10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 0-22961

ANNAPOLIS BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	52-1595772
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1000 Bestgate Road, Annapolis, Maryland 21401

(Address of principal executive offices)

(410) 224-4455

(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 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.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller Reporting Company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

At October 31, 2012, the Registrant had 3,975,601 shares of common stock outstanding.

TABLE OF CONTENTS

	PAGE
PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements
Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011		1
Consolidated Statements of Operations for the Three and Nine Month Periods Ended September  30, 2012 and 2011 (unaudited)		2
Consolidated Statements of Comprehensive Income for the Three and Nine Month Periods Ended September  30, 2012 and 2011 (unaudited)		3
Consolidated Statements of Cash Flows for the Nine Month Periods Ended September  30, 2012 and 2011 (unaudited)		4-5
Notes to Consolidated Financial Statements (unaudited)		6-30
Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		31-42
Item 3 – Quantitative and Qualitative Disclosures About Market Risk		42
Item 4 – Controls and Procedures		42
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings		43
Item 1A – Risk Factors		43
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3 – Defaults Upon Senior Securities		43
Item 4 – Mine Safety Disclosures		43
Item 5 – Other Information		43
Item 6 – Exhibits		44-45
SIGNATURES		46
CERTIFICATIONS

This Quarterly Report on Form 10-Q 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 of places 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 financing plans; (ii) trends affecting the Company’s financial condition, results of operations; plans and objectives (iii) the Company’s growth strategy; (iv) the Company’s future performance and business, including, but not limited to statements with 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, and the effect of legal 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-looking, and the 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 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 and uncertainties as set forth in the Company’s filings with the Securities and Exchange Commission. All forward-looking statements included in this quarterly report on Form 10-Q 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.

PART I - FINANCIAL INFORMATION

Item 1- Financial Statements

Annapolis Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

as of September 30, 2012 and December 31, 2011

(in thousands)

	(Unaudited) September 30, 2012		(Audited) December 31, 2011
Assets
Cash and due from banks	$	1,951	$	2,026
Interest bearing balances with banks		39,996		18,288
Federal funds sold and other overnight investments		11		26,583
Investment securities available for sale, at fair value		91,777		87,549
Federal Reserve and Federal Home Loan Bank stock		2,864		2,992
Loans, less allowance for credit losses of $6,647 and $7,182		278,102		283,284
Premises and equipment, net		9,797		8,418
Accrued interest receivable		1,350		1,279
Deferred income taxes		2,390		2,617
Investment in bank owned life insurance		5,783		5,624
Prepaid FDIC Insurance		954		1,198
Real estate owned		697		1,222
Other assets		683		490
Total Assets	$	436,355	$	441,570
Liabilities and Stockholders’ Equity
Deposits
Noninterest bearing	$	57,314	$	56,664
Interest bearing		281,501		293,717
Securities sold under agreements to repurchase		18,895		11,344
Long-term borrowings		35,000		35,000
Guaranteed preferred beneficial interests in junior subordinated debentures		5,000		5,000
Accrued dividends and interest payable		188		219
Other liabilities		2,381		2,258
Total liabilities		400,279		404,202
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 4,076 shares at September 30, 2012 and 8,152 at December 31, 2011, net of discount of zero and $6		4,076		8,146
Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 3,975,471 shares at September 30, 2012 and 3,958,293 at December 31, 2011		40		39
Warrants		234		234
Paid in capital		11,847		11,779
Retained earnings		18,815		16,179
Accumulated other comprehensive income		1,064		991
Total stockholders’ equity		36,076		37,368
Total liabilities and stockholders’ equity	$	436,355	$	441,570

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

1

Annapolis Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

for the Three and Nine Month Periods Ended September 30, 2012 and 2011

(unaudited)

(in thousands, except Shares and Per Share data)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2012			2011		2012			2011
Interest and dividend income
Loans, including fees	$	4,338		$	4,348	$	12,817		$	12,807
Interest bearing balances with banks		9			4		24			13
Federal funds sold and other overnight investments		9			12		31			27
Mortgage-backed securities		264			363		863			1,081
U. S. Government agencies securities		219			245		635			870
State and municipal securities		9			11		32			33
Equity securities		21			21		71			60
Total interest and dividend income		4,869			5,004		14,473			14,891
Interest expense
Certificates of deposit, $100,000 or more		140			144		435			415
Other deposits		227			397		768			1,314
Securities sold under agreements to repurchase		13			18		36			59
Interest on long-term borrowings		330			328		985			974
Total interest expense		710			887		2,224			2,762
Net interest income		4,159			4,117		12,249			12,129
Provision for credit losses		29			338		306			1,574
Net interest income after provision for credit losses		4,130			3,779		11,943			10,555
Noninterest income
Service charges and fees on deposits		309			322		903			938
Mortgage banking fees		111			59		207			76
Other fee income		130			229		313			227
Gain on sale of loans		0			18		0			165
(Loss) gain on sale of real estate owned and repossessed assets		(41	)		31		(12	)		8
Loss on disposal of fixed assets		0			0		0			(31	)
Total noninterest income		509			659		1,411			1,383
Noninterest expense
Personnel		1,620			1,826		4,927			5,301
Occupancy and equipment		361			360		1,108			1,204
Data processing		209			214		629			635
Legal and professional fees		117			138		385			363
Marketing		50			63		267			295
FDIC Insurance		88			57		256			338
Other operating expenses		403			737		1,207			1,518
Total noninterest expense		2,848			3,395		8,779			9,654
Income before income taxes		1,791			1,043		4,575			2,284
Income tax expense		680			375		1,719			782
Net income		1,111			668		2,856			1,502
Preferred stock dividend and discount accretion		51			123		220			367
Net income available to common shareholders	$	1,060		$	545	$	2,636		$	1,135
Basic earnings per common share	$	0.27		$	0.14	$	0.66		$	0.29
Basic weighted average shares		3,975,395			3,952,772		3,973,132			3,947,233
Diluted earnings per common share	$	0.26		$	0.14	$	0.65		$	0.29
Diluted weighted average shares		4,122,664			3,954,688		4,084,417			3,954,842

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

2

Annapolis Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

for the Three and Nine Month Periods Ended September 30, 2012 and 2011

(unaudited)

(dollars in thousands)

	For the Three Months Ended September 30,
	2012		2011
Net income	$	1,111	$	668
Unrealized net holding gains, on
Available-for-sale portfolios, net of tax of $49 and $311, respectively		77		477
Comprehensive income	$	1,188	$	1,145
	For the Nine Months Ended September 30,
	2012		2011
Net income	$	2,856	$	1,502
Unrealized net holding gains, on
Available-for-sale portfolios, net of tax of $47 and $497, respectively		73		763
Comprehensive income	$	2,929	$	2,265

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

3

Annapolis Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

for the Nine Month Periods Ended September 30, 2012 and 2011

(unaudited)

(in thousands)

	For the Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities
Net income	$	2,856		$	1,502
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		371			466
Amortization of premiums and accretions of discounts, net		197			230
Provision for credit losses		306			1,574
Provisions for loss, other real estate owned		28			37
Origination of loans held for sale		0			(8,186	)
Proceeds from sale of loans held for sale		0			9,730
Stock based compensation		64			87
Deferred income taxes		180			(321	)
Earnings on life insurance policies		(159	)		(137	)
Gain on sale of loans held for sale		0			(165	)
Loss (gain) on sale of real estate owned and repossessed assets		12			(8	)
Loss on write-down and disposal of fixed assets		0			230
(Increase) decrease in:
Accrued interest receivable		(71	)		264
Prepaid FDIC insurance		244			351
Other assets		(217	)		423
Increase (decrease) in:
Accrued interest payable		(31	)		(10	)
Accrued income taxes, net of taxes refundable		(78	)		403
Deferred loan origination fees		5			(123	)
Other liabilities		201			428
Net cash provided by operating activities		3,908			6,775
Cash flows from investing activities
Proceeds from sales and maturities of securities available for sale		29,347			35,468
Purchase of securities available for sale		(33,524	)		(23,042	)
Net decrease (increase) in federal funds sold		26,572			(9,640	)
Net (increase) decrease in interest bearing balances with banks		(21,708	)		178
Net decrease (increase) in loans receivable, net		4,485			(16,411	)
Improvements to other real estate owned and repossessed assets		(41	)		0
Purchase of premises and equipment, net of disposals		(1,778	)		(365	)
Proceeds from sales of real estate owned and repossessed assets		964			502
Net cash provided by (used in) investing activities		4,317			(13,310	)

4

Annapolis Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (continued)

for the Nine Month Periods Ended September 30, 2012 and 2011

(unaudited)

(in thousands)

(continued)

	For the Nine Months Ended September 30,
	2012			2011
Cash flows from financing activities
Net (decrease) increase in:
Time deposits		(7,244	)		1,349
Other deposits		(4,322	)		(2,179	)
Securities sold under agreements to repurchase		7,551			1,597
Redemption of preferred stock		(4,076	)		0
Proceeds from stock options exercised		0			14
Proceeds from issuance of common stock		5			6
Payment of preferred stock dividend		(214	)		(305	)
Net cash (used in) provided by financing activities		(8,300	)		482
Net decrease in cash		(75	)		(6,053	)
Cash and cash equivalents, beginning of period		2,026			7,854
Cash and cash equivalents, end of period	$	1,951		$	1,801
Supplemental cash flow information
Interest paid, including interest credited to accounts	$	2,468		$	3,078
Income taxes paid	$	1,862		$	1,167
Non-cash investing activities
Transfers from loans to real estate owned	$	288		$	25
Transfers from loans to other assets	$	98		$	20

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

5

Annapolis Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

for the Nine Month Periods Ended September 30, 2012 and 2011

(unaudited)

Note A – Basis of Presentation

The accompanying unaudited consolidated financial statements of Annapolis Bancorp, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required for complete financial statements. In the opinion of management, all adjustments and reclassifications that are normal and recurring in nature and are considered necessary for fair presentation have been included. Operating results for the nine month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012 or any other period. These unaudited consolidated financial statements should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2011, which includes the consolidated financial statements and footnotes. Certain reclassifications have been made to amounts previously reported to conform to the classifications made in 2012.

Note B – Business

The Company was incorporated on May 26, 1988, under the laws of the State of Maryland, to serve as a bank holding company for BankAnnapolis (formerly known as Annapolis National Bank) (the “Bank”). The Company (as a bank holding company) and the Bank are subject to governmental supervision, regulation, and control.

The Bank currently conducts a general commercial and retail banking business in its market area, emphasizing the banking needs of small businesses, professional concerns and individuals from its headquarters in Annapolis, its six other branches located in Anne Arundel County, Maryland and one branch located on Kent Island in Queen Anne’s County, Maryland.

The Bank has built its reputation on exemplary customer service and outreach to the communities surrounding each of the Bank’s locations. The Bank is committed to offering products and services that focus on relationship banking and provide an alternative to the large multi-regional financial institutions that are so pervasive in the markets the Bank serves. The Bank attracts most of its customer deposits from Anne Arundel County, Maryland, and to a lesser extent, Queen Anne’s County, Maryland. The Bank’s lending operations are centered in Anne Arundel County, but extend throughout Central and Southern Maryland.

6

Note C – Stock Based Compensation

Stock based-compensation expense for the nine month periods ended September 30, 2012 and 2011 was $64,400 and $87,000, respectively. Stock-based compensation expense recognized in the consolidated statements of income for the first nine months of 2012 and 2011 reflects estimated forfeitures.

For the three month period ended September 30, 2012, $24,300 of expense was recognized on the remaining outstanding options, restricted shares and restricted share units. During the same period of 2011, $30,000 of expense was recognized on the remaining outstanding options, restricted shares and restricted share units.

During the first three quarters of 2012 and 2011, there were no options granted to employees or directors of the Company or Bank. On April 27, 2012 an option to purchase a total of 8,888 shares at a price of $9.30 per share was forfeited when a non-employee director, resigned from the board of directors of the Company and its subsidiary BankAnnapolis.

Stock option activity for the nine months ended September 30, 2012 and 2011 was as follows:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic  Value ($000)
Outstanding at December 31, 2011		92,302		$	7.22
Grants		0			0.00
Exercised		0			0.00
Forfeitures		(8,888	)		9.30
Expired		0			0.00
Outstanding as of September 30, 2012		83,414		$	7.00
Exercisable at September 30, 2012		83,414		$	7.00		1.8	$	97
Outstanding at December 31, 2010		124,270		$	6.06
Grants		0			0.00
Exercised		(5,333	)		2.64
Forfeitures		0			0.00
Expired		(22,374	)		2.64
Outstanding as of September 30, 2011		96,563		$	7.05
Exercisable at September 30, 2011		95,721		$	7.03		2.8	$	4

The aggregate intrinsic value in the table above represents the total pre-tax value of the exercisable in-the-money options (that is, the difference between the closing stock price on the last trading day in the first nine months of 2012 and 2011, and the exercise price of the options multiplied by the number of shares) on September 30, 2012 and September 30, 2011. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised was zero for the nine months ended September 30, 2012 and $8,000 for the nine months ended September 30, 2011.

As of September 30, 2012, there were no unrecognized costs related to unvested options. As of September 30, 2011, $2,300 of total unrecognized costs related to unvested options was expected to be recognized over a weighted average period of 0.6 years.

7

There were no restricted shares awarded to employees during the third quarter of 2012 or 2011.

During the first quarter of 2012, non-employee directors of the Bank were awarded a total of 16,268 shares of restricted stock at a market value of $4.30 per share in lieu of an annual retainer. These shares vest on January 25, 2013. During the first quarter of 2011, an employee of the Bank was awarded 5,000 restricted shares at a market value of $4.45 per share. During the first quarter of 2011, non-employee directors of the Bank were awarded a total of 12,782 shares of restricted stock at a market value of $4.30 per share in lieu of an annual retainer. These shares vested on January 27, 2012.

On January 3, 2012 a total of 2,500 restricted shares and 10,000 restricted share units granted in 2009 were forfeited when an employee of the Bank resigned. On April 27, 2012 a total of 1,162 shares awarded during the first quarter of 2012 to a non-employee director, were forfeited when the director resigned from the board of directors of the Company and its subsidiary BankAnnapolis. Non-compensation related expense of $16,250 and $13,750 was recognized for the three month periods ended September 30, 2012 and 2011, respectively and $48,750 and $41,250 for the nine month periods ending September 30, 2012 and 2011, respectively, relating to the shares issued to non-employee directors.

As of September 30, 2012, 15,000 restricted share units of the 43,606 restricted shares and restricted share units outstanding have vested; the remaining 28,606 restricted shares and restricted share units will vest over a weighted average period of 0.60 years.

Restricted stock activity for the nine months ended September 30, 2012 and 2011 was as follows:

	Shares			Weighted Average Grant Price
Outstanding at December 31, 2011		57,282		$	3.86
Grants		16,268			4.30
Issued		(16,282	)		4.29
Forfeitures		(13,662	)		4.10
Outstanding as of September 30, 2012		43,606		$	3.84
Outstanding at December 31, 2010		68,384		$	3.66
Grants		17,782			4.34
Issued		(26,384	)		3.75
Forfeitures		0			0
Outstanding as of September 30, 2011		59,782		$	3.86

As of September 30, 2012, $52,000 of total unrecognized costs related to unvested restricted shares and restricted share units is expected to be recognized over a weighted average period of 1.0 years. As of September 30, 2011, $124,500 of total unrecognized costs related to unvested restricted shares and restricted share units was expected to be recognized over a weighted average period of 1.9 years.

8

Note D – Earnings Per Share

Information regarding earnings per share is summarized as follows:

Computation of Earnings Per Share

(in thousands, except Earnings Per Share and share data)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2012		2011		2012		2011
Net income available to common shareholders	$	1,060	$	545	$	2,636	$	1,135
Weighted average common shares outstanding		3,975,395		3,952,772		3,973,132		3,947,233
Basic Earnings Per Common Share	$	0.27	$	0.14	$	0.66	$	0.29
Net income available to common shareholders	$	1,060	$	545	$	2,636	$	1,135
Weighted average common shares outstanding		3,975,395		3,952,772		3,973,132		3,947,233
Effect of potential dilutive common shares		147,269		1,916		111,285		7,609
Total weighted average diluted common shares outstanding		4,122,664		3,954,688		4,084,417		3,954,842
Diluted Earnings Per Common Share	$	0.26	$	0.14	$	0.65	$	0.29

Basic earnings per common share are calculated using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share are calculated using the weighted-average number of shares of common stock plus dilutive potential shares of common stock outstanding during the period. Potential common shares consist of stock options and restricted stock, restricted share units and warrants. For the three months ended September 30, 2012 and 2011, 50,081 and 95,609 shares of common stock, respectively, attributable to outstanding stock options, restricted stock, restricted share units and warrants were excluded from the calculations of diluted earnings per share because their effect was anti-dilutive. For the nine months ended September 30, 2012 and 2011, 50,081 and 395,509 shares of common stock, respectively, attributable to outstanding stock options, restricted stock, restricted share units and warrants were excluded from the calculations of diluted earnings per share because their effect was anti-dilutive.

9

Note E – Investment Securities

Investment securities are summarized as follows:

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
September 30, 2012
Available for sale
U.S. Government agency	$	51,603	$	344	$	0	$	51,947
State and municipal		961		68		0		1,029
Residential mortgage-backed securities		36,821		1,362		68		38,115
Other equity securities		635		51		0		686
	$	90,020	$	1,825	$	68	$	91,777
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
December 31, 2011
Available for sale
U.S. Government agency	$	47,782	$	306	$	56	$	48,032
State and municipal		1,077		59		0		1,136
Residential mortgage-backed securities		36,435		1,372		82		37,725
Other equity securities		618		38		0		656
	$	85,912	$	1,775	$	138	$	87,549

The amortized cost and estimated fair value of securities by contractual maturities at September 30, 2012 are shown below. Actual maturities of these securities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

	September 30, 2012
	Available for Sale
	Amortized Cost		Estimated Fair Value
(dollars in thousands)
Due within one year	$	0	$	0
Due after one through five years		26,910		27,063
Due after five through ten years		23,609		23,911
Due after ten years		38,866		40,117
Equity securities		635		686
	$	90,020	$	91,777

The following table shows the level of the Company’s gross unrealized losses and the fair value of the associated securities by type and maturity for securities available for sale at September 30, 2012 and December 31, 2011.

	Less than 12 months				12 months or more				Total
September 30, 2012	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
(dollars in thousands)
Residential mortgage-backed securities	$	3,818	$	11	$	1,460	$	57	$	5,278	$	68
	$	3,818	$	11	$	1,460	$	57	$	5,278	$	68

10

	Less than 12 months				12 months or more				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
December 31, 2011
(dollars in thousands)
U. S. Government Agency	$	16,044	$	56	$	0	$	0	$	16,044	$	56
Residential mortgage-backed securities		0		0		1,854		82		1,854		82
	$	16,044	$	56	$	1,854	$	82	$	17,898	$	138

The unrealized losses that exist are the result of market changes in interest rates since the original purchase. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2012. The Company has used a variety of tools to analyze the contents of its security portfolio and at this time does not believe that the unrealized losses in the portfolio shown in the table above are other than temporary. At September 30, 2012 mortgaged-backed securities with a fair market value of $1.5 million carried bond ratings below investment grade. These securities were evaluated by an independent third-party consulting firm using an expected cash flow model that includes assumptions related to prepayment rates, default trends, and loss severity, and were deemed by management not to be other-than-temporarily impaired at September 30, 2012. At September 30, 2012, both securities were current on both principal and interest payments.

Note F – Loans, Allowance For Credit Losses And Credit Quality

Major classifications of loans are as follows:

	September 30, 2012			December 31, 2011
Commercial	$	43,060		$	47,683
Real estate
Commercial		115,455			114,883
Construction		37,602			35,026
One to four-family		48,052			48,314
Home equity		32,942			36,005
Consumer		7,958			8,870
		285,069			290,781
Deferred loan fees, net		(320	)		(315	)
Allowance for credit losses		(6,647	)		(7,182	)
		(6,967	)		(7,497	)
Loans, net	$	278,102		$	283,284

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

Repricing or maturing within one year	$	91,522	$	100,804
Maturing over one to five years		133,440		132,637
Maturing over five years		60,107		57,340
	$	285,069	$	290,781

The Company’s goal is to mitigate risks inherent in the loan portfolio. Commercial loans and loans secured by real estate make up the majority of the loan portfolio, accounting for 97% of the portfolio as of September 30, 2012 and December 31, 2011. To mitigate risk, commercial loans are generally secured by receivables, inventories, equipment and other assets of the business. Personal guarantees of the borrowers are generally required.

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Loans secured by commercial real estate properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting standards, which require such loans to be qualified on the basis of the property’s value, debt service coverage ratio, and, under certain circumstances, additional collateral. The Bank generally also requires personal guarantees on its commercial real estate 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.

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. The origination of adjustable-rate residential mortgage loans, as opposed to fixed-rate residential mortgage loans, helps to reduce the Bank’s exposure to increases in interest rates. However, adjustable-rate loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. Periodic and lifetime caps on interest rate increases help to reduce the risks associated with the Bank’s adjustable-rate loans, but also limit the interest rate sensitivity of its adjustable-rate mortgage loans.

Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

The Bank’s allowance for credit losses is established through a provision for loan losses based on management’s evaluation of the risks inherent in its loan portfolio and the general economy.

The determination of the allowance for loan losses is based on the Bank’s historical loss experience and ten (10) qualitative factors for specific categories and types of loans. The Bank’s historical 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.

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.

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The following table shows the allowance for credit losses and recorded investment in loans receivable for the three and nine month periods ended September 30, 2012:

Allowance for Credit Losses and Recorded Investment in Loans Receivable

	for the Three Months Ended September 30, 2012
(Dollars in thousands)	Commercial			Commercial Real Estate			Residential			Consumer		Unallocated		Total
Allowance for credit losses
Beginning balance, June 30, 2012	$	1,043		$	3,962		$	1,647		$	256	$	0	$	6,908
Charge-offs		325			0			0			0		0		325
Recoveries		4			0			24			7		0		35
Provision		(27	)		(127	)		(11	)		194		0		29
Ending balance, September 30, 2012	$	695		$	3,835		$	1,660		$	457	$	0	$	6,647

	for the Nine Months Ended September 30, 2012
	Commercial			Commercial Real Estate			Residential		Consumer		Unallocated		Total
Allowance for credit losses
Beginning balance, December 31, 2011	$	1,387		$	3,972		$	1,422	$	401	$	0	$	7,182
Charge-offs		357			0			340		230		0		927
Recoveries		32			0			35		19		0		86
Provision		(367	)		(137	)		543		267		0		306
Ending balance, September 30, 2012	$	695		$	3,835		$	1,660	$	457	$	0	$	6,647
Period ending amount: Individually evaluated for impairment	$	56		$	1,181		$	1,009	$	285	$	0	$	2,531
Period ending amount: Collectively evaluated for impairment	$	639		$	2,654		$	651	$	172	$	0	$	4,116
Period ending amount: Loans acquired with deteriorating credit quality	$	0		$	0		$	0	$	0	$	0	$	0
Loans individually evaluated for impairment	$	856		$	2,676		$	2,665	$	721	$	0	$	6,918
Loans collectively evaluated for impairment	$	42,204		$	150,381		$	78,329	$	7,237	$	0	$	278,151

	for the Three Months Ended September 30, 2011
(Dollars in thousands)	Commercial		Commercial Real Estate		Residential		Consumer			Unallocated		Total
Allowance for credit losses
Beginning balance, June 30, 2011	$	1,403	$	4,077	$	1,394	$	398		$	0	$	7,272
Charge-offs		100		0		0		4			0		104
Recoveries		3		0		1		7			0		11
Provision		74		214		56		(6	)		0		338
Ending balance, September 30, 2011	$	1,380	$	4,291	$	1,451	$	395		$	0	$	7,517

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	for the Nine Months Ended September 30, 2011
	Commercial		Commercial Real Estate		Residential		Consumer			Unallocated		Total
Allowance for credit losses
Beginning balance, December 31, 2010	$	1,868	$	3,205	$	1,257	$	523		$	0	$	6,853
Charge-offs		872		49		133		140			0		1,194
Recoveries		13		0		254		17			0		284
Provision		371		1,135		73		(5	)		0		1,574
Ending balance, September 30, 2011	$	1,380	$	4,291	$	1,451	$	395		$	0	$	7,517
Period ending amount: Individually evaluated for impairment	$	113	$	1,382	$	507	$	164		$	0	$	2,166
Period ending amount: Collectively evaluated for impairment	$	1,267	$	2,909	$	944	$	231		$	0	$	5,351
Period ending amount: Loans acquired with deteriorating credit quality	$	0	$	0	$	0	$	0		$	0	$	0
Loans individually evaluated for impairment	$	932	$	6,664	$	1,906	$	297		$	0	$	9,799
Loans collectively evaluated for impairment	$	49,122	$	142,400	$	84,099	$	9,025		$	0	$	284,646

Nonaccrual loans totaled approximately $6.1 million at September 30, 2012 and $6.2 million at December 31, 2011. There was one loan for $468,000 past due greater than 90 days and still accruing at September 30, 2012. At December 31, 2011, there were no loans past due greater than 90 days and still accruing. As of September 30, 2012, $2.5 million of loan loss allowances were allocated to all loans classified as impaired with $1.6 million of loan loss allowances allocated to all loans classified as impaired at December 31, 2011.

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management assigns a Risk Assessment Rating (“Risk Rating”) to extensions of credit based upon the degree of risk, the likelihood of repayment and the effect on the Bank’s safety and soundness. The Risk Rating, applied consistently, enables lending personnel and bank management to monitor the loan portfolio. The Risk Rating is an integral part of the bank’s loan loss provision formulation process and, properly maintained, the Risk Rating assessment can provide an early warning signal of deterioration in a credit.

The Company uses a risk rating matrix to assign a risk grade to each loan. The Risk Ratings are divided into five general categories:

1. Risk Ratings 1 - 6 are assigned to “Pass” credits.

2. Risk Rating 7 is assigned to “Pass” credits that are also considered “Watch” credits.

3. Risk Rating 8 is assigned to “Criticized” credits.

4. Risk Ratings 9 and 10 are assigned to “Classified” credits.

5. Risk Rating 11 is assigned to “Loss” credits.

A general description of the characteristics of the risk ratings are described below:

• Risk ratings 1, 2 and 3 – these ratings have the highest degree of probability of repayment. Borrowers in this category are established entities, well-positioned within their industry with a proven track record of solid financial performance. These ratings are usually reserved for the strongest customers of the Bank, who have strong capital, stable earnings and alternative sources of financing.

• Risk ratings 4 and 5 – these ratings have a below and average degree of risk. The customers have, generally strong to adequate net worth, stable earnings trends and strong to moderate liquidity.

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• Risk rating 6 – this category represents an above average degree of risk as to repayment with minimal loss potential. Borrowers in this category generally exhibit adequate operating trends, satisfactory balance sheet trends, moderate leverage and adequate liquidity; however, there is minimal excess operating cushion.

• Risk rating 7 – this rating includes loans on management’s “Watch” list. Borrowers in this category generally exhibit characteristics of an acceptable/adequate credit, but may be experiencing income volatility, negative operating trends, and a more highly leveraged balance sheet.

• Risk rating 8 – this rating is for “Other Assets Especially Mentioned” in accordance with regulatory guidelines. This rating generally includes loans to borrowers with currently protected, but potentially weak assets that deserve management’s close attention.

• Risk rating 9 – this rating is for loans considered “Substandard” in accordance with regulatory guidelines. This rating represents assets inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness, or weaknesses, that jeopardize liquidation of the debt and are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

• Risk rating 10 – this rating is for loans considered “Doubtful” in accordance with regulatory guidelines. Borrowers in this category have all the weaknesses inherent in a “Substandard” credit with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly improbable.

• Risk rating 11 – this rating is for loans considered “Loss” in accordance with regulatory guidelines. This category represents loans that are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but simply it is neither practical nor desirable to defer writing off all or some portion of the credit, even though partial recovery may be effected in the future.

The following table presents credit quality indicators:

Credit Quality Indicators

as of September 30, 2012

(Dollars in thousands)
			Commercial Real Estate
	Commercial		Construction		Other
	2012		2012		2012
Risk Rating:
Pass	$	39,110	$	32,511	$	98,389
Other Assets Especially Mentioned		2,012		2,083		14,802
Substandard		1,938		1,856		1,014
Doubtful		0		1,152		1,250
	$	43,060	$	37,602	$	115,455

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	Residential		Consumer Installment
	2012		2012
Risk Rating:
Pass	$	71,732	$	6,913
Other Assets Especially Mentioned		4,514		403
Substandard		3,323		623
Doubtful		1,425		19
	$	80,994	$	7,958

Credit Quality Indicators

as of December 31, 2011

(Dollars in thousands)
			Commercial Real Estate
	Commercial		Construction		Other
	2011		2011		2011
Risk Rating:
Pass	$	41,899	$	29,456	$	102,495
Other Assets Especially Mentioned		2,181		2,432		7,944
Substandard		3,571		1,986		3,194
Doubtful		32		1,152		1,250
	$	47,683	$	35,026	$	114,883

	Residential		Consumer Installment
	2011		2011
Risk Rating:
Pass	$	78,402	$	8,017
Other Assets Especially Mentioned		1,867		290
Substandard		2,632		348
Doubtful		1,418		215
	$	84,319	$	8,870

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The following table presents an age analysis of past due loans receivable:

Age Analysis of Past Due Loans Receivable

As of September 30, 2012

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment 90 Days and Accruing
2012
Commercial	$	4,404	$	225	$	147	$	4,776	$	38,284	$	43,060	$	0
Commercial Real Estate
Construction		174		0		1,152		1,326		36,276		37,602		0
Other		868		0		0		868		114,587		115,455		0
Residential		538		316		2,461		3,315		77,679		80,994		468
Consumer		67		75		598		740		7,218		7,958		0
	$	6,051	$	616	$	4,358	$	11,025	$	274,044	$	285,069	$	468

Age Analysis of Past Due Loans Receivable

As of December 31, 2011

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment 90 Days and Accruing
2011
Commercial	$	0	$	32	$	178	$	210	$	47,473	$	47,683	$	0
Commercial Real Estate
Construction		229		0		1,152		1,381		33,645		35,026		0
Other		482		0		0		482		114,401		114,883		0
Residential		687		0		1,972		2,659		81,660		84,319		0
Consumer		23		0		342		365		8,505		8,870		0
	$	1,421	$	32	$	3,644	$	5,097	$	285,684	$	290,781	$	0

Total past due loans at September 30, 2012 increased $5.9 million to $11.0 million from $5.1 million as of December 31, 2011. The increase was primarily attributed to loans newly considered past due totalling $9.1 million and included one loan for $4.4 million that was past due at September 30, 2012 and current at December 31, 2011. Offsetting a portion of the increase in past due loans were payoffs and the return of loans to performing totaling $1.9 million, charge-offs of loans deemed uncollectible of $839,000 and transfers to real estate owned and repossessed assets of $378,000.

Loans are considered impaired when, based on current information it is probable that the Bank will not collect all principal and interest payments according to contractual terms. Generally, loans are considered impaired once principal and interest payments are past due and they are placed on non-accrual. When a loan is placed on nonaccrual status, the Bank shall debit all accrued and unpaid income outstanding on the account. Management also considers the financial condition of the borrower, cash flows of the loan and the value of the related collateral. Impaired loans do not include large groups of smaller balance homogeneous credits such as residential real estate and consumer installment loans, which are evaluated collectively for impairment. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (usually ninety days or less) provided eventual collection of all amounts due is expected. Impaired loans are

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measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Bank may measure impairment based on a loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. Interest payments on impaired loans are typically applied to principal unless collectability is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

The Company’s policy states that when the probability for full repayment of a loan is unlikely, the Bank will initiate a full charge-off or a partial write-down of the asset based upon the status of the loan.

Consumer loans less than $25,000 for which payments of principal and/or interest are past due ninety (90) days are charged-off and referred for collection. Consumer loans of $25,000 or more are evaluated for charge-off or partial write-down at the discretion of Bank management.

Any other loan over 120 days past due is evaluated for charge-off or partial write-down at the discretion of Bank management.

Generally, real estate secured loans are charged-off on a deficiency basis after liquidation of the collateral. Bank management may determine that when the full loan balance is clearly uncollectible and some loss is anticipated a charge-off or write-down is appropriate prior to liquidation of the collateral. An updated evaluation or appraisal of the property may be required to determine the appropriate level of charge-off or write-down.

The following tables presents a summary of impaired loans as of and for the nine months ended September 30, 2012 and as of December 31, 2011 and for the year then ended:

Impaired Loans

as of and for the Nine Month Period Ended September 30, 2012

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial	$	898	$	898	$	0
Commercial real estate		274		274		0
Residential real estate		697		697		0
Consumer		71		71		0
		1,940		1,940		0
With an allowance recorded
Commercial		105		105		56
Commercial real estate		2,402		2,402		1,181
Residential real estate		2,664		2,664		1,009
Consumer		722		722		285
		5,893		5,893		2,531
Total
Commercial		1,003		1,003		56
Commercial real estate		2,676		2,676		1,181
Residential real estate		3,361		3,361		1,009
Consumer		793		793		285
	$	7,833	$	7,833	$	2,531

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Impaired Loans

as of December 31, 2011

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial	$	242	$	242	$	0
Commercial real estate		0		0		0
Residential real estate		1,074		1,074		0
Consumer		195		195		0
		1,511		1,511		0
With an allowance recorded
Commercial		1,156		1,156		195
Commercial real estate		2,444		2,444		731
Residential real estate		1,981		1,981		475
Consumer		289		289		161
		5,870		5,870		1,562
Total
Commercial		1,398		1,398		195
Commercial real estate		2,444		2,444		731
Residential real estate		3,055		3,055		475
Consumer		484		484		161
	$	7,381	$	7,381	$	1,562

The following presents information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended September 30, 2012				Three Months Ended September 30, 2011
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	905	$	4	$	870	$	10
Commercial real estate		380		4		657		0
Residential real estate		382		4		1,542		26
Consumer		65		0		199		3
		1,732		12		3,268		39
With an allowance recorded
Commercial		324		14	$	355	$	1
Commercial real estate		2,415		4		5,318		8
Residential real estate		2,670		15		1,638		5
Consumer		358		3		209		6
		5,767		36		7,520		20
Total
Commercial	$	1,229		18	$	1,225	$	11
Commercial real estate		2,795		8		5,975		8
Residential real estate		3,052		19		3,180		31
Consumer		423		3		408		9
	$	7,499	$	48	$	10,788	$	59

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	Nine Months Ended September 30, 2012				Nine Months Ended September 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(Dollars in thousands)
With no related allowance recorded
Commercial	$	504	$	4	$	1,095	$	46
Commercial real estate		329		7		795		0
Residential real estate		589		8		1,500		60
Consumer		70		1		208		7
		1,492		20		3,598		113
With an allowance recorded
Commercial		757		59		583		68
Commercial real estate		3,711		38		3,037		232
Residential real estate		2,407		41		1,593		56
Consumer		247		11		210		17
		7,122		149		5,423		373
Total
Commercial		1,261		63		1,678		114
Commercial real estate		4,040		45		3,832		232
Residential real estate		2,996		49		3,093		116
Consumer		317		12		418		24
	$	8,614	$	169	$	9,021	$	486

The Company 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.

The restructuring 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 September 30, 2012 included $930,000 of loans in accrual status and $1.7 million of loans classified as nonaccrual. During the nine months ended September 30, 2012 no new loans were added to those considered to be troubled debt restructurings and none of the loans currently classified as troubled debt restructurings have defaulted. The following table is a summary of loans determined to be troubled debt restructurings for the twelve months ended December 31, 2011.

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	Modifications made during the year ended December 31, 2011
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial		3	$	840	$	840
Commercial Real Estate		2		1,863		1,298
Residential Real Estate		3		453		453
Consumer		1		46		46
		9	$	3,202	$	2,637

	Number of Contracts		Recorded Investment
Troubled Debt Restructurings that Subsequently Defaulted
Commercial		0	$	0
Commercial Real Estate		0		0
Residential Real Estate		0		0
Consumer		0		0
		0	$	0

Note G – Fair Value Measurements

Fair Value Hierarchy

The Company follows FASB’s guidance on “Fair Value Measurements.” The guidance defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The guidance applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value all other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

The guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

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Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the assets credit rating, prepayment assumptions and other factors such as credit loss assumptions

An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis. During the nine months ended September 30, 2012, there were no transfers made between Level 1, 2, and 3 inputs.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

			Fair Value Measurements of Assets
(dollars in thousands)			at September 30, 2012 Using
Description	Fair Value September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Investment Securities Available for Sale
Debt securities
Issued by U. S. Government agencies	$	51,947	$	0	$	51,947	$	0	$	0
Issued by State and municipal		1,029		0		1,029		0		0
Mortgage-backed securities issued by Government agencies		36,655		0		36,655		0		0
Private label mortgage-backed securities		1,460		0		0		1,460		0
Total Debt Securities		91,091		0		89,631		1,460		0
Equity securities
Mutual funds		686		0		686		0		0
Total Equity Securities		686		0		686		0		0
Total Investment Securities Available for Sale	$	91,777	$	0	$	90,317	$	1,460	$	0

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3) – Roll Forward at September 30, 2012

Investment Securities Available for Sale – Debt Securities
Beginning Balance at December 31, 2011	$	1,855
Transfers in to Level 3		0
Transfers out of Level 3		0
Unrealized gains		24
Repayments		(419	)
Ending Balance at September 30, 2012	$	1,460

(dollars in thousands)			Fair Value Measurements of Assets at December 31, 2011 Using
Description	Fair Value December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Investment Securities Available for Sale
Debt securities
Issued by U.S. Government agencies	$	48,032	$	0	$	48,032	$	0	$	0
Issued by State and municipal		1,136		0		1,136		0		0
Mortgage-backed securities issued by Government agencies		35,870		0		35,870		0		0
Private label mortgage-backed securities		1,855		0		0		1,855		0
Total Debt Securities		86,893		0		85,038		1,855		0
Equity Securities
Mutual funds		656		0		656		0		0
Total Equity Securities		656		0		656		0		0
Total Investment Securities Available for Sale	$	87,549	$	0	$	85,694	$	1,855	$	0

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) – Roll Forward

at December 31, 2011

Investment Securities Available for Sale – Debt Securities
Beginning Balance at December 31, 2010	$	2,401
Transfers in to Level 3		0
Transfers out of Level 3		0
Unrealized gains		100
Repayments		(646	)
Ending Balance at December 31, 2011	$	1,855

Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include securities below investment grade and asset-backed securities in illiquid markets. Level 3 securities include two private-label residential one to-four family mortgage backed securities. These 2005 senior tranches in a securitization trust were rated “Aa1 and Aaa” by Moody’s when purchased in 2005 and are currently rated “Ca” and “B3”, respectively. The Company engages the service of independent third party valuation professionals to estimate the fair value of these securities. The valuation is meant to be “Level 3” pursuant to FASB ASC Topic 820 – Fair Value Measurements and Disclosures. The valuation uses an expected cash flow model that includes assumptions related to prepayment rates, default trends, and loss severity. At

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September 30, 2012, both securities were current on both principal and interest payments, and had a fixed weighted average coupon of 5.50%. One security had a weighted average remaining life of less than four months and the other had a weighted average remaining life of less than two years.

The following table details the Level 3 securities:

				Remaining		Current Rating
(in thousands)	Class		Coupon	Par Value		Moody’s	Fitch
CWHL 2005-21		A13	5.5% Fixed	$	104	B3	CC
WFMBS 2005-14		IA7	5.5% Fixed	$	1,412	Ca	A*-

We calculated fair value for the two securities by using a present value of future cash flows model, which incorporated assumptions as follows as of September 30, 2012 and December 31, 2011:

September 30, 2012	Cumulative Default (1)			Weighted Average Life (2)		Modified Duration (3)		Yield (4)
CWHL 2005-21		3.63	%		0.29 years		0.27 years		8.00	%
WFMBS 2005-14		2.77	%		1.73 years		1.50 years		8.00	%

(1) The recent three month level of total defaults from the issuer within the pool of performing collateral.

(2) The average number of years that each dollar of principal remains outstanding.

(3) The weighted average of present values for a series of cash flows which accurately indicates the average time until the cash flows are received.

(4) The discount rate obtained from taking a sequence of cash flows and an estimated price.

December 31, 2011	3 Month Cumulative Default (1)			Weighted Average Life (2)		Modified Duration (3)		Yield (4)
CWHL 2005-21		3.04	%		0.65 years		0.59 years		8.00	%
WFMBS 2005-14		3.84	%		2.10 years		1.80 years		8.00	%

(1) The anticipated level of total defaults from the issuer within the pool of performing collateral as of December 31, 2011.

(2) The average number of years that each dollar of principal remains outstanding.

(3) The weighted average of present values for a series of cash flows which accurately indicates the average time until the cash flows are received.

(4) The discount rate obtained from taking a sequence of cash flows and an estimated price.

The fair value of the Level 3 securities is assessed on a quarterly basis by obtaining an independent third party review of the securities so designated. In addition to using an expected cash-flow model the analysis includes an evaluation of the characteristics and performance of the underlying collateral of each of the securities. Management reviews and compares the results on a quarterly basis to available market information.

The significant unobservable inputs used in the fair value measurement of these private label mortgage-backed securities include prepayment rates, probability of default and loss severity in the event of default. Significant increases or decreases in any of these may result in a lower or higher fair value measurement. A significant increase in default rates could result in a higher level of losses and slower prepayment rates, conversely a lower level of default rates could result in lower levels of losses and increased prepayment rates.

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The Company may be required from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the following tables.

(in thousands)			Fair Value Measurements at September 30, 2012 Using
Description	Fair Value September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Loans
Impaired loans
Commercial	$	947	$	0	$	947	$	0	$	0
Commercial real estate		890		0		890		0		0
Residential real estate		2,352		0		2,352		0		0
Construction		606		0		606		0		0
Consumer		507		0		507		0		0
Total impaired loans		5,302		0		5,302		0		0
Real estate owned		697		0		697		0		0
Other assets (repossessed assets)		0		0		0		0		0
Total Assets Measured at Fair Value on a Nonrecurring Basis	$	5,999	$	0	$	5,999	$	0	$	0

(in thousands)			Fair Value Measurements at December 31, 2011 Using
Description	Fair Value December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Loans
Impaired loans
Commercial	$	1,202	$	0	$	1,202	$	0	$	0
Commercial real estate		995		0		995		0		0
Residential real estate		2,580		0		2,580		0		0
Construction		719		0		719		0		0
Consumer		323		0		323		0		0
Total impaired loans		5,819		0		5,819		0		0
Real estate owned		1,222		0		1,222		0		0
Other assets (repossessed assets)		52		0		52		0		0
Total Assets Measured at Fair Value on a Nonrecurring Basis	$	7,093	$	0	$	7,093	$	0	$	0

Loans for which it is probable that the Company will not collect all of principal and interest due according to contractual terms are measured for impairment in accordance with FASB guidance on Accounting by Creditors for Impairment of a Loan. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method. In our determination of fair value, we have categorized both methods of valuation as estimates based on Level 2 inputs.

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If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal or utilizing some other method of valuation for the collateral and applying a discount factor to the value based on our loan review policy and procedures.

If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flow’s discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums, or discounts existing at origination or acquisition of the loan.

Management establishes a specific reserve for loans that have an estimated fair value below the carrying value. Nonperforming loans had a carrying value of $7.5 million as of September 30, 2012. Of the $7.5 million of nonperforming loans, $5.9 million had specific reserves of $2.5 million.

When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for credit losses. Losses are recognized in the period an obligation becomes uncollectible. The recognition of a loss does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though a partial recovery may occur in the future. During the nine months ended September 30, 2012 the Company charged-off $927,000 of impaired loans to the allowance for credit losses.

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 September 30, 2012 and December 31, 2011 the Company held $697,000 and $1.2 million, respectively, in real estate owned as a result of foreclosure. Real estate owned carried at appraised value is considered to be using Level 2 inputs. The $697,000 in real estate owned consisted of a number of undeveloped lots.

The Company records repossessed assets such as boats, automobiles or equipment at the lower of cost or estimated fair value on the acquisition date and at the lower of such initial amount or estimated fair value less selling costs thereafter. Estimated fair value is generally based upon independent values of the collateral obtained through valuation or listing services specifically used for the type of asset repossessed. We consider these collateral values to be estimated using Level 2 inputs. There were no repossessed assets at September 30, 2012 compared to $52,000 at December 31, 2011.

The fair value of the Company’s time deposits was estimated using discounted cash flow analyses. The discount rates used were based on rates currently offered for deposits with similar remaining maturities. The fair value of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

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The carrying amount for customer repurchase agreements and variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate Federal Home Loan Bank advances is estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate Federal Home Loan Bank advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index

The estimated fair values of the Company’s financial instruments are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

The following table’s present information about the Company’s financial assets and financial liabilities measured at fair value as of September 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

	September 30, 2012				December 31, 2011
(dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Level 2 inputs:
Cash and due from banks	$	1,951	$	1,951	$	2,026	$	2,026
Interest bearing balances with banks		39,996		39,996		18,288		18,288
Federal funds sold		11		11		26,583		26,583
Investment securities		90,317		90,317		85,694		85,694
Federal Reserve and Federal Home Loan Bank stock		2,864		2,864		2,992		2,992
Loans and loans held for sale, net		278,102		278,279		283,284		283,667
Accrued interest receivable		1,350		1,350		1,279		1,279
Bank owned life insurance		5,783		5,783		5,624		5,624
Real estate owned		697		697		1,222		1,222
Level 3 inputs:
Other debt securities		1,460		1,460		1,855		1,855
Financial liabilities
Level 2 inputs:
Noninterest bearing deposits	$	57,314	$	57,314	$	56,664	$	56,664
Interest bearing deposits		281,501		282,647		293,717		298,788
Securities sold under agreements to repurchase		18,895		18,895		11,344		11,344
Long-term borrowings		35,000		31,086		35,000		31,357
Junior subordinated debt		5,000		5,000		5,000		5,000
Accrued dividends and interest payable		188		188		219		219

The carrying amount of cash and due from banks, federal funds sold and interest bearing balances with banks approximates fair value.

The fair values of U.S. Treasury and Government agency securities and mortgage backed securities are determined using market quotations.

The carrying amount of Federal Reserve stock and Federal Home Loan Bank stock approximates fair value.

The fair value of fixed-rate loans is estimated to be the present value of scheduled payments discounted using interest rates currently in effect. The fair value of variable-rate loans, including loans with a demand feature, is estimated to equal the carrying amount. The

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valuation of loans is adjusted for possible credit losses. The fair value of loans held for sale are at the carrying value (lower of cost or market) since such loans are typically committed to be sold (servicing released) at a profit.

The carrying amount of accrued interest receivable approximates fair value.

The fair value of bank owned life insurance is the current cash surrender value which is the carrying value.

The carrying value of real estate owned approximates fair value at the reporting date.

The fair value of noninterest bearing deposits is the amount payable on demand at the reporting date, since generally accepted accounting standards does not permit an assumption of core deposit value.

The fair value of interest bearing transaction, savings, and money market deposits with no defined maturity is the amount payable on demand at the reporting date, since generally accepted accounting standards does not permit an assumption of core deposit value.

The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposits would be accepted.

The carrying amount for customer repurchase agreements and variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate Federal Home Loan Bank advances is estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate Federal Home Loan Bank advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index.

The carrying amount of junior subordinated debentures approximate the fair values at the reporting date.

The carrying amount of accrued interest payable approximates fair value.

Management has reviewed the unfunded portion of commitments to extend credit, as well as standby and other letters of credit, and has determined that the fair value of such instruments is equal to the fee, if any, collected and unamortized for the commitment made.

Note H – Preferred Stock

The Company is authorized to issue up to 5,000,000 shares of preferred stock with a par value of $.01 per share. On January 30, 2009 the Company completed a transaction to participate in the Government sponsored Troubled Asset Relief Program (“TARP”) which resulted in the Treasury purchasing 8,152 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) at a value of $8.2 million. The Series A Preferred Stock qualifies as Tier 1 Capital. On April 18, 2012, Annapolis Bancorp, Inc. (the “Company”) redeemed 4,076 shares of its Series A Preferred Stock for $4,076,000. Following the redemption, 4,076 shares of Series A Preferred Stock remain outstanding totaling $4,076,000. The Series A Preferred Stock pays a dividend of 5% per annum; payable quarterly for five years then pays a dividend of 9% per annum thereafter. Dividends declared for each of the nine months ended September 30, 2012 and 2011 was $214,000 and $305,000, respectively.

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The warrant is exercisable at $4.08 per share at any time on or before January 30, 2019. The number of shares of common stock issuable upon exercise of the warrant and the exercise price per share will be adjusted if specific events occur.

Note I – New Accounting Pronouncements

All pending but not yet effective Accounting Standards Updates (“ASU”) were evaluated and only those listed below could have a material impact on the Company’s financial condition or results of operation.

In December, 2011 FASB issued ASU 2011-11, “Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Company’s financial statements.

In December, 2011 FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 were effective for annual and interim periods beginning after December 15, 2011. The Company has adopted ASU 2011-12 and it did not have a material impact on the Company’s financial statements.

Note J – Subsequent Events

Opening of a New Branch

On October 15, 2012, the Bank opened a new branch in Waugh Chapel Towne Centre located in Gambrills, Maryland.

Entry into Agreement and Plan of Merger

On October 22, 2012, the Company and F.N.B. Corporation (“FNB”) the parent company of First National Bank of Pennsylvania (“FNB Bank”), entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which the Company will merge with and into FNB. Promptly following consummation of the merger, it is expected that the Bank will merge with and into FNB Bank.

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Under the terms of the Merger Agreement, the Company’s shareholders will receive 1.143 shares (the “Exchange Ratio”) of FNB common stock for each share of common stock they own. In addition, a cash credit related adjustment provides that shareholders of the Company may receive up to an additional $0.36 per share in cash for each share of the Company’s common stock they own, dependent on the Company’s ability to resolve an agreed-upon credit matter. The Merger Agreement also provides that all options to purchase the Company’s stock which are outstanding and unexercised immediately prior to the closing shall be converted into fully vested and exercisable options to purchase shares of FNB common stock, as adjusted for the Exchange Ratio.

The Merger Agreement provides that each outstanding share of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “TARP Preferred”), unless repurchased or redeemed prior to the merger, will be converted into the right to receive one share of FNB preferred stock with substantially the same rights, powers and preferences as the TARP Preferred. The outstanding warrant (the “TARP Warrant”) to purchase the Company’s common stock, which was issued on January 30, 2009 to the United States Department of the Treasury will be converted into a warrant to purchase FNB common stock, subject to appropriate adjustments to reflect the Exchange Ratio. Subject to the receipt of requisite regulatory approvals, the parties have agreed to use their best efforts to have the TARP Preferred either purchased by FNB or one of its subsidiaries, in which case it is expected to be extinguished upon consummation of the merger, or repurchased or redeemed by the Company. FNB also may elect to have the TARP Warrant purchased, redeemed or repurchased.

Consummation of the merger is subject to certain conditions, including, among others, approval of the merger by the Company’s common shareholders, governmental filings and regulatory approvals and expiration of applicable waiting periods, accuracy of specified representations and warranties of the other party, effectiveness of the registration statement to be filed by FNB with the SEC to register shares of FNB common stock to be offered to the Company shareholders, absence of a material adverse effect, receipt of tax opinions, and the absence of any injunctions or other legal restraints.

For more information about the merger and Merger Agreement, please see our Current Report on Form 8-K and 8-K/A, filed October 22, 2012 and October 23, 2012, respectively. Further information concerning the proposed merger will be included in a joint proxy statement/prospectus which will be filed with the Securities and Exchange Commission in connection with the merger.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the banking industry. 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 could 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 needs to 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 based either on quoted market prices or are provided by other third-party sources, when available.

Significant accounting policies followed by the Company are presented in Note 1 to the Company’s 2011 consolidated financial statements which can be found in the Company’s Form 10-K and recent accounting provisions adopted have been presented herein in Note I. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts management has identified the determination of the allowance for credit losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The allowance for credit losses represents management’s estimate of probable credit losses inherent in the loan portfolio. 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.

Allowance for Credit Losses Methodology

The Bank’s allowance for credit losses is established through a provision for loan losses based on management’s evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for credit losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable based on information currently known to management. The overall allowance consists of both Accounting Standards Codification (“ASC”) 310 specific reserves for individual loans and ASC 450 general reserves for loan portfolios by specific categories and types. 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 the Bank’s historical loss experience and ten (10) qualitative factors for specific categories and types of loans. The combination of the loss experience factor and the

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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.

• The Bank’s historical 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.

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.

• 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 (including Peer Group loss experience); concentrations of credit; quality of the bank’s loan review system; and, external factors, such as competition, legal and regulatory requirements.

The total allowance for credit losses 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 change as a percentage of total loans and as the aggregate of specific allowances is adjusted due to an increase or decrease in impaired loans.

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 $29,000 for the three month period ended September 30, 2012 and $338,000 for the same period in 2011. For the nine month periods ended September 30, 2012 and 2011 the Bank recorded provisions of $306,000 and $1.6 million, respectively. 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 $5.7 million for the nine months ended September 30, 2012. For the same period, the Bank recorded charge-offs of $927,000 and recovered $86,000 on previously charged-off loans. As of September 30, 2012, the Bank’s allowance for credit losses was $6.6 million or 2.33% of total loans and 88.4% of nonperforming loans as compared to $7.2 million, or 2.47% of total loans and 102.0% of nonperforming loans as of December 31, 2011.

The 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

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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.

Activity in the allowance for credit losses for the nine months ended September 30, 2012 and 2011 is shown below:

(dollars in thousands)	For the Nine Months Ended September 30,
	2012			2011
Total loans outstanding - at September 30	$	285,069		$	294,160
Average loans outstanding year-to-date		296,111			288,312
Allowance for credit losses at beginning of period	$	7,182		$	6,853
Provision charged to expense		306			1,574
Chargeoffs:
Commercial loans		357			872
Real estate and construction loans		340			182
Consumer and other loans		230			140
Total		927			1,194
Recoveries:
Commercial loans		32			13
Real estate and construction loans		35			254
Consumer and other loans		19			17
Total		86			284
Net charge-offs		841			910
Allowance for credit losses at end of period	$	6,647		$	7,517
Allowance for credit losses as a percent of total loans		2.33	%		2.56	%
Net charge-offs (recoveries) as a percent of average loans		0.28	%		0.32	%

The Bank’s nonperforming assets, which are comprised of loans delinquent 90 days or more, non-accrual loans, accruing troubled debt restructurings, loans with repossessed collateral and repossessed assets, totaled $8.2 million at September 30, 2012, compared to $8.3 million at December 31, 2011, a decrease in nonperforming assets of $100,000 or 1.2%. The percentage of nonperforming assets to total assets was 1.88% at September 30, 2012, and at December 31, 2011. The decrease in nonperforming assets was principally attributable to the sales of REO property and repossessed assets of $888,000, payoffs and pay-downs of nonperforming assets of $241,000, the return to performing of $176,000 and to charge-offs and additional write-downs on loans previously classified as nonperforming of $520,000 offset by additions to nonperforming of $1.7 million.

The $8.2 million in nonperforming assets at September 30, 2012 included $6.1 million in nonaccrual loans, $930,000 in accruing troubled debt restructurings, $468,000 of loans past due greater than 90 days and still accruing and $696,000 in other assets. Of the $6.1 million in nonaccrual loans at September 30, 2012, $5.3 million were secured by real estate, $190,000 were commercial loans and $613,000 were consumer and other loans. At December 31, 2011, assets classified as nonperforming totaled $8.3 million and consisted of

33

$6.2 million in nonaccrual loans and $856,000 in accruing troubled debt restructuring and $1.3 million in other assets. Included in the $6.2 million of nonaccrual loans was $5.3 million of loans secured by real estate, $390,000 of commercial and $484,000 of consumer and other loans.

The following table shows the amounts of nonperforming assets at September 30, 2012 and December 31, 2011:

	September 30, 2012			December 31, 2011
Nonaccrual loans:
Commercial	$	190		$	390
Real estate		5,315			5,308
Consumer		613			484
Accrual loans – past due 90 days
Real estate		468			0
Restructured loans		930			856
Total nonperforming loans		7,516			7,038
Real estate owned		697			1,222
Repossessed assets		0			52
Total nonperforming assets	$	8,213		$	8,312
Allowance for credit losses to total nonperforming loans		88.44	%		102.30	%
Ratio of nonperforming loans to total loans		2.64	%		2.42	%
Ratio of nonperforming assets to total assets		1.88	%		1.88	%

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total assets of $436.4 million at September 30, 2012 decreased 1.2% or $5.2 million compared to $441.6 million at December 31, 2011. The contraction of the balance sheet was the result of redeeming 50% of the TARP balance of outstanding Series A Preferred Stock for a total of $4.1 million. Loan demand decreased in the first nine months of 2012, with $285.1 million of gross loans as of September 30, 2012, a decrease of $5.7 million from $290.8 million at December 31, 2011. The decrease resulted primarily from payoffs and payments net of originations of approximately $4.8 million in real estate secured loans and charge-offs of $927,000. Interest bearing balances with banks increased $21.7 million while federal funds sold as of September 30, 2012 decreased $26.6 million from December 31, 2011. Investment securities increased $4.2 million or 4.8% compared to December 31, 2011.

Deposits of $338.8 million at September 30, 2012 decreased $11.6 million or 3.3% from December 31, 2011 deposits of $350.4 million. Savings balances decreased $7.9 million while certificate of deposit balances decreased $7.2 million due to higher rate certificates of deposit maturing and not renewing at current lower yields. Money market balances increased $4.8 million. Securities sold under agreements to repurchase increased $7.6 million.

Comparison of Operating Results for the Nine Months Ended September 30, 2012 and 2011.

General. The Company recorded net income of $2.9 million for the nine months ended September 30, 2012; an increase of $1.4 million, compared to net income of $1.5 million for the nine months ended September 30, 2011, an increase of 90.1%. Net income available to common shareholders for the nine months ended September 30, 2012 was $2.6 million or $0.66 per basic and $0.65 per diluted common shares compared to net income

34

available to common shareholders of $1.1 million or $0.29 per basic and $0.29 per diluted common shares for the nine months ended September 30, 2011. Net interest income increased by $120,000 or 1.0% for the nine months ended September 30, 2012 compared to the same period in 2011. The provision for credit losses decreased $1.3 million to $306,000 for the nine months ended September 30, 2012 compared to $1.6 million for the nine month period ended September 30, 2011.

Interest Income. Total interest income decreased $418,000 or 2.8% for the nine months ended September 30, 2012 compared to the same period in 2011 as a result of lower yields obtained on new loans and investments. Interest income on investment securities decreased $443,000. The yield on the investment portfolio decreased to 2.36% from 2.98% on balances $1.1 million lower on average over the same period in 2011. Income on the loan portfolio increased $10,000 for the nine months ended September 30, 2012 due to an increase in average loan balances of $7.8 million offset by lower loan yields. The yield on the loan portfolio decreased to 5.78% for the nine months ended September 30, 2012 from 5.94% for the nine months ended September 30, 2011.

Interest Expense. Total interest expense decreased by $538,000 or 19.5% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decrease was due to reducing the rates paid on the Company’s deposit and repurchase agreement accounts. The Company’s savings accounts, the largest of the deposit balances, had an average balance of $131.8 million for the nine months ended September 30, 2012 and a yield of 0.33% compared to an average balance of $139.0 million and a yield of 0.68% for the nine months ended September 30, 2011. The average rate of interest paid on all interest bearing liabilities was 0.86% for the nine months ended September 30, 2012 compared to 1.06% for the nine months ended September 30, 2011. Interest expense on long-term borrowings and junior subordinated debentures was $985,000 for the nine months ended September 30, 2012 compared to $974,000 for the nine months ended September 30, 2011. The increase resulted from a rise in the yield on the junior subordinated debentures to 3.65% from 3.50%.

Net Interest Income. Net interest income increased by $120,000 or 1.0% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increase was primarily the result of lower overall cost of deposits. The Company’s cost of funds decreased to 0.74% for the nine months ended September 30, 2012 compared to 0.93% for the nine months ended September 30, 2011.

For the nine months ended September 30, 2012, the net interest margin decreased to 3.90% compared to 3.94% for the nine months ended September 30, 2011. The decrease in net interest margin was primarily the result of the decrease in the yield on earnings assets which decreased to 4.60% for the nine months ended September 30, 2012 from 4.84% for the same period in 2011.

Provision for Credit Losses. The Bank recorded a provision for credit losses of $306,000 for the nine months ended September 30, 2012 compared to $1.6 million for the same period in 2011. The provision was based on the composition and credit quality of the loan portfolio as of September 30, 2012 and reflected the qualitative factors used to calculate the allowance for credit losses relating to historical delinquencies and losses and to factors relating to local economic conditions. Total gross loans decreased by $5.7 million for the nine month period ended September 30, 2012 compared to December 31, 2011. The Bank recorded net charge-offs on loans deemed uncollectible of $841,000 for the nine months ended September 30, 2012 compared to $910,000 for the same period in 2011.

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Noninterest Income. Total noninterest income for the nine months ended September 30, 2012 increased by $28,000 or 2.0% remaining at $1.4 million for the same period in 2011. The increase in noninterest income was due to higher savings and check cashing fees offset by lower loan related fees as the Company discontinued selling mortgages in 2011. The nine months ended September 30, 2011 included losses of $31,000 on the write-down of fixed assets relating to the closure of a branch office. There were no such write-downs for the nine months ended September 30, 2012.

Noninterest Expense. Total noninterest expense decreased by $875,000 or 9.1% for the nine months ended September 30, 2012 compared to the same period in 2011. The decrease in total noninterest expense during the first nine months of 2012 compared with the same period in 2011 resulted from decreased personnel, occupancy and equipment, FDIC and other expense. Offsetting these decreases in noninterest expense was an increase in legal expense related to loan collections. Personnel expense decreased $374,000 for the nine month period due to vacated staff positions that have not been refilled. Occupancy and equipment expense decreased $96,000 as the same period in 2011 included accelerated depreciation relating to the Market House branch closure. FDIC expense decreased $82,000 for the nine months ended September 30, 2012 compared to September 30, 2011 due to the impact of the changes in the assessment formula. Other expense decreased $311,000 as 2011 expense included a $198,000 write-down on a property held for expansion and a write-off of $36,000 related to a payment due from a service provider. Legal collection fees increased $49,000 for 2012 as 2011 results included the reimbursement of legal costs from the payoff of a loan previously classified as nonperforming.

Income Tax Expense. The Company recorded income tax expense for the nine-month period ended September 30, 2012 of $1.7 million compared to $782,000 for the nine months ended September 30, 2011. The Company’s combined effective federal and state income tax rate was approximately 37.6% for the nine months ended September 30, 2012 versus 34.2% for the nine months ended September 30, 2011.

The table below 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).

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Rate/Volume Analysis

(dollars in thousands)	Nine Months Ended September 30, 2012 vs. 2011
				Due to Change in
	Increase or (Decrease)			Volume			Rate			Rate/ Volume
Interest income on:
Loans	$	10		$	347		($	328	)	($	9	)
Investment securities		(443	)		(25	)		(423	)		5
Interest bearing balances with banks		11			0			10			1
Federal funds sold and other overnight investments		4			3			1			0
Total interest income		(418	)		325			(740	)		(3	)
Interest expense on:
NOW accounts		(10	)		0			(10	)		0
Money market accounts		(36	)		37			(58	)		(15	)
Savings accounts		(381	)		(36	)		(364	)		19
Certificates of deposit		(99	)		(52	)		(50	)		3
Repurchase agreements		(23	)		(3	)		(21	)		1
Long-term borrowing		3			0			3			0
Junior subordinated debt		8			0			8			0
Total interest expense		(538	)		(54	)		(492	)		8
Net interest income	$	120		$	379		($	248	)	($	11	)

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Consolidated Average Balances, Yields and Rates

(dollars in thousands)	Nine Month Periods Ended
	September 30, 2012							September 30, 2011
	Average Balance		Interest (1)		Yield/ Rate			Average Balance		Interest (1)		Yield/ Rate
Assets
Interest earning assets
Federal funds sold and other overnight investments	$	17,460	$	31		0.24	%	$	15,930	$	27		0.23	%
Interest bearing balances with banks		15,709		24		0.20	%		15,087		13		0.12	%
Investment securities (1)		90,691		1,601		2.36	%		91,822		2,044		2.98	%
Loans (2)		296,111		12,817		5.78	%		288,312		12,807		5.94	%
Total interest earning assets		419,971		14,473		4.60	%		411,151		14,891		4.84	%
Noninterest earning assets
Cash and due from banks		7,393							7,582
Other assets		14,282							15,211
Total Assets	$	441,646						$	433,944
Liabilities and Stockholders’ Equity
Interest bearing deposits
NOW accounts	$	32,822	$	22		0.09	%	$	32,892	$	32		0.13	%
Money market accounts		52,781		113		0.29	%		42,280		149		0.47	%
Savings accounts		131,838		323		0.33	%		138,952		704		0.68	%
Certificates of deposit		72,755		745		1.37	%		77,508		844		1.46	%
Repurchase agreements		15,322		36		0.31	%		16,163		59		0.49	%
Long-term borrowings		35,000		846		3.18	%		35,000		843		3.22	%
Junior subordinated debt		5,000		139		3.65	%		5,000		131		3.50	%
Total interest bearing liabilities		345,518		2,224		0.86	%		347,795		2,762		1.06	%
Noninterest bearing Liabilities
Demand deposit accounts		57,216							48,446
Other liabilities		2,572							1,991
Stockholders’ Equity		36,340							35,712
Total Liabilities and Stockholders’ Equity	$	441,646						$	433,944
Interest rate spread						3.74	%						3.78	%
Ratio of interest earning assets to interest bearing liabilities						121.55	%						118.22	%
Net interest income and net interest margin			$	12,249		3.90	%			$	12,129		3.94	%

(1) No tax-equivalent adjustments are made, as the effect would not be material.

(2) Includes nonaccrual loans

Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011.

General. The Company recorded net income for the three months ended September 30, 2012 of $1.1 million, an increase of $443,000, compared to a net income of $668,000 for the three months ended September 30, 2011. Net income available to common shareholders was $1.1 million or $0.27 per basic and $0.26 per diluted common share, compared to net income available to common shareholders of $545,000 or $0.14 per basic and diluted common share for the three months ended September 30, 2011. Net interest income improved $42,000 for the three months ended September 30, 2012 compared to the same period in 2011. The Bank recorded $29,000 in provision for credit losses during the three months ended September 30, 2012, compared to $338,000 in provision for credit losses during the same period in 2011.

Interest Income. Interest income decreased $135,000 or 2.7% for the quarter ended September 30, 2012 compared to the same quarter in 2011. The decrease in income is a result of lower yields on both the investment and loan portfolios. Income on the investment

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portfolio decreased $127,000 for the quarter ended September 30, 2012 compared to the same period in 2011 due to a decrease in yield as average investment security balances increased by $8.0 million and the yield decreased to 2.13% from 2.89% for the same period in 2011.

Interest Expense. Interest expense decreased by $177,000 or 20.0% for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 while average interest bearing deposit balances decreased $3.8 million. Interest expense on interest bearing deposits for the quarter ended September 30, 2012 was $367,000 compared to $541,000 for the same period in 2011, a 32.2% decrease. The decrease in interest expense was due to the lower cost of all interest bearing deposit types with the yield dropping to 0.51% for the three months ended September 30, 2012 compared to 0.74% for the three months ended September 30, 2011. Decreases in the Company’s cost of savings accounts to 0.29% from 0.58%, in the cost of the Company’s money market account to 0.26% from 0.42% and a decrease to 1.29% from 1.46% in the cost of the Company’s certificates of deposit contributed to the reduction in interest expense. The total cost of interest bearing liabilities decreased for the quarter ended September 30, 2012 to 0.82% from 1.02% for the quarter ended September 30, 2011. The Company’s overall cost of funds decreased to 0.70% from 0.88% for the same periods. Interest expense on long-term borrowings and junior subordinated debentures increased to $330,000 from $328,000 with a yield of 3.28% and 3.25% for each of the three months ended September 30, 2012 and September 30, 2011, respectively.

Net Interest Income. Net interest income is the difference between interest income and interest expense and is generally affected by increases or decreases in the amount of outstanding interest-earning assets and interest bearing liabilities (volume variance). This volume variance coupled with changes in interest rates on these same assets and liabilities (rate variance) equates to the total change in net interest income in any given period.

Net interest income improved by $42,000 or 1.0% for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The improvement was due to the decrease in interest expense.

For the three months ended September 30, 2012, the net interest margin was 3.95%, a slight increase from 3.93% for the three months ended September 30, 2011. The interest rate spread was 3.80% in the second quarter of 2012 compared to 3.77% in the same quarter in 2011. The increase in the net interest margin was the result of a decrease in the yield on deposit and repurchase accounts.

Provision for Credit Losses. The Bank recorded a provision for credit losses of $29,000 for the three months ended September 30, 2012 compared to $338,000 for the same period in 2011. The decrease in provision was due in part to the release of reserves on criticized assets that paid off. The Bank recorded net charge-offs of $290,000 for the quarter ended September 30, 2012 compared to net charge-offs of $93,000 for the three months ended September 30, 2011. Nonperforming assets totaling $8.2 million at quarter-end and were comprised of $6.1 million of nonaccrual loans, $930,000 in troubled debt restructuring, $468,000 of loans past due more than 90 days and still accruing and $697,000 in other assets.

Noninterest Income. Noninterest income decreased by $150,000 or 22.8% to $509,000 for the three months ended September 30, 2012 from $659,000 for the same period

39

of 2011. Noninterest income decreased for the three months ended September 30, 2012 as September 30, 2011 results included $151,000 in fees on loans held for sale. The loans held for sale program was discontinued in 2011.

Noninterest Expense. Noninterest expense decreased by $547,000 or 16.1% for the three months ended September 30, 2012 compared to the same quarter in 2011. The decrease in noninterest expense was due to reduced personnel and other expenses. The decrease in personnel expense of $206,000 was the result of open staff positions. Other expense decreased $334,000 as 2011 results included a write-down of $198,000 on a piece of property held for expansion and $117,000 in expenses related to loans held for sale. There were no similar other expenses in 2012.

Income Tax Expense. The Company recorded tax expense of $680,000 for the three-month period ended September 30, 2012. The Company’s combined effective federal and state income tax rate was approximately 38.0% for the three months ended September 30, 2012 versus 36.0% for the three months ended September 30, 2011.

Liquidity

Liquidity is the capacity to change the nominal level and mix of assets or liabilities, for any purpose, quickly and economically. Poor or inadequate liquidity risk management could result in a critical situation in which the Bank would be unable to meet deposit withdrawal or loan funding requests from its customers. Either situation could potentially harm both the profits and reputation of the Bank.

The Company’s major source of liquidity is its deposit base. At September 30, 2012, total deposits were $338.8 million. Core deposits, considered to be stable funding sources and defined as all deposits except time deposits totaled $267.8 million or 79.04% of total deposits. Liquidity is also provided through the Company’s overnight investment in federal funds sold, interest bearing deposits with banks as well as securities available-for-sale and investment securities with maturities less than one year. At September 30, 2012, interest bearing deposits with banks, federal funds sold and other overnight investments totaled $40.0 million while investment securities available-for-sale and restricted stock investments totaled $94.6 million.

In addition, the Bank has external sources of funds, which can be used as needed. The FHLB is the primary source of this external liquidity. The FHLB has established credit availability for banks up to 40% of the bank’s total assets. The Bank currently has an approved line of credit with the FHLB of 25% of total assets with the ability to request an increase in the line if necessary. Total assets are based on the most recent quarterly financial information submitted by the Bank to the appropriate regulatory agency. The ability to borrow funds is subject to the Bank’s continued creditworthiness, compliance with the terms and conditions of the FHLB’s Advance Applications and the pledging of sufficient eligible collateral to secure advances. At September 30, 2012, the Bank had a $109.4 million credit limit with the FHLB with advances outstanding of $35.0 million. The Bank had loans currently pledged as collateral sufficient to borrow up to $14.9 million of the remaining $74.4 million availability from the FHLB. The Bank also has the ability to borrow from the Federal Reserve Bank’s discount window. Additional collateral including cash, investment securities and home-equity loans are available for pledging purposes in the event the Bank would need to draw on the unused portion of the line of credit. At September 30, 2012, the Bank had available credit with its correspondent banks of $19.2 million.

40

Capital Resources

Total stockholders’ equity was $36.1 million at September 30, 2012, representing a decrease of $1.3 million or 3.46% from December 31, 2011. The decrease in stockholders’ equity in the first nine months of 2012 was attributable to redeeming 50% of the outstanding Series A Preferred Stock obtained through TARP. The decrease in capital due to the $4.1 million redemption was offset by $2.9 million in income, an increase in other accumulated comprehensive income of $73,000, stock based compensation of $64,000 and stock purchases through the Company’s Employee Stock Purchase Plan of $5,000. Offsetting these increases was the declaration of $214,000 in preferred stock dividends.

During the first quarter of 2009 the Company received an infusion of capital under TARP. Under TARP, the U. S. Treasury created 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, Annapolis Bancorp, Inc. (the “Company”) redeemed 4,076 shares of its Series A Preferred Stock for $4,076,000. Following the redemption, 4,076 shares of Series A Preferred Stock remain outstanding for a total of $4,076,000 in Series A Preferred Stock.

The Company currently has $5.0 million of junior subordinated debt issued in the form of trust preferred securities. Trust preferred securities are considered regulatory capital for purposes of determining the Company’s Tier 1 capital ratios. Regulatory guidance was issued by the Board of Governors of the Federal Reserve System ruled that banks could currently continue to include trust preferred securities in regulatory capital.

The following table summarizes the Company’s risk-based capital ratios:

Annapolis Bancorp, Inc.
	September 30, 2012			December 31, 2011			Minimum Regulatory Requirements			Well-Capitalized Regulatory Requirements
Risk Based Capital Ratios:
Tier 1 Capital		12.6	%		12.8	%		4.0	%		6.0	%
Total Capital		13.8	%		14.0	%		8.0	%		10.0	%
Tier 1 Leverage Ratio		9.0	%		9.4	%		4.0	%		5.0	%

As of September 30, 2012 both the Company and the Bank met the criteria for classification as a “well-capitalized” institution. Designation as a well-capitalized institution under these regulations is not a recommendation or endorsement of the Company or the Bank by federal bank regulators.

41

Risk Management

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

Dodd-Frank Wall Street Reform and Consumer Protection Act

As a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) banks are no longer prohibited from paying interest on demand deposit accounts, including those from businesses, effective July 21, 2011. It is not clear what effect the elimination of this prohibition will have on the Bank’s interest expense, allocation of deposits, deposit pricing, loan pricing, net interest margin, ability to compete, ability to establish and maintain customer relationships, or profitability. The Dodd-Frank Act also includes a regulation to limit debit card interchange fees charged by issuing banks. The impact this regulation will have on the Bank’s noninterest income is not yet known.

Management continues to monitor the implementation of the Dodd-Frank Act which includes many provisions that went into effect on July 21, 2011 and many other provisions which will be phased-in over the next several months and years.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

As of the end of the period covered by this report, based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act), each of the chief executive officer and the chief financial officer of the Company has concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the applicable time periods specified by the Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

42

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

Neither the Company nor the Bank is involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which involve amounts in the aggregate believed by management to be immaterial to the financial condition of the Company and the Bank.

Item 1A – Risk Factors

Not applicable.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

None.

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Item 6 – Exhibits

The following exhibits are filed as part of this report.

3.1	Articles of Incorporation of Annapolis Bancorp, Inc.*
3.2	Amended and Restated Bylaws of Annapolis Bancorp, Inc.**
3.3	Articles of Incorporation of BankAnnapolis***
3.4	Bylaws of BankAnnapolis***
4.0	Stock Certificate of Annapolis National Bancorp, Inc.*
4.1	Form of Stock Certificate for the Fixed Rate Cumulative Preferred Stock, Series A. *******
4.2	Warrant To Purchase 299,706 Shares of Common Stock Of Annapolis Bancorp, Inc. *******
10.1	Annapolis National Bancorp, Inc. Employee Stock Option Plan*+
10.2	Annapolis National Bancorp, Inc. 2000 Employee Stock Option Plan****
10.3	Annapolis Bancorp, Inc. 2006 Stock Incentive Plan*****
10.4	Form of Stock Option Award Agreement*****
10.5	Form of Restricted Share Award Agreement*****
10.6	Form of Deferral Election Agreement for Deferred Share Units*****
10.7	Annapolis Bancorp, Inc. 2007 Employee Stock Purchase Plan ******
10.8	Securities Purchase Agreement by and between the United States Department of the Treasury and Annapolis Bancorp, Inc. dated January 30, 2009*******
10.9	Agreement and Plan of Merger by and between Annapolis Bancorp, Inc. and F.N.B. Corporation dated October 22, 2012********
31.1	Certification Pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith)
31.2	Certification Pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith)
32.1	Certification Pursuant to 18 U.S.C. Section 1350 (filed herewith)
32.2	Certification Pursuant to 18 U.S.C. Section 1350 (filed herewith)
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

+	Management contract or compensatory plan or arrangement.
*	Incorporated herein by reference to the Company’s Registration Statement on Form SB-2, as amended, Commission File Number 333-29841, filed with the Securities and Exchange Commission on September 23, 1997.
**	Incorporated herein by reference to the Company’s Report on Form 8-K, filed with the Securities and Exchange Commission on October 23, 2007.
***	Incorporated herein by reference to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000, filed with the Securities and Exchange Commission on March 28, 2001.
****	Incorporated herein by reference to the Company’s Definitive Proxy Statement for the 2000 annual meeting, filed with the Securities and Exchange Commission on April 5, 2000.
*****	Incorporated herein by reference to the Company’s Registration Statement on Form S-8, Commission File Number 333-136382, filed with the Securities and Exchange Commission on August 8, 2006.
******	Incorporated herein by reference to the Company’s Definitive Proxy Statement for the 2007 annual meeting, filed with the Securities and Exchange Commission on April 13, 2007.

44

*******	Incorporated herein by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 2, 2009.
********	Incorporated herein by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 22, 2012.

45

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ANNAPOLIS BANCORP, INC.
	(Registrant)
Date: November 14, 2012		/s/ Richard M. Lerner
		Richard M. Lerner
		Chief Executive Officer
Date: November 14, 2012		/s/ Edward J. Schneider
		Edward J. Schneider
		Chief Financial Officer

46

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULES 13a-14(a) or 15d-14(a)

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Richard M. Lerner, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Annapolis Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

47

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2012	/s/ Richard M. Lerner
	Richard M. Lerner
	Chief Executive Officer

48

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULES 13a-14(a) or 15d-14(a)

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Edward J. Schneider, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Annapolis Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

49

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2012	/s/ Edward J. Schneider
	Edward J. Schneider
	Chief Financial Officer

50

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Annapolis Bancorp, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard M. Lerner, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 14, 2012	/s/ Richard M. Lerner
	Richard M. Lerner
	Chief Executive Officer

51

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Annapolis Bancorp, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward J. Schneider, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

November 14, 2012	/s/ Edward J. Schneider
	Edward J. Schneider
	Chief Financial Officer

52

XML

Loans, Allowance for Credit Losses and Credit Quality (Details 5) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Impaired loans
Recorded Investment	$ 7,833	$ 7,381
Unpaid Principal Balance	7,833	7,381
Related Allowance	2,531	1,562
Commercial [Member]
Impaired loans
Recorded Investment	1,003	1,398
Unpaid Principal Balance	1,003	1,398
Related Allowance	56	195
Commercial real estate [Member]
Impaired loans
Recorded Investment	2,676	2,444
Unpaid Principal Balance	2,676	2,444
Related Allowance	1,181	731
Residential real estate [Member]
Impaired loans
Recorded Investment	3,361	3,055
Unpaid Principal Balance	3,361	3,055
Related Allowance	1,009	475
Consumer [Member]
Impaired loans
Recorded Investment	793	484
Unpaid Principal Balance	793	484
Related Allowance	285	161
With no related allowance recorded [Member]
Impaired loans
Recorded Investment	1,940	1,511
Unpaid Principal Balance	1,940	1,511
Related Allowance	0	0
With no related allowance recorded [Member] | Commercial [Member]
Impaired loans
Recorded Investment	898	242
Unpaid Principal Balance	898	242
Related Allowance	0	0
With no related allowance recorded [Member] | Commercial real estate [Member]
Impaired loans
Recorded Investment	274	0
Unpaid Principal Balance	274	0
Related Allowance	0	0
With no related allowance recorded [Member] | Residential real estate [Member]
Impaired loans
Recorded Investment	697	1,074
Unpaid Principal Balance	697	1,074
Related Allowance	0	0
With no related allowance recorded [Member] | Consumer [Member]
Impaired loans
Recorded Investment	71	195
Unpaid Principal Balance	71	195
Related Allowance	0	0
With an allowance recorded [Member]
Impaired loans
Recorded Investment	5,893	5,870
Unpaid Principal Balance	5,893	5,870
Related Allowance	2,531	1,562
With an allowance recorded [Member] | Commercial [Member]
Impaired loans
Recorded Investment	105	1,156
Unpaid Principal Balance	105	1,156
Related Allowance	56	195
With an allowance recorded [Member] | Commercial real estate [Member]
Impaired loans
Recorded Investment	2,402	2,444
Unpaid Principal Balance	2,402	2,444
Related Allowance	1,181	731
With an allowance recorded [Member] | Residential real estate [Member]
Impaired loans
Recorded Investment	2,664	1,981
Unpaid Principal Balance	2,664	1,981
Related Allowance	1,009	475
With an allowance recorded [Member] | Consumer [Member]
Impaired loans
Recorded Investment	722	289
Unpaid Principal Balance	722	289
Related Allowance	$ 285	$ 161

XML

Fair Value Measurements (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Fair Value Measurements (Textual) [Abstract]
Non performing loans carrying value	$ 7,500,000		$ 7,500,000
Fair Value Measurements (Additional Textual) [Abstract]
Transfers made between different levels			0
Fixed weighted average coupon	5.50%		5.50%
Specific reserves in non performing loan	5,900,000		5,900,000
Allowance for credit losses, charge-offs	325,000	104,000	927,000	1,194,000
Real estate acquired through foreclosure	697,000		697,000		1,222,000
Repossessed assets	0		0		52,000,000
Specific reserves [Member]
Fair Value Measurements (Textual) [Abstract]
Non performing loans carrying value	$ 2,500,000		$ 2,500,000
Maximum [Member] | CWHL 2005-21 [Member]
Fair Value Measurements (Textual) [Abstract]
Weighted average remaining life			4 months
Maximum [Member] | WFMBS 2005-14 [Member]
Fair Value Measurements (Textual) [Abstract]
Weighted average remaining life			2 years

XML

Fair Value Measurements (Details 3) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets measured at fair value on a nonrecurring basis
Commercial	$ 43,060	$ 47,683
Commercial real estate	115,455	114,883
Residential real estate	48,052	48,314
Construction	37,602	35,026
Consumer	7,958	8,870
Total impaired loans	285,069	290,781
Real estate owned	697	1,222
Other assets (repossessed assets)	0	52,000
Fair Value, Nonrecurring [Member]
Assets measured at fair value on a nonrecurring basis
Commercial	947	1,202
Commercial real estate	890	995
Residential real estate	2,352	2,580
Construction	606	719
Consumer	507	323
Total impaired loans	5,302	5,819
Real estate owned	697	1,222
Other assets (repossessed assets)	0	52
Total Assets Measured at Fair Value on a Nonrecurring Basis	5,999	7,093
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Fair Value, Nonrecurring [Member]
Assets measured at fair value on a nonrecurring basis
Commercial	0	0
Commercial real estate	0	0
Residential real estate	0	0
Construction	0	0
Consumer	0	0
Total impaired loans	0	0
Real estate owned	0	0
Other assets (repossessed assets)	0	0
Total Assets Measured at Fair Value on a Nonrecurring Basis	0	0
Other Observable Inputs (Level 2) [Member] | Fair Value, Nonrecurring [Member]
Assets measured at fair value on a nonrecurring basis
Commercial	947	1,202
Commercial real estate	890	995
Residential real estate	2,352	2,580
Construction	606	719
Consumer	507	323
Total impaired loans	5,302	5,819
Real estate owned	697	1,222
Other assets (repossessed assets)	0	52
Total Assets Measured at Fair Value on a Nonrecurring Basis	5,999	7,093
Significant Unobservable Inputs (Level 3) [Member] | Fair Value, Nonrecurring [Member]
Assets measured at fair value on a nonrecurring basis
Commercial	0	0
Commercial real estate	0	0
Residential real estate	0	0
Construction	0	0
Consumer	0	0
Total impaired loans	0	0
Real estate owned	0	0
Other assets (repossessed assets)	0	0
Total Assets Measured at Fair Value on a Nonrecurring Basis	0	0
Total Changes in Fair Values Included in Period Earnings [Member] | Fair Value, Nonrecurring [Member]
Assets measured at fair value on a nonrecurring basis
Commercial	0	0
Commercial real estate	0	0
Residential real estate	0	0
Construction	0	0
Consumer	0	0
Total impaired loans	0	0
Real estate owned	0	0
Other assets (repossessed assets)	0	0
Total Assets Measured at Fair Value on a Nonrecurring Basis	$ 0	$ 0

XML

Investment Securities (Details Textual) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Investment Securities (Textual) [Abstract]
Mortgaged-backed securities with a fair market value/ Fair market value of mortgage-backed securities with bond ratings below investment grade.	$ 91,777	$ 87,549
Mortgage-backed securities issued by Government agencies [Member]
Investment Securities (Textual) [Abstract]
Mortgaged-backed securities with a fair market value/ Fair market value of mortgage-backed securities with bond ratings below investment grade.	$ 1,500

XML

Stock Based Compensation (Details) (USD $) In Thousands, except Share data, unless otherwise specified	1 Months Ended	9 Months Ended
	Apr. 30, 2012	Sep. 30, 2012	Sep. 30, 2011
Schedule of stock option activity
Outstanding at beginning of period, Shares		92,302	124,270
Grants, Share		0	0
Exercised, Share		0	(5,333)
Forfeitures, Share	(1,162)	(8,888)	0
Expired, Share		0	(22,374)
Outstanding at end of period, Shares		83,414	96,563
Exercisable at end of period		83,414	95,721
Weighted Average Exercise Price, Outstanding at Beginning of Period		$ 7.22	$ 6.06
Weighted Average Exercise Price, Grants		$ 0.00	$ 0.00
Weighted Average Exercise Price, Exercised		$ 0.00	$ 2.64
Weighted average Exercise Price, Forfeitures		$ 9.30	$ 0.00
Weighted Average Exercise Price, Expired		$ 0.00	$ 2.64
Weighted Average Exercise Price, Outstanding at End of Period		$ 7.00	$ 7.05
Weighted Average Remaining Contractual Term, Exercisable at End of Period		1 year 9 months 18 days	2 years 9 months 18 days
Weighted Average Exercise Price, Exercisable at End of Period		$ 7.00	$ 7.03
Aggregate Intrinsic Value, Exercisable at End of Period		$ 97	$ 4

XML

Subsequent Events (Details) (USD $)	Oct. 22, 2012
Subsequent Events (Textual) [Abstract]
Number of shares receive by shareholders	1.143
Additional shares receive by shareholders	$ 0.36
Rights to receive shares of FNB Preferred stock	1

XML

Loans, Allowance for Credit Losses and Credit Quality (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total past due loans	$ 11,025,000	$ 5,097,000
Loans, Allowance for Credit Losses and Credit Quality (Textual) [Abstract]
Nonaccrual loans	6,100,000	6,200,000
Loans past due greater than 90 days and still accruing	468,000	0
Increase in loans past due	5,900,000
New loans considered past due	9,100,000	4,400,000
Loans returned to performing	1,900,000
Loan Loss Allowance allocated to impaired	2,500,000	1,600,000
Charge-offs of loans deemed uncollectible.	839,000
Transfers to real estate owned and repossessed assets	378,000
Troubled debt restructurings included loans in accrual status	930,000
Troubled debt restructurings included loans in nonaccrual	1,700,000
Percentage of the lower of the appraised value or selling price of a property	80.00%
Maximum [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total past due loans	11,000,000
Threshold amount for charge-off decision	25,000
Minimum [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total past due loans		5,100,000
Threshold amount for charge-off decision	25,000
Commercial Real Estate Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loan portfolio composition percentage	97.00%	97.00%
Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total past due loans	740,000	365,000
Principal and interest due period	90 days
Loans, Allowance for Credit Losses and Credit Quality (Textual) [Abstract]
Loans past due greater than 90 days and still accruing	$ 0	$ 0
Other loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Principal and interest due period	120 days

XML

Loans, Allowance for Credit Losses and Credit Quality (Details 3) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Credit quality indicators
Commercial	$ 43,060	$ 47,683
Commercial Real Estate, Construction	37,602	35,026
Commercial Real Estate, Other	115,455	114,883
Residential	80,994	84,319
Consumer Installment	7,958	8,870
Pass [Member]
Credit quality indicators
Commercial	39,110	41,899
Commercial Real Estate, Construction	32,511	29,456
Commercial Real Estate, Other	98,389	102,495
Residential	71,732	78,402
Consumer Installment	6,913	8,017
Other Assets Especially Mentioned [Member]
Credit quality indicators
Commercial	2,012	2,181
Commercial Real Estate, Construction	2,083	2,432
Commercial Real Estate, Other	14,802	7,944
Residential	4,514	1,867
Consumer Installment	403	290
Substandard [Member]
Credit quality indicators
Commercial	1,938	3,571
Commercial Real Estate, Construction	1,856	1,986
Commercial Real Estate, Other	1,014	3,194
Residential	3,323	2,632
Consumer Installment	623	348
Doubtful [Member]
Credit quality indicators
Commercial	0	32
Commercial Real Estate, Construction	1,152	1,152
Commercial Real Estate, Other	1,250	1,250
Residential	1,425	1,418
Consumer Installment	$ 19	$ 215

XML

Fair Value Measurements (Details 4) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Dec. 31, 2010
Financial assets
Cash and due from banks	$ 1,951	$ 2,026	$ 1,801	$ 7,854
Interest bearing balances with banks	39,996	18,288
Federal funds sold	11	26,583
Federal Reserve and Federal Home Loan Bank stock	2,864	2,992
Accrued interest receivable	1,350	1,279
Bank owned life insurance	5,783	5,624
Real estate owned	697	1,222
Financial liabilities
Noninterest bearing deposits	57,314	56,664
Interest bearing deposits	281,501	293,717
Securities sold under agreements to repurchase	18,895	11,344
Long-term borrowings	35,000	35,000
Junior subordinated debt	5,000	5,000
Accrued dividends and interest payable	188	219
Carrying Amount [Member] | Level 2 [Member]
Financial assets
Cash and due from banks	1,951	2,026
Interest bearing balances with banks	39,996	18,288
Federal funds sold	11	26,583
Investment securities	90,317	85,694
Federal Reserve and Federal Home Loan Bank stock	2,864	2,992
Loans and loans held for sale, net	278,102	283,284
Accrued interest receivable	1,350	1,279
Bank owned life insurance	5,783	5,624
Real estate owned	697	1,222
Financial liabilities
Noninterest bearing deposits	57,314	56,664
Interest bearing deposits	281,501	293,717
Securities sold under agreements to repurchase	18,895	11,344
Long-term borrowings	35,000	35,000
Junior subordinated debt	5,000	5,000
Accrued dividends and interest payable	188	219
Carrying Amount [Member] | Level 3 [Member]
Financial assets
Other debt securities	1,460	1,855
Estimated Fair Value [Member] | Level 2 [Member]
Financial assets
Cash and due from banks	1,951	2,026
Interest bearing balances with banks	39,996	18,288
Federal funds sold	11	26,583
Investment securities	90,317	85,694
Federal Reserve and Federal Home Loan Bank stock	2,864	2,992
Loans and loans held for sale, net	278,279	283,667
Accrued interest receivable	1,350	1,279
Bank owned life insurance	5,783	5,624
Real estate owned	697	1,222
Financial liabilities
Noninterest bearing deposits	57,314	56,664
Interest bearing deposits	282,647	298,788
Securities sold under agreements to repurchase	18,895	11,344
Long-term borrowings	31,086	31,357
Junior subordinated debt	5,000	5,000
Accrued dividends and interest payable	188	219
Estimated Fair Value [Member] | Level 3 [Member]
Financial assets
Other debt securities	$ 1,460	$ 1,855

XML

Business

9 Months Ended

Sep. 30, 2012

Business [Abstract]

Business

Note B – Business

The Company was incorporated on May 26, 1988, under the laws of the State of Maryland, to serve as a bank holding company for BankAnnapolis (formerly known as Annapolis National Bank) (the “Bank”). The Company (as a bank holding company) and the Bank are subject to governmental supervision, regulation, and control.

The Bank currently conducts a general commercial and retail banking business in its market area, emphasizing the banking needs of small businesses, professional concerns and individuals from its headquarters in Annapolis, its six other branches located in Anne Arundel County, Maryland and one branch located on Kent Island in Queen Anne’s County, Maryland.

The Bank has built its reputation on exemplary customer service and outreach to the communities surrounding each of the Bank’s locations. The Bank is committed to offering products and services that focus on relationship banking and provide an alternative to the large multi-regional financial institutions that are so pervasive in the markets the Bank serves. The Bank attracts most of its customer deposits from Anne Arundel County, Maryland, and to a lesser extent, Queen Anne’s County, Maryland. The Bank’s lending operations are centered in Anne Arundel County, but extend throughout Central and Southern Maryland.

XML

Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets measured at fair value on a recurring basis
Total Equity Securities	$ 686
Total Investment Securities available for Sale	91,777	87,549
Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	91,091	86,893
Total Equity Securities	686	656
Total Investment Securities available for Sale	91,777	87,549
Issued by U.S. Government agencies [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	51,947	48,032
Issued by State and municipal [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	1,029	1,136
Mortgage-backed securities issued by Government agencies [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	36,655	35,870
Private label mortgage-backed securities [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	1,460	1,855
Mutual funds [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Equity Securities	686	656
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Total Equity Securities	0	0
Total Investment Securities available for Sale	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Issued by U.S. Government agencies [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Issued by State and municipal [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Mortgage-backed securities issued by Government agencies [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Private label mortgage-backed securities [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Mutual funds [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Equity Securities	0	0
Other Observable Inputs (Level 2) [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	89,631	85,038
Total Equity Securities	686	656
Total Investment Securities available for Sale	90,317	85,694
Other Observable Inputs (Level 2) [Member] | Issued by U.S. Government agencies [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	51,947	48,032
Other Observable Inputs (Level 2) [Member] | Issued by State and municipal [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	1,029	1,136
Other Observable Inputs (Level 2) [Member] | Mortgage-backed securities issued by Government agencies [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	36,655	35,870
Other Observable Inputs (Level 2) [Member] | Private label mortgage-backed securities [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Other Observable Inputs (Level 2) [Member] | Mutual funds [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Equity Securities	686	656
Significant Unobservable Inputs (Level 3) [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	1,460	1,855
Total Equity Securities	0	0
Total Investment Securities available for Sale	1,460	1,855
Significant Unobservable Inputs (Level 3) [Member] | Issued by U.S. Government agencies [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Significant Unobservable Inputs (Level 3) [Member] | Issued by State and municipal [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Significant Unobservable Inputs (Level 3) [Member] | Mortgage-backed securities issued by Government agencies [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Significant Unobservable Inputs (Level 3) [Member] | Private label mortgage-backed securities [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	1,460	1,855
Significant Unobservable Inputs (Level 3) [Member] | Mutual funds [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Equity Securities	0	0
Total Changes in Fair Values Included in Period Earnings [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Total Equity Securities	0	0
Total Investment Securities available for Sale	0	0
Total Changes in Fair Values Included in Period Earnings [Member] | Issued by U.S. Government agencies [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Total Changes in Fair Values Included in Period Earnings [Member] | Issued by State and municipal [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Total Changes in Fair Values Included in Period Earnings [Member] | Mortgage-backed securities issued by Government agencies [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Total Changes in Fair Values Included in Period Earnings [Member] | Private label mortgage-backed securities [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Debt Securities	0	0
Total Changes in Fair Values Included in Period Earnings [Member] | Mutual funds [Member] | Fair Value, Recurring [Member]
Assets measured at fair value on a recurring basis
Total Equity Securities	$ 0	$ 0

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Earnings Per Share (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Earnings Per Share (Textual) [Abstract]
Antidilutive securities excluded from computation of earnings per share, amount	50,081	95,609	50,081	395,509

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Computation of earnings per share
Net income available to common shareholders	$ 1,060	$ 545	$ 2,636	$ 1,135
Weighted average common shares outstanding	3,975,395	3,952,772	3,973,132	3,947,233
Basic Earnings Per Common Share	$ 0.27	$ 0.14	$ 0.66	$ 0.29
Effect of potential dilutive common shares	147,269	1,916	111,285	7,609
Total weighted average diluted common shares outstanding	4,122,664	3,954,688	4,084,417	3,954,842
Diluted Earnings Per Common Share	$ 0.26	$ 0.14	$ 0.65	$ 0.29

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Fair Value Measurements (Details 1) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Fair value measurements using significant unobservable inputs (Level 3)
Beginning balance	$ 1,855	$ 2,401
Transfers in to Level 3	0	0
Transfers out of Level 3	0	0
Unrealized gains	24	100
Repayments	(419)	(646)
Ending balance	$ 1,460	$ 1,855

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Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Summary of Investment Securities
Available for sale, Amortized Cost	$ 90,020	$ 85,912
Available for sale, Unrealized Gains	1,825	1,775
Available for sale, Unrealized Losses	68	138
Available for sale, Estimated Fair Value	91,777	87,549
U.S. Government agency [Member]
Summary of Investment Securities
Available for sale, Amortized Cost	51,603	47,782
Available for sale, Unrealized Gains	344	306
Available for sale, Unrealized Losses	0	56
Available for sale, Estimated Fair Value	51,947	48,032
State and municipal [Member]
Summary of Investment Securities
Available for sale, Amortized Cost	961	1,077
Available for sale, Unrealized Gains	68	59
Available for sale, Unrealized Losses	0	0
Available for sale, Estimated Fair Value	1,029	1,136
Residential mortgage-backed securities [Member]
Summary of Investment Securities
Available for sale, Amortized Cost	36,821	36,435
Available for sale, Unrealized Gains	1,362	1,372
Available for sale, Unrealized Losses	68	82
Available for sale, Estimated Fair Value	38,115	37,725
Other equity securities [Member]
Summary of Investment Securities
Available for sale, Amortized Cost	635	618
Available for sale, Unrealized Gains	51	38
Available for sale, Unrealized Losses	0	0
Available for sale, Estimated Fair Value	$ 686	$ 656

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Investment Securities (Details 1) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Amortized cost and estimated fair value of securities by contractual maturities
Investment securities available for sale, due within one year, Amortized Cost	$ 0
Investment securities available for sale, due within one year, Estimated Fair Value	0
Investment securities available for sale, due after one through five years, Amortized Cost	26,910
Investment securities available for sale, due after one through five years, Estimated Fair Value	27,063
Investment securities available for sale, due after five through ten years, Amortized Cost	23,609
Investment securities available for sale, due after five through ten years, Estimated Fair Value	23,911
Investment securities available for sale, due after ten years, Amortized Cost	38,866
Investment securities available for sale, due after ten years, Estimated Fair Value	40,117
Investment securities available for sale, equity securities, Amortized Cost	635
Investment securities available for sale, equity securities, Estimated Fair Value	686
Investment securities available for sale, Amortized Cost	90,020	85,912
Investment securities available for sale, Estimated Fair Value	$ 91,777	$ 87,549

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Basis of Presentation

9 Months Ended

Sep. 30, 2012

Basis of Presentation [Abstract]

Basis of Presentation

Note A – Basis of Presentation

The accompanying unaudited consolidated financial statements of Annapolis Bancorp, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required for complete financial statements. In the opinion of management, all adjustments and reclassifications that are normal and recurring in nature and are considered necessary for fair presentation have been included. Operating results for the nine month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012 or any other period. These unaudited consolidated financial statements should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2011, which includes the consolidated financial statements and footnotes. Certain reclassifications have been made to amounts previously reported to conform to the classifications made in 2012.

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Investment Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Gross unrealized losses and the fair value of the associated securities by type and maturity for securities available for sale
Estimated fair value, less than 12 months	$ 3,818	$ 16,044
Unrealized losses, less than 12 months	11	56
Estimated fair value, 12 months or more	1,460	1,854
Unrealized losses, 12 months or more	57	82
Estimated fair value, Total	5,278	17,898
Unrealized losses, Total	68	138
U.S. Government agency [Member]
Gross unrealized losses and the fair value of the associated securities by type and maturity for securities available for sale
Estimated fair value, less than 12 months		16,044
Unrealized losses, less than 12 months		56
Estimated fair value, 12 months or more		0
Unrealized losses, 12 months or more		0
Estimated fair value, Total		16,044
Unrealized losses, Total		56
Residential mortgage-backed securities [Member]
Gross unrealized losses and the fair value of the associated securities by type and maturity for securities available for sale
Estimated fair value, less than 12 months	3,818	0
Unrealized losses, less than 12 months	11	0
Estimated fair value, 12 months or more	1,460	1,854
Unrealized losses, 12 months or more	57	82
Estimated fair value, Total	5,278	1,854
Unrealized losses, Total	$ 68	$ 82

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Loans, Allowance for Credit Losses and Credit Quality (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment	$ 7,499	$ 10,788	$ 8,614	$ 9,021
Interest Income Recognized	48	59	169	486
Average Recorded Investment with No Related Allowance Recorded	1,732	3,268	1,492	3,598
Interest Income Recognized No Related Allowance Recorded	12	39	20	113
Average Recorded Investment with Related Allowance Recorded	5,767	7,520	7,122	5,423
Interest Income Recognized Related Allowance Recorded	36	20	149	373
Commercial [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment	1,229	1,225	1,261	1,678
Interest Income Recognized	18	11	63	114
Average Recorded Investment with No Related Allowance Recorded	905	870	504	1,095
Interest Income Recognized No Related Allowance Recorded	4	10	4	46
Average Recorded Investment with Related Allowance Recorded	324	355	757	583
Interest Income Recognized Related Allowance Recorded	14	1	59	68
Commercial real estate [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment	2,795	5,975	4,040	3,832
Interest Income Recognized	8	8	45	232
Average Recorded Investment with No Related Allowance Recorded	380	657	329	795
Interest Income Recognized No Related Allowance Recorded	4	0	7	0
Average Recorded Investment with Related Allowance Recorded	2,415	5,318	3,711	3,037
Interest Income Recognized Related Allowance Recorded	4	8	38	232
Residential real estate [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment	3,052	3,180	2,996	3,093
Interest Income Recognized	19	31	49	116
Average Recorded Investment with No Related Allowance Recorded	382	1,542	589	1,500
Interest Income Recognized No Related Allowance Recorded	4	26	8	60
Average Recorded Investment with Related Allowance Recorded	2,670	1,638	2,407	1,593
Interest Income Recognized Related Allowance Recorded	15	5	41	56
Consumer [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment	423	408	317	418
Interest Income Recognized	3	9	12	24
Average Recorded Investment with No Related Allowance Recorded	65	199	70	208
Interest Income Recognized No Related Allowance Recorded	0	3	1	7
Average Recorded Investment with Related Allowance Recorded	358	209	247	210
Interest Income Recognized Related Allowance Recorded	$ 3	$ 6	$ 11	$ 17

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets
Cash and due from banks	$ 1,951	$ 2,026
Interest bearing balances with banks	39,996	18,288
Federal funds sold and other overnight investments	11	26,583
Investment securities available for sale, at fair value	91,777	87,549
Federal Reserve and Federal Home Loan Bank stock	2,864	2,992
Loans, less allowance for credit losses of $6,647 and $7,182	278,102	283,284
Premises and equipment, net	9,797	8,418
Accrued interest receivable	1,350	1,279
Deferred income taxes	2,390	2,617
Investment in bank owned life insurance	5,783	5,624
Prepaid FDIC Insurance	954	1,198
Real estate owned	697	1,222
Other assets	683	490
Total Assets	436,355	441,570
Deposits
Noninterest bearing	57,314	56,664
Interest bearing	281,501	293,717
Securities sold under agreements to repurchase	18,895	11,344
Long-term borrowings	35,000	35,000
Guaranteed preferred beneficial interests in junior subordinated debentures	5,000	5,000
Accrued interest and dividends payable	188	219
Other liabilities	2,381	2,258
Total liabilities	400,279	404,202
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 4,076 shares at September 30, 2012 and 8,152 at December 31, 2011, net of discount of zero and $6	4,076	8,146
Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 3,975,471 shares at September 30, 2012 and 3,958,293 at December 31, 2011	40	39
Warrants	234	234
Paid in capital	11,847	11,779
Retained earnings	18,815	16,179
Accumulated other comprehensive income	1,064	991
Total stockholders' equity	36,076	37,368
Total liabilities and stockholders' equity	$ 436,355	$ 441,570

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Fair Value Measurements (Details 2) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
CWHL 2005-21 [Member]
Summary of Level 3 securities
Cumulative Default	3.63%	3.04%
Weighted Average Life	3 months 15 days	7 months 24 days
Modified Duration	3 months 7 days	7 months 2 days
Yield	8.00%	8.00%
WFMBS 2005-14 [Member]
Summary of Level 3 securities
Cumulative Default	2.77%	3.84%
Weighted Average Life	1 year 8 months 23 days	2 years 1 month 6 days
Modified Duration	1 year 6 months	1 year 9 months 18 days
Yield	8.00%	8.00%
Level 3 [Member] | CWHL 2005-21 [Member]
Summary of Level 3 securities
Class	A13
Coupon	5.50%
Remaining Par Value	104
Level 3 [Member] | CWHL 2005-21 [Member] | Moody's, B3 Rating [Member]
Summary of Level 3 securities
Current Rating	B3
Level 3 [Member] | CWHL 2005-21 [Member] | Fitch, B Rating [Member]
Summary of Level 3 securities
Current Rating	CC
Level 3 [Member] | WFMBS 2005-14 [Member]
Summary of Level 3 securities
Class	IA7
Coupon	5.50%
Remaining Par Value	1,412
Level 3 [Member] | WFMBS 2005-14 [Member] | Moody's, Ca Rating [Member]
Summary of Level 3 securities
Current Rating	Ca
Level 3 [Member] | WFMBS 2005-14 [Member] | Fitch, A Rating [Member]
Summary of Level 3 securities
Current Rating	A

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Consolidated Statements of Comprehensive Income (Parenthetical) (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Consolidated Statements of Comprehensive Income [Abstract]
Unrealized net holding gains, on available-for-sale portfolios, tax	$ 49	$ 311	$ 47	$ 497

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Loans, Allowance for Credit Losses and Credit Quality (Details 1) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Maturity and rate repricing distribution of the loan portfolio
Repricing or maturing within one year	$ 91,522	$ 100,804
Maturing over one to five years	133,440	132,637
Maturing over five years	60,107	57,340
Total Loans	$ 285,069	$ 290,781

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Loans, Allowance for Credit Losses and Credit Quality (Tables)

9 Months Ended

Sep. 30, 2012

Loans, Allowance for Credit Losses and Credit Quality [Abstract]

Major classification of loans

	September 30, 2012			December 31, 2011
Commercial	$	43,060		$	47,683
Real estate
Commercial		115,455			114,883
Construction		37,602			35,026
One to four-family		48,052			48,314
Home equity		32,942			36,005
Consumer		7,958			8,870
		285,069			290,781
Deferred loan fees, net		(320	)		(315	)
Allowance for credit losses		(6,647	)		(7,182	)
		(6,967	)		(7,497	)
Loans, net	$	278,102		$	283,284

Maturity and rate repricing distribution of the loan portfolio

Repricing or maturing within one year	$	91,522	$	100,804
Maturing over one to five years		133,440		132,637
Maturing over five years		60,107		57,340
	$	285,069	$	290,781

Allowance for credit losses and recorded investment in loans receivable

	for the Three Months Ended September 30, 2012
(Dollars in thousands)	Commercial			Commercial Real Estate			Residential			Consumer		Unallocated		Total
Allowance for credit losses
Beginning balance, June 30, 2012	$	1,043		$	3,962		$	1,647		$	256	$	0	$	6,908
Charge-offs		325			0			0			0		0		325
Recoveries		4			0			24			7		0		35
Provision		(27	)		(127	)		(11	)		194		0		29
Ending balance, September 30, 2012	$	695		$	3,835		$	1,660		$	457	$	0	$	6,647

	for the Nine Months Ended September 30, 2012
	Commercial			Commercial Real Estate			Residential		Consumer		Unallocated		Total
Allowance for credit losses
Beginning balance, December 31, 2011	$	1,387		$	3,972		$	1,422	$	401	$	0	$	7,182
Charge-offs		357			0			340		230		0		927
Recoveries		32			0			35		19		0		86
Provision		(367	)		(137	)		543		267		0		306
Ending balance, September 30, 2012	$	695		$	3,835		$	1,660	$	457	$	0	$	6,647
Period ending amount: Individually evaluated for impairment	$	56		$	1,181		$	1,009	$	285	$	0	$	2,531
Period ending amount: Collectively evaluated for impairment	$	639		$	2,654		$	651	$	172	$	0	$	4,116
Period ending amount: Loans acquired with deteriorating credit quality	$	0		$	0		$	0	$	0	$	0	$	0
Loans individually evaluated for impairment	$	856		$	2,676		$	2,665	$	721	$	0	$	6,918
Loans collectively evaluated for impairment	$	42,204		$	150,381		$	78,329	$	7,237	$	0	$	278,151

	for the Three Months Ended September 30, 2011
(Dollars in thousands)	Commercial		Commercial Real Estate		Residential		Consumer			Unallocated		Total
Allowance for credit losses
Beginning balance, June 30, 2011	$	1,403	$	4,077	$	1,394	$	398		$	0	$	7,272
Charge-offs		100		0		0		4			0		104
Recoveries		3		0		1		7			0		11
Provision		74		214		56		(6	)		0		338
Ending balance, September 30, 2011	$	1,380	$	4,291	$	1,451	$	395		$	0	$	7,517

	for the Nine Months Ended September 30, 2011
	Commercial		Commercial Real Estate		Residential		Consumer			Unallocated		Total
Allowance for credit losses
Beginning balance, December 31, 2010	$	1,868	$	3,205	$	1,257	$	523		$	0	$	6,853
Charge-offs		872		49		133		140			0		1,194
Recoveries		13		0		254		17			0		284
Provision		371		1,135		73		(5	)		0		1,574
Ending balance, September 30, 2011	$	1,380	$	4,291	$	1,451	$	395		$	0	$	7,517
Period ending amount: Individually evaluated for impairment	$	113	$	1,382	$	507	$	164		$	0	$	2,166
Period ending amount: Collectively evaluated for impairment	$	1,267	$	2,909	$	944	$	231		$	0	$	5,351
Period ending amount: Loans acquired with deteriorating credit quality	$	0	$	0	$	0	$	0		$	0	$	0
Loans individually evaluated for impairment	$	932	$	6,664	$	1,906	$	297		$	0	$	9,799
Loans collectively evaluated for impairment	$	49,122	$	142,400	$	84,099	$	9,025		$	0	$	284,646

Credit quality indicators

(Dollars in thousands)
			Commercial Real Estate
	Commercial		Construction		Other
	2012		2012		2012
Risk Rating:
Pass	$	39,110	$	32,511	$	98,389
Other Assets Especially Mentioned		2,012		2,083		14,802
Substandard		1,938		1,856		1,014
Doubtful		0		1,152		1,250
	$	43,060	$	37,602	$	115,455

	Residential		Consumer Installment
	2012		2012
Risk Rating:
Pass	$	71,732	$	6,913
Other Assets Especially Mentioned		4,514		403
Substandard		3,323		623
Doubtful		1,425		19
	$	80,994	$	7,958

Credit Quality Indicators

as of December 31, 2011

(Dollars in thousands)
			Commercial Real Estate
	Commercial		Construction		Other
	2011		2011		2011
Risk Rating:
Pass	$	41,899	$	29,456	$	102,495
Other Assets Especially Mentioned		2,181		2,432		7,944
Substandard		3,571		1,986		3,194
Doubtful		32		1,152		1,250
	$	47,683	$	35,026	$	114,883

	Residential		Consumer Installment
	2011		2011
Risk Rating:
Pass	$	78,402	$	8,017
Other Assets Especially Mentioned		1,867		290
Substandard		2,632		348
Doubtful		1,418		215
	$	84,319	$	8,870

Age analysis of past due loans receivable

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment 90 Days and Accruing
2012
Commercial	$	4,404	$	225	$	147	$	4,776	$	38,284	$	43,060	$	0
Commercial Real Estate
Construction		174		0		1,152		1,326		36,276		37,602		0
Other		868		0		0		868		114,587		115,455		0
Residential		538		316		2,461		3,315		77,679		80,994		468
Consumer		67		75		598		740		7,218		7,958		0
	$	6,051	$	616	$	4,358	$	11,025	$	274,044	$	285,069	$	468

Age Analysis of Past Due Loans Receivable

As of December 31, 2011

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment 90 Days and Accruing
2011
Commercial	$	0	$	32	$	178	$	210	$	47,473	$	47,683	$	0
Commercial Real Estate
Construction		229		0		1,152		1,381		33,645		35,026		0
Other		482		0		0		482		114,401		114,883		0
Residential		687		0		1,972		2,659		81,660		84,319		0
Consumer		23		0		342		365		8,505		8,870		0
	$	1,421	$	32	$	3,644	$	5,097	$	285,684	$	290,781	$	0

Impaired loans

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial	$	898	$	898	$	0
Commercial real estate		274		274		0
Residential real estate		697		697		0
Consumer		71		71		0
		1,940		1,940		0
With an allowance recorded
Commercial		105		105		56
Commercial real estate		2,402		2,402		1,181
Residential real estate		2,664		2,664		1,009
Consumer		722		722		285
		5,893		5,893		2,531
Total
Commercial		1,003		1,003		56
Commercial real estate		2,676		2,676		1,181
Residential real estate		3,361		3,361		1,009
Consumer		793		793		285
	$	7,833	$	7,833	$	2,531

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial	$	242	$	242	$	0
Commercial real estate		0		0		0
Residential real estate		1,074		1,074		0
Consumer		195		195		0
		1,511		1,511		0
With an allowance recorded
Commercial		1,156		1,156		195
Commercial real estate		2,444		2,444		731
Residential real estate		1,981		1,981		475
Consumer		289		289		161
		5,870		5,870		1,562
Total
Commercial		1,398		1,398		195
Commercial real estate		2,444		2,444		731
Residential real estate		3,055		3,055		475
Consumer		484		484		161
	$	7,381	$	7,381	$	1,562

Average recorded investment and interest income recognized on impaired loans

	Three Months Ended September 30, 2012				Three Months Ended September 30, 2011
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	905	$	4	$	870	$	10
Commercial real estate		380		4		657		0
Residential real estate		382		4		1,542		26
Consumer		65		0		199		3
		1,732		12		3,268		39
With an allowance recorded
Commercial		324		14	$	355	$	1
Commercial real estate		2,415		4		5,318		8
Residential real estate		2,670		15		1,638		5
Consumer		358		3		209		6
		5,767		36		7,520		20
Total
Commercial	$	1,229		18	$	1,225	$	11
Commercial real estate		2,795		8		5,975		8
Residential real estate		3,052		19		3,180		31
Consumer		423		3		408		9
	$	7,499	$	48	$	10,788	$	59

	Nine Months Ended September 30, 2012				Nine Months Ended September 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(Dollars in thousands)
With no related allowance recorded
Commercial	$	504	$	4	$	1,095	$	46
Commercial real estate		329		7		795		0
Residential real estate		589		8		1,500		60
Consumer		70		1		208		7
		1,492		20		3,598		113
With an allowance recorded
Commercial		757		59		583		68
Commercial real estate		3,711		38		3,037		232
Residential real estate		2,407		41		1,593		56
Consumer		247		11		210		17
		7,122		149		5,423		373
Total
Commercial		1,261		63		1,678		114
Commercial real estate		4,040		45		3,832		232
Residential real estate		2,996		49		3,093		116
Consumer		317		12		418		24
	$	8,614	$	169	$	9,021	$	486

Troubled debt restructurings

	Modifications made during the year ended December 31, 2011
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial		3	$	840	$	840
Commercial Real Estate		2		1,863		1,298
Residential Real Estate		3		453		453
Consumer		1		46		46
		9	$	3,202	$	2,637

	Number of Contracts		Recorded Investment
Troubled Debt Restructurings that Subsequently Defaulted
Commercial		0	$	0
Commercial Real Estate		0		0
Residential Real Estate		0		0
Consumer		0		0
		0	$	0

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Loans, Allowance for Credit Losses and Credit Quality (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Allowance for credit losses and recorded investment in loans receivable
Beginning balance	$ 6,908	$ 7,272	$ 7,182	$ 6,853
Charge-offs	325	104	927	1,194
Recoveries	35	11	86	284
Provision	29	338	306	1,574
Ending balance	6,647	7,517	6,647	7,517
Allowance for credit losses:
Period ending amount: Individually evaluated for impairment	2,531	2,166	2,531	2,166
Period ending amount: Collectively evaluated for impairment	4,116	5,351	4,116	5,351
Loans:
Period ending amount: Loans acquired with deteriorating credit quality	0	0	0	0
Loans individually evaluated for impairment	6,918	9,799	6,918	9,799
Loans collectively evaluated for impairment	278,151	284,646	278,151	284,646
Commercial [Member]
Allowance for credit losses and recorded investment in loans receivable
Beginning balance	1,043	1,403	1,387	1,868
Charge-offs	325	100	357	872
Recoveries	4	3	32	13
Provision	(27)	74	(367)	371
Ending balance	695	1,380	695	1,380
Allowance for credit losses:
Period ending amount: Individually evaluated for impairment	56	113	56	113
Period ending amount: Collectively evaluated for impairment	639	1,267	639	1,267
Loans:
Period ending amount: Loans acquired with deteriorating credit quality	0	0	0	0
Loans individually evaluated for impairment	856	932	856	932
Loans collectively evaluated for impairment	42,204	49,122	42,204	49,122
Commercial real estate [Member]
Allowance for credit losses and recorded investment in loans receivable
Beginning balance	3,962	4,077	3,972	3,205
Charge-offs	0	0	0	49
Recoveries	0	0	0	0
Provision	(127)	214	(137)	1,135
Ending balance	3,835	4,291	3,835	4,291
Allowance for credit losses:
Period ending amount: Individually evaluated for impairment	1,181	1,382	1,181	1,382
Period ending amount: Collectively evaluated for impairment	2,654	2,909	2,654	2,909
Loans:
Period ending amount: Loans acquired with deteriorating credit quality	0	0	0	0
Loans individually evaluated for impairment	2,676	6,664	2,676	6,664
Loans collectively evaluated for impairment	150,381	142,400	150,381	142,400
Residential [Member]
Allowance for credit losses and recorded investment in loans receivable
Beginning balance	1,647	1,394	1,422	1,257
Charge-offs	0	0	340	133
Recoveries	24	1	35	254
Provision	(11)	56	543	73
Ending balance	1,660	1,451	1,660	1,451
Allowance for credit losses:
Period ending amount: Individually evaluated for impairment	1,009	507	1,009	507
Period ending amount: Collectively evaluated for impairment	651	944	651	944
Loans:
Period ending amount: Loans acquired with deteriorating credit quality	0	0	0	0
Loans individually evaluated for impairment	2,665	1,906	2,665	1,906
Loans collectively evaluated for impairment	78,329	84,099	78,329	84,099
Consumer [Member]
Allowance for credit losses and recorded investment in loans receivable
Beginning balance	256	398	401	523
Charge-offs	0	4	230	140
Recoveries	7	7	19	17
Provision	194	(6)	267	(5)
Ending balance	457	395	457	395
Allowance for credit losses:
Period ending amount: Individually evaluated for impairment	285	164	285	164
Period ending amount: Collectively evaluated for impairment	172	231	172	231
Loans:
Period ending amount: Loans acquired with deteriorating credit quality	0	0	0	0
Loans individually evaluated for impairment	721	297	721	297
Loans collectively evaluated for impairment	7,237	9,025	7,237	9,025
Unallocated [Member]
Allowance for credit losses and recorded investment in loans receivable
Beginning balance	0	0	0	0
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	0	0	0	0
Ending balance	0	0	0	0
Allowance for credit losses:
Period ending amount: Individually evaluated for impairment	0	0	0	0
Period ending amount: Collectively evaluated for impairment	0	0	0	0
Loans:
Period ending amount: Loans acquired with deteriorating credit quality	0	0	0	0
Loans individually evaluated for impairment	0	0	0	0
Loans collectively evaluated for impairment	$ 0	$ 0	$ 0	$ 0

XML

Business (Details)	Sep. 30, 2012 Branches
Anne Arundel County [Member]
Business (Textual) [Abstract]
Number of branches	6
Kent Island in Queen Anne's County [Member]
Business (Textual) [Abstract]
Number of branches	1

XML

Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities
Net income	$ 2,856	$ 1,502
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	371	466
Amortization of premiums and accretions of discounts, net	197	230
Provision for credit losses	306	1,574
Provisions for loss, other real estate owned	28	37
Origination of loans held for sale	0	(8,186)
Proceeds from sale of loans held for sale	0	9,730
Stock based compensation	64	87
Deferred income taxes	180	(321)
Earnings on life insurance policies	(159)	(137)
Gain on sale of loans held for sale	0	(165)
Loss (Gain) on sale of real estate owned and repossessed assets	12	(8)
Loss on write- down and disposal of fixed assets	0	230
(Increase) decrease in:
Accrued interest receivable	(71)	264
Prepaid FDIC insurance	244	351
Other assets	(217)	423
Increase (decrease) in:
Accrued interest payable	(31)	(10)
Accrued income taxes, net of taxes refundable	(78)	403
Deferred loan origination fees	5	(123)
Other liabilities	201	428
Net cash provided by operating activities	3,908	6,775
Cash flows from investing activities
Proceeds from sales and maturities of securities available for sale	29,347	35,468
Purchase of securities available for sale	(33,524)	(23,042)
Net decrease (increase) in federal funds sold	26,572	(9,640)
Net (increase) decrease in interest bearing balances with banks	(21,708)	178
Net decrease (increase) in loans receivable, net	4,485	(16,411)
Improvements to other real estate owned and repossessed assets	(41)	0
Purchase of premises and equipment, net of disposals	(1,778)	(365)
Proceeds from sales of real estate owned and repossessed assets	964	502
Net cash provided by (used in) investing activities	4,317	(13,310)
Net (decrease) increase in:
Time deposits	(7,244)	1,349
Other deposits	(4,322)	(2,179)
Securities sold under agreements to repurchase	7,551	1,597
Redemption of preferred stock	(4,076)	0
Proceeds from stock options exercised	0	14
Proceeds from issuance of common stock	5	6
Payment of preferred stock dividend	(214)	(305)
Net cash (used in) provided by financing activities	(8,300)	482
Net decrease in cash	(75)	(6,053)
Cash and cash equivalents, beginning of period	2,026	7,854
Cash and cash equivalents, end of period	1,951	1,801
Supplemental cash flow information
Interest paid, including interest credited to accounts	2,468	3,078
Income taxes paid	1,862	1,167
Non-cash investing activities
Transfers from loans to real estate owned	288	25
Transfers from loans to other assets	$ 98	$ 20

XML

Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Allowance for credit losses	$ 6,647	$ 7,182
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, Series A, liquidation preference, per share	$ 1,000	$ 1,000
Preferred stock, Series A, shares issued	4,076	8,152
Preferred stock, Series A, shares outstanding	4,076	8,152
Preferred stock, discount on shares	$ 0	$ 6
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	3,975,471	3,958,293
Common stock, shares outstanding	3,975,471	3,958,293

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Subsequent Events

9 Months Ended

Sep. 30, 2012

Subsequent Events [Abstract]

Subsequent Events

Note J – Subsequent Events

Opening of a New Branch

On October 15, 2012, the Bank opened a new branch in Waugh Chapel Towne Centre located in Gambrills, Maryland.

Entry into Agreement and Plan of Merger

On October 22, 2012, the Company and F.N.B. Corporation (“FNB”) the parent company of First National Bank of Pennsylvania (“FNB Bank”), entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which the Company will merge with and into FNB. Promptly following consummation of the merger, it is expected that the Bank will merge with and into FNB Bank.

Under the terms of the Merger Agreement, the Company’s shareholders will receive 1.143 shares (the “Exchange Ratio”) of FNB common stock for each share of common stock they own. In addition, a cash credit related adjustment provides that shareholders of the Company may receive up to an additional $0.36 per share in cash for each share of the Company’s common stock they own, dependent on the Company’s ability to resolve an agreed-upon credit matter. The Merger Agreement also provides that all options to purchase the Company’s stock which are outstanding and unexercised immediately prior to the closing shall be converted into fully vested and exercisable options to purchase shares of FNB common stock, as adjusted for the Exchange Ratio.

The Merger Agreement provides that each outstanding share of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “TARP Preferred”), unless repurchased or redeemed prior to the merger, will be converted into the right to receive one share of FNB preferred stock with substantially the same rights, powers and preferences as the TARP Preferred. The outstanding warrant (the “TARP Warrant”) to purchase the Company’s common stock, which was issued on January 30, 2009 to the United States Department of the Treasury will be converted into a warrant to purchase FNB common stock, subject to appropriate adjustments to reflect the Exchange Ratio. Subject to the receipt of requisite regulatory approvals, the parties have agreed to use their best efforts to have the TARP Preferred either purchased by FNB or one of its subsidiaries, in which case it is expected to be extinguished upon consummation of the merger, or repurchased or redeemed by the Company. FNB also may elect to have the TARP Warrant purchased, redeemed or repurchased.

Consummation of the merger is subject to certain conditions, including, among others, approval of the merger by the Company’s common shareholders, governmental filings and regulatory approvals and expiration of applicable waiting periods, accuracy of specified representations and warranties of the other party, effectiveness of the registration statement to be filed by FNB with the SEC to register shares of FNB common stock to be offered to the Company shareholders, absence of a material adverse effect, receipt of tax opinions, and the absence of any injunctions or other legal restraints.

For more information about the merger and Merger Agreement, please see our Current Report on Form 8-K and 8-K/A, filed October 22, 2012 and October 23, 2012, respectively. Further information concerning the proposed merger will be included in a joint proxy statement/prospectus which will be filed with the Securities and Exchange Commission in connection with the merger.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Oct. 31, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	ANNAPOLIS BANCORP INC
Entity Central Index Key	0001041429
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		3,975,601

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New Accounting Pronouncements (Policies)

9 Months Ended

Sep. 30, 2012

New Accounting Pronouncements [Abstract]

Disclosures about Offsetting Assets and Liabilities

In December, 2011 FASB issued ASU 2011-11, “Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Company’s financial statements.

Comprehensive Income

In December, 2011 FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 were effective for annual and interim periods beginning after December 15, 2011. The Company has adopted ASU 2011-12 and it did not have a material impact on the Company’s financial statements.

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Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Interest and dividend income
Loans, including fees	$ 4,338	$ 4,348	$ 12,817	$ 12,807
Interest bearing balances with banks	9	4	24	13
Federal funds sold and other overnight investments	9	12	31	27
Mortgage-backed securities	264	363	863	1,081
U. S. Government agencies securities	219	245	635	870
State and municipal securities	9	11	32	33
Equity securities	21	21	71	60
Total interest and dividend income	4,869	5,004	14,473	14,891
Interest expense
Certificates of deposit, $100,000 or more	140	144	435	415
Other deposits	227	397	768	1,314
Securities sold under agreements to repurchase	13	18	36	59
Interest on long-term borrowings	330	328	985	974
Total interest expense	710	887	2,224	2,762
Net interest income	4,159	4,117	12,249	12,129
Provision for credit losses	29	338	306	1,574
Net interest income after provision for credit losses	4,130	3,779	11,943	10,555
Noninterest income
Service charges and fees on deposits	309	322	903	938
Mortgage banking fees	111	59	207	76
Other fee income	130	229	313	227
Gain on sale of loans	0	18	0	165
(Loss) gain on sale of real estate owned and repossessed assets	(41)	31	(12)	8
Loss on disposal of fixed assets	0	0	0	(31)
Total noninterest income	509	659	1,411	1,383
Noninterest expense
Personnel	1,620	1,826	4,927	5,301
Occupancy and equipment	361	360	1,108	1,204
Data processing	209	214	629	635
Legal and professional fees	117	138	385	363
Marketing	50	63	267	295
FDIC Insurance	88	57	256	338
Other operating expenses	403	737	1,207	1,518
Total noninterest expense	2,848	3,395	8,779	9,654
Income before income taxes	1,791	1,043	4,575	2,284
Income tax expense	680	375	1,719	782
Net income	1,111	668	2,856	1,502
Preferred stock dividend and discount accretion	51	123	220	367
Net income available to common shareholders	$ 1,060	$ 545	$ 2,636	$ 1,135
Basic earnings per common share	$ 0.27	$ 0.14	$ 0.66	$ 0.29
Basic weighted average shares	3,975,395	3,952,772	3,973,132	3,947,233
Diluted earnings per common share	$ 0.26	$ 0.14	$ 0.65	$ 0.29
Diluted weighted average shares	4,122,664	3,954,688	4,084,417	3,954,842

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Investment Securities

9 Months Ended

Sep. 30, 2012

Investment Securities [Abstract]

Investment Securities

Note E – Investment Securities

Investment securities are summarized as follows:

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
September 30, 2012
Available for sale
U.S. Government agency	$	51,603	$	344	$	0	$	51,947
State and municipal		961		68		0		1,029
Residential mortgage-backed securities		36,821		1,362		68		38,115
Other equity securities		635		51		0		686
	$	90,020	$	1,825	$	68	$	91,777
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
December 31, 2011
Available for sale
U.S. Government agency	$	47,782	$	306	$	56	$	48,032
State and municipal		1,077		59		0		1,136
Residential mortgage-backed securities		36,435		1,372		82		37,725
Other equity securities		618		38		0		656
	$	85,912	$	1,775	$	138	$	87,549

The amortized cost and estimated fair value of securities by contractual maturities at September 30, 2012 are shown below. Actual maturities of these securities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

	September 30, 2012
	Available for Sale
	Amortized Cost		Estimated Fair Value
(dollars in thousands)
Due within one year	$	0	$	0
Due after one through five years		26,910		27,063
Due after five through ten years		23,609		23,911
Due after ten years		38,866		40,117
Equity securities		635		686
	$	90,020	$	91,777

The following table shows the level of the Company’s gross unrealized losses and the fair value of the associated securities by type and maturity for securities available for sale at September 30, 2012 and December 31, 2011.

	Less than 12 months				12 months or more				Total
September 30, 2012	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
(dollars in thousands)
Residential mortgage-backed securities	$	3,818	$	11	$	1,460	$	57	$	5,278	$	68
	$	3,818	$	11	$	1,460	$	57	$	5,278	$	68

	Less than 12 months				12 months or more				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
December 31, 2011
(dollars in thousands)
U. S. Government Agency	$	16,044	$	56	$	0	$	0	$	16,044	$	56
Residential mortgage-backed securities		0		0		1,854		82		1,854		82
	$	16,044	$	56	$	1,854	$	82	$	17,898	$	138

The unrealized losses that exist are the result of market changes in interest rates since the original purchase. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2012. The Company has used a variety of tools to analyze the contents of its security portfolio and at this time does not believe that the unrealized losses in the portfolio shown in the table above are other than temporary. At September 30, 2012 mortgaged-backed securities with a fair market value of $1.5 million carried bond ratings below investment grade. These securities were evaluated by an independent third-party consulting firm using an expected cash flow model that includes assumptions related to prepayment rates, default trends, and loss severity, and were deemed by management not to be other-than-temporarily impaired at September 30, 2012. At September 30, 2012, both securities were current on both principal and interest payments.

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Earnings Per Share

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Abstract]

Earnings Per Share

Note D – Earnings Per Share

Information regarding earnings per share is summarized as follows:

Computation of Earnings Per Share

(in thousands, except Earnings Per Share and share data)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2012		2011		2012		2011
Net income available to common shareholders	$	1,060	$	545	$	2,636	$	1,135
Weighted average common shares outstanding		3,975,395		3,952,772		3,973,132		3,947,233
Basic Earnings Per Common Share	$	0.27	$	0.14	$	0.66	$	0.29
Net income available to common shareholders	$	1,060	$	545	$	2,636	$	1,135
Weighted average common shares outstanding		3,975,395		3,952,772		3,973,132		3,947,233
Effect of potential dilutive common shares		147,269		1,916		111,285		7,609
Total weighted average diluted common shares outstanding		4,122,664		3,954,688		4,084,417		3,954,842
Diluted Earnings Per Common Share	$	0.26	$	0.14	$	0.65	$	0.29

Basic earnings per common share are calculated using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share are calculated using the weighted-average number of shares of common stock plus dilutive potential shares of common stock outstanding during the period. Potential common shares consist of stock options and restricted stock, restricted share units and warrants. For the three months ended September 30, 2012 and 2011, 50,081 and 95,609 shares of common stock, respectively, attributable to outstanding stock options, restricted stock, restricted share units and warrants were excluded from the calculations of diluted earnings per share because their effect was anti-dilutive. For the nine months ended September 30, 2012 and 2011, 50,081 and 395,509 shares of common stock, respectively, attributable to outstanding stock options, restricted stock, restricted share units and warrants were excluded from the calculations of diluted earnings per share because their effect was anti-dilutive.

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Assets measured at fair value on a recurring basis

			Fair Value Measurements of Assets
(dollars in thousands)			at September 30, 2012 Using
Description	Fair Value September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Investment Securities Available for Sale
Debt securities
Issued by U. S. Government agencies	$	51,947	$	0	$	51,947	$	0	$	0
Issued by State and municipal		1,029		0		1,029		0		0
Mortgage-backed securities issued by Government agencies		36,655		0		36,655		0		0
Private label mortgage-backed securities		1,460		0		0		1,460		0
Total Debt Securities		91,091		0		89,631		1,460		0
Equity securities
Mutual funds		686		0		686		0		0
Total Equity Securities		686		0		686		0		0
Total Investment Securities Available for Sale	$	91,777	$	0	$	90,317	$	1,460	$	0

(dollars in thousands)			Fair Value Measurements of Assets at December 31, 2011 Using
Description	Fair Value December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Investment Securities Available for Sale
Debt securities
Issued by U.S. Government agencies	$	48,032	$	0	$	48,032	$	0	$	0
Issued by State and municipal		1,136		0		1,136		0		0
Mortgage-backed securities issued by Government agencies		35,870		0		35,870		0		0
Private label mortgage-backed securities		1,855		0		0		1,855		0
Total Debt Securities		86,893		0		85,038		1,855		0
Equity Securities
Mutual funds		656		0		656		0		0
Total Equity Securities		656		0		656		0		0
Total Investment Securities Available for Sale	$	87,549	$	0	$	85,694	$	1,855	$	0

Fair value measurements using significant unobservable inputs (Level 3)

Investment Securities Available for Sale – Debt Securities
Beginning Balance at December 31, 2011	$	1,855
Transfers in to Level 3		0
Transfers out of Level 3		0
Unrealized gains		24
Repayments		(419	)
Ending Balance at September 30, 2012	$	1,460

Investment Securities Available for Sale – Debt Securities
Beginning Balance at December 31, 2010	$	2,401
Transfers in to Level 3		0
Transfers out of Level 3		0
Unrealized gains		100
Repayments		(646	)
Ending Balance at December 31, 2011	$	1,855

Summary of level 3 securities

				Remaining		Current Rating
(in thousands)	Class		Coupon	Par Value		Moody’s	Fitch
CWHL 2005-21		A13	5.5% Fixed	$	104	B3	CC
WFMBS 2005-14		IA7	5.5% Fixed	$	1,412	Ca	A*-

September 30, 2012	Cumulative Default (1)			Weighted Average Life (2)		Modified Duration (3)		Yield (4)
CWHL 2005-21		3.63	%		0.29 years		0.27 years		8.00	%
WFMBS 2005-14		2.77	%		1.73 years		1.50 years		8.00	%

December 31, 2011	3 Month Cumulative Default (1)			Weighted Average Life (2)		Modified Duration (3)		Yield (4)
CWHL 2005-21		3.04	%		0.65 years		0.59 years		8.00	%
WFMBS 2005-14		3.84	%		2.10 years		1.80 years		8.00	%

Assets measured at fair value on a nonrecurring basis

(in thousands)			Fair Value Measurements at September 30, 2012 Using
Description	Fair Value September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Loans
Impaired loans
Commercial	$	947	$	0	$	947	$	0	$	0
Commercial real estate		890		0		890		0		0
Residential real estate		2,352		0		2,352		0		0
Construction		606		0		606		0		0
Consumer		507		0		507		0		0
Total impaired loans		5,302		0		5,302		0		0
Real estate owned		697		0		697		0		0
Other assets (repossessed assets)		0		0		0		0		0
Total Assets Measured at Fair Value on a Nonrecurring Basis	$	5,999	$	0	$	5,999	$	0	$	0

(in thousands)			Fair Value Measurements at December 31, 2011 Using
Description	Fair Value December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Loans
Impaired loans
Commercial	$	1,202	$	0	$	1,202	$	0	$	0
Commercial real estate		995		0		995		0		0
Residential real estate		2,580		0		2,580		0		0
Construction		719		0		719		0		0
Consumer		323		0		323		0		0
Total impaired loans		5,819		0		5,819		0		0
Real estate owned		1,222		0		1,222		0		0
Other assets (repossessed assets)		52		0		52		0		0
Total Assets Measured at Fair Value on a Nonrecurring Basis	$	7,093	$	0	$	7,093	$	0	$	0

Summary of estimated fair value of financial instruments

	September 30, 2012				December 31, 2011
(dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Level 2 inputs:
Cash and due from banks	$	1,951	$	1,951	$	2,026	$	2,026
Interest bearing balances with banks		39,996		39,996		18,288		18,288
Federal funds sold		11		11		26,583		26,583
Investment securities		90,317		90,317		85,694		85,694
Federal Reserve and Federal Home Loan Bank stock		2,864		2,864		2,992		2,992
Loans and loans held for sale, net		278,102		278,279		283,284		283,667
Accrued interest receivable		1,350		1,350		1,279		1,279
Bank owned life insurance		5,783		5,783		5,624		5,624
Real estate owned		697		697		1,222		1,222
Level 3 inputs:
Other debt securities		1,460		1,460		1,855		1,855
Financial liabilities
Level 2 inputs:
Noninterest bearing deposits	$	57,314	$	57,314	$	56,664	$	56,664
Interest bearing deposits		281,501		282,647		293,717		298,788
Securities sold under agreements to repurchase		18,895		18,895		11,344		11,344
Long-term borrowings		35,000		31,086		35,000		31,357
Junior subordinated debt		5,000		5,000		5,000		5,000
Accrued dividends and interest payable		188		188		219		219

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Stock Based Compensation (Tables)

9 Months Ended

Sep. 30, 2012

Stock Based Compensation [Abstract]

Schedule of stock option activity

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic  Value ($000)
Outstanding at December 31, 2011		92,302		$	7.22
Grants		0			0.00
Exercised		0			0.00
Forfeitures		(8,888	)		9.30
Expired		0			0.00
Outstanding as of September 30, 2012		83,414		$	7.00
Exercisable at September 30, 2012		83,414		$	7.00		1.8	$	97
Outstanding at December 31, 2010		124,270		$	6.06
Grants		0			0.00
Exercised		(5,333	)		2.64
Forfeitures		0			0.00
Expired		(22,374	)		2.64
Outstanding as of September 30, 2011		96,563		$	7.05
Exercisable at September 30, 2011		95,721		$	7.03		2.8	$	4

Schedule of restricted stock activity

	Shares			Weighted Average Grant Price
Outstanding at December 31, 2011		57,282		$	3.86
Grants		16,268			4.30
Issued		(16,282	)		4.29
Forfeitures		(13,662	)		4.10
Outstanding as of September 30, 2012		43,606		$	3.84
Outstanding at December 31, 2010		68,384		$	3.66
Grants		17,782			4.34
Issued		(26,384	)		3.75
Forfeitures		0			0
Outstanding as of September 30, 2011		59,782		$	3.86

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Preferred Stock

9 Months Ended

Sep. 30, 2012

Preferred Stock [Abstract]

Preferred Stock

Note H – Preferred Stock

The Company is authorized to issue up to 5,000,000 shares of preferred stock with a par value of $.01 per share. On January 30, 2009 the Company completed a transaction to participate in the Government sponsored Troubled Asset Relief Program (“TARP”) which resulted in the Treasury purchasing 8,152 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) at a value of $8.2 million. The Series A Preferred Stock qualifies as Tier 1 Capital. On April 18, 2012, Annapolis Bancorp, Inc. (the “Company”) redeemed 4,076 shares of its Series A Preferred Stock for $4,076,000. Following the redemption, 4,076 shares of Series A Preferred Stock remain outstanding totaling $4,076,000. The Series A Preferred Stock pays a dividend of 5% per annum; payable quarterly for five years then pays a dividend of 9% per annum thereafter. Dividends declared for each of the nine months ended September 30, 2012 and 2011 was $214,000 and $305,000, respectively.

The warrant is exercisable at $4.08 per share at any time on or before January 30, 2019. The number of shares of common stock issuable upon exercise of the warrant and the exercise price per share will be adjusted if specific events occur.

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Loans, Allowance for Credit Losses and Credit Quality

9 Months Ended

Sep. 30, 2012

Loans, Allowance for Credit Losses and Credit Quality [Abstract]

Loans, Allowance For Credit Losses And Credit Quality

Note F – Loans, Allowance For Credit Losses And Credit Quality

Major classifications of loans are as follows:

	September 30, 2012			December 31, 2011
Commercial	$	43,060		$	47,683
Real estate
Commercial		115,455			114,883
Construction		37,602			35,026
One to four-family		48,052			48,314
Home equity		32,942			36,005
Consumer		7,958			8,870
		285,069			290,781
Deferred loan fees, net		(320	)		(315	)
Allowance for credit losses		(6,647	)		(7,182	)
		(6,967	)		(7,497	)
Loans, net	$	278,102		$	283,284

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

Repricing or maturing within one year	$	91,522	$	100,804
Maturing over one to five years		133,440		132,637
Maturing over five years		60,107		57,340
	$	285,069	$	290,781

The Company’s goal is to mitigate risks inherent in the loan portfolio. Commercial loans and loans secured by real estate make up the majority of the loan portfolio, accounting for 97% of the portfolio as of September 30, 2012 and December 31, 2011. To mitigate risk, commercial loans are generally secured by receivables, inventories, equipment and other assets of the business. Personal guarantees of the borrowers are generally required.

Loans secured by commercial real estate properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting standards, which require such loans to be qualified on the basis of the property’s value, debt service coverage ratio, and, under certain circumstances, additional collateral. The Bank generally also requires personal guarantees on its commercial real estate 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.

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. The origination of adjustable-rate residential mortgage loans, as opposed to fixed-rate residential mortgage loans, helps to reduce the Bank’s exposure to increases in interest rates. However, adjustable-rate loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. Periodic and lifetime caps on interest rate increases help to reduce the risks associated with the Bank’s adjustable-rate loans, but also limit the interest rate sensitivity of its adjustable-rate mortgage loans.

Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

The Bank’s allowance for credit losses is established through a provision for loan losses based on management’s evaluation of the risks inherent in its loan portfolio and the general economy.

The determination of the allowance for loan losses is based on the Bank’s historical loss experience and ten (10) qualitative factors for specific categories and types of loans. The Bank’s historical 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.

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.

The following table shows the allowance for credit losses and recorded investment in loans receivable for the three and nine month periods ended September 30, 2012:

Allowance for Credit Losses and Recorded Investment in Loans Receivable

	for the Three Months Ended September 30, 2012
(Dollars in thousands)	Commercial			Commercial Real Estate			Residential			Consumer		Unallocated		Total
Allowance for credit losses
Beginning balance, June 30, 2012	$	1,043		$	3,962		$	1,647		$	256	$	0	$	6,908
Charge-offs		325			0			0			0		0		325
Recoveries		4			0			24			7		0		35
Provision		(27	)		(127	)		(11	)		194		0		29
Ending balance, September 30, 2012	$	695		$	3,835		$	1,660		$	457	$	0	$	6,647

	for the Nine Months Ended September 30, 2012
	Commercial			Commercial Real Estate			Residential		Consumer		Unallocated		Total
Allowance for credit losses
Beginning balance, December 31, 2011	$	1,387		$	3,972		$	1,422	$	401	$	0	$	7,182
Charge-offs		357			0			340		230		0		927
Recoveries		32			0			35		19		0		86
Provision		(367	)		(137	)		543		267		0		306
Ending balance, September 30, 2012	$	695		$	3,835		$	1,660	$	457	$	0	$	6,647
Period ending amount: Individually evaluated for impairment	$	56		$	1,181		$	1,009	$	285	$	0	$	2,531
Period ending amount: Collectively evaluated for impairment	$	639		$	2,654		$	651	$	172	$	0	$	4,116
Period ending amount: Loans acquired with deteriorating credit quality	$	0		$	0		$	0	$	0	$	0	$	0
Loans individually evaluated for impairment	$	856		$	2,676		$	2,665	$	721	$	0	$	6,918
Loans collectively evaluated for impairment	$	42,204		$	150,381		$	78,329	$	7,237	$	0	$	278,151

	for the Three Months Ended September 30, 2011
(Dollars in thousands)	Commercial		Commercial Real Estate		Residential		Consumer			Unallocated		Total
Allowance for credit losses
Beginning balance, June 30, 2011	$	1,403	$	4,077	$	1,394	$	398		$	0	$	7,272
Charge-offs		100		0		0		4			0		104
Recoveries		3		0		1		7			0		11
Provision		74		214		56		(6	)		0		338
Ending balance, September 30, 2011	$	1,380	$	4,291	$	1,451	$	395		$	0	$	7,517

	for the Nine Months Ended September 30, 2011
	Commercial		Commercial Real Estate		Residential		Consumer			Unallocated		Total
Allowance for credit losses
Beginning balance, December 31, 2010	$	1,868	$	3,205	$	1,257	$	523		$	0	$	6,853
Charge-offs		872		49		133		140			0		1,194
Recoveries		13		0		254		17			0		284
Provision		371		1,135		73		(5	)		0		1,574
Ending balance, September 30, 2011	$	1,380	$	4,291	$	1,451	$	395		$	0	$	7,517
Period ending amount: Individually evaluated for impairment	$	113	$	1,382	$	507	$	164		$	0	$	2,166
Period ending amount: Collectively evaluated for impairment	$	1,267	$	2,909	$	944	$	231		$	0	$	5,351
Period ending amount: Loans acquired with deteriorating credit quality	$	0	$	0	$	0	$	0		$	0	$	0
Loans individually evaluated for impairment	$	932	$	6,664	$	1,906	$	297		$	0	$	9,799
Loans collectively evaluated for impairment	$	49,122	$	142,400	$	84,099	$	9,025		$	0	$	284,646

Nonaccrual loans totaled approximately $6.1 million at September 30, 2012 and $6.2 million at December 31, 2011. There was one loan for $468,000 past due greater than 90 days and still accruing at September 30, 2012. At December 31, 2011, there were no loans past due greater than 90 days and still accruing. As of September 30, 2012, $2.5 million of loan loss allowances were allocated to all loans classified as impaired with $1.6 million of loan loss allowances allocated to all loans classified as impaired at December 31, 2011.

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management assigns a Risk Assessment Rating (“Risk Rating”) to extensions of credit based upon the degree of risk, the likelihood of repayment and the effect on the Bank’s safety and soundness. The Risk Rating, applied consistently, enables lending personnel and bank management to monitor the loan portfolio. The Risk Rating is an integral part of the bank’s loan loss provision formulation process and, properly maintained, the Risk Rating assessment can provide an early warning signal of deterioration in a credit.

The Company uses a risk rating matrix to assign a risk grade to each loan. The Risk Ratings are divided into five general categories:

1. Risk Ratings 1 - 6 are assigned to “Pass” credits.

2. Risk Rating 7 is assigned to “Pass” credits that are also considered “Watch” credits.

3. Risk Rating 8 is assigned to “Criticized” credits.

4. Risk Ratings 9 and 10 are assigned to “Classified” credits.

5. Risk Rating 11 is assigned to “Loss” credits.

A general description of the characteristics of the risk ratings are described below:

• Risk ratings 1, 2 and 3 – these ratings have the highest degree of probability of repayment. Borrowers in this category are established entities, well-positioned within their industry with a proven track record of solid financial performance. These ratings are usually reserved for the strongest customers of the Bank, who have strong capital, stable earnings and alternative sources of financing.

• Risk ratings 4 and 5 – these ratings have a below and average degree of risk. The customers have, generally strong to adequate net worth, stable earnings trends and strong to moderate liquidity.

• Risk rating 6 – this category represents an above average degree of risk as to repayment with minimal loss potential. Borrowers in this category generally exhibit adequate operating trends, satisfactory balance sheet trends, moderate leverage and adequate liquidity; however, there is minimal excess operating cushion.

• Risk rating 7 – this rating includes loans on management’s “Watch” list. Borrowers in this category generally exhibit characteristics of an acceptable/adequate credit, but may be experiencing income volatility, negative operating trends, and a more highly leveraged balance sheet.

• Risk rating 8 – this rating is for “Other Assets Especially Mentioned” in accordance with regulatory guidelines. This rating generally includes loans to borrowers with currently protected, but potentially weak assets that deserve management’s close attention.

• Risk rating 9 – this rating is for loans considered “Substandard” in accordance with regulatory guidelines. This rating represents assets inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness, or weaknesses, that jeopardize liquidation of the debt and are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

• Risk rating 10 – this rating is for loans considered “Doubtful” in accordance with regulatory guidelines. Borrowers in this category have all the weaknesses inherent in a “Substandard” credit with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly improbable.

• Risk rating 11 – this rating is for loans considered “Loss” in accordance with regulatory guidelines. This category represents loans that are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but simply it is neither practical nor desirable to defer writing off all or some portion of the credit, even though partial recovery may be effected in the future.

The following table presents credit quality indicators:

Credit Quality Indicators

as of September 30, 2012

(Dollars in thousands)
			Commercial Real Estate
	Commercial		Construction		Other
	2012		2012		2012
Risk Rating:
Pass	$	39,110	$	32,511	$	98,389
Other Assets Especially Mentioned		2,012		2,083		14,802
Substandard		1,938		1,856		1,014
Doubtful		0		1,152		1,250
	$	43,060	$	37,602	$	115,455

	Residential		Consumer Installment
	2012		2012
Risk Rating:
Pass	$	71,732	$	6,913
Other Assets Especially Mentioned		4,514		403
Substandard		3,323		623
Doubtful		1,425		19
	$	80,994	$	7,958

Credit Quality Indicators

as of December 31, 2011

(Dollars in thousands)
			Commercial Real Estate
	Commercial		Construction		Other
	2011		2011		2011
Risk Rating:
Pass	$	41,899	$	29,456	$	102,495
Other Assets Especially Mentioned		2,181		2,432		7,944
Substandard		3,571		1,986		3,194
Doubtful		32		1,152		1,250
	$	47,683	$	35,026	$	114,883

	Residential		Consumer Installment
	2011		2011
Risk Rating:
Pass	$	78,402	$	8,017
Other Assets Especially Mentioned		1,867		290
Substandard		2,632		348
Doubtful		1,418		215
	$	84,319	$	8,870

The following table presents an age analysis of past due loans receivable:

Age Analysis of Past Due Loans Receivable

As of September 30, 2012

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment 90 Days and Accruing
2012
Commercial	$	4,404	$	225	$	147	$	4,776	$	38,284	$	43,060	$	0
Commercial Real Estate
Construction		174		0		1,152		1,326		36,276		37,602		0
Other		868		0		0		868		114,587		115,455		0
Residential		538		316		2,461		3,315		77,679		80,994		468
Consumer		67		75		598		740		7,218		7,958		0
	$	6,051	$	616	$	4,358	$	11,025	$	274,044	$	285,069	$	468

Age Analysis of Past Due Loans Receivable

As of December 31, 2011

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment 90 Days and Accruing
2011
Commercial	$	0	$	32	$	178	$	210	$	47,473	$	47,683	$	0
Commercial Real Estate
Construction		229		0		1,152		1,381		33,645		35,026		0
Other		482		0		0		482		114,401		114,883		0
Residential		687		0		1,972		2,659		81,660		84,319		0
Consumer		23		0		342		365		8,505		8,870		0
	$	1,421	$	32	$	3,644	$	5,097	$	285,684	$	290,781	$	0

Total past due loans at September 30, 2012 increased $5.9 million to $11.0 million from $5.1 million as of December 31, 2011. The increase was primarily attributed to loans newly considered past due totalling $9.1 million and included one loan for $4.4 million that was past due at September 30, 2012 and current at December 31, 2011. Offsetting a portion of the increase in past due loans were payoffs and the return of loans to performing totaling $1.9 million, charge-offs of loans deemed uncollectible of $839,000 and transfers to real estate owned and repossessed assets of $378,000.

Loans are considered impaired when, based on current information it is probable that the Bank will not collect all principal and interest payments according to contractual terms. Generally, loans are considered impaired once principal and interest payments are past due and they are placed on non-accrual. When a loan is placed on nonaccrual status, the Bank shall debit all accrued and unpaid income outstanding on the account. Management also considers the financial condition of the borrower, cash flows of the loan and the value of the related collateral. Impaired loans do not include large groups of smaller balance homogeneous credits such as residential real estate and consumer installment loans, which are evaluated collectively for impairment. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (usually ninety days or less) provided eventual collection of all amounts due is expected. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Bank may measure impairment based on a loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. Interest payments on impaired loans are typically applied to principal unless collectability is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

The Company’s policy states that when the probability for full repayment of a loan is unlikely, the Bank will initiate a full charge-off or a partial write-down of the asset based upon the status of the loan.

Consumer loans less than $25,000 for which payments of principal and/or interest are past due ninety (90) days are charged-off and referred for collection. Consumer loans of $25,000 or more are evaluated for charge-off or partial write-down at the discretion of Bank management.

Any other loan over 120 days past due is evaluated for charge-off or partial write-down at the discretion of Bank management.

Generally, real estate secured loans are charged-off on a deficiency basis after liquidation of the collateral. Bank management may determine that when the full loan balance is clearly uncollectible and some loss is anticipated a charge-off or write-down is appropriate prior to liquidation of the collateral. An updated evaluation or appraisal of the property may be required to determine the appropriate level of charge-off or write-down.

The following tables presents a summary of impaired loans as of and for the nine months ended September 30, 2012 and as of December 31, 2011 and for the year then ended:

Impaired Loans

as of and for the Nine Month Period Ended September 30, 2012

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial	$	898	$	898	$	0
Commercial real estate		274		274		0
Residential real estate		697		697		0
Consumer		71		71		0
		1,940		1,940		0
With an allowance recorded
Commercial		105		105		56
Commercial real estate		2,402		2,402		1,181
Residential real estate		2,664		2,664		1,009
Consumer		722		722		285
		5,893		5,893		2,531
Total
Commercial		1,003		1,003		56
Commercial real estate		2,676		2,676		1,181
Residential real estate		3,361		3,361		1,009
Consumer		793		793		285
	$	7,833	$	7,833	$	2,531

Impaired Loans

as of December 31, 2011

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial	$	242	$	242	$	0
Commercial real estate		0		0		0
Residential real estate		1,074		1,074		0
Consumer		195		195		0
		1,511		1,511		0
With an allowance recorded
Commercial		1,156		1,156		195
Commercial real estate		2,444		2,444		731
Residential real estate		1,981		1,981		475
Consumer		289		289		161
		5,870		5,870		1,562
Total
Commercial		1,398		1,398		195
Commercial real estate		2,444		2,444		731
Residential real estate		3,055		3,055		475
Consumer		484		484		161
	$	7,381	$	7,381	$	1,562

The following presents information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended September 30, 2012				Three Months Ended September 30, 2011
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	905	$	4	$	870	$	10
Commercial real estate		380		4		657		0
Residential real estate		382		4		1,542		26
Consumer		65		0		199		3
		1,732		12		3,268		39
With an allowance recorded
Commercial		324		14	$	355	$	1
Commercial real estate		2,415		4		5,318		8
Residential real estate		2,670		15		1,638		5
Consumer		358		3		209		6
		5,767		36		7,520		20
Total
Commercial	$	1,229		18	$	1,225	$	11
Commercial real estate		2,795		8		5,975		8
Residential real estate		3,052		19		3,180		31
Consumer		423		3		408		9
	$	7,499	$	48	$	10,788	$	59

	Nine Months Ended September 30, 2012				Nine Months Ended September 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(Dollars in thousands)
With no related allowance recorded
Commercial	$	504	$	4	$	1,095	$	46
Commercial real estate		329		7		795		0
Residential real estate		589		8		1,500		60
Consumer		70		1		208		7
		1,492		20		3,598		113
With an allowance recorded
Commercial		757		59		583		68
Commercial real estate		3,711		38		3,037		232
Residential real estate		2,407		41		1,593		56
Consumer		247		11		210		17
		7,122		149		5,423		373
Total
Commercial		1,261		63		1,678		114
Commercial real estate		4,040		45		3,832		232
Residential real estate		2,996		49		3,093		116
Consumer		317		12		418		24
	$	8,614	$	169	$	9,021	$	486

The Company 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.

The restructuring 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 September 30, 2012 included $930,000 of loans in accrual status and $1.7 million of loans classified as nonaccrual. During the nine months ended September 30, 2012 no new loans were added to those considered to be troubled debt restructurings and none of the loans currently classified as troubled debt restructurings have defaulted. The following table is a summary of loans determined to be troubled debt restructurings for the twelve months ended December 31, 2011.

	Modifications made during the year ended December 31, 2011
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial		3	$	840	$	840
Commercial Real Estate		2		1,863		1,298
Residential Real Estate		3		453		453
Consumer		1		46		46
		9	$	3,202	$	2,637

	Number of Contracts		Recorded Investment
Troubled Debt Restructurings that Subsequently Defaulted
Commercial		0	$	0
Commercial Real Estate		0		0
Residential Real Estate		0		0
Consumer		0		0
		0	$	0

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Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

Note G – Fair Value Measurements

Fair Value Hierarchy

The Company follows FASB’s guidance on “Fair Value Measurements.” The guidance defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The guidance applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value all other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

The guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the assets credit rating, prepayment assumptions and other factors such as credit loss assumptions

An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis. During the nine months ended September 30, 2012, there were no transfers made between Level 1, 2, and 3 inputs.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

			Fair Value Measurements of Assets
(dollars in thousands)			at September 30, 2012 Using
Description	Fair Value September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Investment Securities Available for Sale
Debt securities
Issued by U. S. Government agencies	$	51,947	$	0	$	51,947	$	0	$	0
Issued by State and municipal		1,029		0		1,029		0		0
Mortgage-backed securities issued by Government agencies		36,655		0		36,655		0		0
Private label mortgage-backed securities		1,460		0		0		1,460		0
Total Debt Securities		91,091		0		89,631		1,460		0
Equity securities
Mutual funds		686		0		686		0		0
Total Equity Securities		686		0		686		0		0
Total Investment Securities Available for Sale	$	91,777	$	0	$	90,317	$	1,460	$	0

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) – Roll Forward at September 30, 2012

Investment Securities Available for Sale – Debt Securities
Beginning Balance at December 31, 2011	$	1,855
Transfers in to Level 3		0
Transfers out of Level 3		0
Unrealized gains		24
Repayments		(419	)
Ending Balance at September 30, 2012	$	1,460

(dollars in thousands)			Fair Value Measurements of Assets at December 31, 2011 Using
Description	Fair Value December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Investment Securities Available for Sale
Debt securities
Issued by U.S. Government agencies	$	48,032	$	0	$	48,032	$	0	$	0
Issued by State and municipal		1,136		0		1,136		0		0
Mortgage-backed securities issued by Government agencies		35,870		0		35,870		0		0
Private label mortgage-backed securities		1,855		0		0		1,855		0
Total Debt Securities		86,893		0		85,038		1,855		0
Equity Securities
Mutual funds		656		0		656		0		0
Total Equity Securities		656		0		656		0		0
Total Investment Securities Available for Sale	$	87,549	$	0	$	85,694	$	1,855	$	0

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) – Roll Forward

at December 31, 2011

Investment Securities Available for Sale – Debt Securities
Beginning Balance at December 31, 2010	$	2,401
Transfers in to Level 3		0
Transfers out of Level 3		0
Unrealized gains		100
Repayments		(646	)
Ending Balance at December 31, 2011	$	1,855

Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include securities below investment grade and asset-backed securities in illiquid markets. Level 3 securities include two private-label residential one to-four family mortgage backed securities. These 2005 senior tranches in a securitization trust were rated “Aa1 and Aaa” by Moody’s when purchased in 2005 and are currently rated “Ca” and “B3”, respectively. The Company engages the service of independent third party valuation professionals to estimate the fair value of these securities. The valuation is meant to be “Level 3” pursuant to FASB ASC Topic 820 – Fair Value Measurements and Disclosures. The valuation uses an expected cash flow model that includes assumptions related to prepayment rates, default trends, and loss severity. At September 30, 2012, both securities were current on both principal and interest payments, and had a fixed weighted average coupon of 5.50%. One security had a weighted average remaining life of less than four months and the other had a weighted average remaining life of less than two years.

The following table details the Level 3 securities:

				Remaining		Current Rating
(in thousands)	Class		Coupon	Par Value		Moody’s	Fitch
CWHL 2005-21		A13	5.5% Fixed	$	104	B3	CC
WFMBS 2005-14		IA7	5.5% Fixed	$	1,412	Ca	A*-

We calculated fair value for the two securities by using a present value of future cash flows model, which incorporated assumptions as follows as of September 30, 2012 and December 31, 2011:

September 30, 2012	Cumulative Default (1)			Weighted Average Life (2)		Modified Duration (3)		Yield (4)
CWHL 2005-21		3.63	%		0.29 years		0.27 years		8.00	%
WFMBS 2005-14		2.77	%		1.73 years		1.50 years		8.00	%

(1) The recent three month level of total defaults from the issuer within the pool of performing collateral.

(2) The average number of years that each dollar of principal remains outstanding.

(3) The weighted average of present values for a series of cash flows which accurately indicates the average time until the cash flows are received.

(4) The discount rate obtained from taking a sequence of cash flows and an estimated price.

December 31, 2011	3 Month Cumulative Default (1)			Weighted Average Life (2)		Modified Duration (3)		Yield (4)
CWHL 2005-21		3.04	%		0.65 years		0.59 years		8.00	%
WFMBS 2005-14		3.84	%		2.10 years		1.80 years		8.00	%

(1) The anticipated level of total defaults from the issuer within the pool of performing collateral as of December 31, 2011.

(2) The average number of years that each dollar of principal remains outstanding.

(3) The weighted average of present values for a series of cash flows which accurately indicates the average time until the cash flows are received.

(4) The discount rate obtained from taking a sequence of cash flows and an estimated price.

The fair value of the Level 3 securities is assessed on a quarterly basis by obtaining an independent third party review of the securities so designated. In addition to using an expected cash-flow model the analysis includes an evaluation of the characteristics and performance of the underlying collateral of each of the securities. Management reviews and compares the results on a quarterly basis to available market information.

The significant unobservable inputs used in the fair value measurement of these private label mortgage-backed securities include prepayment rates, probability of default and loss severity in the event of default. Significant increases or decreases in any of these may result in a lower or higher fair value measurement. A significant increase in default rates could result in a higher level of losses and slower prepayment rates, conversely a lower level of default rates could result in lower levels of losses and increased prepayment rates.

The Company may be required from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the following tables.

(in thousands)			Fair Value Measurements at September 30, 2012 Using
Description	Fair Value September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Loans
Impaired loans
Commercial	$	947	$	0	$	947	$	0	$	0
Commercial real estate		890		0		890		0		0
Residential real estate		2,352		0		2,352		0		0
Construction		606		0		606		0		0
Consumer		507		0		507		0		0
Total impaired loans		5,302		0		5,302		0		0
Real estate owned		697		0		697		0		0
Other assets (repossessed assets)		0		0		0		0		0
Total Assets Measured at Fair Value on a Nonrecurring Basis	$	5,999	$	0	$	5,999	$	0	$	0

(in thousands)			Fair Value Measurements at December 31, 2011 Using
Description	Fair Value December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Changes in Fair Values Included in Period Earnings
Loans
Impaired loans
Commercial	$	1,202	$	0	$	1,202	$	0	$	0
Commercial real estate		995		0		995		0		0
Residential real estate		2,580		0		2,580		0		0
Construction		719		0		719		0		0
Consumer		323		0		323		0		0
Total impaired loans		5,819		0		5,819		0		0
Real estate owned		1,222		0		1,222		0		0
Other assets (repossessed assets)		52		0		52		0		0
Total Assets Measured at Fair Value on a Nonrecurring Basis	$	7,093	$	0	$	7,093	$	0	$	0

Loans for which it is probable that the Company will not collect all of principal and interest due according to contractual terms are measured for impairment in accordance with FASB guidance on Accounting by Creditors for Impairment of a Loan. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method. In our determination of fair value, we have categorized both methods of valuation as estimates based on Level 2 inputs.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal or utilizing some other method of valuation for the collateral and applying a discount factor to the value based on our loan review policy and procedures.

If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flow’s discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums, or discounts existing at origination or acquisition of the loan.

Management establishes a specific reserve for loans that have an estimated fair value below the carrying value. Nonperforming loans had a carrying value of $7.5 million as of September 30, 2012. Of the $7.5 million of nonperforming loans, $5.9 million had specific reserves of $2.5 million.

When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for credit losses. Losses are recognized in the period an obligation becomes uncollectible. The recognition of a loss does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though a partial recovery may occur in the future. During the nine months ended September 30, 2012 the Company charged-off $927,000 of impaired loans to the allowance for credit losses.

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 September 30, 2012 and December 31, 2011 the Company held $697,000 and $1.2 million, respectively, in real estate owned as a result of foreclosure. Real estate owned carried at appraised value is considered to be using Level 2 inputs. The $697,000 in real estate owned consisted of a number of undeveloped lots.

The Company records repossessed assets such as boats, automobiles or equipment at the lower of cost or estimated fair value on the acquisition date and at the lower of such initial amount or estimated fair value less selling costs thereafter. Estimated fair value is generally based upon independent values of the collateral obtained through valuation or listing services specifically used for the type of asset repossessed. We consider these collateral values to be estimated using Level 2 inputs. There were no repossessed assets at September 30, 2012 compared to $52,000 at December 31, 2011.

The fair value of the Company’s time deposits was estimated using discounted cash flow analyses. The discount rates used were based on rates currently offered for deposits with similar remaining maturities. The fair value of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

The carrying amount for customer repurchase agreements and variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate Federal Home Loan Bank advances is estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate Federal Home Loan Bank advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index

The estimated fair values of the Company’s financial instruments are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

The following table’s present information about the Company’s financial assets and financial liabilities measured at fair value as of September 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

	September 30, 2012				December 31, 2011
(dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Level 2 inputs:
Cash and due from banks	$	1,951	$	1,951	$	2,026	$	2,026
Interest bearing balances with banks		39,996		39,996		18,288		18,288
Federal funds sold		11		11		26,583		26,583
Investment securities		90,317		90,317		85,694		85,694
Federal Reserve and Federal Home Loan Bank stock		2,864		2,864		2,992		2,992
Loans and loans held for sale, net		278,102		278,279		283,284		283,667
Accrued interest receivable		1,350		1,350		1,279		1,279
Bank owned life insurance		5,783		5,783		5,624		5,624
Real estate owned		697		697		1,222		1,222
Level 3 inputs:
Other debt securities		1,460		1,460		1,855		1,855
Financial liabilities
Level 2 inputs:
Noninterest bearing deposits	$	57,314	$	57,314	$	56,664	$	56,664
Interest bearing deposits		281,501		282,647		293,717		298,788
Securities sold under agreements to repurchase		18,895		18,895		11,344		11,344
Long-term borrowings		35,000		31,086		35,000		31,357
Junior subordinated debt		5,000		5,000		5,000		5,000
Accrued dividends and interest payable		188		188		219		219

The carrying amount of cash and due from banks, federal funds sold and interest bearing balances with banks approximates fair value.

The fair values of U.S. Treasury and Government agency securities and mortgage backed securities are determined using market quotations.

The carrying amount of Federal Reserve stock and Federal Home Loan Bank stock approximates fair value.

The fair value of fixed-rate loans is estimated to be the present value of scheduled payments discounted using interest rates currently in effect. The fair value of variable-rate loans, including loans with a demand feature, is estimated to equal the carrying amount. The valuation of loans is adjusted for possible credit losses. The fair value of loans held for sale are at the carrying value (lower of cost or market) since such loans are typically committed to be sold (servicing released) at a profit.

The carrying amount of accrued interest receivable approximates fair value.

The fair value of bank owned life insurance is the current cash surrender value which is the carrying value.

The carrying value of real estate owned approximates fair value at the reporting date.

The fair value of noninterest bearing deposits is the amount payable on demand at the reporting date, since generally accepted accounting standards does not permit an assumption of core deposit value.

The fair value of interest bearing transaction, savings, and money market deposits with no defined maturity is the amount payable on demand at the reporting date, since generally accepted accounting standards does not permit an assumption of core deposit value.

The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposits would be accepted.

The carrying amount for customer repurchase agreements and variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate Federal Home Loan Bank advances is estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate Federal Home Loan Bank advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index.

The carrying amount of junior subordinated debentures approximate the fair values at the reporting date.

The carrying amount of accrued interest payable approximates fair value.

Management has reviewed the unfunded portion of commitments to extend credit, as well as standby and other letters of credit, and has determined that the fair value of such instruments is equal to the fee, if any, collected and unamortized for the commitment made.

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New Accounting Pronouncements

9 Months Ended

Sep. 30, 2012

New Accounting Pronouncements [Abstract]

New Accounting Pronouncements

Note I – New Accounting Pronouncements

All pending but not yet effective Accounting Standards Updates (“ASU”) were evaluated and only those listed below could have a material impact on the Company’s financial condition or results of operation.

In December, 2011 FASB issued ASU 2011-11, “Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Company’s financial statements.

In December, 2011 FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 were effective for annual and interim periods beginning after December 15, 2011. The Company has adopted ASU 2011-12 and it did not have a material impact on the Company’s financial statements.

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Loans, Allowance for Credit Losses and Credit Quality (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Jun. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Dec. 31, 2010
Major classification of loans
Commercial	$ 43,060		$ 47,683
Commercial real estate	115,455		114,883
Construction	37,602		35,026
One to four-family	48,052		48,314
Home equity	32,942		36,005
Consumer	7,958		8,870
Total Loans	285,069		290,781
Deferred loan fees, net	(320)		(315)
Allowance for credit losses	(6,647)	(6,908)	(7,182)	(7,517)	(7,272)	(6,853)
Allowance for credit losses and deferred loan fees	(6,967)		(7,497)
Loans, net	$ 278,102		$ 283,284

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2012

Investment Securities [Abstract]

Summary of investment securities

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
September 30, 2012
Available for sale
U.S. Government agency	$	51,603	$	344	$	0	$	51,947
State and municipal		961		68		0		1,029
Residential mortgage-backed securities		36,821		1,362		68		38,115
Other equity securities		635		51		0		686
	$	90,020	$	1,825	$	68	$	91,777
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
December 31, 2011
Available for sale
U.S. Government agency	$	47,782	$	306	$	56	$	48,032
State and municipal		1,077		59		0		1,136
Residential mortgage-backed securities		36,435		1,372		82		37,725
Other equity securities		618		38		0		656
	$	85,912	$	1,775	$	138	$	87,549

Amortized cost and estimated fair value of securities by contractual maturities

	September 30, 2012
	Available for Sale
	Amortized Cost		Estimated Fair Value
(dollars in thousands)
Due within one year	$	0	$	0
Due after one through five years		26,910		27,063
Due after five through ten years		23,609		23,911
Due after ten years		38,866		40,117
Equity securities		635		686
	$	90,020	$	91,777

Gross unrealized losses and the fair value of the associated securities by type and maturity for securities available for sale

	Less than 12 months				12 months or more				Total
September 30, 2012	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
(dollars in thousands)
Residential mortgage-backed securities	$	3,818	$	11	$	1,460	$	57	$	5,278	$	68
	$	3,818	$	11	$	1,460	$	57	$	5,278	$	68

	Less than 12 months				12 months or more				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
December 31, 2011
(dollars in thousands)
U. S. Government Agency	$	16,044	$	56	$	0	$	0	$	16,044	$	56
Residential mortgage-backed securities		0		0		1,854		82		1,854		82
	$	16,044	$	56	$	1,854	$	82	$	17,898	$	138

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Stock Based Compensation (Details 1) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Schedule of restricted stock activity
Outstanding at beginning of period, Shares			57,282	68,384
Grants, Share	0	0	16,268	17,782
Issued, Share			(16,282)	(26,384)
Forfeitures, Share			(13,662)	0
Outstanding at end of period, Shares	43,606	59,782	43,606	59,782
Weighted Average Grant Price, Outstanding at Beginning of Period			$ 3.86	$ 3.66
Weighted Average Grant Price, Grants			$ 4.30	$ 4.34
Weighted Average Grant Price, Issued			$ 4.29	$ 3.75
Weighted Average Grant Price, Forfeitures			$ 4.10	$ 0.00
Weighted Average Grant Price, Outstanding at End of Period	$ 3.84	$ 3.86	$ 3.84	$ 3.86

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Preferred Stock (Details) (USD $)	9 Months Ended					1 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Apr. 18, 2012	Dec. 31, 2011	Jan. 30, 2009	Jan. 30, 2009 Series A preferred stock dividend payment percentage for first 5 years [Member]	Jan. 30, 2009 Series A preferred stock dividend payment percentage after 5 years [Member]
Preferred Stock (Textual) [Abstract]
Preferred stock, dividend rate, percentage						5.00%	9.00%
Preferred Stock (Additional Textual) [Abstract]
Preferred stock, shares authorized	5,000,000			5,000,000
Preferred stock, par value	$ 0.01			$ 0.01
Redemption of preferred shares			4,076
Value of redemption of preferred shares			$ 4,076,000
Value of preferred stock outstanding			4,076,000
Preferred stock, Series A, shares outstanding	4,076		4,076	8,152
Treasury repurchases shares of fixed rate cumulative perpetual preferred stock, series A	4,076			8,152	8,152
Treasury repurchases value of fixed rate cumulative perpetual preferred stock, series A	4,076,000			8,146,000	8,200,000
Warrant exercisable per share	4.08
Investment warrants expiration date	Jan. 30, 2019
Dividends declared	$ 214,000	$ 305,000

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Loans, Allowance for Credit Losses and Credit Quality (Details 7) (USD $)	Dec. 31, 2011 Contract
Troubled Debt Restructurings [Member]
Troubled debt restructurings
Number of Contracts	9
Pre-Modification Outstanding Recorded Investment	$ 3,202
Post-Modification Outstanding Recorded Investment	2,637
Troubled Debt Restructurings [Member] | Commercial [Member]
Troubled debt restructurings
Number of Contracts	3
Pre-Modification Outstanding Recorded Investment	840
Post-Modification Outstanding Recorded Investment	840
Troubled Debt Restructurings [Member] | Commercial real estate [Member]
Troubled debt restructurings
Number of Contracts	2
Pre-Modification Outstanding Recorded Investment	1,863
Post-Modification Outstanding Recorded Investment	1,298
Troubled Debt Restructurings [Member] | Residential real estate [Member]
Troubled debt restructurings
Number of Contracts	3
Pre-Modification Outstanding Recorded Investment	453
Post-Modification Outstanding Recorded Investment	453
Troubled Debt Restructurings [Member] | Consumer [Member]
Troubled debt restructurings
Number of Contracts	1
Pre-Modification Outstanding Recorded Investment	46
Post-Modification Outstanding Recorded Investment	46
Troubled Debt Restructurings that Subsequently Defaulted [Member]
Troubled debt restructurings
Number of Contracts	0
Recorded Investment	0
Troubled Debt Restructurings that Subsequently Defaulted [Member] | Commercial [Member]
Troubled debt restructurings
Number of Contracts	0
Recorded Investment	0
Troubled Debt Restructurings that Subsequently Defaulted [Member] | Commercial real estate [Member]
Troubled debt restructurings
Number of Contracts	0
Recorded Investment	0
Troubled Debt Restructurings that Subsequently Defaulted [Member] | Residential real estate [Member]
Troubled debt restructurings
Number of Contracts	0
Recorded Investment	0
Troubled Debt Restructurings that Subsequently Defaulted [Member] | Consumer [Member]
Troubled debt restructurings
Number of Contracts	0
Recorded Investment	$ 0

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Consolidated Statements of Comprehensive Income (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Consolidated Statements of Comprehensive Income [Abstract]
Net income	$ 1,111	$ 668	$ 2,856	$ 1,502
Unrealized net holding gains, on Available-for-sale portfolios, net of tax	77	477	73	763
Comprehensive income	$ 1,188	$ 1,145	$ 2,929	$ 2,265

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Stock Based Compensation

9 Months Ended

Sep. 30, 2012

Stock Based Compensation [Abstract]

Stock Based Compensation

Note C – Stock Based Compensation

Stock based-compensation expense for the nine month periods ended September 30, 2012 and 2011 was $64,400 and $87,000, respectively. Stock-based compensation expense recognized in the consolidated statements of income for the first nine months of 2012 and 2011 reflects estimated forfeitures.

For the three month period ended September 30, 2012, $24,300 of expense was recognized on the remaining outstanding options, restricted shares and restricted share units. During the same period of 2011, $30,000 of expense was recognized on the remaining outstanding options, restricted shares and restricted share units.

During the first three quarters of 2012 and 2011, there were no options granted to employees or directors of the Company or Bank. On April 27, 2012 an option to purchase a total of 8,888 shares at a price of $9.30 per share was forfeited when a non-employee director, resigned from the board of directors of the Company and its subsidiary BankAnnapolis.

Stock option activity for the nine months ended September 30, 2012 and 2011 was as follows:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic  Value ($000)
Outstanding at December 31, 2011		92,302		$	7.22
Grants		0			0.00
Exercised		0			0.00
Forfeitures		(8,888	)		9.30
Expired		0			0.00
Outstanding as of September 30, 2012		83,414		$	7.00
Exercisable at September 30, 2012		83,414		$	7.00		1.8	$	97
Outstanding at December 31, 2010		124,270		$	6.06
Grants		0			0.00
Exercised		(5,333	)		2.64
Forfeitures		0			0.00
Expired		(22,374	)		2.64
Outstanding as of September 30, 2011		96,563		$	7.05
Exercisable at September 30, 2011		95,721		$	7.03		2.8	$	4

The aggregate intrinsic value in the table above represents the total pre-tax value of the exercisable in-the-money options (that is, the difference between the closing stock price on the last trading day in the first nine months of 2012 and 2011, and the exercise price of the options multiplied by the number of shares) on September 30, 2012 and September 30, 2011. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised was zero for the nine months ended September 30, 2012 and $8,000 for the nine months ended September 30, 2011.

As of September 30, 2012, there were no unrecognized costs related to unvested options. As of September 30, 2011, $2,300 of total unrecognized costs related to unvested options was expected to be recognized over a weighted average period of 0.6 years.

There were no restricted shares awarded to employees during the third quarter of 2012 or 2011.

During the first quarter of 2012, non-employee directors of the Bank were awarded a total of 16,268 shares of restricted stock at a market value of $4.30 per share in lieu of an annual retainer. These shares vest on January 25, 2013. During the first quarter of 2011, an employee of the Bank was awarded 5,000 restricted shares at a market value of $4.45 per share. During the first quarter of 2011, non-employee directors of the Bank were awarded a total of 12,782 shares of restricted stock at a market value of $4.30 per share in lieu of an annual retainer. These shares vested on January 27, 2012.

On January 3, 2012 a total of 2,500 restricted shares and 10,000 restricted share units granted in 2009 were forfeited when an employee of the Bank resigned. On April 27, 2012 a total of 1,162 shares awarded during the first quarter of 2012 to a non-employee director, were forfeited when the director resigned from the board of directors of the Company and its subsidiary BankAnnapolis. Non-compensation related expense of $16,250 and $13,750 was recognized for the three month periods ended September 30, 2012 and 2011, respectively and $48,750 and $41,250 for the nine month periods ending September 30, 2012 and 2011, respectively, relating to the shares issued to non-employee directors.

As of September 30, 2012, 15,000 restricted share units of the 43,606 restricted shares and restricted share units outstanding have vested; the remaining 28,606 restricted shares and restricted share units will vest over a weighted average period of 0.60 years.

Restricted stock activity for the nine months ended September 30, 2012 and 2011 was as follows:

	Shares			Weighted Average Grant Price
Outstanding at December 31, 2011		57,282		$	3.86
Grants		16,268			4.30
Issued		(16,282	)		4.29
Forfeitures		(13,662	)		4.10
Outstanding as of September 30, 2012		43,606		$	3.84
Outstanding at December 31, 2010		68,384		$	3.66
Grants		17,782			4.34
Issued		(26,384	)		3.75
Forfeitures		0			0
Outstanding as of September 30, 2011		59,782		$	3.86

As of September 30, 2012, $52,000 of total unrecognized costs related to unvested restricted shares and restricted share units is expected to be recognized over a weighted average period of 1.0 years. As of September 30, 2011, $124,500 of total unrecognized costs related to unvested restricted shares and restricted share units was expected to be recognized over a weighted average period of 1.9 years.

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Stock Based Compensation (Details Textual) (USD $)	1 Months Ended	3 Months Ended						9 Months Ended				1 Months Ended	9 Months Ended		1 Months Ended	9 Months Ended		1 Months Ended	3 Months Ended				9 Months Ended		3 Months Ended
	Apr. 30, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Dec. 31, 2010	Jan. 31, 2012 Restricted Stock [Member]	Sep. 30, 2012 Restricted Stock [Member]	Sep. 30, 2011 Restricted Stock [Member]	Apr. 30, 2012 Stock Options [Member]	Sep. 30, 2011 Stock Options [Member]	Sep. 30, 2012 Stock Options [Member]	Jan. 31, 2012 Restricted Stock Units [Member]	Sep. 30, 2012 Non-Employee Directors of The Bank [Member]	Mar. 31, 2012 Non-Employee Directors of The Bank [Member]	Sep. 30, 2011 Non-Employee Directors of The Bank [Member]	Mar. 31, 2011 Non-Employee Directors of The Bank [Member]	Sep. 30, 2012 Non-Employee Directors of The Bank [Member]	Sep. 30, 2011 Non-Employee Directors of The Bank [Member]	Mar. 31, 2011 Employee of The Bank [Member]
Stock Based Compensation (Additional Textual) [Abstract]
Unrecognized costs related to share based awards													$ 52,000	$ 124,500		$ 2,300	$ 0
Unrecognized costs related to unvested options period for recognition								1 year	1 year 10 months 24 days							7 months 6 days
Restricted shares awarded		0			0			16,268	17,782											16,268		12,782			5,000
Non compensation related expenses																			16,250		13,750		48,750	41,250
Restricted share units vested								16,282	26,384				15,000
Restricted shares outstanding vested													0
Remaining shares to be vested													28,606
Weighted average period of vested stock													7 months 6 days
Market value of restricted stock								$ 4.30	$ 4.34											$ 4.30		$ 4.30			$ 4.45
Shares forfeitures	1,162							8,888	0						8,888
Exercise Price of Forfeited shares								$ 9.30	$ 0.00						$ 9.30
Total restricted shares units		43,606			59,782			43,606	59,782	57,282	68,384		43,606
Total intrinsic value of options exercised								0	8,000
Restricted share granted								13,662	0			2,500						10,000
Shares vested date																				Jan. 25, 2013		Jan. 27, 2012
Stock Based Compensation (Textual) [Abstract]
Stock-based compensation expense								64,400	87,000
Expenses on outstanding options		24,300			30,000			24,300	30,000
Options granted to employees or directors		0	0	0	0	0	0
Unrecognized costs related to unvested restricted stock period for recognition								1 year	1 year 10 months 24 days							7 months 6 days
Non compensation related expenses																			$ 16,250		$ 13,750		$ 48,750	$ 41,250
Restricted share units vested								16,282	26,384				15,000
Restricted shares outstanding vested													0
Weighted average period of vested stock													7 months 6 days

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Loans, Allowance for Credit Losses and Credit Quality (Details 4) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Age analysis of past due loans receivable
30-59 Days Past Due	$ 6,051	$ 1,421
60-89 Days Past Due	616	32
Greater than 90 Days	4,358	3,644
Total Past Due	11,025	5,097
Current	274,044	285,684
Total Loans	285,069	290,781
Recorded Investment 90 Days and Accruing	468	0
Commercial [Member]
Age analysis of past due loans receivable
30-59 Days Past Due	4,404	0
60-89 Days Past Due	225	32
Greater than 90 Days	147	178
Total Past Due	4,776	210
Current	38,284	47,473
Total Loans	43,060	47,683
Recorded Investment 90 Days and Accruing	0	0
Construction Commercial Real Estate [Member]
Age analysis of past due loans receivable
30-59 Days Past Due	174	229
60-89 Days Past Due	0	0
Greater than 90 Days	1,152	1,152
Total Past Due	1,326	1,381
Current	36,276	33,645
Total Loans	37,602	35,026
Recorded Investment 90 Days and Accruing	0	0
Other Commercial Real Estate [Member]
Age analysis of past due loans receivable
30-59 Days Past Due	868	482
60-89 Days Past Due	0	0
Greater than 90 Days	0	0
Total Past Due	868	482
Current	114,587	114,401
Total Loans	115,455	114,883
Recorded Investment 90 Days and Accruing	0	0
Residential [Member]
Age analysis of past due loans receivable
30-59 Days Past Due	538	687
60-89 Days Past Due	316	0
Greater than 90 Days	2,461	1,972
Total Past Due	3,315	2,659
Current	77,679	81,660
Total Loans	80,994	84,319
Recorded Investment 90 Days and Accruing	468	0
Consumer [Member]
Age analysis of past due loans receivable
30-59 Days Past Due	67	23
60-89 Days Past Due	75	0
Greater than 90 Days	598	342
Total Past Due	740	365
Current	7,218	8,505
Total Loans	7,958	8,870
Recorded Investment 90 Days and Accruing	$ 0	$ 0

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Abstract]

Computation of earnings per share

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2012		2011		2012		2011
Net income available to common shareholders	$	1,060	$	545	$	2,636	$	1,135
Weighted average common shares outstanding		3,975,395		3,952,772		3,973,132		3,947,233
Basic Earnings Per Common Share	$	0.27	$	0.14	$	0.66	$	0.29
Net income available to common shareholders	$	1,060	$	545	$	2,636	$	1,135
Weighted average common shares outstanding		3,975,395		3,952,772		3,973,132		3,947,233
Effect of potential dilutive common shares		147,269		1,916		111,285		7,609
Total weighted average diluted common shares outstanding		4,122,664		3,954,688		4,084,417		3,954,842
Diluted Earnings Per Common Share	$	0.26	$	0.14	$	0.65	$	0.29