ANNAPOLIS NATIONAL BANCORP INC, SB-2/A, 1997-08-07

ANNAPOLIS NATIONAL BANCORP INC
SB-2/A, 1997-08-07
NATIONAL COMMERCIAL BANKS

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As filed with the Securities and Exchange Commission on August 7, 1997
Registration No. 333-29841

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

PRE-EFFECTIVE AMENDMENT
NO. 2 TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

ANNAPOLIS NATIONAL BANCORP, INC.
(exact name of registrant as specified in its certificate of incorporation

<TABLE>
<S> <C>
MARYLAND 6712 52-1648903
(State or other jurisdiction (Primary Standard (IRS Employer Identification No.)
of incorporation or organization) Classification Code Number)
</TABLE>

Annapolis National Bancorp, Inc.
180 Admiral Cochrane Drive, Suite 300
Annapolis, Maryland 21401
(410) 224-4455
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

John W. Marhefka, Jr.
Chief Executive Officer
Annapolis National Bancorp, Inc.
180 Admiral Cochrane Drive, Suite 300
Annapolis, Maryland 21401
(410) 224-4455
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:
Mary M. Sjoquist, Esquire
Philip G. Feigen, Esquire
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
(202) 362-0840

Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]

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<CAPTION>
================================================================================================================================
Title of each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price per Unit Aggregate Offering Price (1) Registration Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stock 833,334
$0.01 par Value Shares $6.00 $5,000,004 $1,563
================================================================================================================================
</TABLE>

(1) Registration fee of $1,563 previously paid with Form SB-2 filed on June 23,
1997.

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.

<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.

Cross Reference Sheet Showing Location in the Subscription and Community
Offering Prospectus ("Prospectus") of Information Required by Items of Form
SB-2:

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Registration Statement Item and Caption Prospectus Headings
--------------------------------------- -------------------
<S> <C>
l. Front of Registration Statement and Outside Front Cover Page
Cover of Prospectus

2. Inside Front and Outside Back Cover Page of Inside Front and Outside Back Cover Pages
Prospectus

3. Summary Information and Risk Factors Prospectus Summary; Risk Factors

4. Use of Proceeds Use of Proceeds

5. Determination of Offering Price Risk Factors

6. Dilution Dilution

7. Selling Security Holders Not Applicable

8. Plan of Distribution Front Cover Page; The Offering

9. Legal Proceedings Business -- Legal Proceedings

10. Directors, Executive Officers, Promoters and The Board of Directors and Management of the
Control Persons Company; The Board of Directors and Management of
the Bank

11. Security Ownership of Certain Beneficial The Board of Directors and Management of the Bank -
Owners and Management - Security Ownership of Management

12. Description of Securities Dividends; Description of Capital Stock of the
Company

13. Interests of Named Experts and Counsel Not Applicable

14. Disclosure of Commission Position on The Board of Directors and Management of the Bank -
Indemnification for Securities Act Liabilities Liability and Indemnification of Directors and Officers

15. Organization Within Last Five Years The Board of Directors and Management of the Bank -
- Transactions with Certain Related Persons

16. Description of Business Prospectus Summary; Business; Regulation and
Supervision

17. Management's Discussion and Analysis or Business; Management's Discussion and Analysis of
Plan of Operation Financial Condition and Results of Operations

18. Description of Property Business -- Properties

19. Certain Relationships and Related The Board of Directors and Management of the Bank -
Transactions - Transactions with Certain Related Persons

20. Market for Common Equity and Related Risk Factors -- Absence of Market for Common Stock;
Stockholder Matters Market for Common Stock

21. Executive Compensation The Board of Directors and Management of the Bank

22. Financial Statements Consolidated Financial Statements of Annapolis
National Bancorp, Inc.

23. Changes In and Disagreements With Change in Accountants
Accountants on Accounting and Financial
Disclosure
</TABLE>

<PAGE>

PROSPECTUS

833,334 SHARES

ANNAPOLIS NATIONAL BANCORP, INC.

COMMON STOCK

$6.00 PER SHARE

Annapolis National Bancorp, Inc. (the "Company"), a Maryland
corporation and holding company for Annapolis National Bank, a
federally-chartered commercial bank (the "Bank"), is hereby offering (the
"Offering") a minimum of 333,334 shares and a maximum of 833,334 shares of its
common stock, par value $.01 per share (the "Common Stock") at $6.00 per share
(the "Offering Price"). Prior to this Offering there has been no public market
for the Common Stock. The Company has applied for quotation of its Common Stock
on The Nasdaq SmallCap Market, subject to notice of issuance, under the symbol
"ANNB".

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
RISK FACTORS AT PAGES ____ TO ____ FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY EACH PROSPECTIVE INVESTOR.

THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION"), THE OFFICE OF THE COMPTROLLER OF THE
CURRENCY ("OCC"), OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE COMMISSION, THE OCC OR ANY OTHER AGENCY OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

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<CAPTION>
=================================================================================================================
Underwriting Fees Proceeds to
Price to Public(1) and Offering Expenses(2) Company
=================================================================================================================
<S> <C>
Per Share at Minimum............ $6.00 $0.88 $5.12
- -----------------------------------------------------------------------------------------------------------------
Per Share at Maximum............ $6.00 $0.53 $5.47
- -----------------------------------------------------------------------------------------------------------------
Total Minimum................... $2,000,004 $293,000 $1,707,004
- -----------------------------------------------------------------------------------------------------------------
Total Maximum................... $5,000,004 $443,000 $4,557,004
=================================================================================================================
</TABLE>

(1) See "The Offering" for information concerning indemnification of the
Agent and other matters.
(2) Includes commissions to be paid to the Agent and Selected Dealers of
$93,000 at the Total Minimum and $243,000 at the Total Maximum, and
expenses related to the Offering of $200,000 at both the Total Minimum
and Total Maximum.

The Common Stock is being offered by the Company through Charles Webb &
Company, A Division of Keefe, Bruyette & Woods, Inc. (the "Agent") and selected
broker/dealers (the "Selected Dealers") that are registered broker/dealers and
members of the National Association of Securities Dealers, Inc., on a "best
efforts" agency basis. The Agent and the Selected Dealers have no obligation or
commitment to purchase any of the shares offered or to assure the sale of the
minimum or maximum number of shares offered hereby.

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

CHARLES WEBB & COMPANY

A DIVISION OF KEEFE, BRUYETTE & WOODS

The date of this Prospectus is ________ ____, 1997

<PAGE>

The Offering will commence on or about _______, 1997 and will be
terminated by the Company upon the sale of 833,334 shares or on ______, 1997
(the "Expiration Date") whichever occurs first, unless the Offering is extended,
at the sole discretion of the Company, for additional periods ending no later
than ________, 1997. The Company reserves the right to terminate the Offering at
any time.

The Company has established a minimum subscription of 200 shares and a
maximum subscription of 5% of the shares of Common Stock sold in the Offering;
however, the Company reserves the right to waive these limits without notice to
any subscriber. Subscriptions are binding on subscribers and may not be revoked
except with the consent of the Company. The Company may reject or cancel any
subscription in whole or in part. If the Company does not sell the minimum
number of shares, the Offering is not completed by the Expiration Date, or the
Offering is otherwise terminated by the Company, all subscription funds will be
refunded in full with interest, at an annual rate of 3%. See "The Offering -
General".

Subscription proceeds will be deposited in an interest bearing escrow
account with FMB Trust Company (the "Escrow Account"), pending receipt of
subscriptions for not less than 333,334 shares or before _______, 1997, unless
the Offering is earlier terminated or extended. Notwithstanding the foregoing,
the Agent shall have the right, in its sole discretion, to permit investors to
submit irrevocable orders together with legally binding commitments for payment
for the Common Stock for which they subscribe at any time prior to the
Expiration Date with payment to be received at any time prior to 24 hours before
completion of the Offering. Any subscription proceeds accepted after
satisfaction of the above conditions and release of the subscription amounts
from the Escrow Account, but before termination of the Offering, will not be
deposited in the Escrow Account but will be available for immediate use by the
Company, subject to satisfaction of the conditions of closing set forth in the
Agency Agreement between the Company and the Agent. See "Use of Proceeds" and
"The Offering".

[INSERT MAP]

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PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED ALL REFERENCES TO THE COMPANY SHALL
BE DEEMED TO INCLUDE THE COMPANY AND THE BANK.

THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE
CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR
RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE
PURCHASERS OF THE SHARES OF COMMON STOCK SHOULD SPECIFICALLY CONSIDER THE
VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH
UNDER "RISK FACTORS," WHICH WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.

ANNAPOLIS NATIONAL BANCORP, INC.

Annapolis National Bancorp, Inc., formerly Maryland Publick Banks,
Inc., was incorporated in May 1988 in Maryland for the purpose of acquiring and
holding all of the outstanding stock of Annapolis National Bank (the "Bank").
The Company is a registered Bank Holding Company pursuant to the Bank Holding
Company Act of 1956, as amended ("BHCA"). The Company was capitalized by an
initial offering of common stock which was sold at $10.00 per share in June 1989
and, subsequent to January 1990, an offering at $12.50 per share. The Company's
only significant activity is the operation of the Bank. On a consolidated basis
at March 31, 1997, the Company's total assets were $98.1 million, total
liabilities were $92.2 million and stockholders' equity was $5.9 million.

ANNAPOLIS NATIONAL BANK

The Bank is a commercial bank organized under the laws of the United
States. The Bank is a community oriented bank and the only commercial bank
headquartered in Annapolis, Maryland. As the Company's only subsidiary, the Bank
currently operates as a full service commercial bank through its five branches
located in Anne Arundel County, Maryland, and one branch located on Kent Island
in Queen Anne's County, Maryland. The Bank's principal business consists of
originating loans and attracting deposits. The Bank originates commercial loans
(including Small Business Administration ("SBA") loans), commercial real estate
loans, construction loans, one- to four-family residential mortgage loans and,
to a lesser extent home equity and consumer loans. The Bank also invests in U.S.
Treasury and U.S. Government agency securities and other securities issued by or
guaranteed by the federal government. At March 31, 1997, the Bank's loan
portfolio totalled $69.6 million. Of this amount, $31.3 million or 44.98% were
commercial loans, $18.5 million or 26.59% were commercial real estate loans,
$8.2 million or 11.77% were construction loans, $7.2 million or 10.33% were one-
to four-family residential mortgage loans, $2.1 million or 3.01% were home
equity loans and $2.3 million or 3.32% were consumer and other loans.

BACKGROUND

The Bank was formed as a de novo bank, a start-up bank with no previous
existence, and commenced operations from a single Annapolis location in January
1990. In June 1990, the Company acquired most of the assets and liabilities of
Gibraltar Savings and Loan, F.A. ("Gibraltar") from the Resolution Trust
Corporation as receiver for Gibraltar, expanding its branch network to five
branches. This acquisition was

<PAGE>

funded, in part, through a $3.2 million unsecured loan to the Company from a
director who is the principal stockholder of the Company (the "Principal
Stockholder"), which bore interest at the Bank's prime rate less 2.0%. The
acquisition was accounted for as a purchase and resulted in a premium paid for
the core deposits and other intangible assets in the amount of $2.2 million,
which initially was to be amortized over a 15 year period. At December 31, 1990,
the fiscal year end following this acquisition, the Company's assets totalled
$43.6 million.

From June 1990 through December 31, 1996, management of the Company
concentrated its efforts on growing the Bank by developing loan and deposit
portfolios primarily in Anne Arundel County, Maryland and the surrounding
counties. The Bank experienced steady growth in assets and deposits while its
earnings consistently trailed its peers due to a high level of operating
expenses and loan losses.

In December 1994, the Company conducted a rights offering through which
it offered its stockholders, at the price of $3.50 per share, the right to
purchase 2.5 shares of its Common Stock for each share of common stock owned.
The primary purpose of this offering was to convert the $3.2 million of debt
accumulated in the Gibraltar acquisition into capital to reduce the Company's
interest expense and increase its capitalization. A total of 937,672 shares were
sold, of which 907,143 were sold to the Principal Stockholder in exchange for
retirement of the principal portion of the debt. A new note was issued to the
Principal Stockholder in the amount of $848,400 to cover the portion of the loan
that remained outstanding, which note matures on December 31, 1997 and bears
interest at the Wall Street Journal ("WSJ") prime rate plus 1.0%.

The Company's operating expenses continued to increase as the Bank
opened a sixth branch office and relocated its administrative office in 1996. At
December 31, 1996, the Company's operating expenses as a percentage of average
assets was 4.50%. In addition, the Company's return on average assets has been
consistently below that of its peers. At December 31, 1996, the Company's return
on average assets was .44%

REVISED BUSINESS STRATEGY

During the fourth quarter of 1996, the Board of Directors determined
that there was a need to implement a revised business strategy to improve the
Company's financial performance. Several members of senior management were
relieved of their responsibilities in late 1996 and early in 1997 and certain
other members of senior management resigned during this same period. In February
1997, the Board of Directors engaged John W. Marhefka, Jr. as President and
Chief Executive Officer of the Bank and as Vice President and Chief Executive
Officer of the Company. The Board of Directors believes that Mr. Marhefka's
management skills and local market experience will enable him to guide the
Company and the Bank through a reorganization process which will improve
operating results through implementation of a revised business plan. As
President and Chief Executive Officer of Annapolis Bancshares, Inc. and Bank of
Annapolis, he successfully guided those companies from their inception in 1988
through more than eight years of steady growth and strong continually increasing
earnings performance before they merged with Sandy Spring Bancorp, Inc. In March
1997, Mr. Marhefka hired Russell J. Grimes, Jr., who was appointed as Senior
Vice President, Chief Financial Officer and Treasurer of the Bank and Chief
Financial Officer and Treasurer of the Company. Mr. Grimes was formerly Vice
President, Chief Financial Officer and Treasurer of Annapolis Bancshares, Inc.
and Bank of Annapolis and was instrumental in implementing several successful
financial strategies with those firms. In April 1997, the Board appointed
Stanley H. Katsef as a Director and Vice Chairman of the Board. In addition to
his role as a Director, Mr. Katsef is an employee who assists the Board and Mr.
Marhefka with business development, public relations, and management strategy
issues. Mr. Katsef was formerly Chairman of the Board of Annapolis Bancshares,
Inc. and Bank of Annapolis. For additional

<PAGE>

information on these officers, see "The Board of Directors and Management of the
Bank -- Biographical Information." Additionally, the Board of Directors adopted
a requirement that, in order to assure a high level of commitment to the Company
and the Bank, all Directors must own at least $100,000 of the Company's common
stock. Following the imposition of this requirement, the composition of the
Board of Directors changed during April 1997. In addition to Messrs. Marhefka
and Katsef, two additional Directors who also have long-standing ties to Anne
Arundel County were added.

The reconstituted Board of Directors and senior management team are in
the process of implementing a revised business strategy designed to enhance
stockholder value. This strategy includes the following components:

o Consolidating the Bank's branch network to include fewer
branch locations and to reduce operating expenses.

o Reducing non-performing assets by implementing more stringent
underwriting criteria and more aggressive collection
procedures, and increasing secured real estate lending.

o Reducing interest expense by retiring $1.1 million of Company
debt with a portion of the Offering proceeds.

o Fostering support for the Bank by increasing the local
ownership of the Company by marketing the Offering to a large
number of buyers within the Bank's local community.

o Restructuring internal bank operations to attain operating
efficiencies and cost reductions.

o Increasing net interest income by expanding the loan and
deposit portfolios; the additional capital provided by the
Offering will support such growth by enabling the Bank to
continue to comply with regulatory capital requirements.

o Increasing non-interest income though expanding origination
and sale of fixed-rate one- to four-family residential
mortgage loans and other fee income.

In implementing its revised business strategy, the Company recorded a
one-time restructuring expense of $830,000 for the three months ended March 31,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Comparison of Operating Results for the Three Months
Ended March 31, 1997 and 1996."

The Company's principal executive office is located at 180 Admiral
Cochrane Drive, Suite 300, Annapolis, Maryland 21401 and its telephone number is
(410) 224-4455.

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THE OFFERING

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Common Stock Offered.................................................. A minimum of 333,334 shares.
A maximum of 833,334 shares.

Common Stock to be outstanding after the Offerings.................... 1,812,306 shares at the minimum.
2,312,306 shares at the maximum.

Use of Proceeds........................................................ To retire Company debt of $1.1 million,
to make a capital contribution to
the Bank, to increase the Bank's tier
1 capital, to support managed and controlled
growth, and for general corporate
purposes. See "Use of Proceeds."
Dilution............................................................... Upon completion of the Offering,
there will be an immediate dilution
to investors in the Offering of the
net tangible book value per share of
Common Stock. See "Dilution."

Risk Factors........................................................... Prospective investors in the
Common Stock should read
carefully the information discussed
under the heading "Risk Factors."

Reserved Nasdaq SmallCap Market Symbol................................. "ANNB"

Subscription Procedures................................................ Shares may be subscribed for by
delivering the Stock Order Form
attached hereto ,
completed and executed, to the
Stock Information Center,
established by the Agent, on or
before the Expiration Date. The
address of the Stock Information
Center is 180 Admiral Cochrane
Drive, Suite 300, Annapolis,
Maryland 21401. See "The
Offering -- How to Subscribe."
</TABLE>

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The selected financial and other data of the Company, at or for the
years ended December 31, 1996, 1995, 1994, set forth below is derived in part
from, and should be read in conjunction with, the Financial Statements of the
Company and Notes thereto as of December 31, 1996, and for each of the two years
in the period ended December 31, 1996 presented elsewhere in this Prospectus.
Financial information at March 31, 1997, and for the three month periods ended
March 31, 1997 and 1996 is derived from unaudited financial data, but in the
opinion of management, reflects all adjustments (including a one time charge
related to certain restructuring expenses) which are necessary to present fairly
the results for such interim periods. Interim results at and for the three
months ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. The Company did not pay
any cash dividends in any of the periods set forth.

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AT MARCH 31, YEARS ENDED DECEMBER 31,
--------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C>
SELECTED FINANCIAL CONDITION DATA:

Total assets................................... $98,139 $95,871 $100,227 $95,296 $75,859
Total loans, net of deferred fees and costs.... 69,604 59,015 69,565 56,653 57,337
Total deposits................................. 83,557 83,574 87,106 82,096 66,118
Securities sold under agreements to
repurchase................................... 7,142 6,011 6,345 6,970 4,741
Note payable(1)................................ 1,023 945 1,003 925 4,004
Total stockholders' equity..................... 5,863 5,133 5,471 5,046 760
</TABLE>

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<CAPTION>
AT OR FOR THE AT OR FOR THE YEARS
THREE MONTHS ENDED ENDED DECEMBER 31,
--------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
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SELECTED OPERATING DATA:

Interest income.................................... $1,987 $1,947 $8,021 $7,651 $5,552
Interest expense................................... 754 855 3,362 3,099 2,260
------ ------ ------ ------ -------
Net interest income................................ 1,233 1,092 4,659 4,552 3,292
Provision for loan losses.......................... 237 50 452 318 300
------ ------ ------ ------ -------
Net interest income after
provision for loan losses....................... 996 1,042 4,207 4,234 2,992
Restructuring expense(2)........................... 830 - - - -
Other income....................................... 165 124 588 521 394
Operating expense.................................. 1,067 1,052 4,372 3,957 3,313
------ ------ ------ ------ -------
Income (loss) before income taxes.................. (736) 114 423 798 73
Income tax benefit (expense)(3).................... 1,120 - - (6) -
------ ------ ------ ------ -------
Net income before minority interest in
earnings of consolidated subsidiary............. 384 114 423 792 73
Minority interest in earnings of
consolidated subsidiary.......................... - - - - 55
------ ------ ------ ------ -------
Net income......................................... $ 384 $ 114 $ 423 $ 792 $ 18
====== ====== ====== ====== =======
(Footnotes on page 9)
</TABLE>

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AT OR FOR THE AT OR FOR THE YEARS
THREE MONTHS ENDED ENDED DECEMBER 31,
--------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------- -------------
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PER COMMON SHARE DATA:

Earnings per share................................. $0.26 $0.08 $0.29 $0.57 $0.03
Tangible book value per share...................... 3.78 2.87 3.17 2.78 (0.58)
Book value per share............................... 3.96 3.47 3.70 3.41 1.40
Number of shares of Common Stock
outstanding, at period-end....................... 1,478,972 1,478,972 1,478,972 1,478,972 541,300
RATIOS:

Return on average assets(4)........................ 1.61% 0.49% 0.44% 0.94% 0.03%
Return on average stockholders' equity(4).......... 27.38% 8.94% 7.98% 19.26% 1.97%
Average stockholders' equity to
average total assets............................. 5.87% 5.44% 5.46% 4.88% 1.30%
Other income to average assets..................... 0.69% 0.53% 0.60% 0.62% 0.56%
Operating expenses to average assets(5)............ 7.94% 4.49% 4.50% 4.70% 4.71%
Efficiency ratio(6)................................ 135.69% 86.51% 83.34% 78.00% 89.88%
Interest rate spread............................... 4.98% 4.48% 4.68% 5.29% 4.74%
Net interest margin(7)............................. 5.47% 4.94% 5.10% 5.73% 4.98%
Ratio of interest-earning assets to interest-bearing
liabilities........................................ 113.10% 110.57% 111.20% 111.05% 106.89%
Non-performing loans to total loans................ 3.74% 1.39% 2.87% 3.03% 1.26%
Non-performing loans less SBA guarantees to total
loans.............................................. 1.95% 1.39% 1.20% 3.03% 1.26%
Allowance for loan losses to non-performing loans.. 38.76% 70.29% 38.35% 35.98% 95.15%
Allowance for loan losses to non-performing loans
less SBA guarantees................................ 74.46% 70.29% 91.84% 35.98% 95.15%
Non-performing loans to total assets............... 2.65% 0.85% 1.99% 1.80% 0.95%
Non-performing loans less SBA guarantees to total
assets............................................. 1.38% 0.85% 0.83% 1.80% 0.95%
Total non-performing assets to total assets........ 2.80% 1.37% 2.13% 2.32% 1.57%
Total non-performing assets less SBA guarantees to
total assets....................................... 1.52% 1.37% 0.97% 2.32% 1.57%
Total non-performing assets to total loans......... 3.94% 2.23% 3.07% 3.90% 2.08%
Total non-performing assets less SBA guarantees to
total loans........................................ 2.15% 2.23% 1.40% 3.90% 2.08%
Capital ratios(8)(9):
Tier 1 risk-based capital........................ 7.33% 7.71% 7.46% 7.68% (0.12)%
Total risk-based capital......................... 8.56% 8.74% 8.68% 8.83% 1.13%

(Footnotes on next page)

</TABLE>

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- ----------
(1) Includes accrued interest payable.

(2) The Company recorded a one time restructuring expense of $830,000 for
the three months ended March 31, 1997 resulting from implementation of
a revised business strategy by the Board of Directors and senior
management in February 1997. The increase in expense includes a
reduction of approximately $471,000 relating to the intangible assets
acquired in the June 1990 acquisition of Gibraltar, severance payments
and benefits of $136,000, branch consolidation expense of $119,000,
expense of $50,000 related to the termination of a planned de novo bank
organization in accordance with Mr. Marhefka's employment agreement and
various other expenses of $54,000.

(3) The benefit is attributable to a one time recognition of a deferred tax
adjustment in the amount of $1.1 million as a result of the Company
recording the tax effect of approximately $2.4 million of net operating
loss carryforwards and other deferred tax assets.

(4) At March 31, 1997, the return on average assets and the return on
average stockholders' equity increased mainly due to a one time
adjustment to record the tax benefit of $1.1 million relating to the
deferred tax asset.

(5) The increase in the operating expenses to average assets ratio for the
period ended March 31, 1997 was due to $830,000 of restructuring costs
incurred in this period.

(6) The efficiency ratio represents noninterest expense less (gain) loss on
foreclosed real estate divided by noninterest income plus net interest
income before provision for estimated loan losses. The increase in the
efficiency ratio for the period ended March 31, 1997 was due to
$830,000 of restructuring costs incurred in this period. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Operating Results for the Three
Months Ended March 31, 1997 and 1996."

(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.

(8) Ratios are for the Company and reflect debt owed by the Company to the
Principal Stockholder. The capital of the Company and the capital of
the Bank differ by the amount of the debt at the Company level. The
Company intends to retire this debt using a portion of proceeds of the
Offering. See "Use of Proceeds. For a discussion of the Bank capital
ratios, see "Regulation and Supervision - Federal Banking Regulations -
Capital Requirements."

(9) In 1994, Tier 1 risk-based capital and total risk-based capital were
reduced due to debt in an aggregate amount of $4.0 million (including
accrued interest) due to the Principal Stockholder from the Company
that did not count towards capital at the Company level. In 1995, $3.2
million of this debt was converted to equity representing 907,143
shares of stock. See "Business Background".

<PAGE>

RECENT DEVELOPMENTS

The selected financial and other data of the Company, at or for the
year ended December 31, 1996, set forth below is derived in part from, and
should be read in conjunction with, the Financial Statements of the Company and
Notes thereto as of December 31, 1996, and for each of the two years in the
period ended December 31, 1996 presented elsewhere in this Prospectus. Financial
information at and for the three and six month periods ended June 30, 1997 and
1996 are derived from unaudited financial data, but in the opinion of
management, reflect all adjustments which are necessary to present fairly the
results for such interim periods. Interim results at and for the three and six
months ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. The Company did not pay
any cash dividends in any of the periods set forth.

<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31, 1996
--------------------------- -------------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
SELECTED FINANCIAL CONDITION DATA:

Total assets................................... $111,453 $100,227
Total loans, net of deferred fees and costs.... 75,220 69,565
Total deposits................................. 95,719 87,106
Securities sold under agreements to
repurchase................................... 8,021 6,345
Note payable(1)................................ 1,043 1,003
Total stockholders' equity..................... 6,144 5,471

</TABLE>

<TABLE>
<CAPTION>
AT OR FOR THE THREE AT OR FOR THE SIX MONTHS
MONTHS ENDED JUNE 30, ENDED JUNE 30,
--------------------------- -------------------------------
1997 1996 1997 1996
-------------- ---------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C>
SELECTED OPERATING DATA:

Interest income.................................... $2,260 $1,941 $4,247 $3,888

Interest expense................................... 893 848 1,647 1,703
------ ------ ------ ------
Net interest income................................ 1,367 1,093 2,600 2,185

Provision for loan losses.......................... 82 65 319 115
------ ------ ------ ------
Net interest income after
provision for loan losses....................... 1,285 1,028 2,281 2,070

Restructuring expense(2)........................... -- -- 830 --

Other income....................................... 204 152 369 277

Operating expense.................................. 1,074 1,054 2,141 2,106
----- ----- ----- -----
Income (loss) before income taxes.................. 415 126 (321) 241

Income tax benefit (expense)(3).................... (141) 0 978 0
--- - --- -
Net income before minority interest in
earnings of consolidated subsidiary............. 274 126 657 241

Minority interest in earnings of
consolidated subsidiary.......................... -- -- --
---- ---- ----
Net income......................................... $274 $126 $657 $241
==== ==== ==== ====
(Footnotes on page 12)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
AT OR FOR THE THREE AT OR FOR THE SIX
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
--------------------------- -------------------------------
1997 1996 1997 1996
-------------- ---------- ----------- ----------------
<S> <C>
PER COMMON SHARE DATA:

Earnings per share................................. $0.19 $0.09 $0.44 $0.16

Tangible book value per share...................... 3.76 2.98 3.76 2.98

Book value per share............................... 4.15 3.56 4.15 3.56

Number of shares of Common Stock
outstanding, at period-end....................... 1,478,972 1,478,972 1,478,972 1,478,972

RATIOS:

Return on average assets(4)........................ 1.05% 0.52% 1.32% 0.51%

Return on average stockholders' equity(4).......... 18.92% 9.72% 23.13% 9.25%

Average stockholders' equity to
average total assets............................ 5.56% 5.34% 5.69% 5.46%

Other income to average assets..................... 0.78% 0.63% 0.74% 0.58%

Operating expenses to average assets(5)............ 4.12% 4.34% 5.12% 4.42%

Efficiency ratio(6)................................ 68.36% 84.65% 100.07% 85.54%

Interest rate spread............................... 5.09% 4.41% 5.10% 4.51%

Net interest margin(7)............................. 5.55% 4.80% 5.55% 4.91%

Ratio of interest-earning assets to interest-
bearing liabilities.............................. 112.75% 110.52% 112.91% 110.53%

Non-performing loans to total loans................ 2.12% 1.84% 2.12% 1.84%

Non-performing loans less SBA guarantees
to total loans.................................. 1.13% 1.40% 1.13% 1.40%

Allowance for loan losses to non-performing loans.. 67.94% 54.84% 67.94% 54.84%

Allowance for loan losses to non-performing loans
less SBA guarantees............................ 127.48% 72.24% 127.43% 72.24%

Non-performing loans to total assets............... 1.43% 1.17% 1.43% 1.17%

Non-performing loans less SBA guarantees
to total assets................................. 0.76% 0.89% 0.76% 0.89%

Total non-performing assets to total assets........ 1.47% 1.67% 1.47% 1.67%

Total non-performing assets less SBA guarantees
to total assets................................. 0.81% 1.39% 0.81% 1.39%

Total non-performing assets to total loans......... 2.18% 2.63% 2.18% 2.63%

Total non-performing assets less SBA guarantees
to total loans.................................. 1.20% 2.19% 1.20% 2.19%

Capital ratios(8)(9):

Tier 1 risk-based capital........................ 7.78% 7.65% 7.78% 7.65%

Total risk-based capital......................... 9.03% 8.74% 9.03% 8.74%

(Footnotes on next page)
</TABLE>

<PAGE>

- ----------
(1) Includes accrued interest payable.

(3) The benefit was attributable to a one time recognition of a deferred
tax adjustment in the amount of $1.1 million as a result of the Company
recording the tax effect of approximately $2.4 million of net operating
loss carryforwards and other deferred tax assets.

(4) At June 30, 1997, the return on average assets and the return on
average stockholders' equity increased mainly due to a one time
adjustment to record the tax benefit of $1.1 million relating to the
deferred tax asset.

(5) The increase in the operating expenses to average assets ratio for the
six month period ended June 30, 1997 was due to $830,000 of
restructuring costs incurred in this period.

(6) The efficiency ratio represents noninterest expense less (gain) loss on
foreclosed real estate divided by noninterest income plus net interest
income before provision for estimated loan losses. The increase in the
efficiency ratio for the six month period ended June 30, 1997 was due
to $830,000 of restructuring costs incurred in this period. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Operating Results for the Three
Months Ended March 31, 1997 and 1996."

(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.

(8) Ratios are for the Company and reflect debt owed by the Company to the
Principal Stockholder. The capital of the Company and the capital of
the Bank differ by the amount of the debt at the Company level. The
Company intends to retire this debt using a portion of proceeds of the
Offering. See "Use of Proceeds." For a discussion of the Bank capital
ratios, see "Regulation and Supervision - Federal Banking Regulations -
Capital Requirements."

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS:

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND DECEMBER 31, 1996.

Total assets at June 30, 1997 were $111.5 million an increase of $11.3
million or 11.27% from total assets at December 31, 1996 of $100.2 million. The
increase was primarily due to an increase in federal funds sold and securities
purchased under agreements to resell of $5.5 million or 5.48%, net loan growth
of $5.3 million or 5.29% of total assets, and investment securities of $2.0
million or 2.0%.

Net loans receivable at June 30, 1997 were $74.1 million, an increase
of $5.3 million or 7.7% from net loans receivable of $68.8 million at December
31, 1996. The increase was due to a $2.0 million or 2.9% increase in commercial
loans and $4.0 million or 5.8% increase in loans secured by real estate.

The allowance for loan losses increased $316,000 or 41.31% to $1.1
million at June 30, 1997 from $765,000 at December 31, 1996. The increase in the
allowance for loan losses was due primarily to additional reserves on specific
commercial loans that management has identified and believes may become
non-performing. Management makes periodic provisions to the allowance for loan
losses to maintain the allowance at an acceptable level commensurate with
management's assessment of the credit risk inherent in the loan portfolio.

<PAGE>

At March 31, 1997, 59.46% of the Company's non-performing assets were
represented by three individual borrowers. Since that date two of these
non-performing assets have been resolved and the third is in the process of
resolution. The guaranteed portion of two loans were repaid by the SBA resulting
in no additional losses to the Bank. The third loan was placed on accrual status
and the real estate collateralizing the loan is under a contract of sale which
is expected to result in the repayment of the loan in full by the end of the
third quarter of 1997. Additionally, the Company is currently receiving interest
payments on the loan.

Intangible assets decreased $529,000 or 67.13% due to management's
analysis of the intangible assets related to the June 1990 acquisition of
Gibraltar and amortization of $58,000. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Comparison of Operating
Results for the Three Months Ended March 31, 1997 and 1996 -- Operating
Expenses."

Deferred income taxes increased $978,000 from zero as a result of the
Company recording the tax effect of net operating loss carryforwards and other
deferred tax assets. The Company recorded a federal tax expense of $141,000 for
the quarter ended June 30, 1997, an effective federal tax rate of 34%, which
reduced deferred income taxes from $1.1 million at March 31, 1997 to $978,000 at
June 30, 1997.

Deposits of $95.6 million at June 30, 1997 represent an $8.6 million or
9.89% increase from December 31, 1996 deposits of $87.1 million. The increase
was due in part to a $13.1 million or 14.94% increase in certificates of deposit
and a $1.3 million or 1.29% increase in demand deposit accounts, offset by a
decrease of $4.7 million or 5.40% in NOW accounts and a $1.2 million or 1.38%
decrease in savings accounts.

Stockholders' equity increased $674,000 during the first six months of
1997 as a result of an increase in net retained earnings of $658,000 and a
decrease of $16,000 in the unrealized loss on investments in available for sale
securities.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996.

General. Net income for the six months ended June 30, 1997 totaled
$658,000 or $0.44 per share as compared to $241,000 or $0.16 per share for the
six months ended June 30, 1996. The increase in net income can be attributed
mainly to a one time recognition of a deferred tax adjustment in the amount of
$1.1 million at March 31, 1997 as a result of the Company recording the tax
effect of net operating loss carryforwards and other deferred tax assets. The
increase was partially offset by accrued federal income taxes of $141,000 and a
$830,000 one time restructuring expense resulting from the revised business
strategy. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the Three Months
Ended March 31, 1997 and 1996 -- Operating Expenses." At June 30, 1997, the net
interest margin increased to 5.55% from 4.91% at June 30, 1996. The increase in
the net interest margin was the result of an increase in the average balances of
loans receivable offset by a decrease in the average balance of investment
securities.

Net interest income. Net interest income increased $415,000 or 19.0%
for the six months ended June 30, 1997 to $2.6 million from $2.2 million for the
six months ended June 30, 1996, due primarily to an increase in interest income
of $360,000 and a decrease in interest expense of $56,000.

The increase in interest income was derived primarily from interest on
loans receivable which increased $527,000 or 17.14% from $3.1 million for the
six months ended June 30, 1996 to $3.6 million for the six months ended June 30,
1997. This increase was due primarily to an increase in the average balance

<PAGE>

of loans receivable from $58.6 million at June 30, 1996 to $70.7 million at June
30, 1997 offset by a decrease of $183,000 or 35.12% in interest on investment
securities as a result of a decrease in the average balance of $7.9 million or
39.70% from $19.9 million at June 30, 1996 to $12.0 million at June 30, 1997.

Interest expense decreased $56,000 or 3.29% for the six months ended
June 30, 1997 as compared to the six months ended June 30, 1996, due primarily
to a decrease in the average cost of deposits from 4.22% at June 30, 1996 to
3.97% at June 30, 1997.

Provision for Loan Losses. The provision for loan losses for the six
months ended June 30, 1997 and 1996 totalled $319,000 and $115,000 respectively.
The increase in the provision for loan losses at June 30, 1997 was primarily
attributable to $216,000 in additional specific reserves. The specific reserves
were primarily related to certain commercial loans that management believes may
become non-performing. See "Business --- Lending Activities -- Non-Performing
Assets."

Other Income. Other income, which is comprised primarily of fees and
charges on deposit accounts, increased $92,000 or 33.21% to $369,000 at June 30,
1997 from $277,000 at June 30, 1996. The increase in other income was primarily
due to an increase in fees and charges on deposit accounts of $52,000 and
mortgage banking fees of $25,000.

Operating Expense. Operating expense increased $865,000 or 41.07% for
the six months ended June 30, 1997 from $2.1 million for the six months ended
June 30, 1996 to $2.9 million for the six months ended June 30, 1997. The
increase in operating expense was due to a one time restructuring expense of
$830,000 for the six months ended June 30, 1997 resulting from the
implementation of a revised business strategy by the Board of Directors and
senior management beginning in February 1997. The increase includes $471,000 of
expense written off in relation to the intangible assets acquired in the June
1990 acquisition of Gibraltar, severance payments and benefits of $136,000,
branch consolidation expense of $119,000, $50,000 related to the termination of
a planned de novo bank organization in accordance with Mr. Marhefka's employment
agreement, and various other expenses of $54,000. The goodwill portion of the
intangible asset, representing $296,701 or 62.79% of the amount written off at
March 31, 1997, was deemed impaired at March 31, 1997 and related to key former
employees and management of Gibraltar whose employment with the Company ended
during the quarter ended March 31, 1997. The amortization of the goodwill
paralleled the expected service life of these employees and management
personnel. Data processing expense increased $61,000 or 32.80% for the six
months ended June 30, 1997 from $186,000 for the six months ended June 30, 1996
to $247,000 for the six months ended June 30, 1997, due to an increase in the
volume of transaction accounts.

Income Tax Expense. The Company had approximately $2.4 million of net
operating loss carryforwards at June 30, 1997. As a result, the Company recorded
a net income tax benefit for the six month period ended June 30, 1997 of
$978,000. The Company's federal tax rate is approximately 34%. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Comparison of Operating Results for the Three Months Ended March 31, 1997 and
1996 -- Income Tax Expense."

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND
1996.

General. Net income for the three months ended June 30, 1997 totaled
$274,000 or $0.19 per share as compared to $126,000 or $0.09 per share for the
three months ended June 30, 1996. The increase in net income can be attributed
mainly to an increase in the net interest margin which increased to 5.55% at
June 30, 1997 from 4.80% at June 30, 1996. The increase in the net interest
margin was the result of an increase in the net interest income due to an
increase in average balances of loans receivable offset by a decrease in

<PAGE>

the average balance of investment securities. In addition, other income
increased by $52,000 and income tax expense of $141,000 was recorded.

Net interest income. Net interest income increased $275,000 or 25.18%
for the three months ended June 30, 1997 to $1.4 million from $1.1 million for
the three months ended June 30, 1996, due primarily to an increase in interest
income of $319,000, offset by an increase in interest expense of $44,000.

The increase in interest income was derived primarily from interest on
loans receivable which increased $350,000 or 22.79% from $1.5 million for the
three months ended June 30, 1996 to $1.9 million for the three months ended June
30, 1997. This increase was due primarily to an increase in the average balance
of loans receivable from $60.2 million for the three months ended June 30, 1996
to $71.9 million for the three months ended June 30, 1997. In the three month
period ended June 30, 1997, the Bank recognized $47,000 of interest income on a
commercial real estate loan that was previously a non-accrual loan. At June 30,
1997 the loan was less than 90 days past due. This loan is currently under a
contract of sale and is expected to settle by the end of the third quarter of
1997. The increase in interest income was offset by a decrease of $97,000 or
34.04% in interest on investment securities as a result of a decrease in the
average balance of $8.8 million or 40.74% from $21.6 million for the three
months ended June 30, 1996 to $12.8 million for the three months ended June 30,
1997.

Interest expense increased $44,000 or 5.18% for the three months ended
June 30, 1997 as compared to the three months ended June 30, 1996, due primarily
to an increase in the average volume of deposits from $82.6 million for the
three months ended June 30, 1996 to $87.6 million for the three months ended
June 30, 1997.

Provision for Loan Losses. The provision for loan losses for the three
months ended June 30, 1997 and 1996 totalled $82,000 and $65,000 respectively.
The increase in the provision for loan losses at June 30, 1997 was attributable
to an increase in the outstanding balance of the loan portfolio and management's
assessment of the credit risk inherent in the loan portfolio.

Other Income. Other income increased $52,000 or 34.21% to $204,000 for
the three months ended June 30, 1997 from $152,000 for the three months ended
June 30, 1996. The increase in other income was primarily due to an increase of
fees and charges on deposit accounts of $38,000 and mortgage banking fees of
$12,000.

Operating Expense. Operating expense increased $21,000 or 1.99% for the
three months ended June 30, 1997. The increase in operating expenses was
primarily due to a $20,000 increase in compensation and related expenses and a
$36,000 increase in data processing expense due to an increase in the volume of
transaction accounts offset by a $14,000 decrease in amortization of intangible
asset expense and other expense of $17,000. The decrease in amortization expense
relates to the analysis conducted by management in the first quarter of 1997 and
the resulting decrease in the intangible assets acquired in the June 1990
acquisition of Gibraltar.

Income Tax Expense. The Company has approximately $2.4 million of net
operating loss carryforwards at June 30, 1997. The Company recorded income tax
expense for the three month period ended June 30, 1997 of $141,000, based on a
federal tax rate of 34% which reduced the deferred tax asset established at
March 31, 1997 to $978,000.

<PAGE>

RISK FACTORS

The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock offered hereby.

DEPENDENCE ON KEY PERSONNEL

The Company will depend to a considerable degree on the contributions
of a limited number of key management personnel who will have a significant role
in the development and management of the Company. In that regard, Mr. Marhefka
was hired as President and Chief Executive Officer of the Bank and as Vice
President and Chief Executive Officer of the Company in February 1997 to
implement a revised business strategy for the Company and Bank. Shortly
thereafter, Mr. Grimes was hired as Senior Vice President, Chief Financial
Officer and Treasurer of the Bank and Chief Financial Officer and Treasurer of
the Company and Mr. Katsef was hired as Vice Chairman of the Bank and Company.
While these individuals have only been with the Company a short period of time,
the continued development of the Company and Bank's business strategy depends to
a large extent upon the continued employment of these key management personnel.
The Bank has entered into a five year employment agreement with Mr. Marhefka.
See "- Revised Business Strategy of the Bank," "The Board of Directors and
Management of the Bank - Executive Compensation - Employment Agreement."

RISKS RELATED TO REVISED BUSINESS STRATEGY OF THE BANK

Commencing in the fourth quarter of 1996, the Board of Directors
initiated a revised business strategy in order to improve the Company's
financial performance. The revised business strategy was implemented due
primarily to the Company's high level of non-performing assets and operating
expenses. The Board relieved certain members of senior management of their
responsibilities while certain other members of senior management resigned and
the Board hired key management personnel to implement its revised business
strategy. The key elements of the revised strategy are: (i) consolidating the
Bank's branch network and reducing operating expenses; (ii) reducing
non-performing assets; (iii) reducing interest expense at the Company level;
(iv) increasing local ownership of the Company; (v) increasing operating
efficiencies; (vi) expanding loan and deposit portfolios to increase net
interest income; and (vii) increasing non-interest income. There can be no
assurances that the Board will succeed in implementing its revised business
strategy, including among other things, reducing non-performing assets or
increasing operating efficiencies. The Bank's failure to achieve any of the
elements of its business strategy could impair its ability to successfully
implement the business strategy, which could have a material adverse effect on
the Bank's results of operations and financial condition. See "Business -
Revised Business Strategy."

RISKS RELATED TO NON-PERFORMING ASSETS

As part of its revised business strategy, the Company intends to reduce its
level of non-performing assets. As such, the Company has adopted new policies
and procedures with regard to its monitoring and resolution of problem assets.
The Company believes that its revised policies and procedures related to its
monitoring and resolution of problem loans and assets are adequate, however
there can be no assurances that the Company's revised business strategy will
succeed or that the level of non-performing assets can be reduced or will not
increase in the future. While the Company believes that it has established
adequate reserves against such loans or written down the values of the
collateral securing such loans to reflect the current estimated fair values of
such collateral, no assurance can be provided that the collateral securing such
loans will not further decrease in value or can be sold for their estimated fair
values in the event the Company forecloses or takes possession of such
collateral or that the Company will not experience further losses related to
such loans.

<PAGE>

RISKS RELATED TO COMMERCIAL REAL ESTATE, CONSTRUCTION AND CONSUMER LENDING

Commercial real estate, construction and consumer lending generally are
viewed as exposing the lender to a greater risk of loss than one- to four-family
residential mortgage lending. Commercial real estate lending typically involves
higher loan principal amounts and the repayment of the loans generally is
dependent, in large part, on sufficient income from the properties securing such
loans to cover operating expenses and debt service. Market values may vary as a
result of economic events or governmental regulations outside of the control of
the borrower or lender which could negatively impact the future cash flow of the
affected properties. Construction and land acquisition and development lending
involve additional risks attributable to the fact that funds are advanced upon
the security of the project, which is of uncertain value prior to its
completion. Because of the uncertainties inherent in estimating construction
costs, as well as the market value of the completed project and the effects of
governmental regulation of real property, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related
loan-to-value ratio. As a result of the foregoing, construction loans often
involve the disbursement of substantial funds with repayment dependent, in part,
on the success of the ultimate project rather than the ability of the borrower
or guarantor to repay principal and interest. Consumer loans typically have
shorter terms and lower balances with higher yields as compared to one- to
four-family residential mortgage loans, but generally carry higher risks of
default. Consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. At March 31, 1997, $18.5 million or 26.59%, $8.2
million or 11.77% and $2.3 million or 3.32% of the Bank's total loan portfolio
consisted of commercial real estate loans, construction loans and consumer
loans, respectively.

VOTING CONTROL OF OFFICERS AND DIRECTORS

Directors and executive officers of the Company currently own
approximately 1,119,443 shares or 75.70% of the issued and outstanding shares of
Common Stock. This includes 10,000 shares of the Common Stock attributable to
Mr. Marhefka through stock options. In addition, directors and executive
officers of the Company expect to purchase 21,550 shares or 6.46% of the shares
at the minimum or 2.60% at the maximum of Common Stock to be issued in the
Offering. In particular, the Principal Stockholder currently owns 59.60% of the
outstanding shares of Common Stock, and will own 48.64% or 38.12% of such shares
upon completion of the Offering based upon the sale of 333,334 shares and
833,334 shares, respectively. Accordingly, management's potential voting
control, including the voting control of the Principal Stockholder, will
continue to have a significant influence over the affairs of the Company and the
Bank. Such concentration of ownership may have the effect of delaying, deferring
or preventing takeover attempts that certain stockholders deem to be in their
best interest and may tend to perpetuate existing management. See "The Board of
Directors and Management of the Bank Security Ownership of Management." In
addition, the Company's Amended Articles of Incorporation do not permit
stockholders to cumulate their votes in the election of directors, which could
impair stockholders holding a small number of shares from effectively
participating in the election of the Company's directors. See "The Board of
Directors and Management of the Bank - Security Ownership of Management."

COMPETITION

The Company faces substantial competition for deposits and loans
throughout its market area. Competition for deposits comes primarily from other
commercial banks, savings associations, credit unions, money market and mutual
funds and other investment alternatives. Competition for loans comes primarily
from other commercial banks, savings associations, mortgage banking firms,
credit unions and other

<PAGE>

financial intermediaries. The Company faces competition for deposits and loans
throughout its market area not only from local institutions but also from
institutions with a regional, and in some cases, national presence. Many of
these institutions are significantly larger than the Bank, and therefore have
greater financial and marketing resources than those of the Bank. See "Business
- - Market Area and Competition."

REGULATION

The Company and the Bank operate in a highly regulated environment and
are subject to supervision by several governmental regulatory agencies,
including the Office of the Comptroller of the Currency (the "OCC"), the Federal
Deposit Insurance Corp. (the "FDIC"), the Board of Governors of the Federal
Reserve System (the "FRB") and the Securities and Exchange Commission ("SEC").
Laws and regulations currently applicable to the Company and the Bank may
change, and there is no assurance that such changes will not adversely affect
the business of the Company and the Bank. See "Regulation and Supervision."

RISKS RELATED TO CHANGE IN ECONOMIC CONDITIONS

The success of the Company and the Bank will depend, to a certain
extent, upon economic and political conditions, both local and national, as well
as governmental monetary policies. Conditions such as inflation, recession,
unemployment, changes in interest rates, reductions in the money supply and
other factors beyond the control of the Company and the Bank may adversely
affect the Bank's deposit levels and loan demand and, therefore, the earnings of
the Bank and the Company. Although the Board of Directors believes that the
diversified economy of Central Maryland provides the opportunity for favorable
economic development in the Bank's market area, there is no assurance that
favorable economic development will occur or that the Bank's expectation of
corresponding growth will be achieved. A decline in the Maryland economy, and
particularly the Anne Arundel County economy, could have an adverse effect on
the Bank's business, including the demand for new loans, refinancing activity,
the ability of borrowers to repay outstanding loans and the value of the Bank's
collateral. The Bank could be adversely affected by a decline in economic
conditions or real estate values in its primary service area even if conditions
or values elsewhere in the United States or in Maryland remain stable or
improve. See "Business -- Market Area and Competition."

INTEREST RATE RISK

The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets in response to such movements.

The Bank attempts to manage fluctuations in interest rates by matching
the maturities of its interest-earning assets and interest-bearing liabilities.
The Bank's current strategy to reduce its sensitivity to interest rate
fluctuations is to avoid the risk of concentration in its investment portfolio
except as to investments in the U.S. Government or its agencies and fully
insured deposits in financial institutions. The Bank intends to maintain the
majority of the assets held for liquidity purposes in overnight Federal funds.
The Federal funds investment is the primary source for clearing customer checks
and funding loan advances and serves as the initial investment of excess funds.
As such, the Bank's investment in Federal funds will fluctuate for daily cash
movements and expected loan fundings. All of the loans in the Bank's portfolio
are either adjustable-rate or short term fixed-rate loans with terms to maturity
of 30 days to 30 years. The Bank does

<PAGE>

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

Significant fluctuations in the level of interest rates also may
adversely affect the fair value of the Bank's securities and other
interest-earning assets. Generally, the value of fixed-rate instruments
fluctuates inversely with changes in interest rates. As a result, increases in
interest rates could result in decreases in the carrying value of
interest-earning assets which could adversely affect the Bank's results of
operations if sold or, in the case of interest-earning assets classified as
available for sale, the Bank's equity. Increases in interest rates also can
affect the type (fixed-rate or adjustable-rate) and amount of loans originated
by the Bank and the average life of loans and securities, which can adversely
impact the yields earned on the Bank's loan and securities portfolio. In periods
of decreasing interest rates, the average life of loans held by the Bank may be
shortened to the extent increased prepayment activity occurs during such periods
which, in turn, may result in the Bank investing funds from such prepayments in
lower yielding assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Management of Interest Rate Risk."

ABSENCE OF MARKET FOR COMMON STOCK

There is currently no established active public trading market for the
Company's Common Stock. As of June 19, 1997, the Company's Common Stock was held
by approximately 86 holders of record. The Company has received conditional
approval to have its Common Stock quoted on The Nasdaq SmallCap Market under the
symbol "ANNB" upon completion of the Offering. However, there can be no
assurance that an active and liquid trading market for the Common Stock will
develop, or, once developed, will continue, nor can there be any assurances that
holders of the Common Stock will be able to sell their shares at or above the
price per share in the Offering. Due to the relatively small size of the
Offering, a stockkholder base sufficiently large enough to create an active
trading market may not develop and, if developed, may not be maintained. The
absence or discontinuance of a market for the Common Stock may have an adverse
impact on both the price and liquidity of the Common Stock. In addition, the
stock market has on occasion experienced extreme price and volume fluctuation.
These broad market fluctuations may adversely affect the market price for the
Company's Common Stock and could result in losses to investors. See "Market for
Common Stock."

DETERMINATION OF OFFERING PRICE

The Offering Price has been determined by the Company with the
assistance of the Agent based on certain factors including recent prices of
trades for the Common Stock, an evaluation of the financial condition and
performance of the Company, and comparisons of the relationships between market
prices, book values, and earnings per share of other financial institutions of a
similar size and asset quality. The Offering Price is not based solely on recent
sales prices for the Common Stock since the Common Stock is thinly traded.
Accordingly, there can be no assurance that the Common Stock may be resold at or
above the Offering Price. See "Market for Common Stock" and "The Offering."

<PAGE>

DILUTION

Upon completion of the Offering, there will be an immediate dilution to
investors in the Offering of the net tangible book value per share of Common
Stock of $1.97 per share based on the sale of a minimum of 333,334 shares at
$6.00 per share and of $1.61 per share based on the sale of a maximum of 833,334
shares at $6.00 per share. The offering price is substantially greater than the
price of the Common Stock sold in the last stock offering by the Company in
January 1995, which included the sale of 907,143 shares of Common Stock to the
Principal Stockholder in exchange for a portion of a $3.2 million debt owed to
the Principal Stockholder by the Company. The average price per share paid by
existing stockholders was $5.95. See "Dilution" and "Business - Background."

ADEQUACY OF ALLOWANCE FOR LOAN LOSSES

In originating loans, there is a substantial likelihood that loan
losses will be experienced. The risk of loss varies with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the quality of the collateral for the loan. Management maintains an
allowance for loan losses based on, among other things, industry standards,
management's experience, historical experience, an evaluation of economic
conditions, and regular reviews of delinquencies and loan portfolio quality.
Based upon such factors, management makes various assumptions and judgments
about the ultimate collectability of the loan portfolio and provides for loan
losses based upon a percentage of the outstanding balances and for specific
loans when their ultimate collectability is considered questionable.

As of March 31, 1997, the allowance for loan losses was $1.0 million,
which represented 1.45% of total loans and 38.76% of non-performing loans.
Non-performing loans totaled $2.6 million as of March 31, 1997, including $1.2
million of SBA guaranteed loans. Of this amount, approximately $701,000
represents the guaranteed portion of an SBA guaranteed commercial loan which was
repaid in full in April 1997. The Company reviews the allowance for loan losses
on a monthly basis and provides increases in the allowance, if necessary.

The Bank actively manages past due and non-performing loans in an
effort to minimize credit losses and monitor asset quality to maintain an
adequate loan loss allowance. Although management believes the Bank's allowance
for loan losses is adequate, there can be no assurance the allowance will prove
sufficient to cover future loan losses. Further, future adjustments may be
necessary if economic conditions differ substantially from the assumptions used
or adverse developments arise with respect to the Bank's non-performing or
performing loans. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require

<PAGE>

the Bank to make additional provisions for loan losses based upon judgments
different from those of management. Accordingly, there can be no assurance that
the allowance for loan losses will be adequate to cover loan losses or that
significant increases to the allowance will not be required in the future.
Material additions to the Bank's allowance for loan losses would negatively
affect the Company's earnings. See "Business-Lending Activities --Allowance for
Loan Losses."

DIVIDENDS ON COMMON STOCK

The Company has not paid any cash dividends on its Common Stock and
does not presently anticipate paying cash dividends in the foreseeable future.
The availability of funds for distribution to stockholders will depend
substantially on the earnings of the Bank and its ability to pay dividends to
the Company. Even if earnings are available, the Bank's payment of dividends is
restricted by federal regulations. See "Dividends" and "Regulation and
Supervision--Holding Company Regulation--Federal Regulation" and "- Federal
Banking Regulations - Limitations on Capital Distributions".

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Common Stock
offered hereby are estimated to be approximately $1.7 million at the minimum and
$4.6 million at the maximum after deducting the Underwriting fees and estimated
expenses of the Offering of $293,000 at the minimum and $443,000 at the maximum
at the initial public offering price of $6.00 per share.

The Company intends to use the net proceeds of this offering as
follows: (i) to repay a $1.1 million Company debt owed to the Principal
Stockholder which matures on December 31, 1997 and bears interest at the WSJ
prime rate plus 1.0%, (ii) to make a capital contribution of $600,000 at the
minimum and $3.5 million at the maximum to the Bank to increase the Bank's tier
1 capital, to support managed and controlled growth, and for general corporate
purposes.

The following table sets forth a breakdown of the Use of Proceeds at
the minimum and maximum offering levels:

<TABLE>
<CAPTION>
Minimum Maximum
------- -------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C>
Repayment of Company Debt $1,100,000 64.71% $1,100,000 23.91%
Capital Contributions to the Bank 600,000 35.29 3,500,000 76.09
Total $1,700,000 100.00% $4,600,000 100.00%
</TABLE>

<PAGE>

MARKET FOR COMMON STOCK

Prior to this Offering, there has been no established active public
trading market for the Common Stock. The Company anticipates that, following the
Offering, the Common Stock will be traded on the Nasdaq SmallCap Market under
the symbol "ANNB." As of June 19, 1997, there were 1,478,972 shares of Common
Stock outstanding held by 86 stockholders of record. Although under no
obligation to do so, Keefe, Bruyette & Woods, Inc. has advised the Company that,
upon completion of the Offering, it intends to make a market in the Common
Stock, subject to market conditions. However, an active public trading market
will depend upon the presence in the marketplace of both willing buyers and
willing sellers at any given time. Due to the relatively small size of the
Offering, it is unlikely that a stockholder base sufficiently large to create an
active trading market will develop and, if developed, be maintained. Therefore,
a purchaser of the Common Stock should have a long-term investment intent and
should recognize that the absence or discontinuance of an active trading market
may make it difficult to sell the Common Stock after the Offering and may have
an adverse effect on the price of the Common Stock. Additionally, the
development of a liquid public market depends on the existence of willing buyers
and sellers, the presence of which is not within the control of the Company or
any market maker. The number of active buyers and sellers of the Common Stock at
any particular time may be limited. Under such circumstances, investors in the
Common Stock could have difficulty disposing of their shares on short notice and
should not view the Common Stock as a short-term investment.

See "The Offering" for information concerning the factors considered in
determining the Offering Price. There can be no assurance that the Common Stock
will trade at higher than the Offering Price subsequent to the Offering.

There has been limited trading of the Common Stock. Management has
reviewed available Company records of purchases and sales of Common Stock and,
according to such records, there have been six trades since January 1997
involving, in the aggregate, 225,690 shares of Common Stock, all of which traded
at $5.00 per share. Each of the six trades involved directors or officers of the
Company. Management is aware of one additional trade of 10,000 shares since
January 1997, the terms of which are unavailable, which did not involve a
director or officer of the Company.

DIVIDENDS

The holders of Common Stock are entitled to receive cash dividends when
and if declared by the Board of Directors of the Company out of funds legally
available therefor. The Company has not declared or paid cash dividends in the
past and expects that in the foreseeable future it will retain all future
earnings for the growth and development of its business. The primary source of
funds available to the Company is the payment of dividends by the Bank.
Regulations limit the amount of dividends that may be paid by the Bank to the
Company and by the Company to its stockholders without the prior approval of the
OCC and the FRB, respectively. See "Regulation and Supervision - Holding Company
Regulation - Federal Regulation" and "--Federal Banking Regulations--Limitation
on Capital Distributions."

DILUTION

The net tangible book value of the Common Stock at March 31, 1997 was
$3.78 per share. Net tangible book value per share represents the amount of
total tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding. After giving effect to the Offering at an initial
public offering price of $6.00 per share, and the application of the net
proceeds therefrom, the pro forma net

<PAGE>

tangible book value of the Company at March 31, 1997 would have been $7.3
million, or $4.03 per share of Common Stock in the event that 333,334 shares are
sold or $10.1 million, or $4.39 per share of Common Stock in the event that
833,334 shares are sold. This would represent an immediate increase in net
tangible book value per share of $0.25 at the minimum and $0.61 at the maximum
to the existing stockholders of the Company and an immediate dilution in net
tangible book value per share of $1.97 at the minimum and $1.61 per share at the
maximum to new investors at the assumed initial public offering price. The
following illustrates this dilution per share:

<TABLE>
<CAPTION>
Minimum Maximum
----------------- ---------------------
<S> <C>
Initial public offering price per share............................... $6.00 $6.00
Net tangible book value as of March 31, 1997..................... $3.78 $3.78
Increase in net tangible book value per share attributable
to new investors.............................................. $0.25 $0.61
Pro forma net tangible book value after the Public Offering........... $4.03 $4.39
Dilution to new investors............................................. $1.97 $1.61
</TABLE>

The following table summarizes, on a pro forma basis, as of March 31,
1997, the relative investments of the existing stockholders of the Company and
new investors in the Company, after giving effect to an offering of a minimum of
333,334 shares and a maximum of 833,334 shares at $6.00 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- ------------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ---------- ---------------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C>
Existing stockholders............. 1,478,972 81.61% $ 8,795,852 (1) 81.47% $5.95
New investors (at minimum)........ 333,334 18.39 2,000,004 18.53 6.00
------- ----- --------- ----- ----
Total (at minimum)........... 1,812,306 100.00% $10,795,856 100.00% $5.96

Existing stockholders............. 1,478,972 63.96% $ 8,795,852 (1) 63.76% $5.95
New investors (at maximum)........ 833,334 36.04 5,000,004 36.24 6.00
------- ----- --------- ----- ----
Total (at maximum)........... 2,312,306 100.00% $13,795,856 100.00% $5.97
</TABLE>

- ----------
(1) Includes non-cash consideration of $3,175,000 in which shares issued to
the Principal Stockholder were exchanged for retirement of a principal
portion of debt owed to the stockholder by the Company. See "Business -
Background."

<PAGE>

CAPITALIZATION

The following table sets forth the actual capitalization of the Company
at March 31, 1997 and as adjusted as of that date to give effect to sale by the
Company of a minimum of 333,334 shares and a maximum of 833,334 shares of Common
Stock at the Offering Price of $6.00 per share offered hereby. The information
below should be read in conjunction with the Financial Statements and the Notes
thereto, which are included elsewhere herein.

<TABLE>
<CAPTION>
AT MARCH 31, 1997
------------------------------------------------------------
AS ADJUSTED AS ADJUSTED
BASED ON SALE OF BASED ON SALE OF
A MINIMUM OF A MAXIMUM OF
333,334 SHARES AT 833,334 SHARES AT
ACTUAL $6.00 PER SHARE $6.00 PER SHARE
--------------- ------------------ ----------------------
<S> <C>
Common stock of the Company, $0.01 par
value (10,000,000 shares authorized, 1,478,972
shares issued and outstanding, a minimum of
1,812,306 and a maximum of 2,312,306 shares
issued and outstanding, as adjusted)............. $ 15 $ 18 $ 23
Additional paid-in capital.......................... 8,634 10,338 13,183
Retained earnings (deficit)......................... (2,778) (2,778) (2,778)
Unrealized loss on investments in available
for sale securities................................ (8) (8) (8)
------- ------- -------
Total stockholders' equity.......................... $ 5,863 $ 7,570 $10,420

Bank Regulatory Capital Ratios(1):

Tier 1 risk-based capital......................... 9.00% 10.01% 14.49%
Total risk-based capital.......................... 10.25% 11.26% 15.74%
Leverage capital.................................. 5.99% 6.66% 9.65%
Stockholders' equity to total assets................ 5.97% 7.58% 10.15%
</TABLE>

- ----------
(1) Bank regulatory ratios assume repayment of approximately $1,064 million
of debt at the Company level, estimated commissions to be paid to the
agents of $93,000 and $243,000 at the minimum and maximum, and offering
expenses of approximately $200,000.

<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996

<TABLE>
<CAPTION>
UNAUDITED
MARCH 31, DECEMBER 31,
1997 1996 1996 1995
--------- -------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C>
INTEREST INCOME
Loans......................................................... $1,716 $1,539 $6,481 $6,380
Investment securities......................................... 150 237 975 714
Federal funds sold and securities purchased
under agreement to resell................................... 121 171 565 557
------ ------ ------ ------
Total interest income..................................... 1,987 1,947 8,021 7,651
------ ------ ------ ------

INTEREST EXPENSE
Certificates of deposit, $100,000 or more.................... 47 68 238 207
Other deposits............................................... 634 715 2,814 2,582
Securities sold under agreements to repurchase............... 54 52 231 214
Interest on borrowed funds .................................. 19 20 79 96
------ ------ ------ ------
Total interest expense .............................. 754 855 3,362 3,099
------ ------ ------ ------
Net interest income................................. 1,233 1,092 4,659 4,552

PROVISION FOR CREDIT LOSES (NOTE 3) .......................... 237 50 452 318
------ ------ ------ ------
Net interest income after provision for credit losses..... 996 1,042 4,207 4,234
------ ------ ------ ------

OTHER INCOME
Gain (loss) on sale of loans, securities, equipment,
and other real estate owned, net........................... -- -- (31) 104
Service charges and other..................................... 165 124 619 417
------ ------ ------ ------
165 124 588 521
------ ------ ------ ------

OPERATING EXPENSES
Personnel..................................................... 517 557 2,219 1,939
Occupancy and equipment (Note 9).............................. 204 179 731 719
Restructuring................................................. 830 - - -
Other operating expenses...................................... 310 280 1,278 1,156
Amortization of intangible assets acquired (Note 5)........... 36 36 144 143
------ ------ ------ ------
1,897 1,052 4,372 3,957
------ ------ ------ ------

Income, before income taxes............................ (736) 114 423 798
Income tax benefit (expense) (Note 11)........................ 1,120 - - (6)
------ ------ ------ ------
Net income............................................ $ 384 $ 114 $ 423 $ 792
------ ------ ------ ------

Earnings per common share..................................... $ 0.26 $ 0.08 $ 0.29 $ 0.57
------ ------ ------ ------
</TABLE>

- ---------------------
The accompanying notes are an integral part of these financial statements and
can be found attached to the audited financial statements located elsewhere in
this document.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to provide
information about the financial condition and results of operation of the
Company and should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto appearing elsewhere in this prospectus.

GENERAL

The Company's results of operations are dependent on the operations of
the Bank. The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between interest income earned on its
loan and investment securities portfolios and other interest-earning assets, and
its cost of funds consisting of interest expense paid on its deposits and other
interest-bearing liabilities. Net interest income is also affected by the
relative amounts (volume) of interest-earning assets and liabilities. The Bank's
net income is also impacted by its provision for loan losses, as well as other
income and operating expense. Other income consists principally of gain on sale
of loans, securities, equipment, other real estate owned ("OREO") and service
charges on deposit accounts, while operating expense is comprised of personnel
expenses, occupancy and equipment expenses, and other operating expenses.
Earnings of the Bank are also impacted by general economic, competitive, and
regulatory conditions, particularly changes in market interest rates, government
policy, and actions of regulatory agencies.

ASSET/LIABILITY MANAGEMENT

The Company's earnings are primarily dependent on its net interest
income. Net interest income is affected by (1) the amount of interest-earning
assets and interest-bearing liabilities, (2) rates of interest earned on
interest-bearing assets and rates paid on interest-bearing liabilities, and (3)
the difference ("interest rate spread") between rates of interest earned on
interest-bearing assets and rates paid on interest-bearing liabilities. To
measure the relationship of interest-earning assets and interest-bearing
liabilities and their impact on net interest income, the Company maintains an
asset/liability management program.

One of the principal functions of the Company's asset/liability
management program is to monitor the level to which the balance sheet is subject
to interest rate risk. The goal of this program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize the
fluctuations in the net interest spread and achieve consistent growth in net
interest income during periods of changing interest rates.

Interest rate sensitivity is the relationship of differences in the
amounts and repricing dates of interest-earning assets and interest-bearing
liabilities. These differences, or interest rate repricing "gap," provide an
indication of the extent to which net interest income could be affected by
changes in interest rates. During a period of rising interest rates, a positive
gap (when interest-earning assets are greater than interest-bearing liabilities)
is desirable. A falling interest rate environment would favor a negative gap
position (when interest-earning assets are less than interest-bearing
liabilities). However, not all assets and liabilities with similar maturities
and repricing opportunities will reprice at the same time or to the same degree.
As a result, the Company's gap position is an indicator of the Company's
interest rate risk position, but does not necessarily predict the impact on net
interest income given a change in interest rate levels.

<PAGE>

The following table sets forth the Bank's gap position for March 31,
1997, based upon contractual repricing opportunities or maturities, with
variable rate products measured to the date of the next repricing opportunity as
opposed to contractual maturities. Fixed rate products are measured to
contractual maturity without considering scheduled payment amortization for
fixed rate loans. NOW accounts, money market and savings accounts are assumed to
reprice from 0-91 days.

<TABLE>
<CAPTION>
AT MARCH 31, 1997
-----------------------------------------------------------------------
0-90 91 DAYS - 1 - 5 OVER FIVE
DAYS 1 YEAR YEARS YEARS TOTAL
----------- ------------ ----------- ----------- ------------
<S> <C>
ASSETS:
Federal Funds sold and securities
purchased under agreements to resell... $12,301 $ - $ - $ - $12,301
Investments.............................. 5,965 2,188 1,993 - 10,146
Loans(2)(3).............................. 48,442 8,268 10,723 231 67,664
------- ------ ------- ------- -------
Total Interest Earning Assets........ $66,708 $10,456 $12,716 $ 231 $90,111
======= ======= ======= ======= =======

LIABILITIES:
Interest-bearing deposits:
NOW accounts......................... $16,036 $ - $ - $ - $16,036
Money market accounts................ 13,551 - - - 13,551
Savings accounts..................... 11,740 - - - 11,740
Certificates of deposit(4)........... 10,934 17,303 3,198 - 31,435
Repurchase agreements................ 7,142 - - - 7,142
------- ------- -------- ------- -------
$59,403 $17,303 $3,198 $ - $79,904
======= ======= ====== ======= =======

Interest sensitivity gap................. $7,305 $(6,847) $9,518 $ 231 $10,207
Cumulative rate sensitivity gap.......... 7,305 458 9,976 10,207 -
Rate sensitive assets/rate
sensitive liabilities for period....... 112.30% 60.43% 397.62% 100.00% -
PERCENT OF TOTAL ASSETS:

By period................................ 7.44% (6.98)% 9.70% 0.24% -
Cumulative............................... 7.44% 0.47% 10.17% 10.40% -
</TABLE>

- ----------

(1) Net of Federal Reserve Bank stock.
(2) Loans scheduled by contractual maturities, repricing.
(3) Net of nonaccrual loans of $1.940 million.
(4) Certificates of Deposit scheduled by contractual maturities.

<PAGE>

Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase, thereby causing an increase in nonperforming loans and ultimately
loan losses.

ANALYSIS OF NET INTEREST INCOME

Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them.

Average Balance Sheet. The following tables set forth for the periods
indicated information regarding the total dollar amounts of interest income from
interest-earning assets and the resulting average yields, the total dollar
amount of interest expense on interest-bearing liabilities and the resulting
average costs, net interest income, and the net yield on interest-earning
assets.

<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------------------------- --------------------------------------
AVERAGE AVERAGE
VOLUME INTEREST YIELD VOLUME INTEREST YIELD
----------- --------- ---------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C>
ASSETS:
Interest Earning Assets:
Federal Funds sold and securities
purchased under agreements
to resell........................... $ 9,612 $ 121 5.04% $13,189 $ 171 5.19%
Investment Securities................. 11,134 150 5.39 18,197 237 5.21
Loans(1)(2)........................... 69,349 1,716 9.90 56,960 1,539 10.81
------- ------ ------ ------- ------ ------
Total interest-earning assets....... 90,095 $1,987 8.82 $88,346 $1,947 8.82
====== ======
Noninterest-Earning Assets:
Cash and Due from Banks............... 3,554 2,882
Other Assets.......................... 1,965 2,410
------ ------
TOTAL ASSETS........................ $95,614 $93,638
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest Bearing Deposits:
NOW Accounts.......................... $16,265 $ 91 2.27% $13,833 $ 85 2.49%
Money Market Accounts................. 14,019 119 3.44 14,603 131 3.64
Savings Accounts...................... 11,845 91 3.11 9,759 81 3.37
Certificates of Deposit............... 29,266 380 5.27 33,855 486 5.82
Repurchase Agreements................. 7,420 54 2.95 7,003 52 3.01
Note payable.......................... 848 19 9.09 848 20 9.56
------ --- ---- ----- --- -----
Total Interest-Bearing Liabilities.. 79,663 $754 3.84 79,901 $855 4.34
==== ====
Noninterest-Bearing Liabilities:
Demand Deposit Accounts............... $ 9,839 $ 8,319
Other liabilities..................... 502 320
Capital............................... 5,610 5,098
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............ $95,614 $93,638
======= =======

INTEREST RATE SPREAD...................... 4.98% 4.48%
==== ====
RATIO OF INTEREST-EARNING ASSETS
TO INTEREST-BEARING LIABILITIES......... 113.10% 110.57%
NET INTEREST INCOME AND NET INTEREST
MARGIN.................................. $1,233 5.47% $1,092 4.94%
====== ==== ====== ====
</TABLE>

- ----------
(1) Includes loan fees.
(2) Includes non accrual loans.

<PAGE>

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995
-------------------------------------- -----------------------------------
AVERAGE AVERAGE
VOLUME INTEREST YIELD VOLUME INTEREST YIELD
------------ ----------- --------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C>
ASSETS:
Interest Earning Assets:
Federal Funds sold and securities
purchased under agreements to resell.. $10,935 $ 565 5.17% $ 9,859 $ 557 5.65%
Investment Securities................... 18,339 975 5.32 12,727 714 5.61
Loans(1)(2)............................. 62,144 6,481 10.43 56,905 6,380 11.21
------- ------ ------ ------- ------ ------
Total interest-earning assets......... 91,418 $8,021 8.77 79,491 $7,651 9.62
====== ======
Noninterest-Earning Assets:
Cash and Due From Banks............... 3,210 2,851
Other Assets.......................... 2,424 1,882
------- - -------
TOTAL ASSETS........................ $97,052 $84,224
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest Bearing Deposits:
NOW Accounts.......................... $14,583 $ 363 2.49% $11,532 $ 284 2.46%
Money Market accounts................. 15,819 558 3.53 13,688 528 3.86
Savings Accounts...................... 10,995 354 3.22 9,537 339 3.55
Certificates of Deposit............... 32,207 1,776 5.51 29,095 1,638 5.63
Repurchase Agreements................. 7,762 232 2.99 6,715 214 3.19
Note Payable.......................... 848 79 9.32 1,014 96 9.47
------ ---- ----- ------- ----- -----
Total Interest-Bearing Liabilities.. 82,214 $3,362 4.09 71,581 $3,099 4.33
====== ======
Noninterest-Bearing Liabilities:
Demand Deposit Accounts................. $ 9,158 $ 7,908
Other Liabilities....................... 383 623
Capital................................. 5,297 4,112
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.............. $97,052 $84,224
======= =======

INTEREST RATE SPREAD...................... 4.68% 5.29%
==== ====
RATIO OF INTEREST-EARNING ASSETS
TO INTEREST-BEARING LIABILITIES......... 111.20% 111.05%
NET INTEREST INCOME AND NET INTEREST
MARGIN.................................. $4,659 5.10% $4,552 5.73%
====== ==== ====== ====
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1994
--------------------------------------
AVERAGE
VOLUME INTEREST YIELD
----------- -------- -----------
(Dollars in thousands)
<S> <C>
ASSETS:
Interest Earning Assets:
Federal Funds sold and securities
purchased under agreements to resell.. $ 7,423 $ 290 3.91%
Investment Securities................... 11,190 512 4.58
Loans(1)(2)............................. 47,475 4,750 10.01
------- ------ ------
Total interest-earning assets......... 66,088 $5,552 8.40
======
Noninterest-Earning Assets:
Cash and Due From Banks............... 2,649
Other Assets.......................... 1,644
-------
TOTAL ASSETS........................ $70,381
=======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest Bearing Deposits:
NOW Accounts.......................... $10,346 $ 252 2.44%
Money Market accounts................. 10,388 335 3.22
Savings Accounts...................... 10,258 336 3.28
Certificates of Deposit............... 22,260 1,001 4.50
Repurchase Agreements................. 5,577 155 2.78
Note Payable.......................... 3,000 181 6.03
------ ------ -----
Total Interest-Bearing Liabilities.. 61,829 $2,260 3.66
======
Noninterest-Bearing Liabilities:
Demand Deposit Accounts................. $ 6,600
Other Liabilities....................... 1,039
Capital................................. 913
-----
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.............. $70,381
=======

INTEREST RATE SPREAD...................... 4.74%
====
RATIO OF INTEREST-EARNING ASSETS
TO INTEREST-BEARING LIABILITIES......... 106.89%
NET INTEREST INCOME AND NET INTEREST
MARGIN.................................. $3,292 4.98%
====== ====
</TABLE>

- ----------
(1) Includes loan fees.
(2) Includes nonaccrual loans.

<PAGE>

Rate/Volume Analysis. Changes in net interest income are attributable
to three factors: (1) a change in the volume of an interest earning asset or
interest-bearing liability, (2) a change in interest rates, or (3) a change
attributable to a combination of changes in volume and rate. The following table
sets forth certain information regarding changes in interest income and interest
expense of the Company for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to (a) changes in volume (changes in volume multiplied
by the old interest rate); and (b) changes in interest rates multiplied by the
old average volume.

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------------------- -----------------------------------------
1997 VS. 1996 1996 VS. 1995
----------------------------------------- -----------------------------------------
TOTAL CHANGE DUE CHANGE DUE TOTAL CHANGE DUE CHANGE DUE
CHANGE TO VOLUME TO RATE CHANGE TO VOLUME TO RATE
----------- ------------- ------------ ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C>
RATE/VOLUME ANALYSIS:
INTEREST INCOME ON:
Federal funds and securities purchased under
agreements to resell...................... $ (50) $ (46) $ (4) $ 8 $ 61 $ (53)
Investments............................... (87) (92) 5 261 315 (54)
Loans..................................... 177 335 (158) 101 587 (486)
----- ----- ------ ----- ----- ------
Total interest income........................ 40 197 (157) 370 963 (593)
INTEREST EXPENSE ON:
Now accounts.............................. 6 15 (9) 79 75 4
Money market accounts..................... (12) (5) (7) 30 82 (52)
Savings accounts.......................... 10 18 (8) 15 52 (37)
Certificates of deposit................... (106) (67) (39) 138 175 (37)
Repurchase Agreements..................... 2 3 (1) 18 33 (15)
Note payable.............................. (1) - (1) (17) (16) (1)
------ ----- ------ ------- ------- ------
Total interest expense....................... (101) (36) (65) 263 401 (138)

Net interest income.......................... $ 141 $ 233 $ (92) $ 107 $ 562 $ (455)
====== ====== ======= ====== ====== ========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 VS. 1994
-----------------------------------------
TOTAL CHANGE DUE CHANGE DUE
CHANGE TO VOLUME TO RATE
----------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C>
RATE/VOLUME ANALYSIS:
INTEREST INCOME ON:
Federal funds and securities purchased under
agreements to resell...................... $ 267 $ 95 $ 172
Investments............................... 202 70 132
Loans..................................... 1,630 944 686
------ ------ ------
Total interest income........................ 2,099 1,109 990
INTEREST EXPENSE ON:
Now accounts.............................. 32 29 3
Money market accounts..................... 193 106 87
Savings accounts.......................... 3 (24) 27
Certificates of deposit................... 637 308 329
Repurchase Agreements..................... 59 32 27
Note payable.............................. (85) (120) 35
------ ------- -----
Total interest expense....................... 839 331 508

Net interest income.......................... $1,260 $ 778 $ 482
====== ===== =====
</TABLE>

<PAGE>

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND DECEMBER 31, 1996.

Total assets at March 31, 1997 were $98.1 million, a decrease of $2.1
million or 2.10% from December 31, 1996. The decrease was primarily due to a
$2.6 million decrease in cash and due from banks and a decrease of $3.0 million
or 22.81% in investment securities. This was offset, in part, by an increase of
$3.2 million or 34.75% in federal funds sold, and securities purchased under
agreements to resell.

Net loans receivable at March 31, 1997 totaled $68.6 million, a
decrease of $205,000 or .03% from December 31, 1996. This decline was the result
of relatively flat loan demand combined with normal amortization and repayments
of existing loans. Management monitors current and expected loan growth and is
implementing strategies to increase loan production. Such strategies may include
hiring additional loan originators, increased marketing efforts, and purchasing
loan participations secured by property in the Bank's market area from other
financial institutions.

Deferred income taxes at March 31, 1997 increased to $1.1 million from
zero at December 31, 1996, as a result of the Company recording the tax effect
of approximately $2.4 million of net operating loss carryforwards and other
deferred tax assets. The Company will record a federal income tax liability of
approximately 34% of taxable income in all future periods.

Core deposits and other intangible assets acquired at March 31, 1997
decreased $507,000, or 64.34%, to $281,000 from $788,000 at December 31, 1996.
The decrease was mainly due to accelerated amortization resulting from a
specific analysis by management of the value of the intangible assets purchased
in the June 1990 acquisition of Gibraltar. The goodwill portion of the
intangible asset, representing $296,701 or 62.79% of the amount accelerated at
March 31, 1997, was deemed impaired at March 31, 1997 and related to key former
employees and management of Gibraltar whose employment with the Company ended
during the quarter ended March 31, 1997. The amortization of the goodwill
paralleled the expected service life of these employees and management
personnel. Management believes as a result of the analysis, the asset balance at
March 31, 1997 reflects the remaining value of the core deposits purchased.

Deposits of $83.6 million at March 31, 1997, represented a decrease of
$3.5 million or 4.02% from December 31, 1996. The decrease in deposits was
principally related to lower levels of NOW and Money Market accounts. Total
liabilities at March 31, 1997 were $92.2 million, a decrease of $2.5 million or
2.64% from December 31, 1996. This decrease was primarily due to a decrease in
deposits offset by a $797,000 increase in securities sold under agreements to
repurchase.

Stockholders' equity increased $392,000 or 7.16% during the first three
months of 1997, as a result of net retained earnings, and included a decrease in
the net unrealized loss on investments in available-for- sale securities, of
$8,000.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
1996.

General. Net income for the three months ended March 31, 1997 totaled
$384,000 or $0.26 per share as compared to $114,000 or $0.08 per share for the
three months ended March 31, 1996. The increase in net income can be attributed
mainly to a one time recognition of a deferred tax adjustment in the amount of
$1.1 million as a result of the Company recording the tax effect of
approximately $2.4 million of net

<PAGE>

operating loss carryforwards and other deferred tax assets. This increase was
offset by a $830,000 one time restructuring expense resulting from the
implementation of the revised business strategy. See "--Operating Expenses." At
March 31, 1997, the net interest margin increased to 5.47% from 4.94% at March
31, 1996. The increase in the net interest margin was the result of an increase
in the average balance of loans receivable, offset by a decrease in the average
balance of federal funds sold and securities purchased under agreements to
resell, combined with a decrease in the average interest rate paid on interest
bearing deposits.

Net Interest Income. Net interest income increased $141,000 or 12.91%
for the three months ended March 31, 1997 to $1.2 million from $1.1 million for
the three months ended March 31, 1996 due principally to an increase in total
interest income of $40,000 and a $101,000 decrease in total interest expense.

The increase in interest income was derived primarily from interest
income on loans receivable which increased by $177,000 from $1.5 million for the
three months ended March 31, 1996 to $1.7 million for the three months ended
March 31, 1997 due primarily to an increase in the average balance from $57.0
million at March 31, 1996 to $69.3 million at March 31, 1997, offset by a
decrease in the net yield on loans of 0.91% which was primarily due to an
increase during the period of non-performing loans. The 21.58% increase in
interest income was funded principally by proceeds received from $7.1 million of
investment securities maturing during the period and a $3.6 million decrease in
Federal funds sold and securities purchased under agreements to resell.

Interest expense decreased $101,000 or 11.81% during the three months
ended March 31, 1997, as compared to the three months ended March 31, 1996 due
primarily to the decrease in the average cost of deposits from 4.34% at March
31, 1996 to 3.84% for the three months ended March 31, 1997.

Provision for Loan Losses. The provision for loan losses for the three
months ended March 31,1997 and 1996 totalled $237,000 and $50,000 respectively.
The increase in the provision for loan losses at March 31, 1997 was attributable
to additional specific reserves on certain commercial loans that management
believes may become non-performing. See "Business - Lending Activities -
Non-Performing Assets." Management makes periodic provisions to the allowance
for loan losses to maintain the allowance at an acceptable level commensurate
with management's assessment of the credit risk inherent in the loan portfolio.
See "Business - Lending Activities - Allowance for Loan Losses" for a discussion
of management's procedures in monitoring the adequacy of the allowance for loan
losses.

Other Income. Other income, which is comprised principally of fees and
charges on customer deposit accounts, increased by $41,000 or 33.06% from
$124,000 for the three months ended March 31, 1996 to $165,000 for the three
months ended March 31, 1997. Service charges on customer accounts increased
$11,000 or 12.79%, due largely to an increase in the number of deposit accounts.
Gain on sale of loans, securities, equipment and OREO, net, increased $13,000
during the same period due to a higher volume of loans sold in the secondary
market.

Operating Expenses. Operating expenses increased $845,000 or 80.32% for
the three months ended March 31, 1997 from $1.1 million for the three months
ended March 31, 1996 to $1.9 million for the three months ended March 31, 1997.
The increase in operating expense was due to a one time restructuring expense of
$830,000 for the three months ended March 31, 1997 resulting from implementation
of a revised business strategy by the Board of Directors and senior management
in February 1997. The increase in expense includes a reduction of approximately
$471,000 relating to intangible assets acquired in the June

<PAGE>

1990 acquisition of Gibraltar, severance payments and benefits of $136,000,
branch consolidation expense of $119,000, $50,000 of expenses related to the
termination of a planned de novo bank organization by Mr. Marhefka in accordance
with his employment agreement, and various other expenses of $54,000. The
accelerated write-off of intangible assets acquired in the Gibraltar acquisition
reflects management's determination that, (i) with the determination to
consolidate an ex-Gibraltar branch into another branch of the Bank during the
first quarter of 1997; (ii) the termination of certain officers and employees
previously with Gibraltar during the first quarter of 1997; and (iii) new
management's evaluation that there is no longer any value attributable to
Gibraltar's name in the local market, the goodwill portion of the intangible
asset acquired from Gibraltar had been eliminated by March 31, 1997.

Occupancy and equipment expense increased $25,000 or 13.97% for the
three months ended March 31, 1997 as compared to the three month period ended
March 31, 1996 due mainly to costs related to the operation of the Severna Park
office that opened in September 1996. Data processing expense increased by
$24,000 for the three months ended March 31, 1997 as compared to the three month
period ended March 31, 1996 due to expenses related to the opening of the new
branch and implementation of a check image product for the Bank's checking
account customers.

Income Tax Expense. The Company has approximately $2.4 million of net
operating loss carry forwards at March 31, 1997. New management of the Company
believes that based on net income for the quarter ended March 31, 1997 and a
revised business strategy that it is more likely than not that the Company will
utilize its net operating loss carryforwards before their expiration in 2009.
See "Business -- Revised Business Strategy" and "Recent Developments --
Management's Discussion and Analysis of Recent Developments -- Comparison of
Operating Results for the Six Months Ended June 30, 1997 and 1996" and " --
Comparsion of the Operating Results for the Three Month Period Ended June 30,
1997 and 1996." As such, the Company recorded an income tax benefit for the
three month period ended March 31, 1997 of $1.1 million.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995.

General. Net income for the year ended December 31, 1996 totaled
$423,000 or $0.29 per share compared to $792,000 or $0.57 per share for the year
ended December 31, 1995. This decrease in net income was attributable to a
$134,000 increase in the provision for loan losses and a $415,000 increase in
operating expenses.

Net Interest Income. Net interest income increased $107,000 or 2.35% at
December 1996 to $4.7 million from $4.6 million at December 31, 1995. This
increase was the result of an increase in interest income of $370,000, which was
partially offset by an increase in interest expense of $263,000.

Interest income increased primarily because of an increase in the
average balances of loans and investment securities which was partially offset
by a .78% decrease in the yield earned on loans. This increase in interest
earned on loans is the result of an increase in the average balance to $62.1
million at December 1996 from $56.9 million at December 31, 1995. Income on
investment securities increased $261,000 or 36.55% to $975,000 at December 31,
1996 from $714,000 at December 31, 1995 due to an increase in the average
balance to $18.3 million at December 31, 1996 from $12.7 million at December 31,
1995.

<PAGE>

The increase in interest income was partially offset by an increase in
interest expense of $263,000 or 8.49% in 1996, resulting principally from a
$138,000 increase in interest paid on certificates of deposits. This increase
resulted from an increase in the average balance of certificates of deposits of
$3.1 million or 10.65% to $32.2 million at December 31, 1996 from $29.1 million
at December 31, 1995. The increase in the average balance of certificates of
deposits was partially offset by a decrease in the average interest rate paid to
5.51% at December 31, 1996 from 5.63% at December 31, 1995.

As a result of the above listed factors, the net yield on earning
assets decreased to 5.10% at December 31, 1996 from 5.73% at December 31, 1995.

Provisions for loan losses. The provision for loan losses at December
31, 1996 was $452,000, a $134,000 or 42.14% increase over the $318,000 at
December 31, 1995. The increase in the provision for loan losses was the result
of management's analysis of specifically identified loans in the portfolio that
resulted in additional reserves of $107,000. See "Business - Lending Activities
- - Allowance for Loan Losses" for a discussion of management's practices in
monitoring the adequacy of the allowance for loan losses.

Other Income. Other income increased $67,000 or 12.86% to $588,000 at
December 31, 1996 from $521,000 at December 31, 1995. The increase was primarily
due to an increase in service fees on deposit accounts of $80,000 or 26.76% to
$379,000 at December 31, 1996 from $299,000 at December 31, 1995. Gain on sale
of loans, securities equipment and OREO, net, decreased from $104,000 to
($31,000). This decrease was primarily the result of a decrease in gain on sale
of loans of $113,000 or 100% to zero at December 31, 1996, offset by an increase
of $23,000 or 255.56% on gain on sale of OREO to $32,000 at December 31, 1996
from $9,000 at December 31, 1995. Mortgage banking fees increased $38,000 or
100% at December 31, 1996 from zero at December 31, 1995 from the sale of loans
in the secondary market.

Operating Expenses. Operating expenses increased $415,000 or 10.49% to
$4.4 million at December 31, 1996 from $4.0 million at December 31, 1995. The
primary reason for the increase was the $280,000 or 14.44% increase in personnel
expenses to $2.2 million at December 31, 1996 from $1.9 million at December 31,
1995, and an $122,000 or 10.55% increase in Operating Expenses to $1.2 million
at December 31, 1996 from $1.1 million at December 31, 1995. The increase in
personnel expense was due to the opening of the new Severna Park branch office
in September 1996, and the hiring of additional personnel for the loan
origination department. Operating Expenses increased due to additional expense
related to the bank's implementation of a check image product for its checking
account customers, and increased volumes of transaction and other savings
accounts during the year.

Income Tax Expense. Income tax expense decreased $6,000 or 100.00% to
zero at December 31, 1996. The Company had approximately $2.4 million in net
operating loss carryforwards at December 31, 1996. As a result, the Company had
recorded no income tax expense for the year ended December 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity. Liquidity represents the Company's ability to meet the
normal cash flow requirements of its customers for the funding of loans and
repayment of deposits. The Bank's primary sources of funds are deposits,
principal and interest payments on loans, principal and interest payments on
investment securities and proceeds from the maturation of investment securities
and, to a lesser extent, commercial

<PAGE>

reverse repurchase agreements. Management monitors liquidity daily, and on a
monthly basis incorporates liquidity management into its asset/liability
management program.

The Bank's cash flows are comprised of three primary classifications:
cash flows from operating activities, cash flows from investing activities and
cash flows from financing activities. Operating activities, as presented in the
statement of cash flows in the accompanying financial statements presented
elsewhere herein, provided $340,000 in cash for the three months ended March 31,
1997, generated principally from net income, as compared to the $15,000 provided
for the three months ended March 31, 1996. Operating activities provided $1.3
million in cash for each of the years ending December 31, 1996 and 1995
generated principally from net income of $423,000 for the year ended December
31, 1996 and net income of $792,000 for the year ended December 31, 1995.

Investing activities consist primarily of loan originations and
repayments, and investment purchases, maturities and sales. These activities
used $220,000 in funds for the three months ended March 31, 1997, principally
for the purchase of investment securities and Federal Funds sold offset by
proceeds from the maturity of, and principal repayments on, investments. For the
three months ended March 31, 1996, investing activities used $3.7 million,
resulting from $1.2 million in Federal Funds sold and securities purchased under
agreements to resell and $2.4 million of net loan originations. For the year
ended December 31, 1996, these activities used $4.6 million principally for net
loans of $13.2 million and investment purchases of $19.6 million offset by
proceeds from the sale and redemption of investments of $24.6 million and
repayments of securities purchased under agreements to resell of $3.0 million.
During the year ended December 31, 1995, investing activities used $17.9 million
principally for net increases in investment securities of $11.4 million, net
loans of $2.2 million and $5.3 million for securities purchased under agreements
to resell.

Financing activities consist of the solicitation and repayment of
customer deposits, borrowings and repayments. During the three months ended
March 31, 1997, financing activities utilized $2.8 million in funds, principally
as a result of a decrease in deposit accounts, offset by a $797,000 increase in
securities sold under agreements to repurchase. During the three months ended
March 31, 1996, investing activities provided $519,000 from an increase in
deposits of $1.5 million and for securities sold under agreements to repurchase
of $959,000. For the year ended December 31, 1996, financing activities provided
$4.4 million in cash, principally from increases in deposit accounts of $5.0
million offset by a decrease of $625,000 in securities sold under agreements to
repurchase. During the year ended December 31, 1995, financing activities
provided $18.3 million in cash, principally from a $16.0 million increase in
deposit accounts and a $2.2 million increase in securities sold under agreements
to repurchase.

At March 31, 1997, loan and letter of credit commitments totaled $15.4
million. Many of these commitments are in the form of lines of credit and
letters of credit that are available for use by the borrower, but are generally
not drawn upon. Certificates of deposit and other time deposits scheduled to
mature in one year or less totaled $28.2 million at March 31, 1997. The Company
expects to have sufficient funds available to meet the short-term liquidity
needs of its customers for deposit repayments and loan fundings.

In order to meet its long term liquidity needs, should the Bank require
additional liquidity, it has the ability to raise deposits, sell loans and loan
participations, and/or curtail its loan origination activities. Additionally,
the Bank has the ability to borrow funds from other banks. During the second
quarter of 1997, the Bank established borrowing facilities with the Federal Home
Loan Bank of Atlanta to borrow up to

<PAGE>

$4,000,000 and with two correspondent banks which will allow the Bank to borrow
an additional $7,000,000 to manage liquidity fluctuations. These borrowing
facilities are secured by portions of the Bank's loan and investment portfolios.
As the Bank grows, management expects to expand these borrowing facilities to
provide for greater borrowing capacity.

During the first quarter of 1997, management began to implement a
revised business strategy. See "Business -- Revised Business Strategy."
Management's estimates of the costs of implementing this strategy were charged
to expense during the first quarter of 1997. The Company does not anticipate any
additional significant costs associated with implementing the program, nor does
it anticipate any material impact on liquidity or capital expenditures.

Capital Resources. Capital adequacy is the ability of the Company and
the Bank to support growth while protecting the interests of depositors and the
deposit insurance fund. Bank regulatory agencies have developed certain capital
ratio requirements, which are used to assist them in monitoring the safety and
soundness of financial institutions. At March 31, 1997 the Bank was considered
well capitalized for regulatory purposes. Management continually monitors these
capital requirements and believes the Bank to be in compliance with these
regulations at March 31, 1997. See "Regulations and Supervision - Federal
Banking Regulations -- Capital Requirements."

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements of the Company and the notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost and
income associated with the Company's operations. Unlike most industrial
companies, nearly all of the Company's assets and liabilities are monetary. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.

IMPACT OF RECENT ACCOUNTING STANDARDS

FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB encouraged all entities to adopt the fair value
based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Under the intrinsic value based method, compensation cost is the
excess of the market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of the APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method has been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
years beginning after December 15, 1995. Pro forma disclosures must include the
effects of all awards granted in years beginning after December 15, 1994. The
Company currently has a stock-based compensation plan. The Company has not
adopted SFAS No. 123 and

<PAGE>

has elected to continue to account for its stock-based compensation plan under
APB Opinion No. 25. See "The Board of Directors and Management of the
Bank--Executive Compensation--Benefits."

FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. In June 1996, the FASB issued SFAS
No. 125, which was amended by SFAS No. 127. This Statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it no
longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with a pledge of collateral. The Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996. Retroactive application of this Statement is not permitted.
Management has concluded there is no effect on the Company's financial
statements.

FASB Statement on Accounting for Earnings Per Share. In February 1997,
the FASB issued SFAS No. 128 which is effective for financial statements issued
for periods ending after December 15, 1997. It replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires the presentation of diluted earnings per share for entities with
complex capital structures. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock, such as options, were exercised or converted into common stock.
The Company does not believe that SFAS No. 128 will have a material impact on
its financial statements.

<PAGE>

BUSINESS

ANNAPOLIS NATIONAL BANCORP, INC.

Annapolis National Bancorp, Inc., formerly Maryland Publick Banks, Inc.
was incorporated in May 1988 in Maryland for the purpose of acquiring and
holding all of the outstanding stock of Annapolis National Bank. The Company is
a registered Bank Holding Company pursuant to the BHCA. The Company was
capitalized by an initial offering of common stock which was sold at $10.00 per
share in June 1989 and, subsequent to January 1990, an offering at $12.50. The
Company's only significant activity is the operation of the Bank. On a
consolidated basis at March 31, 1997, the Company's total assets were $98.1
million, total liabilities were $92.2 million and stockholders' equity was $5.9
million.

ANNAPOLIS NATIONAL BANK

The Bank is a commercial bank organized under the laws of the United
States. The Bank is a community oriented bank and the only independent
commercial bank headquartered in Annapolis, Maryland. As the Company's only
subsidiary, the Bank currently operates as a full service commercial bank
through its five branches located in Anne Arundel County, Maryland, and one
branch located on Kent Island in Queen Anne's County, Maryland. The Bank's
principal business consists of originating loans and attracting deposits. The
Bank originates commercial loans (including SBA loans), commercial real estate
loans, construction loans, one- to four-family real estate loans and, to a
lesser extent home equity and consumer loans. The Bank also invests in U.S.
Treasury and U.S. Government agency securities and other securities issued by or
guaranteed by the federal government. At March 31, 1997, the Bank's loan
portfolio totalled $69.6 million. Of this amount, $31.3 million or 44.98% were
commercial loans, $18.5 million or 26.59% were commercial real estate loans,
$8.2 million or 11.77% were construction loans, $7.2 million or 10.33% were one-
to four-family residential mortgage loans, $2.1 million or 3.01% were home
equity loans and $2.3 million or 3.32% were consumer and other loans.

BACKGROUND

The Bank was formed as a de novo bank and commenced operations from a
single Annapolis location in January 1990. In June 1990, the Company acquired
most of the assets and liabilities of Gibraltar Savings and Loan, F.A.
(Gibraltar") from the Resolution Trust Corporation as receiver for Gibraltar,
expanding its branch network to five branches. This acquisition was funded, in
part through a $3.2 million unsecured loan from the Principal Stockholder which
bore interest at the Bank's prime rate less 2.0%. The acquisition was accounted
for as a purchase and resulted in a premium paid for the core deposits and other
intangible assets in the amount of $2.2 million to be amortized over a 15 year
period. At December 31, 1990, the fiscal year end following this acquisition,
the Company's assets totalled $43.6 million.

In December 1994, the Company conducted a rights offering through which
it offered its stockholders, at the price of $3.50 per share, the right to
purchase 2.5 shares of its Common Stock for each

<PAGE>

share of common stock owned. The primary purpose of this offering was to convert
the $3.2 million of debt accumulated in the Gibraltar acquisition into capital
to reduce the Company's interest expense and increase its capitalization. A
total of 937,672 shares were sold, of which 907,143 were sold to the Principal
Stockholder in exchange for retirement of the principal portion of the debt. A
new note, which matures on December 31, 1997, was issued to the Principal
Stockholder in the amount of $848,400 to cover the portion of the loan that
remained outstanding, which note matures on December 31, 1997 and bears interest
at the WSJ prime rate plus 1.0%.

The Company's operating expense continued to increase as the Bank
opened a sixth branch office and relocated its administrative office in 1996. At
December 31, 1996, the Company's operating expenses as a percentage of average
assets was 4.50% on an annualized basis. In addition, the Company's return on
average assets has been consistently below that of its peers. At December 31,
1996, the Company's return on average assets was .44%

REVISED BUSINESS STRATEGY

During the fourth quarter of 1996, the Board of Directors determined
that there was a need to implement a revised business strategy improve the
Company's financial performance. Several members of senior management were
relieved of their responsibilities late in 1996 and early in 1997 and certain
other members of senior management resigned during this same period. In February
1997, the Board of Directors engaged Mr. Marhefka as President and Chief
Executive Officer of the Bank and as Vice President and Chief Executive Officer
of the Company. The Board of Directors believes that Mr. Marhefka's management
skills and local market experience will enable him to guide the Company and the
Bank through a reorganization process which will improve operating results
through implementation of a revised business plan. As President and Chief
Executive Officer of Annapolis Bancshares, Inc. and Bank of Annapolis, he
successfully guided those companies from their inception in 1988 through more
than eight years of steady growth and strong continually increasing earnings
performance before they merged with Sandy Springs Bancorp, Inc. In March 1997,
Mr. Marhefka hired Mr. Grimes, who was appointed as Senior Vice President, Chief
Financial Officer and Treasurer of the Bank and Chief Financial Officer and
Treasurer of the Company. Mr. Grimes was formerly Vice President, Chief
Financial Officer and Treasurer of Annapolis Bancshares, Inc. and Bank of
Annapolis and was instrumental in implementing several successful financial
strategies with those firms. In April 1997, the Board appointed Mr. Katsef as a
Director and Vice Chairman of the Board. In addition to his role as a Director,
Mr. Katsef is an employee who assists the Board and Mr. Marhefka with business
development, public relations, and management strategy issues. Mr. Katsef was
formerly Chairman of the Board of Annapolis Bancshares, Inc. and Bank of
Annapolis. For additional information on these officers, see "The Board of
Directors and Management of the Bank -- Biographical Information." Additionally,
the Board of Directors adopted a requirement that, in order to assure a high
level of commitment to the Company and the Bank, all Directors must own at least
$100,000 of the Company's common stock. Following the imposition of this
requirement, the composition of the Board of Directors changed during April
1997. In addition to Messrs. Marhefka and Katsef, two additional Directors were
added who also have long-standing ties to Anne Arundel County.

<PAGE>

CONSOLIDATING THE BANK'S BRANCH NETWORK TO INCLUDE FEWER BRANCH
LOCATIONS AND TO REDUCE OPERATING EXPENSES. The Bank currently operates seven
facilities, six branch offices and a separate 9,500 square foot administrative
and operations headquarters facility. As a result, the Bank's historical
operating expenses have been considerably higher than its peers that, at a
comparable asset size, operate from fewer locations. New management has
undertaken a strategy of reducing the number of locations from which the Bank
operates. Toward that end, the Bank has entered into a lease for a location in
Annapolis where it intends to consolidate its two existing Annapolis branch
office locations. Since the new site is located between the Bank's existing
Annapolis branches, management anticipates that it will retain most of its
current customers following the consolidation. In addition, management believes
that the new location is superior in amenities to both of the Bank's current
Annapolis locations and will allow the Bank to better serve both current and new
Annapolis customers. The new Annapolis location is a "turn-key" existing banking
location which requires minimal expense to be ready for occupancy. By reducing
the number of branch offices from six to five, management expects to
significantly reduce operating expenses following the consolidation, which is
expected to occur in October 1997. Management is evaluating other branch network
consolidation options. Also being evaluated is the feasibility of relocating the
Bank administrative and operations headquarters to a lower cost and more highly
visible location which may be combined with a branch location to further reduce
the total number of facilities which the Bank operates.

REDUCING NON-PERFORMING ASSETS BY IMPLEMENTING MORE STRINGENT
UNDERWRITING CRITERIA AND MORE AGGRESSIVE COLLECTION PROCEDURES, AND BY
INCREASING SECURED REAL ESTATE LENDING. The Bank has historically had a high
level of non-performing assets and loan losses in relation to its peers. New
management has made a priority of emphasizing the resolution of problem assets
by aggressively pursuing the Bank's default remedies. In doing so, management
expects to reduce the amount of the Bank's existing non-performing assets.
During the first quarter of 1997, management has conducted an evaluation of the
loan portfolio and has provided for specific loan loss reserves for those assets
for which losses are expected. Additionally, new lending standards are being
implemented in an effort to improve asset quality. Such standards include an
increased emphasis on readily marketable collateral for new loans and a
de-emphasis on certain SBA loan programs.

REDUCING INTEREST EXPENSE BY RETIRING $1.1 MILLION OF COMPANY DEBT WITH
A PORTION OF THE OFFERING PROCEEDS. At March 31, 1997, the Company has an
unsecured loan from the Principal Stockholder with a principal balance of
$848,000, excluding accrued interest payable which continues to accrue at a rate
of 1.0% above the WSJ prime rate. Accrued interest on this debt totalled $96,000
in 1995 and $79,000 in 1996. Given the current prime rate of 8.5%, annual
interest on the debt is expected to be $81,000 for the year ended December 31,
1997. The Company intends to retire this debt using a portion of the Offering
proceeds, thereby eliminating this interest expense.

FOSTERING SUPPORT FOR THE BANK BY INCREASING THE LOCAL OWNERSHIP OF THE
COMPANY BY MARKETING THE OFFERING TO A LARGE NUMBER OF BUYERS WITH THE BANK'S
LOCAL COMMUNITY. Management believes that those persons within the Bank's market
area who become stockholders of the Company are likely to become customers,
supporters and business referral sources of the Bank. Consequently, the Company
intends to market the Offering primarily within the Bank's market area to build
a backbone of community support. Also, the Company has strategically established
a low minimum subscription amount to encourage many small investors to become
owners of the Company and have a vested interest in the Bank.

<PAGE>

RESTRUCTURING INTERNAL BANK OPERATIONS TO ATTAIN OPERATING EFFICIENCIES
AND COST REDUCTIONS. Certain of the Bank's systems of processing data and items
are inefficient and expensive. Management is evaluating alternative systems
which are expected to significantly reduce operating expenses. Additionally,
management is re-evaluating expenses bank-wide with a goal of making cost
conscious decisions about whether to continue purchasing certain goods and
services and, if they are to continue being purchased, soliciting competing bids
for such goods and services so as to assure optimum value for dollars spent.
Also, management has recently made an evaluation of its staffing eliminating
several employment positions and reassigning those duties to other existing
personnel.

INCREASING NET INTEREST INCOME BY EXPANDING THE LOAN AND DEPOSIT
PORTFOLIOS; THE ADDITIONAL CAPITAL PROVIDED BY THE OFFERING WILL SUPPORT SUCH
GROWTH ENABLING THE BANK TO CONTINUE TO COMPLY WITH REGULATORY CAPITAL
REQUIREMENTS. The Bank intends to pursue growth in its loan and deposit
portfolios which it expects will add to net interest income. Growth in the loan
portfolio is intended to be accomplished by utilizing the substantial contacts
of new officers and directors of the Bank, adding additional loan personnel,
aggressively promoting competitively priced products, developing new customer
relationships based upon the Bank's position as the only independent commercial
bank headquartered in Annapolis, and by placing a greater emphasis on real
estate loans whose principal is expected to repay less quickly than commercial
loans. Growth in the deposit portfolio is intended to be accomplished by
aggressively promoting competitively priced products. The increased capital
expected to be realized from the proceeds of the Offering will allow the Bank to
grow while continuing to comply with regulatory capital requirements.
Additionally, such new capital will provide a low cost source of funds to
enhance the Bank's net interest income.

INCREASING NON-INTEREST INCOME THROUGH EXPANDING ONE- TO FOUR-FAMILY
RESIDENTIAL MORTGAGE SALES AND OTHER FEE INCOME OPPORTUNITIES. Management
expects to increase non-interest income in several areas. The Bank will add
additional home loan originators, expand its array of home loan products, and
seek to build relationships with builders which are intended to increase
opportunities to originate one- to four-family residential mortgage loans for
sale. In doing so, management expects that gains on sales of loans into the
secondary home loan market will increase. The Bank also expects to increase fee
income from operation of its automated teller machine (ATM) network and from
other sources of fee income.

MARKET AREA AND COMPETITION

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

Anne Arundel County is centrally located at the heart of a mid-Atlantic
metropolitan area bounded to the north by Baltimore, to the east by the
Chesapeake Bay, and to the southwest by the suburbs of Washington, DC.
Annapolis, which serves as both the Anne Arundel County seat and the Maryland
State capital, is located only 24 highway miles from Baltimore, MD and 33
highway miles from Washington, DC. The county has experienced rapid population
growth, with total population having increased from 370,775 in 1980 to 427,239
in 1990 to 459,700 in 1995 (according to the Anne Arundel County Department of
Planning, Maryland Office of Planning, and U.S. Bureau of the Census). The
population of Anne Arundel County is relatively young (42.4% between the ages of
20 and 44 and 20.6% between 45 and 64 with only

<PAGE>

9.7% being 65 and over as of 1993 as estimated by the Maryland Department of
Health & Mental Hygiene) and affluent (1994 median household disposable personal
income of $49,671 as compared to $44,439 for Maryland and $37,070 for the entire
United States of America according to the Office of Business and Economic
Research).

The local economy in Anne Arundel County has historically been strong
and its strength is based upon its diversity. As the state capital and county
seat, Annapolis serves as a major government center. Annapolis is home to the
United States Naval Academy which, in addition to enrolling approximately 4,000
students from every state in the country, serves as a significant employer and a
major tourist attraction. Anne Arundel County is home to the
Baltimore-Washington International Airport ("BWI"), one of the fastest growing
airports in the country, whose surrounding supporting business district includes
more than 30 business parks with over 11 million square feet of commercial space
to meet the needs of manufacturers, distributors, high-tech and service
companies, and specialized firms. As a 300 year old colonial sea town on the
Chesapeake Bay, Annapolis serves as a major tourist attraction. Tourism is a
strong and growing industry which adds approximately $1.0 billion a year into
the county economy. The tourism industry is one of the largest sources of
employment in Anne Arundel County, with over 12,000 people employed by
visitor-related businesses. The hospitality industry is vital to the local
economy, where hotels at BWI and Annapolis attract not only tourists but also
business travelers and conferences. In addition to fostering a large
recreational boating industry, the Chesapeake Bay also supports a significant
waterman's industry for many people who earn their living working the bay. Other
major Anne Arundel County employers (with number of employees) include the
National Security Agency (35,000), Ft. George C. Meade defense facility
(14,000), State of Maryland (8,725), Northrop Grumman (7,000), Anne Arundel
County Public School System (7,651), Anne Arundel County (3,500), U.S. Naval
Academy (2,510), USAirways (2,400), Anne Arundel Health System, Inc. (1,800),
North Arundel Hospital (1,700), Baltimore Gas & Electric (1,372), McDonald's
Corporation (1,300), Giant Food Company (1,281), ARINC (1,100), Wal-Mart Stores
(1,050), International Paper (892), IIT Research Institute (660), and Lockheed
Martin (630). Additionally, in 1995, Potomac Electric Power Company and
Baltimore Gas & Electric announced merger plans, to be completed in 1997, that
will create Constellation Energy Corporation, a major power company to be
headquartered in Annapolis. No assurances can be given that growth in population
and number of businesses and increases or improvement in income levels, housing
values and other economic indicators will occur or continue in the future.

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

The Bank's Anne Arundel County service area is a highly concentrated,
highly branched banking market. Competition in Anne Arundel County for loans to
small businesses and professionals, the Bank's target market, is intense and
pricing, service and access to decision-making are important. Most of the Bank's
competitors have substantially greater resources and lending limits than the
Bank and offer certain services, such as extensive and established branch
networks and trust services, that the Bank does not provide. Deposit competition
among institutions in Anne Arundel County also is strong.

LENDING ACTIVITIES

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

<PAGE>

available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies.

The Bank's loan portfolio consists of commercial, commercial real
estate, residential construction, one- to four-family residential mortgage, home
equity and consumer loans. At March 31, 1997, the Bank's loan portfolio totalled
$69.6 million, of which $31.3 million, or 44.98%, were commercial loans; $18.5
million, or 26.59%, were commercial real estate loans; $8.2 million, or 11.77%,
were construction loans; $7.2 million, or 10.33%, were one- to four-family
residential mortgage loans $2.1 million, or 3.01% were home equity loans and
$2.3 million, or 3.32%, were consumer and other loans. All of the loans in the
Bank's portfolio are either adjustable-rate or short term fixed-rate loans with
terms to maturity of 30 days to 30 years. The Bank does not engage in longer
term fixed-rate portfolio lending. Any long term fixed-rate loans made by the
Bank are sold in the secondary market.

<PAGE>

The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.

<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------------------
1997 1996
----------------------------- --------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C>
Commercial loans..................... $31,306 44.98% $28,979 49.10%
Real estate:
Commercial....................... 18,507 26.59 13,743 23.29
Construction..................... 8,194 11.77 9,182 15.56
One- to four-family.............. 7,187 10.33 4,028 6.83
Home equity loans................ 2,092 3.01 1,315 2.22
Consumer loans....................... 2,318 3.32 1,768 3.00
------- ----- ------ -----
Total loans................. 69,604 100.00% 59,015 100.00%
====== ======
Less:

Allowance for loan losses........ (1,009) (575)
------- -------
Net loans receivable................. $68,595 $58,440
======= =======
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------
1996 1995
--------------------------- ----------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C>
Commercial loans..................... $30,469 43.80% $27,727 48.94%
Real estate:
Commercial....................... 17,845 25.65 13,553 23.92
Construction..................... 10,173 14.62 7,937 14.01
One- to four-family.............. 7,002 10.07 4,391 7.75
Home equity loans................ 1,744 2.51 1,197 2.11
Consumer loans....................... 2,332 3.35 1,848 3.27
------ ----- ------ -----
Total loans................. 69,565 100.00% 56,653 100.00%
====== ======
Less:

Allowance for loan losses........ (765) (617)
------- -------
Net loans receivable................. $68,800 $56,036
======= =======
</TABLE>

<PAGE>

Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's loans at March 31, 1997. The table does not include the
effect of future principal prepayments.

<TABLE>
<CAPTION>
AT MARCH 31, 1997
- --------------------------------------------------------------------------------------------------------------------
DUE AFTER ONE
DUE IN ONE YEAR BUT BEFORE DUE AFTER NON ACCRUAL
YEAR OR LESS FIVE YEARS FIVE YEARS LOANS TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Commercial loans............. $28,359 $ 1,511 $ 0 $ 1,436 $ 31,306
Real Estate:
Commercial................. 11,396 6,600 61 450 18,507
Construction............... 7,121 1,073 0 0 8,194
One- to four-family........ 6,091 955 141 0 7,187
Home equity loans.......... 2,092 0 0 0 2,092
Consumer loans............... 1,651 584 29 54 2,318
------- ------ ----- ----- -------

Total Loans......... $56,710 $10,723 $ 231 $1,940 $69,604
======= ======= ===== ====== =======
</TABLE>

The following table sets forth at March 31, 1997, the dollar amount of
gross loans receivable contractually due after March 31, 1998, and whether such
loans have fixed interest rates or variable interest rates.

<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1998
-------------------------------------------------------------------------
FIXED RATE VARIABLE RATE TOTAL
--------------- -------- ------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Commercial loans........................... $1,409 $ 102 $1,511
Real Estate:
Commercial.............................. 512 6,149 6,661
Construction............................ 1,073 - 1,073
One- to four-family..................... 227 869 1,096
Home equity loans....................... - - -
Consumer loans............................. 575 38 613
----- ------ ------
Total loans......................... $3,796 $7,158 $10,954
====== ====== =======
</TABLE>

<PAGE>

Commercial Lending. The Bank offers commercial business loans to
businesses operating in the Bank's primary market area. These loans consist of
lines of credit which require an annual repayment, adjustable-rate loans with
terms of five to seven years, and short term fixed-rate loans with terms of up
to three years. Such loans are offered in amounts up to $750,000 and are
generally secured by receivables, inventories, equipment and other assets of the
business. The Bank generally requires personal guarantees on its commercial
loans. The Bank also offers unsecured commercial loans to businesses on a
selective basis. These types of loans are made to existing customers and are of
a short duration, generally one year or less, up to $500,000. The Bank also
originates commercial loans which are guaranteed by the SBA. The Bank has been
an active participant in a variety of SBA loan programs. As of March 31, 1997,
SBA guaranteed loans total $6.7 million, or 9.63% of total loans. Each of these
loans is guaranteed between a range of 75 - 90% by the SBA. In order to generate
income, during 1995 the Bank sold participation interests in the insured portion
of 12 SBA loans totalling $2.6 million. The Bank continues to be a minority
participant in the uninsured portion of these loans totalling $421,000 which it
continues to service for a third party. At March 31, 1997, the Bank's commercial
loan portfolio totalled $31.3 million, or 44.98% of total loans, of which $4.0
million, or 12.78%, were unsecured. The largest commercial loan at March 31,
1997 was a $1.0 million loan to a manufacturer and importer of leather goods to
provide permanent working capital secured by an indemnity deed of trust on a
personal residence, a perfected security interest in corporate assets and a 75%
SBA guarantee.

Commercial business loans are generally of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. In order to reduce the overall risk and
cost of its loan portfolio, the Bank intends to reduce the ratio of commercial
loans to total loans and may reduce the level of its SBA loans.

Commercial Real Estate Lending. The Bank originates adjustable-rate
commercial real estate loans, that are generally secured by properties used for
business purposes such as small office buildings or a combination of residential
and retail facilities located in the Bank's primary market area. The Bank's
underwriting procedures provide that commercial real estate loans may generally
be made in amounts up to 80% of the lower of the appraised value or sales price
of the property, subject to the Bank's current loans-to- one-borrower limit,
which at March 31, 1997, was $1.0 million. These loans may be made with terms up
to 25 years and are generally offered at interest rates which adjust annually or
annually after an initial three year period in accordance with the prime rate as
reported in the WSJ. In reaching a decision as to whether or not to make a
commercial real estate loan, the Bank considers the value of the real estate to
be financed and the credit strength of the borrower and/or the lessee of the
real estate project. The Bank has generally required that the properties
securing commercial real estate loans have debt service coverage ratios of at
least 1.2 times. At March 31, 1997, the Bank's commercial real estate loan
portfolio totalled approximately $18.5 million, or 26.59% of total loans. The
largest commercial real estate loan in the Bank's portfolio at March 31, 1997,
was a $1.4 million loan secured by a commercial building of which $700,000 was
sold in a loan participation to another financial institution.

Loans secured by commercial real estate properties generally involve
larger principal amounts and a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management

<PAGE>

of the properties, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's value, debt service ratio and, under certain
circumstances, additional collateral. See "Risk Factors -- Risks Related to
Commercial Real Estate, Construction and Consumer Lending."

Construction Lending. The Bank originates construction loans on both
one- to four-family residences and on commercial real estate properties. The
Bank originates two types of residential construction loans, consumer and
builder. The Bank originates consumer construction loans to build a primary
residence, a secondary residence, or an investment or rental property. The Bank
will originate builder construction loans to companies engaged in the business
of constructing homes for resale. These loans may be for homes currently under
contract for sale, model homes from which other homes will be marketed within a
subdivision or, on a very limited basis, homes built for speculative purposes to
be marketed for sale during construction. Although the Bank attempts to procure
permanent end financing, many of the Bank's construction loans, at the time
entered into with the Bank, have permanent end financing committed by other
financial institutions. At March 31, 1997, $5.3 million, or 64.68% of the Bank's
residential construction loans had permanent end financing committed by other
financial institutions. The Bank originates land acquisition and development
loans with the source of repayment being either the sale of finished lots or the
sale of homes to be constructed on the finished lots. The Bank will originate
land acquisition, development, and construction loans on a revolving line of
credit basis for subdivisions whereby the borrower may draw upon such line of
credit as lots are sold for the purpose of improving additional lots.
Construction loans are generally offered with terms up to six months for
consumer loans, up to twelve months for builder loans, and up to eighteen months
for land development loans.

Construction loans are generally made in amounts up to 80% of the value
of the security property. During construction, loan proceeds are disbursed in
draws as construction progresses based upon inspections of work in place by
independent construction inspectors. The largest one- to four-family residential
construction loan in the Bank's portfolio as of March 31, 1997 was a $612,000
loan originated in January 1997. The largest commercial real estate construction
loan at this same date was a $1.5 million loan to construct a commercial
building of which $688,000 was sold in a loan participation to another financial
institution. The largest land acquisition and development loan at March 31, 1997
was a $600,000 loan to a corporation, originated in May 1996 for the purpose of
developing a 17 lot single family home subdivision, secured by a first lien on
said lots, including a $150,000 lead participation with another lender. At March
31, 1997, the Bank had construction loans, including land acquisition and
development loans totalling $8.2 million, or 11.77% of the Bank's total loan
portfolio, of which $3.8 million consisted of one- to four-family residential
construction loans, $2.3 million consisted of commercial real estate
construction loans and $2.1 million consisted of land acquisition and
development loans.

Construction loans are generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the security property's value upon completion of
construction as compared to the estimated costs of construction, including
interest. Also, the Bank assumes certain risks associated with the borrowers'
ability to complete construction timely and in a workmanlike manner. If the
estimate of value proves to be inaccurate, or if construction is not performed
timely or accurately, the Bank may be confronted with a project which, when
completed, has a value which is insufficient to assure full repayment.

<PAGE>

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

At March 31, 1997, one- to four-family residential mortgage loans
totalled $7.2 million, or 10.33%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, 23.01% were short term fixed-rate loans
with terms of up to three years with a balloon payment at the end of the term
and 76.99% were adjustable-rate mortgage loans. The Bank currently offers a
number of adjustable-rate mortgage loans with terms of up to 30 years and
interest rates which adjust annually from the outset of the loan or which adjust
annually after a 1 or 3 year initial period in which the loan has a fixed rate.
The interest rates for the majority of the Bank's adjustable-rate mortgage loans
are indexed to the one year Treasury Constant Maturity Index. Interest rate
adjustments on such loans are limited to a 2% annual adjustment cap with a
maximum adjustment of 6% over the life of the loan.

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

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

Home Equity Lending. As of March 31, 1997, home equity loans totalled
$2.1 million, or 3.01% of the Bank's total loan portfolio. Fixed-rate,
fixed-term home equity loans and adjustable rate home equity lines of credit are
offered in amounts up to 100% of the appraised value with a maximum loan amount
of $100,000. Fixed-rate, fixed-term home equity loans are offered with terms up
to five years and home equity lines of

<PAGE>

credit are offered with terms up to twenty years. Substantially all of the
Bank's home equity loans are adjustable rate and reprice with changes in the WSJ
prime rate.

Consumer Lending. The Bank's portfolio of consumer loans primarily
consists of adjustable rate, personal lines of credit and installment loans
secured by new or used automobiles, new or used boats, and loans secured by
deposit accounts. Unsecured consumer loans are made with a maximum term of three
years and a maximum loan amount based on a borrower's financial condition. At
March 31, 1997, unsecured consumer loans totalled $938,000, of which there were
only four loans over $80,000, the largest of which was $130,000. As of March 31,
1997, consumer loans totalled $2.3 million or 3.32% of the Bank's total loan
portfolio. Consumer loans are generally originated in the Bank's primary market
area.

Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies and loan approval limits of the Bank. The Board
of Directors has established an Executive Committee, comprised of seven
directors, and an Officers' Loan Committee, comprised of the Vice-Chairman of
the Board, the President and the Senior Vice President - Chief Lending Officer.
The Executive Committee may approve loans up to the Bank's legal lending limit.
Additionally, the Board of Directors has authorized the following persons to
approve loans up to the amounts indicated: commercial and consumer loans in the
amount of up to $250,000 and residential construction loans in the amount of up
to $400,000 by the Officers' Loan Committee; $150,000 for all types of loans by
the President of the Bank; $100,000 for all types of loans by the Senior Vice
President - Chief Lending Officer; $75,000 for all types of loans by the Senior
Vice President - Loan Officer; and $10,000 for consumer loans by the Senior Vice
President - Administration and Marketing.

For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and certain
other information is verified by an independent credit agency. If necessary,
additional financial information may be required. An appraisal of real estate
intended to secure a proposed loan generally is required to be performed by an
appraiser designated and approved by the Bank. For proposed mortgage loans, the
Board annually approves independent appraisers used by the Bank and approves the
Bank's appraisal policy. The Bank's policy is to obtain title and hazard
insurance on all mortgage loans and the Bank may require borrowers to make
payments to a mortgage escrow account for the payment of property taxes.

Non-Performing Assets. The Bank's general collection policy is to
provide a late notice to commercial and consumer accounts at five and 15 days
past due. Late charges are assessed on consumer loans after 15 days past due.
Delinquent accounts are contacted by phone at 30 days past due, and a collection
letter is issued on the 45th day. In general, personal property securing
consumer loans is subject to repossession at 60 days past due. Commercial loans
are subject to call at 30 days past due. Notice of intent to foreclose is
provided to consumer mortgage customers at 90 days past due. At 120 days past
due, foreclosure proceedings are initiated on real estate securing mortgage
loans.

Loans are continually monitored by management and the Board of
Directors. Loans are placed on nonaccrual status when, in the opinion of
management, the collection of additional interest is doubtful. Non- real estate
loans 90 days past due and real estate loans 120 days past due are automatically
placed on nonaccrual status. When a loan is placed on non-accrual status, any
previously accrued and uncollected interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received. At March
31, 1997, the Bank had $663,000 in loans greater than 90 days past due and still
accruing interest,

<PAGE>

and $1.9 million in loans on non-accrual status of which approximately $1.2
million was guaranteed by the SBA and which management believes is collectible.

At March 31, 1997, 59.46% of the nonperforming assets of the Company
were represented by three individual borrowers. At that date, the Bank had an
$801,000 nonperforming commercial loan on a restaurant of which $100,000 had
been previously charged off in 1996 and the balance of which was guaranteed by
the SBA. Since March 31, 1997 the guaranteed portion of the loan, approximately
$701,000, has been repaid to the bank by the SBA. In addition, the Bank had a
$450,000 nonperforming commercial real estate loan on an office building at that
date which is currently under contract of sale which will result in repayment to
the Bank the full amount of principal and accrued interest. Finally, the Bank
had two commercial loans totalling $380,000 to a moving company for which the
Bank had a $101,000 reserve at March 31, 1997. The balance of these loans was
guaranteed by the SBA. The Bank had no other non-performing loans in excess of
$200,000 at March 31, 1997.

<PAGE>

The following table sets forth non-performing loans and other real
estate owned at March 31, 1997 and December 31, 1996, 1995 and 1994:

<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
---------------- ---------------------------------------------------------
1997 1996 1995 1994
---------------- ----------------- ------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C>
Loans past due 90 days or more and
still accruing....................... $ 663 $ 101 $ 300 $ -
Nonaccrual loans..................... 1,940 1,894 1,415 722
----- ----- ----- ---
Total non-performing loans........... 2,603 1,995 1,715 722
----- ----- ----- ---
Less SBA guarantees.................. 1,248 1,162 - -
----- ----- ------- ------
Total non-performing loans less SBA
guarantees........................... 1,355 833 1,715 722
Other real estate owned.............. 140 140 496 470
----- ----- ----- -----
Total non-performing assets.......... $2,743 $2,135 $2,211 $1,192
====== ====== ====== ======
Total non-performing assets less SBA
guarantees........................... $1,495 $ 973 $2,211 $1,192
====== ====== ====== ======
Non-performing loans to total loans.. 3.74% 2.87% 3.03% 1.26%
Non-performing loans less SBA
guarantees to total loans(1)......... 1.95% 1.20% 3.03% 1.26%
Allowance for loan losses to non-
performing loans..................... 38.76% 38.35% 35.98% 95.15%
Allowance for loan losses to non-
performing loans less SBA
guarantees(1)........................ 74.46% 91.84% 35.98% 95.15%
Non-performing loans to total assets. 2.65% 1.99% 1.80% 0.95%
Non-performing loans less SBA
guarantees to total assets(1)........ 1.38% 0.83% 1.80% 0.95%
Total non-performing assets to total
assets............................... 2.80% 2.13% 2.32% 1.57%
Total non-performing assets less SBA
guarantees to total assets(1) ....... 1.52% 0.97% 2.32% 1.57%
Total non-performing assets to total
loans................................ 3.94% 3.07% 3.90% 2.08%
Total non-performing assets less SBA
guarantees to total loans(1)......... 2.15% 1.40% 3.90% 2.08%
</TABLE>

- ----------
(1) Prior to 1996 there were no non-performing SBA guaranteed loans.

In addition to non-performing loans, at March 31, 1997, there were $3.3
million of loans which are currently performing, but about which management has
doubts as to the ability of the borrowers to comply with the present loan
repayment terms. These loans are therefore on the Bank's "watch list." Of this
amount,

<PAGE>

$2.4 million are commercial loans, including $440,000 of SBA loans, of which 75%
to 90% is guaranteed. In addition, a $280,000 commercial real estate loan, which
management believes is adequately collateralized, is on the "watch list," as is
a $577,000 one- to four-family residential construction loan.

Allowance for Loan Losses. The Bank's allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risks inherent in its loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed probable
and estimable based on information currently known to management. The allowance
is based upon a number of factors, including current economic conditions, actual
loss experience and industry trends. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to make additional
provisions for estimated loan losses based upon judgments different from those
of management. As of March 31, 1997, the Bank's allowance for loan losses was
$1.0 million or 1.45% of total loans and 38.76% of non-performing loans as
compared to $765,000, or 1.1% of total loans and 38.35% of non-performing loans
as of December 31, 1996. The Bank had total non-performing loans of $2.6 million
and $2.0 million at March 31, 1997 and December 31, 1996, respectively, and
non-performing loans to total loans of 3.74% and 2.87%, respectively. The Bank
will continue to monitor and modify its allowances for loan losses as conditions
dictate. While management believes that, based on information currently
available, the Bank's allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances can be given that the
Bank's level of allowance for loan losses will be sufficient to cover future
loan losses incurred by the Bank or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions at the time management
determined the current level of the allowance for loan losses. Management may in
the future increase its level of loan loss allowances as a percentage of total
loans and non-performing loans as its loan portfolio increases.

The following table sets forth activity in the Bank's allowance for
loan losses for the periods indicated.

<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
-------------------- -------------------------------------------
1997 1996 1995 1994
-------------------- ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C>
Total loans outstanding........................ $69,604 $69,565 $56,653 $57,337
Average loans outstanding...................... 69,349 62,144 56,905 47,475
Allowance for loan losses at beginning of
period....................................... $ 765 $ 617 $ 687 $ 574
Provision charged to expense................... 237 452 318 300
Chargeoffs:
Residential/commercial real estate......... - 15 104 101
Commercial loans........................... - 279 291 95
Consumer and other loans................... 5 28 1 2
------- ------ ------- ------
Total................................... 5 322 396 198
Recoveries:
Residential/commercial real estate......... 12 8 8 3
Commercial loans........................... - 10 - 3
Consumer and other loans................... - - - 5
------- ------ ------ ------
Total................................... 12 18 8 11
----- ---- ----- -----
Net chargeoffs................................. (7) 304 388 187
Allowance for loan losses at end of period..... $1,009 $ 765 $ 617 $ 687
====== ====== ====== =====
Allowance for loan losses as a percent of
total loans.............................. 1.45% 1.10% 1.09% 1.20%
Net chargeoffs as a percent of average loans... (0.01)% 0.49% 0.68% 0.39%
</TABLE>

<PAGE>

The following table set forth the Bank's allocation of the allowance
for loan losses and the percent of loans to total loans in each of the
categories listed at the dates indicated.

AT MARCH 31, AT DECEMBER 31,
------------------------ --------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------- ------------ --------- ------------ -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C>
Commercial loans.................... $ 647 44.98% $504 49.10% $362 48.94%
Real estate:
Commercial....................... 139 26.59 124 23.29 118 23.92
Construction..................... 61 11.77 77 15.56 78 14.01%

One- to four -family............. 129 10.33 34 6.83 35 7.75
Home equity loans................ 16 3.01 11 2.22 9 2.11
Consumer loans...................... 17 3.32 15 3.00 15 3.26
---- ---- ----
Total allowance for loan losses.. $1,009 $765 $617
====== ==== ====
</TABLE>

INVESTMENT PORTFOLIO

At March 31, 1997, the Bank's investment portfolio, which totalled
$10.1 million, consisted primarily of U.S. treasury and government agency
securities and a mortgage-backed security. Of this amount, $9.1 million, or
88.35%, were U.S. treasury securities and U.S. government agency obligations.
The mortgage-backed security totalled $991,000, which was issued by the FHLMC.
Additionally, the Company owns $194,000 in stock of the Federal Reserve Bank of
Richmond. Management generally maintains an investment portfolio with relatively
short maturities to minimize overall interest rate risk. At March 31, 1997,
approximately 70.56% of the investment securities portfolio had maturities of
one year or less.

Investment decisions are made within policy guidelines established by
the Board of Directors. It is the Bank's policy to invest in non-speculative
debt instruments, particularly debt instruments that are guaranteed by the U.S.
Government or an agency thereof, to maintain a diversified investment portfolio
which complements the overall asset/liability and liquidity objectives of the
Bank, while limiting the related credit risk to an acceptable level. To meet the
credit risk objectives, nongovernment debt instruments must have a rating of "B"
or better to be held in the portfolio. The Bank's investment policy designates
the investment portfolio to be classified as "available-for-sale", unless
otherwise designated. At March 31, 1997, approximately $6.2 million, or 61.61%
of the investment portfolio was classified available-for-sale.

<PAGE>

The following table sets forth the carrying value of the Bank's
investment portfolio. At March 31, 1997 the market value of the Bank's
investment portfolio totaled $10.1 million.

<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------------- --------------------------------------------------------
1997 1996 1995
------------------------- --------------------------- --------------------------
AVAILABLE HELD TO AVAILABLE HELD TO AVAILABLE HELD TO
FOR SALE MATURITY FOR SALE MATURITY FOR SALE MATURITY
----------- ----------- ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C>
U.S. Treasury................... $5,255 $3,892 $9,157 $1,993 $16,186 $ -
U.S. Government agency.......... - - 996 - 978 -
Mortgage-backed securities...... 991 - 987 - 984 -
------ ------ ------- ------ ------- ------
Total............. $6,246 $3,892 $11,140 $1,993 $18,148 $ -
====== ====== ======= ====== ======= ======
</TABLE>

The following table sets forth certain information regarding the
amortized cost, weighted average yields, and maturities of the Bank's investment
securities portfolio at March 31, 1997.

<TABLE>
<CAPTION>
GREATER THAN 90
DAYS
BUT WITHIN ONE AFTER ONE YEAR BUT
WITHIN 90 DAYS YEAR WITHIN FIVE YEARS
--------------------- ------------------------ ------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- -------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C>
AVAILABLE FOR SALE:
U.S. Treasury................... $4,965 5.49% $ 290 5.33% $ - -%
U.S. Government agency.......... - - - - - -
Mortgage-backed securities...... - - - - 991 5.79
------ ---- ------ ---- ------ ----
Total...................... $4,965 5.49% $ 290 5.33% $ 991 5.79%
------ ---- ------ ---- ------ ----
HELD TO MATURITY:
U.S. Treasury................... $ - -% $1,898 5.64% $1,994 5.63%
U.S. Government agency.......... - - - - - -
Mortgage-backed securities...... - - - - - -
------ ---- ------ ---- ------ ----
Total...................... $ - -% $1,898 5.64% $1,994 5.63%
------ ---- ------ ---- ------ ----

Total............. $4,965 5.49% $2,188 5.60% $2,985 5.68%
====== ====== ======
</TABLE>

<PAGE>

SOURCES OF FUNDS

General. Deposits and commercial reverse repurchase agreements are the
primary source of the Bank's funds for lending and investing activities.
Secondary sources of funds are derived from loan repayments and investment
maturities. Loan repayments and investment maturities can be considered a
relatively stable funding source, while deposit activity is greatly influenced
by interest rates, general market conditions and competition.

Deposits. The Bank offers a variety of retail deposit account products
to both consumer and commercial deposit customers. The Bank's deposit accounts
consist of savings, NOW accounts, checking accounts, money market accounts and
certificate of deposit accounts. The Bank also offers individual retirement
accounts. Time deposits comprised 36.03% of the deposit portfolio at March 31,
1997. Core deposits considered to be noninterest bearing and interest bearing
demand deposit accounts, savings deposits, and money market accounts accounted
for 63.97% of the deposit portfolio at March 31, 1997.

The Bank intends to continue to emphasize retail deposit accounts as
its primary source of funds. Deposit products are promoted in periodic newspaper
advertisements, along with notices provided in customer account statements. The
Bank does not accept brokered deposits and held no such deposits at March 31,
1997. The Bank's market strategy is based on its reputation as a community bank
that provides quality products and personal customer service.

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

<PAGE>

The following table sets forth the types of deposits at the periods
indicated.

<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------------------------- --------------------------------------
1997 1996
------------------------------------- --------------------------------------
AVERAGE AVERAGE PERCENT AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL BALANCE RATE OF TOTAL
---------- ----------- ---------- ---------- ---------- -----------
<S> <C>
DEPOSIT TYPES:
Noninterest-bearing demand.......... $ 9,839 -% 12.11% $ 9,158 -% 11.07%
NOW accounts........................ 16,265 2.27 20.02 14,583 2.49 17.62
Money markets....................... 14,019 3.44 17.26 15,819 3.53 19.11
Savings accounts.................... 11,845 3.11 14.58 10,995 3.22 13.28
Certificates of deposit............. 29,266 5.27 36.03 32,207 5.51 38.92
------- ------ ------- -------
Total...................... $81,234 3.40% 100.00% $82,762 3.69% 100.00%
======= ====== ======= ======
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1995
--------------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
---------- ----------- ----------
<S> <C>
DEPOSIT TYPES:
Noninterest-bearing demand.......... $ 7,908 -% 11.02%
NOW accounts........................ 11,532 2.46 16.07
Money markets....................... 13,688 3.86 19.07
Savings accounts.................... 9,537 3.55 13.30
Certificates of deposit............. 29,095 5.63 40.54
------- -------
Total...................... $71,760 3.89% 100.00%
======= ======
</TABLE>

<PAGE>

Jumbo Certificates of Deposits. Jumbo certificates of deposit are
accounts of $100,000 or more. These accounts totaled $4.2 million at March 31,
1997 and consisted principally of time certificates of deposit. The following
table sets forth the amount and maturity of jumbo certificates of deposit at
March 31, 1997.

<TABLE>
<CAPTION>
GREATER THAN ONE YEAR
THREE MONTHS THREE MONTHS TO GREATER THAN
OR LESS TO ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- -------------------- ------------------ ------------------- ---------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
$1,480 $2,487 $228 $ - $4,195
</TABLE>

At March 31, 1997, the Bank had no short-term borrowing facilities in
place. The Bank anticipates having access to funds through credit facilities
made available by the FHLB and secured lines of credit with various other
commercial banks, as well as access to the Federal Reserve Bank discount window.

Commercial Reverse Repurchase Agreements. Commercial reverse repurchase
agreements represent transactions with customers for correspondent or commercial
account cash management services. These are overnight borrowing arrangements
with interest rates discounted from the federal funds sold rate. Securities
underlying the repurchase agreements are maintained in the Company's control. At
March 31, 1997, the average cost of these borrowings were 2.95%. At December 31,
1996 and 1995, the average cost was 2.97% and 3.19%, respectively.

<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
MARCH 31, DECEMBER 31,
-------------------- ----------------------------------------
1997 1996 1995
-------------------- ----------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Commercial reverse repurchase
agreements outstanding........................ $7,142 $6,345 $6,970
Average amount outstanding at
the end of period.............................. 7420 7,762 6,715
Maximum amount outstanding at
the end of any month........................... 9,980 9,591 8,364
Weighted average interest rate
for the period................................. 2.95% 2.97% 3.19%
</TABLE>

<PAGE>

SUBSIDIARIES

As of March 31, 1997, the Bank was the only subsidiary of the Company.
As of March 31, 1997, the Bank had one subsidiary, ANB Mortgage Services, LLC
("ANB Mortgage"), a dormant limited liability company which had previously
originated and serviced residential construction loans. On June 2, 1997, ANB
Mortgage was dissolved and is no longer an existing entity.

PERSONNEL

As of March 31, 1997, the Bank had 53 full-time employees and 13
part-time employees. The employees are not represented by a collective
bargaining unit. The Company believes its relationship with its employees is
good.

PROPERTIES

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

The following table sets forth the location of and certain additional
information regarding the offices of the Company and the Bank at March 31, 1997.

<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED YEAR OF LEASEHOLD
LEASED/ OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION MARCH 31, 1997
- ----------------------------- ------------- ------------------- --------------------- -------------------
<S> <C>
Administration Leased 1995 2005 $54,241

West Street Leased 1989 2000(1) 46,554

Edgewater Land Leased 1996 2006(1) 430,108

Cape St. Claire Leased 1995 2000(1) 26,367

Kent Island Leased 1990 1998(1) 2,606

Taylor Avenue Leased 1990 1998(1) 287

Severna Park Leased 1996 2006(1) 19,206
</TABLE>

- ----------
(1) These leases may be extended at the option of the Company for periods
ranging from three to twenty years.

<PAGE>

The Bank anticipates consolidating its West Street and Taylor Avenue
Branches in Annapolis in one new location in Annapolis for which the Bank has
already entered a lease. Costs of terminating the leases on these two locations
have been factored into the one-time restructuring charge. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Comparison of Operating Results for the Three Months Ended March 31, 1997 and
1996 - Operating Expenses."

LEGAL PROCEEDINGS

The Company is not involved in any pending legal proceedings other than
legal proceedings occurring in the ordinary course of business. Management
believes that none of these legal proceedings, individually or in the aggregate,
will have a material adverse impact on the results of operations or financial
condition of the Company.

REGULATION AND SUPERVISION

GENERAL

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

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

Certain of the regulatory requirements applicable to the Bank and to
the Company are referred to below or elsewhere herein. This description of
statutory provisions and regulations applicable to national banks and their
holding companies does not purport to be a complete description of such statutes
and regulations and their effects on the Bank and the Company.

HOLDING COMPANY REGULATION

Federal Regulation. Due to its control of the Bank, the Company is
subject to examination, regulation, and periodic reporting under the BHCA, as
administered by the FRB.

<PAGE>

The Company is required to obtain the prior approval of the FRB to
acquire all, or substantially all, of the assets of any bank or bank holding
company or merge with another bank holding company. Prior FRB approval will also
be required for the Company to acquire direct or indirect ownership or control
of any voting securities of any bank or bank holding company if, after giving
effect to such acquisition, it would, directly or indirectly, own or control
more than 5% of any class of voting shares of such bank or bank holding company.
Bank holding companies may acquire additional banks as separate subsidiaries in
any state, subject to certain conditions set forth in the BHCA, such as deposit
concentration limits. In addition to the approval of the FRB before any bank
acquisition can be completed, prior approval may also be required to be obtained
from other agencies having supervisory jurisdiction over the bank to be
acquired.

A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting securities of
any company engaged in non-banking activities. One of the principal exceptions
to this prohibition is for activities found by the FRB to be so closely related
to banking or managing or controlling banks to be a proper incident thereto.
Some of the principal activities that the FRB has determined by regulation to be
closely related to banking are: (i) making or servicing loans; (ii) performing
certain data processing services; (iii) providing discount brokerage services;
(iv) acting as fiduciary, investment or financial advisor; (v) finance leasing
personal or real property; (vi) making investments in corporations or projects
designed primarily to promote community welfare; and (vii) acquiring a savings
association, provided that the savings association only engages in activities
permitted bank holding companies.

The FRB has adopted capital adequacy guidelines for bank holding
companies (on a consolidated basis) substantially similar to those of the OCC
for the Bank. See "--Federal Banking Regulations--Capital Requirements." The
Company's total and Tier 1 capital exceeds these requirements.

Bank holding companies are generally required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the Company's
consolidated net worth. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe and unsound practice,
or would violate any law, regulation, FRB order or directive, or any condition
imposed by, or written agreement with, the FRB. The FRB has recently adopted an
exception to this approval requirement for well- capitalized bank holding
companies that meet certain other conditions.

The FRB has issued a policy statement regarding the payment of
dividends by bank holding companies. In general, the FRB's policies provide that
dividends should be paid only out of current earnings and only if the
prospective rate of earnings retention by the bank holding company appears
consistent with the organization's capital needs, asset quality, and overall
financial condition. The FRB's policies also require that a bank holding company
serve as a source of financial strength to its subsidiary banks by standing
ready to use available resources to provide adequate capital funds to those
banks during periods of financial stress or adversity and by maintaining the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks where necessary. These regulatory
policies could affect the ability of the Company to pay dividends or otherwise
engage in capital distributions.

The FRB has general authority to enforce the BHCA as to the Company and
also may require a bank holding company to cease any activity or terminate
control of any subsidiary engaged in an activity that the FRB believes
constitutes a serious risk to the safety, soundness or stability of its bank
subsidiaries.

<PAGE>

The status of the Company as a registered bank holding company under
the BHCA does not exempt it from certain Federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the Federal securities laws.

The Company and its subsidiaries will be affected by the monetary and
fiscal policies of various agencies of the United States Government, including
the Federal Reserve System. In view of changing conditions in the national
economy and in the money markets, it is impossible for the management of the
Company to accurately predict future changes in monetary policy or the effect of
such changes on the business or financial condition of the Company or the Bank.

State Regulation. The Company is also a "bank holding company" within
the meaning of the Maryland bank holding company laws. The prior approval of the
Maryland Commissioner of Financial Regulation is required before the Company may
acquire all or substantially all of the assets of any bank (or holding company
thereof), merge with a holding company of a bank or acquire more than 5% of the
voting stock of a bank or holding company thereof.

ACQUISITION OF THE COMPANY

Federal Regulation. Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the FRB if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's outstanding voting stock, unless the FRB has found that the
acquisition will not result in a change in control of the Company. Under the
CIBCA, the FRB has 60 days from the filing of a complete notice to act, taking
into consideration certain factors, including the financial and managerial
resources of the acquirer, the convenience and needs of the communities served
by the Company and the Bank, and the effects of the acquisition on competition.

Under the BHCA, any company would be required to obtain prior approval
from the FRB before it may obtain "control" of the Company within the meaning of
the BHCA. Control generally is defined to mean the ownership or power to vote 25
percent or more of any class of voting securities of the Company or the ability
to control in any manner the election of a majority of the Company's directors.
An existing bank holding company would be required to obtain the FRB's prior
approval under the BHCA before acquiring more than 5% of a class of the
Company's voting securities. A Change of Control is not contemplated by and will
not occur as a result of this Offering. See "Holding Company Regulation."
Approval of the Maryland Commissioner of Financial Regulation may also be
required for acquisition of the Company under some circumstances.

FEDERAL BANKING REGULATIONS

CAPITAL REQUIREMENTS. The OCC's capital regulations require national
banks to meet two minimum capital standards: a 3% Tier 1 capital to total
adjusted assets ratio for the most highly rated banks (at least 100 to 200 basis
points more for other national banks) (the "leverage" ratio) and an 8%
risk-based capital ratio. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital to
total assets standard, a 4% leverage ratio (3% for institutions receiving the
highest rating on the financial institution examination rating system), and,
together with the risk-based capital standard itself, a 4% Tier 1 capital to
risk-based assets standard. Tier 1 capital is defined as common stockholders'
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related

<PAGE>

surplus, and minority interests in equity accounts of consolidated subsidiaries
less intangibles other than certain mortgage servicing rights and credit card
relationships.

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

At March 31, 1997 the Bank was considered well capitalized for
regulatory purposes. The following table presents the Bank's capital position at
March 31, 1997 relative to the applicable regulatory requirements.

<TABLE>
<CAPTION>
AT MARCH 31, 1997
------------------------------------
AMOUNT PERCENTAGE
-------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C>
Tier 1 risk-based capital:

Actual.......................... $5,729 9.00%
Regulatory requirement.......... 2,546 4.00
------ ----
Excess...................... $3,183 5.00%
====== ====

Total risk-based capital:

Actual.......................... $6,525 10.25%
Regulatory requirement.......... 5092 8.00
----- ----
Excess...................... $1,433 2.25%
====== ====

Leverage capital:

Actual.......................... $5,729 5.99%
Regulatory requirement.......... 3,825 4.00
------ ----
Excess.......................... $1,904 1.99%
====== ====
</TABLE>

PROMPT CORRECTIVE REGULATORY ACTION. Under the prompt corrective action
regulations, the OCC is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a depository institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is
at least 6%, its leverage ratio is at least 5%, and it is not subject to any
order or

<PAGE>

directive by the appropriate regulator to meet a specific capital level. An
institution generally is considered "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8%, its ratio of Tier 1
capital to risk-weighted assets is at least 4%, and its leverage ratio is at
least 4% (3% if the institution receives the highest examination rating). An
institution that has a ratio of total capital to risk weighted assets of less
than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a
leverage ratio of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." An institution that
has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of
less than 3% or a leverage ratio that is less than 3% is considered to be
"significantly undercapitalized" and an institution that has a tangible capital
to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The OCC has discretion to assign a bank to the next lower
capital category if it determines, subject to a notice and opportunity for
hearing process, that such action is warranted due to unsafe or unsound
conditions or practices. The regulation also provides that a capital restoration
plan must be filed with the OCC within 45 days of the date an institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. Such capital restoration plan is subject to OCC
approval.

INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Bank are insured by the
BIF. The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary regulator and such other information that the
FDIC deems relevant with respect to the institution's financial condition and
the risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for BIF deposits currently range from 0 basis points
for well-capitalized institutions in the highest supervisory category to 27
basis points for the weakest institutions. The FDIC is authorized to raise the
assessment rates in certain circumstances, including to maintain or achieve the
designated reserve ratio of 1.25%, which requirement the BIF currently meets.
The FDIC has exercised its authority to raise rates in the past and may raise
insurance premiums in the future. If such action is taken by the FDIC, it could
have an adverse effect on the earnings of the Bank.

Both the BIF and the Savings Association Insurance Fund ("SAIF") (the
deposit insurance fund that covers most savings association deposits) are
statutorily required to be capitalized to at least a 1.25% of insured reserve
deposits ratio. Until recently, members of the SAIF and BIF were paying average
deposit insurance premiums of between 24 and 25 basis points. The BIF met the
required reserve in 1995, whereas the SAIF was not expected to meet or exceed
the required level until 2002 at the earliest. This situation was primarily due
to the statutory requirement that SAIF members make payments on bonds issued in
the late 1980s by the Financing Corporation ("FICO") to recapitalize the
predecessor to the SAIF.

In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of from 0 to 27 basis points under which
92% of BIF members paid an annual administration fee of only $2,000. With
respect to SAIF member institutions, the FDIC adopted a final rule retaining the
previously existing assessment rate schedule applicable to SAIF member
institutions of 23 to 31 basis points. As long as the premium differential
continued, it may have had adverse consequences for SAIF members, including
reduced earnings and an impaired ability to raise funds in the capital markets.

<PAGE>

On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed
a special one-time assessment on SAIF member institutions to recapitalize the
SAIF. As required by the Funds Act, the FDIC imposed a special assessment of
65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable
November 27, 1996 (the "SAIF Special Assessment"). The Funds Act also spread the
obligations for payment of the FICO bonds across all SAIF and BIF members.
Beginning on January 1, 1997, BIF deposits, including those held by the Bank,
were assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay
6.48 basis points. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.

Management cannot predict the level of FDIC insurance assessments on an
on-going basis or whether the BIF and SAIF will eventually be merged.

The Bank's assessed premium for the year ended December 31, 1996 was
$13,000. During 1996, the FDIC reduced deposit premiums and, as a result, the
Bank paid an administration fee for the third and fourth quarters of $500. FDIC
premiums for the first and second quarters of 1996 were $12,000. A significant
increase in FDIC insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank.

Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the regulators.
The management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.

LOANS TO ONE BORROWER. National banks are subject to limits on the
amount that they may lend to single borrowers. Generally, banks may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of its capital and surplus (including Tier 1 capital, Tier 2 capital and the
amount of the allowance for loan and lease losses not includable in Tier 2
capital). An additional amount may be lent, equal to 10% of capital and surplus,
if such loan is secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. At March 31, 1997, the Bank's
limit on loans to one borrower was $1.0 million. At March 31, 1997, the Bank's
largest aggregate outstanding balance of loans to one borrower, net of loan
participations sold and cash collateral, was $1.0 million.

LIMITATION ON CAPITAL DISTRIBUTIONS. National banks may not pay
dividends out of its permanent capital and may not, without OCC approval, pay
dividends in excess of the total of the bank's retained net income for the year
combined with retained net income for the prior two years less any transfers to
surplus. A national bank may not pay a dividend that would cause it to fall
below any applicable regulatory capital standard.

ASSESSMENTS. National banks are required to pay assessments to the OCC
to fund the agency's operations. The general assessments, paid on a semi-annual
basis, are computed according to the bank's asset size, including consolidated
subsidiaries. The assessments paid by the Bank for the fiscal year ended
December 31, 1996, totalled $38,000.

<PAGE>

BRANCHING. National banks are authorized to establish branches within
the state in which they are headquartered but only to the extent state law
allows branching by state banks. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Act") provides for interstate branching
for national banks, effective June 1, 1997. Under the Act, interstate branching
by merger is authorized on June 1, 1997 unless the state in which the bank is to
branch has enacted a law opting out of interstate branching or expedites the
effective date by passing legislation. De novo interstate branching will be
permitted by the Act to the extent the state into which the bank is to branch
has enacted a law authorizing out-of-state banks to establish de novo branches.
The State of Maryland has adopted legislation authorizing interstate bank
mergers, and permitting interstate de novo branching, under certain conditions.

TRANSACTIONS WITH RELATED PARTIES. The authority of a depository
institution to engage in transactions with related parties or "affiliates"
(e.g., any company that controls or is under common control with an institution,
including the Company) is limited by Sections 23A and 23B of the Federal Reserve
Act ("FRA"). Section 23A limits the aggregate amount of covered transactions
with any individual affiliate to 10% of the capital and surplus of the savings
institution. The aggregate amount of covered transactions with all affiliates is
limited to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B generally provides
that certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.

The authority of the Bank to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception to this requirement for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees.
Regulation O also places individual and aggregate limits on the amount of loans
that institutions may make to insiders based, in part, on the institution's
capital position and requires certain board approval procedures to be followed.

ENFORCEMENT. Under the FDI Act, the OCC has primary enforcement
responsibility over national banks and has the authority to bring actions
against such banks and all institution-affiliated parties, including directors,
officers, stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
and/or directors to institution of receivership or conservatorship. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. Under the FDI Act, the
FDIC has the authority to recommend to the OCC that it take enforcement action
with respect to a national bank. If action is not taken by the agency, the FDIC
has authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.

The FRB has generally similar enforcement authority with respect to the
Company.

STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement

<PAGE>

safety and soundness standards required under the FDI Act. The Guidelines set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. The standards set forth in the Guidelines address
internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.

PROPOSED LEGISLATION. Congress is currently considering various
legislative proposals that would restructure the regulation of bank holding
companies, expand the activities in which companies controlling banks may
engage, eliminate the federal savings association charter and merge the BIF and
SAIF funds. The Company is unable to predict whether such legislation will be
enacted, or, if enacted, the extent to which the legislation would restrict or
disrupt its operations or those of the Bank.

COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment act, as
amended ("CRA"), as implemented by OCC regulations, a national bank has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OCC, in connection with its examination of a bank, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain corporate
applications by such institution, such as mergers and branching. The Bank's most
recent rating was "outstanding."

FEDERAL RESERVE SYSTEM

The Federal Reserve Board regulations require depository institutions
to maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). Federal Reserve Board regulations
currently require that reserves be maintained against aggregate transaction
accounts as follows: for accounts aggregating $49.3 million or less (subject to
adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for
accounts aggregating greater than $49.3 million, the reserve requirement is
$1.479 million plus 10% (subject to adjustment by the Federal Reserve Board
between 8% and 14%) against that portion of total transaction accounts in excess
of $49.3 million. The first $4.4 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements.

<PAGE>

THE BOARD OF DIRECTORS AND MANAGEMENT OF THE COMPANY

The following table sets forth certain information regarding executive
officers and directors of the Company.

NAME POSITION(S) HELD WITH COMPANY
- ---------------------------------- ------------------------------------------
Albert Phillips Chairman of the Board and President
Stanley H. Katsef Vice Chairman of the Board
John W. Marhefka, Jr. Director, Chief Executive Officer, Vice
President and Assistant Secretary
Ronald E. Gardner Director
Stanley J. Klos, Jr. Director
Lawrence E. Lerner Director
Richard M. Lerner Director
Dimitri P. Mallios Director
Lawrence W. Schwartz Director
Russell J. Grimes, Jr. Chief Financial Officer and Treasurer
Lori J. Mueller Secretary

The Board of Directors of the Company is divided into three classes,
each of which contains approximately one-third of the Board. The directors are
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. A class of directors,
consisting of Messrs. Klos, R. Lerner and Marhefka, has a term of office
expiring at the 1998 annual meeting of stockholders; another class, consisting
of Messrs. Gardner, L. Lerner and Schwartz, has a term of office expiring at the
1999 annual meeting of stockholders; and a class, consisting of Messrs. Katsef,
Mallios and Phillips, has a term of office expiring at the 2000 annual meeting
of stockholders, although Mr. Katsef will stand for election before the
stockholders at the 1998 annual meeting of stockholders, as he was appointed to
the Board following the 1997 annual meeting of stockholders.

COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY

The Company has established an Audit Committee consisting of Messrs.
Katsef and Schwartz, a Capital Planning Committee consisting of Messrs. Katsef,
R. Lerner, Marhefka and Schwartz, and a Compensation Committee consisting of
Messrs. Gardner, Klos, R. Lerner and Mallios, and Mr. Marhefka as a non-voting
member. The Audit and Compensation Committees are joint committees with the
Bank. The Company's nominating committee consists of the full Board of
Directors.

<PAGE>

DIRECTORS' COMPENSATION

The directors of the Company do not receive fees for attendance at
meetings or for services rendered to the Company.

THE BOARD OF DIRECTORS AND MANAGEMENT OF THE BANK

DIRECTORS

The following table sets forth certain information regarding the Board
of Directors of the Bank.

<TABLE>
<CAPTION>
POSITIONS HELD WITH THE DIRECTOR TERM
NAME AGE(1) BANK SINCE EXPIRES
- ---------------------------- --------- ------------------------------------ ----------- -----------
<S> <C>
Albert Phillips 70 Chairman of the Board 1990 1998
Stanley H. Katsef 53 Vice Chairman of the Board 1997 1998
John W. Marhefka, Jr. 42 Director, President and 1997 1998
Chief Executive Officer
Ronald E. Gardner 43 Director 1997 1998
Stanley J. Klos, Jr. 45 Director 1997 1998
Lawrence E. Lerner 64 Director 1990 1998
Richard M. Lerner 37 Director 1990 1998
Dimitri P. Mallios 64 Director 1990 1998
Lawrence W. Schwartz 42 Director 1990 1998
</TABLE>

- ----------
(1) As of March 31, 1997.

<PAGE>

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

The following table sets forth certain information regarding the
executive officers of the Bank who are not also directors.

<TABLE>
<CAPTION>
NAME AGE(1) POSITION HELD WITH THE BANK
- ---------------------------- -------- -------------------------------------------------------------------------
<S> <C>
Jeffrey Armiger 41 Senior Vice President and Loan Officer

Russell J. Grimes, Jr. 40 Senior Vice President, Chief Financial Officer and Treasurer

M. John Miller, Jr. 46 Senior Vice President and Chief Lending Officer

Lori J. Mueller 34 Senior Vice President, Administration and Marketing, and Secretary
</TABLE>

- ----------
(1) As of March 31, 1997.

BIOGRAPHICAL INFORMATION

Presented below is biographical information regarding directors and
executive officers of the Company and executive officers of the Bank who are not
also directors or executive officers of the Company.

Albert Phillips. Mr. Phillips has been the Chairman of the Board of The
Phillips Corporation, a manufacturer and supplier of manufacturing technology
products headquartered in Columbia, Maryland since 1963. He has been a Director
of the Company and the Bank since their inception. Mr. Phillips serves as
Chairman of the Board of the Company and the Bank as well as President of the
Company.

Stanley H. Katsef. Mr. Katsef became a Director and Vice Chairman of
the Board of the Company and the Bank in April 1997. He was previously a
founding Director of Annapolis Bancshares, Inc. and Bank of Annapolis in 1988,
where he served as Chairman of the Board and a full-time employee of both
companies from 1992 to 1996. He was the owner of Katsef Sales, Inc., an
Annapolis based distributor of janitorial supply products until July 1, 1990.

John W. Marhefka, Jr. Mr. Marhefka was appointed Chief Executive
Officer and Vice President of the Company and President and Chief Executive
Officer of the Bank on February 21, 1997. He has held high level positions in
the Maryland financial institution industry since 1978. Most recently, he was a
founder of Annapolis Bancshares, Inc. and Bank of Annapolis in 1988. As
President and Chief Executive Officer of those companies, he led them through
more than seven years of earnings and asset growth before they merged with Sandy
Spring Bancorp, Inc. in 1996. Mr. Marhefka also served as Chairman of the Board
of both companies from 1988 to 1992. Under Mr. Marhefka's leadership, the Bank
of Annapolis went from a start-up bank with $1.1 million in assets to $81.1
million at June 30, 1996, immediately prior to the time it was acquired. At that
date, the Bank had a return on assets of 1.85% and a return on equity of 16.53%.
There can

<PAGE>

be no assurances that the financial success of these companies can be repeated.
He is active in community affairs and serves on the Board of Directors of
Leadership Anne Arundel.

Ronald E. Gardner. Mr. Gardner was an owner, Director and Vice
President of E.L. Gardner, Inc. from 1969 to 1996, at which time he sold his
interest in the company and resigned. He was responsible for day to day
operations of E.L. Gardner, Inc., which is a producer of ready mix concrete in
Anne Arundel County. He has been a Director of the Company and the Bank since
April 1997. Mr. Gardner is also an Officer and Director of Arundel Management
Corporation located in Annapolis, Maryland, a real estate and management company
and President and principal owner of Washington Street Pub located in Easton,
Maryland.

Stanley J. Klos, Jr. Mr. Klos has been a practicing attorney in Anne
Arundel and Prince George's Counties since 1977. He is currently a principal of
the Annapolis law firm of Klos & Seles, P.A. He is a member of the Maryland,
District of Columbia, Anne Arundel County, and Prince George's County Bar
Associations. He has been a Director of the Company and the Bank since April
1997. Mr. Klos is active in community affairs and serves on the Boards of
Directors of Leadership Anne Arundel, the American Heart Association Anne
Arundel County Chapter and the Anne Arundel County YMCA.

Lawrence E. Lerner. Mr. Lerner has been active in real estate
development in the Washington, D.C. metropolitan area for 30 years. He has been
involved in the development and construction of two regional shopping centers,
several other commercial developments, and more than 2,800 apartment units. Mr.
Lerner manages his real estate investments, comprised of various partnership
interests in entities which own real estate. He has been a Director of the
Company and the Bank since their inception. Mr. Lerner is the father of Richard
M. Lerner, a Director of the Company and Bank.

Richard M. Lerner. Mr. Lerner has been President of White Flint
Builders, Inc. since 1984. White Flint Builders, Inc. is located in Bethesda,
Maryland and is engaged in high-end residential development and construction. He
has been a Director of the Company and the Bank since their inception. Richard
Lerner is the son of Lawrence E. Lerner, a Director of the Company and Bank.

Dimitri P. Mallios. Mr. Mallios is an attorney who has practiced law
since 1960, and is a member of the Bars of the State of Maryland and the
District of Columbia. He is presently a senior partner of the law firm of
Margolius, Mallios, Davis, Rider & Tomar, located in Washington, D.C. Mr.
Mallios has been a Director of the Company and the Bank since their inception.

Lawrence W. Schwartz. Mr. Schwartz is a certified public accountant who
has operated CPA firms since 1984 and is currently Managing Partner of Schwartz,
Albert & Company, Chartered, a CPA firm based in Bethesda, Maryland.
Additionally, he was Executive Vice President and Chief Financial Officer of
Federal Supply Contracts Group, Inc., a reseller of furniture to the government,
from 1993 to 1995. Mr. Schwartz has been a Director of the Company since April
1997 and a Director of the Bank since its inception.

Jeffrey Armiger. Mr. Armiger has been an officer of the Bank since
1990. As Senior Vice President and Loan Officer, he is primarily responsible for
business development and relationship management of commercial accounts. His
eighteen years of banking experience include similar positions with First
American Bank in Anne Arundel County.

<PAGE>

Russell J. Grimes, Jr. Mr. Grimes became Chief Financial Officer and
Treasurer of the Company and Senior Vice President, Chief Financial Officer and
Treasurer of the Bank in March 1997. His eighteen years of related prior banking
experience include having served as Vice President, Treasurer, and Chief
Financial Officer of Annapolis Bancshares, Inc. and Bank of Annapolis from 1994
to 1996 and similar positions with First Virginia Banks, Inc. and American
National Savings Bank, F.S.B.

M. John Miller, Jr. Mr. Miller has been Senior Vice President and Chief
Lending Officer of the Bank since 1994. In this capacity, he is primarily
responsible for all areas of the Bank's lending function, including origination,
servicing, and credit quality. Previously, he joined Second National FSB in
1988, and in December 1991 became Senior Vice President responsible for the
bank's Credit and Commercial Real Estate Departments. Mr. Miller continued in
the same capacity with Second National/RTC and had the additional management
responsibilities necessary to effect the resolution of the institution until
June 1994. From 1974 to 1988 he held various management positions with Maryland
National Bank.

Lori J. Mueller. Ms. Mueller has been an officer of the Bank since
1990. As Senior Vice President Administration and Marketing, she is primarily
responsible for retail banking, deposit account administration, marketing,
employee benefits, and general bank administration. Her fifteen years of related
banking experience include similar positions with Bay National Bank in
Annapolis.

COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK

As of February 1997, the Board of Directors meets on a monthly basis
and may have additional special meetings upon the request of the Chairman of the
Board. During the year ended December 31, 1996, the Board of Directors met on a
quarterly basis. No director attended fewer than 75% of the total number of
Board meetings held during this period.

The Board of Directors of the Bank has established the following Board
and management committees:

The Audit Committee consists of Messrs. Katsef and Schwartz. The Bank's
Certified Public Accountants report to this committee. The purpose of this
committee is to review the audit function and management actions regarding the
implementation of audit findings. The committee also maintains a liaison with
the outside auditors and reviews the adequacy of internal controls. The
committee meets as needed.

The Executive Committee consists of Messrs. Katsef, L. Lerner, R.
Lerner, Marhefka, Mallios, Phillips and Schwartz. This Committee has delegated
authority to approve loans up to the Bank's legal lending limit. The Executive
Committee also may act in lieu of the full board and on matters of urgency
between Board Meetings. The Executive Committee meets weekly.

The Compensation Committee consists of Messrs. Gardner, Klos, R. Lerner
and Mallios, and Mr. Marhefka is a non-voting member. This Committee manages and
sets policy with respect to executive compensation and employee benefits at the
Bank level and manages the Stock Option Plan at the Company level. The
Compensation Committee meets as needed.

The Marketing Committee consists of Messrs. Gardner, Katsef, Klos, L.
Lerner, Marhefka and Phillips. This Committee assists management in developing
and implementing marketing strategies, advertising campaigns, and new products.

<PAGE>

DIRECTORS' COMPENSATION

DIRECTORS' FEES. Directors of the Bank are not compensated for
attendance at monthly meetings of the Board or for service to the Bank. Members
of the Executive Committee, except for Mr. Marhefka, are paid $400 per month for
service on that Committee.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table shows for the fiscal
years ending December 31, 1996, 1995 and 1994, the cash compensation paid by the
Company and the Bank as well as certain other compensation paid or accrued for
those years, to the Chief Executive Officer. Mr. Morgan resigned from his
positions with the Company and Bank effective February 20, 1997. Mr. Morgan will
receive a bi-weekly severance payment of $4,038, as well as health insurance,
through August 20, 1997. Mr. Marhefka was subsequently appointed as Chief
Executive Officer of the Company and President and Chief Executive Officer of
the Bank on February 21, 1997. See "The Board of Directors and Management of the
Bank -- Employment Agreement." No other executive officers of the Company or the
Bank received total salary and bonus in excess of $100,000 in 1996 (the "Named
Executive Officer").

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------- ----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ------------------------ -------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS PAYOUTS COMPENSATION
PRINCIPAL OFFICER YEAR ($) ($) ($)(1) ($) SARS(#) ($)(2) ($)
- -------------------- ------ --------- -------- ------------- ---------- ------------ ------- ---------------
<S> <C>
Richard J. Morgan 1996 $105,000 - - - - - 2,307(3)
Vice President and 1995 100,000 30,000 - - - - -
Chief Executive 1994 89,250 - - - - - -
Officer of the
Company and
President and Chief
Executive Officer of
the Bank
</TABLE>

- ----------
(1) For 1996, 1995 and 1994, there were no (a) perquisites over the lesser
of $50,000 or 10% of the individual's total salary and bonus for the
years; (b) payments of above market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long term
incentive plans prior to settlement or maturation; (d) tax payment
reimbursements; or (e) preferential discounts on stock.
(2) The Bank does not maintain a long-term incentive plan and therefore,
there were no payouts or awards under such plan.
(3) Represents amounts contributed to Mr. Morgan by the Bank pursuant to
the Bank's 401(k) plan.

<PAGE>

EMPLOYMENT AGREEMENT

On February 21, 1997, the Bank and Mr. Marhefka entered into a five
year employment agreement (the "Employment Agreement"). Pursuant to the
Employment Agreement, Mr. Marhefka receives a base salary of $132,500 per year,
and such base salary increases on each anniversary of the Employment Agreement
by an amount determined by multiplying the then base salary by the annual
percentage increase of the most recently released Consumer Price Index for Urban
Consumers. Additionally, the Bank provides and maintains an automobile for Mr.
Marhefka's use and provides family health insurance.

Pursuant to the Employment Agreement, on April 25, 1997, Mr. Marhefka
was granted incentive stock options to purchase 10,000 shares of Company Common
Stock at an exercise price of $5.00 per share. In addition, Mr. Marhefka will
have an opportunity to be granted additional options at the close of each
calendar year during the term of the Employment Agreement (the "Annual
Options"). The exercise price of the Annual Options will be calculated as
133.334% of the book value per share of the Company's Common Stock at the close
of the calendar year and the number of Annual Options will be determined as a
function of the Company's return on average equity ("ROE") for the calendar
year. Should the Company's ROE for the calendar year be calculated at 15% or
greater, the amount of Annual Options to be granted will be 1,000 plus 10
additional options for each 0.01% by which the Company's ROE exceeds 15% for
that calendar year.

Pursuant to the Employment Agreement, the Bank will also pay a bonus to
Mr. Marhefka following the close of each calendar year during the term of the
Employment Agreement (the "Annual Bonus"). The amount of each Annual Bonus will
be calculated as 5% of the amount by which the Company's ROE exceeds 15% during
that calendar year.

No Annual Options or Annual Bonus will be paid for any calendar year in
which (i) the Company's ROE is less than 15% during that year, or (ii) the
amount of the Bank's non-performing assets, as defined in the contract, exceeds
0.75% of its total assets at the end of the calendar year just completed, or
(iii) the amount of the Bank's allowance for loan losses is less than 150% of
its non-accrual loans after deducting any portion thereof which are government
guaranteed.

If the Company increases its stockholder equity by virtue of selling
new shares of Common Stock, as is the case with the Offering, or another method
of external recapitalization, the Annual Options and Annual Bonus incentive
calculations will be adjusted to account for the dilutive effect of such
recapitalization on the Company's ROE.

Pursuant to the Employment Agreement, the Bank has reimbursed State
Capital Bancorp, Inc. $50,000 in expenses related to a public offering of State
Capital Bancorp, Inc. which was abandoned by Mr. Marhefka in order to accept
employment with the Bank.

The Employment Agreement may be terminated by either party with or
without "cause". The Employment Agreement provides that, except in certain
circumstances, if Mr. Marhefka terminates the Employment Agreement by voluntary
resignation, or his employment is terminated without cause, Mr. Marhefka will
not, without the Bank's written consent, participate or be connected with any
competing institution that has offices or does business in Anne Arundel County,
Maryland for the remaining term of the Employment Agreement, not to exceed one
year in the case of resignation, or eight months if employment is terminated
without cause. The Employment Agreement further provides that if the Bank
terminates the Employment Agreement for any reason, other than for "cause" or
due to Mr. Marhefka's death, disability or

<PAGE>

resignation, Mr. Marhefka will be paid an amount equal to his base salary for
the twelve months immediately preceding termination of the Employment Agreement.
Notwithstanding the above, in the event of a "change in control" of the
Companies (as defined in the Employment Agreement), Mr. Marhefka will have the
option within six months of the "change in control" to continue under the terms
of the Employment Agreement with the consent of the Bank, enter into a new
employment agreement with the Bank, on mutually agreeable terms, or receive a
payment equal to one and one-half (1.5) times the base salary and bonus earned
during the preceding twelve month period. The Employment Agreement does not
provide benefits to Mr. Marhefka in the event of his death or disability, his
discharge by the Companies for "cause", or his resignation.

BENEFITS

Insurance Plans. All full-time employees are covered as a group for
comprehensive hospitalization, including major medical, long-term disability,
accidental death and dismemberment insurance and group term life insurance.

Stock Option Plan. The Company maintains an Employee Stock Option Plan
(the "Option Plan") which provides for discretionary awards of up to an
aggregate of 100,000 options to purchase Company Common Stock to officers and
key employees of the Company and Bank as determined by a committee of
disinterested directors at the fair market value of the Common Stock on the date
of grant. The Option Plan is not qualified under Section 401(a) of the Internal
Revenue Code and is not subject to any provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The Option Plan was approved
by the Company's stockholders on April 25, 1997, therefore, no grants were made
in 1996. Pursuant to an Employment Agreement dated February 21, 1997, the
Company granted Mr. Marhefka options to purchase 10,000 shares of Company Common
Stock at an exercise price of $5.00 per share on April 25, 1997. Additionally,
on July 17, 1997, the Company granted to five other executive officers options
to purchase a aggregate of 25,000 shares of Company Common Stock at an exercise
price of $6.00 per share. These options are subject to a vesting schedule and
will become exercisable in five equal annual installments beginning one year
from the date of grant. The Company intends to grant additional options to
certain key Bank employees in the future, however, the timing and amount of such
grants has yet to be determined. All such options will be granted at not less
than the fair market value of the Common Stock at the time of the grant.

TRANSACTIONS WITH CERTAIN RELATED PERSONS

The Bank has adopted a policy which requires that all loans or
extensions of credit to executive officers and directors must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the general public and
must not involve more than the normal risk of repayment or present other
unfavorable features.

Mr. L. Lerner has a $200,000 participation interest in a $600,000 line
of credit which a local businessman maintains with the Bank at a rate of WSJ
prime +1.0%. The Bank was unable to fund the entire line of credit, as it would
have exceeded its loan-to-one-borrower limit.

In June 1990, Mr. L. Lerner, a director of the Company and Bank, made a
$3.2 million unsecured loan to the Company which accrued interest at a rate of
the Bank's prime rate less 2.0%. In December 1994, 907,143 shares of Company
Common Stock were issued to Mr. L. Lerner in exchange for retirement of the
principal portion of the debt. A new note was issued to Mr. L. Lerner in the
amount of $848,000 to cover the accrued interest portion of the loan that
remained outstanding, which note matures on December 31, 1997 and bears interest
at the WSJ prime rate plus 1.0%. The Company intends to repay the debt owed to
Mr. L. Lerner using a portion of the proceeds from the Offering. See "Use of
Proceeds."

<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT

At July 23, 1997, the Company had 1,478,972 shares of common stock
outstanding. The following table sets forth, as of July 23, 1997, on an
historical and on a pro forma basis, giving effect to the sale of a minimum of
333,334 and a maximum of 833,334 shares in the Offering, certain information as
to those persons who were known by management to be beneficial owners of more
than 5% of the Company's outstanding shares of Common Stock, each director, each
Named Executive Officer and the shares of Common Stock beneficially owned by all
directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERING AFTER OFFERING
-------------------------------- -----------------------------------------------
NAME AND ADDRESS
OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
- ------------------------------------- --------------- -------------- --------------- -----------------------------
MINIMUM MAXIMUM
<S> <C>
Albert Phillips 17,500 1.18% 18,500 1.02% *

Stanley H. Katsef 20,800 1.41% 25,800 1.42% 1.12%

John W. Marhefka, Jr. 37,690(1) 2.55% 42,690 2.36% 1.85%

Ronald E. Gardner 20,000 1.35% 20,000 1.10% *

Stanley J. Klos, Jr. 20,000 1.35% 20,000 1.10% *

Lawrence E. Lerner 881,453 59.60% 881,453 48.64% 38.12%

Richard M. Lerner 100,000 6.76% 100,000 5.51% 4.32%

Dimitri Mallios 10,000 * 10,000 * *

Lawrence W. Schwartz 12,000 * 17,300 * *

Jeffrey Armiger - * - * *

Russell J. Grimes, Jr. - * 1,000 * *

M. John Miller, Jr. - * 4,250 * *

Lori J. Mueller - * - * *

--------------- -------------- --------------- ------------- -------------
All Executive Officers 1,119,443 75.70% 1,140,993 62.96% 49.34%
and Directors as a
Group (13 persons)
</TABLE>

- ----------
* Less than one percent

(1) Includes options to purchase 10,000 shares of Company Common Stock held
by Mr. Marhefka which are currently exercisable at an exercise price of
$5.00 per share.

<PAGE>

RESTRICTIONS ON ACQUISITION OF THE COMPANY

GENERAL

Certain provisions in the Company's Amended Articles of Incorporation
and Bylaws and in its management remuneration together with provisions of
Maryland corporate law, may have anti-takeover effects.

RESTRICTIONS IN THE COMPANY'S AMENDED ARTICLES OF INCORPORATION AND BYLAWS

A number of provisions of the Company's Amended Articles of
Incorporation (the "Articles of Incorporation") and Bylaws deal with matters of
corporate governance and certain rights of stockholders. The following
discussion is a general summary of the provisions of the Articles of
Incorporation and Bylaws which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt that is not approved by the Board of Directors, but
which individual Company stockholders may deem to be in their best interests or
in which stockholders may receive a substantial premium for their shares over
then current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors or
management of the Company more difficult. The following description of certain
of the provisions of the Articles of Incorporation and Bylaws of the Company is
necessarily general and reference should be made in each case to such Articles
of Incorporation and Bylaws, which are incorporated herein by reference. See
"Additional Information" as to how to obtain a copy of these documents.

Board of Directors. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected each
year. The Articles of Incorporation and Bylaws provide that the size of the
Board shall be determined by a two thirds vote of directors then in office. The
Articles of Incorporation and the Bylaws provide that any vacancy occurring in
the Board, including a vacancy created by an increase in the number of directors
or resulting from death, resignation, retirement, disqualification, removal from
office or other cause, may be filled for the remainder of the unexpired term
exclusively by a two-thirds vote of the directors then in office whether or not
a quorum. The classified Board is intended to provide for continuity of the
Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the
Company. The Articles of Incorporation of the Company provides that a director
may be removed from the Board of Directors prior to the expiration of his term
only for cause, upon the vote of at least two-thirds of the outstanding shares
of voting stock. In the absence of these provisions, the vote of the holders of
a majority of the shares could remove the entire Board, with or without cause,
and replace it with persons of such holders' choice. The provisions can only be
amended by the shareholders with the affirmative vote of holders of at least 80%
of the shares of common stock entitled to vote.

Cumulative Voting, Special Meetings and Action by Written Consent. The
Articles of Incorporation do not provide for cumulative voting for any purpose.
Moreover, special meetings of stockholders of the Company may be called only by
the Board of Directors of the Company, an appropriate committee designated by
the Board of Directors or the written request of not less than 25 percent of all
votes entitled to be cast at the meeting. The Bylaws also provide that any
action required or permitted to be taken by the stockholders

<PAGE>

of the Company may be taken only at an annual or special meeting and prohibits
stockholder action by written consent in lieu of a meeting.

Authorized Shares. The Articles of Incorporation authorizes the
issuance of 10,000,000 shares of Common Stock and 5,000,000 shares of serial
preferred stock. The shares of Common Stock and Preferred Stock were authorized
in an amount greater than that to be issued in the Offering to provide the
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and employee stock options. However, these additional authorized shares
may also be used by the Board of Directors consistent with its fiduciary duty to
deter future attempts to gain control of the Company. The Board of Directors
also has sole authority to determine the terms of any one or more series of
Preferred Stock, including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a series of
Preferred Stock, the Board has the power, to the extent consistent with its
fiduciary duty, to issue a series of Preferred Stock to persons friendly to
management in order to attempt to block a post-tender offer merger or other
transaction by which a third party seeks control, and thereby assist management
to retain its position. The Company's Board of Directors currently has no plans
for the issuance of additional shares.

Certain Bylaw Provisions. The Articles of Incorporation and Bylaws of
the Company also require a stockholder who intends to nominate a candidate for
election to the Board of Directors, or to raise new business at a stockholder
meeting to give not less than 30 nor more than 60 days notice to the Secretary
of the Company. The notice provision requires a stockholder who desires to raise
new business to provide certain information to the Company concerning the nature
of the new business, the stockholder and the stockholder's interest in the
business matter. Similarly, a stockholder wishing to nominate any person for
election as a director must provide the Company with certain information
concerning the nominee and the proposing stockholder.

ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION

The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions that have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the employment agreement with Mr. Marhefka may also discourage
takeover attempts by increasing the costs to be incurred by the Bank and the
Company in the event of a takeover. See "The Board of Directors and Management
of the Bank - Employment Agreement."

The Company's Board of Directors believes that the provisions of the
Articles of Incorporation, Bylaws and Mr. Marhefka's employment agreement are in
the best interest of the Company and its stockholders. An unsolicited
non-negotiated proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Accordingly, the Board of Directors
believes it is in the best interests of the Company and its stockholders to
encourage potential acquirors to negotiate directly with management and that
these provisions will encourage such negotiations and discourage non-negotiated
takeover attempts. It is also the Board of Directors' view that these provisions
should not discourage persons from proposing a merger or other transaction at a
price that reflects the true value of the Company and that otherwise is in the
best interest of all stockholders.

<PAGE>

BUSINESS COMBINATIONS

Under the Maryland General Corporation Law, certain "business
combinations" (including any merger or similar transaction subject to a
statutory stockholder vote and additional transactions involving transfers of
assets or securities in specific amounts) between a Maryland corporation and any
person who, after the date on which the corporation has 100 or more beneficial
owners of its stock, beneficially owns 10% or more of the voting power of the
corporation's shares or any affiliate of the corporation who, at any time within
the two year period prior to the date in question and after the date on which
the corporation has 100 or more beneficial owners of its stock, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder"), or an affiliate
thereof, are prohibited for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder unless an exemption is
available. Thereafter, any such business combination must be recommended by the
board of directors of the corporation and approved by the affirmative vote of at
least: (i) 80% of the votes entitled to be cast by holders of outstanding voting
shares of the corporation; and (ii) two-thirds of the votes entitled to be cast
by holders of outstanding voting shares of the corporation other than shares
held by the Interested Stockholder with whom the business combination is to be
effected, unless the corporation's stockholders receive a minimum price (as
described in the Maryland General Corporation Law) for their shares and the
consideration is received in cash or in the same form a previously paid by the
Interested Stockholder for its shares. These provisions of Maryland law do not
apply, however, to business combinations that are approved or exempted by
resolution of the board of directors prior to the time that the Interested
Stockholder becomes an Interested Stockholder. In order to amend the Company's
charter to elect not to be subject to the foregoing requirements with respect to
Interested Stockholders, an affirmative vote of at least 80% of the votes
entitled to be cast by all holders of outstanding shares of voting stock and
two-thirds of the votes entitled to be cast by holders of outstanding shares of
voting stock who are not Interested Stockholders is required under the Maryland
General Corporation Law. Such an amendment to the Company's charter shall not
become effective until 18 months after the vote of stockholders and shall not
apply to any business combination between the Company and an Interested
Stockholder, or any affiliate of the Interested Stockholder, who became an
Interested Stockholder on or before the date of the stockholder vote.

CONTROL SHARE ACQUISITIONS

The Maryland General Corporation Law provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the shares
entitled to be voted on the matter, excluding shares of stock owned by the
acquiror or by officers or directors who are employees of the corporation.
"Control shares" are voting shares of stock which, if aggregated with all other
such shares of stock previously acquired by the acquiror, or in respect of which
the acquiror is able to exercise or direct the exercise of voting power except
solely by virtue of a revocable proxy, would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third; (ii) one-third or more but
less than a majority; or (iii) a majority of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.

A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses and delivery of an "acquiring person statement"), may compel the
corporation's board of directors to call a special meeting of stockholders to be
held within 50 days

<PAGE>

of demand to consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question at any
stockholders' meeting.

Unless the charter or bylaws provide otherwise, if voting rights are
not approved at the meeting or if the acquiring person does not deliver an
acquiring person statement within 10 days following a control share acquisition
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. Moreover, unless the
charter or bylaws provide otherwise, if voting rights for control shares are
approved at a stockholders' meeting and the acquiror becomes entitled to
exercise or direct the exercise of a majority or more of all voting power, other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.

DESCRIPTION OF CAPITAL STOCK OF THE COMPANY

COMMON STOCK

The Company is authorized to issue 15,000,000 shares of stock, of which
10,000,000 shares are designated Common Stock and 5,000,000 shares are
designated Serial Preferred Stock. Currently, there are 1,478,972 shares of
Common Stock issued and outstanding, and no shares of serial preferred stock are
issued or outstanding. The Company expects to issue a minimum of 333,334 and a
maximum of 833,334 shares of Common Stock and no shares of serial preferred
stock in connection with the Offering.

Voting Rights. The holders of Company Common Stock possess exclusive
voting rights in the Company, except to the extent that shares of serial
preferred stock issued in the future may have voting rights, if any. Each holder
of Common Stock will be entitled to one vote for each share held of record on
all matters submitted to a vote of holders of the Common Stock.

Dividends. Subject to such preferences as may be applicable to any
shares of preferred stock which may be issued in the future, the holders of
Common Stock are entitled to such dividends as the Board of Directors may
declare from time to time out of funds legally available therefore and are
entitled to share pro rata in liquidating and other distributions to
shareholders. For information pertaining to cash dividends, see "Dividends."

Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of Common Stock which
may be issued. Therefore, the Board of Directors may sell shares of capital
stock of the Company without first offering it to existing stockholders. The
Common Stock is not subject to call for redemption and the outstanding shares of
Common Stock when issued and upon receipt by the Company of the offering price
will be fully paid and non-assessable.

<PAGE>

SERIAL PREFERRED STOCK

None of the 5,000,000 authorized shares of serial preferred stock of
the Company will be issued in the Offering. The Board of Directors of the
Company is authorized, without stockholder approval, to issue serial preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof. If and when issued, the serial preferred stock is likely
to rank prior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have full or limited voting rights which could
adversely affect the voting power of holders of Common Stock. The Board of
Directors has no present intention to issue any of the serial preferred stock.

SHARES ELIGIBLE FOR FUTURE SALE

The Company's Amended Articles of Incorporation authorizes the issuance
of 10,000,000 shares of Common Stock. Upon completion of the Offering, there
will be outstanding a minimum of 333,334 and a maximum of 833,334 shares of
Common Stock.

All shares of Common Stock issued in the Offering will be available for
resale in the public market without restriction or further registration under
the Securities Act, except for shares purchased by affiliates of the Company (in
general, any person who has a control relationship with the Company) or shares
exchanged by affiliates in the Reorganization, which shares will be subject to
the resale limitations of Rule 144. After the Offering, 1,180,993 shares of
Common Stock held by affiliates will be considered to be "control shares" and
10,000 shares of Common Stock issuable upon the exercise of options that the
Company has granted or agreed to grant will be "restricted securities" within
the meaning of Rule 144, and are eligible for sale in the public market in
compliance with Rule 144. The Company intends to file a registration statement
on Form S-8 under the Securities Act registering approximately 100,000 shares of
Common Stock issuable upon the exercise of options granted or to be granted
pursuant to the Stock Option Plan. Upon effectiveness of the registration
statement, shares issued to nonaffiliates upon the exercise of the options
generally will be freely tradeable without restriction or further registration
under the Securities Act. All officers and directors of the Company have agreed,
subject to certain exceptions, that they will not offer, sell or otherwise
dispose of any shares of Common Stock owned by them for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Representatives of the Agents. The Company has agreed, subject to certain
exceptions, that it will not offer, sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of the Representative of the Agents.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of restricted shares
as to which at least two years have elapsed from the later of the acquisition of
such shares from the Company or an affiliate of the Company in an amount that
does not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (18,123 and 23,123 shares based upon 1,812,306 and 2,312,306 shares
to be outstanding at the minimum and the maximum immediately after the
Offering), or (ii) if the Common Stock is quoted on the National Market System
of the Nasdaq Stock Market or a stock exchange, the average weekly trading
volume of the Common Stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements as to the manner
of sale, notice, and the availability of current public information about the
Company. However, a person who is not deemed to have been an affiliate of the
Company during the 90 days preceding a sale by such person and who

<PAGE>

has beneficially owned shares as to which at least three years has elapsed from
the later of the acquisition of such shares from the Company or an affiliate of
the Company is entitled to sell them without regard to the volume, manner of
sale, or notice requirements of Rule 144.

THE OFFERING

GENERAL

The Company is offering for sale a minimum of 333,334 and a maximum of
833,334 shares of its Common Stock at a price of $6.00 per share to raise gross
proceeds of between $2.0 million and $5 million for the Company. The minimum
purchase for any investor is 200 shares and the maximum purchase is 5% of the
Common Stock sold in the Offering, unless the Company, in its sole discretion,
accepts a subscription for a lesser or greater number of shares. Subscribers
should be aware that beneficial ownership of more than 5% of the outstanding
shares could obligate the beneficial owner to comply with certain reporting and
disclosure requirements of federal and state banking and securities laws.

Subscriptions to purchase shares will be received until 5:00 p.m.,
Annapolis, Maryland time on _______, 1997, unless all of the shares are earlier
sold or the offering is earlier terminated or extended by the Company. See
"--Conditions to the Offering and Release of Funds" below. The Company reserves
the right to terminate the Offering at any time or to extend the expiration date
for additional periods not to extend beyond_______, 1997. The date the Offering
terminates is referred to herein as the "Expiration Date". Written notice of an
extension of the offering period shall be given prior to the commencement of
each extended offering period to all persons who are already subscribers at the
time of the extension but such notice will not alter the binding nature of
subscriptions already accepted by the Company. Extension of the Expiration Date
might cause an increase in the Company's expenses.

Following acceptance by the Company, subscriptions are binding on
subscribers and may not be revoked by subscribers except with the consent of the
Company. In addition, the Company reserves the right to cancel subscriptions
received at any time and for any reason until the proceeds of the Offering are
released from the Escrow Account (as discussed in greater detail in
"--Conditions to the Offering and Release of Funds" below), and the Company
reserves the right to reject, in whole or in part and in its sole discretion,
any subscription. The Company may, in its sole discretion, allocate shares among
subscribers in the event of an over-subscription for the shares of Common Stock.
In determining which subscriptions to accept, in whole or in part, the Company
may take into account the order in which subscriptions are received, a
subscriber's potential to do business with, or to direct customers to, the Bank,
and the Company's desire to have a broad distribution of stock ownership, and
other considerations.

In the event the Company rejects all, or accepts less than all, of any
subscription, the Company will refund promptly without interest the amount
remitted that corresponds to $6.00 multiplied by the number of shares as to
which the subscription is not accepted. If the Company accepts a subscription
but in its discretion subsequently elects to cancel all or part of such
subscription, the Company will refund promptly the amount remitted which
corresponds to $6.00 multiplied by the number of shares as to which the
subscription is canceled, together with any interest earned thereon.

Certificates representing shares duly subscribed and paid for will be
issued by the Company promptly after the Offering conditions are satisfied and
escrowed funds are delivered to the Company.

<PAGE>

CONDITIONS TO THE OFFERING AND RELEASE OF FUNDS

Subscription proceeds accepted by the Company for the initial 333,334
shares subscribed for in this offering will be promptly deposited in an escrow
account with FMNB Trust Company (the "Escrow Agent"), until the conditions to
the Offering have been satisfied and the Company has requested such funds, or
until the earlier termination of the Offering. The Escrow Agent has not
investigated the desirability or advisability of an investment in the shares by
prospective investors and has not approved, endorsed, or passed upon the merits
of an investment in the shares of Common Stock. Subscription proceeds held in
the Escrow Account will be invested in one or more interest bearing bank
money-market accounts secured by U.S. Government securities. In no event will
the subscription proceeds held in the Escrow be invested in instruments that
would mature after the date on which escrowed funds may be required to be paid
to the Company or returned to investors. The Offering will be terminated, no
shares will be issued, and no subscription proceeds will be released from the
Escrow Account by the Escrow Agent to the Company unless on or before the
Expiration Date the Company has accepted subscriptions for and payment in full
for at least 333,334 shares. The Escrow Agent is not affiliated with the
Company, the Agent, or any Selected Dealers.

If the above conditions are not satisfied by the Expiration Date or if
the Offering is otherwise earlier terminated, accepted subscription agreements
will be of no further force or effect and the full amount of subscription funds
will be returned promptly to subscribers, together with the full amount of
interest earned thereon in the Escrow Account, without deduction of any fees,
commissions, or expenses. In such event, organizational, offering, and
pre-opening costs and expenses will be paid by the Organizers.

If the above conditions are satisfied, the Escrow Account will be
terminated by the Company, in which event the subscription amounts held in
Escrow Account, and any interest earned thereon, will be paid to the Company.
Thereafter, any subscription proceeds accepted by the Company will not be
deposited in the Escrow Account, but will be available for immediate use by the
Company, subject to satisfaction of the conditions of closing set forth in the
Agency Agreement between the Company and the Agent, to fund, offering expenses
of the Company and the Bank and for working capital.

HOW TO SUBSCRIBE

Shares may be subscribed for by delivering the Stock Order Form
attached hereto as Exhibit A, completed and executed, to the Stock Information
Center, established by the Agent, on or before the Expiration Date. The address
of the Stock Information Center is 180 Admiral Cochrane Drive, Suite 300,
Annapolis, Maryland 21401. Subscribers should retain a copy of the completed
Stock Order Form for their records. The subscription price is due and payable
when the Stock Order Form is delivered. Payment must be made in United States
dollars by check, bank draft or money order drawn to the order of "FMB Trust
Company, as Escrow Agent for Annapolis National Bancorp, Inc.", in the amount of
$6.00 multiplied by the number of shares subscribed for. Funds also may be
delivered to the Escrow Agent by wire transfer. Please call the Stock
Information Center at __________ for further information on wire transfer
instructions.

Notwithstanding the foregoing, the Agent shall have the right, in its
sole discretion, to permit investors to submit irrevocable orders together with
legally binding commitments for payment for the Common Stock for which they
subscribe at any time prior to the Expiration Date with payment to be received
at any time prior to 24 hours before completion of the Offering.

<PAGE>

PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES

To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date, or Extended Expiration Date, in accordance with
Rule 15c2-8 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), no Prospectus will be mailed any later than five days prior to the
Expiration Date, or Extended Expiration Date, or hand delivered any later than
two days prior to such date. Order forms will only be distributed with a
Prospectus. Execution of the order form will confirm receipt of the Prospectus
in accordance with Rule 15c2-8. The Company is not obligated to accept orders
not submitted on original order forms. Order forms unaccompanied by an executed
acknowledgment form will not be accepted. Payment by check, money order,
bank-draft, cash, or wire transfer must accompany the order and acknowledgment
forms.

SELLING ARRANGEMENTS

The Company has engaged Charles Webb & Company, A Division of Keefe,
Bruyette, & Woods, Inc., (the "Agent") as financial and marketing advisor to
advise the Company with respect to the Offering. The Agent is a member of the
National Association of Securities Dealers, Inc. (the "NASD"). The Agent will
assist the Company in the Offering by, among other things, (i) developing
marketing materials; (ii) targeting potential investors in the Offering; (iii)
soliciting potential investors by phone or in person; and (iv) managing the
subscription campaign.

The Company will pay the Agent a fee equal to 5% of the dollar value of
all stock sold in the Offering, excluding shares sold to the directors and
executive officers of the Company and Bank and members of their immediate
families. Such fees will be paid upon the sale of a minimum of 333,334 shares of
Common Stock, the termination of the Escrow Account, the release of funds to the
Company, and the issuance of shares to subscribers whose subscriptions have been
accepted (the "Closing"). If the shares continue to be sold after the Closing,
the fees due to the Agent will be paid at the termination of the Offering. The
Agent shall be reimbursed for its expenses, including its legal fees, in an
amount not to exceed $______. The Agent has not prepared any report or opinion
constituting a recommendation or advice to the Company or to persons who
subscribe in the Offering, nor has it prepared an opinion as to the fairness to
the Company of the Offering Price or the terms of the Offering. The Agent
expresses no opinion as to the price at which the Common Stock to be issued in
the Offering may trade after the Offering. The Company has agreed to indemnify
the Agent against certain liabilities, including certain liabilities under the
Securities Act relating to the Agreement with the Agent.

The Agent may seek to form a syndicate of registered broker-dealers
(the "Selected Dealers") to assist in the sale of such Common Stock on a best
efforts basis, subject to the terms and conditions set forth in an agreement
with Selected Dealers. The Agent will endeavor to distribute the Common Stock
among Selected Dealers in a fashion which best meets the distribution objectives
of the Company. The Agent will be paid a fee not to exceed 5% of the aggregate
purchase price of the shares of Common Stock sold by them. The Agent will pass
onto Selected Dealers, who assist in the Offering, an amount competitive with
gross underwriting discounts charged at such time for comparable amounts of
stock sold at a comparable price per share in a similar market environment. Fees
with respect to purchases effected with the assistance of Selected Dealers other
than the Agent shall be transmitted by the Agent to such Selected Dealers. Total
marketing fees are expected to be $93,000 and $243,000 at the minimum and
maximum of the Offering, respectively.

<PAGE>

Directors and executive officers of the Company may participate in the
solicitation of offers to purchase Common Stock. The Company will rely on Rule
3a4-1 under the Exchange Act, and sales of Common Stock will be conducted within
the requirements of Rule 3a4-1, so as to permit directors and executive officers
of the Company to participate in the sale of Common Stock. No director, officer,
or employee of the Company will be compensated in connection with his/her
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.

TRANSFER AGENT AND REGISTRAR

Annapolis National Bancorp, Inc. is the transfer agent and registrar
for the Company's Common Stock.

EXPERTS

The financial statements of the Company and its subsidiaries as of
December 31, 1996 and for each of the two years in the period ended December 31,
1996, included elsewhere herein have been audited by C.W. Amos & Company,
independent certified public accountants, as stated in their report appearing
elsewhere herein. On April 25, 1997, the Board of Directors of the Company
approved a change in independent certified public accountants to Rowles &
Company, LLP in anticipation of this public offering.

LEGAL MATTERS

The legality of the Common Stock will be passed upon for the Company by
Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the Company.
Certain legal matters will be passed upon for Charles Webb by Silver, Freedman
and Taff, L.L.P. (a partnership including professional corporations) Washington,
D.C.

CHANGE IN ACCOUNTANTS

For the year ended December 31, 1996 the Company's financial statements
were audited by C.W. Amos & Company. C.W. Amos and Company was replaced on April
25, 1997 and Rowles & Company, LLP was engaged and continues as the independent
auditors of the Company. The decision to change auditors was approved by the
Board of Directors of the Company and Bank. The financial statements of the
Company and its subsidiaries as of December 31, 1996 and for each of the two
years in the period ended December 31, 1996, and included in this Prospectus,
were audited by C.W. Amos & Company..

For the two year period ended December 31, 1996 and up to the date of
replacement of C.W. Amos and Company, there were no disagreements with C.W. Amos
& Company on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, not resolved to the
satisfaction of C.W. Amos & Company, would have caused it to make reference to
the subject matter of the disagreement in connection with its report. The
independent auditors' report on the financial statements for the year ended
December 31, 1996 did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope or accounting
principles.

<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Company and the Common Stock, reference is hereby made to
the Registration Statement and the exhibits thereto. The Registration Statement
may be examined at the public reference facilities maintained by the SEC at 450
Fifth Street, N.W., Washington, DC 20549, and at the following Regional Office
of the SEC: New York Regional Office, 7 World Trade Center, New York, NY 12048.
Copies of the Registration Statement may be obtained at prescribed rates from
the Public Reference Section of the SEC, Room 1024, 450 Fifth Street, N.W.,
Washington, DC 20549. In addition, the SEC maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the SEC.

REPORTS TO SHAREHOLDERS

In connection with the Offering, the Company intends to register the
Common Stock with the SEC under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). The Company will be required to file
electronically annual reports on Form 10-KSB and quarterly reports on Form
10-QSB with the SEC containing consolidated financial statements and other
information concerning the consolidated financial conditions and operations of
the Company and its subsidiaries. Pursuant to the proxy soliciting rules of the
SEC, the Company will also furnish its stockholders with annual reports
containing audited financial information for each fiscal year and will
distribute quarterly reports for the first three quarters of each of the fiscal
years containing unaudited summary financial information. The Company's fiscal
year ends on December 31.

<PAGE>

C. W. AMOS & COMPANY, LLC
170 Jennifer Road
Suite 320
Annapolis, Maryland 21401-3064

INDEPENDENT AUDITORS' REPORT

Board of Directors
Annapolis National Bancorp, Inc.
Annapolis, Maryland

We have audited the accompanying consolidated balance sheet of Annapolis
National Bancorp, Inc. (formerly Maryland Publick Banks, Inc.) and its
subsidiary, Annapolis National Bank, as of December 31, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
two years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Annapolis National
Bancorp, Inc. and its subsidiary as of December 31, 1996, and the results of
their operations and their cash flows for the two years then ended in conformity
with generally accepted accounting principles.

/s/ C.W. Amos & Company, LLC
- ----------------------------
Annapolis, Maryland
January 23, 1997

<PAGE>
<TABLE>
<CAPTION>
Annapolis National Bancorp, Inc. and Subsidiary

Consolidated Balance Sheet
(in thousands)

Unaudited
March 31, December 31,
1997 1996 1996
Assets -------- ------- ------------
<S><C>
Cash and due from banks $ 3,452 $ 1,787 $ 6,084
Federal funds sold 8,038 5,939 4,379
Securities purchased under agreement to resell 4,263 8,232 4,750
Federal Reserve Bank stock, at cost 194 179 194
Investment securities available-for-sale (Note 2) 6,246 17,980 11,140
Investment securities held-to-maturity (Note 2) 3,892 - 1,993
Loans, less allowance for credit losses (Note 3) 68,595 58,440 68,800
Premises and equipment (Note 4) 1,283 1,271 1,335
Core deposits and other intangible assets acquired (Note 5) 281 896 788
Accrued interest receivable 437 409 437
Deferred income taxes 1,120 - -
Other real estate owned 140 496 140
Other assets 198 242 187
--------- -------- -----------
Total assets $ 98,139 $ 95,871 $ 100,227
--------- -------- -----------
<CAPTION>
Liabilities and Stockholders' Equity
<S><C>
Deposits (Note 6)
Noninterest-bearing $ 10,795 $ 8,595 $ 10,052
Interest-bearing 72,762 74,979 77,054
--------- -------- -----------
83,557 83,574 87,106
Securities sold under agreements to repurchase (Note 2) 7,142 6,011 6,345
Accrued interest and other liabilities 554 208 302
Note and accrued interest payable to stockholder (Note 7 & 12) 1,023 945 1,003
--------- -------- -----------
Total liabilities 92,276 90,738 94,756
--------- -------- -----------
Commitments (Notes 9 and 10)
Stockholders' equity (Notes 8, 10, and 12)
Preferred stock - $.01 par value - - -
Common stock - $.01 par value 15 15 15
Capital surplus 8,634 8,634 8,634
Accumulated deficit (2,778) (3,471) (3,162)
Unrealized losses on investments in available for sale securities (Note 2) (8) (45) (16)
--------- -------- -----------
Total stockholders' equity 5,863 5,133 5,471
--------- -------- -----------
Total liabilities and stockholders' equity $ 98,139 $ 95,871 $ 100,227
--------- -------- -----------
</TABLE>

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

F-2

<PAGE>

Annapolis National Bancorp, Inc. and Subsidiary

Consolidated Statements of Income
For the Years Ended December 31, 1996 and 1995
and the Three Month Periods Ended March 31, 1997 and 1996
(in thousands)

Unaudited
March 31, December 31,
------------------------ -----------------------
1997 1996 1996 1995
<S><C> --------- ----------- ---------- ----------
Interest income
Loans $ 1,716 $ 1,539 $ 6,481 $ 6,380
Investment securities 150 237 975 714
Federal funds sold and securities purchased
under agreement to resell 121 171 565 557
--------- --------- --------- ---------
Total interest income 1,987 1,947 8,021 7,651
--------- --------- --------- ---------
Interest expense
Certificates of deposit, $100,000 or more 47 68 238 207
Other deposits 634 715 2,814 2,582
Securities sold under agreements to repurchase 54 52 231 214
Interest on borrowed funds 19 20 79 96
--------- --------- --------- ---------
Total interest expense 754 855 3,362 3,099
--------- --------- --------- ---------
Net interest income 1,233 1,092 4,659 4,552

Provision for credit losses (Note 3) 237 50 452 318
--------- --------- --------- ---------
Net interest income after provision for credit losses 996 1,042 4,207 4,234

Other income
Gain (loss) on sale of loans, securities, equipment,
and other real estate owned, net -- -- (31) 104
Service charges and other 165 124 619 417
--------- --------- --------- ---------
165 124 588 521
--------- --------- --------- ---------

Operating expenses
Personnel 517 557 2,219 1,939
Occupancy and equipment (Note 9) 204 179 731 719
Restructuring 830 - - -
Other operating expenses 310 280 1,278 1,156
Amortization of intangible assets acquired (Note 5) 36 36 144 143
--------- --------- --------- ---------
1,897 1,052 4,372 3,957
--------- --------- --------- ---------
Income (loss) before income taxes (736) 114 423 798
Income tax (expense) benefit (Note 11) 1,120 - - (6)
--------- --------- --------- ---------
Net income $ 384 $ 114 $ 423 $ 792
--------- --------- --------- ---------
Earnings per common share $ 0.26 $ 0.08 $ 0.29 $ 0.57
--------- --------- --------- ---------
</TABLE>

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

F-3

<PAGE>

<TABLE>
<CAPTION>
Annapolis National Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity

For the Years Ended December 31, 1996 and 1995
and the Three Month Period Ended March 31, 1997
(Dollars in thousands)

Unrealized
loss on
Common stock Accumulated investment
Shares Par value Surplus deficit securities Total
------ --------- ------- ----------- ---------- ---------
<S> <C>
Balance, December 31, 1994 541,300 $ 6 $ 5,380 $ (4,377) $ (249) $ 760

Sale of common stock (Note 12) 937,672 9 3,254 - - 3,263

Net income - - - 792 792

Change in unrealized loss - - - - 231 231
--------- ------ -------- --------- -------- ---------
Balance, December 31, 1995 1,478,972 15 8,634 (3,585) (18) 5,046

Net income - - - 423 423

Change in unrealized loss - - - - 2 2
--------- ------ -------- --------- -------- ---------
Balance, December 31, 1996 1,478,972 15 8,634 (3,162) (16) 5,471

Net income - - - 384 - 384

Change in unrealized loss - - - - 8 8
--------- ------ -------- --------- -------- ---------
Balance,
March 31, 1997 (unaudited) 1,478,972 $ 15 $ 8,634 $ (2,778) $ (8) $ 5,863
--------- ------ -------- --------- -------- ---------
</TABLE>

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

F-4

<PAGE>

Annapolis National Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Years Ended December 31, 1996 and 1995
and the Three Month Periods Ended March 31, 1997 and 1996
(in thousands)

(Unaudited)
March 31, December 31,
1997 1996 1996 1995
------- ------- ------- -------
Cash flows from operating activities
Net income $ 384 $ 114 $ 423 $ 792
Adjustments to reconcile net income to
net cash provided by operating activities
Deferred income taxes (1,120) - - -
Write-off of intangibles 471 - - -
Depreciation and amortization of
furniture, equipment, and leasehold
improvements 50 42 187 148
Amortization of discounts and premiums - - 10 (137)
Amortization of intangible assets acquired 36 36 144 144
Decrease (increase in accrued interest
receivable - 11 (17) (29)
Accrued interest on note to stockholder 19 20 79 96
Provision for credit losses 237 50 452 318
Net loss on sale of available-for-sale
securities - - - (10)
Net loss (gain) on sale of loans,
equipment, and other real estate owned - - 32 (94)
Other 263 (258) (19) 36
----- ------ ------ -----
Net cash provided by operating
activities 340 15 1,291 1,264
----- ------ ------ -----

Cash flows from investing activities
Net increase in loans (32) (2,363) (13,217) (2,211)
Investment in securities - held-to-maturity (1,899) - (1,946) -
Investment in securities - available-for-sale - - (17,687) (24,776)
Proceeds from redemption of securities
and principal repayments 4,886 137 22,642 9,080
Proceeds from sale of available-for-sale
securities - - 1,980 4,253
Other real estate owned:
Acquired - - (140) (16)
Sold - - 464 -
Proceeds from sale of loans - - - 2,620
Net decrease (increase) in federal funds
sold (3,659) (716) 844 (898)
Net decrease (increase) in securities
purchased under agreement to resell 487 (482) 3,000 (5,250)
Purchase of furniture, equipment, and
leasehold improvements (3) (316) (525) (720)
----- ------ ------ -----
Net cash used in investing activities (220) (3,740) (4,585) (17,918)
----- ------ ------ -----

(Continued)

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

F-5
<PAGE>

(Unaudited)
March 31, December 31,
1997 1996 1996 1995
------- ------- ------- -------
Cash flows from financing activities
Net increase (decrease) in deposits $(3,549) $1,478 $5,010 $15,978
Net increase (decrease) in securities
sold under agreements to repurchase 797 (959) (625) 2,229
Proceeds from sale of common stock - - - 88
----- ------ ------ -----

Net cash provided by financing
activities (2,752) 519 4,385 18,295
----- ------ ------ -----

Net increase (decrease) in cash (2,632) (3,206) 1,091 1,641
Cash beginning of period 6,084 4,993 4,993 3,352
----- ------ ------ -----

Cash, end of period $ 3,452 $1,787 $6,084 $4,993
----- ------ ------ -----

Supplemental cash flows information
Interest paid on deposits and repurchase
agreements $ 739 $ 835 $3,283 $3,003
----- ------ ------ -----
Income taxes paid $ - $ - $ - $ 6
----- ------ ------ -----
Supplemental Non-Cash financing activity
Conversion of stockholder note to
common stock $ - $ - $ - $3,175
----- ------ ------ -----

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

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

In late 1993, the Bank formed a new company, ANB Mortgage Services, LLC
(ANB Mortgage), for the purpose of originating and servicing residential
construction loans. ANB Mortgage assets and liabilities and its results
of operation are consolidated in the accompanying financial statements.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary, Annapolis National Bank and the
Bank's subsidiary, ANB Mortgage Services, LLC. All significant
intercompany balances and transactions have been eliminated in
consolidation.

SECURITIES HELD-TO-MATURITY
Debt securities for which the company has the positive intent and ability
to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest
method over the period of maturity.

SECURITIES AVAILABLE-FOR-SALE
Available-for sale securities consist of bonds, notes, and debentures not
classified as trading securities nor as held-to-maturity securities.

Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of
stockholders' equity until realized.

Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method.

Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary would result in write-downs of the individual securities to
their fair value. The related write-downs would be included in earnings
as realized losses.

Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.

LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.

Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the related
loan.

The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.

F-6

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic
conditions.

FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Furniture, equipment, and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation is charged to
operations over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized over the
shorter of the lease term or the life of the improvement.

PURCHASE METHOD OF ACCOUNTING
Net assets acquired in purchase transactions are recorded at their face
value at the date of acquisition. Core deposits and other intangible
assets are amortized on either an accelerated or straight line basis over
the estimated periods benefited.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are accounted for as
borrowings and recorded as a liability of the Company at the amount of
the repurchase obligation. These agreements mature the day following the
transaction.

SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell are accounted for as
investments and recorded as an asset of the Company at cost. They are
collateralized by securities held by a third party custodian, with a fair
value of $4,857,000 at December 31, 1996. The agreements mature the day
following the transaction. Securities purchased under agreements to
resell averaged approximately $5,821,000 during 1996, and the maximum
amount outstanding at any month-end during 1996 was $8,750,000.

OTHER REAL ESTATE OWNED
Other real estate owned includes formally foreclosed property and is
recorded at the lower of the Company's cost or the asset's fair value,
less estimated costs to sell, at the time of acquisition. Any write-downs
based on the asset's fair value at date of acquisition are charged to the
allowance for loan losses. Costs incurred in maintaining foreclosed real
estate and subsequent write-downs to reflect declines in the fair value
of the property are included in operating expenses. Such costs and
write-downs were $41,000 in 1996.

STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents is
composed of cash on hand and amounts due from correspondent banks and the
Federal Reserve Bank.

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 revenue and expenses
during the reporting period.

F-7

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. INVESTMENT SECURITIES

The amortized cost and fair value of investment securities are as
follows:

AVAILABLE-FOR-SALE SECURITIES

<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
(Dollars in thousands) cost gains losses value
- ---------------------------------- --------- ---------- ---------- ---------
<S><C>
December 31, 1996:
U.S. Treasury $ 9,156 $ 2 $ 1 $ 9,157
U.S. Government agency notes 1,000 - 4 996
Mortgage-backed securities (including REMIC's)
issued by FHLMC 1,000 - 13 987
-------- --- ---- --------
$ 11,156 $ 2 $ 18 $ 11,140
-------- --- ---- --------
HELD-TO-MATURITY SECURITIES

December 31, 1996:
U.S. Treasury securities: $ 1,993 $ - $ 7 $ 1,986
-------- --- ---- --------
</TABLE>

Securities with a cost of $6,367,000 (fair value of $6,352,000) were sold
to commercial customers of the Bank under agreements for the Bank to
repurchase the securities in the amount of $6,345,000 at December 31,
1996. Information concerning securities sold under agreement to
repurchase is summarized as follows:

(Dollars in thousands) 1996
- ------------------------------------- --------
Average balance during the year $ 7,762
Average interest rate during the year 2.97%
Maximum month-end balance during the year $ 9,591

Proceeds from the sales of securities during 1996 and 1995 were
$1,980,000 and $4,253,000, respectively. Gains of $304 and losses of $9,528 were
realized on these sales in 1996 and 1995, respectively, using the specific
identification method of determining cost.

Securities held at December 31, 1996, mature as follows:

Estimated
Amortized fair
(Dollars in thousands) cost value
- ------------------------------------- --------- ---------
<S><C>
Within one year $ 10,155 $ 10,153
After one year through five years (held-to-maturity security) 1,993 1,986
Mortgage backed securities with varying maturity dates 1,000 987
--------- ---------
$ 13,148 $ 13,126
--------- ---------
</TABLE>
F-8

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

The company grants commercial and consumer loans to customers primarily
in its market area of Anne Arundel and Queen Anne's Counties in Maryland.
The principal categories of the loan portfolio of the company, as of
December 31, 1996, are as follows:

(Dollars in thousands)
- -----------------------------
Commercial $ 30,801
Real esate
Commercial 17,845
Construction 10,173
Residential 1-4 family 7,002
Home equity 1,744
Consumer 2,332
--------
69,897
Unearned income (332)
Allowance for loan losses (765)
--------
$ 68,800
--------

The allowance for loan losses is summarized as follows:

December 31,
(Dollars in thousands) 1996 1995
- ----------------------------- -------- --------
Balance, beginning of year $ 617 $ 687
Provision charged to operations 452 318
Loans charged off (322) (395)
Recoveries 18 7
-------- --------
Balance, end of year $ 765 $ 617
-------- --------

F-9

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Loans on which the accrual of interest has been discontinued amounted to
$1,894,000, and the related allowance for loan losses was $183,000 at
December 31, 1996. The impairment of these loans has been recognized in
conformity with FASB Statement No. 114, as amended by FASB Statement No.
118. Of the nonaccrued loans outstanding at December 31, 1996, $1,076,000
are guaranteed by the SBA, $136,000 of principal was collected through
January 23, 1997 and the Bank has cash collateral relating to the loans
of $20,000. If interest on nonaccrual loans had been accrued, such income
would have approximated $78,000 during 1996. Payments totaling
approximately $56,000 were received on these loans during 1996 and were
applied to the interest of these loans. It is the Bank's policy to
examine these loans on a case by case basis to determine if payments
received will be applied to principal or past interest. The average
balance of impaired loans was $1,276,000 for the year ended December 31,
1996.

Certain officers and directors (and companies in which they have a 10% or
more beneficial ownership) have loans with the Bank. Such loans were made
in the ordinary course of business on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated
parties and are being repaid as agreed. Such loans were $3,071,000 at
December 31, 1996. Activity during 1996 follows:

(Dollars in thousands)
- --------------------------------
Balance, beginning of year $ 2,153
New loans 1,764
Repayments (846)
-------
Balance, end of year $ 3,071
-------

4. PREMISES AND EQUIPMENT

Furniture, equipment, and leasehold improvements are as follows:

(Dollars in thousdands)
- ---------------------------------
Furniture and equipment $ 1,046
Leasehold improvements 805
-------
1,851
Less; accumulated depreciation and amortization (516)
-------
$ 1,335
-------

F-10

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. PURCHASE AND ASSUMPTION AGREEMENT

In June, 1990 the Company acquired most of the assets and assumed most of
the deposit liabilities of a failed savings and loan, Gibraltar Savings
and Loan Association, F.A. from the Resolution Trust Corporation under a
Purchase and Assumption Agreement. The acquisition was recorded as a
purchase of assets and assumption of liabilities at their fair value of
the date of acquisition using the purchase method of accounting. The
excess of the purchase price and related costs over the fair value of the
net tangible assets acquired represented a premium paid for the core
deposit base and other intangible assets in the amount of $2,127,000. The
premium is being amortized over a period expiring in 2005.

6. INTEREST-BEARING DEPOSITS

Deposit balances and rates at December 31, 1996, are summarized as
follows:

Weighted
average
(Dollars in thousands) Amount rate
- ----------------------------- ------ --------
Time deposit accounts:
Less than $100,000 $25,059 5.27%
$100,000 or greater 3,617 5.25%
Money market accounts 14,401 3.66%
NOW accounts 20,759 2.48%
Other saving accounts 13,218 3.36%
-------
$77,054 3.44%
-------

The time deposit accounts mature and/or reprice as follows: in three
months or less - $12,687,000; four months to one year - $13,884,000; and
over one year - $2,105,000.

7. NOTE AND ACCRUED INTEREST PAYABLE TO STOCKHOLDER

In, June, 1990 the Company borrowed $3,000,000 under an unsecured
promissory note to a stockholder of the Company to provide sufficient
regulatory capital to allow the Company to purchase and assume
Gibraltar's assets and liabilities (Note 5). Interest accrued, but not
paid, on the note was at an annual rate equal to the Bank's prime rate
less 2%. In December, 1989, this same stockholder advanced funds to the
Company to provide sufficient funds to start banking operations in
January, 1990.

The stockholder acquired 907,143 shares of stock in exchange for
$3,175,000 due him in a stock offering which terminated in January, 1995
(see Note 12). The Company issued a new note for the remaining amount
owed the stockholder ($848,400). Interest accrues on the note at an
annual rate of the prime rate published in the Wall Street Journal plus
1%. The principal and interest on the note are due December 31, 1997.
Interest expense accrued, but not paid on the notes was $79,000 in 1996.

8. COMMON STOCK WARRANTS

The Company had issued warrants to purchase 6,900 shares of its common
stock at a price of $10.00 per share. The warrants expired in April, 1996
without any of the warrants being exercised.

F-11

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. COMMITMENTS

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.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by
the Company upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include
accounts receivable; inventory, property, plan, and equipment; and income
producing commercial properties.

Standby letters of credit and financial guarantees written are
conditional commitments issued by the Company to guarantee the
performance of the customer to a third party. 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
supporting those commitments for which collateral is deemed necessary.

The Company has not been required to perform on any financial guarantees
during the past two years. The Company has not incurred any losses on its
commitments in either 1996 or 1995.

At December 31, 1996, a summary of the Company's commitments is as
follows:

Commitments to extend credit $ 14,762,000

Standby letters of credit of which $746,000 are
secured by funds deposited in Bank $ 1,250,000

The above commitments to extend credit include $6,106,000 of undisbursed
funds under residential construction/development mortgage loans.

The Company has either entered into or assumed leases for its branches
and office space. Some of the leases contain renewal options. The minimum
noncancelable future rental commitments at December 31, 1996 are as
follows:

Year ending
December 31, (in thousands)
------------ --------------
1997 $ 429
1998 415
1999 386
2000 312
2001 85
Thereafter 372

The related rent expense was $402,000 in 1996 and $430,000 in 1995.

F-12

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. 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 Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined). Management believes,
as of December 31, 1996, that the Bank meets all capital adequacy
requirements to which it is subject.

As of December 31, 1996, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category.

The Bank's actual capital amounts and ratios at December 31, 1996
are presented in the following table:

<TABLE>
<CAPTION>
To be "Adequately To be "Well
Actual capitalized" capitalized"
------------- -------------------- ----------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------- ------ ----- ------ ----- ------ -----
<S><C>
Total capital
(to risk-weighted assets) $6,446 10.2% greater/= $5,035 greater/= 8.0% greater/= $6,294 greater/= 10.0%
Tier 1 capital
(to risk-weighted assets) $5,681 9.0% greater/= $2,518 greater/= 4.0% greater/= $3,776 greater/= 6.0%
Tier 1 capital
(to average assets) $5,681 5.8% greater/= $3,898 greater/= 4.0% greater/= $4,879 greater/= 5.0%
</TABLE>

At December 31, 1996, no retained earnings were available for dividend
declaration without prior regulatory approval.

11. INCOME TAXES

The Company accounts for income taxes in accordance with Financial
Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes.
SFAS No. 109 uses an asset and liability approach for the recognition of
deferred tax liabilities and assets based on the expected future tax
consequences of temporary differences between the carrying amounts and
the tax bases of certain assets and liabilities.

F-13

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. INCOME TAXES (Continued)

Temporary differences consist primarily of net operating loss carryovers,
allowance for loan losses, depreciation and amortization, and income on
loans. Since the utilization of these benefits is dependent on future
taxable earnings of the Company, a valuation allowance for deferred taxes
of $1,123,000 has been recognized.

December 31,
(Dollars in thousands) 1996
----------------------------------- ------------
Allowance for credit losses $ 185
Deferred fees 71
Accrued interest on debentures 60
Nonaccrual interest 20
Deferred rent 5
Net operating loss carryforward 942
--------
Total deferred tax assets $ 1,283
--------
Core deposit and other intangible assets 157
Depreciation 3
--------
Total deferred tax liabilities 160
--------
Valuation allowance 1,123
--------
Net deferred tax assets recognized $ -
--------

The Company has a net tax operating loss (NOL) carryforward at December
31, 1996 of approximately $2,400,000 available to reduce future taxable
income. The carryforward periods expire through the year 2009.

Book income was increased by the following to arrive at taxable income.

(Dollars in thousands) 1996
---------------------------------- ----
Book income $ 422
Permanent differences 44
Temporary differences 171
-----
Taxable income, before NOL $ 637
-----
Net operating loss used $ 637
-----

F-14
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. INCOME TAXES (Continued)

The differences between the amount of federal income taxes at 34% and the
amount reported by the Company follow:

1996 1995
---- ----
Income before income taxes $ 423 $ 798
----------- ---------
Taxes computed at federal income tax rate 144 271
Increase (decrease) resulting from
State income taxes, net of federal benefit 20 37
Nondeductible expenses 15 15
Net operating loss carryforward (179) (317)
----------- ---------
Income tax expense $ - $ 6
----------- ---------

12. CAPITAL STOCK AND SALE OF COMMON STOCK

During 1995, the Company amended its articles of incorporation to
increase its preferred stock and common stock shares authorized from
1,000,000 and 2,000,000 shares to 5,000,000 and 10,000,000 shares,
respectively. There were no shares of preferred stock issued in 1996 and
1,478,972 shares of common stock issued and outstanding at December 31,
1996.

During December, 1994, the Company offered to its stockholders of record
(December 10, 1994, record date) the right to acquire 2.5 shares of stock
(basic subscription) for each share of stock owned at the price of $3.50
per share. Additionally, to the extent that all options to purchase
shares were not exercised, each stockholder who purchased all of the
shares pursuant to the basic subscription had the supplemental right to
subscribe to any unpurchased shares (over-subscription right). The
offering terminated on January 31, 1995. As a result of this offering,
937,672 shares were purchased. The Company's principal stockholder
acquired 907,143 shares in exchange for $3,175,000 of the amount due to
him by the Company.

F-15

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. PROFIT SHARING PLAN

The Company has a profit sharing plan with a 401(k) feature for those
employees who meet the eligibility requirements set forth in the plan.
The plan does not require the Company to match the participants'
contributions. The company's contributions to the plan were $19,596 in
1996 and $15,000 in 1995.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has considered disclosure of the fair value of its financial
instruments, including those off balance sheet items disclosed in Note 9,
as required by Financial Accounting Standards Board Statement No. 107,
and determined that the differences between the fair value of its assets
and liabilities and their carrying values are insignificant. The fair
value of federal funds sold and securities sold under agreements to
resell equals the carrying amount since such instruments represent
overnight investments bearing daily market rates. The fair values of U.S.
Treasury and Government agency securities disclosed in Note 2 are
determined using market quotations. Loans with variable rates or that
reprice within one year represent 86.5% of the total portfolio. These
loans include demand features, and their fair value approximates the
carrying amount. Fixed rate loans, comprising 13.5% of the portfolio,
reprice within 5 years. Management estimates that their fair value
approximates the carrying amount. The valuation of loans is adjusted for
possible loan losses.

The fair value of interest-bearing checking, savings, and money market
deposit accounts is equal to the carrying amount. The fair value of fixed
maturity deposits, of which 89.2% mature or reprice within one year,
approximates the carrying amount.

Loan commitments and unused lines of credit are made on substantially the
same terms and conditions as loans currently outstanding, and are at
current market rates. Letters of credit are generally cash secured.
Management estimates no significant fair value or loss associated with
these off balance sheet accounts.

F-16

<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. PARENT COMPANY FINANCIAL INFORMATION

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

December 31,
(Dollars in thousands) 1996
- -------------------------------------------------------------------------------
Balance Sheet
Assets
Cash $ 21

Investment in Annapolis National Bank 6,454
--------
Total assets $ 6,475
--------

Liabilities and Stockholders' Equity

Note payable $ 848
Accrued interest expense 156
--------
Total liabilities 1,004
--------
Stockholders' equity
Common stock, par value $.01 per share; authorized
10,000,000 shares; issued and outstanding 1,478,972 shares 15
Additional paid-in capital 8,634
Retained earnings (deficit) (3,162)
Net unrealized loss on securities available for sale (16)
--------
Total stockholders' equity 5,471
--------
Total liabilities and stockholders' equity $ 6,475
--------

F-17

<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. PARENT COMPANY FINANCIAL INFORMATION (Continued)

Year ended
(Dollars in thousands) December 31, 1996
- -----------------------------------------------------------------------------
Statement of Income

Equity in undistributed income of subsidiary $ 502

Interest expense 79
----------
Net income $ 423
----------

(Dollars in thousands)
- ----------------------------------------------------------------------------
Statement of Cash Flows

Cash and equivalents at beginning of year $ 23
----------
Cash and equivalents at end of year $ 23
----------
Cash flows from operating activities
Net income $ 423

Adjustments to reconcile net income to net cash used in
operating activities
Undistributed net income of subsidiary (502)
Interest accrued, not paid 79
----------
Net change in cash $ -
----------

F-18

<PAGE>

================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE BANK OR CHARLES WEBB & CO, INC., A DIVISION OF
KEEFE, BRUYETTE & WOODS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE BANK SINCE ANY OF THE DATES
AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS

Summary
Summary Consolidated Financial and Other Data
Risk Factors
Use of Proceeds
Market for Common Stock
Dividends
Dilution
Capitalization
Consolidated Statements of Income
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business
Regulation and Supervision
The Board of Directors and Management of the Company
The Board of Directors and Management of the Bank
Restrictions on Acquisition of the Company
Description of Capital Stock of the Company
Shares Eligible for Future Use
The Offering
Transfer Agent and Registrar
Experts
Legal matters
Additional Information
Reports to Shareholders

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

UNTIL __________, 1997 OR 25 DAYS AFTER COMMENCEMENT OF THE OFFERING, IF
ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================

================================================================================

____________ Shares

[LOGO]

ANNAPOLIS NATIONAL
BANCORP, INC.

COMMON STOCK

__________

PROSPECTUS
__________

CHARLES WEBB & CO., INC.
A DIVISION OF KEEFE, BRUYETTE & SONS

____________, 1997

================================================================================

<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

In accordance with Section 2-418 of the Corporations and Associations Article of
the Annotated Code of Maryland, Articles Ninth and Tenth of the Registrant's
Articles of Incorporation provide as follows:

ARTICLE XII

Indemnification

The Corporation shall indemnify to the fullest extent permissible under the
Maryland General Corporation Law any individual who is or was a director,
officer, employee, or agent of the Corporation, and any individual who serves or
served at the Corporation's request as a director, officer, partner, trustee,
employee, or agent of another corporation, partnership, joint venture, trust or
other enterprise, in any proceeding in which the individual is made a party as a
result of his service in such capacity. An individual will not be indemnified if
it is proved that the act or omission at issue was material to the cause of
action adjudicated in the subject proceeding and that (i) it was committed in
bad faith, or (ii) it was the result of active and deliberate dishonesty, or
(iii) the individual actually received an improper personal benefit in money,
property, or services, or (iv) in the case of a criminal proceeding, the
individual had reasonable cause to believe that the act or omission was
unlawful.

ARTICLE XIII

Limitations on Liability of Officers and Directors

An officer or director of the Corporation shall not be personally liable to
the Corporation or its shareholders for monetary damages for breach of their
fiduciary duty as an officer or director, unless: (i) it is proved that the
individual officer or director actually received an improper benefit or profit
in money, property or services from the Corporation; or (ii) a judgment or other
final adjudication adverse to the individual officer or director is entered in a
proceeding based on a finding in the proceeding that the individual's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. If the Maryland
General Corporation Law is amended to further eliminate or limit the personal
liability of officers and directors, then the liability of officers and
directors of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Maryland General Corporation Law, as so amended.

Any repeal or modification of the foregoing paragraph by the shareholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.

<PAGE>

Item 25. Other Expenses of Issuance and Distribution

SEC filing fee(1).................................... $ 1,563
Printing, postage and mailing........................ 12,000
Legal fees and expenses.............................. 75,000
Selling commissions(1) and expenses.................. 300,000
Marketing expenses................................... 10,000
Accounting fees and expenses......................... 10,000
Blue Sky fees and expenses .......................... 10,000
Bank Escrow Agreement................................ 5,000
Miscellaneous........................................ 16,437
--------

TOTAL................................................ $440,000
========

(1) Actual expenses based upon the registration of 833,334 shares at $6.00
per share. All other expenses are estimated.

Item 26. Recent Sales of Unregistered Securities

In December 1994, the Company offered certain existing stockholders the
right to purchase 2.5 shares of Company Common Stock for each share of Common
Stock owned at the price of $3.50 per share. A total 937,672 shares were sold to
14 stockholders of which 30,529 were sold for $3.50 per share. The balance,
907,143 shares, were sold to one stockholder in exchange for the retirement of
$3.175 million, the principal portion of a debt owed to the principal
stockholder by the Company. Each purchaser in the offering was either an
accredited investor or, if not an accredited investor, either alone or with his
or her purchaser representative, had such knowledge and experience in financial
and business matters that he or she was capable of evaluating the merits and
risks of the investment. The offering was made in reliance upon Section 4(2) of
the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated
thereunder.

<PAGE>

Item 27. Exhibits

The exhibits filed as a part of this Registration Statement are as follows:

(a) List of Exhibits (filed herewith unless otherwise noted)

1.1 Engagement Letter between Annapolis National Bancorp and Charles Webb &
Company, A Division of Keefe, Bruyette & Woods, Inc.*

1.2 Draft Form of Underwriting Agreement between Annapolis National Bancorp
and Charles Webb & Company, A Division of Keefe, Bruyette & Woods, Inc.*

3.1 Amended and Restated Articles of Incorporation of Annapolis National
Bancorp, Inc.*

3.2 Bylaws of Annapolis National Bancorp, Inc.*

3.3 Articles of Incorporation of Annapolis National Bank*

3.4 Bylaws of Annapolis National Bank*

4.0 Draft Stock Certificate of Annapolis National Bancorp, Inc.*

5.0 Opinion of Muldoon, Murphy & Faucette re: legality*

10.1 Employment Agreement between Annapolis National Bancorp, Inc. and John W.
Marhefka, Jr.*

10.2 Promissory Note Between Annapolis National Bancorp, Inc. and Lawrence E.
Lerner dated January 31, 1995.*

10.3 Annapolis National Bancorp, Inc. Employee Stock Option Plan*

10.4 Form of Escrow Agreement between Annapolis National Bancorp, Inc. and
FMB Trust Company, National Association*

16.0 C.W. Amos & Company letter re: changes in accountants

23.1 Consent of Muldoon, Murphy & Faucette*

23.2 Consent of Rowles & Company, LLP

23.3 Consent of C.W. Amos & Company

24.1 Powers of Attorney*

27.0 Financial Data Schedule*

99.1 Draft Stock Order Form*

- ----------
*Previously filed.

<PAGE>

Item 28. Undertakings.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration
Statement:

(i) To include any Prospectus required by section
10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the Prospectus any facts or events
which, individually or together, represent a
fundamental change in the information set forth in
the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement; and

(iii) To include any additional or changed information on
the plan of distribution;

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, treat each post-effective amendment as
a new Registration Statement of the securities offered, and
the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain
unsold at the end of the offering.

The undersigned Registrant hereby undertakes to furnish stock
certificates to or in accordance with the instructions of the respective
purchasers of the Common Stock, so as to make delivery to each purchaser
promptly following the closing.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 will be governed by the final
adjudication of such issue.

<PAGE>

CONFORMED
SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certified that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Annapolis, State of Maryland, on August 7, 1997.

Annapolis National Bancorp, Inc.

By: /s/ John W. Marhefka, Jr.
---------------------------------------
John W. Marhefka, Jr.
Director, Chief Executive Officer, Vice
President and Assistant Secretary

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.

Name Title Date
---- ----- ----

/s/ John W. Marhefka, Jr. Director, Chief Executive August 7, 1997
- -------------------------- Officer, Vice President and
John W. Marhefka, Jr. Assistant Secretary (principal
executive officer)

* Chairman of the Board and
- -------------------------- President
Albert Phillips

* Vice Chairman of the Board
- --------------------------
Stanley H. Katsef

* Chief Financial Officer and
- -------------------------- Treasurer (principal accounting
Russell J. Grimes, Jr. and financial officer)

* Director
- --------------------------
Ronald E. Gardner

* Director
- --------------------------
Stanley J. Klos, Jr.

* Director
- --------------------------
Lawrence E. Lerner

* Director
- --------------------------
Richard M. Lerner

<PAGE>

* Director
- --------------------------
Dimitri P. Mallios

* Director
- --------------------------
Lawrence W. Schwartz

*Pursuant to the Power of Attorney filed on June 23, 1997, as Exhibit 24.1 to
the Form SB-2 Registration Statement of Annapolis National Bancorp, Inc.

<PAGE>

LIST OF EXHIBITS

List of Exhibits (filed herewith unless otherwise noted)

1.1 Engagement Letter between Annapolis National Bancorp, Inc. and Charles
Webb & Company, A Division of Keefe, Bruyette & Woods, Inc.*

1.2 Draft Form of Underwriting Agreement between Annapolis National
Bancorp, Inc. and Charles Webb & Company, A Division of Keefe, Bruyette
& Woods, Inc.*

3.1 Amended and Restated Articles of Incorporation of Annapolis National
Bancorp, Inc.*

3.2 Bylaws of Annapolis National Bancorp, Inc.*

3.3 Articles of Incorporation of Annapolis National Bank*

3.4 Bylaws of Annapolis National Bank*

4.0 Draft Stock Certificate of Annapolis National Bancorp, Inc.*

5.0 Opinion of Muldoon, Murphy & Faucette re: legality*

10.1 Employment Agreement between Annapolis National Bancorp, Inc. and John
W. Marhefka, Jr.*

10.2 Promissory Note between Annapolis National Bancorp, Inc. and Lawrence
E. Lerner dated January 31, 1995*

10.3 Annapolis National Bancorp, Inc. Employee Stock Option Plan*

10.4 Form of Escrow Agreement between Annapolis National Bancorp, Inc. and
FMB Trust Company, National Association*

16.0 C.W. Amos & Company letter re: changes in accountants

23.1 Consent of Muldoon, Murphy & Faucette*

23.2 Consent of Rowles & Company, LLP

23.3 Consent of C.W. Amos & Company

24.1 Powers of Attorney*

27.0 Financial Data Schedule*

99.1 Draft Stock Order Form*

- ----------
*Previously filed.

Exhibit 16.0 C.W. Amos & Company Letter re: Changes in Accountants

<PAGE>

[C.W. Amos & Company Logo]
- -------------------------------------------------------------------------------
Certified Public Accountants
Business Consultants

August 7, 1997

Securities and Exchange Commission
Washington, D.C. 20549

To whom it may concern:

On April 25, 1997, our appointment as auditors for Annapolis National Bancorp,
Inc. was terminated. We have read the statement concerning changes in
accountants contained in its Registration Statement on Form SB-2, and any
amendments thereto, originally filed with the Securities and Exchange Commission
on June 23, 1997, File No. 333-29841 and we agree with such statement.

/s/ C.W. Amos & Company, LLC
- ----------------------------
C.W. AMOS & COMPANY, LLC
Annapolis, Maryland

170 Jennifer Road, Suite 320, Annapolis, MD 21401-3064
Annapolis Phone 410/266-9396 Baltimore Phone 410/841-6173
Washington Phone 301/970-2025 Fax 410/841-5040

Exhibit 23.2 Consent of Rowles & Company, LLP

<PAGE>

ROWLES
& Company, LLP

Certified Public Accountants

Consent of Independent Accountants

We consent to the use of our name as it appears under the caption
"Experts" and "Change in Accountants" in the Registration Statement on Form SB-2
and the Prospectus included therein.

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

August 7, 1997
Baltimore, Maryland

101 E. Chesapeake Avenue, Suite 300, Baltimore, Maryland 21286
410-583-6990 FAX 410-583-7061

Exhibit 23.3 Consent of C.W. Amos & Company

<PAGE>

[C.W. Amos & Company Logo]
- -------------------------------------------------------------------------------
Certified Public Accountants
Business Consultants

August 7, 1997

Consent Of Certified Public Accountants
---------------------------------------

Annapolis National Bancorp, Inc.
Annapolis, Maryland

We consent to the use in this registration statement on Form SB-2 of our report
dated January 23, 1997 on the financial statements of Annapolis National
Bancorp, Inc. (Formerly Maryland Public Banks, Inc.) appearing in the
registration statement and to the reference made to us under the captions
"Experts" and "Changes in Accountants" in the prospectus.

/s/ C.W. Amos & Company, LLC
- ----------------------------
C.W. AMOS & COMPANY, LLC
Annapolis, Maryland

170 Jennifer Road, Suite 320, Annapolis, MD 21401-3064
Annapolis Phone 410/266-9396 Baltimore Phone 410/841-6173
Washington Phone 301/970-2025 Fax 410/841-5040