##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K [X]
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal yearended December 31, 2003 or[   ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transitionperiod from
to
 Commission file number: 0-24047 GLEN BURNIE BANCORP  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 whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
[   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 16, 2004 was $36,536,438. The number of shares of common stock outstanding as of March 16, 2004 was
2,028,250. 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 2004 Annual
Meeting of Shareholders (to be filed).




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GLEN BURNIE BANCORP
2003 ANNUAL REPORT ON FORM 10-K  
 Table of Contents PART IItem 1.
    
    Business
    
    
    3Item 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
    
    
    20Item 7.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    21Item 7A.
    
    Quantitative And Qualitative Disclosures About Market Risk
    
    
    30Item 8.
    
    Financial Statements and Supplementary Data
    
    
    30Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    30Item 9A.
    
    Controls and Procedures
    
    
    30PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    31Item 11.
    
    Executive Compensation
    
    
    31Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    

    31Item 13.
    
    Certain Relationships and Related Transactions
    
    
    31Item 14.
    
    Principal Accountant Fees and Services
    
    
    31PART IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    32Signatures
    
    
    
    
    33Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32.1




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##### Table of Contents



PART I 
 ITEM 1. BUSINESS General Glen Burnie Bancorp (the Company) is a bank holding company organized in
1990 under the laws of the State of Maryland. It presently owns all the
outstanding shares of capital stock of The Bank of Glen Burnie (the Bank), a
commercial bank organized in 1949 under the laws of the State of Maryland,
serving northern Anne Arundel County and surrounding areas from its main office
and branch in Glen Burnie, Maryland and branch offices in Glen Burnie (South
Crain location) Odenton, Riviera Beach, Crownsville, Severn and Severna Park,
Maryland. The Bank also maintains three remote Automated Teller Machine (ATM)
locations in Ferndale, Jessup and Pasadena, Maryland. The Bank maintains a
website at www.thebankofglenburnie.com. The Bank is the oldest independent
commercial bank in Anne Arundel County. The Bank is engaged in the commercial
and retail banking business as authorized by the banking statutes of the State
of Maryland, including the acceptance of demand and time deposits, and the
origination of loans to individuals, associations, partnerships and
corporations. The Banks real estate financing consists of residential first
and second mortgage loans, home equity lines of credit and commercial mortgage
loans. Commercial lending consists of both secured and unsecured loans. The
Bank also originates automobile loans through arrangements with local
automobile dealers. The Banks deposits are insured up to applicable limits by
the Federal Deposit Insurance Corporation (FDIC). The Companys principal executive office is located at 101 Crain Highway,
S.E., Glen Burnie, Maryland 21061. Its telephone number at such office is (410)
766-3300. Information on the Company and its subsidiary Bank may be obtained from
the Companys website www.thebankofglenburnie.com. Copies of the
Companys annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments thereto are available free of charge on
the website as soon as they are filed with the SEC through a link to the SECs
EDGAR reporting system. Simply select the Investor Relations menu item, then
click on the All SEC Filings or Insider Transactions link. Market Area The Bank considers its principal market area for lending and deposit
products to consist of Northern Anne Arundel County, Maryland, which consists
of those portions of the county north of U.S. Route 50. Northern Anne Arundel
County includes mature suburbs of the City of Baltimore, which in recent years
have experienced modest population growth and are characterized by an aging
population. Management believes that the majority of the working population in
its market area either commutes to Baltimore or is employed at businesses
located at or around the nearby Baltimore Washington International Airport.
Anne Arundel County is generally considered to have more affordable housing
than other suburban Baltimore areas and has begun to attract younger persons
and minorities on this basis. This inflow, however, has not been sufficient to
affect current population trends. Lending Activities The Bank offers a full range of consumer and commercial loans. The Banks
lending activities include residential and commercial real estate loans,
construction loans, land acquisition and development loans, commercial loans
and consumer installment lending including indirect automobile lending.
Substantially all of the Banks loan customers are residents of Anne Arundel
County and surrounding areas of Central Maryland. The Bank solicits loan
applications for commercial loans from small to medium sized businesses located
in its market area. The Company believes that this is a market in which a
relatively small community bank, like the Bank, has a competitive advantage in
personal service and flexibility. The Banks consumer lending currently
consists primarily of automobile loans originated through local dealers. The
Bank has expanded its indirect automobile loans by entering into arrangements
with individual automobile dealers. The Companys total loan portfolio increased during the 2003, 2001, 2000
and 1999 fiscal years, while declining in 2002. In 1999 and 2000, the
increases were primarily due to the introduction of an indirect automobile
lending program in 1998. In 2001 and 2003, the increases in loans were
primarily due to increases in residential mortgages. The commercial mortgage
portfolio continued to decline in 2003 as a result of softening loan demand and
increased competition from large financial institutions. In contrast, the
residential mortgage portfolio achieved steady increases over the past five
years due to a strong housing market environment. 3




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##### Table of Contents



The following table provides information on the composition of the loan
portfolio at the indicated dates. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in Thousands)
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %Mortgage:Residential
    
    $
    64,471
    
    
    
    36.62
    %
    
    $
    49,572
    
    
    
    30.67
    %
    
    $
    44,293
    
    
    
    26.32
    %
    
    $
    36,187
    
    
    
    21.74
    %
    
    $

    34,099
    
    
    
    22.03
    %Commercial
    
    
    28,525
    
    
    
    16.20
    
    
    
    31,584
    
    
    
    19.54
    
    
    
    36,920
    
    
    
    21.94
    
    
    
    40,169
    
    
    
    24.13
    
    
    
    42,342
    
    
    
    27.36Construction and land
development
    
    
    3,112
    
    
    
    1.77
    
    
    
    2,338
    
    
    
    1.45
    
    
    
    2,355
    
    
    
    1.40
    
    
    
    5,257
    
    
    
    3.16
    
    
    
    6,095
    
    
    
    3.94Consumer:Installment
    
    
    19,767
    
    
    
    11.23
    
    
    
    19,758
    
    
    
    12.22
    
    
    
    20,063
    
    
    
    11.92
    
    
    
    19,119
    
    
    
    11.49
    
    
    
    16,203
    
    
    
    10.47Credit card
    
    
    175
    
    
    
    .10
    
    
    
    228
    
    
    
    .14
    
    
    
    272
    
    
    
    0.16
    
    
    
    281
    
    
    
    0.16
    
    
    
    1,348
    
    
    
    0.88Indirect automobile
    
    
    53,883
    
    
    
    30.61
    
    
    
    52,795
    
    
    
    32.66
    
    
    
    59,308
    
    
    
    35.24
    
    
    
    61,725
    
    
    
    37.08
    
    
    
    50,967
    
    
    
    32.93Commercial
    
    
    6,113
    
    
    
    3.47
    
    
    
    5,374
    
    
    
    3.32
    
    
    
    5,083
    
    
    
    3.02
    
    
    
    3,726
    
    
    
    2.24
    
    
    
    3,701
    
    
    
    2.39Gross loans
    
    
    176,046
    
    
    
    100.00
    %
    
    
    161,649
    
    
    
    100.00
    %
    
    
    168,294
    
    
    
    100.00
    %
    
    
    166,464
    
    
    
    100.00
    %
    
    
    154,755
    
    
    
    100.00
    %Unearned income on loans
    
    
    (981
    )
    
    
    
    
    
    
    (847
    )
    
    
    
    
    
    
    (786
    )
    
    
    
    
    
    
    (705
    )
    
    
    
    
    
    
    (727
    )Gross loans net of
unearned income
    
    
    175,065
    
    
    
    
    
    
    
    160,802
    
    
    
    
    
    
    
    167,508
    
    
    
    
    
    
    
    165,759
    
    
    
    
    
    
    
    154,028Allowance for credit
losses
    
    
    (2,246
    )
    
    
    
    
    
    
    (2,515
    )
    
    
    
    
    
    
    (2,939
    )
    
    
    
    
    
    
    (3,385
    )
    
    
    
    
    
    
    (2,922
    )Loans, net
    
    $
    172,819
    
    
    
    
    
    
    $
    158,287
    
    
    
    
    
    
    $
    164,569
    
    
    
    
    
    
    $
    162,374
    
    
    
    
    
    
    $
    151,106
 The following table sets forth the maturities for various categories of
the loan portfolio at December 31, 2003. Demand loans and loans, which have no
stated maturity, are treated as due in one year or less. At December 31, 2003,
the Bank had $13,264,083 in loans due after one year with variable rates and
$143,056,431 in such loans with fixed rates. The Banks long-term real estate
loans allow the Bank to call the loan after three years in order to adjust the
interest rate if necessary. The Bank has generally not exercised its call
option and the following table assumes no exercise of the Banks call option. Due Within
    
    Due Over One To
    
    Due OverOne Year
    
    Five Years
    
    Five Years
    
    Total(In Thousands)Real Estate - mortgage:Residential
    
    $
    8,061
    
    
    $
    3,079
    
    
    $
    53,331
    
    
    $
    64,471Commercial
    
    
    1,719
    
    
    
    9,182
    
    
    
    17,587
    
    
    
    28,525Construction and land
development
    
    
    
    
    
    
    721
    
    
    
    2,391
    
    
    
    3,112Installment
    
    
    2,053
    
    
    
    14,526
    
    
    
    3,188
    
    
    
    19,767Credit Card
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    175Indirect automobile
    
    
    1,647
    
    
    
    48,916
    
    
    
    3,320
    
    
    
    53,883Commercial
    
    
    6,021
    
    
    
    16
    
    
    
    76
    
    
    
    6,113$
    19,676
    
    
    $
    76,440
    
    
    $
    79,930
    
    
    $
    176,046
 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. The Banks long-term,
fixed-rate mortgages include a provision allowing the Bank to call the loan
after three years in order to adjust the interest rate. The Bank, however, has
never exercised this right. Substantially all of the Banks real estate loans
are secured by properties in northern Anne Arundel County, Maryland. Under the
Banks loan policies, the maximum permissible loan-to-value ratio for
owner-occupied residential mortgages is 80% of the lesser of the purchase price
or appraised value. The Bank, however, will make loans secured by
owner-occupied residential real estate with loan-to-value ratios up to 95%,
provided the borrower obtains private mortgage insurance for the portion of the
loan in excess of 80%. For residential investment properties, the maximum
loan-to-value ratio is 75%. The maximum permissible loan-to-value ratio for
residential and commercial construction loans is 80%. The maximum
loan-to-value ratio for permanent commercial mortgages is 75%. The maximum
loan-to-value ratio for land development loans is 70% and for unimproved land
is 65%. The Bank also offers home equity loans secured by the borrowers
primary residence provided that the aggregate indebtedness on the property does
not exceed 80% of its value. 4




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Commercial Lending.The Banks commercial loan portfolio consists
principally of demand and time loans for commercial purposes. The Banks
business demand and time lending includes various working capital loans, lines
of credit and letters of credit for commercial customers. Demand loans require
the payment of interest until called, while time loans require a single payment
of principal and interest at maturity. Such loans may be made on a secured or
an unsecured basis. All such loans are underwritten on the basis of the
borrowers creditworthiness rather than the value of the collateral. Installment Lending.The Bank makes consumer and commercial installment
loans for the purchase of automobiles, boats, other consumer durable goods,
capital goods and equipment. Such loans provide for repayment in regular
installments and are secured by the goods financed. Also included in
installment loans are overdraft loans and other credit repayable in
installments. As of December 31, 2003, approximately 75.8% of the installment
loans in the Banks portfolio (other than indirect automobile lending) had been
originated for commercial purposes and
24.2% had been originated for consumer purposes. Indirect Automobile Lending.The Bank commenced its indirect automobile
lending program in January 1998. The Bank finances new and used automobiles
for terms of up to 66 months. Used vehicles must be no more than five years
old and the maximum loan term is reduced for higher mileage vehicles. The Bank
does not lend more than the invoice price on new vehicles. On used vehicles,
the Bank will not lend more than the fair market value as published in a
nationally recognized used vehicle pricing guide. The Bank requires all
borrowers to obtain vendors single interest coverage protecting the Bank
against loss in the case a borrowers automobile insurance lapses. The Bank
originates indirect loans through a network of 40 dealers which are primarily
new car dealers located in Anne Arundel County. Participating dealers take
loan applications from their customers and transmit them to the Bank for
approval. Other Loans.The Bank offers overdraft protection lines of credit, tied
to checking accounts, as a convenience to qualified customers. Prior to 2000,
the Bank issued credit cards, but in February 2000 the Bank ceased issuing
credit cards and sold its portfolio of credit card loans. 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 lending authority granted by the Bank to any
one Lending Officer is $750,000. A combination of approvals from 5




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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 $1.5
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 $3.01 million to any one borrower at December 31, 2003. By
interpretive ruling of the Commissioner of Financial Regulation, Maryland banks
have the option of lending up to the amount that would be permissible for a
national bank which is generally 15% of unimpaired capital and surplus (defined
to include a banks total capital for regulatory capital purposes plus any loan
loss allowances not included in regulatory capital). Under this formula, the
Bank would have been permitted to lend up to $4.45 million to any one borrower
at December 31, 2003. It is currently the Banks policy to limit its exposure
to any one borrower to no more than $2.2 million in the aggregate unless any
borrowings exceeding this amount are approved by a 75% vote of the Board of
Directors. At December 31, 2003, the largest amount outstanding to any one
borrower and its related interests was $2,809,610. Non-Performing Loans It is the policy of the Bank to reverse accrued, and discontinue the
accrual of, interest when a loan becomes 90 days or more delinquent and
circumstances indicate that collection is doubtful. The Bank seeks to control delinquencies through diligent collection
procedures. For consumer loans, the Bank sends out payment reminders on the
seventh and twelfth days after a payment is due. If a consumer loan becomes 15
days past due, the account is transferred to the Banks collections department,
which will contact the borrower by telephone and letter before the account
becomes 30 days past due. If a consumer loan becomes more than 30 days past
due, the Bank will continue its collection efforts and will move to
repossession or foreclosure by the 45th day if the Bank has reason to believe
that the collateral may be in jeopardy or the borrower has failed to respond to
prior communications. The Bank will move to repossess or foreclose in all
instances in which a consumer loan becomes more than 60 days delinquent. After
repossession of a motor vehicle, the borrower has a 15-day statutory right to
redeem the vehicle and is entitled to 10 days notice before the sale of a
repossessed vehicle. The Bank sells the vehicle as promptly as feasible after
the expiration of these periods. If the amount realized from the sale of the
vehicle is less than the loan amount, the Bank will seek a deficiency judgment
against the borrower. The Bank follows similar collection procedures with
respect to commercial loans. 6




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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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars In Thousands)Restructured Loans
    
    $
    
    
    
    $
    41
    
    
    $
    
    
    
    $
    370
    
    
    $
    243Non-accrual loans:Real estate
 mortgage:Residential
    
    $
    34
    
    
    $
    264
    
    
    $
    284
    
    
    $
    120
    
    
    $
    237Commercial
    
    
    265
    
    
    
    178
    
    
    
    189
    
    
    
    77
    
    
    
    135Real estate - construction
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    280Installment
    
    
    250
    
    
    
    112
    
    
    
    88
    
    
    
    72
    
    
    
    315Commercial
    
    
    23
    
    
    
    10
    
    
    
    40
    
    
    
    101
    
    
    
    45Total non-accrual loans
    
    
    572
    
    
    
    571
    
    
    
    601
    
    
    
    370
    
    
    
    1,012Accruing loans past due 90 days or moreReal estate  mortgage:Residential
    
    
    5
    
    
    
    1
    
    
    
    45
    
    
    
    34
    
    
    
    43Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate - construction
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Installment
    
    
    
    
    
    
    13
    
    
    
    13
    
    
    
    
    
    
    
    Credit card & related
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Total accruing loans past due
90 days or more
    
    
    11
    
    
    
    15
    
    
    
    59
    
    
    
    34
    
    
    
    43Total non-accrual and past due loans
    
    $
    583
    
    
    $
    586
    
    
    $
    660
    
    
    $
    404
    
    
    $
    1,055Non-accrual and past due loans to
gross loans
    
    
    .33
    %
    
    
    0.36
    %
    
    
    0.39
    %
    
    
    0.24
    %
    
    
    0.68
    %Allowance for credit losses to
non-accrual and past due loans
    
    
    385.25
    %
    
    
    429.13
    %
    
    
    445.30
    %
    
    
    837.87
    %
    
    
    276.97
    %
 For the year ended December 31, 2003, interest of approximately $56,882
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. Approximately $371,074, or 64.8%,
of the Banks total $572,000 non-accrual loans at December 31, 2003 were
attributable to 4 borrowers. No charge-offs have previously been taken on these
loans. Seven of these borrowers with loans totaling $324,167 were in
bankruptcy at that date. Because of the legal protections afforded to borrowers
in bankruptcy, collections on such loans are difficult and the Bank anticipates
that such loans may remain delinquent for an extended period of time. Each of
these loans is secured by collateral with a value well in excess of the current
active balance of the Banks loan. At December 31, 2003, there were two loans outstanding, totaling $73,000,
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, 2003, the Company had $171,882 in real estate acquired in
partial or total satisfaction of debt, compared to $413,373 and $420,162 in
such properties at December 31, 2002 and 2001, respectively. All such
properties are recorded at the lower of cost or fair value at the date acquired
and carried on the balance sheet as other real estate owned. Losses arising at
the date of acquisition are charged against the allowance for credit losses.
Subsequent write-downs that may be required and expense of operation are
included in non-interest expense. Gains and losses realized from the sale of
other real estate owned are included in non-interest income or expense. For a
description of the properties comprising other real estate owned at December
31, 2003, see Item 2.  Properties. 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 7




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##### Table of Contents



Accountings Standards (SFAS) No. 5 Accounting for Contingencies, which
requires that losses be accrued when they are probable of occurring and
estimable, and (2) SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, which requires that losses be accrued based on the differences between
the value of collateral, present value of future cash flows or values that are
observable in the secondary market and the loan balance. The allowance for credit losses is established through a provision for
credit losses charged to expense. Loans are charged against the allowance for
credit losses when management believes that the collectibility of the principal
is unlikely. The allowance, based on evaluations of the collectibility of loans
and prior loan loss experience, is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, value of collateral, and current economic
conditions and trends that may affect the borrowers ability to pay. Transactions in the allowance for credit losses during the last five fiscal
years were as follows: Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars In Thousands)Beginning Balance
    
    $
    2,515
    
    
    $
    2,939
    
    
    $
    3,385
    
    
    $
    2,922
    
    
    $
    2,841Loans charged offReal estate - mortgage:Residential
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    19
    
    
    
    Commercial
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4
    
    
    
    50Real estate - construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27
    )Installment
    
    
    687
    
    
    
    594
    
    
    
    498
    
    
    
    470
    
    
    
    477Credit card & related
    
    
    42
    
    
    
    95
    
    
    
    89
    
    
    
    101
    
    
    
    92Commercial
    
    
    29
    
    
    
    80
    
    
    
    96
    
    
    
    167
    
    
    
    81Total
    
    
    758
    
    
    
    730
    
    
    
    687
    
    
    
    761
    
    
    
    673RecoveriesReal estate - mortgage:Residential
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    52
    
    
    
    32Commercial
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    16Real estate - construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470
    
    
    
    36Installment
    
    
    369
    
    
    
    215
    
    
    
    310
    
    
    
    111
    
    
    
    259Credit card & related
    
    
    30
    
    
    
    30
    
    
    
    53
    
    
    
    41
    
    
    
    4Commercial
    
    
    49
    
    
    
    59
    
    
    
    28
    
    
    
    550
    
    
    
    107Total
    
    
    449
    
    
    
    306
    
    
    
    391
    
    
    
    1,224
    
    
    
    454Net charge offs/(recoveries)
    
    
    308
    
    
    
    424
    
    
    
    296
    
    
    
    (463
    )
    
    
    219Provisions charged to operations
    
    
    40
    
    
    
    
    
    
    
    (150
    )
    
    
    
    
    
    
    300Ending balance
    
    $
    2,246
    
    
    $
    2,515
    
    
    $
    2,939
    
    
    $
    3,385
    
    
    $
    2,922Average loans
    
    $
    166,786
    
    
    $
    164,818
    
    
    $
    163,695
    
    
    $
    159,810
    
    
    $
    142,077Net charge-offs to average loans
    
    
    0.18
    %
    
    
    0.26
    %
    
    
    0.18
    %
    
    
    (0.28
    )%
    
    
    0.15
    %
 8




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##### Table of Contents



The following table shows the allowance for credit losses broken down by loan
category as of December 31, 2003, 2002, 2001, 2000 and 1999: At December 31,2003
    
    2002Percentage Of Loans In
    
    
    
    
    
    Percentage Of Loans InAllowance For
    
    Each Category To
    
    Allowance For
    
    Each Category ToPortfolio
    
    Each Category
    
    Total Loans
    
    Each Category
    
    Total Loans(Dollars In Thousands)Real Estate - mortgage:Residential
    
    $
    143
    
    
    
    6.37
    %
    
    $
    131
    
    
    
    27.60
    %Commercial
    
    
    314
    
    
    
    13.97
    
    
    
    349
    
    
    
    21.02Real Estate - construction
    
    
    29
    
    
    
    1.29
    
    
    
    48
    
    
    
    1.33Installment
    
    
    137
    
    
    
    6.10
    
    
    
    152
    
    
    
    5.83Credit Card
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect automobile
    
    
    1,357
    
    
    
    60.42
    
    
    
    1,461
    
    
    
    33.00Commercial
    
    
    271
    
    
    
    12.07
    
    
    
    168
    
    
    
    11.22Unallocated
    
    
    (5
    )
    
    
    (.22
    )
    
    
    206
    
    
    
    Total
    
    $
    2,246
    
    
    
    100.00
    %
    
    $
    2,515
    
    
    
    100.00
    %
 At December 31,2001
    
    2000
    
    1999Percentage Of
    
    
    
    
    
    Percentage Of
    
    
    
    
    
    Percentage OfLoans In Each
    
    
    
    
    
    Loans In Each
    
    
    
    
    
    Loans In EachAllowance For
    
    Category To
    
    Allowance For
    
    Category To
    
    Allowance For
    
    Category ToPortfolio
    
    Each Category
    
    Total Loans
    
    Each Category
    
    Total Loans
    
    Each Category
    
    Total Loans(Dollars In Thousands)Real Estate  mortgage:Residential
    
    $
    164
    
    
    
    26.32
    %
    
    $
    199
    
    
    
    21.74
    %
    
    $
    200
    
    
    
    22.03
    %Commercial
    
    
    456
    
    
    
    21.94
    
    
    
    506
    
    
    
    24.13
    
    
    
    613
    
    
    
    27.36Real Estate  construction
    
    
    71
    
    
    
    1.40
    
    
    
    292
    
    
    
    3.16
    
    
    
    296
    
    
    
    3.94Installment
    
    
    237
    
    
    
    11.92
    
    
    
    221
    
    
    
    11.49
    
    
    
    177
    
    
    
    10.47Credit Card
    
    
    
    
    
    
    0.16
    
    
    
    
    
    
    
    0.16
    
    
    
    92
    
    
    
    0.88Indirect automobile
    
    
    1,390
    
    
    
    35.24
    
    
    
    1,486
    
    
    
    37.08
    
    
    
    793
    
    
    
    32.93Commercial
    
    
    300
    
    
    
    3.02
    
    
    
    288
    
    
    
    2.24
    
    
    
    526
    
    
    
    2.39Unallocated
    
    
    321
    
    
    
    
    
    
    
    393
    
    
    
    
    
    
    
    225
    
    
    
    Total
    
    $
    2,939
    
    
    
    100.00
    %
    
    $
    3,385
    
    
    
    100.00
    %
    
    $
    2,922
    
    
    
    100.00
    %
 Investment Securities The Bank maintains a substantial portfolio of investment securities to
provide liquidity as well as a source of earnings. The Banks investment
securities portfolio consists primarily of U.S. Treasury securities, securities
issued by U.S. Government agencies including mortgage-backed securities,
securities issued by certain states and their political subdivisions, and
corporate trust preferred securities. The tax treatment of the Banks
portfolio of securities issued by certain states and their political
subdivisions allows the Company to use the full tax advantage of this
portfolio. The following table presents at amortized cost the composition of the
investment portfolio by major category at the dates indicated. At December 31,2003
    
    2002
    
    2001(In Thousands)U.S. Treasury securities
    
    $
    
    
    
    $
    499
    
    
    $
    1,248U.S. Government agencies and mortgage backed
securities
    
    
    52,444
    
    
    
    51,916
    
    
    
    45,603Obligations of states and political subdivisions
    
    
    43,624
    
    
    
    31,899
    
    
    
    20,659Corporate trust preferred
    
    
    5,026
    
    
    
    5,057
    
    
    
    4,820Total investment securities
    
    $
    101,094
    
    
    $
    89,371
    
    
    $
    72,330
 9




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##### Table of Contents



The following table sets forth the scheduled maturities, book values and
weighted average yields for the Companys investment securities portfolio at
December 31, 2003: One Year Or Less
    
    One To Five Years
    
    Five to Ten Years
    
    More Than Ten Years
    
    TotalWeighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedBook
    
    Average
    
    Book
    
    Average
    
    Book
    
    Average
    
    Book
    
    Average
    
    Book
    
    AverageValue
    
    Yield
    
    Value
    
    Yield
    
    Value
    
    Yield
    
    Value
    
    Yield
    
    Value
    
    YieldU.S. Treasury securities
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %U.S. Government agencies
and mortgage backed
securities
    
    
    1,000
    
    
    
    6.44
    
    
    
    7,840
    
    
    
    4.74
    
    
    
    5,295
    
    
    
    4.04
    
    
    
    38,309
    
    
    
    5.34
    
    
    
    52,444
    
    
    
    5.14Obligations of states
and political
subdivisions
    
    
    1,145
    
    
    
    2.95
    
    
    
    3,744
    
    
    
    3.41
    
    
    
    14,128
    
    
    
    3.64
    
    
    
    24,607
    
    
    
    5.01
    
    
    
    43,624
    
    
    
    4.38Corporate trust preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,026
    
    
    
    6.95
    
    
    
    5,026
    
    
    
    6.95Total investment
securities
    
    $
    2,145
    
    
    
    4.57
    %
    
    $
    11,584
    
    
    
    4.31
    %
    
    $
    19,423
    
    
    
    3.75
    %
    
    $
    67,942
    
    
    
    5.34
    %
    
    $
    101,094
    
    
    
    4.90
    %
 At December 31, 2003, 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 main office and
six branches in northern Anne Arundel County. Consolidated total deposits were
$256,908,235 as of December 31, 2003. The Bank uses borrowings from the Federal
Home Loan Bank (FHLB) of Atlanta to supplement funding from deposits. The
Bank was permitted to borrow up to $36.2 million under a line of credit from
the FHLB of Atlanta as of December 31, 2003. 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® and Star® ATM networks. As stated above, the Bank obtains deposits principally through its network
of seven offices. The Bank does not solicit brokered deposits. At December 31,
2003, the Bank had approximately $21.5 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, 2003: Amount(In Thousands)Three months or less
    
    $
    3,753Over three through six months
    
    
    4,733Over six through 12 months
    
    
    3,391Over 12 months
    
    
    9,672Total
    
    $
    21,549
 Borrowings.In addition to deposits, the Bank from time to time obtains
advances from the FHLB of Atlanta of which it is a member. FHLB of Atlanta
advances may be used to provide funds for residential housing finance, for
small business lending, and to meet specific and anticipated needs. The Bank
may draw on a $36.2 million line of credit from the FHLB of Atlanta, which is
secured by a floating lien on the Banks residential first mortgage loans and
various federal and agency securities. There was $7 million in a long-term
convertible advance under this credit arrangement at December 31, 2003. The
advance matures in September 2010 and bears a 5.84% rate of interest. On
September 7, 2000, the Company issued $5,155,000 of its 10.6% Junior
Subordinated Deferrable Interest Debentures to Glen Burnie Statutory Trust I, a
Connecticut statutory trust wholly owned by the Company.
The Trust, in turn, issued $5 million of its 10.6% capital securities to
institutional investors. The debentures are scheduled to mature on September
7, 2030, unless called by the Company not earlier than September 7, 2010. It
is 10




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##### Table of Contents



the Companys intention to call these debentures at the earliest
opportunity. The Bank also has a unsecured line of credit in the amount of $5
million from another commercial bank but has not drawn on this line. The Bank
has a mortgage note on the 103 Crain Highway address with a balance of $226,501
as of December 31, 2003. This note is payable monthly through October 2010 and
has a 7% interest rate. Competition The Bank faces competition from other community banks and financial
institutions and larger intra- and inter- state banks and financial
institutions, which compete vigorously (currently, sixteen FDIC-insured
depository institutions operate within two miles of the Banks headquarters).
With respect to indirect lending, the Bank faces competition from other banks
and the financing arms of automobile manufacturers. The Bank competes in this
area by offering competitive rates and responsive service to dealers. The Banks interest rates, loan and deposit terms, and offered products
and services are impacted, to a large extent, by such competition. The Bank
attempts to provide superior service within its community and to know, and
facilitate services to, its customers. It seeks commercial relationships with
small to medium size businesses, which the Bank believes would welcome personal
service and flexibility. While the Bank believes it is the eighth largest
deposit holder in Anne Arundel County, Maryland, with an estimated 4.46% market
share as of June 30, 2003 (the latest date for which relevant data is available
from the FDIC), it believes its greatest competition comes from smaller
community banks which offer similar personalized services. Other Activities The Company also owns all outstanding shares of capital stock of GBB
Properties, Inc. (GBB), another Maryland corporation which was organized in
1994 and which is engaged in the business of acquiring, holding and disposing
of real property, typically acquired in connection with foreclosure proceedings
(or deeds in lieu of foreclosure) instituted by the Bank or acquired in
connection with branch expansions by the Bank. Employees At December 31, 2003, the Bank had 123 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 11




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##### Table of Contents



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. 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




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##### Table of Contents



Dividends and Distributions.The Federal Reserve Board has the power to
prohibit dividends by bank holding companies if their actions constitute unsafe
or unsound practices. The Federal Reserve Board has issued a policy statement
on the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Boards view that a bank holding company should pay cash
dividends only to the extent that the companys net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention
that is consistent with the companys capital needs, asset quality, and overall
financial condition. Bank holding companies are required to give the Federal Reserve Board
notice of any purchase or redemption of their outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of the bank holding companys
consolidated net worth. The Federal Reserve Board may disapprove such a
purchase or redemption if it determines that the proposal would violate any
law, regulation, Federal Reserve Board order, directive, or any condition
imposed by, or written agreement with, the Federal Reserve Board. Bank holding
companies whose capital ratios exceed the thresholds for well capitalized
banks on a consolidated basis are exempt from the foregoing requirement if they
were rated composite 1 or 2 in their most recent inspection and are not the
subject of any unresolved supervisory issues. Regulation of the Bank General.As a state-chartered bank with deposits insured by the FDIC but
which is not a member of the Federal Reserve System (a state non-member
bank), the Bank is subject to the supervision of the Maryland Commissioner of
Financial Regulation and the FDIC. The Commissioner and FDIC regularly examine
the operations of the Bank, including but not limited to capital adequacy,
reserves, loans, investments and management practices. These examinations are
for the protection of the Banks depositors and not its stockholders. In
addition, the Bank is required to furnish quarterly and annual call reports to
the Commissioner and FDIC. The FDICs enforcement authority includes the power
to remove officers and directors and the authority to issue cease-and-desist
orders to prevent a bank from engaging in unsafe or unsound practices or
violating laws or regulations governing its business. The Banks deposits are insured by the FDIC to the legal maximum of
$100,000 for each insured depositor. Some of the aspects of the lending and
deposit business of the Bank that are subject to regulation by the Federal
Reserve Board and the FDIC include reserve requirements and disclosure
requirements in connection with personal and mortgage loans and savings deposit
accounts. In addition, the Bank is subject to numerous Federal and state laws
and regulations which set forth specific restrictions and procedural
requirements with respect to the establishment of branches, investments,
interest rates on loans, credit practices, the disclosure of customer
information, the disclosure of credit terms and discrimination in credit
transactions. Patriot Act.On October 26, 2001, President Bush signed the USA Patriot
Act (the Patriot Act), which includes provisions pertaining to domestic
security, surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001 includes amendments to the Bank Secrecy Act which expand
the responsibilities of financial institutions in regard to anti-money
laundering activities with particular emphasis upon international money
laundering and terrorism financing activities through designated correspondent
and private banking accounts. Effective December 25, 2001, Section 313(a) of the Patriot Act prohibits
any insured financial institution such as the Bank, from providing
correspondent accounts to foreign banks which do not have a physical presence
in any country (designated as shell banks), subject to certain exceptions for
regulated affiliates of foreign banks. Section 313(a) also requires financial
institutions to take reasonable steps to ensure that foreign bank correspondent
accounts are not being used to indirectly provide banking services to foreign
shell banks, and Section 319(b) requires financial institutions to maintain
records of the owners and agent for service of process of any such foreign
banks with whom correspondent accounts have been established. Effective July 23, 2002, Section 312 of the Patriot Act creates a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
correspondent account in the United States for a
non-United States person, including a foreign individual visiting the
United States, or a representative of a non-United States person shall
establish appropriate, specific, and, where necessary, enhanced, due diligence
policies, procedures, and controls that are reasonably designed to detect and
record instances of money laundering through those accounts. 13




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##### Table of Contents



The Company and the Bank are not currently aware of any account
relationships between the Bank and any foreign bank or other person or entity
as described above under Sections 313(a) or 312 of the Patriot Act. The
terrorist attacks on September 11, 2001 have realigned national security
priorities of the United States and it is reasonable to anticipate that the
United States Congress may enact additional legislation in the future to combat
terrorism including modifications to existing laws such as the Patriot Act to
expand powers as deemed necessary. The effects which the Patriot Act and any
additional legislation enacted by Congress may have upon financial institutions
is uncertain; however, such legislation would likely increase compliance costs
and thereby potentially have an adverse effect upon the Companys results of
operations. Community Reinvestment Act.Community Reinvestment Act (CRA)
regulations evaluate banks lending to low and moderate income individuals and
businesses across a four-point scale from outstanding to substantial
noncompliance, and are a factor in regulatory review of applications to merge,
establish new branch offices or form bank holding companies. In addition, any
bank rated in substantial noncompliance with the CRA regulations may be
subject to enforcement proceedings. The Bank has a current rating of
outstanding for CRA compliance. Capital Adequacy.The Federal Reserve Board and the FDIC have established
guidelines with respect to the maintenance of appropriate levels of capital by
bank holding companies and state non-member banks, respectively. The
regulations impose two sets of capital adequacy requirements: minimum leverage
rules, which require bank holding companies and banks to maintain a specified
minimum ratio of capital to total assets, and risk-based capital rules, which
require the maintenance of specified minimum ratios of capital to
risk-weighted assets. The regulations of the Federal Reserve Board and the FDIC require bank
holding companies and state non-member banks, respectively, to maintain a
minimum leverage ratio of Tier 1 capital (as defined in the risk-based
capital guidelines discussed in the following paragraphs) to total assets of
3.0%. Although setting a minimum 3.0% leverage ratio, the capital regulations
state that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the Federal bank
regulators, would be permitted to operate at or near such minimum level of
capital. All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organizations capital adequacy by its primary
regulator. Any bank or bank holding company experiencing or anticipating
significant growth would be expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve Board has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organizations ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital. The risk-based capital rules of the Federal Reserve Board and the FDIC
require bank holding companies and state non-member banks, respectively, to
maintain minimum regulatory capital levels based upon a weighting of their
assets and off-balance sheet obligations according to risk. Risk-based capital
is composed of two elements: Tier 1 capital and Tier 2 capital. Tier 1 capital
consists primarily of common stockholders equity, certain perpetual preferred
stock (which must be noncumulative in the case of banks), and minority
interests in the equity accounts of consolidated subsidiaries; less all
intangible assets, except for certain purchased mortgage servicing rights and
credit card relationships. Tier 2 capital elements include, subject to certain
limitations, the allowance for losses on loans and leases; perpetual preferred
stock that does not qualify as Tier 1 capital and long-term preferred stock
with an original maturity of at least 20 years from issuance; hybrid capital
instruments, including perpetual debt and mandatory convertible securities; and
subordinated debt and intermediate-term preferred stock. The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets. The risk-based capital regulations require all banks and
bank holding companies to maintain a minimum ratio of total capital (Tier 1
capital plus Tier 2 capital) to total risk-weighted assets of 8%, with at least
4% as Tier 1 capital. For the purpose of calculating these ratios: (i) Tier 2
capital is limited to no more than 100% of Tier 1 capital; and (ii) the
aggregate amount of certain types of
Tier 2 capital is limited. In addition, the risk-based capital regulations
limit the allowance for loan losses includable as capital to 1.25% of total
risk-weighted assets. 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 14




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##### Table of Contents



maintain higher
risk-based capital ratios. The Federal banking agencies, including the FDIC,
have proposed a system for measuring and assessing the exposure of a banks net
economic value to changes in interest rates. The Federal banking agencies,
including the FDIC, have stated their intention to propose a rule establishing
an explicit capital charge for interest rate risk based upon the level of a
banks measured interest rate risk exposure after more experience has been
gained with the proposed measurement process. Federal Reserve Board regulations
do not specifically take into account interest rate risk in measuring the
capital adequacy of bank holding companies. The FDIC has issued regulations which classify state non-member banks by
capital levels and which authorize the FDIC to take various prompt corrective
actions to resolve the problems of any bank that fails to satisfy the capital
standards. Under such regulations, a well-capitalized bank is one that is not
subject to any regulatory order or directive to meet any specific capital level
and that has or exceeds the following capital levels: a total risk-based
capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage
ratio of 5%. An adequately capitalized bank is one that does not qualify as
well-capitalized but meets or exceeds the following capital requirements: a
total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%,
and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest
composite examination rating. A bank not meeting these criteria is treated as
undercapitalized, significantly undercapitalized, or critically
undercapitalized depending on the extent to which the banks capital levels are
below these standards. A state non-member bank that falls within any of the
three undercapitalized categories established by the prompt corrective action
regulation will be subject to severe regulatory sanctions. As of December 31,
2003, the Bank was well capitalized as defined by the FDICs regulations. Branching.Maryland law provides that, with the approval of the
Commissioner, Maryland banks may establish branches within the State of
Maryland without geographic restriction and may establish branches in other
states by any means permitted by the laws of such state or by federal law. The
Riegle-Neal Act authorizes the FDIC to approve interstate branching de novo by
state banks, only in states that specifically allow for such branching. The
Riegle-Neal Act also requires the appropriate federal banking agencies to
prescribe regulations by June 1, 1997 that prohibit any out-of-state bank from
using the interstate branching authority primarily for the purpose of deposit
production. These regulations must include guidelines to ensure that interstate
branches operated by an out-of-state bank in a host state are reasonably
helping to meet the credit needs of the communities that they serve. Dividend Limitations.Pursuant to the Maryland Financial Institutions
Code, Maryland banks may only pay dividends from undivided profits or, with the
prior approval of the Commissioner, their surplus in excess of 100% of required
capital stock. The Maryland Financial Institutions Code further restricts the
payment of dividends by prohibiting a Maryland bank from declaring a dividend
on its shares of common stock until its surplus fund equals the amount of
required capital stock or, if the surplus fund does not equal the amount of
capital stock, in an amount in excess of 90% of net earnings. In addition, the
Bank is prohibited by federal statute from paying dividends or making any other
capital distribution that would cause the Bank to fail to meet its regulatory
capital requirements. Further, the FDIC also has authority to prohibit the
payment of dividends by a state non-member bank when it determines such payment
to be an unsafe and unsound banking practice. Deposit Insurance.The Bank is required to pay semi-annual assessments
based on a percentage of its insured deposits to the FDIC for insurance of its
deposits by the Bank Insurance Fund (BIF). Under the Federal Deposit
Insurance Act, the FDIC is required to set semi-annual assessments for
BIF-insured institutions to maintain the designated reserve ratio of the BIF at
1.25% of estimated insured deposits or at a higher percentage of estimated
insured deposits that the FDIC determines to be justified for that year by
circumstances raising a significant risk of substantial future losses to the
BIF. 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. 15




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##### Table of Contents



Transactions With Affiliates.A state non-member bank or its subsidiaries
may not engage in covered transactions with any one affiliate in an amount
greater than 10% of such banks capital stock and surplus, and for all such
transactions with all affiliates a state non-member bank is limited to an
amount equal to 20% of capital stock and surplus. All such transactions must
also be on terms substantially the same, or at least as favorable, to the bank
or subsidiary as those provided to a non-affiliate. The term covered
transaction includes the making of loans, purchase of assets, issuance of a
guarantee and similar other types of transactions. An affiliate of a state
non-member bank is any company or entity which controls or is under common
control with the state non-member bank and, for purposes of the aggregate limit
on transactions with affiliates, any subsidiary that would be deemed a
financial subsidiary of a national bank. In a holding company context, the
parent holding company of a state non-member bank (such as the Company) and any
companies which are controlled by such parent holding company are affiliates of
the state non-member bank. The BHCA further prohibits a depository institution
from extending credit to or offering any other services, or fixing or varying
the consideration for such extension of credit or service, on the condition
that the customer obtain some additional service from the institution or
certain of its affiliates or not obtain services of a competitor of the
institution, subject to certain limited exceptions. Loans To Directors, Executive Officers and Principal Stockholders.Loans
to directors, executive officers and principal stockholders of a state
non-member bank must be made on substantially the same terms as those
prevailing for comparable transactions with persons who are not executive
officers, directors, principal stockholders or employees of the Bank unless the
loan is made pursuant to a compensation or benefit plan that is widely
available to employees and does not favor insiders. Loans to any executive
officer, director and principal stockholder together with all other outstanding
loans to such person and affiliated interests generally may not exceed 15% of
the banks unimpaired capital and surplus and all loans to such persons may not
exceed the institutions unimpaired capital and unimpaired surplus. Loans to
directors, executive officers and principal stockholders, and their respective
affiliates, in excess of the greater of $100,000 or 5% of capital and surplus
(up to $500,000) must be approved in advance by a majority of the board of
directors of the bank with any interested director not participating in the
voting. State non-member banks are prohibited from paying the overdrafts of any
of their executive officers or directors. In addition, loans to executive
officers may not be made on terms more favorable than those afforded other
borrowers and are restricted as to type, amount and terms of credit. 16




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##### Table of Contents



ITEM 2. PROPERTIES The following table sets forth certain information with respect to the
Banks offices: Owned/
    
    
    
    
    
    ApproximateYear Opened
    
    Leased
    
    Book Value
    
    Square Footage
    
    DepositsMain Office:101 Crain Highway, S.E.
    
    
    1953
    
    
    Owned
    
    $
    840,247
    
    
    
    10,000
    
    
    $
    90,939,586Glen Burnie, MD 21061Branches:Odenton
    
    
    1969
    
    
    Owned
    
    
    159,692
    
    
    
    6,000
    
    
    
    36,232,3991405 Annapolis Road
Odenton, MD 21113Riviera Beach
    
    
    1973
    
    
    Owned
    
    
    201,211
    
    
    
    2,500
    
    
    
    29,878,3908707 Ft. Smallwood Road
Pasadena, MD 21122Crownsville
    
    
    1979
    
    
    Owned
    
    
    360,917
    
    
    
    3,000
    
    
    
    44,798,2181221 Generals Highway
Crownsville, MD 21032Severn
    
    
    1984
    
    
    Owned
    
    
    287,579
    
    
    
    2,500
    
    
    
    25,623,631811 Reece Road
Severn, MD 21144South Crain
    
    
    1995
    
    
    Leased
    
    
    53,937
    
    
    
    2,600
    
    
    
    20,845,2947984 Crain Highway
Glen Burnie, MD 21061Severna Park(1)
    
    
    1999
    
    
    Leased
    
    
    
    
    
    
    1,250
    
    
    
    790 Ritchie Highway
Severna Park, MD 21146Severna Park
    
    
    2002
    
    
    Leased
    
    
    303,603
    
    
    
    2,184
    
    
    
    9,012,839534 Ritchie Highway
Severna Park, MD 21146Operations Centers:106 Padfield Blvd.
    
    
    1991
    
    
    Owned
    
    
    1,348,829
    
    
    
    16,200
    
    
    
    N/AGlen Burnie, MD 21061103 Crain Highway, S.E.
    
    
    2000
    
    
    Owned
    
    
    298,682
    
    
    
    3,727
    
    
    
    N/AGlen Burnie, MD 21061
   (1) This property was the former Severna Park branch location. The lease expires September 2004. The branch is
now located at 534 Ritchie Highway address. At December 31, 2003, the Bank owned 2 foreclosed real estate properties
with a total book value of $ 171,882. The Bank is holding these
commercial properties for sale. 
 ITEM 3. LEGAL PROCEEDINGS From time to time, the Company and the Bank are involved in various legal
actions relating to their business activities. At December 31, 2003, 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 On October 8, 2003, the Company held a Special Meeting of Stockholders.
The matters submitted to the stockholders for a vote were: (i) the approval of
amendments to the Companys Articles of Incorporation to reduce the stockholder
vote required to amend the Articles from 80% to 66 2/3% of all votes entitled
to be cast; and (ii)the 17




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##### Table of Contents



approval of amendments to the Companys Bylaws to
reduce the stockholder vote required to amend the Bylaws from 80% to 66 2/3% of
all votes entitled to be cast. At the Meeting, the stockholders: (i) approved the amendment to the
Companys Articles of Incorporation, with 1,432,509 shares voting in favor of
the amendment, 25,677 shares voting to withhold approval, and 7,534 shares
abstaining; and (ii) approved the amendments to the Companys Bylaws, with
1,433,034 shares voting in favor of the amendments, 25,152 shares voting to
withhold approval, and 7,534 shares abstaining. 
 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information about the Companys executive officers. NAME
    
    AGE
    
    POSITIONSF. William Kuethe, Jr.
    
    
    71
    
    
    President and Chief Executive OfficerMichael G. Livingston
    
    
    50
    
    
    Senior Vice President, Chief Lending Officer and Chief
Operating OfficerJohn E. Porter
    
    
    50
    
    
    Senior Vice President and Chief Financial Officer
 F. WILLIAM KUETHE, JR. has been President and Chief Executive Officer of
the Company and the Bank since 1995. He also was director of the Bank from 1963
through 1989. He was President of Glen Burnie Mutual Savings Bank from 1960
through 1995. Mr. Kuethe is a former licensed appraiser and real estate broker
with banking experience from 1960 to present, at all levels. He is the father
of Frederick W. Kuethe, III, a director of the Company. MICHAEL G. LIVINGSTON was appointed Senior Vice President in January 1998
and has been Chief Lending Officer of the Bank since 1996. He served as Deputy
Chief Operating Officer from February 14, 2003 through December 31, 2003 and
was appointed the Chief Operating Officer effective January 1, 2004. He was
Regional Vice President and commercial loan officer with Citizens Bank from
March 1993 until April 1996. JOHN E. PORTER was appointed Senior Vice President in January 1998. He has
been Treasurer and Chief Financial Officer of the Company since 1995 and Vice
President, Treasurer and Chief Financial Officer of the Bank since 1990. He has
been Secretary/Treasurer of GBB since 1995. 18




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER               PURCHASES OF EQUITY SECURITIES The Common Stock is traded on the Nasdaq SmallCap Market under the symbol
GLBZ. As of March 2, 2004, there were 479 record holders of the Common
Stock. The closing price for the Common Stock on that date was $25.30. A six
for five stock dividend has been declared for stockholders of record on
January 5, 2004, payable January 16, 2004. The following table sets forth the high and low sales prices for the
Common Stock for each full quarterly period during 2003 and 2002 as reported by
Nasdaq and as available through the OTC market. 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. 2003
    
    2002Quarter Ended
    
    High
    
    Low
    
    Dividends
    
    High
    
    Low
    
    DividendsMarch 31,
    
    $
    20.85
    
    
    $
    18.00
    
    
    $
    0.12
    
    
    $
    22.40
    
    
    $
    13.80
    
    
    $
    0.10June 30,
    
    
    22.39
    
    
    
    20.72
    
    
    
    0.12
    
    
    
    20.90
    
    
    
    18.70
    
    
    
    0.10September 30
    
    
    24.00
    
    
    
    20.76
    
    
    
    0.12
    
    
    
    18.49
    
    
    
    16.65
    
    
    
    0.12December 31
    
    
    30.99
    
    
    
    23.50
    
    
    
    0.18
    
    
    
    17.93
    
    
    
    16.27
    
    
    
    0.18
 A regular dividend of $0.12 and a bonus dividend of $0.06 were declared
for stockholders of record on December 23, 2003, payable on January 7, 2004
and January 12, 2004, respectively. The Company intends to pay dividends equal to 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. 19




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA The following table presents consolidated selected financial data for the
Company and its subsidiaries for each of the periods indicated. Dividends and
earnings per share have been adjusted to give retroactive effect to a
six-for-five stock split effected through a stock dividend paid on January 11,
2000 and a three-for-two stock split effected through a stock dividend paid on
June 21, 2001. Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars In Thousand Except Per Share Data)Operations Data:Net Interest Income
    
    $
    11,263
    
    
    $
    11,368
    
    
    $
    10,674
    
    
    $
    10,801
    
    
    $
    9,925Provision for Credit Losses
    
    
    40
    
    
    
    
    
    
    
    (150
    )
    
    
    
    
    
    
    300Other Income
    
    
    2,289
    
    
    
    2,485
    
    
    
    1,821
    
    
    
    3,658
    
    
    
    2,828Other Expense
    
    
    9,748
    
    
    
    9,957
    
    
    
    10,332
    
    
    
    10,746
    
    
    
    9,822Net Income
    
    
    3,077
    
    
    
    2,811
    
    
    
    1,725
    
    
    
    2,275
    
    
    
    1,455Share Data:Basic Net Income Per Share
    
    $
    1.83
    
    
    $
    1.68
    
    
    $
    1.04
    
    
    $
    1.38
    
    
    $
    0.88Diluted Net Income Per Share
    
    
    1.83
    
    
    
    1.68
    
    
    
    1.04
    
    
    
    1.38
    
    
    
    0.88Cash Dividends Declared Per Common Share
    
    
    0.54
    
    
    
    0.50
    
    
    
    0.45
    
    
    
    0.449
    
    
    
    0.28Weighted Average Common Shares
Outstanding:Basic
    
    
    1,682,235
    
    
    
    1,668,335
    
    
    
    1,656,904
    
    
    
    1,652,001
    
    
    
    1,636,275Diluted
    
    
    1,682,235
    
    
    
    1,671,155
    
    
    
    1,656,904
    
    
    
    1,652,001
    
    
    
    1,636,275Financial Condition Data:Total Assets
    
    $
    302,252
    
    
    $
    279,406
    
    
    $
    263,362
    
    
    $
    239,211
    
    
    $
    213,439Loans Receivable, Net
    
    
    172,819
    
    
    
    158,287
    
    
    
    164,569
    
    
    
    162,373
    
    
    
    151,107Total Deposits
    
    
    256,908
    
    
    
    241,420
    
    
    
    229,307
    
    
    
    205,968
    
    
    
    194,090Long Term Borrowings
    
    
    7,227
    
    
    
    7,251
    
    
    
    7,275
    
    
    
    7,297
    
    
    
    Junior Subordinated Debentures
    
    
    5,155
    
    
    
    5,155
    
    
    
    5,155
    
    
    
    5,155
    
    
    
    Total Stockholders Equity
    
    
    23,948
    
    
    
    21,789
    
    
    
    17,862
    
    
    
    17,181
    
    
    
    15,102Performance Ratios:Return on Average Assets
    
    
    1.05
    %
    
    
    1.05
    %
    
    
    0.69
    %
    
    
    1.02
    %
    
    
    0.66
    %Return on Average Equity
    
    
    13.56
    
    
    
    14.49
    
    
    
    9.77
    
    
    
    12.94
    
    
    
    9.97Net Interest Margin (1)
    
    
    4.48
    
    
    
    4.76
    
    
    
    4.80
    
    
    
    5.27
    
    
    
    4.96Dividend Payout Ratio
    
    
    29.53
    
    
    
    29.70
    
    
    
    43.27
    
    
    
    32.61
    
    
    
    43.48Capital Ratios:Average Equity to Average Assets
    
    
    7.76
    %
    
    
    9.03
    %
    
    
    9.08
    %
    
    
    8.59
    %
    
    
    6.67
    %Leverage Ratio
    
    
    9.25
    
    
    
    9.07
    
    
    
    8.79
    
    
    
    9.30
    
    
    
    6.87Total Risk-Based Capital Ratio
    
    
    15.79
    
    
    
    15.28
    
    
    
    13.92
    
    
    
    13.99
    
    
    
    10.80Asset Quality Ratios:Allowance for Credit Losses to
Gross Loans
    
    
    1.28
    %
    
    
    1.56
    %
    
    
    1.75
    %
    
    
    2.04
    %
    
    
    1.89
    %Non-accrual and Past Due Loans to
Gross Loans
    
    
    0.33
    %
    
    
    0.36
    %
    
    
    0.39
    %
    
    
    0.24
    %
    
    
    0.68
    %Allowance for Credit Losses to Non-
Accrual and Past Due Loans
    
    
    385.25
    %
    
    
    429.13
    %
    
    
    445.30
    %
    
    
    837.87
    %
    
    
    276.97
    %Net Loan Charge-offs (Recoveries) to
Average Loans
    
    
    0.18
    %
    
    
    0.26
    %
    
    
    0.18
    %
    
    
    (0.28
    )%
    
    
    0.15
    %
   (1) Presented on a tax-equivalent basis 20




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview During 2003, the Company continued many favorable operating trends. Most
notably, the Banks net income grew from $2,811,083 in 2002 to $3,077,074 in
2003, a 9.46% increase in net income. In addition, 2003 saw significant growth
in both the Banks deposits and investment portfolio. Deposit growth in 2003
was strong with increases of $4,901,787 in interest bearing deposits and
$10,586,841 in non-interest bearing demand deposits. Investment portfolio
growth was due primarily to the increase in the Banks investment in state and
municipal bonds which had grown to $43,624,164. Forward-Looking Statements When used in this discussion and elsewhere in this Annual Report on Form
10-K, the words or phrases will likely result, are expected to, will
continue, is anticipated, estimate, project or similar expressions are
intended to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company cautions readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and readers are advised that various factors,
including regional and national economic conditions, unfavorable judicial
decisions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors could affect the Companys financial performance and could cause the
Companys actual results for future periods to differ materially from those
anticipated or projected. The Company does not undertake and specifically disclaims any obligation
to update any forward-looking statements to reflect occurrence of anticipated
or unanticipated events or circumstances after the date of such statements. Comparison of Results of Operations for the Years Ended December 31, 2003, 2002 and 2001 General.For the year ended December 31, 2003, the Company reported
consolidated net income of $3,077,074 ($1.83 basic and diluted
earnings per share) compared to consolidated net income of $2,811,083 ($1.68
basic and diluted earnings per share) for the year ended December 31, 2002 and
consolidated net income of $1,725,236 ($1.04 basic and diluted earnings per
share) for the year ended December 31, 2001. (All per share amounts throughout
this report have been adjusted to give retroactive effect to a three-for-two
stock split effected through a stock dividend paid on June 21, 2001.) Income
for 2002 included a $763,644 curtailment gain on a post retirement benefit plan
amendment. Net income for 2002, adjusted to remove the effects of this item,
net of taxes, was $2,342,358. Net Interest Income.The primary component of the Companys net income is
its net interest income, which is the difference between income earned on
assets and interest paid on the deposits and borrowings used to fund income
producing assets. Net interest income is determined by the spread between the
yields earned on the Companys interest-earning assets and the rates paid on
interest-bearing liabilities as well as the relative amounts of such assets and
liabilities. Net interest income, divided by average interest-earning assets,
represents the Companys net interest margin. Consolidated net interest income for the year ended December 31, 2003 was
$11,263,294 compared to $11,368,150 for the year ended December 31, 2002 and
$10,673,730 for the year ended December 31, 2001. The $104,856 decrease
for the most recent year was due to a decrease in loan and federal funds
income, partially offset by a decrease in deposit expense. The $694,420
increase in net interest income for 2002 as compared to 2001 was due to a
decrease in the interest expense on deposits combined with an increase in
interest income on state and municipal securities, partially offset by a
decrease in interest income on loans. Since a large portion of the Companys
portfolio is invested in state and municipal securities, which are tax
advantaged, the after tax net interest income for 2003 was $12,193,604, a
$307,460 or 2.58% increase over the $11,886,144 after tax net interest income
for 2002, which was an increase of $827,939 or 7.49% compared to $11,058,205
in after tax net interest income for 2001. Interest expense decreased from $5,202,132 in 2002 to $4,276,724 in 2003,
a $925,408, or 17.79% decrease, primarily due to decreases in deposit rates.
Interest expense decreased from $6,533,274 in 2001 to 21




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##### Table of Contents



$5,202,132 in 2002, a $1,331,142, or 20.4% decrease, primarily due to
decreases in interest rates. Net interest margin for the year ended December
31, 2003 was 4.48% compared to 4.76% and 4.80% for the years ended December 31,
2002 and 2001, respectively. The following table allocates changes in income and expense attributable
to the Companys interest-earning assets and interest-bearing liabilities for
the periods indicated between changes due to changes in rate and changes in
volume. Changes due to rate/volume are allocated to changes due to volume. Year Ended December 31,2003
    
    VS.
    
    2002
    
    2002
    
    VS.
    
    2001Change Due To:
    
    
    
    
    
    Change Due To:Increase/
    
    
    
    
    
    
    
    
    
    Increase/Decrease
    
    Rate
    
    Volume
    
    Decrease
    
    Rate
    
    Volume(In Thousands)ASSETSInterest-earning assets:Federal funds sold
    
    $
    (43
    )
    
    $
    (26
    )
    
    $
    (17
    )
    
    $
    (192
    )
    
    $
    (157
    )
    
    $
    (35
    )Interest-bearing deposits
    
    
    6
    
    
    
    3
    
    
    
    3
    
    
    
    (185
    )
    
    
    (18
    )
    
    
    (167
    )Investment securities:U.S. Treasury securities,
obligations of U.S. government
agencies and mortgage-backed
securities
    
    
    (544
    )
    
    
    (649
    )
    
    
    105
    
    
    
    75
    
    
    
    (717
    )
    
    
    792Obligations of states and
political subdivisions(1)
    
    
    961
    
    
    
    (85
    )
    
    
    1,046
    
    
    
    616
    
    
    
    (183
    )
    
    
    799All other investment securities
    
    
    13
    
    
    
    6
    
    
    
    7
    
    
    
    17
    
    
    
    (78
    )
    
    
    95Total investment securities
    
    
    430
    
    
    
    (728
    )
    
    
    1,158
    
    
    
    708
    
    
    
    (978
    )
    
    
    1,686Loans, net of unearned income:Demand, time and lease
    
    
    (21
    )
    
    
    (60
    )
    
    
    39
    
    
    
    (78
    )
    
    
    (127
    )
    
    
    49Mortgage and construction
    
    
    (247
    )
    
    
    (658
    )
    
    
    411
    
    
    
    (74
    )
    
    
    (359
    )
    
    
    285Installment and credit card
    
    
    (725
    )
    
    
    (535
    )
    
    
    (190
    )
    
    
    (685
    )
    
    
    (239
    )
    
    
    (446
    )Total gross loans(2)
    
    
    (993
    )
    
    
    (1,253
    )
    
    
    260
    
    
    
    (837
    )
    
    
    (725
    )
    
    
    (112
    )Allowance for credit losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net loans
    
    
    (993
    )
    
    
    (1,253
    )
    
    
    260
    
    
    
    (837
    )
    
    
    (725
    )
    
    
    (112
    )Total interest-earning assets
    
    $
    (600
    )
    
    $
    (2,004
    )
    
    $
    1,404
    
    
    $
    (506
    )
    
    $
    (1,878
    )
    
    $
    1,372LIABILITIES:Interest-bearing deposits:Savings and NOW
    
    $
    (201
    )
    
    $
    (260
    )
    
    $
    59
    
    
    $
    (255
    )
    
    $
    (323
    )
    
    $
    68Money market
    
    
    (81
    )
    
    
    (97
    )
    
    
    16
    
    
    
    (171
    )
    
    
    (190
    )
    
    
    19Other time deposits
    
    
    (655
    )
    
    
    (686
    )
    
    
    31
    
    
    
    (889
    )
    
    
    (1,147
    )
    
    
    258Total interest-bearing deposits
    
    
    (937
    )
    
    
    (1,043
    )
    
    
    106
    
    
    
    (1,315
    )
    
    
    (1,160
    )
    
    
    345Non-interest-bearing deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Borrowed funds
    
    
    12
    
    
    
    (67
    )
    
    
    79
    
    
    
    (17
    )
    
    
    (32
    )
    
    
    15Total interest-bearing liabilities.
    
    $
    (925
    )
    
    $
    (1,110
    )
    
    $
    185
    
    
    $
    (1,332
    )
    
    $
    (1,692
    )
    
    $
    360
   (1)
    
    Tax equivalent basis.(2)
    
    Non-accrual loans included in average balances. 22




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##### Table of Contents



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 31,2003
    
    2002
    
    2001Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost(Dollars In Thousands)ASSETS:Interest-earning assets:Federal funds sold
    
    $
    4,815
    
    
    $
    51
    
    
    
    1.06
    %
    
    $
    5,919
    
    
    $
    94
    
    
    
    1.59
    %
    
    $
    6,733
    
    
    $
    286
    
    
    
    4.25
    %Interest-bearing deposits
    
    
    2,078
    
    
    
    61
    
    
    
    2.94
    
    
    
    1,782
    
    
    
    55
    
    
    
    3.09
    
    
    
    5,878
    
    
    
    240
    
    
    
    4.08Investment securities:U.S. Treasury securities,
obligations of U.S. government
agencies and mortgage-backed
securities
    
    
    54,497
    
    
    
    1,973
    
    
    
    3.62
    
    
    
    52,287
    
    
    
    2,517
    
    
    
    4.81
    
    
    
    39,491
    
    
    
    2,442
    
    
    
    6.18Obligations of states and political
subdivisions(1)
    
    
    40,655
    
    
    
    2,702
    
    
    
    6.64
    
    
    
    25,402
    
    
    
    1,741
    
    
    
    6.85
    
    
    
    13,761
    
    
    
    1,125
    
    
    
    8.18All other investment securities
    
    
    5,038
    
    
    
    357
    
    
    
    7.09
    
    
    
    4,935
    
    
    
    344
    
    
    
    6.97
    
    
    
    3,833
    
    
    
    327
    
    
    
    8.56Total investment securities
    
    
    100,190
    
    
    
    5,032
    
    
    
    5.02
    
    
    
    82,624
    
    
    
    4,602
    
    
    
    5.57
    
    
    
    57,085
    
    
    
    3,894
    
    
    
    6.82Loans, net of unearned income:Demand, time and lease
    
    
    5,624
    
    
    
    327
    
    
    
    5.81
    
    
    
    5,066
    
    
    
    348
    
    
    
    6.87
    
    
    
    4,542
    
    
    
    426
    
    
    
    9.38Mortgage and construction
    
    
    88,853
    
    
    
    6,095
    
    
    
    6.86
    
    
    
    83,444
    
    
    
    6,342
    
    
    
    7.60
    
    
    
    79,873
    
    
    
    6,416
    
    
    
    8.03Installment and credit card
    
    
    71,326
    
    
    
    4,922
    
    
    
    6.90
    
    
    
    73,851
    
    
    
    5,647
    
    
    
    7.65
    
    
    
    79,416
    
    
    
    6,332
    
    
    
    7.97Total gross loans(2)
    
    
    165,803
    
    
    
    11,344
    
    
    
    6.84
    
    
    
    162,361
    
    
    
    12,337
    
    
    
    7.60
    
    
    
    163,831
    
    
    
    13,174
    
    
    
    8.04Allowance for credit losses
    
    
    2,343
    
    
    
    
    
    
    
    
    
    
    
    2,767
    
    
    
    
    
    
    
    
    
    
    
    3,242Total net loans
    
    
    163,460
    
    
    
    11,344
    
    
    
    6.94
    
    
    
    159,594
    
    
    
    12,337
    
    
    
    7.59
    
    
    
    160,589
    
    
    
    13,174
    
    
    
    8.20Total interest-earning assets
    
    
    270,317
    
    
    
    16,376
    
    
    
    6.06
    
    
    
    249,919
    
    
    
    17,088
    
    
    
    6.84
    
    
    
    230,285
    
    
    
    17,594
    
    
    
    7.64Cash and due from banks
    
    
    10,317
    
    
    
    
    
    
    
    
    
    
    
    8,921
    
    
    
    
    
    
    
    
    
    
    
    9,963Other assets
    
    
    12,039
    
    
    
    
    
    
    
    
    
    
    
    10,199
    
    
    
    
    
    
    
    
    
    
    
    9,124Total assets
    
    $
    292,673
    
    
    
    
    
    
    
    
    
    
    $
    269,039
    
    
    
    
    
    
    
    
    
    
    $
    249,372LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing deposits:Savings and NOW
    
    $
    76,632
    
    
    
    284
    
    
    
    0.37
    %
    
    $
    67,926
    
    
    
    485
    
    
    
    0.71
    %
    
    $
    61,992
    
    
    $
    740
    
    
    
    1.19
    %Money market
    
    
    21,514
    
    
    
    105
    
    
    
    0.49
    
    
    
    19,770
    
    
    
    186
    
    
    
    0.94
    
    
    
    18,756
    
    
    
    357
    
    
    
    1.90Other time deposits
    
    
    89,108
    
    
    
    2,887
    
    
    
    3.24
    
    
    
    88,304
    
    
    
    3,542
    
    
    
    4.01
    
    
    
    83,498
    
    
    
    4,431
    
    
    
    5.31Total interest-bearing deposits
    
    
    187,254
    
    
    
    3,276
    
    
    
    1.75
    
    
    
    176,000
    
    
    
    4,213
    
    
    
    2.39
    
    
    
    164,246
    
    
    
    5,528
    
    
    
    3.37Short-term borrowed funds
    
    
    1,816
    
    
    
    28
    
    
    
    1.54
    
    
    
    755
    
    
    
    16
    
    
    
    2.12
    
    
    
    541
    
    
    
    18
    
    
    
    3.33Long-term borrowed funds
    
    
    12,393
    
    
    
    972
    
    
    
    7.84
    
    
    
    12,417
    
    
    
    974
    
    
    
    7.84
    
    
    
    12,440
    
    
    
    988
    
    
    
    7.94Total interest-bearing liabilities
    
    
    201,463
    
    
    
    4,277
    
    
    
    2.12
    
    
    
    189,172
    
    
    
    5,202
    
    
    
    2.75
    
    
    
    177,227
    
    
    
    6,534
    
    
    
    3.69Non-interest-bearing deposits
    
    
    66,635
    
    
    
    
    
    
    
    
    
    
    
    58,351
    
    
    
    
    
    
    
    
    
    
    
    52,252Other liabilities S
    
    
    2,154
    
    
    
    
    
    
    
    
    
    
    
    1,389
    
    
    
    
    
    
    
    
    
    
    
    2,240Stockholders equity
    
    
    22,421
    
    
    
    
    
    
    
    
    
    
    
    20,127
    
    
    
    
    
    
    
    
    
    
    
    17,653Total liabilities and equity
    
    $
    292,673
    
    
    
    
    
    
    
    
    
    
    $
    269,039
    
    
    
    
    
    
    
    
    
    
    $
    249,372Net interest income
    
    
    
    
    
    $
    12,099
    
    
    
    
    
    
    
    
    
    
    $
    11,886
    
    
    
    
    
    
    
    
    
    
    $
    11,060Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.94
    %
    
    
    
    
    
    
    
    
    
    
    4.09
    %
    
    
    
    
    
    
    
    
    
    
    3.95
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.48
    %
    
    
    
    
    
    
    
    
    
    
    4.76
    %
    
    
    
    
    
    
    
    
    
    
    4.80
    %
   1
    
    Tax equivalent basis. The incremental tax rate applied was 35.23% for 2003 and 30.73% for 2002.2
    
    Non-accrual loans included in average balance. Provision For Credit Losses.During the year ended December 31, 2003, the
Company made a provision of $40,000 for credit losses, compared to no provision
during the year ended December 31, 2002, and a negative $150,000 provision
during the year ended December 31, 2001. At December 31, 2003, the allowance
for loan losses equaled 385.25% of non-accrual and past due loans compared to
429.13% and 445.30% at December 31, 2002 and 2001, respectively. During the
year ended December 31, 2003, the Company recorded net chargeoffs of $308,306
compared to $423,755 and $296,360 in net charge-offs during the years
ended December 31, 2002 and 2001, respectively. 23




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##### Table of Contents



Other Income.Other income includes service charges on deposit accounts,
other fees and commissions, net gains on investment securities, and income on
life insurance (including bank owned life insurance income (BOLI) and gains of
approximately $117,000 from the death of an officer). For 2002, other income
also included a curtailment gain of $763,644 on a post-retirement benefit plan
amendment. Other income decreased from $2,484,725 in 2002 to $2,289,413 in
2003, a $195,312, or 7.86% decrease. The decrease was primarily due to the
curtailment gain realized in 2002, partially offset by gains on investment
securities, an increase in BOLI income and an increase in service charge
income. Other income increased from $1,821,138 in 2001 to $2,484,725 in 2002,
a $663,587, or 36.4% increase. The increase was largely due to the 2002
non-recurring curtailment gain and increases in income on service charges and
other fees and commissions, partially offset by a decrease in securities gains
realized. Other Expenses.Other expenses decreased from $9,956,847 in 2002 to
$9,747,693 in 2003, a $209,154 or 2.1% decrease. This decrease
was primarily due to a decrease in furniture and fixtures expense and operating
expense, offset by an increase in employee benefits and occupancy expense
relating to the opening of the Severna Park location. Other expenses decreased
from $10,332,093 in 2001 to $9,956,847 in 2002, a $375,246 or 3.6% decrease.
This decrease was primarily due to a decline in other operating expenses and
employee benefit costs, which were partially offset by an increase in salaries
and wages. Income Taxes.During the year ended December 31, 2003, the Company
recorded income tax expense of $687,940, compared to income tax expense of
$1,084,945 for the year ended December 31, 2002. The decrease in income tax
expense for 2003 as compared to 2002, despite higher net income in 2003, was
primarily due to the tax advantaged treatment of the state and municipal
securities portfolio and BOLI income. During the year ended December 31, 2002,
the Company recorded income tax expense of $1,084,945, compared to income tax
expense of $587,539 for the year ended December 31, 2001. The increase in
income tax expense for 2002 as compared to 2001 was primarily due to the
curtailment gain on post retirement benefits and an increase in net interest
income partially offset by the tax benefits from the Companys increased
investment in state and municipal securities. Comparison of Financial Condition at December 31, 2003, 2002 and 2001 The Companys total assets increased to $302,252,466 at December 31, 2003
from $279,406,206 at December 31, 2002. The increase in total assets during
the year ended December 31, 2003 is a result of an increase in the loan and
securities portfolio, offset by a decrease in federal funds sold due to a
redeployment of assets. The Companys total assets increased to $279,406,206
at December 31, 2002 from $263,361,726 at December 31, 2001. The increase in
assets during the year ended December 31, 2002 is a result primarily of growth
in investment securities and other total assets partially offset by a decrease
in the loan portfolio. The Companys loan portfolio increased to $172,819,049 at December 31,
2003 compared to $158,286,746 at December 31, 2002 and $164,569,252 at December
31, 2001. The increase in the loan portfolio during the 2003 period is
primarily due to residential mortgage loans increasing by approximately $14.9
million with lesser increases in the other loan portfolios, partially offset by
a decline in the commercial loan portfolio. The decline in the loan portfolio
during the 2002 period is attributable almost entirely to a decrease in the
indirect automobile portfolio. The decrease in indirect automobile lending can
be at least partially attributed to zero percent financing offered by
automobile manufacturers after September 2001. During 2003, the Companys total investment securities portfolio
(including both investment securities available for sale and investment
securities held to maturity) totaled $103,181,107, a $11,321,056 or 12.32%,
increase from $91,860,051 at December 31, 2002. This increase is primarily
attributable to an increase in state and municipal and U.S. Government agency
securities, offset by a decrease in mortgage backed securities. During 2002,
the Companys total investment securities portfolio (including both investment
securities available for sale and investment securities held to maturity)
totaled $91,860,051, a $19,795,130 or 27.5%, increase from $72,064,921 at
December 31, 2001. This increase is primarily attributable to growth in
mortgage backed and state and municipal securities, partially offset by a
decline in U.S. Government agency securities. Deposits as of December 31, 2003 totaled $256,908,235, an increase of
$15,488,628, or 6.42%, from the $241,419,607 total as of December 31, 2002.
The $241,419,607 in total deposits as of December 31, 2002 was a $12,112,889 or
5.3% increase from the $229,306,717 total deposits as of December 31, 2001.
Demand deposits as of December 31, 2003 totaled $69,648,819, a $10,586,842 or
17.92% increase from $59,061,977 at December 31, 2002. NOW and Super NOW
accounts as of December 31, 2003 increased by $4,329,331 or 17.99% from their
2002 level to $28,400,505. Money market accounts increased by $254,674 or
1.28%, from their 2002 level to total 24




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##### Table of Contents



$20,144,401 December 31, 2003. Savings deposits increased by $5,762,412,
or 12.10%, from their 2002 level, to $53,378,579 at December 31, 2003. Time
deposits over $100,000 totaled $21,549,128 on December 31, 2003, an increase of
$3,850,569, or 21.76% from December 31, 2002. Other time deposits (made up of
certificates of deposit less than $100,000 and individual retirement accounts)
totaled $63,786,805 on December 31, 2003, a $9,295,199 or a 12.72%, decrease
from December 31, 2002. Total stockholders equity as of December 31, 2003 increased by
$2,158,242, or 9.91%, from the 2002 period. The increase was attributed to an
increase in retained earnings and surplus, offset by a decline in accumulated
other comprehensive income, net of tax. Total stockholders equity as of
December 31, 2002 increased by $3,927,801, or 22.0%, from the 2001 period. The
increase was attributed to an increase in retained earnings and accumulated
other comprehensive income, net of tax. Off-Balance Sheet Arrangements, Contractual Obligations, and Commitments Off-Balance Sheet Arrangements.The Bank is a party to financial
instruments in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit, which involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
consolidated financial statements. Loan commitments and lines of credit are agreements to lend to customers
as long as there is no violation of any conditions of the contracts. Loan
commitments generally have interest rates fixed at current market amounts,
fixed expiration dates, and may require payment of a fee. Lines of credit
generally have variable interest rates. Many of the loan commitments and lines
of credit are expected to expire without being drawn upon; accordingly, the
total commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customers creditworthiness on a case-by-case basis.
The amount of collateral or other security obtained, if deemed necessary by the
Bank upon extension of credit, is based on managements credit evaluation.
Collateral held varies but may include deposits held in financial institutions,
U.S. Treasury securities, other marketable securities, accounts receivable,
inventory, property and equipment, personal residences, income-producing
commercial properties, and land under development. Personal guarantees are
also obtained to provide added security for certain commitments. Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to guarantee the installation of real property improvements
and similar transactions. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Bank holds collateral and obtains personal guarantees
supporting those commitments for which collateral or other securities is deemed
necessary. The Banks exposure to credit loss in the event of nonperformance by the
customer is the contractual amount of the commitment. Loan commitments, lines
of credit, and letters of credit are made on the same terms, including
collateral, as outstanding loans. As of December 31, 2003, the Bank has
accrued $150,000 for unfunded commitments related to these financial
instruments with off balance sheet risk, which is included in other
liabilities. Contractual Obligations.The following table presents, as of December 31,
2003, significant fixed and determinable contractual obligations to third
parties by payment date. Further discussion of the nature of each obligation
is included in the referenced note to the consolidated financial statements. PAYMENTS DUE INONE TO
    
    THREE TO
    
    OVERNOTE
    
    ONE YEAR
    
    THREE
    
    FIVE
    
    FIVE(IN THOUSANDS)
    
    REFERENCE
    
    OR LESS
    
    YEARS
    
    YEARS
    
    YEARS
    
    TOTALDeposits without a
stated maturity (a),(c)
    
    
    9
    
    
    $
    171,572
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    171,572Time deposits (a)
    
    
    9
    
    
    
    47,148
    
    
    
    21,952
    
    
    
    14,848
    
    
    
    1,388
    
    
    
    85,336Short-term borrowings (a)
    
    
    6
    
    
    
    6,602
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,602Long-term borrowings (b)
    
    
    7,8
    
    
    
    573
    
    
    
    1,153
    
    
    
    1,161
    
    
    
    13,320
    
    
    
    16,207Operating leases
    
    
    5
    
    
    
    102
    
    
    
    60
    
    
    
    30
    
    
    
    
    
    
    
    192
  (a)
    
    Excludes interest(b)
    
    Includes Junior Subordinated Debentures and semi-annual payments (made in March and September) of $273,215. This is also
assuming that the Debentures will be paid off in September 2010.(c)
    
    Includes non-interest bearing deposits 25




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##### Table of Contents



Commitments.The following table details the amounts and expected
maturities of significant commitments as of December 31, 2003. Further
discussion of these commitments is included in Note 17 to the consolidated
financial statements. PAYMENTS DUE INONE TO
    
    THREE TO
    
    OVERONE YEAR
    
    THREE
    
    FIVE
    
    FIVE(IN THOUSANDS)
    
    OR LESS
    
    YEARS
    
    YEARS
    
    YEARS
    
    TOTALLoan commitments:Other mortgage loans
    
    $
    2,082
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,082Unused lines of credit:Home-equity lines
    
    
    207
    
    
    
    71
    
    
    
    1,050
    
    
    
    3,340
    
    
    
    4,668Commercial lines
    
    
    8,501
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,501Unsecured consumer lines
    
    
    983
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    983Letters of credit
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    667
    
    
    
    773
 Asset/Liability Management Net interest income, the primary component of the Companys net income,
arises from the difference between the yield on interest-earning assets and the
cost of interest-bearing liabilities and the relative amounts of such assets
and liabilities. The Company manages its assets and liabilities by
coordinating the levels of and gap between interest-rate sensitive assets and
liabilities to minimize changes in net interest income and in the economic
value of its equity despite changes in market interest rates. The Banks
Asset/Liability and Risk Management Committee meets on a monthly basis to
monitor compliance with the Boards objectives. Among other tools used by the
Asset/Liability and Risk Management Committee to monitor interest rate risk is
a gap report which measures the dollar difference between the amount of
interest-earning assets and interest-bearing liabilities subject to repricing
within a given time period. Generally, during a period of rising interest
rates, a negative gap position would adversely affect net interest income,
while a positive gap would result in an increase in net interest income, while,
conversely, during a period of falling interest rates, a negative gap would
result in an increase in net interest income and a positive gap would adversely
affect net interest income. During recent periods, the Company has maintained a negative gap position
that has benefited earnings as interest rates have fallen. In order to reduce
its negative gap position, the Company has recently begun investing in
mortgage-backed and other government securities which have rates that adjust to
market rates. The Company also maintains a significant portfolio of
available-for-sale securities that can be quickly converted to more liquid
assets if needed. The following table sets forth the Banks interest-rate sensitivity at
December 31, 2003. 26




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##### Table of Contents



Over 3 To
    
    Over 1
    
    Over 50-3 Months
    
    12 Months
    
    Through 5 Years
    
    Years
    
    Total(Dollars In Thousands)Assets:Cash and due from banks
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    11,120Federal funds and overnight deposits
    
    
    1,775
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,775Securities
    
    
    
    
    
    
    3,057
    
    
    
    12,054
    
    
    
    88,967
    
    
    
    104,078Loans
    
    
    16,578
    
    
    
    3,036
    
    
    
    75,996
    
    
    
    79,455
    
    
    
    175,065Fixed Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,220Other Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,994Total assets
    
    $
    18,353
    
    
    $
    6,093
    
    
    $
    88,050
    
    
    $
    168,422
    
    
    $
    302,252Liabilities:Demand deposit accounts
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    69,649NOW accounts
    
    
    28,401
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,401Money market deposit accounts
    
    
    20,144
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,144Savings accounts
    
    
    53,378
    
    
    
    197
    
    
    
    
    
    
    
    
    
    
    
    53,575IRA accounts
    
    
    1,904
    
    
    
    4,050
    
    
    
    15,005
    
    
    
    1,193
    
    
    
    22,152Certificates of deposit
    
    
    11,961
    
    
    
    29,036
    
    
    
    21,795
    
    
    
    195
    
    
    
    62,987Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,241Junior Subordinated Debenture
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    5,155Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,948Total liabilities and
Stockholders equity
    
    $
    115,788
    
    
    $
    33,283
    
    
    $
    36,800
    
    
    $
    1,388
    
    
    $
    302,252GAP
    
    $
    (97,435
    )
    
    $
    (27,190
    )
    
    $
    51,250
    
    
    $
    167,034Cumulative GAP
    
    
    (97,435
    )
    
    
    (124,625
    )
    
    
    (73,375
    )
    
    
    93,659Cumulative GAP as a % of
total assets
    
    
    (32.37
    %)
    
    
    (41.40
    %)
    
    
    (24.37
    %)
    
    
    31.11
    %
 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
within three months although it is the Companys experience that such accounts
may be less sensitive to changes in market rates. Liquidity and Capital Resources The Company currently has no business other than that of the Bank and does
not currently have any material funding commitments. The Companys principal
sources of liquidity are cash on hand and dividends received from the Bank.
The Bank is subject to various regulatory restrictions on the payment of
dividends. The Banks principal sources of funds for investments and operations are
net income, deposits from its primary market area, principal and interest
payments on loans, interest received on investment securities and proceeds from
maturing investment securities. Its principal funding commitments are for the
origination or purchase of loans and the payment of maturing deposits.
Deposits are considered the primary source of funds supporting the Banks
lending and investment activities. The Bank also uses borrowings from the FHLB
of Atlanta to supplement deposits, residential and small business lending, and
to meet specific and anticipated needs. The Banks most liquid assets are cash and cash equivalents, which are
cash on hand, amounts due from financial institutions, federal funds sold and
money market mutual funds. The levels of such assets are dependent on the
Banks operating financing and investment activities at any given time. The
variations in levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows. Cash and cash equivalents (cash due from banks, interest-bearing deposits
in other financial institutions, and federal funds sold), as of December 31,
2003, totaled $12,894,894, a decrease of $2,847,194 or 18.09%, from the
December 31, 2002 total of $15,742,088. Most of this decrease was due to a
reduction in the federal funds sold. As of December 31, 2003, the Bank was permitted to draw on a $36.2 million
line of credit from the FHLB of Atlanta. Borrowings under the line are secured
by a floating lien on the Banks residential mortgage loans and its portfolio
of U.S. Government and agency securities. As of December 31, 2003, a $7
million long-term convertible advance was outstanding under this line. In
addition the Bank has a secured line of credit in the amount of $5 27




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##### Table of Contents



million from another commercial bank on which it has not drawn. Furthermore,
on September 7, 2000, the Company issued $5,155,000 of its 10.6% Junior
Subordinated Deferrable Interest Debentures to Glen Burnie Statutory Trust I, a
Connecticut statutory trust wholly owned by the Company. The Trust, in turn,
issued $5,000,000 of its 10.6% capital securities to institutional investors.
The debentures are scheduled to mature on September 7, 2030, unless called by
the Company not earlier than September 7, 2010. As of December 31, 2003, 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, 2003, the Company was in
compliance with these requirements with a leverage ratio of 9.25%, a Tier 1
risk-based capital ratio of 14.54% and total risk-based capital ratio of
15.79%. At December 31, 2003, 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
mature. As a result, interest rates have a greater impact on the Companys
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services. Critical Accounting Policies The Companys accounting policies are more fully described in Note 1 of
the Notes to the Consolidated Financial Statements, starting on page F-8 and
are essential to understanding Managements Discussion and Analysis of
Financial Condition and Results of Operations. As discussed there, the
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Since future events and their
effects cannot be determined with absolute certainty, the determination of
estimates requires the exercise of judgment. Management has used the best
information available to make the estimations necessary to value the related
assets and liabilities based on historical experience and on various
assumptions which are believed to be reasonable under the circumstances.
Actual results could differ from those estimates, and such differences may be
material to the financial statements. The Company reevaluates these variables
as facts and circumstances change. Historically, actual results have not
differed significantly from the Companys estimates. The following is a
summary of the more judgmental accounting estimates and principles involved in
the preparation of the Companys financial statements, including the
identification of the variables most important in the estimation process: Allowance for Credit Losses.The Banks allowance for credit losses is
determined based upon estimates that can and do change when the actual events
occur, including historical losses as an indicator of future losses, fair
market value of collateral, and various general or industry or geographic
specific economic events. The use of these estimates and values is inherently
subjective and the actual losses could be greater or less than the estimates.
For further information regarding our allowance for credit losses, see
Allowance for Credit Losses under Item 1- Business of this Annual Report. Accrued Taxes.Management estimates income tax expense based on the
amount it expects to owe various tax authorities. Income taxes are discussed
in more detail in Note 10 to the consolidated financial statements. Accrued
taxes represent the net estimated amount due or to be received from taxing
authorities. In estimating accrued taxes, management assesses the relative
merits and risks of the appropriate tax treatment of transactions taking into
account statutory, judicial and regulatory guidance in the context of the
Companys tax position. Recently Issued Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretations No. 46 (FIN 46), Consolidation of Variable Interest
Entities, which provides guidance on how to identify a variable interest entity
(VIE) and determine when the assets, liabilities, noncontrolling interests, and
results of operations of a VIE are to be included in an entitys consolidated
financial statements. A VIE exists when either the total equity investment at
risk is not sufficient to permit the entity to finance its activities by
itself, or the equity investors lack one of three characteristics associated
with owning a controlling financial interest. Those characteristics include
the 28




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##### Table of Contents



direct or indirect ability to make decisions about an entitys activities
through voting rights or similar rights, the obligation to absorb the expected
losses of an entity if they occur, or the right to receive the expected
residual returns of the entity if they occur. During the third quarter of 2003, the Company applied the provisions of
FIN 46 to a wholly-owned subsidiary trust that issued capital securities to
third-party investors. The application of FIN 46 resulted in the
deconsolidation of a wholly-owned subsidiary trust. See Note 8 for further
discussion of this trust and the Companys related obligations. In December 2003, the FASB reissued FIN 46 with certain modifications and
clarifications. Application of this guidance was effective for interests in
certain VIEs commonly referred to as special-purpose entities (SPEs) as of
December 31, 2003. Application for all other types of entities is required for
periods ending after March 15, 2004, unless previously applied. Management continues to evaluate the applicability of FIN 46. Management
does not believe that the application of FIN 46 will have an impact on
financial condition, results of operations, or liquidity. The Federal Reserve
Board is currently evaluating the impact on Tier 1 capital. In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments and hedging
activities under SFAS 133, as well as amends certain other existing FASB
pronouncements. In general, SFAS 149 is effective for derivative transactions
entered into or modified and for hedging relationships designated after June
30, 2003. The adoption of this standard did not have an impact on financial
condition, the results of operations, or liquidity, as the Company and Bank
does not have derivative or hedging instruments. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
Statement establishes standards for classifying and measuring certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity. The provisions of SFAS 150 became effective June
1, 2003, for all financial instruments created or modified after May 31, 2003,
and otherwise became effective as of July 1, 2003. The adoption of this
standard did not have a material impact on financial condition, the results of
operations, or liquidity. In December 2003, the FASB deferred for an indefinite period the
application of the guidance in SFAS 150 to noncontrolling interests that are
classified as equity in the financial statements of a subsidiary but would be
classified as a liability in the parents financial statements under SFAS 150.
The deferral is limited to mandatorily redeemable noncontrolling interests
associated with finite-lived subsidiaries. Management does not believe any
such applicable entities exist as of December 31, 2003. In March 2003, the SEC issued Regulation G, Conditions for Use of Non-GAAP
Financial Measures. As defined in Regulation G, a non-GAAP financial measure
is a numerical measure of a companys historical or future performance,
financial position, or cash flow that excludes or includes amounts or
adjustments that are included or excluded in the most directly comparable
measure calculated in accordance with generally accepted accounting principles
(GAAP). Companies that present non-GAAP financial measures must disclose a
numerical reconciliation to the most directly comparable measurement using
GAAP. In January 2003, the SEC adopted final rules implementing Section 401(a)
of the Sarbanes Oxley Act of 2002, which requires disclosure of off-balance
sheet arrangements and contractual obligations in a public companys periodic
SEC reports. Off-balance sheet arrangements include guarantees and similar
arrangements that may be a source of potential risk to a companys future
liquidity, capital resources and results of operations, regardless of whether
or not they are recorded as liabilities. The definition uses GAAP concepts to
identify the four types of arrangements for which disclosure is required:
guarantee contracts, retained or contingent liabilities, certain derivative
instruments and variable interests. Off-balance sheet arrangements that either
have, or are reasonably likely to have a current or future effect that is
material to investors with respect to the companys financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources must be disclosed.
Companies must explain the reasons for using off-balance sheet arrangements,
the financial importance and magnitude thereof and circumstances that could
trigger obligations. The Companys off-balance sheet arrangements consist of
commitments to extend credit and standby letters of credit and have been
discussed elsewhere in this report. 29




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##### Table of Contents



Under the final rules, tabular disclosure of contractual obligations for
specified time periods must also be made. Contractual obligations must be
aggregated into categories applicable to a companys business, for example (i)
long-term debt, (ii) capital lease obligations, (iii) operating leases, (iv)
purchase obligations, and (v) other long-term liabilities reflected on the
balance sheet under GAAP. However, each company should use categories suitable
to its business. See Off-Balance Sheet Arrangements, Contractual Obligations,
and Commitments for the Companys presentation of the information required by
the new rules. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item 8
are included in the Companys Consolidated Financial Statements and set forth
in the pages indicated in Item 16(a) of this Annual Report. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 
 ITEM 9A. CONTROLS AND PROCEDURES The Company maintains a system of disclosure controls and procedures that
is designed to provide reasonable assurance that information, which is required
to be disclosed by the Company in the reports that it files or submits under
the Securities and Exchange Act of 1934, as amended, is accumulated and
communicated to management in a timely manner. The Companys Chief Executive
Officer and Chief Financial Officer have evaluated this system of disclosure
controls and procedures as of the end of the period covered by this annual
report, and believe that the system is operating effectively to ensure
appropriate disclosure. There have been no changes in the Companys internal
control over financial reporting during the most recent fiscal year that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 30




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##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to the identity and business experience of
the directors of the Company and their remuneration set forth in the section
captioned Proposal I  Election of Directors in the Companys definitive
Proxy Statement to be filed pursuant to Regulation 14A and issued in
conjunction with the 2003 Annual Meeting of Stockholders (the Proxy
Statement) is incorporated herein by reference. The information with respect
to the identity and business experience of executive officers of the Company is
set forth in Part I of this Form 10-K. The information with respect to the
Companys Audit Committee is incorporated herein by reference to the section
captioned Meetings and Committees of the Board of Directors in the Proxy
Statement. The information with respect to compliance with Section 16(a) of
the Exchange Act is incorporated herein by reference to the section captioned
Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy
Statement. The information with respect to the Companys Code of Ethics is
incorporated herein by reference to the section captioned Code of Ethics in
the Proxy Statement. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference
to the sections captioned Director Compensation and Executive Compensation
in the Proxy Statement. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference
to the sections captioned Voting Securities and Principal Holders Thereof and
Securities Ownership of Management in the Proxy Statement. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference
to the section captioned Transactions with Management in the Proxy Statement. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated herein by reference
to the section captioned Authorization for Appointment of Auditors 
Disclosure of Independent Auditor Fees in the Proxy Statement. 31




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. PageIndependent Auditors Report
    
    
    F-1Consolidated Balance Sheets as of December 31, 2003, 2002 and 2001
    
    
    F-2Consolidated Statements of Income for the Years Ended December 31, 2003, 2002 and 2001
    
    
    F-3Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2003,
2002 and 2001
    
    
    F-4Consolidated Statements of Changes in Stockholders Equity for the Years Ended
December 31, 2003, 2002 and 2001
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001
    
    
    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 LLC31.1
    
    Rule 15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 15d-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certifications
 (b) Reports on Form 8-K. On October 31, 2003, the Registrant filed a Current Report of Form 8-K
furnishing, under Item 12, the Registrants October 29, 2003 earnings release
with respect to the Registrants quarter ended September 30, 2003. 32




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##### Table of Contents



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 26, 2004
    
    By:
    
    /s/ F. William Kuethe, Jr.F. William Kuethe, Jr.President and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/
    
    F. William Kuethe, Jr.
    
    President, Chief Executive Officer
and Director
    
    March 26, 2004F. William Kuethe, Jr./s/
    
    John E. Porter
    
    Senior Vice President and Chief Financial Officer
    
    March 26, 2004John E. PorterChairman of the Board and Director
    
    March , 2004John E. Demyan/s/
    
    Shirley E. Boyer
    
    Director
    
    March 26, 2004Shirley E. Boyer/s/
    
    Thomas Clocker
    
    Director
    
    March 26, 2004Thomas Clocker/s/
    
    Alan E. Hahn
    
    Director
    
    March 26, 2004Alan E. HahnDirector
    
    March , 2004Charles L. Hein/s/
    
    F. W. Kuethe, III
    
    Director
    
    March 26, 2004F. W. Kuethe, IIIDirector
    
    March , 2004Charles Lynch/s/
    
    William N. Scherer, Sr.
    
    Director
    
    March 26, 2004William N. Scherer, Sr.
 33




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##### Table of Contents



Signature
    
    Title
    
    Date/s/
    
    Karen B. Thorwarth
    
    Director
    
    March 26, 2004Karen B. ThorwarthDirector
    
    March , 2004Mary Lou Wilcox
 34




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##### Table of Contents



(TRICE GEARY & MYERS LLC LOGO) INDEPENDENT AUDITORS REPORT The Board of Directors
Glen Burnie Bancorp and Subsidiaries
Glen Burnie, Maryland We have audited the accompanying consolidated balance sheets of Glen Burnie
Bancorp and subsidiaries as of December 31, 2003, 2002, and 2001, and the
related consolidated statements of income, comprehensive income, changes in
stockholders equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the
Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Glen
Burnie Bancorp and subsidiaries as of December 31, 2003, 2002, and 2001, and
the results of their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in the United
States of America. (SIGNATURE)
Salisbury, Maryland
January 29, 2004 F-1


(ADDRESS)



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##### Table of Contents



Glen Burnie Bancorp and Subsidiaries Consolidated Balance Sheets December 31,
    
2003
    
    2002
    
    2001AssetsCash and due from banks
    
    $
    11,119,791
    
    
    $
    11,297,175
    
    
    $
    10,888,085Interest-bearing deposits in other financial institutions
    
    
    57,192
    
    
    
    41,335
    
    
    
    1,879,444Federal funds sold
    
    
    1,717,911
    
    
    
    4,403,578
    
    
    
    5,453,299Cash and cash equivalents
    
    
    12,894,894
    
    
    
    15,742,088
    
    
    
    18,220,828Certificates of deposit in other financial institutions
    
    
    
    
    
    
    100,000
    
    
    
    100,000Investment securities available for sale, at fair value
    
    
    99,602,353
    
    
    
    84,657,682
    
    
    
    55,547,998Investment securities held to maturity (fair value
2003 $3,815,855; 2002 $7,615,702; 2001 $16,881,451)
    
    
    3,578,754
    
    
    
    7,202,369
    
    
    
    16,516,923Federal Home Loan Bank stock, at cost
    
    
    896,400
    
    
    
    703,200
    
    
    
    652,300Common stock in the Glen Burnie Statutory Trust I
    
    
    155,000
    
    
    
    155,000
    
    
    
    155,000Ground rents, at cost
    
    
    248,300
    
    
    
    249,900
    
    
    
    249,900Loans, less allowance for credit losses
2003 $2,246,395; 2002 $2,514,700; 2001 $2,938,455
    
    
    172,819,049
    
    
    
    158,286,746
    
    
    
    164,569,252Premises and equipment, at cost, less accumulated depreciation
    
    
    4,219,812
    
    
    
    4,143,429
    
    
    
    3,886,631Accrued interest receivable on loans and investment securities
    
    
    1,575,918
    
    
    
    1,547,511
    
    
    
    1,527,018Deferred income tax benefits
    
    
    
    
    
    
    
    
    
    
    427,367Other real estate owned
    
    
    171,882
    
    
    
    413,373
    
    
    
    420,162Cash value of life insurance
    
    
    4,782,258
    
    
    
    5,024,964
    
    
    
    Other assets
    
    
    1,307,846
    
    
    
    1,179,944
    
    
    
    1,088,347Total assets
    
    $
    302,252,466
    
    
    $
    279,406,206
    
    
    $
    263,361,726Liabilities and Stockholders EquityLiabilities:Deposits:Noninterest-bearing
    
    $
    69,648,818
    
    
    $
    59,061,977
    
    
    $
    55,685,108Interest-bearing
    
    
    187,259,417
    
    
    
    182,357,630
    
    
    
    173,621,610Total deposits
    
    
    256,908,235
    
    
    
    241,419,607
    
    
    
    229,306,718Short-term borrowings
    
    
    6,601,920
    
    
    
    837,074
    
    
    
    882,408Long-term borrowings
    
    
    7,226,501
    
    
    
    7,251,489
    
    
    
    7,274,791Junior subordinated debentures owed to unconsolidated
subsidiary trust
    
    
    5,155,000
    
    
    
    5,155,000
    
    
    
    5,155,000Dividends payable
    
    
    236,938
    
    
    
    236,291
    
    
    
    195,333Accrued interest payable on deposits
    
    
    67,099
    
    
    
    111,398
    
    
    
    155,174Accrued interest payable on junior subordinated debentures
    
    
    171,518
    
    
    
    171,518
    
    
    
    171,518Deferred income tax liabilities
    
    
    792,100
    
    
    
    915,314
    
    
    
    Other liabilities
    
    
    1,145,527
    
    
    
    1,519,129
    
    
    
    2,359,199Total liabilities
    
    
    278,304,838
    
    
    
    257,616,820
    
    
    
    245,500,141Commitments, contingencies and subsequent eventsStockholders equity:Common stock, par value $1, authorized 15,000,000 shares;
issued and outstanding 2003 1,689,281 shares;
2002 1,677,173 shares; 2001 1,663,560 shares
    
    
    1,689,281
    
    
    
    1,677,173
    
    
    
    1,663,560Surplus
    
    
    10,861,986
    
    
    
    10,637,578
    
    
    
    10,390,511Retained earnings
    
    
    10,115,038
    
    
    
    7,946,747
    
    
    
    5,970,537Accumulated other comprehensive income (loss), net of tax
    
    
    1,281,323
    
    
    
    1,527,888
    
    
    
    (163,023
    )Total
stockholders equity
    
    
    23,947,628
    
    
    
    21,789,386
    
    
    
    17,861,585Total
liabilities and stockholders equity
    
    $
    302,252,466
    
    
    $
    279,406,206
    
    
    $
    263,361,726
 The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. F-2




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##### Table of Contents



Glen Burnie Bancorp and Subsidiaries Consolidated Statements of Income Years Ended December 31,
    
    2003
    
    2002
    
    2001Interest income on:Loans, including fees
    
    $

    11,344,040
    

    
    $
    12,336,820
    
    
    $
    13,173,325U.S. Treasury securities
    
    

    18,394
    

    
    
    59,818
    
    
    
    94,336U.S. Government agency securities
    
    

    1,954,437
    

    
    
    2,457,585
    
    
    
    2,347,049State and municipal securities
    
    

    1,749,556
    

    
    
    1,206,798
    
    
    
    738,330Corporate trust preferred securities
    
    

    356,740
    

    
    
    341,094
    
    
    
    310,484Federal funds sold
    
    

    51,141
    

    
    
    93,735
    
    
    
    286,176Other
    
    

    65,710
    

    
    
    74,432
    
    
    
    257,304Total interest income
    
    

    15,540,018
    

    
    
    16,570,282
    
    
    
    17,207,004Interest expense on:Deposits
    
    

    3,276,093
    

    
    
    4,212,826
    
    
    
    5,527,610Short-term borrowings
    
    

    28,588
    

    
    
    15,579
    
    
    
    17,885Long-term borrowings
    
    

    425,613
    

    
    
    427,297
    
    
    
    436,817Junior subordinated debentures
    
    

    546,430
    

    
    
    546,430
    
    
    
    550,962Total interest expense
    
    

    4,276,724
    

    
    
    5,202,132
    
    
    
    6,533,274Net interest income
    
    

    11,263,294
    

    
    
    11,368,150
    
    
    
    10,673,730Provision for credit losses
    
    

    40,000
    

    
    
    
    
    
    
    (150,000
    )Net interest income after provision for credit losses
    
    

    11,223,294
    

    
    
    11,368,150
    
    
    
    10,823,730Other income:Service charges on deposit accounts
    
    

    924,709
    

    
    
    917,816
    
    
    
    860,681Other fees and commissions
    
    

    781,795
    

    
    
    725,421
    
    
    
    687,454Gains on investment securities, net
    
    

    218,579
    

    
    
    52,880
    
    
    
    273,003Income on life insurance
    
    

    364,330
    

    
    
    24,964
    
    
    
    Curtailment gain on post-retirement benefits plan amendment
    
    

    
    

    
    
    763,644
    
    
    
    Total other income
    
    

    2,289,413
    

    
    
    2,484,725
    
    
    
    1,821,138Other expenses:Salaries and wages
    
    

    4,133,621
    

    
    
    4,165,994
    
    
    
    4,083,115Employee benefits
    
    

    1,687,775
    

    
    
    1,614,284
    
    
    
    1,769,209Occupancy
    
    

    709,122
    

    
    
    589,289
    
    
    
    577,440Furniture and equipment
    
    

    821,747
    

    
    
    854,059
    
    
    
    889,924Other expenses
    
    

    2,395,428
    

    
    
    2,733,221
    
    
    
    3,012,405Total other expenses
    
    

    9,747,693
    

    
    
    9,956,847
    
    
    
    10,332,093Income before income taxes
    
    

    3,765,014
    

    
    
    3,896,028
    
    
    
    2,312,775Federal and state income tax expense
    
    

    687,940
    

    
    
    1,084,945
    
    
    
    587,539Net income
    
    $

    3,077,074
    

    
    $
    2,811,083
    
    
    $
    1,725,236Basic and diluted earnings per share of common stock
    
    $

    1.83
    

    
    $
    1.68
    
    
    $
    1.04
 The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. F-3




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##### Table of Contents



Glen Burnie Bancorp and Subsidiaries Consolidated Statements of Comprehensive Income Years Ended December 31,
    
    2003
    
    2002
    
    2001Net income
    
    $
    3,077,074
    
    
    $
    2,811,083
    
    
    $
    1,725,236Other comprehensive income (loss), net of taxUnrealized holding gains (losses) arising during the
period (net of deferred taxes (benefits) 2003
($70,722); 2002 $1,081,095; 2001 ($98,834))
    
    
    (112,401
    )
    
    
    1,718,218
    
    
    
    (157,081
    )Reclassification adjustment for gains included in net
income (net of deferred taxes 2003 $84,415;
2002 $17,182; 2001 $99,907)
    
    
    (134,164
    )
    
    
    (27,307
    )
    
    
    (158,786
    )Total other comprehensive income (loss)
    
    
    (246,565
    )
    
    
    1,690,911
    
    
    
    (315,867
    )Comprehensive income
    
    $
    2,830,509
    
    
    $
    4,501,994
    
    
    $
    1,409,369
 The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



Glen Burnie Bancorp and Subsidiaries Consolidated Statements of Changes in Stockholders Equity Years Ended December 31, 2003, 2002, and 2001 AccumulatedOther
    
    TotalCommon Stock
    
    
    
    
    
    Retained
    
    Comprehensive
    
    StockholdersShares
    
    Par Value
    
    Surplus
    
    Earnings
    
    Income (Loss)
    
    EquityBalances, December 31, 2000
    
    
    1,110,049
    
    
    $
    1,110,049
    
    
    $
    10,373,549
    
    
    $
    5,544,305
    
    
    $
    152,844
    
    
    $
    17,180,747Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,725,236
    
    
    
    
    
    
    
    1,725,236Shares repurchased and retired
    
    
    (10,000
    )
    
    
    (10,000
    )
    
    
    (138,750
    )
    
    
    
    
    
    
    
    
    
    
    (148,750
    )Cash dividends, $.45 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (747,807
    )
    
    
    
    
    
    
    (747,807
    )Dividends reinvested under dividend
reinvestment plan
    
    
    12,314
    
    
    
    12,314
    
    
    
    155,712
    
    
    
    
    
    
    
    
    
    
    
    168,026Stock split effected in form of 50%
stock dividend
    
    
    551,197
    
    
    
    551,197
    
    
    
    
    
    
    
    (551,197
    )
    
    
    
    
    
    
    Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (315,867
    )
    
    
    (315,867
    )Balances, December 31, 2001
    
    
    1,663,560
    
    
    
    1,663,560
    
    
    
    10,390,511
    
    
    
    5,970,537
    
    
    
    (163,023
    )
    
    
    17,861,585Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,811,083
    
    
    
    
    
    
    
    2,811,083Cash dividends, $.50 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (834,873
    )
    
    
    
    
    
    
    (834,873
    )Dividends reinvested under dividend
reinvestment plan
    
    
    10,548
    
    
    
    10,548
    
    
    
    169,522
    
    
    
    
    
    
    
    
    
    
    
    180,070Shares issued under employee stock
purchase plan
    
    
    3,065
    
    
    
    3,065
    
    
    
    39,140
    
    
    
    
    
    
    
    
    
    
    
    42,205Vested stock options
    
    
    
    
    
    
    
    
    
    
    38,405
    
    
    
    
    
    
    
    
    
    
    
    38,405Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,690,911
    
    
    
    1,690,911Balances, December 31, 2002
    
    
    1,677,173
    
    
    
    1,677,173
    
    
    
    10,637,578
    
    
    
    7,946,747
    
    
    
    1,527,888
    
    
    
    21,789,386Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,077,074
    
    
    
    
    
    
    
    3,077,074Cash dividends, $.54 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (908,783
    )
    
    
    
    
    
    
    (908,783
    )Dividends reinvested under dividend
reinvestment plan
    
    
    8,758
    
    
    
    8,758
    
    
    
    187,702
    
    
    
    
    
    
    
    
    
    
    
    196,460Shares issued under employee stock
purchase plan
    
    
    3,350
    
    
    
    3,350
    
    
    
    42,779
    
    
    
    
    
    
    
    
    
    
    
    46,129Expired stock options
    
    
    
    
    
    
    
    
    
    
    (6,073
    )
    
    
    
    
    
    
    
    
    
    
    (6,073
    )Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (246,565
    )
    
    
    (246,565
    )Balances, December 31, 2003
    
    
    1,689,281
    
    
    $
    1,689,281
    
    
    $
    10,861,986
    
    
    $
    10,115,038
    
    
    $
    1,281,323
    
    
    $
    23,947,628
 The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



Glen Burnie Bancorp and Subsidiaries
Consolidated Statements of Cash Flows Years Ended December 31,
    
    2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    3,077,074
    
    
    $
    2,811,083
    
    
    $
    1,725,236Adjustments to reconcile net income to net
cash provided by operating activitiesDepreciation, amortization, and accretion
    
    
    1,503,805
    
    
    
    1,241,007
    
    
    
    805,988Compensation (income) expense from vested stock options,
net
    
    
    (6,073
    )
    
    
    38,405
    
    
    
    Provision for credit losses
    
    
    40,000
    
    
    
    
    
    
    
    (150,000
    )Losses on other real estate owned
    
    
    6,491
    
    
    
    6,789
    
    
    
    63,986Deferred income taxes (benefits), net
    
    
    31,925
    
    
    
    278,768
    
    
    
    (101,691
    )(Gains) losses on disposals of assets, net
    
    
    (216,776
    )
    
    
    14,429
    
    
    
    (259,135
    )Income on investment in life insurance
    
    
    (364,330
    )
    
    
    (24,964
    )
    
    
    Changes in assets and liabilities:(Increase) decrease in accrued interest receivable
    
    
    (28,407
    )
    
    
    (20,493
    )
    
    
    154,201Increase in other assets
    
    
    (79,638
    )
    
    
    (209,838
    )
    
    
    (59,006
    )Decrease in accrued interest payable
    
    
    (44,299
    )
    
    
    (43,776
    )
    
    
    (35,460
    )Decrease in other liabilities
    
    
    (373,602
    )
    
    
    (840,072
    )
    
    
    (167,514
    )Net cash provided by operating activities
    
    
    3,546,170
    
    
    
    3,251,338
    
    
    
    1,976,605Cash flows from investing activities:Maturities of held to maturity mortgage-backed securities
    
    
    3,119,394
    
    
    
    3,179,978
    
    
    
    3,303,672Maturities of other held to maturity investment securities
    
    
    499,732
    
    
    
    6,134,713
    
    
    
    10,961,629Maturities of available for sale mortgage-backed
securities
    
    
    22,500,165
    
    
    
    12,624,980
    
    
    
    2,271,148Maturities of other available for sale investment
securities
    
    
    718,025
    
    
    
    2,044,232
    
    
    
    5,237,023Sales of available for sale debt securities
    
    
    10,994,980
    
    
    
    4,989,082
    
    
    
    7,067,274Purchases of available for sale mortgage-backed securities
    
    
    (33,252,275
    )
    
    
    (30,417,008
    )
    
    
    (25,158,011
    )Purchases of other available for sale investment securities
    
    
    (16,928,577
    )
    
    
    (16,085,767
    )
    
    
    (23,434,008
    )Purchase of FHLB stock
    
    
    (193,200
    )
    
    
    (50,900
    )
    
    
    Maturity of certificate of deposit
    
    
    100,000
    
    
    
    
    
    
    
    Proceeds from life insurance
    
    
    607,034
    
    
    
    
    
    
    
    Purchase of life insurance contracts
    
    
    
    
    
    
    (5,000,000
    )
    
    
    (Increase) decrease in loans, net
    
    
    (14,572,303
    )
    
    
    6,282,506
    
    
    
    (2,045,521
    )Proceeds from sales of other real estate
    
    
    235,000
    
    
    
    
    
    
    
    Purchases of premises and equipment
    
    
    (784,278
    )
    
    
    (904,507
    )
    
    
    (432,658
    )Net cash used by investing activities
    
    
    (26,956,303
    )
    
    
    (17,202,691
    )
    
    
    (22,229,452
    )Cash flows from financing activities:Increase in noninterest-bearing deposits, NOW
accounts, money market accounts, and savings accounts, net
    
    
    20,933,258
    
    
    
    9,587,004
    
    
    
    10,990,615(Decrease) increase in time deposits, net
    
    
    (5,444,630
    )
    
    
    2,525,885
    
    
    
    12,347,766Increase (decrease) in short-term borrowings
    
    
    5,764,846
    
    
    
    (45,334
    )
    
    
    394,430Repayments of long-term borrowings
    
    
    (24,988
    )
    
    
    (23,302
    )
    
    
    (21,732
    )Cash dividends paid
    
    
    (908,136
    )
    
    
    (793,915
    )
    
    
    (765,819
    )Common stock dividends reinvested
    
    
    196,460
    
    
    
    180,070
    
    
    
    168,026Repurchase and retirement of common stock
    
    
    
    
    
    
    
    
    
    
    (148,750
    )Issuance of common stock
    
    
    46,129
    
    
    
    42,205
    
    
    
    Net cash provided by financing activities
    
    
    20,562,939
    
    
    
    11,472,613
    
    
    
    22,964,536(Decrease) increase in cash and cash equivalents
    
    
    (2,847,194
    )
    
    
    (2,478,740
    )
    
    
    2,711,689Cash and cash equivalents, beginning of year
    
    
    15,742,088
    
    
    
    18,220,828
    
    
    
    15,509,139Cash and cash equivalents, end of year
    
    $
    12,894,894
    
    
    $
    15,742,088
    
    
    $
    18,220,828
 The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. F-6




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Glen Burnie Bancorp and Subsidiaries Consolidated Statements of Cash Flows
(Continued) Years Ended December 31,
    
    2003
    
    2002
    
    2001Supplementary Cash
Flow Information:Interest paid
    
    $
    4,321,023
    
    
    $
    5,245,908
    
    
    $
    6,568,734Income taxes paid
    
    
    689,087
    
    
    
    712,844
    
    
    
    693,000Total (decrease) increase in unrealized (depreciation)
appreciation on
available for sale
securities
    
    
    (401,702
    )
    
    
    2,754,826
    
    
    
    (514,610
    )
 The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. F-7




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies  The Bank of Glen Burnie (the Bank) provides financial services to
individuals and corporate customers located in Anne Arundel County and
surrounding areas of Central Maryland, and is subject to competition from
other financial institutions. The Bank is also subject to the
regulations of certain Federal and State of Maryland (the State)
agencies and undergoes periodic examinations by those regulatory
authorities. The accounting policies of the Bank conform to generally
accepted accounting principles and to general practices within the
banking industry.Significant accounting policies not disclosed elsewhere in the
consolidated financial statements are as follows:Principles of Consolidation:The consolidated financial statements include the accounts of Glen Burnie
Bancorp (Bancorp or Company) and its subsidiaries, The Bank of Glen
Burnie and GBB Properties, Inc., a company engaged in the acquisition and
disposition of other real estate. Intercompany balances and transactions
have been eliminated. The Parent Only financial statements (see Note 22)
of the Company account for the subsidiaries using the equity method of
accounting.Use of Estimates:The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted within the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.Securities Held to Maturity:Bonds, notes, and debentures for which the Bank has the positive intent
and ability to hold to maturity are reported at cost, adjusted for
premiums and discounts that are recognized in interest income using the
effective interest rate method over the period to maturity. Securities
transferred into held to maturity from the available for sale portfolio
are recorded at fair value at time of transfer with unrealized gains or
losses reflected in equity and amortized over the remaining life of the
security.Securities Available for Sale:Marketable debt securities not classified as held to maturity are
classified as available for sale. Securities available for sale may be
sold in response to changes in interest rates, loan demand, changes in
prepayment risk, and other factors. Changes in unrealized appreciation
(depreciation) on securities available for sale are reported in other
comprehensive income, net of tax. Realized gains (losses) on securities
available for sale are included in other income (expense) and, when
applicable, are reported as a reclassification adjustment, net of tax, in
other comprehensive income. The gains and losses on securities sold are
determined by the specific identification method. Premiums and discounts
are recognized in interest income using the effective interest rate
method over the period to maturity. Additionally, declines in the fair
value of individual investment securities below their cost that are other
than temporary are reflected as realized losses in the consolidated
statements of income.Other Securities:Federal Home Loan Bank (FHLB) stock is an equity interest in the FHLB,
which does not have a readily determinable fair value for purposes of
Statement of Financial Accounting Standards (SFAS) No 115, Accounting
for Certain Investments in Debt and Equity Securities, because its
ownership is restricted and it lacks a market. FHLB stock can be sold
back only at its par value of $100 per share and only to the FHLB or
another member institution. F-8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies(continued)  Loans and Allowance for Credit Losses:Loans are generally carried at the amount of unpaid principal, adjusted
for deferred loan fees, which are amortized over the term of the loan
using the effective interest rate method. Interest on loans is accrued
based on the principal amounts outstanding. It is the Banks policy to
discontinue the accrual of interest when a loan is specifically
determined to be impaired or when principal or interest is delinquent for
ninety days or more. When a loan is placed on nonaccrual status all
interest previously accrued but not collected is reversed against current
period interest income. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss is remote.
Cash collections on such loans are applied as reductions of the loan
principal balance and no interest income is recognized on those loans
until the principal balance has been collected. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments
received. The carrying value of impaired loans is based on the present
value of the loans expected future cash flows or, alternatively, the
observable market price of the loan or the fair value of the collateral.The allowance for loan losses is maintained at a level believed adequate
by management to absorb probable losses inherent in the loan portfolio
and is based on the size and current risk characteristics of the loan
portfolio, an assessment of individual problem loans and actual loss
experience, current economic events in specific industries and
geographical areas, including unemployment levels, and other pertinent
factors, including regulatory guidance and general economic conditions.
Determination of the allowance is inherently subjective as it requires
significant estimates, including the amounts and timing of expected
future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration
of current economic trends, all of which may be susceptible to
significant change. Loan losses are charged off against the allowance,
while recoveries of amounts previously charged off are credited to the
allowance. A provision for loan losses is charged to operations based on
managements periodic evaluation of the factors previously mentioned, as
well as other pertinent factors. Evaluations are conducted at least
quarterly and more often if deemed necessary.The allowance for loan losses consists of an allocated component and an
unallocated component. The components of the allowance for loan losses
represent an estimation done pursuant to either SFAS No 5, Accounting for
Contingencies, or SFAS No 114. The allocated component of the allowance
for loan losses reflects expected losses resulting from analyses
developed through specific credit allocations for individual loans and
historical loss experience for each loan category. The specific credit
allocations are based on regular analyses of all loans over a
fixed-dollar amount where the internal credit rating is at or below a
predetermined classification. The historical loan loss element is
determined statistically using a loss migration analysis that examines
loss experience and the related internal gradings of loans charged off.
The loss migration analysis is performed quarterly and loss factors are
updated regularly based on actual experience. The allocated component of
the allowance for loan losses also includes consideration of
concentrations and changes in portfolio mix and volume.The unallocated portion of the allowance reflects managements estimate
of probable inherent but undetected losses within the portfolio due to
uncertainties in economic conditions, delays in obtaining information,
including unfavorable information about a borrowers financial condition,
the difficulty in identifying triggering events that correlate perfectly
to subsequent loss rates, and risk factors that have not yet manifested
themselves in loss allocation factors. In addition, the unallocated
allowance includes a component that explicitly accounts for the inherent
imprecision in loan loss migration models. The historical losses used in
the migration analysis may not be representative of actual unrealized
losses inherent in the portfolio. F-9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies(continued)  Reserve for Unfunded Commitments:The reserve for unfunded commitments is established through a provision
for unfunded commitments charged to other expenses. The reserve is
calculated by utilizing the same methodology and factors as the
allowance for credit losses. The reserve, based on evaluations of the
collectibiltiy of loans and prior loan loss experience, is an amount that
management believes will be adequate to absorb possible losses on
unfunded commitments (off-balance sheet financial instruments) that may
become uncollectible in the future.Other Real Estate Owned (OREO):OREO comprises properties acquired in partial or total satisfaction of
problem loans. The properties are recorded at the lower of cost or fair
value (appraised value) at the date acquired. Losses arising at the time
of acquisition of such properties are charged against the allowance for
credit losses. Subsequent write-downs that may be required and expenses
of operation are included in other income or expenses. Gains and losses
realized from the sale of OREO are included in other income or expenses.
No loans were converted to OREO in 2003, 2002, or 2001. The Bank
financed no sales of OREO for 2003, 2002, or 2001.Bank Premises and Equipment:Bank premises and equipment are stated at cost less accumulated
depreciation. The provision for depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are depreciated over the lesser of the terms of
the leases or their estimated useful lives. Expenditures for
improvements that extend the life of an asset are capitalized and
depreciated over the assets remaining useful life. Gains or losses
realized on the disposition of premises and equipment are reflected in
the consolidated statements of income. Expenditures for repairs and
maintenance are charged to other expenses as incurred. Computer software
is recorded at cost and amortized over three to five years.Intangible Assets:A core deposit intangible asset of $544,652, relating to a branch
acquisition, is being amortized on the straight-line method over 10
years. Accumulated amortization totaled $449,337, $394,872, and $340,407
at December 31, 2003, 2002, and 2001, respectively. Amortization expense
totaled $54,465for each of the years ended December 2003, 2002, and
2001.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, 2003 and 2001, no long-lived assets existed which management
considered impaired; however, in 2002 certain long-lived assets were
deemed to be impaired (See Note 5).Income Taxes:The provision for Federal and state income taxes is based upon the
results of operations, adjusted for tax-exempt income. Deferred income
taxes are provided by applying enacted statutory tax rates to temporary
differences between financial and taxable bases.Temporary differences which give rise to deferred tax benefits relate
principally to deferred compensation and benefit plans, other real estate
owned, net unrealized depreciation on investment securities available for
sale, and reserve for unfunded commitments. F-10




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies(continued)  Temporary differences which give rise to deferred tax liabilities relate
principally to accumulated depreciation, allowance for credit losses,
accumulated securities discount accretion, and net unrealized
appreciation on investment securities available for sale.Credit Risk:The Bank has deposits in other financial institutions in excess of
amounts insured by the Federal Deposit Insurance Corporation (FDIC).
At December 31, 2003, the Bank had deposits and Federal funds sold with
three separate financial institutions of approximately $613,000,
$627,000, and $5,505,000.Cash and Cash Equivalents:The Bank has included cash and due from banks, interest-bearing deposits
in other financial institutions, and Federal funds sold as cash and cash
equivalents for the purpose of reporting cash flows.Accounting for Stock Options:The Company applies the intrinsic value-based method of accounting
prescribed by the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employeesand related interpretations in
accounting for its employee stock options. As such, compensation expense
would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. SFAS No. 123
Accounting for Stock-Based Compensation, established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic value-based method
of accounting prescribed above, and has adopted the disclosure-only
provisions of SFAS No.123.Earnings per share:Basic earnings per common share are determined by dividing net income by
the weighted average number of shares of common stock outstanding.
Diluted earnings per share are calculated including the average dilutive
common stock equivalents outstanding during the period. Dilutive common
equivalent shares consist of stock options, calculated using the treasury
stock method.Financial Statement Presentation:Certain amounts in the prior years financial statements have been
reclassified to conform to the current years presentation. Note 2. Restrictions on Cash and Due from Banks  The Federal Reserve requires the Bank to maintain noninterest-bearing
cash reserves against certain categories of average deposit liabilities.
Such reserves averaged approximately $4,901,000, $4,196,000, and
$2,923,000 during the years ended December 31, 2003, 2002, and 2001,
respectively. F-11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Investment Securities  Investment securities are summarized as follows: Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairDecember 31, 2003
    
    Cost
    
    Gains
    
    Losses
    
    ValueAvailable for sale:U.S. Government agencies
    
    $
    13,066,518
    
    
    $
    382,806
    
    
    $
    214,216
    
    
    $
    13,235,108State and municipal
    
    
    42,941,347
    
    
    
    1,342,191
    
    
    
    74,432
    
    
    
    44,209,106Corporate trust preferred
    
    
    5,025,537
    
    
    
    495,725
    
    
    
    1,419
    
    
    
    5,519,843Mortgage-backed
    
    
    36,481,430
    
    
    
    361,884
    
    
    
    205,018
    
    
    
    36,638,296$
    97,514,832
    
    
    $
    2,582,606
    
    
    $
    495,085
    
    
    $
    99,602,353Held to maturity:U.S. Government agencies
    
    $
    1,000,000
    
    
    $
    48,293
    
    
    $
    
    
    
    $
    1,048,293State and municipal
    
    
    682,817
    
    
    
    66,133
    
    
    
    
    
    
    
    748,950Mortgage-backed
    
    
    1,895,937
    
    
    
    122,675
    
    
    
    
    
    
    
    2,018,612$
    3,578,754
    
    
    $
    237,101
    
    
    $
    
    
    
    $
    3,815,855
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairDecember 31, 2002
    
    Cost
    
    Gains
    
    Losses
    
    ValueAvailable for sale:U.S. Treasury
    
    $
    499,497
    
    
    $
    14,568
    
    
    $
    
    
    
    $
    514,065U.S. Government agencies
    
    
    8,084,257
    
    
    
    469,446
    
    
    
    140,000
    
    
    
    8,413,703State and municipal
    
    
    31,216,663
    
    
    
    812,011
    
    
    
    86,496
    
    
    
    31,942,178Corporate trust preferred
    
    
    5,056,735
    
    
    
    471,397
    
    
    
    
    
    
    
    5,528,132Mortgage-backed
    
    
    37,311,301
    
    
    
    948,303
    
    
    
    
    
    
    
    38,259,604$
    82,168,453
    
    
    $
    2,715,725
    
    
    $
    226,496
    
    
    $
    84,657,682Held to maturity:U.S. Government agencies
    
    $
    1,499,692
    
    
    $
    106,321
    
    
    $
    
    
    
    $
    1,606,013State and municipal
    
    
    682,688
    
    
    
    47,014
    
    
    
    
    
    
    
    729,702Mortgage-backed
    
    
    5,019,989
    
    
    
    259,998
    
    
    
    
    
    
    
    5,279,987$
    7,202,369
    
    
    $
    413,333
    
    
    $
    
    
    
    $
    7,615,702
 F-12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Investment Securities(continued) Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairDecember 31, 2001
    
    Cost
    
    Gains
    
    Losses
    
    ValueAvailable for sale:U.S. Treasury
    
    $
    498,684
    
    
    $
    25,066
    
    
    $
    
    
    
    $
    523,750U.S. Government agencies
    
    
    7,504,660
    
    
    
    13,859
    
    
    
    9,688
    
    
    
    7,508,831State and municipal
    
    
    19,976,500
    
    
    
    137,505
    
    
    
    313,434
    
    
    
    19,800,571Corporate trust preferred
    
    
    4,819,930
    
    
    
    126,842
    
    
    
    9,958
    
    
    
    4,936,814Mortgage-backed
    
    
    23,013,820
    
    
    
    33,127
    
    
    
    268,915
    
    
    
    22,778,032$
    55,813,594
    
    
    $
    336,399
    
    
    $
    601,995
    
    
    $
    55,547,998Held to maturity:U.S. Treasury
    
    $
    749,498
    
    
    $
    21,830
    
    
    $
    
    
    
    $
    771,328U.S. Government agencies
    
    
    6,881,993
    
    
    
    161,650
    
    
    
    14,375
    
    
    
    7,029,268State and municipal
    
    
    682,560
    
    
    
    19,197
    
    
    
    
    
    
    
    701,757Mortgage-backed
    
    
    8,202,872
    
    
    
    183,604
    
    
    
    7,378
    
    
    
    8,379,098$
    16,516,923
    
    
    $
    386,281
    
    
    $
    21,753
    
    
    $
    16,881,451
  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, 2003 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
    
    $
    2,455,313
    
    
    $
    44,216
    
    
    $
    1,830,000
    
    
    $
    170,000
    
    
    $
    4,285,313
    
    
    $
    214,216State and Municipal
    
    
    7,934,158
    
    
    
    74,432
    
    
    
    
    
    
    
    
    
    
    
    7,934,158
    
    
    
    74,432Corporate trust
preferred
    
    
    267,680
    
    
    
    1,419
    
    
    
    
    
    
    
    
    
    
    
    267,680
    
    
    
    1,419Mortgaged-backed
    
    
    17,271,564
    
    
    
    205,018
    
    
    
    
    
    
    
    
    
    
    
    17,271,564
    
    
    
    205,018$
    27,928,715
    
    
    $
    325,085
    
    
    $
    1,830,000
    
    
    $
    170,000
    
    
    $
    29,758,715
    
    
    $
    495,085
  For individual securities classified as available for sale, the Bank
determines whether a decline in fair value below the amortized cost basis
is other than temporary. If the decline in fair value is considered to
be other than temporary, the cost basis of the individual security is
written down to fair value as a new cost basis and the amount of the
write-down is included in earnings (that is, accounted for as a realized
loss). Management has determined that all unrealized loss positions as
of December 31, 2003 are temporary unrealized losses that will not be
realized upon maturities of the securities.There are two preferred stock investments in the Federal Home Loan
Mortgage Corporation, (Freddie Mac), that have been in an unrealized loss
position for more than twelve months. Managements evaluation of Freddie
Mac indicates that this market valuation is not related to any credit
risk concerning Freddie Mac but relates to changes in the interest rate
environment. F-13




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Investment Securities(continued)  Contractual maturities of investment securities at December 31, 2003,
2002, and 2001 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, 2003
    
    Cost
    
    Value
    
    Cost
    
    ValueDue within one year
    
    $
    1,145,360
    
    
    $
    1,160,318
    
    
    $
    1,000,000
    
    
    $
    1,048,293Due over one to five years
    
    
    11,310,601
    
    
    
    11,774,429
    
    
    
    
    
    
    
    Due over five to ten years
    
    
    17,628,071
    
    
    
    17,797,250
    
    
    
    
    
    
    
    Due over ten years
    
    
    30,949,370
    
    
    
    32,232,060
    
    
    
    682,817
    
    
    
    748,950Mortgage-backed, due in
monthly installments
    
    
    36,481,430
    
    
    
    36,638,296
    
    
    
    1,895,937
    
    
    
    2,018,612$
    97,514,832
    
    
    $
    99,602,353
    
    
    $
    3,578,754
    
    
    $
    3,815,855
 Available for Sale
    
    Held to MaturityAmortized
    
    Fair
    
    Amortized
    
    FairDecember 31, 2002
    
    Cost
    
    Value
    
    Cost
    
    ValueDue within one year
    
    $
    579,445
    
    
    $
    595,838
    
    
    $
    
    
    
    $
    Due over one to five years
    
    
    7,370,459
    
    
    
    7,707,811
    
    
    
    1,499,692
    
    
    
    1,606,013Due over five to ten years
    
    
    5,762,134
    
    
    
    6,085,881
    
    
    
    
    
    
    
    Due over ten years
    
    
    31,145,134
    
    
    
    32,008,548
    
    
    
    682,688
    
    
    
    729,702Mortgage-backed, due in
monthly installments
    
    
    37,311,281
    
    
    
    38,259,604
    
    
    
    5,019,989
    
    
    
    5,279,987$
    82,168,453
    
    
    $
    84,657,682
    
    
    $
    7,202,369
    
    
    $
    7,615,702
 Available for Sale
    
    Held to MaturityAmortized
    
    Fair
    
    Amortized
    
    FairDecember 31, 2001
    
    Cost
    
    Value
    
    Cost
    
    ValueDue within one year
    
    $
    
    
    
    $
    
    
    
    $
    1,669,481
    
    
    $
    1,715,190Due over one to five years
    
    
    7,277,130
    
    
    
    7,274,011
    
    
    
    1,000,000
    
    
    
    1,066,579Due over five to ten years
    
    
    4,195,187
    
    
    
    4,126,922
    
    
    
    499,625
    
    
    
    534,375Due over ten years
    
    
    21,327,457
    
    
    
    21,369,033
    
    
    
    5,144,945
    
    
    
    5,186,209Mortgage-backed, due in
monthly installments
    
    
    23,013,820
    
    
    
    22,778,032
    
    
    
    8,202,872
    
    
    
    8,379,098$
    55,813,594
    
    
    $
    55,547,998
    
    
    $
    16,516,923
    
    
    $
    16,881,451
  Proceeds from sales of available for sale securities prior to maturity
totaled $10,994,980, $4,989,082, and $7,067,274 for the years ended
December 31, 2003, 2002, and 2001, respectively. The Bank realized gains
of $220,034and losses of $1,455on those sales for 2003. The Bank
realized gains of $52,943 and losses of $63 on those sales for 2002. The
Bank realized gains of $276,392 and losses of F-14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Investment Securities(continued)  $3,389 on those sales for 2001. Realized gains and losses were
calculated based on the amortized cost of the securities at the date of
trade. Income tax benefit (expense) relating to net gains/losses on
sales of investment securities totaled ($84,415), ($20,422), and
($105,434) for the years ended December 31, 2003, 2002, and 2001,
respectively.Securities with amortized cost of approximately $1,000,000, $999,000, and
$1,248,000 were pledged as collateral for short-term borrowings at
December 31, 2003, 2002, and 2001, respectively.The Bank has no derivative financial instruments required to be disclosed
under SFAS No. 119, Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments. Note 4. Loans  Major categories of loans are as follows: 2003
    
    2002
    
    2001Mortgage:Residential
    
    $
    64,470,867
    
    
    $
    49,572,269
    
    
    $
    44,293,130Commercial
    
    
    28,525,381
    
    
    
    31,584,086
    
    
    
    36,920,258Construction and land development
    
    
    3,112,105
    
    
    
    2,337,489
    
    
    
    2,355,395Demand and time
    
    
    6,113,311
    
    
    
    5,374,283
    
    
    
    5,082,790Installment
    
    
    73,824,338
    
    
    
    72,780,383
    
    
    
    79,642,436176,046,002
    
    
    
    161,648,510
    
    
    
    168,294,009Unearned income on loans
    
    
    (980,558
    )
    
    
    (847,064
    )
    
    
    (786,302
    )175,065,444
    
    
    
    160,801,446
    
    
    
    167,507,707Allowance for credit losses
    
    
    (2,246,395
    )
    
    
    (2,514,700
    )
    
    
    (2,938,455
    )$
    172,819,049
    
    
    $
    158,286,746
    
    
    $
    164,569,252
  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
$53,833,000, $52,795,000, and $59,308,000 of such loans at December 31,
2003, 2002, and 2001, 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, 2003,
2002, and 2001, the amounts of such loans outstanding totaled $1,998,843,
$1,244,758, and $1,194,860, respectively. During 2003, loan additions
and repayments totaled $2,016,444 and $1,258,409, respectively. F-15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Loans(continued)  The allowance for credit losses is as follows: 2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    2,514,700
    
    
    $
    2,938,455
    
    
    $
    3,384,815Provision for credit losses
    
    
    40,000
    
    
    
    
    
    
    
    (150,000
    )Recoveries
    
    
    449,909
    
    
    
    306,332
    
    
    
    390,792Loans charged off
    
    
    (758,214
    )
    
    
    (730,087
    )
    
    
    (687,152
    )Balance, end of year
    
    $
    2,246,395
    
    
    $
    2,514,700
    
    
    $
    2,938,455
  Loans on which the accrual of interest has been discontinued totaled
$572,282, $571,057, and $601,120 at December 31, 2003, 2002, and 2001,
respectively. Interest that would have been accrued under the terms of
these loans totaled $56,882, $9,188, and $14,877 for the years ended
December 31, 2003, 2002, and 2001, respectively.Information regarding loans classified by the Bank as impaired is
summarized as follows: 2003
    
    2002
    
    2001Loans classified as impaired
    
    $
    425,458
    
    
    $
    355,489
    
    
    $
    443,874Allowance for credit losses on
impaired loans
    
    
    154,923
    
    
    
    109,310
    
    
    
    117,271Average balance of impaired loans
    
    
    288,180
    
    
    
    175,609
    
    
    
    211,294Following is a summary of cash receipts on impaired loans and how they were applied:Cash receipts applied to reduce principal balance
    
    $
    64,490
    
    
    $
    19,381
    
    
    $
    71,057Cash receipts recognized as interest income
    
    
    20,945
    
    
    
    8,454
    
    
    
    10,878Total cash receipts
    
    $
    85,435
    
    
    $
    27,835
    
    
    $
    81,935
  No troubled debt restructurings transpired in 2003. All previous
restructurings appear to be performing under the terms of the modified
agreements.At December 31, 2002, the recorded investment in new troubled debt
restructurings totaled $40,833. The average recorded investment in
troubled debt restructurings totaled $41,964 for the year ended December
31, 2002. The allowance for credit losses relating to troubled debt
restructurings totaled $8,166 at December 31, 2002. The Bank recognized
$2,304 in interest income on troubled debt restructurings for cash
payments received in 2002.No troubled debt restructurings transpired in 2001.The Bank has no commitments to loan additional funds to the borrowers of
restructured, impaired, or non-accrual loans. F-16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5. Premises and Equipment  A summary of premises and equipment is as follows: Usefullives
    
    2003
    
    2002
    
    2001Land
    
    
    
    
    
    $
    684,977
    
    
    $
    684,977
    
    
    $
    684,977Buildings
    
    5-50 years
    
    
    4,399,730
    
    
    
    4,166,210
    
    
    
    4,157,641Equipment and fixtures
    
    5-30 years
    
    
    5,062,486
    
    
    
    5,304,871
    
    
    
    4,768,901Construction in progress
    
    
    
    
    
    
    282,341
    
    
    
    622,587
    
    
    
    17,95410,429,534
    
    
    
    10,778,645
    
    
    
    9,629,473Accumulated depreciation
    
    
    
    
    
    
    (6,209,722
    )
    
    
    (6,012,629
    )
    
    
    (5,742,842
    )$
    4,219,812
    
    
    $
    4,766,016
    
    
    $
    3,886,631
  Construction in progress relates primarily to certain computer hardware
and software upgrades in the main office.Depreciation expense totaled $453,967, $508,301, and $573,674 for the
years ended December 31, 2003, 2002, and 2001, respectively.
Amortization of software and intangible assets totaled $205,461,
$190,493, and $192,670 for the years ended December 31, 2003, 2002, and
2001, respectively.The Bank leases its South Crain Highway and Severna Park branches.
Minimum lease obligations under the South Crain Highway branch are
$71,800 per year through September 2004, adjusted annually by the CPI.
Minimum lease obligations under the Severna Park branch are $30,000 per
year through September 2007. The Bank is also required to pay all
maintenance costs under all these leasing arrangements. Rent expense
totaled $106,928, $117,929, and $110,612 for the years ended December 31,
2003, 2002, and 2001, respectively.In the fourth quarter of 2002, the Board of Directors of the Company
decided to close and relocate the existing Severna Park branch. At
December 31, 2002, management determined that leasehold improvements made
to this Severna Park branch, with a book value of $64,648, were impaired
as prescribed by SFAS No. 144, and had no net realizable value, and
recorded an asset impairment loss from continuing operations for this
amount. The Bank also accrued approximately $77,000, as prescribed in
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities(See Note 21), relating to the estimated future lease and
maintenance obligations. All expenses were included in other operating
expenses for 2002 (see Note 14). Note 6. Short-term borrowings  Short-term borrowings are as follows: 2003
    
    2002
    
    2001Notes
payable - U.S. Treasury
    
    $
    401,920
    
    
    $
    837,074
    
    
    $
    882,408FHLB
    
    
    6,200,000
    
    
    
    
    
    
    
    $
    6,601,920
    
    
    $
    837,074
    
    
    $
    882,408
  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, $999,000, and $998,000 at
December 31, 2003, 2002, and 2001, respectively. F-17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Short-term borrowings(continued)  The Bank owned 8,964 shares of common stock of the FHLB at December 31,
2003. The Bank is required to maintain an investment of .3% of total
assets, adjusted annually. This investment was a condition for obtaining
a variable rate, 1.15% at December 31, 2003, credit facility with the
FHLB. The credit available under this facility is determined at 12% of
the Banks total assets, or approximately $36,200,000 at December 31,
2003. Long-term advances totaled $7,000,000 under this credit
arrangement at December 31, 2003 (see Note 7). This credit facility is
secured by a floating lien on the Banks residential mortgage loan
portfolio and by investment securities with amortized cost of
approximately $0, $0, and $250,000 at December 31, 2003, 2002, and 2001,
respectively. Average short-term borrowings under this facility
approximated $1,555,000and $233,000 for 2003 and 2002, respectively,
with no short-term borrowings in 2001.The Bank also has available $5,000,000 in a short-term credit facility,
an unsecured line of credit, from another bank for short-term liquidity
needs, if necessary. No outstanding borrowings existed under this credit
arrangement at December 31, 2003, 2002, and 2001. Note 7. Long-term Borrowings  Long-term borrowings are as follows: 2003
    
    2002
    
    2001Federal Home Loan Bank of Atlanta,
convertible advance
    
    $
    7,000,000
    
    
    $
    7,000,000
    
    
    $
    7,000,000Mortgage payable-individual, interest at 7%,
payments of $3,483, including principal
and interest, due monthly through
October 2010, secured by real estate
    
    
    226,501
    
    
    
    251,489
    
    
    
    274,791$
    7,226,501
    
    
    $
    7,251,489
    
    
    $
    7,274,791
  The Federal Home Loan Bank of Atlanta convertible advance matures in
September 2010, with interest at 5.84%, payable quarterly. The Federal
Home Loan Bank of Atlanta has the option of converting the rate to a
three-month LIBOR; however, if converted, the borrowing can be repaid
without penalty. The proceeds of the convertible advance were used to
purchase higher yielding investment securities.At December 31, 2003, the scheduled maturities of long-term borrowings are
approximately as follows: 20032004
    
    $
    27,0002005
    
    
    29,0002006
    
    
    31,0002007
    
    
    33,0002008
    
    
    35,0002009 and thereafter
    
    
    7,072,000$
    7,227,000
 F-18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Junior Subordinated Debentures owed to Unconsolidated Subsidiary Trust  The Bancorp sponsored a trust, Glen Burnie Statutory Trust I, of which
100% of the common equity is owned by the Company. The trust was formed
for the purpose of issuing Company-obligated mandatorily redeemable
capital securities (the capital securities) to third-party investors and
investing the proceeds from the sale of such capital securities solely in
junior subordinated debt securities of the Company (the debentures). The
debentures held by the trust are the sole assets of that trust.
Distributions on the capital securities issued by the trust are payable
semi-annually at a 10.6% rate per annum equal to the interest rate being
earned by the trust on the debentures held by that trust. The capital
securities are subject to mandatory redemption, in whole or in part, upon
repayment of the debentures. The Company has entered into agreements
which, taken collectively, fully and unconditionally guarantee the
capital securities subject to the terms of each of the guarantees. The
debentures held by the trust carry non-call provisions over the first 10
year period, and a declining 10 year premium call thereafter. Both the
capital securities of the statutory trust and the junior subordinated
debentures are scheduled to mature on September 7, 2030, unless called by
the Bancorp not earlier than September 7, 2010.In the third quarter of 2003, as a result of applying the provisions of
FIN 46, governing when an equity interest should be consolidated, the
Company was required to deconsolidate this subsidiary trust from its
financial statements. The deconsolidation of the net assets and results
of operations of the trust had no impact on the Companys financial
statements or liquidity position since the Company continues to be
obligated to repay the debentures held by the trust and guarantees
repayment of the capital securities issued by the trust. The
consolidated debt obligation related to the trust is $5,155,000 of which
$155,000 relates to the Bancorps common ownership interest in the trust.The capital securities held by the trust qualify as Tier 1 capital for
the Company under Federal Reserve Board guidelines. As a result of the
issuance of FIN 46, the Federal Reserve Board is currently evaluating
whether deconsolidation of the trust will affect the qualification of the
capital securities as Tier 1 capital for regulatory purposes. If it is
later determined that the capital securities no longer qualify as Tier 1
capital, the effect may have a material impact on Tier 1 capital. Note 9. Deposits  Major classifications of interest-bearing deposits are as follows: 2003
    
    2002
    
    2001NOW and SuperNOW
    
    $
    28,400,505
    
    
    $
    24,071,173
    
    
    $
    22,395,703Money Market
    
    
    20,144,401
    
    
    
    19,889,727
    
    
    
    20,626,249Savings
    
    
    53,378,579
    
    
    
    47,616,167
    
    
    
    42,344,960Certificates of Deposit, $100,000 or more
    
    
    15,649,757
    
    
    
    17,698,559
    
    
    
    17,635,466Other time deposits
    
    
    69,686,175
    
    
    
    73,082,004
    
    
    
    70,619,232$
    187,259,417
    
    
    $
    182,357,630
    
    
    $
    173,621,610
  Interest expense on deposits is as follows: 2003
    
    2002
    
    2001NOW and SuperNOW
    
    $
    42,980
    
    
    $
    64,644
    
    
    $
    136,590Money Market
    
    
    104,546
    
    
    
    186,059
    
    
    
    356,798Savings
    
    
    241,429
    
    
    
    431,320
    
    
    
    613,088Certificates of Deposit, $100,000 or more
    
    
    584,996
    
    
    
    684,691
    
    
    
    750,434Other time deposits
    
    
    2,302,142
    
    
    
    2,846,112
    
    
    
    3,670,700$
    3,276,093
    
    
    $
    4,212,826
    
    
    $
    5,527,610
 F-19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Deposits (continued)  At December 31, 2003, the scheduled maturities of time deposits are approximately as follows: 20032004
    
    $
    47,148,0002005
    
    
    12,173,0002006
    
    
    9,779,0002007
    
    
    9,698,0002008
    
    
    5,150,0002009 and thereafter
    
    
    1,388,000$
    85,336,000
  Deposit balances of executive officers and directors and their affiliated
interests totaled approximately
$1,048,000, $1,058,000, and $526,000 at December 31, 2003, 2002, and 2001,
respectively.The Bank had no brokered deposits at December 31, 2003, 2002, and 2001. Note 10. Income Taxes  The components of income tax expense for the years ended December 31, 2003, 2002, and 2001
are as follows: 2003
    
    2002
    
    2001Current:Federal
    
    $
    561,686
    
    
    $
    739,995
    
    
    $
    594,160State
    
    
    94,330
    
    
    
    66,182
    
    
    
    95,070Total current
    
    
    656,016
    
    
    
    806,177
    
    
    
    689,230Deferred income taxes
(benefits):Federal
    
    
    26,453
    
    
    
    229,215
    
    
    
    (70,871
    )State
    
    
    5,471
    
    
    
    49,553
    
    
    
    (30,820
    )Total deferred
    
    
    31,924
    
    
    
    278,768
    
    
    
    (101,691
    )Income tax expense
    
    $
    687,940
    
    
    $
    1,084,945
    
    
    $
    587,539
 F-20




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##### Table of Contents



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, 2003, 2002, and 2001 is as follows: 2003
    
    2002
    
    2001Income before income taxes
    
    $
    3,765,014
    
    
    $
    3,896,028
    
    
    $
    2,312,775Taxes computed at Federal income tax rate
    
    $
    1,280,105
    
    
    $
    1,324,650
    
    
    $
    786,344Increase (decrease) resulting from:Tax-exempt income
    
    
    (693,992
    )
    
    
    (408,130
    )
    
    
    (248,386
    )State income taxes, net of
Federal income
tax benefit
    
    
    92,462
    
    
    
    108,518
    
    
    
    42,405Other
    
    
    9,365
    
    
    
    59,907
    
    
    
    7,176Income tax expense
    
    $
    687,940
    
    
    $
    1,084,945
    
    
    $
    587,539
  Sources of deferred income taxes and the tax effects of each for the years ended
December 31, 2003, 2002, and 2001 are as follows: 2003
    
    2002
    
    2001Depreciation
    
    $
    10,037
    
    
    $
    (33,128
    )
    
    $
    (52,012
    )Securities discount accretion
    
    
    1,741
    
    
    
    5,379
    
    
    
    8,109Provision for credit losses
    
    
    (37,415
    )
    
    
    (3,549
    )
    
    
    52,185Deferred compensation and pension benefit plans
    
    
    25,186
    
    
    
    310,066
    
    
    
    (89,370
    )Write-downs on other real estate owned
    
    
    32,375
    
    
    
    
    
    
    
    (22,912
    )Alternative minimum tax credits
    
    
    
    
    
    
    
    
    
    
    60,239Reserve for unfunded commitments
    
    
    
    
    
    
    
    
    
    
    (57,930
    )Deferred income tax expense (benefit)
    
    $
    31,924
    
    
    $
    278,768
    
    
    $
    (101,691
    )
 F-21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Income Taxes(continued)  The components of the net deferred income tax benefits as of December 31, 2003, 2002,
and 2001 are as follows: 2003
    
    2002
    
    2001Deferred income tax benefits:Accrued deferred compensation and benefit
plan obligations
    
    $
    80,173
    
    
    $
    105,359
    
    
    $
    415,425Other real estate owned
    
    
    
    
    
    
    32,375
    
    
    
    32,375Net unrealized depreciation on investment
securities available for sale
    
    
    
    
    
    
    
    
    
    
    102,573Reserve for unfunded commitments
    
    
    57,930
    
    
    
    57,930
    
    
    
    57,930Total deferred income tax benefits
    
    
    138,103
    
    
    
    195,664
    
    
    
    608,303Deferred income tax liabilities:Accumulated depreciation
    
    
    71,052
    
    
    
    61,016
    
    
    
    94,144Allowance for credit losses
    
    
    8,235
    
    
    
    45,650
    
    
    
    49,199Accumulated securities discount accretion
    
    
    44,713
    
    
    
    42,972
    
    
    
    37,593Net unrealized appreciation on investment
securities available for sale
    
    
    806,203
    
    
    
    961,340
    
    
    
    Total deferred income tax liabilities
    
    
    930,203
    
    
    
    1,110,978
    
    
    
    180,936Net deferred income tax (liabilities)
benefits
    
    $
    (792,100
    )
    
    $
    (915,314
    )
    
    $
    427,367
  Management has determined that no valuation allowance is required as it
is more likely than not that the net deferred income tax benefits will be
fully realizable in future years. Note 11. Pension and Profit Sharing Plans  The Bank has a money purchase pension plan, which provides for annual
employer contributions based on employee compensation, and covers
substantially all employees. Contributions under this plan, made from
the safe harbor accrual, totaled $188,995, $188,470, and $175,794 for the
years ended December 31, 2003, 2002 and 2001, respectively. The Bank is
also making additional contributions under this plan to certain employees
whose retirement funds were negatively affected by the termination of a
defined benefit pension plan. These additional contributions, included
in employee benefit expense, totaled $76,189, $103,476, and $149,045 for
the years ended December 31, 2003, 2002, and 2001, respectively. As of
December 31, 2003, the Bank has accrued approximately $260,000 relating
to the remaining safe harbor contributions and additional contributions
to adversely affected employees.The Bank also has a defined contribution retirement plan qualifying under
Section 401(k) of the Internal Revenue Code that is funded through a
profit sharing agreement and voluntary employee contributions. The plan
provides for discretionary employer matching contributions to be
determined annually by the Board of Directors. The plan covers
substantially all employees. The Banks contributions to the plan,
included in employee benefit expense, totaled $362,978, $359,914, and
$242,997 for the years ended December 31, 2003, 2002, and 2001,
respectively. Note 12. Post-Retirement Health Care Benefits  The Bank provides health care benefits to employees who retire at age 65
with five years of full time service immediately prior to retirement and
two years of participation in the medical benefits plan. In 2001, the
Bank amended the plan to include the current Board of Directors and their
spouses and the spouses of current retirees. In the first quarter of
2002, the Bank again amended the plan so that all post-retirement
healthcare benefits currently provided by the Bank to the above qualified
participants will F-22




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12. Post-Retirement Health Care Benefits(continued)  terminate on December 31, 2006. This amendment to the plan resulted in a
net curtailment gain of approximately $764,000 in the year ended December
31, 2002. The plan was funded only to the extent of the Banks monthly
payments of insurance premiums, which totaled $87,538, $59,316, and
$42,312 for the years ended December 31, 2003, 2002, and 2001,
respectively.The following table sets forth the financial status of the plan at
December 31, 2003, 2002, and 2001: 2003
    
    2002
    
    2001Accumulated post-retirement benefit obligation:Retirees
    
    $
    261,119
    
    
    $
    269,955
    
    
    $
    503,823Other active participants, fully eligible
    
    
    
    
    
    
    
    
    
    
    79,954Other active participants, not fully eligible
    
    
    
    
    
    
    
    
    
    
    1,023,038261,119
    
    
    
    269,955
    
    
    
    1,606,815Unrecognized net (loss) gain
    
    
    (53,526
    )
    
    
    2,857
    
    
    
    31,712Unrecognized transition obligation
    
    
    
    
    
    
    
    
    
    
    (434,186
    )Unrecognized past service cost
    
    
    
    
    
    
    
    
    
    
    (128,666
    )Accrued post-retirement benefit cost
    
    $
    207,593
    
    
    $
    272,812
    
    
    $
    1,075,675
  Net post-retirement benefit expense for the years ended December 31, 2003, 2002, and 2001
includes the following: 2003
    
    2002
    
    2001Service cost
    
    $
    
    
    
    $
    
    
    
    $
    135,368Interest cost
    
    
    21,280
    
    
    
    20,096
    
    
    
    100,651Amortization of unrecognized transition obligation
    
    
    
    
    
    
    
    
    
    
    33,399Amortization of net gain
    
    
    1,039
    
    
    
    
    
    
    
    Amortization of past service cost
    
    
    
    
    
    
    
    
    
    
    4,304Net post-retirement benefit expense
    
    $
    22,319
    
    
    $
    20,096
    
    
    $
    273,722
  Assumptions used in the accounting for net post-retirement benefit
expense were as follows: 2003
    
    2002
    
    2001Health care cost trend rate
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %Discount rate
    
    
    6.5
    %
    
    
    6.5
    %
    
    
    6.5
    %
  If the assumed health cost trend rate were increased 6% for 2003, 2002,
and 2001, the total of the service and interest cost components of net
periodic post-retirement health care benefit cost would increase by $294,
$369, and $46,848 for the years ended December 31, 2003, 2002, and 2001,
respectively, and the accumulated post-retirement benefit obligation
would increase to $22,613, $20,465, and $320,570 as of December 31, 2003,
2002, and 2001, respectively. Note 13. Other Benefit Plans  During the fourth quarter of 2002, the Bank purchased life insurance
contracts on several officers and is the sole owner and beneficiary of
the policies. Cash value totaled $4,782,258and $5,024,964 at December
31, 2003 and 2002, respectively. Income on their insurance investment
totaled $364,330 and $24,964 for 2003 and 2002, respectively, including a
gain of approximately $117,000 attributable to the death of its Executive
Vice President during 2003. F-23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13. Other Benefit Plans(continued)  In March 1998, the Bank established and funded a grantor trust for
$1,500,000 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.Subsequent to the repurchase of the Companys common stock under a
Redemption Agreement and entering into a standstill agreement (see Note
15), and effective as of December 31, 1998, all assets held by this trust
were returned to the Bank; however, the trust continues to exist on an
unfunded status. In August 2001, the Board of Directors approved certain
amendments and revisions to the plan to reflect changes at the Bank since
inception of the plan. Note 14. Other Operating Expenses  Other operating expenses include the following: 2003
    
    2002
    
    2001Professional services
    
    $
    475,565
    
    
    $
    533,194
    
    
    $
    605,952Stationery, printing and supplies
    
    
    221,453
    
    
    
    226,127
    
    
    
    260,863Postage and delivery
    
    
    216,410
    
    
    
    256,080
    
    
    
    262,759FDIC assessment
    
    
    37,852
    
    
    
    38,015
    
    
    
    37,696Directors fees and expenses
    
    
    134,020
    
    
    
    142,762
    
    
    
    128,101Marketing
    
    
    197,768
    
    
    
    212,470
    
    
    
    244,838Data processing
    
    
    158,365
    
    
    
    144,580
    
    
    
    154,980Correspondent bank services
    
    
    77,833
    
    
    
    76,508
    
    
    
    74,533Telephone
    
    
    135,588
    
    
    
    142,703
    
    
    
    138,220Liability insurance
    
    
    98,945
    
    
    
    116,121
    
    
    
    93,608Losses and expenses on real estate owned (OREO)
    
    
    21,544
    
    
    
    7,157
    
    
    
    73,455Asset impairment losses on branch closures and
related exit expenses (see Note 5)
    
    
    
    
    
    
    141,647
    
    
    
    Provision for losses on unfunded credit related
commitments with off-balance sheet risk
    
    
    
    
    
    
    
    
    
    
    150,000Other ATM expense
    
    
    201,614
    
    
    
    151,654
    
    
    
    163,471Other
    
    
    418,471
    
    
    
    544,203
    
    
    
    623,929$
    2,395,428
    
    
    $
    2,733,221
    
    
    $
    3,012,405
 Note 15. Litigation Charges  In 2001 the Company incurred a non-recurring expense of $70,000 relating
to the settlement of a legal claim. Note 16. Repurchase and Retirement of Company Common Stock  During 1998, the Company was pursued by another competing financial
institution (the institution) in a hostile take-over attempt. In
November 1998, the Company reached an agreement with the institution to
repurchase 213,168 shares of its common stock, or approximately 19.5% of
its then outstanding shares, for an aggregate purchase price of
$5,580,764. In conjunction with the redemption agreement, the Company
and the institution also entered into a standstill agreement through
November 2008. Under the standstill agreement, the Company made payments
over four years totaling $675,510.For the years ended December 31, 2003, 2002, and 2001, the Company made
payments totaling $0, $131,378, and $131,378, respectively, relating to
the standstill agreement. These payments are included in other expenses. F-24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17. 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: 2003
    
    2002
    
    2001Loan commitments:Construction and land development
    
    $
    
    
    
    $
    357,000
    
    
    $
    250,000Other mortgage loans
    
    
    2,082,250
    
    
    
    3,422,912
    
    
    
    5,456,022$
    2,082,250
    
    
    $
    3,779,912
    
    
    $
    5,706,022Unused lines of credit:Home-equity lines
    
    $
    4,668,479
    
    
    $
    4,288,833
    
    
    $
    3,775,941Commercial lines
    
    
    8,500,927
    
    
    
    9,272,579
    
    
    
    7,272,045Unsecured consumer lines
    
    
    982,715
    
    
    
    841,400
    
    
    
    862,555$
    14,152,121
    
    
    $
    14,402,812
    
    
    $
    11,910,541Letters of credit:
    
    $
    772,731
    
    
    $
    891,549
    
    
    $
    1,257,361
  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, 2003, the
Bank has accrued $ 150,000 for unfunded commitments related to these financial instruments with
off balance sheet risk, which is included in other liabilities. F-25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 18. 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 $4,993,000, $3,462,000, and
$2,469,000 at December 31, 2003, 2002, and 2001, respectively, based on
the earnings restrictions and minimum capital ratio requirements noted
below.Stock repurchase program:In December 2000, the Company instituted a Stock Repurchase Program.
Under the program, the Company could spend up to $250,000 to repurchase its outstanding stock.
The repurchases could be made from time to time at a price not to exceed
$10.667 per share. During 2001, the Company repurchased 15,000 shares at
an average price of $9.917 (adjusted for stock splits and stock
dividends). This program was terminated by the Company in December 2001.Employee stock purchase benefit plans:The Company has a stock-based compensation plan, which is described
below. The Bank applies APB No. 25 and related Interpretations in
accounting for this plan. Net compensation cost (benefit) of ($6,073),
$38,405, and $0 have been recognized in the accompanying consolidated
financial statements in 2003, 2002, and 2001, respectively. If
compensation cost for the Companys stock-based compensation plan had
been determined based on the fair value at the grant date for awards
under this plan consistent with the methods outlined in SFAS No. 123
Accounting for Stock-Based Compensation, there would be no material
change in reported net income.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 the lesser of 85% of the fair market value of the stock on the
date of grant or exercise. Options granted will expire no later than 27
months from the grant date or upon termination of employment. Activity
under this plan is as follows: GrantShares
    
    PriceOutstanding December 31, 2000
    
    
    Outstanding December 31, 2001
    
    
    Granted on May 17, 2002, expiring August 13, 2003
    
    
    7,765
    
    
    $
    13.77Exercised
    
    
    (3,065
    )Expired
    
    
    (145
    )
    
    $
    13.77Outstanding December 31, 2002
    
    
    4,555Exercised
    
    
    (3,350
    )
    
    $
    13.77Expired
    
    
    (1,205
    )
    
    $
    13.77Outstanding December 31, 2003
    
    
    
 F-26




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 18. Stockholders Equity(continued)  At December 31, 2003 shares of common stock reserved for issuance under
the plan totaled 35,147.The Board of Directors may suspend or discontinue the plan at its
discretion.In January 2004, the Company authorized issuance of options to purchase
up to 19,200 shares of common stock at $20.70 under this plan. All
unexercised options expire December 2004.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 2003, 2002, and 2001, shares of common stock purchased under the
plan totaled 8,758, 10,548, and 12,314, respectively. At December 31,
2003, shares of common stock reserved for issuance under the plan totaled
134,933.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,
2003, 2002, and 2001.At December 31, 2003, shares of common stock reserved for issuance under
the plan totaled 181,666.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, 2003, 2002, and 2001, that both the Company
and Bank meet all capital adequacy requirements to which they are
subject. F-27




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 18. Stockholders Equity(continued)  As of December 31, 2003, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios. There have been no conditions or events since that
notification that management believes have changed the Banks category.As discussed in Note 8, the capital securities held by the Glen Burnie
Statutory Trust I qualifies as Tier 1 capital for the Company under
Federal Reserve Board guidelines. As a result of the issuance of FIN 46,
the Federal Reserve Board is currently evaluating whether deconsolidation
of the trust will affect the qualification of the capital securities as
Tier 1 capital for regulatory purposes. If it is later determined that
the capital securities no longer qualify as Tier 1 capital, the effect of
such a change may be material.A comparison of capital as of December 31, 2003, 2002, and 2001 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, 2003Total Capital
(to Risk Weighted Assets)Company
    
    $
    30,110,000
    
    
    
    15.8
    %
    
    $
    15,255,225
    
    
    
    8.0
    %
    
    
    N/ABank
    
    
    29,674,000
    
    
    
    15.6
    %
    
    
    15,217,000
    
    
    
    8.0
    %
    
    $
    19,022,000
    
    
    
    10.0
    %Tier I Capital
(to Risk Weighted Assets)Company
    
    
    27,726,000
    
    
    
    14.5
    %
    
    
    7,628,000
    
    
    
    4.0
    %
    
    
    N/ABank
    
    
    27,296,000
    
    
    
    14.4
    %
    
    
    7,609,000
    
    
    
    4.0
    %
    
    
    11,413,000
    
    
    
    6.0
    %Tier I Capital
(to Average Assets)Company
    
    
    27,726,000
    
    
    
    9.3
    %
    
    
    11,990,000
    
    
    
    4.0
    %
    
    
    N/ABank
    
    
    27,296,000
    
    
    
    9.1
    %
    
    
    11,972,000
    
    
    
    4.0
    %
    
    
    14,965,000
    
    
    
    5.0
    %As of December 31, 2002Total Capital
(to Risk Weighted Assets)Company
    
    $
    27,523,000
    
    
    
    15.3
    %
    
    $
    14,410,000
    
    
    
    8.0
    %
    
    
    N/ABank
    
    
    26,949,000
    
    
    
    15.0
    %
    
    
    14,363,000
    
    
    
    8.0
    %
    
    $
    17,954,000
    
    
    
    10.0
    %Tier I Capital
(to Risk Weighted Assets)Company
    
    
    25,266,000
    
    
    
    14.0
    %
    
    
    7,209,000
    
    
    
    4.0
    %
    
    
    N/ABank
    
    
    24,699,000
    
    
    
    13.8
    %
    
    
    7,185,000
    
    
    
    4.0
    %
    
    
    10,778,000
    
    
    
    6.0
    %Tier I Capital
(to Average Assets)Company
    
    
    25,266,000
    
    
    
    9.1
    %
    
    
    11,143,000
    
    
    
    4.0
    %
    
    
    N/ABank
    
    
    24,699,000
    
    
    
    8.9
    %
    
    
    11,126,000
    
    
    
    4.0
    %
    
    
    13,907,000
    
    
    
    5.0
    %
 F-28




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 18. Stockholders Equity(continued) To Be Well CapitalizedFor Capital
    
    Under Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2001Total Capital
(to Risk Weighted Assets)Company
    
    $
    25,254,000
    
    
    
    13.9
    %
    
    $
    14,514,000
    
    
    
    8.0
    %
    
    
    N/ABank
    
    
    24,361,000
    
    
    
    13.5
    %
    
    
    14,458,000
    
    
    
    8.0
    %
    
    $
    18,072,000
    
    
    
    10.0
    %Tier I Capital
(to Risk Weighted Assets)Company
    
    
    22,976,000
    
    
    
    12.7
    %
    
    
    7,254,000
    
    
    
    4.0
    %
    
    
    N/ABank
    
    
    22,092,000
    
    
    
    12.2
    %
    
    
    7,226,000
    
    
    
    4.0
    %
    
    
    10,838,000
    
    
    
    6.0
    %Tier I Capital
(to Average Assets)Company
    
    
    22,976,000
    
    
    
    8.8
    %
    
    
    10,456,000
    
    
    
    4.0
    %
    
    
    N/ABank
    
    
    22,092,000
    
    
    
    8.5
    %
    
    
    10,421,000
    
    
    
    4.0
    %
    
    
    13,026,000
    
    
    
    5.0
    %
 Note 19. Earnings Per Common Share  Earnings per common share are calculated as follows: 2003
    
    
    2002
    
    

    2001Basic:Net income
    
    $
    
    
    
    
    3,077,074
    
    
    $
    
    
    
    
    2,811,083
    
    
    $
    1,725,236Weighted average common shares outstanding
    
    
    
    
    
    
    1,682,235
    
    
    
    
    
    
    
    1,668,335
    
    
    
    1,656,904Basic net income per share
    
    $
    
    
    
    
    1.83
    
    
    $
    
    
    
    
    1.68
    
    
    $
    1.04Diluted:Net income
    
    
    
    
    
    
    
    
    
    $

    
    
    
    
    2,811,083Weighted average common shares outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,668,335Dilutive effect of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,820Average common shares outstanding  diluted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,671,155Diluted net income per share
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    1.68
  Diluted earnings per share calculations were not required for 2003 and
2001 as there were no options outstanding at December 31, 2003 and 2001.In December 2003, the Company approved a stock split in the form of a 20%
stock dividend, effective for January 2004. F-29




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20. 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: 2003
    
    
    2002
    
    2001Carrying
    
    Fair
    
    
    Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    
    Amount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and due from banks
    
    
    $

    11,119,791
    
    
    $
    11,119,791
    
    
    
    $
    11,297,175
    
    
    $
    11,297,175
    
    
    $
    10,888,085
    
    
    $
    10,888,085Interest-bearing deposits in
other financial institutions
    
    
    
    57,192
    
    
    
    57,192
    
    
    
    
    41,335
    
    
    
    41,335
    
    
    
    1,879,444
    
    
    
    1,879,444Federal funds sold
    
    
    
    1,717,911
    
    
    
    1,717,911
    
    
    
    
    4,403,578
    
    
    
    4,403,578
    
    
    
    5,453,299
    
    
    
    5,453,299Certificates of deposit in other
financial institutions
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    100,000
    
    
    
    100,000
    
    
    
    100,000Investment securities
available for sale
    
    
    
    99,602,353
    
    
    
    99,602,353
    
    
    
    
    84,657,682
    
    
    
    84,657,682
    
    
    
    55,547,998
    
    
    
    55,547,998Investment securities held to
maturity
    
    
    
    3,578,754
    
    
    
    3,815,855
    
    
    
    
    7,202,369
    
    
    
    7,615,702
    
    
    
    16,516,923
    
    
    
    16,881,451Federal Home Loan Bank Stock
    
    
    
    896,400
    
    
    
    896,400
    
    
    
    
    703,200
    
    
    
    703,200
    
    
    
    652,300
    
    
    
    652,300Common stock-Statutory Trust I
    
    
    
    155,000
    
    
    
    155,000
    
    
    
    
    155,000
    
    
    
    155,000
    
    
    
    155,000
    
    
    
    155,000Ground rents
    
    
    
    248,300
    
    
    
    248,300
    
    
    
    
    249,900
    
    
    
    249,900
    
    
    
    249,900
    
    
    
    249,900Loans, less allowance for
credit losses
    
    
    
    172,819,049
    
    
    
    172,820,000
    
    
    
    
    158,286,746
    
    
    
    158,290,000
    
    
    
    164,569,252
    
    
    
    164,570,000Accrued interest receivable
    
    
    
    1,575,918
    
    
    
    1,575,918
    
    
    
    
    1,547,511
    
    
    
    1,547,511
    
    
    
    1,527,018
    
    
    
    1,527,018Financial liabilities:Deposits
    
    
    
    256,908,235
    
    
    
    256,910,000
    
    
    
    
    241,419,607
    
    
    
    241,420,000
    
    
    
    229,306,718
    
    
    
    231,692,000Short-term borrowings
    
    
    
    6,601,920
    
    
    
    6,601,920
    
    
    
    
    837,074
    
    
    
    837,074
    
    
    
    882,408
    
    
    
    882,408Long-term borrowings
    
    
    
    7,226,501
    
    
    
    7,226,501
    
    
    
    
    7,251,489
    
    
    
    7,251,489
    
    
    
    7,274,791
    
    
    
    7,274,791Dividends payable
    
    
    
    236,938
    
    
    
    236,938
    
    
    
    
    236,291
    
    
    
    236,291
    
    
    
    195,333
    
    
    
    195,333Accrued interest payable
    
    
    
    67,099
    
    
    
    67,099
    
    
    
    
    111,398
    
    
    
    111,398
    
    
    
    155,174
    
    
    
    155,174Accrued 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
    
    
    
    5,155,000
    
    
    
    
    5,155,000
    
    
    
    5,155,000
    
    
    
    5,155,000
    
    
    
    5,155,000Unrecognized financial instruments:Commitments to extend credit
    
    
    
    16,234,371
    
    
    
    16,234,371
    
    
    
    
    18,182,724
    
    
    
    18,182,724
    
    
    
    17,616,563
    
    
    
    17,466,563Standby letters of credit
    
    
    
    772,731
    
    
    
    772,731
    
    
    
    
    891,549
    
    
    
    891,549
    
    
    
    1,257,361
    
    
    
    1,257,361
  For purposes of the disclosures of estimated fair value, the following
assumptions were used.Loans:The estimated fair value for loans is determined by discounting future
cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.Investment securities:Estimated fair values are based on quoted market prices. F-30




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20. 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 21. Recently Issued Accounting Pronouncements  In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretations No. 46 (FIN 46), Consolidation of Variable
Interest Entities, which provides guidance on how to identify a variable
interest entity (VIE) and determine when the assets, liabilities,
noncontrolling interests, and results of operations of a VIE are to be
included in an entitys consolidated financial statements. A VIE exists
when either the total equity investment at risk is not sufficient to
permit the entity to finance its activities by itself, or the equity
investors lack one of three characteristics associated with owning a
controlling financial interest. Those characteristics include the direct
or indirect ability to make decisions about an entitys activities
through voting rights or similar rights, the obligation to absorb the
expected losses of an entity if they occur, or the right to receive the
expected residual returns of the entity if they occur.During the third quarter of 2003, the Company applied the provisions of
FIN 46 to a wholly-owned subsidiary trust that issued capital securities
to third-party investors. The application of FIN 46 resulted in the
deconsolidation of a wholly-owned subsidiary trust. See Note 8 for
further discussion of this trust and the Companys related obligations.In December 2003, the FASB reissued FIN 46 with certain modifications and
clarifications.
Application of this guidance was effective for interests in certain VIEs
commonly referred to as special-purpose entities (SPEs) as of December
31, 2003. Application for all other types of entities is required for
periods ending after March 15, 2004, unless previously applied.Management continues to evaluate the applicability of FIN 46. Management
does not believe that the application of FIN 46 will have an impact on
financial condition, results of operations, or liquidity. The Federal
Reserve Board is currently evaluating the impact on Tier 1 capital.In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments and hedging
activities under SFAS 133, as well as amends certain other existing FASB
pronouncements. In general, SFAS 149 is effective for derivative
transactions entered into or modified and for hedging relationships
designated after June 30, 2003. The adoption of this standard did not
have an impact on financial condition, the results of operations, or
liquidity, as the Company and Bank does not have derivative or hedging
instruments. F-31




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 21. Recently Issued Accounting Pronouncements(continued)  In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
Statement establishes standards for classifying and measuring certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. The provisions of SFAS
150 became effective June 1, 2003, for all financial instruments created
or modified after May 31, 2003, and otherwise became effective as of July
1, 2003. The adoption of this standard did not have a material impact on
financial condition, the results of operations, or liquidity.In December 2003, the FASB deferred for an indefinite period the
application of the guidance in SFAS 150 to noncontrolling interests that
are classified as equity in the financial statements of a subsidiary but
would be classified as a liability in the parents financial statements
under SFAS 150. The deferral is limited to mandatorily redeemable
noncontrolling interests associated with finite-lived subsidiaries.
Management does not believe any such applicable entities exist as of
December 31, 2003.In March 2003, the SEC issued Regulation G, Conditions for Use of
Non-GAAP Financial Measures. As defined in Regulation G, a non-GAAP
financial measure is a numerical measure of a companys historical or
future performance, financial position, or cash flow that excludes or
includes amounts or adjustments that are included or excluded in the most
directly comparable measure calculated in accordance with generally
accepted accounting principles (GAAP). Companies that present non-GAAP
financial measures must disclose a numerical reconciliation to the most
directly comparable measurement using GAAP. Management does not believe
it has used any non-GAAP financial measure in this report. F-32




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 22. 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,
    
    2003
    
    2002
    
    2001AssetsCash
    
    $
    268,893
    
    
    $
    397,118
    
    
    $
    512,981Investment in The Bank of Glen Burnie
    
    
    28,672,564
    
    
    
    26,376,359
    
    
    
    22,133,607Investment in GBB Properties, Inc.
    
    
    257,023
    
    
    
    251,012
    
    
    
    244,920Investment in the Glen Burnie Statutory Trust I
    
    
    155,000
    
    
    
    155,000
    
    
    
    155,000Due from subsidiaries
    
    
    26,658
    
    
    
    34,484
    
    
    
    104,384Other assets
    
    
    137,182
    
    
    
    141,361
    
    
    
    232,544Total assets
    
    $
    29,517,320
    
    
    $
    27,355,334
    
    
    $
    23,383,436Liabilities and Stockholders EquityDividends payable
    
    $
    236,938
    
    
    $
    236,291
    
    
    $
    195,333Accrued interest payable on borrowed funds
    
    
    171,518
    
    
    
    171,518
    
    
    
    171,518Other liabilities
    
    
    6,236
    
    
    
    3,139
    
    
    
    Borrowed funds from subsidiary
    
    
    5,155,000
    
    
    
    5,155,000
    
    
    
    5,155,000Total liabilities
    
    
    5,569,692
    
    
    
    5,565,948
    
    
    
    5,521,851Stockholders equity:Common stock
    
    
    1,689,281
    
    
    
    1,677,173
    
    
    
    1,663,560Surplus
    
    
    10,861,986
    
    
    
    10,637,578
    
    
    
    10,390,511Retained earnings
    
    
    10,115,038
    
    
    
    7,946,747
    
    
    
    5,970,537Accumulated other comprehensive income
(loss), net of taxes (benefits)
    
    
    1,281,323
    
    
    
    1,527,888
    
    
    
    (163,023
    )Total stockholders equity
    
    
    23,947,628
    
    
    
    21,789,386
    
    
    
    17,861,585Total liabilities and stockholders equity
    
    $
    29,517,320
    
    
    $
    27,355,334
    
    
    $
    23,383,436
  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, 2003. (See Notes 8 and
21 for further discussions on FIN 46). F-33




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 22. Parent Company Financial Information(continued) Statements of IncomeYears Ended December 31,
    
    
    
    
    
    2003
    
    2002
    
    2001Dividends and distributions from subsidiaries
    
    
    
    
    
    $
    880,000
    
    
    $
    720,000
    
    
    $
    1,750,000Other income
    
    
    
    
    
    
    16,430
    
    
    
    16,430
    
    
    
    16,430Standstill agreement expense
    
    
    
    
    
    
    
    
    
    
    (131,378
    )
    
    
    (131,378
    )Interest expense on junior subordinated debentures
    
    
    
    
    
    
    (546,430
    )
    
    
    (546,430
    )
    
    
    (550,962
    )Other expenses
    
    
    
    
    
    
    (52,896
    )
    
    
    (36,642
    )
    
    
    (42,156
    )Income before income tax benefit and equity in
undistributed net income of subsidiaries
    
    
    
    
    
    
    297,104
    
    
    
    21,980
    
    
    
    1,041,934Income tax benefit
    
    
    
    
    
    
    225,115
    
    
    
    269,575
    
    
    
    240,739Change in undistributed net income of subsidiaries
    
    
    
    
    
    
    2,554,855
    
    
    
    2,519,528
    
    
    
    442,563Net income
    
    
    
    
    
    $
    3,077,074
    
    
    $
    2,811,083
    
    
    $
    1,725,236
 Statements of Cash FlowsYears Ended December 31,
    
    2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    3,077,074
    
    
    $
    2,811,083
    
    
    $
    1,725,236Adjustments to reconcile net income to net
cash provided by operating activities:Decrease (increase) in other assets
    
    
    4,179
    
    
    
    91,183
    
    
    
    (82,544
    )Decrease in due from subsidiaries
    
    
    7,826
    
    
    
    69,900
    
    
    
    94,095Decrease in due to subsidiaries
    
    
    
    
    
    
    
    
    
    
    (150,000
    )Increase in accrued interest payable
    
    
    
    
    
    
    
    
    
    
    4,532Increase in other liabilities
    
    
    3,097
    
    
    
    3,139
    
    
    
    Change in undistributed net income of
subsidiaries
    
    
    (2,554,855
    )
    
    
    (2,519,528
    )
    
    
    (442,563
    )Net cash provided by operating activities
    
    
    537,321
    
    
    
    455,777
    
    
    
    1,148,756Cash flows from financing activities:Proceeds from dividend reinvestment plan
    
    
    196,460
    
    
    
    180,070
    
    
    
    168,026Proceeds from issuance of common stock
    
    
    46,130
    
    
    
    42,205
    
    
    
    Repurchase and retirement of common stock
    
    
    
    
    
    
    
    
    
    
    (148,750
    )Dividends paid
    
    
    (908,136
    )
    
    
    (793,915
    )
    
    
    (765,819
    )Net cash used in financing activities
    
    
    (665,546
    )
    
    
    (571,640
    )
    
    
    (746,543
    )(Decrease) increase in cash
    
    
    (128,225
    )
    
    
    (115,863
    )
    
    
    402,213Cash, beginning of year
    
    
    397,118
    
    
    
    512,981
    
    
    
    110,768Cash, end of year
    
    $
    268,893
    
    
    $
    397,118
    
    
    $
    512,981
 F-34




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 23. Quarterly Results of Operations(Unaudited) The following is a summary of consolidated unaudited quarterly results of
operations: 2003(Dollars in thousands,
    
    Three months ended,except per share amounts)
    
    December 31
    
    September 30
    
    June 30
    
    March 31Interest income
    
    $
    3,955
    
    
    $
    3,864
    
    
    $
    3,909
    
    
    $
    3,812Interest expense
    
    
    970
    
    
    
    1,051
    
    
    
    1,112
    
    
    
    1,144Net interest income
    
    
    2,985
    
    
    
    2,813
    
    
    
    2,797
    
    
    
    2,668Provision for credit losses
    
    
    30
    
    
    
    10
    
    
    
    
    
    
    
    Net securities gains
    
    
    49
    
    
    
    63
    
    
    
    15
    
    
    
    92Income before income taxes
    
    
    1,124
    
    
    
    1,033
    
    
    
    855
    
    
    
    753Net income
    
    
    849
    
    
    
    839
    
    
    
    733
    
    
    
    656Net income per share (basic and diluted)
    
    $
    0.50
    
    
    $
    0.50
    
    
    $
    0.44
    
    
    $
    0.39
 2002(Dollars in thousands,

    
    Three months ended,except per share amounts)
    
    December 31
    
    September 30
    
    June 30
    
    March 31Interest income
    
    $
    4,021
    
    
    $
    4,250
    
    
    $
    4,178
    
    
    $
    4,121Interest expense
    
    
    1,248
    
    
    
    1,302
    
    
    
    1,284
    
    
    
    1,368Net interest income
    
    
    2,773
    
    
    
    2,948
    
    
    
    2,894
    
    
    
    2,753Provision for credit losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net securities gains
    
    
    5
    
    
    
    42
    
    
    
    2
    
    
    
    4Income before income taxes
    
    
    775
    
    
    
    918
    
    
    
    762
    
    
    
    1,441Net income
    
    
    545
    
    
    
    691
    
    
    
    587
    
    
    
    988Net income per share (basic and diluted)
    
    $
    0.33
    
    
    $
    0.41
    
    
    $
    0.35
    
    
    $
    0.59
 2001(Dollars in thousands,
    
    Three months ended,except per share amounts)
    
    December 31
    
    September 30
    
    June 30
    
    March 31Interest income
    
    $
    4,316
    
    
    $
    4,297
    
    
    $
    4,303
    
    
    $
    4,291Interest expense
    
    
    1,564
    
    
    
    1,627
    
    
    
    1,598
    
    
    
    1,744Net interest income
    
    
    2,752
    
    
    
    2,670
    
    
    
    2,705
    
    
    
    2,547Provision for credit losses
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    Net securities gains
    
    
    89
    
    
    
    137
    
    
    
    29
    
    
    
    18Income before income taxes
    
    
    404
    
    
    
    825
    
    
    
    485
    
    
    
    599Net income
    
    
    330
    
    
    
    586
    
    
    
    377
    
    
    
    432Net income per share (basic and diluted)
    
    $
    0.20
    
    
    $
    0.35
    
    
    $
    0.23
    
    
    $
    0.26
 F-35