ANNB Annapolis Bancorp Inc. (MM)

Notes to Financial Statements

For the ten month period ended October 31, 2012 and the year ended December 31, 2011.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies in the financial statements conform with accounting principles generally accepted in the United States of America. 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.

Administrative Expenses. Certain administrative functions are performed by employees of BankAnnapolis. However, no such employees receive compensation from the Annapolis Bancorp, Inc. 2007 Employee Stock Purchase Plan (the “Plan”). Certain other third party administrative expenses are paid directly by Annapolis Bancorp, Inc. (the “Company”).

2. PLAN TERMINATION

The Plan was terminated by the Annapolis Bancorp, Inc. Board of Directors effective October 31, 2012.

3. DESCRIPTION OF PLAN

The Company’s Board of Directors approved the Plan on March 16, 2007. The stockholders of the Company approved the Plan on May 17, 2007 to commence on July 1, 2007. The Plan provides for the purchase of up to 200,000 shares of common stock of the Company which the Company will provide by issuing authorized but unissued common shares of the Company’s common stock. All employees of the Company and its designated affiliates (including designated related entities for sub-plans) who have been employed by BankAnnapolis for at least one (1) year are eligible to participate in the Plan, except a person whose customary employment is less than 20 hours per week, or is customarily less than five months per year. Persons who are deemed for purposes of Section 423(b)(3) of the Internal Revenue Code of 1986, as amended (the “Code”) to own shares of the Company’s common stock possessing 5% or more of the total combined voting power or value of all classes of common stock or shares of a subsidiary are ineligible to participate in the Plan. For any offering period, each eligible employee may elect to have payroll deductions occur on each payday in an amount equal to a percentage from 0.50% (or $25 per payroll period, if greater) to 25% (or $2,000 per offering period, if less) of their compensation. The maximum contribution is $25,000 per calendar year.

At the end of each offering period, the balance in each participant’s payroll deduction account is applied to the purchase of full shares of the Company’s common stock. The price per share of common stock sold under the Plan during an offering is equal to 95% of the fair market value of a share of the Company’s common stock on the last day of the offering which, is typically the closing sales price of the Company’s common stock on the last day of the offering if a trade occurred or the mean of the bid and ask price on the last trading day of the offering if no trade occurred. Any unused balance in a participant’s account at the end of an offering period is carried over to the next period. As of the Plan’s termination date all unused balances in participants’ accounts were returned to the participant.

Prior to termination the Plan had four participants.

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4. RELATED PARTY TRANSACTIONS

The cash of the Plan is held in a non-interest bearing checking account at the Company. The number of shares purchased with Plan assets on behalf of the participants in the Plan for the ten months ended October 31, 2012 and the year ended December 31, 2011, was 1,026 shares and 2,070 respectively.

5. TAX STATUS

Participants’ contributions are deducted from their after-tax earnings and there are no Company contributions; consequently the Plan is not subject to income tax under the Internal Revenue Code. The Plan is intended, but not required, to qualify as an employee stock purchase plan (under Section 423 of the Code. Qualification of the Plan under Code Section 423 requires shareholder approval of the number of shares of Company’s common stock that may be sold under the Plan. The Plan is generally exempt from the provisions of the Employee Retirement Income Security Act of 1974, as amended, and is not intended to qualify under Section 401 of the Code.

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