$490,000, respectively, from its activity in this market.

The increased  service fees on deposit  accounts are  attributed to increases in
both account  volume and  activity,  since  service  charges per account and per
transaction remained relatively constant between the periods.

NONINTEREST  EXPENSES:  Noninterest  expenses decreased $319,000,  but excluding
merger-related  costs of $460,000  in 1997 and $2.87  million in 1996 would have
increased $2.09 million.

Increases  in  salaries  and  employee  benefits of $813,000 or 4.5% in 1997 and
$785,000  or 4.6% in 1996,  primarily  reflect the effects of an increase in the
number of Company personnel during these periods.

Net  occupancy  and  equipment  expenses in 1997  increased  $91,000  (2.6%) and
$466,000 (23.3%), respectively, compared to those incurred in 1996. The increase
in occupancy and equipment  expenses is primarily  associated with the increased
costs of  maintaining  the new  corporate  headquarters  facility.  These  costs
include additional depreciation, utility expenses and real estate taxes.

Other  operating  expenses  increased  $716,000 or 8.5% in 1997,  but  decreased
$93,000 or 1.1% in 1996. See Note 13 to the  consolidated  financial  statements
for a schedule  showing a detailed  breakdown of the Company's more  significant
other operating expenses.

INCOME TAXES: Income tax expense increased to $5.07 million in 1997, compared to
$3.89 million in 1996.

<PAGE>

SELECTED FINANCIAL DATA

The following table for the years 1997, 1996, 1995 and 1994 has been restated to
include the effects of the acquisitions of Capital and Frederick Underwriters in
1998,  accounted for as poolings of interests  and sets forth  certain  selected
financial data  concerning the Company,  and is qualified in its entirety by the
detailed information and financial statements, including notes thereto, included
elsewhere herein.


<TABLE>
<CAPTION>


====================================================================================================================================
Year ended December 31,                            1998                      1997           1996           1995            1994
====================================================================================================================================
                                                                        (dollars in thousands, except per share data)
<S>                                                <C>                    <C>            <C>            <C>             <C>    
Summary of Operating Results:
Total interest income                              $85,421                $74,675        $63,802        $58,463         $50,123
Total interest expense (1)                          43,835                 35,978         28,725         25,721          19,132
====================================================================================================================================
Net interest income                                 41,586                 38,697         35,077         32,742          30,991
Provision for credit losses                          1,770                  1,524            408          1,080             705
====================================================================================================================================
Net interest income after
  provision for credit losses                       39,816                 37,173         34,669         31,662          30,286
Net securities gains (losses)                        1,481                    733            440            123             393
Noninterest income (excluding
  net securities gains (losses))                    14,184                 11,797         10,514         10,498           9,049
Noninterest expenses                                40,644                 34,537         34,856         30,604          28,603
====================================================================================================================================
Income before provision for income taxes            14,837                 15,166         10,767         11,679          11,125
====================================================================================================================================
Provision for income taxes:
Operating activities                                 5,026                  5,070          3,891          3,198           3,054
Thrift bad debt reserve recapture                    1,750                     --             --             --              --
====================================================================================================================================
Income tax expense                                   6,776                  5,070          3,891          3,198           3,054
====================================================================================================================================
Net income                                           8,061                 10,096          6,876          8,481           8,071
   Other comprehensive income (loss),
    net of taxes                                       212                  2,919           (34)          2,875         (3,359)
====================================================================================================================================
Comprehensive income                               $ 8,273                $13,015         $6,842        $11,356          $4,712
------------------------------------------------------------------------------------------------------------------------------------
Net income before merger-related expenses          $11,222                $10,381         $8,787         $8,784          $8,298
====================================================================================================================================
Per Share Data: (2)
Basic earnings                                       $0.80                  $1.01          $0.69          $0.86           $0.83
Diluted earnings                                     $0.80                  $1.01          $0.69          $0.86           $0.83
Basic earnings before merger-related
     expenses                                        $1.12                  $1.04          $0.88          $0.90           $0.86
Diluted earnings before merger-related
     expenses                                       $1.11                    $1.03          $0.88          $0.89           $0.85
Cash dividends declared                            $0.436                  $0.340         $0.301         $0.301          $0.269
Book value at period-end                           $9.01                    $8.81          $7.86          $7.56           $6.76
Shares outstanding at period-end                   10,060,714           9,988,312      9,969,334      9,844,735       9,516,361
Weighted average shares outstanding:
  Basic                                            10,024,630           9,975,300      9,975,655      9,813,797       9,691,289
  Diluted                                          10,114,648          10,042,062     10,010,423      9,839,105       9,712,245

Other Data (At Year-End):
Total loans, net of unearned  income               $727,566              $674,568       $583,826       $501,283        $445,814
Total assets                                                            1,083,898        911,945        771,038         716,609
                                                   1,337,224
Total deposits                                     851,819                745,486        690,710        615,084         576,052
Federal funds purchased and securities
sold under agreement to repurchase                 92,287                  84,827         55,203         32,251          29,896
Other short-term borrowings                        248,155                154,793         78,593         34,253          30,953
Long-term debt                                     40,250                                                 5,680           7,000
Total shareholders' equity                         90,610                  88,016         78,332         74,382          64,350

Consolidated Ratios:
Return on average total assets                     0.70%                    1.04%          0.84%          1.15%           1.19%
Return on average total assets before
  merger-related expenses                          0.98%                    1.06%          1.07%          1.19%           1.22%
Return on average shareholders' equity             8.80%                   12.35%          9.24%         12.25%          12.97%
Return on average shareholders' equity
before merger-related expenses                     12.25%                  12.70%         11.81%         12.69%          13.34%
Average equity to average assets                   7.97%                    8.39%          9.09%          9.40%           9.16%
Cash dividends declared to net income              54.45%                  34.29%         43.00%         34.82%          31.11%

</TABLE>
----------
(1) Net of $108,000 and $300,000 of capitalized  construction period interest in
    1996 and 1995, respectively.

(2) Per share data for 1997,  1996,  1995,  and 1994 has been  restated  for the
    effects of a four-for-three  stock split effected in the form of a 33% stock
    dividend paid in August 1998.

<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
  
<TABLE>
<CAPTION>
                                                                            December 31,
                                                                 ----------------------------------
                                                                  1998                    1997
                                                                  ----                    ----
                                                           (dollars in thousands, except per share amounts)
<S>                                                           <C>                   <C>        
ASSETS
Cash and due from banks                                       $    30,500           $    32,136
Interest-bearing deposits in other banks                            1,334                   755
Federal funds sold                                                 47,262                41,031
   Cash and cash equivalents                                       79,096                73,922
Loans held for sale                                                 5,087                   909
Investment securities held to maturity - fair value
 of $30,469 in 1998 and $49,230 in 1997                            30,045                48,889
Investment securities available for sale - at fair value          421,176               230,293
Loans                                                             727,589               674,944
Less: Allowance for credit losses                                  (7,198)               (6,701)
        Unearned income                                               (23)                 (376)
      Net loans                                                   720,368               667,867
Bank premises and equipment                                        25,280                24,665
Other assets                                                       56,172                37,353
      Total assets                                             $1,337,224            $1,083,898


LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
 Noninterest-bearing deposits                                   $ 139,320              $110,646
 Interest-bearing deposits                                        712,499               634,840
      Total deposits                                              851,819               745,486
Short-term borrowings:
 Federal funds purchased and securities
  sold under agreements to repurchase                              92,287                84,827
 Other short-term borrowings                                      248,155               154,793
Long term debt:
  Guaranteed preferred beneficial interests in the Company's
  subordinated debentures                                          40,250                     -
Accrued interest and other liabilities                             14,103                10,776
      Total liabilities                                         1,246,614               995,882

COMMITMENTS AND CONTINGENCIES (Notes 10 & 17)
SHAREHOLDERS' EQUITY
Preferred stock, per share par value $1.00;
 1,000,000 shares authorized; none outstanding                         --                    --
Common stock, per share par value $1.00;
 20,000,000 shares authorized;  10,060,714 in 1998
 and 8,017,378 in 1997 shares issued
 and outstanding                                                   10,061                 8,017
Capital surplus                                                    46,597                49,950
Retained earnings                                                  30,082                26,391
Accumulated other comprehensive income                              3,870                 3,658
      Total shareholders' equity                                   90,610                88,016
      Total liabilities and shareholders' equity               $1,337,224            $1,083,898
</TABLE>

                See Notes to Consolidated Financial Statements.


<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME  


<TABLE>
<CAPTION>
                                                                                  For the years ended December 31,
                                                                              -----------------------------------------------
                                                                                  1998           1997             1996
                                                                                  ----           ----             ----
                                                                              (dollars in thousands, except per share amounts) 
<S>                                                                             <C>            <C>             <C>    
Interest income:
   Interest and fees on loans                                                   $62,894        $57,728         $50,232
   Interest and dividends on investment
    securities:
      Taxable                                                                    19,466         14,692          11,089
      Tax exempt                                                                    326            341             505
      Dividends                                                                   1,069            618             539
   Interest on federal funds sold                                                 1,590          1,196           1,263
   Other interest income                                                             76            100             174
               Total interest income                                             85,421         74,675          63,802

Interest expense:
  Interest on deposits                                                           29,277         26,211          23,556
  Interest on federal funds purchased and
    securities sold under agreements
     to repurchase                                                                2,919          3,428           1,884
  Interest on other short-term
     borrowings                                                                  10,112          6,082           2,783
  Interest on long-term debt                                                      1,527            257             502
               Total interest expense                                            43,835         35,978          28,725
Net interest income                                                              41,586         38,697          35,077
Provision for credit losses                                                       1,770          1,524             408
Net interest income after provision
  for credit losses                                                              39,816         37,173          34,669

Noninterest income:
   Service fees                                                                   4,154          3,403           2,931
   Insurance commissions                                                          5,332          5,668           5,631
   Net securities gains                                                           1,481            733             440
   Gain on sale of loans                                                            751            407             305
   Income from bank-owned life insurance                                          1,222            605              --
   Other operating income                                                         2,725          1,714           1,647
               Total noninterest income                                          15,665         12,530          10,954

Noninterest expenses:
  Salaries and employee benefits                                                 21,464         18,850          18,037
  Occupancy expenses, net                                                         4,267          3,617           3,526
  Equipment expenses                                                              3,218          2,466           2,000
  Merger-related expenses                                                         1,936            460           2,865
  Other operating expenses                                                        9,759          9,144           8,428
               Total noninterest expenses                                        40,644         34,537          34,856

Income before provision for income taxes                                         14,837         15,166          10,767
Provision for income taxes:
   Operating activities                                                           5,026          5,070           3,891
   Thrift bad debt reserve recapture                                              1,750             --              --
Income tax expense                                                                6,776          5,070           3,891

Net income                                                                        8,061         10,096           6,876
Other comprehensive income, net of tax:
   Unrealized gains on securities:
      Unrealized holding gains arising during period, net of taxes
        of $711, $2,118, and $149                                                 1,117          3,369             236
         Less:  reclassification adjustment for gains
            included in net income, net of taxes of $576, $283, and $170            905            450             270
Other comprehensive income (loss), net of tax                                       212          2,919             (34)
Comprehensive income                                                            $ 8,273        $13,015         $ 6,842         
                                                                                -------        -------         -------         
Basic and diluted earnings per share                                              $0.80          $1.01           $0.69

</TABLE>

                See Notes to Consolidated Financial Statements.
<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
(dollars in thousands, except per share amounts)
          
<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                                                                           Other           Total
                                                      Shares         Common      Capital    Retained   Comprehensive   Shareholders'
                                                    outstanding      stock       Surplus    Earnings      Income          Equity
                                                    -----------      -----       -------    --------      ------          ------
<S>                                                   <C>            <C>          <C>          <C>          <C>            <C>    
Balance at December 31, 1995                          5,298,361      $ 5,298      $26,733      $33,658      $  530         $66,219
Effects of pooled entities                            2,073,633        2,074        6,428         (582)        243           8,163
Net income                                                   --           --           --        6,876          --           6,876
Dividend reinvestment and stock purchase plan                --           --           --          (11)         --             (11)
Issuance of common stock                                 27,507           27          103           --          --             130
Repurchase of common stock                              (30,000)         (30)        (550)          --          --            (580)
Stock option transactions                                96,199           97          469           --          --             566
Cash dividends declared ($0.301 per share)                   --           --           --       (2,997)         --          (2,997)
Change in fair value of securities available for  
  sale, net                                                  --           --           --           --         (34)            (34)
                                                      =========      =======      =======      =======      ======         =======
Balance at December 31, 1996                          7,465,700        7,466       33,183       36,944         739          78,332

Net income                                                   --           --           --       10,096          --          10,096
Dividend reinvestment and stock purchase plan                --           --           --          (18)         --             (18)
Issuance of common stock                                  3,954            4           22           --          --              26
Shares issued with stock dividend                       536,503          536       16,633      (17,169)         --              --
Repurchase of common stock                              (10,000)         (10)        (203)          --          --            (213)
Stock option transactions                                21,221           21          315           --          --             336
Cash dividends declared($0.340 per share)                    --           --           --       (3,462)         --          (3,462)
Change in fair value of securities available for 
  sale, net                                                  --           --           --           --       2,919           2,919
                                                      =========      =======      =======      =======      ======         =======
Balance at December 31, 1997                          8,017,378        8,017       49,950       26,391       3,658          88,016
Net income                                                   --           --           --        8,061          --           8,061
Dividend reinvestment and stock purchase plan                --           --           --          (29)         --             (29)
Issuance of common stock                                  3,899            4           81           --          --              85
Shares issued with stock split effected in the form  
  of a stock dividend                                 1,973,335        1,973       (1,973)          --          --              --
Repurchase of common stock                              (92,500)         (92)      (2,016)          --          --          (2,108)
Stock option transactions                               158,602          159          555           --          --             714
Cash dividends declared($0.436 per share)                    --           --           --       (4,341)         --          (4,341)
Change in fair value of securities available for 
  sale, net                                                  --           --           --           --         212             212
Balance at December 31, 1998                         10,060,714      $10,061      $46,597      $30,082      $3,870         $90,610
</TABLE>

                See Notes to Consolidated Financial Statements.
<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                             For the years ended December 31,
                                                                             --------------------------------
                                                                           1998          1997             1996
                                                                           ----          ----             ----
                                                                                      (dollars in thousands)
<S>                                                                    <C>           <C>              <C>      
Cash flows from operating activities:
 Net income                                                            $   8,061     $  10,096        $   6,876
    Adjustments to reconcile net income to
     net cash provided by (used in) operating activities:
      Depreciation and amortization                                        2,812         2,288            1,933
      Provisions for credit losses and foreclosed properties               1,822         1,559              439
      Deferred income taxes (benefits)                                      (164)        1,101              (70)
      Accretion of net loan origination fees                              (1,209)         (781)            (496)
      Net securities gains                                                (1,481)         (733)            (440)
      Net (gain) loss on sales of property                                   101           204             (241)
      Increase (decrease) in other assets                                 (1,399)       (1,106)             266
      Decrease (increase) in loans held for sale                          (4,178)        2,253             (800)
      Increase (decrease) in accrued interest and other liabilities        3,039         1,856           (1,164)
      Other operating activities                                             (14)         (457)            (250)
             Net cash provided by operating activities                     7,390        16,280            6,553
Cash flows from investing activities:
    Proceeds from sales of investment securities
      available for sale                                                  53,933        62,068           33,434
    Proceeds from maturities of investment securities
      available for sale                                                 144,467        66,678           37,788
    Proceeds from maturities of investment securities
      held to maturity                                                     9,991        12,257           25,286
    Purchases of investment securities available for sale               (376,134)     (177,896)        (122,467)
    Purchases of investment securities held to maturity                   (2,070)      (18,031)         (22,708)
    Net increase in loans                                                (53,377)      (91,371)         (55,341)
    Purchases of bank premises and equipment                              (2,359)       (1,957)          (5,498)
    Proceeds from dispositions of property                                 1,444           939            2,166
    Purchase of foreclosed properties                                        (26)         (159)            (128)
    Purchases of investments in bank-owned life insurance                (15,000)      (13,540)              --
    Acquisition of business, net of cash acquired                         41,836            --           (2,981)
             Net cash (used in) investing activities                    (197,295)     (161,012)        (110,449)

Cash flows from financing activities:
    Net increase in noninterest-
     bearing deposits, NOW accounts, money
     market accounts, and savings accounts                             $  47,406     $   5,766        $  26,552 
    Net increase  in time deposits                                        14,125        49,011           20,064 
    Net increase in short-term borrowings                                100,822       106,064           65,634 
    Proceeds from long-term debt                                          40,250         1,833               -- 
    Payments on long-term debt                                                --        (2,181)          (5,680)
    Debt issuance costs                                                    1,710            --               -- 
    Dividend reinvestment and stock purchase plan                            (29)          (18)             (11)
    Proceeds from issuance of common stock                                   664           210              578 
    Repurchase of common stock                                            (2,108)         (213)            (580)
    Dividends paid                                                        (4,341)       (3,462)          (2,997)
             Net cash provided by financing activities                   195,079       157,010          103,560 
Net increase (decrease)in cash and cash equivalents                        5,174        12,278             (336)
Cash and cash equivalents-beginning of year                               73,922        61,644           61,980 
Cash and cash equivalents-end of year                                  $  79,096     $  73,922          $61,644 
                                                                                                                
Supplemental cash flow information:                                                                             
    Noncash investing and financing activities:                                                                 
    Foreclosed properties acquired  in settlement of loans                  $440          $589             $720 
    Transfers from foreclosed properties to loans                             --            --           $1,165 
    Bank premises transferred to other assets                                 --            --           $1,190 
    Surplus from stock option transactions                                  $135          $152             $118 
                                                                                                                
Details of acquisition:                                                                                         
    Fair value of assets acquired                                      $   2,096            --          $35,130 
    Fair value of liabilities assumed                                    (45,090)           --          (31,616)
    Purchase price in excess of the net assets acquired                    2,273            --            3,212 
    Cash paid (received)                                                 (40,721)           --            6,726 
    Less cash acquired                                                     1,115            --            3,745 
Net cash paid (received) for acquisition                               $ (41,836)           --           $2,981 
                                                                                                      
</TABLE>

The Company  paid  interest of  $43,062,  $34,878 and $28,846 in 1998,  1997 and
1996,  respectively.  Income taxes paid by the Company  were $6,714,  $2,728 and
$4,323 in 1998, 1997 and 1996 respectively.

                See Notes to Consolidated Financial Statements.
<PAGE>
                            FCNB CORP AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

NOTE 1.  NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

FCNB Corp (the "Parent Company") is a one bank holding company that provides its
customers with banking and non-banking  financial services through its principal
wholly-owned  subsidiary  FCNB Bank (the "Bank").  The Bank offers various loan,
deposit and other  financial  service  products to their  customers.  The Bank's
customers include individuals and commercial  enterprises.  Its principal market
areas encompass Frederick,  Baltimore,  Carroll,  Howard, Prince George's,  Anne
Arundel and  Montgomery  counties in  Maryland,  Washington,  D.C.,  and Fairfax
County,  Virginia.   Additionally,  the  Bank  maintains  correspondent  banking
relationships and transacts daily federal funds sales on an unsecured basis with
regional correspondent banks.

The  accounting  and reporting  policies and practices of the Parent Company and
its subsidiary  (collectively,  the "Company")  conform with generally  accepted
accounting  principles.  The following is a summary of the Company's significant
accounting policies:

Basis of presentation:

The consolidated financial statements include the accounts of the Parent Company
and the Bank, presented on the accrual basis of accounting, after elimination of
all   intercompany   accounts  and   transactions.   In  the  Parent   Company's
unconsolidated  financial statements,  the investment in subsidiary is accounted
for using the equity method of accounting.

Use of Estimates:

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from these estimates.

Comprehensive income:

On January 1, 1998, the Company  adopted  Financial  Accounting  Standards Board
("FASB") Statement No. 130,  "Reporting  Comprehensive  Income (Statement 130)."
Comprehensive  income, as defined by Statement 130, is the change in equity of a
business enterprise during a reporting period from transactions and other events
and  circumstances  from  non-owner  sources.  In addition to the  Company's net
income, change in equity components under comprehensive income reporting include
the net change in unrealized gain or loss on available-for-sale securities.

Presentation of cash flows:

For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand,  amounts due from banks (including cash items in process of clearing) with
a maturity of 90 days or less, and federal funds sold. Generally,  federal funds
are sold for one day periods.

Investment securities:

Securities  classified as held-to-maturity are those debt securities the Company
has both the intent and  ability to hold to  maturity  regardless  of changes in
market  conditions,  liquidity needs or changes in general economic  conditions.
These  securities are carried at cost,  adjusted for amortization of premium and
accretion of discount  computed using the interest method over their contractual
lives.
<PAGE>
Securities classified as  available-for-sale  are equity securities with readily
determinable  fair values and those debt  securities that the Company intends to
hold for an  indefinite  period of time but not  necessarily  to  maturity.  Any
decision to sell a security classified as  available-for-sale  would be based on
various factors,  including  significant movements in interest rates, changes in
the maturity  mix of the  Company's  assets and  liabilities,  liquidity  needs,
regulatory capital  considerations,  and other similar factors. These securities
are  carried  at  estimated  fair  value,  with any  unrealized  gains or losses
reported in shareholders' equity, net of the related deferred tax effect.

Dividend and interest income, including amortization of premium and accretion of
discount  arising at acquisition,  from all categories of investment  securities
are included in interest income in the consolidated  statements of income. Gains
and losses  realized on sales of  investment  securities,  determined  using the
adjusted cost basis of the specific securities sold, are included in noninterest
income in the consolidated statements of income.  Additionally,  declines in the
estimated fair value of individual  investment  securities below their cost that
are other than  temporary are reflected as realized  losses in the  consolidated
statements of income.

Loans held for sale:

Loans held for sale are  generally  held for  periods of ninety days or less and
are carried at the lower of aggregate cost or fair value.

Impaired loans:

The Company  accounts for  impaired  loans  following  FASB  Statement  No. 114,
"Accounting by Creditors for Impairment of a Loan,"  (Statement  114) as amended
by FASB  Statement No. 118,  "Accounting by Creditors for Impairment of a Loan -
Income  Recognition and Disclosures".  Statement 114, as amended,  requires that
the  measurement  of a loan's  impairment  be based on the present  value of the
loan's expected future cash flows or, alternatively, the observable market price
of the loan or the fair value of the collateral. Statement 114 does not apply to
large groups of homogeneous loans such as consumer,  credit card and residential
mortgage loans.  Impaired loans are therefore  primarily  business loans,  which
include  commercial  loans,  commercial  mortgages and construction  real estate
loans.  The  Company  discontinues  the  accrual  of  interest  when a  loan  is
specifically determined to be impaired.  Interest receipts on impaired loans are
recognized  as  interest  income or are  applied to  principal  when  management
believes ultimate collectability of principal is in doubt.

Loans and allowance for credit losses:

Loans are carried at the amount of unpaid principal,  adjusted for deferred loan
fees and origination costs.  Interest on loans is accrued based on the principal
amounts outstanding. When principal or interest is delinquent for ninety days or
more the  Company  evaluates  the loan for  nonaccrual  status.  After a loan is
placed on nonaccrual status,  all interest  previously accrued but not collected
is  reversed  against  current  period  interest  income.  Consistent  with  the
Company's policy for impaired loans,  interest  receipts on nonaccrual loans are
recognized as interest income unless ultimate  collectability  is in doubt. Cash
collections  on such  loans are  applied  as  reductions  of the loan  principal
balance and no interest  income is recognized  until the  principal  balance has
been collected.

Nonrefundable loan fees and related direct costs are deferred and the net amount
is amortized to income as a yield adjustment over the life of the loan using the
interest method.

The allowance  for credit losses is maintained at a level that, in  management's
judgment,  is adequate to absorb credit losses inherent in the credit  extension
process.  Management's  evaluation  of  the  loan  portfolio  considers  current
economic  conditions,  past loss  experience,  specific  impaired loans and such
other  factors  as,  in  management's  best  judgment,  deserve  recognition  in
estimating  credit losses.  Allowances for impaired loans are generally based on
collateral  values or the present value of estimated  cash flows.  Uncertainties
inherent in the estimation process might cause  management's  estimate of credit
losses in the loan  portfolio  and the related  allowance  to change in the near
term. The provisions for credit losses included in the  consolidated  statements
of income serve to maintain the allowance at a level which management  considers
adequate.
<PAGE>
Bank premises and equipment:

Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. The provision for depreciation is computed using straight-line and
accelerated  methods  based on the  estimated  useful  lives of the assets which
range  from 5 to 75 years for bank  premises  and 5 to 25 years  for  equipment.
Leasehold  improvements are amortized over the lesser of the terms of the leases
or their estimated useful lives. Expenditures for improvements, which extend the
life of an asset,  are capitalized and  depreciated  over the asset's  remaining
useful life.  Gains or losses  realized on the  disposition  of  properties  and
equipment are reflected in the consolidated  statements of income.  Expenditures
for repairs and maintenance are charged to operating expenses as incurred.

Foreclosed properties:

Foreclosed  properties include properties that have been acquired in complete or
partial  satisfaction of debt. These  properties are initially  recorded at fair
value on the date of acquisition. Any write-downs at the time of acquisition are
charged to the  allowance  for  credit  losses.  Subsequent  to  acquisition,  a
valuation allowance is established,  if necessary, to report these assets at the
lower of (a) fair value  minus  estimated  costs to sell or (b) cost.  Gains and
losses  realized  on the  sale,  and any  adjustments  resulting  from  periodic
revaluation of this property are included in noninterest  income or expense,  as
appropriate.  Net costs of maintaining and operating the properties are expensed
as incurred.

Goodwill:

Goodwill  represents the excess of the cost of companies  acquired over the fair
value of their net assets at dates of acquisition  and is being amortized on the
straight-line method over 25 years.

Income taxes:

Provisions  for income taxes are based on taxes  payable or  refundable  for the
current year and deferred taxes on temporary  differences  between the amount of
taxable income and pretax  financial  income and between the tax bases of assets
and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are included in the financial statements at currently
enacted  income tax rates  applicable  to the period in which the  deferred  tax
assets and liabilities are expected to be realized or settled. As changes in tax
laws or rates are  enacted,  deferred  tax assets and  liabilities  are adjusted
through the provision for income taxes.

Per share amounts:

Earnings per share  ("EPS") are  disclosed  as basic and  diluted.  Basic EPS is
generally  computed by  dividing  net income by the  weighted-average  number of
common  shares  outstanding  for the period,  whereas  diluted  EPS  essentially
reflects the potential dilution in basic EPS that could occur if other contracts
to issue  common  stock  were  exercised.  Per  share  amounts  are based on the
weighted-average number of shares outstanding during each year as follows:

<TABLE>
<CAPTION>
                                                         1998           1997           1996
                                                         ----           ----           ----
<S>                                                  <C>              <C>            <C>      
Basic EPS weighted-average shares outstanding        10,024,630       9,975,300      9,975,655
Effect of dilutive securities-stock options              90,018          66,762         34,768
Diluted EPS weighted-average shares outstanding      10,114,648      10,042,062     10,010,423
</TABLE>


<PAGE>
Risk management instruments:

Interest rate swaps used to achieve interest rate risk management objectives are
accounted for in a manner  consistent  with the accounting  basis of the related
asset or  liability.  An  instrument  designed  to  hedge an asset or  liability
carried at  historical  cost is accounted for on an accrual  basis,  whereby the
interest income or expense of the related asset or liability is adjusted for the
net amount of any  interest  receivable  or  payable  generated  by the  hedging
instrument during the reporting period.  For such instruments,  no amounts other
than any accrued interest receivable or payable are included in the accompanying
consolidated balance sheets.

Interest  rate swaps  involve the  exchange of payments  between  counterparties
based on the interest  differential between a fixed and a variable interest rate
applied  to  a  notional  balance.  Under  accrual  accounting,   this  interest
differential is recognized as an adjustment to the interest income or expense of
the related asset or liability in the accompanying statements of income.

Upon early termination of derivative instruments accounted for under the accrual
method,  the net proceeds  received or paid are  deferred,  if material,  in the
accompanying consolidated balance sheets and amortized to the interest income or
expense of the  related  asset or  liability  over the  lesser of the  remaining
contractual  life of the  instrument  or the  maturity of the  related  asset or
liability. At December 31, 1998 and 1997, there were no deferred gains or losses
in the accompanying  consolidated balance sheets arising from the termination of
instruments qualifying for accrual accounting prior to maturity.

Fair value of financial instruments:

Fair value  estimates  are made at a specific  point in time,  based on relevant
market  information  and  information  about  the  financial  instrument.  These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the  Company's  entire  holdings of a particular  financial
instrument. When no market exists for the Company's financial instruments,  fair
value  estimates  are  based  on  judgments   regarding   future  expected  loss
experience,   current  economic  conditions,  risk  characteristics  of  various
financial  instruments,  and other  factors.  These  estimates are subjective in
nature and  involve  uncertainties  and  matters  of  significant  judgment  and
therefore  cannot be determined  with  precision.  Changes in assumptions  could
significantly affect the estimates.

Fair value estimates are based on existing on- and  off-balance  sheet financial
instruments  without  attempting  to estimate  the value of  anticipated  future
business  and the  value of  assets  and  liabilities  that  are not  considered
financial   instruments.   Significant  assets  and  liabilities  that  are  not
considered   financial  assets  or  liabilities  include  the  mortgage  banking
operation, depositor relationships, deferred tax assets, and property, plant and
equipment.  In addition, the tax ramifications related to the realization of the
unrealized  gains  and  losses  can  have a  significant  effect  on fair  value
estimates and have not been considered in any of the estimates. As a result, the
estimates are only indicative of individual  financial  instruments'  values and
should not be considered an indication of the fair value of the combined Company
taken as a whole.

Reclassifications:

Certain  reclassifications  to  prior  year  balances  have  been  made  in  the
accompanying  consolidated  financial statements to make disclosures  consistent
with those of the current year.

NOTE 2.  ACQUISITIONS:

In June 1998, the Company  assumed $44.80  million of deposit  liabilities,  and
purchased  $126,000  of loans,  $849,000 of fixed  assets,  and  recorded  $2.30
million of  intangible  assets,  relating  to four  branches  of First  Virginia
Bank-Maryland  located  in  Gaithersburg,  Germantown,  Poolesville  and  Silver
Spring,  Maryland,  and three  branches  of its sister  bank,  Farmers'  Bank of
Maryland,  located in Catonsville,  Pikesville and Reisterstown,  Maryland.  The
acquisition of these  branches has been accounted for under the purchase  method
of accounting.

<PAGE>
In November  1998,  the Company  consummated  the  acquisition  of Capital Bank,
National  Association,  Rockville,  Maryland  ("Capital"),  in which Capital was
merged with and into FCNB Bank, Frederick,  Maryland, the Company's wholly owned
subsidiary  bank (the "Bank"),  with the Bank surviving the Merger.  The Company
issued 1,776,966 shares FCNB Common Stock in a tax-free  transaction,  which was
accounted for as a pooling of interests.  As of November 19, 1998, the effective
date of the  transaction,  Capital  had total  assets of  approximately  $165.96
million,  deposits of $136.07 million,  and total shareholders' equity of $12.36
million.  The Company's  1998  consolidated  statements of income  include total
income  and net  income of  Capital  for the  period  during  1998  prior to its
acquisition totaling $12.17 million and $1.08 million, respectively. The Company
incurred pretax one-time  charges of  approximately  $1.66 million.  Capital has
branches located in Rockville, Maryland, Tysons Corner,Virginia,  and Friendship
Heights and Farraguat Square in the District of Columbia.

In  December  1998,  the  Company   consummated  the  acquisition  of  Frederick
Underwriters,  Inc.  headquartered  in  Frederick,  Maryland and its  affiliated
agencies - Phillips Insurance Agency,  Inc. and Carroll County Insurance Agency,
Inc. (collectively,  "Frederick Underwriters"). The Company issued approximately
413,317  shares  of FCNB  Common  Stock in a  tax-free  transaction,  which  was
accounted  for as a  pooling  of  interests.  The  Company's  1998  consolidated
statements  of  income   include  total  income  and  net  (loss)  of  Frederick
Underwriters  for the  period  during  1998  prior to its  acquisition  totaling
$5,850,000 and $(88,200), respectively.

On April 30, 1996, the Company acquired all of the outstanding  shares of common
stock  of  Harbor  Investment   Corporation  ("Harbor")  for  a  cash  price  of
approximately  $6.7 million.  Harbor was the holding  company of Odenton Federal
Savings and Loan Association, a thrift institution located in Odenton, Maryland.
This  acquisition has been accounted for under the purchase method of accounting
and  the  results  of  the  operations  of  Harbor  have  been  included  in the
consolidated  financial statements since the date of acquisition.  The excess of
the  purchase  price over the fair value of net assets  acquired of $3.2 million
was recognized as goodwill and is being amortized on a straight-line  basis over
25 years.

The following tables present the combined and separate results of operations for
Capital,  Frederick  Underwriters and the Company for the periods  preceding the
acquisitions  and also reflect the unaudited pro forma  consolidated  results of
operations  of  the  Company  and  Harbor  Investment   Corporation  as  if  its
acquisition in April 1996 had occurred on January 1, 1996.

                                          Year ended December 31, 1996
                                -------------------------------------------
                                 Total          Net       Basic and diluted
                                 income        income    earnings per share
                                 ------        ------    ------------------
                                (dollars in thousands, except per share data)

Company                         $58,914       $ 5,867            $0.74
Capital                           9,835           931
Combined                         68,749         6,798             0.71
Underwriters                      6,007            78
Combined                         74,756         6,876             0.69
Harbor                            1,037            81
Pro forma (unaudited)           $75,793       $ 6,957            $0.70



                                        Year ended December 31, 1997
                                --------------------------------------------
                                Total          Net       Basic and diluted
                                income        income     earnings per share
                                ------        ------    ------------------
                               (dollars in thousands, except per share data) 

Company                         $69,311        $8,803         $1.12
Capital                          12,282         1,223
Combined                         81,593        10,026         $1.05
Underwriters                      5,612            70
Combined                        $87,205       $10,096         $1.01


<PAGE>

The unaudited  pro forma results in the preceding  tables have been prepared for
comparative  purposes only and include certain  adjustments,  such as additional
depreciation  expense  as a result of a  step-up  in basis of fixed  assets  and
additional  amortization expense as a result of goodwill. They do not purport to
be indicative of the results of operations  which  actually  would have resulted
had the  combination  been in effect on January 1, 1996, or of future results of
operations of the consolidated entities.

Merger-related  expenses in the  consolidated  statements of income  principally
include costs for investment bankers,  professional fees,  severance payments to
terminated employees and other conversion costs.

NOTE 3.  COMPENSATING BALANCES:

Compensating balance arrangements exist with various  correspondent banks. These
noninterest-bearing  deposits  are  maintained  in  lieu of  cash  payments  for
standard bank services.  The required  balances  amounted to $45,000 at December
31,  1998 and  $40,000 at  December  31,  1997.  In  addition,  for the  reserve
maintenance  period in  effect  at  December  31,  1998 and  1997,  the Bank was
required to maintain average daily balances totaling  $2,341,000 and $7,323,000,
respectively, consisting of vault cash and noninterest-bearing deposits with the
Federal Reserve Bank.

NOTE 4.  INVESTMENTS:

The amortized cost and estimated fair value of securities being held to maturity
at December 31, 1998 and 1997 are as follows:


HELD-TO-MATURITY PORTFOLIO
<TABLE>
<CAPTION>
                                                                Gross               Gross         Estimated
                                            Amortized         Unrealized          Unrealized         Fair
December 31, 1998                              Cost              Gains              Losses          Value
-----------------                              ----              -----              ------          -----
                                                                (dollars in thousands)
<S>                                           <C>                  <C>             <C>                <C>    
U.S. Treasury and other U.S.
  government agencies and corporations        $16,006              $  48           $      --          $16,054
State and political subdivisions                5,670                357                  --            6,027
Mortgage-backed debt securities                 8,369                 65                  46            8,388
                                              $30,045               $470             $    46          $30,469
</TABLE>


<TABLE>
<CAPTION>
                                                                Gross               Gross         Estimated
                                            Amortized         Unrealized          Unrealized         Fair
December 31, 1997                              Cost              Gains              Losses          Value
-----------------                              ----              -----              ------          -----
                                                                (dollars in thousands)
<S>                                           <C>                  <C>                 <C>            <C>    
U.S. Treasury and other U.S.
  government agencies and corporations        $26,023              $  16               $  29          $26,010
State and political subdivisions                3,690                387                  --            4,077
Mortgage-backed debt securities                19,176                150                 183           19,143

                                              $48,889               $553                $212          $49,230
</TABLE>

<PAGE>
The amortized cost and estimated fair value of securities  available for sale at
December 31, 1998 and 1997 are as follows:


AVAILABLE-FOR-SALE PORTFOLIO

<TABLE>
<CAPTION>
                                                                Gross               Gross         Estimated
                                            Amortized         Unrealized          Unrealized         Fair
December 31, 1998                              Cost              Gains              Losses          Value
-----------------                              ----              -----              ------          -----
                                                                (dollars in thousands)
<S>                                           <C>                  <C>                 <C>            <C>    
U.S. Treasury and other U.S.
  government agencies and corporations       $141,965             $1,125                $249         $142,841
Mortgage-backed debt securities               172,437              1,190                 407          173,220
Corporate bonds                                69,398              1,377               1,102           69,673
Equity securities                              31,082              4,771                 411           35,442
                                             $414,882             $8,463              $2,169         $421,176
</TABLE>



<TABLE>
<CAPTION>
                                                                Gross               Gross         Estimated
                                            Amortized         Unrealized          Unrealized         Fair
December 31, 1997                              Cost              Gains              Losses          Value
-----------------                              ----              -----              ------          -----
                                                                (dollars in thousands)

<S>                                          <C>                 <C>                   <C>          <C>      
U.S. Treasury and other U.S.
  government agencies and corporations       $ 96,772            $   617               $  11        $  97,378
Mortgage-backed debt securities                93,063              1,532                 216           94,379
Corporate bonds                                15,074                238                   3           15,309
Equity securities                              19,820              3,412                   5           23,227
                                             $224,729             $5,799                $235         $230,293
</TABLE>

<PAGE>

The amortized cost and estimated fair value of securities being held to maturity
and those available for sale at December 31, 1998 by contractual  maturity,  are
as follows:

<TABLE>
<CAPTION>
                                                Held-to-maturity                   Available-for-sale
                                             ---------------------------      ---------------------------
                                                              Estimated                        Estimated
                                             Amortized          Fair          Amortized           Fair
                                                Cost            Value            Cost            Value
                                                ----            -----            ----            -----
                                                                  (dollars in thousands)
<S>                                           <C>              <C>               <C>             <C>     
Due in one year or less                       $ 10,712         $ 10,751          $ 61,575        $ 58,850
Due after one through five years                 8,393            8,714            44,734          47,673
Due after five years through ten years           1,385            1,422            81,602          83,256
Due after ten years                              1,186            1,194            23,452          22,735
Mortgage-backed debt securities                  8,369            8,388           172,437         173,220
Equity securities                                   --               --            31,082          35,442
                                               $30,045          $30,469          $414,882        $421,176
</TABLE>

Actual  maturities may differ from the contractual  maturities  reflected in the
preceding  table  because  borrowers  may  have  the  right  to call  or  prepay
obligations with or without  prepayment  penalties.  Mortgage-backed  securities
have  no  stated   maturity  and  primarily   reflect   investments  in  various
Pass-through  and  Participation  Certificates  issued by the  Federal  National
Mortgage  Association,  the  Federal  Home  Loan  Mortgage  Corporation  and the
Government   National  Mortgage   Association.   Repayment  of   mortgage-backed
securities  is affected by the  contractual  repayment  terms of the  underlying
mortgages  collateralizing  these  obligations and the current level of interest
rates.

Included  in the  investment  portfolio  at  December  31,  1998 and  1997,  are
securities  carried at $269,315,000  and  $150,778,000  respectively,  which are
pledged  to  secure  public  deposits,   securities  sold  under  agreements  to
repurchase and for other purposes as required and permitted by law.

Gross realized  gains and losses from the sale of securities  available for sale
were as follows:

                                         Years ended December 31,  
                               ------------------------------------------  
                                 1998            1997             1996
                                 ----            ----             ----
                                         (dollars in thousands)

    Realized gains              $1,520           $ 9183              $770
    Realized (losses)           $  (39)          $ (185)            $(330)


NOTE 5.  LOANS AND ALLOWANCE FOR CREDIT LOSSES:

                                                        December 31, 
                                                  ---------------------------- 
                                                  1998                  1997
                                                  ----                  ----
                                                    (dollars in thousands)
Loans are as follows:

Real estate loans:
 Construction and land development                $ 113,321           $ 80,075
Mortgage loans:
   Secured by farmland                                3,182              2,752
   Secured by 1 to 4 family residential
      properties                                    216,362            217,236
   Secured by multi-family (5 or more)
      residential properties                          4,817              5,859
   Secured by commercial properties                 206,403            198,428
 Total mortgage loans                               430,764            424,275
Total loans secured by real estate                  544,085            504,350
Commercial and industrial loans                     111,730            101,288
Industrial revenue bonds                              6,666              4,457
Loans to farmers                                        563                810
Loans to individuals for household, family
 and other personal expenditures                     64,545             64,039
                                                   $727,589           $674,944

<PAGE>
Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated  balance sheets.  The unpaid  principal  balances of mortgage loans
serviced for others was  $70,000,000  and  $94,000,000  at December 31, 1998 and
1997, respectively.

Transactions in the allowance for credit losses are summarized as follows:

                                                  Years ended December 31,  
                                                  ---------------------------  
                                                  1998       1997       1996
                                                  ----       ----       ----
                                                     (dollars in thousands)
Balance at beginning of year                    $6,701      $5,997      $6,364
Provision for credit losses                      1,770       1,524         408
Recoveries                                         407         579         187
Other transfers and allowance on loans
   acquired with purchased entity                   --          --         462
                                                 8,878       8,100       7,421
Credits charged-off                             (1,680)     (1,399)     (1,424)

Balance at end of year                          $7,198      $6,701      $5,997



Selected  information  concerning the Company's recorded  investment in impaired
loans and related interest income are summarized as follows:


                                                  Years ended December 31,  
                                                  ---------------------------  
                                                    1998               1997
                                                    ----               ----
                                                     (dollars in thousands)

Impaired loans with specific allocation of 
  allowance for credit losses                       $2,239           $2,488
Specific allocation of allowance for
  credit losses                                        793              801
Other impaired loans                                 3,613            1,460


                                                  Years ended December 31,  
                                                  ---------------------------  
                                                    1998               1997
                                                    ----               ----
                                                     (dollars in thousands)

Average recorded investment in impaired loans       $5,284           $4,162
Interest income recognized on impaired loans 
  based on cash payments received                       80               33



<PAGE>
Additional   information   concerning  the  Company's  recorded   investment  in
nonaccrual loans, for which impairment had not been recognized are as follows:



<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                      ------------------------------------
                                                                       1998             1997          1996
                                                                       ----             ----          ----
                                                                               (dollars in thousands)

<S>                                                                    <C>             <C>           <C> 
Nonaccrual loans                                                       $567            $697          $731
Interest income not recognized due to loans in nonaccrual status         61              94            73
</TABLE>


NOTE 6.  BANK PREMISES AND EQUIPMENT:

Bank premises and equipment consist of the following:

                                                             December 31,
                                                      ------------------------
                                                        1998            1997
                                                        ----            ----
                                                       (dollars in thousands)

Bank premises and leasehold improvements              $24,958         $24,678
Equipment                                              13,367          10,749
                                                       38,325          35,429
Less accumulated depreciation and amortization         13,045          10,762
                                                      $25,280         $24,665



Depreciation and amortization  charged to operations  amounted to $2,535,000 for
1998, $2,087,000 for 1997 and $1,854,000 for 1996.

NOTE 7.  DEPOSITS:

Certificates  of deposit  and other time  deposits  issued in  denominations  of
$100,000 or more totaled  $85,192,000  and  $87,496,000 at December 31, 1998 and
1997,  respectively,  and  are  included  in  interest-bearing  deposits  in the
consolidated balance sheets.

At December 31, 1998, the maturity  distribution  of certificates of deposit are
as follows:

          Certificates of Deposit
------------------------------------------
           (dollars in thousands)

Maturing:
    1999                         $277,839
    2000                           79,270
    2001                           28,885
    2002                            2,852
    2003                            4,440
    Thereafter                         33
                                 $393,319



Interest on deposits consists of the following:

<TABLE>
<CAPTION>
                                                         Years ended December 31, 
                                                         ------------------------ 
                                                      1998        1997         1996
                                                      ----        ----         ----
                                                         (dollars in thousands)

<S>                                                 <C>        <C>           <C>    
NOW and Super NOW accounts                          $ 1,286     $ 1,198      $ 1,376
Savings accounts                                      1,979       2,124        2,679
Money market accounts                                 4,504       3,311        3,309
Certificates of deposit and other time
 deposits less than $100,000                         16,725      16,022       13,205
Certificates of deposit and other time
 deposits of $100,000 or more                         4,783       3,556        3,029
                                                     29,277      26,211       23,598
Less capitalized construction period interest            --          --           42
                                                    $29,277     $26,211      $23,556

</TABLE>
<PAGE>

NOTE 8.  SHORT-TERM BORROWINGS:

The Company  purchases  federal funds and enters into sales of securities  under
agreements to repurchase the same securities,  which generally mature within one
to ninety days from the transaction date.  Securities  pledged as collateral for
securities sold under  agreements to repurchase  include various debt securities
having  aggregate  amortized cost book values of $51,961,000  and $78,807,000 at
December 31, 1998 and 1997, respectively.

Other  short-term  borrowings  primarily  reflect amounts borrowed under secured
lending  arrangements  with  the  Federal  Home  Loan  Bank  of  Atlanta.  These
borrowings are secured by a blanket lien on real estate  mortgages  secured by 1
to 4 family residential  properties.  In addition,  at December 31, 1998 various
debt securities having aggregate amortized cost book values of $196,134,000 were
pledged to secure these borrowings.

The  Company's  unused  lines  of  credit  for  short-term   borrowings  totaled
$13,277,000 at December 31, 1998.

Selected information on short-term borrowings is as follows:

                                                              December 31, 
                                                      ------------------------- 
                                                         1998             1997
                                                         ----             ----
                                                         (dollars in thousands)

FEDERAL FUNDS PURCHASED AND SECURITIES
  SOLD UNDER AGREEMENT TO REPURCHASE:
Total outstanding at year-end                          $  92,287      $84,827
                                                       =========      =======
Average amount outstanding during year                 $  59,301      $63,717
                                                       =========      =======
Maximum amount outstanding at any month-end             $105,974      $86,896
                                                       =========      =======
Weighted-average interest rate at year-end                  4.62%        5.46%
                                                       =========      ======= 
Weighted-average interest rate for the year                 4.92%        5.38%
                                                       =========      ======== 

OTHER SHORT-TERM BORROWINGS:
Total outstanding at year-end                           $248,155     $154,793
                                                       =========      =======
Average amount outstanding during year                  $184,727     $111,989
                                                       =========      =======
Maximum amount outstanding at any month-end             $248,155     $152,138
                                                       =========      =======
Weighted-average interest rate at year-end                  5.17%        5.36%
                                                       =========      =======
Weighted-average interest rate for the year                 5.47%        5.63%
                                                       =========      =======

Included in the other short-term  borrowings schedule above at December 31, 1998
are the following  borrowings from the Federal Home Loan Bank of Atlanta.  These
borrowings  have  scheduled  maturity dates but the majority are callable at the
sole discretion of the Federal Home Loan Bank of Atlanta, one year from the date
of their initial funding.  The Company has the option to terminate the remainder
of these  agreements upon the repricing date. All of these  borrowings  re-price
monthly,  quarterly,  semi-annually,  or annually, until the first call date and
then are repriced quarterly, thereafter.

                           December 31, 1998 
           ----------------------------------------------------------
             Due in         Interest rate range               Amount
            ------         -------------------               ------
                          (dollars in thousands)
              2000                 5.28%                 $   16,000
              2002                 5.30%                     29,000
              2003               5.01% - 5.26%               25,000
              2004                 5.36%                     10,000
              2007               5.03% - 5.27%               72,000
              2008               4.19% - 5.37%               51,000
             Total                                         $203,000
<PAGE>
NOTE 9. LONG-TERM DEBT:

On July 20, 1998, FCNB Capital Trust, a newly-formed  subsidiary of the Company,
issued  1,610,000  of its  8.25%  Cumulative  Trust  Preferred  Securities  (the
"Preferred  Securities")  in an  underwritten  public  offering for an aggregate
price of $40,250,000.  Proceeds of the Preferred Securities were invested in the
8.25% Subordinated  Debentures (the  "Subordinated  Debentures") of the Company.
After deducting  underwriter's  compensation and other expenses of the offering,
the net  proceeds  were  available  to the Company to  increase  capital and for
general  corporate  purposes,  including  use in investment  activities  and the
Bank's lending activities.

The Preferred Securities and the Subordinated Debentures each mature on July 31,
2028.  If  certain  conditions  are met,  the  maturity  dates of the  Preferred
Securities  and the  subordinated  Debentures  may be  shortened  to a date  not
earlier than July 31, 2003. The Preferred Securities and Subordinated Debentures
also may be redeemed  prior to maturity if certain  events occur.  The Preferred
Securities  are  subject  to  mandatory  redemption,  in whole or in part,  upon
repayment  of the  Subordinated  Debentures  at  maturity,  or the  deferral  of
dividend payments on the Preferred Securities, at any time or from time to time,
for a period not to exceed 20 consecutive quarters in a deferral period.

The Company and FCNB Capital Trust believe that, taken together, the obligations
of the Company under the Preferred Securities  Guarantee Agreement,  the Amended
and Restated Trust Agreement, the Subordinated Debentures, the Indenture and the
Agreement As To Expenses and  Liabilities,  entered into in connection  with the
offering of the Preferred  Securities and the  Subordinated  Debentures,  in the
aggregate  constitute a full and  unconditional  guarantee by the Company of the
obligations of FCNB Capital Trust under the Preferred Securities.

FCNB  Capital  Trust is a Delaware  business  trust  created  for the purpose of
issuing the Preferred  Securities and purchasing  the  Subordinated  Debentures,
which are its sole assets. The Company owns all of the 49,800 outstanding common
securities,  liquidation value $25 per share, (the "Common  Securities") of FCNB
Capital Trust.

The  Preferred  Securities  meet the  regulatory  criteria  for Tier I  capital,
subject to Federal  Reserve  guidelines  that limit the amount of the  Preferred
Securities and cumulative  perpetual  preferred  stock to an aggregate of 25% of
Tier I capital.  At December 31, 1998,  $27,136,000 of the Preferred  Securities
were included in Tier I Capital.

For financial statement purposes,  the Preferred Securities are presented on the
Consolidated  Balance  Sheets as a separate  category of long-term debt entitled
"Guaranteed  Preferred  Beneficial  Interests  in  the  Company's   Subordinated
Debentures".

NOTE 10.  LEASING ARRANGEMENTS:

The Company leases branch office facilities under noncancellable operating lease
arrangements  whose  terms do not extend  beyond  November  2039.  These  leases
contain  options,  which  enable the  Company to renew the leases at fair rental
value for  periods of 3 to 10 years.  In addition  to minimum  rentals,  certain
leases have  escalation  clauses  based upon various  price  indices and include
provisions for additional  payments to cover taxes,  insurance and  maintenance.
The total  minimum  rental  commitment,  including  renewal  periods under these
leases at December 31, 1998 is outlined below:

                         (dollars in thousands)

           Years ending December 31,
                 1999                         $   1,258
                 2000                             1,276
                 2001                             1,177
                 2002                             1,154
                 2003                             1,101
                 Later years                     10,237
                                                 16,203
                 Less:  Sublease income             638
                                                $15,565

Rent expense  included in occupancy  expenses  amounted to $1,520,000  for 1998,
$1,177,000  for 1997,  and  $1,218,000  for 1996. 

Sublease income amounted to $89,000,  $79,000,  and $87,000 for 1998,  1997, and
1996 respectively.

NOTE 11.  EMPLOYEE BENEFIT PLANS:

401(K) PROFIT SHARING PLAN:

The Company has a Section 401(k) profit sharing plan covering  employees meeting
certain  eligibility  requirements  as to  minimum  age and  years  of  service.
Employees  may  make  voluntary   contributions  to  the  Plan  through  payroll
deductions on a pre-tax basis. The Company makes discretionary  contributions to
the Plan  based on the  Company's  earnings.  The  Company's  contributions  are
subject to a vesting  schedule (20 percent per year) requiring the completion of
five years of service with the Company,  before these benefits are fully vested.
A  participant's  account  under the Plan,  together  with  investment  earnings
thereon, is normally distributable,  following retirement,  death, disability or
other termination of employment, in a single lump-sum payment.

The Company's annual contribution to the Plan totaled $686,000 in 1998, $609,000
in 1997 and $489,000 in 1996.
<PAGE>

DEFERRED COMPENSATION PLANS:

The Company maintains deferred compensation plans for certain key executives and
its directors,  and a supplemental executive retirement plan (SERP), for certain
key  officers.  The Plans  provide for  supplemental  retirement  income for the
Plan's  participants.  Amounts  to be paid by the  Company  under  the  deferred
compensation  plans will be recovered through life insurance  policies purchased
on the lives of the  participants.  Amounts to be paid by the Company  under the
SERP will be funded by the General Assets of the Company.  The expense for these
plans is included in the consolidated statements of income and totaled $355,000,
$211,000 and $175,000 for 1998, 1997, and 1996, respectively.

STOCK OPTION PLAN:

On December 31, 1998, the Company had two stock-based  compensation  plans,  the
1992 Employee Stock Option Plan ("1992 Plan") and the 1997 Stock Option Plan for
Directors  ("1997  Plan").  Both  Plans are  accounted  for in  accordance  with
Accounting  Principles  Board (APB) Opinion 25,  "Accounting for Stock Issued to
Employees," and related interpretations.

In  connection  with the stock options  granted under the 1992 Plan,  additional
restricted stock grants for 21,077 shares at December 31, 1998 may be awarded at
no additional cost to the Plan's  participants.  Restricted stock,  subject to a
three-year  restriction  period and certain other conditions,  is awarded to the
Plan's  participants  following  their  purchase of the shares granted under the
1992 Plan.  In addition,  certain  participants  under the 1992 Plan may receive
additional reload options upon the exercise of options issued under the Plan, if
the exercise  occurs within three years from the date of the original  grant and
certain other  conditions are  satisfied.  A reload feature is one that provides
for grants of additional  options  whenever a participant  exercises  previously
granted  options.  The  terms of the  Plans  provide  that the  number of reload
options granted is the same as the number of original options exercised, and the
exercise  price of the reload is the  market  price of the stock on the date the
reload option is granted. Compensation expense, reflecting the fair value of the
restricted  shares on the date the stock  options  were  initially  granted,  is
recognized  ratably  over a four year period,  commencing  on the date the stock
options  were  granted  and  ending  with  the  expiration  of  the  three  year
restriction  period.  Compensation  expense recognized under this Plan for years
ended December 31, 1998, 1997, and 1996 totaled $68,000,  $65,000,  and $52,000,
respectively.
<PAGE>
The 1997  Plan  requires  the  Company  to issue  options  to each  non-employee
Director on the day after each  annual  meeting of the  Company's  shareholders.
Participants  under this Plan will receive  reload  options upon the exercise of
options issued under this Plan,  provided the options are exercised within three
years from the date of the  original  grant and  certain  other  conditions  are
satisfied.

Had compensation  expense for both Plans been determined based on the fair value
of each  option  granted on the date of grant using an  option-pricing  model as
prescribed in FASB Statement 123, "Accounting for Stock-Based Compensation," the
Company's  net income and basic and diluted  earnings  per share would have been
reduced to the pro forma amounts indicated below:

                                                 Years ended December 31,
                                          ----------------------------------
                                            1998         1997            1996
                                            ----         ----            ----
Net income:
    As reported                            $8,061       $10,096         $6,876
    Pro forma                              $7,386        $9,385         $6,653

Basic and diluted earnings per share:
    As reported                             $0.80         $1.01          $0.69
    Pro forma                               $0.74         $0.95          $0.67


The 1992 Plan  provides  that  606,376  shares  of the  Company's  common  stock
(adjusted  for  stock  splits  and stock  dividends)  will be  reserved  for the
granting of both incentive stock options (ISO) and  non-qualified  stock options
(NQSO) to purchase these shares. At December 31, 1998, reserved shares remaining
for future grants under this Plan totaled  255,553.  The 1997 Plan provides that
333,333  shares of the Company's  common stock will be reserved for the granting
of NQSO's to purchase  these  shares.  At December  31,  1998,  reserved  shares
remaining for future grants under this Plan totaled  274,424.  Under both Plans,
the  exercise  price per share shall not be less than the fair market value of a
share of common stock on the date on which such options were granted, subject to
adjustments for the effects of any stock splits or stock  dividends,  and may be
exercised immediately upon being granted.
<PAGE>
The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions:


                                                 Years ended December 31,
                                          ----------------------------------
                                            1998         1997            1996
                                            ----         ----            ----
Dividend yield                                2.5%          2.5%          2.5%
Expected volatility                         36.53%        40.71%        49.66%
Risk free interest rate                     4.650%        5.740%        6.420%
Expected life, in years                        10            10            10
Weighted-average fair value of
  options granted during the year           $9.47         $9.42         $7.07


The following is a summary of transactions for both Plans during the three years
ended December 31, 1998, 199 and 1996.

                                       Options Issued          Weighted-Average
                                       and Outstanding           Exercise Price
                                       ---------------           --------------


Balance at December 31, 1995                325,639                 5.90
  Exercised                                (158,474)                3.33
  Terminated                                (13,572)                5.05
  Granted                                    75,031                 8.59
Balance at December 31, 1996                228,624                 8.62
  Exercised                                 (27,519)                7.30
  Terminated                                 (4,037)                7.44
  Granted                                   100,130                16.89
Balance at December 31, 1997                297,198                11.52
  Exercise                                 (164,784)                7.85
  Terminated                                (22,291)                7.73
  Granted                                   162,078                19.90
Balance at December 31, 1998                272,201               $19.34



At December 31, 1998, the 272,201  options issued and  outstanding  had exercise
prices  ranging  from  $4.17  to  $24.47  and had a  weighted-average  remaining
contractual life of 98 months.

                                              December 31,   
                                 --------------------------------------
                                     1998         1997           1996
                                     ----         ----           ----
  Exercisable options:
    Options outstanding           272,201       297,198         197.396
    Weighted-average price         $19.34        $11.52           $7.77

<PAGE>

NOTE 12.  INCOME TAXES:

Significant  components of the Company's deferred tax assets and liabilities are
as follows:



                                                              December 31, 
                                                      ------------------------- 
                                                         1998             1997
                                                         ----             ----
                                                         (dollars in thousands)

Deferred tax assets:
    Provision for credit losses                           $2,061      $1,999
    Net securities losses                                    173         169
    Deferred compensation                                    570         459
    Postretirement benefits                                  257         253
    Provision for foreclosed properties                       21         150
Deferred Fees                                                276         430
    Other                                                    858         538
   Total deferred tax assets                               4,216       3,998
   Valuation allowance for deferred tax assets                --          (9)
Deferred tax assets after valuation allowance              4,216       3,989

Deferred tax liabilities:
    Unrealized gain on securities available for sale       2,424       2,205
    Depreciation                                             541         532
    Other                                                    331         224
   Total deferred tax liabilities                          3,296       2,961
   Net deferred tax assets                                $  920      $1,028
                                                     

A reconciliation of the maximum statutory income tax to the provision for income
taxes  attributable  to  continuing  operations  included  in  the  consolidated
statements of income, is as follows:

<TABLE>
<CAPTION>
                                                        December 31, 
                                               ------------------------------ 
                                                1998        1997         1998
                                                ----        ----        ------
                                                (dollars in thousands)
<S>                                           <C>          <C>          <C>    
Income before income tax                      $14,837      $15,166      $10,767
Tax rate                                           35%          35%          35%
Income tax at statutory rate                    5,193        5,308        3,768
Increases (decreases)
 in tax resulting from:
    Tax-exempt interest income                   (184)        (149)        (160)
    Insurance cash values                        (429)        (217)          (3)
    Thrift bad debt reserve recapture           1,750           --           --
    State income taxes, net of federal
     income tax benefit                           165          426          418
    Benefit of income taxed at lower rate        (100)        (100)         (82)
    Other                                         381         (198)         (50)
                                              $ 6,776       $5,070      $ 3,891
</TABLE>




Significant  components  of the  provision  for  income  taxes  attributable  to
continuing operations are as follows:

<TABLE>
<CAPTION>
                                                        December 31, 
                                               ------------------------------ 
                                                1998        1997         1996
                                                ----        ----        ------
                                                (dollars in thousands)
<S>                                           <C>         <C>          <C>    
Taxes currently payable                       $ 5,190       $ 3,969    $ 3,961
Deferred tax liabilities (benefits)              (164)        1,101        (70)
Operating activities                            5,026         5,070      3,891
Thrift bad debt reserve recapture               1,750            --         --
Total                                          $6,776        $5,070     $3,891

</TABLE>

Included in the above amounts are income taxes of $576,000 in 1998,  $283,000 in
1997, and $170,000 in 1996 related to net security gains.
<PAGE>
NOTE 13.  OTHER OPERATING EXPENSES:

Other operating  expenses in the  consolidated  statements of income include the
following:


<TABLE>
<CAPTION>
                                                        December 31, 
                                           ----------------------------------- 
                                            1998          1997           1998
                                            ----          ----          ------
                                                  (dollars in thousands)
<S>                                       <C>             <C>            <C>    
FDIC and general insurance                 $   644         $  369        $  540
Professional and directors fees              2,801          3,005         1,943
Advertising and public relations             1,712          1,294         1,208
Credit and collection expense                  298            302           299
Postage and supplies                         1,503          1,244         1,241
Net loss on foreclosed properties              187            195            88
Other                                        2,614          2,735         3,109
                                            $9,759         $9,144        $8,428
</TABLE>


Changes in the allowance for foreclosed properties are summarized as follows:


<TABLE>
<CAPTION>
                                                            December 31, 
                                                   ----------------------------- 
                                                   1998        1997         1998
                                                   ----        ----         -----
                                                      (dollars in thousands)
<S>                                                 <C>        <C>        <C>    
Balance at beginning of year                        $410       $533       $646
Provision charged to income                           52         35         31
Losses charged to the allowance                     (266)      (158)       (32)
Other transfers net of allowance on properties
    acquired with purchased entity                    --         --       (112)
Balance at end of year                              $196       $410       $533
</TABLE>


NOTE 14.  SHAREHOLDERS' EQUITY:

Restrictions on dividends:

The  amount of  dividends  that the Bank can pay to the Parent  Company  without
approval  from the Federal  Reserve  Board is limited to its net profits for the
current year plus its retained net profits for the preceding two years.  Amounts
available for the payment of dividends during 1998 aggregated $13,193,000.

Restrictions on lending from subsidiary to parent:

Federal law imposes  certain  restrictions  limiting  the ability of the Bank to
transfer funds to the Parent Company in the forms of loans or advances.  Section
23A of the Federal  Reserve Act prohibits the Bank from making loans or advances
to the Parent  Company in excess of 10 percent of its capital stock and surplus,
as defined  therein.  There were no material  loans or advances  outstanding  at
December 31, 1998.

Preferred stock:

The Board of Directors has the authority to issue preferred stock in one or more
classes  or  series,  with  such  designations,   voting  powers,   preferences,
participation, redemption, sinking fund, conversion, dividend and other optional
or special rights, and such restrictions,  limitations and qualifications as the
Board of Directors may determine.


<PAGE>

Capital:

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

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

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

The Company and the Bank's  actual  capital  amounts and ratios are presented in
the following table.

<TABLE>
<CAPTION>  
                                                                                              Capitalized Under
                                                                       For Capital            Prompt Corrective
                                               Actual                Adequacy Purposes:       Action Provisions:
                                        -----------------        --------------------------   ------------------
                                        Amount      Ratio           Amount          Ratio     Amount      Ratio
                                        ------      -----           ------          -----     ------      -----
                                                             (dollars in thousands)

<S>                                     <C>        <C>             <C>              <C>                         
As of December 31, 1998:                                                            
Total Capital
  (to Risk-Weighted Assets):
    FCNB Corp                           $130,814   14.15%          $73,949          8.0%         N/A        N/A
    FCNB Bank                           $100,679   11.08%          $72,697          8.0%       $90,872      10.0%

Tier I Capital
  (To Risk-Weighted Assets):
    FCNB Corp                           $108,545   11.74%          $36,974          4.0%         N/A        N/A
    FCNB Bank                           $ 93,292   10.27%          $36,349          4.0%       $54,523       6.0%

Tier I Capital
  (To Average Assets):
    FCNB Corp                           $108,545    8.70%          $37,431          3.0%         N/A        N/A
    FCNB Bank                           $ 93,292    7.59%          $36,871          3.0%       $61,452       5.0%

As of December 31, 1997:
Total Capital
  (to Risk-Weighted Assets):
    FCNB Corp                           $ 88,099   11.79%          $59,915          8.0%         N/A        N/A
    FCNB Bank(1)                        $ 73,879    9.99%          $59,188          8.0%       $73,986      10.0%

Tier I Capital
(To Risk-Weighted Assets):
    FCNB Corp                           $ 81,398   10.88%          $29,957          4.0%        N/A         N/A
    FCNB Bank(1)                        $ 67,178    9.09%          $29,594          4.0%       $44,391       6.0%

Tier I Capital
(To Average Assets):
    FCNB Corp                           $ 81,398    7.96%          $32,309          3.0%        N/A         N/A
    FCNB Bank(1)                        $ 67,178    6.60%          $32,121          3.0%       $50,986       5.0%
</TABLE>

------------
N/A = Not applicable

<PAGE>
Dividend reinvestment plan:

The Company  maintains a Dividend  Reinvestment  and Stock Purchase Plan for all
shareholders of the Company. This Plan provides that 509,217 shares, as adjusted
for stock  splits and stock  dividends,  of the  Company's  common stock will be
reserved for issuance  under the Plan.  At December  31, 1998,  reserved  shares
remaining for future issuance under this plan totaled 235,064. The terms of this
Plan allow  participating  shareholders to purchase  additional shares of common
stock in the Company by reinvesting  the dividends paid on shares  registered in
their name, by making optional cash payments,  or both.  Shares  purchased under
the Plan with reinvested dividends or optional cash payments are acquired at 97%
of current  market  prices.  Optional cash payments to this Plan are limited and
may not exceed $2,500 in any calendar quarter. Contributions to the Plan will be
used by a designated  agent to acquire  common  shares of the Company at current
market  prices.  The Company  reserves  the right to amend,  modify,  suspend or
terminate this Plan at any time at its discretion.

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS:

In  accordance  with the  disclosure  requirements  of  Statement  of  Financial
Accounting  Standards  No.  107,  the  estimated  fair  values of the  Company's
financial instruments are as follows:

<TABLE>
<CAPTION>
                                              December 31, 1998             December 31, 1996
                                           -------------------------     ----------------------
                                           Carrying             Fair     Carrying         Fair
                                             Amount            Value       Amount        Value
                                             ------            -----       ------        -----
                                                           (dollars in thousands)
<S>                                    <C>              <C>           <C>          <C>        
FINANCIAL ASSETS
Cash and cash equivalents              $     79,096     $     79,096  $    73,922  $    73,922
Loans held for sale                           5,087            5,087          909          909
Investment securities                       451,221          451,645      279,182      279,523
Net loans                                   720,368          725,704      667,867      671,493

Total financial assets                   $1,256,042       $1,261,532   $1,021,880   $1,025,847


FINANCIAL LIABILITIES
Deposits                                $   851,819      $   854,510   $  745,486   $  747,027
Short-term borrowings                       340,442          340,273      239,620      239,703
Long-term debt                               40,250           39,165           --           --
     Total financial liabilities         $1,232,511       $1,233,948   $  985,106   $  986,730
</TABLE>

<PAGE>

The  following  methods and  assumptions  were used to  estimate  the fair value
disclosures for financial instruments as of December 31, 1998 and 1997:

Cash and cash equivalents:

The fair value of cash and cash  equivalents  is  estimated to  approximate  the
carrying amounts.

Loans held for sale:

Fair value is estimated to equal the carrying  amount due to their short holding
period.

Investment securities:

Fair values are based on quoted market prices.

Loans:

Fair  values  are  estimated  for  portfolios  of loans with  similar  financial
characteristics.  Each portfolio is further  segmented into fixed and adjustable
rate interest terms by performing and non-performing categories.

The fair value of  performing  loans with original  maturities  greater than one
year is calculated by  discounting  estimated  cash flows using current rates at
which similar loans would be made to borrowers  with similar  credit ratings and
for the same  remaining  maturities.  The estimated cash flows do not anticipate
prepayments.  The fair value of performing loans with original maturities of one
year or less is considered equal to the carrying amount.

Fair value for non-performing  loans is based on estimated cash flows, which are
discounted using a rate commensurate with the risk associated with the estimated
cash flows.  Assumptions  regarding  credit risk, cash flows, and discount rates
are  judgmentally  determined  using available  market  information and specific
borrower information.

Management  has made  estimates of fair value discount rates that it believes to
be reasonable.  However,  because there is no market for many of these financial
instruments,  management  has no  basis to  determine  whether  the  fair  value
presented  for loans would be  indicative  of the value  negotiated in an actual
sale.

Deposits:

The fair value of deposits with no stated maturity,  such as noninterest-bearing
demand deposits,  savings,  NOW accounts and money market accounts,  is equal to
the amount  payable on demand at the  reporting  date (that is,  their  carrying
amounts).  The fair value of  certificates of deposit is based on the discounted
value of contractual  cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining  maturities.  The fair value
estimates do not include the benefit  that  results  from the  low-cost  funding
provided by the deposit  liabilities  compared to the cost of borrowing funds in
the market.


<PAGE>

Short-term borrowings:

The fair value of  short-term  borrowings is  determined  using rates  currently
available to the Company for debt with similar terms and remaining maturities.

Long-term borrowings:

The fair value of long-term debt is determined  using rates currently  available
to the Company for debt with similar terms and remaining maturities.

Interest rate swaps:

The fair values of  interest  rate swaps are  estimated  based on the amount the
Company  would  receive or pay to terminate  the  contracts or  agreements.  The
carrying  value of interest rate swaps related to interest rate risk  management
activities  was  immaterial at December 31, 1998 and 1997. The carrying value of
such  instruments,  if any,  includes  any accrued  interest  receivable  and/or
payable balances

NOTE 16.  TRANSACTIONS WITH RELATED PARTIES:

In the  normal  course  of  banking  business,  loans are made to  officers  and
directors of the Company, as well as to their associates. Such loans are made in
the ordinary  course of business with  substantially  the same terms  (including
interest rates and  collateral)  as those  prevailing at the time for comparable
transactions  with other  persons.  They do not involve more than normal risk of
collectability  or  present  other  unfavorable  features.  An  analysis  of the
activity during 1998 is as follows:

                                               (dollars in thousands)
                                                ----------------------

    Balance at December 31, 1997                     $ 11,229
    New loans                                           1,575
    Repayments                                         (4,367)

    Balance at December 31, 1998                       $8,437





<PAGE>

NOTE 17.  COMMITMENTS AND CONTINGENCIES:

In addition, Note 2 contains detailed information relating to the acquisition of
Frederick  Underwriters  during  1998.  Prior to the  merger,  a director of the
Company was the principal shareholder of Frederick Underwriters.

Financial instruments:

In the normal course of business, there are outstanding commitments,  contingent
liabilities  and  other  financial  instruments  that are not  reflected  in the
accompanying  consolidated  financial  statements.  These include commitments to
extend credit, standby letters of credit and interest rate swaps, which are some
of the  instruments  used by the  Company  to meet  the  financing  needs of its
customers and to manage its own interest rate risk. These  instruments  involve,
to varying  degrees,  elements of credit and interest rate risk in excess of the
amounts  recognized in the  consolidated  balance  sheets.  Any losses which may
result from these transactions are not expected to have a material effect on the
accompanying consolidated financial statements. Notional principal amounts often
are used to express the volume of a  transaction,  but the  amounts  potentially
subject to credit risk are much smaller. The contract or notional amount of each
class of such instruments at December 31 was:

                                                       December 31, 
                                                --------------------------
                                                  1998              1997
                                                ---------        ---------
                                                Contract/        Contract/
                                                 Notional         Notional
                                                 Amount            Amount
                                                 ------            ------
                                                   (dollars in thousands)
Financial instruments whose notional or
 contract amounts represent credit risk:
  Commitments to extend credit                  $199,739       $147,015
  Standby letters of credit                       12,550         11,707
  Total                                         $212,289       $158,722
Financial instruments whose notional or
  contract amounts exceeded maximum
   credit risk:
    For interest rate risk management:
      Interest rate swaps                        $10,000        $10,000
  Total                                          $10,000        $10,000


Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any  condition  established  in the  contract.  Certain
commitments have fixed expiration dates, or other termination  clauses,  and may
require payment of a fee. Many of the commitments are expected to expire without
being drawn upon,  accordingly,  the total commitment amounts do not necessarily
represent  future cash  requirements.  The  Company  evaluates  each  customer's
creditworthiness  on a  case-by-case  basis.  The amount of  collateral or other
security obtained,  if deemed necessary by the Company upon extension of credit,
is based on  management's  credit  evaluation.  Collateral  held  varies but may
include deposits held in financial institutions; U.S. Treasury securities; other
marketable securities;  accounts receivable;  inventory; property and equipment;
personal  residences;  income-producing  commercial  properties  and land  under
development. Personal guarantees are also obtained to provide added security for
certain commitments.

Standby letters of credit are conditional  commitments  issued by the Company to
guarantee the performance of a customer to a third party.  Those  guarantees are
primarily issued to guarantee the installation of real property improvements and
similar  transactions.  The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company holds  collateral and obtains personal  guarantees  supporting those
commitments for which collateral or other security is deemed necessary.

As a financial institution, the Company assumes interest rate risk as a provider
of  banking  services  to  its  customers.  This  risk  can be  managed  through
derivative interest rate contracts,  such as interest rate swaps. Changes in the
fair value of such derivatives are generally offset by changes in the fair value
of the underlying  hedged asset or liability.  For interest rate risk management
purposes,  the Company was using interest rate  (pay-fixed)  swaps with notional
balances  of  $10,000,000  at December  31, 1998 and 1997 to convert  fixed rate
loans to variable rates.


<PAGE>

Legal proceedings:

The Company is subject to various legal  proceedings which are incidental to the
ordinary  course of business.  In the opinion of the  management of the Company,
there are no material pending legal  proceedings to which the Company is a party
or which involves any of its property.

Tax liability:

The Company has been notified by the Internal Revenue Service (the Service) that
the Service  has taken under  review the  Company's  treatment  of an income tax
reserve for bad debts relating to the Company's  1996  acquisition of Laurel and
its  subsidiary  thrift.  As a part of its  acquisition  of Laurel,  the Company
assumed an  unrecorded  deferred  tax  liability of  approximately  $1.6 million
related to the special bad debt  deduction  for years  before  December 1, 1988,
which thrifts were  allowed.  The Company  determined  that  recognition  of the
deferred tax  liability was not required as a result of the merger of Laurel and
its subsidiary into the company and its subsidiary  bank. The Service has raised
issues  related to the  availability  of an exemption  from recapture of the bad
debt  reserve.  The Company is reviewing  the  Service's  position.  The Company
intends to vigorously contest the additional  assessment,  but has accrued $1.75
million  as a  reserve  against  such  liability,  which has been  considered  a
merger-related expense for financial reporting purposes.

NOTE 18. FCNB CORP (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION:

FCNB CORP (PARENT COMPANY)
Balance Sheets

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                      -------------------
                                                                       1998           1997
                                                                       ----           ----
                                                                      (dollars in thousands)
<S>                                                                  <C>             <C>    
ASSETS
Cash                                                                 $10,889         $ 4,042
Receivable from subsidiaries                                           1,838           1,103
Investment securities available for sale-at fair value                16,477          10,845
Investment in subsidiaries                                           101,350          71,882
Other assets                                                           3,112           1,346
             Total assets                                           $133,666         $89,218

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Long-term debt                                                       $41,495         $   --
Other liabilities                                                      1,561           1,202
             Total liabilities                                        43,056           1,202

Common stock                                                          10,061           8,017
Surplus                                                               46,597          49,950
Retained earnings                                                     30,082          26,391
Net unrealized gain on securities available for sale                   3,870           3,658
             Total shareholders' equity                               90,610          88,016
             Total liabilities and shareholders' equity             $133,666         $89,218
</TABLE>
<PAGE>
FCNB CORP (PARENT COMPANY)
Statements of Income and Comprehensive Income


<TABLE>
<CAPTION>
                                                                 For the years ended December 31,  
                                                               ------------------------------------  
                                                                1998          1997            1996
                                                                ----          ----            ----
                                                                       (dollars in thousands)
<S>                                                             <C>          <C>          <C>    
Income:
    Dividends from subsidiary banks                             $  3,576        $3,842       $10,710
    Net securities gains                                             554           173            82
    Other income, principally interest                               653           278           189
Total income                                                       4,783         4,293        10,981
Expenses                                                           1,941           344           843
Income before provision for income taxes
 and equity in undistributed
 (excess distributions of) earnings of subsidiaries                2,842         3,949        10,138
Provision for income taxes (benefits)                               (263)           (7)         (141)
Income before equity in  undistributed
  (excess distributions of) earnings of subsidiaries               3,105         3,956        10,279
Equity in undistributed (excess distributions of) earnings
 of subsidiaries                                                   4,956         6,140        (3,403)
Net income                                                      $  8,061       $10,096        $6,876)
Other Comprehensive income (loss), net of tax                        212         2,919           (34)
Comprehensive income                                            $  8,273       $13,015        $6,842
</TABLE>



FCNB CORP (PARENT COMPANY)
Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                    For the years ended December 31,  
                                                                 ------------------------------------  
                                                                  1998          1997            1996
                                                                  ----          ----            ----
                                                                       (dollars in thousands)
<S>                                                                <C>          <C>          <C>    
Cash flows from operating activities:
    Net income                                                       $ 8,061      $10,096       $6,876
    Adjustments to reconcile net income to
     net cash provided by operating activities:
      (Equity in undistributed) excess distribution of
         earnings of subsidiary                                       (4,956)      (6,140)       3,403
      Noncash charitable contribution                                     --           98           64
      Net securities gains                                              (554)        (173)         (82)
      Decrease (increase) in receivable from
       subsidiaries                                                     (735)        (746)          93
      Decrease (increase) in other assets                             (1,631)      (1,184)          (9)
      Increase (decrease) in other liabilities                            --         (590)         306
             Net cash provided by operating activities                   185        1,361       10,651
Cash flows from investing activities:
    Proceeds from sale of investment securities
     available for sale                                                1,612          510          140
    Purchase of investment securities
     available for sale                                               (5,856)      (6,330)      (1,360)
    Investment in subsidiary                                         (24,775)       5,496       (1,490)
             Net cash (used in) investing activities                 (29,019)        (324)      (2,710)

Cash flows from financing activities:
    Proceeds from long-term debt                                      41,495           --           --
    Dividend reinvestment plan                                           (29)         (18)         (11)
    Proceeds from issuance of common stock                               664          210          578
    Repurchase of common stock                                        (2,108)        (213)        (580)
    Cash dividends paid                                               (4,341)      (3,462)      (2,997)
             Net cash provided by (used in) financing activities      35,681       (3,483)      (3,010)
Net increase (decrease) in cash                                        6,847       (2,446)       4,931
Beginning cash                                                         4,042        6,488        1,557
Ending cash                                                          $10,889       $4,042       $6,488

Supplemental schedule of noncash investing and financing activities:
    Surplus from stock options granted                                  $135         $152         $118
</TABLE>


<PAGE>
NOTE 19.  CURRENT ACCOUNTING DEVELOPMENTS:

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards No. 133 "Accounting for Derivative  Instruments
and Hedging  Activities."  This Statement  establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging  activities.  It requires that an entity  recognizes all  derivatives as
either assets or liabilities in the statement of financial  position and measure
those  instruments  at fair value.  This  Statement is effective  for all fiscal
quarters of fiscal years beginning after June 15, 1999. In management's opinion,
the adoption of this Statement will not have a material  impact on the financial
position or the results of operations of the Company.

NOTE 20.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The  following  is a summary of the  Company's  unaudited  quarterly  results of
operations:


<TABLE>
<CAPTION>
                                                                                                1998       
                                                               --------------------------------------------------------------------
                                                             December 31(3)     September 30 (1)   June 30(1)(2)    March 31(1)(2)
                                                             --------------     ----------------   -------------    --------------
                                                                        (dollars in thousands, except per share amounts)
<S>                                                              <C>                <C>              <C>              <C>    
 Interest income                                                 $23,079            $21,762          $20,660          $19,920
 Net interest income                                              10,976             10,368           10,330            9,912
 Provision for credit losses                                         815                385              400              170
 Net securities gains                                                508                286              535              152
 Income before income taxes                                        2,424              4,089            4,271            4,053
 Net income (loss)                                                 (252)              2,729            2,864            2,720
 Net income before merger-related expense                          2,798              2,806            2,898            2,720
 Basic earnings per share                                          (.03)                .27              .29              .27
 Diluted earnings per share                                        (.03)                .27              .29              .27
 Basic earnings per share before merger-related expenses             .28                .28              .29              .27
 Diluted earnings per share before merger-related expenses           .27                .28              .29              .27
</TABLE>


<TABLE>
<CAPTION>
                                                                                                1997 (1)(2)
                                                               -------------------------------------------------------------------
                                                               December 31       September 30        June 30          March 31
                                                               -----------       ------------        --------        ---------
                                                                        (dollars in thousands, except per share amounts)
<S>                                                              <C>                <C>              <C>              <C>    
 Interest income                                                 $19,766            $19,263          $18,245          $17,401
 Net interest income                                               9,846              9,826            9,660            9,365
 Provision for credit losses                                         455                512              276              281
 Net securities gains                                                213                221               57               89
 Income before income taxes                                        3,912              4,159            3,977            3,118
 Net income                                                        2,657              2,748            2,541            2,150
 Basic earnings per share                                            .28                .28              .26              .22
 Diluted earnings per share                                          .27                .28              .26              .22
</TABLE>

-------------

(1) The  financial  data for 1998 and 1997  has been  restated  to  include  the
    effects  of  the   acquisitions   of  Capital   Bank,   N.A.  and  Frederick
    Underwriters, Inc. in 1998, accounted for as pooling of interests.

(2) Per share data has been restated for the effects of a  four-for-three  stock
    split effected in the form of a 33% stock dividend declared in July 1998 and
    paid in August 1998.

(3) During the quarter ended December 31, 1998, the Company recognized a current
    period income tax  provision,  totaling  $1,750,000,  for the tax effects of
    certain pre-1988 tax reserves for bad debts required to be recaptured.

<PAGE>
Market For Registrant's Common Equity And Related Stockholder Matters

Quarterly stock prices and dividends(1)     

<TABLE>
<CAPTION>
                                              1998
                            ---------------------------------------
                                   Price Range            
                               -------------------        Dividend
                               High           Low         Declared
                               ----           ---         --------
<S>                           <C>            <C>           <C>  
First Quarter                 $24.38         $20.81        $.101
Second Quarter                 24.94          24.44         .106
Third Quarter                  26.81          23.88         .112
Fourth Quarter                 24.50          23.00         .117
</TABLE>

<TABLE>
<CAPTION>
                                              1997
                            ---------------------------------------
                                   Price Range            
                               -------------------        Dividend
                               High           Low         Declared
                               ----           ---         --------
<S>                           <C>            <C>           <C>  
First Quarter                 $15.34         $13.64        $.081
Second Quarter                 15.00          13.64         .081
Third Quarter                  23.87          13.98         .086
Fourth Quarter                 23.69          20.80         .092
</TABLE>

-----------
(1) The quarterly  stock prices and dividends have been restated for the effects
    of a  four-for-three  stock  split  effected  in  the  form  of a 33%  stock
    dividend, declared in August 1998.

The stock  prices  are the high and low sale  prices as  recorded  on the NASDAQ
National  Market.  The Company  trades on the NASDAQ  National  Market under the
symbol FCNB.

Number of shareholders of record, as of December 31,1998:  3,954


PRINCIPAL AFFILIATE
Balance Sheet
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1998
                        ----------------------------------------------------------------------------
                                                         (DOLLARS IN THOUSANDS) 
                        ASSETS                                               LIABILITIES AND EQUITY
                        ------                                               ----------------------

<S>                                                    <C>                                             <C>     
FCNB Bank               Cash and due from banks        $    30,500         Total deposits                $862,708
7200 FCNB Court         Earning assets                   1,215,993         Short-term borrowings          340,442
Frederick, MD 21703                                                        Accrued interest and
(301) 662-2191                                                               other liabilities             15,942
32 Offices              Allowance for credit losses         (7,198)
                        Other Assets                        79,902         Shareholders' equity           100,105
                                                                           Total liabilities
                        Total assets                    $1,319,197           and shareholders' equity  $1,319,197

                        Net income                          $8,532

</TABLE>
<PAGE>
Annual Meeting of Shareholders

Tuesday, April 20, 1999 - 7:00 p.m.
FSK Holiday Inn
Frederick, Maryland 21703


TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone (800) 937-5449


ANALYST CONTACT
Alex C. Hart
Vice President, Investor Relations
Phone (301 or 800) 662-2191 or (301) 624-2340 Direct


SHAREHOLDER CONTACT
Kristen Howes
Senior Shareholder Relations Officer
Phone (301 or 800) 662-2191 or (301) 624-2306 Direct


AVAILABILITY OF 10-K REPORT
The annual report on Form 10K filed with the Securities and Exchange  Commission
is available  without charge upon written  request to: Mark A. Severson,  Senior
Vice President and Treasurer,  FCNB CORP, 7200 FCNB Court,  Frederick,  Maryland
21703.


PROFILE

FCNB CORP is a one bank holding company organized under the laws of the State of
Maryland.  FCNB Bank, a  state-chartered  commercial  bank under the laws of the
State of  Maryland  was  converted  from a national  bank in June 1993,  and was
originally  chartered in 1818.  The Bank is engaged in a general  commercial and
retail  banking  business  serving  individuals  and  businesses  in  Frederick,
Carroll,  Howard, Prince George's,  Anne Arundel and Montgomery counties located
in Maryland,  Washington,  D.C.,  and Fairfax  County  located in Virginia.  The
deposits  of the Bank are  insured by the FDIC.  FCNB Corp  trades on the NASDAQ
Stock market under the symbol "FCNB".




<PAGE>

The following brokers are registered as market makers of FCNB Corp Common Stock:


Ferris, Baker, Watts & Co.                  Legg Mason Wood Walker, Inc. 
365 West Patrick Street                     30 West Patrick Street      
Frederick, MD  21701                        Frederick, MD 21701         
(301) 662-6488                              (301) 663-8833              

F.J. Morrisey & Co., Inc.                   Ryan, Beck & Co.
1700 Market Street,                         3 Parkway      
Suite 1420                                  Philadelphia, PA 19102      
Philadelphia, PA 19102                      (800) 342-2325         
(215) 563-8500                                           

Janney Montgomery Scott, Inc.               Sandler O'Neill & Partners, L.P.
1801 Market Street                          Two World Trade Center     
Philadelphia, PA 1910                       104th Floor                 
(215) 665-6000                              New York, NY 10048          
                                            (800) 635-6860              
                      
Friedman, Billings, Ramsey & Co., Inc.      Wheat First Securities, Inc.
1001 Nineteenth Street North                18 West Patrick Street      
Arlington, VA 22209-1722                    Frederick, MD 21701         
(703) 312-9500                              (301) 662-0002              
                                            (800) 456-7801              
                                            

Corporate Headquarters                       Subsidiary                         
FCNB Corp (MD)                               FCNB Bank (MD)*                    
7200 FCNB Court                              7200 FCNB Court                    
Frederick, Maryland 21703                    Frederick, Maryland 21703          
(301) 662-2191                               (301) 662-2191                     
                                                                                
                                             Frederick Underwriters, Inc. (MD)**
                                             1201 East Street                   
                                             Frederick, MD 21701                
                                             (301) 662-1147                     
                                             



* The Bank is the principal subsidiary of FCNB Corp as of December 31, 1998. The
voting securities of the Bank are owned entirely by FCNB Corp.

**The Insurance  Agency is the principal  subsidiary of FCNB Bank as of December
31, 1998. The voting securities of the Agency are owned entirely by FCNB Bank.