GLEN BURNIE BANCORP - Annual Report: 2010 (Form 10-K)

Unassociated Document

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2010 or

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to .

Commission file number: 0-24047

GLEN BURNIE BANCORP

(Exact name of registrant as specified in its charter)

MARYLAND		52-1782444
(State or other jurisdiction		(I.R.S. Employer
of 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 Registered
None	None

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

Title of Class

Common Stock, $1.00 par value

Common Stock Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ 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

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

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

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

Yes ¨ No x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2010 was $18,771,806.

The number of shares of common stock outstanding as of February 28, 2011 was 2,702,093.

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 2011 Annual Meeting of Shareholders (to be filed).

GLEN BURNIE BANCORP

2010 ANNUAL REPORT ON FORM 10-K

Table of Contents


PART I

Item 1.	Business	3
Item 2.	Properties	16
Item 3.	Legal Proceedings	17
	Executive Officers of the Registrant	17

PART II

Item 5.	Market for Registrant’s Common Equity, Related
	Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6.	Selected Financial Data	19
Item 7.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations	20
Item 8.	Financial Statements and Supplementary Data	28
Item 9.	Changes in and Disagreements with Accountants
	on Accounting and Financial Disclosure	28
Item 9A.	Controls and Procedures	29
Item 9B.	Other Information	29

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	30
Item 11.	Executive Compensation	30
Item 12.	Security Ownership of Certain Beneficial Owners
	and Management and Related Stockholder Matters	30
Item 13.	Certain Relationships and Related Transactions, and Director Independence	30
Item 14.	Principal Accountant Fees and Services	30

PART IV

Item 15.	Exhibits and Financial Statement Schedules	31

Signatures		32

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. The Company 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 Odenton, Riviera Beach, Crownsville, Severn (two locations), Linthicum and Severna Park, Maryland. The Bank also maintains two remote Automated Teller Machine (“ATM”) locations in Ferndale and Pasadena, Maryland. The Bank maintains a website at www.thebankofglenburnie.com. The Bank is the oldest independent commercial bank in Anne Arundel County. The Bank is engaged in the commercial and retail banking business as authorized by the banking statutes of the State of Maryland, including the acceptance of demand and time deposits, and the origination of loans to individuals, associations, partnerships and corporations. The Bank’s real estate financing consists of residential first and second mortgage loans, home equity lines of credit and commercial mortgage loans. Commercial lending consists of both secured and unsecured loans. The Bank also originates automobile loans through arrangements with local automobile dealers. The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”).

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

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

Economic and Credit Turmoil of 2008, 2009 and 2010

The turmoil and economic downturn of 2008, which continued in 2009, has engulfed the United States and world financial services industry. The ensuing overall consequences to numerous industries and the U.S. economy is well known and discussed daily in the media. The Bank and, as a result, the Company, have not been immune to the impact of these difficult economic times. While, due to conservative lending decisions, the Bank has no exposure to the credit issues affecting the sub-prime residential mortgage market, the economic slowdown resulted in the necessity of our contributing $2,442,976 to the provision for loan losses in 2009, in addition to the $1,145,649 provision made in 2008, primarily due to valuation issues in our commercial mortgage portfolio and continuing delinquency in our indirect automobile portfolio combined with adjustments we made to the risk factors in our calculation of required loan loss reserves. In addition, the economic downturn also resulted in an FDIC insurance premium assessment for 2009 of $549,716 which increased rates continued for 2010, a more than 1,400% increase from the 2008 assessment of $35,544. In 2008, the economic downturn also resulted in the necessity of the Bank taking in our first OREO (Other Real Estate Owned) property on a defaulted mortgage since 1999. Also in 2008, the Federal Housing Finance Agency was named conservator over both the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), two government sponsored agencies in which we had invested through the purchase of $3,000,000 of AAA rated preferred stock. As a result, in 2008 we wrote down the value of those investments to $184,000 by taking a charge to earnings in third quarter of 2008 of $2,816,000. Each of these factors will be discussed as appropriate elsewhere in this report. Nevertheless, despite the continuing economic downturn and these events, which are unusual for us in any year, we realized net income of $1,262,462 for 2009, and $403,962 net income for 2008. The Bank and others believe that the economy showed signs of improvement in 2010, although economic weakness continues in the real estate and other markets. For 2010, we realized net income of $2,064,785. We remain well capitalized and did not need to apply for any funding from the U.S. Department of Treasury’s Troubled Asset Relief Program (TARP). During the past three years, we continued to lend money and, we believe, meet the needs of our customers and neighbors through a difficult time. We believe we are a sound, conservatively run financial institution that has been profitable in 2008, 2009 and 2010 despite the deterioration in the economic environment and the outside forces that have affected us these past three years.

Market Area

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

Lending Activities

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

The Company’s total loan portfolio decreased in 2010 and increased during the 2009, 2008, 2007, and 2006 fiscal years. In 2010, the decrease in the loan portfolio was primarily due to decreases in indirect loans, commercial mortgages, secured demand commercial loans and commercial loans, partially offset by increases in refinance and purchase money mortgage loans and land development loans. Mortgage participations purchased decreased but so did mortgage participations sold. In 2009, the increase in the loan portfolio was primarily due to increases in refinanced mortgage loans, purchase money mortgage loans, home equity and commercial mortgages, partially offset by a decrease in indirect loans and mortgage participations purchased. In 2008, the increase in the loan portfolio was primarily due to increases in refinanced mortgage loans, commercial and residential construction loans and mortgage participations purchased, partially offset by additional mortgage participations sold and a decrease in indirect loans. In 2007, the increases were due to residential and commercial mortgages and construction, offset by a decrease in indirect lending and mortgage participations purchased and an increase in mortgage participations sold. In 2006, the increases were primarily due to an increase in commercial mortgages (due to an increase in participations), offset by decreases in residential mortgages and indirect automobile loans.

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

	At December 31,
	2010						2009						2008						2007						2006
(Dollars in Thousands)	$			%			$			%			$			%			$			%			$			%
Mortgage:
Residential	$	102,199			43.62	%	$	95,683			39.81	%	$	87,708			36.85	%	$	76,781			37.98	%	$	68,341			34.88	%
Commercial		72,670			31.02			79,845			33.23			76,153			31.99			47,843			23.66			53,164			27.13
Construction and land development		5,363			2.29			1,743			0.73			6,590			2.77			5,876			2.91			1,609			0.83

Consumer:
Installment		16,407			7.00			15,965			6.64			16,451			6.91			17,087			8.45			15,044			7.67
Credit card		168			0.07			166			0.07			173			0.07			143			0.07			144			0.08
Indirect automobile		30,286			12.93			37,092			15.44			43,970			18.47			49,260			24.37			52,539			26.81
Commercial		7,193			3.07			9,801			4.08			6,974			2.94			5,184			2.56			5,077			2.60
Gross loans		234,286			100.00	%		240,295			100.00	%		238,019			100.00	%		202,174			100.00	%		195,918			100.00	%
Unearned income on loans		(1,035	)					(839	)					(864	)					(816	)					(743	)
Gross loans net of unearned income		233,251						239,456						237,155						201,357						195,175
Allowance for credit losses		(3,400	)					(3,573	)					(2,022	)					(1,604	)					(1,839	)
Loans, net	$	229,851					$	235,883					$	235,133					$	199,753					$	193,336

The following table sets forth the maturities for various categories of the loan portfolio at December 31, 2010. Demand loans and loans which have no stated maturity, are treated as due in one year or less. At December 31, 2010, the Bank had $42,552,709 in loans due after one year with variable rates and $155,319,356 in such loans with fixed rates.

	Due Within One Year		Due Over One To Five Years		Due Over Five Years		Total
			(In Thousands)
Real Estate - mortgage:
Residential	$	8,633	$	2,666	$	90,900	$	102,199
Commercial		19,039		33,336		20,295		72,670
Construction and land development		2,393		2,163		807		5,363
Installment		1,120		8,254		7,033		16,407
Credit Card		37		14		117		168
Indirect automobile		1,237		22,784		6,265		30,286
Commercial		3,954		3,239		-		7,193
	$	36,413	$	72,456	$	125,417	$	234,286

Real Estate Lending. The Bank offers long-term mortgage financing for residential and commercial real estate as well as shorter term construction and land development loans. Residential mortgage and residential construction loans are originated with fixed rates, while commercial mortgages may be originated on either a fixed or variable rate basis. Commercial construction loans are generally originated on a variable rate basis. Substantially all of the Bank’s real estate loans are secured by properties in Anne Arundel County, Maryland. Under the Bank’s loan policies, the maximum permissible loan-to-value ratio for owner-occupied residential mortgages is 80% of the lesser of the purchase price or appraised value. For residential investment properties, the maximum loan-to-value ratio is 80%. The maximum permissible loan-to-value ratio for residential and residential construction loans is 80%. The maximum loan-to-value ratio for permanent commercial mortgages is 75%. The maximum loan-to-value ratio for land development loans is 70% and for unimproved land is 65%. The Bank also offers home equity loans secured by the borrower’s primary residence, provided that the aggregate indebtedness on the property does not exceed 80% of its value. Because mortgage lending decisions are based on conservative lending policies, the Company has no exposure to the credit issues affecting the sub-prime residential mortgage market.

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

Installment Lending. The Bank makes consumer and commercial installment loans for the purchase of automobiles, boats, other consumer durable goods, capital goods and equipment. Such loans provide for repayment in regular installments and are secured by the goods financed. Also included in installment loans are overdraft loans and other credit repayable in installments. As of December 31, 2010, approximately 57.34% of the installment loans in the Bank’s portfolio (other than indirect automobile lending) had been originated for commercial purposes and 42.66% had been originated for consumer purposes.

Indirect Automobile Lending. The Bank commenced its indirect automobile lending program in January 1998. The Bank finances new automobiles for terms of up to 72 months and used automobiles for terms of up to 66 months. The Bank does not lend more than the MSRP on new vehicles. On used vehicles, the Bank will not lend more than 110% of the average wholesale published in a nationally recognized used vehicle pricing guide. The Bank requires all borrowers to obtain vendor’s single interest coverage protecting the Bank against loss in the case a borrower’s automobile insurance lapses. The Bank originates indirect loans through a network of approximately 50 dealers which are primarily new car dealers located in Anne Arundel County and the surrounding counties. Participating dealers take loan applications from their customers and transmit them to the Bank for approval.

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

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

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

The Bank’s loan approval policy provides for various levels of individual lending authority. The maximum aggregate lending authority granted by the Bank to any one Lending Officer is $750,000. A combination of approvals from certain officers may be used to lend up to an aggregate of $1,000,000. The Bank’s Executive Committee is authorized to approve loans up to $3.0 million. Larger loans must be approved by the full Board of Directors.

Under Maryland law, the maximum amount which the Bank is permitted to lend to any one borrower and their related interests may generally not exceed 10% of the Bank’s unimpaired capital and surplus, which is defined to include the Bank’s capital, surplus, retained earnings and 50% of its allowance for possible loan losses. Under this authority, the Bank would have been permitted to lend up to $2.86 million to any one borrower at December 31, 2010. 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 is permitted to lend up to $4.49 million to any one borrower from and after January 1, 2011. At December 31, 2010, the largest amount outstanding to any one borrower and its related interests was $4,618,000.

Non-Performing Loans

It will be the policy of The Bank of Glen Burnie that any loan that is ninety (90) days or more delinquent in the payment of principal and/or interest be placed into non-accrual status. Notwithstanding the aforementioned, it is determined that there appears to be a substantial amount of risk of not collecting all of the agreed upon interest that would normally accrue to a loan, the loan should be placed into Non-Accrual status even if the determination is made prior to ninety (90) days delinquent. A variance to this rule would be if the asset is both well secured and in the process of collection. An asset is “well secured” if it is secured by (1) by collateral in the form of liens on or pledges of real or personal property, including securities that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. An asset is “in the process of collection” if collection of the asset is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in prepayment of the debt or in its restoration to a current status in the near future.

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

While the Bank has weathered the economic and credit turbulence during 2010 and remains strong, the Bank experienced a significant increase in non-accrual loans as of December 31, 2010. 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,
	2010			2009			2008			2007			2006
	(Dollars In Thousands)
Restructured Loans	$	-		$	87		$	-		$	578		$	-

Non-accrual loans:
Real estate – mortgage:
Residential	$	976		$	215		$	-		$	-		$	3
Commercial		4,522			2,626			659			-			-
Real estate - construction		-			-			-			-			-
Installment		125			176			208			212			46
Commercial		1,360			-			-			-			8
Total non-accrual loans		6,983			3,017			867			212			57

Accruing loans past due 90 days or more
Real estate – mortgage:
Residential		-			8			3			512			2
Commercial		-			-			-			-			-
Real estate - construction		-			-			5			-			-
Installment		-			1			26			-			-
Commercial		-			12			-			128			-
Total accruing loans past due 90 days or more		-			21			34			640			2
Total non-accrual and past due loans	$	6,983		$	3,038		$	901		$	852		$	59
Non-accrual and past due loans to gross loans		2.99	%		1.26	%		0.38	%		0.43	%		0.03	%
Allowance for credit losses to non-accrual and past due loans		48.69	%		117.61	%		224.42	%		188.27	%		3,116.95	%

For the year ended December 31, 2010, interest of $145,148 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. $6,361,029, or 91.1%, of the Bank’s total $6,983,004 non-accrual loans at December 31, 2010 were attributable to 5 borrowers. None of these borrowers was 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.

At December 31, 2010, there were loans outstanding, totaling $4,440,733, 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, 2010, the Company had $215,000 in real estate acquired in partial or total satisfaction of debt, compared to $25,000 and $550,000 in such properties at each of December 31, 2009 and 2008. This increase was the result of a property acquired in 2010. The $25,000 balance at December 31, 2009 reflects the deposit on OREO acquired during 2009, which was awaiting ratification by the court. 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, 2010, 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) ASC Topic 450, formerly Statement of Financial Accountings Standards (SFAS) No. 5 “Accounting for Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC Topic 310, formerly 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 collectability of the principal is unlikely. The allowance, based on evaluations of the collectability of loans and prior loan loss experience, is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, value of collateral, and current economic conditions and trends that may affect the borrower’s ability to pay. Because mortgage lending decisions are based on conservative lending policies, the Company has no exposure to the credit issues affecting the sub-prime residential mortgage market.

In 2010, the Bank decreased its provision for credit losses even with net charge offs on indirect loans of $406,000 and on commercial mortgages of $814,000. Many of the loans already had specific reserves from the previous year.

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

	Year Ended December 31,
	2010			2009			2008			2007			2006
	(Dollars In Thousands)
Beginning Balance	$	3,573		$	2,022		$	1,604		$	1,839		$	2,201

Loans charged off
Real estate - mortgage:
Residential		66			85			-			-			1
Commercial		825			-			-			-			-
Real estate - construction		-			-			-			-			-
Installment		959			1,070			1,079			591			528
Credit card & related		-			-			-			-			-
Commercial		12			133			2			-			253
Total		1,862			1,288			1,081			591			782

Recoveries
Real estate - mortgage:
Residential		85			-			-			-			1
Commercial		11			-			-			-			-
Real estate - construction		-			-			-			-			-
Installment		497			359			333			258			335
Credit card & related		-			-			-			-			-
Commercial		46			37			20			48			22
Total		639			396			353			306			358
Net charge offs/(recoveries)		1,223			892			728			285			424
Provisions (credited) charged to operations		1,050			2,443			1,146			50			62
Ending balance	$	3,400		$	3,573		$	2,022		$	1,604		$	1,839
Average loans	$	234,495		$	239,788		$	219,485		$	199,632		$	186,706
Net charge-offs to average loans		0.53	%		0.37	%		0.33	%		0.14	%		0.23	%

The following table shows the allowance for credit losses broken down by loan category as of December 31, 2010, 2009, 2008, 2007, and 2006:

	At December 31,
	2010					2009
Portfolio	Allowance For Each Category		Percentage Of Loans In Each Category To Total Loans			Allowance For Each Category			Percentage Of Loans In Each Category To Total Loans
	(Dollars In Thousands)
Real Estate - mortgage:
Residential	$	196		43.62	%	$	162			39.81	%
Commercial		2,096		31.02			2,377			33.23
Real Estate — construction		12		2.29			4			0.73
Installment		196		7.00			146			6.64
Credit Card		-		0.07			-			0.07
Indirect automobile		634		12.93			697			15.44
Commercial		263		3.07			237			4.08
Unallocated		3		-			(50	)		-
Total	$	3,400		100.00	%	$	3,573			100.00	%

	At December 31,
	2008					2007					2006
Portfolio	Allowance For Each Category		Percentage Of Loans In Each Category To Total Loans			Allowance For Each Category		Percentage Of Loans In Each Category To Total Loans			Allowance For Each Category		Percentage Of Loans In Each Category To Total Loans
	(Dollars In Thousands)
Real Estate – mortgage:
Residential	$	123		36.85	%	$	117		37.98	%	$	149		34.88	%
Commercial		460		31.99			163		23.66			314		27.13
Real Estate – construction		63		2.77			102		2.91			14		0.83
Installment		161		6.91			55		8.45			103		7.67
Credit Card		-		0.07			-		0.07			-		0.08
Indirect automobile		942		18.47			892		24.37			1,119		26.81
Commercial		240		2.94			257		2.56			260		2.60
Unallocated		33		-			18		-			120		-
Total	$	2,022		100.00	%	$	1,604		100.00	%	$	1,839		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 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,
	2010		2009		2008
	(In Thousands)
U.S. Treasury securities	$	-	$	-	$	-
U.S. Government agencies and mortgage backed securities		52,365		54,030		25,571
Obligations of states and political subdivisions		34,776		30,073		31,466
Corporate trust preferred		1,793		2,080		2,169
Total investment securities	$	88,935	$	86,183	$	59,206

The following table sets forth the scheduled maturities, amortized costs and weighted average yields for the Company’s investment securities portfolio at December 31, 2010:

	One Year Or Less					One To Five Years					Five to Ten Years					More Than Ten Years					Total
	Amort. Cost		Weighted Average Yield			Amort. Cost		Weighted Average Yield			Amort. Cost		Weighted Average Yield			Amort. Cost		Weighted Average Yield			Amort. Cost		Weighted Average Yield
U.S. Treasury securities	$	-		-	%	$	-		-	%	$	-		-	%	$	-		-	%	$	-		-	%
U.S. Government agencies and mortgage backed securities		-		-			-		-			1,125		5.00			51,241		4.50			52,366		4.51
Obligations of states and political subdivisions		-		-			1,589		3.51			305		3.43			32,882		4.47			34,776		4.42
Corporate trust preferred		-		-			-		-			-		-			1,793		8.60			1,793		8.60
Total investment securities	$	-		-	%	$	1,589		3.51	%	$	1,430		4.67	%	$	85,916		4.58	%	$	88,935		4.56	%

At December 31, 2010, the Bank had no investments in securities of a single issuer (other than the U.S. Government securities and securities of federal agencies and government-sponsored enterprises), which aggregated more than 10% of stockholders’ equity.

Deposits And Other Sources of Funds

The funds needed by the Bank to make loans are primarily generated by deposit accounts solicited from the communities surrounding its branches in northern Anne Arundel County. Consolidated total deposits were $294,444,828 as of December 31, 2010. 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 $55.47 million under a line of credit from the FHLB of Atlanta as of December 31, 2010.

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

As stated above, the Bank obtains deposits principally through its network of branch offices. The Bank does not solicit brokered deposits. At December 31, 2010, the Bank had approximately $44.2 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, 2010:

	Amount (In Thousands)
Three months or less	$	7,517
Over three through six months		6,504
Over six through 12 months		7,736
Over 12 months		22,436
Total	$	44,193

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 $55.47 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 a $4 million daily rate credit line advance outstanding at December 31, 2010, with a variable rate. This advance can be paid back in whole or partially. The interest is computed daily on the advance and charged at the end of the month. This advance is scheduled to mature on November 22, 2011 and the rate was 0.47% at December 31, 2010. There was $10 million in a convertible advance under this credit arrangement at December 31, 2010. The advance matures in November 1, 2017, is callable monthly, and bears a 3.28% rate of interest. There was a $5 million convertible advance settled July 21, 2008 with a final maturity of July 23, 2018. This advance has a 2.73% rate of interest and was callable quarterly, starting July 23, 2009. There was a $5 million convertible advance taken out August 22, 2008 which has a final maturity of August 22, 2018. This advance has a 3.344% rate of interest and is callable quarterly, starting August 22, 2011. The Bank also has an unsecured line of credit in the amount of $3 million from another commercial bank but currently has no balance outstanding. The Bank paid off the mortgage note on the 103 Crain Highway address.

Competition

The Bank faces competition for deposits and loans from other community banks, branches or affiliates of larger banks, savings and loan associations, savings banks and credit unions, which compete vigorously (currently, sixteen FDIC-insured depository institutions operate within two miles of the Bank’s headquarters). With respect to indirect lending, the Bank faces competition from other banks and the financing arms of automobile manufacturers. The Bank competes in this area by offering competitive rates and responsive service to dealers.

The Bank’s interest rates, loan and deposit terms, and offered products and services are impacted, to a large extent, by such competition. The Bank attempts to provide superior service within its community and to know, and facilitate services, to, its customers. It seeks commercial relationships with small to medium size businesses, which the Bank believes would welcome personal service and flexibility. The bank believes its greatest competition comes from larger intra- and inter-state financial institutions.

Other Activities

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

Employees

At December 31, 2010, the Bank had 118 full-time equivalent employees. Neither the Company nor GBB currently has any employees.

Regulation of the Company

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

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

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

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.”

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

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

Regulation of the Bank

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

The Bank’s deposits are insured by the FDIC to the legal maximum of $250,000 for each insured depositor. Some of the aspects of the lending and deposit business of the Bank that are subject to regulation by the Federal Reserve Board and the FDIC include reserve requirements and disclosure requirements in connection with personal and mortgage loans and savings deposit accounts. In addition, the Bank is subject to numerous Federal and state laws and regulations which set forth specific restrictions and procedural requirements with respect to the establishment of branches, investments, interest rates on loans, credit practices, the disclosure of customer information, the disclosure of credit terms and discrimination in credit transactions.

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

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

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

The Company and the Bank are not currently aware of any account relationships between the Bank and any foreign bank or other person or entity as described above under Sections 313(a) or 312 of the Patriot Act.

The terrorist attacks on September 11, 2001 have realigned national security priorities of the United States and it is reasonable to anticipate that the United States Congress may enact additional legislation in the future to combat terrorism including modifications to existing laws such as the Patriot Act to expand powers as deemed necessary. The enactment of the Patriot Act has increased the Bank’s compliance costs, and the impact of any additional legislation enacted by Congress may have upon financial institutions is uncertain. However, such legislation would likely increase compliance costs and thereby potentially have an adverse effect upon the Company’s results of operations.

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

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

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

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

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

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

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, 2010, the Bank was well capitalized as defined by the FDIC’s regulations.

Branching. Maryland law provides that, with the approval of the Commissioner, Maryland banks may establish branches within the State of Maryland without geographic restriction and may establish branches in other states by any means permitted by the laws of such state or by federal law. The Riegle-Neal Act authorizes the FDIC to approve interstate branching de novo by state banks, only in states that specifically allow for such branching.

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

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

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

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

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

ITEM 2. PROPERTIES

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

	Year Opened	Owned/ Leased	Book Value		Approximate Square Footage		Deposits
Main Office:
101 Crain Highway, S.E. Glen Burnie, MD 21061	1953	Owned	$	699,341		10,000	$	86,441,035

Branches:
Odenton 1405 Annapolis Road Odenton, MD 21113	1969	Owned		167,783		6,000		38,975,886

Riviera Beach 8707 Ft. Smallwood Road Pasadena, MD 21122	1973	Owned		228,426		2,500		31,055,075

Crownsville 1221 Generals Highway Crownsville, MD 21032	1979	Owned		315,033		3,000		51,986,175

Severn 811 Reece Road Severn, MD 21144	1984	Owned		142,713		2,500		26,756,463

New Cut Road 740 Stevenson Road Severn, MD 21144	1995	Owned		1,397,720		2,600		25,193,939

Linthicum Burwood Village Shopping Center Glen Burnie, MD 21060	2005	Leased		107,903		2,500		15,938,661

Severna Park 534 Ritchie Highway Severna Park, MD 21146	2002	Leased		60,684		2,184		18,626,494

Operations Centers:
106 Padfield Blvd. Glen Burnie, MD 21061	1991	Owned		736,177		16,200		N/A

103 Crain Highway, S.E. Glen Burnie, MD 21061	2000	Owned		267,835		3,727		N/A

At December 31, 2010, the Bank owned one foreclosed real estate property with a total book value of $215,000.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company and the Bank are involved in various legal actions relating to their business activities. At December 31, 2010, 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.

EXECUTIVE OFFICERS OF THE REGISTRANT

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

NAME	AGE	POSITIONS

F. William Kuethe, Jr.	78	President Emeritus
Michael G. Livingston	57	President and Chief Executive Officer
John E. Porter	57	Senior Vice President and Chief Financial Officer

F. WILLIAM KUETHE, JR. was appointed to the honorary position of President Emeritus of the Company and the Bank effective January 1, 2008 when he retired from full-time employment and stepped down from his positions of President and Chief Executive Officer of the Company and the Bank which he held since 1995. Mr. Kuethe has been a director of the Company and the Bank since 1995 and was President of Glen Burnie Mutual Savings Bank from 1960 through 1995. Mr. Kuethe is a former licensed appraiser and real estate broker with banking experience from 1960 to present, at all levels. He is the father of Frederick W. Kuethe, III, a director of the Company.

MICHAEL G. LIVINGSTON was appointed President and Chief Executive Officer of the Company and the Bank effective January 1, 2008. Prior to that date, Mr. Livingston was Deputy Chief Executive Officer and Executive Vice President since August 2004, Chief Operating Officer since January 2004, Deputy Chief Operating Officer from February 2003 through December 2003, Senior Vice President from January 1998 until August 2004, and Chief Lending Officer of the Bank from 1996 until August 2004. Mr. Livingston was elected as a director of the Company and the Bank on January 1, 2005.

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

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 Capital Market under the symbol “GLBZ”. As of February 22, 2011, there were 424 record holders of the Common Stock. The closing price for the Common Stock on that date was $8.62.

The following table sets forth the high and low sales prices for the Common Stock for each full quarterly period during 2010 and 2009 as reported by Nasdaq. The quotations represent prices between dealers and do not reflect the retailer markups, markdowns or commissions, and may not represent actual transactions. Also shown are dividends declared per share for these periods.

	2010						2009
Quarter Ended	High		Low		Dividends		High		Low		Dividends

March 31,	$	11.70	$	8.50	$	0.10	$	10.96	$	8.41	$	0.10
June 30,		10.95		9.00		0.10		9.40		7.80		0.10
September 30		10.10		7.74		0.10		9.25		7.70		0.10
December 31		9.60		7.75		0.10		9.76		8.09		0.10

A regular dividend of $0.10 was declared for stockholders’ of record on December 27, 2010, payable on January 6, 2011.

The Company intends to pay dividends approximating forty percent (40%) of its profits for each quarter. However, dividends remain subject to declaration by the Board of Directors in its sole discretion and there can be no assurance that the Company will be legally or financially able to make such payments. Payment of dividends may be limited by federal and state regulations which impose general restrictions on a bank’s and bank holding company’s right to pay dividends (or to make loans or advances to affiliates which could be used to pay dividends). Generally, dividend payments are prohibited unless a bank or bank holding company has sufficient net (or retained) earnings and capital as determined by its regulators. See “Item 1. Business - Supervision and Regulation - Regulation of the Company - Dividends and Distributions” and “Item 1. Business — Supervision and Regulation - Regulation of the Bank - Dividend Limitations.” The Company does not believe that those restrictions will materially limit its ability to pay dividends.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents consolidated selected financial data for the Company and its subsidiaries for each of the periods indicated. Dividends and earnings per share have been adjusted to give retroactive effect to a 20% stock dividend paid on January 18, 2008, and one paid on January 23, 2006.

	Year Ended December 31,
	2010			2009			2008			2007			2006
	(Dollars In Thousand Except Per Share Data)
Operations Data:
Net Interest Income	$	12,880		$	12,102		$	11,922		$	11,866		$	11,821
Provision for Credit Losses		1,050			2,443			1,146			50			62
Other Income		1,899			2,365			2,051			2,157			2,244
Other Expense		11,178			10,995			13,102			10,433			10,682
Net Income		2,065			1,262			404			2,782			2,720

Share Data:
Basic Net Income Per Share	$	0.76		$	0.46		$	0.14		$	0.93		$	0.92
Diluted Net Income Per Share		0.76			0.46			0.14			0.93			0.92
Cash Dividends Declared Per Common Share		0.40			0.40			0.45			0.45			0.45
Weighted Average Common Shares Outstanding:
Basic		2,690,218			2,734,524			2,981,124			2,988,796			2,972,362
Diluted		2,690,218			2,734,524			2,981,124			2,988,796			2,972,362

Financial Condition Data:
Total Assets	$	347,067		$	353,397		$	332,502		$	307,274		$	317,746
Loans Receivable, Net		229,851			235,883			235,133			199,753			193,337
Total Deposits		294,445			294,358			269,768			252,917			274,833
Long Term Borrowings		20,000			27,034			27,072			17,107			7,140
Junior Subordinated Debentures		-			5,155			5,155			5,155			5,155
Total Stockholders’ Equity		26,333			25,149			27,908			29,736			28,201

Performance Ratios:
Return on Average Assets		0.58	%		0.36	%		0.13	%		0.89	%		0.84	%
Return on Average Equity		7.75			4.87			1.49			9.60			10.00
Net Interest Margin (1)		4.05			4.29			4.31			4.39			4.31
Dividend Payout Ratio		52.11			85.59			332.98			48.33			49.18

Capital Ratios:
Average Equity to Average Assets		7.45	%		7.37	%		8.99	%		9.28	%		8.36	%
Leverage Ratio		7.64			8.86			10.50			11.34			10.30
Total Risk-Based Capital Ratio		12.58			14.40			14.93			17.50			17.07

Asset Quality Ratios:
Allowance for Credit Losses to Gross Loans		1.45	%		1.18	%		0.85	%		0.80	%		0.94	%
Non-accrual and Past Due Loans to Gross Loans		2.99	%		1.26	%		0.38	%		0.43	%		0.03	%
Allowance for Credit Losses to Non-Accrual and Past Due Loans		48.69	%		117.61	%		224.42	%		188.27	%		3,116.95	%
Net Loan Charge-offs (Recoveries) to Average Loans		0.53	%		0.37	%		0.33	%		0.14	%		0.23	%

(1) Presented on a tax-equivalent basis

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

Overview

During 2010, net interest income before provision for credit losses increased to $12,880,012 from $12,101,787 in 2009, a 6.43% increase. Total interest income decreased from $18,644,297 in 2009 to $18,178,967 in 2010, a 2.50% decrease. Interest expense for 2010 totaled $5,298,955, a 19.01% decrease from $6,542,510 in 2009. Net income in 2010 was $2,064,785 compared to $1,262,462 in 2009. The increase in net income was primarily due to the reduction in interest expense and in the provision for loan losses which declined from $2,442,976 in 2009 to $1,050,000 for 2010.

The Bank and, as a result, the Company, experienced improved performance in 2010. In spite of the continuing economic downturn, our long standing policy of conservative lending decisions and having no exposure to the sub-prime residential mortgage market resulted in minimal charge offs in residential real estate and a decrease in installment loan charge offs combined with an increase in recoveries on installment loans. Although we took a charge off in 2010 on commercial real estate that we had reserved for in 2009, the Bank’s loan portfolio remained stable in 2010 with net charge offs of $1,223,012 for the year.

In September 2010, the Company repaid $5,155,000 plus accrued interest and prepayment penalties of $546,690 on its 10.6% Junior Subordinated Deferrable Interest Debentures issued to Glen Burnie Statutory Trust I, a Connecticut statutory trust subsidiary of the Company, and the Bank repaid $7 million plus accrued interest of $104,471 on a 5.84% FHLB advance that had come due. The repayment of the Junior Subordinated Deferrable Interest Debentures will result in a $546,430 reduction in annual interest expense for the Company. The Bank’s repayment of the FHLB advance will result in an annual reduction of $408,800 in interest expense on long-term borrowings.

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

Comparison of Results of Operations for the Years Ended December 31, 2010, 2009 and 2008

General. For the year ended December 31, 2010, the Company reported consolidated net income of $2,064,785 ($0.76 basic and diluted earnings per share) compared to consolidated net income of $1,262,462 ($0.46 basic and diluted earnings per share) for the year ended December 31, 2009 and consolidated net income of $403,962 ($0.14 basic and diluted earnings per share) for the year ended December 31, 2008. The increase in the 2010 consolidated net income was mainly due to a decrease in interest expense on deposits and a decrease in provision for loan losses. This was partially offset by a decrease in gains on investment securities. The increase in 2009 consolidated net income was due to the write down on Fannie Mae and Freddie Mac preferred stock in 2008, offset by an increase in the provision for loan losses and the increased FDIC insurance premium assessment (discussed earlier in this Report, on page 3), and an increase in deposit and long term borrowings expense in 2009.

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.

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

In 2010, the Bank continued its strategy of reducing its portfolio of above market rate savings products and achieved a significant reduction in interest expense on deposits. The Bank also continued its efforts to increase the portfolio of higher yielding commercial loans and, while successful, was impacted by increased competition from large competitors. At the same time, we continued to reduce our exposure to lower yielding indirect automobile loans.

Consolidated net interest income for the year ended December 31, 2010 was $12,880,012 compared to $12,101,787 for the year ended December 31, 2009 and $11,922,003 for the year ended December 31, 2008. The $778,225 increase for the most recent year was primarily due to an increase in interest income on securities and decreases in interest expense on deposits and long-term borrowings, partially offset by a decrease in loan income. The $179,784 increase for 2009 compared to 2008 was primarily due to an increase in loan income partially offset by a decrease in interest income on securities and increases in interest expense on deposits and long-term borrowings. The interest income, net of tax, for 2010 was $13,618,449, a $811,390 or 6.33% increase from the after tax net interest income for 2009, which was $12,807,059, a $212,720 or 1.69% increase from the $12,594,339 after tax net interest income for 2008.

Interest expense decreased from $6,542,510 in 2009 to $5,298,955 in 2010, a $1,243,555 or a 19.01% decrease, primarily due to a decrease in deposit expense and long-term borrowings (due to the repayment of the $7 million Federal Home Loan Bank of Atlanta loan in September 2010), partially offset by a $273,215 early repayment penalty on the Trust Preferred Securities. Interest expense increased from $6,254,033 in 2008 to $6,542,510 in 2009, a $288,477 or a 4.62% increase, primarily due to a full year of interest expense on the long-term borrowings and an increase in deposit expense. Net interest margin for the year ended December 31, 2010 was 4.05% compared to 4.29% and 4.31% for the years ended December 31, 2009 and 2008, 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,
	2010			VS.			2009			2009			VS.			2008
				Change Due To:									Change Due To:
	Increase/ Decrease			Rate			Volume			Increase/ Decrease			Rate			Volume
	(In Thousands)
ASSETS:
Interest-earning assets:
Federal funds sold	$	(2	)	$	-		$	(2	)	$	7		$	(44	)	$	51
Interest-bearing deposits		1			2			(1	)		(115	)		(229	)		114

Investment securities:
U.S. Treasury securities, obligations of U.S. government agencies and mortgage-backed securities		62			(461	)		523			(109	)		(404	)		295
Obligations of states and political subdivisions(1)		121			-			121			(121	)		68			(189	)
All other investment securities		(23	)		(10	)		(13	)		(4	)		(1	)		(3	)
Total investment securities		160			(471	)		631			(234	)		(337	)		103

Loans, net of unearned income:
Demand, time and lease		76			36			40			9			(122	)		131
Mortgage and construction		(177	)		(307	)		130			995			(436	)		1,431
Installment and credit card		(501	)		77			(578	)		(212	)		54			(266	)
Total gross loans(2)		(602	)		(194	)		(408	)		792			(504	)		1,296
Allowance for credit losses		-			-			-			-			-			-
Total net loans		(602	)		(194	)		(408	)		792			(504	)		1,296
Total interest-earning assets	$	(443	)	$	(663	)	$	220		$	450		$	(1,114	)	$	1,564

LIABILITIES:
Interest-bearing deposits:
Savings and NOW	$	14		$	-		$	14		$	(22	)	$	(23	)	$	1
Money market		10			-			10			(5	)		(8	)		3
Other time deposits		(1,264	)		(1,225	)		(39	)		184			(958	)		1,142
Total interest-bearing deposits		(1,240	)		(1,225	)		(15	)		157			(989	)		1,146
Non-interest-bearing deposits		-			-			-			-			-			-
Borrowed funds		(3	)		169			(172	)		130			(147	)		277
Total interest-bearing liabilities	$	(1,243	)	$	(1,056	)	$	(187	)	$	287		$	(1,136	)	$	1,423

(1) Tax equivalent basis.

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

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

	Year Ended December 31,
	2010								2009								2008
	Average Balance			Interest		Yield/ Cost			Average Balance			Interest		Yield/ Cost			Average Balance			Interest		Yield/ Cost
	(Dollars In Thousands)
ASSETS:
Interest-earning assets:
Federal funds sold	$	3,797		$	10		0.25	%	$	4,843		$	12		0.26	%	$	433		$	5		1.15	%
Interest-bearing deposits		11,188			16		0.14			12,337			15		0.12			6,560			130		1.98

Investment securities:
U.S. Treasury securities, obligations of U.S. government agencies and mortgage-backed securities		56,868			1,916		3.37			44,367			1,854		4.18			38,532			1,963		5.09
Obligations of states and political subdivisions(1)		31,341			2,134		6.81			29,557			2,013		6.81			32,421			2,134		6.58
All other investment securities		1,995			166		8.32			2,138			189		8.84			2,168			193		8.90
Total investment securities		90,204			4,216		4.67			76,062			4,056		5.33			73,121			4,290		5.87

Loans, net of unearned income:
Demand, time and lease		8,946			475		5.31			8,132			399		4.91			6,082			390		6.41
Mortgage and construction		175,812			10,593		6.03			173,741			10,770		6.20			151,656			9,775		6.45
Installment and credit card		49,737			3,578		7.19			57,915			4,079		7.04			61,747			4,291		6.95
Total gross loans(2)		234,495			14,646		6.25			239,788			15,248		6.36			219,485			14,456		6.59
Allowance for credit losses		(3,874	)							(2,037	)							(1,479	)
Total net loans		230,621			14,646		6.35			237,751			15,248		6.41			218,006			14,456		6.63
Total interest-earning assets		335,810			18,888		5.62			330,993			19,331		5.84			298,120			18,881		6.33
Cash and due from banks		3,182								4,488								7,891
Other assets		18,696								16,709								14,740
Total assets	$	357,688							$	352,192							$	320,751

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing deposits:
Savings and NOW	$	75,541			176		0.23	%	$	71,124			162		0.23	%	$	69,468			184		0.26	%
Money market		16,756			67		0.40			14,363			57		0.40			13,751			62		0.45
Other time deposits		136,822			3,454		2.52			137,764			4,718		3.42			110,049			4,534		4.12
Total interest-bearing deposits		229,119			3,697		1.61			223,251			4,937		2.21			193,268			4,780		2.47
Short-term borrowed funds		522			1		0.29			262			0		0.02			2,209			51		2.31
Long-term borrowed funds		28,747			1,601		5.57			32,206			1,605		4.98			26,287			1,424		5.42
Total interest-bearing liabilities		258,389			5,299		2.05			255,719			6,542		2.56			221,764			6,255		2.82

Non-interest-bearing deposits		71,212								67,572								68,340
Other liabilities		1,451								2,957								1,806
Stockholders’ equity		26,636								25,944								28,841
Total liabilities and equity	$	357,688							$	352,192							$	320,751
Net interest income				$	13,589							$	12,789							$	12,626
Net interest spread							3.57	%							3.28	%							3.51	%
Net interest margin							4.05	%							4.29	%							4.31	%

1 Tax equivalent basis. The incremental tax rate applied was 14.88% for 2010 and (13.45%) for 2009.

2 Non-accrual loans included in average balance.

Provision for Credit Losses. During the year ended December 31, 2010, the Company made a provision of $1,050,000 for credit losses, compared to a provision of $2,442,976 and $1,145,649 for credit losses for the years ended December 31, 2009 and 2008, respectively. The decrease in 2010 was primarily due to many of the delinquent commercial real estate loans already having specific provisions made in 2009. At December 31, 2010, the allowance for credit losses equaled 48.69% of non-accrual and past due loans compared to 117.61% and 224.42% at December 31, 2009 and 2008, respectively. During the year ended December 31, 2010, the Company recorded net charge-offs of $1,223,000 compared to $892,000 and $728,000 in net charge-offs during the years ended December 31, 2009 and 2008, respectively.

Other Income. Other income includes service charges on deposit accounts, other fees and commissions, net gains on investment securities, and income on Bank owned life insurance (BOLI). Other income decreased from $2,365,249 in 2009 to $1,898,607 in 2010, a $466,642, or 19.73% decrease. The decrease was primarily due to a decrease in gains on securities, with a lesser decrease in service charges. Other income increased from $2,050,587 in 2008 to $2,365,249 in 2009, a $314,662, or 15.34% increase. The increase was primarily due to an increase in gains on securities, partially offset by decreases in service charges and other fees and commissions.

Other Expenses. Other expenses, which consist of non-interest operating expenses, increased from $10,994,851 in 2009 to $11,178,323 in 2010, an $183,470 or 1.67% increase. This increase was primarily due to an increase in employee benefits and a lesser increase in salaries and an additional write-down of one Fannie Mae, two Freddie Macs and two Regional Diversified Funding (Reg. Div.) securities during 2010. This was primarily offset by a decrease in other expenses and a lesser decrease in occupancy expense. Other expenses decreased from $13,102,341 in 2008 to $10,994,851 in 2009, a $2,107,490 or 16.08% decrease. This decrease was primarily due to the write-down of one Fannie Mae and two Freddie Mac securities in the amount of $2,816,000 in 2008, offset by increases in salary and employee benefits and FDIC assessments in 2009.

Income Taxes. During the year ended December 31, 2010, the Company recorded an income tax expense of $485,511, compared to an income tax benefit of $233,253 for the year ended December 31, 2009. This increase was due to a lesser amount contributed to provision for credit losses in 2010 and less interest expense paid on deposits. During the year ended December 31, 2009, the Company recorded an income tax benefit of $233,253, compared to an income tax benefit of $679,362 for the year ended December 31, 2008. This decrease was primarily due to a tax benefit of $1,110,770 from the write-down of $2,816,000 for the Fannie Mae and Freddie Mac securities in 2008. In addition to this, the amount of tax exempt income on municipal securities decreased and there was a larger amount contributed to provision for credit losses in 2009.

Comparison of Financial Condition at December 31, 2010, 2009 and 2008

The Company’s total assets decreased to $347,067,276 at December 31, 2010 from $353,396,697 at December 31, 2009. The Company’s total assets increased to $353,396,697 at December 31, 2009 from $332,502,215 at December 31, 2008.

The Company’s net loan portfolio decreased to $229,850,888 at December 31, 2010 compared to $235,882,862 at December 31, 2009 and $235,132,621 at December 31, 2008. The decrease in the loan portfolio during the 2010 period is primarily due to a decrease in indirect automobile loans, commercial mortgages, demand secured commercial loans and participation loans, both those purchased and sold. They were partially offset by refinance mortgages, purchase money mortgages, land development loans and home equity loans. The increase in the loan portfolio during the 2009 period is primarily due to an increase in commercial mortgages, purchase money mortgages, refinances, home equity and demand commercial secured loans. They were partially offset by a decline in indirect automobile loans and mortgage participations purchased besides a larger provision for credit losses.

During 2010, the Company’s total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $87,268,359, a $2,805,754 or 3.33%, increase from $84,462,605 at December 31, 2009. This increase is primarily attributable to an increase in municipal securities. During 2009, the Company’s total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $84,462,605, a $26,513,960 or 45.75%, increase from $57,948,645 at December 31, 2008. This increase is primarily attributable to an increase in mortgage backed securities and Government Agency collateralized mortgage obligations (CMO) partially offset by a decrease in U.S. Government Agencies and non-Maryland municipal securities.

Deposits as of December 31, 2010 totaled $294,444,828, an increase of $86,991, or 0.03%, from the $294,357,837 total as of December 31, 2009. Deposits as of December 31, 2009 totaled $294,357,837, an increase of $24,590,239, or 9.12%, from the $269,767,598 total as of December 31, 2008. Demand deposits as of December 31, 2010 totaled $68,056,610, a $248,911, or 0.37%, increase from $67,807,699 at December 31, 2009. NOW and Super NOW accounts, as of December 31, 2010, increased by $1,330,322, or 5.96% from their 2009 level to $23,683,375. Money market accounts increased by $1,426,388, or 9.34%, from their 2009 level, to total $16,710,611 at December 31, 2010. Savings deposits increased by $4,628,974, or 9.57%, from their 2009 level, to $53,007,293 at December 31, 2010. Time deposits over $100,000 totaled $44,193,229 on December 31, 2010, a decrease of $1,052,857, or 2.33% from December 31, 2009. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $88,793,710 on December 31, 2010, a $6,494,747 or 6.82% decrease from December 31, 2009.

Total stockholders’ equity as of December 31, 2010 increased by $1,183,524, or 4.71%, from the 2009 period. The increase was attributed to an increase in earnings less the cash dividends paid, net of dividends reinvested. Total stockholders’ equity as of December 31, 2009 decreased by $2,759,130, or 9.89%, from the 2008 period. The decrease was attributed to an increase in accumulated other comprehensive loss, net of tax, and the excess of the cash dividends paid and common stock shares repurchased and retired over the net income for 2009.

Off-Balance Sheet Arrangements

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

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

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

The Bank’s exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. As of December 31, 2010, the Bank has accrued $200,000 for unfunded commitments related to these financial instruments with off balance sheet risk, which is included in other liabilities.

Market Risk Management

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

The following table sets forth the Bank’s interest-rate sensitivity at December 31, 2010.

	0-3 Months			Over 3 To 12 Months			Over 1 Through 5 Years			Over 5 Years			Total
	(Dollars In Thousands)
Assets:
Cash and due from banks	$	-		$	-		$	-		$	-		$	8,060
Federal funds and overnight deposits		940			-			-			-			940
Securities		-			555			1,054			85,659			87,268
Loans		13,697			18,282			72,455			125,417			229,851
Fixed Assets		-			-			-			-			4,124
Other Assets		-			-			-			-			16,824

Total assets	$	14,637		$	18,837		$	73,509		$	211,076		$	347,067

Liabilities:
Demand deposit accounts	$	-		$	-		$	-		$	-		$	68,056
NOW accounts		23,683			-			-			-			23,683
Money market deposit accounts		16,711			-			-			-			16,711
Savings accounts		53,007			244			-			-			53,251
IRA accounts		3,818			9,624			23,904			1,114			38,460
Certificates of deposit		21,968			36,594			35,252			469			94,283
Short-term borrowings		4,274			-			-			-			4,274
Long-term borrowings		-			-			-			-			20,000
Other liabilities		-			-			-			-			2,016
Stockholders’ equity		-			-			-			-			26,333

Total liabilities and Stockholders’ equity	$	123,461		$	46,462		$	59,156		$	1,583		$	347,067

GAP	$	(110,407	)	$	(27,625	)	$	14,353		$	209,493
Cumulative GAP		(110,407	)		(138,032	)		(123,679	)		85,814
Cumulative GAP as a % of total assets		(31.81	%)		(39.77	%)		(35.64	%)		24.73	%

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

In addition to gap analysis, the Bank utilizes a simulation model to quantify the effect a hypothetical immediate plus or minus 200 basis point change in rates would have on net interest income and the economic value of equity. The model takes into consideration the effect of call features of investments as well as prepayments of loans in periods of declining rates. When actual changes in interest rates occur, the changes in interest earning assets and interest bearing liabilities may differ from the assumptions used in the model and, in the Bank’s experience, the changes historically realized have been narrower than those projected by the model. However, the Bank believes that the model is a prudent forecasting tool. As of December 31, 2010, the model produced the following sensitivity profile for net interest income and the economic value of equity.

	Immediate Change in Rates
	-200			-100			+100			+200
	Basis Points			Basis Points			Basis Points			Basis Points

% Change in Net Interest Income		-3.5	%		-1.9	%		0.4	%		-1.8	%
% Change in Economic Value of Equity		-19.8	%		-11.2	%		0.4	%		-11.7	%

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, 2010, totaled $9,000,303, a decrease of $2,433,519 or 21.29%, from the December 31, 2009 total of $11,433,822. This decrease comes from the payoff of a $7 million advance at FHLB and the payoff of over $5 million in junior subordinated debentures during the month of September 2010.

As of December 31, 2010, the Bank was permitted to draw on a $55.47 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, 2010, there was a $4 million daily rate credit borrowing advance outstanding under this line. This was a short term borrowing due in November 2011 and had a rate of 0.49% at December 31, 2010 but this is a daily variable rate borrowing. There was also a $10 million convertible advance (callable monthly and with a final maturity of November 1, 2017.) There was a $5 million convertible advance settled July 21, 2008 with a final maturity of July 23, 2018. This advance has a 2.73% rate of interest and was callable quarterly, starting July 23, 2009. There was a $5 million convertible advance taken out August 22, 2008 which has a final maturity of August 22, 2018. This advance has a 3.344% rate of interest and is callable quarterly, starting August 22, 2011. In addition the Bank has unsecured lines of credit totaling $3 million from a commercial bank on which there is no outstanding balances at December 31, 2010.

Federal banking regulations require the Company and the Bank to maintain specified levels of capital. At December 31, 2010, the Company was in compliance with these requirements with a leverage ratio of 7.64%, a Tier 1 risk-based capital ratio of 11.33% and total risk-based capital ratio of 12.58%. At December 31, 2010, the Bank met the criteria for designation as a well capitalized depository institution under FDIC regulations.

Impact of Inflation and Changing Prices

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

Critical Accounting Policies

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

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 2010, the FASB issued ASU No. 2010-06 - Fair Value Measurements and Disclosures amending Topic 820. The ASU provides for additional disclosures of transfers between assets and liabilities valued under Level 1 and 2 inputs as well as additional disclosures regarding those assets and liabilities valued under Level 3 inputs. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for those provisions addressing Level 3 fair value measurements which provisions are effective for fiscal years, and interim periods therein, beginning after December 15, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09 amending FASB ASC Topic 855 to exclude SEC reporting entities from the requirement to disclose the date on which subsequent events have been evaluated. It further modifies the requirement to disclose the date on which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively. The Company has complied with ASU No. 2010-09.

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The main objective of this ASU is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The ASU requires that entities provide additional information to assist financial statement users in assessing their credit risk exposures and evaluating the adequacy of its allowance for credit losses. For the Company, the disclosures as of the end of a reporting period are required for the annual reporting periods ending on December 31, 2010. Required disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning January 1, 2011. The adoption of this ASU will result in additional disclosures in the Company’s financial statements regarding its loan portfolio and related allowance for loan losses but does not change the accounting for loans or the allowance. The Company has complied with this ASU for the annual reporting period ending December 31, 2010 and will comply for interim and annual reporting periods thereafter.

The FASB has issued several exposure drafts which, if adopted, would significantly alter the Company’s (and all other financial institutions’) method of accounting for, and reporting, its financial assets and some liabilities from a historical cost method to a fair value method of accounting as well as the reported amount of net interest income. Also, the FASB has issued an exposure draft regarding a change in the accounting for leases. Under this exposure draft, the total amount of “lease rights” and total amount of future payments required under all leases would be reflected on the balance sheets of all entities as assets and debt. If the changes under discussion in either of these exposure drafts are adopted, the financial statements of the Company could be materially impacted as to the amounts of recorded assets, liabilities, capital, net interest income, interest expense, depreciation expense, rent expense and net income. The Company has not determined the extent of the possible changes at this time. The exposure drafts are in different stages of review, approval and possible adoption.

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 15 of this Annual Report.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this annual report, and have concluded that the system is effective.

Management’s Annual Report on Internal Control over Financial Reporting

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

Management (with the participation of the Company’s Chief Executive Officer and Chief Financial Officer) conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

Not applicable.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information with respect to the identity and business experience of the directors of the Company and their remuneration set forth in the section captioned “Proposal I — Election of Directors” in the Company’s definitive Proxy Statement to be filed pursuant to Regulation 14A and issued in conjunction with the 2011 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 AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the section captioned “Election of Directors” and “Transactions with Management” in the Proxy Statement.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements.

	Page
Report of Independent registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 31, 2010, 2009 and 2008	F-2
Consolidated Statements of Income for the Years Ended December 31, 2010, 2009 and 2008	F-3
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2010, 2009 and 2008	F-4
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008	F-6
Notes 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 TGM Group LLC
31.1	Rule 15d-14(a) Certification of Chief Executive Officer
31.2	Rule 15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certifications

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GLEN BURNIE BANCORP

March 10, 2011	By:	/s/ Michael G. Livingston
		Michael G. Livingston
		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/ Michael G. Livingston	President, Chief Executive Officer	March 10, 2011
Michael G. Livingston	and Director

/s/ F. William Kuethe, Jr.	President Emeritus and Director	March 10, 2011
F. William Kuethe, Jr.

/s/ John E. Porter	Senior Vice President and Chief	March 10, 2011
John E. Porter	Financial Officer

/s/ John E. Demyan	Chairman of the Board and Director	March 10, 2011
John E. Demyan

/s/ Shirley E. Boyer	Director	March 10, 2011
Shirley E. Boyer

/s/ Thomas Clocker	Director	March 10, 2011
Thomas Clocker

/s/ Norman E. Harrison, Jr.	Director	March 10, 2011
Norman E. Harrison, Jr.

/s/ F. W. Kuethe, III	Director	March 10, 2011
F. W. Kuethe, III

/s/ Charles Lynch	Director	March 10, 2011
Charles Lynch

/s/ Edward L. Maddox	Director	March 10, 2011
Edward L. Maddox

/s/ William N. Scherer, Sr.	Director	March 10, 2011
William N. Scherer, Sr.

/s/ Karen B. Thorwarth	Director	March 10, 2011
Karen B. Thorwarth

/s/ Mary Lou Wilcox	Director	March 10, 2011
Mary Lou Wilcox

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Glen Burnie Bancorp and Subsidiaries

Glen Burnie, Maryland

We have audited the accompanying consolidated balance sheets of Glen Burnie Bancorp and subsidiaries as of December 31, 2010, 2009, and 2008, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years then ended. Glen Burnie Bancorp and subsidiaries’ management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Glen Burnie Bancorp and subsidiaries as of December 31, 2010, 2009, and 2008, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Salisbury, Maryland

March 10, 2011

F-1

Glen Burnie Bancorp and Subsidiaries

Consolidated Balance Sheets

December 31,	2010			2009			2008

Assets
Cash and due from banks	$	6,492,313		$	6,993,811		$	6,960,377
Interest-bearing deposits in other financial institutions		1,567,673			3,748,387			7,883,816
Federal funds sold		940,317			691,624			6,393,710
Cash and cash equivalents		9,000,303			11,433,822			21,237,903
Investment securities available for sale, at fair value		87,268,359			84,462,605			57,948,645
Federal Home Loan Bank stock, at cost		1,745,100			1,858,300			1,767,600
Maryland Financial Bank stock, at cost		100,000			100,000			100,000
Common stock in the Glen Burnie Statutory Trust I		-			155,000			155,000
Ground rents, at cost		178,200			184,900			184,900
Loans, less allowance for credit losses
2010 $3,399,516; 2009 $3,572,528; 2008 $2,021,690;		229,850,888			235,882,862			235,132,621
Premises and equipment, at cost, less accumulated depreciation		4,123,616			4,120,597			3,099,448
Accrued interest receivable on loans and investment securities		1,538,883			1,626,792			1,680,392
Deferred income tax benefits		3,348,974			3,129,435			2,286,483
Other real estate owned		215,000			25,000			550,000
Cash value of life insurance		7,954,062			7,702,656			7,434,573
Other assets		1,743,891			2,714,728			924,650

Total assets	$	347,067,276		$	353,396,697		$	332,502,215

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	68,056,159		$	67,807,699		$	63,538,759
Interest-bearing		226,388,669			226,550,138			206,228,839
Total deposits		294,444,828			294,357,837			269,767,598
Short-term borrowings		4,273,948			81,290			629,855
Long-term borrowings		20,000,000			27,033,711			27,071,712
Junior subordinated debentures owed to unconsolidated subsidiary trust		-			5,155,000			5,155,000
Dividends payable		231,579			230,285			385,794
Accrued interest payable on deposits		55,131			112,599			139,579
Accrued interest payable on junior subordinated debentures		-			171,518			171,518
Other liabilities		1,729,144			1,105,335			1,272,907
Total liabilities		320,734,630			328,247,575			304,593,963

Commitments and contingencies

Stockholders' equity:
Common stock, par value $1, authorized 15,000,000 shares; issued and outstanding 2010 2,702,091 shares; 2009 2,683,015 shares; 2008 2,967,727 shares;		2,702,091			2,683,015			2,967,727
Surplus		9,334,810			9,190,911			11,568,241
Retained earnings		15,300,344			14,311,508			14,129,637
Accumulated other comprehensive loss, net of tax benefits		(1,004,599	)		(1,036,312	)		(757,353	)
Total stockholders' equity		26,332,646			25,149,122			27,908,252

Total liabilities and stockholders' equity	$	347,067,276		$	353,396,697		$	332,502,215

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-2

Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Income

Years Ended December 31,	2010			2009			2008

Interest income on:
Loans, including fees	$	14,646,011		$	15,248,717		$	14,456,017
U.S. Government agency securities		1,915,845			1,854,201			1,962,553
State and municipal securities		1,400,651			1,308,116			1,410,676
Corporate trust preferred securities		166,085			189,012			192,749
Federal funds sold		9,632			12,428			5,034
Other		40,743			31,823			149,007
Total interest income		18,178,967			18,644,297			18,176,036

Interest expense on:
Deposits		3,696,631			4,937,282			4,780,185
Short-term borrowings		1,492			49			50,567
Long-term borrowings		952,705			1,058,749			877,101
Junior subordinated debentures		648,127			546,430			546,180
Total interest expense		5,298,955			6,542,510			6,254,033

Net interest income		12,880,012			12,101,787			11,922,003

Provision for credit losses		1,050,000			2,442,976			1,145,649

Net interest income after provision for credit losses		11,830,012			9,658,811			10,776,354

Other income:
Service charges on deposit accounts		648,183			693,725			737,070
Other fees and commissions		823,854			817,559			849,417
Gains on investment securities, net		175,164			585,882			190,930
Income on life insurance		251,406			268,083			273,170
Total other income		1,898,607			2,365,249			2,050,587

Other expenses:
Salaries and wages		4,856,835			4,792,480			4,694,461
Employee benefits		1,823,669			1,503,848			1,525,023
Occupancy		830,105			871,081			903,976
Furniture and equipment		761,997			761,462			754,191
Other expenses		2,643,509			2,989,201			2,408,690
Total impairment losses on investment securities		979,322			1,179,652			3,640,644
Portion of impairment losses recognized in other comprehensive income (before taxes)		(717,114	)		(1,102,873	)		(824,644	)
Net impairment loss on investment securities		262,208			76,779			2,816,000
Total other expenses		11,178,323			10,994,851			13,102,341

Income (loss) before income taxes (benefits)		2,550,296			1,029,209			(275,400	)

Federal and state income taxes (benefits)		485,511			(233,253	)		(679,362	)

Net income	$	2,064,785		$	1,262,462		$	403,962

Basic and diluted earnings per share of common stock	$	0.76		$	0.46		$	0.14

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-3

Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

Years Ended December 31,	2010			2009			2008

Net income	$	2,064,785		$	1,262,462		$	403,962

Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) arising during the period (net of deferred taxes (benefits) 2010 ($13,677); 2009 $18,260; 2008 ($1,264,081));		(20,709	)		27,648			(1,913,998	)
Reclassification adjustment for impairment loss included in net income (net of deferred tax benefits 2010 $104,293; 2009 $30,539; 2008 $1,110,771)		157,915			46,240			1,705,229
Reclassification adjustment for gains included in net income (net of deferred taxes 2010 $69,671; 2009 $233,034; 2008 $75,942;)		(105,493	)		(352,847	)		(114,988	)
Total other comprehensive income (loss)		31,713			(278,959	)		(323,757	)

Comprehensive income	$	2,096,498		$	983,503		$	80,205

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-4

Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2010, 2009, and 2008

													Accumulated
													Other
													Comprehensive			Total
	Common Stock									Retained			(Loss)			Stockholders'
	Shares			Par Value			Surplus			Earnings			Income			Equity

Balances, December 31, 2007		2,498,465		$	2,498,465		$	11,921,129		$	15,750,156		$	(433,596	)	$	29,736,154

Net income		-			-			-			403,962			-			403,962
Cummulative effect of adoption of EITF 06-04		-			-			-			(179,794	)		-			(179,794	)
Shares repurchased and retired		(50,300	)		(50,300	)		(526,939	)		-			-			(577,239	)
Cash dividends, $.45 per share		-			-			-			(1,345,128	)		-			(1,345,128	)
Dividends reinvested under dividend reinvestment plan		20,003			20,003			174,051			-			-			194,054
Stock split effected in form of 20% stock dividend		499,559			499,559			-			(499,559	)		-			-
Other comprehensive loss, net of tax		-			-			-			-			(323,757	)		(323,757	)

Balances, December 31, 2008		2,967,727			2,967,727			11,568,241			14,129,637			(757,353	)		27,908,252

Net income		-			-			-			1,262,462			-			1,262,462
Shares repurchased and retired		(305,083	)		(305,083	)		(2,530,626	)		-			-			(2,835,709	)
Cash dividends, $.40 per share		-			-			-			(1,080,591	)		-			(1,080,591	)
Dividends reinvested under dividend reinvestment plan		20,371			20,371			153,296			-			-			173,667
Other comprehensive loss, net of tax		-			-			-			-			(278,959	)		(278,959	)

Balances, December 31, 2009		2,683,015			2,683,015			9,190,911			14,311,508			(1,036,312	)		25,149,122

Net income		-			-			-			2,064,785			-			2,064,785
Cash dividends, $.40 per share		-			-			-			(1,075,949	)		-			(1,075,949	)
Dividends reinvested under dividend reinvestment plan		19,076			19,076			143,899			-			-			162,975
Other comprehensive income, net of tax		-			-			-			-			31,713			31,713

Balances, December 31, 2010		2,702,091		$	2,702,091		$	9,334,810		$	15,300,344		$	(1,004,599	)	$	26,332,646

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-5

Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31,	2010			2009			2008

Cash flows from operating activities:
Net income	$	2,064,785		$	1,262,462		$	403,962
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization, and accretion		1,001,488			652,780			421,229
Provision for credit losses		1,050,000			2,442,976			1,145,649
Deferred income tax benefits, net		(240,485	)		(658,719	)		(1,605,603	)
Gains on disposals of assets, net		(248,221	)		(569,428	)		(173,393	)
Impairment losses on investment securities		262,208			76,779			2,816,000
Income on investment in life insurance		(251,406	)		(268,083	)		(273,170	)
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		87,909			53,600			(171,752	)
Decrease (increase) in other assets		869,991			(1,838,514	)		(118,962	)
(Decrease) increase in accrued interest payable		(228,986	)		(26,980	)		5,305
Increase (decrease) in other liabilities		623,809			(167,572	)		(72,369	)

Net cash provided by operating activities		4,991,092			959,301			2,376,896

Cash flows from investing activities:
Maturities of available for sale mortgage-backed securities		13,219,687			7,612,135			4,402,208
Sales of available for sale debt securities		9,073,406			24,920,635			25,977,280
Purchases of available for sale mortgage-backed securities		(18,958,955	)		(54,787,147	)		(981,811	)
Purchases of other available for sale investment securities		(6,748,849	)		(4,456,293	)		(13,318,481	)
Purchase of FHLB stock		113,200			(90,700	)		(385,700	)
Redemption of common stock in the Glen Burnie Staturtory Trust I		155,000			-			-
(Decrease) increase in loans, net		4,469,727			(3,218,217	)		(37,075,138	)
Proceeds from sales of other real estate		450,827			548,994			50,000
Purchases of premises and equipment		(377,912	)		(1,398,320	)		(501,717	)

Net cash provided (used) by investing activities		1,396,131			(30,868,913	)		(21,149,259	)

Cash flows from financing activities:
Increase (decrease) in noninterest-bearing deposits, NOW accounts, money market accounts, and savings accounts, net		248,460			4,268,940			(5,221,614	)
(Decrease) increase in time deposits, net		(161,469	)		20,321,299			22,072,446
Increase (decrease) in short-term borrowings		4,192,658			(548,565	)		127,326
Proceeds from long-term borrowings		-			-			10,000,000
Repayments of long-term borrowings		(7,033,711	)		(38,001	)		(35,423	)
Cash dividends paid		(1,074,655	)		(1,236,100	)		(1,344,344	)
Common stock dividends reinvested		162,975			173,667			194,054
Redemption of guaranteed preferred beneficial interests in
Glen Burnie Bancorp junior subordinated debentures		(5,155,000	)		-			-
Repurchase and retirement of common stock		-			(2,835,709	)		(577,239	)

Net cash (used) provided by financing activities		(8,820,742	)		20,105,531			25,215,206

(Decrease) increase in cash and cash equivalents		(2,433,519	)		(9,804,081	)		6,442,843

Cash and cash equivalents, beginning of year		11,433,822			21,237,903			14,795,060

Cash and cash equivalents, end of year	$	9,000,303		$	11,433,822		$	21,237,903

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-6

Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

(Continued)

Years Ended December 31,	2010		2009			2008

Supplementary Cash Flow Information:
Interest paid	$	5,527,941	$	6,569,490		$	6,248,728
Income taxes paid		275,000		1,125,000			600,000
Total decrease (increase) in unrealized depreciation on available for sale securities		52,659		(463,192	)		(551,125	)

Supplementary Noncash Investing Activities:
Loans converted to other real estate		512,247		25,000			550,000

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

The Bank of Glen Burnie (the “Bank”) provides financial services to individuals and corporate customers located in Anne Arundel County and surrounding areas of Central Maryland, and is subject to competition from other financial institutions. The Bank is also subject to the regulations of certain Federal and State of Maryland (the “State”) agencies and undergoes periodic examinations by those regulatory authorities. The accounting and financial reporting policies of the Bank conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the banking industry.

Significant accounting policies not disclosed elsewhere in the consolidated financial statements are as follows:

Principles of Consolidation:

The consolidated financial statements include the accounts of Glen Burnie Bancorp 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 20) of the Company account for the subsidiaries using the equity method of accounting.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States. Voting interest entities are entities, in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (VIE’s) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in an entity is present when an enterprise has a variable interest, or a combination of variable interest, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company’s wholly owned subsidiary, Glen Burnie Statutory Trust I, is a VIE for which the Company is not the primary beneficiary. Accordingly, the accounts of this entity are not included in the Company’s consolidated financial statements.

Accounting Standards Codification:

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective for interim and annual periods ending after September 15, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (“GAAP”) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literatures. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies (continued)

Use of Estimates:

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted within the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Securities Held to Maturity:

Bonds, notes, and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the effective interest rate method over the period to maturity. Securities transferred into held to maturity from the available for sale portfolio are recorded at fair value at time of transfer with unrealized gains or losses reflected in equity and amortized over the remaining life of the security.

Securities Available for Sale:

Marketable debt securities not classified as held to maturity are classified as available for sale. Securities available for sale may be sold in response to changes in interest rates, loan demand, changes in prepayment risk, and other factors. Changes in unrealized appreciation (depreciation) on securities available for sale are reported in other comprehensive income, net of tax. Realized gains (losses) on securities available for sale are included in other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. The gains and losses on securities sold are determined by the specific identification method. Premiums and discounts are recognized in interest income using the effective interest rate method over the period to maturity. Additionally, declines in the fair value of individual investment securities below their cost that are other than temporary are reflected as realized losses in the consolidated statements of income.

Other Securities:

Federal Home Loan Bank (“FHLB”) and Maryland Financial Bank (“MFB”) stocks are equity interests that do not necessarily have readily determinable fair values for purposes of the ASC Topic 320, formerly, Statement of Financial Accounting Standards (“SFAS”) No 115, Accounting for Certain Investments in Debt and Equity Securities, because their ownership is restricted and they lack a market. FHLB stock can be sold back only at its par value of $100 per share and only to the FHLB or another member institution.

Loans and Allowance for Credit Losses:

Loans are generally carried at the amount of unpaid principal, adjusted for deferred loan fees, which are amortized over the term of the loan using the effective interest rate method. Interest on loans is accrued based on the principal amounts outstanding. It is the Bank’s policy to discontinue the accrual of interest when a loan is specifically determined to be impaired or when principal or interest is delinquent for ninety days or more. When a loan is placed on nonaccrual status all interest previously accrued but not collected is reversed against current period interest income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Cash collections on such loans are applied as reductions of the loan principal balance and no interest income is recognized on those loans until the principal balance has been collected. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. The carrying value of impaired loans is based on the present value of the loan’s expected future cash flows or, alternatively, the observable market price of the loan or the fair value of the collateral.

F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies (continued)

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary.

The allowance for loan losses typically consists of an allocated component and an unallocated component. The components of the allowance for loan losses represent an estimation done pursuant to either ASC Topic 450, formerly SFAS No 5, Accounting for Contingencies, or ASC Topic 310, formerly SFAS No 114, Accounting by Creditors for Impairment of a Loan. 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.

Any unallocated portion of the allowance reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. In addition, the unallocated allowance includes a component that explicitly accounts for the inherent imprecision in loan loss migration models. The historical losses used in the migration analysis may not be representative of actual unrealized losses inherent in the portfolio. At December 31, 2010, there was no unallocated component of the allowance reflected in the allowance for credit losses.

Reserve for Unfunded Commitments:

The reserve for unfunded commitments is established through a provision for unfunded commitments charged to other expenses. The reserve is calculated by utilizing the same methodology and factors as the allowance for credit losses. The reserve, based on evaluations of the collectibiltiy of loans and prior loan loss experience, is an amount that management believes will be adequate to absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may become uncollectible in the future.

Other Real Estate Owned (“OREO”):

OREO comprises properties acquired in partial or total satisfaction of problem loans. The properties are recorded at the lower of cost or fair value (appraised value) at the date acquired. Losses arising at the time of acquisition of such properties are charged against the allowance for credit losses. Subsequent write-downs that may be required and expenses of operation are included in other income or expenses. Gains and losses realized from the sale of OREO are included in other income or expenses. Loans converted to OREO through foreclosure proceedings totaled $512,247 and $25,000 for the years ended December 31, 2010 and 2009, respectively. The Bank financed no sales of OREO for 2010, 2009, or 2008.

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies (continued)

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.

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 ASC Topic 360, formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset. As of December 31, 2010, 2009, and 2008, certain loans existed which management considered impaired (See Note 4). During the years ended December 31, 2010 and 2009, management deemed certain investment securities were impaired and recorded an impairment loss on these securities (See Note 3).

Income Taxes:

The provision for Federal and state income taxes is based upon the results of operations, adjusted for tax-exempt income. Deferred income taxes are provided by applying enacted statutory tax rates to temporary differences between financial and taxable bases.

Temporary differences which give rise to deferred tax benefits relate principally to accrued deferred compensation, accumulated impairment losses on investment securities, allowance for credit losses, unused alternative minimum tax credits, net unrealized depreciation on investment securities available for sale, accumulated depreciation, OREO, and reserve for unfunded commitments.

Temporary differences which give rise to deferred tax liabilities relate principally to accumulated depreciation, and accumulated securities discount accretion.

Credit Risk:

The Bank has unsecured deposits and Federal funds sold with several other financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation (“FDIC”).

Cash and Cash Equivalents:

The Bank has included cash and due from banks, interest-bearing deposits in other financial institutions, and Federal funds sold as cash and cash equivalents for the purpose of reporting cash flows.

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies (continued)

Accounting for Stock Options:

The Company follows ASC Topic 718, formerly SFAS No. 123R, Share-Based Payments, for accounting and reporting for stock-based compensation plans. ASC Topic 718 defines a fair value at grant date based method of accounting for measuring compensation expense for stock-based plans to be recognized in the statement of income.

Earnings per share:

Basic earnings per common share are determined by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share are calculated including the average dilutive common stock equivalents outstanding during the period. Dilutive common equivalent shares consist of stock options, calculated using the treasury stock method.

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 $4,700,000, $5,026,000, and $4,781,000 during the years ended December 31, 2010, 2009, and 2008, respectively.

Note 3. Investment Securities

Investment securities are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2010	Cost		Gains		Losses		Value

Available for sale:
U.S. Government agencies	$	1,028,360	$	51,640	$	200	$	1,079,800
State and municipal		34,775,927		54,285		1,960,277		32,869,935
Corporate trust preferred		1,793,287		64,898		717,115		1,141,070
Mortgage-backed		51,337,038		984,851		144,335		52,177,554

	$	88,934,612	$	1,155,674	$	2,821,927	$	87,268,359

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2009	Cost		Gains		Losses		Value

Available for sale:
U.S. Government agencies	$	3,180,360	$	14,060	$	135,330	$	3,059,090
State and municipal		30,073,170		335,146		664,647		29,743,669
Corporate trust preferred		2,080,282		33,521		1,102,874		1,010,929
Mortgage-backed		50,849,527		368,642		569,252		50,648,917

	$	86,183,339	$	751,369	$	2,472,103	$	84,462,605

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Investment Securities (continued)

December 31, 2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Available for sale:
U.S. Government agencies	$	8,686,877	$	191,455	$	140,280	$	8,738,052
State and municipal		31,466,012		235,128		979,935		30,721,205
Corporate trust preferred		2,168,928		-		971,426		1,197,502
Mortgage-backed		16,884,368		413,682		6,164		17,291,886

	$	59,206,185	$	840,265	$	2,097,805	$	57,948,645

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, 2010 are as follows:

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies	$	9,000	$	200	$	-	$	-	$	9,000	$	200
State and Municipal		24,187,563		1,489,402		3,045,857		470,875		27,233,420		1,960,277
Corporate trust preferred		-		-		121,070		717,115		121,070		717,115
Mortgaged-backed		7,309,166		85,522		3,244,475		58,813		10,553,641		144,335

	$	31,505,729	$	1,575,124	$	6,411,402	$	1,246,803	$	37,917,131	$	2,821,927

At December 31,2010, the Company owned one pooled trust preferred security issued by Regional Diversified Funding, Senior notes with a Fitch credit rating of B, which is included in the securities described above. The market for these securities at December 31, 2010 was not active and markets for similar securities were also not active.

The market values for these securities (and any securities other than those issued or guaranteed by the U.S. Treasury) are very depressed relative to historical levels. Therefore, a low market price for a particular security may only provide evidence of stress in the credit markets overall rather than being an indicator of credit problems with a particular issuer.

During 2010, the Company took a write down of $110,208 on these trust preferred securities to bring the book value into alignment with the present value of $838,136 which was arrived at as the result of cash flow testing performed by an unrelated third party in order to measure the extent of other-than-temporary-impairment (“OTTI”). This testing assumed defaults of 75 basis points applied annually with a 15% recovery with a two year lag.

During 2010, the Company also took an additional write down of $152,000 on the Freddie Mac and Fannie Mae securities already written down in 2008. In management’s judgment the decline in the market value of these securities are permanent in nature and therefore were written down to the current market value as provided by third party repricing provider.

During 2009, the Company took a write down of $76,779 on these trust preferred securities to bring the book value into alignment with the current and performing principal balance outstanding, which we considered to be a prudent action to take in the current environment based on defaults by three of the twenty-nine financial institutions in the pool. In addition, cash flow testing was performed by an unrelated third party in order to measure the extent of other-than-temporary-impairment (“OTTI”). This testing, assumed a 15% recovery with a two year lag on two of the previously defaulting financial institutions, with future defaults on the currently performing financial institutions of 150 basis points applied annually with no future recovery. This testing resulted in a net present value of $1,142,047, compared to the book value of $1,127,965 at December 31, 2009.

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Investment Securities (continued)

During 2008, Freddie Mac and Fannie Mae government sponsored entities entered into conservatorship agreements with the U.S. Treasury Department. This conservatorship precludes these entities from paying preferred stock dividends. As a result, the market values declined significantly and the Company recorded an impairment loss of $2,816,000 during the year ended December 31, 2008. The write down represented 94% of the initial investment in these securities.

Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

As of December 31, 2010, management had the ability and intent to hold the securities classified as available for sale for a period of time sufficient for a recovery of cost. On December 31, 2010, the Bank held 15 investment securities having continuous unrealized loss positions for more than 12 months. Management has determined that all unrealized losses are either due to increases in market interest rates over the yields available at the time the underlying securities were purchased, current call features that are nearing, and the effect the sub-prime market has had on all mortgaged-backed securities. The Bank has no mortgaged-backed securities collateralized by sub-prime mortgages. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2010, management believes the impairments detailed in the table above are temporary and no additional impairment loss is required to be realized in the Company’s consolidated income statement.

A rollforward of the cumulative other-than-temporary credit losses recognized in earnings for all debt securities for which a portion of an other-then-temporary loss is recognized in accumulated other comprehensive loss is as follows:

	2010		2009		2008

Estimated credit losses, beginning of year	$	2,892,779	$	2,816,000	$	-
Credit losses - no previous OTTI recognized		-		76,779		2,816,000
Credit losses - previous OTTI recognized		262,208		-		-

Estimated credit losses, end of year	$	3,154,987	$	2,892,779	$	2,816,000

Contractual maturities of investment securities at December 31, 2010, 2009, and 2008 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.

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Investment Securities (continued)

	Available for Sale
	Amortized		Fair
December 31, 2010	Cost		Value

Due within one year	$	-	$	-
Due over one to five years		1,589,004		1,609,925
Due over five to ten years		304,997		312,135
Due over ten years		35,703,573		33,168,745
Mortgage-backed, due in monthly installments		51,337,038		52,177,554

	$	88,934,612	$	87,268,359

December 31, 2009

Due within one year	$	649,998	$	650,982
Due over one to five years		1,825,146		1,850,726
Due over five to ten years		565,946		571,123
Due over ten years		32,292,722		30,740,857
Mortgage-backed, due in monthly installments		50,849,527		50,648,917

	$	86,183,339	$	84,462,605

December 31, 2008

Due within one year	$	-	$	-
Due over one to five years		4,577,077		4,560,487
Due over five to ten years		5,563,224		5,685,637
Due over ten years		32,181,516		30,410,635
Mortgage-backed, due in monthly installments		16,884,368		17,291,886

	$	59,206,185	$	57,948,645

Proceeds from sales of available for sale securities prior to maturity totaled $9,073,406, $24,920,635, and $25,977,280 for the years ended December 31, 2010, 2009, and 2008, respectively. The Bank realized gains of $176,046 and losses of $882 on those sales for 2010. The Bank realized gains of $600,696 and losses of $14,815 on those sales for 2009. The Bank realized gains of $195,780 and losses of $4,850 on those sales for 2008. Realized gains and losses were calculated based on the amortized cost of the securities at the date of trade. Income tax expense relating to net gains on sales of investment securities totaled $69,674, $233,034, and $75,942 for the years ended December 31, 2010, 2009, and 2008, respectively.

In July 2008, the Company sold its remaining two positions in securities classified as held to maturity. Inasmuch as these positions were liquidated prior to maturity in a manner which did not meet the prescribed requirements of ASC Topic 320, the Company may be precluded for a period of time from classifying any securities positions as held to maturity.

The Bank has no derivative financial instruments required to be disclosed under ASC Topic 815, formerly SFAS No. 149, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments.

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans

Major categories of loans are as follows:

	2010			2009			2008
Mortgage:
Residential	$	102,199,134		$	95,683,441		$	87,707,878
Commercial		72,669,909			79,845,030			76,152,837
Construction and land development		5,363,232			1,742,515			6,589,673
Demand and time		7,193,070			9,800,625			6,974,607
Installment		46,860,351			53,222,692			60,593,752
		234,285,696			240,294,303			238,018,747
Unearned income on loans		(1,035,292	)		(838,913	)		(864,436	)
		233,250,404			239,455,390			237,154,311
Allowance for credit losses		(3,399,516	)		(3,572,528	)		(2,021,690	)

	$	229,850,888		$	235,882,862		$	235,132,621

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 $30,286,000, $37,092,000, and $43,970,000 of such loans at December 31, 2010, 2009, and 2008, 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, 2010, 2009, and 2008, the amounts of such loans outstanding totaled $5,109,539, $5,137,397, and $4,344,974, respectively. During 2010, loan additions and repayments totaled $1,184,500 and $1,212,358, respectively.

The allowance for credit losses is as follows:

	Commercial						Consumer
	and			Commercial			and			Residential
2010	Industrial			Real Estate			Indirect			Real Estate			Unallocated			Total

Balance, beginning of year	$	237,461		$	2,380,024		$	842,901		$	162,142		$	(50,000	)	$	3,572,528
Provision for credit losses		(7,822	)		542,416			448,197			14,959			52,250			1,050,000
Recoveries		45,731			10,593			497,479			85,195			-			638,998
Loans charged off		(12,119	)		(824,810	)		(959,060	)		(66,021	)		-			(1,862,010	)

Balance, end of year	$	263,251		$	2,108,223		$	829,517		$	196,275		$	2,250		$	3,399,516

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans (continued)

	2009			2008

Balance, beginning of year	$	2,021,690		$	1,604,491
Provision for credit losses		2,442,976			1,145,649
Recoveries		395,584			352,933
Loans charged off		(1,287,722	)		(1,081,383	)

Balance, end of year	$	3,572,528		$	2,021,690

Loans classified by the Bank as impaired by categories of loans at December 31, 2010 are as follows:

	Commercial						Consumer
	and			Commercial			and			Residential
	Industrial			Real Estate			Indirect			Real Estate			Total
Individually evaluated impaired balance:
Balance, beginning of year	$	757,553		$	7,870,847		$	5,969		$	189,260		$	8,823,629
Originations		-			125,117			-			-			125,117
Sales/repayments		(101,676	)		(2,765,713	)		(4,823	)		(2,566	)		(2,874,778	)
Charge-offs		-			(824,810	)		-			(59,000	)		(883,810	)
Transfers to/from collectively impaired		137,776			4,593,949			77,358			1,035,279			5,844,362

Balance, end of year	$	793,653		$	8,999,390		$	78,504		$	1,162,973		$	11,034,520
Fair value of ending Balance	$	610,821		$	7,298,090		$	57,124		$	1,129,114		$	9,095,149

Collectively evaluated impaired balance:
Balance, beginning of year	$	-		$	-		$	475,008		$	215,000		$	690,008
Originations		-			-			-			-			-
Sales/repayments		-			-			(16,550	)		-			(16,550	)
Charge-offs		(12,119	)		-			(959,060	)		(7,021	)		(978,200	)
Transfers to/from collectively impaired		12,119			-			889,819			(207,979	)		693,959

Balance, end of year	$	-		$	-		$	389,217		$	-		$	389,217
Fair value of ending Balance	$	-		$	-		$	381,298		$	-		$	381,298

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans (continued)

The allowance for credit losses on loans classified by the Bank as impaired by categories of loans at December 31, 2010 is as follows:

	Commercial						Consumer
	and			Commercial			and			Residential
	Industrial			Real Estate			Indirect			Real Estate			Total
Allowance for individually evaluated impaired:
Balance, beginning of year	$	47,290		$	2,122,715		$	3,588		$	5,387		$	2,178,980
Provision for credit losses		101,930			392,802			17,792			9,298			521,822
Recoveries		45,731			10,593			-			85,195			141,519
Loans charged off		(12,119	)		(824,810	)		-			(66,021	)		(902,950	)

Balance, end of year	$	182,832		$	1,701,300		$	21,380		$	33,859		$	1,939,371

Allowance for collectively evaluated impaired:
Balance, beginning of year	$	-		$	-		$	8,719		$	-		$	8,719
Provision for credit losses		-			-			460,781			-			460,781
Recoveries		-			-			497,479			-			497,479
Loans charged off		-			-			(959,060	)		-			(959,060	)

Balance, end of year	$	-		$	-		$	7,919		$	-		$	7,919

Risk ratings of loans by categories of loans at December 31, 2010 are as follows:

	Commercial				Consumer
	and		Commercial		and		Residential
	Industrial		Real Estate		Indirect		Real Estate		Total

Pass	$	5,852,779	$	66,763,903	$	44,931,931	$	102,281,090	$	219,829,703
Special mention		642,248		686,338		1,543,756		809,127		3,681,469
Substandard		698,043		8,999,390		259,939		692,427		10,649,799
Doubtful		-		-		124,725		-		124,725
Loss		-		-		-		-		-

	$	7,193,070	$	76,449,631	$	46,860,351	$	103,782,644	$	234,285,696

Current, past due, and nonaccrual loans by categories of loans at December 31, 2010 are as follows:

					90 Days or
			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total

Commercial and industrial	$	5,735,517	$	97,999	$	-	$	1,359,554	$	7,193,070
Commercial real estate		70,675,983		1,251,402		-		4,522,246		76,449,631
Consumer and indirect		45,155,344		1,580,082		-		124,925		46,860,351
Residential real estate		102,706,757		99,608		-		976,279		103,782,644

	$	224,273,601	$	3,029,091	$	-	$	6,983,004	$	234,285,696

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans (continued)

Loans on which the accrual of interest has been discontinued totaled $6,983,004, $3,016,727, and $866,912 at December 31, 2010, 2009, and 2008, respectively. Interest that would have been accrued under the terms of these loans totaled $145,148, $105,365, and $29,807 for the years ended December 31, 2010, 2009, and 2008, respectively. Loans past due 90 days or more and still accruing interest totaled $0, $0 and $22,551 at December 31, 2010, 2009 and 2008, respectively.

Information regarding loans classified by the Bank as impaired is summarized as follows:

	2010		2009		2008
Loans classified as impaired with a valuation allowance	$	11,423,737	$	9,513,637	$	1,387,043
Allowance for credit losses on impaired loans		1,947,290		2,187,699		629,036
Average balance of impaired loans		12,466,887		10,111,516		1,458,245

Following is a summary of cash receipts on impaired loans and how they were applied:

Cash receipts applied to reduce principal balance	$	498,629	$	2,604,832	$	131,730
Cash receipts recognized as interest income		589,625		380,190		41,062

Total cash receipts	$	1,088,254	$	2,985,022	$	172,792

At December 31, 2010, the recorded investment in new troubled debt restructurings totaled $0. During 2010, one troubled debt restructuring transpired totaling $2,808,466, however did not perform under the terms of the modified agreement and is included in impaired and nonaccrual loans above. All prior investments in troubled debt were performing under the terms of the modified agreement and are no longer considered to be troubled debt restructurings.

At December 31, 2009, the recorded investment in new troubled debt restructurings totaled $86,707. The allowance for credit losses relating to troubled debt restructurings totaled $954 at December 31, 2009. The average recorded investment in troubled debt restructurings totaled $100,747 for the year ended December 31, 2009. The Bank recognized $7,552 in interest income on troubled debt restructurings for cash payments received in 2009. All prior investments in troubled debt were performing under the terms of the modified agreement and are no longer considered to be troubled debt restructurings.

No troubled debt restructurings transpired in 2008. All prior investments in troubled debt were performing under the terms of the modified agreement and are no longer considered to be troubled debt restructurings.

The Bank has no commitments to loan additional funds to the borrowers of restructured, impaired, or non-accrual loans.

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Premises and Equipment

A summary of premises and equipment is as follows:

	Useful
	lives	2010			2009			2008

Land		$	684,977		$	684,977		$	684,977
Buildings	5-50 years		5,937,856			5,864,145			4,796,309
Equipment and fixtures	5-30 years		5,200,693			5,093,759			5,056,015
Construction in progress			39,704			322			121,973
			11,863,230			11,643,203			10,659,274
Accumulated depreciation			(7,739,614	)		(7,522,606	)		(7,559,826	)

		$	4,123,616		$	4,120,597		$	3,099,448

Depreciation expense totaled $368,248, $334,465, and $347,040 for the years ended December 31, 2010, 2009, and 2008, respectively. Amortization of software and intangible assets totaled $58,668, $75,694, and $96,312 for the years ended December 31, 2010, 2009, and 2008, respectively.

The Bank leases its Severna Park and Linthicum branches. Minimum lease obligations under the Severna Park branch are $30,000 per year through September 2012. Minimum lease obligations under the Linthicum branch are $104,335 per year through December 2014, adjusted annually on a pre-determined basis, with one ten year extension option. The Bank is also required to pay all maintenance costs under all these leasing arrangements. Rent expense totaled $134,081, $227,479, and $257,467 for the years ended December 31, 2010, 2009, and 2008, respectively.

Note 6. Short-term Borrowings

Short-term borrowings are as follows:

	2010		2009		2008

Notes payable - U.S. Treasury	$	273,948	$	81,290	$	629,855
FHLB		4,000,000		-		-

	$	4,273,948	$	81,290	$	629,855

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 or below the Federal funds rate. This arrangement is secured by investment securities with an amortized cost of approximately $1,000,000 over each of the years ended December 31, 2010, 2009, and 2008.

The Bank owned 17,451 shares of common stock of the FHLB at December 31, 2010. The Bank is required to maintain an investment of 0.2% of total assets, adjusted annually, plus 4.5% of total advances, adjusted for advances and repayments. The credit available under this facility is determined at 20% of the Bank’s total assets, or approximately $55,470,000 at December 31, 2010. Short-term advances totaled $4,000,000 under this credit arrangement at December 31, 2010. This advance is a daily rate credit, adjustable daily, and due by November 2011. Long-term advances totaled $20,000,000 under this credit arrangement at December 31, 2010 (see Note 7). This credit facility is secured by a floating lien on the Bank’s residential mortgage loan portfolio. Average short-term borrowings under this facility approximated $307,000, $11,000 and $1,924,000 for 2010, 2009, and 2008, respectively.

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Short-term Borrowings (continued)

The Bank also has available $3,000,000, $9,000,000, and $9,000,000 at December 31, 2010, 2009, and 2008, respectively, 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, 2010, 2009, and 2008.

Note 7. Long-term Borrowings

Long-term borrowings are as follows:

	2010		2009		2008

Federal Home Loan Bank of Atlanta, convertible advances	$	20,000,000	$	27,000,000	$	27,000,000
Mortgage payable-individual, interest at 7%, payments of $3,483, including principal and interest, due monthly through October 2010, secured by real estate		-		33,711		71,712

	$	20,000,000	$	27,033,711	$	27,071,712

The Federal Home Loan Bank of Atlanta, convertible advances total includes the following:

A $10,000,000 convertible advance issued in 2007, which has a final maturity of November, 1, 2017, but is callable monthly. This advance has a 3.28% interest rate, with interest payable monthly. The proceeds of the convertible advance were used to fund loans and purchase investment securities.

A $5,000,000 convertible advance issued in 2008, which has a final maturity of July 23, 2018, but is callable quarterly starting July 23, 2009. This advance has a 2.73% interest rate, with interest payable quarterly. The proceeds of the convertible advance were used to fund loans.

A $5,000,000 convertible advance issued in 2008, which has a final maturity of August 22, 2018, but is callable quarterly starting August 22, 2011. This advance has a 3.34% interest rate, with interest payable quarterly. The proceeds of the convertible advance were used to fund loans.

At December 31, 2010, the scheduled maturities of long-term borrowings are approximately as follows:

	2010

2016 and thereafter		20,000,000

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 Bancorp exercised its right to call both the capital securities of the statutory trust and the junior subordinated debentures on September 7, 2010. As a result, the Company realized a $250,000 early call premium, which is included in interest expense on junior subordinated debentures for the year ended December 31, 2010.

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Junior Subordinated Debentures Owed To Unconsolidated Subsidiary Trust (continued)

At December 31, 2009 and 2008, despite the fact that the Trust I was not included in the Company’s consolidated financial statements, the trust preferred securities issued by these subsidiary trusts were included in the Tier 1 capital of the Company for regulatory capital purposes. Federal Reserve Board rules limit the aggregate amount of restricted core capital elements (which includes trust preferred securities, among other things) that may be included in the Tier 1 capital of most bank holding companies to 25% of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. The current quantitative limits did not preclude the Company from including the $5.0 million in trust preferred securities outstanding in Tier 1 capital as of December 31, 2009 and 2008.

Note 9. Deposits

Major classifications of interest-bearing deposits are as follows:

	2010		2009		2008

NOW and SuperNOW	$	23,683,375	$	22,353,053	$	21,079,314
Money Market		16,710,611		15,284,223		12,764,167
Savings		53,007,293		48,378,319		45,801,719
Certificates of Deposit, $100,000 or more		30,885,936		31,576,905		27,882,777
Other time deposits		102,101,454		108,957,638		98,700,862

	$	226,388,669	$	226,550,138	$	206,228,839

Interest expense on deposits is as follows:

	2010		2009		2008

NOW and SuperNOW	$	27,833	$	27,702	$	30,618
Money Market		66,840		57,280		62,475
Savings		147,998		134,607		153,301
Certificates of Deposit, $100,000 or more		734,355		1,063,174		976,446
Other time deposits		2,719,605		3,654,519		3,557,345

	$	3,696,631	$	4,937,282	$	4,780,185

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Deposits (continued)

At December 31, 2010, the scheduled maturities of time deposits are approximately as follows:

	2010

2011	$	72,247,000
2012		21,714,000
2013		17,761,000
2014		7,190,000
2015		12,493,000
2016 and thereafter		1,582,000

	$	132,987,000

Deposit balances of executive officers and directors and their affiliated interests totaled approximately $2,131,000, $2,215,000, and $2,611,000 at December 31, 2010, 2009, and 2008, respectively.

The Bank had no brokered deposits at December 31, 2010, 2009, and 2008.

Note 10. Income Taxes

The components of income tax expense for the years ended December 31, 2010, 2009, and 2008 are as follows:

	2010			2009			2008
Current:
Federal	$	472,423		$	268,693		$	655,129
State		253,573			156,773			271,112

Total current		725,996			425,466			926,241
Deferred income taxes (benefits):
Federal		(231,837	)		(509,545	)		(1,275,873	)
State		(8,648	)		(149,174	)		(329,730	)

Total deferred		(240,485	)		(658,719	)		(1,605,603	)

Income tax expense (benefit)	$	485,511		$	(233,253	)	$	(679,362	)

F-23

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, 2010, 2009, and 2008 is as follows:

	2010			2009			2008

Income (loss) before income tax expense (benefit)	$	2,550,296		$	1,029,209		$	(275,400	)

Taxes computed at Federal income tax rate	$	867,102		$	349,925		$	(93,636	)
Increase (decrease) resulting from:
Tax-exempt income		(530,509	)		(502,488	)		(547,038	)
State income taxes, net of Federal income tax benefit		161,650			(80,690	)		(38,688	)
Other		(12,732	)		-			-

Income tax expense (benefit)	$	485,511		$	(233,253	)	$	(679,362	)

The relationship between pre-tax loss and income tax benefits for 2008 is affected by increased deferred tax benefits attributable to tax methodologies utilized for loan loss provisions.

The components of the net deferred income tax benefits as of December 31, 2010, 2009, and 2008 are as follows:

	2010		2009		2008

Deferred income tax benefits:
Accrued deferred compensation	$	99,454	$	90,594	$	82,049
Impairment loss on investment securities		1,176,090		1,072,662		1,110,771
Allowance for credit losses		1,077,153		1,206,604		563,737
Nonaccrual interest		69,103		11,849		-
Alternative minimum tax credits		199,140		-		66,371
Net unrealized depreciation on investment securities available for sale		663,477		684,422		500,186
Accumulated depreciation		39,916		35,692		-
Other real estate owned		2,644		-		-
Reserve for unfunded commitments		78,890		78,890		78,890
Total deferred income tax benefits		3,405,867		3,180,713		2,402,004

Deferred income tax liabilities:
Accumulated depreciation		-		-		41,113
Accumulated securities discount accretion		56,893		51,278		74,408
Total deferred income tax liabilities		56,893		51,278		115,521

Net deferred income tax benefits	$	3,348,974	$	3,129,435	$	2,286,483

Management has determined that no valuation allowance is required as it believes it is more likely then not that all of the deferred tax assets will be fully realizable in the future. At December 31, 2010, 2009, and 2008, management believes there are no uncertain tax positions under ASC Topic 740 Income Taxes (formerly FIN 48, Accounting for Uncertainty in Income Taxes).

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Income Taxes (continued)

The Company’s federal income tax returns for 2009, 2008, and 2007 are subject to examinations by the IRS generally for three years after they were filed. In addition, the Company’s state tax returns for the same years are subject to examination by state tax authorities for similar time periods.

Note 11. Pension and Profit Sharing Plans

The Bank has a money purchase pension plan, which provides for annual employer contributions based on employee compensation, and covers substantially all employees. Annual contributions, included in employee benefit expense, totaled $328,268, $231,538 and $220,000 for the years ended December 31, 2010, 2009 and 2008, respectively. The Bank is also making additional contributions under this plan for the benefit of certain employees, whose retirement funds were negatively affected by the termination of a prior defined benefit pension plan. These additional contributions, also included in employee benefit expense, totaled $16,116, $26,992, and $33,452 for the years ended December 31, 2010, 2009, and 2008, respectively.

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 $301,116, $200,858, and $116,027 for the years ended December 31, 2010, 2009, and 2008, respectively.

Note 12. Other Benefit Plans

The Bank has life insurance contracts on several officers and is the sole owner and beneficiary of the policies. Cash value totaled $7,954,062, $7,702,656, and $7,434,573 at December 31, 2010, 2009, and 2008, respectively. Income on their insurance investment totaled $251,406, $268,083, and $273,170 for 2010, 2009, and 2008, respectively.

The Bank has an unfunded grantor trust, as part of a change in control severance plan, covering substantially all employees. Participants in the plan are entitled to cash severance benefits upon termination of employment, for any reason other than just cause, should a “change in control” of the Company occur.

F-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13. Other Operating Expenses

Other operating expenses include the following:

	2010			2009		2008

Professional services	$	454,147		$	489,485	$	485,685
Stationery, printing and supplies		202,796			189,446		214,815
Postage and delivery		167,922			162,782		187,017
FDIC assessment		464,585			549,716		35,544
Directors fees and expenses		203,833			200,765		198,939
Marketing		227,883			246,947		255,921
Data processing		61,008			82,743		100,562
Correspondent bank services		54,399			87,249		60,706
Telephone		172,507			173,550		160,242
Liability insurance		63,383			67,264		71,497
(Gains) losses and expenses on OREO		(121,876	)		64,790		8,343
Other ATM expense		110,899			155,818		232,670
Other		582,023			518,646		396,749

	$	2,643,509		$	2,989,201	$	2,408,690

Note 14. 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:

	2010		2009		2008
Loan commitments:
Construction and land development	$	-	$	1,155,200	$	400,000
Other mortgage loans		2,013,000		2,270,000		2,590,000

	$	2,013,000	$	3,425,200	$	2,990,000
Unused lines of credit:
Home-equity lines	$	8,130,179	$	6,404,113	$	6,395,182
Commercial lines		10,738,826		11,335,335		13,380,292
Unsecured consumer lines		808,053		805,479		785,487

	$	19,677,058	$	18,544,927	$	20,560,961

Letters of credit:	$	71,762	$	79,250	$	196,530

F-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14. Commitments and Contingencies (continued)

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, 2010, the Bank has accrued $200,000 as a reserve for losses on unfunded commitments related to these financial instruments with off balance sheet risk, which is included in other liabilities.

Note 15. 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 $15,251,000, $13,813,000, and $12,430,000 at December 31, 2010, 2009, and 2008, respectively, based on the earnings restrictions and minimum capital ratio requirements noted below.

Stock repurchase program:

In February 2008, the Company instituted a Stock Repurchase Program which expired in December 2009. Under the program, as extended and increased, the Company could spend up to $4,127,309 to repurchase its outstanding stock. The repurchases may be made from time to time at a price not to exceed $12.50 per share. During 2009, the Company repurchased 305,083 shares at an average price of $9.29. During 2008, the Company repurchased 50,300 shares at an average price of $11.48.

Employee stock purchase benefit plans:

The Company has a stock-based compensation plan, which is described below. There were no options issued during the years ended December 31, 2010, 2009 and 2008.

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15. Stockholders’ Equity (continued)

Employees who have completed one year of service are eligible to participate in the employee stock purchase plan. The number of shares of common stock granted under options will bear a uniform relationship to compensation. The plan allows employees to buy stock under options granted at 85% of the fair market value of the stock on the date of grant. Options are vested when granted and will expire no later than 27 months from the grant date or upon termination of employment. Activity under this plan is as follows:

At December 31, 2010, shares of common stock reserved for issuance under the plan totaled 48,011.

The Board of Directors may suspend or discontinue the plan at its discretion.

Dividend reinvestment and stock purchase plan:

The Company’s dividend reinvestment and stock purchase plan allows all participating stockholders the opportunity to receive additional shares of common stock in lieu of cash dividends at 95% of the fair market value on the dividend payment date.

During 2010, 2009, and 2008, shares of common stock purchased under the plan totaled 19,076, 20,371, and 20,003, respectively. At December 31, 2010, shares of common stock reserved for issuance under the plan totaled 106,397.

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, 2010, 2009, and 2008.

At December 31, 2010, shares of common stock reserved for issuance under the plan totaled 313,919.

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.

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15. Stockholders’ Equity (continued)

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, 2010, 2009, and 2008, that both the Company and Bank meet all capital adequacy requirements to which they are subject.

The Bank has been notified by its regulator that, as of its most recent regulatory examination, it is regarded as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

As discussed in Note 8, the capital securities held by the Glen Burnie Statutory Trust I qualifies as Tier I capital for the Company as of December 31, 2009 and 2008, under Federal Reserve Board guidelines.

A comparison of capital as of December 31, 2010, 2009, and 2008 with minimum requirements is approximately as follows:

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2010
Total Capital
(to Risk Weighted Assets)
Company	$	30,361,000		12.6	%	$	19,307,000		8.0	%	N/A
Bank		29,974,000		12.4	%		19,307,000		8.0	%	$	24,134,000		10.0	%

Tier I Capital
(to Risk Weighted Assets)
Company		27,337,000		11.3	%		9,651,000		4.0	%	N/A
Bank		26,951,000		11.2	%		9,651,000		4.0	%		14,477,000		6.0	%

Tier I Capital
(to Average Assets)
Company		27,337,000		7.6	%		14,313,000		4.0	%	N/A
Bank		26,951,000		7.7	%		13,928,000		4.0	%		17,410,000		5.0	%

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15. Stockholders’ Equity (continued)

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2009
Total Capital
(to Risk Weighted Assets)
Company	$	34,048,000		14.5	%	$	18,798,000		8.0	%	N/A
Bank		33,745,000		14.4	%		18,786,000		8.0	%	$	23,483,000		10.0	%

Tier I Capital
(to Risk Weighted Assets)
Company		31,100,000		13.2	%		9,403,000		4.0	%	N/A
Bank		30,799,000		13.1	%		9,390,000		4.0	%		14,085,000		6.0	%

Tier I Capital
(to Average Assets)
Company		31,100,000		8.9	%		14,041,000		4.0	%	N/A
Bank		30,799,000		8.7	%		14,193,000		4.0	%		14,741,000		5.0	%

As of December 31, 2008
Total Capital
(to Risk Weighted Assets)
Company	$	35,687,000		14.9	%	$	19,122,000		8.0	%	N/A
Bank		35,707,000		15.0	%		19,107,000		8.0	%	$	23,884,000		10.0	%

Tier I Capital
(to Risk Weighted Assets)
Company		33,665,000		14.1	%		9,564,000		4.0	%	N/A
Bank		33,485,000		14.0	%		9,553,000		4.0	%		14,330,000		6.0	%

Tier I Capital
(to Average Assets)
Company		33,665,000		10.5	%		12,825,000		4.0	%	N/A
Bank		33,485,000		10.2	%		13,196,000		4.0	%		16,495,000		5.0	%

F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16. Earnings Per Common Share

Earnings per common share are calculated as follows:

	2010		2009		2008
Basic:
Net income	$	2,064,785	$	1,262,462	$	403,962
Weighted average common shares outstanding		2,690,218		2,734,524		2,981,124
Basic net income per share	$	0.76	$	0.46	$	0.14

Diluted earnings per share calculations were not required for 2010, 2009, and 2008 as there were no options outstanding at December 31, 2010, 2009, and 2008.

In January 2008, the Company declared a six for five stock split effected in the form of a 20% stock dividend.

Note 17. Fair Values of Financial Instruments

ASC Topic 825, Disclosure about Fair Value of Financial Instruments, formerly SFAS No. 107, requires the disclosure of the estimated fair values of financial instruments. Quoted market prices, where available, are shown as estimates of fair values. Because no quoted market prices are available or a significant part of the Company’s financial instruments, the fair values of such instruments have been derived based on the amount and timing of future cash flows and estimated discount rates.

Present value techniques used in estimating the fair value of the Company’s financial instruments are significantly affected by the assumptions used. Fair values derived from using present value techniques are not substantiated by comparisons to independent markets, and in many cases, could not be realized in immediate settlement of the instruments.

ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17. Fair Values of Financial Instruments (continued)

The following table shows the estimated fair value and the related carrying values of the Company’s financial instruments as December 31, 2010, 2009, and 2008. Items that are not financial instruments are not included.

	2010				2009				2008
	Carrying		Fair		Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	6,492,313	$	6,492,313	$	6,993,811	$	6,993,811	$	6,960,377	$	6,960,377
Interest-bearing deposits in other financial institutions		1,567,673		1,567,673		3,748,387		691,624		7,883,816		7,883,816
Federal funds sold		940,317		940,317		691,624		6,393,710		6,393,710		6,393,710
Investment securities available for sale		87,268,359		87,268,359		84,462,605		84,462,605		57,948,645		57,948,645
Federal Home Loan Bank Stock		1,745,100		1,745,100		1,858,300		1,858,300		1,767,600		1,767,600
Maryland Financial Bank Stock		100,000		100,000		100,000		100,000		100,000		100,000
Common stock-Statutory Trust I		-		-		155,000		155,000		155,000		155,000
Ground rents		178,200		178,200		184,900		184,900		184,900		184,900
Loans, less allowance for credit losses		229,850,888		234,426,000		235,882,862		239,915,000		235,132,621		239,446,000
Accrued interest receivable		1,538,883		1,538,883		1,626,792		1,626,792		1,680,392		1,680,392

Financial liabilities:
Deposits		294,444,828		269,480,000		294,357,837		267,358,000		269,767,598		272,091,000
Short-term borrowings		4,273,948		4,273,948		81,290		81,290		629,855		629,855
Long-term borrowings		20,000,000		19,611,000		27,033,711		25,979,000		27,071,712		27,162,000
Dividends payable		231,579		231,579		230,285		230,285		385,794		385,794
Accrued interest payable		55,131		55,131		112,599		112,599		139,579		139,579
Accrued interest payable on junior subordinated debentures		-		-		171,518		171,518		171,518		171,518
Junior subordinated debentures owed to unconsolidated subsidiary trust		-		-		5,155,000		5,707,615		5,155,000		5,281,827
Unrecognized financial instruments:
Commitments to extend credit		21,690,058		21,690,058		21,970,127		21,970,127		23,550,961		23,550,961
Standby letters of credit		71,762		71,762		79,250		79,250		196,530		196,530

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-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17. 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.

Borrowings:

The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed rate borrowings is estimated by discounting future cash flows using current interest rates currently offered for similar financial instruments.

Junior Subordinated Debentures:

Fair value is estimated based on quoted market prices of similar instruments.

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 18. Fair Value Measurements

Effective January 1, 2008, the Company adopted ASC Topic 820, formerly SFAS No. 157, Fair Value Measurements which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis or on a nonrecurring basis.

ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

Fair Value Hierarchy

Level 1 – Quoted prices in active markets for identical assets or liabilities

Level 2 – Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)

Level 3 – Significant unobservable inputs (including the Bank’s own assumptions in determining the fair value of assets or liabilities)

F-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18. Fair Value Measurements (continued)

In determining the appropriate levels, the Company performs a detailed analysis of assets and liabilities that are subject to ASC Topic 820. The Bank’s securities available-for-sale are the only assets or liabilities subject to fair value measurements on a recurring basis. The Bank may also be required, from time to time, to measure certain other financial and non-financial assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. At December 31, 2010 these non-recurring assets consisted of 22 loans classified as nonaccrual and a homogeneous pool of indirect and consumer loans considered to be impaired, which are valued under Level 3 inputs and one property classified as OREO valued under Level 2 inputs.

Fair value measurements on a recurring and non-recurring basis at December 31, 2010 are as follows:

									Fair
December 31, 2009	Level 1		Level 2			Level 3			Value
Recurring:
Securities available for sale	$	-	$	84,462,605		$	-		$	84,462,605

Non-recurring:
Impaired loans		-		-			7,325,938			7,325,938
OREO		-		25,000			-			25,000
		-		84,487,605			7,325,938			91,813,543
Activity:
Securities available for sale:
Purchases of securities		-		25,707,804			-			25,707,804
Sales, calls, and maturities of securities		-		(22,117,929	)		-			(22,117,929	)
Net amortization/accretion of premium/discount		-		(574,572	)		-			(574,572	)
Increase in market value		-		52,659			-			52,659
OTTI on investments		-		(262,208	)		-			(262,208	)

Impaired loans:
New impaired loans		-		-			6,228,366			6,228,366
Payments and other loan reductions		-		-			(1,377,911	)		(1,377,911	)
Change in total provision		-		-			(240,409	)		(240,409	)
Loans converted to OREO		-		-			(512,247	)		(512,247	)

OREO:
OREO converted from loans		-		512,247			-			512,247
Sales of OREO		-		(322,247	)		-			(322,247	)

December 31, 2010
Recurring:
Securities available for sale		-		87,268,359			-			87,268,359

Non-recurring:
Impaired loans		-		-			11,423,737			11,423,737
OREO		-		215,000			-			215,000

	$	-	$	87,483,359		$	11,423,737		$	98,907,096

F-34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18. Fair Value Measurements (continued)

Securities available-for-sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Measured on a Non-Recurring Basis:

Financial Assets and Liabilities

The Bank is predominantly a cash flow lender with real estate serving as collateral on a majority of loans. Loans which are deemed to be impaired and foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Bank determines such fair values from independent appraisals.

Non-Financial Assets and Non-Financial Liabilities

Application of ASC Topic 820 to non-financial assets and non-financial liabilities became effective January 1, 2009. The Corporation has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities typically measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

Foreclosed real estate were adjusted to their fair values, resulting in an impairment charge, which was included in earnings for the year. Foreclosed real estate, which are considered to be non-financial assets, have been valued using a market approach. The values were determined using market prices of similar real estate assets, which the Bank considers to be level 2 inputs.

Note 19. Recently Issued Accounting Pronouncements

F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19. Recently Issued Accounting Pronouncements (continued)

F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20. 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 Sheets
December 31,	2010			2009			2008
Assets

Cash	$	355,922		$	348,515		$	338,902
Investment in The Bank of Glen Burnie		25,946,536			29,848,797			32,727,244
Investment in GBB Properties, Inc.		255,770			260,184			261,999
Investment in the Glen Burnie Statutory Trust I		-			155,000			155,000
Due from subsidiaries		1,414			43,996			22,878
Other assets		4,583			49,433			114,541

Total assets	$	26,564,225		$	30,705,925		$	33,620,564

Liabilities and Stockholders’ Equity

Dividends payable	$	231,579		$	230,285		$	385,794
Accrued interest payable on borrowed funds		-			171,518			171,518
Borrowed funds from subsidiary		-			5,155,000			5,155,000
Total liabilities		231,579			5,556,803			5,712,312

Stockholders’ equity:
Common stock		2,702,091			2,683,015			2,967,727
Surplus		9,334,810			9,190,911			11,568,241
Retained earnings		15,300,344			14,311,508			14,129,637
Accumulated other comprehensive loss, net of benefits		(1,004,599	)		(1,036,312	)		(757,353	)
Total stockholders’ equity		26,332,646			25,149,122			27,908,252

Total liabilities and stockholders’ equity	$	26,564,225		$	30,705,925		$	33,620,564

The borrowed funds from subsidiary balance represented the junior subordinated debt securities payable to the wholly-owned subsidiary trust that was deconsolidated as a result of applying the provisions of ASC Topic 810, formerly FIN 46. The Company repaid this balance in September 2010 (See Note 8).

F-37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20. Parent Company Financial Information (continued)

Statements of Income
Years Ended December 31,	2010			2009			2008

Dividends and distributions from subsidiaries	$	1,455,000		$	4,269,844		$	1,902,239
Other income		24,645			16,430			16,430
Interest expense on junior subordinated debentures		(648,127	)		(546,430	)		(546,180	)
Other expenses		(105,785	)		(122,096	)		(69,468	)
Income before income tax benefit and equity in undistributed net income of subsidiaries		725,733			3,617,748			1,303,021
Income tax benefit		277,440			246,018			226,356
Change in undistributed equity of subsidiaries		1,061,612			(2,601,304	)		(1,125,415	)

Net income	$	2,064,785		$	1,262,462		$	403,962

F-38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20. Parent Company Financial Information (continued)

Statements of Cash Flows
Years Ended December 31,	2010			2009			2008

Cash flows from operating activities:
Net income	$	2,064,785		$	1,262,462		$	403,962
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease in other assets		44,850			65,108			5,001
Decrease (increase) in due from subsidiaries		42,582			(21,118	)		(169	)
Decrease in accrued interest payable		(171,518	)		-			-
Change in undistributed equity of subsidiaries		(1,061,612	)		2,601,304			1,125,415

Net cash provided by operating activities		919,087			3,907,756			1,534,209

Cash flows from investing activities:
Sale of common stock in the Glen Burnie Statutory Trust I		155,000			-			-
Capital contributed from subsidiary		5,000,000			-			-

Net cash provided by investing activities		5,155,000			-			-

Cash flows from financing activities:
Proceeds from dividend reinvestment plan		162,975			173,667			194,054
Redemption of guaranteed preferred beneficial interest in Glen Burnie Bancorp junior subordinated debentures		(5,155,000	)		-			-
Repurchase and retirement of common stock		-			(2,835,709	)		(577,239	)
Dividends paid		(1,074,655	)		(1,236,101	)		(1,344,344	)

Net cash used in financing activities		(6,066,680	)		(3,898,143	)		(1,727,529	)

Increase (decrease) in cash		7,407			9,613			(193,320	)

Cash, beginning of year		348,515			338,902			532,222

Cash, end of year	$	355,922		$	348,515		$	338,902

F-39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 21. Quarterly Results of Operations (Unaudited)

The following is a summary of consolidated unaudited quarterly results of operations:

2010
(Dollars in thousands,	Three months ended,
except per share amounts)	December 31			September 30			June 30		March 31

Interest income	$	4,387		$	4,608		$	4,612	$	4,572
Interest expense		993			1,397			1,431		1,478
Net interest income		3,394			3,211			3,181		3,094
Provision for credit losses		-			300			450		300
Net securities gains		(1	)		176			-		-
Income before income taxes		881			900			318		451
Net income		655			689			322		399
Net income per share (basic and diluted)	$	0.24		$	0.25		$	0.12	$	0.15

2009
(Dollars in thousands,	Three months ended,
except per share amounts)	December 31			September 30			June 30		March 31

Interest income	$	4,673		$	4,749		$	4,689	$	4,533
Interest expense		1,570			1,649			1,655		1,668
Net interest income		3,103			3,100			3,034		2,865
Provision for credit losses		1,747			337			209		150
Net securities gains		402			135			51		(2	)
Income before income taxes		(699	)		648			570		510
Net income		(210	)		527			490		455
Net income per share (basic and diluted)	$	(0.08	)	$	0.20		$	0.18	$	0.16

2008
(Dollars in thousands,	Three months ended,
except per share amounts)	December 31			September 30			June 30		March 31

Interest income	$	4,604		$	4,667		$	4,492	$	4,413
Interest expense		1,661			1,546			1,499		1,548
Net interest income		2,943			3,121			2,993		2,865
Provision for credit losses		700			239			152		55
Net securities gains		50			86			48		7
Income before income taxes		272			(1,915	)		743		625
Net income		1,382			(2,118	)		604		536
Net income per share (basic and diluted)	$	0.47		$	(0.71	)	$	0.20	$	0.18

F-40