UNITEDTable STATESof Contents

~~SECURITIES~~UNITED ~~AND~~STATES ~~EXCHANGE COMMISSION~~

~~Washington,~~SECURITIES DCAND ~~20549~~EXCHANGE COMMISSION

~~FORM~~Washington, ~~10-K~~ DC 20549

xFORM ~~ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934~~10-K

~~For~~x ~~the~~ANNUAL ~~fiscal~~REPORT ~~year~~PURSUANT ~~ended~~TO ~~December 31,~~SECTION ~~2011~~13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

¨For ~~TRANSITION~~the ~~REPORT~~fiscal ~~PURSUANT~~year TOended ~~SECTION~~December 31, 132012 ~~OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~¨ ~~the~~TRANSITION ~~transition~~REPORT ~~period~~PURSUANT ~~from to~~ TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

~~Commission~~For ~~File~~the ~~No.:~~transition ~~0-22961~~period from to

~~Annapolis~~Commission ~~Bancorp,~~File ~~Inc~~No.: 0-22961

~~(Exact~~Annapolis Bancorp, ~~name~~Inc. ~~of registrant as specified in its charter)~~

Maryland		52-1595772
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer I.D. No.)
1000 Bestgate Road, Suite 400, Annapolis, Maryland		21401
(Address of principal executive offices)		(Zip Code)

(Exact name of registrant as specified in its charter)

Registrant’s Telephone Number, including area code:

Maryland

52-1595772

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

I.D. No.)

(410) 224-4455


1000 Bestgate Road, Suite 400, Annapolis, Maryland		21401
(Address of principal executive offices)		(Zip Code)

~~Securities~~Registrant’s ~~registered~~Telephone ~~pursuant~~Number, toincluding ~~Section 12(b)~~area ~~of the Exchange Act~~code:

~~None~~(410) 224-4455

Securities registered pursuant to Section 12(gb) of the Exchange Act:

Common Stock $0.01 par value		NASDAQ Capital Market
(Title of class)		(Exchange on which registered)

None

~~Indicate~~Securities byregistered ~~check~~pursuant ~~mark~~to ifSection 12(g) ~~the registrant is a well-known seasoned issuer, as defined in Rule 405~~ of the ~~Securities~~Exchange Act~~. Yes~~: ~~¨ No: x~~

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes: ¨ No: x


Common Stock $0.01 par value		NASDAQ Capital Market
(Title of class)		(Exchange on which registered)

Indicate by check mark ~~whether~~if the registrant ~~(1) has~~is ~~filed~~a ~~all~~well-known ~~reports~~seasoned ~~required~~issuer, toas bedefined ~~filed~~in byRule ~~Section 13~~405 ~~or 15(d)~~ of the Securities ~~Exchange Act of 1934 during the preceding 12 months (or for~~ ~~such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days~~Act. Yes: x¨ No: ¨x

Indicate by check mark ~~whether~~if the registrant ~~has~~is ~~submitted~~not ~~electronically and posted on its corporate Web site, if any, every Interactive Data File~~ required to befile ~~submitted~~reports ~~and posted~~ pursuant to ~~Rule 405~~Section 13 ofor ~~Regulation S-T~~ 15(~~§232.405~~d) of ~~this chapter) during~~ the ~~preceding 12 months (or for a shorter period that the registrant was required to submit and post such files).~~ Act. Yes: x¨ No: ¨x

Indicate by check mark ifwhether ~~disclosure~~the ofregistrant ~~delinquent~~(1) has ~~filers~~filed ~~pursuant~~all toreports ~~Item 405~~required ofto ~~Regulation~~be ~~S-K~~filed ~~(§229.405~~by ofSection 13 ~~this~~or ~~chapter~~15(d) isof ~~not~~the ~~contained~~Securities ~~herein,~~Exchange ~~and~~Act ~~will~~of ~~not~~1934 beduring ~~contained,~~the topreceding ~~the~~12 ~~best~~months of(or ~~the~~for ~~registrant’s~~such ~~knowledge,~~shorter inperiod ~~definitive~~that ~~proxy~~the orregistrant ~~information~~was ~~statements~~required ~~incorporated~~to byfile ~~reference~~such inreports), ~~Part~~and ~~III~~(2) has ofbeen ~~this~~subject ~~Form~~to ~~10-K~~such orfiling ~~any~~requirements ~~amendment~~for tothe ~~this~~past ~~Form 10-K~~ 90 days. Yes: x No: ¨

Indicate by check mark whether the registrant ishas asubmitted ~~large~~electronically ~~accelerated~~and posted ~~filer,~~on anits ~~accelerated~~corporate ~~filer~~Web site, aif ~~non-accelerated filer~~any, orevery aInteractive ~~smaller~~Data ~~reporting company.~~File ~~See~~required ~~the~~to ~~definitions~~be submitted and posted pursuant to Rule 405 of ~~“large~~Regulation ~~accelerated~~S-T ~~filer,”~~(§232.405 ~~“accelerated~~of ~~filer”~~this ~~and~~chapter) ~~“smaller~~during ~~reporting~~the ~~company”~~preceding in12 ~~Rule~~months ~~12b-2~~(or offor a shorter period that the registrant ~~Exchange~~was ~~Act~~required to submit and post such files). Yes: x No: ¨

~~Large~~Indicate ~~accelerated~~by ~~filer~~check ¨mark ~~Accelerated~~if ~~filer~~disclosure ¨of ~~Non-accelerated~~delinquent ~~filer~~filers ¨pursuant to Item 405 of Regulation S-K (Do§229.405 of this chapter) is not ~~check~~contained herein, ifand awill ~~smaller~~not ~~reporting~~be ~~company)~~contained, ~~Smaller~~to ~~reporting~~the ~~company~~best xof the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨

Indicate by check mark whether the registrant is a ~~shell~~large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. ~~(as~~See ~~defined~~the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). ~~Yes: ¨ No x~~

~~The~~Large ~~aggregate~~accelerated ~~market~~filer ~~value~~¨ ofAccelerated ~~the~~filer ~~outstanding~~¨ ~~Common~~Non-accelerated ~~Stock~~filer ~~held~~¨ by(Do ~~nonaffiliates~~not ~~was~~check ~~$7,324,856~~if ~~as of June 30, 2011 based on~~ a ~~sales~~smaller ~~price~~reporting ofcompany) ~~$4.13~~Smaller ~~per~~reporting ~~share~~company ~~of Common Stock.~~ x

~~The~~Indicate ~~number~~by ofcheck ~~shares~~mark ~~outstanding~~whether of the registrant’s ~~Common~~is ~~Stock~~a ~~was~~shell ~~3,973,991~~company (as defined in Rule 12b-2 of ~~March 1,~~the ~~2012~~Exchange Act). Yes: ¨ No x

~~DOCUMENTS~~The ~~INCORPORATED~~aggregate BYmarket ~~REFERENCE~~value of the outstanding Common Stock held by nonaffiliates was $9,967,182 as of June 30, 2012 based on a sales price of $6.80 per share of Common Stock.

~~PORTIONS~~The OFnumber ~~THE~~of ~~ANNUAL~~shares ~~REPORT~~outstanding TOof ~~STOCKHOLDERS~~the ~~FOR~~registrant’s ~~THE~~Common ~~FISCAL~~Stock ~~YEAR~~was ~~ENDED DECEMBER 31~~4,059,802 ~~2011~~as ~~ARE~~of ~~INCORPORATED~~March 1, ~~BY REFERENCE INTO PART I AND PART II OF THIS FORM 10-K~~2013.

PORTIONSTable OFof THE PROXY STATEMENT FOR THE 2012 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 17, 2012, ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K. Contents

INDEX

		~~PAGE~~		PAGE
PART I
~~Item 1.~~	~~Description~~Item ~~of Business~~1.	Description of Business	~~1-7~~		1-10
~~Item 1A.~~	~~Risk~~Item ~~Factors~~1A.	Risk Factors	7		10
~~Item 1B.~~	~~Unresolved~~Item ~~Staff Comments~~1B.	Unresolved Staff Comments	7		10
~~Item 2.~~	~~Properties~~Item 2.	Properties	8		11
~~Item 3.~~	~~Legal~~Item ~~Proceedings~~3.	Legal Proceedings	8		11
~~Item 4.~~	~~Mine~~Item ~~Safety Disclosures~~4.	Mine Safety Disclosures	8		11
PART II
~~Item 5.~~	~~Market~~Item ~~for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~5.	Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	~~8-9~~		12-13
~~Item 6.~~	~~Selected~~Item ~~Financial Data~~6.	Selected Financial Data	~~9-10~~		13
~~Item 7.~~	~~Management’s~~Item ~~Discussion and Analysis of Financial Condition and Results of Operations~~7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~10-26~~		14-29
~~Item 7A.~~	~~Quantitative~~Item ~~and Qualitative Disclosures About Market Risk~~7A.	Quantitative and Qualitative Disclosures About Market Risk	26		29
~~Item 8.~~	~~Financial~~Item ~~Statements and Supplementary Data~~8.	Financial Statements and Supplementary Data	~~26-60~~		29-66
~~Item 9.~~	~~Changes~~Item ~~In and Disagreements with Accountants on Accounting and Financial Disclosure~~9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	61		66
~~Item 9A.~~	~~Controls~~Item ~~and Procedures~~9A.	Controls and Procedures	61		66-67
~~Item 9B.~~	~~Other~~Item ~~Information~~9B.	Other Information	61		67
PART III
~~Item 10.~~	~~Directors,~~Item ~~Executive Officers and Corporate Governance~~10.	Directors, Executive Officers and Corporate Governance	61		67-71
~~Item 11.~~	~~Executive~~Item ~~Compensation~~11.	Executive Compensation	62		72-75
~~Item 12.~~	~~Security~~Item ~~Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters~~12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	62		76-79
~~Item 13.~~	~~Certain~~Item ~~Relationships and Related Transactions and Director Independence~~13.	Certain Relationships and Related Transactions and Director Independence	62		79-81
~~Item 14.~~	~~Principal~~Item ~~Accountant Fees and Services~~14.	Principal Accountant Fees and Services	63		82
PART IV
~~Item 15.~~	~~Exhibits,~~Item ~~Financial Statement Schedules~~15.	Exhibits, Financial Statement Schedules	64		83-84

PARTTable Iof Contents

~~ITEM 1.~~PART ~~BUSINESS~~I

Annapolis Bancorp, Inc. (the “Company”), formerly Annapolis National Bancorp, Inc. and Maryland Publick Banks, Inc., is a bank holding company, incorporated under the laws of Maryland in May 1988 for the purpose of acquiring and holding all of the outstanding stock of BankAnnapolis (the “Bank”). In November 1998 the Company went public and joined the NASDAQ Stock Market using the ticker symbol ANNB. Effective JuneITEM 1~~, 2001 the Company changed its name to Annapolis Bancorp, Inc~~. BUSINESS

~~The~~Annapolis ~~Company~~Bancorp, ~~and~~Inc. ~~later~~ (the ~~Bank~~“Company”), ~~were~~formerly ~~formed~~Annapolis byNational aBancorp, ~~group~~Inc. ofand ~~businessmen~~Maryland ~~who~~Publick atBanks, ~~the~~Inc., ~~time~~is ~~the~~a ~~Company~~bank holding ~~was~~company, ~~organized~~incorporated ~~were~~under ~~dissatisfied with~~ the ~~banking opportunities~~laws ~~available~~of Maryland in ~~the~~May ~~Annapolis~~1988 ~~area.~~for ~~The~~the ~~Bank~~purpose ~~grew~~of ~~based~~acquiring ~~upon~~and aholding ~~real~~all ~~desire~~of tothe ~~serve~~outstanding ~~people~~stock ~~and~~of ~~business~~BankAnnapolis in (the ~~Annapolis region~~“Bank”). ~~Throughout~~In ~~the~~November ~~Company’s~~1997 ~~history~~ the ~~Board~~Company ofwent ~~Directors~~public ~~has~~and ~~attempted~~joined tothe ~~and~~NASDAQ ~~succeeded~~Stock Market inusing ~~hiring talented~~the ~~and~~ticker ~~competent~~symbol ~~community~~ANNB. ~~bankers~~Effective toJune 1, ~~lead~~2001 the Company ~~and~~changed ~~Bank~~its asname ~~its~~to ~~Senior~~Annapolis ~~Management~~Bancorp, ~~Team~~Inc.

~~BankAnnapolis~~The Company and later the Bank were formed by a group of businessmen who at the time the Company was organized were dissatisfied with the banking opportunities available in the Annapolis area. The Bank grew based upon a real desire to serve people and business in the Annapolis region. Throughout the Company’s history the Board of Directors has attempted to and succeeded in hiring talented and competent community bankers to lead the Company and Bank as its Senior Management Team.

~~The~~On October 22, 2012, the Company and F.N.B. Corporation (“FNB”), the parent company of First National Bank isof aPennsylvania ~~federally~~(“FNB Bank”), ~~insured~~entered ~~community-oriented~~into ~~bank~~an Agreement and isPlan of Merger (the ~~only~~“Merger ~~commercial~~Agreement”), ~~bank~~pursuant ~~headquartered~~to inwhich ~~Annapolis,~~the ~~Maryland.~~Company ~~Effective~~will ~~November 1~~merge with and into FNB, ~~2000~~ ~~the~~with ~~Bank~~FNB ~~changed~~surviving ~~its~~the ~~charter~~merger ~~from~~(the “Merger”). As a ~~national~~result ~~charter~~of the Merger, the Company will cease to exist as a ~~state~~separate ~~charter~~legal entity and ~~joined~~its ~~the~~business ~~State~~will be combined with that of ~~Maryland~~FNB’s. ~~and~~As ~~the~~soon ~~Federal~~as ~~Reserve~~practicable ~~banking~~after ~~systems.~~the ~~Also~~completion ~~effective~~of ~~November 1~~the Merger, ~~2000~~ the Bank ~~changed~~will ~~its~~merge ~~name~~with ~~from~~and ~~Annapolis~~into ~~National~~FNB Bank, ~~to BankAnnapolis.~~with ~~The~~FNB ~~Company~~Bank (as athe ~~bank~~surviving ~~holding~~entity. Our ~~company)~~Board of Directors and the ~~Bank~~Board ~~are~~of ~~subject~~Directors toof ~~governmental supervision~~FNB, ~~regulation,~~have approved the Merger and ~~control~~the Merger Agreement.

~~The Bank~~Consummation ~~currently~~of ~~operates~~the asMerger ais subject ~~full~~to ~~service~~certain ~~commercial~~conditions, ~~bank~~including, ~~from~~among ~~its headquarters in Annapolis~~others, ~~its~~approval ~~five~~by ~~other~~shareholders ~~branches~~of ~~located~~the ~~in Anne Arundel County~~Company, ~~Maryland~~of ~~and~~the ~~one~~Board ~~branch~~of ~~located~~Governors onof ~~Kent~~the ~~Island~~Federal inReserve ~~Queen~~System ~~Anne’s~~(the ~~County,~~“Federal ~~Maryland.~~Reserve”) ~~The~~and ~~Bank~~the ~~has built~~Comptroller ~~its~~of ~~reputation~~the onCurrency ~~exemplary~~(the ~~customer~~“OCC”). ~~service~~See “Pending ~~and~~Merger ~~outreach~~with toFNB” ~~the~~for ~~communities~~a ~~surrounding~~further ~~each~~description of the ~~Bank’s locations~~Merger. The ~~Bank~~information ispresented ~~committed~~in tothis ~~offering~~Annual ~~products~~Report ~~and services that focus~~ on ~~relationship~~Form 10-K ~~banking~~does ~~and~~not ~~provide~~give aneffect ~~alternative~~ to the ~~large multi-regional financial institutions that are so pervasive in the markets the Bank serves~~Merger.

~~The~~BankAnnapolis Bank also created a Private Business Banking Division to provide local businesses with an unprecedented level of service and attention, as well as easy access to an exclusive set of financial products and services and the professional guidance and support to take advantage of them.

The Bank ~~competes~~is ~~with~~a ~~numerous~~federally ~~other~~insured ~~financial~~community-oriented ~~intermediaries,~~bank ~~commercial~~and ~~banks,~~is ~~savings~~the ~~and~~only commercial ~~loan~~bank ~~associations,~~headquartered ~~credit~~in ~~unions~~Annapolis, ~~mortgage~~ ~~banking~~Maryland. ~~firms~~Effective November 1, ~~consumer~~2000 ~~finance~~the ~~companies,~~Bank ~~securities~~changed ~~brokerage~~its ~~firms,~~charter ~~insurance~~from ~~companies,~~a ~~money~~national ~~market~~charter ~~mutual~~to ~~funds~~a state charter and ~~other~~joined ~~financial~~the ~~institutions~~State ~~operating~~of inMaryland ~~Anne~~and ~~Arundel~~the ~~County~~Federal ~~and~~Reserve ~~elsewhere~~banking systems. ~~The~~Also effective November 1, 2000 the Bank ~~continually~~changed ~~evaluates~~its ~~new products,~~name ~~and~~from ~~implements~~Annapolis ~~such~~National ~~new~~Bank ~~products~~to BankAnnapolis. The Company (as ~~deemed~~a ~~appropriate~~bank byholding ~~management~~company) and the Bank are subject to governmental supervision, regulation, and control.

The Bank ~~conducts~~currently operates as a ~~general~~full service commercial ~~and~~bank ~~retail~~from ~~banking business~~its headquarters in Annapolis, its ~~market~~six ~~area~~other branches located in Anne Arundel County, Maryland ~~emphasizing~~and ~~the~~one ~~banking~~branch ~~needs~~located ofon ~~small~~Kent ~~businesses,~~Island ~~professional~~in ~~concerns~~Queen ~~and~~Anne’s ~~individuals~~County, Maryland. The Bank ~~attracts~~has ~~most~~built of its ~~customer~~reputation ~~deposits~~on ~~from~~exemplary ~~Anne~~customer ~~Arundel~~service ~~County, Maryland,~~ and outreach to athe ~~lesser~~communities ~~extent,~~surrounding ~~Queen~~each ~~Anne~~of the Bank’s ~~County,~~ ~~Maryland~~locations. The Bank’s ~~lending~~is committed ~~operations~~to ~~are~~offering ~~centered~~products inand ~~Anne~~services ~~Arundel~~that ~~County,~~focus ~~but~~on ~~extend~~relationship ~~throughout~~banking ~~Central~~and ~~Maryland.~~provide Onan ~~May 27,~~alternative ~~2011,~~to the ~~Bank~~large ~~closed~~multi-regional ~~its~~financial ~~downtown~~institutions ~~Annapolis~~that ~~branch,~~are ~~Market~~so ~~House~~pervasive ~~and~~in ~~transferred~~ the ~~branch’s deposits~~markets to the Bank’s ~~Bestgate branch~~serves.

The Bank’s ~~principal~~also ~~business~~created ~~consists~~a ofPrivate ~~originating~~Business ~~loans~~Banking ~~and~~Division ~~attracting~~to ~~deposits.~~provide ~~The Bank~~local ~~originates~~businesses ~~commercial~~with ~~loans,~~an ~~commercial~~unprecedented ~~real~~level ~~estate~~of ~~loans,~~service ~~construction~~and ~~loans~~attention, ~~one-~~as towell ~~four-family~~as easy ~~real~~access ~~estate~~to ~~loans,~~an ~~home~~exclusive ~~equity~~set ~~loans~~of ~~and~~financial ~~consumer~~products ~~loans.~~and ~~The~~services ~~Bank also invests in U.S. Treasury~~ and ~~U.S.~~the ~~Government~~professional ~~agency~~guidance ~~securities~~ and ~~other securities~~support ~~including~~to ~~mortgage~~take ~~backed~~advantage ~~securities~~of ~~issued or guaranteed by the federal government~~them.

The Bank ~~Services~~competes with numerous other financial intermediaries, commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in Anne Arundel County and elsewhere. The Bank continually evaluates new products, and implements such new products as deemed appropriate by management.

The Bank’s ~~Anne~~conducts ~~Arundel~~a ~~County~~general ~~service~~commercial ~~area~~and isretail abanking ~~highly~~business ~~concentrated~~in its market area, ~~highly~~emphasizing ~~branched~~the banking ~~market~~needs of small businesses, professional concerns and individuals. ~~Competition~~The inBank attracts most of its customer deposits from Anne Arundel County, ~~for~~Maryland, ~~loans~~and to ~~small~~ ~~businesses~~a ~~and~~lesser ~~professionals~~extent, ~~the~~Queen ~~Bank~~Anne’s ~~target market~~County, isMaryland. ~~intense~~The ~~and~~Bank’s ~~pricing,~~lending ~~service~~operations ~~and~~are ~~access~~centered toin ~~decision-makers~~Anne ~~are~~Arundel ~~important~~County, but extend throughout Central Maryland. ~~Deposit~~On ~~competition~~October 15, ~~among~~2012, ~~institutions~~the inBank ~~Anne~~opened ~~Arundel~~its ~~County~~Waugh ~~also~~Chapel isbranch ~~strong~~in Gambrills, Maryland.

The Bank’s principal isbusiness aconsists ~~full service commercial bank and offers a variety~~ of ~~products~~originating ~~and~~loans ~~services to both commercial~~ and ~~retail~~attracting ~~customers~~deposits. ~~Commercial~~The ~~services offered by the~~ Bank ~~include~~originates acommercial ~~variety~~loans, ~~of lending products including~~ commercial real estate ~~and~~loans, ~~commercial~~construction ~~business~~ loans, ~~cash~~one- ~~management~~to ~~services~~four-family ~~and~~real ~~letters~~estate ofloans, ~~credit.~~home ~~Commercial~~equity ~~business~~ loans ~~are typically made on a secured basis to corporations, partnerships~~ and ~~individual~~consumer ~~businesses~~loans. ~~On the deposit side commercial customers are offered cash management~~ The

1Bank also invests in U.S. Treasury and U.S. Government agency securities and other securities including mortgage backed securities issued or guaranteed by the federal government.

~~services~~1 including account analysis, remote deposit capture, merchant services and a wide array of deposit products. To a lesser extent, the Bank offers consumer loans to its retail customers, including mortgages, home equity loans and lines of credit and new and used car and boat loans. The Bank’s retail banking services also include a variety of deposit products including transaction accounts, a high yielding savings account, money market accounts, certificates of deposit and individual retirement accounts. The Bank also participates in the Certificate of Deposit Account Registry Service® known as CDARS® that allows the Bank to offer FDIC insured deposits of $50 million or more to its customers.

LendingTable Activitiesof Contents

~~The~~Pending ~~Bank’s~~Merger primary business is to make loans. Outstanding loan balances account for 65.9% of total assets at December 31, 2011. The Bank offers a wide selection of consumer loans to individuals primarily through its branch network. The Bank does a majority of its consumer lending on a secured basis with ~~the~~FNB highest percentage of loans secured by first and second liens on one- to four-family owner occupied residences. The Bank will originate and maintain servicing rights on some loans and broker fixed rate loans to other financial institutions. In addition to consumer mortgage loans the Bank offers a variety of home equity products including fixed rate amortizing term loans and revolving lines of credit. The Bank generally requires that the loan to value for such loans be below 80%. The Bank also offers new and used auto loans and to a lesser extent boat loans.

~~The~~On ~~Bank~~October 22, ~~provides~~2012, ~~numerous~~the ~~commercial~~Company ~~lending products~~ and ~~services~~F.N.B. toentered ~~businesses~~into ~~operating in~~ the ~~Bank’s~~Merger ~~primary~~Agreement, ~~market~~pursuant ~~area.~~to ~~These loans consist of lines of credit,~~ which ~~may~~the ~~require~~Company anwill ~~annual~~merge ~~repayment, adjustable-rate loans~~ with ~~terms~~and ofinto ~~five to seven years~~FNB, ~~and fixed-rate loans~~ with ~~terms~~FNB ofsurviving upthe ~~to five years~~merger. ~~Such~~As ~~loans~~a ~~are~~result ~~generally~~of ~~secured~~the ~~by receivables~~Merger, ~~inventories, equipment and~~ ~~other assets of~~ the ~~business.~~Company ~~The~~will ~~Bank~~cease ~~generally requires personal guarantees on its commercial loans. The Bank also offers unsecured commercial loans~~ to ~~businesses~~exist onas a ~~selective~~separate ~~basis.~~legal ~~These~~entity ~~types~~and ofits ~~loans~~business ~~are~~will ~~made~~be tocombined ~~existing~~with ~~customers~~that ~~and are~~ of a ~~short duration, generally one year or less~~FNB’s. ~~The~~As ~~Bank~~soon ~~also~~as ~~originates~~practicable ~~commercial~~after ~~loans~~the ~~which~~completion ~~are~~of ~~guaranteed~~the byMerger, the ~~Small Business Administration. The~~ Bank ~~has~~will ~~been~~merge awith ~~participant~~and ininto aFNB ~~variety~~Bank, ofwith ~~SBA~~FNB ~~loan~~Bank ~~programs.~~as ~~Refer to pages 19 to 23 for a more~~the ~~detailed~~surviving ~~discussion on the Bank’s lending activities~~entity.

~~Investment~~Under ~~Activities~~the terms of the Merger Agreement, shareholders of the Company will be entitled to receive, subject to possible adjustment, as provided in the Merger Agreement, 1.143 shares of FNB’s common stock for each share of the Company’s common stock they own and if, prior to the effective time of the Merger, the Company is able to collect in cash part or all of the amounts due on a particular loan in the amount of approximately $4.6 million, up to $0.36 in cash per share of the Company’s common stock they own. The Merger is intended to qualify for United States federal income tax purposes as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.

The ~~Bank’s~~Merger ~~second~~Agreement ~~largest~~contains ~~asset~~(a) customary representations isand ~~its~~warranties ~~investment~~of ~~portfolio~~the Company and FNB, ~~accounting~~including, ~~for~~among ~~24.7%~~others, ofwith ~~total~~respect ~~assets~~to atcorporate ~~December 31~~organization, ~~2011.~~capitalization, ~~The~~corporate ~~investment~~authority, ~~portfolio generally~~third ~~consists~~party ofand ~~U.S.~~governmental ~~Government~~consents and ~~Agency~~approvals, ~~notes~~financial statements, and ~~government~~compliance with ~~guaranteed~~applicable ~~mortgage~~laws, ~~backed~~(b) covenants ~~securities.~~of ~~Management~~the ~~invests~~Company ~~excess~~and ~~liquidity~~FNB ~~following~~to ~~specific~~conduct ~~policies~~their ~~and~~respective ~~procedures~~business ~~that~~in ~~limit~~the ordinary course until the ~~Bank’s~~Merger ~~exposure~~is completed; and (c) covenants of the Company and FNB not to ~~any~~take ~~one~~certain ~~type~~actions ~~of investment.~~during such period. The ~~Bank’s~~Company ~~policy~~has ~~generally~~also ~~requires~~agreed ~~that~~not ~~each~~to ~~new~~(i) solicit ~~investment~~proposals berelating ~~rated~~to ~~“A”~~alternative business combination transactions or ~~better.~~(ii) subject ~~All~~to ~~investments~~certain ~~are~~exceptions, ~~made~~enter ~~with~~into ~~the~~discussions ~~intent~~concerning, toor ~~preserve~~provide ~~and~~confidential ~~protect~~information ~~the~~in ~~capital~~connection with, ofany ~~the~~proposals ~~Bank~~for alternative business combination transactions.

~~Investment~~FNB ~~targets~~and ~~such~~the asCompany ~~total~~expect ~~investment~~to ~~securities,~~complete the ~~mix~~transaction ofin ~~investment~~April ~~products~~2013. Completion ~~and the average life~~ of the ~~investment~~Merger ~~are~~depends ~~derived~~on ~~from~~ the ~~Bank’s~~ ~~strategic~~satisfaction ~~plan~~of ~~and~~customary ~~expected~~closing ~~liquidity~~conditions, ~~requirements.~~including ~~Strategies~~approval toof ~~achieve~~the ~~these~~shareholders ~~targets~~of ~~are~~ the ~~responsibility~~Company, of the ~~Bank’s~~Federal ~~Asset~~Reserve and ~~Liability~~of ~~Committee. For a further discussion on~~ the ~~Bank’s investment activities refer to pages 18 and 19~~OCC.

~~Employees~~The Merger Agreement provides that upon completion of the Merger, each outstanding option or similar right to acquire the Company’s common stock granted under any Company’s equity plan, except for options under the Annapolis Bancorp, Inc. 2007 Employee Stock Purchase Plan (which was terminated effective October 31, 2012), will convert automatically into an option to purchase a number of shares of FNB common stock equal to the numbers of shares of the Company’s common stock underlying such Company’s stock option or similar right multiplied by the exchange ratio, with an exercise price that equals the exercise price of such Company’s stock option or similar right immediately prior to the Merger divided by the exchange ratio and otherwise on the same terms and conditions as were in effect immediately prior to the completion of the Merger. The outstanding warrant to purchase Company’s common stock, which was issued on January 30, 2009 to the U.S. Treasury, or the Company’s TARP Warrant, will be converted into a warrant to purchase FNB common stock, subject to appropriate adjustments to reflect the exchange ratio. FNB may elect to have the Company’s TARP Warrant purchased or redeemed, but has no obligation to do so.

AtThe ~~December 31,~~parties ~~2011~~can ~~the~~agree ~~Bank~~to ~~employed~~terminate 89the ~~full-time~~Merger ~~and~~Agreement 11at any ~~part-~~time ~~individuals.~~prior ~~Six~~to ofcompletion ~~these individuals are executive officers~~ of the ~~Bank.~~Merger, ~~None of~~and ~~the~~either ~~employees are employees of~~ the Company. ~~The~~or ~~Bank~~FNB ~~provides~~can ~~both~~terminate ~~full-~~the ~~and~~Merger ~~part-time~~Agreement ~~individuals with a comprehensive benefit program that includes health and dental insurance~~if, ~~Bank~~among ~~paid~~other ~~life and short-and long-term disability insurance~~reasons, ~~access to~~any ~~vision~~of ~~and~~the ~~catastrophic~~following ~~health~~occurs: ~~insurance and a 401(k) plan.~~

~~Regulation~~• The approval of a governmental entity, which is required for completion of the Merger, is denied by final and ~~Supervision~~non-appealable action;

~~General~~• The Merger has not been completed by June 30, 2013;

• The ~~supervision~~other ~~and regulation~~party ofcommits ~~the~~a ~~Company~~breach ~~and~~of the ~~Bank~~Merger byAgreement ~~the~~which ~~banking~~would ~~agencies~~cause ~~is intended primarily for~~ the ~~protection~~failure of ~~depositors,~~ the ~~Deposit~~closing ~~Insurance~~conditions ~~Fund~~set offorth ~~the~~in ~~FDIC, and~~ the ~~banking~~Merger ~~system~~Agreement asand asuch ~~whole,~~breach ~~and~~is not ~~for the protection of shareholders~~ or ~~creditors.~~ ~~The~~cannot ~~banking~~be ~~agencies~~cured ~~have~~within ~~broad~~the ~~enforcement~~timeframes ~~power~~given ~~over~~in ~~bank holding companies and banks, including~~ the ~~power~~Merger ~~to impose substantial fines and other penalties for violations of laws and regulations.~~ Agreement;

• The ~~following~~requisite ~~description~~stockholder ~~summarizes~~vote ~~some of the laws~~ to ~~which~~adopt ~~the Company~~ and ~~the~~approve ~~Bank are subject. References in~~ the ~~following~~Merger ~~description~~Agreement ~~to applicable statutes~~ and ~~regulations~~the ~~are~~Merger ~~brief~~is ~~summaries of these statutes and regulations, do~~ not ~~purport to be complete, and are qualified in their entirety by reference to such statutes and regulations.~~ obtained;

2• A significant reduction in the market value of FNB common stock prior to the closing;

~~The~~Subject to certain conditions, the Company may also terminate the Merger Agreement in order to enter into an agreement with respect to an unsolicited acquisition proposal that the company’s board of directors concluded is a superior proposal, provided that the Company pays the Break-up Fee, as defined below, to FNB.

~~The~~2 Company, by virtue of its control of the Bank, is a registered bank holding company as defined under the Bank Holding Company Act of 1956 (“the Act”). As a bank holding company, the Company is required to file certain reports with, and otherwise comply with the rules and regulations of, the Federal Reserve Board (“FRB”) under the Act.

Dodd-FrankTable Wall Street Reform and Consumer Protection Act. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act is intended to effect a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act created the Financial Stability Oversight Council to identify threats to the financial stability of the United States; promote market discipline; and respond to emerging risks to the stability of the United States financial system. The Dodd-Frank Act additionally created a new independent federal regulator to administer federal consumer protection laws, the Consumer Financial Protection Bureau. The Dodd-Frank Act is expected to have a significant impact on the Company’s business operations as its provisions take effect. Contents

~~The~~If ~~Company~~the ~~may~~Merger beis ~~affected~~not byconsummated under certain circumstances, the ~~following~~Company ~~provisions~~has agreed to pay FNB a termination fee of $2.5 million (the ~~Dodd~~“Break-~~Frank~~up ~~Act:~~Fee”) and up to $500,000 of FNB’s expenses incurred in connection with the Merger.

•This ~~Holding~~description ~~Company~~of ~~Capital Requirements – The Dodd-Frank Act requires~~ the ~~Federal~~Merger ~~Reserve~~Agreement todoes ~~apply~~not ~~consolidated~~purport ~~capital requirements~~ to ~~depository holding companies that are no less stringent than those that apply to depository institutions. Under these standards, trust preferred securities will~~ be ~~excluded~~complete ~~from~~and ~~Tier~~it 1is ~~capital~~qualified ~~unless~~in ~~such~~its ~~securities~~entirety ~~were issued prior to May 19, 2010~~ by areference ~~bank holding company with less than $15 billion in assets. Effective July 21, 2011, the Dodd-Frank Act amended the BHC Act,~~ to ~~provide specific authorization for~~ the ~~Federal~~Merger ~~Reserve to issue orders and regulations relating to the capital requirements of depository holding companies. In establishing these rules~~Agreement, ~~the~~which ~~Federal~~is ~~Reserve~~filed ~~must~~as ~~seek~~Exhibit to make the capital requirements countercyclical, so that the amount of capital required to be maintained by the company increases in times of economic expansion and decreases in times of economic contraction, consistent with the safety and soundness of the company10.9 ~~The~~hereto ~~Company’s trust preferred securities were issued prior to May 19, 2010~~ and ~~will~~incorporated ~~not~~by reference ~~need to be excluded from Tier 1 capital~~herein.

•In ~~Deposit~~connection ~~Insurance~~with ~~– The Dodd-Frank Act makes permanent~~ the ~~$250~~Merger,~~000~~ ~~deposit~~FNB ~~insurance~~has ~~limit~~filed ~~for~~a ~~insured~~registration ~~deposits~~statement ~~and~~on ~~provided~~Form ~~unlimited federal deposit insurance until January 1, 2013, for noninterest~~S-~~bearing~~4 ~~demand~~with ~~transaction accounts at all depository institutions. Amendments to~~ the ~~Federal~~SEC ~~Deposit~~that ~~Insurance~~includes ~~Act~~a ~~also~~proxy statement/prospectus ~~revise~~and ~~the~~other ~~assessment~~documents ~~base~~relevant ~~against which an insured depository institution’s deposit insurance premium paid~~ to the ~~Deposit Insurance Fund (“DIF”) will be calculated~~Merger. ~~Under~~On ~~the amendments~~February 25, ~~the assessment base will no longer be the institution’s deposit base~~2013, ~~but~~FNB ~~rather~~filed ~~its~~Amendment ~~average~~No. 1 ~~consolidated~~to ~~total assets less its average tangible equity during~~ the ~~assessment period~~Form S-4. ~~Additionally,~~The ~~the~~registration ~~Dodd-Frank~~statement ~~Act~~was ~~makes~~declared ~~changes~~effective toby the ~~minimum~~SEC ~~designated~~on ~~reserve ratio of the DIF~~February 27, ~~increasing the minimum from 1~~2013.15 ~~percent~~On February 27, to2013, ~~1.35 percent of~~ the ~~estimated~~Company ~~amount~~filed ~~total~~a ~~insured~~definitive ~~deposits~~proxy ~~and~~statement ~~eliminating~~with the ~~requirement that the FDIC pays dividends to depository institutions when the reserve ratio exceeds certain threshold~~SEC. ~~[In~~A ~~December~~definitive ~~2010,~~proxy ~~the~~statement ~~FDIC~~was ~~increased~~first ~~the~~mailed ~~reserve ratio~~ to ~~2.0 percent]. The Dodd-Frank Act also eliminates~~ the ~~federal~~shareholders ~~statutory~~of ~~prohibitions against~~ the ~~payment~~Company ~~of interest~~ on ~~business~~or ~~transaction~~about ~~and~~March 1, ~~other accounts~~2013.

•Bank ~~Corporate~~Services Governance – As of January 21, 2011, all domestic publicly traded companies are required to give stockholders a non-binding “Say on Pay” vote to approve executive compensation disclosed in the proxy statement on at least a triennial basis. As of April 25, 2011, domestic public companies must include a non-binding “Say on Golden Parachutes” vote in a proxy statement seeking shareholder approval for a merger or similar corporate transaction, together with disclosure regarding any compensation arrangement that the issuer has with the named executive officers or those of the other party in the corporate transaction. and acquisitions unless previously voted on by shareholders. It will also mandate the enhancement of independence requirements of the compensation committee and adopt incentive based clawback policies for executive officers. The legislation also authorized the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. As a result, the SEC adopted Rule 14a-11, which was vacated by the United States Court of Appeals for the District of Columbia Circle and therefore is not effective. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

•The ~~Prohibition~~Bank’s Anne ~~Against~~Arundel ~~Charter~~County ~~Conversions~~service ofarea ~~Troubled~~is ~~Institutions~~a –highly ~~Effective July 21~~concentrated, ~~2011,~~highly ~~the~~branched ~~Dodd-Frank~~banking ~~Act~~market. ~~prohibits~~Competition ain ~~depository~~Anne ~~institution~~Arundel ~~from~~County ~~converting~~for ~~from~~loans ~~a state~~ to ~~federal~~small ~~charter~~businesses ~~or vice versa while it is the subject of a cease~~ and ~~desist~~professionals, ~~order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless~~ the ~~appropriate~~Bank’s ~~federal~~target ~~banking~~market, ~~agency~~is ~~gives~~intense ~~notice~~and ofpricing, ~~the~~service ~~conversion to the federal or state authority that issued the enforcement action~~ and ~~that agency does not object within 30 days. The notice must include a plan~~ access to ~~address~~decision-makers ~~the~~are ~~significant supervisory matter~~important. ~~The~~Deposit ~~converting~~competition ~~institution~~among ~~must~~institutions also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in anAnne ~~enforcement~~Arundel ~~action~~County ~~and~~also ~~provide~~is ~~access to all supervisory and investigative information relating hereto~~strong.

3The Bank is a full service commercial bank and offers a variety of products and services to both commercial and retail customers. Commercial services offered by the Bank include a variety of lending products including commercial real estate and commercial business loans, cash management services and letters of credit. Commercial business loans are typically made on a secured basis to corporations, partnerships and individual businesses. On the deposit side commercial customers are offered cash management services including account analysis, remote deposit capture, merchant services and a wide array of deposit products. To a lesser extent, the Bank offers consumer loans to its retail customers, including mortgages, home equity loans and lines of credit and new and used car and boat loans. The Bank’s retail banking services also include a variety of deposit products including transaction accounts, a high yielding savings account, money market accounts, certificates of deposit and individual retirement accounts. The Bank also participates in the Certificate of Deposit Account Registry Service® known as CDARS® that allows the Bank to offer FDIC insured deposits of $50 million or more to its customers.

•Lending ~~Interstate~~Activities Branching – The Dodd-Frank Act authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely. The Dodd-Frank Act restricts the preemption of state law by federal law and disallows subsidiaries and affiliates of federally regulated banks from availing themselves of such preemptions.

•The ~~Limits~~Bank’s onprimary ~~Derivatives~~business –is ~~Effective~~to 18make ~~months~~loans. ~~after~~Outstanding loan ~~the~~balances ~~transfer~~account ~~date~~for 63.0% of ~~the~~total ~~Dodd-Frank~~assets ~~Act~~at December 31, in2012. ~~the~~The ~~first~~Bank ~~half~~offers a wide selection of ~~2013,~~consumer ~~the~~loans ~~Dodd-Frank~~to ~~Act~~individuals ~~prohibits~~primarily ~~state-chartered~~through ~~banks~~its ~~from~~branch ~~engaging~~network. inThe ~~derivatives~~Bank ~~transactions~~does ~~unless~~a ~~the~~majority of its consumer lending ~~limit~~on ~~law~~a ofsecured basis with the ~~state~~highest inpercentage ~~which~~of ~~the~~loans ~~bank~~secured isby ~~chartered~~first ~~takes~~and ~~into~~second ~~considerations~~liens ~~credit~~on ~~exposure~~one- to ~~derivative~~four-family ~~transactions~~owner occupied residences. ~~For~~The ~~this~~Bank ~~purpose,~~will ~~derivative~~originate ~~transactions~~and ~~includes~~maintain ~~any~~servicing ~~contract,~~rights ~~agreement,~~on ~~swap,~~some ~~warrant~~loans ~~note~~and orbroker ~~option~~fixed ~~that~~rate isloans ~~based~~to inother ~~whole~~financial orinstitutions. In inaddition ~~part~~to onconsumer mortgage loans the ~~value~~Bank offers a variety of, ~~any~~home ~~interest~~equity ~~in,~~products orincluding ~~any~~fixed ~~quantitative~~rate ~~measure~~amortizing ofterm ~~occurrence~~loans and revolving lines of ~~any~~credit. ~~event~~The ~~relating~~Bank generally requires that the loan to, ~~one~~value orfor ~~more~~such ~~commodities~~loans ~~securities,~~be ~~currencies,~~below ~~interest~~80%. orThe Bank ~~other~~also ~~rates~~offers ~~indices~~new orand ~~other~~used ~~assets~~auto loans and to a lesser extent boat loans.

•The ~~Transactions~~Bank ~~with~~provides ~~Affiliates~~numerous orcommercial ~~Insiders~~lending –products ~~Effective~~and services ~~July~~to ~~21,~~businesses ~~2011,~~operating ~~the~~in ~~Dodd-Frank Act expands~~ the ~~definition~~Bank’s ofprimary ~~affiliate~~market ~~for~~area. ~~purposes~~These ofloans ~~quantitative~~consist ~~and qualitative limitations~~ of ~~Section~~lines ~~23A~~ of ~~the~~credit, ~~Federal~~which ~~Reserve~~may ~~Act~~require toan ~~include~~annual ~~mutual~~repayment, ~~funds advised by a depository institution and its affiliates. The Dodd~~adjustable-~~Frank~~rate ~~Act~~loans ~~will~~with ~~apply~~terms ~~Section 23A and Section 22(h)~~ of ~~the~~five ~~Federal Reserve Act (governing transactions with insiders)~~ to ~~derivative~~seven ~~transactions~~years, ~~repurchase agreements~~ and ~~securities~~fixed-rate ~~lending~~loans ~~and~~with ~~borrowing~~terms ~~transaction~~of ~~that~~up ~~create~~to five ~~credit~~years. ~~exposure~~Such toloans anare ~~affiliate~~generally orsecured anby ~~insider.~~receivables, ~~Any~~inventories, ~~such~~equipment ~~transactions~~and ~~with~~other ~~affiliates~~assets ~~must~~of bethe ~~fully secured~~business. The ~~current~~Bank ~~exemption~~generally ~~from~~requires ~~Section~~personal ~~23A~~guarantees ~~for~~on ~~transactions~~its ~~with~~commercial ~~financial subsidiaries will be eliminated~~loans. The ~~Dodd-Frank~~Bank ~~Act~~also ~~will~~offers ~~additionally~~unsecured ~~prohibit~~commercial anloans ~~insured~~to businesses ~~depository~~on ~~institution~~a ~~from~~selective ~~purchasing~~basis. anThese ~~asset~~types ~~from,~~of orloans ~~selling~~are anmade ~~asset~~ to, anexisting ~~executive~~customers ~~officer,~~and ~~director~~are ~~or principal shareholder~~ of ~~the~~a ~~institution~~short duration, orgenerally ~~any~~one ~~related~~year ~~interest~~or ofless. ~~that~~The ~~person~~Bank ~~unless~~also ~~the~~originates ~~transaction~~commercial isloans onwhich ~~market~~are ~~terms.~~guaranteed Ifby the ~~transaction~~Small ~~represents~~Business ~~more~~Administration. ~~than~~The Bank ~~10%~~has ofbeen ~~the~~a ~~capital~~participant ~~stock~~in ~~and~~a ~~surplus~~variety of ~~the~~SBA ~~institution,~~loan ~~the~~programs. ~~transaction~~Refer ~~must~~to bepages ~~approved~~21 into ~~advance~~24 byfor a ~~majority~~more ofdetailed discussion on the ~~disinterested~~Bank’s ~~directors~~lending activities.

•Investment ~~Debit~~Activities Card Interchange Fees – Effective July 21, 2011, the Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. Within nine months of enactment, the Federal Reserve Board is required to establish standards for reasonable and proportional fees which may take into account the costs of preventing fraud. The restrictions on interchange fees, however, do not apply to banks, that, together with their affiliates, have assets of less than $10 billion.

~~• Consumer Financial Protection Bureau –~~ The ~~Dodd-Frank~~Bank’s ~~Act~~second ~~created~~largest ~~the~~asset ~~Consumer~~is ~~Financial~~its ~~Protection Bureau (“CFPB”)~~investment portfolio, inaccounting ~~order~~for to24.4% ~~regulate~~of ~~consumer~~total ~~financial~~assets ~~products~~at ~~and services~~December 31, ~~as well as providers of such products and services~~2012. The ~~CFPB~~investment ~~authority~~portfolio togenerally ~~enforce~~consists ~~existing consumer protection laws was transferred to it on July 21, 2011. In January~~ of ~~2012, President Obama appointed Rich Cordray to be the first Director of the CFPB~~U.S. ~~The~~Government ~~CFPB supervises~~ and ~~examines,~~Agency ~~with respect to Federal consumer financial laws~~notes, ~~banks, savings associations~~ and ~~credit~~government ~~unions~~guaranteed ~~with~~mortgage ~~assets~~backed ~~in excess of $10 billion~~securities. ~~Smaller~~Management ~~institutions~~invests ~~will~~excess beliquidity following ~~subject~~specific topolicies ~~rules promulgated by the CFPB but will continue to be examined~~ and ~~supervised~~procedures bythat ~~federal~~limit ~~banking~~the ~~regulators~~Bank’s ~~for~~exposure ~~consumer compliance purposes. The CFPB has authority~~ to ~~prevent~~any ~~unfair,~~one ~~deceptive~~type ~~or abusive practices in connection with the offering~~ of ~~consumer financial products~~investment. The ~~Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including determination of the borrower~~Bank’s ~~ability~~policy togenerally ~~repay.~~requires Inthat ~~addition,~~each ~~the~~new ~~Dodd-Frank~~investment ~~Act~~be ~~will~~rated ~~allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a~~ “~~qualified mortgage~~A” asor ~~defined by the CFPB~~better. ~~The~~All ~~Dodd-Frank~~investments ~~Act permits states to adopt consumer protection laws and standards that~~ are ~~more~~made ~~stringent~~with ~~than those adopted at~~ the intent ~~federal~~to ~~level~~preserve and, inprotect ~~certain~~the ~~circumstances,~~capital ~~permits~~of ~~state attorneys general to enforce compliance with both~~ the ~~state and federal laws and regulations~~Bank.

•Investment ~~Financial~~targets ~~Stability~~such ~~Oversight~~as ~~Council~~total –investment ~~The~~securities, ~~Dodd-Frank~~the ~~Act~~mix ~~created~~of investment products and the ~~Financial~~average ~~Oversight~~life ~~Stability~~of ~~Council,~~the ~~which,~~investment ~~among~~are ~~other~~derived ~~things,~~from ~~will~~the ~~recommend~~Bank’s tostrategic ~~the~~plan ~~Federal~~and ~~Reserve~~expected ~~Board~~liquidity ~~increasingly~~requirements. ~~strict~~Strategies ~~rules~~to ~~for~~achieve ~~capital,~~these ~~leverage,~~targets ~~liquidity,~~are ~~development~~the responsibility of ~~resolution~~the ~~plans,~~Bank’s ~~mandatory~~Asset ~~stress~~and ~~tests,~~Liability ~~risk~~Committee. ~~management~~For ~~and~~a further ~~other~~discussion ~~requirements~~on asthe ~~companies~~Bank’s ~~grow~~investment inactivities ~~size~~refer ~~and~~to ~~complexity~~page 21.

•3 Mortgage Reform – The Dodd-Frank Act provides mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions.

•Table Wellof Capitalized and Well Managed – Effective July 21, 2011the Dodd-Frank Act amended the BHC Act to require that a depository holding company that is a financial holding company, such as the Company, be well capitalized and well managed.Contents

•Employees The Electronic Fund Transfer Act – The Dodd-Frank Act amends the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

4At December 31, 2012, the Bank employed 87 full-time and 12 part-time individuals. Five of these individuals are executive officers of the Bank. None of the employees are employees of the Company. The Bank provides both full- and part-time individuals with a comprehensive benefit program that includes health and dental insurance, Bank paid life and short-and long-term disability insurance, access to vision and catastrophic health insurance and a 401(k) plan.

~~The~~Regulation ~~Bank~~and Supervision

~~The~~General Bank is regulated by the State of Maryland Department of Labor, Licensing and Regulation. The Bank is subject to extensive regulation, examination and supervision by the State of Maryland as its primary regulator, the Federal Reserve Bank of Richmond as its secondary regulator and the FDIC, as the deposit insurer. The Bank must file reports with the Federal Reserve and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of other institutions. The state and the Federal Reserve conduct periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. Many aspects of the Bank’s operations are regulated by federal law including allowable activities, reserves against deposits, branching, mergers and investments. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the State of Maryland, the Federal Reserve, the FDIC or Congress, could have a material adverse impact on the Company or the Bank and their operations.

~~Insurance~~The supervision and regulation of ~~Deposit~~the ~~Accounts.~~Company ~~The~~and the Bank’s ~~deposit~~by ~~accounts~~the ~~are~~banking agencies ~~insured~~is upintended toprimarily ~~applicable~~for ~~limits~~the byprotection ~~the~~of ~~FDIC’s~~depositors, the Deposit Insurance Fund ~~(“DIF”)~~ of the FDIC, and ~~are~~the ~~subject~~banking tosystem ~~deposit~~as ~~insurance~~a ~~assessments~~whole, toand ~~maintain~~not for the ~~DIF.~~protection ~~Under~~of ~~the~~shareholders ~~Dodd-Frank~~or ~~Act,~~creditors. ~~the~~The ~~maximum~~banking ~~deposit~~agencies ~~insurance~~have ~~amount~~broad isenforcement ~~permanently~~power over ~~increased~~bank ~~from~~holding ~~$100,000~~companies toand ~~$250~~banks,~~000~~ ~~and~~including ~~unlimited~~the ~~deposit~~power ~~insurance~~to ~~has~~impose ~~been extended~~substantial tofines ~~non-interest~~and ~~bearing~~other ~~transaction~~penalties ~~accounts~~for ~~until~~violations ~~December 31,~~of ~~2012~~laws and regulations.

The ~~Dodd-Frank~~following ~~Act~~description ~~also~~summarizes ~~sets~~some aof ~~new~~the ~~minimum~~laws ~~DIF reserve ratio at 1.35%. The FDIC is required~~ to ~~attain~~which ~~this ratio by September 30, 2020. In addition,~~ the ~~Dodd-Frank~~Company ~~Act~~and ~~will have a significant impact on~~ the ~~calculation~~Bank ofare ~~deposit insurance premiums going forward~~subject. OnReferences ~~February 7,~~in ~~2011~~ the ~~FDIC Board~~following ~~approved~~description ~~a final rule that changes the assessment base for insurance premiums from domestic deposits~~ to ~~the~~applicable ~~institution’s~~statutes ~~average~~and ~~consolidated~~regulations ~~total~~are ~~assets~~brief ~~during~~summaries ~~the assessment period minus average tangible equity. The rule defines~~of ~~tangible~~these ~~equity~~statutes asand ~~Tier~~regulations, 1do ~~capital.~~not ~~The~~purport ~~rule~~to ~~requires~~be ~~banks~~complete, ~~under~~and $1are ~~billion~~qualified in ~~assets~~their toentirety ~~report~~by ~~average~~reference ~~weekly balances during the calendar quarter unless they elect~~ to ~~report~~such ~~daily~~statutes ~~averages. The new rate schedule~~ and ~~other revisions to the assessment rates became effective April 1, 2011~~regulations.

OnThe ~~November 12,~~Company 2009, the FDIC adopted a final rule amending the assessment regulations to require insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk-based assessment for the third quarter of 2009. On December 30, 2009 the Bank prepaid $2.2 million in FDIC insurance for 2010, 2011 and 2012 estimated assessments. As of December 31, 2011 the Bank had $1.2 million prepaid in FDIC insurance for the 2012 estimated assessments.

~~Emergency~~The ~~Economic~~Company, ~~Stabilization~~by ~~Act~~virtue of ~~2008.~~its Oncontrol ~~October 3,~~of ~~2008,~~ the ~~President~~Bank, ~~signed~~is ~~into~~a ~~law~~registered bank ~~the~~holding ~~Emergency~~company ~~Economic~~as ~~Stabilization~~defined ~~Act~~under ~~of 2008 (~~the ~~“EESA”),~~Bank ~~which,~~Holding ~~among~~Company ~~other~~Act ~~measures, authorized the Secretary~~ of ~~the~~1956 ~~U. S. Treasury~~ (“~~Treasury”) to establish~~ the ~~Trouble Asset Relief Program (the “TARP~~Act”). ~~Pursuant~~ toAs ~~TARP,~~a ~~the~~bank ~~Treasury~~holding ~~has~~company, the ~~authority~~Company ~~to,~~is ~~among~~required ~~other things, purchase up~~ to ~~$700~~file ~~billion~~certain ofreports ~~mortgages~~with, ~~mortgage-backed securities~~ and ~~certain~~otherwise ~~other~~comply ~~financial~~with ~~instruments from financial institutions for~~ the ~~purpose~~rules ~~of stabilizing~~ and ~~providing~~ ~~liquidity~~regulations ~~to the U.S. financial markets. In addition~~of, ~~under TARP,~~ the ~~Treasury~~Federal ~~created the Capital Purchase Program (the “CPP”), pursuant to which it provides access to capital that will serve as Tier 1 capital to financial~~Reserve ~~institutions~~Board ~~through a standardized program to acquire preferred stock~~ (~~accompanied by warrants) from eligible financial institutions. On January 30, 2009, the Company sold 8,152 shares of the Company’s Fixed Rate Cumulative Preferred Stock, Series A (the~~ “~~Series A Preferred Stock~~FRB”), ~~having a liquidation amount per share equal to $1,000 and a warrant to purchase 299,706 shares of the Company’s common stock, at an exercise price of $4.08 per share, to the Treasury~~ under the ~~CPP for a total purchase price of $8,152,000~~Act.

~~Comprehensive~~Dodd-Frank ~~Financial~~Wall ~~Stability~~Street ~~Plan~~Reform ofand ~~2009~~Consumer Protection Act. On ~~February~~July 1021, ~~2009~~2010, the ~~Secretary~~Dodd-Frank ofWall ~~the~~Street ~~Treasury~~Reform ~~announced~~and aConsumer ~~new~~Protection ~~comprehensive~~Act ~~financial stability plan~~ (the “~~Financial~~Dodd-Frank ~~Stability Plan~~Act”), ~~which~~was ~~builds~~signed ~~upon~~into ~~existing~~law ~~programs~~with ~~and~~the ~~earmarks~~intent ~~the~~to ~~second~~effect ~~$350~~a ~~billion~~fundamental restructuring of ~~unused~~federal ~~funds~~banking ~~originally~~regulation. ~~authorized~~Among ~~under~~other things, the ~~EESA.~~ ~~The~~Dodd-Frank ~~major~~Act ~~elements~~created of the Financial Stability ~~Plan~~Oversight ~~include:~~Council ~~(i) a~~to ~~capital~~identify ~~assistance~~threats ~~program~~to ~~that~~the ~~will~~financial ~~invest~~stability ~~in convertible preferred stock~~ of ~~certain~~the ~~qualifying~~United ~~institutions,~~States; ~~(ii) a~~promote ~~consumer~~market discipline; and ~~business~~respond ~~lending~~to ~~initiative~~emerging risks to ~~fund new~~the ~~consumer~~stability ~~loans,~~of ~~small~~the ~~business~~United ~~loans~~States ~~and~~financial ~~commercial~~system. ~~mortgage~~The ~~asset~~Dodd-~~backed~~Frank ~~securities~~Act additionally ~~issuances,~~created ~~(iii)~~ a new ~~public-private~~independent ~~investment~~federal ~~fund~~regulator ~~that will leverage public and private capital with public financing~~ to ~~purchase~~administer ~~$500~~federal ~~billion~~consumer toprotection ~~$1 trillion of legacy “toxic assets” from financial institutions~~laws, ~~(iv) assistance~~the ~~for~~Consumer ~~homeowners~~Financial toProtection ~~reduce~~Bureau ~~mortgage payments and interest rates and~~ (v“CFPB”) ~~establishment of loan modification guidelines for government and private programs~~. InThe ~~addition,~~Dodd-Frank ~~all~~Act ~~banking~~is ~~institutions~~expected ~~with assets over $100 billion will be required~~ to ~~undergo a comprehensive “stress test” to determine if they~~ have ~~sufficient capital to continue lending and to absorb losses that could result from~~ a ~~more~~significant ~~severe~~impact ~~decline~~on in the economy than projected. Institutions receiving assistance under the Financial Stability Plan going forward will be subject to higher transparency and accountability standards, including restrictions on dividends,Company’s ~~acquisitions,~~business ~~executive~~operations ~~compensation~~as ~~and~~its ~~additional~~provisions ~~disclosure~~take ~~requirements~~effect.

5The Company may be affected by the following provisions of the Dodd-Frank Act:

~~American~~• ~~Recovery~~Holding ~~and~~Company ~~Reinvestment~~Capital Requirements – The Dodd-Frank Act ofrequires ~~2009.~~the OnFederal ~~February 17,~~Reserve ~~2009,~~to ~~President~~apply ~~Obama~~consolidated ~~signed into~~capital ~~law~~requirements ~~the~~to ~~American~~depository ~~Recovery~~holding ~~and~~companies ~~Reinvestment~~that ~~Act~~are ofno ~~2009~~less ~~(the~~stringent ~~“ARRA”),~~than ~~which~~those isthat ~~intended,~~apply ~~among~~to ~~other~~depository ~~things~~institutions. Under these standards, totrust ~~provide~~preferred asecurities ~~stimulus~~will tobe ~~the~~excluded ~~U.S.~~from ~~economy~~Tier in1 ~~the~~capital ~~wake~~unless ofsuch ~~the~~securities ~~economic~~were ~~downturn~~issued ~~brought~~prior ~~about~~to May 19, 2010 by ~~the~~a ~~subprime~~bank ~~mortgage~~holding ~~crisis and~~company ~~the~~with ~~resulting~~less ~~dislocations~~than in$15 ~~the~~billion ~~financial~~in ~~markets~~assets. ~~ARRA~~Effective ~~also~~July ~~includes~~21, ~~numerous~~2011, ~~non~~the Dodd-~~economic~~Frank ~~recovery~~Act ~~related~~amended ~~items,~~the ~~including~~BHC aAct, ~~limitation~~to onprovide ~~executive~~specific ~~compensation~~authorization offor ~~certain~~the ofFederal ~~the~~Reserve ~~most~~to ~~highly-compensated~~issue ~~employees~~orders and ~~executive~~regulations ~~officers~~relating ~~of financial~~to ~~institutions,~~the ~~such~~capital asrequirements ~~the~~of ~~Company,~~depository ~~that~~holding ~~participated~~companies. inIn establishing these rules, the ~~TARP~~Federal ~~CPP.~~Reserve ~~Compliance~~must ~~requirements~~seek ~~under~~to ~~ARRA~~make ~~for~~the ~~TARP~~capital ~~recipients~~requirements countercyclical, ~~which~~so ~~will~~that bethe ~~further~~amount ~~described~~of incapital ~~rules~~required to be ~~adopted~~maintained by the ~~Securities~~company ~~and~~increases ~~Exchange~~in ~~Commission~~times of economic expansion and ~~standards~~decreases ~~to be~~in ~~established~~times byof ~~the~~economic ~~Treasury~~contraction, ~~include~~consistent ~~restrictions~~with onthe ~~executive~~safety ~~compensation~~ and ~~corporate~~soundness ~~governance~~of ~~requirements~~the company. The Company’s trust preferred securities were issued prior to May 19, 2010 and will not need to be excluded from Tier 1 capital.

~~The~~• ~~interim~~Deposit ~~final~~Insurance ~~rule (Interim~~– ~~Final~~The ~~Rule)~~Dodd-Frank ofAct made permanent the ~~Emergency~~$250,000 ~~Economic~~deposit ~~Stabilization~~insurance ~~Act~~limit offor ~~2008~~insured ~~(EESA)~~deposits and provided unlimited federal deposit insurance until January 1, as2013, ~~amended~~for bynoninterest-bearing ~~the~~demand ~~American~~transaction ~~Recovery~~accounts ~~and~~at ~~Reinvestment~~all ~~Act~~depository institutions. As of ~~2009~~January ~~(ARRA)~~1, ~~provides~~2013, ~~guidance~~noninterest-bearing ondemand transaction accounts are insured up to the ~~executive~~standard ~~compensation~~maximum ~~and~~deposit ~~corporate~~insurance ~~governance~~coverage ~~provisions~~amount of ~~EESA that~~$250,000 ~~apply~~per depositor under the FDIC’s general deposit insurance rules. Amendments to ~~entities~~the ~~that~~Federal ~~receive~~Deposit ~~financial~~Insurance ~~assistance~~Act ~~under~~also revise the ~~Troubled~~assessment ~~Asset~~base ~~Relief~~against ~~Program~~which an insured depository institution’s deposit insurance premium paid to the Deposit Insurance Fund (~~TARP~~“DIF”) will be calculated. ~~Section 111~~Under ofthe ~~EESA~~amendments, ~~requires~~the ~~entities~~assessment ~~receiving~~base ~~financial~~is ~~assistance~~no ~~(TARP~~longer ~~recipients)~~be ~~from~~the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the ~~Department~~assessment period. Additionally, the Dodd-Frank Act made changes to the minimum designated reserve ratio of the ~~Treasury~~DIF, ~~(Treasury)~~increasing the minimum from 1.15 percent to ~~meet~~ ~~appropriate~~1.35 ~~standards~~percent ~~for~~of ~~executive~~the ~~compensation~~estimated amount total insured deposits and ~~corporate~~eliminating ~~governance~~the requirement that the FDIC pays dividends to depository institutions when the reserve ratio exceeds certain threshold. The ~~requirements~~Dodd-Frank ~~generally~~Act ~~apply~~also ~~for~~eliminated ~~any~~the ~~period~~federal ~~during~~statutory ~~which~~prohibitions ~~any~~against ~~obligation~~the ~~arising~~payment ~~from~~of ~~financial~~interest ~~assistance~~on ~~under~~business ~~TARP~~transaction ~~remains~~and ~~outstanding~~other ~~(1)~~accounts.

~~Annapolis~~4 Bancorp, Inc. is a TARP recipient and is therefore subject to the provisions of the Interim Final Rule described above. However, all Executive Compensation Programs are administered through BankAnnapolis, a wholly-owned subsidiary of Annapolis Bancorp, Inc., with the exception of any stock-based awards which are administered through Annapolis Bancorp, Inc.

OnTable June 10, 2009, the U.S. Treasury issued an interim final rule (the “Interim Final Rule”) that provides guidance on the executive compensation and corporate governance provisions of the EESA that apply to TARP recipients. Contents

• ~~Limits~~Corporate Governance – As of January 21, 2011, all domestic publicly traded companies are required to give stockholders a non-binding “Say on Pay” vote to approve executive compensation ~~that~~disclosed ~~exclude~~in ~~incentives~~the proxy statement on at least a triennial basis. As of April 25, 2011, domestic public companies must include a non-binding “Say on Golden Parachutes” vote in a proxy statement seeking shareholder approval for ~~senior~~a merger or similar corporate transaction, together with disclosure regarding any compensation arrangement that the issuer has with the named executive officers ~~(SEOs)~~or tothose ~~take~~of ~~unnecessary~~the other party in the corporate transactions and ~~excessive~~acquisitions ~~risks~~unless previously voted on by shareholders. On June 20, 2012, the SEC adopted Rule 10C-1 directing the national securities exchanges to adopt certain listing standards related to the independence of the compensation committee. The rule also provides six criteria the compensation committee should consider when evaluating the independence of compensation committee advisers. As of July 1, 2013, the compensation committee of a NASDAQ Company may no longer select, or receive advice from, an adviser unless it has conducted the six-factor independence assessment as the new NASDAQ Rules require. The Dodd Frank Act directs adopting incentive based clawback policies for executive officers. The legislation also authorized the SEC to promulgate rules that ~~threaten~~would allow stockholders to nominate their own candidates using a company’s proxy materials. As a result, the ~~value~~SEC adopted Rule 14a-11, which was vacated by the United States Court of Appeals for the ~~TARP~~District ~~recipient~~of Columbia Circle and therefore is not effective. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

• AProhibition ~~provision~~Against ~~for~~Charter Conversions of Troubled Institutions – Effective July 21, 2011, the ~~recovery~~Dodd-Frank Act prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of ~~any~~a ~~bonus,~~cease ~~retention~~and ~~award,~~desist order or ~~incentive~~other ~~compensation~~formal ~~paid~~enforcement action or a memorandum of understanding with respect to a ~~SEO~~significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the ~~next~~enforcement ~~twenty~~action ~~most~~and ~~highly~~that ~~compensated~~agency ~~employees~~does ~~based~~not onobject ~~materially~~within ~~inaccurate~~30 ~~statements~~days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of ~~earnings,~~the ~~revenues,~~conversion ~~gains,~~application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or ~~other~~investigative ~~criteria~~proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating hereto.

• ~~Prohibition~~Interstate onBranching ~~making~~– ~~any~~The ~~golden~~Dodd-Frank ~~parachute~~Act ~~payment~~authorizes national and state banks to establish branches in other states to the same extent as a ~~SEO~~bank orchartered ~~any~~by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely. The Dodd-Frank Act restricts the ~~next~~preemption ~~five~~of ~~most~~state ~~highly~~law ~~compensated~~by ~~employees~~federal law and disallows subsidiaries and affiliates of federally regulated banks from availing themselves of such preemptions.

• ~~Prohibition~~Limits on ~~the~~Derivatives ~~payment~~– orEffective ~~accrual~~18 months after the transfer date of ~~bonus~~the orDodd-Frank ~~retention~~Act, ~~awards~~in the first half of 2013, orthe ~~incentive~~Dodd-Frank ~~compensation~~Act prohibits state-chartered banks from engaging in derivatives transactions unless the lending limit law of the state in which the bank is chartered takes into considerations credit exposure to ~~SEOs~~derivative ortransactions. ~~certain~~For ~~highly~~this ~~compensated~~purpose, ~~employees~~derivative transactions includes any contract, ~~subject~~agreement, toswap, ~~certain~~warrant ~~exceptions~~note ~~for~~or ~~payments~~option ~~made~~that is based in whole or in part on the ~~form~~value of, ~~restricted~~any ~~stock~~interest in, or any quantitative measure of occurrence of any event relating to, one or more commodities securities, currencies, interest or other rates indices or other assets.

• ~~Prohibition~~Transactions onwith ~~employee~~Affiliates ~~compensation~~or ~~plans~~Insiders ~~that~~– ~~would~~Effective ~~encourage~~July ~~manipulation~~21, 2011, the Dodd-Frank Act expanded the definition of ~~earnings~~affiliate ~~reported~~for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution and its affiliates. The Dodd-Frank Act apples Section 23A and Section 22(h) of the ~~TARP~~Federal ~~recipient~~Reserve Act (governing transactions with insiders) to ~~enhance~~derivative transactions, repurchase agreements and securities lending and borrowing transaction that create credit exposure to an ~~employee’s~~affiliate ~~compensation~~or an insider. Any such transactions with affiliates must be fully secured. The exemption from Section 23A for transactions with financial subsidiaries was eliminated. The Dodd-Frank Act imposes further restrictions on transactions with affiliates and extensions of credit to executive officers, director and principal shareholders, by, among other things, expanding covered transactions to include securities lending, repurchase agreement and derivatives activities with affiliates. These changes became effective on July 21, 2012. The Dodd-Frank Act prohibits an insured depository institution from purchasing an asset from, or selling an asset to, an executive officer, director or principal shareholder of the institution, or any related interest of that person unless the transaction is on market terms. If the transaction represents more than 10% of the capital stock and surplus of the institution, the transaction must be approved in advance by a majority of the disinterested directors.

• ~~Establishment~~Debit Card Interchange Fees – Effective July 21, 2011, the Dodd-Frank Act requires that the amount of any interchange fee charged by a ~~compensation~~debit ~~committee~~card ofissuer ~~independent~~with ~~directors~~respect to ~~meet~~a ~~semi-annually~~debit tocard ~~review~~transaction ~~employee~~must ~~compensation~~be ~~plans~~reasonable and proportional to the ~~risks~~cost ~~posed~~incurred by ~~these~~the ~~plans~~issuer. Effective October 2011, interchange fees on debit card transactions are limited to a maximum of 21 cents per transaction plus 5 basis points of the ~~TARP~~transaction ~~recipient~~amount. A debit card issuer may recover an additional one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud related requirements prescribed by the FRB. The restrictions on interchange fees, however, do not apply to banks, that, together with their affiliates, have assets of

•5 ~~Adoption of excessive or luxury expenditures policy.~~

•Table Disclosure of perquisites offered to SEOs and certain highly compensated employees.Contents

•less ~~Disclosure~~than ~~related~~$10 billion as of the end of the calendar year preceding the date of the electronic debit transaction for which the interchange fee is charged or received. Under the rules, where an exempt issuer ceases to ~~compensation~~be ~~consultant~~a ~~engagement~~legal entity after acquisition, the acquiring entity becomes the issuer of the previously exempt debit cards.

• ~~Prohibition~~Consumer onFinancial ~~tax~~Protection ~~gross~~Bureau – The Dodd-~~ups~~Frank Act created the Consumer Financial Protection Bureau (“CFPB”), in order to ~~SEOs~~regulate consumer financial products and services, as well as providers of such products and services. The CFPB authority to enforce existing consumer protection laws was transferred to it on July 21, 2011. In January of 2012, President Obama appointed Rich Cordray to be the first Director of the CFPB. The CFPB supervises and examines, with respect to Federal consumer financial laws, banks, savings associations and credit unions with assets in excess of $10 billion. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorized the CFPB to establish certain ~~highly~~minimum ~~compensated~~standards ~~employees~~for the origination of residential mortgages including determination of the borrower’s ability to repay.

•Regulation ~~Compliance~~of ~~with~~Mortgage ~~federal~~Origination ~~securities~~and Servicing. In January 2013, the CFPB issued a series of final rules related to mortgage loan origination and ~~regulations~~mortgage ~~regarding~~loan ~~submission~~servicing. ofWe aare ~~non-binding~~still ~~resolution~~evaluating onthe ~~SEO~~recently ~~compensation~~issued rules to ~~shareholders~~determine if they will have any long-term impact or our mortgage loan origination and servicing activities.

•On ~~The~~January 10, ~~establishment~~2013, the CFPB issued a final rule concerning lenders’ assessments of consumers’ ability to repay home loans. Currently, Regulation Z prohibits creditors from extending higher-priced mortgage loans without regard for the ~~Office~~consumer’s ability to repay. The rule extends application of this requirement to all loans secured by dwellings, not just higher-priced mortgages. Creditors must, at a minimum, consider eight specified factors while making a reasonable and good faith determination that the ~~Special~~consumer ~~Master~~has ~~for~~a ~~TARP~~reasonable ~~Executive~~ability ~~Compensation~~to repay the loan before entering any consumer credit transaction secured by virtually any dwelling. The factors include information such as the consumer’s income, debt obligations, credit history, and monthly payments on the loan. The rule also establishes a safe harbor and presumption of compliance with the ability-to-repay ~~address~~requirement for so-called “qualified mortgages,” restricts the application of ~~these~~prepayment ~~rules~~penalties, and requires the retention of evidence of compliance with the ability-to-repay ~~TARP~~requirement ~~recipients~~for ~~and~~three years. ~~their~~The ~~employees~~final rule becomes effective January 10, 2014.

~~The~~Additionally, ~~Interim~~on ~~Final~~January 10, ~~Rule~~2013, ~~also~~the ~~establishes~~CFPB ~~compliance~~issued ~~reporting~~a final rule to expand the types of mortgage loans that are subject to the protections of the Home Ownership and ~~recordkeeping~~Equity ~~requirements~~Protections ~~regarding~~Act of 1994, or HOEPA. Loans that meet HOEPA’s high-cost coverage tests are subject to special disclosure requirements ~~executive~~and ~~compensation~~restrictions on loan terms, and ~~corporate~~borrowers ~~governance~~in ~~standards~~high-cost mortgages have enhanced remedies for violations of the law. The rule revises and expands the tests for coverage under HOEPA and imposes additional restrictions on mortgages that are covered by HOEPA, including a pre-loan counseling requirement. The rule becomes effective January 10, 2014.

•On InJanuary 17, 2013, ~~addition~~the toCFPB ~~the~~issued ~~standards~~final ~~set~~rules ~~forth~~concerning inmortgage ~~the~~servicing ~~Interim~~standards, ~~Final~~which ~~Rule~~amend ~~certain~~both ~~standards~~Regulation ~~established~~X inand ~~prior~~Regulation ~~interim~~Z. ~~final~~The ~~rules~~Regulation ~~have~~X ~~been~~rule ~~determined~~requires servicers to ~~not~~provide becertain ~~inconsistent~~information ~~with~~to ~~the~~borrows, ~~most~~to ~~recent~~establish ~~rules~~policies and ~~thus~~procedures ~~will~~to achieve ~~continue~~certain delineated objectives, to becorrect ~~required.~~errors ~~The~~asserted ~~most~~by ~~notable~~borrowers, ~~standard~~and ~~from~~to ~~earlier~~evaluate ~~interim~~borrowers’ ~~final~~applications ~~rules~~for isavailable ~~the~~loss ~~requirement~~mitigation ~~that~~options. ~~any~~The ~~TARP~~Regulation ~~recipient~~Z ~~not~~rule ~~claim~~requires acreditors, ~~deduction~~assignees and servicers to provide interest rate adjustment notices for ~~compensation~~adjustable-rate ~~during~~mortgages, aperiodic ~~taxable~~statements ~~year~~for inresidential ~~excess~~mortgage loans, prompt crediting of ~~$500~~mortgage payments,~~000~~ and responses to requests for anpayoff ~~SEO~~amounts. Both rules become effective January 10, 2014.

~~Regulatory~~On ~~Reform.~~January 20, In2013, ~~June~~the ~~2009,~~CFPB ~~President~~issued ~~Obama’s~~a ~~administration~~final ~~proposed~~rule awith multiple effective dates implementing requirements and ~~wide~~restrictions ~~range~~imposed ofby ~~regulatory~~the ~~reforms~~Reform ~~that~~Act concerning, ifamong ~~enacted~~other things, ~~may~~qualifications ~~have~~of ~~significant~~individual ~~effects~~loan onoriginators and the ~~financial~~compensation ~~services~~practices ~~industry~~with inrespect ~~the~~to ~~United~~such ~~States~~persons. ~~Significant~~The ~~aspects~~rule prohibits loan origination organizations from basing compensation for themselves or individual loan originators on any of the ~~administration~~origination transaction’s ~~proposals~~terms ~~that~~or ~~may~~conditions ~~affect~~and prohibits such persons from receiving compensation from another person in connection with the ~~Company~~same ~~included,~~transaction. ~~among~~The ~~other~~rule ~~things,~~also ~~proposals:~~imposes ~~(i)~~ duties on loan originator organizations to ~~reassess~~ensure that their individual loan originators meet certain licensing or qualification standards and ~~increase~~extends ~~capital~~existing recordkeeping requirements. In addition, effective June 1, 2013, the rule prohibits the inclusion of certain provisions in residential mortgage loan agreements that could restrict legal recourse by a consumer against the loan origination organization and prohibits the financing of single-premium credit insurance. All other provisions of the final rule become effective January 10, 2014.

6The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

~~for~~6 banks and bank holding companies and examine the types of instruments that qualify as regulatory capital; (ii) to create a federal consumer financial protection agency to be the primary federal consumer protection supervisor with broad examination, supervision and enforcement authority with respect to consumer financial products and services; and (iii) to further limit the ability of banks to engage transactions with affiliates. Some of these proposals were addressed in the Dodd-Frank Act.

TheTable U.S. Congress, state lawmaking bodies and federal and state regulatory agencies continue to consider a number of wide-ranging and comprehensive proposals for altering the structure, regulation and competitive relationships of the nation’s financial institutions, including rules and regulations related to the administration’s proposals. Separate comprehensive financial reform bills intended to address the proposals set forth by the administration were introduced in both houses of Congress during 2011 and remain under review by both the U.S. House of Representatives and the U.S. Senate. In addition, both the U.S. Treasury Department and the Basel Committee have issued policy statements regarding proposed significant changes to the regulatory capital framework applicable to banking organizations, as discussed above. The Company cannot predict whether or in what form further legislation or regulations may be adopted or the extent to which the Company may be affected thereby. Contents

~~Forward~~In ~~Looking~~late ~~Statements~~2012, a Community Bank Advisory Council was formed. Representatives were drawn from small-to-medium-sized community banks to engage in discussions on how smaller institutions help level the playing field for consumers experiencing difficulty in managing their money and what opportunities and challenges exist in mortgage lending for small institutions. The CFPB has developed prototype designs for various disclosures and agreements and invited the public and financial industry to review and comment on what works. Their website (www.consumerfinance.gov) serves as a public information resource laws and regulations, assistance with financial questions, participation with projects or initiatives, and submission of complaints. The CFPB has positioned itself to serve as a resource for submission of complaints and to provide help to consumers with complaints regarding credit cards, mortgages, student loans, checking accounts, savings accounts, credit reporting, bank services, and other consumer loans. Guidance and consumer tips on various financial topics were issued throughout 2012 in a Blog on the CFPB’s website.

~~This Annual~~• ~~Report~~Financial onStability ~~Form~~Oversight ~~10-K~~Council ~~contains~~– ~~statements~~The ~~which constitute forward~~Dodd-~~looking~~Frank ~~statements within the meaning of the Private Securities Litigation Reform~~ Act ofcreated ~~1995. These statements appear in a number of places in this Report and include all statements regarding~~ the ~~intent,~~Financial ~~belief~~Oversight orStability ~~current expectations of Annapolis Bancorp~~Council, ~~Inc. (the “Company”)~~which, ~~its directors or its officers with respect to,~~ among other things~~: (i) the Company’s financing plans; (ii) trends affecting the Company’s financial condition~~, ~~results~~will ofrecommend ~~operations;~~to ~~plans and objectives (iii)~~ the ~~Company’s~~Federal ~~growth~~Reserve ~~strategy;~~Board ~~(iv) the~~increasingly ~~Company’s~~strict ~~future~~rules ~~performance and business, including, but not limited to statements with respect to the adequacy of the allowance~~ for ~~credit losses~~capital, ~~delinquency trends~~leverage, ~~market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and~~ liquidity, ~~and~~development ~~the effect~~ of ~~legal~~resolution proceedings and new accounting standards on the Company’s financial condition and results of operations; and (v) the declaration and payment of dividends. All statements contained herein that are not clearly historical in nature are forward-lookingplans, ~~and~~mandatory ~~the~~stress ~~words “anticipate~~tests,” ~~“believe,”~~risk ~~“continues,”~~management ~~“expect,” “estimate,” “intend,” “project”~~ and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties which could cause actual results to differ materially from those expressed in forward-looking statements. Factors that might cause such a difference may, include, but are not limited to: (i) the rate of declining growth in the economy and employment levels, as well as general business and economic conditions; (ii) changes in interest rates, as well as the magnitude of such changes; (iii) the fiscal and monetary policies of the federal government and its agencies; (iv) changes in federal bank regulatory and supervisory policies, including required levels of capital; (v) the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market; (vi) the performance of the stock and bond markets; (vii) competition in the financial services industry, (viii) possible legislative, tax or regulatory changes, and such other ~~risks~~requirements ~~and uncertainties~~ as ~~set~~companies ~~forth~~grow in ~~the~~size ~~Company’s filings with the Securities~~ and ~~Exchange Commission~~complexity. All forward-looking statements included in this annual report on Form 10-K are based upon information available to the Company as of the date of this report, and other than to the extent required by applicable law, including the requirements of applicable securities laws, the Company undertakes no obligation to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

~~ITEM 1A.~~Mortgage ~~RISK~~Reform ~~FACTORS~~– The Dodd-Frank Act provides mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions.

~~Not~~Appraisal Rules. ~~applicable~~In January 2013, pursuant to the Dodd-Frank Act, the federal banking regulatory agencies issued final rules on appraisal requirements for higher-priced mortgage loans. For mortgage loans with an annual percentage rate that exceeds a certain threshold, lenders must obtain an appraisal using a licensed or certified appraiser. The appraiser must prepare a written appraisal report based on a physical inspection of the interior of the property. Lenders must also then disclose to applicants information about the purpose of the appraisal and provide them with a free copy of the appraisal report. Qualified mortgages, as defined by Section 1026.43(e) of the CFPB’s final rule implementing the Dodd-Frank Act’s ability-to-repay requirements, are exempt from the appraisal requirements of these final rules. These final rules become effective January 18, 2014.

~~ITEM 1B.~~As ~~UNRESOLVED~~defined ~~STAFF~~by ~~COMMENTS~~the CFPB, qualified mortgages are mortgages that meet the following standards prohibiting or limiting certain high risk product and features:

~~Not~~(1) ~~applicable.~~No excessive upfront points and fees – generally points and fees paid by the borrower must not exceed 3% of the total amount borrowed;

7(2) No toxic loan features – prohibited features are: no interest only-loans, no negative-amortization loans, no terms beyond 30 years and no balloon loans;

~~ITEM 2.~~(3) ~~PROPERTIES~~Limited on debt-to-income ratios – borrowers’ debt-to-income ratios must be no higher than 43%.

~~The~~Lenders ~~executive~~that ~~offices~~generate qualified mortgage loans will receive specific protections against borrower lawsuits that could result from failing to satisfy the ability to pay rule. There are two levels of liability protections for qualified mortgages – the ~~Company~~Safe Harbor protection and the ~~Bank~~Rebuttable Presumption protection. Safe Harbor qualified mortgages are ~~located~~lower atpriced ~~1000~~loans ~~Bestgate~~with ~~Road,~~interest ~~Suite~~rates ~~400~~closer to the prime rate, ~~Annapolis~~issued to borrowers with high credit scores. Borrowers suing lenders under Safe Harbor qualified mortgages are faced with overcoming the pre-determined legal conclusion that the lender has satisfied the ability-to-repay rule. Rebuttable Presumption qualified mortgages are loans at higher prices that are granted to borrowers with lower credit scores. Lenders generating Rebuttable Presumption qualified mortgages receive the protection of a presumption that they have legally satisfied the ability-to-pay rule while the borrower can rebut that presumption by proving that the lender did not consider the borrower’s living expenses after their mortgage and other debts. In addition, ~~Maryland~~qualified ~~21401~~mortgages are exempt from the new appraisal requirement rules stated above.

~~The~~• ~~following~~Well ~~table~~Capitalized ~~sets~~and ~~forth~~Well ~~the~~Managed ~~location~~– ofEffective ~~and~~July ~~certain~~21, ~~additional~~2011, ~~information~~the ~~regarding~~Dodd-Frank Act amended the ~~offices~~BHC ofAct to require that a depository holding company that is a financial holding company, such as the Company, ~~and~~be ~~the~~well ~~Bank~~capitalized atand ~~December 31, 2011:~~well managed.

	Leased/Owned	Original Year LeasedorLocation Acquired	Year ofLease Expiration	Net Book Value of Propertyor Leasehold Improvements atDecember 31, 2011($000)
Administration (2), (3)	Owned	2001	N/A	$	4,281
Bestgate	Owned	2001	N/A		1,263
Edgewater	Land Leased	1996	2016 (1)		471
Cape St. Claire	Leased	1995	2015 (1)		12
Kent Island	Land Leased	1990	2023 (1)		1,481
Severna Park	Leased	1996	2013 (1)		13
BayWoods	Leased	2003	2013 (1)		5
Annapolis Towne Centre	Leased	2008	2018 (1)		278

•

The Electronic Fund Transfer Act – The Dodd-Frank Act amends the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. In February 2012, the CFPB issued a final rule to the Electronic Fund Transfer Act and Regulation E which implemented Dodd-Frank Act provisions regarding remittance

~~(1)~~7 ~~These leases may be extended at the option of the Company for periods ranging from one to twenty years.~~

(2)Table The Company owns an undeveloped piece of property in Odenton, Maryland for future branch expansion.Contents

~~(3)~~transfers. ~~The~~These ~~Company~~final ~~has~~rules ~~entered~~provided ~~into~~new aprotections, ~~long-term~~including ~~lease~~new ~~for~~disclosures and error resolution and cancellation rights, to consumers sending remittance transfers to other consumers or businesses in a ~~location~~foreign country. Further additional rulemaking in ~~Waugh~~August ~~Chapel~~2012 supplemented these final rules. Though originally scheduled to take effect on February 7, 2013, the CFPB proposed a temporary delay of the final remittance transfer rules to address additional changes regarding disclosure of foreign taxes and institution fees, disclosure of subnational taxes in ~~Anne~~a ~~Arundel~~foreign ~~County~~country, ~~Maryland~~and errors from incorrect account information. The ~~property~~effective date is ~~undeveloped~~now ~~and~~delayed ~~lease~~until ~~payments~~90 ~~have~~days ~~not~~after ~~commenced~~finalizing the amendments.

~~ITEM 3.~~The ~~LEGAL~~Bank ~~PROCEEDINGS~~

The ~~Company~~Bank is ~~not~~regulated ~~involved~~by the State of Maryland Department of Labor, Licensing and Regulation. The Bank is subject to extensive regulation, examination and supervision by the State of Maryland as its primary regulator, the Federal Reserve Bank of Richmond as its secondary regulator and the FDIC, as the deposit insurer. The Bank must file reports with the Federal Reserve and the FDIC concerning its activities and financial condition in ~~any~~addition to ~~pending~~obtaining ~~legal~~regulatory ~~proceedings~~approvals prior to entering into certain transactions such as mergers with, or acquisitions of other ~~than~~institutions. ~~routine~~The ~~legal~~state ~~proceedings~~and ~~occurring~~the inFederal Reserve conduct periodic examinations to test the ~~ordinary~~Bank’s ~~course~~safety and soundness and compliance with various regulatory requirements. Many aspects of ~~business~~the Bank’s operations are regulated by federal law including allowable activities, reserves against deposits, branching, mergers and investments. ~~Such~~This regulation and ~~routine~~supervision ~~legal~~establishes ~~proceedings,~~a comprehensive framework of activities in which an institution can engage and is intended primarily for the ~~aggregate~~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, ~~are~~including ~~believed~~policies bywith ~~management~~respect to bethe ~~immaterial~~classification toof assets and the ~~Company’s~~establishment ~~financial~~of ~~condition~~adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and ~~results~~policies, whether by the State of Maryland, the Federal Reserve, the FDIC or Congress, could have a material adverse impact on the Company or the Bank and their operations.

~~ITEM 4~~Insurance of Deposit Accounts. ~~MINE~~The ~~SAFETY~~Bank’s ~~DISCLOSURES~~deposit accounts are insured up to applicable limits by the FDIC’s Deposit Insurance Fund (“DIF”) and are subject to deposit insurance assessments to maintain the DIF. Under the Dodd-Frank Act, the maximum deposit insurance amount is permanently increased from $100,000 to $250,000.

~~Not~~The ~~Applicable~~Dodd-Frank Act also sets a new minimum DIF reserve ratio at 1.35%. The FDIC is required to attain this ratio by September 30, 2020. In addition, the Dodd-Frank Act will have a significant impact on the calculation of deposit insurance premiums going forward. On February 7, 2011 the FDIC Board approved a final rule that changes the assessment base for insurance premiums from domestic deposits to the institution’s average consolidated total assets during the assessment period minus average tangible equity. The rule defines tangible equity as Tier 1 capital. The rule requires banks under $1 billion in assets to report average weekly balances during the calendar quarter unless they elect to report daily averages. The new rate schedule and other revisions to the assessment rates became effective April 1, 2011.

~~PART~~On IINovember 12, 2009, the FDIC adopted a final rule amending the assessment regulations to require insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk-based assessment for the third quarter of 2009. On December 30, 2009 the Bank prepaid $2.2 million in FDIC insurance for 2010, 2011 and 2012 estimated assessments. As of December 31, 2012 the Bank had $873,000 prepaid in FDIC insurance for the 2013 estimated assessments.

~~ITEM~~Emergency Economic Stabilization Act of 2008. On October 53, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”), which, among other measures, authorized the Secretary of the U. ~~MARKET~~S. ~~FOR~~Treasury ~~REGISTRANT’~~(“Treasury”) to establish the Trouble Asset Relief Program (the “TARP”). Pursuant to TARP, the Treasury has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. ~~COMMON~~financial ~~EQUITY~~markets. In addition, ~~RELATED~~under ~~STOCKHOLDER~~TARP, ~~MATTERS~~the ~~AND~~Treasury ~~ISSUER~~created the ~~PURCHASES~~Capital OFPurchase ~~EQUITY~~Program ~~SECURITIES~~(the “CPP”), pursuant to which it provides access to capital that will serve as Tier 1 capital to financial institutions through a standardized program to acquire preferred stock (accompanied by warrants) from eligible financial institutions. On January 30, 2009, the Company sold 8,152 shares of the Company’s Fixed Rate Cumulative Preferred Stock, Series A (the “Series A Preferred Stock”), having a liquidation amount per share equal to $1,000 and a warrant to purchase 299,706 shares of the Company’s common stock, at an exercise price of $4.08 per share, to the Treasury under the CPP for a total purchase price of $8,152,000. On April 18, 2012, The Company redeemed 4,076 shares of its Series A Preferred Stock for $4,076,000 and on March 6, 2013, the Company redeemed the final 4,076 shares of its Series A Preferred Stock for $4,076,000.

~~Market~~Comprehensive ~~Value~~Financial Stability Plan of 2009. On February 10, 2009, the Secretary of the Treasury announced a new comprehensive financial stability plan (the “Financial Stability Plan”), which builds upon existing programs and ~~Dividend~~earmarks ~~Information~~the second $350 billion of unused funds originally authorized under the EESA. The major elements of the Financial Stability Plan include: (i) a capital assistance program that invested in convertible preferred stock of certain qualifying institutions, (ii) a

~~The~~8 Company’s common stock is listed on The NASDAQ Capital Market® under the symbol “ANNB.” The Company’s stock began trading on October 1, 1997. At March 1, 2012 the closing price was $5.05 per share.

AsTable of March 1, 2012 the Company has outstanding 3,973,991 shares of common stock held by approximately 201 shareholders of record. On January 30, 2009 the Company sold 8,152 shares of Series A Preferred Stock to one shareholder, the Treasury under the Treasury’s TARP CPP. The shares have a liquidation preference of $1,000 per share for an aggregate purchase price of $8.152 million. The Company has also issued a warrant to purchase 299,706 shares of common stock which may be purchased upon exercise of the warrant at a price of $4.08 per share. The warrant is also issued to the Treasury under the CPP. The warrant expires on January 30, 2019. The issuances of the warrant and the Series A Preferred Stock were completed in a private placement to Treasury exempt from the registration requirements of the Securities Act of 1933. Contents

~~Under~~ consumer ~~the~~and ~~terms~~business oflending ~~the~~initiative ~~CPP~~to ~~the~~fund ~~Company~~new ~~will~~consumer beloans, ~~required~~small tobusiness ~~pay~~loans and commercial mortgage asset-backed securities issuances, (iii) a 5%new public-private investment fund that leveraged public and private capital with public financing to purchase $500 billion to $1 trillion of legacy “toxic assets” from financial institutions, (iv) ~~per~~assistance ~~annum~~for ~~dividend~~homeowners onto ~~the~~reduce ~~Series~~mortgage Apayments ~~Preferred~~and interest ~~Stock~~rates and (v) establishment of loan modification guidelines for ~~the~~government ~~five~~and ~~years~~private ~~beginning~~programs. ~~January 30~~In addition, ~~2009~~all ~~ending~~banking ~~February 15,~~institutions ~~2014~~with ~~and~~assets over $10 billion are required to undergo a 9%comprehensive ~~dividend~~“stress ~~for~~test” ~~the~~to ~~period~~determine ~~thereafter.~~if they ~~The~~have ~~first~~sufficient ~~dividend~~capital ~~was~~to ~~paid~~continue lending and to ~~the~~absorb ~~Treasury~~losses onthat ~~May 15,~~could ~~2009~~result ~~with~~from ~~future~~a ~~dividend~~more ~~payments~~severe ~~due~~decline ~~quarterly thereafter~~in the economy than projected. ~~During~~Institutions ~~2011~~receiving ~~$407~~assistance under the Financial Stability Plan are subject to higher transparency and accountability standards,~~600~~ inincluding restrictions on dividends, ~~were~~acquisitions, ~~paid~~executive tocompensation ~~the~~and ~~Treasury~~additional disclosure requirements.

The ~~Company~~U.S. ~~discontinued~~Congress, ~~the~~state ~~payment~~lawmaking ofbodies ~~cash~~and ~~dividends~~federal and state regulatory agencies continue to ~~common stockholders~~consider ina ~~2002.~~number ~~The~~of ~~Company~~wide-ranging ~~has~~and nocomprehensive proposals ~~current~~for ~~plans~~altering tothe ~~resume~~structure, ~~payments~~regulation ofand ~~cash~~competitive ~~dividends~~relationships onof ~~its~~the ~~common~~nation’s ~~stock~~financial asinstitutions. ~~Management~~The ~~believes~~Company itcannot ispredict inwhether ~~the~~or ~~best~~in ~~interest~~what ofform ~~the~~further ~~Company~~legislation toor ~~retain~~regulations ~~capital~~may tobe ~~support~~adopted or the ~~growth~~extent ofto which the Company may be affected thereby.

8Forward Looking Statements

AsThis Annual Report on Form 10-K contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number ~~condition~~of toplaces in this Report and include all statements regarding the intent, belief or current expectations of Annapolis Bancorp, Inc. (the “Company”), its directors or its officers with respect to, among other things: (i) the Company’s ~~participation~~financing inplans; (ii) trends affecting the ~~CPP~~Company’s financial condition, results of operations; plans and objectives (iii) the Company’s ~~ability~~growth strategy; (iv) the Company’s future performance and business, including, but not limited to ~~declare~~statements orwith ~~pay~~respect to the adequacy of the allowance for credit losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, ~~dividends~~and the effect of legal proceedings and new accounting standards on ~~its~~the ~~common~~Company’s ~~stock~~financial iscondition ~~restricted~~and results of operations; and (v) the declaration and payment of dividends. ~~Specifically~~All statements contained herein that are not clearly historical in nature are forward-looking, and the ~~Company~~words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not ~~declare~~guarantees ~~dividend~~of ~~payments~~future onperformance and involve certain risks and uncertainties which could cause actual results to differ materially from those expressed in forward-looking statements. Factors that might cause such a difference may, include, but are not limited to: (i) the rate of declining growth in the economy and employment levels, as well as general business and economic conditions; (ii) changes in interest rates, as well as the magnitude of such changes; (iii) the fiscal and monetary policies of the federal government and its ~~common~~agencies; (iv) changes in federal bank regulatory and supervisory policies, including required levels of capital; (v) the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market; (vi) the performance of the stock ifand itbond ismarkets; (vii) competition in ~~arrears~~the onfinancial services industry, (viii) possible legislative, tax or regulatory changes, (ix) the ~~dividends~~actual onresults of the ~~Series~~pending AMerger ~~Preferred~~with ~~Stock~~FNB could vary materially as a result of a number of factors, including the possibility that various closing conditions for the transaction may not be satisfied or waived, and the Merger Agreement could be terminated under certain circumstances; (x) delays in closing the Merger, and such other risks and uncertainties as set forth in the Company’s filings with the Securities and Exchange Commission. ~~Until~~All forward-looking statements included in this annual report on Form 10-K are based upon information available to the ~~Series~~Company Aas ~~Preferred~~of ~~Stock~~the ~~issued~~date of this report, and other than to the extent required by applicable ~~Treasury~~law, ~~under~~including the ~~CPP~~requirements isof ~~redeemed~~applicable orsecurities ~~transferred~~laws, the Company undertakes no obligation to publicly release the results of any revisions that may ~~not~~be ~~pay~~made ato ~~cash~~any ~~dividend~~forward-looking ~~without~~statements ~~approval~~to ~~from~~reflect events or circumstances after the ~~Treasury~~date of such statements or to reflect the occurrence of anticipated or unanticipated events.

AImportant ~~summary~~Additional ~~of the~~Information ~~Company’s quarterly stock prices is shown below:~~

	2011						2010
	Stock Price Range				Per Share		Stock Price Range				Per Share
Quarter	High		Low		Dividend		High		Low		Dividend
1st	$	4.49	$	3.70	$	0.0000	$	4.18	$	2.02	$	0.0000
2nd		4.50		4.00		0.0000		4.50		3.06		0.0000
3rd		4.28		3.42		0.0000		4.40		3.55		0.0000
4th		4.10		3.61		0.0000		4.50		3.45		0.0000

In connection with the Merger, FNB has filed a registration statement on Form S-4 with the SEC that includes a proxy statement/prospectus and other documents relevant to the proposed Merger. On February 25, 2013, FNB filed Amendment No. 1 to the Form S-4. The registration statement was declared effective by the SEC on February 27, 2013. On February 27, 2013, the Company filed a definitive proxy statement with the SEC. A definitive proxy statement was first mailed to the shareholders of the Company on or about March 1, 2013. SHAREHOLDERS OF THE COMPANY AND FNB ARE URGED TO READ THE REGISTRATION STATEMENT, PROXY STATEMENT/PROSPECTUS AND DEFINITIVE PROXY STATEMENT REGARDING THE MERGER AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC. AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS BECAUSE THEY CONTAIN AND WILL CONTAIN IMPORTANT INFORMATION.

~~The~~9 ~~closing price of the Company’s stock at December 31, 2011 was $3.89 per share.~~

EquityTable Compensationof Plan Information Contents

~~The~~A ~~table~~free ~~setting~~copy ~~forth~~of ~~Securities~~the ~~Authorized~~Proxy ~~for~~Statement/Prospectus, ~~Issuance~~Definitive ~~Under~~Proxy ~~Equity~~Statement, ~~Compensation~~as ~~Plans~~well ~~can~~as other filings containing important information about the Company and FNB, may be ~~found~~obtained ~~under~~at ~~Item 12~~the onSEC’s ~~page~~Internet 62site (http://www.sec.gov). These documents may also be obtained, free of ~~this~~charge, ~~report~~from FNB by contacting James Orie, Chief Legal Officer, F.N.B. Corporation, at One F.N.B Boulevard, Hermitage PA 16148, telephone (724) 983-3317 or by contacting Edward J. Schneider, Chief Financial Officer of the Company at 1000 Bestgate Road, Suite 400, Annapolis MD 21401.

~~Recent~~ITEM 1A. ~~Sales~~RISK ofFACTORS ~~Unregistered securities~~

~~None~~Not applicable.

~~Purchases~~ITEM 1B. ofUNRESOLVED ~~Equity~~STAFF ~~Securities by the Issuer and Affiliated Purchasers.~~ COMMENTS

None.

~~ITEM 6.~~10 ~~SELECTED FINANCIAL DATA~~

TheTable following table summarizes the Company’s selected financial information and other financial data. The selected balance sheet and statement of income data are derived from our audited financial statements. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this report. Results for past periods are not necessarily indicative of results that may be expected for any future period. Contents

9ITEM 2. PROPERTIES

~~Selected~~The ~~Consolidated~~executive ~~Financial~~offices ~~Highlights~~of the Company and the Bank are located at 1000 Bestgate Road, Suite 400, Annapolis, Maryland 21401.

~~Selected~~The ~~Consolidated~~following ~~Financial~~table ~~Data~~sets atforth the location of and ~~for~~certain ~~years~~additional ~~ended~~information regarding the offices of the Company and the Bank at December 31, 2012:

Selected Financial Data	2011				2010				2009				2008			2007
	Leased/Owned		Original Year LeasedorLocation Acquired				Year ofLease Expiration				Net Book Value of Propertyor Leasehold Improvements atDecember 31, 2012($000)
	(Dollars in thousands, except per share data)
Administration (2)	Owned			2001				N/A			$	4,176
Total assets	$	441,570			$	432,140			$	444,332			$	394,916		$	361,879
Bestgate	Owned			2001				N/A				1,233
Total loans, net		283,284				273,063				274,032				264,093			243,905
Edgewater	Land Leased			1996				2016	(1)			438
Total deposits		350,381				340,914				350,463				300,627			291,589
Cape St. Claire	Leased			1995				2015	(1)			9
Securities sold under agreement to repurchase		11,344				14,558				14,642				12,639			13,337
Kent Island	Land Leased			1990				2023	(1)			1,432
Short-term debt		0				0				0				0			4,170
Severna Park	Leased			1996				2013	(1)			12
Long-term debt		40,000				40,000				45,000				45,000			25,000
BayWoods	Leased			2003				2018	(1)			4
Stockholders’ equity		37,368				34,774				32,632				26,814			26,852
Annapolis Towne Centre Waugh Chapel	Leased Leased			2008 2012				2018 2032	(1) (1)			239 1,663
Selected Operating Data
Interest income	$	19,857			$	19,853			$	21,226			$	21,800		$	22,466
Interest expense		3,597				4,633				7,135				8,765			10,616
Net interest income		16,260				15,220				14,091				13,035			11,850
Provision for credit losses		2,190				2,148				6,540				2,375			448
Net interest income after provision for credit losses		14,070				13,072				7,551				10,660			11,402
Noninterest income		1,842				1,815				1,989				1,753			1,831
Noninterest expense		12,563				12,385				12,405				10,325			9,490
Income (loss) before income taxes		3,349				2,502				(2,865	)			2,088			3,743
Income tax expense (benefit)		1,178				886				(1,158	)			661			1,319
Net income (loss)	$	2,171			$	1,616			($	1,707	)		$	1,427		$	2,424
Preferred stock dividend and discount accretion		490				485				442				0			0
Net income (loss) available to common shareholders	$	1,681			$	1,131			($	2,149	)		$	1,427		$	2,424
Key Financial Ratios and Other Data	2011				2010				2009				2008			2007
Return on average assets
Net income (loss) divided by average assets		0.50	%			0.37	%			(0.38	%)			0.38	%		0.69	%
Return on average equity
Net income (loss) divided by average equity		6.05	%			4.68	%			(5.24	%)			5.41	%		9.51	%
Equity to asset ratio
Average equity divided by average assets		8.23	%			7.93	%			7.33	%			7.01	%		7.28	%
Diluted earnings (loss) per common share	$	0.39			$	0.29			$	(0.56	)		$	0.35		$	0.58
Book value per common share	$	7.38			$	6.81			$	6.39			$	6.98		$	6.69
Tangible book value per common share	$	7.38			$	6.81			$	6.39			$	6.98		$	6.69
Number of common shares outstanding		3,958,293				3,922,006				3,867,006				3,842,943			4,014,928
Efficiency ratio		69.40	%			72.70	%			77.15	%			69.82	%		69.37	%
Interest rate spread		3.76	%			3.47	%			3.07	%			3.28	%		3.06	%
Net interest margin		3.93	%			3.66	%			3.32	%			3.65	%		3.59	%
Risk based capital ratio – Tier 1		12.78	%			12.80	%			12.45	%			11.37	%		12.49	%
Risk based capital ratio – Total		14.04	%			14.06	%			13.72	%			12.62	%		13.39	%

~~ITEM 7.~~(1) ~~MANAGEMENT’S~~These ~~DISCUSSION~~leases ~~AND~~may ~~ANALYSIS~~be OFextended ~~FINANCIAL~~at ~~CONDITION~~the ~~AND~~option ~~RESULTS~~of ~~OF OPERATIONS~~the Company for periods ranging from one to twenty years.

~~Overview~~(2) The Company owns an undeveloped piece of property in Odenton, Maryland for future branch expansion.

~~The following is management’s discussion and analysis of the financial condition and results of operations of Annapolis Bancorp, Inc~~ITEM 3. onLEGAL aPROCEEDINGS consolidated basis with its wholly owned subsidiary, BankAnnapolis, for the periods presented, and should be read in conjunction with the consolidated financial statements and the related notes thereto appearing elsewhere in this annual report.

~~The Company~~Andera ~~reported net income for 2011 of $2~~v.2 ~~million~~Lerner, anet ~~increase~~al of $555 thousand or 34.3% from net income of $1.6 million in 2010. Net income available to common shareholders after accruing for preferred stock dividends and discount accretion for 2011 was $1.7 million compared to net income of $1.1 million in 2010. The increase in 2011 earnings was primarily due to higher net interest income. The net income per diluted common share for 2011 was $0.39 compared to a net income of $0.29 per diluted common share in 2010.

~~The~~On ~~primary~~November 8, ~~source~~2012, ofa ~~income~~purported stockholder of the ~~Bank~~Company filed isa ~~interest~~derivative complaint on ~~its~~behalf ~~loan~~of the Company in the Circuit Court for Anne Arundel County, Maryland, captioned Andera v. Lerner, et al., Case no. 02C12173766, and ~~investment~~naming ~~portfolios~~as defendants the Company, ~~while~~The ~~one~~Company’s board of directors and FNB. The lawsuit makes various allegations against the ~~principal~~ ~~expenses~~defendants, ofincluding that the ~~Bank~~merger consideration is ~~interest~~inadequate onand ~~its~~undervalues ~~deposit~~the ~~accounts~~company that the director defendants breached their fiduciary duties to the Company in approving the Merger, and ~~borrowings~~that FNB aided and abetted those alleged breaches. The ~~difference~~lawsuit ~~between~~generally ~~interest~~seeks ~~income~~an oninjunction ~~interest~~barring ~~earning~~the ~~assets~~defendants from consummating the Merger. In addition, the lawsuit seeks rescission of the Merger Agreement to the extent already implemented or, in the alternative, award of rescissory damages, an accounting to plaintiff for all damages caused by the defendants and for all profits and special benefits obtained as a result of the defendants’ alleged breaches of fiduciary duties, and an award of the costs and expenses incurred in the action, including a reasonable allowance for counsel fees and expert fees.

10On February 7, 2013, the plaintiff filed an amended complaint with additional allegations regarding certain purported non-disclosures relating to the proxy statement/prospectus for the pending merger filed with the SEC on January 23, 2013.

On February 22, 2013, solely to avoid the costs, risks and uncertainties inherent in ~~interest~~litigation, ~~expense~~the onCompany, ~~interest~~the ~~bearing~~Company’s ~~liabilities~~board isof ~~referred~~directors toand asFNB, ~~net~~on ~~interest~~the ~~income.~~one ~~Net~~hand, ~~interest~~and ~~income~~the ~~was~~plaintiff, ~~$16.3~~on ~~million~~the ~~for~~other ~~2011~~hand, reached an ~~increase~~agreement ofin ~~$1.1~~principle ~~million~~to orsettle ~~6.8%~~the ~~compared~~action, and expect to ~~$15.2 million~~memorialize inthat ~~2010.~~agreement ~~Total~~in ~~assets~~a ~~were~~written ~~$441~~settlement agreement.6 ~~million~~As aspart of ~~December 31,~~this ~~2011,~~agreement ain ~~$9.5~~principle, ~~million~~FNB orand athe ~~2.2%~~Company ~~increase~~have ~~compared~~agreed to ~~December 31,~~disclose ~~2010~~additional ~~total~~information ~~assets~~in ofthe ~~$432.1~~proxy ~~million.~~statement/prospectus, ~~The~~including ~~Company’s~~but ~~return~~not onlimited ~~average~~to ~~assets~~certain information about the data that was ~~0.50%~~analyzed and ~~0.37% for~~presented to the ~~years~~Company’s ~~ending~~board ~~December 31,~~of ~~2011~~directors by the financial advisor, the engagement of the financial advisor and ~~2010,~~the ~~respectively~~negotiations process. ~~The~~No ~~Company’s~~substantive ~~return~~term onof ~~average~~the ~~equity~~Merger ~~was~~Agreement ~~6.05%~~will ~~and~~be 4modified as part of this settlement.~~68%~~ ~~for~~The settlement set forth in the ~~years~~settlement ~~ending~~agreement ~~December 31,~~will ~~2011,~~be ~~and~~subject ~~2010,~~to ~~respectively~~court approval.

AtOther ~~December 31,~~than ~~2011~~as disclosed above the ~~Bank’s~~Company ~~gross~~is ~~loan~~not ~~portfolio~~involved ~~totaled~~in ~~$290.8~~any ~~million.~~pending legal Ofproceedings ~~this~~other ~~amount,~~than ~~$47.7~~routine ~~million~~legal orproceedings ~~16.4%~~occurring ~~were~~in ~~commercial~~the ~~loans, $114.9~~ordinary ~~million~~course orof 39business.5% ~~were~~Such ~~commercial~~routine ~~real~~legal ~~estate loans~~proceedings, ~~$35.0~~in ~~million~~the ~~or 12.0% were construction loans~~aggregate, ~~$48.3~~are ~~million~~believed orby ~~16.6%~~management ~~were one-~~ to ~~four-family~~be ~~residential~~immaterial ~~mortgage~~to ~~loans,~~the ~~$36.0~~Company’s ~~million~~financial orcondition ~~12.4% were home equity loans,~~ and ~~$8.9 million or~~results ~~3.1%~~of ~~were consumer and other loans~~operations.

~~Application~~ITEM 4. ofMINE ~~Critical~~SAFETY ~~Accounting~~DISCLOSURES ~~Policies~~

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

~~The~~11 most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements which can be found on page 33 and continuing to page 36. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for credit losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

TheTable allowance for credit losses represents management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the consolidated financial statements found on pages 33 to 36 describes the methodology used to determine the allowance for credit losses and a discussion of the factors driving changes in the amount of the allowance for credit losses is included in the Credit Risk Management section of this financial analysis. Contents

~~Financial~~PART ~~Condition~~II ~~as of December 31, 2011 and 2010 and Results of Operations for the Years then Ended~~

The Company, through its Bank subsidiary, functions as a financial intermediary, and as such its financial condition and results of operations can be examined in terms of developing trends in its sources and uses of fundsITEM 5. ~~These trends are the result of both external environmental factors, such as changing economic conditions, regulatory changes and competition, and also internal environmental~~MARKET ~~factors~~FOR ~~such as management~~REGISTRANT’sS ~~evaluation~~COMMON asEQUITY, toRELATED ~~the~~STOCKHOLDER ~~best~~MATTERS ~~use~~AND ofISSUER ~~funds~~PURCHASES inOF ~~these~~EQUITY ~~changing~~SECURITIES ~~conditions.~~

~~Total~~Market ~~assets~~Value ~~increased by $9.4 million or 2.2% during 2011 to $441.6 million from $432.1 million at December 31, 2010 as loan demand improved~~ and ~~deposits increased. Total deposits and securities sold under agreements to repurchase, the Company’s primary sources of funds,~~Dividend ~~increased~~Information $6.3 million or 1.8% to $361.7 million from $355.5 million at December 31, 2010. Time deposits totaled $78.3 million or 22.3% of the Bank’s total deposits at December 31, 2011, compared to $77.6 million or 22.8% in 2010. Savings and money market accounts, the largest portion of the Bank’s total deposits, totaled $182.5 million or 52.1% of the Bank’s total deposits at December 31, 2011, compared to $184.6 million or 54.1% in 2010. NOW accounts totaled $32.9 million or 9.4% and $33.2 million or 9.7% of total deposits at December 31, 2011 and 2010, respectively. Demand, noninterest bearing

11The Company’s common stock is listed on The NASDAQ Capital Market® under the symbol “ANNB.” The Company’s stock began trading on October 1, 1997. At March 1, 2013 the closing price was $13.02 per share.

As of March 1, ~~accounts~~2013 ~~totaled~~the ~~$56.7~~Company ~~million~~had oroutstanding ~~16.2%~~4,059,802 shares of ~~total~~common ~~deposits~~stock atheld ~~December 31,~~by ~~2011~~approximately ~~and~~201 ~~$45.5~~shareholders ~~million~~of ~~or 13~~record.4% atOn ~~December~~January 3130, ~~2010.~~2009 ~~The~~the ~~increase~~Company insold ~~demand~~8,152 ~~deposit~~shares ~~accounts~~of isSeries ~~due~~A toPreferred ~~higher balances~~Stock into ~~corporate~~one ~~accounts~~shareholder, athe ~~result~~Treasury ofunder ~~increased~~the Treasury’s ~~business~~TARP ~~development~~CPP. ~~activity~~The ~~during~~shares ~~2011.~~had ~~Securities~~a ~~sold~~liquidation ~~under~~preference ~~agreements~~of to$1,000 ~~repurchase~~per ~~decreased~~share ~~$3.3~~for ~~million~~an toaggregate purchase price of $118.3152 million. atOn ~~December~~April 3118, ~~2011~~2012, ~~from~~The Company redeemed 4,076 shares of its Series A Preferred Stock for $~~14.~~4,076,000 and on March 6, ~~million~~2013 atthe ~~December 31~~Company redeemed the final 4, ~~2010~~076 shares of Series A Preferred Stock for $4,076,000. ~~Long-term~~The ~~borrowings~~Company ~~remained~~also issued a warrant to purchase 299,706 shares of common stock which may be purchased upon exercise of the warrant at a price of $354.008 ~~million~~per atshare. ~~December~~The warrant is also issued to the Treasury under the CPP. The warrant expires on January 3130, ~~2011~~2019. The issuances of the warrant and ~~2010~~the Series A Preferred Stock were completed in a private placement to Treasury exempt from the registration requirements of the Securities Act of 1933.

OnUnder ~~March 26,~~the ~~2003,~~terms ~~Annapolis~~of ~~Bancorp~~the ~~Statutory Trust~~CPP Ithe ~~(“Statutory~~Company ~~Trust~~will ~~I”),~~be required to pay a ~~Connecticut~~5% per ~~business~~annum dividend ~~trust~~on ~~formed,~~the ~~funded~~Series ~~and~~A ~~wholly~~Preferred ~~owned~~Stock byfor the ~~Company~~five years beginning January 30, ~~issued~~2009 $5ending February 15,~~000,000~~ of2014 ~~variable-rate~~and ~~capital~~a ~~securities~~9% todividend ~~institutional~~for ~~investors~~the period thereafter. The ~~proceeds~~first ofdividend ~~the~~was ~~securities~~paid ~~were used~~ to ~~provide~~ ~~funding~~the ~~for~~Treasury ~~future~~on ~~growth~~May 15, ~~and~~2009 towith ~~improve~~future dividend ~~the~~payments ~~Company’s~~due ~~capital~~quarterly ~~ratios~~thereafter. ~~The~~During ~~current~~2012 ~~cost~~$290,415 ofin ~~these~~dividends ~~securities~~were ispaid 3to the Treasury.~~72%.~~

The Company’s ~~primary~~discontinued ~~uses~~the payment of ~~funds~~cash ~~are~~dividends ~~for loans and investments. Loans including loans held for sale and excluding deferred fees/costs and discounts and the allowance for credit losses, increased $10.7 million or 3.8%~~ to ~~$290.8~~common ~~million~~stockholders ~~at December 31,~~in ~~2011 from $280~~2002.1 ~~million~~The aCompany ~~year~~has ~~earlier.~~no ~~Commercial~~current ~~real~~plans ~~estate balances increased $20.0 million or 21.1% due~~ to ~~new~~resume ~~customer~~payments ~~relationships.~~of ~~Commercial~~cash ~~and~~dividends ~~industrial~~on ~~loans~~its ~~decreased~~common ~~$3.7~~stock ~~million~~as orManagement ~~7.2%.~~believes ~~Construction~~it ~~loans increased~~is ~~$1.5~~in ~~million~~the orbest ~~4.5%~~interest ~~and~~of ~~residential~~the ~~real~~Company ~~estate~~to ~~loan~~retain ~~balances~~capital ~~decreased~~to bysupport ~~$5.3~~the ~~million~~growth ~~or 5.9%. Installment and other consumer loans decreased by $1.8 million or 16.8%. Investment security balances decreased $8.7 million during~~ of the ~~year as proceeds from matured and called securities flowed into federal funds sold and other overnight investments and interest bearing balances with banks~~Company.

~~Operating~~As ~~Results~~a condition to the Company’s participation in the CPP, the Company’s ability to declare or pay dividends on its common stock is restricted. Specifically, the Company may not declare dividend payments on its common stock if it is in arrears on the dividends on the Series A Preferred Stock. Until the Series A Preferred Stock issued to the Treasury under the CPP is redeemed or transferred, the Company may not pay a cash dividend without approval from the Treasury.

~~The~~A ~~following~~summary ~~discussion outlines some~~ of the ~~more important factors and~~Company’s ~~trends~~quarterly ~~affecting~~stock ~~the~~prices ~~earnings~~is ofshown ~~the~~below: ~~Company as presented in its consolidated statements of income.~~

Net Interest Income


	2012						2011
	Stock Price Range				Per Share		Stock Price Range				Per Share
Quarter	High		Low		Dividend		High		Low		Dividend

1st	$	6.34	$	3.80	$	0.0000	$	4.49	$	3.70	$	0.0000
2nd		7.59		5.00		0.0000		4.50		4.00		0.0000
3rd		7.48		6.90		0.0000		4.28		3.42		0.0000
4th		12.31		7.13		0.0000		4.10		3.61		0.0000

~~Net~~The ~~interest~~closing ~~income~~price ~~is the difference between interest income and interest expense and is generally affected by increases or decreases in the amount~~ of ~~outstanding~~ ~~interest earning assets and interest bearing liabilities (volume variance). This volume variance coupled with changes in interest rates on these same assets and liabilities (rate variance) equates to~~ the ~~total~~Company’s ~~change~~stock inat ~~net~~December 31, ~~interest income~~2012 inwas ~~any given period~~$11.84 ~~The~~per table on page 13 sets forth certain information regarding changes in interest income and interest expense attributable to (1) changes in volume (change in volume multiplied by the old rate); (2) changes in rates (change in rate multiplied by the old volume); and (3) changes in rate/volume (change in rate multiplied by change in volume)share.

~~Net interest~~Equity ~~income~~Compensation ~~for~~Plan ~~the~~Information year ended December 31, 2011, was $16.3 million, representing an increase of $1.1 million or 6.8% from net interest income of $15.2 million for the year ended December 31, 2010. The increase in net interest income is due primarily to a decrease in the cost of interest bearing liabilities and increased income on the loan portfolio, offset by a decrease in the yield on investment securities. The net interest margin was 3.93% for the year ended December 31, 2011 and 3.66% for the year ended December 31, 2010. The yield on earning assets increased to 4.80% for the year ended December 31, 2011 compared to 4.77% for the year ended December 31, 2010 while the cost of interest bearing liabilities decreased to 1.04% from 1.30% for the same periods, respectively. Net interest income for 2011 includes $350 thousand of interest collected on a cash basis related to loans on nonaccrual status, compared to $197 thousand of interest collected on nonaccrual loans in 2010.

The table setting forth Securities Authorized for Issuance Under Equity Compensation Plans can be found under Item 12 on page 76 of this report.

~~Rate/Volume~~Recent ~~Analysis~~Sales of Unregistered Securities

	2011 vs. 2010												2010 vs. 2009
				Due to Change in												Due to Change in
	Increase or(Decrease)			Volume			Rate			Rate/Volume			Increase or(Decrease)			Volume			Rate			Rate/Volume
										(Dollars in thousands)
Interest income on:
Loans	$	1,144		$	724		$	401		$	19		$	41		$	175		($	132	)	($	2	)
Investment securities		(1,137	)		(525	)		(711	)		99			(1,369	)		(301	)		(1,134	)		66
Interest bearing deposits in other banks		(11	)		(5	)		(6	)		0			(32	)		26			(40	)		(18	)
Federal funds sold and other overnight investments		8			5			3			0			(13	)		(23	)		17			(7	)
Total interest income		4			199			(313	)		118			(1,373	)		(123	)		(1,289	)		39
Interest expense on:
NOW accounts		(4	)		4			(7	)		(1	)		(6	)		5			(10	)		(1	)
Money market accounts		(83	)		6			(87	)		(2	)		(141	)		(33	)		(118	)		10
Savings accounts		(488	)		(27	)		(471	)		10			(1,097	)		(10	)		(1,091	)		4
Certificates of deposit		(402	)		(129	)		(298	)		25			(1,128	)		(324	)		(916	)		112
Repurchase agreements		(33	)		(3	)		(31	)		1			(14	)		13			(24	)		(3	)
Long-term borrowing		(24	)		(34	)		10			0			(89	)		(122	)		37			(4	)
Junior subordinated debt		(2	)		0			(2	)		0			(27	)		0			(27	)		0
Total interest expense		(1,036	)		(183	)		(886	)		33			(2,502	)		(471	)		(2,149	)		118
Net interest income	$	1,040		$	382		$	573		$	85		$	1,129		$	348		$	860		($	79	)

None.

~~Interest~~12 ~~Income~~

TheTable Company’s interest income remained at $19.8 million for the year ended December 31, 2011 compared to the year ended December 31, 2010. The maintenance of interest income in the current rate environment can be attributed to an increase of $12.5 million in average loan balances, an increase of 4.5%. The yield on the loan portfolio improved to 5.93% from 5.78% for the year ended December 31, 2010 due to interest of $350 thousand received on nonaccrual loans during 2011. The yield on the securities portfolio dropped to 2.89% from 3.56%. Average federal funds sold balances increased $2.4 million or 15.9% and interest bearing balances with banks decreased $2.4 million or 13.4%. The yield on federal funds sold increased to 0.23% from 0.22% for the year ended 2011 while the yield on interest bearing balances with banks decreased to 0.13% from 0.18% for the same period. Contents

~~Interest~~Purchases ~~Expense~~of Equity Securities by the Issuer and Affiliated Purchasers

~~The~~None Company’s interest expense decreased $1.0 million or 22.4% to $3.6 million for 2011, compared to $4.6 million for 2010. The decrease in interest expense for the year ended December 31, 2011 can be attributed primarily to lower interest rates on all of the Bank’s deposit accounts, repurchase agreement accounts and the junior subordinated debentures.

~~Provision~~ITEM 6. ~~for~~SELECTED ~~Credit~~FINANCIAL ~~Losses~~ DATA

The ~~Company~~following ~~recorded~~table asummarizes ~~provision~~the ~~for~~Company’s ~~credit~~selected ~~losses~~financial ofinformation $2and other financial data.2 ~~million~~The ~~for~~selected ~~the~~balance ~~year~~sheet ~~ended~~and ~~December 31,~~statement ~~2011~~of ~~compared~~income todata ~~$2.1~~are ~~million~~derived ~~for~~from our audited financial ~~the~~statements. ~~year~~You ~~ended~~should ~~December 31,~~read ~~2010,~~this aninformation ~~increase~~together with “Management’s Discussion and Analysis of ~~$42~~Financial ~~thousand~~Condition orand ~~2.0%.~~Results ~~The~~of ~~increase~~Operations” inand ~~provision~~our ~~was~~financial ~~primarily~~statements and the ~~result~~related ofnotes anincluded ~~increase~~elsewhere in ~~loan~~this ~~balances~~report. Results for past periods are not necessarily indicative of results that may be expected for any future period.

13Selected Consolidated Financial Highlights

~~Nonperforming assets at year end decreased to $8.3 million for the year ended December 31, 2011 from~~Selected ~~$10.1~~Consolidated ~~million~~Financial ~~for~~Data ~~the year ended December 31, 2010. Nonperforming assets included $1.2 million of foreclosed real estate~~ at ~~December 31, 2011~~ and ~~$52~~for ~~thousand~~years ofended ~~repossessed assets. Nonperforming assets of $10.1 million at~~ December 31, ~~2010 included $1.6 million of foreclosed real estate and $145 thousand of repossessed assets.~~

Net charge-offs totaled $1.9 million for the year ended December 31, 2011 compared to net charge-offs of $3.2 million for the same period in 2010. The net charge-offs in 2011 included $1.2 million in commercial and industrial loans, $516 thousand in loans secured by real estate and $180 thousand in consumer and installment loans. See the discussion under the heading “Provision for Credit Losses and Credit Risk Management” on pages 22 through 23 for greater analysis regarding the Allowance for Credit Losses and related provision.


	2012		2011		2010		2009			2008
	(Dollars in thousands, except per share data)

Selected Financial Data
Total assets	$	446,386	$	441,570	$	432,140	$	444,332		$	394,916
Total loans, net		274,560		283,284		273,063		274,032			264,093
Total deposits		352,917		350,381		340,914		350,463			300,627
Securities sold under agreement to repurchase		14,584		11,344		14,558		14,642			12,639
Long-term debt		40,000		40,000		40,000		45,000			45,000
Stockholders’ equity		36,215		37,368		34,774		32,632			26,814

Selected Operating Data
Interest income	$	18,916	$	19,857	$	19,853	$	21,226		$	21,800
Interest expense		2,914		3,597		4,633		7,135			8,765

Net interest income		16,002		16,260		15,220		14,091			13,035
Provision for credit losses		684		2,190		2,148		6,540			2,375

Net interest income after provision for credit losses		15,318		14,070		13,072		7,551			10,660
Noninterest income		1,916		1,842		1,815		1,989			1,753
Noninterest expense		12,308		12,563		12,385		12,405			10,325

Income (loss) before income taxes		4,926		3,349		2,502		(2,865	)		2,088
Income tax expense (benefit)		1,834		1,178		886		(1,158	)		661

Net income (loss)		3,092	$	2,171	$	1,616	($	1,707	)	$	1,427
Preferred stock dividend and discount accretion		271		490		485		442			0

Net income (loss) available to common shareholders	$	2,821	$	1,681	$	1,131	($	2,149	)	$	1,427

Noninterest Income



	2012			2011			2009			2008			2007
Key Financial Ratios and Other Data
Return on average assets
Net income (loss) divided by average assets		0.70	%		0.50	%		0.37	%		(0.38	%)		0.38	%
Return on average equity
Net income (loss) divided by average equity		8.54	%		6.05	%		4.68	%		(5.24	%)		5.41	%
Equity to asset ratio
Average equity divided by average assets		8.17	%		8.23	%		7.93	%		7.33	%		7.01	%
Diluted earnings (loss) per common share	$	0.68		$	0.39		$	0.29		($	0.56	)	$	0.35
Book value per common share	$	8.02		$	7.38		$	6.81		$	6.39		$	6.98
Tangible book value per common share	$	8.02		$	7.38		$	6.81		$	6.39		$	6.98
Number of common shares outstanding		4,008,934			3,958,293			3,922,006			3,867,006			3,842,943
Efficiency ratio		68.69	%		69.40	%		72.70	%		77.15	%		69.82	%
Interest rate spread		3.65	%		3.76	%		3.47	%		3.07	%		3.28	%
Net interest margin		3.80	%		3.93	%		3.66	%		3.32	%		3.65	%
Risk based capital ratio – Tier 1		12.65	%		12.78	%		12.80	%		12.45	%		11.37	%
Risk based capital ratio – Total		13.91	%		14.04	%		14.06	%		13.72	%		12.62	%

~~The~~13 Company’s primary sources of noninterest income are fees charged on deposit products, fees generated by the Bank’s VISA check card program and fees recognized on residential mortgage lending. Noninterest income of $1.8 million for the year ended December 31, 2011 was an increase of $27 thousand or 1.5% from the year ended December 31, 2010. Included in noninterest income for the year ended December 31, 2011 were gains on the sale of loans in the secondary market of $166 thousand compared to $159 thousand for the year ended December 31, 2010. For the year ended December 31, 2011 the Bank recorded net gains on the sale of other assets primarily real estate owned and repossessed assets of $8 thousand compared to losses of $51 thousand in 2010 on similar assets. In 2011 the Bank also recorded a loss of $32 thousand on the disposal of fixed assets related to the closure of a branch office. In 2010 the Bank recorded a loss of $55 thousand on the sale of securities available for sale with no sales recorded in 2011. Fees charged on deposit products increased $57 thousand or 4.8%, while other mortgage banking fees totaled $139 thousand for the year ended December 31, 2011, an increase of $65 thousand or 87.8% from fees of $74 thousand for the year ended December 31, 2010.

NoninterestTable Expenseof Contents

~~Noninterest expense increased $178 thousand or 1.4% to $12.6 million from $12.4 million for the year ended December~~ITEM ~~31, 2011, compared to the year ended December 31, 2010~~7. ~~Personnel~~MANAGEMENT’S ~~costs~~DISCUSSION ~~increased~~AND ~~$248~~ANALYSIS ~~thousand~~OF ~~and~~FINANCIAL ~~other operating expenses increased $203~~CONDITION ~~thousand.~~AND ~~These~~RESULTS ~~increases~~OF ~~were~~OPERATIONS offset by a decrease in legal and professional fees of $115 thousand primarily due to a reduction in collection costs. Also offsetting the increase in noninterest expenses was lower FDIC expense. FDIC expense decreased $122 thousand for the year ended December 31, 2011 compared to the year ended December 31, 2010 due to changes in the insurance assessment calculations.

~~The~~Pending ~~increase~~Merger in personnel expense included $311 thousand due to a rise in staffing costs including benefit increases and payroll tax increases due to higher federal and state unemployment rates. Offsetting a portion of the increase in personnel expense was a decrease in expense associated with bank owned life insurance of $95 thousand.

~~The~~On ~~increase~~October 22, of2012, ~~$203~~the ~~thousand~~Company orand 12F.1%N.B. inentered ~~other~~into ~~operating~~the ~~expenses~~Merger ~~was~~Agreement, ~~due~~pursuant to awhich ~~partial~~the ~~write-down~~Company ofwill ~~$199~~merge ~~thousand~~with ~~taken~~and asinto FNB, with FNB surviving the merger. As a result of athe ~~recent~~Merger, ~~appraisal~~the onCompany will cease to exist as a ~~property~~separate ~~held~~legal ~~for~~entity ~~future~~and ~~branch~~its ~~expansion~~business will be combined with that of FNB’s. As soon as practicable after the completion of the Merger, the Bank will merge with and into FNB Bank, with FNB Bank as the surviving entity.

~~Occupancy~~Under the terms of the Merger Agreement, shareholders of the Company will be entitled to receive, subject to possible adjustment, as provided in the Merger Agreement, 1.143 shares of FNB’s common stock for each share of the Company’s common stock they own and ~~equipment~~if, ~~expense~~prior ~~decreased~~to ~~$43~~the ~~thousand~~effective time of the Merger, the Company is able to collect in cash part or ~~2.7%~~all of ~~primarily~~the amounts due toon a ~~partial~~ ~~year~~particular loan in the amount of ~~expense~~approximately on$4.6 million, up to $0.36 in cash per share of the ~~branch~~Company’s ~~office~~common ~~closed~~stock ~~during~~they ~~2011~~own.

~~Provision~~Overview ~~for Income Taxes~~

The ~~Company~~following ~~and~~is ~~the~~management’s ~~Bank~~discussion ~~file~~and ~~consolidated~~analysis ~~federal~~of ~~income~~the ~~tax~~financial condition ~~returns~~ and ~~separate~~results ~~Maryland~~of ~~income~~operations ~~tax~~of ~~returns~~Annapolis Bancorp, Inc. ~~The~~on ~~Company~~a ~~recognized~~consolidated ~~tax~~basis ~~expense~~with ofits ~~$1.2 million~~wholly owned subsidiary, BankAnnapolis, for the ~~year~~periods ~~ended December 31~~presented, ~~2011~~and ~~compared~~should tobe ~~$886~~read ~~thousand~~in ~~for~~conjunction with the ~~year~~consolidated ~~ended~~financial ~~December 31,~~statements ~~2010,~~and ~~for~~the related annotes ~~effective~~thereto ~~tax~~appearing ~~rate~~elsewhere ~~of 35.2%~~ in ~~2011~~this ~~and~~annual 35report.4% ~~in 2010.~~

14The Company reported net income for 2012 of $3.1 million, an increase of $921,000 or 42.4% from net income of $2.2 million in 2011. Net income available to common shareholders after accruing for preferred stock dividends and discount accretion for 2012 was $2.8 million compared to net income available to common shareholders of $1.7 million in 2011. The increase in 2012 earnings was due to lower interest expense, lower provision for credit losses expense, lower noninterest expense, and higher noninterest income. The net income per diluted common share for 2012 was $0.68 compared to a net income of $0.39 per diluted common share in 2011.

~~Consolidated~~The ~~Average~~primary ~~Balances~~source of income of the Bank is interest on its loan and investment portfolios, ~~Yields~~while one of the principal expenses of the Bank is interest on its deposit accounts and ~~Rates~~borrowings. The difference between interest income on interest earning assets and interest expense on interest bearing liabilities is referred to as net interest income. Net interest income was $16.0 million for 2012, a decrease of $258,000 or 1.6% compared to $16.3 million in 2011. Total assets were $446.4 million as of December 31, 2012, a $4.8 million or a 1.1% increase compared to December 31, 2011 total assets of $441.6 million. The Company’s return on average assets was 0.70% and 0.50% for the years ending December 31, 2012, and 2011, respectively. The Company’s return on average common equity was 9.09% and 6.01% for the years ending December 31, 2012, and 2011, respectively.

~~The~~At ~~following table presents a condensed average balance sheet as well as income/expense and yields/costs of funds thereon for the years ended~~ December 31, ~~2011~~2012 ~~and~~the Bank’s ~~2010.~~gross ~~The~~loan ~~yields~~portfolio ~~and~~totaled ~~costs~~$281.2 ~~are~~million. ~~derived~~Of bythis ~~dividing~~amount, ~~income~~$44.4 million or ~~expense~~15.8% bywere ~~the~~commercial ~~average~~loans, ~~balance~~$116.9 ofmillion ~~assets~~ or ~~liabilities for the periods shown~~41.6% ~~Average~~were ~~balances~~commercial ~~are~~real ~~derived~~estate ~~from~~loans, ~~average daily balances~~$33.3 ~~The~~million ~~yields~~or ~~and~~11.8% ~~costs include~~were ~~loan~~construction ~~fees~~loans, ~~that~~$47.9 ~~are~~million ~~considered~~or ~~adjustments~~17.0% were one- to ~~yields.~~four-family ~~Net~~residential ~~interest~~mortgage ~~spread~~loans, ~~the~~$31.6 ~~difference~~million ~~between~~or ~~the~~11.3% ~~average~~were ~~rate~~home onequity ~~interest~~loans, ~~bearing assets~~ and ~~the~~$7.1 ~~average~~million ~~rate~~or ~~on interest bearing liabilities, increased to 3~~2.765% ~~for~~were ~~the~~consumer ~~year~~and ~~ended December 31,~~other ~~2011 from 3~~loans.~~47%~~ ~~at December 31, 2010.~~

	Years Ended
	December 31, 2011							December 31, 2010
	AverageBalance		Interest(1)		Yield/Rate			AverageBalance		Interest(1)		Yield/Rate
	(Dollars in thousands)
Assets
Interest Earning Assets
Federal funds sold and other overnight investments	$	17,233	$	40		0.23	%	$	14,868	$	32		0.22	%
Interest bearing balances in other banks		15,681		21		0.13	%		18,106		32		0.18	%
Investment securities (2)		91,246		2,639		2.89	%		105,989		3,776		3.56	%
Loans (3)		289,502		17,157		5.93	%		276,984		16,013		5.78	%
Total interest earning assets		413,662		19,857		4.80	%		415,947		19,853		4.77	%
Noninterest Earning Assets
Cash and due from banks		7,521							4,044
Other assets		14,827							15,487
Total Assets	$	436,010						$	435,478
Liabilities and Stockholders’ Equity
Interest Bearing Deposits
NOW accounts	$	32,495	$	41		0.13	%	$	30,003	$	45		0.15	%
Money market accounts		43,107		189		0.44	%		42,191		272		0.64	%
Savings accounts		137,732		860		0.62	%		140,580		1,348		0.96	%
Certificates of deposit		78,031		1,131		1.45	%		85,190		1,533		1.80	%
Repurchase agreements		16,004		74		0.46	%		16,516		107		0.65	%
Long-term borrowings		35,000		1,127		3.18	%		36,065		1,151		3.15	%
Junior subordinated debt		5,000		175		3.45	%		5,000		177		3.49	%
Total interest bearing liabilities		347,369		3,597		1.04	%		355,545		4,633		1.30	%
Noninterest Bearing Liabilities
Demand deposit accounts		50,331							43,273
Other liabilities		2,438							2,113
Stockholders’ Equity		35,872							34,547
Total Liabilities and Stockholders’ Equity	$	436,010						$	435,478
Interest rate spread						3.76	%						3.47	%
Ratio of interest earning assets to interest bearing liabilities						119.08	%						116.99	%
Net interest income and net interest margin			$	16,260		3.93	%			$	15,220		3.66	%

Application of Critical Accounting Policies

~~(1)~~The NoCompany’s ~~tax-equivalent~~consolidated ~~adjustments~~financial statements are ~~made~~prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the ~~effect~~date ~~would~~of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be ~~material~~established, or when an asset or liability must be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are either based on quoted market prices or are provided by other third-party sources, when available.

~~(2)~~14 ~~Includes Federal Reserve and Federal Home Loan Bank stock.~~

(3)Table Includesof non-accrual loansContents

~~Risk~~The ~~Management~~most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements which can be found on page 37 and continuing to page 40. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for credit losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The ~~Board~~allowance offor ~~Directors~~credit islosses ~~the~~represents ~~foundation~~management’s ~~for~~estimate ~~effective~~of ~~corporate~~probable ~~governance~~credit ~~and~~losses ~~risk~~inherent ~~management.~~in ~~The~~the ~~Board~~loan ~~demands~~portfolio ~~accountability~~as of the ~~management,~~balance ~~keeps~~sheet ~~stockholders’~~date. ~~and~~Determining ~~other~~the ~~constituencies’~~amount ~~interests~~of inthe ~~focus,~~allowance ~~advocates~~for credit losses is considered a critical accounting estimate because it requires significant judgment and the ~~upholding~~use of estimates related to the ~~Company’s~~amount ~~code~~and timing of ~~ethics~~expected future cash flows on impaired loans, ~~and~~estimated ~~fosters~~losses aon ~~strong~~pools ~~internal~~of ~~control~~homogeneous ~~environment.~~loans ~~Through~~based ~~its~~on ~~Audit~~historical ~~Committee~~loss experience, ~~the~~and ~~Board~~consideration ~~actively reviews~~of ~~critical~~current ~~risk~~economic ~~positions,~~trends ~~including~~and ~~market~~conditions, ~~credit,~~all ~~liquidity,~~of ~~and~~which ~~operational~~may ~~risk~~be susceptible to significant change. The ~~Company’s~~loan ~~goal~~portfolio inalso represents ~~managing~~the ~~risk~~largest isasset totype ~~reduce~~on ~~earnings~~the ~~volatility,~~consolidated ~~control~~balance ~~exposure~~sheet. Note 1 to ~~unnecessary~~the ~~risk,~~consolidated ~~and~~financial ~~ensure~~statements ~~appropriate~~found ~~returns~~on ~~for~~page ~~risk assumed.~~39 ~~Senior~~describes ~~management~~the ~~manages~~methodology ~~risk~~used atto determine the ~~business~~allowance ~~line~~for ~~level,~~credit ~~supplemented~~losses ~~with~~and ~~corporate-level~~a ~~oversight~~discussion ~~through~~of the ~~Asset~~factors ~~Liability~~driving changes ~~Committee,~~in ~~internal~~the ~~audit~~amount ~~and~~of ~~quality~~the ~~control~~allowance ~~functions~~for credit losses is included in the Credit Risk Management section of this financial analysis.

~~Liquidity~~Financial ~~Risk~~Condition ~~Management~~as of December 31, 2012 and ~~Capital~~2011 ~~Resources~~and Results of Operations for the Years then Ended

The ~~objective~~Company, ofthrough ~~liquidity~~its ~~management~~Bank issubsidiary, functions toas ~~ensure~~a ~~that~~financial ~~the~~intermediary, ~~cash~~and ~~flow~~as ~~requirements~~such ofits ~~depositors~~financial condition and ~~borrowers,~~results asof ~~well~~operations ascan ~~the~~be ~~operating~~examined ~~cash~~in ~~needs~~terms of ~~the~~developing ~~Company~~trends ~~are~~in ~~met,~~its ~~taking~~sources ~~into account all on-~~ and ~~off-balance~~ ~~sheet~~uses ~~funding~~of ~~demands~~funds. ~~Liquidity~~These ~~management~~trends ~~also~~are ~~includes~~the ~~ensuring~~result ~~that~~of ~~cash~~both ~~flow~~external ~~needs~~environmental ~~are~~factors, such ~~met~~as atchanging aeconomic ~~reasonable~~conditions, ~~cost.~~regulatory ~~Liquidity~~changes ~~risk~~and ~~arises~~competition, ~~from~~and ~~the~~also ~~possibility~~internal ~~the~~environmental ~~Company~~factors ~~may~~such ~~not~~as bemanagement’s ~~able~~evaluation as to ~~satisfy~~the ~~current~~best oruse ~~future~~of ~~financial commitments,~~funds orin ~~the~~these ~~Company~~changing ~~may~~conditions. ~~become unduly reliant on~~

15Total assets increased by $4.8 million or 1.1% during 2012 to $446.4 million from $441.6 million at December 31, 2011 as investment securities, deposits and securities sold under agreements to repurchase increased. Total deposits and securities sold under agreements to repurchase, the Company’s primary sources of funds, increased $5.8 million or 1.6% to $367.5 million from $361.7 million at December 31, 2011. Time deposits totaled $68.8 million or 19.5% of the Bank’s total deposits at December 31, 2012, compared to $78.3 million or 22.3% in 2011. Savings and money market accounts, the largest portion of the Bank’s total deposits, totaled $189.6 million or 53.7% of the Bank’s total deposits at December 31, 2012, compared to $182.5 million or 52.1% in 2011. NOW accounts totaled $35.9 million or 10.2% and $32.9 million or 9.4% of total deposits at December 31, 2012 and 2011, respectively. Demand, noninterest bearing accounts totaled $58.5 million or 16.6% of total deposits at December 31, 2012 and $56.7 million or 16.2% at December 31, 2011. Securities sold under agreements to repurchase increased $3.3 million to $14.6 million at December 31, 2012 from $11.3 million at December 31, 2011. Long-term borrowings remained at $35.0 million at December 31, 2012 and 2011.

~~alternative~~On ~~funding~~March 26, ~~sources.~~2003, ~~The~~Annapolis ~~Company~~Bancorp ~~maintains~~Statutory aTrust ~~liquidity~~I ~~risk~~(“Statutory ~~management~~Trust ~~policy~~I”), toa ~~address~~Connecticut ~~and~~business ~~manage~~trust ~~this~~formed, ~~risk.~~funded ~~The~~and ~~policy~~wholly ~~identifies~~owned by the ~~primary~~Company, ~~sources~~issued ~~of liquidity~~$5,000,000 ~~establishes procedures~~of ~~for~~variable-rate ~~monitoring~~capital ~~and~~securities ~~measuring~~to ~~liquidity,~~institutional ~~and~~investors. ~~establishes~~The ~~minimum~~proceeds ~~liquidity~~of ~~requirements~~the ~~which~~securities ~~comply~~were ~~with~~used ~~regulatory~~to ~~guidance.~~provide ~~The~~funding ~~policy~~for isfuture ~~updated~~growth atand ato ~~minimum~~improve onthe aCompany’s ~~yearly~~capital ~~basis~~ratios. The ~~liquidity~~current ~~position~~cost ~~is continually monitored and~~of ~~reported~~these ~~monthly~~securities tois ~~the Board of Directors~~3.46%.

~~Deposits,~~The ~~commercial~~Company’s ~~reverse~~primary ~~repurchase~~uses ~~agreements,~~of ~~and~~funds ~~lines~~are offor ~~credit~~loans ~~are~~and ~~the~~investments. ~~primary~~Loans ~~sources~~excluding deferred fees/costs and ofdiscounts and the ~~Bank’s~~allowance ~~funds~~ for ~~lending~~credit ~~and~~losses, ~~investing~~decreased ~~activities~~$9.6 Asmillion ofor 3.3% to $281.2 million at December 31, ~~2011~~2012 ~~the~~from ~~Company’s~~$290.8 ~~deposit~~million ~~and~~a ~~repurchase~~year ~~agreement~~earlier. Commercial real estate balances increased $62.30 million or 1.87% ~~over~~due ~~December 31,~~to ~~2010~~several ~~balances~~new customer relationships. AtCommercial ~~December 31,~~and ~~2011 the~~industrial ~~Company~~loans ~~also~~decreased ~~had~~$3.2 ~~available~~million ~~both~~or ~~secured~~6.8%. ~~and~~Construction ~~unsecured~~loans ~~lines~~decreased of$1.7 ~~credit~~million ~~with~~or ~~the~~4.8% ~~Federal~~and ~~Home~~residential ~~Loan~~real ~~Bank~~estate ~~and~~loan ~~correspondent~~balances ~~banks~~decreased by $4.8 ~~Secondary~~million ~~sources~~or of5.7%. ~~funds~~Installment ~~are~~and ~~derived~~other ~~from~~consumer ~~loan~~loans decreased ~~repayments~~by ~~and~~$1.9 ~~investment~~million ~~maturities~~or 20.4%. ~~Loan~~Investment ~~repayments~~security ~~and~~balances ~~investment maturities~~increased ~~can~~$18.7 bemillion ~~considered~~during athe ~~relatively~~year ~~stable~~as ~~funding~~proceeds ~~source,~~from ~~while~~loan ~~deposit~~payoffs ~~activity~~and isincreased ~~greatly~~deposit ~~influenced~~and byrepurchase ~~interest~~agreement ~~rates,~~balances ~~general~~were ~~market~~placed ~~conditions~~in ~~and~~investment ~~competition~~securities.

~~The~~Operating ~~Bank~~Results 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 22.3% of the deposit portfolio at December 31, 2011. Core deposits, considered to be noninterest bearing and interest bearing demand deposit accounts, savings deposits and money market accounts, accounted for 77.7% of the deposit portfolio at December 31, 2011. This represents a 0.5% increase in the percentage of core deposits to total deposits. Core deposits accounted for 77.2% of the deposit portfolio at December 31, 2010.

The ~~Bank intends to continue to emphasize retail deposit~~following ~~accounts~~discussion asoutlines ~~its~~some ~~primary source~~ of ~~liquidity.~~the ~~Deposit~~more ~~products~~important ~~are~~factors ~~promoted~~and intrends ~~periodic~~affecting ~~newspaper~~the ~~advertisements,~~earnings ~~along~~of ~~with~~the ~~notices~~Company ~~provided~~as presented in ~~customer~~its ~~account~~consolidated statements. ~~The~~of ~~Bank’s market strategy is based on its reputation as a community bank providing quality products and personal customer service~~income.

~~The~~Net ~~Bank pays interest rates on interest bearing deposit products competitive with rates offered by other financial institutions in its market area.~~ Interest ~~rates~~Income on deposits are reviewed by management which considers a number of factors including: (1) the Bank’s internal cost of funds; (2) rates offered by competing financial institutions; (3) investing and lending opportunities; and (4) the Bank’s liquidity position.

~~Jumbo certificates~~Net ofinterest ~~deposit~~income ~~are~~is ~~accounts~~the ofdifference ~~$100,000~~between orinterest ~~more.~~income ~~These~~and interest ~~accounts~~expense ~~totaled~~and ~~$47.8~~is ~~million~~generally ataffected ~~December 31,~~by ~~2011~~increases ~~and~~or ~~consisted~~decreases ~~principally~~in ofthe ~~time~~amount ~~certificates~~ of ~~deposit.~~outstanding ~~The~~interest ~~following~~earning ~~table~~assets ~~sets forth the amount~~ and ~~maturity~~interest ofbearing ~~jumbo certificates~~liabilities of(volume ~~deposit~~variance). atThis ~~December 31,~~volume ~~2011:~~

Three Months or Less	Greater than Three Months to Six Months	Greater than Six Months to One Year	Greater than One Year	Total
(Dollars in thousands)
$ 14,253	$ 5,886	$ 9,588	$ 18,109	$ 47,836

SecuritiesTable sold under agreements to repurchase represent transactions with customers for correspondent or commercial account cash management services. Securities underlying the repurchase agreements are maintained in the Company’s control. For the years ended December 31, 2011 and 2010, the average cost of these borrowings was 0.46% and 0.65%, respectively. Contents

~~The~~ variance ~~Bank~~coupled ~~maintains~~with achanges ~~secured~~in ~~borrowing~~interest ~~line~~rates ~~with~~on ~~the~~these ~~Federal~~same ~~Home~~assets ~~Loan~~and ~~Bank~~liabilities (~~FHLB~~rate variance) ~~with~~equates ~~the potential~~ to ~~draw~~the uptotal tochange ~~$110.4 million,~~in ~~and~~net ~~may~~interest ~~borrow~~income upin toany ~~$19~~given period.2 ~~million~~The ~~under~~table ~~secured~~on ~~and~~page ~~unsecured~~16 sets ~~lines~~forth ~~established~~certain ~~with~~information ~~correspondent~~regarding ~~commercial~~changes ~~banks.~~in Ininterest ~~addition,~~income ~~the~~and ~~Bank~~interest ~~has~~expense ~~the~~attributable ~~ability~~ to ~~borrow~~(1) changes ~~directly~~in ~~from~~volume ~~the~~(change ~~Federal~~in ~~Reserve~~volume ~~Bank~~multiplied ~~discount~~by ~~window.~~the ~~At December 31,~~old ~~2011,~~rate); ~~the~~(2) changes ~~Bank~~in ~~had~~rates ~~advances~~(change ~~outstanding~~in ofrate ~~$35.0~~multiplied ~~million~~by ~~under~~ the ~~Federal~~old volume); ~~Home Loan Bank’s convertible advance program~~ and ~~had~~(3) changes noin ~~borrowings~~rate/volume ~~outstanding~~(change ~~under~~in ~~its~~rate ~~secured~~multiplied ~~and~~by ~~unsecured~~change ~~lines~~in ~~of credit~~volume).

~~Potential~~Net ~~adverse~~interest ~~impacts~~income onfor ~~liquidity~~the ~~can~~year ~~occur~~ended December 31, as2012, was $16.0 million, representing a ~~result~~decrease of ~~changes~~$258,000 inor ~~the~~1.6% ~~estimated~~from ~~cash~~net ~~flows~~interest ~~from~~income ~~investment,~~of ~~loan,~~$16.3 ~~and~~million ~~deposit~~for ~~portfolios~~the year ended December 31, 2011. The decrease in net interest income is due primarily to a decrease in yields ~~Bank~~on ~~manages~~the ~~this~~loan ~~inherent~~and ~~risk~~securities byportfolios, ~~maintaining~~offset by a ~~portfolio~~decrease ofin ~~available~~the ~~for~~yield ~~sale~~on ~~investments~~deposits and ~~through~~repurchase ~~secondary~~agreements. ~~sources~~The ofnet ~~liquidity~~interest ~~including~~margin ~~FHLB~~was ~~advances~~3.80% for the year ended December 31, 2012 and ~~reverse~~3.93% ~~repurchase~~for ~~agreements~~the year ended December 31, 2011. InThe yield ~~addition~~on earning assets decreased to 4.49% for the year ended December 31, 2012 compared to 4.80% for the ~~Bank~~year ~~has~~ended December 31, 2011 while the ~~ability~~cost of interest bearing liabilities decreased to ~~increase~~0.84% ~~its~~from 1.04% for the same periods, ~~liquidity~~respectively. byNet ~~raising~~interest income for 2012 includes $333,000 of interest ~~rates~~collected on ~~deposit~~a ~~accounts,~~cash ~~selling~~basis ~~loans~~related into ~~the~~loans ~~secondary~~on ~~market~~nonaccrual orstatus, ~~curtailing~~compared ~~the~~to ~~volume~~$350,000 of ~~loan~~interest ~~originations~~collected on nonaccrual loans in 2011.

16Rate/Volume Analysis

The Bank maintains the majority of the assets held for liquidity purposes in overnight federal funds and short-term interest bearing balances with banks.


	2012 vs. 2011												2011 vs. 2010
				Due to Change in												Due to Change in
	Increase or (Decrease)			Volume			Rate			Rate/ Volume			Increase or (Decrease)			Volume			Rate			Rate/ Volume
	(Dollars in thousands)
Interest income on:
Loans	($	404	)		176			(574	)		(6	)	$	1,144		$	724		$	401		$	19
Investment securities		(556	)		41			(588	)		(9	)		(1,137	)		(525	)		(711	)		99
Interest bearing deposits in other banks		18			4			12			2			(11	)		(5	)		(6	)		0
Federal funds sold and other overnight investments		1			(1	)		2			0			8			5			3			0

Total interest income		(941	)		220			(1,148	)		(13	)		4			199			(313	)		118

Interest expense on:
NOW accounts		(12	)		1			(13	)		0			(4	)		4			(7	)		(1	)
Money market accounts		(40	)		51			(71	)		(20	)		(83	)		6			(87	)		(2	)
Savings accounts		(453	)		(46	)		(430	)		23			(488	)		(27	)		(471	)		10
Certificates of deposit		(165	)		(87	)		(85	)		7			(402	)		(129	)		(298	)		25
Repurchase agreements		(25	)		0			(25	)		0			(33	)		(3	)		(31	)		1
Long-term borrowing		3			0			3			0			(24	)		(34	)		10			0
Junior subordinated debt		9			0			9			0			(2	)		0			(2	)		0

Total interest expense		(683	)		(81	)		(612	)		10			(1,036	)		(183	)		(886	)		33


Net interest income	($	258	)	$	301		($	536	)	($	23	)	$	1,040		$	382		$	573		$	85

Interest ~~Rate~~Income ~~Risk Sensitivity~~

~~Interest~~The ~~rate~~Company’s ~~sensitivity~~interest isincome andecreased ~~important~~to ~~factor~~$18.9 inmillion for the ~~management~~year ofended ~~the~~December 31, ~~composition~~2012 ~~and~~compared ~~maturity~~to ~~configurations~~$19.9 ofmillion for the ~~Company’s~~year ~~interest~~ended ~~earning assets~~December 31, ~~and~~2011, ~~funding~~a ~~sources.~~decrease ~~Additionally~~of $941,000 ~~the~~or ~~Bank’s~~4.7%. The ~~profitability~~decrease isin ~~dependent~~interest income can be attributed to a ~~large~~decrease ~~extent~~in ~~upon~~the ~~its~~yield ~~net~~on ~~interest~~the ~~income,~~loan ~~which~~portfolio isto 5.73% compared to 5.93% for the ~~difference~~year ~~between~~ended ~~its~~December 31, ~~interest~~2011. ~~income~~The yield on ~~interest~~the ~~bearing~~securities ~~assets,~~portfolio ~~such~~dropped asto ~~loans~~2.25% ~~and~~from ~~investments~~2.89%. Average federal funds sold balances decreased $131,000 or 0.8% and ~~its~~ interest ~~expense~~bearing onbalances ~~its~~with ~~funding~~banks ~~sources,~~increased ~~such~~$3.0 asmillion ~~deposits~~or ~~and borrowings~~19.0%. ~~Accordingly,~~The ~~the~~yield ~~Bank’s~~on ~~results~~federal offunds ~~operations~~sold ~~and~~increased ~~financial~~to ~~condition~~0.24% ~~are~~from ~~largely~~0.23% ~~dependent~~for onthe ~~movements~~year inended ~~market~~2011 while the yield on interest bearing ~~rates~~balances ~~and~~with ~~its~~banks ~~ability~~increased to ~~manage~~0.21% ~~its~~from ~~assets in~~0.13% ~~response~~for tothe ~~such~~same ~~movements~~period.

~~The~~Interest ~~Bank~~Expense attempts to manage fluctuations in interest rates by matching the maturities of its interest earning assets and interest bearing liabilities. The Bank’s current strategy to manage its sensitivity to interest rate fluctuations is to emphasize adjustable rate loans and short and intermediate-term fixed rate loans. To reduce the negative impact of engaging in excessive fixed rate lending in a volatile rate environment, the Bank originates long-term fixed rate mortgage loans as a broker for other financial institutions. The partner financial institutions underwrite and fund the loans.

The ~~following table summarizes the anticipated maturities or repricing of the~~ Company’s interest ~~earning~~expense ~~assets~~decreased ~~and interest bearing liabilities as of December 31~~$683,000 ~~2011,~~or ~~and~~19.0% ~~the~~to ~~Company’s~~$2.9 ~~interest~~million ~~sensitivity~~for ~~gap (i.e.~~2012, ~~interest~~compared ~~earning~~to ~~assets less interest bearing liabilities)~~$3.6 Amillion ~~positive gap~~ for ~~any~~2011. ~~time~~The ~~period~~decrease ~~indicates~~in ~~that more~~ interest ~~earning assets will mature~~ orexpense ~~reprice during that period than interest bearing liabilities. The Company’s goal is to maintain a cumulative gap position~~ for the ~~period of one~~ year orended ~~less~~December 31, of2012 ~~plus~~can orbe ~~minus~~attributed ~~fifteen~~primarily ~~percent in order~~ to ~~mitigate~~lower ~~the impact of changes in~~ interest rates on ~~liquidity,~~all ~~interest~~of ~~margins and operating results. The actual results show~~ the Bank’s todeposit beaccounts ~~negatively~~and ~~gapped~~repurchase ~~cumulatively~~agreement ~~in the three to twelve month category~~accounts.

~~The~~Provision ~~analysis presented below represents a modified gap position~~ for ~~interest~~Credit ~~sensitive~~Losses ~~assets and liabilities at December 31, 2011.~~

~~Interest~~The ~~Sensitivity~~Company ~~Gap~~recorded ~~Analysis~~a provision for credit losses of $684,000 for the year ended December 31, 2012 compared to $2.2 million for the year ended December 31, 2011, a decrease of $1.5 million or 68.8%. The decrease in provision was primarily the result of

December 31, 2011	WithinThreeMonths			After Threebut withinTwelveMonths			After Onebut withinFive Years			AfterFive Years			Total
	(Dollars in thousands)
Assets
Federal funds sold and other overnight investments	$	26,583		$	0		$	0		$	0		$	26,583
Interest bearing balances with banks		18,288			0			0			0			18,288
Investment securities (1)		20,084			17,146			9,362			40,299			86,891
Loans (2) (3)		56,123			41,470			130,583			56,423			284,599
	$	121,078		$	58,616		$	139,945		$	96,722		$	416,361
Liabilities
Interest bearing liabilities
NOW accounts (5)	$	6,583		$	3,291		$	23,041		$	0		$	32,915
Money market accounts (5)		29,742			2,635			15,127			0			47,504
Savings accounts (5)		65,632			13,504			55,906			0			135,042
Certificates of deposit (4)		18,857			28,251			31,148			0			78,256
Commercial repurchase agreements		11,344			0			0			0			11,344
Long-term borrowings		20,000			0			15,000			0			35,000
Junior subordinated debt		5,000			0			0			0			5,000
	$	157,158		$	47,681		$	140,222		$	0		$	345,061
Interest sensitivity gap	($	36,080	)	$	10,935		($	277	)	$	96,722		$	71,300
Cumulative interest sensitivity gap	($	36,080	)	($	25,145	)	($	25,422	)	$	71,300
Cumulative interest sensitivity gap as a percentage of total interest-earning assets		(8.67	%)		(6.04	%)		(6.11	%)		17.12	%

(1)Table Net of Federal Reserve Bank, Federal Home Loan Bank stock and other equity investments, debt securities by call date.Contents

~~(2)~~ incorporating ~~Loans~~historical ~~scheduled~~loss bypercentages ~~contractual~~into ~~maturities~~the calculation of the allowance for credit losses rather than using peer data. The change was made as management determined that the Company had sufficient quarters of loss data to perform a meaningful analysis of the allowance for credit losses.

(Nonperforming assets at year end increased to $12.1 million for the year ended December 31, 2012 from $8.3) ~~Net~~million for the year ended December 31, 2011 primarily due to the addition of ~~non-accrual~~one ~~loans~~loan with a principal balance of $64.1 million. Nonperforming assets included $769,000 of foreclosed real estate at December 31, 2012 and $337,000 of repossessed assets. Nonperforming assets of $8.3 million at December 31, 2011 included $1.2 million of foreclosed real estate and $52,000 of repossessed assets.

~~(4)~~Net ~~Certificates~~charge-offs totaled $1.5 million for the year ended December 31, 2012 compared to net charge-offs of ~~deposits~~$1.9 ~~scheduled~~million for the same period in 2011. The net charge-offs in 2012 included $307,000 in commercial and industrial loans, $834,000 in loans secured by ~~contractual~~real ~~maturities~~estate and $408,000 in consumer and installment loans. See the discussion under the heading “Provision for Credit Losses and Credit Risk Management” on pages 24 through 26 for greater analysis regarding the Allowance for Credit Losses and related provision.

~~(5)~~Noninterest ~~NOW,~~Income ~~savings and money market accounts are presented using decay rates and historical repricing patterns.~~

17The Company’s primary sources of noninterest income are fees charged on deposit products, fees generated by the Bank’s VISA check card program and fees recognized on residential mortgage lending. Noninterest income of $1.9 million for the year ended December 31, 2012 was an increase of $74,000 or 4.0% from the year ended December 31, 2011. Included in noninterest income for the year ended December 31, 2011 were gains on the sale of loans in the secondary market of $166,000. There were no loans sold in the secondary market in 2012. For the year ended December 31, 2012 the Bank recorded net losses on the sale of other assets primarily real estate owned and repossessed assets of $5,000 compared to a gain on the sale of similar assets of $8,000 in 2011. In 2011 the Bank also recorded a loss of $32,000 on the disposal of fixed assets related to the closure of a branch office. Fees charged on deposit products decreased $23,000 or 1.8%, while other mortgage banking fees totaled $262,000 for the year ended December 31, 2012; an increase of $123,000 or 88.5% from fees of $139 thousand for the year ended December 31, 2011.

~~Investment~~Noninterest ~~Portfolio~~ Expense

AtNoninterest ~~December 31,~~expense ~~2011~~decreased $255,000 ~~the~~or ~~Bank’s~~2.0% ~~investment~~to ~~portfolio,~~$12.3 ~~which~~million ~~totaled~~from $9012.56 million for the year ended December 31, ~~consisted~~2012 ~~primarily~~compared ofto the Uyear ended December 31, 2011.S. ~~Government~~Personnel ~~Agency~~costs ~~securities~~decreased $530,000 and ~~mortgage-backed~~other ~~agency~~operating ~~securities.~~expenses ~~Additionally~~decreased $288, ~~the~~000. ~~Company~~These ~~owns~~decreases were offset by Merger related expenses of $~~748~~546,~~750~~000 in ~~stock~~2012. ofMerger ~~the~~related ~~Federal~~expenses ~~Reserve~~consisted ~~Bank~~primarily of professional ~~Richmond,~~and legal expenses totaling $2413,~~242,900~~000. Also contributing to the decrease in ~~stock~~noninterest ofexpenses was lower FDIC expense. FDIC expense continues to decrease as new regulation changed the ~~Federal~~method ~~Home~~of ~~Loan~~calculation ~~Bank~~in the summer of ~~Atlanta~~2011. ~~(FHLB)~~2012 was ~~and~~the afirst full year under the new method. FDIC expense decreased $~~656~~97,000 ~~thousand~~for ~~investment~~the inyear aended ~~community~~December 31, ~~development~~2012 ~~activity~~compared ~~qualified~~to ~~mutual~~the ~~fund~~year ended December 31, 2011 due to changes in the insurance assessment calculations.

~~Investment~~The ~~decisions~~decrease ~~are made within policy guidelines established by the Board of Directors. It is the Bank’s policy to invest~~ in ~~non-speculative debt~~personnel ~~instruments,~~expense ~~particularly~~was ~~debt instruments that are guaranteed by~~ the ~~U.S.~~result ~~Government or an agency thereof, to maintain a diversified investment portfolio which complements the overall asset/liability and liquidity objectives~~ of ~~the~~open ~~Bank,~~staffing ~~while limiting the related credit risk to an acceptable level~~requisitions. The Bank’s investment policy designates the investment portfolio to be classified as “available-for-sale,” unless otherwise designated. At December 31, 2011, 100% of the investment portfolio was classified available-for-sale. The composition of securities at December 31 for each of the past five fiscal years was:

	2011		2010		2009		2008		2007
	(Dollars in thousands)
Available for Sale
U.S. Agency	$	48,032	$	53,761	$	54,788	$	47,297	$	55,496
State and Municipal		1,136		1,089		1,089		834		868
Mortgage-backed		37,725		40,828		61,415		32,035		24,181
Equity Securities		656		617		591		564		541
Total Securities	$	87,549	$	96,295	$	117,883	$	80,730	$	81,086

The decrease of $288,000 or 15.3% in other operating expenses was due to 2011 results including a partial write-down of $199,000 on a property held for future branch expansion.

~~The~~Occupancy ~~following~~and ~~table~~equipment ~~presents~~expense ~~maturities~~increased ~~and~~$35,000 ~~weighted~~or ~~average~~2.2% ~~yields~~primarily ~~for~~due ~~investments~~to ina ~~available-for-sale~~partial ~~securities~~year of expense on a branch office opened during 2012.

	Years to Maturity
	Within One Year					Within One Year to Five Years					Within Five to Ten Years
December 31, 2011	Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
Available for Sale
U.S. Agency	$	0		0.00	%	$	32,052		1.48	%	$	8,761		2.55	%
State and Municipal		116		4.20	%		493		4.41	%		527		3.69	%
Mortgage-backed		0		0.00	%		0		0.00	%		1,972		4.50	%
Total Debt Securities	$	116		4.20	%	$	32,545		1.98	%	$	11,260		2.92	%
	Greater than Ten Years
	Amount		Yield			Total
Available for Sale
U.S. Agency	$	7,219		3.93	%	$	48,032
State and Municipal		0		0.00	%		1,136
Mortgage-backed		35,753		4.25	%		37,725
Total Debt Securities	$	42,972		4.19	%	$	86,893

Provision for Income Taxes

~~Actual~~The ~~maturities~~Company and ofthe ~~these~~Bank ~~securities~~file ~~may~~consolidated ~~differ~~federal ~~from~~income ~~contractual~~tax ~~maturities~~returns ~~because~~and ~~borrowers~~separate ~~may~~Maryland ~~have~~income tax returns. The Company recognized tax expense of $1.8 million for the ~~right~~year ended December 31, 2012 compared to $1.2 million for the year ended ~~prepay~~December 31, ~~obligations~~2011, ~~with~~for oran ~~without~~effective ~~call~~tax orrate ~~prepayment~~of ~~penalties~~37.2% in 2012 and 35.2% in 2011.

~~Lending~~17 ~~Activities~~

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

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

18The following table presents a condensed average balance sheet as well as income/expense and yields/costs of funds thereon for the years ended December 31, 2012 and 2011. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities for the periods shown. Average balances are derived from average daily balances. The yields and costs include loan fees that are considered adjustments to yields. Net interest spread, the difference between the average rate on interest bearing assets and the average rate on interest bearing liabilities, decreased to 3.65% for the year ended December 31, 2012 from 3.76% at December 31, 2011.

Analysis of Loans


	Years Ended
	December 31, 2012							December 31, 2011
	Average Balance		Interest (1)		Yield/ Rate			Average Balance		Interest (1)		Yield/ Rate
	(Dollars in thousands)

Assets
Interest Earning Assets
Federal funds sold and other overnight investments	$	17,102	$	41		0.24	%	$	17,233	$	40		0.23	%
Interest bearing balances in other banks		18,664		39		0.21	%		15,681		21		0.13	%
Investment securities (2)		92,632		2,083		2.25	%		91,246		2,639		2.89	%
Loans (3)		292,468		16,753		5.73	%		289,502		17,157		5.93	%

Total interest earning assets		420,866		18,916		4.49	%		413,662		19,857		4.80	%
Noninterest Earning Assets
Cash and due from banks		7,378							7,521
Other assets		14,487							14,827

Total Assets	$	442,731						$	436,010


Liabilities and Stockholders’ Equity
Interest Bearing Deposits
NOW accounts	$	32,757	$	29		0.09	%	$	32,495	$	41		0.13	%
Money market accounts		54,038		149		0.28	%		43,107		189		0.44	%
Savings accounts		130,850		407		0.31	%		137,732		860		0.62	%
Certificates of deposit		72,038		966		1.34	%		78,031		1,131		1.45	%
Repurchase agreements		16,075		49		0.30	%		16,004		74		0.46	%
Long-term borrowings		35,000		1,130		3.18	%		35,000		1,127		3.18	%
Junior subordinated debt		5,000		184		3.62	%		5,000		175		3.45	%

Total interest bearing liabilities		345,758		2,914		0.84	%		347,369		3,597		1.04	%

Noninterest Bearing Liabilities
Demand deposit accounts		58,064							50,331
Other liabilities		2,721							2,438
Stockholders’ Equity		36,188							35,872

Total Liabilities and Stockholders’ Equity	$	442,731						$	436,010


Interest rate spread						3.65	%						3.76	%
Ratio of interest earning assets to interest bearing liabilities						121.72	%						119.08	%
Net interest income and net interest margin			$	16,002		3.80	%			$	16,260		3.93	%

~~The~~(1) ~~following~~No ~~table~~tax-equivalent ~~presents~~adjustments ~~the~~are ~~composition~~made, ofas the ~~loan~~effect ~~portfolio~~would ~~over~~not ~~the~~be ~~previous five years:~~ material.

	2011						2010						2009						2008						2007
As of December 31,	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial loans	$	47,683			16.4	%	$	51,359			18.3	%	$	59,900			21.2	%	$	53,366			19.9	%	$	46,007			18.7	%
Real estate loans
Commercial		114,883			39.5	%		94,864			33.9	%		82,168			29.2	%		78,215			29.1	%		71,537			29.0	%
Construction		35,026			12.0	%		33,534			12.0	%		36,185			12.8	%		28,381			10.6	%		24,563			10.0	%
One to four-family (1)		48,314			16.6	%		52,960			18.9	%		57,098			20.2	%		66,964			24.9	%		64,796			26.3	%
Home equity		36,005			12.4	%		36,697			13.1	%		34,262			12.2	%		27,072			10.1	%		21,376			8.7	%
Consumer loans		8,870			3.1	%		10,664			3.8	%		12,479			4.4	%		14,422			5.4	%		18,070			7.3	%
Total loans		290,781			100.0	%		280,078			100.0	%		282,092			100.0	%		268,420			100.0	%		246,349			100.0	%
Less:
Unearned income		(315	)					(162	)					(134	)					(204	)					(161	)
Allowance for credit losses		(7,182	)					(6,853	)					(7,926	)					(4,123	)					(2,283	)
Net loans receivable	$	283,284					$	273,063					$	274,032					$	264,093					$	243,905

(2)	Includes Federal Reserve and Federal Home Loan Bank stock.

(13) Includes ~~loans~~non-accrual ~~held for sale.~~loans

~~The~~Risk ~~Bank’s~~Management loan portfolio consists of commercial, commercial real estate, residential construction, one- to four-family residential mortgage, home equity and consumer loans. At December 31, 2011 the Bank’s loan portfolio totaled $290.8 million. All of the loans in the Bank’s portfolio are either adjustable-rate with terms to maturity of 30 days to 30 years or short- to intermediate-term fixed-rate loans.

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

As of December 31, 2011	Due inOne Yearor Less		Due afterOne Yearbut beforeFive Years		Due afterFive Years		NonaccrualLoans		90 DaysPast Due		Total
	(Dollars in thousands)
Commercial loans	$	26,505	$	13,888	$	6,900	$	390	$	0	$	47,683
Real estate loans
Commercial		17,170		75,086		21,377		1,250		0		114,883
Construction		21,047		12,827		0		1,152		0		35,026
One to four-family		14,145		22,841		8,856		2,472		0		48,314
Home equity		17,783		1,132		16,656		434		0		36,005
Consumer loans		943		4,809		2,634		484		0		8,870
Total loans	$	97,593	$	130,583	$	56,423	$	6,182	$	0	$	290,781

Liquidity Risk Management and Capital Resources

	Due After One Year (1)
	FixedRate		VariableRate		Total
Commercial loans	$	18,177	$	2,611	$	20,788
Real estate loans
Commercial		59,152		37,311		96,463
Construction		12,827		0		12,827
One to four-family		17,144		14,553		31,697
Home equity		17,788		0		17,788
Consumer loans		2,547		4,896		7,443
Total loans	$	127,635	$	59,371	$	187,006

The objective of liquidity management is to ensure that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Company are met, taking into account all on- and off-balance sheet funding demands. Liquidity management also includes ensuring that cash flow needs are met at a reasonable cost. Liquidity risk arises from the possibility the

~~(1)~~18 ~~Excludes nonaccruals loans.~~

19Table of Contents

~~Commercial~~ Company ~~Lending.~~may ~~The~~not ~~Bank~~be ~~offers~~able ~~commercial business loans~~ to ~~businesses~~satisfy ~~operating~~current inor ~~the Bank’s~~future ~~primary~~financial ~~market~~commitments, ~~area.~~or ~~These~~the ~~loans~~Company ~~consist~~may ofbecome ~~lines~~unduly ofreliant ~~credit,~~on ~~which~~alternative ~~may~~funding ~~require~~sources. anThe ~~annual~~Company ~~repayment,~~maintains ~~adjustable-rate~~a ~~loans~~liquidity ~~with~~risk management ~~terms~~policy ~~of five~~ to ~~seven~~address ~~years,~~ and ~~fixed-rate~~manage ~~loans~~this ~~with~~risk. ~~terms~~The ofpolicy upidentifies tothe ~~five~~primary ~~years.~~sources ~~Such~~of ~~loans~~liquidity, ~~are~~establishes ~~generally secured~~procedures byfor ~~receivables,~~monitoring ~~inventories, equipment~~ and ~~other~~measuring ~~assets~~liquidity, ofand ~~the~~establishes ~~business.~~minimum ~~The~~liquidity ~~Bank~~requirements ~~generally~~which ~~requires~~comply ~~personal~~with ~~guarantees on its commercial loans~~regulatory guidance. The ~~Bank~~policy ~~also~~is ~~offers~~updated ~~unsecured~~at ~~commercial~~a ~~loans~~minimum ~~to businesses~~ on a ~~selective~~yearly basis. ~~These~~The ~~types of~~liquidity ~~loans~~position ~~are~~is ~~made~~continually tomonitored ~~existing customers~~ and ~~are~~reported ofmonthly ato ~~short duration, generally one year or less. The Bank also originates commercial loans which are guaranteed by~~ the ~~Small~~Board ~~Business Administration. The Bank has been a participant in a variety~~ of ~~SBA loan programs~~Directors.

~~Commercial~~Deposits, ~~Real Estate Lending. The Bank originates adjustable-rate~~ commercial ~~real~~reverse ~~estate~~repurchase ~~loans~~agreements, ~~that are generally secured by properties used for business purposes such as small office buildings~~ and ~~retail~~lines ~~facilities~~of ~~located~~credit inare the ~~Bank’s~~ primary ~~market~~sources ~~area.~~of ~~The~~the Bank’s ~~underwriting~~funds ~~procedures~~for ~~provide~~lending ~~that~~and ~~commercial~~investing ~~real~~activities. ~~estate~~As ~~loans~~of ~~may~~December 31, ~~generally~~2012 bethe ~~made~~Company’s indeposit ~~amounts~~and uprepurchase toagreement ~~80-85%~~balances ofincreased ~~the~~$5.8 ~~lower~~million ~~of the appraised value~~ or ~~sales~~1.6% ~~price~~over ~~of the property, subject to the Bank’s current loans-to-one-borrower limit, which at~~ December 31, 2011, ~~was $6~~balances.8 ~~million.~~At ~~These~~December 31, ~~loans~~2012 ~~may~~the beCompany ~~made~~also ~~with~~had ~~terms~~available ~~up to~~both 30secured ~~years if owner occupied~~ and ~~are~~unsecured ~~generally~~lines ~~offered~~of atcredit ~~interest rates which adjust annually or annually after an initial three-, five- or seven-year period in accordance~~ with the ~~prime~~Federal ~~rate,~~Home Loan orBank ~~the 3~~ and 5correspondent ~~year U~~banks.S. ~~Constant~~Secondary ~~Maturity~~sources ~~Indices~~of ~~as reported~~funds inare ~~the~~derived ~~Wall~~from ~~Street Journal. In reaching a decision whether to make a commercial real estate~~ loan, ~~the~~repayments ~~Bank~~and ~~considers~~investment ~~the~~maturities. ~~value~~Loan ofrepayments ~~the~~and ~~real~~investment ~~estate~~maturities tocan be ~~financed~~considered ~~and~~a ~~the~~relatively ~~credit~~stable ~~strength~~funding ofsource, ~~the~~while ~~borrower~~deposit ~~and/or~~activity ~~the lessee of the real estate~~is ~~project.~~greatly ~~The~~influenced ~~Bank~~by ~~has~~interest ~~generally~~rates, ~~required~~general ~~that~~market ~~properties~~conditions ~~securing~~and ~~commercial real estate loans have debt service coverage ratios of at least 1~~competition.~~2:1.~~

~~Loans~~The ~~secured~~Bank byoffers ~~commercial real estate properties generally involve larger principal amounts and~~ a ~~greater~~variety ~~degree~~ of ~~risk~~retail ~~than~~deposit ~~one-~~account products to ~~four-family~~both ~~residential~~consumer ~~mortgage~~and ~~loans.~~commercial ~~Because~~deposit ~~payments~~customers. onThe ~~loans secured~~Bank’s bydeposit ~~commercial~~accounts ~~real~~consist ~~estate~~of ~~properties~~savings, ~~are~~NOW ~~often~~accounts, ~~dependent~~checking onaccounts, ~~the~~money ~~successful~~market ~~operation~~accounts orand ~~management~~certificate of ~~the~~deposit ~~properties,~~accounts. ~~repayment~~The ofBank ~~such~~also ~~loans~~offers ~~may~~individual beretirement ~~subject~~accounts. Time todeposits ~~adverse~~comprised ~~conditions~~19.5% inof the ~~real~~deposit ~~estate~~portfolio ~~market~~at orDecember 31, ~~the economy~~2012. ~~The~~Core ~~Bank~~deposits, ~~seeks~~considered to ~~minimize~~ ~~these~~be ~~risks~~noninterest ~~through~~bearing ~~its~~and ~~underwriting~~interest ~~standards,~~bearing ~~which~~demand ~~require~~deposit ~~such~~accounts, ~~loans~~savings todeposits beand ~~qualified~~money onmarket ~~the basis of the property’s value~~accounts, ~~debt~~accounted ~~service~~for ~~coverage~~80.5% ~~ratio,~~of the ~~and,~~deposit ~~under~~portfolio ~~certain~~at ~~circumstances~~December 31, ~~additional collateral~~2012. ~~The~~Core ~~Bank~~deposits ~~generally requires~~accounted ~~personal~~for ~~guarantees~~77.7% onof ~~its~~the ~~commercial~~deposit ~~real~~portfolio ~~estate~~at ~~loans~~December 31, 2011.

~~Construction Lending.~~ The Bank ~~originates~~intends ~~construction~~to ~~loans~~continue ~~on both one-~~ to ~~four-family~~emphasize ~~residences~~retail ~~and~~deposit onaccounts ~~commercial~~as ~~real~~its ~~estate~~primary ~~properties.~~source ~~The Bank originates two types~~ of ~~residential construction loans, consumer and builder~~liquidity. ~~The~~Deposit ~~Bank~~products ~~originates~~are ~~consumer~~promoted ~~construction~~in ~~loans~~periodic tonewspaper ~~build a primary residence~~advertisements, aalong ~~secondary residence,~~with ornotices anprovided ~~investment~~in orcustomer ~~rental~~account ~~property~~statements. The Bank’s ~~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~~market ~~from~~strategy ~~which~~is ~~other~~based ~~homes~~on ~~will~~its bereputation ~~marketed~~as ~~within~~ a ~~subdivision~~community ~~or,~~bank onproviding aquality ~~very~~products ~~limited~~and ~~basis,~~personal ~~homes~~customer ~~built for speculative purposes to be marketed for sale during construction~~service. ~~The Bank offers permanent end-financing to the Bank’s construction loan customers generally on a 3/1 or 5/1 Adjustable Rate Mortgage (“ARM”) basis.~~

The Bank ~~originates~~pays ~~land acquisition and development~~interest ~~loans~~rates ~~with~~on ~~the~~interest ~~source~~bearing ofdeposit ~~repayment~~products ~~being~~competitive ~~either~~with ~~the~~rates ~~sale~~offered ofby ~~finished~~other ~~lots~~financial orinstitutions ~~the~~in ~~sale~~its ofmarket ~~homes~~area. toInterest berates ~~constructed~~ on ~~the~~deposits ~~finished~~are ~~lots.~~reviewed ~~The~~by ~~Bank~~management ~~will~~which ~~originate~~considers ~~land acquisition, development, and construction loans on~~ a ~~revolving~~number ~~line~~ of ~~credit~~factors ~~basis for~~including: ~~subdivisions whereby~~ (1) the Bank’s ~~borrower~~internal ~~may~~cost ~~draw upon such line~~ of ~~credit~~funds; as(2) rates ~~lots are sold for the purpose of improving additional lots. Construction loans are generally~~ offered ~~with~~by ~~terms~~competing upfinancial toinstitutions; ~~twelve~~(3) investing ~~months for consumer~~ and ~~builder~~lending ~~loans,~~opportunities; and up(4) the ~~to twenty-four~~Bank’s ~~months~~liquidity ~~for land development loans~~position.

~~Construction~~Jumbo ~~loans~~certificates of deposit are ~~generally~~accounts ~~made~~of in$100,000 ~~amounts~~or upmore. toThese ~~80%~~accounts oftotaled ~~the~~$38.0 ~~appraised~~million ~~market~~at ~~value~~December 31, ~~of the~~2012 ~~security~~and ~~property.~~consisted ~~During~~principally ~~construction,~~of ~~loan~~time ~~proceeds~~certificates ~~are~~of ~~disbursed~~deposit. inThe ~~draws~~following table assets ~~construction~~forth ~~progresses~~the ~~based~~amount ~~upon~~and ~~inspections~~maturity of ~~work~~jumbo incertificates ~~place~~of bydeposit ~~independent~~at ~~construction~~December 31, ~~inspectors.~~2012:

At December 31, 2011, the Bank had construction loans, including land acquisition and development loans, totaling $35.0 million, or 12.0% of the Bank’s total loan portfolio, of which $365 thousand consisted of one- to four-family residential construction loans, $9.6 million consisted of commercial real estate construction loans and $25.0 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 of improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the security property’s value upon completion of construction as compared to the estimated costs of construction, including interest. Also, the Bank assumes certain risks associated with the borrowers’ ability to complete construction in a timely and workmanlike manner. If the estimate of value proves to be inaccurate, or if construction is not performed timely or accurately, the Bank may be faced with a project which, when completed, has a value that is insufficient to assure full repayment.


Three Months or Less		Greater than Three Months to Six Months		Greater than Six Months to One Year		Greater than One Year		Total
(Dollars in thousands)

$	10,013	$	3,551	$	4,472	$	19,948	$	37,984

~~One-~~Securities tosold ~~Four-Family~~under ~~Residential~~agreements ~~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~~repurchase ~~residences~~represent ~~and~~transactions ~~lot~~with ~~loans~~customers for ~~one-~~correspondent toor ~~four-family~~commercial account ~~residences~~cash ~~located~~management ~~throughout the Baltimore-Washington Metropolitan area~~services. ~~One-~~Securities tounderlying ~~four-family~~the ~~mortgage~~repurchase ~~loan~~agreements ~~originations~~ are ~~generally~~maintained ~~obtained~~in ~~from~~ the ~~Bank~~ Company’s ~~loan~~control. ~~representatives~~For ~~and their contacts in~~ the ~~local~~years ~~real~~ended ~~estate industry~~December 31, ~~direct~~2012 ~~contacts~~and ~~made~~2011, by the ~~Bank’s~~average ~~and~~cost ~~the~~of ~~Company’s~~these ~~directors,~~borrowings ~~existing~~was or0.30% ~~past customers,~~ and ~~members of the local communities~~0.46%, respectively.

20The Bank maintains a secured borrowing line with the Federal Home Loan Bank (FHLB) with the potential to draw up to $111.4 million, and may borrow up to $19.2 million under secured and unsecured lines established with correspondent commercial banks. In addition, the Bank has the ability to borrow directly from the Federal Reserve Bank discount window. At December 31, 2012, the Bank had advances outstanding of $35.0 million under the Federal Home Loan Bank’s convertible advance program and had no borrowings outstanding under its secured and unsecured lines of credit.

AtPotential ~~December 31,~~adverse ~~2011,~~impacts ~~one-~~on toliquidity ~~four-family~~can ~~residential~~occur ~~mortgage~~as ~~loans~~a ~~totaled~~result ~~$48.3 million, or 16.6%~~ of ~~total~~ ~~loans.~~changes Ofin the ~~one-to~~estimated ~~four-family~~cash ~~mortgage~~flows ~~loans~~from ~~outstanding~~investment, atloan, ~~that~~and ~~date,~~deposit ~~$22~~portfolios.3 ~~million~~The Bank ~~were~~manages ~~fixed-rate~~this ~~loans~~inherent ~~with~~risk ~~terms~~by ofmaintaining ~~up to fifteen years with~~ a ~~balloon~~portfolio ~~payment~~of atavailable ~~the~~for ~~end~~sale ofinvestments ~~the term,~~ and ~~$26.0~~through ~~million~~secondary ~~were~~sources ~~adjustable-rate loans with terms~~ of upliquidity toincluding 30FHLB ~~years~~advances and ~~interest~~reverse ~~rates~~repurchase ~~which~~agreements. ~~adjust~~In ~~annually~~addition, ~~from~~ the ~~outset~~Bank ofhas the ~~loan~~ability orto ~~which~~increase ~~adjust~~its liquidity ~~annually~~by ~~after~~raising ~~a 3 or 5 year initial period in which the loan has a fixed rate. The~~ interest rates ~~for~~on ~~the~~deposit ~~majority~~accounts, ofselling ~~the Bank’s adjustable-rate mortgage~~ loans ~~are~~in ~~indexed to~~ the ~~one-year~~secondary ~~Treasury~~market ~~Constant~~or ~~Maturity~~curtailing ~~Index. Interest rate increases on such loans are limited to a 2% annual adjustment cap with a maximum adjustment of 6% over~~ the ~~life~~volume of ~~the~~ loan originations.

~~The~~19 Company also originates fixed-rate residential mortgage loans as a broker for other financial institutions. The partner financial institutions underwrite and fund the loans. This enables the Company to expand the product offerings to its customers, earn fee income and manage its exposure to increases in interest rates.

TheTable origination of and retention of adjustable-rate residential mortgage loans, as opposed to fixed-rate residential mortgage loans, helps 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. Contents

~~Periodic~~The ~~and~~Bank ~~lifetime~~maintains ~~floors~~the onmajority ~~interest~~of ~~rate increases help to reduce~~ the ~~risks~~assets ~~associated~~held ~~with~~for ~~the~~liquidity ~~Bank’s~~purposes ~~adjustable-rate~~in ~~loans,~~overnight ~~but~~federal ~~also~~funds ~~limit~~and ~~the~~short-term interest ~~rate~~bearing ~~sensitivity~~balances ofwith ~~its adjustable-rate mortgage loans~~banks.

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

~~Home Equity~~Interest ~~Lending.~~rate Assensitivity ofis ~~December 31,~~an ~~2011,~~important ~~home~~factor ~~equity~~in ~~loans~~the ~~totaled~~management ~~$36.0~~of ~~million,~~the orcomposition ~~12.4%~~and maturity configurations of the ~~Bank~~Company’s ~~total~~interest ~~loan~~earning assets ~~portfolio. Fixed-rate, fixed-term home equity loans~~ and ~~adjustable~~funding ~~rate~~sources. ~~home~~Additionally, ~~equity~~the ~~lines~~Bank’s ofprofitability ~~credit~~is ~~are~~dependent ~~generally offered~~to ina ~~amounts~~large upextent toupon ~~80%~~its ofnet ~~the~~interest ~~market~~income, ~~value~~which ofis the ~~security~~difference ~~property.~~between ~~Home~~its ~~equity~~interest ~~lines~~income ofon ~~credit~~interest ~~are~~bearing ~~offered~~assets, ~~with~~such ~~terms~~as uploans toand ~~twenty~~investments, ~~years.~~and its Ofinterest ~~the~~expense ~~$36.0~~on ~~million~~its infunding ~~home equity loans~~sources, ~~$18.0~~such ~~million~~as ~~are~~deposits ~~fixed~~and ~~rate~~borrowings. ~~with~~Accordingly, ~~terms~~the upBank’s toresults 10of ~~years.~~operations ~~The remaining~~and ~~$18.0~~financial ~~million~~condition ofare ~~the~~largely ~~Bank’s~~dependent ~~home~~on ~~equity~~movements ~~loans~~in ~~are~~market ~~adjustable~~interest ~~rate~~rates and ~~reprice~~its ~~with~~ability ~~changes~~to inmanage ~~the~~its ~~Wall~~assets in ~~Street~~response ~~Journal~~to ~~prime~~such ~~rate~~movements.

~~Consumer~~The ~~Lending~~Bank attempts to manage fluctuations in interest rates by matching the maturities of its interest earning assets and interest bearing liabilities. The Bank’s ~~portfolio~~current ofstrategy ~~consumer~~to ~~loans~~manage ~~primarily~~its ~~consists~~sensitivity ofto ~~adjustable~~interest rate, ~~personal~~fluctuations ~~lines~~is ofto ~~credit~~emphasize adjustable rate loans and ~~generally~~short and intermediate-term fixed rate ~~installment~~ loans. ~~secured~~To byreduce ~~new~~the ornegative ~~used~~impact ~~automobiles,~~of ~~new~~engaging orin ~~used~~excessive ~~boats,~~fixed ~~and~~rate ~~loans~~lending ~~secured~~in bya ~~deposit~~volatile ~~accounts.~~rate ~~At December 31~~environment, ~~2011,~~the ~~consumer~~Bank ~~loans~~originates ~~totaled~~long-term ~~$8.9~~fixed ~~million~~rate ormortgage ~~3.1%~~loans ofas ~~total~~a ~~loans~~broker ~~outstanding.~~for ~~Consumer~~other ~~loans~~financial ~~are~~institutions. ~~generally~~The ~~originated~~partner infinancial ~~the~~institutions ~~Bank’s~~underwrite ~~primary~~and ~~market~~fund ~~area~~the loans.

~~Provision~~The following table summarizes the anticipated maturities or repricing of the Company’s interest earning assets and interest bearing liabilities as of December 31, 2012, and the Company’s interest sensitivity gap (i.e., interest earning assets less interest bearing liabilities). A positive gap for ~~Credit~~any ~~Losses~~time period indicates that more interest earning assets will mature or reprice during that period than interest bearing liabilities. The Company’s goal is to maintain a cumulative gap position for the period of one year or less of plus or minus fifteen percent in order to mitigate the impact of changes in interest rates on liquidity, interest margins and ~~Credit~~operating ~~Risk~~results. ~~Management~~The actual results show the Bank to be negatively gapped cumulatively in the three to twelve month category.

~~Originating~~The ~~loans~~analysis ~~involves~~presented abelow ~~degree~~represents ofa ~~risk~~modified ~~that~~gap ~~credit~~position ~~losses~~for ~~will~~interest ~~occur~~sensitive inassets ~~varying~~and ~~amounts~~liabilities ~~according~~at toDecember 31, among other factors, the type of loans being made, the credit-worthiness of the borrowers over the term of the loans, the quality of the collateral for the loan, if any, as well as general economic conditions2012.

~~The~~Interest ~~Bank’s~~Sensitivity ~~allowance for~~Gap ~~credit~~Analysis losses is established through a provision for loan losses based on management’s evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for credit losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable based on information currently known to management. The Bank estimates an acceptable allowance for credit loss with the objective of quantifying portfolio risk into a dollar figure of inherent losses, thereby translating the subjective risk value into an objective number. Emphasis is placed on independent external loan reviews and regular internal reviews. The determination of the allowance for loan losses is based on a combination of the higher of the Bank’s historical loss experience or the peer group average historical loss experience and ten (10) qualitative factors for specific categories and types of loans. The combination of the loss experience factor and the total qualitative factors (“Total ALLL Factor”) is expressed as a percentage of the portfolio for specific categories and types of loans to create the inherent loss index for each loan portfolio. Individual loans deemed impaired are separated from the respective loan portfolios and a specific reserve allocation is assigned based upon Bank management’s best estimate as to the loss exposure for each loan. Each Total ALLL Factor is assigned a percentage weight and that total weight is applied to each loan category. The Total ALLL Factor is different for each loan type and for each risk assessment category within each loan type.


December 31, 2012	Within Three Months			After Three but within Twelve Months			After One but within Five Years			After Five Years			Total
				(Dollars in thousands)
Assets
Interest bearing balances with banks	$	38,175		$	0		$	0		$	0		$	38,175
Investment securities (1)		15,003			42,630			7,989			39,938			105,560
Loans (2) (3)		54,337			36,438			121,720			58,510			271,005

	$	107,515		$	79,068		$	129,709		$	98,448		$	414,740


Liabilities
Interest bearing liabilities
NOW accounts (5)	$	7,188			3,594			25,159		$	0		$	35,941
Money market accounts (5)		33,699			3,629			22,280			0			59,608
Savings accounts (5)		62,014			13,001			54,996			0			130,011
Certificates of deposit (4)		14,170			18,631			36,049			0			68,850
Commercial repurchase agreements		14,584			0			0			0			14,584
Long-term borrowings (6)		30,000			0			5,000			0			35,000
Junior subordinated debt		5,000			0			0			0			5,000

	$	166,655		$	38,855		$	143,484		$	0		$	348,994


Interest sensitivity gap	($	59,140	)	$	40,213		($	13,775	)	$	98,448		$	65,746
Cumulative interest sensitivity gap	($	59,140	)	($	18,927	)	($	32,702	)		65,746
Cumulative interest sensitivity gap as a percentage of total interest-earning assets		(14.26	%)		(4.56	%)		(7.88	%)		15.85	%

•(1) ~~The~~Net ~~Bank’s~~of ~~historical~~Federal ~~loss~~Reserve ~~experience~~Bank, isFederal ~~calculated~~Home byLoan ~~aggregating~~Bank ~~the~~stock ~~actual loan losses by category for the previous eight quarters~~ and ~~converting~~other ~~that~~equity ~~total~~investments, ~~into~~debt asecurities ~~percentage~~by ~~for~~call ~~each loan category~~date.

•(2) ~~Peer~~Loans ~~Group~~scheduled ~~average loss experience is calculated~~ by ~~averaging~~contractual ~~the industry loss experience by loan category over the last eight rolling quarters~~maturities.

•(3) ~~Qualitative~~Net ~~factors~~of ~~include: levels and trends in delinquencies and~~ non-~~accruals;~~accrual ~~trends in volumes and terms of~~ loans; ~~effects~~ of ~~any~~$9.9 changes in lending policies; the experience, ability and depth of management; national and local economic trends and conditions; concentrations of credit; quality of the bank’s loan review system; and, external factors, such as competition, legal and regulatory requirementsmillion.

~~The~~(4) ~~total~~Certificates allowance for credit losses requires these changes as the percentage weight assigned to each Total ALLL Factor is increased or decreased due to its particular circumstance, as the various types and categories of ~~loans~~deposits ~~change~~scheduled asby acontractual ~~percentage of total loans and as the aggregate of specific allowances is adjusted due to an increase or decrease in impaired loans~~maturities.

~~Management~~(5) believes this approach effectively measures the risk associated with any particular loan or group of loans. The Bank’s Board of Directors engages an independent loan review consultant to evaluate the adequacy of the Bank’s allowance for credit losses. In additionNOW, ~~various~~savings regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Bank to make additional provisions for estimated credit losses based upon judgments different from those of management. The Bank recorded a total provision for credit losses of $2.2 million for the year ended December 31, 2011 and ~~$2.1~~money ~~million~~market inaccounts ~~2010.~~are ~~The~~presented increase in provision was primarily the result of an increase of $10.7 million in loans outstanding at December 31, 2011 compared to December 31, 2010. The aggregate provision was based upon the results of quarterly evaluations using adecay ~~combination~~rates ~~of factors including the level of nonperforming loans, the Bank’s growth in total gross loans~~ and ~~the Bank’s~~historical ~~net~~repricing ~~credit loss experience~~patterns. Total gross loans increased by $10.7 million for the year ended December 31, 2011. The Bank recorded charge-offs of $2.2 million on loans deemed uncollectible and recovered $335 thousand on previously charged-off loans. As of December 31, 2011, the Bank’s allowance for credit losses was $7.2 million or 2.47% of total loans and 102.3% of nonperforming loans as compared to $6.9 million, or 2.45% of total loans and 81.7% of nonperforming loans as of December 31, 2010. The Bank had total nonperforming loans of $7.0 million at December 31, 2011 and $8.4 million at December 31, 2010, and nonperforming loans to total assets of 1.67% and 1.94% at December 31, 2011 and December 31, 2010, respectively.

~~The~~(6) ~~Bank~~Long-term ~~places~~borrowings ~~loans~~by oncall a nonaccrual status after 90 days of not having received contractual principal or interest payments unless the loan is well secured and in the process of collection. In addition the Bank maintains a watch list of loans on a monthly basis that warrant more than the normal level of management supervision. At December 31, 2011 the Bank had approximately $42.7 million in watch list loans compared to $33.3 million at December 31, 2010. date

At December 31, 2011 $6.2 million in loans were classified as nonaccrual compared to $7.8 at December 31, 2010. Approximately 40.0% of the year-end nonaccrual total consisted of one- to four-family loans; commercial mortgages accounted for approximately 20~~.2%, while~~ acquisition and development loans were approximately 18.7% of the total. Home equity loans represented 7.0% of the total, consumer and installment loans accounted for 7.8% and commercial loans 6.3% of the total nonaccrual loans at December 31, 2011.

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

22Investment Portfolio

~~The~~At ~~following~~December 31, ~~table~~2012, ~~presents~~ the ~~allocation~~Bank’s investment portfolio, which totaled $109.1 million, consisted primarily of ~~the~~U.S. ~~allowance~~Government ~~for~~Agency ~~credit~~securities ~~losses~~and mortgage-backed agency securities. Additionally, the ~~reflecting~~Company ~~use~~owns $626,500 in stock of the ~~methodology~~ ~~presented~~Federal ~~above~~Reserve Bank of Richmond, ~~along~~$2.2 ~~with~~million in stock of the ~~percentage~~Federal Home Loan Bank of ~~total~~Atlanta ~~loans~~(FHLB) and a $686,000 investment in ~~each~~a ~~category~~community development activity qualified mutual fund.

At December 31,	2011					2010
(Dollars in thousands)	Amount		Loan Mix			Amount		Loan Mix
Amount applicable to:
Commercial	$	1,387		16.4	%	$	1,868		18.3	%
Real estate
Commercial		2,155		39.5	%		1,374		33.9	%
One to four-family		1,422		29.0	%		1,257		32.0	%
Construction		1,817		12.0	%		1,831		12.0	%
Consumer		401		3.1	%		523		3.8	%
Total allowance	$	7,182		100.0	%	$	6,853		100.0	%

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. The Bank’s investment policy designates the investment portfolio to be classified as “available-for-sale,” unless otherwise designated. At December 31, 2012, 100% of the investment portfolio was classified available-for-sale. The composition of securities at December 31 for each of the past five fiscal years was:

Analysis of Credit Risk


	2012		2011		2010		2009		2008
	(Dollars in thousands)
Available for Sale
U.S. Agency	$	70,368	$	48,032	$	53,761	$	54,788	$	47,297
State and Municipal		1,026		1,136		1,089		1,089		834
Mortgage-backed		34,166		37,725		40,828		61,415		32,035
Equity Securities		686		656		617		591		564


Total Securities	$	106,246	$	87,549	$	96,295	$	117,883	$	80,730

~~Activity~~The infollowing ~~the~~table ~~allowance~~presents ~~for~~maturities ~~credit~~and ~~losses~~weighted ~~for~~average ~~the~~yields ~~two~~for ~~years~~investments ~~ended~~in ~~December 31~~available-for-sale ~~is shown below:~~ securities.

	2011			2010
Total loans outstanding – at December 31 (1)	$	290,466		$	279,916
Average loans outstanding for the year		289,502			276,984
Allowance for credit losses at beginning of period	$	6,853		$	7,926
Provision charged to expense		2,190			2,148
Chargeoffs:
Commercial loans		1,183			1,169
Real estate loans		810			1,610
Consumer and other loans		203			526
Total		2,196			3,305
Recoveries:
Commercial loans		19			43
Real estate loans		294			6
Consumer and other loans		22			35
Total		335			84
Net charge-offs		1,861			3,221
Allowance for credit losses at end of year	$	7,182		$	6,853
Allowance for credit losses as a percent of total loans		2.47	%		2.45	%
Net charge-offs as a percent of average loans		0.64	%		1.16	%

December 31, 2012

(1) Net of deferred fees and costs.


	Years to Maturity
	Within One Year					Within One Year to Five Years					Within Five to Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
Available for Sale
U.S. Agency	$	1,015		2.00	%	$	28,595		0.98	%	$	35,059		1.42	%
State and Municipal		0		0.00	%		791		4.41	%		235		2.75	%
Mortgage-backed		0		0.00	%		162		5.50	%		3,544		2.88	%


Total Debt Securities	$	1,015		2.00	%	$	29,548		1.09	%	$	38,838		1.55	%

Nonperforming Loans and Other Delinquent Assets


	Greater than Ten Years
	Amount		Yield			Total
Available for Sale
U.S. Agency	$	5,699		3.85	%	$	70,368
State and Municipal		0		0.00	%		1,026
Mortgage-backed		30,460		3.57	%		34,166


Total Debt Securities	$	36,159		3.61	%	$	105,560

~~Management~~Actual ~~performs~~maturities ~~reviews~~ of ~~all~~these ~~delinquent~~securities ~~loans.~~may ~~Management~~differ ~~will~~from ~~generally~~contractual ~~classify~~maturities ~~loans~~because asborrowers ~~nonaccrual~~may ~~when~~have ~~collection of full principal and interest under~~ the ~~original~~right ~~terms~~to prepay ofobligations ~~the~~with ~~loan is not expected~~ or ~~payment~~without ofcall ~~principal~~ or ~~interest~~prepayment ~~has become 90 days past due~~penalties. Classifying a loan as non-accrual results in the Company no longer accruing interest on such loan and reversing any interest previously accrued but not collected. A nonaccrual loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected. The Company will recognize interest on nonaccrual loans only when received. As of December 31, 2011 and 2010, the Company had $6.2 and $7.8 million of nonaccrual loans, respectively. (See the previous discussion under the heading “Provision for Credit Losses and Credit Risk Management” for additional comments regarding nonaccrual loan activity.)

~~The~~Lending ~~Company~~Activities considers a loan to be a troubled debt restructuring when for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. The Company may consider granting a concession in an attempt to protect as much of its investment as possible.

23The types of loans that the Bank may originate are subject to federal laws and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors.

~~The~~These ~~restructuring~~factors ~~of a loan may include~~are, ~~but is not necessarily limited to: (1) the transfer from the~~in ~~borrower to the Bank of real estate~~turn, ~~receivables~~affected ~~from third parties~~by, ~~other~~among ~~assets, or an equity interest in the borrower in full or partial satisfaction of the loan (2) the issuance or~~ other granting of an equity interest to the Company by the borrower to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt in to an equity interest (3) a modification of the loan termsthings, ~~such~~economic ~~as a reduction of the stated interest rate~~conditions, ~~principal,~~monetary orpolicies ~~accrued interest or an extension~~ of the ~~maturity~~federal ~~date at a stated interest rate lower than the current market rate for new debt with similar risk~~government, orincluding ~~(4) a reduction of~~ the ~~face~~Federal ~~amount~~Reserve or maturity amount of the debt as stated in the instrument or other agreement and (5) a reduction of accrued interest. The current outstanding balance of troubled debt restructurings as of December 31Board, ~~2011 included $857,000 of loans in accrual status~~ and ~~$1.8~~legislative ~~million~~tax ~~of loans classified as nonaccrual~~policies.

~~Property~~21 acquired by the Company as a result of foreclosure on a mortgage loan will be classified as “real estate owned.” Personal property acquired through repossession will be classified as “repossessed assets.” Property acquired will be recorded at the lower of the unpaid principal balance or fair value at the date of acquisition and subsequently carried at the lower of cost or net realizable value. Any required write-down of the loan to its net realizable value will be charged against the allowance for credit losses. As of December 31, 2011 the Company held $1.2 million in real estate owned as a result of foreclosure. The Company held $1.6 million in real estate owned at December 31, 2010. Property held as the result of repossession totaled $52 thousand at December 31, 2011 and $145 thousand at December 31, 2010.

TheTable following table shows the amounts of nonperforming assets at December 31 for the past five years. Contents

	2011			2010			2009			2008			2007
				(Dollars in thousands)
Nonaccrual loans:
Commercial	$	390		$	2,107		$	6,718		$	292		$	116
Real estate		5,308			5,054			9,532			3,397			532
Consumer		484			630			517			604			139
Accrual loans – past due 90 days
Commercial		0			0			33			0			0
Real estate		0			598			0			2,005			172
Consumer		0			0			0			0			0
Restructured loans		856			0			0			0			0
Total nonperforming loans		7,038			8,389			16,800			6,298			959
Real estate owned		1,222			1,608			2,398			0			0
Repossessed assets		52			145			122			182			137
Total nonperforming assets	$	8,312		$	10,142		$	19,320		$	6,480		$	1,096
Allowance for credit losses to total nonperforming loans		102.03	%		81.69	%		47.18	%		65.47	%		238.06	%
Ratio of nonperforming loans to total loans		2.42	%		3.00	%		5.96	%		2.35	%		0.39	%
Ratio of nonperforming assets to total assets		1.88	%		2.35	%		4.35	%		1.64	%		0.30	%

Analysis of Loans

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

~~The~~As ~~Bank~~of ~~has various financial obligations~~December 31, ~~including contractual obligations and commitments that may require future cash payments.~~

The following table presents, as of December 31, 2011, significant fixed and determinable contractual obligations to third parties by payment date.


	2012						2011						2010						2009						2008
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)

Commercial loans	$	44,422			15.8	%	$	47,683			16.4	%	$	51,359			18.3	%	$	59,900			21.2	%	$	53,366			19.9	%
Real estate loans
Commercial		116,883			41.6	%		114,883			39.5	%		94,864			33.9	%		82,168			29.2	%		78,215			29.1	%
Construction		33,319			11.8	%		35,026			12.0	%		33,534			12.0	%		36,185			12.8	%		28,381			10.6	%
One to four-family (1)		47,873			17.0	%		48,314			16.6	%		52,960			18.9	%		57,098			20.2	%		66,964			24.9	%
Home equity		31,650			11.3	%		36,005			12.4	%		36,697			13.1	%		34,262			12.2	%		27,072			10.1	%
Consumer loans		7,061			2.5	%		8,870			3.1	%		10,664			3.8	%		12,479			4.4	%		14,422			5.4	%

Total loans		281,208			100.0	%		290,781			100.0	%		280,078			100.0	%		282,092			100.0	%		268,420			100.0	%


Less:
Unearned income		(331	)					(315	)					(162	)					(134	)					(204	)
Allowance for credit losses		(6,317	)					(7,182	)					(6,853	)					(7,926	)					(4,123	)

Net loans receivable	$	274,560					$	283,284					$	273,063					$	274,032					$	264,093

Payments due by Period	Total		Less thanone year		One to threeyears		Three tofive years		More thanfive years
			(Dollars in thousands)
Deposits with a stated maturity	$	78,256	$	47,108	$	21,631	$	9,517	$	0
Long-term borrowings		35,000		0		5,000		0		30,000
Junior subordinated debentures		5,000		0		0		0		5,000
Operating lease obligations		9,452		384		1,302		1,170		6,596
Data processing contracts		1,114		374		740		0		0
	$	128,822	$	47,866	$	28,673	$	10,687	$	41,596

(1)	Includes loans held for sale.

24The Bank’s loan portfolio consists of commercial, commercial real estate, residential construction, one- to four-family residential mortgage, home equity and consumer loans. At December 31, 2012 the Bank’s loan portfolio totaled $281.2 million. All of the loans in the Bank’s portfolio are either adjustable-rate with terms to maturity of 30 days to 30 years or short- to intermediate-term fixed-rate loans.

~~Off-Balance~~The ~~Sheet~~following ~~Arrangements~~table presents the maturity distribution of the loan portfolio:

As of December 31, ~~2011,~~2012 the Company had a wholly-owned statutory trust formed for the purpose of issuing junior subordinated debentures in the form of trust preferred securities. The statutory trust has not been consolidated with the holding company.

The Company does have significant commitments to fund loans in the ordinary course of business. Such commitments and resulting off-balance sheet risk is discussed further in Note 5 to the consolidated financial statements.


	Due in One Year or Less		Due after One Year but before Five Years		Due after Five Years		Nonaccrual Loans		90 Days Past Due		Total
	(Dollars in thousands)
Commercial loans	$	19,250	$	14,181	$	6,511		4,480	$	0	$	44,422
Real estate loans
Commercial		10,556		76,936		27,272		2,119		0		116,883
Construction		24,677		8,642		0		0		0		33,319
One to four-family		18,957		17,740		8,189		2,773		214		47,873
Home equity		15,703		522		15,030		395		0		31,650
Consumer loans		1,748		3,429		1,779		105		0		7,061

Total loans	$	90,891	$	121,450	$	58,781	$	9,872	$	214	$	281,208

With the exception of these off-balance sheet arrangements, the Company has no-off balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, capital expenditures or capital resources.


	Due After One Year (1)
	Fixed Rate		Variable Rate		Total
Commercial loans	$	16,006	$	4,685	$	20,691
Real estate loans
Commercial		70,116		34,092		104,208
Construction		8,642		0		8,642
One to four-family		14,895		11,035		25,930
Home equity		15,552		0		15,552
Consumer loans		2,105		3,103		5,208

Total loans	$	127,316	$	52,915	$	180,231

~~Capital~~(1) ~~Management~~Excludes nonaccrual and 90 day past due loans.

~~Total~~22 stockholders’ equity was $37.4 million at December 31, 2011, representing an increase of $2.6 million or 7.5% from December 31, 2010. The growth of stockholders’ equity during 2011 as compared to the same period in 2010 was attributable to income of $2.2 million and improvement in other comprehensive income of $695 thousand.

OnTable January 30, 2009, the Company sold 8,152 shares of the Company’s Fixed Rate Cumulative Preferred Stock, Series A (the “Series A Preferred Stock”), having a liquidation amount per share equal to $1,000, and a warrant to purchase 299,706 shares of the Company’s common stock, at an exercise price of $4.08 per share, to the Treasury under the CPP for a total purchase price of $8,152,000. Contents

~~Offsetting~~Commercial ~~the~~Lending. ~~increase~~The Bank offers commercial business loans to businesses operating in ~~stockholder~~the Bank’s ~~equity~~primary ~~attributable~~market area. These loans consist of lines of credit, which may require an annual repayment, adjustable-rate loans with terms of five to ~~net~~seven ~~income~~years, and ~~the~~fixed-rate ~~increase~~loans inwith ~~accumulated~~terms ~~other comprehensive~~of ~~income~~up ~~were~~to ~~$408~~five ~~thousand~~years. inSuch ~~preferred~~loans ~~stock~~are ~~dividends.~~generally secured ~~Stock~~by ~~based~~receivables, ~~compensation~~inventories, ~~stock~~equipment ~~purchases~~and ~~through~~other assets of the ~~Company’s~~business. ~~Employee~~The ~~Stock~~Bank ~~Purchase~~generally ~~Plan~~requires ~~and~~personal ~~the~~guarantees ~~exercise~~on ofits ~~options~~commercial ~~added~~loans. ~~$136~~The ~~thousand~~Bank also offers unsecured commercial loans to ~~the~~businesses ~~stockholder’s~~on ~~equity~~a selective basis. These types ~~for~~of ~~the~~loans ~~period~~are ~~ended~~made ~~December 31~~to existing customers and are of a short duration, ~~2011~~generally one year or less. The Bank also originates commercial loans which are guaranteed by the Small Business Administration. The Bank has been a participant in a variety of SBA loan programs.

~~Regulatory~~Commercial ~~Capital~~Real ~~Requirements~~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 and retail facilities located in the Bank’s primary market area. The Bank’s underwriting procedures provide that commercial real estate loans may generally be made in amounts up to 80-85% of the lower of the appraised value or sales price of the property, subject to the Bank’s current loans-to-one-borrower limit, which at December 31, 2012, was $6.7 million. These loans may be made with terms up to 30 years if owner occupied and are generally offered at interest rates which adjust annually or annually after an initial three-, five- or seven-year period in accordance with the prime rate, or the 3 and 5 year U.S. Constant Maturity Indices as reported in the Wall Street Journal. In reaching a decision whether to make a commercial real estate loan, the Bank considers the value of the real estate to be financed and the credit strength of the borrower and/or the lessee of the real estate project. The Bank has generally required that properties securing commercial real estate loans have debt service coverage ratios of at least 1.2:1.

~~The~~Loans ~~Federal~~secured ~~Reserve’s~~by ~~capital~~commercial ~~regulations~~real ~~require~~estate ~~state~~properties ~~member~~generally ~~banks~~involve tolarger ~~meet~~principal ~~two~~amounts ~~minimum~~and ~~capital~~a ~~standards:~~greater adegree 4%of ~~Tier~~risk 1than ~~capital~~one- to ~~total~~four-family ~~adjusted~~residential ~~average~~mortgage ~~assets~~loans. ~~ratio~~Because ~~(the~~payments ~~“leverage”~~on loans ~~ratio),~~secured ~~and~~by ancommercial 8%real ~~risk-based~~estate ~~capital~~properties ~~ratio.~~are ~~Tier~~often 1dependent ~~capital~~on isthe ~~defined~~successful asoperation ~~common~~or ~~stockholders’~~management ~~equity~~of ~~(including~~the ~~retained earnings)~~properties, ~~certain~~repayment ~~non-cumulative~~of ~~perpetual~~such ~~preferred~~loans ~~stock~~may ~~and~~be ~~related~~subject ~~paid~~to adverse conditions in ~~capital,~~the ~~and~~real ~~minority~~estate ~~interests~~market inor ~~equity~~the economy. The Bank seeks to ~~accounts~~minimize these risks through its underwriting standards, which require such loans to be qualified on the basis of ~~consolidated~~the ~~subsidiaries~~property’s value, ~~less~~debt ~~intangibles~~service ~~other~~coverage ~~than~~ratio, and, under certain ~~mortgage~~circumstances, ~~servicing~~additional ~~rights~~collateral. ~~and~~The ~~credit~~Bank ~~card~~generally requires ~~relationships~~personal guarantees on its commercial real estate loans.

~~The risk-based~~Construction ~~capital~~Lending. ~~standard~~The ~~requires~~Bank ~~the~~originates ~~maintenance~~construction ofloans ~~Tier~~on 1both one- ~~and Total capital (which is defined as Tier 1 capital plus Tier 2 capital)~~ to ~~risk~~four-~~weighted~~family ~~assets~~residences ofand aton ~~least~~commercial 4%real ~~and~~estate ~~8%, respectively~~properties. AThe ~~well-capitalized~~Bank ~~institution~~originates ~~has~~two ~~Tier~~types ~~1 and Total capital to risk-weighted assets~~ of atresidential ~~least~~construction ~~6% and 10%~~loans, ~~respectively,~~consumer and ~~a leverage ratio of at least 5%~~builder. InThe ~~determining~~Bank ~~the~~originates ~~amount~~consumer ofconstruction ~~risk-weighted~~loans ~~assets,~~to ~~all~~build ~~assets,~~a ~~including~~primary ~~certain off-balance sheet assets~~residence, ~~are multiplied by~~ a ~~risk-weight~~ ~~factor of 0% to 100%~~secondary residence, asor ~~assigned~~an byinvestment ~~the~~or ~~Federal~~rental ~~Reserve~~property. ~~capital~~The ~~regulations,~~Bank ~~based~~will onoriginate ~~the~~builder ~~risks~~construction ~~the~~loans ~~agency~~to ~~believes~~companies ~~are~~engaged ~~inherent~~ in the ~~type~~business of ~~asset.~~constructing ~~The~~homes ~~regulators~~for ~~have~~resale. ~~recently~~These ~~added~~loans amay ~~market~~be ~~risk~~for ~~adjustment~~homes tocurrently ~~cover~~under acontract ~~bank’s trading~~for ~~account~~sale, ~~and~~model ~~foreign~~homes from ~~exchange~~which ~~and~~other ~~commodity~~homes ~~positions.~~will ~~The~~be ~~components~~marketed ofwithin ~~Tier~~a 1subdivision ~~capital are equivalent to those discussed above. Tier 2 capital may include cumulative preferred stock~~or, ~~long-term~~on ~~perpetual~~a ~~preferred~~very ~~stock,~~limited ~~mandatory convertible securities~~basis, ~~subordinated~~homes ~~debt,~~built ~~intermediate~~for ~~preferred~~speculative ~~stock~~purposes ~~and~~to ~~the~~be ~~allowance~~marketed for ~~credit~~sale ~~losses~~during ~~limited~~construction. toThe aBank ~~maximum~~offers ofpermanent ~~1.25% of risk~~end-~~weighted~~financing ~~assets.~~to ~~Overall,~~ the ~~amount~~Bank’s ofconstruction ~~Tier~~loan customers 2generally ~~capital~~on ~~included~~a as3/1 ~~part~~or of5/1 ~~total~~Adjustable ~~capital~~Rate ~~cannot~~Mortgage ~~exceed~~(“ARM”) ~~100% of Tier 1 capital~~basis.

~~Trust~~The ~~preferred~~Bank ~~securities~~originates ~~are~~land ~~considered~~acquisition ~~regulatory~~and ~~capital~~development loans ~~for~~with ~~purposes~~the source of ~~determining~~repayment ~~the~~being ~~Company’s~~either ~~Tier~~the 1sale ~~capital~~of ~~ratios. The~~finished ~~Dodd-Frank~~lots ~~Act~~or ~~requires~~ the ~~Federal~~sale ~~Reserve~~of homes to ~~apply~~be ~~consolidated~~constructed ~~capital~~on ~~requirements~~the tofinished ~~depository~~lots. ~~holding~~The ~~companies~~Bank ~~that~~will ~~are~~originate noland ~~less~~acquisition, ~~stringent~~development, ~~than~~and ~~those~~construction ~~that~~loans ~~apply~~on toa ~~depository~~revolving ~~institutions.~~line ~~Under~~of ~~these~~credit ~~standards, trust preferred securities~~basis ~~will~~for besubdivisions ~~excluded~~whereby ~~from~~the ~~Tier~~borrower 1may ~~capital~~draw ~~unless~~upon such ~~securities~~line ~~were~~of ~~issued~~credit ~~prior~~as tolots ~~May 19,~~are ~~2010~~sold byfor athe ~~bank~~purpose ~~holding~~of ~~company~~improving ~~with~~additional ~~less~~lots. ~~than~~Construction ~~$15~~loans ~~billion~~are ingenerally ~~assets.~~offered ~~The~~with ~~Company’s~~terms ~~trust~~up ~~preferred~~to ~~securities~~twelve ~~were~~months ~~issued~~for ~~prior~~consumer toand ~~May 19~~builder loans, ~~2010~~ and ~~will~~up ~~not need~~ to twenty-four bemonths ~~excluded~~for ~~from~~land ~~Tier~~development ~~1 capital~~loans.

AtConstruction ~~December 31,~~loans ~~2011,~~are ~~the~~generally ~~Company’s~~made ~~Tier~~in 1amounts ~~and~~up ~~Total~~to ~~Risk-based capital ratios were 12.8~~80% ~~and~~of ~~14.0%,~~the ~~respectively.~~appraised Atmarket ~~December 31,~~value ~~2010,~~ of the ~~Bank’s~~security ~~Tier 1 and Total Risk-based capital ratios were 12~~property.8% ~~and~~During ~~14.1%~~construction, ~~respectively.~~loan ~~The~~proceeds ~~Bank~~are ~~was~~disbursed ~~considered~~in ~~well-capitalized~~draws ~~for regulatory purposes~~ as ~~of December 31,~~construction ~~2011.~~progresses ~~Designation~~based asupon ainspections ~~well-capitalized institution under these regulations is not a recommendation or endorsement~~ of ~~the~~work ~~Company~~in orplace ~~the Bank~~ by ~~federal~~independent ~~bank~~construction ~~regulators~~inspectors.

25At December 31, 2012, the Bank had construction loans, including land acquisition and development loans, totaling $33.3 million, or 11.8% of the Bank’s total loan portfolio, of which $2.6 million consisted of one- to four-family owner occupied construction loans, $7.1 million consisted of non-owner occupied construction loans and $23.6 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 of improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the security property’s value upon completion of construction as compared to the estimated costs of construction, including interest. Also, the Bank assumes certain risks associated with the borrowers’ ability to complete construction in a timely and workmanlike manner. If the estimate of value proves to be inaccurate, or if construction is not performed timely or accurately, the Bank may be faced with a project which, when completed, has a value that is insufficient to assure full repayment.

~~See~~One- ~~Note~~to 19Four-Family ofResidential ~~the~~Mortgage ~~Consolidated~~Lending. ~~Financial~~The ~~Statements~~Bank currently offers both fixed-rate and adjustable-rate mortgage loans, first and second mortgage loans secured by one- to four-family residences and lot loans for ~~more~~one- ~~information~~to onfour-family residences located throughout the Baltimore-Washington Metropolitan area. One- to four-family mortgage loan originations are generally obtained from the Bank’s ~~risk-based capital~~loan ~~ratios~~representatives and their contacts in 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.

~~Impact~~23 ~~of Inflation and Changing Prices~~

TheTable Consolidated Financial Statements and Notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Nearly all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our 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 or services. Contents

~~ITEM~~At December 7A31, 2012, one- to four-family residential mortgage loans totaled $47.9 ~~QUALITATIVE~~million, ~~AND~~or 17.0% of ~~QUANTITATIVE~~total ~~DISCLOSURES~~loans. ~~ABOUT~~Of ~~MARKET~~the ~~RISK~~one-to four-family mortgage loans outstanding at that date, $23.4 million were fixed-rate loans with terms of up to fifteen years with a balloon payment at the end of the term, and $24.5 million were adjustable-rate 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 3 or 5 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 increases on such loans are limited to a 2% annual adjustment cap with a maximum adjustment of 6% over the life of the loan.

~~Not~~The ~~applicable~~Company also originates fixed-rate residential mortgage loans as a broker for other financial institutions. The partner financial institutions underwrite and fund the loans. This enables the Company to expand the product offerings to its customers, earn fee income and manage its exposure to increases in interest rates.

~~ITEM 8~~The origination of and retention of adjustable-rate residential mortgage loans, as opposed to fixed-rate residential mortgage loans, helps reduce the Bank’s exposure to increases in interest rates. However, ~~FINANCIAL~~adjustable-rate ~~STATEMENTS~~loans ~~AND~~generally ~~SUPPLEMENTARY~~pose ~~DATA~~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.

~~The~~Periodic ~~following~~and ~~consolidated~~lifetime ~~financial~~floors ~~statements~~on ~~are~~interest ~~filed~~rate increases help to reduce the risks associated with ~~this~~the ~~report:~~Bank’s adjustable-rate loans, but also limit the interest rate sensitivity of its adjustable-rate mortgage loans.

~~Management~~The Bank currently originates one- to four-family residential mortgage loans in amounts typically up to 80% (or higher with private mortgage insurance) of the lower of the appraised value or the selling price of the property securing the loan. Mortgage loans originated by the Bank generally include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank’s ~~Report~~consent. Due-on-sale ~~Internal~~clauses ~~Control~~are ~~over~~an ~~Financial~~important ~~Reporting~~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.

~~Report~~Home Equity Lending. As of ~~Independent~~December 31, ~~Registered~~2012, ~~Public~~home ~~Accounting~~equity ~~Firm~~loans totaled $31.6 million, or 11.3% of the Bank’s total loan portfolio. Fixed-rate, fixed-term home equity loans and adjustable rate home equity lines of credit are generally offered in amounts up to 80% of the market value of the security property. Home equity lines of credit are offered with terms up to twenty years. Of the $31.6 million in home equity loans, $15.7 million are fixed rate with terms up to 10 years. The remaining $15.9 million of the Bank’s home equity loans are adjustable rate and reprice with changes in the Wall Street Journal prime rate.

~~Consolidated~~Consumer ~~Balance~~Lending. ~~Sheets~~The —Bank’s portfolio of consumer loans primarily consists of adjustable rate, personal lines of credit and generally fixed rate installment loans secured by new or used automobiles, new or used boats, and loans secured by deposit accounts. At December 31, ~~2011~~2012, ~~and~~consumer ~~2010~~loans totaled $7.1 million or 2.5% of total loans outstanding. Consumer loans are generally originated in the Bank’s primary market area.

~~Consolidated Statements~~Provision offor ~~Income~~Credit —Losses ~~For~~and ~~the~~Credit ~~years~~Risk ~~ended~~Management ~~December 31, 2011 and 2010~~

~~Consolidated~~Originating ~~Statements~~loans involves a degree of ~~Changes~~risk that credit losses will occur in varying amounts according to, among other factors, the type of loans being made, the credit-worthiness of the borrowers over ~~Stockholders’~~the ~~Equity~~term —of ~~For~~the loans, the ~~years~~quality ~~ended~~of ~~December 31~~the collateral for the loan, ~~2011~~if ~~and~~any, ~~2010~~as well as general economic conditions.

~~Consolidated~~The ~~Statements~~Bank’s allowance for credit losses is established through a provision for loan losses based on management’s evaluation of ~~Cash~~the ~~Flows~~risks inherent in its loan portfolio and the general economy. The allowance for credit losses is maintained at an amount management —considers ~~For~~adequate to cover estimated losses in loans receivable which are deemed probable and estimable based on information currently known to management. The Bank estimates an acceptable allowance for credit loss with the ~~years~~objective ~~ended~~of ~~December 31~~quantifying portfolio risk into a dollar figure of inherent losses, ~~2011~~thereby translating the subjective risk value into an objective number. Emphasis is placed on independent external loan reviews and ~~2010~~regular internal reviews. The determination of the allowance for loan losses is based on a combination of the Bank’s historical loss and ten (10) qualitative factors for specific categories and types of loans. The combination of the loss experience factor and the total qualitative factors (“Total ALLL Factor”) is expressed as a percentage of the portfolio for specific categories and types of loans to create the inherent loss index for each loan portfolio. Individual loans deemed impaired are separated from the respective loan portfolios and a specific reserve allocation is assigned based upon Bank management’s best estimate as to the loss exposure for each loan. Each Total ALLL Factor is assigned a percentage weight and that total weight is applied to each loan category. The Total ALLL Factor is different for each loan type and for each risk assessment category within each loan type. Previously (in 2011) due to the Bank’s limited historical loss experience the loss experience factor was the greater of either the Bank’s historical loss experience or the peer group average historical loss experience.

~~Notes~~• toThe ~~Consolidated~~Bank’s ~~Financial~~historical ~~Statements~~loss experience is calculated by aggregating the actual loan losses by category for the previous eight quarters and converting that total into a percentage for each loan category.

26• Qualitative factors include: levels and trends in delinquencies and non-accruals; trends in volumes and terms of loans; effects of any changes in lending policies; the experience, ability and depth of management; national and local economic trends and conditions; concentrations of credit; quality of the bank’s loan review system; and, external factors, such as competition, legal and regulatory requirements.

~~MANAGEMENT’S~~24 ~~REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING~~

Management’sTable Reportof Contents

The ~~Management of~~total ~~Annapolis~~allowance ~~Bancorp, Inc. (the “Company”) is responsible~~ for ~~the~~credit ~~preparation,~~losses ~~integrity~~requires ~~and~~these ~~fair~~changes ~~presentation~~as of the ~~consolidated~~percentage ~~financial~~weight ~~statements~~assigned ~~included~~to ineach ~~this~~Total ALLL ~~Annual~~Factor ~~Report~~is onincreased ~~Form~~or ~~10-K.~~decreased ~~These~~due ~~financial~~to ~~statements~~its ~~are~~particular ~~in conformity~~circumstance, ~~with~~as ~~accounting~~the ~~principles~~various ~~generally~~types ~~accepted~~and incategories ~~the United States~~ of ~~America~~loans ~~and,~~change ~~therefore,~~as ~~include~~a ~~amounts~~percentage ~~based~~of ontotal ~~informed~~loans ~~judgments~~ and ~~estimates.~~as Wethe ~~also~~aggregate ~~accept~~of ~~responsibility~~specific ~~for~~allowances ~~the~~is ~~preparation~~adjusted ofdue ~~other~~to ~~financial~~an ~~information~~increase ~~that is~~or ~~included~~decrease in impaired ~~this document~~loans.

~~Report~~Management believes this approach effectively measures the risk associated with any particular loan or group of loans. The Bank’s Board of Directors engages an independent loan review consultant to evaluate the adequacy of the Bank’s allowance for credit losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Bank to make additional provisions for estimated credit losses based upon judgments different from those of management. The Bank recorded a total provision for credit losses of $684,000 for the year ended December 31, 2012 and $2.2 million in 2011. The decrease in provision was primarily the result of a decrease in loan levels and applying the Bank’s historical loss percentages when calculating the allowance for credit losses compared to the use of peer data in prior years. The aggregate provision was based upon the results of quarterly evaluations using a combination of factors including the level of nonperforming loans, the Bank’s growth in total gross loans and the Bank’s net credit loss experience. Total gross loans decreased by $9.6 million for the year ended December 31, 2012. The Bank recorded charge-offs of $1.7 million on ~~Internal~~loans ~~Control~~deemed uncollectible ~~Over~~and ~~Financial~~recovered ~~Reporting~~$170,000 on previously charged-off loans. As of December 31, 2012, the Bank’s allowance for credit losses was $6.3 million or 2.25% of total loans and 57.4% of nonperforming loans as compared to $7.2 million, or 2.47% of total loans and 102.3% of nonperforming loans as of December 31, 2011. The Bank had total nonperforming loans of $11.0 million at December 31, 2012 and $7.0 million at December 31, 2011, and nonperforming loans to total assets of 2.47% and 1.67% at December 31, 2012 and December 31, 2011, respectively.

The ~~management~~Bank ofplaces ~~the~~loans ~~Company,~~on ~~including~~a ~~its~~nonaccrual ~~Chairman and Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and~~status ~~maintaining~~after ~~adequate~~90 ~~internal~~days ~~control~~of ~~over~~not ~~financial~~having ~~reporting~~received ascontractual ~~defined~~principal inor ~~Rules~~interest ~~13a-15(f)~~payments ~~and~~unless ~~15d-15(f) under~~ the ~~Securities~~loan ~~Exchange Act of 1934. The Company’s internal control over financial reporting~~ is ~~designed~~well tosecured ~~provide reasonable assurance regarding the reliability of financial reporting~~ and ~~the preparation of financial statements for external purposes~~ in ~~accordance with generally accepted accounting principles in~~ the ~~United~~process ~~States~~ of ~~America~~collection. ~~The~~In ~~Company’s~~addition ~~internal control~~the ~~over~~Bank ~~financial~~maintains ~~reporting~~a ~~includes~~watch ~~those~~list ~~policies~~of ~~and~~loans ~~procedures~~on ~~that:~~a ~~(i) pertain~~monthly tobasis ~~the maintenance of records~~ that, inwarrant ~~reasonable~~more ~~detail,~~than ~~accurately and fairly reflect~~ the ~~transactions and dispositions of the assets of the Company;~~ ~~(ii) provide~~normal ~~reasonable~~level ~~assurance that transactions are recorded as necessary to permit preparation~~ of ~~financial~~management ~~statements~~supervision. inAt ~~accordance with generally accepted accounting principles~~December 31, ~~and~~2012 ~~that receipts and expenditures of~~ the ~~Company~~Bank ~~are~~had ~~being made~~approximately ~~only~~$25.5 million in ~~accordance~~watch ~~with~~list ~~authorizations~~loans ofcompared ~~management~~to ~~and~~$42.7 ~~directors~~million ofat ~~the Company; and (iii)~~December ~~provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition~~31, ~~use or disposition of the Company’s assets that could have a material effect on the financial statements~~2011.

~~Because~~At ~~of its inherent limitations~~December 31, ~~internal~~2012 ~~control over financial reporting may not prevent or detect misstatements~~$9.9 ~~Also,~~million ~~projections~~in ofloans ~~any~~were ~~evaluation~~classified ofas ~~effectiveness~~nonaccrual tocompared ~~future periods are subject~~ to ~~the~~$6.2 ~~risk~~million ~~that~~at ~~controls~~December 31, ~~may~~2011. ~~become~~Approximately ~~inadequate~~28.0% ~~because~~ of ~~changes~~the inyear-end ~~conditions,~~nonaccrual ortotal ~~that~~consisted ~~the degree~~ of ~~compliance~~one- ~~with the~~to ~~policies~~four-family orloans ~~procedures~~while ~~may~~commercial ~~deteriorate.~~mortgages ~~Management,~~accounted ~~including~~for ~~its~~approximately ~~Chairman~~21.5% ~~and~~of ~~Chief Executive Officer and~~ the ~~Chief~~total. ~~Financial~~Home ~~Officer,~~equity ~~assessed~~loans ~~the~~represented ~~effectiveness~~4.0% of the ~~Company’s~~total, ~~internal~~consumer ~~control~~and ~~over~~installment ~~financial~~loans ~~reporting~~accounted asfor ~~of December 31, 2011~~1.1% Inand ~~making~~commercial ~~this~~loans ~~assessment,~~45.4% ~~management used the criteria set forth by the Committee~~ of ~~Sponsoring Organizations of~~ the ~~Treadway~~total ~~Commission~~nonaccrual ~~in Internal Control-Integrated Framework. Based on this assessment management believes~~loans ~~that~~at ~~the Company maintained effective internal control over financial reporting as of~~ December 31, ~~2011~~2012.

~~This~~The ~~annual~~Bank ~~report~~continues ~~does~~to ~~not~~monitor and modify its allowance for credit losses as conditions dictate. While management ~~include~~believes anthat, ~~attestation~~based ~~report~~on ofinformation currently available, the ~~Company~~Bank’s ~~independent~~allowance ~~registered~~for ~~public~~credit ~~accounting~~losses ~~firm~~is ~~regarding~~sufficient ~~internal~~to ~~control~~cover ~~over~~losses ~~financial~~inherent ~~reporting.~~in ~~Management’s~~its ~~report~~loan ~~was~~portfolio ~~not~~at ~~subject~~this totime, ~~attestation~~no byassurances can be given that the ~~Company~~Bank’s ~~independent~~level of allowance for ~~registered~~credit ~~public~~losses ~~accounting~~will ~~firm~~be ~~pursuant~~sufficient to cover future loan losses incurred by the ~~rules~~Bank ofor that future adjustments to the ~~Securities~~allowance for credit losses will not be necessary if economic and ~~Exchange~~other ~~Commission~~conditions ~~that~~differ ~~permit~~substantially ~~the~~from ~~Company~~economic toand ~~provide~~other conditions ~~only~~at the time management’s ~~report~~determined the current level of the allowance for credit losses. Management may in ~~this~~the ~~annual~~future ~~report~~increase the level of the allowance as its loan portfolio increases or as circumstances dictate.

~~/s/~~25 ~~Richard M. Lerner Richard M. Lerner Chairman and Chief Executive Officer /s/ Edward J. Schneider Edward J. Schneider Principal Financial and Accounting Officer March 26, 2012~~

27Table of Contents

~~ANNAPOLIS~~The ~~BANCORP~~following table presents the allocation of the allowance for credit losses, ~~INC~~reflecting use of the methodology presented above, along with the percentage of total loans in each category.

~~Report~~At ofDecember 31, ~~Independent Registered Public Accounting Firm~~

Board of Directors and Stockholders


	2012					2011
	Amount		Loan Mix			Amount		Loan Mix
(Dollars in thousands)
Amount applicable to:
Commercial	$	1,381		15.8	%	$	1,387		16.4	%
Real estate
Commercial		2,177		41.6	%		2,155		39.5	%
One to four-family		1,770		28.3	%		1,422		29.0	%
Construction		714		11.8	%		1,817		12.0	%
Consumer		275		2.5	%		401		3.1	%

Total allowance	$	6,317		100.0	%	$	7,182		100.0	%

~~Annapolis~~Analysis ~~Bancorp,~~of ~~Inc.~~Credit ~~and~~Risk ~~Subsidiaries~~

WeActivity ~~have~~in ~~audited~~ the ~~accompanying~~allowance ~~consolidated~~for ~~balance~~credit ~~sheets~~losses of Annapolis Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2011 and 2010 and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for ~~each of~~ the ~~years in the~~ two ~~year~~years ~~period~~ ended December 31, ~~2011. The Company’s management~~ is ~~responsible~~shown ~~for~~below: ~~these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.~~

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.


	2012			2011

Total loans outstanding – at December 31 (1)	$	280,877		$	290,466
Average loans outstanding for the year		292,468			289,502

Allowance for credit losses at beginning of period	$	7,182		$	6,853

Provision charged to expense		684			2,190

Charge-offs:
Commercial loans		357			1,183
Real estate loans		896			810
Consumer and other loans		466			203

Total		1,719			2,196

Recoveries:
Commercial loans		50			19
Real estate loans		62			294
Consumer and other loans		58			22

Total		170			335


Net charge-offs		1,549			1,861

Allowance for credit losses at end of year	$	6,317		$	7,182


Allowance for credit losses as a percent of total loans		2.25	%		2.47	%
Net charge-offs as a percent of average loans		0.53	%		0.64	%

In(1) ~~our~~Net ~~opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position~~ of ~~Annapolis~~deferred ~~Bancorp,~~fees ~~Inc.~~ and subsidiaries as of December 31, 2011 and 2010 and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of Americacosts.

~~/s/~~Nonperforming ~~Stegman~~Loans &and ~~Company~~Other Delinquent Assets

~~Baltimore~~Management performs reviews of all delinquent loans. Management will generally classify loans as nonaccrual when collection of full principal and interest under the original terms of the loan is not expected or payment of principal or interest has become 90 days past due. Classifying a loan as non-accrual results in the Company no longer accruing interest on such loan and reversing any interest previously accrued but not collected. A nonaccrual loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected. The Company will recognize interest on nonaccrual loans only when received. As of December 31, ~~Maryland~~2012 and 2011, the Company had $9.9 and $6.2 million of nonaccrual loans, respectively. (See the previous discussion under the heading “Provision for Credit Losses and Credit Risk Management” for additional comments regarding nonaccrual loan activity.)

~~March 26~~The Company considers a loan to be a troubled debt restructuring when for economic or legal reasons related to a borrower’s financial difficulties, ~~2012~~the Company grants a concession to the borrower that it would not otherwise consider. The Company may consider granting a concession in an attempt to protect as much of its investment as possible.

2826

ANNAPOLISTable BANCORP,of INC. Contents

~~Consolidated~~The ~~Balance~~restructuring ~~Sheets~~of a loan may include, but is not necessarily limited to: (1) the transfer from the borrower to the Bank of real estate, receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan (2) the issuance or other granting of an equity interest to the Company by the borrower to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt in to an equity interest (3) a modification of the loan terms, such as a reduction of the stated interest rate, principal, or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, or (4) a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement and (5) a reduction of accrued interest. The current outstanding balance of troubled debt restructurings as of December 31, 2012 included $925,000) of loans in accrual status and $1.7 million of loans classified as nonaccrual.

December 31,	2011		2010
Assets
Cash and due from banks	$	2,026	$	7,854
Interest bearing balances with banks		18,288		16,856
Federal funds sold and other overnight investments		26,583		11,984
Investment securities available for sale, at fair value		87,549		96,295
Federal Reserve Bank and Federal Home Loan Bank stock		2,992		3,035
Loans held for sale		0		1,379
Loans, less allowance for credit losses of $7,182 and $6,853		283,284		271,684
Premises and equipment, net		8,418		8,787
Accrued interest receivable		1,279		1,567
Deferred income taxes		2,617		2,929
Investment in bank owned life insurance		5,624		5,442
Prepaid FDIC insurance		1,198		1,639
Real estate owned		1,222		1,608
Other assets		490		1,081
Total assets	$	441,570	$	432,140
Liabilities and Stockholders’ Equity
Deposits
Noninterest bearing	$	56,664	$	45,514
Interest bearing		293,717		295,400
Securities sold under agreements to repurchase		11,344		14,558
Long-term borrowings		35,000		35,000
Guaranteed preferred beneficial interests in junior subordinated debentures		5,000		5,000
Accrued interest and dividends payable		219		239
Other liabilities		2,258		1,655
Total liabilities		404,202		397,366
Stockholders’ Equity
Preferred stock, par value $0.01 per share; authorized 5,000,000 shares; Series A, $1,000 per share liquidation preference, shares issued and outstanding 8,152 shares at December 31, 2011 and 2010, net of discount of $6 and $89, respectively		8,146		8,063
Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 3,958,293 shares in 2011 and 3,922,006 shares in 2010		39		39
Warrants		234		234
Paid in capital		11,779		11,643
Retained earnings		16,179		14,499
Accumulated other comprehensive income		991		296
Total stockholders’ equity		37,368		34,774
Total liabilities and stockholders’ equity	$	441,570	$	432,140

Property acquired by the Company as a result of foreclosure on a mortgage loan will be classified as “real estate owned.” Personal property acquired through repossession will be classified as “repossessed assets.” Property acquired will be recorded at the lower of the unpaid principal balance or fair value at the date of acquisition and subsequently carried at the lower of cost or net realizable value. Any required write-down of the loan to its net realizable value will be charged against the allowance for credit losses. As of December 31, 2012 the Company held $769,000 in real estate owned as a result of foreclosure. The Company held $1.2 million in real estate owned at December 31, 2011. Property held as the result of repossession totaled $337,000 at December 31, 2012 and $52,000 at December 31, 2011.

The ~~accompanying~~following ~~notes~~table ~~are~~shows anthe ~~integral~~amounts ~~part~~ of ~~these~~nonperforming ~~financial~~assets ~~statements.~~at December 31 for the past five years.


	2012			2011			2010			2009			2008
	(Dollars in thousands)
Nonaccrual loans:
Commercial	$	4,480		$	390		$	2,107		$	6,718		$	292
Real estate		5,287			5,308			5,054			9,532			3,397
Consumer		105			484			630			517			604
Accrual loans – past due 90 days
Commercial		0			0			0			33			0
Real estate		214			0			598			0			2,005
Consumer		0			0			0			0			0
Restructured loans		925			856			0			0			0

Total nonperforming loans		11,011			7,038			8,389			16,800			6,298
Real estate owned		769			1,222			1,608			2,398			0
Repossessed assets		337			52			145			122			182

Total nonperforming assets	$	12,117		$	8,312		$	10,142		$	19,320		$	6,480


Allowance for credit losses to total nonperforming loans		57.37	%		102.03	%		81.69	%		47.18	%		65.47	%
Ratio of nonperforming loans to total loans		3.92	%		2.42	%		3.00	%		5.96	%		2.35	%
Ratio of nonperforming assets to total assets		2.71	%		1.88	%		2.35	%		4.35	%		1.64	%

~~ANNAPOLIS~~Contractual ~~BANCORP,~~Obligations ~~INC.~~

~~Consolidated~~The ~~Statements~~Bank ofhas ~~Income~~various ~~($000~~financial ~~except~~obligations, ~~per~~including ~~share~~contractual ~~data)~~obligations and commitments that may require future cash payments.

Years Ended December 31,	2011			2010
Interest and Dividend Income
Loans, including fees	$	17,157		$	16,013
Interest bearing balances with banks		21			32
Federal funds sold and other overnight investments		40			32
Mortgage-backed securities		1,404			1,875
U.S. Treasury securities and obligations of other U.S. Government agencies		1,111			1,783
State and municipal securities		44			44
Equity securities		80			74
Total interest and dividend income		19,857			19,853
Interest Expense
Certificates of deposit, $100,000 or more		563			675
Other deposits		1,658			2,523
Securities sold under agreements to repurchase		74			107
Interest on long-term borrowings		1,302			1,328
Total interest expense		3,597			4,633
Net interest income		16,260			15,220
Provision for credit losses		2,190			2,148
Net interest income after provision for credit losses		14,070			13,072
Noninterest Income
Service charges and fees on deposits		1,250			1,193
Mortgage banking fees		139			74
Other fee income		311			494
Net gain on sale of loans		166			159
Net loss on sale of securities, available for sale		0			(55	)
Net gain (loss) on sale of real estate owned and repossessed assets		8			(51	)
(Loss) gain on disposal of fixed assets		(32	)		1
Total noninterest income		1,842			1,815
Noninterest Expense
Personnel		7,049			6,801
Occupancy and equipment		1,560			1,603
Data processing		847			836
Legal and professional fees		439			554
Marketing and advertising		348			352
FDIC insurance		440			562
Other operating expenses		1,880			1,677
Total noninterest expense		12,563			12,385
Income Before Income Taxes		3,349			2,502
Income Tax Expense		1,178			886
Net Income		2,171			1,616
Preferred Stock Dividend and Discount Accretion		490			485
Net Income Available to Common Shareholders	$	1,681		$	1,131
Basic earnings per common share	$	0.43		$	0.29
Average common shares outstanding before the effect of grants, options and warrants		3,949,717			3,909,688
Diluted earnings per common share	$	0.39		$	0.29
Average common shares outstanding with the effect of grants, options and warrants		4,261,423			3,946,656

The following table presents, as of December 31, 2012, significant fixed and determinable contractual obligations to third parties by payment date.

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


Payments due by Period	Total		Less than one year		One to three years		Three to five years		More than five years
	(Dollars in thousands)

Deposits with a stated maturity	$	68,850	$	32,801	$	18,546	$	17,503	$	0
Long-term borrowings		35,000		0		5,000		15,000		15,000
Junior subordinated debentures		5,000		0		0		0		5,000
Operating lease obligations		9,199		301		1,138		1,135		6,625
Data processing contracts		1,005		485		520		0		0

	$	119,054	$	33,587	$	25,204	$	33,638	$	26,625

3027

ANNAPOLISTable BANCORP,of INC. Contents

~~Consolidated~~Off-Balance ~~Statements~~Sheet ofArrangements ~~Changes in Stockholders’ Equity and Comprehensive Income ($000)~~

	PreferredStock		CommonStock		Warrants		Paid inCapital		RetainedEarnings			AccumulatedOtherComprehensiveIncome (Loss)			TotalStockholders’Equity			ComprehensiveIncome
For the years ended December 31, 2011 and 2010
BALANCE JANUARY 1, 2010	$	7,985	$	39	$	234	$	11,500	$	13,368		($	494	)	$	32,632
Net income		0		0		0		0		1,616			0			1,616			1,616
Preferred stock dividends declared and discount accretion		78		0		0		0		(485	)		0			(407	)
Stock-based compensation		0		0		0		30		0			0			30
Issuance of restricted stock		0		0		0		60		0			0			60
Stock options exercised		0		0		0		43		0			0			43
Employee stock purchase plan		0		0		0		10		0			0			10
Reclassification adjustment for Securities losses, net of taxes of $20 included in net income													35			35			35
Unrealized gain on investment securities available for sale, net of income taxes of $495		0		0		0		0		0			755			755			755
BALANCE DECEMBER 31, 2010		8,063		39		234		11,643		14,499			296			34,774			2,406
Net income		0		0		0		0		2,171			0			2,171			2,171
Preferred stock dividends declared and discount accretion		83		0		0		0		(491	)		0			(408	)
Stock-based compensation		0		0		0		59		0			0			59
Issuance of restricted stock		0		0		0		55		0			0			55
Stock options exercised		0		0		0		14		0			0			14
Employee stock purchase plan		0		0		0		8		0			0			8
Unrealized gain on investment securities available for sale, net of income taxes of $453		0		0		0		0		0			695			695			695
BALANCE DECEMBER 31, 2011	$	8,146	$	39	$	234	$	11,779	$	16,179		$	991		$	37,368		$	2,866

As of December 31, 2012, the Company had a wholly-owned statutory trust formed for the purpose of issuing junior subordinated debentures in the form of trust preferred securities. The statutory trust has not been consolidated with the holding company.

The ~~accompanying~~Company ~~notes~~does ~~are~~have ansignificant ~~integral~~commitments ~~part~~to fund loans in the ordinary course of business. ~~these~~Such commitments and resulting off-balance sheet risk is discussed further in Note 5 to the consolidated financial statements.

31With the exception of these off-balance sheet arrangements, the Company has no-off balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, capital expenditures or capital resources.

~~ANNAPOLIS~~Capital ~~BANCORP,~~Management ~~INC.~~

~~Consolidated~~Total ~~Statements~~stockholders’ equity was $36.2 million at December 31, 2012, representing a decrease of ~~Cash~~$1.1 ~~Flows~~million or 3.1% from December 31, 2011. The decrease in stockholders’ equity during 2012 as compared to the same period in 2011 was attributable to the redemption of $4.1 million in Fixed Rate Cumulative Preferred Stock, Series A (the “Series A Preferred Stock”), and a decrease in other comprehensive income of $137,000) offset by net income of $3.1 million.

Years Ended December 31,	2011			2010
Cash Flows from Operating Activities
Net income	$	2,171		$	1,616
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		591			619
Provision for credit losses		2,190			2,148
Origination of loans held for sale		(8,186	)		(22,549	)
Proceeds from sale of loans held for sale		9,731			24,625
Stock-based compensation		114			90
Deferred income taxes		(141	)		458
Earnings on life insurance policies		(182	)		(216	)
Amortization of premiums and accretion of discounts, net		305			408
Gain on sale of real estate owned		(18	)		0
Gain on sale of loans held for sale		(166	)		(159	)
Loss on sale of securities, available for sale		0			55
Loss on sale of repossessed assets		10			50
Loss on write-down and disposals of fixed assets		231			0
(Increase) decrease in:
Accrued interest receivable		288			367
Prepaid FDIC insurance		441			964
Real estate owned		(34	)		0
Repossessed assets		19			0
Other assets		485			(974	)
(Decrease) increase in
Accrued interest payable		32			(24	)
Accrued income taxes, net of taxes refundable		198			(47	)
Deferred loan origination fees		153			(28	)
Other liabilities		353			370
Net cash provided by operations		8,585			7,773
Cash Flows from Investing Activities
Proceeds from sales and maturities of securities available for sale		45,478			63,310
Purchase of securities available for sale		(35,846	)		(40,655	)
Purchase of life insurance policy		0			(1,000	)
Net increase in federal funds sold		(14,599	)		(3,294	)
Net increase in interest bearing certificates of deposit.		(1,432	)		(6,718	)
Net increase in loans receivable		(13,943	)		(4,174	)
Proceeds from sale of repossessed assets		117			181
Proceeds from sale of real estate owned		385			1,642
Purchases of premises and equipment, net of disposals		(440	)		(160	)
Net cash (used in) provided by investing activities		(20,280	)		9,132
Cash Flows from Financing Activities
Net increase (decrease) in:
Time deposits		636			(19,271	)
Other deposits		8,831			9,722
Securities sold under agreements to repurchase		(3,214	)		(84	)
Repayment of long-term borrowings		0			(5,000	)
Proceeds from stock options exercised		14			43
Proceeds from issuance of common stock		8			10
Payment of preferred stock dividend		(408	)		(407	)
Net cash provided (used in) by financing activities		5,867			(14,987	)
Net (decrease) increase in cash and cash equivalents		(5,828	)		1,918
Cash and cash equivalents at beginning of year		7,854			5,936
Cash and cash equivalents at end of year	$	2,026		$	7,854
Supplemental Cash Flow Information
Interest paid, including interest credited to accounts	$	3,620		$	4,660
Income taxes paid		1,298			1,082
Non-cash investing activities
Transfers from loans to other assets and real estate owned	$	97		$	1,106

On January 30, 2009, the Company sold 8,152 shares of the Company’s Series A Preferred Stock, having a liquidation amount per share equal to $1,000, and a warrant to purchase 299,706 shares of the Company’s common stock, at an exercise price of $4.08 per share, to the Treasury under the CPP for a total purchase price of $8,152,000. On April 18, 2012, Annapolis Bancorp, Inc. (the “Company”) redeemed 4,076 shares of its Series A Preferred Stock for $4,076,000. On April 18, 2012, The Company redeemed 4,076 shares of its Series A Preferred Stock for $4,076,000 and on March 6, 2013, the Company redeemed the final 4,076 shares of its Series A Preferred Stock for $4,076,000.

~~The~~Stockholder’s ~~accompanying~~equity ~~notes~~was ~~are~~also anlowered ~~integral~~by ~~part~~$264,000 in preferred stock dividends. Stock based compensation, stock purchases through the Company’s Employee Stock Purchase Plan and the exercise of options ~~these~~added ~~financial~~$231,000 ~~statements~~to the stockholder’s equity for the period ended December 31, 2012.

32Regulatory Capital Requirements

~~ANNAPOLIS~~The ~~BANCORP~~Federal Reserve’s capital regulations require state member banks to meet two minimum capital standards: a 4% Tier 1 capital to total adjusted average assets ratio (the “leverage” ratio), ~~INC~~and an 8% risk-based capital ratio. Tier 1 capital is defined as common stockholders’ equity (including retained earnings), certain non-cumulative perpetual preferred stock and related paid in capital, and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships.

~~Notes~~The torisk-based ~~Consolidated~~capital ~~Financial~~standard ~~Statements~~requires the maintenance of Tier 1 and Total capital (~~$000~~which ~~except~~is ~~share~~defined ~~data~~as Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 4% and 8%, respectively. A well-capitalized institution has Tier 1 and Total capital to risk-weighted assets of at least 6% and 10%, respectively, and a leverage ratio of at least 5%. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the Federal Reserve capital regulations, based on the risks the agency believes are inherent in the type of asset. The regulators have recently added a market risk adjustment to cover a bank’s trading account and foreign exchange and commodity positions. The components of Tier 1 capital are equivalent to those discussed above. Tier 2 capital may include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt, intermediate preferred stock and the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital included as part of total capital cannot exceed 100% of Tier 1 capital.

~~For~~Trust preferred securities are considered regulatory capital for purposes of determining the ~~years~~Company’s ~~ended~~Tier ~~December~~1 capital ratios. The Dodd-Frank Act requires the Federal Reserve to apply consolidated capital requirements to depository holding companies that are no less stringent than those that apply to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 3119, ~~2011~~2010 ~~and~~by a bank holding company with less than $15 billion in assets. The Company’s trust preferred securities were issued prior to May 19, 2010 and will not need to be excluded from Tier 1 capital.

1.28 ~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~

TheTable accounting and reporting policies in the consolidated financial statements conform with accounting principles generally accepted in the United States of America and to general practices within the banking industry. Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain reclassifications have been made to the 2010 consolidated financial statements to conform with the 2011 presentation. Contents

~~Business~~At December 31, 2012, the Company’s Tier 1 and Total Risk-based capital ratios were 12.7% and 13.9%, respectively. At December 31, 2011, the Bank’s Tier 1 and Total Risk-based capital ratios were 12.8% and 14.0%, respectively. The Bank was considered well-capitalized for re

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