**SECURITIES
AND EXCHANGE COMMISSION**


Washington,
D.C. 20549





**FORM
10-K**





x
    Annual
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the fiscal year ended December 31, 2004
or





o
    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:**  **0-24047**





**GLEN BURNIE
    BANCORP**(Exact
      name of registrant as specified in its
charter)


****





MARYLAND
    
    52-1782444(State or other jurisdiction of incorporation or
      organization)
    
    (I.R.S.
      EmployerIdentification
      No.)101 Crain Highway, S.E., Glen Burnie,
      Maryland
    
    21061(Address of principal executive
      offices)
    
    (Zip Code)Registrant's telephone number, including area
      code
    
    (410) 766-3300


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





Title of Class
    
    Name
      of Each Exchange on Which RegisteredNone
    
    None





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





Title
of Class


**Common
Stock, $1.00 par value**


**Common
Stock Purchase Rights**





Indicate
by check mark whether the registrant: (1) has 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 o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).


Yes o No x





The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 2, 2005 was $35,005,523.


The
number of shares of common stock outstanding as of March 2, 2005 was
2,041,028.





documents
incorporated by reference





To the
extent specified, Part III of this Form 10-K incorporates information by
reference to the Registrant's definitive proxy statement for its 2005 Annual
Meeting of Shareholders (to be filed).








**GLEN
BURNIE BANCORP**


2004
ANNUAL REPORT ON FORM 10-K





Table
of Contents




PART
I




Item
      1.
    Business
    3Item 2.
    Properties
    17Item 3.
    Legal Proceedings
    17Item 4.
    Submission of Matters to Vote of Security
      Holders Executive Officers of the Registrant
    18





PART
II





Item 5.
    Market for Registrant's Common Equity,
      Related Stockholder Matters and Issuer Purchases of Equity
      Securities
    19Item
      6.
    Selected Financial Data
    20Item
      7.
    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
    21Item 7A.
    Quantitative And Qualitative Disclosures
      About Market Risk
    30Item 8.
    Financial Statements and Supplementary
      Data
    30Item 9.
    Changes in and Disagreements with Accountants
      on Accounting and Financial Disclosure
    30Item 9A.
    Controls and Procedures
    30Item 9B.
    Other
      Information
    30





PART
III




Item 10.
    Directors and Executive Officers of the
      Registrant
    31Item 11.
    Executive Compensation
    31Item 12.
    Security Ownership of Certain Beneficial
      Owners and Management and related Stockholder Matters
    31Item 13.
    Certain Relationships and Related
      Transactions
    31Item 14.
    Principal Accountant Fees and
    Services
    31




PART
IV





Item 15.
    Exhibits and Financial Statement
      Schedules
    32Signatures
    
    34















**PART
I**





**ITEM
1** **.** **BUSINESS**





**General**





Glen
Burnie Bancorp (the "Company") is a bank holding company organized in 1990 under
the laws of the State of Maryland. It presently owns all the outstanding shares
of capital stock of The Bank of Glen Burnie (the "Bank"), a commercial bank
organized in 1949 under the laws of the State of Maryland, serving northern Anne
Arundel County and surrounding areas from its main office and branch in Glen
Burnie, Maryland and branch offices in Glen Burnie (South Crain location),
Odenton, Riviera Beach, Crownsville, Severn and Severna Park, Maryland. As of
January 27, 2005, the Bank opened its eighth office in Linthicum, Maryland. The
Bank also maintains two remote Automated Teller Machine ("ATM" ) locations in
Ferndale and Pasadena, Maryland. The Bank maintains a website at
www.thebankofglenburnie.com. The Bank is the oldest independent commercial bank
in Anne Arundel County. The Bank is engaged in the commercial and retail banking
business as authorized by the banking statutes of the State of Maryland,
including the acceptance of demand and time deposits, and the origination of
loans to individuals, associations, partnerships and corporations. The Bank's
real estate financing consists of residential first and second mortgage loans,
home equity lines of credit and commercial mortgage loans. Commercial lending
consists of both secured and unsecured loans. The Bank also originates
automobile loans through arrangements with local automobile dealers. The Bank's
deposits are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC" ).





The
Company's principal executive office is located at 101 Crain Highway, S.E., Glen
Burnie, Maryland 21061. Its telephone number at such office is (410)
766-3300.





Information
on the Company and its subsidiary Bank may be obtained from the Company's
website www.thebankofglenburnie.com . Copies
of the Company's annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments thereto are available free of
charge on the website as soon as they are filed with the SEC through a link to
the SEC's EDGAR reporting system. Simply select the "Investor Relations" menu
item, then click on the "All SEC Filings" or "Insider Transactions"
link.





**Market
Area**





The Bank
considers its principal market area for lending and deposit products to consist
of Northern Anne Arundel County, Maryland, which consists of those portions of
the county north of U.S. Route 50. Northern Anne Arundel County includes mature
suburbs of the City of Baltimore, which in recent years have experienced modest
population growth and are characterized by an aging population. Management
believes that the majority of the working population in its market area either
commutes to Baltimore or is employed at businesses located at or around the
nearby Baltimore Washington International Airport. Anne Arundel County is
generally considered to have more affordable housing than other suburban
Baltimore areas and has begun to attract younger persons and minorities on this
basis. This inflow, however, has not been sufficient to affect current
population trends.





**Lending
Activities**





The Bank
offers a full range of consumer and commercial loans. The Bank's lending
activities include residential and commercial real estate loans, construction
loans, land acquisition and development loans, commercial loans and consumer
installment lending including indirect automobile lending. Substantially all of
the Bank's loan customers are residents of Anne Arundel County and surrounding
areas of Central Maryland. The Bank solicits loan applications for commercial
loans from small to medium sized businesses located in its market area. The
Company believes that this is a market in which a relatively small community
bank, like the Bank, has a competitive advantage in personal service and
flexibility. The Bank's consumer lending currently consists primarily of
automobile loans originated through local dealers. The Bank has expanded its
indirect automobile loans by entering into arrangements with individual
automobile dealers.





The
Company's total loan portfolio increased during the 2004, 2003, 2001, and 2000
fiscal years, while declining in 2002. In 2000, the increases were primarily due
to the introduction of an indirect automobile lending program in 1998. In 2001,
2003, and 2004, the increases in loans were primarily due to increases in
residential mortgages. The commercial mortgage portfolio continued to decline in
2003 as a result of softening loan demand and increased competition from large
financial institutions. In contrast, the residential mortgage portfolio achieved
steady increases over the past five years due to a strong housing market
environment.





3





The
following table provides information on the composition of the loan portfolio at
the indicated dates.







**At
      December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****(Dollars
      in Thousands)**
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %Mortgage:Residential
    
    $
    71,039
    
    
    38.27
    %
    $
    64,471
    
    
    36.62
    %
    $
    49,572
    
    
    30.67
    %
    $
    44,293
    
    
    26.32
    %
    $
    36,187
    
    
    21.74
    %Commercial
    
    
    31,983
    
    
    17.23
    
    
    28,525
    
    
    16.20
    
    
    31,584
    
    
    19.54
    
    
    36,920
    
    
    21.94
    
    
    40,169
    
    
    24.13Construction
      and landdevelopment
    
    
    2,080
    
    
    1.12
    
    
    3,112
    
    
    1.77
    
    
    2,338
    
    
    1.45
    
    
    2,355
    
    
    1.40
    
    
    5,257
    
    
    3.16Consumer:Installment
    
    
    19,019
    
    
    10.25
    
    
    19,767
    
    
    11.23
    
    
    19,758
    
    
    12.22
    
    
    20,063
    
    
    11.92
    
    
    19,119
    
    
    11.49Credit
      card
    
    
    180
    
    
    .10
    
    
    175
    
    
    .10
    
    
    228
    
    
    .14
    
    
    272
    
    
    0.16
    
    
    281
    
    
    0.16Indirect
      automobile
    
    
    55,703
    
    
    30.00
    
    
    53,883
    
    
    30.61
    
    
    52,795
    
    
    32.66
    
    
    59,308
    
    
    35.24
    
    
    61,725
    
    
    37.08Commercial
    
    
    5,618
    
    
    3.03
    
    
    6,113
    
    
    3.47
    
    
    5,374
    
    
    3.32
    
    
    5,083
    
    
    3.02
    
    
    3,726
    
    
    2.24Gross
      loans
    
    
    185,622
    
    
    100.00
    %
    
    176,046
    
    
    100.00
    %
    
    161,649
    
    
    100.00
    %
    
    168,294
    
    
    100.00
    %
    
    166,464
    
    
    100.00
    %Unearned
      income on loans
    
    
    (919
    )
    
    
    
    
    (981
    )
    
    
    
    
    (847
    )
    
    
    
    
    (786
    )
    
    
    
    
    (705
    )Gross
      loans net ofunearned
      income
    
    
    184,703
    
    
    
    
    
    175,065
    
    
    
    
    
    160,802
    
    
    
    
    
    167,508
    
    
    
    
    
    165,759Allowance
      for creditlosses
    
    
    (2,412
    )
    
    
    
    
    (2,246
    )
    
    
    
    
    (2,515
    )
    
    
    
    
    (2,939
    )
    
    
    
    
    (3,385
    )Loans,
      net
    
    $
    182,291
    
    
    
    
    $
    172,819
    
    
    
    
    $
    158,287
    
    
    
    
    $
    164,569
    
    
    
    
    $
    162,374








The
following table sets forth the maturities for various categories of the loan
portfolio at December 31, 2004. Demand loans and loans, which have no stated
maturity, are treated as due in one year or less. At December 31, 2004, the Bank
had $17,227,490 in loans due after one year with variable rates and $147,360,367
in such loans with fixed rates.





**Due
      Within**
      **One
      Year**
    
    **Due
      Over One**
      **To
      Five Years**
    
    **Due
      Over**
      **Five
      Years**
    
    **Total****(In
      Thousands)**Real
      Estate - mortgage:Residential
    
    $
    8,043
    
    $
    3,215
    
    $
    59,781
    
    $
    71,039Commercial
    
    
    3,666
    
    
    11,326
    
    
    16,991
    
    
    31,983Construction
      and landdevelopment
    
    
    --
    
    
    1,007
    
    
    1,073
    
    
    2,080Installment
    
    
    2,344
    
    
    13,298
    
    
    3,377
    
    
    19,019Credit
      Card
    
    
    180
    
    
    --
    
    
    --
    
    
    180Indirect
      automobile
    
    
    1,163
    
    
    51,784
    
    
    2,756
    
    
    55,703Commercial
    
    
    5,472
    
    
    90
    
    
    56
    
    
    5,618$
    20,868
    
    $
    80,720
    
    $
    84,034
    
    $
    185,622





**Real
Estate Lending.** The Bank
offers long-term mortgage financing for residential and commercial real estate
as well as shorter term construction and land development loans. Residential
mortgage and residential construction loans are originated with fixed rates,
while commercial mortgages may be originated on either a fixed or variable rate
basis. Commercial construction loans are generally originated on a variable rate
basis. Substantially all of the Bank's real estate loans are secured by
properties in Anne Arundel County, Maryland **.** Under the
Bank's loan policies, the maximum permissible loan-to-value ratio for
owner-occupied residential mortgages is 80% of the lesser of the purchase price
or appraised value. The Bank, however, will make loans secured by owner-occupied
residential real estate with loan-to-value ratios up to 95%, provided the
borrower obtains private mortgage insurance for the portion of the loan in
excess of 80%. For residential investment properties, the maximum loan-to-value
ratio is 75%. The maximum permissible loan-to-value ratio for residential and
commercial construction loans is 80%. The maximum loan-to-value ratio for
permanent commercial mortgages is 75%. The maximum loan-to-value ratio for land
development loans is 70% and for unimproved land is 65%. The Bank also offers
home equity loans secured by the borrower's primary residence, provided that the
aggregate indebtedness on the property does not exceed 80% of its
value.





4


****


**Commercial
Lending.** The
Bank's commercial loan portfolio consists of demand, installment and time loans
for commercial purposes. The Bank's business demand, installment and time
lending includes various working capital loans, lines of credit and letters of
credit for commercial customers. Demand loans require the payment of interest
until called, while installment loans require a monthly payment of principal and
interest, and time loans require a single payment of principal and interest at
maturity. Such loans may be made on a secured or an unsecured basis. All such
loans are underwritten on the basis of the borrower's creditworthiness rather
than the value of the collateral.





**Installment
Lending.** The Bank
makes consumer and commercial installment loans for the purchase of automobiles,
boats, other consumer durable goods, capital goods and equipment. Such loans
provide for repayment in regular installments and are secured by the goods
financed. Also included in installment loans are overdraft loans and other
credit repayable in installments. As of December 31, 2004, approximately
76.1 **%** of the
installment loans in the Bank's portfolio (other than indirect automobile
lending) had been originated for commercial purposes and 23.9 **%** had been
originated for consumer purposes.





**Indirect
Automobile Lending.** The Bank
commenced its indirect automobile lending program in January 1998. The Bank
finances new and used automobiles for terms of up to 66 months. For used
vehicles, the age of the vehicle plus the term of the loan cannot exceed eight
years. The Bank does not lend more than the invoice price on new vehicles. On
used vehicles, the Bank will not lend more than the fair market value as
published in a nationally recognized used vehicle pricing guide. The Bank
requires all borrowers to obtain vendor's single interest coverage protecting
the Bank against loss in the case a borrower's automobile insurance lapses. The
Bank originates indirect loans through a network of approximately 40 dealers
which are primarily new car dealers located in Anne Arundel County.
Participating dealers take loan applications from their customers and transmit
them to the Bank for approval.





**Other
Loans.** The Bank
offers overdraft protection lines of credit, tied to checking accounts, as a
convenience to qualified customers.





Although
the risk of non-payment for any reason exists with respect to all loans, certain
other specific risks are associated with each type of loan. The primary risks
associated with commercial loans, including commercial real estate loans, are
the quality of the borrower's management and a number of economic and other
factors which induce business failures and depreciate the value of business
assets pledged to secure the loan, including competition, insufficient capital,
product obsolescence, changes in the borrowers cost, environmental hazards,
weather, changes in laws and regulations and general changes in the marketplace.
Primary risks associated with residential real estate loans include fluctuating
land and property values and rising interest rates with respect to fixed-rate,
long-term loans. Residential construction lending exposes the Company to risks
related to builder performance. Consumer loans, including indirect automobile
loans, are affected primarily by domestic economic instability and a variety of
factors that may lead to the borrower's unemployment, including deteriorating
economic conditions in one or more segments of a local or broader economy.
Because the Bank deals with borrowers through an intermediary on indirect
automobile loans, this form of lending potentially carries greater risks of
defects in the application process for which claims may be made against the
Bank. Indirect automobile lending may also involve the Bank in consumer disputes
under state "lemon" or other laws. The Bank seeks to control these risks by
following strict underwriting and documentation guidelines. In addition,
dealerships are contractually obligated to indemnify the Bank for such losses
for a limited period of time.





The
Bank's lending activities are conducted pursuant to written policies approved by
the Board of Directors intended to ensure proper management of credit risk.
Loans are subject to a well defined credit process that includes credit
evaluation of borrowers, establishment of lending limits and application of
lending procedures, including the holding of adequate collateral and the
maintenance of compensating balances, as well as procedures for on-going
identification and management of credit deterioration. Regular portfolio reviews
are performed by the Bank's Senior Credit Officer to identify potential
underperforming loans and other credit facilities, estimate loss exposure and to
ascertain compliance with the Bank's policies. On a quarterly basis, the Bank's
Internal Auditor performs an independent loan review in accordance with the
Bank's loan review policy. For significant problem loans, management review
consists of evaluation of the financial strengths of the borrower and any
guarantor, the related collateral, and the effects of economic
conditions.





The
Bank's loan approval policy provides for various levels of individual lending
authority. The maximum aggregate lending authority granted by the Bank to any
one Lending Officer is $750,000. A combination of approvals from certain
officers may be used to lend up to an aggregate of $1,000,000. The Bank's
Executive Committee is authorized to approve loans up to $2.0 million. Larger
loans must be approved by the full Board of Directors.





5





Under
Maryland law, the maximum amount which the Bank is permitted to lend to any one
borrower and their related interests may generally not exceed 10% of the Bank's
unimpaired capital and surplus, which is defined to include the Bank's capital,
surplus, retained earnings and 50% of its allowance for possible loan losses.
Under this authority, the Bank would have been permitted to lend up to $3.16
million to any one borrower at December 31, 2004. By interpretive ruling of the
Commissioner of Financial Regulation, Maryland banks have the option of lending
up to the amount that would be permissible for a national bank which is
generally 15% of unimpaired capital and surplus (defined to include a bank's
total capital for regulatory capital purposes plus any loan loss allowances not
included in regulatory capital). Under this formula, the Bank would have been
permitted to lend up to $4.82 million to any one borrower at December 31, 2004.
It is currently the Bank's policy to limit its exposure to any one borrower to
no more than $2.9 million in the aggregate unless any borrowings exceeding this
amount are approved by a 75% vote of the Board of Directors. At December 31,
2004, the largest amount outstanding to any one borrower and its related
interests was $3,000,000.





**Non-Performing
Loans**





It is the
policy of the Bank to reverse accrued, and discontinue the accrual of, interest
when a loan becomes 90 days or more delinquent and circumstances indicate that
collection is doubtful.





The Bank
seeks to control delinquencies through diligent collection procedures. For
consumer loans, the Bank sends out payment reminders on the seventh and twelfth
days after a payment is due. If a consumer loan becomes 15 days past due, the
account is transferred to the Bank's collections department, which will contact
the borrower by telephone and letter before the account becomes 30 days past
due. If a consumer loan becomes more than 30 days past due, the Bank will
continue its collection efforts and will move to repossession or foreclosure by
the 45th day if the Bank has reason to believe that the collateral may be in
jeopardy or the borrower has failed to respond to prior communications. The Bank
will move to repossess or foreclose in all instances in which a consumer loan
becomes more than 60 days delinquent. After repossession of a motor vehicle, the
borrower has a 15-day statutory right to redeem the vehicle and is entitled to
10 days notice before the sale of a repossessed vehicle. The Bank sells the
vehicle as promptly as feasible after the expiration of these periods. If the
amount realized from the sale of the vehicle is less than the loan amount, the
Bank will seek a deficiency judgment against the borrower. The Bank follows
similar collection procedures with respect to commercial loans.





6





The
following table sets forth the amount of the Bank's restructured loans,
non-accrual loans and accruing loans 90 days or more past due at the dates
indicated:





**At
      December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****(Dollars
      In Thousands)**Restructured
      Loans
    
    $
    95
    
    $
    --
    
    $
    41
    
    $
    --
    
    $
    370Non-accrual
      loans:Real
      estate - mortgage:Residential
    
    $
    122
    
    $
    34
    
    $
    264
    
    $
    284
    
    $
    120Commercial
    
    
    255
    
    
    265
    
    
    178
    
    
    189
    
    
    77Real
      estate - construction
    
    
    --
    
    
    --
    
    
    7
    
    
    --
    
    
    --Installment
    
    
    205
    
    
    250
    
    
    112
    
    
    88
    
    
    72Commercial
    
    
    16
    
    
    23
    
    
    10
    
    
    40
    
    
    101Total
      non-accrual loans
    
    
    598
    
    
    572
    
    
    571
    
    
    601
    
    
    370Accruing
      loans past due 90 days or moreReal
      estate - mortgage:Residential
    
    
    1
    
    
    5
    
    
    1
    
    
    45
    
    
    34Commercial
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Real
      estate - construction
    
    
    6
    
    
    6
    
    
    -
    
    
    -
    
    
    -Installment
    
    
    --
    
    
    --
    
    
    13
    
    
    13
    
    
    --Credit
      card & related
    
    
    --
    
    
    --
    
    
    --
    
    
    1
    
    
    --Total
      accruing loans past due90
      days or more
    
    
    7
    
    
    11
    
    
    15
    
    
    59
    
    
    34Total
      non-accrual and past due loans
    
    $
    605
    
    $
    583
    
    $
    586
    
    $
    660
    
    $
    404Non-accrual
      and past due loans togross
      loans
    
    
    .33
    %
    
    .33
    %
    
    0.36
    %
    
    0.39
    %
    
    ****0.24
    ****%Allowance
      for credit losses to non-accrual and past due loans
    
    
    398.68
    %
    
    385.25
    %
    
    429.13
    %
    
    445.30
    %
    
    837.87
    %





For the
year ended December 31, 2004, interest of $46,751 would have been accrued on
non-accrual loans if such loans had been current in accordance with their
original terms. During that period, interest on non-accrual loans was not
included in income. $509,821, or 85.2%, of the Bank's total $598,165 non-accrual
loans at December 31, 2004 were attributable to 5 borrowers. No charge-offs have
previously been taken on these loans. Four of these borrowers with loans
totaling $453,142 were in bankruptcy at that date. Because of the legal
protections afforded to borrowers in bankruptcy, collections on such loans are
difficult and the Bank anticipates that such loans may remain delinquent for an
extended period of time. Each of these loans is secured by collateral with a
value well in excess of the current active balance of the Bank's
loan.





At
December 31, 2004, there were no loans outstanding not reflected in the above
table as to which known information about the borrower's possible credit
problems caused management to have serious doubts as to the ability of the
borrowers to comply with present loan repayment terms. These loans consist of
loans which were not 90 days or more past due but where the borrower is in
bankruptcy or has a history of delinquency or the loan to value ratio is
considered excessive due to deterioration of the collateral or other
factors.





At
December 31, 2004, the Company had $50,000 in real estate acquired in partial or
total satisfaction of debt, compared to $171,882 and $413,373 in such properties
at December 31, 2003 and 2002, respectively. All such properties are recorded at
the lower of cost or fair value at the date acquired and carried on the balance
sheet as other real estate owned. Losses arising at the date of acquisition are
charged against the allowance for credit losses. Subsequent write-downs that may
be required and expense of operation are included in non-interest expense. Gains
and losses realized from the sale of other real estate owned are included in
non-interest income or expense. For a description of the properties comprising
other real estate owned at December 31, 2004, see "Item 2. -- Properties."





7


****


**Allowance
For Credit Losses**





The
Bank's allowance for credit losses is based on the probable estimated losses
that may be sustained in its loan portfolio.  The allowance is based on two
basic principles of accounting.  (1) Statement of Financial Accountings
Standards (SFAS) No. 5 "Accounting for Contingencies", which requires that
losses be accrued when they are probable of occurring and estimable, and (2)
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires
that losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.





The
allowance for credit losses is established through a provision for credit losses
charged to expense. Loans are charged against the allowance for credit losses
when management believes that the collectibility of the principal is unlikely.
The allowance, based on evaluations of the collectibility of loans and prior
loan loss experience, is an amount that management believes will be adequate to
absorb possible losses on existing loans that may become uncollectible. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, value of collateral, and current economic conditions and trends
that may affect the borrower's ability to pay.





Transactions
in the allowance for credit losses during the last five fiscal years were as
follows:





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****(Dollars
      In Thousands)**Beginning
      Balance
    
    $
    2,246
    
    $
    2,515
    
    $
    2,939
    
    $
    3,385
    
    $
    2,922Loans
      charged offReal
      estate - mortgage:Residential
    
    
    --
    
    
    --
    
    
    1
    
    
    --
    
    
    19Commercial
    
    
    --
    
    
    --
    
    
    --
    
    
    4
    
    
    4Real
      estate - construction
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Installment
    
    
    502
    
    
    687
    
    
    594
    
    
    498
    
    
    470Credit
      card & related
    
    
    --
    
    
    42
    
    
    95
    
    
    89
    
    
    101Commercial
    
    
    49
    
    
    29
    
    
    80
    
    
    96
    
    
    167Total
    
    
    551
    
    
    758
    
    
    730
    
    
    687
    
    
    761RecoveriesReal
      estate - mortgage:Residential
    
    
    35
    
    
    1
    
    
    1
    
    
    --
    
    
    52Commercial
    
    
    --
    
    
    --
    
    
    1
    
    
    --
    
    
    --Real
      estate - construction
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    470Installment
    
    
    293
    
    
    369
    
    
    215
    
    
    310
    
    
    111Credit
      card & related
    
    
    --
    
    
    30
    
    
    30
    
    
    53
    
    
    41Commercial
    
    
    49
    
    
    49
    
    
    59
    
    
    28
    
    
    550Total
    
    
    377
    
    
    449
    
    
    306
    
    
    391
    
    
    1,224Net
      charge offs/(recoveries)
    
    
    174
    
    
    308
    
    
    424
    
    
    296
    
    
    (463
    )Provisions
      charged to operations
    
    
    340
    
    
    40
    
    
    --
    
    
    (150
    )
    
    --Ending
      balance
    
    $
    2,412
    
    $
    2,246
    
    $
    2,515
    
    $
    2,939
    
    $
    3,385Average
      loans
    
    $
    181,881
    
    $
    166,786
    
    $
    164,818
    
    $
    163,695
    
    $
    159,810Net
      charge-offs to average loans
    
    
    0.10
    %
    
    0.18
    %
    
    0.26
    %
    
    0.18
    %
    
    (0.28
    )%











8





The
following table shows the allowance for credit losses broken down by loan
category as of December 31, 2004, 2003, 2002, 2001 and 2000:




**At December
      31****,****2004**
    
    **2003****Portfolio**
    
    **Allowance
      For**
      **Each
      Category**
    
    **Percentage
      Of Loans In Each Category To****Total
      Loans**
    
    **Allowance
      For****Each
      Category**
    
    **Percentage
      Of****Loans
      In Each****Category
      To****Total
      Loans******
    
    **(Dollars
      In Thousands)**Real
      Estate - mortgage:Residential
    
    $
    153
    
    
    38.27
    %
    $
    143
    
    
    36.62
    %Commercial
    
    
    328
    
    
    17.23
    
    
    314
    
    
    16.20Real
      Estate -- construction
    
    
    13
    
    
    1.12
    
    
    29
    
    
    1.77Installment
    
    
    136
    
    
    10.25
    
    
    137
    
    
    11.23Credit
      Card
    
    
    --
    
    
    0.10
    
    
    --
    
    
    0.10Indirect
      automobile
    
    
    1,254
    
    
    30.00
    
    
    1,357
    
    
    30.61Commercial
    
    
    343
    
    
    3.03
    
    
    271
    
    
    3.47Unallocated
    
    
    185
    
    
    --
    
    
    (5
    )
    
    --Total
    
    $
    2,412
    
    
    100.00
    %
    $
    2,246
    
    
    100.00
    %





**At
      December 31,******2002****
    
    **2001**
    
    **2000****Portfolio**
    
    **Allowance For****Each
      Category**
    
    **Percentage
      Of Loans In Each Category To**
      **Total
      Loans**
    
    **Allowance
      For****Each
      Category**
    
    **Percentage
      Of**
      **Loans
      In Each Category To****Total
      Loans**
    
    **Allowance
      For****Each
      Category**
    
    **Percentage
      Of Loans In Each Category To**
      **Total
      Loans****(Dollars In
      Thousands)**Real
      Estate - mortgage:Residential
    
    $
    131
    
    
    30.67
    %
    $
    164
    
    
    26.32
    %
    $
    199
    
    
    21.74
    %Commercial
    
    
    349
    
    
    19.54
    
    
    456
    
    
    21.94
    
    
    506
    
    
    24.13Real
      Estate - construction
    
    
    48
    
    
    1.45
    
    
    71
    
    
    1.40
    
    
    292
    
    
    3.16Installment
    
    
    152
    
    
    12.22
    
    
    237
    
    
    11.92
    
    
    221
    
    
    11.49Credit
      Card
    
    
    --
    
    
    .14
    
    
    --
    
    
    0.16
    
    
    --
    
    
    0.16Indirect
      automobile
    
    
    1,461
    
    
    32.66
    
    
    1,390
    
    
    35.24
    
    
    1,486
    
    
    37.08Commercial
    
    
    168
    
    
    3.32
    
    
    300
    
    
    3.02
    
    
    288
    
    
    2.24Unallocated
    
    
    206
    
    
    --
    
    
    321
    
    
    --
    
    
    393
    
    
    --Total
    
    $
    2,515
    
    
    100.00
    %
    $
    2,939
    
    
    100.00
    %
    $
    3,385
    
    
    100.00
    %





**Investment
Securities**





The Bank
maintains a substantial portfolio of investment securities to provide liquidity
as well as a source of earnings. The Bank's investment securities portfolio
consists primarily of U.S. Treasury securities, securities issued by U.S.
Government agencies including mortgage-backed securities, securities issued by
certain states and their political subdivisions, and corporate trust preferred
securities. The tax treatment of the Bank's portfolio of securities issued by
certain states and their political subdivisions allows the Company to use the
full tax advantage of this portfolio.








The
following table presents at amortized cost the composition of the investment
portfolio by major category at the dates indicated.





**At
      December 31,****2004**
    
    **2003**
    
    **2002****(In
      Thousands)**U.S.
      Treasury securities
    
    $
    --
    
    $
    --
    
    $
    499U.S.
      Government agencies and mortgage backedsecurities
    
    
    52,020
    
    
    52,444
    
    
    51,916Obligations
      of states and political subdivisions
    
    
    36,640
    
    
    43,624
    
    
    31,899Corporate
      trust preferred
    
    
    5,008
    
    
    5,026
    
    
    5,057Total
      investment securities
    
    $
    93,668
    
    $
    101,094
    
    $
    89,371











9





The
following table sets forth the scheduled maturities, book values and weighted
average yields for the Company's investment securities portfolio at December 31,
2004:




**One
      Year****Or
      Less**
    
    **One To****Five
      Years**
    
    **Five
      to Ten Years**
    
    **More
      Than****Ten
      Years**
    
    **Total****Book****Value**
    
    **Weighted
      Average****Yield**
    
    **Book****Value**
    
    **Weighted
      Average****Yield**
    
    **Book****Value**
    
    **Weighted
      Average****Yield**
    
    **Book****Value**
    
    **Weighted
      Average****Yield**
    
    **Book****Value**
    
    **Weighted
      Average****Yield**U.S.
      Treasury securities
    
    $
    --
    
    
    -
    %
    $
    --
    
    
    --
    %
    $
    ---
    
    
    -
    %
    $
    --
    
    
    --
    %
    $
    --
    
    
    -
    %U.S.
      Government agencies and mortgage backed securities
    
    
    1,500
    
    
    4.19
    
    
    6,013
    
    
    4.08
    
    
    3,777
    
    
    3.44
    
    
    40,730
    
    
    5.11
    
    
    52,020
    
    
    4.84Obligations
      of states and political subdivisions
    
    
    1,375
    
    
    2.96
    
    
    1,885
    
    
    3.76
    
    
    14,112
    
    
    3.70
    
    
    19,268
    
    
    5.13
    
    
    36,640
    
    
    4.43Corporate
      trust preferred
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    -
    
    
    --
    
    
    3,008
    
    
    6.95
    
    
    5,008
    
    
    6.95Total
      investment securities
    
    $
    2,875
    
    
    3.60
    %
    $
    7,898
    
    
    4.00
    %
    $
    17,889
    
    
    3.65
    %
    $
    65,006
    
    
    5.26
    %
    $
    93,668
    
    
    4.79
    %





At
December 31, 2004, the Bank had no investments in securities of a single issuer
(other than the U.S. Government securities and securities of federal agencies
and government-sponsored enterprises), which aggregated more than 10% of
stockholders equity.





**Deposits
And Other Sources Of Funds**





The funds
needed by the Bank to make loans are primarily generated by deposit accounts
solicited from the communities surrounding its branches in northern Anne Arundel
County. Consolidated total deposits were $261,674,043 as of December 31, 2004.
The Bank uses borrowings from the Federal Home Loan Bank ("FHLB") of Atlanta to
supplement funding from deposits. The Bank was permitted to borrow up to $36.2
million under a line of credit from the FHLB of Atlanta as of December 31,
2004.





**Deposits.** The
Bank's deposit products include regular savings accounts (statements), money
market deposit accounts, demand deposit accounts, NOW checking accounts, IRA and
SEP accounts, Christmas Club accounts and certificates of deposit. Variations in
service charges, terms and interest rates are used to target specific markets.
Ancillary products and services for deposit customers include safe deposit
boxes, money orders and travelers checks, night depositories, automated
clearinghouse transactions, wire transfers, ATMs, telephone banking, and a
customer call center. The Bank is a member of the Cirrus(R) and Star(R) ATM
networks.





As stated
above, the Bank obtains deposits principally through its network of branch
offices. The Bank does not solicit brokered deposits. At December 31, 2004, the
Bank had approximately $21.0 million in certificates of deposit and other time
deposits of $100,000 or more, including IRA accounts. The following table
provides information as to the maturity of all time deposits of $100,000 or more
at December 31, 200 4:





**Amount**
      **(In
      Thousands)**Three
      months or less
    
    $
    5,430Over
      three through six months
    
    
    2,650Over
      six through 12 months
    
    
    1,680Over
      12 months
    
    
    11,243Total
    
    $
    21,003





**Borrowings.** In
addition to deposits, the Bank from time to time obtains advances from the FHLB
of Atlanta of which it is a member. FHLB of Atlanta advances may be used to
provide funds for residential housing finance, for small business lending, and
to meet specific and anticipated needs. The Bank may draw on a $36.2 million
line of credit from the FHLB of Atlanta, which is secured by a floating lien on
the Bank's residential first mortgage loans and various federal and agency
securities. There was $7 million in a long-term convertible advance under this
credit arrangement at December 31, 2004. The advance matures in **** September
2010 and bears a 5.84% rate of interest. On September 7, 2000, the Company
issued $5,155,000 of its 10.6% Junior Subordinated Deferrable Interest
Debentures to Glen Burnie Statutory Trust I, a Connecticut statutory trust
wholly owned by the Company. The Trust, in turn, issued $5 million of its 10.6%
capital securities to institutional investors. The debentures are scheduled to
mature on September 7, 2030, unless called by the Company not earlier than
September 7, 2010. It is the Company's intention to call these debentures at the
earliest opportunity. The Bank also has a unsecured line of credit in the amount
of **$** 5 million
from another commercial bank but has not drawn on this line. The Bank has a
mortgage note on the 103 Crain Highway address with a balance of $199,708 as of
December 31, 2004. This note is payable monthly through October 2010 and has a
7% interest rate.





10


****


**Competition**





The Bank
faces competition from other community banks and financial institutions and
larger intra- and inter- state banks and financial institutions, which compete
vigorously (currently, sixteen FDIC-insured depository institutions operate
within two miles of the Bank's headquarters). With respect to indirect lending,
the Bank faces competition from other banks and the financing arms of automobile
manufacturers. The Bank competes in this area by offering competitive rates and
responsive service to dealers.





The
Bank's interest rates, loan and deposit terms, and offered products and services
are impacted, to a large extent, by such competition. The Bank attempts to
provide superior service within its community and to know, and facilitate
services to, its customers. It seeks commercial relationships with small to
medium size businesses, which the Bank believes would welcome personal service
and flexibility. While the Bank believes it is the ninth largest deposit holder
in Anne Arundel County, Maryland, with an estimated 3.47% market share as of
June 30, 2004 (the latest date for which relevant data is available from the
FDIC), it believes its greatest competition comes from smaller community banks
which offer similar personalized services.





**Other
Activities**





The
Company also owns all outstanding shares of capital stock of GBB Properties,
Inc. ("GBB"), another Maryland corporation which was organized in 1994 and which
is engaged in the business of acquiring, holding and disposing of real property,
typically acquired in connection with foreclosure proceedings (or deeds in lieu
of foreclosure) instituted by the Bank or acquired in connection with branch
expansions by the Bank.





**Employees**





At
December 31, 2004, the Bank had 128 full-time equivalent employees. Neither the
Company nor GBB currently has any employees.





**Regulation
of the Company**





**General.** The
Company is a bank holding company within the meaning of the Bank Holding Company
Act of 1956 (the "BHCA"). As such, the Company is registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and
subject to Federal Reserve Board regulation, examination, supervision and
reporting requirements. As a bank holding company, the Company is required to
furnish to the Federal Reserve Board annual and quarterly reports of its
operations at the end of each period and to furnish such additional information
as the Federal Reserve Board may require pursuant to the BHCA. The Company is
also subject to regular inspection by Federal Reserve Board
examiners.





Under the
BHCA, a bank holding company must obtain the prior approval of the Federal
Reserve Board before: (1) acquiring direct or indirect ownership or control of
any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company.





The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act") authorizes the Federal Reserve Board to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The Federal Reserve Board may not approve the acquisition of a bank that
has not been in existence for the minimum time period (not exceeding five years)
specified by the statutory law of the host state. The Riegle-Neal Act also
prohibits the Federal Reserve Board from approving such an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target bank's home state or in any state in which the target
bank maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit contained in the Riegle-Neal Act. Under Maryland law, a bank holding
company is prohibited from acquiring control of any bank if the bank holding
company would control more than 30% of the total deposits of all depository
institutions in the State of Maryland unless waived by the Maryland Commissioner
of Financial Regulation.





11





Additionally,
the federal banking agencies are authorized to approve interstate merger
transactions without regard to whether such transaction is prohibited by the law
of any state, unless the home state of one of the banks opted out of the
Riegle-Neal Act by adopting a law after the date of enactment of the Riegle-Neal
Act and prior to June 1, 1997 which applies equally to all out-of-state banks
and expressly prohibits merger transactions involving out-of-state banks. The
State of Maryland did not pass such a law during this period. Interstate
acquisitions of branches will be permitted only if the law of the state in which
the branch is located permits such acquisitions. Interstate mergers and branch
acquisitions will also be subject to the nationwide and statewide insured
deposit concentration amounts described above.





The BHCA
also prohibits, with certain exceptions, a bank holding company from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
a company that is not a bank or a bank holding company, or from engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or providing services for its subsidiaries. The principal
exceptions to these prohibitions involve certain non-bank activities which, by
statute or by Federal Reserve Board regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The activities of the Company are subject to these legal and regulatory
limitations under the BHCA and the Federal Reserve Board's regulations
thereunder. Notwithstanding the Federal Reserve Board's prior approval of
specific nonbanking activities, the Federal Reserve Board has the power to order
a holding company or its subsidiaries to terminate any activity, or to terminate
its ownership or control of any subsidiary, when it has reasonable cause to
believe that the continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that holding company.





Effective
with the enactment of the Gramm-Leach-Bliley Act ("G-L-B") on November 12, 1999,
bank holding companies whose financial institution subsidiaries are well
capitalized and well managed and have satisfactory Community Reinvestment Act
records can elect to become "financial holding companies" which will be
permitted to engage in a broader range of financial activities than are
currently permitted to bank holding companies. Financial holding companies are
authorized to engage in, directly or indirectly, financial activities. A
financial activity is an activity that is: (i) financial in nature; (ii)
incidental to an activity that is financial in nature; or (iii) complementary to
a financial activity and that does not pose a safety and soundness risk. The
G-L-B Act includes a list of activities that are deemed to be financial in
nature. Other activities also may be decided by the Federal Reserve Board to be
financial in nature or incidental thereto if they meet specified criteria. A
financial holding company that intends to engage in a new activity to acquire a
company to engage in such an activity is required to give prior notice to the
Federal Reserve Board. If the activity is not either specified in the G-L-B Act
as being a financial activity or one that the Federal Reserve Board has
determined by rule or regulation to be financial in nature, the prior approval
of the Federal Reserve Board is required.





The
Maryland Financial Institutions Code prohibits a bank holding company from
acquiring more than 5% of any class of voting stock of a bank or bank holding
company without the approval of the Commissioner of Financial Regulation except
as otherwise expressly permitted by federal law or in certain other limited
situations. The Maryland Financial Institutions Code additionally prohibits any
person from acquiring voting stock in a bank or bank holding company without 60
days prior notice to the Commissioner if such acquisition will give the person
control of 25% or more of the voting stock of the bank or bank holding company
or will affect the power to direct or to cause the direction of the policy or
management of the bank or bank holding company. Any doubt whether the stock
acquisition will affect the power to direct or cause the direction of policy or
management shall be resolved in favor of reporting to the Commissioner. The
Commissioner may deny approval of the acquisition if the Commissioner determines
it to be anti-competitive or to threaten the safety or soundness of a banking
institution. Voting stock acquired in violation of this statute may not be voted
for five years.





12


****


**Capital
Adequacy.** The
Federal Reserve Board has adopted guidelines regarding the capital adequacy of
bank holding companies, which require bank holding companies to maintain
specified minimum ratios of capital to total assets and capital to risk-weighted
assets. See "Regulation of the Bank -- Capital Adequacy."





**Dividends
and Distributions.** The
Federal Reserve Board has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound practices. The Federal
Reserve Board has issued a policy statement on the payment of cash dividends by
bank holding companies, which expresses the Federal Reserve Board's view that a
bank holding company should pay cash dividends only to the extent that the
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the company s
capital needs, asset quality, and overall financial condition.





Bank
holding companies are required to give the Federal Reserve Board notice of any
purchase or redemption of their outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the bank holding company's consolidated net
worth. The Federal Reserve Board may disapprove such a purchase or redemption if
it determines that the proposal would violate any law, regulation, Federal
Reserve Board order, directive, or any condition imposed by, or written
agreement with, the Federal Reserve Board. Bank holding companies whose capital
ratios exceed the thresholds for "well capitalized" banks on a consolidated
basis are exempt from the foregoing requirement if they were rated composite 1
or 2 in their most recent inspection and are not the subject of any unresolved
supervisory issues.





**Regulation
of the Bank**





**General.** As a
state-chartered bank with deposits insured by the FDIC but which is not a member
of the Federal Reserve System (a "state non-member bank"), the Bank is subject
to the supervision of the Maryland Commissioner of Financial Regulation and the
FDIC. The Commissioner and FDIC regularly examine the operations of the Bank,
including but not limited to capital adequacy, reserves, loans, investments and
management practices. These examinations are for the protection of the Bank's
depositors and not its stockholders. In addition, the Bank is required to
furnish quarterly and annual call reports to the Commissioner and FDIC. The
FDIC's enforcement authority includes the power to remove officers and directors
and the authority to issue cease-and-desist orders to prevent a bank from
engaging in unsafe or unsound practices or violating laws or regulations
governing its business.





The
Bank's deposits are insured by the FDIC to the legal maximum of $100,000 for
each insured depositor. Some of the aspects of the lending and deposit business
of the Bank that are subject to regulation by the Federal Reserve Board and the
FDIC include reserve requirements and disclosure requirements in connection with
personal and mortgage loans and savings deposit accounts. In addition, the Bank
is subject to numerous Federal and state laws and regulations which set forth
specific restrictions and procedural requirements with respect to the
establishment of branches, investments, interest rates on loans, credit
practices, the disclosure of customer information, the disclosure of credit
terms and discrimination in credit transactions.




**Patriot
Act.** On
October 26, 2001, President Bush signed the USA Patriot Act (the "Patriot Act"),
which includes provisions pertaining to domestic security, surveillance
procedures, border protection, and terrorism laws to be administered by the
Secretary of the Treasury.  Title III of the Patriot Act entitled,
"International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.




Effective
December 25, 2001, Section 313(a) of the Patriot Act prohibits any insured
financial institution such as the Bank, from providing correspondent accounts to
foreign banks which do not have a physical presence in any country (designated
as "shell banks"), subject to certain exceptions for regulated affiliates of
foreign banks.  Section 313(a) also requires financial institutions to take
reasonable steps to ensure that foreign bank correspondent accounts are not
being used to indirectly provide banking services to foreign shell banks, and
Section 319(b) requires financial institutions to maintain records of the owners
and agent for service of process of any such foreign banks with whom
correspondent accounts have been established.






Effective
July 23, 2002, Section 312 of the Patriot Act creates a requirement for special
due diligence for correspondent accounts and private banking accounts. 
Under Section 312, each financial institution that establishes, maintains,
administers, or manages a private banking account or a correspondent account in
the United States for a non-United States person, including a foreign individual
visiting the United States, or a representative of a non-United States person
shall establish appropriate, specific, and, where necessary, enhanced, due
diligence policies, procedures, and controls that are reasonably designed to
detect and record instances of money laundering through those
accounts.




13





The
Company and the Bank are not currently aware of any account relationships
between the Bank and any foreign bank or other person or entity as described
above under Sections 313(a) or 312 of the Patriot Act.  The terrorist
attacks on September 11, 2001 have realigned national security priorities of the
United States and it is reasonable to anticipate that the United States Congress
may enact additional legislation in the future to combat terrorism including
modifications to existing laws such as the Patriot Act to expand powers as
deemed necessary.  The effects which the Patriot Act and any additional
legislation enacted by Congress may have upon financial institutions is
uncertain; however, such legislation would likely increase compliance costs and
thereby potentially have an adverse effect upon the Company's results of
operations.





**Community
Reinvestment Act.** Community Reinvestment Act ("CRA") regulations evaluate banks lending to low and
moderate income individuals and businesses across a four-point scale from
"outstanding" to "substantial noncompliance," and are a factor in regulatory
review of applications to merge, establish new branch offices or form bank
holding companies.  In addition, any bank rated in "substantial
noncompliance" with the CRA regulations may be subject to enforcement
proceedings.  The Bank has a current rating of "outstanding" for CRA
compliance.





**Capital
Adequacy.** The
Federal Reserve Board and the FDIC have established guidelines with respect to
the maintenance of appropriate levels of capital by bank holding companies and
state non-member banks, respectively. The regulations impose two sets of capital
adequacy requirements: minimum leverage rules, which require bank holding
companies and banks to maintain a specified minimum ratio of capital to total
assets, and risk-based capital rules, which require the maintenance of specified
minimum ratios of capital to "risk-weighted" assets.





The
regulations of the Federal Reserve Board and the FDIC require bank holding
companies and state non-member banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" (as defined in the risk-based capital
guidelines discussed in the following paragraphs) to total assets of 3.0%.
Although setting a minimum 3.0% leverage ratio, the capital regulations state
that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the Federal bank
regulators, would be permitted to operate at or near such minimum level of
capital. All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organization's capital adequacy by its primary
regulator. Any bank or bank holding company experiencing or anticipating
significant growth would be expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve Board has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of
capital.





The
risk-based capital rules of the Federal Reserve Board and the FDIC require bank
holding companies and state non-member banks, respectively, to maintain minimum
regulatory capital levels based upon a weighting of their assets and off-balance
sheet obligations according to risk. Risk-based capital is composed of two
elements: Tier 1 capital and Tier 2 capital. Tier 1 capital consists primarily
of common stockholders equity, certain perpetual preferred stock (which must be
noncumulative in the case of banks), and minority interests in the equity
accounts of consolidated subsidiaries; less all intangible assets, except for
certain purchased mortgage servicing rights and credit card relationships. Tier
2 capital elements include, subject to certain limitations, the allowance for
losses on loans and leases; perpetual preferred stock that does not qualify as
Tier 1 capital and long-term preferred stock with an original maturity of at
least 20 years from issuance; hybrid capital instruments, including perpetual
debt and mandatory convertible securities; and subordinated debt and
intermediate-term preferred stock.





The
risk-based capital regulations assign balance sheet assets and credit equivalent
amounts of off-balance sheet obligations to one of four broad risk categories
based principally on the degree of credit risk associated with the obligor. The
assets and off-balance sheet items in the four risk categories are weighted at
0%, 20%, 50% and 100%. These computations result in the total risk-weighted
assets. The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital (Tier 1 capital plus Tier
2 capital) to total risk-weighted assets of 8%, with at least 4% as Tier 1
capital. For the purpose of calculating these ratios: (i) Tier 2 capital is
limited to no more than 100% of Tier 1 capital; and (ii) the aggregate amount of
certain types of Tier 2 capital is limited. In addition, the risk-based capital
regulations limit the allowance for loan losses includable as capital to 1.25%
of total risk-weighted assets.





14





FDIC
regulations and guidelines additionally specify that state non-member banks with
significant exposure to declines in the economic value of their capital due to
changes in interest rates may be required to maintain higher risk-based capital
ratios. The Federal banking agencies, including the FDIC, have proposed a system
for measuring and assessing the exposure of a bank's net economic value to
changes in interest rates. The Federal banking agencies, including the FDIC,
have stated their intention to propose a rule establishing an explicit capital
charge for interest rate risk based upon the level of a bank's measured interest
rate risk exposure after more experience has been gained with the proposed
measurement process. Federal Reserve Board regulations do not specifically take
into account interest rate risk in measuring the capital adequacy of bank
holding companies.





The FDIC
has issued regulations which classify state non-member banks by capital levels
and which authorize the FDIC to take various prompt corrective actions to
resolve the problems of any bank that fails to satisfy the capital standards.
Under such regulations, a well-capitalized bank is one that is not subject to
any regulatory order or directive to meet any specific capital level and that
has or exceeds the following capital levels: a total risk-based capital ratio of
10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of 5%. An
adequately capitalized bank is one that does not qualify as well-capitalized but
meets or exceeds the following capital requirements: a total risk-based capital
ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of
either (i) 4% or (ii) 3% if the bank has the highest composite examination
rating. A bank not meeting these criteria is treated as undercapitalized,
significantly undercapitalized, or critically undercapitalized depending on the
extent to which the bank s capital levels are below these standards. A state
non-member bank that falls within any of the three undercapitalized categories
established by the prompt corrective action regulation will be subject to severe
regulatory sanctions. As of December 31, 2004, the Bank was well capitalized as
defined by the FDIC's regulations.





**Branching.** Maryland
law provides that, with the approval of the Commissioner, Maryland banks may
establish branches within the State of Maryland without geographic restriction
and may establish branches in other states by any means permitted by the laws of
such state or by federal law. The Riegle-Neal Act authorizes the FDIC to approve
interstate branching de novo by state banks, only in states that specifically
allow for such branching. The Riegle-Neal Act also requires the appropriate
federal banking agencies to prescribe regulations by June 1, 1997 that prohibit
any out-of-state bank from using the interstate branching authority primarily
for the purpose of deposit production. These regulations must include guidelines
to ensure that interstate branches operated by an out-of-state bank in a host
state are reasonably helping to meet the credit needs of the communities that
they serve.





**Dividend
Limitations.** Pursuant
to the Maryland Financial Institutions Code, Maryland banks may only pay
dividends from undivided profits or, with the prior approval of the
Commissioner, their surplus in excess of 100% of required capital stock. The
Maryland Financial Institutions Code further restricts the payment of dividends
by prohibiting a Maryland bank from declaring a dividend on its shares of common
stock until its surplus fund equals the amount of required capital stock or, if
the surplus fund does not equal the amount of capital stock, in an amount in
excess of 90% of net earnings. In addition, the Bank is prohibited by federal
statute from paying dividends or making any other capital distribution that
would cause the Bank to fail to meet its regulatory capital requirements.
Further, the FDIC also has authority to prohibit the payment of dividends by a
state non-member bank when it determines such payment to be an unsafe and
unsound banking practice.





**Deposit
Insurance.** The Bank
is required to pay semi-annual assessments based on a percentage of its insured
deposits to the FDIC for insurance of its deposits by the Bank Insurance Fund
("BIF"). Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for BIF-insured institutions to maintain the designated
reserve ratio of the BIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the BIF.





15





Under the
risk-based deposit insurance assessment system adopted by the FDIC, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- "well capitalized, adequately capitalized or
undercapitalized." Within each capital group, institutions are assigned to one
of three subgroups on the basis of supervisory evaluations by the institution's
primary supervisory authority and such other information as the FDIC determines
to be relevant to the institution's financial condition and the risk posed to
the deposit insurance fund. Under the current assessment schedule,
well-capitalized banks with the best supervisory ratings are not required to pay
any premium for deposit insurance. All BIF-insured banks, however, will be
required to begin paying an assessment to the FDIC in an amount equal to 2.12
basis points times their assessable deposits to help fund interest payments on
certain bonds issued by the Financing Corporation, an agency established by the
federal government to finance takeovers of insolvent thrifts.





**Transactions
With Affiliates.** A state
non-member bank or its subsidiaries may not engage in "covered transactions"
with any one affiliate in an amount greater than 10% of such bank's capital
stock and surplus, and for all such transactions with all affiliates a state
non-member bank is limited to an amount equal to 20% of capital stock and
surplus. All such transactions must also be on terms substantially the same, or
at least as favorable, to the bank or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. An affiliate of a state non-member bank is any company or entity
which controls or is under common control with the state non-member bank and,
for purposes of the aggregate limit on transactions with affiliates, any
subsidiary that would be deemed a financial subsidiary of a national bank. In a
holding company context, the parent holding company of a state non-member bank
(such as the Company) and any companies which are controlled by such parent
holding company are affiliates of the state non-member bank. The BHCA further
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain limited
exceptions.





**Loans
To Directors, Executive Officers and Principal
Stockholders.** Loans to
directors, executive officers and principal stockholders of a state non-member
bank must be made on substantially the same terms as those prevailing for
comparable transactions with persons who are not executive officers, directors,
principal stockholders or employees of the Bank unless the loan is made pursuant
to a compensation or benefit plan that is widely available to employees and does
not favor insiders. Loans to any executive officer, director and principal
stockholder together with all other outstanding loans to such person and
affiliated interests generally may not exceed 15% of the bank's unimpaired
capital and surplus and all loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus. Loans to directors,
executive officers and principal stockholders, and their respective affiliates,
in excess of the greater of $100,000 or 5% of capital and surplus (up to
$500,000) must be approved in advance by a majority of the board of directors of
the bank with any "interested" director not participating in the voting. State
non-member banks are prohibited from paying the overdrafts of any of their
executive officers or directors. In addition, loans to executive officers may
not be made on terms more favorable than those afforded other borrowers and are
restricted as to type, amount and terms of credit.











16





**ITEM
2** **.
PROPERTIES**





The
following table sets forth certain information with respect to the Bank's
offices:


**Year****Opened**
    
    **Owned/********Leased**
    
    ******Book
      Value**
    
    **Approximate**
      **Square
      Footage**
    
    ******Deposits****Main
      Office:**101
      Crain Highway, S.E.
      Glen
      Burnie, MD 21061
    
    
    1953
    
    
    Owned
    
    $
    792,643
    
    
    10,000
    
    $
    91,823,668**Branches:**Odenton
      1405
      Annapolis Road
      Odenton,
      MD 21113
    
    
    1969
    
    
    Owned
    
    
    227,914
    
    
    6,000
    
    
    38,777,450Riviera
      Beach
      8707
      Ft. Smallwood Road
      Pasadena,
      MD 21122
    
    
    1973
    
    
    Owned
    
    
    188,645
    
    
    2,500
    
    
    30,597,814Crownsville
      1221
      Generals Highway
      Crownsville,
      MD 21032
    
    
    1979
    
    
    Owned
    
    
    380,653
    
    
    3,000
    
    
    47,158,352Severn
      811
      Reece Road
      Severn,
      MD 21144
    
    
    1984
    
    
    Owned
    
    
    284,467
    
    
    2,500
    
    
    25,737,966South
      Crain
      7984
      Crain Highway
      Glen
      Burnie, MD 21061
    
    
    1995
    
    
    Leased
    
    
    51,529
    
    
    2,600
    
    
    20,849,609Linthicum(1)
      Burwood
      Village Shopping Center
      Glen
      Burnie, MD 21060
    
    
    2005
    
    
    Leased
    
    
    --
    
    
    2,500
    
    
    --Severna
      Park
      534
      Ritchie Highway
      Severna
      Park, MD 21146
    
    
    2002
    
    
    Leased
    
    
    275,006
    
    
    2,184
    
    
    7,250,535**Operations
      Centers:**106
      Padfield Blvd.
      Glen
      Burnie, MD 21061
    
    
    1991
    
    
    Owned
    
    
    1,447,594
    
    
    16,200
    
    
    N/A103
      Crain Highway, S.E.
      Glen
      Burnie, MD 21061
    
    
    2000
    
    
    Owned
    
    
    299,553
    
    
    3,727
    
    
    N/A__________________________________
      (1)
      This branch opened on January 27, 2005.





At
December 31, 2004, the Bank owned one foreclosed real estate property with a
total book value of $ 50,000. The Bank is holding this commercial property for
sale.





**ITEM
3** **.** **LEGAL
PROCEEDINGS**





From time
to time, the Company and the Bank are involved in various legal actions relating
to their business activities. At December 31, 2004, there were no actions to
which the Company or the Bank was a party which involved claims for money
damages exceeding 10% of the Company's consolidated current assets in any one
case or in any group of proceedings presenting in large degree the same legal
and factual issues.





**ITEM
4** **.** **SUBMISSION
OF MATTERS TO VOTE OF SECURITY HOLDERS** ****





Not
applicable.








17








**EXECUTIVE
OFFICERS OF THE REGISTRANT**





Set forth
below is information about the Company's executive officers.





**NAME**
    
    **AGE**
    
    **POSITIONS**F.
      William Kuethe, Jr.
    
    72
    
    President
      and Chief Executive OfficerMichael
      G. Livingston
    
    51
    
    Deputy
      Chief Executive Officer, Executive Vice President and Chief Operating
      OfficerJohn
      E. Porter
    
    51
    
    Senior
      Vice President and Chief Financial Officer





F.
WILLIAM KUETHE, JR. has been President and Chief Executive Officer of the
Company and the Bank since 1995. He also was director of the Bank from 1963
through 1989. He was President of Glen Burnie Mutual Savings Bank from 1960
through 1995. Mr. Kuethe is a former licensed appraiser and real estate broker
with banking experience from 1960 to present, at all levels. He is the father of
Frederick W. Kuethe, III, a director of the Company.





MICHAEL
G. LIVINGSTON was appointed Deputy Chief Executive Officer and Executive Vice
President in August 2004 and became a Director on January 1, 2005. Mr.
Livingston was a Senior Vice President from January 1998 until August 2004 and
had been Chief Lending Officer of the Bank from 1996 until August 2004. He
served as Deputy Chief Operating Officer from February 14, 2003 through December
31, 2003 and was appointed the Chief Operating Officer effective January 1,
2004. He was Regional Vice President and commercial loan officer with Citizens
Bank from March 1993 until April 1996.





JOHN E.
PORTER was appointed Senior Vice President in January 1998. He has been
Treasurer and Chief Financial Officer of the Company since 1995 and Vice
President, Treasurer and Chief Financial Officer of the Bank since 1990. He has
been Secretary/Treasurer of GBB since 1995.








18





**PART
II**





**ITEM
5** **.** **MARKET
FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER**


**** **MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES**





The
Common Stock is traded on the Nasdaq SmallCap Market under the symbol "GLBZ". As
of March 2, 2005, there were 480 record holders of the Common Stock. The closing
price for the Common Stock on that date was $21.62.




The
following table sets forth the high and low sales prices for the Common Stock
for each full quarterly period during 2004 and 2003 as reported by Nasdaq. The
quotations represent prices between dealers and do not reflect the retailer
markups, markdowns or commissions, and may not represent actual transactions.
Also shown are dividends declared per share for these periods.





2004
    
    2003Quarter
      Ended
    
    High
    
    Low
    
    Dividends
    
    High
    
    Low
    
    DividendsMarch
      31,
    
    $
    26.51
    
    $
    24.10
    
    $
    0.11
    
    $
    16.68
    
    $
    14.40
    
    $
    0.10June
      30,
    
    
    25.60
    
    
    21.10
    
    
    0.11
    
    
    17.91
    
    
    16.58
    
    
    0.10September
      30
    
    
    23.25
    
    
    21.10
    
    
    0.12
    
    
    19.20
    
    
    16.61
    
    
    0.10December
      31
    
    
    24.86
    
    
    21.96
    
    
    0.18
    
    
    24.79
    
    
    18.80
    
    
    0.15





A regular
dividend of $0.12 and a bonus dividend of $0.06 were declared for stockholders
of record on December 27, 2004, payable on January 7, 2005 and January 11, 2005,
respectively.





The
Company intends to pay dividends approximating thirty-five percent (35%) of its
profits for each quarter. However, dividends remain subject to declaration by
the Board of Directors in its sole discretion and there can be no assurance that
the Company will be legally or financially able to make such payments. Payment
of dividends may be limited by federal and state regulations which impose
general restrictions on a bank's and bank holding company s right to pay
dividends (or to make loans or advances to affiliates which could be used to pay
dividends). Generally, dividend payments are prohibited unless a bank or bank
holding company has sufficient net (or retained) earnings and capital as
determined by its regulators. See " Item
1. Business -
Supervision and Regulation - Regulation of the Company - Dividends and
Distributions" and " Item
1. Business --
Supervision and Regulation - Regulation of the Bank - Dividend Limitations." The
Company does not believe that those restrictions will materially limit its
ability to pay dividends.





19


****


**ITEM
6** **.** **SELECTED
FINANCIAL DATA**




The following
table presents consolidated selected financial data for the Company and its
subsidiaries for each of the periods indicated. Dividends and earnings per share
have been adjusted to give retroactive effect to a six-for-five stock split
effected through a stock dividend paid on January 6, 2004 and a three-for-two
stock split effected through a stock dividend paid on June 21,
2001.




**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****(Dollars
      In Thousand Except Per Share Data)****Operations
      Data:**Net
      Interest Income
    
    $
    12,016
    
    $
    11,263
    
    $
    11,368
    
    $
    10,674
    
    $
    10,801Provision
      for Credit Losses
    
    
    340
    
    
    40
    
    
    --
    
    
    (150
    )
    
    --Other
      Income
    
    
    2,372
    
    
    2,289
    
    
    2,485
    
    
    1,821
    
    
    3,658Other
      Expense
    
    
    10,360
    
    
    9,748
    
    
    9,957
    
    
    10,332
    
    
    10,746Net
      Income
    
    
    3,056
    
    
    3,077
    
    
    2,811
    
    
    1,725
    
    
    2,275**Share
      Data:**Basic
      Net Income Per Share
    
    $
    1.50
    
    $
    1.52
    
    $
    1.40
    
    $
    0.87
    
    $
    1.14Diluted
      Net Income Per Share
    
    
    1.50
    
    
    1.52
    
    
    1.40
    
    
    0.87
    
    
    1.14Cash
      Dividends Declared Per Common Share
    
    
    0.52
    
    
    0.45
    
    
    0.42
    
    
    0.38
    
    
    0.37Weighted
      Average Common Shares Outstanding:Basic
    
    
    2,031,843
    
    
    2,019,502
    
    
    2,005,602
    
    
    1,994,171
    
    
    1,989,268Diluted
    
    
    2,031,843
    
    
    2,019,502
    
    
    2,008,986
    
    
    1,994,171
    
    
    1,989,268**Financial
      Condition Data:**Total
      Assets
    
    $
    302,312
    
    $
    302,252
    
    $
    279,406
    
    $
    263,362
    
    $
    239,211Loans
      Receivable, Net
    
    
    182,291
    
    
    172,819
    
    
    158,287
    
    
    164,569
    
    
    162,373Total
      Deposits
    
    
    261,674
    
    
    256,908
    
    
    241,420
    
    
    229,307
    
    
    205,968Long
      Term Borrowings
    
    
    7,200
    
    
    7,227
    
    
    7,251
    
    
    7,275
    
    
    7,297Junior
      Subordinated Debentures
    
    
    5,155
    
    
    5,155
    
    
    5,155
    
    
    5,155
    
    
    5,155Total
      Stockholders Equity
    
    
    25,744
    
    
    23,948
    
    
    21,789
    
    
    17,862
    
    
    17,181**Performance
      Ratios:**Return
      on Average Assets
    
    
    1.00
    %
    
    1.05
    %
    
    1.05
    %
    
    0.69
    %
    
    1.02
    %Return
      on Average Equity
    
    
    12.51
    
    
    13.56
    
    
    14.49
    
    
    9.77
    
    
    12.94Net
      Interest Margin (1)
    
    
    4.61
    
    
    4.48
    
    
    4.76
    
    
    4.80
    
    
    5.27Dividend
      Payout Ratio
    
    
    34.67
    
    
    29.53
    
    
    29.70
    
    
    43.27
    
    
    32.61**Capital
      Ratios:**Average
      Equity to Average Assets
    
    
    8.16
    %
    
    7.76
    %
    
    9.03
    %
    
    9.08
    %
    
    8.59
    %Leverage
      Ratio
    
    
    9.85
    
    
    9.25
    
    
    9.07
    
    
    8.79
    
    
    9.30Total
      Risk-Based Capital Ratio
    
    
    16.40
    
    
    15.79
    
    
    15.28
    
    
    13.92
    
    
    13.99**Asset
      Quality Ratios:**Allowance
      for Credit Losses to
      Gross
      Loans
    
    
    1.30
    %
    
    1.28
    %
    
    1.56
    %
    
    1.75
    %
    
    2.04
    %Non-accrual
      and Past Due Loans to
      Gross
      Loans
    
    
    0.33
    %
    
    0.33
    %
    
    0.36
    %
    
    0.39
    %
    
    0.24
    %Allowance
      for Credit Losses to Non-
      Accrual
      and Past Due Loans
    
    
    398.68
    %
    
    385.25
    %
    
    429.13
    %
    
    445.30
    %
    
    837.87
    %Net
      Loan Charge-offs (Recoveries) to Average Loans
    
    
    0.10
    %
    
    0.18
    %
    
    0.26
    %
    
    0.18
    %
    
    (0.28
    )%(1)
      Presented on a tax-equivalent basis


****





20


****


**ITEM
7** **.** **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS OF
OPERATIONS**




**Forward-Looking
Statements**





When used
in this discussion and elsewhere in this Annual Report on Form 10-K, the words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company cautions readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and readers are advised that various factors, including
regional and national economic conditions, unfavorable judicial decisions,
substantial changes in levels of market interest rates, credit and other risks
of lending and investment activities and competitive and regulatory factors
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected.





The
Company does not undertake and specifically disclaims any obligation to update
any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such
statements.





**Overview**





During 2004, the
Company saw continued growth in both deposits and the loan portfolio.
Non-interest bearing deposits increased $3,778,548 and interest bearing deposits
increased $987,260. The loan portfolio increased by $9,472,243, primarily due to
a $6,567,752 increase in residential mortgage loans. Earnings remained stable
with net income of $3,055,501 for 2004 and $3,077,074 for 2003.





All per
share amounts throughout this report have been adjusted to give retroactive
effect to a six-for-five stock split effected through a stock dividend paid on
January 6, 2004.





**Comparison
of Results of Operations for the Years Ended December 31, 2004, 2003 and
2002**





**General.** For the
year ended December 31, 2004, the Company reported consolidated net income of
$3,055,501 ($1.50 basic and diluted earnings per share) compared to consolidated
net income of $3,077,074 ($1.52 basic and diluted earnings per share) for the
year ended December 31, 2003 and consolidated net income of $2,811,083 ($1.40
basic and diluted earnings per share) for the year ended December 31, 2002.
Income for 2002 included a $763,644 curtailment gain on a post retirement
benefit plan amendment. Net income for 2002, adjusted to remove the effects of
this item, net of taxes, was $2,342,358.





**Net
Interest Income.** The
primary component of the Company's net income is its net interest income, which
is the difference between income earned on assets and interest paid on the
deposits and borrowings used to fund income producing assets. Net interest
income is determined by the spread between the yields earned on the Company's
interest-earning assets and the rates paid on interest-bearing liabilities as
well as the relative amounts of such assets and liabilities. Net interest
income, divided by average interest-earning assets, represents the Company's net
interest margin.





Consolidated
net interest income for the year ended December 31, 2004 was $12,016,466
compared to $11,263,294 for the year ended December 31, 2003 and $11,368,150 for
the year ended December 31, 2002. The $753,172 increase for the most recent year
was primarily due to a decrease in deposit expense and an increase in income on
U.S. Government agency securities. The $104,856 decrease in net interest income
for 2003 as compared to 2002 was due to a decrease in loan and federal funds
income, partially offset by a decrease in deposit expense. Since a large portion
of the Company's portfolio is invested in state and municipal securities, which
are tax advantaged, the after tax net interest income for 2004 was $12,946,071,
a $752,467 or 6.17% increase over the $12,193,604 after tax net interest income
for 2003, which was an increase of $307,460 or 2.58% compared to $11,886,144 in
after tax net interest income for 2002.





21





Interest
expense decreased from $4,276,724 in 2003 to $3,644,661 in 2004, a $632,063, or
14.78% decrease, primarily due to a decrease in interest rates paid on deposits.
Interest expense decreased from $5,202,132 in 2002 to $4,276,724 in 2003, a
$925,408, or 17.79% decrease, also primarily due to decreases in interest rates
paid on deposits. Net interest margin for the year ended December 31, 2004 was
4.61% compared to 4.48% and 4.76% for the years ended December 31, 2003 and
2002, respectively.





The
following table allocates changes in income and expense attributable to the
Company's interest-earning assets and interest-bearing liabilities for the
periods indicated between changes due to changes in rate and changes in volume.
Changes due to rate/volume are allocated to changes due to volume.




**Year
      Ended December 31,****2004**
    
    **VS.**
    
    **2003**
    
    **2003**
    
    **VS.**
    
    **2002****Change
      Due To:**
    
    
    
    **Change
      Due To:****Increase/**
      **Decrease**
    
    **Rate**
    
    **Volume**
    
    **Increase/**
      **Decrease**
    
    **Rate**
    
    **Volume****(In
      Thousands)****ASSETS**Interest-earning
      assets:Federal
      funds sold
    
    $
    8
    
    $
    6
    
    $
    2
    
    $
    (43
    )
    $
    (26
    )
    $
    (17
    )Interest-bearing
      deposits
    
    
    (24
    )
    
    4
    
    
    (28
    )
    
    6
    
    
    3
    
    
    3Investment
      securities:U.S.
      Treasury securities, obligations of U.S. government agencies and
      mortgage-backed securities
    
    
    244
    
    
    384
    
    
    (140
    )
    
    (544
    )
    
    (649
    )
    
    105Obligations
      of states and political subdivisions(1)
    
    
    (6
    )
    
    (28
    )
    
    22
    
    
    961
    
    
    (85
    )
    
    1,046All
      other investment securities
    
    
    1
    
    
    2
    
    
    (1
    )
    
    13
    
    
    6
    
    
    7Total
      investment securities
    
    
    239
    
    
    358
    
    
    (119
    )
    
    430
    
    
    (728
    )
    
    1,158Loans,
      net of unearned income:Demand,
      time and lease
    
    
    6
    
    
    10
    
    
    (4
    )
    
    (21
    )
    
    (60
    )
    
    39Mortgage
      and construction
    
    
    399
    
    
    (402
    )
    
    801
    
    
    (247
    )
    
    (658
    )
    
    411Installment
      and credit card
    
    
    (546
    )
    
    (794
    )
    
    248
    
    
    (725
    )
    
    (535
    )
    
    (190
    )Total
      gross loans(2)
    
    
    (141
    )
    
    (1,186
    )
    
    1,045
    
    
    (993
    )
    
    (1,253
    )
    
    260Allowance
      for credit losses
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Total
      net loans
    
    
    (141
    )
    
    (1,186
    )
    
    1,045
    
    
    (993
    )
    
    (1,253
    )
    
    260Total
      interest-earning assets
    
    $
    82
    
    $
    (818
    )
    $
    900
    
    $
    (600
    )
    $
    (2,004
    )
    $
    1,404**LIABILITIES:**Interest-bearing
      deposits:Savings
      and NOW
    
    $
    (16
    )
    $
    (41
    )
    $
    25
    
    $
    (201
    )
    $
    (260
    )
    $
    59Money
      market
    
    
    (20
    )
    
    (19
    )
    
    (1
    )
    
    (81
    )
    
    (97
    )
    
    16Other
      time deposits
    
    
    (628
    )
    
    (491
    )
    
    (137
    )
    
    (655
    )
    
    (686
    )
    
    31Total
      interest-bearing deposits
    
    
    (664
    )
    
    (551
    )
    
    (113
    )
    
    (937
    )
    
    (1,043
    )
    
    106Non-interest-bearing
      deposits
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Borrowed
      funds
    
    
    32
    
    
    1
    
    
    31
    
    
    12
    
    
    (67
    )
    
    79Total
      interest-bearing liabilities
    
    $
    (632
    )
    $
    (550
    )
    $
    (82
    )
    $
    (925
    )
    $
    (1,110
    )
    $
    185(1)
      Tax equivalent basis.
      (2)
      Non-accrual loans included in average balances.





The
following table provides information for the designated periods with respect to
the average balances, income and expense and annualized yields and costs
associated with various categories of interest-earning assets and
interest-bearing liabilities.







22










**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Average**
      **Balance**
    
    **Interest**
    
    **Yield/**
      **Cost**
    
    **Average****Balance**
    
    **Interest**
    
    **Yield/**
      **Cost**
    
    **Average****Balance**
    
    **Interest**
    
    **Yield/**
      **Cost****(****Dollars
      In Thousands)****ASSETS:**Interest-earning
      assets:Federal
      funds sold
    
    $
    4,962
    
    $
    59
    
    
    1.18
    %
    $
    4,815
    
    $
    51
    
    
    1.06
    %
    $
    5,919
    
    $
    94
    
    
    1.59
    %Interest-bearing
      deposits
    
    
    1,126
    
    
    37
    
    
    3.29
    
    
    2,078
    
    
    61
    
    
    2.94
    
    
    1,782
    
    
    55
    
    
    3.09Investment
      securities:U.S.
      Treasury securities, obligations of U.S. government agencies and
      mortgage-backed securities
    
    
    50,575
    
    
    2,217
    
    
    4.38
    
    
    54,497
    
    
    1,973
    
    
    3.62
    
    
    52,287
    
    
    2,517
    
    
    4.81Obligations
      of states and political subdivisions(1)
    
    
    41,016
    
    
    2,696
    
    
    6.57
    
    
    40,655
    
    
    2,702
    
    
    6.64
    
    
    25,402
    
    
    1,741
    
    
    6.85All
      other investment securities
    
    
    5,019
    
    
    358
    
    
    7.13
    
    
    5,038
    
    
    357
    
    
    7.09
    
    
    4,935
    
    
    344
    
    
    6.97Total
      investment securities
    
    
    96,610
    
    
    5,271
    
    
    5.46
    
    
    100,190
    
    
    5,032
    
    
    5.02
    
    
    82,624
    
    
    4,602
    
    
    5.57Loans,
      net of unearned income:Demand,
      time and lease
    
    
    5,556
    
    
    333
    
    
    5.99
    
    
    5,624
    
    
    327
    
    
    5.81
    
    
    5,066
    
    
    348
    
    
    6.87Mortgage
      and construction
    
    
    100,590
    
    
    6,494
    
    
    6.46
    
    
    88,853
    
    
    6,095
    
    
    6.86
    
    
    83,444
    
    
    6,342
    
    
    7.60Installment
      and credit card
    
    
    74,902
    
    
    4,376
    
    
    5.84
    
    
    71,326
    
    
    4,922
    
    
    6.90
    
    
    73,851
    
    
    5,647
    
    
    7.65Total
      gross loans(2)
    
    
    181,048
    
    
    11,203
    
    
    6.19
    
    
    165,803
    
    
    11,344
    
    
    6.84
    
    
    162,361
    
    
    12,337
    
    
    7.60Allowance
      for credit losses
    
    
    (2,338
    )
    
    
    
    
    
    
    
    (2,343
    )
    
    
    
    
    
    
    
    (2,767
    )Total
      net loans
    
    
    178,710
    
    
    11,203
    
    
    6.27
    
    
    163,460
    
    
    11,344
    
    
    6.94
    
    
    159,594
    
    
    12,337
    
    
    7.59Total
      interest-earning assets
    
    
    281,408
    
    
    16,570
    
    
    5.89
    
    
    270,317
    
    
    16,488
    
    
    6.06
    
    
    249,919
    
    
    17,088
    
    
    6.84Cash
      and due from banks
    
    
    11,203
    
    
    
    
    
    
    
    
    10,317
    
    
    
    
    
    
    
    
    8,921Other
      assets
    
    
    13,162
    
    
    
    
    
    
    
    
    12,039
    
    
    
    
    
    
    
    
    10,199Total
      assets
    
    $
    305,773
    
    
    
    
    
    
    
    $
    292,673
    
    
    
    
    
    
    
    $
    269,039**LIABILITIES
      AND STOCKHOLDERS EQUITY:**Interest-bearing
      deposits:Savings
      and NOW
    
    $
    83,354
    
    
    268
    
    
    0.32
    %
    $
    76,632
    
    
    284
    
    
    0.37
    %
    $
    67,926
    
    
    485
    
    
    0.71
    %Money
      market
    
    
    21,146
    
    
    85
    
    
    0.40
    
    
    21,514
    
    
    105
    
    
    0.49
    
    
    19,770
    
    
    186
    
    
    0.94Other
      time deposits
    
    
    84,621
    
    
    2,259
    
    
    2.66
    
    
    89,108
    
    
    2,887
    
    
    3.24
    
    
    88,304
    
    
    3,542
    
    
    4.01Total
      interest-bearing deposits
    
    
    189,121
    
    
    2,612
    
    
    1.38
    
    
    187,254
    
    
    3,276
    
    
    1.75
    
    
    176,000
    
    
    4,213
    
    
    2.39Short-term
      borrowed funds
    
    
    3,983
    
    
    57
    
    
    1.43
    
    
    1,816
    
    
    28
    
    
    1.54
    
    
    755
    
    
    16
    
    
    2.12Long-term
      borrowed funds
    
    
    12,367
    
    
    976
    
    
    7.89
    
    
    12,393
    
    
    972
    
    
    7.84
    
    
    12,417
    
    
    974
    
    
    7.84Total
      interest-bearing liabilities
    
    
    205,471
    
    
    3,645
    
    
    1.77
    
    
    201,463
    
    
    4,277
    
    
    2.12
    
    
    189,172
    
    
    5,202
    
    
    2.75Non-interest-bearing
      deposits
    
    
    74,686
    
    
    
    
    
    
    
    
    66,635
    
    
    
    
    
    
    
    
    58,351Other
      liabilities
    
    
    1,191
    
    
    
    
    
    
    
    
    2,154
    
    
    
    
    
    
    
    
    1,389Stockholders
      equity
    
    
    24,425
    
    
    
    
    
    
    
    
    22,421
    
    
    
    
    
    
    
    
    20,127Total
      liabilities and equity
    
    $
    305,773
    
    
    
    
    
    
    
    $
    292,673
    
    
    
    
    
    
    
    $
    269,039Net
      interest income
    
    
    
    
    $
    12,925
    
    
    
    
    
    
    
    $
    12,099
    
    
    
    
    
    
    
    $
    11,886Net
      interest spread
    
    
    
    
    
    
    
    
    4.12
    %
    
    
    
    
    
    
    
    3.94
    %
    
    
    
    
    
    
    
    4.09
    %Net
      interest margin
    
    
    
    
    
    
    
    
    4.61
    %
    
    
    
    
    
    
    
    4.48
    %
    
    
    
    
    
    
    
    4.76
    %(1)
      Tax equivalent basis. The incremental tax rate applied was 34.35% for 2004
      and 35.23% for 2003.
      (2)
      Non-accrual loans included in average
balance.





**Provision
For Credit Losses.** During
the year ended December 31, 2004, the Company made a provision of $340,000 for
credit losses, compared to a provision of $40,000 during the year ended December
31, 2003, and no provision during the year ended December 31, 2002. At December
31, 2004, the allowance for loan losses equaled 398.68% of non-accrual and past
due loans compared to 385.25% and 429.13% at December 31, 2003 and 2002,
respectively. During the year ended December 31, 2004, the Company recorded net
chargeoffs of $174,501 compared to $308,306 and $423,755 in net charge-offs
during the years ended December 31, 2003 and 2002, respectively.





**Other
Income.** Other
income includes service charges on deposit accounts, other fees and commissions,
net gains on investment securities, and income on life insurance (including bank
owned life insurance income (BOLI) and gains of approximately $117,000 from the
death of an officer in 2002). For 2002, other income also included a curtailment
gain of $763,644 on a post-retirement benefit plan amendment. Other income
increased from $2,289,413---- in 2003 to $2,371,636 in 2004, a $82,223, or 3.59%
increase. The increase was primarily due to gains on investment securities
offset by a decrease in other fees and commissions. Other income decreased from
$2,484,725 in 2002 to $2,289,413---- in 2003, a $195,312, or 7.86% decrease. The
decrease was primarily due to the curtailment gain realized in 2002, partially
offset by gains on investment securities, an increase in BOLI income and an
increase in service charge income.





23


****


**Other
Expenses.** Other
expenses increased from $9,747,693 in 2003 to $10,359,377 in 2004, a $611,684 or
6.28% increase. This increase was primarily due to increases in salaries and
employee benefits. Other expenses decreased from $9,956,847 in 2002 to
$9,747,693 in 2003, a $209,154 or 2.1% decrease. This decrease was primarily due
to a decrease in furniture and fixtures expense and operating expense, offset by
an increase in employee benefits and occupancy expense relating to the opening
of the Severna Park location.





**Income
Taxes.** During
the year ended December 31, 2004, the Company recorded income tax expense of
$633,224, compared to income tax expense of $687,940 for the year ended December
31, 2003. During the year ended December 31, 2003, the Company recorded income
tax expense of $687,940, compared to income tax expense of $1,084,945 for the
year ended December 31, 2002. The decrease in income tax expense for 2003 as
compared to 2002, despite higher net income in 2003, was primarily due to the
tax advantaged treatment of the state and municipal securities portfolio and
BOLI income.





**Comparison
of Financial Condition at December 31, 2004, 2003 and
2002**





The
Company's total assets increased to $302,312,126 at December 31, 2004 from
$302,252,466 at December 31, 2003. The Company's total assets increased to
$302,252,466 at December 31, 2003 from $279,406,206 at December 31, 2002. The
increase in total assets during 2003 is attributable to increases in the loan
and securities portfolios, funded by decreases in federal funds sold and
increases in deposits and short term borrowings.





The
Company's net loan portfolio increased to $182,291,292 at December 31, 2004
compared to $172,819,049 at December 31, 2003 and $158,286,746 at December 31,
2002. The increase in the loan portfolio during the 2004 period is primarily due
to an increase in residential mortgages with lesser increases in commercial
mortgages and indirect automobile loans. The increase in the loan portfolio
during 2003, is primarily due to residential mortgage loans increasing by
approximately $14.9 million.





During
2004, the Company's total investment securities portfolio (including both
investment securities available for sale and investment securities held to
maturity) totaled $94,906,047, a $8,275,060 or 8.02%, decrease from $103,181,107
at December 31, 2003. This decrease is primarily attributable to a decrease in
state and municipal securities. During 2003, the Company's total investment
securities portfolio (including both investment securities available for sale
and investment securities held to maturity) totaled $103,181,107, a $11,321,056
or 12.32%, increase from $91,860,051 at December 31, 2002. This increase is
primarily attributable to an increase in state and municipal and U.S. Government
agency securities, offset by a decrease in mortgage backed securities.





Deposits
as of December 31, 2004 totaled $261,674,043, an increase of $4,765,808, or
1.86%, from the $256,908,235 total as of December 31, 2003. Deposits as of
December 31, 2003 totaled $256,908,235, an increase of $15,488,628, or 6.42%,
from the $241,419,607 total as of December 31, 2002. Demand deposits as of
December 31, 2004 totaled $73,427,366, a $3,778,547, or 5.43%, increase from
$69,648,819 at December 31, 2003. NOW and Super NOW accounts as of December 31,
2004 decreased by $1,310,661 or 4.61% from their 2003 level to $27,089,844.
Money market accounts increased by $64,403 or 0.32%, from their 2003 level to
total $20,208,804 at December 31, 2004. Savings deposits increased by
$4,286,115, or 8.03%, from their 2003 level, to $57,664,694 at December 31,
2004. Time deposits over $100,000 totaled $21,003,332 on December 31, 2004, a
decrease of $545,796, or 2.53% from December 31, 2003. Other time deposits (made
up of certificates of deposit less than $100,000 and individual retirement
accounts) totaled $62,280,003 on December 31, 2004, a $1,506,802 or a 2.36%,
decrease from December 31, 2003.





Total
stockholders equity as of December 31, 2004 increased by $ 1,796,780, or 7.50%,
from the 2003 period. The increase was attributed to an increase in retained
earnings, surplus and common stock offset by a decline in accumulated other
comprehensive income, net of tax. Total stockholders equity as of December 31,
2003 increased by $2,158,242, or 9.91%, from the 2002 period. The increase was
attributed to an increase in retained earnings and surplus, offset by a decline
in accumulated other comprehensive income, net of tax.





****


24


****


**Off-Balance
Sheet Arrangements,** **** **Contractual
Obligations, and Commitments**





**Off-Balance
Sheet Arrangements.** The Bank
is a party to financial instruments in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit, which involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the consolidated financial statements.





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





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





The
Bank's exposure to credit loss in the event of nonperformance by the customer is
the contractual amount of the commitment. Loan commitments, lines of credit, and
letters of credit are made on the same terms, including collateral, as
outstanding loans. As of December 31, 2004, the Bank has accrued $150,000 for
unfunded commitments related to these financial instruments with off balance
sheet risk, which is included in other liabilities.





**Contractual
Obligations.** The
following table presents, as of December 31, 2004, significant fixed and
determinable contractual obligations to third parties by payment date. Further
discussion of the nature of each obligation is included in the referenced note
to the consolidated financial statements.





PAYMENTS
      DUE IN(IN
      THOUSANDS)
    
    NOTE
      REFERENCE
    
    ONE
      YEAR
      OR
      LESS
    
    ONE
      TO
      THREE
      YEARS
    
    THREE
      TO
      FIVE
      YEARS
    
    OVER
      FIVE
      YEARS
    
    TOTALDeposits
      without astated
      maturity (a),(c)
    
    
    9
    
    $
    178,390
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    178,390Time
      deposits (a)
    
    
    9
    
    
    39,905
    
    
    31,002
    
    
    9,763
    
    
    2,614
    
    
    83,284Short-term
      borrowings (a)
    
    
    6
    
    
    542
    
    
    --
    
    
    --
    
    
    --
    
    
    542Long-term
      borrowings (b)
    
    
    7,8
    
    
    575
    
    
    1,157
    
    
    1,166
    
    
    12,735
    
    
    15,633Operating
      leases
    
    
    5
    
    
    235
    
    
    472
    
    
    402
    
    
    1,940
    
    
    3,049


(a)
    Excludes
      interest


(b)
    Includes
      Junior Subordinated Debentures and semi-annual payments (made in March and
      September) of $273,215.  This is also assuming that the Debentures
      will be paid off in September 2010.


(c)
    Includes
      non-interest bearing deposits.


**Commitments.** The
following table details the amounts and expected maturities of significant
commitments as of December 31, 2004. Further discussion of these commitments is
included in Note 16 to the consolidated financial statements.








25







PAYMENTS
      DUE IN(IN
      THOUSANDS)
    
    ONE
      YEAR
      OR
      LESS
    
    ONE
      TO
      THREE
      YEARS
    
    THREE
      TO
      FIVE
      YEARS
    
    OVER
      FIVE
      YEARS
    
    TOTALLoan
      commitments:Other
      mortgage loans
    
    $
    4,287
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    4,287Unused
      lines of credit:Home-equity
      lines
    
    
    1,123
    
    
    728
    
    
    416
    
    
    4,030
    
    
    6,297Commercial
      lines
    
    
    10,551
    
    
    --
    
    
    --
    
    
    --
    
    
    10,551Unsecured
      consumer lines
    
    
    836
    
    
    --
    
    
    --
    
    
    --
    
    
    836Letters
      of credit
    
    
    178
    
    
    --
    
    
    --
    
    
    545
    
    
    723








**Market
Risk Management**





Market
risk is the risk of loss arising from adverse changes in the fair value of
financial instruments due to changes in interest rates, exchange rates or equity
pricing. The Company's principal market risk is interest rate risk that arises
from its lending, investing and deposit taking activities. The Company's
profitability is dependent on the Bank's net interest income. Interest rate risk
can significantly affect net interest income to the degree that interest bearing
liabilities mature or reprice at different intervals than interest earning
assets. The Bank's Asset/Liability and Risk Management Committee oversees the
management of interest rate risk. The primary purpose of the committee is to
manage the exposure of net interest margins to unexpected changes due to
interest rate fluctuations. The Company does not utilize derivative financial or
commodity instruments or hedging strategies in its management of interest rate
risk. The primary tool used by the committee to monitor interest rate risk is a
"gap" report which measures the dollar difference between the amount of interest
bearing assets and interest bearing liabilities subject to repricing within a
given time period. These efforts affect the loan pricing and deposit rate
policies of the Company as well as the asset mix, volume guidelines, and
liquidity and capital planning.





The
following table sets forth the Bank's interest-rate sensitivity at December 31,
2004.





**0-3
      Months**
    
    **Over
      3 To**
      **12
      Months**
    
    **Over
      1**
      **Through****5 Years**
    
    **Over
      5**
      ******Years**
    
    **Total****(****Dollars
      In Thousands)****Assets:**Cash
      and due from banks
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    9,767Federal
      funds and overnight deposits
    
    
    1,613
    
    
    --
    
    
    --
    
    
    --
    
    
    1,613Securities
    
    
    500
    
    
    2,392
    
    
    8,615
    
    
    84,318
    
    
    95,825Loans
    
    
    15,500
    
    
    5,369
    
    
    80,720
    
    
    84,034
    
    
    185,623Fixed
      Assets
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    4,031Other
      Assets
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    5,631Total
      assets
    
    $
    17,613
    
    $
    7,761
    
    $
    89,335
    
    $
    168,352
    
    $
    302,312**Liabilities:**Demand
      deposit accounts
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    73,427NOW
      accounts
    
    
    27,090
    
    
    --
    
    
    --
    
    
    --
    
    
    27,090Money
      market deposit accounts
    
    
    20,209
    
    
    --
    
    
    --
    
    
    --
    
    
    20,209Savings
      accounts
    
    
    57,665
    
    
    220
    
    
    --
    
    
    --
    
    
    57,885IRA
      accounts
    
    
    1,788
    
    
    4,559
    
    
    14,980
    
    
    1,583
    
    
    22,910Certificates
      of deposit
    
    
    13,492
    
    
    19,847
    
    
    25,784
    
    
    1,030
    
    
    60,153Other
      liabilities
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    9,739Junior
      Subordinated Debenture
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    5,155Stockholders
      equity
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    25,744Total
      liabilities andStockholders
      equity
    
    $
    120,244
    
    $
    24,626
    
    $
    40,764
    
    $
    2,613
    
    $
    302,312GAP
    
    $
    (102,631
    )
    $
    (16,865
    )
    $
    48,571
    
    $
    165,739Cumulative
      GAP
    
    
    (102,631
    )
    
    (119,496
    )
    
    (70,925
    )
    
    94,814Cumulative
      GAP as a % oftotal
      assets
    
    
    (33.95
    %)
    
    (39.53
    %)
    
    (23.46
    %)
    
    31.36
    %








The
foregoing analysis assumes that the Bank's assets and liabilities move with
rates at their earliest repricing opportunities based on final maturity.
Mortgage backed securities are assumed to mature during the period in which they
are estimated to prepay and it is assumed that loans and other securities are
not called prior to maturity. Certificates of deposit and IRA accounts are
presumed to reprice at maturity. NOW savings accounts are assumed to reprice at
within three months although it is the Company's experience that such accounts
may be less sensitive to changes in market rates.





26





In
addition to gap analysis, the Bank utilizes a simulation model to quantify the
effect a hypothetical immediate plus or minus 200 basis point change in rates
would have on net interest income and the economic value of equity. The model
takes into consideration the effect of call features of investments as well as
prepayments of loans in periods of declining rates. When actual changes in
interest rates occur, the changes in interest earning assets and interest
bearing liabilities may differ from the assumptions used in the model. As of
December 31, 2004, the model produced the following sensitivity profile for net
interest income and the economic value of equity.





**Immediate
      Change in Rates****-200**
    
    **-100**
    
    **+100**
    
    **+200****Basis
      Points**
    
    **Basis
      Points**
    
    **Basis
      Points**
    
    **Basis
      Points**%
      Change in Net Interest Income
    
    
    -10.7
    %
    
    -3.3
    %
    
    1.9
    %
    
    5.4
    %%
      Change in Economic Value of Equity
    
    
    -13.0
    %
    
    -4.7
    %
    
    -3.7
    %
    
    -9.6
    %





**Liquidity
and Capital Resources**





The
Company currently has no business other than that of the Bank and does not
currently have any material funding commitments. The Company's principal sources
of liquidity are cash on hand and dividends received from the Bank. The Bank is
subject to various regulatory restrictions on the payment of
dividends.





The
Bank's principal sources of funds for investments and operations are net income,
deposits from its primary market area, principal and interest payments on loans,
interest received on investment securities and proceeds from maturing investment
securities. Its principal funding commitments are for the origination or
purchase of loans and the payment of maturing deposits. Deposits are considered
the primary source of funds supporting the Bank's lending and investment
activities. The Bank also uses borrowings from the FHLB of Atlanta to supplement
deposits, residential and small business lending, and to meet specific and
anticipated needs.





The
Bank's most liquid assets are cash and cash equivalents, which are cash on hand,
amounts due from financial institutions, federal funds sold and money market
mutual funds. The levels of such assets are dependent on the Bank's operating
financing and investment activities at any given time. The variations in levels
of cash and cash equivalents are influenced by deposit flows and anticipated
future deposit flows.





Cash and
cash equivalents (cash due from banks, interest-bearing deposits in other
financial institutions, and federal funds sold), as of December 31, 2004,
totaled $11,373,891, a decrease of $1,521,003 or 11.80%, from the December 31,
2003 total of $12,894,894. Most of this decrease was due to a decrease in the
vault cash held at the branches and a decrease in deposits held at two other
institutions.





As of
December 31, 2004, the Bank was permitted to draw on a $36.2 million line of
credit from the FHLB of Atlanta. Borrowings under the line are secured by a
floating lien on the Bank's residential mortgage loans and its portfolio of U.S.
Government and agency securities. As of December 31, 2004, a $7 million
long-term convertible advance was outstanding under this line. In addition the
Bank has a secured line of credit in the amount of **$** 5 million
from another commercial bank on which it has not drawn. Furthermore, on
September 7, 2000, the Company issued $5,155,000 of its 10.6% Junior
Subordinated Deferrable Interest Debentures to Glen Burnie Statutory Trust I, a
Connecticut statutory trust wholly owned by the Company. The Trust, in turn,
issued $5,000,000 of its 10.6% capital securities to institutional investors.
The debentures are scheduled to mature on September 7, 2030, unless called by
the Company not earlier than September 7, 2010. As of December 31, 2004, the
full $5,155,000 was outstanding.





Federal
banking regulations require the Company and the Bank to maintain specified
levels of capital. At December 31, 2004, the Company was in compliance with
these requirements with a leverage ratio of 9.85%, a Tier 1 risk-based capital
ratio of 15.15% and total risk-based capital ratio of 16.40%. At December 31,
2004, the Bank met the criteria for designation as a well capitalized depository
institution under FDIC regulations.





27


****


**Impact
of Inflation and Changing Prices**





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





**Critical
Accounting Policies**





The
Company's accounting policies are more fully described in Note 1 of the Notes to
the Consolidated Financial Statements, starting on page F-8 and are essential to
understanding Management's Discussion and Analysis of Financial Condition and
Results of Operations. As discussed there, the preparation of financial
statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions about future events
that affect the amounts reported in the financial statements and accompanying
notes. Since future events and their effects cannot be determined with absolute
certainty, the determination of estimates requires the exercise of judgment.
Management has used the best information available to make the estimations
necessary to value the related assets and liabilities based on
historical experience and on various assumptions which are believed to be
reasonable under the circumstances. Actual
results could differ from those estimates, and such differences may be material
to the financial statements. The Company reevaluates these variables as facts
and circumstances change. Historically, actual results have not differed
significantly from the Company's estimates. The following is a summary of the
more judgmental accounting estimates and principles involved in the preparation
of the Company's financial statements, including the identification of the
variables most important in the estimation process:





**Allowance
for Credit Losses.** The
Bank's allowance for credit losses is determined based upon estimates that can
and do change when the actual events occur, including historical losses as an
indicator of future losses, fair market value of collateral, and various general
or industry or geographic specific economic events.  The use of these
estimates and values is inherently subjective and the actual losses could be
greater or less than the estimates.  For further information regarding our
allowance for credit losses, see "Allowance for Credit Losses" under Item 1-
"Business" of this Annual Report.





**Accrued
Taxes.** Management estimates income tax expense based on the amount it expects to owe
various tax authorities. Income taxes are discussed in more detail in Note 10 to
the consolidated financial statements. Accrued taxes represent the net estimated
amount due or to be received from taxing authorities. In estimating accrued
taxes, management assesses the relative merits and risks of the appropriate tax
treatment of transactions taking into account statutory, judicial and regulatory
guidance in the context of the Company's tax position.





**Recently
Issued Accounting Pronouncements**





In
January 2003, the Financial Accounting Standards Board (FASB) issued Financial
Interpretations No. 46 (FIN 46), *Consolidation
of Variable Interest Entities* , which
provides guidance on how to identify a variable interest entity (VIE) and
determine when the assets, liabilities, noncontrolling interests, and results of
operations of a VIE are to be included in an entity's consolidated financial
statements. A VIE exists when either the total equity investment at risk is not
sufficient to permit the entity to finance its activities by itself, or the
equity investors lack one of three characteristics associated with owning a
controlling financial interest. Those characteristics include the direct or
indirect ability to make decisions about an entity s activities through voting
rights or similar rights, the obligation to absorb the expected losses of an
entity if they occur, or the right to receive the expected residual returns of
the entity if they occur.








During
the third quarter of 2003, the Company applied the provisions of FIN 46 to a
wholly-owned subsidiary trust that issued capital securities to third-party
investors. The application of FIN 46 resulted in the deconsolidation of a
wholly-owned subsidiary trust. See Note 8 for further discussion of this trust
and the Company's related obligations.





In
December 2003, the FASB reissued FIN 46 with certain modifications and
clarifications. Application of this guidance was effective for interests in
certain VIEs commonly referred to as special-purpose entities (SPEs) as of
December 31, 2003. Application for all other types of entities is required for
periods ending after March 15, 2004, unless previously applied.





28





Management
continues to evaluate the applicability of FIN 46. Management does not believe
that the application of FIN 46 will have an impact on financial condition,
results of operations, or liquidity. The Federal Reserve Board is currently
evaluating the impact on Tier 1 capital.





In April
2003, the FASB issued SFAS 149, *Amendment
of Statement 133 on Derivative Instruments and Hedging
Activities* , which
amends and clarifies financial accounting and reporting for derivative
instruments and hedging activities under SFAS 133, as well as amends certain
other existing FASB pronouncements. In general, SFAS 149 is effective for
derivative transactions entered into or modified and for hedging relationships
designated after June 30, 2003. The adoption of this standard did not have an
impact on financial condition, the results of operations, or liquidity, as the
Company and Bank does not have derivative or hedging instruments.





In May
2003, the FASB issued SFAS 150, *Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity* . This
Statement establishes standards for classifying and measuring certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity. The provisions of SFAS 150 became effective June 1,
2003, for all financial instruments created or modified after May 31, 2003, and
otherwise became effective as of July 1, 2003. The adoption of this standard did
not have a material impact on financial condition, the results of operations, or
liquidity.





In
December 2003, the FASB deferred for an indefinite period the application of the
guidance in SFAS 150 to noncontrolling interests that are classified as equity
in the financial statements of a subsidiary but would be classified as a
liability in the parent's financial statements under SFAS 150. The deferral is
limited to mandatorily redeemable noncontrolling interests associated with
finite-lived subsidiaries. Management does not believe any such applicable
entities exist as of December 31, 2003.





In
December 2004, the FASB issued SFAS No. 123, "Share-Based Payment (Revised
2004)." SFAS 123R establishes standards for the accounting for transactions in
which an entity (i) exchanges its equity instruments for goods or services, or
(ii) incurs liabilities in exchange for goods or services that are based on the
fair value of the entity s equity instruments or that may be settled by the
issuance of the equity instruments. SFAS 123R eliminates the ability to account
for stock-based compensation using APB 25 and requires that such transactions be
recognized as compensation cost in the income statement based on their fair
values on the date of the grant. SFAS 123R is effective for the Company on
January 1, 2006. The Company will transition to fair value based accounting for
stock-based compensation using a modified version of prospective application
(modified prospective application). Under modified prospective application, as
it is applicable to the Company, SFAS 123R applies to new awards and to awards
modified, repurchased, or cancelled after January 1, 2006. Additionally,
compensation cost for the portion of awards for which the requisite service has
not been rendered (generally referring to non-vested awards) that are
outstanding as of January 1, 2006 must be recognized as the remaining requisite
service is rendered during the period of and/or the periods after the adoption
of SFAS 123R. The attribution of compensation cost for those earlier awards will
be based on the same method and on the same grant-date fair values previously
determined for the pro forma disclosures required for companies that did not
adopt the fair value accounting method for stock-based employee compensation.
The Company expects to recognize additional pre-tax, quarterly compensation
costs beginning in the first quarter of 2006 as a result of the adoption of SFAS
123R. Future levels of compensation cost recognized related to stock-based
compensation awards (including the aforementioned expected costs during the
period of adoption) may be impacted by new awards and/or modifications,
repurchases and cancellations of existing awards before and after the adoption
of this standard.





In
November 2003, the FASB also issued Emerging Issues Task Force Issue No. 03-1, *The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.* This
statement establishes standards for accounting for and disclosure of declines in
fair value below cost basis of available for sale and held to maturity
investment securities. The recognition and measurement provisions were initially
effective for other-than-temporary impairment evaluations in reporting periods
beginning June 15, 2004. However, in September 2004, the effective date of these
provisions was delayed until the finalization of a FASB Staff Position to
provide additional implementation guidance.








29





**ITEM
7A** **.** **QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





The
information required by this item may be found in Item 7 of Part II of this
report under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operation-Market Risk Management", which is
incorporated herein by reference.





**ITEM
8** **.** **FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA**





The
financial statements and supplementary data required by this Item 8 are included
in the Company's Consolidated Financial Statements and set forth in the pages
indicated in Item 16(a) of this Annual Report.


****


**ITEM
9.** **** **CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE**





Not
applicable.





**ITEM
9A** **.** **CONTROLS
AND PROCEDURES**





The
Company maintains a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed by the Company in the reports that it files or submits under the
Securities and Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission, and is accumulated and communicated
to management in a timely manner. The Company's Chief Executive Officer and
Chief Financial Officer have evaluated this system of disclosure controls and
procedures as of the end of the period covered by this annual report, and
believe that the system is effective. There have been no changes in the
Company's internal control over financial reporting during the most recent
fiscal year that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.


****


**ITEM
9B** **.** **OTHER
INFORMATION**





Not
applicable.














30





**PART
III**





**ITEM
10** **.** **DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT**





The
information with respect to the identity and business experience of the
directors of the Company and their remuneration set forth in the section
captioned "Proposal I -- Election of Directors" in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A and issued in conjunction
with the 2005 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference. The information with respect to the identity
and business experience of executive officers of the Company is set forth in
Part I of this Form 10-K. The information with respect to the Company's Audit
Committee is incorporated herein by reference to the section captioned "Meetings
and Committees of the Board of Directors" in the Proxy Statement. The
information with respect to compliance with Section 16(a) of the Exchange Act is
incorporated herein by reference to the section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement. The
information with respect to the Company's Code of Ethics is incorporated herein
by reference to the section captioned "Code of Ethics" in the Proxy
Statement.





**ITEM
11** **.** **EXECUTIVE
COMPENSATION**





The
information required by this item is incorporated herein by reference to the
sections captioned "Director Compensation" and "Executive Compensation" in the
Proxy Statement.


****


**ITEM
12.**  **SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS**





The
information required by this item is incorporated herein by reference to the
sections captioned "Voting Securities and Principal Holders Thereof" and
"Securities Ownership of Management" in the Proxy Statement.





**ITEM
13** **.** **CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS**





The
information required by this item is incorporated herein by reference to the
section captioned "Transactions with Management" in the Proxy Statement.





**ITEM
14** **.** **PRINCIPAL
ACCOUNTANT FEES AND SERVICES**





The
information required by this item is incorporated herein by reference to the
section captioned "Authorization for Appointment of Auditors - Disclosure of Independent
Auditor Fees" in the
Proxy Statement.








31




**PART
IV**





**ITEM
15** **.** **EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES**





**(a)**
    **1.
      Financial Statements**.





PageIndependent Auditors Report
    F-1Consolidated Balance Sheets as of December
      31, 2004, 2003 and 2002
    F-2Consolidated Statements of Income for the
      Years Ended December 31, 2004, 2003 and 2002
    F-3Consolidated Statements of Comprehensive
      Income for the Years Ended December 31, 2004, 2003
      and 2002
    F-4Consolidated Statements of Changes in
      Stockholders Equity for the Years Ended December
      31, 2004, 2003 and 2002
    F-5Consolidated Statements of Cash Flows for the
      Years Ended December 31, 2004, 2003 and 2002
    F-6Notes to Consolidated Financial
      Statements
    F-8








32





**(a)**
    **2.
      Financial Statement Schedules.**

All
schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes
thereto.

**(a)**
    **3.
      Exhibits required to be filed by Item 601 of Regulation
      S-K.**

Exhibit
No.
3.1
    Articles
      of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment
      No. 1 to the Registrant's Form 8-A filed December 27, 1999, File No.
      0-24047)
3.2
    Articles
      of Amendment, dated October 8, 2003(incorporated
      by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form
      10-Q for the Quarter ended September 30, 2003, File No.
      0-24047)
3.3
    Articles
      Supplementary, dated November 16, 1999 (incorporated by reference to
      Exhibit 3.3 to the Registrant's Current Report on Form 8-K filed December
      8, 1999, File No. 0-24047)
3.4
    By-Laws
      (incorporated by reference to Exhibit 3.4 to the Registrant's Quarterly
      Report on Form 10-Q for the Quarter ended September 30, 2003, File No.
      0-24047)
4.1
    Rights
      Agreement, dated as of February 13, 1998, between Glen Burnie Bancorp and
      The Bank of Glen Burnie, as Rights Agent, as amended and restated as of
      December 27, 1999 (incorporated by reference to Exhibit 4.1 to Amendment
      No. 1 to the Registrant's Form 8-A filed December 27, 1999, File No.
      0-24047)
10.1
    Glen
      Burnie Bancorp Director Stock Purchase Plan (incorporated by reference to
      Exhibit 99.1 to Post-Effective Amendment No. 1 to the Registrant's
      Registration Statement on Form S-8, File
No.33-62280)
10.2
    The
      Bank of Glen Burnie Employee Stock Purchase Plan (incorporated by
      reference to Exhibit 99.1 to Post-Effective Amendment No. 1 to the
      Registrant's Registration Statement on Form S-8, File No.
      333-46943)
10.3
    Amended
      and Restated Change-in-Control Severance Plan (incorporated by reference
      to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the
      Fiscal Year Ended December 31, 2001, File No.
0-24047)
10.4
    The
      Bank of Glen Burnie Executive and Director Deferred Compensation Plan
      (incorporated by reference to Exhibit 10.4 to the Registrant's Annual
      Report on Form 10-K for the Fiscal Year Ended December 31, 1999, File No.
      0-24047)
21
    Subsidiaries
      of the Registrant (incorporated by reference to Exhibit 3.2 to the
      Registrant's Annual Report on Form 10-K for the Fiscal Year Ended December
      31, 2001, File No. 0-24047)
23
    Consent
      of Trice Geary & Myers LLC
31.1
    Rule
      15d-14(a) Certification of Chief Executive
Officer
31.2
    Rule15d-14(a) Certification of Chief Financial
Officer
32.1
    Section1350 Certifications


33

**SIGNATURES**

Pursuant
to the requirements of Section 13 or 15(d) 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.

**GLEN BURNIE
      BANCORP**Date: March 10,
2005
    By:
    /s/ F. William Kuethe,
      Jr.F. William Kuethe,
      Jr.President and Chief Executive Officer

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

**Signature**
    
    **Title**
    
    **Date**/s/
      F. William Kuethe, Jr.
    
    President, Chief Executive Officer and Director
    
    March
      10, 2005F. William Kuethe, Jr.

/s/
      Michael G. Livingston
    
    Deputy
      Chief Executive Officer,
    
    March
      10, 2005Michael G. Livingston
    
    Executive Vice President, ChiefOperating Officer and Director

/s/
      John E. Porter
    
    Senior
      Vice President and Chief
    
    March
      10, 2005John E. Porter
    
    Financial
      Officer

/s/
      John E. Demyan
    
    Chairman
      of the Board and Director
    
    March
      10, 2005John E. Demyan

/s/
      Shirley E. Boyer
    
    Director
    
    March
      10, 2005Shirley E. Boyer

/s/
      Thomas Clocker
    
    Director
    
    March
      10, 2005Thomas Clocker

/s/
      Alan E. Hahn
    
    Director
    
    March
      10, 2005Alan E. Hahn

Director
    
    March
      __, 2005F. W. Kuethe, III

/s/
      Charles Lynch
    
    Director
    
    March
      10, 2005Charles Lynch

/s/
      William N. Scherer, Sr.
    
    Director
    
    March
      10, 2005William N. Scherer, Sr.

/s/
      Karen B. Thorwarth
    
    Director
    
    March
      10, 2005Karen B. Thorwarth

/s/
      Mary Lou Wilcox
    
    Director
    
    March
      10, 2005Mary Lou Wilcox



34


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 The Board
of Directors
 Glen
Burnie Bancorp and Subsidiaries
 Glen
Burnie, Maryland
 
 We have
audited the accompanying consolidated balance sheets of Glen Burnie Bancorp and
subsidiaries as of December 31, 2004 , 2003 , and 2002 , and the
related consolidated statements of income, comprehensive income, changes in
stockholders’ equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Glen Burnie
Bancorp and subsidiaries as of December 31, 2004 , 2003 , and 2002 , and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
  /s/ Trice
Geary & Myers LLC
 Salisbury,
Maryland
 January
28, 2005
  
 F-1
 
 **Glen
      Burnie Bancorp and Subsidiaries****Consolidated
      Balance Sheets**
  December
      31,
    
    **2004**
    
    2003
    
    2002**Assets**Cash
      and due from banks
    
    **$**
    **9,766,710**
    
    $
    11,119,791
    
    $
    11,297,175Interest-bearing
      deposits in other financial institutions
    
    
    **65,947**
    
    
    57,192
    
    
    41,335Federal
      funds sold
    
    
    **1,541,234**
    
    
    1,717,911
    
    
    4,403,578Cash
      and cash equivalents
    
    
    **11,373,891**
    
    
    12,894,894
    
    
    15,742,088Certificates
      of deposit in other financial institutions
    
    
    **--**
    
    
    --
    
    
    100,000Investment
      securities available for sale, at fair value
    
    
    **93,278,857**
    
    
    99,602,353
    
    
    84,657,682Investment
      securities held to maturity (fair value**2004
      $1,761,894**;
      2003 $3,815,855; 2002 $7,615,702)
    
    
    **1,627,190**
    
    
    3,578,754
    
    
    7,202,369Federal
      Home Loan Bank stock, at cost
    
    
    **919,000**
    
    
    896,400
    
    
    703,200Maryland
      Financial Bank stock, at cost
    
    
    **100,000**
    
    
    --
    
    
    --Common
      stock in the Glen Burnie Statutory Trust I
    
    
    **155,000**
    
    
    155,000
    
    
    155,000Ground
      rents, at cost
    
    
    **235,700**
    
    
    248,300
    
    
    249,900Loans,
      less allowance for credit losses**2004
      $2,411,894**;
      2003 $2,246,395; 2002 $2,514,700
    
    
    **182,291,292**
    
    
    172,819,049
    
    
    158,286,746Premises
      and equipment, at cost, less accumulated depreciation
    
    
    **4,030,777**
    
    
    4,219,812
    
    
    4,143,429Accrued
      interest receivable on loans and investment securities
    
    
    **1,484,869**
    
    
    1,575,918
    
    
    1,547,511Other
      real estate owned
    
    
    **50,000**
    
    
    171,882
    
    
    413,373Cash
      value of life insurance
    
    
    **5,483,681**
    
    
    4,782,258
    
    
    5,024,964Other
      assets
    
    
    **1,281,869**
    
    
    1,307,846
    
    
    1,179,944**Total
      assets**
    
    **$**
    **302,312,126**
    
    $
    302,252,466
    
    $
    279,406,206**Liabilities
      and Stockholders' Equity**Liabilities:Deposits:Noninterest-bearing
    
    **$**
    **73,427,366**
    
    $
    69,648,818
    
    $
    59,061,977Interest-bearing
    
    
    **188,246,677**
    
    
    187,259,417
    
    
    182,357,630Total
      deposits
    
    
    **261,674,043**
    
    
    256,908,235
    
    
    241,419,607Short-term
      borrowings
    
    
    **541,672**
    
    
    6,601,920
    
    
    837,074Long-term
      borrowings
    
    
    **7,199,708**
    
    
    7,226,501
    
    
    7,251,489Junior
      subordinated debentures owed to unconsolidatedsubsidiary trust
    
    
    **5,155,000**
    
    
    5,155,000
    
    
    5,155,000Dividends
      payable
    
    
    **287,938**
    
    
    236,938
    
    
    236,291Accrued
      interest payable on deposits
    
    
    **55,980**
    
    
    67,099
    
    
    111,398Accrued
      interest payable on junior subordinated debentures
    
    
    **171,518**
    
    
    171,518
    
    
    171,518Deferred
      income tax liabilities
    
    
    **330,583**
    
    
    792,100
    
    
    915,314Other
      liabilities
    
    
    **1,151,276**
    
    
    1,145,527
    
    
    1,519,129**Total
      liabilities**
    
    
    **276,567,718**
    
    
    278,304,838
    
    
    257,616,820**Commitments,
      contingencies and subsequent event**Stockholders'
      equity:Common
      stock, par value $1, authorized 15,000,000 shares;issued and outstanding **2004
      2,041,033 shares**;2003
      1,689,281 shares; 2002 1,677,173 shares
    
    
    **2,041,033**
    
    
    1,689,281
    
    
    1,677,173Surplus
    
    
    **11,169,283**
    
    
    10,861,986
    
    
    10,637,578Retained
      earnings
    
    
    **11,773,915**
    
    
    10,115,038
    
    
    7,946,747Accumulated
      other comprehensive income, net of tax
    
    
    **760,177**
    
    
    1,281,323
    
    
    1,527,888**Total
      stockholders' equity**
    
    
    **25,744,408**
    
    
    23,947,628
    
    
    21,789,386**Total
      liabilities and stockholders' equity**
    
    **$**
    **302,312,126**
    
    $
    302,252,466
    
    $
    279,406,206
  *The
      Notes to Consolidated Financial Statements are an integral part of these
      consolidated financial
statements.*
  
 
  
 F-2
 
 **Glen
      Burnie Bancorp and Subsidiaries****Consolidated
      Statements of Income**
  Years
      Ended December 31,
    
    **2004**
    
    2003
    
    2002**Interest
      income on:**Loans,
      including fees
    
    **$**
    **11,203,896**
    
    $
    11,344,040
    
    $
    12,336,820U.S.
      Treasury securities
    
    
    **-**
    
    
    18,394
    
    
    59,818U.S.
      Government agency securities
    
    
    **2,216,554**
    
    
    1,954,437
    
    
    2,457,585State
      and municipal securities
    
    
    **1,769,813**
    
    
    1,749,556
    
    
    1,206,798Corporate
      trust preferred securities
    
    
    **358,290**
    
    
    356,740
    
    
    341,094Federal
      funds sold
    
    
    **59,461**
    
    
    51,141
    
    
    93,735Other
    
    
    **53,113**
    
    
    65,710
    
    
    74,432Total
      interest income
    
    
    **15,661,127**
    
    
    15,540,018
    
    
    16,570,282**Interest
      expense on:**Deposits
    
    
    **2,611,536**
    
    
    3,276,093
    
    
    4,212,826Short-term
      borrowings
    
    
    **56,938**
    
    
    24,046
    
    
    10,992Long-term
      borrowings
    
    
    **429,484**
    
    
    430,155
    
    
    431,884Junior
      subordinated debentures
    
    
    **546,703**
    
    
    546,430
    
    
    546,430Total
      interest expense
    
    
    **3,644,661**
    
    
    4,276,724
    
    
    5,202,132**Net
      interest income**
    
    
    **12,016,466**
    
    
    11,263,294
    
    
    11,368,150**Provision
      for credit losses**
    
    
    **340,000**
    
    
    40,000
    
    
    -**Net
      interest income after provision for credit losses**
    
    
    **11,676,466**
    
    
    11,223,294
    
    
    11,368,150**Other
      income:**Service
      charges on deposit accounts
    
    
    **899,196**
    
    
    924,709
    
    
    917,816Other
      fees and commissions
    
    
    **859,539**
    
    
    781,795
    
    
    725,421Gains
      on investment securities, net
    
    
    **411,478**
    
    
    218,579
    
    
    52,880Income
      on life insurance
    
    
    **201,423**
    
    
    364,330
    
    
    24,964Curtailment
      gain on post-retirement benefits plan amendment
    
    
    **-**
    
    
    -
    
    
    763,644Total
      other income
    
    
    **2,371,636**
    
    
    2,289,413
    
    
    2,484,725**Other
      expenses:**Salaries
      and wages
    
    
    **4,404,605**
    
    
    4,133,621
    
    
    4,165,994Employee
      benefits
    
    
    **1,891,244**
    
    
    1,687,775
    
    
    1,614,284Occupancy
    
    
    **684,242**
    
    
    709,122
    
    
    589,289Furniture
      and equipment
    
    
    **839,485**
    
    
    821,747
    
    
    854,059Other
      expenses
    
    
    **2,539,801**
    
    
    2,395,428
    
    
    2,733,221Total
      other expenses
    
    
    **10,359,377**
    
    
    9,747,693
    
    
    9,956,847**Income
      before income taxes**
    
    
    **3,688,725**
    
    
    3,765,014
    
    
    3,896,028**Federal
      and state income tax expense**
    
    
    **633,224**
    
    
    687,940
    
    
    1,084,945**Net
      income**
    
    **$**
    **3,055,501**
    
    $
    3,077,074
    
    $
    2,811,083**Basic
      and diluted earnings per share of common stock**
    
    **$**
    **1.50**
    
    $
    1.52
    
    $
    1.40
  *The
      Notes to Consolidated Financial Statements are an integral part of these
      consolidated financial
statements.*
  
 
 
 
 F-3
 
 **Glen
      Burnie Bancorp and Subsidiaries****Consolidated
      Statements of Comprehensive Income**
  Years
      Ended December 31,
    
    **2004**
    
    2003
    
    2002**Net
      income**
    
    **$**
    **3,055,501**
    
    $
    3,077,074
    
    $
    2,811,083**Other
      comprehensive (loss) income, net of tax**Unrealized
      holding (losses) gains arising during theperiod
      (net of deferred (benefits) taxes**2004
      ($173,611)**;2003
      ($70,722); 2002 $1,081,0955)
    
    
    **(275,926**
    **)**
    
    (112,401
    )
    
    1,718,218Reclassification
      adjustment for gains included in netincome
      (net of deferred taxes**2004
      $154,291**;2003
      $84,415; 2002 $17,182)
    
    
    **(245,220**
    **)**
    
    (134,164
    )
    
    (27,307
    )Total
      other comprehensive (loss) income
    
    
    **(521,146**
    **)**
    
    (246,565
    )
    
    1,690,911**Comprehensive
      income**
    
    **$**
    **2,534,355**
    
    $
    2,830,509
    
    $
    4,501,994
  *The
      Notes to Consolidated Financial Statements are an integral part of these
      consolidated financial statements.*
 
 F-4
 
 **Glen
      Burnie Bancorp and Subsidiaries****Consolidated
      Statements of Changes in Stockholders' Equity****Years
      Ended December 31, 2004, 2003, and
2002**
  AccumulatedCommon
    
    
    
    
    
    
    
    Other
    
    TotalStock
    
    
    
    
    
    Retained
    
    Comprehensive
    
    Stockholders'Shares
    
    Par
      Value
    
    Surplus
    
    Earnings
    
    Income
      (Loss)
    
    EquityBalances,
      December 31, 2001
    
    
    1,663,560
    
    $
    1,663,560
    
    $
    10,390,511
    
    $
    5,970,537
    
    $
    (163,023
    )
    $
    17,861,585Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    2,811,083
    
    
    -
    
    
    2,811,083Cash
      dividends, $.42 per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (834,873
    )
    
    -
    
    
    (834,873
    )Dividends
      reinvested under dividendreinvestment
      plan
    
    
    10,548
    
    
    10,548
    
    
    169,522
    
    
    -
    
    
    -
    
    
    180,070Shares
      issued under employee stockpurchase
      plan
    
    
    3,065
    
    
    3,065
    
    
    39,140
    
    
    -
    
    
    -
    
    
    42,205Vested
      stock options, net
    
    
    -
    
    
    -
    
    
    38,405
    
    
    -
    
    
    -
    
    
    38,405Other
      comprehensive income, net of tax
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,690,911
    
    
    1,690,911Balances,
      December 31, 2002
    
    
    1,677,173
    
    
    1,677,173
    
    
    10,637,578
    
    
    7,946,747
    
    
    1,527,888
    
    
    21,789,386Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    3,077,074
    
    
    -
    
    
    3,077,074Cash
      dividends, $.45 per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (908,783
    )
    
    -
    
    
    (908,783
    )Dividends
      reinvested under dividendreinvestment
      plan
    
    
    8,758
    
    
    8,758
    
    
    187,702
    
    
    -
    
    
    -
    
    
    196,460Shares
      issued under employee stockpurchase
      plan
    
    
    3,350
    
    
    3,350
    
    
    42,779
    
    
    -
    
    
    -
    
    
    46,129Expired
      stock options, net
    
    
    -
    
    
    -
    
    
    (6,073
    )
    
    -
    
    
    -
    
    
    (6,073
    )Other
      comprehensive loss, net of tax
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (246,565
    )
    
    (246,565
    )**Balances,
      December 31, 2003**
    
    
    **1,689,281**
    
    
    **1,689,281**
    
    
    **10,861,986**
    
    
    **10,115,038**
    
    
    **1,281,323**
    
    
    **23,947,628****Net
      income**
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    **3,055,501**
    
    
    **-**
    
    
    **3,055,501****Cash
      dividends, $.52 per share**
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    **(1,059,357**
    **)**
    
    **-**
    
    
    **(1,059,357**
    **)****Dividends
      reinvested under dividend****reinvestment
      plan**
    
    
    **10,796**
    
    
    **10,796**
    
    
    **221,159**
    
    
    **-**
    
    
    **-**
    
    
    **231,955****Shares
      issued under employee stock****purchase
      plan**
    
    
    **3,689**
    
    
    **3,689**
    
    
    **72,673**
    
    
    **-**
    
    
    **-**
    
    
    **76,362****Stock
      split effected in form of 20%****stock
      dividend**
    
    
    **337,267**
    
    
    **337,267**
    
    
    **-**
    
    
    **(337,267**
    **)**
    
    **-**
    
    
    **-****Vested
      stock options, net**
    
    
    **-**
    
    
    **-**
    
    
    **13,465**
    
    
    **-**
    
    
    **-**
    
    
    **13,465****Other
      comprehensive loss, net of tax**
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    **(521,146**
    **)**
    
    **(521,146**
    **)****Balances,
      December 31, 2004**
    
    
    **2,041,033**
    
    **$**
    **2,041,033**
    
    **$**
    **11,169,283**
    
    **$**
    **11,773,915**
    
    **$**
    **760,177**
    
    **$**
    **25,744,408**
  *The
      Notes to Consolidated Financial Statements are an integral part of these
      consolidated financial statements.*
 
 
 
  
 F-5
  **Glen
      Burnie Bancorp and Subsidiaries****Consolidated
      Statements of Cash Flows**
  Years
      Ended December 31,
    
    **2004**
    
    2003
    
    2002**Cash
      flows from operating activities:**Net
      income
    
    **$**
    **3,055,501**
    
    $
    3,077,074
    
    $
    2,811,083Adjustments
      to reconcile net income to netcash provided by operating activitiesDepreciation,
      amortization, and accretion
    
    
    **828,444**
    
    
    1,503,805
    
    
    1,241,007Compensation
      expense (income) from vested stock options, net
    
    
    **13,465**
    
    
    (6,073
    )
    
    38,405Provision
      for credit losses
    
    
    **340,000**
    
    
    40,000
    
    
    -Losses
      on other real estate owned
    
    
    **7,372**
    
    
    6,491
    
    
    6,789Deferred
      income (benefits) taxes, net
    
    
    **(133,613**
    **)**
    
    31,925
    
    
    278,768(Gains)
      losses on disposals of assets, net
    
    
    **(409,211**
    **)**
    
    (216,776
    )
    
    14,429Income
      on investment in life insurance
    
    
    **(201,423**
    **)**
    
    (364,330
    )
    
    (24,964
    )Changes
      in assets and liabilities:Decrease
      (increase) in accrued interest receivable
    
    
    **91,049**
    
    
    (28,407
    )
    
    (20,493
    )Decrease
      (increase) in other assets
    
    
    **5,663**
    
    
    (79,638
    )
    
    (209,838
    )Decrease
      in accrued interest payable
    
    
    **(11,119**
    **)**
    
    (44,299
    )
    
    (43,776
    )Increase
      (decrease) in other liabilities
    
    
    **5,749**
    
    
    (373,602
    )
    
    (840,072
    )Net
      cash provided by operating activities
    
    
    **3,591,877**
    
    
    3,546,170
    
    
    3,251,338**Cash
      flows from investing activities:**Maturities
      of held to maturity mortgage-backed securities
    
    
    **952,233**
    
    
    3,119,394
    
    
    3,179,978Maturities
      of other held to maturity investment securities
    
    
    **1,000,000**
    
    
    499,732
    
    
    6,134,713Maturities
      of available for sale mortgage-backed securities
    
    
    **6,984,287**
    
    
    22,500,165
    
    
    12,624,980Maturities
      of other available for sale investment securities
    
    
    **3,229,796**
    
    
    718,025
    
    
    2,044,232Sales
      of available for sale debt securities
    
    
    **18,345,056**
    
    
    10,994,980
    
    
    4,989,082Purchases
      of available for sale mortgage-backed securities
    
    
    **(18,214,141**
    **)**
    
    (33,252,275
    )
    
    (30,417,008
    )Purchases
      of other available for sale investment securities
    
    
    **(4,651,079**
    **)**
    
    (16,928,577
    )
    
    (16,085,767
    )Purchase
      of FHLB stock
    
    
    **(22,600**
    **)**
    
    (193,200
    )
    
    (50,900
    )Purchase
      of MFB stock
    
    
    **(100,000**
    **)**
    
    -
    
    
    -Maturity
      of certificate of deposit
    
    
    **-**
    
    
    100,000
    
    
    -Proceeds
      from life insurance
    
    
    **-**
    
    
    607,034
    
    
    -Purchase
      of life insurance contracts
    
    
    **(500,000**
    **)**
    
    -
    
    
    (5,000,000
    )(Increase)
      decrease in loans, net
    
    
    **(9,697,733**
    **)**
    
    (14,572,303
    )
    
    6,282,506Proceeds
      from sales of other real estate
    
    
    **-**
    
    
    235,000
    
    
    -Purchases
      of premises and equipment
    
    
    **(417,426**
    **)**
    
    (784,278
    )
    
    (904,507
    )Net
      cash used by investing activities
    
    
    **(3,091,607**
    **)**
    
    (26,956,303
    )
    
    (17,202,691
    )**Cash
      flows from financing activities:**Increase
      in noninterest-bearing deposits, NOWaccounts,
      money market accounts, and savings accounts, net
    
    
    **3,778,548**
    
    
    20,933,258
    
    
    9,587,004Increase
      (decrease) in time deposits, net
    
    
    **987,260**
    
    
    (5,444,630
    )
    
    2,525,885(Decrease)
      increase in short-term borrowings
    
    
    **(6,060,248**
    **)**
    
    5,764,846
    
    
    (45,334
    )Repayments
      of long-term borrowings
    
    
    **(26,793**
    **)**
    
    (24,988
    )
    
    (23,302
    )Cash
      dividends paid
    
    
    **(1,008,357**
    **)**
    
    (908,136
    )
    
    (793,915
    )Common
      stock dividends reinvested
    
    
    **231,955**
    
    
    196,460
    
    
    180,070Issuance
      of common stock
    
    
    **76,362**
    
    
    46,129
    
    
    42,205Net
      cash (used) provided by financing activities
    
    
    **(2,021,273**
    **)**
    
    20,562,939
    
    
    11,472,613**Decrease
      in cash and cash equivalents**
    
    
    **(1,521,003**
    **)**
    
    (2,847,194
    )
    
    (2,478,740
    )**Cash
      and cash equivalents, beginning of year**
    
    
    **12,894,894**
    
    
    15,742,088
    
    
    18,220,828**Cash
      and cash equivalents, end of year**
    
    **$**
    **11,373,891**
    
    $
    12,894,894
    
    $
    15,742,088
  *The
      Notes to Consolidated Financial Statements are an integral part of these
      consolidated financial statements.*
 
 F-6
 ****
 ****Glen
      Burnie Bancorp and Subsidiaries****Consolidated
      Statements of Cash Flows**(Continued)

Years
      Ended December 31,
    
    **2004**
    
    2003
    
    2002**Supplementary
      Cash Flow Information:**Interest
      paid
    
    **$**
    **3,655,780**
    
    $
    4,321,023
    
    $
    5,245,908Income
      taxes paid
    
    
    **908,812**
    
    
    689,087
    
    
    712,844Total
      (decrease) increase in unrealized (depreciation)appreciation
      on available for sale securities
    
    
    **(849,050**
    **)**
    
    (401,702
    )
    
    2,754,826

*The
      Notes to Consolidated Financial Statements are an integral part of these
      consolidated financial statements.***
 ****
 F-7
 ****
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 ****
 **Note
1. Summary of Significant Accounting Policies**
 
 The Bank
of Glen Burnie (the “Bank”) provides financial services to individuals and
corporate customers located in Anne Arundel County and surrounding areas of
Central Maryland, and is subject to competition from other financial
institutions. The Bank is also subject to the regulations of certain Federal and
State of Maryland (the “State”) agencies and undergoes periodic examinations by
those regulatory authorities. The accounting policies of the Bank conform to
generally accepted accounting principles and to general practices within the
banking industry.
 
 Significant
accounting policies not disclosed elsewhere in the consolidated financial
statements are as follows:
 
 Principles
of Consolidation:
 
 The
consolidated financial statements include the accounts of Glen Burnie Bancorp
(“Bancorp” or “Company”) and its subsidiaries, The Bank of Glen Burnie and GBB
Properties, Inc., a company engaged in the acquisition and disposition of other
real estate. Intercompany balances and transactions have been eliminated. The
Parent Only financial statements (see Note 21) of the Company account for the
subsidiaries using the equity method of accounting.
 
 Use of
Estimates:
 
 The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted within the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
 
 Securities
Held to Maturity:
 
 Bonds,
notes, and debentures for which the Bank has the positive intent and ability to
hold to maturity are reported at cost, adjusted for premiums and discounts that
are recognized in interest income using the effective interest rate method over
the period to maturity. Securities transferred into held to maturity from the
available for sale portfolio are recorded at fair value at time of transfer with
unrealized gains or losses reflected in equity and amortized over the remaining
life of the security.
 
 Securities
Available for Sale:
 
 Marketable
debt securities not classified as held to maturity are classified as available
for sale. Securities available for sale may be sold in response to changes in
interest rates, loan demand, changes in prepayment risk, and other factors.
Changes in unrealized appreciation (depreciation) on securities available for
sale are reported in other comprehensive income, net of tax. Realized gains
(losses) on securities available for sale are included in other income (expense)
and, when applicable, are reported as a reclassification adjustment, net of tax,
in other comprehensive income. The gains and losses on securities sold are
determined by the specific identification method. Premiums and discounts are
recognized in interest income using the effective interest rate method over the
period to maturity. Additionally, declines in the fair value of individual
investment securities below their cost that are other than temporary are
reflected as realized losses in the consolidated statements of income.
  Other
Securities:
 
 Federal
Home Loan Bank (“FHLB”) and Maryland Financial Bank (“MFB”) stocks are equity
interests that do not necessarily have readily determinable fair values for
purposes of Statement of Financial Accounting Standards (“SFAS”) No 115, *Accounting
for Certain Investments in Debt and Equity Securities* , because
their ownership is restricted and they lack a market. FHLB stock can be sold
back only at its par value of $100 per share and only to the FHLB or another
member institution.
 
 
 F-8
 ****
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 ****
 **Note
1. Summary of Significant Accounting Policies** (continued)
 
 Loans and
Allowance for Credit Losses:
 
 Loans are
generally carried at the amount of unpaid principal, adjusted for deferred loan
fees, which are amortized over the term of the loan using the effective interest
rate method. Interest on loans is accrued based on the principal amounts
outstanding. It is the Bank’s policy to discontinue the accrual of interest when
a loan is specifically determined to be impaired or when principal or interest
is delinquent for ninety days or more. When a loan is placed on nonaccrual
status all interest previously accrued but not collected is reversed against
current period interest income. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss is remote. Cash
collections on such loans are applied as reductions of the loan principal
balance and no interest income is recognized on those loans until the principal
balance has been collected. Interest income on other nonaccrual loans is
recognized only to the extent of interest payments received. The carrying value
of impaired loans is based on the present value of the loan’s expected future
cash flows or, alternatively, the observable market price of the loan or the
fair value of the collateral.
 
 The
allowance for loan losses is maintained at a level believed adequate by
management to absorb probable losses inherent in the loan portfolio and is based
on the size and current risk characteristics of the loan portfolio, an
assessment of individual problem loans and actual loss experience, current
economic events in specific industries and geographical areas, including
unemployment levels, and other pertinent factors, including regulatory guidance
and general economic conditions. Determination of the allowance is inherently
subjective as it requires significant estimates, including the amounts 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, all of which may be susceptible to
significant change. Loan losses are charged off against the allowance, while
recoveries of amounts previously charged off are credited to the allowance. A
provision for loan losses is charged to operations based on management’s
periodic evaluation of the factors previously mentioned, as well as other
pertinent factors. Evaluations are conducted at least quarterly and more often
if deemed necessary.
 
 The
allowance for loan losses consists of an allocated component and an unallocated
component. The components of the allowance for loan losses represent an
estimation done pursuant to either SFAS No 5, Accounting for Contingencies, or
SFAS No 114. The allocated component of the allowance for loan losses reflects
expected losses resulting from analyses developed through specific credit
allocations for individual loans and historical loss experience for each loan
category. The specific credit allocations are based on regular analyses of all
loans over a fixed-dollar amount where the internal credit rating is at or below
a predetermined classification. The historical loan loss element is determined
statistically using a loss migration analysis that examines loss experience and
the related internal gradings of loans charged off. The loss migration analysis
is performed quarterly and loss factors are updated regularly based on actual
experience. The allocated component of the allowance for loan losses also
includes consideration of concentrations and changes in portfolio mix and
volume.
 
 The
unallocated portion of the allowance reflects management’s estimate of probable
inherent but undetected losses within the portfolio due to uncertainties in
economic conditions, delays in obtaining information, including unfavorable
information about a borrower’s financial condition, the difficulty in
identifying triggering events that correlate perfectly to subsequent loss rates,
and risk factors that have not yet manifested themselves in loss allocation
factors. In addition, the unallocated allowance includes a component that
explicitly accounts for the inherent imprecision in loan loss migration models.
The historical losses used in the migration analysis may not be representative
of actual unrealized losses inherent in the portfolio.
 
 
 F-9
 
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 
 **Note
1. Summary of Significant Accounting Policies** (continued)
 
 Reserve
for Unfunded Commitments:
 
 The
reserve for unfunded commitments is established through a provision for unfunded
commitments charged to other expenses. The reserve is calculated by utilizing
the same methodology and factors as the allowance for credit losses. The
reserve, based on evaluations of the collectibiltiy of loans and prior loan loss
experience, is an amount that management believes will be adequate to absorb
possible losses on unfunded commitments (off-balance sheet financial
instruments) that may become uncollectible in the future.
 
 Other
Real Estate Owned (“OREO”):
 
 OREO
comprises properties acquired in partial or total satisfaction of problem loans.
The properties are recorded at the lower of cost or fair value (appraised value)
at the date acquired. Losses arising at the time of acquisition of such
properties are charged against the allowance for credit losses. Subsequent
write-downs that may be required and expenses of operation are included in other
income or expenses. Gains and losses realized from the sale of OREO are included
in other income or expenses. No loans were converted to OREO in 2004 , 2003 , or 2002 . The
Bank financed no sales of OREO for 2004 , 2003 , or 2002 .
 
 Bank
Premises and Equipment:
 
 Bank
premises and equipment are stated at cost less accumulated depreciation. The
provision for depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are depreciated
over the lesser of the terms of the leases or their estimated useful lives.
Expenditures for improvements that extend the life of an asset are capitalized
and depreciated over the asset’s remaining useful life. Gains or losses realized
on the disposition of premises and equipment are reflected in the consolidated
statements of income. Expenditures for repairs and maintenance are charged to
other expenses as incurred. Computer software is recorded at cost and amortized
over three to five years.
 
 Intangible
Assets:
 
 A core
deposit intangible asset of **$544,652** ,
relating to a branch acquisition, is being amortized on the straight-line method
over 10 years. Accumulated amortization totaled **$503,802** ,
$449,337, and $394,872 at December 31, 2004 , 2003 , and 2002 ,
respectively. Amortization expense totaled **$54,465** for each
of the years ended December 2004 , 2003 , and 2002 .
 
 Long-Lived
Assets:
 
 The
carrying value of long-lived assets and certain identifiable intangibles,
including goodwill, is reviewed by the Bank for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, as prescribed in SFAS No. 144, *Accounting
for the Impairment or Disposal of Long-Lived Asset* . As of
December 31, 2004, 2003, and 2002, certain loans existed which management
considered impaired (See Note 4); in addition, in 2002 certain long-lived assets
were deemed to be impaired also (See Note 5).
 
 Income
Taxes:
 
 The
provision for Federal and state income taxes is based upon the results of
operations, adjusted for tax-exempt income. Deferred income taxes are provided
by applying enacted statutory tax rates to temporary differences between
financial and taxable bases.
 
 F-10
 
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
  **Note
1. Summary of Significant Accounting Policies** (continued)
 
 Temporary
differences which give rise to deferred tax benefits relate principally to
deferred compensation and benefit plans, allowance for credit losses, and
reserve for unfunded commitments.
 
 Temporary
differences which give rise to deferred tax liabilities relate principally to
accumulated depreciation, allowance for credit losses, accumulated securities
discount accretion, and net unrealized appreciation on investment securities
available for sale.
 
 Credit
Risk:
 
 The Bank
has deposits in other financial institutions in excess of amounts insured by the
Federal Deposit Insurance Corporation (“FDIC”). At December
31, 2004 , the
Bank had deposits and Federal funds sold with a separate financial institution
of approximately **$2,053,000** .
 
 Cash and
Cash Equivalents:
 
 The Bank
has included cash and due from banks, interest-bearing deposits in other
financial institutions, and Federal funds sold as cash and cash equivalents for
the purpose of reporting cash flows.
 
 Accounting
for Stock Options:
 
 The
Company applies the intrinsic value-based method of accounting prescribed by the
Accounting Principles Board (APB) Opinion No. 25, *Accounting
for Stock Issued to Employees* and
related interpretations in accounting for its employee stock options. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. SFAS No. 123 *Accounting
for Stock-Based Compensation* ,
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting prescribed above, and has adopted the
disclosure-only provisions of SFAS No.123.
 
 The
Company expects to adopt the provisions of SFAS No. 123R on January 1, 2006.
Among other things, SFAS No. 123R eliminates the ability to account for
stock-based compensation using APB 25 and requires that such transactions be
recognized as compensation cost in the income statement based on their fair
values on the date of the grant. SFAS No. 123R is effective for the Company on
January 1, 2006 (See Note 20).
 
 Earnings
per share:
 
 Basic
earnings per common share are determined by dividing net income by the weighted
average number of shares of common stock outstanding. Diluted earnings per share
are calculated including the average dilutive common stock equivalents
outstanding during the period. Dilutive common equivalent shares consist of
stock options, calculated using the treasury stock method.
 
 Financial
Statement Presentation:
 
 Certain
amounts in the prior years’ financial statements have been reclassified to
conform to the current year’s presentation.
 
 **Note
2. Restrictions on Cash and Due from Banks**
 
 The
Federal Reserve requires the Bank to maintain noninterest-bearing cash reserves
against certain categories of average deposit liabilities. Such reserves
averaged approximately **$5,684,000** , **** $4,901,000,
and $4,196,000 during the years ended December 31, 2004 , 2003 , and 2002 ,
respectively.
 ****
 F-11
 ****
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
3. Investment Securities**
  Investment
      securities are summarized as follows:
  ****
    
    **Gross**
    
    **Gross****Amortized**
    
    **Unrealized**
    
    **Unrealized**
    
    **Fair****December
      31, 2004**
    
    **Cost**
    
    **Gains**
    
    **Losses**
    
    **Value*********Available
      for sale:*****U.S.
      Government agencies**
    
    **$**
    **12,511,877**
    
    **$**
    **93,242**
    
    **$**
    **487,504**
    
    **$**
    **12,117,615****State
      and municipal**
    
    
    **35,956,838**
    
    
    **1,237,281**
    
    
    **88,450**
    
    
    **37,105,669****Corporate
      trust preferred**
    
    
    **5,008,127**
    
    
    **459,840**
    
    
    **-**
    
    
    **5,467,967****Mortgage-backed**
    
    
    **38,563,539**
    
    
    **187,391**
    
    
    **163,324**
    
    
    **38,587,606****$**
    **92,040,381**
    
    **$**
    **1,977,754**
    
    **$**
    **739,278**
    
    **$**
    **93,278,857*****Held
      to maturity:*****State
      and municipal**
    
    **$**
    **682,945**
    
    **$**
    **71,933**
    
    **$**
    **-**
    
    **$**
    **754,878****Mortgage-backed**
    
    
    **944,245**
    
    
    **62,771**
    
    
    **-**
    
    
    **1,007,016****$**
    **1,627,190**
    
    **$**
    **134,704**
    
    **$**
    **-**
    
    **$**
    **1,761,894**
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairDecember
      31, 2003
    
    Cost
    
    Gains
    
    Losses
    
    Value***Available
      for sale:***U.S.
      Government agencies
    
    $
    13,066,518
    
    $
    382,806
    
    $
    214,216
    
    $
    13,235,108State
      and municipal
    
    
    42,941,347
    
    
    1,342,191
    
    
    74,432
    
    
    44,209,106Corporate
      trust preferred
    
    
    5,025,537
    
    
    495,725
    
    
    1,419
    
    
    5,519,843Mortgage-backed
    
    
    36,481,430
    
    
    361,884
    
    
    205,018
    
    
    36,638,296$
    97,514,832
    
    $
    2,582,606
    
    $
    495,085
    
    $
    99,602,353***Held
      to maturity:***U.S.
      Government agencies
    
    $
    1,000,000
    
    $
    48,293
    
    $
    -
    
    $
    1,048,293State
      and municipal
    
    
    682,817
    
    
    66,133
    
    
    -
    
    
    748,950Mortgage-backed
    
    
    1,895,937
    
    
    122,675
    
    
    -
    
    
    2,018,612$
    3,578,754
    
    $
    237,101
    
    $
    -
    
    $
    3,815,855
 
 F-12
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
3. Investment Securities** (continued)
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairDecember
      31, 2002
    
    Cost
    
    Gains
    
    Losses
    
    Value***Available
      for sale:***U.S.
      Treasury
    
    $
    499,497
    
    $
    14,568
    
    $
    -
    
    $
    514,065U.S.
      Government agencies
    
    
    8,084,257
    
    
    469,446
    
    
    140,000
    
    
    8,413,703State
      and municipal
    
    
    31,216,663
    
    
    812,011
    
    
    86,496
    
    
    31,942,178Corporate
      trust preferred
    
    
    5,056,735
    
    
    471,397
    
    
    -
    
    
    5,528,132Mortgage-backed
    
    
    37,311,301
    
    
    948,303
    
    
    -
    
    
    38,259,604$
    82,168,453
    
    $
    2,715,725
    
    $
    226,496
    
    $
    84,657,682***Held
      to maturity:***U.S.
      Government agencies
    
    $
    1,499,692
    
    $
    106,321
    
    $
    -
    
    $
    1,606,013State
      and municipal
    
    
    682,688
    
    
    47,014
    
    
    -
    
    
    729,702Mortgage-backed
    
    
    5,019,989
    
    
    259,998
    
    
    -
    
    
    5,279,987$
    7,202,369
    
    $
    413,333
    
    $
    -
    
    $
    7,615,702
  The gross
unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, at December
31, 2004 are as
follows:
 
 Securities available for sale:
 
 **Less
      than 12 months**
    
    **12
      months or more**
    
    **Total****Fair**
    
    **Unrealized**
    
    **Fair**
    
    **Unrealized**
    
    **Fair**
    
    **Unrealized****Value**
    
    **Loss**
    
    **Value**
    
    **Loss**
    
    **Value**
    
    **Loss******Obligations
      of U.S.**Government agencies**
    
    **$**
    **3,471,719**
    
    **$**
    **24,504**
    
    **$**
    **1,537,000**
    
    **$**
    **463,000**
    
    **$**
    **5,008,719**
    
    **$**
    **487,504****State
      and Municipal**
    
    
    **3,531,704**
    
    
    **45,151**
    
    
    **1,989,067**
    
    
    **43,299**
    
    
    **5,520,771**
    
    
    **88,450****Mortgaged-backed**
    
    
    **12,162,333**
    
    
    **84,458**
    
    
    **3,563,678**
    
    
    **78,866**
    
    
    **15,726,011**
    
    
    **163,324****$**
    **19,165,756**
    
    **$**
    **154,113**
    
    **$**
    **7,089,745**
    
    **$**
    **585,165**
    
    **$**
    **26,255,501**
    
    **$**
    **739,278**
  Declines
in the fair value of held to maturity and available for sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment losses,
management considers, among other things, (i) the length of time and the extent
to which the fair value has been less than cost, (ii) the financial condition
and near-term prospects of the issuer, and (iii) the intent and ability of the
Company to retain is investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in fair value.
 
 Management
has the ability and intent to hold the securities classified as held to maturity
until they mature, at which time the Company will receive full value for the
securities. Furthermore, as of December 31, 2004, management also had the
ability and intent to hold the securities classified as available for sale for a
period of time sufficient for a recovery of cost. The unrealized losses are
largely due to increases in market interest rates over the yields available at
the time the underlying securities were purchased. The fair value is expected to
recover as the bonds approach their maturity date or repricing date or if market
yields for such investments decline. Management does not believe any of the
securities are impaired due to reasons of credit quality. Accordingly, as of
December 31,
 
 ****
 F-13
 ****
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 ****
 **Note
3. Investment Securities** (continued)
 
 2004,
management believes the impairments detailed in the table above are temporary
and no impairment loss has been realized in the Company’s consolidated income
statement.
 
 Contractual
maturities of investment securities at December 31, 2004 , 2003 , and 2002 are
shown below. Actual maturities may differ from contractual maturities because
debtors may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities have no stated maturity and
primarily reflect investments in various Pass-through and Participation
Certificates issued by the Federal National Mortgage Association and the
Government National Mortgage Association. Repayment of mortgage-backed
securities is affected by the contractual repayment terms of the underlying
mortgages collateralizing these obligations and the current level of interest
rates.
  ***Available
      for Sale***
    
    ***Held
      to Maturity*****Amortized**
    
    **Fair**
    
    **Amortized**
    
    **Fair****December
      31, 2004**
    
    **Cost**
    
    **Value**
    
    **Cost**
    
    **Value****Due
      within one year**
    
    **$**
    **2,874,617**
    
    **$**
    **2,893,275**
    
    **$**
    **-**
    
    **$**
    **-****Due
      over one to five years**
    
    
    **7,894,560**
    
    
    **8,011,579**
    
    
    **-**
    
    
    **-****Due
      over five to ten years**
    
    
    **17,111,432**
    
    
    **17,210,406**
    
    
    **-**
    
    
    **-****Due
      over ten years**
    
    
    **25,596,233**
    
    
    **26,575,991**
    
    
    **682,945**
    
    
    **754,878****Mortgage-backed,
      due in monthly installments**
    
    
    **38,563,539**
    
    
    **38,587,606**
    
    
    **944,245**
    
    
    **1,007,016****$**
    **92,040,381**
    
    **$**
    **93,278,857**
    
    **$**
    **1,627,190**
    
    **$**
    **1,761,894**
  *Available
      for Sale*
    
    *Held
      to Maturity*Amortized
    
    Fair
    
    Amortized
    
    FairDecember
      31, 2003
    
    Cost
    
    Value
    
    Cost
    
    ValueDue
      within one year
    
    $
    1,145,360
    
    $
    1,160,318
    
    $
    1,000,000
    
    $
    1,048,293Due
      over one to five years
    
    
    11,310,601
    
    
    11,774,429
    
    
    -
    
    
    -Due
      over five to ten years
    
    
    17,628,071
    
    
    17,797,250
    
    
    -
    
    
    -Due
      over ten years
    
    
    30,949,370
    
    
    32,232,060
    
    
    682,817
    
    
    748,950Mortgage-backed,
      due in monthly installments
    
    
    36,481,430
    
    
    36,638,296
    
    
    1,895,937
    
    
    2,018,612$
    97,514,832
    
    $
    99,602,353
    
    $
    3,578,754
    
    $
    3,815,855
  *Available
      for Sale*
    
    *Held
      to Maturity*Amortized
    
    Fair
    
    Amortized
    
    FairDecember
      31, 2002
    
    Cost
    
    Value
    
    Cost
    
    ValueDue
      within one year
    
    $
    579,445
    
    $
    595,838
    
    $
    -
    
    $
    -Due
      over one to five years
    
    
    7,370,459
    
    
    7,707,811
    
    
    1,499,692
    
    
    1,606,013Due
      over five to ten years
    
    
    5,762,134
    
    
    6,085,881
    
    
    -
    
    
    -Due
      over ten years
    
    
    31,145,134
    
    
    32,008,548
    
    
    682,688
    
    
    729,702Mortgage-backed,
      due in monthly installments
    
    
    37,311,281
    
    
    38,259,604
    
    
    5,019,989
    
    
    5,279,987$
    82,168,453
    
    $
    84,657,682
    
    $
    7,202,369
    
    $
    7,615,702
 
 F-14
 ****
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
3. Investment Securities** (continued)
 
 Proceeds
from sales of available for sale securities prior to maturity
totaled **$18,345,056** , **** $10,994,980,
and $4,989,082 for the years ended December 31, 2004 , 2003 , and 2002 ,
respectively. The Bank realized gains of **$483,760** and
losses of **$72,282** on those
sales for 2004 . The
Bank realized gains of $220,034 and losses of $1,455 on those sales for 2003 . The
Bank realized gains of $52,943 and losses of $63 on those sales for 2002 .
Realized gains and losses were calculated based on the amortized cost of the
securities at the date of trade. Income tax expense relating to net gains on
sales of investment securities totaled **$158,913** ,
$84,415, and $20,422 for the years ended December 31, 2004 , 2003 , and 2002 ,
respectively.
 
 The
      Bank has no derivative financial instruments required to be disclosed
      under SFAS No. 119,*Disclosure
      about Derivative Financial Instruments and Fair Value of Financial
      Instruments.*
 
 **Note
4. Loans**
 
 Major
categories of loans are as follows:
 **2004**
    
    2003
    
    2002Mortgage:Residential
    
    **$**
    **71,038,619**
    
    $
    64,470,867
    
    $
    49,572,269Commercial
    
    
    **31,982,864**
    
    
    28,525,381
    
    
    31,584,086Construction
      and land development
    
    
    **2,080,178**
    
    
    3,112,105
    
    
    2,337,489Demand
      and time
    
    
    **5,617,982**
    
    
    6,113,311
    
    
    5,374,283Installment
    
    
    **74,902,306**
    
    
    73,824,338
    
    
    72,780,383**185,621,949**
    
    
    176,046,002
    
    
    161,648,510Unearned
      income on loans
    
    
    **(918,763**
    **)**
    
    (980,558
    )
    
    (847,064
    )**184,703,186**
    
    
    175,065,444
    
    
    160,801,446Allowance
      for credit losses
    
    
    **(2,411,894**
    **)**
    
    (2,246,395
    )
    
    (2,514,700
    )**$**
    **182,291,292**
    
    $
    172,819,049
    
    $
    158,286,746
 The Bank
has an automotive indirect lending program where vehicle collateralized loans
made by dealers to consumers are acquired by the Bank. The Bank’s installment
loan portfolio included approximately **$55,703,000** , **** $53,833,000,
and $52,795,000 of such loans at December 31, 2004 , 2003 , and 2002 ,
respectively.
 
 The Bank
makes loans to customers located primarily in Anne Arundel County and
surrounding areas of Central Maryland. Although the loan portfolio is
diversified, its performance will be influenced by the economy of the
region.
 
 Executive
officers, directors, and their affiliated interests enter into loan transactions
with the Bank in the ordinary course of business. These loans are made on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable loans with unrelated borrowers. They do not involve more
than normal risk of collectibility or present other unfavorable terms. At
December 31, 2004 , 2003 , and 2002 , the
amounts of such loans outstanding totaled **$1,443,878** ,
$1,998,843, and $1,244,758, respectively. During 2004 , loan
additions and repayments totaled **$587,471** and **$1,142,436** ,
respectively.
 
 
 F-15
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
4. Loans** (continued)
 
 Loans on
which the accrual of interest has been discontinued totaled **$598,162** ,
$572,282, and $571,057 at December 31, 2004 , 2003 , and 2002 ,
respectively. Interest that would have been accrued under the terms of these
loans totaled **$46,751** ,
$56,882, and $9,188 for the years ended December 31, 2004 , 2003 , and 2002 ,
respectively.
 
 The
allowance for credit losses is as follows:
  **2004**
    
    2003
    
    2002****Balance,
      beginning of year
    
    **$**
    **2,246,395**
    
    $
    2,514,700
    
    $
    2,938,455Provision
      for credit losses
    
    
    **340,000**
    
    
    40,000
    
    
    -Recoveries
    
    
    **377,213**
    
    
    449,909
    
    
    306,332Loans
      charged off
    
    
    **(551,714**
    **)**
    
    (758,214
    )
    
    (730,087
    )Balance,
      end of year
    
    **$**
    **2,411,894**
    
    $
    2,246,395
    
    $
    2,514,700
 Information
regarding loans classified by the Bank as impaired is summarized as
follows:
  **2004**
    
    2003
    
    2002Loans
      classified as impaired
    
    **$**
    **490,656**
    
    $
    425,458
    
    $
    355,489Allowance
      for credit losses onimpaired loans
    
    
    **116,160**
    
    
    154,923
    
    
    109,310Average
      balance of impaired loans
    
    
    **461,400**
    
    
    288,180
    
    
    175,609
  Following
is a summary of cash receipts on impaired loans and how they were
applied:
 
 Cash
      receipts applied to reduce principal balance
    
    **$**
    **27,630**
    
    $
    64,490
    
    $
    19,381Cash
      receipts recognized as interest income
    
    
    **27,190**
    
    
    20,945
    
    
    8,454Total
      cash receipts
    
    **$**
    **54,820**
    
    $
    85,435
    
    $
    27,835
 
 At
December 31, 2004, the recorded investment in new troubled debt restructurings
totaled **$94,783** . The
average recorded investment in troubled debt restructurings totaled **$96,624** for the
year ended December 31, 2004. The allowance for credit losses relating to
troubled debt restructurings totaled **$31,436** at
December 31, 2004. The Bank recognized **$8,015** in
interest income on troubled debt restructurings for cash payments received in
2004. All prior investments in troubled debt were performing under the terms of
the modified agreements, with the exception of one credit relationship
classified as impaired in the amount of **$173,010** as of
December 31, 2004.
 
 No
troubled debt restructurings transpired in 2003.
 
 At
December 31, 2002, the recorded investment in new troubled debt restructurings
totaled $40,833. The average recorded investment in troubled debt restructurings
totaled $41,964 for the year ended December 31, 2002. The allowance for credit
losses relating to troubled debt restructurings totaled $8,166 at December 31,
2002. The Bank recognized $2,304 in interest income on troubled debt
restructurings for cash payments received in 2002.
 
 The Bank
has no commitments to loan additional funds to the borrowers of restructured,
impaired, or non-accrual loans.
 
 
 F-16
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
5. Premises and Equipment**
 
 A summary
of premises and equipment is as follows:
 Usefullives
    
    **2004**
    
    2003
    
    2002Land
    
    
    
    
    **$**
    **684,977**
    
    $
    684,977
    
    $
    684,977Buildings
    
    
    5-50
      years
    
    
    **4,437,516**
    
    
    4,399,730
    
    
    4,166,210Equipment
      and fixtures
    
    
    5-30
      years
    
    
    **5,248,830**
    
    
    5,062,486
    
    
    5,304,871Construction
      in progress
    
    
    
    
    
    **298,480**
    
    
    282,341
    
    
    622,587**10,669,803**
    
    
    10,429,534
    
    
    10,778,645Accumulated
      depreciation
    
    
    
    
    
    **(6,639,026**
    **)**
    
    (6,209,722
    )
    
    (6,012,629
    )**$**
    **4,030,777**
    
    $
    4,219,812
    
    $
    4,766,016
 Construction
in progress at December 31, 2004 relates primarily to certain computer hardware
and software upgrades in the main office and leasehold improvements and
equipment and fixtures in the new Linthicum branch.
 
 Depreciation
expense totaled **$469,633** ,
$453,967, and $508,301 for the years ended December 31, 2004 , 2003 , and 2002 ,
respectively. Amortization of software and intangible assets totaled **$167,474** , **** $205,461,
and $190,493 for the years ended December 31, 2004 , 2003 , and 2002 ,
respectively.
 
 The Bank
leases its South Crain Highway and Severna Park branches. Minimum lease
obligations under the South Crain Highway branch are $115,400 per year through
September 2009, adjusted annually by the CPI. Minimum lease obligations under
the Severna Park branch are $30,000 per year through September 2007. The Bank is
also required to pay all maintenance costs under all these leasing arrangements.
Rent expense totaled **$125,198** ,
$106,928, and $117,929 for the years ended December 31, 2004 , 2003 , and 2002 ,
respectively.
 
 In
January 2005, the Bank opened its new Linthicum branch and entered into an
operating lease agreement. Minimum lease obligations under this arrangement are
$90,000 per year through December 2014, adjusted annually on a pre-determined
basis, with one ten year extension option. The Bank is also required to pay all
maintenance costs under this leasing arrangement.
 
 In the
fourth quarter of 2002, the Board of Directors of the Company decided to close
and relocate the existing Severna Park branch. At December 31, 2002, management
determined that leasehold improvements made to this Severna Park branch, with a
book value of $64,648, were impaired as prescribed by SFAS No. 144, and had no
net realizable value, and recorded an asset impairment loss from continuing
operations for this amount. The Bank also accrued approximately $77,000, as
prescribed in SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities* (See Note
20), relating to the estimated future lease and maintenance obligations. All
expenses were included in other operating expenses for 2002 (see Note
14).
 
 **Note
6. Short-term borrowings**
 
 Short-term
borrowings are as follows:
 **2004**
    
    2003
    
    2002Notes
      payable - U.S. Treasury
    
    **$**
    **541,672**
    
    $
    401,920
    
    $
    837,074FHLB
    
    
    **-**
    
    
    6,200,000
    
    
    -**$**
    **541,672**
    
    $
    6,601,920
    
    $
    837,074
 F-17
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 ****
 **Note
6. Short-term borrowings** (continued)
 
 Notes
payable to the U.S. Treasury represents Federal treasury tax and loan deposits
accepted by the Bank from its customers to be remitted on demand to the Federal
Reserve Bank. The Bank pays interest on these balances at a slight discount to
the Federal funds rate. This arrangement is secured by investment securities
with an amortized cost of approximately **$1,000,000** at
December 31, 2004 , 2003 , and 2002 .
 
 The Bank
owned 9,190 shares of common stock of the FHLB at December
31, 2004 . The
Bank is required to maintain an investment of .2% of total assets, adjusted
annually, plus 4.5% of total advances, adjusted for advances and repayments.
This investment was a condition for obtaining a variable rate, 2.24% at December
31, 2004 , credit
facility with the FHLB. The credit available under this facility is determined
at 12% of the Bank’s total assets, or approximately $36,200,000 at December
31, 2004 .
Long-term advances totaled $7,000,000 under this credit arrangement at December
31, 2004 (see
Note 7). This credit facility is secured by a floating lien on the Bank’s
residential mortgage loan portfolio. Average short-term borrowings under this
facility approximated **$3,605,000,** $1,555,000 **** and **** $233,000 **** for 2004 , 2003 , and 2002 ,
respectively.
 
 The Bank
also has available $5,000,000 in a short-term credit facility, an unsecured line
of credit, from another bank for short-term liquidity needs, if necessary. No
outstanding borrowings existed under this credit arrangement at December 31, 2004 , 2003 , and 2002 .
 
 **Note
7. Long-term Borrowings**
 
 Long-term
borrowings are as follows:
 **2004**
    
    2003
    
    2002Federal
      Home Loan Bank of Atlanta,convertible
advance
    
    **$**
    **7,000,000**
    
    $
    7,000,000
    
    $
    7,000,000Mortgage
      payable-individual, interest at 7%,payments of $3,483,including
      principaland interest, due monthly
      throughOctober
      2010, secured by real estate
    
    
    **199,708**
    
    
    226,501
    
    
    251,489**$**
    **7,199,708**
    
    $
    7,226,501
    
    $
    7,251,489
 The
Federal Home Loan Bank of Atlanta convertible advance matures in September 2010,
with interest at 5.84%, payable quarterly. The Federal Home Loan Bank of Atlanta
has the option of converting the rate to a three-month LIBOR; however, if
converted, the borrowing can be repaid without penalty. The proceeds of the
convertible advance were used to purchase higher yielding investment
securities.
 
 At December
31, 2004 , the
scheduled maturities of long-term borrowings are approximately as
follows:
  **2004**2005
    
    **$**
    **29,000**2006
    
    
    **31,000**2007
    
    
    **33,000**2008
    
    
    **35,000**2009
    
    
    **38,000**2010
    
    
    **7,034,000****$**
    **7,200,000**
 
 F-18
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
8. Junior Subordinated Debentures owed to Unconsolidated Subsidiary
Trust**
 
 The
Bancorp sponsored a trust, Glen Burnie Statutory Trust I, of which 100% of the
common equity is owned by the Company. The trust was formed for the purpose of
issuing Company-obligated mandatorily redeemable capital securities (the capital
securities) to third-party investors and investing the proceeds from the sale of
such capital securities solely in junior subordinated debt securities of the
Company (the debentures). The debentures held by the trust are the sole assets
of that trust. Distributions on the capital securities issued by the trust are
payable semi-annually at a 10.6% rate per annum equal to the interest rate being
earned by the trust on the debentures held by that trust. The capital securities
are subject to mandatory redemption, in whole or in part, upon repayment of the
debentures. The Company has entered into agreements which, taken collectively,
fully and unconditionally guarantee the capital securities subject to the terms
of each of the guarantees. The debentures held by the trust carry non-call
provisions over the first 10 year period, and a declining 10 year premium call
thereafter. Both the capital securities of the statutory trust and the junior
subordinated debentures are scheduled to mature on September 7, 2030, unless
called by the Bancorp not earlier than September 7, 2010.
 
 In the
third quarter of 2003, as a result of applying the provisions of FIN 46,
governing when an equity interest should be consolidated, the Company was
required to deconsolidate this subsidiary trust from its financial statements
since the trust is considered a variable interest entity for which the Company
is not the primary beneficiary. The deconsolidation of the net assets and
results of operations of the trust had no impact on the Company’s financial
statements or liquidity position since the Company continues to be obligated to
repay the debentures held by the trust and guarantees repayment of the capital
securities issued by the trust. The consolidated debt obligation related to the
trust is $5,155,000 of which $155,000 relates to the Bancorp’s common ownership
interest in the trust.
 
 Despite
the fact that Trust I is not included in the Company’s consolidated financial
statements, the $5.0 million in trust preferred securities issued by the trust
are included in the Tier 1 capital of the Bank for regulatory capital purposes
as allowed by the Federal Reserve Board. In May 2004, the Federal Reserve Board
proposed a rule that would continue to allow the inclusion of trust preferred
securities issued by unconsolidated subsidiary trusts in Tier 1 capital, but
with stricter quantitative limits. Under the proposal, after a three-year
transition period, the aggregate amount of trust preferred securities and
certain other capital elements would be limited to 25% of Tier 1 capital
elements, net of goodwill. The amount of trust preferred securities and certain
other elements in excess of the limit could be included in Tier 2 capital,
subject to restrictions. Bank holding companies with significant international
operations would generally be expected to limit trust preferred securities and
certain other capital elements to 15% of Tier 1 capital elements, net of
goodwill. Based on the proposed rule, the Company expects to include all of its
$5.0 million in trust preferred securities in Tier 1 capital. However, the
provisions of the final rule could significantly differ from those proposed and
there can be no assurance that the Federal Reserve Board will not further limit
the amount of trust preferred securities permitted to be included in Tier 1
capital for regulatory capital purposes. The trust preferred securities could be
redeemed without penalty if they were no longer permitted to be included in Tier
1 capital.
 
 **Note
9. Deposits**
 
 
 Major
classifications of interest-bearing deposits are as follows:
 **2004**
    
    2003
    
    2002NOW
      and SuperNOW
    
    **$**
    **27,089,844**
    
    $
    28,400,505
    
    $
    24,071,173Money
      Market
    
    
    **20,208,804**
    
    
    20,144,401
    
    
    19,889,727Savings
    
    
    **57,664,694**
    
    
    53,378,579
    
    
    47,616,167Certificates
      of Deposit, $100,000 or more
    
    
    **16,556,548**
    
    
    15,649,757
    
    
    17,698,559Other
      time deposits
    
    
    **66,726,787**
    
    
    69,686,175
    
    
    73,082,004**$**
    **188,246,677**
    
    $
    187,259,417
    
    $
    182,357,630
 F-19
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 ****
 ****
 **Note
9. Deposits** (continued)
 
 Interest
expense on deposits is as follows:
 
 **2004**
    
    2003
    
    2002NOW
      and SuperNOW
    
    **$**
    **31,465**
    
    $
    42,980
    
    $
    64,644Money
      Market
    
    
    **84,385**
    
    
    104,546
    
    
    186,059Savings
    
    
    **236,550**
    
    
    241,429
    
    
    431,320Certificates
      of Deposit, $100,000 or more
    
    
    **424,710**
    
    
    584,996
    
    
    684,691Other
      time deposits
    
    
    **1,834,426**
    
    
    2,302,142
    
    
    2,846,112**$**
    **2,611,536**
    
    $
    3,276,093
    
    $
    4,212,826
 At
December 31, 2004, the scheduled maturities of time deposits are approximately
as follows:
  **2004**2005
    
    **$**
    **39,905,000**2006
    
    
    **20,227,000**2007
    
    
    **10,775,000**2008
    
    
    **5,366,000**2009
    
    
    **4,397,000**2010
      and thereafter
    
    
    **2,614,000****$**
    **83,284,000**
 Deposit
balances of executive officers and directors and their affiliated interests
totaled approximately **$1,309,000** , **** $1,048,000,
and $1,058,000 at December 31, 2004 , 2003 , and 2002 ,
respectively.
 
 The Bank
had no brokered deposits at December 31, 2004 , 2003 , and 2002 .
 
 **Note
10. Income Taxes**
 ****
 The
components of income tax expense for the years ended December 31, 2004 , 2003 , and 2002 are as
follows:
 **2004**
    
    2003
    
    2002Current:Federal
    
    **$**
    **660,981**
    
    $
    561,686
    
    $
    739,995State
    
    
    **105,856**
    
    
    94,330
    
    
    66,182Total
      current
    
    
    **766,837**
    
    
    656,016
    
    
    806,177Deferred
      income taxes (benefits):Federal
    
    
    **(111,600**
    **)**
    
    26,453
    
    
    229,215State
    
    
    **(22,013**
    **)**
    
    5,471
    
    
    49,553Total
      deferred
    
    
    **(133,613**
    **)**
    
    31,924
    
    
    278,768Income
      tax expense
    
    **$**
    **633,224**
    
    $
    687,940
    
    $
    1,084,945
 
 
 F-20
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
10. Income Taxes** (continued)
 
 A
reconciliation of income tax expense computed at the statutory rate of 34% to
the actual income tax expense for the years ended December 31, 2004 , 2003 , and 2002 is as
follows:
  **2004**
    
    2003
    
    2002****Income
      before income taxes
    
    **$**
    **3,688,725**
    
    $
    3,765,014
    
    $
    3,896,028Taxes
      computed at Federal income tax rate
    
    **$**
    **1,254,167**
    
    $
    1,280,105
    
    $
    1,324,650Increase
      (decrease) resulting from:Tax-exempt
      income
    
    
    **(648,864**
    **)**
    
    (693,992
    )
    
    (408,130
    )State
      income taxes, net of Federal incometax
    benefit
    
    
    **55,336**
    
    
    65,869
    
    
    108,518Other
    
    
    **(27,415**
    **)**
    
    35,958
    
    
    59,907Income
      tax expense
    
    **$**
    **633,224**
    
    $
    687,940
    
    $
    1,084,945
 The
components of the net deferred income tax liabilities as of December 31, 2004 , 2003 , and 2002 are as
follows:
  **2004**
    
    2003
    
    2002Deferred
      income tax benefits:Accrued
      deferred compensation and benefitplan
      obligations
    
    **$**
    **57,807**
    
    $
    80,173
    
    $
    105,359Allowance
      for credit losses
    
    
    **140,771**
    
    
    -
    
    
    -Other
      real estate owned
    
    
    **-**
    
    
    -
    
    
    32,375Reserve
      for unfunded commitments
    
    
    **57,930**
    
    
    57,930
    
    
    57,930Total
      deferred income tax benefits
    
    
    **256,508**
    
    
    138,103
    
    
    195,664Deferred
      income tax liabilities:Accumulated
      depreciation
    
    
    **76,244**
    
    
    71,052
    
    
    61,016Allowance
      for credit losses
    
    
    **-**
    
    
    8,235
    
    
    45,650Accumulated
      securities discount accretion
    
    
    **32,547**
    
    
    44,713
    
    
    42,972Net
      unrealized appreciation on investmentsecurities available for
      sale
    
    
    **478,300**
    
    
    806,203
    
    
    961,340Total
      deferred income tax liabilities
    
    
    **587,091**
    
    
    930,203
    
    
    1,110,978Net
      deferred income tax liabilities
    
    **$**
    **(330,583**
    **)**
    $
    (792,100
    )
    $
    (915,314
    )
 **Note
11. Pension and Profit Sharing Plans**
 
 The Bank
has a money purchase pension plan, which provides for annual employer
contributions based on employee compensation, and covers substantially all
employees. Contributions under this plan, made from an existing safe harbor
accrual as a result of a prior termination of a defined benefit pension plan,
totaled **$182,581** ,
$188,995, and $188,470 for the years ended December 31, 2004 , 2003 and 2002 ,
respectively. Beginning in 2004, the Bank is also accruing additional
contributions under this plan, as the safe harbor accrual is exhausted. These
additional contributions, included in employee benefit expense, totaled **$210,000** for the
year ended December 31, 2004. The Bank is also making additional contributions
under this plan to certain employees whose retirement funds were negatively
affected by the termination of a defined benefit pension plan. These additional
contributions, included
 
 F-21
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 ****
 **Note
11. Pension and Profit Sharing Plans** (continued)
 
 in
employee benefit expense, totaled **$60,182** , **** $76,189,
and **** $103,476 **** for the
years ended December 31, 2004 , 2003 , and 2002 ,
respectively. As of December
31, 2004 , the
Bank has accrued approximately **$284,000** relating
to the current year accrual and the additional contributions to adversely
affected employees.
 
 The Bank
also has a defined contribution retirement plan qualifying under Section 401(k)
of the Internal Revenue Code that is funded through a profit sharing agreement
and voluntary employee contributions. The plan provides for discretionary
employer matching contributions to be determined annually by the Board of
Directors. The plan covers substantially all employees. The Bank’s contributions
to the plan, included in employee benefit expense, totaled **$357,138** , **** $362,978,
and $359,914 for the years ended December 31, 2004 , 2003 , and 2002 ,
respectively.
 ****
 **Note
12. Post-Retirement Health Care Benefits**
 
 The Bank
provides health care benefits to employees who retire at age 65 with five years
of full time service immediately prior to retirement and two years of
participation in the medical benefits plan. In 2001, the Bank amended the plan
to include the current Board of Directors and their spouses and the spouses of
current retirees. In the first quarter of 2002, the Bank again amended the plan
so that all post-retirement healthcare benefits currently provided by the Bank
to the above qualified participants will terminate on December 31, 2006. This
amendment to the plan resulted in a net curtailment gain of approximately
$764,000 in the year ended December 31, 2002. The plan was funded only to the
extent of the Bank’s monthly payments of insurance premiums, which totaled **$122,664** ,
$87,538, and $59,316 for the years ended December 31, 2004 , 2003 , and 2002 ,
respectively.
 
 The
following table sets forth the financial status of the plan at December 31, 2004 , 2003 , and 2002 :
  **2004**
    
    2003
    
    2002Accumulated
      post-retirement benefit obligation:Retirees
    
    **$**
    **268,168**
    
    $
    261,119
    
    $
    269,955Unrecognized
      net (loss) gain
    
    
    **(118,489**
    **)**
    
    (53,526
    )
    
    2,857Accrued
      post-retirement benefit cost
    
    **$**
    **149,679**
    
    $
    207,593
    
    $
    272,812
 
 Net
post-retirement benefit expense for the years ended December 31, 2004, 2003, and
2002 includes the following:
  **2004**
    
    2003
    
    2002Interest
      cost
    
    **$**
    **23,854**
    
    $
    21,280
    
    $
    20,096Amortization
      of net gain
    
    
    **40,896**
    
    
    1,039
    
    
    -Net
      post-retirement benefit expense
    
    **$**
    **64,750**
    
    $
    22,319
    
    $
    20,096
 Assumptions
used in the accounting for net post-retirement benefit expense were as
follows:
 **2004**
    
    2003
    
    2002Health
      care cost trend rate
    
    
    **5.0**
    **%**
    
    5.0
    %
    
    5.0
    %Discount
      rate
    
    
    **6.5**
    **%**
    
    6.5
    %
    
    6.5
    %
 
 F-22
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
****
****
 
 **Note
12. Post-Retirement Health Care Benefits** (continued)
 
 If the
assumed health cost trend rate were increased to 6% for 2004 , 2003 , and 2002 , the
total of the service and interest cost components of net periodic
post-retirement health care benefit cost would increase by **$220** , $294,
and $369 for the years ended December 31, 2004 , 2003 , and 2002 ,
respectively, and the accumulated post-retirement benefit obligation would
increase to **$64,970** ,
$22,613, and $20,465 as of December 31, 2004 , 2003 , and 2002 ,
respectively.
 
 **Note
13. Other Benefit Plans**
 
 During
the fourth quarter of 2002, the Bank purchased life insurance contracts on
several officers and is the sole owner and beneficiary of the policies. Cash
value totaled **$5,483,681** ,
$4,782,258, and $5,024,964 at December 31, 2004 , 2003 , and 2002 ,
respectively. Income on their insurance investment totaled **$201,423** ,
$364,330, and $24,964 for 2004 , 2003 , and 2002 ,
respectively, including a gain of approximately $117,000 attributable to the
death of its Executive Vice President during 2003.
 
 The Bank
has an unfunded grantor trust, as part of a change in control severance plan,
covering substantially all employees (See Note 15). Participants in the plan are
entitled to cash severance benefits upon termination of employment, for any
reason other than just cause, should a “change in control” of the Company
occur.
 
 **Note
14. Other Operating Expenses**
 
 Other
operating expenses include the following:
 **2004**
    
    2003
    
    2002Professional
      services
    
    **$**
    **430,301**
    
    $
    475,565
    
    $
    533,194Stationery,
      printing and supplies
    
    
    **229,806**
    
    
    221,453
    
    
    226,127Postage
      and delivery
    
    
    **232,742**
    
    
    216,410
    
    
    256,080FDIC
      assessment
    
    
    **36,972**
    
    
    37,852
    
    
    38,015Directors
      fees and expenses
    
    
    **194,901**
    
    
    134,020
    
    
    142,762Marketing
    
    
    **220,899**
    
    
    197,768
    
    
    212,470Data
      processing
    
    
    **123,782**
    
    
    158,365
    
    
    144,580Correspondent
      bank services
    
    
    **81,668**
    
    
    77,833
    
    
    76,508Telephone
    
    
    **117,228**
    
    
    135,588
    
    
    142,703Liability
      insurance
    
    
    **94,370**
    
    
    98,945
    
    
    116,121Losses
      and expenses on real estate owned (OREO)
    
    
    **551**
    
    
    21,544
    
    
    7,157Asset
      impairment losses on branch closures and related exit expenses(see Note 5)
    
    
    **-**
    
    
    -
    
    
    141,647Other
      ATM expense
    
    
    **251,688**
    
    
    201,614
    
    
    151,654Other
    
    
    **524,893**
    
    
    418,471
    
    
    544,203**$**
    **2,539,801**
    
    $
    2,395,428
    
    $
    2,733,221
 
 F-23
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
****
****
 
 
 **Note
15. Repurchase and Retirement of Company Common Stock**
 
 During
1998, the Company was pursued by another competing financial institution (the
institution) in a hostile take-over attempt. In November 1998, the Company
reached an agreement with the institution to repurchase 213,168 shares of its
common stock, or approximately 19.5% of its then outstanding shares, for an
aggregate purchase price of $5,580,764. In conjunction with the redemption
agreement, the Company and the institution also entered into a standstill
agreement through November 2008. Under the standstill agreement, the Company
made payments over four years totaling $675,510.
 
 For the
years ended December 31, 2004 , 2003 , and 2002 , the
Company made payments totaling **$0** , $0, and
$131,378, respectively, **** relating
to the standstill agreement. This payment is included in other
expenses.
 
 **Note
16. Commitments and Contingencies**
 
 Financial
instruments:
 
 The Bank
is a party to financial instruments in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit, which involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the consolidated financial statements.
 
 Outstanding
loan commitments, unused lines of credit and letters of credit are as
follows:
 **2004**
    
    2003
    
    2002Loan
      commitments:Construction
      and land development
    
    **$**
    **3,150,000**
    
    $
    -
    
    $
    357,000Other
      mortgage loans
    
    
    **1,137,500**
    
    
    2,082,250
    
    
    3,422,912**$**
    **4,287,500**
    
    $
    2,082,250
    
    $
    3,779,912Unused
      lines of credit:Home-equity
      lines
    
    **$**
    **6,297,160**
    
    $
    4,668,479
    
    $
    4,288,833Commercial
      lines
    
    
    **10,550,804**
    
    
    8,500,927
    
    
    9,272,579Unsecured
      consumer lines
    
    
    **836,377**
    
    
    982,715
    
    
    841,400**$**
    **17,684,341**
    
    $
    14,152,121
    
    $
    14,402,812Letters
      of credit:
    
    **$**
    **723,134**
    
    $
    772,731
    
    $
    891,549
 
 Loan
commitments and lines of credit are agreements to lend to customers as long as
there is no violation of any conditions of the contracts. Loan commitments
generally have interest rates fixed at current market amounts, fixed expiration
dates, and may require payment of a fee. Lines of credit generally have variable
interest rates. Many of the loan commitments and lines of credit are expected to
expire without being drawn upon; accordingly, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer’s creditworthiness on a case-by-case basis. The amount of collateral or
other security obtained, if deemed necessary by the Bank upon extension of
credit, is based on management’s credit evaluation. Collateral held varies but
may include deposits held in financial institutions, U.S. Treasury securities,
other marketable securities, accounts receivable, inventory, property and
equipment, personal residences, income-producing commercial properties, and land
under development. Personal guarantees are also obtained to provide added
security for certain commitments.
 
 F-24
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
****
****
 
 **Note
16. Commitments and Contingencies** (continued)
 
 Letters
of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to guarantee the installation of real property improvements and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds collateral and obtains personal guarantees supporting those
commitments for which collateral or other securities is deemed
necessary.
 
 The
Bank’s exposure to credit loss in the event of nonperformance by the customer is
the contractual amount of the commitment. Loan commitments, lines of credit, and
letters of credit are made on the same terms, including collateral, as
outstanding loans. As of December
31, 2004 , the
Bank has accrued **$150,000** for
unfunded commitments related to these financial instruments with off balance
sheet risk, which is included in other liabilities.
 
 **Note
17. Stockholders’ Equity**
 
 Restrictions
on dividends:
 
 Banking
regulations limit the amount of dividends that may be paid without prior
approval of the Bank’s regulatory agencies. Regulatory approval is required to
pay dividends that exceed the Bank’s net profits for the current year plus its
retained net profits for the preceding two years. Retained earnings from which
dividends may not be paid without prior approval totaled approximately **$5,633,000** , **** $4,993,000,
and $3,462,000 at December 31, 2004 , 2003 , and 2002 ,
respectively, based on the earnings restrictions and minimum capital ratio
requirements noted below.
 
 Employee
stock purchase benefit plans:
 
 The
Company has a stock-based compensation plan, which is described below. The Bank
applies APB No. 25 and related Interpretations in accounting for this plan. Net
compensation cost (benefit) of **$13,465** ,
($6,073), and $38,405 have been recognized in the accompanying consolidated
financial statements in 2004 , 2003 , and 2002 ,
respectively. If compensation cost for the Company’s stock-based compensation
plan had been determined based on the fair value at the grant date for awards
under this plan consistent with the methods outlined in SFAS No. 123 *Accounting
for Stock-Based Compensation* , there
would be no material change in reported net income.
 
 The
Company expects to adopt the provisions of SFAS No. 123, *Share-Base
Payment (Revised 2004),* on
January 1, 2006. Among other things, SFAS No. 123R eliminates the ability to
account for stock-based compensation using APB 25 and requires that such
transactions be recognized as compensation cost in the income statement based on
their fair values on the date of grant.
 
 Employees
who have completed one year of service are eligible to participate in the
employee stock purchase plan. The number of shares of common stock granted under
options will bear a uniform relationship to compensation. The plan allows
employees to buy stock under options granted at 85% of the fair market value of
the stock on the date of grant. Options granted will expire no later than 27
months from the grant date or upon termination of employment. Activity under
this plan is as follows:
 
 F-25
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
****
****
 
 **Note
17. Stockholders’ Equity** (continued)
  GrantShares
    
    PriceOutstanding
      December 31, 2001
    
    
    -Granted
      on May 17, 2002, expiring August 13, 2003
    
    
    9,318
    
    $
    11.48Exercised
    
    
    (3,678
    )Expired
    
    
    (174
    )
    $
    11.48Outstanding
      December 31, 2002
    
    
    5,466Exercised
    
    
    (4,020
    )
    $
    11.48Expired
    
    
    (1,446
    )
    $
    11.48**Outstanding
      December 31, 2003**
    
    
    **-****Granted
      on January 7, 2004, expiring December 15, 2004**
    
    
    **7,944**
    
    **$**
    **20.70****Exercised**
    
    
    **(3,689**
    **)****Expired**
    
    
    **(4,255**
    **)**
    **$**
    **20.70****Outstanding
      December 31, 2004**
    
    
    **-**
 
 At December
31, 2004 shares
of common stock reserved for issuance under the plan totaled **38,487** .
 
 The Board
of Directors may suspend or discontinue the plan at its discretion.
 
 Dividend
reinvestment and stock purchase plan:
 
 The
Company’s dividend reinvestment and stock purchase plan allows all participating
stockholders the opportunity to receive additional shares of common stock in
lieu of cash dividends at 95% of the fair market value on the dividend payment
date.
 
 During 2004 , 2003 , and 2002 , shares
of common stock purchased under the plan **** totaled **10,796** , 8,758,
and 10,548, respectively. At December
31, 2004 , shares
of common stock reserved for issuance under the plan totaled **151,124** .
 
 The Board
of Directors may suspend or discontinue the plan at its discretion.
 
 Stockholder
purchase plan:
 
 The
Company’s stockholder purchase plan allows participating stockholders an option
to purchase newly issued shares of common stock. The Board of Directors shall
determine the number of shares that may be purchased pursuant to options.
Options granted will expire no later than three months from the grant date. Each
option will entitle the stockholder to purchase one share of common stock, and
will be granted in proportion to stockholder share holdings. At the discretion
of the Board of Directors, stockholders may be given the opportunity to purchase
unsubscribed shares.
 
 There was
no activity under this plan for the years ended December 31, 2004 , 2003 , and 2002 .
 
 At December
31, 2004 , shares
of common stock reserved for issuance under the plan totaled **217,999.**
 
 F-26
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
****
****
 ****
 **Note
17. Stockholders’ Equity** (continued)
 
 The Board
of Directors may suspend or discontinue the plan at its discretion.
 
 Under all
three plans, options granted, exercised, and expired, shares issued and
reserved, and grant prices have been restated for the effects of any stock
dividends or stock splits.
 
 Regulatory
capital requirements:
 
 The
Company and Bank are subject to various regulatory capital requirements
administered by Federal and State banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. The Company and Bank must
meet specific capital guidelines that involve quantitative measures of their
respective assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting principles. The Company’s and Bank’s
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other
factors.
 
 Quantitative
measures established by regulation to ensure capital adequacy require the
Company and Bank to maintain minimum amounts and ratios (as defined in the
regulations) of total and Tier I capital to risk-weighted assets and of Tier I
capital to average assets. Management believes, as of December 31, 2004 , 2003 , and 2002 , that
both the Company and Bank meet all capital adequacy requirements to which they
are subject.
 
 As of
December 31, 2004, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios. There have been
no conditions or events since that notification that management believes have
changed the Bank’s category.
 
 As
discussed in Note 8, the capital securities held by the Glen Burnie Statutory
Trust I qualifies as Tier 1 capital for the Company under Federal Reserve Board
guidelines. As a result of the issuance of FIN 46, the Federal Reserve Board is
currently evaluating whether deconsolidation of the trust will affect the
qualification of the capital securities as Tier 1 capital for regulatory
purposes. If it is later determined that the capital securities no longer
qualify as Tier 1 capital, the effect of such a change may be
material.
 
 
 F-27
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
****
****
 
 **Note
17. Stockholders’ Equity** (continued)
 
 A
comparison of capital as of December 31, 2004 , 2003 , and 2002 with
minimum requirements is approximately as follows:
  ***To
      Be Well Capitalized******For
      Capital***
    
    ***Under
      Prompt Corrective******Actual***
    
    
    
    ***Adequacy
      Purposes***
    
    ***Action
      Provisions******Amount***
    
    ***Ratio***
    
    ***Amount***
    
    ***Ratio***
    
    ***Amount***
    
    ***Ratio*****As
      of December 31, 2004****Total
      Capital**
    
    ******(to
      Risk Weighted Assets)****Company**
    
    **$**
    **32,416,000**
    
    
    **16.4**
    **%**
    **$**
    **15,813,000**
    
    
    **8.0**
    **%**
    
    **N/A****Bank**
    
    
    **32,004,000**
    
    
    **16.2**
    **%**
    
    **15,804,000**
    
    
    **8.0**
    **%**
    **$**
    **19,756,000**
    
    
    **10.0**
    **%****Tier
      I Capital**
    
    
    ******(to
      Risk Weighted Assets)****Company**
    
    
    **29,944,000**
    
    
    **15.2**
    **%**
    
    **7,880,000**
    
    
    **4.0**
    **%**
    
    **N/A****Bank**
    
    
    **29,538,000**
    
    
    **15.0**
    **%**
    
    **7,877,000**
    
    
    **4.0**
    **%**
    
    **11,815,000**
    
    
    **6.0**
    **%****Tier
      I Capital**
    
    
    ******(to
      Average Assets)****Company**
    
    
    **29,944,000**
    
    
    **9.9**
    **%**
    
    **12,099,000**
    
    
    **4.0**
    **%**
    
    **N/A****Bank**
    
    
    **29,538,000**
    
    
    **9.7**
    **%**
    
    **12,181,000**
    
    
    **4.0**
    **%**
    
    **15,226,000**
    
    
    **5.0**
    **%**As
      of December 31, 2003Total
      Capital(to
      Risk Weighted Assets)Company
    
    $
    30,110,000
    
    
    15.8
    %
    $
    15,255,225
    
    
    8.0
    %
    
    N/ABank
    
    
    29,674,000
    
    
    15.6
    %
    
    15,217,000
    
    
    8.0
    %
    $
    19,022,000
    
    
    10.0
    %Tier
      I Capital(to
      Risk Weighted Assets)Company
    
    
    27,726,000
    
    
    14.5
    %
    
    7,628,000
    
    
    4.0
    %
    
    N/ABank
    
    
    27,296,000
    
    
    14.4
    %
    
    7,609,000
    
    
    4.0
    %
    
    11,413,000
    
    
    6.0
    %Tier
      I Capital(to
      Average Assets)Company
    
    
    27,726,000
    
    
    9.3
    %
    
    11,990,000
    
    
    4.0
    %
    
    N/ABank
    
    
    27,296,000
    
    
    9.1
    %
    
    11,972,000
    
    
    4.0
    %
    
    14,965,000
    
    
    5.0
    %
 
 F-28
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
17. Stockholders’ Equity** (continued)
  *To
      Be Well Capitalized**For
      Capital*
    
    *Under
      Prompt Corrective**Actual*
    
    
    
    *Adequacy
      Purposes*
    
    *Action
      Provisions**Amount*
    
    *Ratio*
    
    *Amount*
    
    *Ratio*
    
    *Amount*
    
    *Ratio*As
      of December 31, 2002Total
      Capital(to
      Risk Weighted Assets)Company
    
    $
    27,523,000
    
    
    15.3
    %
    $
    14,410,000
    
    
    8.0
    %
    
    N/ABank
    
    
    26,949,000
    
    
    15.0
    %
    
    14,363,000
    
    
    8.0
    %
    $
    17,954,000
    
    
    10.0
    %Tier
      I Capital (to
      Risk Weighted Assets)Company
    
    
    25,266,000
    
    
    14.0
    %
    
    7,209,000
    
    
    4.0
    %
    
    N/ABank
    
    
    24,699,000
    
    
    13.8
    %
    
    7,185,000
    
    
    4.0
    %
    
    10,778,000
    
    
    6.0
    %Tier
      I Capital(to
      Average Assets)Company
    
    
    25,266,000
    
    
    9.1
    %
    
    11,143,000
    
    
    4.0
    %
    
    N/ABank
    
    
    24,699,000
    
    
    8.9
    %
    
    11,126,000
    
    
    4.0
    %
    
    13,907,000
    
    
    5.0
    %
   **Note
18. Earnings Per Common Share**
 
 Earnings
per common share are calculated as follows:
  **2004**
    
    2003
    
    2002Basic:Net
      income
    
    **$**
    **3,055,501**
    
    $
    3,077,074
    
    $
    2,811,083Weighted
      average common shares outstanding
    
    
    **2,031,843**
    
    
    2,019,502
    
    
    2,005,602Basic
      net income per share
    
    **$**
    **1.50**
    
    $
    1.52
    
    $
    1.40Diluted:Net
      income
    
    
    
    
    
    
    
    $
    2,811,083Weighted
      average common shares outstanding
    
    
    
    
    
    
    
    
    2,005,602Dilutive
      effect of stock options
    
    
    
    
    
    
    
    
    3,384Average
      common shares outstanding - diluted
    
    
    
    
    
    
    
    
    2,008,986Diluted
      net income per share
    
    
    
    
    
    
    
    $
    1.40
 Diluted
earnings per share calculations were not required for 2004 and 2003 as there
were no options outstanding at December 31, 2004 and 2003.
 
 
 F-29
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
19. Fair Values of Financial Instruments**
 
 In
accordance with the disclosure requirements of SFAS No. 107, the estimated fair
value and the related carrying values of the Company’s financial instruments are
as follows:
 **2004**
    
    2003
    
    2002**Carrying**
    
    **Fair**
    
    Carrying
    
    Fair
    
    Carrying
    
    Fair**Amount**
    
    **Value**
    
    Amount
    
    Value
    
    Amount
    
    ValueFinancial
      assets:Cash
      and due from banks
    
    **$**
    **9,766,710**
    
    **$**
    **9,766,710**
    
    $
    11,119,791
    
    $
    11,119,791
    
    $
    11,297,175
    
    $
    11,297,175Interest-bearing
      deposits inother
      financial institutions
    
    
    **65,947**
    
    
    **65,947**
    
    
    57,192
    
    
    57,192
    
    
    41,335
    
    
    41,335Federal
      funds sold
    
    
    **1,541,234**
    
    
    **1,541,234**
    
    
    1,717,911
    
    
    1,717,911
    
    
    4,403,578
    
    
    4,403,578Certificates
      of deposit in otherfinancial
      institutions
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -
    
    
    100,000
    
    
    100,000Investment
      securitiesavailable
      for sale
    
    
    **93,278,857**
    
    
    **93,278,857**
    
    
    99,602,353
    
    
    99,602,353
    
    
    84,657,682
    
    
    84,657,682****Investment
      securities held tomaturity
    
    
    **1,627,190**
    
    
    **1,761,894**
    
    
    3,578,754
    
    
    3,815,855
    
    
    7,202,369
    
    
    7,615,702Federal
      Home Loan Bank Stock
    
    
    **919,000**
    
    
    **919,000**
    
    
    896,400
    
    
    896,400
    
    
    703,200
    
    
    703,200Maryland
      Financial Bank Stock
    
    
    **100,000**
    
    
    **100,000**
    
    
    -
    
    
    -
    
    
    -
    
    
    -Common
      stock-Statutory Trust I
    
    
    **155,000**
    
    
    **155,000**
    
    
    155,000
    
    
    155,000
    
    
    155,000
    
    
    155,000Ground
      rents
    
    
    **235,700**
    
    
    **235,700**
    
    
    248,300
    
    
    248,300
    
    
    249,900
    
    
    249,900Loans,
      less allowance forcredit losses
    
    
    **182,291,292**
    
    
    **180,500,000**
    
    
    172,819,049
    
    
    172,820,000
    
    
    158,286,746
    
    
    158,290,000Accrued
      interest receivable
    
    
    **1,484,869**
    
    
    **1,484,869**
    
    
    1,575,918
    
    
    1,575,918
    
    
    1,547,511
    
    
    1,547,511Financial
      liabilities:Deposits
    
    
    **261,674,043**
    
    
    **261,826,000**
    
    
    256,908,235
    
    
    256,910,000
    
    
    241,419,607
    
    
    241,420,000Short-term
      borrowings
    
    
    **541,672**
    
    
    **541,672**
    
    
    6,601,920
    
    
    6,601,920
    
    
    837,074
    
    
    837,074Long-term
      borrowings
    
    
    **7,199,708**
    
    
    **8,388,328**
    
    
    7,226,501
    
    
    7,226,501
    
    
    7,251,489
    
    
    7,251,489Dividends
      payable
    
    
    **287,938**
    
    
    **287,938**
    
    
    236,938
    
    
    236,938
    
    
    236,291
    
    
    236,291Accrued
      interest payable
    
    
    **55,980**
    
    
    **55,980**
    
    
    67,099
    
    
    67,099
    
    
    111,398
    
    
    111,398Accrued
      interest payable onjunior
      subordinated debentures
    
    
    **171,518**
    
    
    **171,518**
    
    
    171,518
    
    
    171,518
    
    
    171,518
    
    
    171,518Junior
      subordinated debenturesowed
      to unconsolidatedsubsidiary
      trust
    
    
    **5,155,000**
    
    
    **5,155,000**
    
    
    5,155,000
    
    
    5,155,000
    
    
    5,155,000
    
    
    5,155,000Unrecognized
      financial instruments:
    
    
    ****Commitments
      to extend credit
    
    
    **21,971,841**
    
    
    **21,971,841**
    
    
    16,234,371
    
    
    16,234,371
    
    
    18,182,724
    
    
    18,182,724Standby
      letters of credit
    
    
    **723,134**
    
    
    **723,134**
    
    
    772,731
    
    
    772,731
    
    
    891,549
    
    
    891,549
 For
purposes of the disclosures of estimated fair value, the following assumptions
were used.
 
 Loans:
 
 The
estimated fair value for loans is determined by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
 
 Investment
securities:
 
 Estimated
fair values are based on quoted market prices.
 
 F-30
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
19. Fair Values of Financial Instruments** (continued)
 
 Deposits:
 
 The
estimated fair value of deposits with no stated maturity, such as
noninterest-bearing demand  deposits, savings, NOW accounts and money market accounts, is equal to the
amount payable on  demand
at the reporting date (that is, their carrying amounts). The fair value of
certificates of deposit is based on the rates currently offered for deposits of
similar maturities. The fair value estimates do not include the benefit that
results from the low-cost funding provided by the deposit liabilities   compared
to the cost of borrowing funds in the market.
 
 
 Other
assets and liabilities:
 
 The
estimated fair values for cash and due from banks, interest-bearing deposits in
other financial institutions, Federal funds sold, accrued interest receivable
and payable, and short-term borrowings are considered to approximate cost
because of their short-term nature.
 
 Other
assets and liabilities of the Bank that are not defined as financial instruments
are not included in the above disclosures, such as property and equipment. In
addition, non-financial instruments typically not recognized in the financial
statements nevertheless may have value but are not included in the above
disclosures. These include, among other items, the estimated earnings power of
core deposit accounts, the trained work force, customer goodwill, and similar
items.
 ****
 **Note
20. Recently Issued Accounting Pronouncements**
 
 In
January 2003, the Financial Accounting Standards Board (FASB) issued Financial
Interpretations No. 46 (FIN 46), *Consolidation
of Variable Interest Entities* , which
provides guidance on how to identify a variable interest entity (VIE) and
determine when the assets, liabilities, noncontrolling interests, and results of
operations of a VIE are to be included in an entity’s consolidated financial
statements. A VIE exists when either the total equity investment at risk is not
sufficient to permit the entity to finance its activities by itself, or the
equity investors lack one of three characteristics associated with owning a
controlling financial interest. Those characteristics include the direct or
indirect ability to make decisions about an entity’s activities through voting
rights or similar rights, the obligation to absorb the expected losses of an
entity if they occur, or the right to receive the expected residual returns of
the entity if they occur.
 
 During
the third quarter of 2003, the Company applied the provisions of FIN 46 to a
wholly-owned subsidiary trust that issued capital securities to third-party
investors. The application of FIN 46 resulted in the deconsolidation of a
wholly-owned subsidiary trust. See Note 8 for further discussion of this trust
and the Company’s related obligations.
 
 In
December 2003, the FASB reissued FIN 46 with certain modifications and
clarifications.
 Application
of this guidance was effective for interests in certain VIEs commonly referred
to as special-purpose entities (SPEs) as of December 31, 2003. Application for
all other types of entities is required for periods ending after March 15, 2004,
unless previously applied.
 
 Management
continues to evaluate the applicability of FIN 46. Management does not believe
that the application of FIN 46 will have an impact on financial condition,
results of operations, or liquidity. The Federal Reserve Board is currently
evaluating the impact on Tier 1 capital.
 
 In April
2003, the FASB issued SFAS 149, *Amendment
of Statement 133 on Derivative Instruments and Hedging
Activities* , which
amends and clarifies financial accounting and reporting for derivative
instruments and hedging activities under SFAS 133, as well as amends certain
other existing FASB pronouncements. In general, SFAS 149 is effective for
derivative transactions entered into or modified and for hedging relationships
designated after June 30, 2003. The adoption of this standard did not
 
 F-31
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 ****
 **Note
20. Recently Issued Accounting Pronouncements** (continued)
 
 have an
impact on financial condition, the results of operations, or liquidity, as the
Company and Bank does not have derivative or hedging instruments.
 
 In May
2003, the FASB issued SFAS 150, *Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity* . This
Statement establishes standards for classifying and measuring certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity. The provisions of SFAS 150 became effective June 1,
2003, for all financial instruments created or modified after May 31, 2003, and
otherwise effective as of July 1, 2003. The adoption of this standard did not
have a material impact on financial condition, the results of operations, or
liquidity.
 
 In
December 2003, the FASB deferred for an indefinite period the application of the
guidance in SFAS 150 to noncontrolling interests that are classified as equity
in the financial statements of a subsidiary but would be classified as a
liability in the parent’s financial statements under SFAS 150. The deferral is
limited to mandatorily redeemable noncontrolling interests associated with
finite-lived subsidiaries. Management does not believe any such applicable
entities exist as of December 31, 2003.
 
 In
December 2004, the FASB issued SFAS No. 123, *“Share-Based
Payment (Revised 2004).”* SFAS
123R establishes standards for the accounting for transactions in which an
entity (i) exchanges its equity instruments for goods or services, or (ii)
incurs liabilities in exchange for goods or services that are based on the fair
value of the entity’s equity instruments or that may be settled by the issuance
of the equity instruments. SFAS 123R eliminates the ability to account for
stock-based compensation using APB 25 and requires that such transactions be
recognized as compensation cost in the income statement based on their fair
values on the date of the grant. SFAS 123R is effective for the Company on
January 1, 2006. The Company will transition to fair value based accounting for
stock-based compensation using a modified version of prospective application
(modified prospective application”). Under modified prospective application, as
it is applicable to the Company, SFAS 123R applies to new awards and to awards
modified, repurchased, or cancelled after January 1, 2006. Additionally,
compensation cost for the portion of awards for which the requisite service has
not been rendered (generally referring to non-vested awards) that are
outstanding as of January 1, 2006 must be recognized as the remaining requisite
service is rendered during the period of and/or the periods after the adoption
of SFAS 123R. The attribution of compensation cost for those earlier awards will
be based on the same method and on the same grant-date fair values previously
determined for the pro forma disclosures required for companies that did not
adopt the fair value accounting method for stock-based employee compensation.
The Company expects to recognize additional pre-tax, quarterly compensation
costs beginning in the first quarter of 2006 as a result of the adoption of SFAS
123R. Future levels of compensation cost recognized related to stock-based
compensation awards (including the aforementioned expected costs during the
period of adoption) may be impacted by new awards and/or modifications,
repurchases and cancellations of existing awards before and after the adoption
of this standard.
 
 In
November 2003, the FASB also issued Emerging Issues Task Force Issue No. 03-1, *The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.* This
statement establishes standards for accounting for and disclosure of declines in
fair value below cost basis of available for sale and held to maturity
investment securities. The recognition and measurement provisions were initially
effective for other-than-temporary impairment evaluations in reporting periods
beginning after June 15, 2004. However, in September 2004, the effective date of
these provisions was delayed until the finalization of a FASB Staff Position to
provide additional implementation guidance.
 
 F-32
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
21. Parent Company Financial Information**
 
 The
Balance Sheets, Statements of Income, and Statements of Cash Flows for Glen
Burnie Bancorp (Parent Only) are presented below:
  Balance
      SheetsDecember
      31,
    
    **2004**
    
    2003
    
    2002**Assets**Cash
    
    **$**
    **453,685**
    
    $
    268,893
    
    $
    397,118Investment
      in The Bank of Glen Burnie
    
    
    **30,339,198**
    
    
    28,672,564
    
    
    26,376,359Investment
      in GBB Properties, Inc.
    
    
    **262,343**
    
    
    257,023
    
    
    251,012Investment
      in the Glen Burnie Statutory Trust I
    
    
    **155,000**
    
    
    155,000
    
    
    155,000Due
      from subsidiaries
    
    
    **20,765**
    
    
    26,658
    
    
    34,484Other
      assets
    
    
    **132,250**
    
    
    137,182
    
    
    141,361**Total
      assets**
    
    **$**
    **31,363,241**
    
    $
    29,517,320
    
    $
    27,355,334**Liabilities
      and Stockholders’ Equity**Dividends
      payable
    
    **$**
    **287,938**
    
    $
    236,938
    
    $
    236,291Accrued
      interest payable on borrowed funds
    
    
    **171,518**
    
    
    171,518
    
    
    171,518Other
      liabilities
    
    
    **4,377**
    
    
    6,236
    
    
    3,139Borrowed
      funds from subsidiary
    
    
    **5,155,000**
    
    
    5,155,000
    
    
    5,155,000**Total
      liabilities**
    
    
    **5,618,833**
    
    
    5,569,692
    
    
    5,565,948Stockholders’
      equity:Common
      stock
    
    
    **2,041,033**
    
    
    1,689,281
    
    
    1,677,173Surplus
    
    
    **11,169,283**
    
    
    10,861,986
    
    
    10,637,578Retained
      earnings
    
    
    **11,773,915**
    
    
    10,115,038
    
    
    7,946,747Accumulated
      other comprehensive income,net of
taxes
    
    
    **760,177**
    
    
    1,281,323
    
    
    1,527,888**Total
      stockholders’ equity**
    
    
    **25,744,408**
    
    
    23,947,628
    
    
    21,789,386**Total
      liabilities and stockholders’ equity**
    
    **$**
    **31,363,241**
    
    $
    29,517,320
    
    $
    27,355,334
 The
borrowed funds from subsidiary balance represents the junior subordinated debt
securities payable to the wholly-owned subsidiary trust that was deconsolidated
as a result of applying the provisions of FIN 46. The Company continues to
guarantee the capital securities issued by the trust, which totaled **$5,000,000** at December
31, 2004 . (See
Notes 8 and 20 for further discussions on FIN 46).
 
 F-33
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
21. Parent Company Financial Information** (continued)
  Statements
      of IncomeYears
      Ended December 31,
    
    **2004**
    
    2003
    
    2002Dividends
      and distributions from subsidiaries
    
    **$**
    **1,235,000**
    
    $
    880,000
    
    $
    720,000Other
      income
    
    
    **16,430**
    
    
    16,430
    
    
    16,430Standstill
      agreement expense
    
    
    **-**
    
    
    -
    
    
    (131,378
    )Interest
      expense on junior subordinated debentures
    
    
    **(546,703**
    **)**
    
    (546,430
    )
    
    (546,430
    )Other
      expenses
    
    
    **(54,826**
    **)**
    
    (52,896
    )
    
    (36,642
    )Income
      before income tax benefit and equity inundistributed
      net income of subsidiaries
    
    
    **649,901**
    
    
    297,104
    
    
    21,980Income
      tax benefit
    
    
    **225,965**
    
    
    225,115
    
    
    269,575Change
      in undistributed net income of subsidiaries
    
    
    **2,179,635**
    
    
    2,554,855
    
    
    2,519,528**Net
      income**
    
    **$**
    **3,055,501**
    
    $
    3,077,074
    
    $
    2,811,083
  Statements
      of Cash FlowsYears
      Ended December 31,
    
    **2004**
    
    2003
    
    2002**Cash
      flows from operating activities:**Net
      income
    
    **$**
    **3,055,501**
    
    $
    3,077,074
    
    $
    2,811,083Adjustments
      to reconcile net income to net cash provided by operatingactivities:Decrease
      in other assets
    
    
    **4,932**
    
    
    4,179
    
    
    91,183Decrease
      in due from subsidiaries
    
    
    **5,893**
    
    
    7,826
    
    
    69,900(Decrease)
      increase in other liabilities
    
    
    **(1,859**
    **)**
    
    3,097
    
    
    3,139Change
      in undistributed net income ofsubsidiaries
    
    
    **(2,179,635**
    **)**
    
    (2,554,855
    )
    
    (2,519,528
    )****Net
      cash provided by operating activities
    
    
    **884,832**
    
    
    537,321
    
    
    455,777**Cash
      flows from financing activities:**Proceeds
      from dividend reinvestment plan
    
    
    **231,955**
    
    
    196,460
    
    
    180,070Proceeds
      from issuance of common stock
    
    
    **76,362**
    
    
    46,130
    
    
    42,205Dividends
      paid
    
    
    **(1,008,357**
    **)**
    
    (908,136
    )
    
    (793,915
    )Net
      cash used in financing activities
    
    
    **(700,040**
    **)**
    
    (665,546
    )
    
    (571,640
    )**Increase
      (decrease) in cash**
    
    
    **184,792**
    
    
    (128,225
    )
    
    (115,863
    )**Cash,
      beginning of year**
    
    
    **268,893**
    
    
    397,118
    
    
    512,981**Cash,
      end of year**
    
    **$**
    **453,685**
    
    $
    268,893
    
    $
    397,118
 
 
 F-34
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
22. Quarterly Results of Operations** (Unaudited)
 
 The
following is a summary of consolidated unaudited quarterly results of
operations:
 **2004****(Dollars
      in thousands,**
    
    **Three
      months ended,****except
      per share amounts)**
    
    **December
      31**
    
    **September
      30**
    
    **June
      30**
    
    **March
      31****Interest
      income**
    
    **$**
    **3,908**
    
    **$**
    **4,065**
    
    **$**
    **3,807**
    
    **$**
    **3,881****Interest
      expense**
    
    
    **894**
    
    
    **928**
    
    
    **885**
    
    
    **938****Net
      interest income**
    
    
    **3,014**
    
    
    **3,137**
    
    
    **2,922**
    
    
    **2,943****Provision
      for credit losses**
    
    
    **-**
    
    
    **140**
    
    
    **60**
    
    
    **140****Net
      securities gains**
    
    
    **102**
    
    
    **41**
    
    
    **39**
    
    
    **230****Income
      before income taxes**
    
    
    **921**
    
    
    **973**
    
    
    **883**
    
    
    **912****Net
      income**
    
    
    **840**
    
    
    **769**
    
    
    **706**
    
    
    **741****Net
      income per share (basic and diluted)**
    
    **$**
    **0.40**
    
    **$**
    **0.38**
    
    **$**
    **0.35**
    
    **$**
    **0.37**
  2003(Dollars
      in thousands,
    
    Three
      months ended,except
      per share amounts)
    
    December
      31
    
    September
      30
    
    June
      30
    
    March
      31Interest
      income
    
    $
    3,955
    
    $
    3,864
    
    $
    3,909
    
    $
    3,812Interest
      expense
    
    
    970
    
    
    1,051
    
    
    1,112
    
    
    1,144Net
      interest income
    
    
    2,985
    
    
    2,813
    
    
    2,797
    
    
    2,668Provision
      for credit losses
    
    
    30
    
    
    10
    
    
    -
    
    
    -Net
      securities gains
    
    
    49
    
    
    63
    
    
    15
    
    
    92Income
      before income taxes
    
    
    1,124
    
    
    1,033
    
    
    855
    
    
    753Net
      income
    
    
    849
    
    
    839
    
    
    733
    
    
    656Net
      income per share (basic and diluted)
    
    $
    0.42
    
    $
    0.41
    
    $
    0.37
    
    $
    0.32
  2002(Dollars
      in thousands,
    
    Three
      months ended,except
      per share amounts)
    
    December
      31
    
    September
      30
    
    June
      30
    
    March
      31Interest
      income
    
    $
    4,021
    
    $
    4,250
    
    $
    4,178
    
    $
    4,121Interest
      expense
    
    
    1,248
    
    
    1,302
    
    
    1,284
    
    
    1,368Net
      interest income
    
    
    2,773
    
    
    2,948
    
    
    2,894
    
    
    2,753Provision
      for credit losses
    
    
    -
    
    
    -
    
    
    -
    
    
    -Net
      securities gains
    
    
    5
    
    
    42
    
    
    2
    
    
    4Income
      before income taxes
    
    
    775
    
    
    918
    
    
    762
    
    
    1,441Net
      income
    
    
    545
    
    
    691
    
    
    587
    
    
    988Net
      income per share (basic and diluted)
    
    $
    0.28
    
    $
    0.34
    
    $
    0.29
    
    $
    0.49
 F-35