SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





xAnnual report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 2008 or





 ̈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
              
              (I.R.S.
      Employerof
      incorporation or organization)
              
              Identification
      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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.


Yes  ̈No x





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 xNo 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.  ̈





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


Large
Accelerated Filer  ̈Accelerated Filer
 ̈Non-Accelerated
Filer  ̈Smaller Reporting
Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈No x





The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2008 was $26,280,443.





The
number of shares of common stock outstanding as of February 4, 2009 was
2,967,729.





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 2009 Annual
Meeting of Shareholders (to be filed).








GLEN
BURNIE BANCORP


2008
ANNUAL REPORT ON FORM 10-K





Table of
Contents





PART
      IItem
      1.
                      Business
                      3Item
      1B.
                      Unresolved
      Staff Comments
                      16Item
      2.
                      Properties
                      17Item
      3.
                      Legal
      Proceedings
                      17Item
      4.
                      Submission
      of Matters to Vote of Security Holders
                      17Executive
      Officers of the Registrant
                      18PART
      IIItem
      5.
                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      19Item
      6.
                      Selected
      Financial Data
                      21Item
      7.
                      Management’s
      Discussion and Analysis of FinancialCondition
      and Results of Operations
                      22Item
      8.
                      Financial
      Statements and Supplementary Data
                      31Item
      9.
                      Changes
      in and Disagreements with Accountantson
      Accounting and Financial Disclosure
                      31Item
      9A.
                      Controls
      and Procedures
                      31Item
      9B.
                      Other
      Information
                      32PART
      IIIItem
      10.
                      Directors,
      Executive Officers and Corporate Governance
                      33Item
      11.
                      Executive
      Compensation
                      33Item
      12.
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      33Item
      13.
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      33Item
      14.
                      Principal
      Accountant Fees and Services
                      33PART
      IVItem
      15.
                      Exhibits
      and Financial Statement Schedules
                      34Signatures
                      35





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, Linthicum and Severna Park,
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.





Economic and Credit Turmoil
of 2008





The turmoil and economic downturn which
engulfed the United States and world financial services industry during 2008 and
the ensuing overall consequences to numerous industries and the U.S. economy is
well known and discussed daily in the media.  The Bank and, as a
result, the Company, have not been immune to the impact of these difficult
economic times.  While, due to conservative lending decisions, the
Bank has no exposure to the credit issues affecting the sub-prime residential
mortgage market, the economic slowdown resulted in the necessity of our
contributing $1,146,000 to our reserve for loan losses in 2008, primarily due to
delinquency in our indirect automobile portfolio combined with adjustments we
made to the risk factors in our calculation of required loan loss
reserves.  The economic downturn also resulted in the necessity of the
Bank taking in our first OREO (Other Real Estate Owned) property on a defaulted
mortgage since 1999.  In September, the Federal Housing Finance Agency
was named conservator over both the Federal National Mortgage Association
(Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), two
government sponsored agencies in which we had invested through the purchase of
$3,000,000 of AAA rated preferred stock.  As a result, we wrote down
the value of those investments to $184,000 by taking a charge to earnings in the
third quarter of $2,816,000.  Each of these factors will be discussed
as appropriate elsewhere in this report.  Nevertheless, despite the
sharp economic downturn and these events, which are unusual for us in any year,
we realized net income of $403,962 for 2008, remained well capitalized and did
not need to apply for any funding from the U.S. Department of Treasury’s
Troubled Asset Relief Program (TARP).  During 2008, we continued to
lend money and, we believe, meet the needs of our customers and neighbors
through a difficult year.  We believe we are a sound, conservatively
run financial institution that has been profitable in 2008 despite the
deterioration in the economic environment and the outside forces that have
affected us this past year.





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 attracts younger persons and minorities on this basis. This
inflow, however, has not been sufficient to affect current population
trends.


3


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
indirect automobile loans originated through arrangements with local
dealers.





The Company’s total loan portfolio
increased during the 2008, 2007, 2006, 2005, and 2004 fiscal
years.  In 2008, the increase in the loan portfolio was primarily due
to increases in refinanced mortgage loans, commercial and residential
construction loans and mortgage participations purchased, partially offset by
additional mortgage participations sold and a decrease in indirect
loans.  In 2007, the increases were due to residential and commercial
mortgages and construction, offset by a decrease in indirect lending and
mortgage participations purchased and an increase in mortgage participations
sold.  In 2006, the increases were primarily due to an increase in
commercial mortgages (due to an increase in participations), offset by decreases
in residential mortgages and indirect automobile loans.  In 2005, the
increases were primarily due to an increase in commercial and industrial
mortgages and indirect automobile loans.  In 2004, the increases in
loans were primarily due to increases in residential mortgages due to a strong
housing market environment.





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





At
      December 31,2008
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              2005
                              
                              
                              2004(Dollars
      in Thousands)
                              
                              $
                              
                              
                              %
                              
                              
                              $
                              
                              
                              %
                              
                              
                              $
                              
                              
                              %
                              
                              
                              $
                              
                              
                              %
                              
                              
                              $
                              
                              
                              %Mortgage:Residential
                              
                              $
                              87,708
                              
                              
                              
                              36.85
                              %
                              
                              $
                              76,781
                              
                              
                              
                              37.98
                              %
                              
                              $
                              68,341
                              
                              
                              
                              34.88
                              %
                              
                              $
                              71,841
                              
                              
                              
                              37.17
                              %
                              
                              $
                              71,039
                              
                              
                              
                              38.27
                              %Commercial
                              
                              
                              76,153
                              
                              
                              
                              31.99
                              
                              
                              
                              47,843
                              
                              
                              
                              23.66
                              
                              
                              
                              53,164
                              
                              
                              
                              27.13
                              
                              
                              
                              37,666
                              
                              
                              
                              19.50
                              
                              
                              
                              31,983
                              
                              
                              
                              17.23Construction
      and landdevelopment
                              
                              
                              6,590
                              
                              
                              
                              2.77
                              
                              
                              
                              5,876
                              
                              
                              
                              2.91
                              
                              
                              
                              1,609
                              
                              
                              
                              0.83
                              
                              
                              
                              1,402
                              
                              
                              
                              0.73
                              
                              
                              
                              2,080
                              
                              
                              
                              1.12Consumer:Installment
                              
                              
                              16,451
                              
                              
                              
                              6.91
                              
                              
                              
                              17,087
                              
                              
                              
                              8.45
                              
                              
                              
                              15,044
                              
                              
                              
                              7.67
                              
                              
                              
                              15,748
                              
                              
                              
                              8.15
                              
                              
                              
                              19,019
                              
                              
                              
                              10.25Credit
      card
                              
                              
                              173
                              
                              
                              
                              0.07
                              
                              
                              
                              143
                              
                              
                              
                              0.07
                              
                              
                              
                              144
                              
                              
                              
                              0.08
                              
                              
                              
                              128
                              
                              
                              
                              0.07
                              
                              
                              
                              180
                              
                              
                              
                              0.10Indirect
      automobile
                              
                              
                              43,970
                              
                              
                              
                              18.47
                              
                              
                              
                              49,260
                              
                              
                              
                              24.37
                              
                              
                              
                              52,539
                              
                              
                              
                              26.81
                              
                              
                              
                              60,510
                              
                              
                              
                              31.31
                              
                              
                              
                              55,703
                              
                              
                              
                              30.00Commercial
                              
                              
                              6,974
                              
                              
                              
                              2.94
                              
                              
                              
                              5,184
                              
                              
                              
                              2.56
                              
                              
                              
                              5,077
                              
                              
                              
                              2.60
                              
                              
                              
                              5,932
                              
                              
                              
                              3.07
                              
                              
                              
                              5,618
                              
                              
                              
                              3.03Gross
      loans
                              
                              
                              238,019
                              
                              
                              
                              100.00
                              %
                              
                              
                              202,174
                              
                              
                              
                              100.00
                              %
                              
                              
                              195,918
                              
                              
                              
                              100.00
                              %
                              
                              
                              193,227
                              
                              
                              
                              100.00
                              %
                              
                              
                              185,622
                              
                              
                              
                              100.00
                              %Unearned
      income on loans
                              
                              
                              (864
                              )
                              
                              
                              
                              
                              
                              
                              (816
                              )
                              
                              
                              
                              
                              
                              
                              (743
                              )
                              
                              
                              
                              
                              
                              
                              (821
                              )
                              
                              
                              
                              
                              
                              
                              (919
                              )Gross
      loans net ofunearned
      income
                              
                              
                              237,155
                              
                              
                              
                              
                              
                              
                              
                              201,357
                              
                              
                              
                              
                              
                              
                              
                              195,175
                              
                              
                              
                              
                              
                              
                              
                              192,406
                              
                              
                              
                              
                              
                              
                              
                              184,703Allowance
      for creditlosses
                              
                              
                              (2,022
                              )
                              
                              
                              
                              
                              
                              
                              (1,604
                              )
                              
                              
                              
                              
                              
                              
                              (1,839
                              )
                              
                              
                              
                              
                              
                              
                              (2,201
                              )
                              
                              
                              
                              
                              
                              
                              (2,412
                              )Loans,
      net
                              
                              $
                              235,133
                              
                              
                              
                              
                              
                              
                              $
                              199,753
                              
                              
                              
                              
                              
                              
                              $
                              193,336
                              
                              
                              
                              
                              
                              
                              $
                              190,205
                              
                              
                              
                              
                              
                              
                              $
                              182,291





The
following table sets forth the maturities for various categories of the loan
portfolio at December 31, 2008. Demand loans and loans which have no stated
maturity, are treated as due in one year or less. At December 31, 2008, the Bank
had $51,812,762 in loans due after one year with variable rates and $163,134,728
in such loans with fixed rates.


4





Due Within
                                          One Year
                                        
                                        
                                        Due Over One To
                                          Five Years
                                        
                                        
                                        Due Over
                                          Five Years
                                        
                                        
                                        Total(In
      Thousands)Real
      Estate - mortgage:Residential
                                        
                                        $
                                        6,494
                                        
                                        
                                        $
                                        2,366
                                        
                                        
                                        $
                                        78,848
                                        
                                        
                                        $
                                        87,708Commercial
                                        
                                        
                                        6,909
                                        
                                        
                                        
                                        40,525
                                        
                                        
                                        
                                        28,719
                                        
                                        
                                        
                                        76,153Construction
      and land development
                                        
                                        
                                        465
                                        
                                        
                                        
                                        4,075
                                        
                                        
                                        
                                        2,050
                                        
                                        
                                        
                                        6,590Installment
                                        
                                        
                                        1,194
                                        
                                        
                                        
                                        9,529
                                        
                                        
                                        
                                        5,728
                                        
                                        
                                        
                                        16,451Credit
      Card
                                        
                                        
                                        173
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        173Indirect
      automobile
                                        
                                        
                                        1,284
                                        
                                        
                                        
                                        33,736
                                        
                                        
                                        
                                        8,950
                                        
                                        
                                        
                                        43,970Commercial
                                        
                                        
                                        5,386
                                        
                                        
                                        
                                        26
                                        
                                        
                                        
                                        1,562
                                        
                                        
                                        
                                        6,974$
                                        21,905
                                        
                                        
                                        $
                                        90,257
                                        
                                        
                                        $
                                        125,857
                                        
                                        
                                        $
                                        238,019





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% (some restrictions
may apply), 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 80%.  The maximum
permissible loan-to-value ratio for residential and residential 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.  Because mortgage lending decisions are based on
conservative lending policies, the Company has no exposure to the credit issues
affecting the sub-prime residential mortgage market.





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, equipment, vehicles, 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 at maturity a single payment of principal and
interest due monthly.  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, 2008, approximately 64.10% of the
installment loans in the Bank’s portfolio (other than indirect automobile
lending) had been originated for commercial purposes and 35.90% had been
originated for consumer purposes.





Indirect Automobile
Lending.  The Bank commenced its indirect automobile lending
program in January 1998.  The Bank finances new automobiles for terms
of up to 72 months and used automobiles for terms of up to 60
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 MSRP on new vehicles. On used vehicles, the Bank will not lend more than
110% of the average wholesale 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 49 dealers which are primarily new car
dealers located in Anne Arundel County and the surrounding
counties.  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.


5


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 $3.0 million.  Larger loans must be approved by the full
Board of Directors.





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 $3.34 million to any one borrower at December 31, 2008.  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 $5.02 million to any
one borrower at December 31, 2008.  At December 31, 2008, the largest
amount outstanding to any one borrower and its related interests was
$4,816,000.





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/or  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





While the
Bank has weathered the economic and credit turbulence during 2008 and remains
strong, the Bank experienced a significant increase in non-accrual loans as of
December 31, 2008, from one commercial mortgage loan.  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 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      In Thousands)Restructured
      Loans
                
                $
                -
                
                
                $
                578
                
                
                $
                -
                
                
                $
                -
                
                
                $
                95Non-accrual
      loans:Real
      estate – mortgage:Residential
                
                $
                -
                
                
                $
                -
                
                
                $
                3
                
                
                $
                14
                
                
                $
                122Commercial
                
                
                659
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                255Real
      estate - construction
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Installment
                
                
                208
                
                
                
                212
                
                
                
                46
                
                
                
                159
                
                
                
                205Commercial
                
                
                -
                
                
                
                -
                
                
                
                8
                
                
                
                12
                
                
                
                16Total
      non-accrual loans
                
                
                867
                
                
                
                212
                
                
                
                57
                
                
                
                185
                
                
                
                598Accruing
      loans past due 90 days or moreReal
      estate – mortgage:Residential
                
                
                3
                
                
                
                512
                
                
                
                2
                
                
                
                1
                
                
                
                1Commercial
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Real
      estate - construction
                
                
                5
                
                
                
                -
                
                
                
                -
                
                
                
                3
                
                
                
                6Installment
                
                
                26
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                128
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      accruing loans past due 90 days or more
                
                
                34
                
                
                
                640
                
                
                
                2
                
                
                
                4
                
                
                
                7Total
      non-accrual and past due loans
                
                $
                901
                
                
                $
                852
                
                
                $
                59
                
                
                $
                189
                
                
                $
                605Non-accrual
      and past due loans to gross loans
                
                
                0.38
                %
                
                
                0.43
                %
                
                
                0.03
                %
                
                
                0.10
                %
                
                
                0.33
                %Allowance
      for credit losses to non-accrual and past due loans
                
                
                224.42
                %
                
                
                188.27
                %
                
                
                3,116.95
                %
                
                
                1,164.55
                %
                
                
                398.68
                %





For the
year ended December 31, 2008, interest of $29,807 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. $859,586, or 99%, of the Bank’s total $866,912 non-accrual
loans at December 31, 2008 were attributable to 13 borrowers. No charge-offs
have previously been taken on these loans.  Two of these borrowers
with a loan totaling $12,402 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. All but one of these loans, the balance of which is
$79,167, is secured by collateral with a value well in excess of the current
active balance of the Bank’s loan.





At
December 31, 2008, there were loans outstanding, totaling $520,131, 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, 2008, the Company had $550,000 in real estate acquired in partial
or total satisfaction of debt, compared to $50,000 in such properties at each of
December 31, 2007 and 2006.  This increase resulted from the
foreclosure by the Bank on one residential property during 2008, the first time
since 1999 that the Bank took in an OREO (Other Real Estate Owned) property on a
defaulted mortgage.  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, 2008, 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.  Because mortgage
lending decisions are based on conservative lending policies, the Company has no
exposure to the credit issues affecting the sub-prime residential mortgage
market.





In 2008,
the Bank increased its provision for credit losses due to net charge offs on
installment loans of $746,000 (primarily made up of charge offs on indirect
automobile loans of $719,000) and adjustments to the risk factors for our loan
loss reserve calculation as economic conditions deteriorated.





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





Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(Dollars
      In Thousands)Beginning
      Balance
                  
                  $
                  1,604
                  
                  
                  $
                  1,839
                  
                  
                  $
                  2,201
                  
                  
                  $
                  2,412
                  
                  
                  $
                  2,246Loans
      charged offReal
      estate - mortgage:Residential
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -Commercial
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Real
      estate - construction
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Installment
                  
                  
                  1,079
                  
                  
                  
                  591
                  
                  
                  
                  528
                  
                  
                  
                  495
                  
                  
                  
                  502Credit
      card & related
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Commercial
                  
                  
                  2
                  
                  
                  
                  -
                  
                  
                  
                  253
                  
                  
                  
                  127
                  
                  
                  
                  49Total
                  
                  
                  1,081
                  
                  
                  
                  591
                  
                  
                  
                  782
                  
                  
                  
                  622
                  
                  
                  
                  551RecoveriesReal
      estate - mortgage:Residential
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  35Commercial
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Real
      estate - construction
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Installment
                  
                  
                  333
                  
                  
                  
                  258
                  
                  
                  
                  335
                  
                  
                  
                  276
                  
                  
                  
                  293Credit
      card & related
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Commercial
                  
                  
                  20
                  
                  
                  
                  48
                  
                  
                  
                  22
                  
                  
                  
                  185
                  
                  
                  
                  49Total
                  
                  
                  353
                  
                  
                  
                  306
                  
                  
                  
                  358
                  
                  
                  
                  461
                  
                  
                  
                  377Net
      charge offs/(recoveries)
                  
                  
                  728
                  
                  
                  
                  285
                  
                  
                  
                  424
                  
                  
                  
                  161
                  
                  
                  
                  174Provisions
      (credited) charged to operations
                  
                  
                  1,146
                  
                  
                  
                  50
                  
                  
                  
                  62
                  
                  
                  
                  (50
                  )
                  
                  
                  340Ending
      balance
                  
                  $
                  2,022
                  
                  
                  $
                  1,604
                  
                  
                  $
                  1,839
                  
                  
                  $
                  2,201
                  
                  
                  $
                  2,412Average
      loans
                  
                  $
                  219,485
                  
                  
                  $
                  199,632
                  
                  
                  $
                  186,706
                  
                  
                  $
                  191,706
                  
                  
                  $
                  181,881Net
      charge-offs to average loans
                  
                  
                  0.33
                  %
                  
                  
                  0.14
                  %
                  
                  
                  0.23
                  %
                  
                  
                  0.09
                  %
                  
                  
                  0.10
                  %


8





The
following table shows the allowance for credit losses broken down by loan
category as of December 31, 2008, 2007, 2006, 2005, and 2004:




At December 31,2008
                    
                    
                    2007Portfolio
                    
                    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
                    
                    $
                    123
                    
                    
                    
                    36.85
                    %
                    
                    $
                    117
                    
                    
                    
                    37.98
                    %Commercial
                    
                    
                    460
                    
                    
                    
                    31.99
                    
                    
                    
                    163
                    
                    
                    
                    23.66Real
      Estate — construction
                    
                    
                    63
                    
                    
                    
                    2.77
                    
                    
                    
                    102
                    
                    
                    
                    2.91Installment
                    
                    
                    161
                    
                    
                    
                    6.91
                    
                    
                    
                    55
                    
                    
                    
                    8.45Credit
      Card
                    
                    
                    -
                    
                    
                    
                    0.07
                    
                    
                    
                    -
                    
                    
                    
                    0.07Indirect
      automobile
                    
                    
                    942
                    
                    
                    
                    18.47
                    
                    
                    
                    892
                    
                    
                    
                    24.37Commercial
                    
                    
                    240
                    
                    
                    
                    2.94
                    
                    
                    
                    257
                    
                    
                    
                    2.56Unallocated
                    
                    
                    33
                    
                    
                    
                    -
                    
                    
                    
                    18
                    
                    
                    
                    -Total
                    
                    $
                    2,022
                    
                    
                    
                    100.00
                    %
                    
                    $
                    1,604
                    
                    
                    
                    100.00
                    %


At December 31,2006
                      
                      
                      2005
                      
                      
                      2004Portfolio
                      
                      Allowance For
                        Each Category
                      
                      
                      Percentage Of
                        Loans In Each
                        Category To
                        Total Loans
                      
                      
                      AllowanceFor
                        EachCategory
                      
                      
                      Percentage Of
                        Loans In Each
                        Category To
                        Total Loans
                      
                      
                      AllowanceFor
                        EachCategory
                      
                      
                      Percentage Of
                        Loans InEach
                        CategoryTo
                        Total Loans(Dollars In Thousands)Real
      Estate – mortgage:Residential
                      
                      $
                      149
                      
                      
                      
                      34.88
                      %
                      
                      $
                      153
                      
                      
                      
                      37.17
                      %
                      
                      $
                      153
                      
                      
                      
                      38.27
                      %Commercial
                      
                      
                      314
                      
                      
                      
                      27.13
                      
                      
                      
                      277
                      
                      
                      
                      19.50
                      
                      
                      
                      328
                      
                      
                      
                      17.23Real
      Estate – construction
                      
                      
                      14
                      
                      
                      
                      0.83
                      
                      
                      
                      8
                      
                      
                      
                      0.73
                      
                      
                      
                      13
                      
                      
                      
                      1.12Installment
                      
                      
                      103
                      
                      
                      
                      7.67
                      
                      
                      
                      103
                      
                      
                      
                      8.15
                      
                      
                      
                      136
                      
                      
                      
                      10.25Credit
      Card
                      
                      
                      -
                      
                      
                      
                      0.08
                      
                      
                      
                      -
                      
                      
                      
                      0.07
                      
                      
                      
                      -
                      
                      
                      
                      0.10Indirect
      automobile
                      
                      
                      1,119
                      
                      
                      
                      26.81
                      
                      
                      
                      1,260
                      
                      
                      
                      31.31
                      
                      
                      
                      1,254
                      
                      
                      
                      30.00Commercial
                      
                      
                      260
                      
                      
                      
                      2.60
                      
                      
                      
                      264
                      
                      
                      
                      3.07
                      
                      
                      
                      343
                      
                      
                      
                      3.03Unallocated
                      
                      
                      120
                      
                      
                      
                      -
                      
                      
                      
                      136
                      
                      
                      
                      -
                      
                      
                      
                      185
                      
                      
                      
                      -Total
                      
                      $
                      1,839
                      
                      
                      
                      100.00
                      %
                      
                      $
                      2,201
                      
                      
                      
                      100.00
                      %
                      
                      $
                      2,412
                      
                      
                      
                      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. In the third quarter of 2008, as a
result of the appointment of the Federal Housing Finance Agency as conservator
over Federal National Mortgage Association (Fannie Mae) and Federal Home Loan
Mortgage Corporation (Freddie Mac), the Bank wrote-down $2,816,000 on
investments in three series of preferred stock issued by Fannie Mae and Freddie
Mac held by the Company, as required by SFAS 115.





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





At
      December 31,2008
                
                
                2007
                
                
                2006(In
      Thousands)U.S.
      Treasury securities
                
                $
                -
                
                
                $
                -
                
                
                $
                -U.S.
      Government agencies and mortgage backed securities
                
                
                25,571
                
                
                
                44,094
                
                
                
                57,119Obligations
      of states and political subdivisions
                
                
                31,466
                
                
                
                32,311
                
                
                
                36,811Corporate
      trust preferred
                
                
                2,169
                
                
                
                2,167
                
                
                
                3,080Total
      investment securities
                
                $
                59,206
                
                
                $
                78,572
                
                
                $
                97,010


9





The
following table sets forth the scheduled maturities, amortized costs and
weighted average yields for the Company’s investment securities portfolio at
December 31, 2008:





One Year Or Less
                    
                    
                    One To Five Years
                    
                    
                    Five to Ten Years
                    
                    
                    More Than Ten Years
                    
                    
                    TotalAmort.
                      Cost
                    
                    
                    Weighted
                      Average
                      Yield
                    
                    
                    Amort.
                      Cost
                    
                    
                    Weighted
                      Average
                      Yield
                    
                    
                    Amort.
                      Cost
                    
                    
                    Weighted
                      Average
                      Yield
                    
                    
                    Amort.
                      Cost
                    
                    
                    Weighted
                      Average
                      Yield
                    
                    
                    Amort.
                      Cost
                    
                    
                    Weighted
                      Average
                      YieldU.S.
      Treasury securities
                    
                    $
                    -
                    
                    
                    
                    -
                    %
                    
                    $
                    -
                    
                    
                    
                    -
                    %
                    
                    $
                    -
                    
                    
                    
                    -
                    %
                    
                    $
                    -
                    
                    
                    
                    -
                    %
                    
                    $
                    -
                    
                    
                    
                    -
                    %U.S.
      Government agencies and mortgage backed securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,568
                    
                    
                    
                    4.76
                    
                    
                    
                    21,003
                    
                    
                    
                    4.96
                    
                    
                    
                    25,571
                    
                    
                    
                    4.16Obligations
      of states and political subdivisions
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,577
                    
                    
                    
                    2.89
                    
                    
                    
                    1,557
                    
                    
                    
                    3.82
                    
                    
                    
                    25,332
                    
                    
                    
                    4.42
                    
                    
                    
                    31,466
                    
                    
                    
                    4.17Corporate
      trust preferred
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,169
                    
                    
                    
                    8.70
                    
                    
                    
                    2,169
                    
                    
                    
                    8.70Total
      investment securities
                    
                    $
                    -
                    
                    
                    
                    -
                    %
                    
                    $
                    4,577
                    
                    
                    
                    2.89
                    %
                    
                    $
                    6,125
                    
                    
                    
                    4.52
                    %
                    
                    $
                    48,504
                    
                    
                    
                    4.85
                    %
                    
                    $
                    59,206
                    
                    
                    
                    4.66
                    %





At December 31, 2008, 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 $269,768,000 as of December 31, 2008.
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 $66.01
million under a line of credit from the FHLB of Atlanta as of December 31,
2008.





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, 2008, the
Bank had approximately $37.6 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, 2008:





Amount
                    (In Thousands)Three
      months or less
                  
                  $
                  5,230Over
      three through six months
                  
                  
                  4,495Over
      six through 12 months
                  
                  
                  9,847Over
      12 months
                  
                  
                  18,071Total
                  
                  $
                  37,643





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 $66.01 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 $10 million in a convertible advance under this credit
arrangement at December 31, 2008. The advance matures inNovember 1, 2017, is
callable monthly, and bears a 3.28% rate of interest. There was a $5 million
convertible advance settled July 21, 2008 with a final maturity of July 23,
2018.  This advance has a 2.73% rate of interest and is callable
quarterly, starting July 23, 2009. There was a $5 million convertible advance
taken out August 22, 2008 which has a final maturity of August 22,
2018.  This advance has a 3.344% rate of interest and is callable
quarterly, starting August 22, 2011. There was $7 million in a long-term
convertible advance under this credit arrangement at December 31, 2008. The
advance matures inSeptember 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 an unsecured line of credit
in the amount of $9 million from another commercial bank but currently has no
balance outstanding.  The Bank has a mortgage note on the 103 Crain
Highway address with a balance of $71,712 as of December 31,
2008.  This note is payable monthly through October 2010 and has a 7%
interest rate.


10


Competition





The Bank faces competition for deposits
and loans from other community banks, branches or affiliates of larger banks,
savings and loan associations, savings banks and credit unions, 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.  The
bank believes its greatest competition comes from larger intra- and inter-state
financial institutions.





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, 2008, the Bank had 114 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.





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.”


12


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 $250,000 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.  The
USA Patriot Act (the “Patriot Act”), 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.




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.




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.




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.


13


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 enactment of the Patriot Act has
increased the Bank’s compliance costs, and the impact of 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 “satisfactory”
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.





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.


14


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, 2008, 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.





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.





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.


15


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.





ITEM
1B.  UNRESOLVED STAFF
COMMENTS





Not
applicable.


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
                                        
                                        
                                        DepositsMain
      Office:101
      Crain Highway, S.E.
                                          Glen
      Burnie, MD  21061
                                        1953
                                        
                                        Owned
                                        
                                        $
                                        670,156
                                        
                                        
                                        
                                        10,000
                                        
                                        
                                        $
                                        80,355,138Branches:Odenton
                                          1405
      Annapolis Road
                                          Odenton,
      MD  21113
                                        1969
                                        
                                        Owned
                                        
                                        
                                        165,543
                                        
                                        
                                        
                                        6,000
                                        
                                        
                                        
                                        36,582,755Riviera
      Beach
                                          8707
      Ft. Smallwood Road
                                          Pasadena,
      MD  21122
                                        1973
                                        
                                        Owned
                                        
                                        
                                        138,513
                                        
                                        
                                        
                                        2,500
                                        
                                        
                                        
                                        29,136,358Crownsville
                                          1221
      Generals Highway
                                          Crownsville,
      MD  21032
                                        1979
                                        
                                        Owned
                                        
                                        
                                        297,696
                                        
                                        
                                        
                                        3,000
                                        
                                        
                                        
                                        46,607,554Severn
                                          811
      Reece Road
                                          Severn,
      MD  21144
                                        1984
                                        
                                        Owned
                                        
                                        
                                        172,822
                                        
                                        
                                        
                                        2,500
                                        
                                        
                                        
                                        27,461,301South
      Crain
                                          7984
      Crain Highway
                                          Glen
      Burnie, MD  21061
                                        1995
                                        
                                        Leased
                                        
                                        
                                        148,317
                                        
                                        
                                        
                                        2,600
                                        
                                        
                                        
                                        21,945,968Linthicum
                                          Burwood
      Village Shopping Center
                                          Glen
      Burnie, MD  21060
                                        2005
                                        
                                        Leased
                                        
                                        
                                        167,510
                                        
                                        
                                        
                                        2,500
                                        
                                        
                                        
                                        12,469,351Severna
      Park
                                          534
      Ritchie Highway
                                          Severna
      Park, MD   21146
                                        2002
                                        
                                        Leased
                                        
                                        
                                        121,986
                                        
                                        
                                        
                                        2,184
                                        
                                        
                                        
                                        15,731,659Operations
      Centers:106
      Padfield Blvd.
                                          Glen
      Burnie, MD  21061
                                        1991
                                        
                                        Owned
                                        
                                        
                                        936,598
                                        
                                        
                                        
                                        16,200
                                        
                                        
                                        
                                        N/A103
      Crain Highway, S.E.
                                          Glen
      Burnie, MD 21061
                                        2000
                                        
                                        Owned
                                        
                                        
                                        280,305
                                        
                                        
                                        
                                        3,727
                                        
                                        
                                        
                                        N/A







At
December 31, 2008, the Bank owned one foreclosed real estate property with a
total book value of $550,000.





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, 2008, 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
                
                POSITIONSF.
      William Kuethe, Jr.
                
                76
                
                President
      EmeritusMichael
      G. Livingston
                
                55
                
                President
      and Chief Executive OfficerJohn
      E. Porter
                
                55
                
                Senior
      Vice President and Chief Financial
Officer





F.
WILLIAM KUETHE, JR. was appointed to the honorary position of President Emeritus
of the Company and the Bank effective January 1, 2008 when he retired from
full-time employment and stepped down from his positions of President and Chief
Executive Officer of the Company and the Bank which he held since
1995.  Mr. Kuethe has been a director of the Company and the Bank
since 1995 and 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 President and Chief Executive Officer of the Company
and the Bank effective January 1, 2008.  Prior to that date, Mr.
Livingston was Deputy Chief Executive Officer and Executive Vice President since
August 2004, Chief Operating Officer since January 2004, Deputy Chief Operating
Officer from February 2003 through December 2003, Senior Vice President from
January 1998 until August 2004, and Chief Lending Officer of the Bank from 1996
until August 2004.  Mr. Livingston was elected as a director of the
Company and the Bank on January 1, 2005.





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.





18


PART II





ITEM
      5.
            MARKET FOR THE
      REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES





The
Common Stock is traded on the Nasdaq SmallCap Market under the symbol
“GLBZ”.  As of February 4, 2009, there were 442 record holders of the
Common Stock.  The closing price for the Common Stock on that date was
$8.54.  A 20% stock dividend had been declared for stockholders’ of
record on January 12, 2008, payable January 18, 2008.





The
following table sets forth the high and low sales prices for the Common Stock
for each full quarterly period during 2008 and 2007 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.





2008
                
                
                2007Quarter Ended
                
                High
                
                
                Low
                
                
                Dividends
                
                
                High
                
                
                Low
                
                
                DividendsMarch
      31,
                
                $
                14.12
                
                
                $
                10.25
                
                
                $
                0.10
                
                
                $
                15.42
                
                
                $
                14.21
                
                
                $
                0.10June
      30,
                
                
                12.95
                
                
                
                11.00
                
                
                
                0.10
                
                
                
                14.79
                
                
                
                14.38
                
                
                
                0.10September
      30
                
                
                12.00
                
                
                
                8.90
                
                
                
                0.10
                
                
                
                14.82
                
                
                
                12.84
                
                
                
                0.10December
      31
                
                
                10.94
                
                
                
                8.54
                
                
                
                0.15
                
                
                
                14.17
                
                
                
                12.81
                
                
                
                0.15





A regular
dividend of $0.10 and a bonus dividend of $0.05 were declared for stockholders’
of record on December 29, 2008, payable on January 9, 2009 and January 12, 2009,
respectively.





The
Company intends to pay dividends approximating forty percent (40%) 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.





Performance
Graph





The
following graph compares the cumulative total return on the Common Stock during
the five years ended December 31, 2008 with that of a broad market index (Nasdaq
Composite), and a peer group consisting of publicly traded Maryland, Virginia
and District of Columbia commercial banks with total assets between $200 million
and $500 million (“Peer Group”). The Peer Group is comprised of Pinnacle
Bankshares Corp., Bank of the James Financial Group, Inc., Botetourt Bankshares,
Inc., Village Bank and Trust Financial Corp., Bay Banks of VA., Inc., Citizens
Bancorp of Virginia, First Capital Bancorp, Inc., Old Line Bankshares, Inc.,
Patapsco Bancorp Inc.,  Frederick County Bancorp Inc., Central
Virginia Bankshares, Inc., Bay National Corp., Annapolis Bancorp, Inc., Calvin
B. Taylor Bankshares Inc., Abigail Adams National Bancorp, Inc., and Carrollton
Bancorp. A significant number of the banks we used in the Peer Group in prior
years no longer qualified for the criteria which would afford a reasonable
comparison to the Company and, accordingly, a new Peer Group was
developed.  The graph assumes $100 was invested on December 31, 2003
in the Common Stock and in each of the indices and assumes reinvestment of
dividends.The
following information shall not be deemed to be “soliciting material” or to be
“filed” with the SEC or subject to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) or to the liabilities of Section 18
of the Exchange Act, except to the extent that the Company specifically
incorporates it by reference into a later filing with the SEC.


19














Total
Return Analysis


12/31/2003
                        
                        
                        12/31/2004
                        
                        
                        12/31/2005
                        
                        
                        12/31/2006
                        
                        
                        12/31/2007
                        
                        
                        12/31/2008Glen Burnie Bancorp
                        
                        $
                        100.00
                        
                        
                        $
                        97.00
                        
                        
                        $
                        87.76
                        
                        
                        $
                        86.20
                        
                        
                        $
                        80.29
                        
                        
                        $
                        70.71Peer Group
                        
                        $
                        100.00
                        
                        
                        $
                        112.75
                        
                        
                        $
                        116.32
                        
                        
                        $
                        123.59
                        
                        
                        $
                        102.40
                        
                        
                        $
                        64.23Nasdaq Composite
                        
                        $
                        100.00
                        
                        
                        $
                        109.16
                        
                        
                        $
                        111.47
                        
                        
                        $
                        123.05
                        
                        
                        $
                        140.12
                        
                        
                        $
                        84.12


Source: Zacks Investment
Research.


20


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 20% stock dividend
paid on January 18, 2008, one paid on January 23, 2006, and one paid on January
6, 2004.





Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(Dollars
      In Thousand Except Per Share Data)Operations
      Data:Net
      Interest Income
                  
                  $
                  11,922
                  
                  
                  $
                  11,866
                  
                  
                  $
                  11,821
                  
                  
                  $
                  11,966
                  
                  
                  $
                  12,016Provision
      for Credit Losses
                  
                  
                  1,146
                  
                  
                  
                  50
                  
                  
                  
                  62
                  
                  
                  
                  (50
                  )
                  
                  
                  340Other
      Income
                  
                  
                  2,051
                  
                  
                  
                  2,157
                  
                  
                  
                  2,244
                  
                  
                  
                  2,114
                  
                  
                  
                  2,372Other
      Expense
                  
                  
                  13,102
                  
                  
                  
                  10,433
                  
                  
                  
                  10,682
                  
                  
                  
                  10,625
                  
                  
                  
                  10,360Net
      Income
                  
                  
                  404
                  
                  
                  
                  2,782
                  
                  
                  
                  2,720
                  
                  
                  
                  2,775
                  
                  
                  
                  3,056Share
      Data:Basic
      Net Income Per Share
                  
                  $
                  0.14
                  
                  
                  $
                  0.93
                  
                  
                  $
                  0.92
                  
                  
                  $
                  0.94
                  
                  
                  $
                  1.04Diluted
      Net Income Per Share
                  
                  
                  0.14
                  
                  
                  
                  0.93
                  
                  
                  
                  0.92
                  
                  
                  
                  0.94
                  
                  
                  
                  1.04Cash
      Dividends Declared Per Common Share
                  
                  
                  0.45
                  
                  
                  
                  0.45
                  
                  
                  
                  0.45
                  
                  
                  
                  0.41
                  
                  
                  
                  0.36Weighted
      Average Common Shares Outstanding:Basic
                  
                  
                  2,981,124
                  
                  
                  
                  2,988,796
                  
                  
                  
                  2,972,362
                  
                  
                  
                  2,956,417
                  
                  
                  
                  2,942,638Diluted
                  
                  
                  2,981,124
                  
                  
                  
                  2,988,796
                  
                  
                  
                  2,972,362
                  
                  
                  
                  2,956,417
                  
                  
                  
                  2,942,638Financial
      Condition Data:Total
      Assets
                  
                  $
                  332,502
                  
                  
                  $
                  307,274
                  
                  
                  $
                  317,746
                  
                  
                  $
                  306,561
                  
                  
                  $
                  302,312Loans
      Receivable, Net
                  
                  
                  235,133
                  
                  
                  
                  199,753
                  
                  
                  
                  193,337
                  
                  
                  
                  190,205
                  
                  
                  
                  182,291Total
      Deposits
                  
                  
                  269,768
                  
                  
                  
                  252,917
                  
                  
                  
                  274,833
                  
                  
                  
                  265,248
                  
                  
                  
                  261,674Long
      Term Borrowings
                  
                  
                  27,072
                  
                  
                  
                  17,107
                  
                  
                  
                  7,140
                  
                  
                  
                  7,171
                  
                  
                  
                  7,200Junior
      Subordinated Debentures
                  
                  
                  5,155
                  
                  
                  
                  5,155
                  
                  
                  
                  5,155
                  
                  
                  
                  5,155
                  
                  
                  
                  5,155Total
      Stockholders’ Equity
                  
                  
                  27,908
                  
                  
                  
                  29,736
                  
                  
                  
                  28,201
                  
                  
                  
                  26,625
                  
                  
                  
                  25,744Performance
      Ratios:Return
      on Average Assets
                  
                  
                  0.13
                  %
                  
                  
                  0.89
                  %
                  
                  
                  0.84
                  %
                  
                  
                  0.89
                  %
                  
                  
                  1.00
                  %Return
      on Average Equity
                  
                  
                  1.49
                  
                  
                  
                  9.60
                  
                  
                  
                  10.00
                  
                  
                  
                  10.50
                  
                  
                  
                  12.51Net
      Interest Margin (1)
                  
                  
                  4.31
                  
                  
                  
                  4.39
                  
                  
                  
                  4.31
                  
                  
                  
                  4.46
                  
                  
                  
                  4.61Dividend
      Payout Ratio
                  
                  
                  332.98
                  
                  
                  
                  48.33
                  
                  
                  
                  49.18
                  
                  
                  
                  43.52
                  
                  
                  
                  34.67Capital
      Ratios:Average
      Equity to Average Assets
                  
                  
                  8.99
                  %
                  
                  
                  9.28
                  %
                  
                  
                  8.36
                  %
                  
                  
                  8.47
                  %
                  
                  
                  8.16
                  %Leverage
      Ratio
                  
                  
                  10.50
                  
                  
                  
                  11.34
                  
                  
                  
                  10.30
                  
                  
                  
                  10.17
                  
                  
                  
                  9.85Total
      Risk-Based Capital Ratio
                  
                  
                  14.93
                  
                  
                  
                  17.50
                  
                  
                  
                  17.07
                  
                  
                  
                  16.98
                  
                  
                  
                  16.40Asset
      Quality Ratios:Allowance
      for Credit Losses to Gross Loans
                  
                  
                  0.85
                  %
                  
                  
                  0.80
                  %
                  
                  
                  0.94
                  %
                  
                  
                  1.14
                  %
                  
                  
                  1.30
                  %Non-accrual
      and Past Due Loans to Gross Loans
                  
                  
                  0.38
                  %
                  
                  
                  0.43
                  %
                  
                  
                  0.03
                  %
                  
                  
                  0.10
                  %
                  
                  
                  0.33
                  %Allowance
      for Credit Losses to Non-Accrual
      and Past Due Loans
                  
                  
                  224.42
                  %
                  
                  
                  188.27
                  %
                  
                  
                  3,116.95
                  %
                  
                  
                  1,164.55
                  %
                  
                  
                  398.68
                  %Net
      Loan Charge-offs (Recoveries) to Average Loans
                  
                  
                  0.33
                  %
                  
                  
                  0.14
                  %
                  
                  
                  0.23
                  %
                  
                  
                  0.09
                  %
                  
                  
                  0.10
                  %










(1)
Presented on a tax-equivalent basis





21


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,” “intends”, “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 2008, net interest income before
provision for credit losses increased to $11,922,003 from $11,866,208 in 2007, a
0.47% increase. Total interest income increased from $17,837,256 in 2007 to
$18,176,036 in 2008, a 1.90% increase. Interest expense for 2008 totaled
$6,254,033, a 4.74% increase from $5,971,048 in 2007. Net income in 2008 was
$403,962 compared to $2,782,141 in 2007. The decrease in net income was
primarily due to a write-down of $2,816,000 taken in the third quarter on
investments in three series of preferred stock issued by Federal National
Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation
(Freddie Mac) held by the Company, as a result of the appointment of the Federal
Housing Finance Agency as conservator over Fannie Mae and Freddie Mac. In 2008,
the Company recorded a provision for loan losses of $1,145,649, an increase from
the $50,000 provision made in 2007.





The Bank and, as a result, the Company,
have not been immune to the impact of the economic downturn in the United States
during 2008. While, due to conservative lending decisions, the Bank has no
exposure to the credit issues affecting the sub-prime residential mortgage
market, the economic slowdown resulted in the necessity of our increasing our
reserve for loan losses in 2008, as noted above, primarily due to delinquency in
our indirect automobile portfolio combined with adjustments we made to the risk
factors in our calculation of required loan loss reserves. In addition to the
Fannie Mae and Freddie Mac losses noted above, the economic downturn also
resulted in the necessity of the Bank taking in our first OREO (Other Real
Estate Owned) property on a defaulted mortgage since 1999. Despite the sharp
economic downturn and these events, we realized net income of $403,962 for 2008,
remained well capitalized and did not need to apply for any funding from the
U.S. Department of Treasury’s Troubled Asset Relief Program (TARP). In 2008, the
Bank saw continued growth in the loan portfolio. The loan portfolio increased by
$35,379,000, primarily due to increases in commercial and residential mortgage
loans.





All per
share amounts throughout this report have been adjusted to give retroactive
effect to a 20% stock dividend paid on January 23, 2006 and to a 20% stock
dividend paid on January 18, 2008.





Comparison of Results of
Operations for the Years Ended December 31, 2008, 2007 and
2006





General. For the year ended
December 31, 2008, the Company reported consolidated net income of $403,962($0.14 basic and diluted
earnings per share) compared to consolidated net income of $2,782,141 ($0.93 basic and diluted
earnings per share) for the year ended December 31, 2007 and consolidated net
income of $2,720,045 ($0.92 basic and diluted
earnings per share) for the year ended December 31, 2006. The decrease in
consolidated net income was due to the write down on Fannie Mae and Freddie Mac
preferred stock and the increase in the provision for loan losses.





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.


22


Net
interest income is affected by the mix of loans in the Bank’s loan portfolio.
Currently a majority of the Bank’s loans are residential and commercial mortgage
loans secured by real estate and indirect automobile loans secured by
automobiles.




In 2008,
the Bank reduced its portfolio of above market rate savings products and
continued to direct its efforts to increase higher yielding commercial loans.
This strategy produced significant increases in the Bank’s commercial loan
portfolio. Because mortgage lending decisions are based on conservative lending
policies the Company has no exposure to the credit issues affecting the
sub-prime residential mortgage market. At the same time, we have reduced our
exposure to lower yielding indirect automobile loans.





Consolidated
net interest income for the year ended December 31, 2008 was $11,922,003
compared to $11,866,208 for the year ended December 31, 2007 and $11,821,431 for
the year ended December 31, 2006. The $55,795 increase for the most recent year
was primarily due to an increase in loan income partially offset by decreases in
interest income on securities and increases in interest expense on long term
borrowings. The $44,777 increase for 2007 compared to 2006 was primarily due to
an increase in loan income partially offset by decreases in interest income on
securities and increases in interest expense on deposits, short term borrowings
and long term borrowings. The interest income, net of tax, for 2008 was
$12,594,339, a $28,869 or 0.23% decrease from the after tax net interest income
for 2007, which was $12,623,208, a $117,935 or 0.92% decrease from the
$12,741,143 after tax net interest income for 2006.





Interest
expense increased from $5,971,048 in 2007 to $6,254,033 in 2008, a $282,985 or a
4.74% increase, primarily due to increased borrowings used to fund the outflow
from maturing higher rate 15-month certificates of deposit and IRAs and to fund
loan growth. Interest expense increased from $5,833,765 in 2006 to $5,971,048 in
2007, a $137,283 or a 2.35% increase, primarily due to increased borrowings used
to fund the outflow from maturing higher rate 15-month certificates of deposit
and IRAs and the interest paid on the 15-month certificates of deposit and IRAs.
Net interest margin for the year ended December 31, 2008 was 4.31% compared to
4.39% and 4.31% for the years ended December 31, 2007 and 2006,
respectively.


23


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 31,2008
                  
                  
                  VS.
                  
                  
                  2007
                  
                  
                  2007
                  
                  
                  VS.
                  
                  
                  2006Change Due To:
                  
                  
                  
                  
                  
                  Change Due To:Increase/
                    Decrease
                  
                  
                  Rate
                  
                  
                  Volume
                  
                  
                  Increase/
                    Decrease
                  
                  
                  Rate
                  
                  
                  Volume(In Thousands)ASSETS:Interest-earning
      assets:Federal
      funds sold
                  
                  $
                  (134
                  )
                  
                  $
                  (18
                  )
                  
                  $
                  (116
                  )
                  
                  $
                  (61
                  )
                  
                  $
                  -
                  
                  
                  $
                  (61
                  )Interest-bearing
      deposits
                  
                  
                  31
                  
                  
                  
                  (207
                  )
                  
                  
                  238
                  
                  
                  
                  (134
                  )
                  
                  
                  7
                  
                  
                  
                  (141
                  )Investment
      securities:U.S.
      Treasury securities, obligations of U.S. government agencies and
      mortgage-backed securities
                  
                  
                  (591
                  )
                  
                  
                  7
                  
                  
                  
                  (598
                  )
                  
                  
                  (793
                  )
                  
                  
                  14
                  
                  
                  
                  (807
                  )Obligations
      of states and political subdivisions(1)
                  
                  
                  (75
                  )
                  
                  
                  43
                  
                  
                  
                  (118
                  )
                  
                  
                  (307
                  )
                  
                  
                  (20
                  )
                  
                  
                  (287
                  )All
      other investment securities
                  
                  
                  (58
                  )
                  
                  
                  1
                  
                  
                  
                  (59
                  )
                  
                  
                  (124
                  )
                  
                  
                  1
                  
                  
                  
                  (125
                  )Total
      investment securities
                  
                  
                  (724
                  )
                  
                  
                  51
                  
                  
                  
                  (775
                  )
                  
                  
                  (1,224
                  )
                  
                  
                  (5
                  )
                  
                  
                  (1,219
                  )Loans,
      net of unearned income:Demand,
      time and lease
                  
                  
                  (58
                  )
                  
                  
                  (179
                  )
                  
                  
                  121
                  
                  
                  
                  (8
                  )
                  
                  
                  17
                  
                  
                  
                  (25
                  )Mortgage
      and construction
                  
                  
                  1,749
                  
                  
                  
                  152
                  
                  
                  
                  1,597
                  
                  
                  
                  719
                  
                  
                  
                  (265
                  )
                  
                  
                  984Installment
      and credit card
                  
                  
                  (183
                  )
                  
                  
                  253
                  
                  
                  
                  (436
                  )
                  
                  
                  406
                  
                  
                  
                  504
                  
                  
                  
                  (98
                  )Total
      gross loans(2)
                  
                  
                  1,508
                  
                  
                  
                  226
                  
                  
                  
                  1,282
                  
                  
                  
                  1,117
                  
                  
                  
                  256
                  
                  
                  
                  861Allowance
      for credit losses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      net loans
                  
                  
                  1,508
                  
                  
                  
                  226
                  
                  
                  
                  1,282
                  
                  
                  
                  1,117
                  
                  
                  
                  256
                  
                  
                  
                  861Total
      interest-earning assets
                  
                  $
                  681
                  
                  
                  $
                  52
                  
                  
                  $
                  629
                  
                  
                  $
                  (302
                  )
                  
                  $
                  258
                  
                  
                  $
                  (560
                  )LIABILITIES:Interest-bearing
      deposits:Savings
      and NOW
                  
                  $
                  (79
                  )
                  
                  $
                  (69
                  )
                  
                  $
                  (10
                  )
                  
                  $
                  (11
                  )
                  
                  $
                  -
                  
                  
                  $
                  (11
                  )Money
      market
                  
                  
                  (41
                  )
                  
                  
                  (27
                  )
                  
                  
                  (14
                  )
                  
                  
                  (3
                  )
                  
                  
                  -
                  
                  
                  
                  (3
                  )Other
      time deposits
                  
                  
                  76
                  
                  
                  
                  (209
                  )
                  
                  
                  285
                  
                  
                  
                  57
                  
                  
                  
                  298
                  
                  
                  
                  (241
                  )Total
      interest-bearing deposits
                  
                  
                  (44
                  )
                  
                  
                  (305
                  )
                  
                  
                  261
                  
                  
                  
                  43
                  
                  
                  
                  298
                  
                  
                  
                  (255
                  )Non-interest-bearing
      deposits
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Borrowed
      funds
                  
                  
                  328
                  
                  
                  
                  (577
                  )
                  
                  
                  905
                  
                  
                  
                  94
                  
                  
                  
                  (71
                  )
                  
                  
                  165Total
      interest-bearing liabilities
                  
                  $
                  284
                  
                  
                  $
                  (882
                  )
                  
                  $
                  1,166
                  
                  
                  $
                  137
                  
                  
                  $
                  227
                  
                  
                  $
                  (90
                  )




(1) 
      Tax equivalent basis.


(2) 
      Non-accrual loans included in average
balances.


24





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.





Year Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Average
                        Balance
                      
                      
                      Interest
                      
                      
                      Yield/
                        Cost
                      
                      
                      Average
                        Balance
                      
                      
                      Interest
                      
                      
                      Yield/
                        Cost
                      
                      
                      Average
                        Balance
                      
                      
                      Interest
                      
                      
                      Yield/
                        Cost(Dollars In Thousands)ASSETS:Interest-earning
      assets:Federal
      funds sold
                      
                      $
                      433
                      
                      
                      $
                      5
                      
                      
                      
                      1.15
                      %
                      
                      $
                      2,665
                      
                      
                      $
                      139
                      
                      
                      
                      5.22
                      %
                      
                      $
                      3,848
                      
                      
                      $
                      200
                      
                      
                      
                      5.20
                      %Interest-bearing
      deposits
                      
                      
                      6,560
                      
                      
                      
                      130
                      
                      
                      
                      1.98
                      
                      
                      
                      1,929
                      
                      
                      
                      99
                      
                      
                      
                      5.13
                      
                      
                      
                      4,901
                      
                      
                      
                      233
                      
                      
                      
                      4.76Investment
      securities:U.S.
      Treasury securities, obligations of U.S. government agencies and
      mortgage-backed securities
                      
                      
                      38,532
                      
                      
                      
                      1,963
                      
                      
                      
                      5.09
                      
                      
                      
                      50,392
                      
                      
                      
                      2,554
                      
                      
                      
                      5.07
                      
                      
                      
                      66,501
                      
                      
                      
                      3,347
                      
                      
                      
                      5.04Obligations
      of states and political subdivisions(1)
                      
                      
                      32,421
                      
                      
                      
                      2,134
                      
                      
                      
                      6.58
                      
                      
                      
                      34,288
                      
                      
                      
                      2,209
                      
                      
                      
                      6.45
                      
                      
                      
                      38,723
                      
                      
                      
                      2,516
                      
                      
                      
                      6.50All
      other investment securities
                      
                      
                      2,168
                      
                      
                      
                      193
                      
                      
                      
                      8.90
                      
                      
                      
                      2,839
                      
                      
                      
                      251
                      
                      
                      
                      8.84
                      
                      
                      
                      4,257
                      
                      
                      
                      375
                      
                      
                      
                      8.81Total
      investment securities
                      
                      
                      73,121
                      
                      
                      
                      4,290
                      
                      
                      
                      5.87
                      
                      
                      
                      87,519
                      
                      
                      
                      5,014
                      
                      
                      
                      5.73
                      
                      
                      
                      109,481
                      
                      
                      
                      6,238
                      
                      
                      
                      5.70Loans,
      net of unearned income:Demand,
      time and lease
                      
                      
                      6,082
                      
                      
                      
                      390
                      
                      
                      
                      6.41
                      
                      
                      
                      4,788
                      
                      
                      
                      448
                      
                      
                      
                      9.36
                      
                      
                      
                      5,064
                      
                      
                      
                      456
                      
                      
                      
                      9.01Mortgage
      and construction
                      
                      
                      151,656
                      
                      
                      
                      9,775
                      
                      
                      
                      6.45
                      
                      
                      
                      126,391
                      
                      
                      
                      8,026
                      
                      
                      
                      6.35
                      
                      
                      
                      111,426
                      
                      
                      
                      7,307
                      
                      
                      
                      6.56Installment
      and credit card
                      
                      
                      61,747
                      
                      
                      
                      4,291
                      
                      
                      
                      6.95
                      
                      
                      
                      68,453
                      
                      
                      
                      4,474
                      
                      
                      
                      6.54
                      
                      
                      
                      70,216
                      
                      
                      
                      4,068
                      
                      
                      
                      5.80Total
      gross loans(2)
                      
                      
                      219,485
                      
                      
                      
                      14,456
                      
                      
                      
                      6.59
                      
                      
                      
                      199,632
                      
                      
                      
                      12,948
                      
                      
                      
                      6.49
                      
                      
                      
                      186,706
                      
                      
                      
                      11,831
                      
                      
                      
                      6.34Allowance
      for credit losses
                      
                      
                      (1,479
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,766
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (2,071
                      )Total
      net loans
                      
                      
                      218,006
                      
                      
                      
                      14,456
                      
                      
                      
                      6.63
                      
                      
                      
                      197,866
                      
                      
                      
                      12,948
                      
                      
                      
                      6.54
                      
                      
                      
                      184,635
                      
                      
                      
                      11,831
                      
                      
                      
                      6.41Total
      interest-earning assets
                      
                      
                      298,120
                      
                      
                      
                      18,881
                      
                      
                      
                      6.33
                      
                      
                      
                      289,979
                      
                      
                      
                      18,200
                      
                      
                      
                      6.28
                      
                      
                      
                      302,865
                      
                      
                      
                      18,502
                      
                      
                      
                      6.11Cash
      and due from banks
                      
                      
                      7,891
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,862
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      9,493Other
      assets
                      
                      
                      14,740
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,661
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,045Total
      assets
                      
                      $
                      320,751
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      312,502
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      325,403LIABILITIES
      AND STOCKHOLDERS’ EQUITY:Interest-bearing
      deposits:Savings
      and NOW
                      
                      $
                      69,468
                      
                      
                      
                      184
                      
                      
                      
                      0.26
                      %
                      
                      $
                      72,831
                      
                      
                      
                      263
                      
                      
                      
                      0.36
                      %
                      
                      $
                      77,761
                      
                      
                      
                      274
                      
                      
                      
                      0.36
                      %Money
      market
                      
                      
                      13,751
                      
                      
                      
                      62
                      
                      
                      
                      0.45
                      
                      
                      
                      15,918
                      
                      
                      
                      103
                      
                      
                      
                      0.65
                      
                      
                      
                      16,415
                      
                      
                      
                      106
                      
                      
                      
                      0.65Other
      time deposits
                      
                      
                      110,049
                      
                      
                      
                      4,534
                      
                      
                      
                      4.12
                      
                      
                      
                      103,491
                      
                      
                      
                      4,458
                      
                      
                      
                      4.31
                      
                      
                      
                      109,499
                      
                      
                      
                      4,401
                      
                      
                      
                      4.02Total
      interest-bearing deposits
                      
                      
                      193,268
                      
                      
                      
                      4,780
                      
                      
                      
                      2.47
                      
                      
                      
                      192,240
                      
                      
                      
                      4,824
                      
                      
                      
                      2.51
                      
                      
                      
                      203,675
                      
                      
                      
                      4,781
                      
                      
                      
                      2.35Short-term
      borrowed funds
                      
                      
                      2,209
                      
                      
                      
                      51
                      
                      
                      
                      2.31
                      
                      
                      
                      2,294
                      
                      
                      
                      119
                      
                      
                      
                      5.19
                      
                      
                      
                      1,603
                      
                      
                      
                      81
                      
                      
                      
                      5.06Long-term
      borrowed funds
                      
                      
                      26,287
                      
                      
                      
                      1,424
                      
                      
                      
                      5.42
                      
                      
                      
                      13,949
                      
                      
                      
                      1,028
                      
                      
                      
                      7.37
                      
                      
                      
                      12,309
                      
                      
                      
                      972
                      
                      
                      
                      7.90Total
      interest-bearing liabilities
                      
                      
                      221,764
                      
                      
                      
                      6,255
                      
                      
                      
                      2.82
                      
                      
                      
                      208,483
                      
                      
                      
                      5,971
                      
                      
                      
                      2.86
                      
                      
                      
                      217,587
                      
                      
                      
                      5,834
                      
                      
                      
                      2.69Non-interest-bearing
      deposits
                      
                      
                      68,340
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      73,415
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      79,199Other
      liabilities
                      
                      
                      1,806
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,609
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,407Stockholders’
      equity
                      
                      
                      28,841
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      28,995
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      27,210Total
      liabilities and equity
                      
                      $
                      320,751
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      312,502
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      325,403Net
      interest income
                      
                      
                      
                      
                      
                      $
                      $12,626
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      $12,229
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      $12,668Net
      interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.51
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.42
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.42
                      %Net
      interest margin
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.31
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.39
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.31
                      %




1
Tax equivalent basis. The incremental tax rate applied was (104.7%) for 2008 and
34.27% for 2007.


2
Non-accrual loans included in average balance.





Provision for Credit Losses.
During the year ended December 31, 2008, the Company made a provision of
$1,145,649 for credit losses, compared to a provision of $50,000 and $62,000 for
credit losses for the years ended December 31, 2007 and 2006, respectively. The
increase in the provision for credit losses for 2008 was due to net charge offs
on installment loans of $746,000 (primarily made up of charge offs on indirect
automobile loans of $719,000) and adjustments to the risk factors for our loan
loss reserve calculation as economic conditions deteriorated. At December 31,
2008, the allowance for credit losses equaled 224.42% of non-accrual and past
due loans compared to 188.27% and 3,116.95% at December 31, 2007 and 2006,
respectively. During the year ended December 31, 2008, the Company recorded net
charge-offs of $728,000 compared to $285,000 and $424,256 in net charge-offs
during the years ended December 31, 2007 and 2006,
respectively.


25


Other Income. Other income
includes service charges on deposit accounts, other fees and commissions, net
gains on investment securities, and income on life insurance. Other income
decreased from $2,157,292 in 2007 to $2,050,587 in 2008, a $106,705, or 4.95%
decrease. The decrease was primarily due to a decrease in service charges and
other fees and commissions, partially offset by gains on investment securities.
Other income decreased from $2,244,390 in 2006 to $2,157,292 in 2007, an
$87,098, or 3.88% decrease. The decrease was primarily due to a decrease in
gains on investment securities with lesser decreases in service charges and
other fees and commissions.





Other Expenses.Other expenses
increased from $10,433,019 in 2007 to $13,102,341 in 2008, a $2,669,322 or
25.59% increase. This increase, which consists of non-interest operating
expenses, was primarily due to the write-down of one Fannie Mae and two Freddie
Mac securities in the amount of $2,816,000. Lesser increases occurred in
salaries and wages and occupancy costs, partially offset by decreases in
employee benefits and furniture and equipment. Other expenses decreased from
$10,596,661 in 2006 to $10,433,019 in 2007, a $163,190 or 1.55% decrease. This
decrease, which consists of non-interest operating expenses, was primarily due
to a decrease in salaries, employee benefits, and furniture and equipment costs
partially offset by an increase in occupancy and other miscellaneous
expenses.





Income Taxes. During the year
ended December 31, 2008, the Company recorded income tax benefit of $679,362,
compared to income tax expense of $758,340 for the year ended December 31, 2007.
This decrease was primarily due to a tax benefit of $1,110,770 from the
write-down of $2,816,000 for the Fannie Mae and Freddie Mac securities. In
addition to this, the amount of tax exempt income on municipal securities
decreased and there was a larger amount contributed to provision for credit
losses. During the year ended December 31, 2007, the Company recorded income tax
expense of $758,340, compared to income tax expense of $687,115 for the year
ended December 31, 2006. This increasewas primarily due to
less tax exempt income on municipal securities.





Comparison of Financial
Condition at December 31, 2008, 2007 and 2006





The
Company’s total assets increased to $332,502,215 at December 31, 2008 from
$307,273,868 at December 31, 2007. The Company’s total assets decreased to
$307,273,868 at December 31, 2007 from $317,745,601 at December 31,
2006.





The
Company’s net loan portfolio increased to $235,132,621 at December 31, 2008
compared to $199,753,132 at December 31, 2007 and $193,336,604 at December 31,
2006. The increase in the loan portfolio during the 2008 period is primarily due
to an increase in refinanced mortgage loans, commercial and residential
construction loans, demand commercial secured loans and mortgage participations
purchased. They were partially offset by a decline in indirect automobile loans
and additional mortgage participations sold. The increase in the loan portfolio
during the 2007 period is primarily due to an increase in refinanced mortgage
loans, commercial and residential construction loans, personal and commercial
secured installment loans. They were partially offset by a decline in indirect
automobile loans and mortgage participations purchased.





During
2008, the Company’s total investment securities portfolio (including both
investment securities available for sale and investment securities held to
maturity) totaled $57,948,645, a $19,917,368 or 25.58%, decreasefrom $77,866,013 at
December 31, 2007. This decrease is primarily attributable to a decrease in
mortgage backed securities. During 2007, the Company’s total investment
securities portfolio (including both investment securities available for sale
and investment securities held to maturity) totaled $77,866,013, an $18,628,646
or 19.31%, decrease from $96,494,659 at December 31, 2006. This decrease is
primarily attributable to a decrease in mortgage backed securities and
government agencies.





Deposits
as of December 31, 2008 totaled $269,767,598, an increase of $16,850,832, or
6.66%, from the $252,916,766 total as of December 31, 2007. Deposits as of
December 31, 2007 totaled $252,916,766, a decrease of $21,916,691, or 7.98%,
from the $274,833,457 total as of December 31, 2006. Demand deposits as of
December 31, 2008 totaled $63,538,759, a $5,221,614, or 7.59%, decrease from
$68,760,373 at December 31, 2007. NOW and Super NOW accounts, as of December 31,
2008, decreased by $2,075,226, or 8.96% from their 2007 level to $21,079,314.
Money market accounts decreased by $184,175, or 1.42%, from their 2007 level, to
total $12,764,167 at December 31, 2008. Savings deposits decreased by
$1,579,894, or 3.33%, from their 2007 level, to $45,801,719 at December 31,
2008. Time deposits over $100,000 totaled $37,643,347 on December 31, 2008, an
increase of $9,759,573, or 35.00% from December 31, 2007. Other time deposits
(made up of certificates of deposit less than $100,000 and individual retirement
accounts) totaled $88,940,292 on December 31, 2008, a $16,153,569 or 22.19%
increase from December 31, 2007.


26


Total
stockholders’ equity as of December 31, 2008 decreased by $1,827,902, or 6.15%,
from the 2007 period. The decrease was attributed to an increase in accumulated
other comprehensive loss, net of tax, and the excess of the cash dividends paid
and common stock shares repurchased and retired over the net income for
2008.Total
stockholders’ equity as of December 31, 2007 increased by $1,535,641, or 5.45%,
from the 2006 period. The increase was attributed to the excess of net income
over the cash dividends paid and partially offset by an increase in accumulated
other comprehensive loss, net of tax.




Off-Balance Sheet
Arrangements





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, 2008, the Bank has accrued $200,000 for
unfunded commitments related to these financial instruments with off balance
sheet risk, which is included in other liabilities.




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,
2008.


27





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
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                14,844Federal
      funds and overnight deposits
                
                
                6,394
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,394Securities
                
                
                -
                
                
                
                -
                
                
                
                4,561
                
                
                
                53,388
                
                
                
                57,949Loans
                
                
                12,858
                
                
                
                9,047
                
                
                
                90,257
                
                
                
                125,857
                
                
                
                238,019Fixed
      Assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,099Other
      Assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,197Total
      assets
                
                $
                19,252
                
                
                $
                9,047
                
                
                $
                94,818
                
                
                $
                179,245
                
                
                $
                332,502Liabilities:Demand
      deposit accounts
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                63,539NOW
      accounts
                
                
                21,079
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                21,079Money
      market deposit accounts
                
                
                12,764
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,764Savings
      accounts
                
                
                45,802
                
                
                
                204
                
                
                
                -
                
                
                
                -
                
                
                
                46,006IRA
      accounts
                
                
                2,860
                
                
                
                8,997
                
                
                
                21,188
                
                
                
                907
                
                
                
                33,952Certificates
      of deposit
                
                
                16,347
                
                
                
                39,980
                
                
                
                35,760
                
                
                
                341
                
                
                
                92,428Other
      liabilities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                29,671Junior
      Subordinated Debenture
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,155Stockholders’
      equity
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                27,908Total
      liabilities and Stockholders’ equity
                
                $
                98,852
                
                
                $
                49,181
                
                
                $
                56,948
                
                
                $
                1,248
                
                
                $
                332,502GAP
                
                $
                (79,600
                )
                
                $
                (40,134
                )
                
                $
                37,870
                
                
                $
                177,997Cumulative
      GAP
                
                
                (79,600
                )
                
                
                (119,734
                )
                
                
                (81,864
                )
                
                
                96,133Cumulative
      GAP as a % of total assets
                
                
                (23.96
                %)
                
                
                (36.04
                %)
                
                
                (24.64
                %)
                
                
                28.94
                %





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.





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 and, in
the Bank’s experience, the changes historically realized have been narrower than
those projected by the model. However, the Bank believes that the model is a
prudent forecasting tool. As of December 31, 2008, the model produced the
following sensitivity profile for net interest income and the economic value of
equity.





Immediate Change in Rates-200
                
                
                
                -100
                
                
                
                +100
                
                
                
                +200Basis Points
                
                
                Basis Points
                
                
                Basis Points
                
                
                Basis Points%
      Change in Net Interest Income
                
                
                4.0
                %
                
                
                1.5
                %
                
                
                2.2
                %
                
                
                1.1
                %%
      Change in Economic Value of Equity
                
                
                -25.5
                %
                
                
                -11.6
                %
                
                
                7.9
                %
                
                
                -0.9
                %





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.




28




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, 2008,
totaled $21,237,903, an increase of $6,442,843 or 43.55%, from the December 31,
2007 total of $14,795,060. Most of this increase was due to federal funds sold
with a lesser increase in interest-bearing deposits in FHLB but was offset by a
decrease in cash and due from banks.




As of December 31, 2008, the Bank was
permitted to draw on a $66.01 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, 2008, a $7 million long-term convertible advance
was outstanding under this line. There was also a $10 million convertible
advance (callable monthly and with a final maturity of November 1, 2017.)There was a $5 million
convertible advance settled July 21, 2008 with a final maturity of July 23,
2018. This advance has a 2.73% rate of interest and is callable quarterly,
starting July 23, 2009. There was a $5 million convertible advance taken out
August 22, 2008 which has a final maturity of August 22, 2018. This advance has
a 3.344% rate of interest and is callable quarterly, starting August 22,
2011.In addition
the Bank has unsecured lines of credit totaling $9 million from a commercial
bank on which there is no outstanding balances at December 31, 2008.
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,
2008, 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, 2008, the Company was in compliance with
these requirements with a leverage ratio of 10.50%, a Tier 1 risk-based capital
ratio of 14.08% and total risk-based capital ratio of 14.93%. At December 31,
2008, the Bank met the criteria for designation as a well capitalized depository
institution under FDIC regulations.





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 nature. 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:


29


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
December 2007, the FASB issued Statement No. 141 Revised 2007 (SFAS 141R), Business Combinations. SFAS
141R’s objective is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after December 31, 2008. On January 1, 2008, the Company adopted SFAS
No. 141R. The Company has determined that the adoption of this
pronouncement did not have a significant impact on the financial
statements.





In
February 2007, the FASB issued Statement No. 159 (SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities-including an amendment of FASB Statement No.
115 which is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. Management has not elected to adopt this SFAS
but will continue to evaluate the impact of adopting this Statement on the
Company’s financial statements for future periods.





In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS 160’s objective is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements by
establishing accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 shall be
effective for fiscal years and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company does not expect the
implementation of SFAS 160 to have a material impact on its consolidated
financial statements.




In
September 2006, the FASB ratified the consensus reached by the Emerging Issued
Task Force (EITF) on Issue No. 06-04, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. The scope of this Issue is limited to the recognition
of a liability and related compensation costs for endorsement split-dollar life
insurance arrangements that provide a benefit to an employee that extends to
postretirement periods. Therefore, this Issue would not apply to a split-dollar
life insurance arrangement that provides a specified benefit to an employee that
is limited to the employee's active service period with an
employer.





The
consensus in this Issue is effective for fiscal years beginning after December
15, 2007, with earlier application permitted. Entities should recognize the
effects of applying the consensus in this Issue through either (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings
or to other components of equity or net assets in the statement of financial
position as of the beginning of the year of adoption or (b) a change in
accounting principle through retrospective application to all prior periods. On
January 1, 2008, the Company adopted EITF No. 06-04 and under option (a)
recorded a cumulative accrued expense and reduction in stockholder’s equity
totaling $179,794 statements.




On
January 12, 2009, the FASB issued FASB Staff Position EITF 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20 (FSP). FASB FSP 99-20-1 amends the
impairment guidance in FASB EITF Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests that
Continue to be held by a Transferor in Securitized Financial Assets. The
intent of the FSP is to reduce complexity and achieve more consistent
determinations as to whether other-than-temporary impairments of available for
sale or held to maturity debt securities have occurred. The FSP is effective for
interim and annual reporting periods ending after December 15, 2008. The
adoption of this FSP did not have an impact on the Company’s consolidated
financial statements.


30


In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an Amendment of FASB Statement No.
133.” This Statement amends and expands the disclosure requirements of
SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” The Statement requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company does not expect the implementation of SFAS 161 to have a
material impact on its consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Principles.” This statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States. The Statement is directed to entities rather than auditors
because entities are responsible for the selection of accounting principles for
financial statements that are presented in conformity with GAAP. This Statement
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” The Company
does not expect the implementation of SFAS 162 to have a material impact on its
consolidated financial statements.





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





Evaluation
of Disclosure 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
Exchange Act 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 have concluded that the system is
effective.





Management’s
Annual Report on Internal Control over Financial Reporting




The
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of our financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles
(GAAP). Internal control over financial reporting includes those policies
and procedures that: (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that receipts and expenditures
of the company are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on
the financial statements. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with policies or procedures may
deteriorate.





Management
(with the participation of the Company’s Chief Executive Officer and Chief
Financial Officer) conducted an evaluation of the effectiveness of the Company’s
internal control over financial reporting based on the framework in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that
the Company’s internal control over financial reporting was effective as of
December 31, 2008.


31





This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report.





Changes
in Internal Control Over Financial Reporting





There
have been no changes in the Company’s internal control over financial reporting
during the fourth quarter of 2008 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.


32


PART
III





ITEM10.
            DIRECTORS, EXECUTIVE
      OFFICERS AND CORPORATE
GOVERNANCE





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 2009 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.
            CERTAINRELATIONSHIPS AND
      RELATED TRANSACTIONS AND DIRECTOR
  INDEPENDENCE





The
information required by this item is incorporated herein by reference to the
section captioned “Election of Directors” and “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.


33


PART
IV





ITEM
      15.
            EXHIBITS AND FINANCIAL
      STATEMENT SCHEDULES





(a) 1. Financial
Statements.


PageIndependent
      Auditors’ Report F-1
              F-1Consolidated
      Balance Sheets as of December 31, 2008, 2007 and 2006
              F-2Consolidated
      Statements of Income for the Years Ended December 31, 2008, 2007 and
      2006
              F-3Consolidated
      Statements of Comprehensive Income for the Years Ended December 31,
      2008,  2007 and 2006
              F-4Consolidated
      Statements of Changes in Stockholders’ Equity for the Years Ended December
      31, 2008, 2007 and 2006
              F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006
              F-6Notes
      to Consolidated Financial Statements
              F-8





(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
            Rule
      15d-14(a) Certification of Chief Financial
  Officer


32.1
            Section
      1350 Certifications


34


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 BANCORPMarch
      13, 2009
              By:
              /s/ Michael G.
LivingstonMichael
      G. LivingstonPresident
      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/ Michael G. Livingston
                  
                  President,
      Chief Executive Officer
                  
                  March
      13, 2009Michael G. Livingston
                  
                  and
      Director/s/ F. William Kuethe, Jr.
                  
                  President
      Emeritus and Director
                  
                  March
      13, 2009F. William Kuethe, Jr./s/ John E. Porter
                  
                  Senior
      Vice President and Chief
                  
                  March
      13, 2009John E. Porter
                  
                  Financial
      Officer/s/ John E. Demyan
                  
                  Chairman
      of the Board and Director
                  
                  March
      13, 2009John E. Demyan/s/ Shirley E. Boyer
                  
                  Director
                  
                  March
      13, 2009Shirley E. Boyer/s/ Thomas Clocker
                  
                  Director
                  
                  March
      13, 2009Thomas Clocker/s/ Norman E. Harrison, Jr.
                  
                  Director
                  
                  March
      13, 2009Norman E. Harrison, Jr./s/ F. W. Kuethe, III
                  
                  Director
                  
                  March
      13, 2009F. W. Kuethe, III/s/ Charles Lynch
                  
                  Director
                  
                  March
      13, 2009Charles Lynch/s/ Edward L. Maddox
                  
                  Director
                  
                  March
      13, 2009Edward L. Maddox/s/  William N. Scherer,
      Sr.
                  
                  Director
                  
                  March
      13, 2009William N. Scherer, Sr./s/ Karen B. Thorwarth
                  
                  Director
                  
                  March
      13, 2009Karen B. Thorwarth/s/ Mary Lou Wilcox
                  
                  Director
                  
                  March
      13, 2009Mary Lou Wilcox


35


REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 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, 2008, 2007, and 2006, and the related
consolidated statements of income, comprehensive income, changes in
stockholders’ equity, and cash flows for each of the years then
ended.  Glen Burnie Bancorp and subsidiaries’ management is
responsible for these consolidated financial statements.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.
 
 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, 2008, 2007, and 2006, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
 
 Salisbury,
Maryland
 March 9,
2009
  F-1
   Glen Burnie Bancorp and Subsidiaries
 
 Consolidated
Balance Sheets
  
 
 December
      31,
                                                              
                                                              2008
                                                              
                                                              
                                                              2007
                                                              
                                                              
                                                              2006AssetsCash
      and due from banks
                                                              
                                                              $
                                                              6,960,377
                                                              
                                                              
                                                              $
                                                              8,220,582
                                                              
                                                              
                                                              $
                                                              9,005,691Interest-bearing
      deposits in other financial institutions
                                                              
                                                              
                                                              7,883,816
                                                              
                                                              
                                                              
                                                              5,847,562
                                                              
                                                              
                                                              
                                                              342,309Federal
      funds sold
                                                              
                                                              
                                                              6,393,710
                                                              
                                                              
                                                              
                                                              726,916
                                                              
                                                              
                                                              
                                                              3,971,978Cash
      and cash equivalents
                                                              
                                                              
                                                              21,237,903
                                                              
                                                              
                                                              
                                                              14,795,060
                                                              
                                                              
                                                              
                                                              13,319,978Investment
      securities available for sale, at fair value
                                                              
                                                              
                                                              57,948,645
                                                              
                                                              
                                                              
                                                              77,182,181
                                                              
                                                              
                                                              
                                                              95,811,296Investment
      securities held to maturity (fair value 2007 $726,193; 2006
      $729,960)
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              683,832
                                                              
                                                              
                                                              
                                                              683,363Federal
      Home Loan Bank stock, at cost
                                                              
                                                              
                                                              1,767,600
                                                              
                                                              
                                                              
                                                              1,381,900
                                                              
                                                              
                                                              
                                                              928,000Maryland
      Financial Bank stock, at cost
                                                              
                                                              
                                                              100,000
                                                              
                                                              
                                                              
                                                              100,000
                                                              
                                                              
                                                              
                                                              100,000Common
      stock in the Glen Burnie Statutory Trust I
                                                              
                                                              
                                                              155,000
                                                              
                                                              
                                                              
                                                              155,000
                                                              
                                                              
                                                              
                                                              155,000Ground
      rents, at cost
                                                              
                                                              
                                                              184,900
                                                              
                                                              
                                                              
                                                              202,900
                                                              
                                                              
                                                              
                                                              219,100Loans,
      less allowance for credit losses 2008 $2,021,690;2007
      $1,604,491; 2006 $1,839,094
                                                              
                                                              
                                                              235,132,621
                                                              
                                                              
                                                              
                                                              199,753,132
                                                              
                                                              
                                                              
                                                              193,336,604Premises
      and equipment, at cost, less accumulated depreciation
                                                              
                                                              
                                                              3,099,448
                                                              
                                                              
                                                              
                                                              3,087,908
                                                              
                                                              
                                                              
                                                              3,406,014Accrued
      interest receivable on loans and investment securities
                                                              
                                                              
                                                              1,680,392
                                                              
                                                              
                                                              
                                                              1,508,640
                                                              
                                                              
                                                              
                                                              1,627,433Deferred
      income tax benefits
                                                              
                                                              
                                                              2,286,483
                                                              
                                                              
                                                              
                                                              453,512
                                                              
                                                              
                                                              
                                                              292,131Other
      real estate owned
                                                              
                                                              
                                                              550,000
                                                              
                                                              
                                                              
                                                              50,000
                                                              
                                                              
                                                              
                                                              50,000Cash
      value of life insurance
                                                              
                                                              
                                                              7,434,573
                                                              
                                                              
                                                              
                                                              7,161,403
                                                              
                                                              
                                                              
                                                              6,892,455Other
      assets
                                                              
                                                              
                                                              924,650
                                                              
                                                              
                                                              
                                                              758,400
                                                              
                                                              
                                                              
                                                              924,227Total
    assets
                                                              
                                                              $
                                                              332,502,215
                                                              
                                                              
                                                              $
                                                              307,273,868
                                                              
                                                              
                                                              $
                                                              317,745,601Liabilities
      and Stockholders' EquityLiabilities:Deposits:Noninterest-bearing
                                                              
                                                              $
                                                              63,538,759
                                                              
                                                              
                                                              $
                                                              68,760,373
                                                              
                                                              
                                                              $
                                                              74,729,298Interest-bearing
                                                              
                                                              
                                                              206,228,839
                                                              
                                                              
                                                              
                                                              184,156,393
                                                              
                                                              
                                                              
                                                              200,104,159Total
      deposits
                                                              
                                                              
                                                              269,767,598
                                                              
                                                              
                                                              
                                                              252,916,766
                                                              
                                                              
                                                              
                                                              274,833,457Short-term
      borrowings
                                                              
                                                              
                                                              629,855
                                                              
                                                              
                                                              
                                                              502,529
                                                              
                                                              
                                                              
                                                              545,349Long-term
      borrowings
                                                              
                                                              
                                                              27,071,712
                                                              
                                                              
                                                              
                                                              17,107,135
                                                              
                                                              
                                                              
                                                              7,140,170Junior
      subordinated debentures owed to unconsolidated subsidiary
      trust
                                                              
                                                              
                                                              5,155,000
                                                              
                                                              
                                                              
                                                              5,155,000
                                                              
                                                              
                                                              
                                                              5,155,000Dividends
      payable
                                                              
                                                              
                                                              385,794
                                                              
                                                              
                                                              
                                                              385,010
                                                              
                                                              
                                                              
                                                              366,580Accrued
      interest payable on deposits
                                                              
                                                              
                                                              139,579
                                                              
                                                              
                                                              
                                                              134,274
                                                              
                                                              
                                                              
                                                              145,642Accrued
      interest payable on junior subordinated debentures
                                                              
                                                              
                                                              171,518
                                                              
                                                              
                                                              
                                                              171,518
                                                              
                                                              
                                                              
                                                              171,518Other
      liabilities
                                                              
                                                              
                                                              1,272,907
                                                              
                                                              
                                                              
                                                              1,165,482
                                                              
                                                              
                                                              
                                                              1,187,372Total
      liabilities
                                                              
                                                              
                                                              304,593,963
                                                              
                                                              
                                                              
                                                              277,537,714
                                                              
                                                              
                                                              
                                                              289,545,088Commitments
      and contingenciesStockholders'
      equity:Common
      stock, par value $1, authorized 15,000,000 shares; issued and outstanding
      2008 2,967,727
      shares; 2007 2,498,465 shares; 2006 2,484,633 shares;
                                                              
                                                              
                                                              2,967,727
                                                              
                                                              
                                                              
                                                              2,498,465
                                                              
                                                              
                                                              
                                                              2,484,633Surplus
                                                              
                                                              
                                                              11,568,241
                                                              
                                                              
                                                              
                                                              11,921,129
                                                              
                                                              
                                                              
                                                              11,719,907Retained
      earnings
                                                              
                                                              
                                                              14,129,637
                                                              
                                                              
                                                              
                                                              15,750,156
                                                              
                                                              
                                                              
                                                              14,312,496Accumulated
      other comprehensive loss, net of tax
                                                              
                                                              
                                                              (757,353
                                                              )
                                                              
                                                              
                                                              (433,596
                                                              )
                                                              
                                                              
                                                              (316,523
                                                              )Total
      stockholders' equity
                                                              
                                                              
                                                              27,908,252
                                                              
                                                              
                                                              
                                                              29,736,154
                                                              
                                                              
                                                              
                                                              28,200,513Total
      liabilities and stockholders' equity
                                                              
                                                              $
                                                              332,502,215
                                                              
                                                              
                                                              $
                                                              307,273,868
                                                              
                                                              
                                                              $
                                                              317,745,601
 
 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,
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Interest
      income on:Loans,
      including fees
                        
                        $
                        14,456,017
                        
                        
                        $
                        13,326,693
                        
                        
                        $
                        11,830,676U.S.
      Government agency securities
                        
                        
                        1,962,553
                        
                        
                        
                        2,553,527
                        
                        
                        
                        3,347,090State
      and municipal securities
                        
                        
                        1,410,676
                        
                        
                        
                        1,451,540
                        
                        
                        
                        1,653,109Corporate
      trust preferred securities
                        
                        
                        192,749
                        
                        
                        
                        250,526
                        
                        
                        
                        374,588Federal
      funds sold
                        
                        
                        5,034
                        
                        
                        
                        139,075
                        
                        
                        
                        200,418Other
                        
                        
                        149,007
                        
                        
                        
                        115,895
                        
                        
                        
                        249,315Total
      interest income
                        
                        
                        18,176,036
                        
                        
                        
                        17,837,256
                        
                        
                        
                        17,655,196Interest
      expense on:Deposits
                        
                        
                        4,780,185
                        
                        
                        
                        4,824,425
                        
                        
                        
                        4,780,871Short-term
      borrowings
                        
                        
                        50,567
                        
                        
                        
                        119,101
                        
                        
                        
                        80,994Long-term
      borrowings
                        
                        
                        877,101
                        
                        
                        
                        481,092
                        
                        
                        
                        425,470Junior
      subordinated debentures
                        
                        
                        546,180
                        
                        
                        
                        546,430
                        
                        
                        
                        546,430Total
      interest expense
                        
                        
                        6,254,033
                        
                        
                        
                        5,971,048
                        
                        
                        
                        5,833,765Net
      interest income
                        
                        
                        11,922,003
                        
                        
                        
                        11,866,208
                        
                        
                        
                        11,821,431Provision
      for credit losses
                        
                        
                        1,145,649
                        
                        
                        
                        50,000
                        
                        
                        
                        62,000Net
      interest income after provision for credit losses
                        
                        
                        10,776,354
                        
                        
                        
                        11,816,208
                        
                        
                        
                        11,759,431Other
      income:Service
      charges on deposit accounts
                        
                        
                        737,070
                        
                        
                        
                        814,392
                        
                        
                        
                        831,140Other
      fees and commissions
                        
                        
                        849,417
                        
                        
                        
                        953,873
                        
                        
                        
                        1,026,144Gains
      on investment securities, net
                        
                        
                        190,930
                        
                        
                        
                        120,079
                        
                        
                        
                        176,453Income
      on life insurance
                        
                        
                        273,170
                        
                        
                        
                        268,948
                        
                        
                        
                        210,653Total
      other income
                        
                        
                        2,050,587
                        
                        
                        
                        2,157,292
                        
                        
                        
                        2,244,390Other
      expenses:Salaries
      and wages
                        
                        
                        4,694,461
                        
                        
                        
                        4,623,067
                        
                        
                        
                        4,769,495Employee
      benefits
                        
                        
                        1,525,023
                        
                        
                        
                        1,702,535
                        
                        
                        
                        1,748,294Occupancy
                        
                        
                        903,976
                        
                        
                        
                        886,345
                        
                        
                        
                        850,843Furniture
      and equipment
                        
                        
                        754,191
                        
                        
                        
                        844,147
                        
                        
                        
                        864,151Impairment
      loss on investment securities
                        
                        
                        2,816,000
                        
                        
                        
                        -
                        
                        
                        
                        -Other
      expenses
                        
                        
                        2,408,690
                        
                        
                        
                        2,376,925
                        
                        
                        
                        2,363,878Total
      other expenses
                        
                        
                        13,102,341
                        
                        
                        
                        10,433,019
                        
                        
                        
                        10,596,661(Loss)
      income before income taxes (benefits)
                        
                        
                        (275,400
                        )
                        
                        
                        3,540,481
                        
                        
                        
                        3,407,160Federal
      and state income taxes (benefits)
                        
                        
                        (679,362
                        )
                        
                        
                        758,340
                        
                        
                        
                        687,115Net
      income
                        
                        $
                        403,962
                        
                        
                        $
                        2,782,141
                        
                        
                        $
                        2,720,045Basic
      and diluted earnings per share of common stock
                        
                        $
                        0.14
                        
                        
                        $
                        0.93
                        
                        
                        $
                        0.92
 
 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,
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Net
      income
                        
                        $
                        403,962
                        
                        
                        $
                        2,782,141
                        
                        
                        $
                        2,720,045Other
      comprehensive loss, net of taxUnrealized
      holding losses arising during the period (net of deferred tax benefits
      2008 $1,264,081;
      2007 $23,422; 2006 $6,826)
                        
                        
                        (1,913,998
                        )
                        
                        
                        (37,231
                        )
                        
                        
                        (10,849
                        )Reclassification
      adjustment for impairment loss included in net income (net of deferred tax
      benefits2008
      $1,110,771)
                        
                        
                        1,705,229
                        
                        
                        
                        -
                        
                        
                        
                        -Reclassification
      adjustment for gains included in net income (net of deferred taxes 2008 $75,942; 2007
      $50,237; 2006 $47,522)
                        
                        
                        (114,988
                        )
                        
                        
                        (79,842
                        )
                        
                        
                        (75,529
                        )Total
      other comprehensive loss
                        
                        
                        (323,757
                        )
                        
                        
                        (117,073
                        )
                        
                        
                        (86,378
                        )Comprehensive
      income
                        
                        $
                        80,205
                        
                        
                        $
                        2,665,068
                        
                        
                        $
                        2,633,667
 
 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, 2008, 2007, and 2006
 
 AccumulatedOther
                        
                        
                        TotalCommon Stock
                        
                        
                        
                        
                        
                        Retained
                        
                        
                        Comprehensive
                        
                        
                        Stockholders'Shares
                        
                        
                        Par Value
                        
                        
                        Surplus
                        
                        
                        Earnings
                        
                        
                        Loss
                        
                        
                        EquityBalances,
      December 31, 2005
                        
                        
                        2,056,024
                        
                        
                        $
                        2,056,024
                        
                        
                        $
                        11,458,465
                        
                        
                        $
                        13,341,097
                        
                        
                        $
                        (230,145
                        )
                        
                        $
                        26,625,441Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,720,045
                        
                        
                        
                        -
                        
                        
                        
                        2,720,045Cash
      dividends, $.45 per share
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,337,545
                        )
                        
                        
                        -
                        
                        
                        
                        (1,337,545
                        )Dividends
      reinvested under dividend reinvestment plan
                        
                        
                        15,113
                        
                        
                        
                        15,113
                        
                        
                        
                        229,946
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        245,059Shares
      issued under employee stock purchase plan
                        
                        
                        2,395
                        
                        
                        
                        2,395
                        
                        
                        
                        31,496
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        33,891Stock
      split effected in form of 20% stock dividend
                        
                        
                        411,101
                        
                        
                        
                        411,101
                        
                        
                        
                        
                        
                        
                        
                        (411,101
                        )
                        
                        
                        
                        
                        
                        
                        -Other
      comprehensive loss, net of tax
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (86,378
                        )
                        
                        
                        (86,378
                        )Balances,
      December 31, 2006
                        
                        
                        2,484,633
                        
                        
                        
                        2,484,633
                        
                        
                        
                        11,719,907
                        
                        
                        
                        14,312,496
                        
                        
                        
                        (316,523
                        )
                        
                        
                        28,200,513Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,782,141
                        
                        
                        
                        -
                        
                        
                        
                        2,782,141Cash
      dividends, $.45 per share
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,344,481
                        )
                        
                        
                        -
                        
                        
                        
                        (1,344,481
                        )Dividends
      reinvested under dividend reinvestment plan
                        
                        
                        12,791
                        
                        
                        
                        12,791
                        
                        
                        
                        187,668
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        200,459Shares
      issued under employee stock purchase plan
                        
                        
                        1,041
                        
                        
                        
                        1,041
                        
                        
                        
                        13,554
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        14,595Other
      comprehensive loss, net of tax
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (117,073
                        )
                        
                        
                        (117,073
                        )Balances,
      December 31, 2007
                        
                        
                        2,498,465
                        
                        
                        
                        2,498,465
                        
                        
                        
                        11,921,129
                        
                        
                        
                        15,750,156
                        
                        
                        
                        (433,596
                        )
                        
                        
                        29,736,154Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        403,962
                        
                        
                        
                        -
                        
                        
                        
                        403,962Cummulative
      effect of adoption of EITF 06-04
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (179,794
                        )
                        
                        
                        -
                        
                        
                        
                        (179,794
                        )Shares
      repurchased and retired
                        
                        
                        (50,300
                        )
                        
                        
                        (50,300
                        )
                        
                        
                        (526,939
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (577,239
                        )Cash
      dividends, $.45 per share
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,345,128
                        )
                        
                        
                        -
                        
                        
                        
                        (1,345,128
                        )Dividends
      reinvested under dividend reinvestment plan
                        
                        
                        20,003
                        
                        
                        
                        20,003
                        
                        
                        
                        174,051
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        194,054Stock
      split effected in form of 20% stock dividend
                        
                        
                        499,559
                        
                        
                        
                        499,559
                        
                        
                        
                        -
                        
                        
                        
                        (499,559
                        )
                        
                        
                        -
                        
                        
                        
                        -Other
      comprehensive loss, net of tax
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (323,757
                        )
                        
                        
                        (323,757
                        )Balances,
      December 31, 2008
                        
                        
                        2,967,727
                        
                        
                        $
                        2,967,727
                        
                        
                        $
                        11,568,241
                        
                        
                        $
                        14,129,637
                        
                        
                        $
                        (757,353
                        )
                        
                        $
                        27,908,252
  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,
                                    
                                    2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Cash
      flows from operating activities:Net
      income
                                    
                                    $
                                    403,962
                                    
                                    
                                    $
                                    2,782,141
                                    
                                    
                                    $
                                    2,720,045Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation,
      amortization, and accretion
                                    
                                    
                                    421,229
                                    
                                    
                                    
                                    496,172
                                    
                                    
                                    
                                    571,741Provision
      for credit losses
                                    
                                    
                                    1,145,649
                                    
                                    
                                    
                                    50,000
                                    
                                    
                                    
                                    62,000Deferred
      income (benefits) taxes, net
                                    
                                    
                                    (1,605,603
                                    )
                                    
                                    
                                    (87,720
                                    )
                                    
                                    
                                    26,357Gains
      on disposals of assets, net
                                    
                                    
                                    (173,393
                                    )
                                    
                                    
                                    (119,652
                                    )
                                    
                                    
                                    (175,634
                                    )Impairment
      losses on investment securities
                                    
                                    
                                    2,816,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Income
      on investment in life insurance
                                    
                                    
                                    (273,170
                                    )
                                    
                                    
                                    (268,948
                                    )
                                    
                                    
                                    (210,653
                                    )Changes
      in assets and liabilities:(Increase)
      decrease in accrued interest receivable
                                    
                                    
                                    (171,752
                                    )
                                    
                                    
                                    118,793
                                    
                                    
                                    
                                    (175,627
                                    )(Increase)
      decrease in other assets
                                    
                                    
                                    (118,962
                                    )
                                    
                                    
                                    106,163
                                    
                                    
                                    
                                    38,161Increase
      (decrease) in accrued interest payable
                                    
                                    
                                    5,305
                                    
                                    
                                    
                                    (11,368
                                    )
                                    
                                    
                                    62,531(Decrease)
      increase in other liabilities
                                    
                                    
                                    (72,369
                                    )
                                    
                                    
                                    (21,890
                                    )
                                    
                                    
                                    41,751Net
      cash provided by operating activities
                                    
                                    
                                    2,376,896
                                    
                                    
                                    
                                    3,043,691
                                    
                                    
                                    
                                    2,960,672Cash
      flows from investing activities:Maturities
      of held to maturity mortgage-backed securities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    468,199Maturities
      of available for sale mortgage-backed securities
                                    
                                    
                                    4,402,208
                                    
                                    
                                    
                                    7,301,634
                                    
                                    
                                    
                                    9,331,430Maturities
      of other available for sale investment securities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    300,000
                                    
                                    
                                    
                                    4,330,544Sales
      of held to maturity debt securities
                                    
                                    
                                    684,100
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Sales
      of available for sale debt securities
                                    
                                    
                                    25,977,280
                                    
                                    
                                    
                                    17,889,342
                                    
                                    
                                    
                                    22,431,078Purchases
      of available for sale mortgage-backed securities
                                    
                                    
                                    (981,811
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (25,365,231
                                    )Purchases
      of other available for sale investment securities
                                    
                                    
                                    (13,318,481
                                    )
                                    
                                    
                                    (6,907,162
                                    )
                                    
                                    
                                    (20,398,575
                                    )Purchase
      of FHLB stock
                                    
                                    
                                    (385,700
                                    )
                                    
                                    
                                    (453,900
                                    )
                                    
                                    
                                    (9,100
                                    )Purchase
      of life insurance contracts
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1,000,000
                                    )Increase
      in loans, net
                                    
                                    
                                    (36,525,138
                                    )
                                    
                                    
                                    (6,466,528
                                    )
                                    
                                    
                                    (3,193,606
                                    )Purchases
      of premises and equipment
                                    
                                    
                                    (501,717
                                    )
                                    
                                    
                                    (128,452
                                    )
                                    
                                    
                                    (131,821
                                    )Net
      cash (used) provided by investing activities
                                    
                                    
                                    (20,649,259
                                    )
                                    
                                    
                                    11,534,934
                                    
                                    
                                    
                                    (13,537,082
                                    )Cash
      flows from financing activities:Decrease
      in noninterest-bearing deposits, NOW accounts, money market accounts, and
      savings accounts, net
                                    
                                    
                                    (5,221,614
                                    )
                                    
                                    
                                    (5,968,925
                                    )
                                    
                                    
                                    (4,584,623
                                    )Increase
      (decrease) in time deposits, net
                                    
                                    
                                    22,072,446
                                    
                                    
                                    
                                    (15,947,766
                                    )
                                    
                                    
                                    14,169,812Increase
      (decrease) in short-term borrowings
                                    
                                    
                                    127,326
                                    
                                    
                                    
                                    (42,820
                                    )
                                    
                                    
                                    (76,701
                                    )Proceeds
      from long-term borrowings
                                    
                                    
                                    10,000,000
                                    
                                    
                                    
                                    10,000,000
                                    
                                    
                                    
                                    -Repayments
      of long-term borrowings
                                    
                                    
                                    (35,423
                                    )
                                    
                                    
                                    (33,035
                                    )
                                    
                                    
                                    (30,807
                                    )Cash
      dividends paid
                                    
                                    
                                    (1,344,344
                                    )
                                    
                                    
                                    (1,326,051
                                    )
                                    
                                    
                                    (1,309,970
                                    )Common
      stock dividends reinvested
                                    
                                    
                                    194,054
                                    
                                    
                                    
                                    200,459
                                    
                                    
                                    
                                    245,059Repurchase
      and retirement of common stock
                                    
                                    
                                    (577,239
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Issuance
      of common stock
                                    
                                    
                                    -
                                    
                                    
                                    
                                    14,595
                                    
                                    
                                    
                                    33,891Net
      cash provided (used) by financing activities
                                    
                                    
                                    25,215,206
                                    
                                    
                                    
                                    (13,103,543
                                    )
                                    
                                    
                                    8,446,661Increase
      (decrease) in cash and cash equivalents
                                    
                                    
                                    6,942,843
                                    
                                    
                                    
                                    1,475,082
                                    
                                    
                                    
                                    (2,129,749
                                    )Cash
      and cash equivalents, beginning of year
                                    
                                    
                                    14,795,060
                                    
                                    
                                    
                                    13,319,978
                                    
                                    
                                    
                                    15,449,727Cash
      and cash equivalents, end of year
                                    
                                    $
                                    21,737,903
                                    
                                    
                                    $
                                    14,795,060
                                    
                                    
                                    $
                                    13,319,978
 
 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,
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Supplementary Cash Flow
      Information:Interest
      paid
                  
                  $
                  6,248,728
                  
                  
                  $
                  5,982,416
                  
                  
                  $
                  5,771,234Income
      taxes paid
                  
                  
                  600,000
                  
                  
                  
                  886,156
                  
                  
                  
                  626,374Total
      increase in unrealized depreciation on available for sale
      securities
                  
                  
                  (551,125
                  )
                  
                  
                  (190,732
                  )
                  
                  
                  (140,725
                  )
  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 and
financial reporting policies of the Bank conform, in all material respects, to
accounting principles generally accepted in the United States 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 the “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.
 
 The
Company determines whether it has a controlling financial interest in an entity
by first evaluating whether the entity is a voting interest entity or a variable
interest entity under accounting principles generally accepted in the United
States.  Voting interest entities are entities, in which the total
equity investment at risk is sufficient to enable the entity to finance itself
independently and provides the equity holders with the obligation to absorb
losses, the right to receive residual returns and the right to make decisions
about the entity’s activities.  The Company consolidates voting
interest entities in which it has all, or at least a majority of, the voting
interest.  As defined in applicable accounting standards, variable
interest entities (VIE’s) are entities that lack one or more of the
characteristics of a voting interest entity.  A controlling financial
interest in an entity is present when an enterprise has a variable interest, or
a combination of variable interest, that will absorb a majority of the entity’s
expected losses, receive a majority of the entity’s expected residual returns,
or both.  The enterprise with a controlling financial interest, known
as the primary beneficiary, consolidates the VIE.  The Company’s
wholly owned subsidiary, Glen Burnie Statutory Trust I, is a VIE for which the
Company is not the primary beneficiary.  Accordingly, the accounts of
this entity are not included in the Company’s consolidated financial
statements.
 
 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.
  F-8
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 1.  Summary of
Significant Accounting Policies(continued)
 
 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.
 
 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 typically 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, Accounting by Creditors for Impairment of a
Loan.  The allocated component of the allowance for loan losses
reflects expected
  F-9
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 1.  Summary of
Significant Accounting Policies(continued)
 
 Any
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.  At December 31, 2008, there was approximately a $33,000 unallocated component
of the allowance reflected in the allowance for credit losses.
 
 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.  Loans converted to OREO through foreclosure proceedings
totaled $550,000 for the
year ended December 31, 2008.  No loans were converted to OREO in 2007
or 2006.  The Bank financed no sales of OREO for 2008, 2007, or
2006.
 
 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.
  F-10
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 1.  Summary of
Significant Accounting Policies(continued)
 
 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, 2008, 2007,
and 2006, certain loans existed which management considered impaired (See Note
4).  During the year ended December 31, 2008, management deemed
certain investment securities were impaired and recorded an impairment loss on
these securities (See Note 3).
 
 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.
 
 Temporary
differences which give rise to deferred tax benefits relate principally to
accrued deferred compensation, accumulated impairment losses on investment
securities, allowance for credit losses, unused alternative minimum tax credits,
net unrealized depreciation on investment securities available for sale, and
reserve for unfunded commitments.
 
 Temporary
differences which give rise to deferred tax liabilities relate principally to
accumulated depreciation, and accumulated securities discount
accretion.
 
 Credit Risk:
 
 The Bank
has unsecured deposits and Federal funds sold with several other financial
institutions in excess of amounts insured by the Federal Deposit Insurance
Corporation (“FDIC”).
 
 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 follows SFAS No. 123R, Share-Based Payments, for
accounting and reporting for stock-based compensation plans.  SFAS No.
123R defines a fair value at grant date based method of accounting for measuring
compensation expense for stock-based plans to be recognized in the statement of
income.
 
 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.
  F-11
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 1.  Summary of
Significant Accounting Policies(continued)
 
 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 $4,781,000,$5,368,000, and
$5,530,000 during the years ended December 31, 2008, 2007, and 2006,
respectively.
 
 Note
3.  Investment Securities
 
 Investment
securities are summarized as follows:
 
 Gross
                      
                      
                      GrossAmortized
                      
                      
                      Unrealized
                      
                      
                      Unrealized
                      
                      
                      FairDecember 31, 2008
                      
                      Cost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueAvailable for
      sale:U.S.
      Government agencies
                      
                      $
                      8,686,877
                      
                      
                      $
                      191,455
                      
                      
                      $
                      140,280
                      
                      
                      $
                      8,738,052State
      and municipal
                      
                      
                      31,466,012
                      
                      
                      
                      235,128
                      
                      
                      
                      979,935
                      
                      
                      
                      30,721,205Corporate
      trust preferred
                      
                      
                      2,168,928
                      
                      
                      
                      -
                      
                      
                      
                      971,426
                      
                      
                      
                      1,197,502Mortgage-backed
                      
                      
                      16,884,368
                      
                      
                      
                      413,682
                      
                      
                      
                      6,164
                      
                      
                      
                      17,291,886$
                      59,206,185
                      
                      
                      $
                      840,265
                      
                      
                      $
                      2,097,805
                      
                      
                      $
                      57,948,645
  Gross
                        
                        
                        GrossAmortized
                        
                        
                        Unrealized
                        
                        
                        Unrealized
                        
                        
                        FairDecember 31, 2007
                        
                        Cost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        ValueAvailable
      for sale:U.S.
      Government agencies
                        
                        $
                        8,489,126
                        
                        
                        $
                        44,593
                        
                        
                        $
                        761,906
                        
                        
                        $
                        7,771,813State
      and municipal
                        
                        
                        31,627,159
                        
                        
                        
                        272,449
                        
                        
                        
                        164,764
                        
                        
                        
                        31,734,844Corporate
      trust preferred
                        
                        
                        2,167,271
                        
                        
                        
                        253,283
                        
                        
                        
                        -
                        
                        
                        
                        2,420,554Mortgage-backed
                        
                        
                        35,605,038
                        
                        
                        
                        110,145
                        
                        
                        
                        460,213
                        
                        
                        
                        35,254,970$
                        77,888,594
                        
                        
                        $
                        680,470
                        
                        
                        $
                        1,386,883
                        
                        
                        $
                        77,182,181Held
      to maturity:State
      and municipal
                        
                        $
                        683,832
                        
                        
                        $
                        42,361
                        
                        
                        $
                        -
                        
                        
                        $
                        726,193$
                        683,832
                        
                        
                        $
                        42,361
                        
                        
                        $
                        -
                        
                        
                        $
                        726,193
  F-12
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 3.  Investment
Securities(continued)
 
 December 31, 2006
                                
                                Amortized
                                  Cost
                                
                                
                                Gross
                                  Unrealized
                                  Gains
                                
                                
                                Gross
                                  Unrealized
                                  Losses
                                
                                
                                Fair ValueAvailable for
      sale:U.S.
      Government agencies
                                
                                $
                                11,484,102
                                
                                
                                $
                                6,250
                                
                                
                                $
                                299,634
                                
                                
                                $
                                11,190,718State
      and municipal
                                
                                
                                36,127,782
                                
                                
                                
                                429,062
                                
                                
                                
                                179,207
                                
                                
                                
                                36,377,637Corporate
      trust preferred
                                
                                
                                3,079,958
                                
                                
                                
                                372,316
                                
                                
                                
                                -
                                
                                
                                
                                3,452,274Mortgage-backed
                                
                                
                                45,635,133
                                
                                
                                
                                39,152
                                
                                
                                
                                883,618
                                
                                
                                
                                44,790,667$
                                96,326,975
                                
                                
                                $
                                846,780
                                
                                
                                $
                                1,362,459
                                
                                
                                $
                                95,811,296Held
      to maturity:State
      and municipal
                                
                                $
                                683,363
                                
                                
                                $
                                46,597
                                
                                
                                $
                                -
                                
                                
                                $
                                729,960$
                                683,363
                                
                                
                                $
                                46,597
                                
                                
                                $
                                -
                                
                                
                                $
                                729,960
 
 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, 2008 are as follows:
 
 Securities available for sale:
 
 Less than 12 months
                  
                  
                  12 months or more
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Loss
                  
                  
                  Value
                  
                  
                  Loss
                  
                  
                  Value
                  
                  
                  LossObligations
      of U.S.Government
      agencies
                  
                  $
                  1,026,580
                  
                  
                  $
                  45,420
                  
                  
                  $
                  13,500
                  
                  
                  $
                  94,860
                  
                  
                  $
                  1,040,080
                  
                  
                  $
                  140,280State
      and Municipal
                  
                  
                  14,504,594
                  
                  
                  
                  670,225
                  
                  
                  
                  3,436,150
                  
                  
                  
                  309,710
                  
                  
                  
                  17,940,744
                  
                  
                  
                  979,935Corporate
      trust preferred
                  
                  
                  1,197,502
                  
                  
                  
                  971,426
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,197,502
                  
                  
                  
                  971,426Mortgaged-backed
                  
                  
                  1,001,761
                  
                  
                  
                  6,164
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,001,761
                  
                  
                  
                  6,164$
                  17,730,437
                  
                  
                  $
                  1,693,235
                  
                  
                  $
                  3,449,650
                  
                  
                  $
                  404,570
                  
                  
                  $
                  21,180,087
                  
                  
                  $
                  2,097,805
 
 In
September 2008, Freddie Mac and Fannie Mae government sponsored entities entered
into conservatorship agreements with the U.S. Treasury
Department.  This conservatorship precludes these entities from paying
preferred stock dividends.  As a result, the market values declined
significantly and the Company recorded an impairment loss of $2,816,000 during
the year ended December 31, 2008.  The write down represented 94% of
the initial investment in these securities.
 
 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 its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair
value.
 
 As of
December 31, 2008, management 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.  On December 31, 2008, the Bank held 14 investment securities
having continuous unrealized loss positions for more than 12
  F-13
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 3.  Investment
Securities(continued)
 
 months.  Management
has determined that all unrealized losses are either due to increases in market
interest rates over the yields available at the time the underlying securities
were purchased, current call features that are nearing, and the effect the
sub-prime market has had on all mortgaged-backed securities.  The Bank
has no mortgaged-backed securities collateralized by sub-prime
mortgages.  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, 2008, 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, 2008, 2007, and 2006 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 MaturityAmortized
                                  
                                  
                                  Fair
                                  
                                  
                                  Amortized
                                  
                                  
                                  FairDecember 31, 2008
                                  
                                  Cost
                                  
                                  
                                  Value
                                  
                                  
                                  Cost
                                  
                                  
                                  ValueDue
      within one year
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Due
      over one to five years
                                  
                                  
                                  4,577,077
                                  
                                  
                                  
                                  4,560,487Due
      over five to ten years
                                  
                                  
                                  5,563,224
                                  
                                  
                                  
                                  5,685,637Due
      over ten years
                                  
                                  
                                  32,181,516
                                  
                                  
                                  
                                  30,410,635Mortgage-backed,
      due in monthly installments
                                  
                                  
                                  16,884,368
                                  
                                  
                                  
                                  17,291,886$
                                  59,206,185
                                  
                                  
                                  $
                                  57,948,645December 31, 2007Due
      within one year
                                  
                                  $
                                  1,000,000
                                  
                                  
                                  $
                                  996,094
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Due
      over one to five years
                                  
                                  
                                  9,638,992
                                  
                                  
                                  
                                  9,635,177
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Due
      over five to ten years
                                  
                                  
                                  4,089,402
                                  
                                  
                                  
                                  4,068,131
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Due
      over ten years
                                  
                                  
                                  27,555,162
                                  
                                  
                                  
                                  27,227,809
                                  
                                  
                                  
                                  683,832
                                  
                                  
                                  
                                  726,193Mortgage-backed,
      due in monthly installments
                                  
                                  
                                  35,605,038
                                  
                                  
                                  
                                  35,254,970
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -$
                                  77,888,594
                                  
                                  
                                  $
                                  77,182,181
                                  
                                  
                                  $
                                  683,832
                                  
                                  
                                  $
                                  726,193December 31, 2006Due
      within one year
                                  
                                  $
                                  300,989
                                  
                                  
                                  $
                                  298,897
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Due
      over one to five years
                                  
                                  
                                  10,355,087
                                  
                                  
                                  
                                  10,221,909
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Due
      over five to ten years
                                  
                                  
                                  9,938,119
                                  
                                  
                                  
                                  9,826,970
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Due
      over ten years
                                  
                                  
                                  30,097,647
                                  
                                  
                                  
                                  30,672,853
                                  
                                  
                                  
                                  683,363
                                  
                                  
                                  
                                  729,960Mortgage-backed,
      due in monthly installments
                                  
                                  
                                  45,635,133
                                  
                                  
                                  
                                  44,790,667
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -$
                                  96,326,975
                                  
                                  
                                  $
                                  95,811,296
                                  
                                  
                                  $
                                  683,363
                                  
                                  
                                  $
                                  729,960
  F-14
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 3.  Investment
Securities(continued)
 
 Proceeds
from sales of available for sale securities prior to maturity totaled$25,977,280,$17,889,342, and
$22,431,078 for the years ended December 31, 2008, 2007, and 2006,
respectively.  The Bank realized gains of $195,780and losses of $4,850on those sales for
2008.  The Bank realized gains of $230,038 and losses of $109,959 on
those sales for 2007.  The Bank realized gains of $225,438 and losses
of $48,985 on those sales for 2006.  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 $75,942, $47,761, and $68,146
for the years ended December 31, 2008, 2007, and 2006,
respectively.
 
 In July
2008, the Company sold its remaining two positions in securities classified as
held to maturity.  Inasmuch as these positions were liquidated prior
to maturity in a manner which did not meet the prescribed requirements of SFAS
115, the Company may be precluded for a period of time from classifying any
securities positions as held to maturity.
 
 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:
 
 2008
                    
                    
                    2007
                    
                    
                    2006Mortgage:Residential
                    
                    $
                    87,707,878
                    
                    
                    $
                    76,780,857
                    
                    
                    $
                    68,340,050Commercial
                    
                    
                    76,152,837
                    
                    
                    
                    47,842,942
                    
                    
                    
                    53,164,479Construction
      and land development
                    
                    
                    6,589,673
                    
                    
                    
                    5,876,285
                    
                    
                    
                    1,609,132Demand
      and time
                    
                    
                    6,974,607
                    
                    
                    
                    5,184,349
                    
                    
                    
                    5,077,680Installment
                    
                    
                    60,593,752
                    
                    
                    
                    66,490,020
                    
                    
                    
                    67,726,942238,018,747
                    
                    
                    
                    202,174,453
                    
                    
                    
                    195,918,283Unearned
      income on loans
                    
                    
                    (864,436
                    )
                    
                    
                    (816,830
                    )
                    
                    
                    (742,585
                    )237,154,311
                    
                    
                    
                    201,357,623
                    
                    
                    
                    195,175,698Allowance
      for credit losses
                    
                    
                    (2,021,690
                    )
                    
                    
                    (1,604,491
                    )
                    
                    
                    (1,839,094
                    )$
                    235,132,621
                    
                    
                    $
                    199,753,132
                    
                    
                    $
                    193,336,604
 
 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 $43,970,000,$49,260,000, and
$52,539,000 of such loans at December 31, 2008, 2007, and 2006,
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,
2008, 2007, and 2006, the amounts of such loans outstanding totaled $4,344,974, $4,009,224, and
$3,293,148, respectively.  During 2008, loan additions and repayments
totaled $653,500 and
$317,750,
respectively.
  F-15
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 4.  Loans(continued)
 
 The
allowance for credit losses is as follows:
 
 2008
                    
                    
                    2007
                    
                    
                    2006Balance,
      beginning of year
                    
                    $
                    1,604,491
                    
                    
                    $
                    1,839,094
                    
                    
                    $
                    2,201,350Provision
      for credit losses
                    
                    
                    1,145,649
                    
                    
                    
                    50,000
                    
                    
                    
                    62,000Recoveries
                    
                    
                    352,933
                    
                    
                    
                    305,841
                    
                    
                    
                    357,803Loans
      charged off
                    
                    
                    (1,081,383
                    )
                    
                    
                    (590,444
                    )
                    
                    
                    (782,059
                    )Balance,
      end of year
                    
                    $
                    2,021,690
                    
                    
                    $
                    1,604,491
                    
                    
                    $
                    1,839,094
 
 Loans on
which the accrual of interest has been discontinued totaled $866,912, $212,416, and
$57,429 at December 31, 2008, 2007, and 2006, respectively.  Interest
that would have been accrued under the terms of these loans totaled $29,807, $20,037, and $10,658
for the years ended December 31, 2008, 2007, and 2006,
respectively.  Loans past due 90 days or more and still accruing
interest totaled $22,551, $639,982 and $1,751
at December 31, 2008, 2007 and 2006, respectively.
 
 Information
regarding loans classified by the Bank as impaired is summarized as
follows:
 
 2008
                            
                            
                            2007
                            
                            
                            2006Loans
      classified as impaired with avaluation
    allowance
                            
                            $
                            1,387,043
                            
                            
                            $
                            212,416
                            
                            
                            $
                            57,429Allowance
      for credit losses onimpaired loans
                            
                            
                            629,036
                            
                            
                            
                            159,312
                            
                            
                            
                            35,423Average
      balance of impaired loans
                            
                            
                            1,458,245
                            
                            
                            
                            95,605
                            
                            
                            
                            6,846
  Following
is a summary of cash receipts on impaired loans and how they were
applied:
  Cash
      receipts applied to reduce principal balance
                    
                    $
                    131,730
                    
                    
                    $
                    -
                    
                    
                    $
                    9,723Cash
      receipts recognized as interest income
                    
                    
                    41,062
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      cash receipts
                    
                    $
                    172,792
                    
                    
                    $
                    -
                    
                    
                    $
                    9,723
 
 No
troubled debt restructurings transpired in 2008.  All prior
investments in troubled debt were performing under the terms of the modified
agreement.
 
 At
December 31, 2007, the recorded investment in new troubled debt restructurings
totaled $578,345.  The allowance for credit losses relating to
troubled debt restructurings totaled $0 at December 31, 2007.  The
average recorded investment in troubled debt restructurings totaled $611,379 for
the year ended December 31, 2007.  The Bank recognized $51,742 in
interest income on troubled debt restructurings for cash payments received in
2007.  All prior investments in troubled debt were performing under
the terms of the modified agreement.
 
 No
troubled debt restructurings transpired in 2006.  All prior
investments in troubled debt were performing under the terms of the modified
agreement.
 
 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
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006Land
                      
                      
                      $
                      684,977
                      
                      
                      $
                      684,977
                      
                      
                      $
                      684,977Buildings
                      5-50
      years
                      
                      
                      4,796,309
                      
                      
                      
                      4,738,733
                      
                      
                      
                      4,710,503Equipment
      and fixtures
                      5-30
      years
                      
                      
                      5,056,015
                      
                      
                      
                      5,450,210
                      
                      
                      
                      5,456,049Construction
      in progress
                      
                      
                      
                      121,973
                      
                      
                      
                      60,226
                      
                      
                      
                      26,08810,659,274
                      
                      
                      
                      10,934,146
                      
                      
                      
                      10,877,617Accumulated
      depreciation
                      
                      
                      
                      (7,559,826
                      )
                      
                      
                      (7,846,238
                      )
                      
                      
                      (7,471,603
                      )$
                      3,099,448
                      
                      
                      $
                      3,087,908
                      
                      
                      $
                      3,406,014
 
 Construction
in progress at December 31, 2008 relates primarily to a future branch
site.
 
 Depreciation
expense totaled $347,040, $412,198, and
$450,278 for the years ended December 31, 2008, 2007, and 2006,
respectively.  Amortization of software and intangible assets totaled
$96,312,$109,797, and $97,954
for the years ended December 31, 2008, 2007, and 2006,
respectively.
 
 The Bank
leases its South Crain Highway, Severna Park, and Linthicum
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 were
$30,000 per year through September 2012.  Minimum lease obligations
under the Linthicum branch are $92,700 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
all these leasing arrangements.  Rent expense totaled $257,467, $252,087, and
$236,166 for the years ended December 31, 2008, 2007, and 2006,
respectively.
 
 Note
6.  Short-term borrowings
 
 Short-term
borrowings are as follows:
 
 2008
                    
                    
                    2007
                    
                    
                    2006Notes
      payable - U.S. Treasury
                    
                    $
                    629,855
                    
                    
                    $
                    502,529
                    
                    
                    $
                    545,349
 
 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, $500,000 and
$1,000,000 at December 31, 2008, 2007, and 2006, respectively.
 
 The Bank
owned 17,676 shares of common stock of the FHLB at December 31,
2008.  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.  The credit available under this facility is
determined at 20% of the Bank’s total assets, or approximately $66,010,000 at
December 31, 2008.  Long-term advances totaled $27,000,000 under this
credit arrangement at December 31, 2008 (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 $1,924,000,$1,616,000and$1,047,000for 2008, 2007, and
2006, respectively.
  F-17
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 6.  Short-term
borrowings(continued)
 
 The Bank
also has available $9,000,000 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, 2008, 2007, and 2006.
 
 Note
7.  Long-term Borrowings
 
 Long-term borrowings are as
follows:
 
 2008
                      
                      
                      2007
                      
                      
                      2006Federal
      Home Loan Bank of Atlanta, convertible advances
                      
                      $
                      27,000,000
                      
                      
                      $
                      17,000,000
                      
                      
                      $
                      7,000,000Mortgage
      payable-individual, interest at 7%,  payments of $3,483,
      including principal and interest, due monthly through  October
      2010, secured by real estate
                      
                      
                      71,712
                      
                      
                      
                      107,135
                      
                      
                      
                      140,170$
                      27,071,712
                      
                      
                      $
                      17,107,135
                      
                      
                      $
                      7,140,170
 
 The
Federal Home Loan Bank of Atlanta, convertible advances total includes the
following:
 
 A
$7,000,000 convertible advance issued in 2000, which 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.
 
 A
$10,000,000 convertible advance issued in 2007, which has a final maturity of
November, 1, 2017, but is callable monthly.  This advance has a 3.28%
interest rate, with interest payable monthly.  The proceeds of the
convertible advance were used to fund loans and purchase investment
securities.
 
 A
$5,000,000 convertible advance issued in 2008, which has a final maturity of
July 23, 2018, but is callable quarterly starting July 23, 2009.  This
advance has a 2.73% interest rate, with interest payable
quarterly.  The proceeds of the convertible advance were used to fund
loans.
 
 A
$5,000,000 convertible advance issued in 2008, which has a final maturity of
August 22, 2018, but is callable quarterly starting August 22,
2011.  This advance has a 3.34% interest rate, with interest payable
quarterly.  The proceeds of the convertible advance were used to fund
loans.
 
 At December 31, 2008, the scheduled
maturities of long-term borrowings are approximately as follows:
 
 20082009
                    
                    $
                    38,0002010
                    
                    
                    7,034,0002014
      and thereafter
                    
                    
                    20,000,000$
                    27,072,000
  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.
 
 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 (the “Board”).   In April
2005, the Board amended its risk-based capital standards for bank holding
companies to allow the continued inclusion of outstanding and prospective
issuances of trust preferred securities in the Tier 1 capital of bank holding
companies, subject to stricter quantitative limits and qualitative
standards.  The Board also revised the quantitative limits applied to
the aggregate amount of cumulative perpetual preferred stock, trust preferred
securities, and minority interest in the equity accounts of most consolidated
subsidiaries (collectively, restricted core capital elements) included in the
Tier 1 capital of bank holding companies.  The new quantitative limits
become effective after a five-year transition period, ending March 31,
2009.  In addition, the Board also revised the qualitative standards
for capital instruments included in regulatory capital consistent with
longstanding Board policies.  The Board has adopted this final rule to
address supervisory concerns, competitive equity considerations and changes in
generally accepted accounting principles and to strengthen the definition of
regulatory capital for bank holding companies.  The Company does not
expect that the quantitative limits will preclude it from including the $5.0
million in trust preferred securities in Tier 1 capital in the
future.
 
 Note
9.  Deposits
 
 Major
classifications of interest-bearing deposits are as follows:
 
 2008
                      
                      
                      2007
                      
                      
                      2006NOW
      and SuperNOW
                      
                      $
                      21,079,314
                      
                      
                      $
                      23,154,540
                      
                      
                      $
                      22,274,015Money
      Market
                      
                      
                      12,764,167
                      
                      
                      
                      12,948,342
                      
                      
                      
                      15,341,221Savings
                      
                      
                      45,801,719
                      
                      
                      
                      47,381,613
                      
                      
                      
                      50,234,238Certificates
      of Deposit, $100,000 or more
                      
                      
                      27,882,777
                      
                      
                      
                      20,654,230
                      
                      
                      
                      22,380,391Other
      time deposits
                      
                      
                      98,700,862
                      
                      
                      
                      80,017,668
                      
                      
                      
                      89,874,294$
                      206,228,839
                      
                      
                      $
                      184,156,393
                      
                      
                      $
                      200,104,159
  F-19
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 9.  Deposits(continued)
 
 Interest expense on deposits is as
follows:
 
 2008
                      
                      
                      2007
                      
                      
                      2006NOW
      and SuperNOW
                      
                      $
                      30,618
                      
                      
                      $
                      47,885
                      
                      
                      $
                      52,047Money
      Market
                      
                      
                      62,475
                      
                      
                      
                      103,472
                      
                      
                      
                      106,264Savings
                      
                      
                      153,301
                      
                      
                      
                      214,998
                      
                      
                      
                      222,018Certificates
      of Deposit, $100,000 or more
                      
                      
                      976,446
                      
                      
                      
                      915,889
                      
                      
                      
                      859,707Other
      time deposits
                      
                      
                      3,557,345
                      
                      
                      
                      3,542,181
                      
                      
                      
                      3,540,835$
                      4,780,185
                      
                      
                      $
                      4,824,425
                      
                      
                      $
                      4,780,871
 
 At
December 31, 2008, the scheduled maturities of time deposits are approximately
as follows:
 
 20082009
                    
                    $
                    68,385,0002010
                    
                    
                    34,732,0002011
                    
                    
                    5,444,0002012
                    
                    
                    3,146,0002013
                    
                    
                    13,626,0002014
      and thereafter
                    
                    
                    1,251,000$
                    126,584,000
 
 Deposit
balances of executive officers and directors and their affiliated interests
totaled approximately $2,611,000,$2,213,000, and
$2,308,000 at December 31, 2008, 2007, and 2006, respectively.
 
 The Bank
had no brokered deposits at December 31, 2008, 2007, and 2006.
  Note
10.  Income Taxes
  The
components of income tax expense for the years ended December 31, 2008, 2007,
and 2006 are    as follows:
 
 2008
                    
                    
                    2007
                    
                    
                    2006Current:Federal
                    
                    $
                    655,129
                    
                    
                    $
                    646,449
                    
                    
                    $
                    493,052State
                    
                    
                    271,112
                    
                    
                    
                    199,611
                    
                    
                    
                    167,706Total
      current
                    
                    
                    926,241
                    
                    
                    
                    846,060
                    
                    
                    
                    660,758Deferred
      income taxes (benefits):Federal
                    
                    
                    (1,275,873
                    )
                    
                    
                    (80,277
                    )
                    
                    
                    25,655State
                    
                    
                    (329,730
                    )
                    
                    
                    (7,443
                    )
                    
                    
                    702Total
      deferred
                    
                    
                    (1,605,603
                    )
                    
                    
                    (87,720
                    )
                    
                    
                    26,357Income
      tax (benefit) expense
                    
                    $
                    (679,362
                    )
                    
                    $
                    758,340
                    
                    
                    $
                    687,115
 
 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, 2008, 2007, and
2006 is as follows:
 
 2008
                    
                    
                    2007
                    
                    
                    2006(Loss)
      income before income taxes (benefit)
                    
                    $
                    (275,400
                    )
                    
                    $
                    3,540,481
                    
                    
                    $
                    3,407,160Taxes
      computed at Federal income tax rate
                    
                    $
                    (93,636
                    )
                    
                    $
                    1,203,764
                    
                    
                    $
                    1,158,434Increase
      (decrease) resulting from:Tax-exempt
      income
                    
                    
                    (547,038
                    )
                    
                    
                    (581,208
                    )
                    
                    
                    (610,541
                    )State
      income taxes, net of Federal income tax benefit
                    
                    
                    (38,688
                    )
                    
                    
                    126,832
                    
                    
                    
                    110,686Other
                    
                    
                    -
                    
                    
                    
                    8,952
                    
                    
                    
                    28,536Income
      tax (benefit) expense
                    
                    $
                    (679,362
                    )
                    
                    $
                    758,340
                    
                    
                    $
                    687,115
 
 The
relationship between pre-tax loss and income tax benefits for 2008 is affected
by increased deferred tax benefits attributable to tax methodologies utilized
for loan loss provisions.
 
 The
components of the net deferred income tax benefits as of December 31, 2008,
2007, and 2006 are as follows:
 
 2008
                    
                    
                    2007
                    
                    
                    2006Deferred
      income tax benefits:Accrued
      deferred compensation
                    
                    $
                    82,049
                    
                    
                    $
                    -
                    
                    
                    $
                    -Impairment
      loss on investment securities
                    
                    
                    1,110,771
                    
                    
                    
                    -
                    
                    
                    
                    -Allowance
      for credit losses
                    
                    
                    563,737
                    
                    
                    
                    80,300
                    
                    
                    
                    90,186Alternative
      minimum tax credits
                    
                    
                    66,371
                    
                    
                    
                    94,642
                    
                    
                    
                    37,678Net
      unrealized depreciation on investment securities available for
      sale
                    
                    
                    500,186
                    
                    
                    
                    272,816
                    
                    
                    
                    199,155Reserve
      for unfunded commitments
                    
                    
                    78,890
                    
                    
                    
                    78,890
                    
                    
                    
                    77,240Total
      deferred income tax benefits
                    
                    
                    2,402,004
                    
                    
                    
                    526,648
                    
                    
                    
                    404,259Deferred
      income tax liabilities:Accumulated
      depreciation
                    
                    
                    41,113
                    
                    
                    
                    15,769
                    
                    
                    
                    42,991Accumulated
      securities discount accretion
                    
                    
                    74,408
                    
                    
                    
                    57,367
                    
                    
                    
                    69,137Total
      deferred income tax liabilities
                    
                    
                    115,521
                    
                    
                    
                    73,136
                    
                    
                    
                    112,128Net
      deferred income tax benefits
                    
                    $
                    2,286,483
                    
                    
                    $
                    453,512
                    
                    
                    $
                    292,131
 
 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.  Annual contributions, included in employee benefit
expense, totaled $220,000, $201,321 and
$200,005 for the years ended December 31, 2008, 2007 and 2006,
respectively.  The Bank is also making additional contributions under
this plan for the benefit of certain employees, whose retirement funds were
negatively affected by the termination of a prior defined benefit pension
plan.  These additional contributions, also included in employee
benefit expense, totaled $33,452,$37,105, and$47,495for the years ended
December 31, 2008, 2007, and 2006, respectively.
  F-21
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
11.  Pension and Profit Sharing Plans (continued)
 
 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 $116,027,$340,254, and $335,724
for the years ended December 31, 2008, 2007, and 2006,
respectively.
 
 Note
12.  Post-Retirement Health Care Benefits
 
 The Bank
has previously provided 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
terminated on December 31, 2006.  The plan was funded only to the
extent of the Bank’s monthly payments of insurance premiums, which totaled
$50,483 for the year ended December 31,2006.
 
 The
following table sets forth the financial status of the plan at December 31,
2006:
 
 Net
post-retirement benefit income for the year ended December 31, 2006 includes the
following:
 
 2006Interest
      cost
                    
                    $
                    3,081Amortization
      of net gain
                    
                    
                    (37,723
                    )Net
      post-retirement benefit income
                    
                    $
                    (34,642
                    )
 
 Assumptions
used in the accounting for net post-retirement benefit expense were as
follows:
 
 2006Health
      care cost trend rate
                    
                    
                    5.0
                    %Discount
      rate
                    
                    
                    6.5
                    %
 
 If the
assumed health cost trend rate were increased to 6% for 2006, the total of the
service and interest cost components of net periodic post-retirement health care
income cost would increase by $0 to ($34,642) as of for the year ended December
31, 2006.
 
 Note
13.  Other Benefit Plans
 
 The Bank
has life insurance contracts on several officers and is the sole owner and
beneficiary of the policies.  Cash value totaled $7,434,573, $7,161,403, and
$6,892,455 at December 31, 2008, 2007, and 2006, respectively.  Income
on their insurance investment totaled $273,170, $268,948, and
$210,653 for 2008, 2007, and 2006, respectively.
 
 The Bank
has an unfunded grantor trust, as part of a change in control severance plan,
covering substantially all employees.  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.
  F-22
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
14.  Other Operating Expenses
 
 Other operating expenses include the
following:
 
 2008
                    
                    
                    2007
                    
                    
                    2006Professional
      services
                    
                    $
                    485,685
                    
                    
                    $
                    479,877
                    
                    
                    $
                    434,465Stationery,
      printing and supplies
                    
                    
                    214,815
                    
                    
                    
                    225,709
                    
                    
                    
                    209,385Postage
      and delivery
                    
                    
                    187,017
                    
                    
                    
                    222,642
                    
                    
                    
                    224,856FDIC
      assessment
                    
                    
                    35,544
                    
                    
                    
                    31,605
                    
                    
                    
                    33,847Directors
      fees and expenses
                    
                    
                    198,939
                    
                    
                    
                    210,097
                    
                    
                    
                    207,796Marketing
                    
                    
                    255,921
                    
                    
                    
                    236,917
                    
                    
                    
                    232,258Data
      processing
                    
                    
                    100,562
                    
                    
                    
                    109,797
                    
                    
                    
                    104,976Correspondent
      bank services
                    
                    
                    60,706
                    
                    
                    
                    95,407
                    
                    
                    
                    89,924Telephone
                    
                    
                    160,242
                    
                    
                    
                    157,811
                    
                    
                    
                    165,529Liability
      insurance
                    
                    
                    71,497
                    
                    
                    
                    67,959
                    
                    
                    
                    81,508Losses
      and expenses on real estate owned (OREO)
                    
                    
                    8,343
                    
                    
                    
                    2,905
                    
                    
                    
                    922Other
      ATM expense
                    
                    
                    232,670
                    
                    
                    
                    242,429
                    
                    
                    
                    235,116Other
                    
                    
                    396,749
                    
                    
                    
                    293,770
                    
                    
                    
                    343,296$
                    2,408,690
                    
                    
                    $
                    2,376,925
                    
                    
                    $
                    2,363,878
 
 Note
15.  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:
 
 2008
                    
                    
                    2007
                    
                    
                    2006Loan
      commitments:Construction
      and land development
                    
                    $
                    400,000
                    
                    
                    $
                    -
                    
                    
                    $
                    482,000Other
      mortgage loans
                    
                    
                    2,590,000
                    
                    
                    
                    685,000
                    
                    
                    
                    528,000$
                    2,990,000
                    
                    
                    $
                    685,000
                    
                    
                    $
                    1,010,000Unused
      lines of credit:Home-equity
      lines
                    
                    $
                    6,395,182
                    
                    
                    $
                    7,507,778
                    
                    
                    $
                    6,410,947Commercial
      lines
                    
                    
                    13,380,292
                    
                    
                    
                    18,335,771
                    
                    
                    
                    10,805,449Unsecured
      consumer lines
                    
                    
                    785,487
                    
                    
                    
                    815,960
                    
                    
                    
                    809,802$
                    20,560,961
                    
                    
                    $
                    26,659,509
                    
                    
                    $
                    18,026,198Letters
      of credit:
                    
                    $
                    196,530
                    
                    
                    $
                    197,000
                    
                    
                    $
                    296,136
 
 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
  F-23
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 15.  Commitments and
Contingencies(continued)
 
 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, 2008, the Bank has accrued
$200,000 as a reserve
for losses on unfunded commitments related to these financial instruments with
off balance sheet risk, which is included in other liabilities.
 
 Note
16.  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 $12,430,000,$11,363,000, and
$9,367,000 at December 31, 2008, 2007, and 2006, respectively, based on the
earnings restrictions and minimum capital ratio requirements noted
below.
 
 Stock
repurchase program:
 
 In
February 2008, the Company instituted a Stock Repurchase
Program.  Under the program, the Company may spend up to $1,000,000 to
repurchase its outstanding stock.  The repurchases may be made from
time to time at a price not to exceed $12.50 per share.  During 2008,
the Company repurchased 50,300 shares at an average price of
$11.48.  In December 2008, the Company extended the program until
December 31, 2009 and replenished the repurchase funds to
$1,000,000.
 
 Employee
stock purchase benefit plans:
 
 The
Company has a stock-based compensation plan, which is described
below.  As determined under SFAS No. 123R utilizing the Black-Scholes
option pricing model, management of the Company has not recorded any
compensation expense for options issued during the years ended December 31, 2007
and 2006, as there would be no material impact in the reported net
income.  There were no options issued during the year ended December
31, 2008.
 
 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 are vested when granted and will expire no later than
27 months from the grant date or upon termination of
employment.  Activity under this plan is as follows:
  F-24
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 16.  Stockholders’
Equity(continued)
 
 GrantShares
                    
                    
                    PriceOutstanding
      December 31, 2005
                    
                    
                    -Granted
      on June 8, 2006, expiring December 11, 2006
                    
                    
                    4,755
                    
                    
                    $
                    14.15Exercised
                    
                    
                    (2,395
                    )Expired
                    
                    
                    (2,360
                    )
                    
                    $
                    14.15Outstanding
      December 31, 2006
                    
                    
                    -Granted
      on August 9, 2007, expiring December 10, 2007
                    
                    
                    3,126
                    
                    
                    $
                    14.02Exercised
                    
                    
                    (1,041
                    )Expired
                    
                    
                    (2,085
                    )
                    
                    $
                    14.02Outstanding
      December 31, 2007
                    
                    
                    -
 
 At
December 31, 2008, shares of common stock reserved for issuance under the plan
totaled 48,011.
 
 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
2008, 2007, and 2006, shares of common stock purchased under the plantotaled 20,003, 12,791, and 15,113,
respectively.  At December 31, 2008, shares of common stock reserved
for issuance under the plan totaled 145,844.
 
 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, 2008, 2007, and 2006.
 
 At
December 31, 2008, shares of common stock reserved for issuance under the plan
totaled 313,919.
  F-25
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 16.  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,
2008, 2007, and 2006, that both the Company and Bank meet all capital adequacy
requirements to which they are subject.
 
 The Bank
has been notified by its regulator that, as of its most recent regulatory
examination, it is regarded 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 I capital for the Company under Federal Reserve Board
guidelines.
  F-26




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 16.  Stockholders’
Equity(continued)
 
 A
comparison of capital as of December 31, 2008, 2007, and 2006 with minimum
requirements is approximately as follows:
  To Be Well CapitalizedFor Capital
                                                                      
                                                                      
                                                                      Under Prompt CorrectiveActual
                                                                      
                                                                      
                                                                      Adequacy Purposes
                                                                      
                                                                      
                                                                      Action ProvisionsAmount
                                                                      
                                                                      
                                                                      Ratio
                                                                      
                                                                      
                                                                      Amount
                                                                      
                                                                      
                                                                      Ratio
                                                                      
                                                                      
                                                                      Amount
                                                                      
                                                                      
                                                                      RatioAs
      of December 31, 2008Total
      Capital(to
      Risk Weighted Assets)Company
                                                                      
                                                                      $
                                                                      35,687,000
                                                                      
                                                                      
                                                                      
                                                                      14.9
                                                                      %
                                                                      
                                                                      $
                                                                      19,122,000
                                                                      
                                                                      
                                                                      
                                                                      8.0
                                                                      %
                                                                      
                                                                      
                                                                      N/ABank
                                                                      
                                                                      
                                                                      35,707,000
                                                                      
                                                                      
                                                                      
                                                                      15.0
                                                                      %
                                                                      
                                                                      
                                                                      19,107,000
                                                                      
                                                                      
                                                                      
                                                                      8.0
                                                                      %
                                                                      
                                                                      $
                                                                      23,884,000
                                                                      
                                                                      
                                                                      
                                                                      10.0
                                                                      %Tier
      I Capital(to
      Risk Weighted Assets)Company
                                                                      
                                                                      
                                                                      33,665,000
                                                                      
                                                                      
                                                                      
                                                                      14.1
                                                                      %
                                                                      
                                                                      
                                                                      9,564,000
                                                                      
                                                                      
                                                                      
                                                                      4.0
                                                                      %
                                                                      
                                                                      
                                                                      N/ABank
                                                                      
                                                                      
                                                                      33,485,000
                                                                      
                                                                      
                                                                      
                                                                      14.0
                                                                      %
                                                                      
                                                                      
                                                                      9,553,000
                                                                      
                                                                      
                                                                      
                                                                      4.0
                                                                      %
                                                                      
                                                                      
                                                                      14,330,000
                                                                      
                                                                      
                                                                      
                                                                      6.0
                                                                      %Tier
      I Capital(to
      Average Assets)Company
                                                                      
                                                                      
                                                                      33,665,000
                                                                      
                                                                      
                                                                      
                                                                      10.5
                                                                      %
                                                                      
                                                                      
                                                                      12,825,000
                                                                      
                                                                      
                                                                      
                                                                      4.0
                                                                      %
                                                                      
                                                                      
                                                                      N/ABank
                                                                      
                                                                      
                                                                      33,485,000
                                                                      
                                                                      
                                                                      
                                                                      10.2
                                                                      %
                                                                      
                                                                      
                                                                      13,196,000
                                                                      
                                                                      
                                                                      
                                                                      4.0
                                                                      %
                                                                      
                                                                      
                                                                      16,495,000
                                                                      
                                                                      
                                                                      
                                                                      5.0
                                                                      %As
      of December 31, 2007Total
      Capital(to
      Risk Weighted Assets)Company
                                                                      
                                                                      $
                                                                      36,774,000
                                                                      
                                                                      
                                                                      
                                                                      17.6
                                                                      %
                                                                      
                                                                      $
                                                                      16,744,000
                                                                      
                                                                      
                                                                      
                                                                      8.0
                                                                      %
                                                                      
                                                                      
                                                                      N/ABank
                                                                      
                                                                      
                                                                      36,592,000
                                                                      
                                                                      
                                                                      
                                                                      17.5
                                                                      %
                                                                      
                                                                      
                                                                      16,728,000
                                                                      
                                                                      
                                                                      
                                                                      8.0
                                                                      %
                                                                      
                                                                      $
                                                                      20,910,000
                                                                      
                                                                      
                                                                      
                                                                      10.0
                                                                      %Tier
      I Capital(to
      Risk Weighted Assets)Company
                                                                      
                                                                      
                                                                      35,170,000
                                                                      
                                                                      
                                                                      
                                                                      16.8
                                                                      %
                                                                      
                                                                      
                                                                      8,374,000
                                                                      
                                                                      
                                                                      
                                                                      4.0
                                                                      %
                                                                      
                                                                      
                                                                      N/ABank
                                                                      
                                                                      
                                                                      34,788,000
                                                                      
                                                                      
                                                                      
                                                                      16.6
                                                                      %
                                                                      
                                                                      
                                                                      8,363,000
                                                                      
                                                                      
                                                                      
                                                                      4.0
                                                                      %
                                                                      
                                                                      
                                                                      12,544,000
                                                                      
                                                                      
                                                                      
                                                                      6.0
                                                                      %Tier
      I Capital(to
      Average Assets)Company
                                                                      
                                                                      
                                                                      35,170,000
                                                                      
                                                                      
                                                                      
                                                                      11.3
                                                                      %
                                                                      
                                                                      
                                                                      12,494,000
                                                                      
                                                                      
                                                                      
                                                                      4.0
                                                                      %
                                                                      
                                                                      
                                                                      N/ABank
                                                                      
                                                                      
                                                                      34,788,000
                                                                      
                                                                      
                                                                      
                                                                      11.3
                                                                      %
                                                                      
                                                                      
                                                                      12,271,000
                                                                      
                                                                      
                                                                      
                                                                      4.0
                                                                      %
                                                                      
                                                                      
                                                                      15,339,000
                                                                      
                                                                      
                                                                      
                                                                      5.0
                                                                      %
  F-27
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 16.  Stockholders’
Equity(continued)
 
 To Be Well CapitalizedFor Capital
                                
                                
                                Under Prompt CorrectiveActual
                                
                                
                                Adequacy Purposes
                                
                                
                                Action ProvisionsAmount
                                
                                
                                Ratio
                                
                                
                                Amount
                                
                                
                                Ratio
                                
                                
                                Amount
                                
                                
                                RatioAs
      of December 31, 2006Total
      Capital(to
      Risk Weighted Assets)Company
                                
                                $
                                35,357,000
                                
                                
                                
                                17.1
                                %
                                
                                $
                                16,570,000
                                
                                
                                
                                8.0
                                %
                                
                                N/ABank
                                
                                
                                35,240,000
                                
                                
                                
                                17.0
                                %
                                
                                
                                16,564,000
                                
                                
                                
                                8.0
                                %
                                
                                $
                                20,705,000
                                
                                
                                
                                10.0
                                %Tier
      I Capital(to
      Risk Weighted Assets)Company
                                
                                
                                33,518,000
                                
                                
                                
                                16.2
                                %
                                
                                
                                8,281,000
                                
                                
                                
                                4.0
                                %
                                
                                
                                N/ABank
                                
                                
                                33,201,000
                                
                                
                                
                                16.0
                                %
                                
                                
                                8,285,000
                                
                                
                                
                                4.0
                                %
                                
                                
                                12,427,000
                                
                                
                                
                                6.0
                                %Tier
      I Capital(to
      Average Assets)Company
                                
                                
                                33,518,000
                                
                                
                                
                                10.3
                                %
                                
                                
                                13,017,000
                                
                                
                                
                                4.0
                                %
                                
                                
                                N/ABank
                                
                                
                                33,201,000
                                
                                
                                
                                10.2
                                %
                                
                                
                                13,046,000
                                
                                
                                
                                4.0
                                %
                                
                                
                                16,307,000
                                
                                
                                
                                5.0
                                %
 
 Note
17.  Earnings Per Common Share
 
 Earnings
per common share are calculated as follows:
 
 2008
                    
                    
                    2007
                    
                    
                    2006Basic:Net
      income
                    
                    $
                    403,962
                    
                    
                    $
                    2,782,141
                    
                    
                    $
                    2,720,045Weighted
      average common shares outstanding
                    
                    
                    2,981,124
                    
                    
                    
                    2,988,796
                    
                    
                    
                    2,972,362Basic
      net income per share
                    
                    $
                    0.14
                    
                    
                    $
                    0.93
                    
                    
                    $
                    0.92
 
 Diluted
earnings per share calculations were not required for 2008, 2007, and 2006 as
there were no options outstanding at December 31, 2008, 2007, and
2006.
 
 In
January 2008, the Company declared a six for five stock split effected in the
form of a 20% stock dividend.
  F-28
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
18.  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:
 
 2008
                      
                      
                      2007
                      
                      
                      2006Carrying
                      
                      
                      Fair
                      
                      
                      Carrying
                      
                      
                      Fair
                      
                      
                      Carrying
                      
                      
                      FairAmount
                      
                      
                      Value
                      
                      
                      Amount
                      
                      
                      Value
                      
                      
                      Amount
                      
                      
                      ValueFinancial
      assets:Cash
      and due from banks
                      
                      $
                      6,960,377
                      
                      
                      $
                      6,960,377
                      
                      
                      $
                      8,220,582
                      
                      
                      $
                      8,220,582
                      
                      
                      $
                      9,005,691
                      
                      
                      $
                      9,005,691Interest-bearing
      deposits in other financial institutions
                      
                      
                      7,883,816
                      
                      
                      
                      7,883,816
                      
                      
                      
                      5,847,562
                      
                      
                      
                      5,847,562
                      
                      
                      
                      342,309
                      
                      
                      
                      342,309Federal
      funds sold
                      
                      
                      6,393,710
                      
                      
                      
                      6,393,710
                      
                      
                      
                      726,916
                      
                      
                      
                      726,916
                      
                      
                      
                      3,971,978
                      
                      
                      
                      3,971,978Investment
      securities available for sale
                      
                      
                      57,948,645
                      
                      
                      
                      57,948,645
                      
                      
                      
                      77,182,181
                      
                      
                      
                      77,182,181
                      
                      
                      
                      95,811,296
                      
                      
                      
                      95,811,296Investment
      securities held to maturity
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      683,832
                      
                      
                      
                      726,193
                      
                      
                      
                      683,363
                      
                      
                      
                      729,960Federal
      Home Loan Bank Stock
                      
                      
                      1,767,600
                      
                      
                      
                      1,767,600
                      
                      
                      
                      1,381,900
                      
                      
                      
                      1,381,900
                      
                      
                      
                      928,000
                      
                      
                      
                      928,000Maryland
      Financial Bank Stock
                      
                      
                      100,000
                      
                      
                      
                      100,000
                      
                      
                      
                      100,000
                      
                      
                      
                      100,000
                      
                      
                      
                      100,000
                      
                      
                      
                      100,000Common
      stock-Statutory Trust I
                      
                      
                      155,000
                      
                      
                      
                      155,000
                      
                      
                      
                      155,000
                      
                      
                      
                      155,000
                      
                      
                      
                      155,000
                      
                      
                      
                      155,000Ground
      rents
                      
                      
                      184,900
                      
                      
                      
                      184,900
                      
                      
                      
                      202,900
                      
                      
                      
                      202,900
                      
                      
                      
                      219,100
                      
                      
                      
                      219,100Loans,
      less allowance forcredit
      losses
                      
                      
                      235,132,621
                      
                      
                      
                      239,446,000
                      
                      
                      
                      199,753,132
                      
                      
                      
                      203,326,000
                      
                      
                      
                      193,336,604
                      
                      
                      
                      192,492,000Accrued
      interest receivable
                      
                      
                      1,680,392
                      
                      
                      
                      1,680,392
                      
                      
                      
                      1,508,640
                      
                      
                      
                      1,508,640
                      
                      
                      
                      1,627,433
                      
                      
                      
                      1,627,433Financial
      liabilities:Deposits
                      
                      
                      269,767,598
                      
                      
                      
                      272,091,000
                      
                      
                      
                      252,916,766
                      
                      
                      
                      251,088,000
                      
                      
                      
                      274,833,457
                      
                      
                      
                      273,033,000Short-term
      borrowings
                      
                      
                      629,855
                      
                      
                      
                      629,855
                      
                      
                      
                      502,529
                      
                      
                      
                      502,529
                      
                      
                      
                      545,349
                      
                      
                      
                      545,349Long-term
      borrowings
                      
                      
                      27,071,712
                      
                      
                      
                      27,162,000
                      
                      
                      
                      17,107,135
                      
                      
                      
                      16,982,135
                      
                      
                      
                      7,140,170
                      
                      
                      
                      7,151,651Dividends
      payable
                      
                      
                      385,794
                      
                      
                      
                      385,794
                      
                      
                      
                      385,010
                      
                      
                      
                      385,010
                      
                      
                      
                      366,580
                      
                      
                      
                      366,580Accrued
      interest payable
                      
                      
                      139,579
                      
                      
                      
                      139,579
                      
                      
                      
                      134,274
                      
                      
                      
                      134,274
                      
                      
                      
                      145,642
                      
                      
                      
                      145,642Accrued
      interest payable on junior subordinated debentures
                      
                      
                      171,518
                      
                      
                      
                      171,518
                      
                      
                      
                      171,518
                      
                      
                      
                      171,518
                      
                      
                      
                      171,518
                      
                      
                      
                      171,518Junior
      subordinated debentures owed to unconsolidated subsidiary
      trust
                      
                      
                      5,155,000
                      
                      
                      
                      5,281,827
                      
                      
                      
                      5,155,000
                      
                      
                      
                      6,031,097
                      
                      
                      
                      5,155,000
                      
                      
                      
                      5,155,000Unrecognized
      financial instruments:Commitments
      to extend credit
                      
                      
                      23,550,961
                      
                      
                      
                      23,550,961
                      
                      
                      
                      27,344,509
                      
                      
                      
                      27,344,509
                      
                      
                      
                      19,036,198
                      
                      
                      
                      19,036,198Standby
      letters of credit
                      
                      
                      196,530
                      
                      
                      
                      196,530
                      
                      
                      
                      197,000
                      
                      
                      
                      197,000
                      
                      
                      
                      296,136
                      
                      
                      
                      296,136
 
 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-29
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 18.  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
19.  Fair Value Measurements
 
 Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements which
provides a framework for measuring and disclosing fair value under generally
accepted accounting principles.  SFAS No. 157 requires disclosures
about the fair value of assets and liabilities recognized in the balance sheet
in periods subsequent to initial recognition, whether the measurements are made
on a recurring basis or on a nonrecurring basis.
 
 SFAS No.
157 defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.  SFAS No. 157 also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value.  The standard describes three levels of inputs that may be
used to measure fair value.
 
 Fair
Value Hierarchy
 Level 1 –
Quoted prices in active markets for identical assets or liabilities
 Level 2 –
Other significant observable inputs (including quoted prices in active markets
for similar assets or liabilities)
 Level 3 –
Significant unobservable inputs (including the Bank’s own assumptions in
determining the fair value of assets or liabilities)
 
 In
determining the appropriate levels, the Company performs a detailed analysis of
assets and liabilities that are subject to SFAS No. 157.
 
 Fair
value measurements on a recurring basis at December 31, 2008 are as
follows:
 
 FairLevel 1
                      
                      
                      Level 2
                      
                      
                      Level 3
                      
                      
                      ValueSecurities
      available for sale
                      
                      $
                      -
                      
                      
                      $
                      57,948,645
                      
                      
                      $
                      -
                      
                      
                      $
                      57,948,645
  F-30
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 19.  Fair Value
Measurements(continued)
 
 Securities
available-for-sale are based on quoted market prices, where
available.  If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
 
 The Bank
may also be required, from time to time, to measure certain other financial
assets and liabilities at fair value on a non-recurring basis in accordance with
GAAP.  Fair value measurements on a non-recurring basis at December
31, 2008 are as follows:
 
 FairLevel 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    ValueImpaired
      loans
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    758,007
                    
                    
                    $
                    758,007OREO
                    
                    
                    -
                    
                    
                    
                    550,000
                    
                    
                    
                    -
                    
                    
                    
                    550,000$
                    -
                    
                    
                    $
                    550,000
                    
                    
                    $
                    758,007
                    
                    
                    $
                    1,308,007
 
 The Bank
is predominantly a cash flow lender with real estate serving as collateral on a
majority of loans.  Loans which are deemed to be impaired and
foreclosed real estate assets are primarily valued on a nonrecurring basis at
the fair values of the underlying real estate collateral.  The Bank
determines such fair values from independent appraisals.  If the
independent appraisals are current (within approximately six months), management
deems them level 2 inputs.  Non-current appraisals from which
management derives fair values are considered level 3 inputs.
 
 Note
20.  Recently Issued Accounting Pronouncements
 
 In
December 2007, the FASB issued Statement No. 141 Revised 2007 (SFAS 141R), Business
Combinations.  SFAS 141R’s objective is to improve the
relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects.  SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after December 31,
2008.  On January 1, 2008, the Company adopted SFAS
No. 141R.  The Company has determined that the adoption of this
pronouncement did not have a significant impact on the financial
statements.
 
 In
February 2007, the FASB issued Statement No. 159 (SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities-including an amendment of FASB Statement No.
115which is effective as of the beginning of the first fiscal year that
begins after November 15, 2007.  Management has not elected to adopt
this SFAS but will continue to evaluate the impact of adopting this Statement on
the Company’s financial statements for future periods.
 
 In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements.  SFAS 160’s objective is to
improve the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  SFAS 160 shall be effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15,
2008.  The Company does not expect the implementation of SFAS 160 to
have a material impact on its consolidated financial statements.
  F-31
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 20.  Recently Issued
Accounting Pronouncements(continued)
 
 In
September 2006, the FASB ratified the consensus reached by the Emerging Issued
Task Force (EITF) on Issue No. 06-04, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. The scope of this
Issue is limited to the recognition of a liability and related compensation
costs for endorsement split-dollar life insurance arrangements that provide a
benefit to an employee that extends to postretirement periods. Therefore, this
Issue would not apply to a split-dollar life insurance arrangement that provides
a specified benefit to an employee that is limited to the employee's active
service period with an employer.
 
 The
consensus in this Issue is effective for fiscal years beginning after December
15, 2007, with earlier application permitted. Entities should recognize the
effects of applying the consensus in this Issue through either (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings
or to other components of equity or net assets in the statement of financial
position as of the beginning of the year of adoption or (b) a change in
accounting principle through retrospective application to all prior
periods.  On January 1, 2008, the Company adopted EITF No. 06-04
and under option (a) recorded a cumulative accrued expense and reduction in
stockholder’s equity totaling $179,794 statements.
 
 On
January 12, 2009, the FASB issued FASB Staff Position EITF 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20(FSP).  FASB FSP 99-20-1
amends the impairment guidance in FASB EITF Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests that
Continue to be held by a Transferor in Securitized Financial
Assets.  The intent of the FSP is to reduce complexity and
achieve more consistent determinations as to whether other-than-temporary
impairments of available for sale or held to maturity debt securities have
occurred.  The FSP is effective for interim and annual reporting
periods ending after December 15, 2008.  The adoption of this FSP did
not have an impact on the Company’s consolidated financial
statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an Amendment of FASB Statement No.
133.”  This Statement amends and expands the disclosure
requirements of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”  The Statement requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements.  This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.  The Company does not expect the implementation of
SFAS 161 to have a material impact on its consolidated financial
statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Principles.”  This statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States.  The Statement is directed to entities rather
than auditors because entities are responsible for the selection of accounting
principles for financial statements that are presented in conformity with
GAAP.  This Statement is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles.”  The Company does not expect the implementation of
SFAS 162 to have a material impact on its consolidated financial
statements.
  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,
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006AssetsCash
                    
                    $
                    338,902
                    
                    
                    $
                    532,222
                    
                    
                    $
                    441,919Investment
      in The Bank of Glen Burnie
                    
                    
                    32,727,244
                    
                    
                    
                    34,354,422
                    
                    
                    
                    32,884,293Investment
      in GBB Properties, Inc.
                    
                    
                    261,999
                    
                    
                    
                    263,787
                    
                    
                    
                    265,579Investment
      in the Glen Burnie Statutory Trust I
                    
                    
                    155,000
                    
                    
                    
                    155,000
                    
                    
                    
                    155,000Due
      from subsidiaries
                    
                    
                    22,878
                    
                    
                    
                    22,709
                    
                    
                    
                    26,820Other
      assets
                    
                    
                    114,541
                    
                    
                    
                    119,542
                    
                    
                    
                    120,000Total
      assets
                    
                    $
                    33,620,564
                    
                    
                    $
                    35,447,682
                    
                    
                    $
                    33,893,611Liabilities
      and Stockholders’ EquityDividends
      payable
                    
                    $
                    385,794
                    
                    
                    $
                    385,010
                    
                    
                    $
                    366,580Accrued
      interest payable on borrowed funds
                    
                    
                    171,518
                    
                    
                    
                    171,518
                    
                    
                    
                    171,518Other
      liabilities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Borrowed
      funds from subsidiary
                    
                    
                    5,155,000
                    
                    
                    
                    5,155,000
                    
                    
                    
                    5,155,000Total
      liabilities
                    
                    
                    5,712,312
                    
                    
                    
                    5,711,528
                    
                    
                    
                    5,693,098Stockholders’
      equity:Common
      stock
                    
                    
                    2,967,727
                    
                    
                    
                    2,498,465
                    
                    
                    
                    2,484,633Surplus
                    
                    
                    11,568,241
                    
                    
                    
                    11,921,129
                    
                    
                    
                    11,719,907Retained
      earnings
                    
                    
                    14,129,637
                    
                    
                    
                    15,750,156
                    
                    
                    
                    14,312,496Accumulated
      other comprehensive loss, net of benefits
                    
                    
                    (757,353
                    )
                    
                    
                    (433,596
                    )
                    
                    
                    (316,523
                    )Total
      stockholders’ equity
                    
                    
                    27,908,252
                    
                    
                    
                    29,736,154
                    
                    
                    
                    28,200,513Total
      liabilities and stockholders’ equity
                    
                    $
                    33,620,564
                    
                    
                    $
                    35,447,682
                    
                    
                    $
                    33,893,611
  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, 2008 (See Note 8).
  F-33
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 21.  Parent Company
Financial Information (continued)
 
 Statements of IncomeYears Ended December 31,
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006Dividends
      and distributions from subsidiaries
                      
                      $
                      1,902,239
                      
                      
                      $
                      1,565,000
                      
                      
                      $
                      1,350,000Other
      income
                      
                      
                      16,430
                      
                      
                      
                      16,430
                      
                      
                      
                      16,430Interest
      expense on junior subordinated debentures
                      
                      
                      (546,180
                      )
                      
                      
                      (546,430
                      )
                      
                      
                      (546,430
                      )Other
      expenses
                      
                      
                      (69,468
                      )
                      
                      
                      (62,271
                      )
                      
                      
                      (59,453
                      )Income
      before income tax benefit and equity inundistributed
      net income of subsidiaries
                      
                      
                      1,303,021
                      
                      
                      
                      972,729
                      
                      
                      
                      760,547Income
      tax benefit
                      
                      
                      226,356
                      
                      
                      
                      224,002
                      
                      
                      
                      227,647Change
      in undistributed equity of subsidiaries
                      
                      
                      (1,125,415
                      )
                      
                      
                      1,585,410
                      
                      
                      
                      1,731,851Net
      income
                      
                      $
                      403,962
                      
                      
                      $
                      2,782,141
                      
                      
                      $
                      2,720,045
 
 Statements of Cash FlowsYears Ended December 31,
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Cash
      flows from operating activities:Net
      income
                        
                        $
                        403,962
                        
                        
                        $
                        2,782,141
                        
                        
                        $
                        2,720,045Adjustments
      to reconcile net income to net cash provided by operating
      activities:Decrease
      in other assets
                        
                        
                        5,001
                        
                        
                        
                        458
                        
                        
                        
                        7,250(Increase)
      decrease in due from subsidiaries
                        
                        
                        (169
                        )
                        
                        
                        4,111
                        
                        
                        
                        (3,932
                        )Decrease
      in other liabilities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,032
                        )Change
      in undistributed equity of Subsidiaries
                        
                        
                        1,125,415
                        
                        
                        
                        (1,585,410
                        )
                        
                        
                        (1,731,851
                        )Net
      cash provided by operating activities
                        
                        
                        1,534,209
                        
                        
                        
                        1,201,300
                        
                        
                        
                        989,480Cash
      flows from financing activities:Proceeds
      from dividend reinvestment plan
                        
                        
                        194,054
                        
                        
                        
                        200,459
                        
                        
                        
                        245,059Proceeds
      from issuance of common stock
                        
                        
                        -
                        
                        
                        
                        14,595
                        
                        
                        
                        33,891Repurchase
      and retirement of common stock
                        
                        
                        (577,239
                        )
                        
                        
                        -
                        
                        
                        
                        -Dividends
      paid
                        
                        
                        (1,344,344
                        )
                        
                        
                        (1,326,051
                        )
                        
                        
                        (1,309,970
                        )Net
      cash used in financing activities
                        
                        
                        (1,727,529
                        )
                        
                        
                        (1,110,997
                        )
                        
                        
                        (1,031,020
                        )(Decrease)
      increase in cash
                        
                        
                        (193,320
                        )
                        
                        
                        90,303
                        
                        
                        
                        (41,540
                        )Cash,
      beginning of year
                        
                        
                        532,222
                        
                        
                        
                        441,919
                        
                        
                        
                        483,459Cash,
      end of year
                        
                        $
                        338,902
                        
                        
                        $
                        532,222
                        
                        
                        $
                        441,919
  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:
 
 2008(Dollars
      in thousands,
                            
                            Three
      months ended,except per share
    amounts)
                            
                            December 31
                            
                            
                            September 30
                            
                            
                            June 30
                            
                            
                            March 31Interest
      income
                            
                            $
                            4,604
                            
                            
                            $
                            4,667
                            
                            
                            $
                            4,492
                            
                            
                            $
                            4,413Interest
      expense
                            
                            
                            1,661
                            
                            
                            
                            1,546
                            
                            
                            
                            1,499
                            
                            
                            
                            1,548Net
      interest income
                            
                            
                            2,943
                            
                            
                            
                            3,121
                            
                            
                            
                            2,993
                            
                            
                            
                            2,865Provision
      for credit losses
                            
                            
                            700
                            
                            
                            
                            239
                            
                            
                            
                            152
                            
                            
                            
                            55Net
      securities gains
                            
                            
                            50
                            
                            
                            
                            86
                            
                            
                            
                            48
                            
                            
                            
                            7Income
      before income taxes
                            
                            
                            272
                            
                            
                            
                            (1,915
                            )
                            
                            
                            743
                            
                            
                            
                            625Net
      income
                            
                            
                            1,382
                            
                            
                            
                            (2,118
                            )
                            
                            
                            604
                            
                            
                            
                            536Net
      income per share (basic and diluted)
                            
                            $
                            0.47
                            
                            
                            $
                            (0.71
                            )
                            
                            $
                            0.20
                            
                            
                            $
                            0.182007(Dollars
      in thousands,
                            
                            Three
      months ended,except per share
    amounts)
                            
                            December 31
                            
                            
                            September 30
                            
                            
                            June 30
                            
                            
                            March 31Interest
      income
                            
                            $
                            4,487
                            
                            
                            $
                            4,476
                            
                            
                            $
                            4,465
                            
                            
                            $
                            4,409Interest
      expense
                            
                            
                            1,506
                            
                            
                            
                            1,441
                            
                            
                            
                            1,507
                            
                            
                            
                            1,517Net
      interest income
                            
                            
                            2,981
                            
                            
                            
                            3,035
                            
                            
                            
                            2,958
                            
                            
                            
                            2,892Provision
      for credit losses
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            20
                            
                            
                            
                            30Net
      securities gains
                            
                            
                            -
                            
                            
                            
                            115
                            
                            
                            
                            4
                            
                            
                            
                            1Income
      before income taxes
                            
                            
                            903
                            
                            
                            
                            1,049
                            
                            
                            
                            873
                            
                            
                            
                            715Net
      income
                            
                            
                            700
                            
                            
                            
                            785
                            
                            
                            
                            691
                            
                            
                            
                            606Net
      income per share (basic and diluted)
                            
                            $
                            0.23
                            
                            
                            $
                            0.27
                            
                            
                            $
                            0.23
                            
                            
                            $
                            0.202006(Dollars
      in thousands,
                            
                            Three
      months ended,except per share amounts)
                            
                            December 31
                            
                            
                            September 30
                            
                            
                            June 30
                            
                            
                            March 31Interest
      income
                            
                            $
                            4,542
                            
                            
                            $
                            4,492
                            
                            
                            $
                            4,447
                            
                            
                            $
                            4,174Interest
      expense
                            
                            
                            1,609
                            
                            
                            
                            1,538
                            
                            
                            
                            1,480
                            
                            
                            
                            1,206Net
      interest income
                            
                            
                            2,933
                            
                            
                            
                            2,954
                            
                            
                            
                            2,967
                            
                            
                            
                            2,968Provision
      for credit losses
                            
                            
                            62
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Net
      securities gains
                            
                            
                            106
                            
                            
                            
                            70
                            
                            
                            
                            -
                            
                            
                            
                            -Income
      before income taxes
                            
                            
                            903
                            
                            
                            
                            912
                            
                            
                            
                            844
                            
                            
                            
                            748Net
      income
                            
                            
                            609
                            
                            
                            
                            772
                            
                            
                            
                            713
                            
                            
                            
                            626Net
      income per share (basic and diluted)
                            
                            $
                            0.21
                            
                            
                            $
                            0.26
                            
                            
                            $
                            0.24
                            
                            
                            $
                            0.21
  F-35