Edgar Filing: GLEN BURNIE BANCORP

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, 2011 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 x No ¨

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

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, 2011 was $18,428,889.

The number of shares of common stock outstanding as of March 8, 2012 was 2,722,628.

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

2011 ANNUAL REPORT ON FORM 10-K

Table of Contents

		Page

PART I

Item 1.	Business	3
Item 2.	Properties	16
Item 3.	Legal Proceedings	16
	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	29
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29
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 a remote Automated Teller Machine (“ATM”) location in 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 from 2008 to 2011

The turmoil and economic downturn, which began in, and has continued since 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 $1,145,649 to the provision for loan losses in 2008, $2,442,976 in 2009, $1,050,000 in 2010 and $663,000 for 2011, 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 rising from $35,544 in 2008 to $549,716 in 2009, a more than 1,400% increase. For 2010 and 2011, our FDIC assessments were $464,585 and $572,425 respectively. Despite the economic downturn and these events, which are unusual for us in any year, we realized net income of $1,262,462, $2,064,785, and $2,993,093 for 2009, 2010 and 2011, respectively. 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. 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 2009, 2010 and 2011 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 2011, 2009, 2008, and 2007 fiscal years. In 2011, the increase in the loan portfolio was primarily due to increases in indirect loans, residential mortgages, and installment loans, partially offset by a decrease in commercial mortgages. In 2011, mortgage participations purchased decreased but so did mortgage participations sold. 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.

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

	At December 31,
	2011						2010						2009						2008						2007
(Dollars in Thousands)	$			%			$			%			$			%			$			%			$			%
Mortgage:
Residential	$	107,664			45.29	%	$	102,199			43.62	%	$	95,683			39.81	%	$	87,708			36.85	%	$	76,781			37.98	%
Commercial		67,656			28.46			72,670			31.02			79,845			33.23			76,153			31.99			47,843			23.66
Construction and land development		5,092			2.14			5,363			2.29			1,743			0.73			6,590			2.77			5,876			2.91

Consumer:
Installment		18,048			7.59			16,407			7.00			15,965			6.64			16,451			6.91			17,087			8.45
Credit card		163			0.07			168			0.07			166			0.07			173			0.07			143			0.07
Indirect automobile		31,907			13.42			30,286			12.93			37,092			15.44			43,970			18.47			49,260			24.37
Commercial		7,193			3.03			7,193			3.07			9,801			4.08			6,974			2.94			5,184			2.56
Gross loans		237,723			100.00	%		234,286			100.00	%		240,295			100.00	%		238,019			100.00	%		202,174			100.00	%
Unearned income on loans		(1,058	)					(1,035	)					(839	)					(864	)					(816	)
Gross loans net of unearned income		236,665						233,251						239,456						237,155						201,357
Allowance for credit losses		(3,931	)					(3,400	)					(3,573	)					(2,022	)					(1,604	)
Loans, net	$	232,734					$	229,851					$	235,883					$	235,133					$	199,753

The following table sets forth the maturities for various categories of the loan portfolio at December 31, 2011. Demand loans and loans which have no stated maturity, are treated as due in one year or less. At December 31, 2011, the Bank had $41,444,840 in loans due after one year with variable rates and $166,427,149 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	$	9,950	$	2,667	$	95,047	$	107,664
Commercial		12,741		36,112		18,803		67,656
Construction and land development		1,544		1,034		2,514		5,092
Installment		1,234		7,941		8,873		18,048
Credit Card		3		48		112		163
Indirect automobile		973		20,556		10,378		31,907
Commercial		3,407		-		3,786		7,193
	$	29,852	$	68,358	$	139,513	$	237,723

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 may be originated on either a fixed or 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, 2011, approximately 57.50% of the installment loans in the Bank’s portfolio (other than indirect automobile lending) had been originated for commercial purposes and 42.50% 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 60 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 $3.10 million to any one borrower at December 31, 2011. 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 was permitted to lend up to $4.49 million to any one borrower from and after January 1, 2011. At December 31, 2011, the largest amount outstanding to any one borrower and its related interests was $4,552,000. From and after January 1, 2012, the Bank is permitted to lend up to $4.94 million to any one borrower.

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, if 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 efforts. 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 may 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 may seek a deficiency judgment against the borrower. The Bank follows similar collection procedures with respect to commercial loans.

While the period of economic and credit turbulence continued into 2011, the Bank remains strong and experienced a solid decrease in non-accrual loans as of December 31,2011. 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,
	2011			2010			2009			2008			2007
	(Dollars In Thousands)
Restructured Loans	$	4,108		$	2,844		$	87		$	-		$	578

Non-accrual loans:
Real estate – mortgage:
Residential	$	481		$	976		$	215		$	-		$	-
Commercial		3,192			4,522			2,626			659			-
Real estate - construction		-			-			-			-			-
Installment		75			125			176			208			212
Commercial		1,313			1,360			-			-			-
Total non-accrual loans		5,061			6,983			3,017			867			212

Accruing loans past due 90 days or more
Real estate – mortgage:
Residential		19			-			8			3			512
Commercial		-			-			-			-			-
Real estate - construction		-			-			-			5			-
Installment		-			-			1			26			-
Commercial		-			-			12			-			128
Total accruing loans past due 90 days or more		19			-			21			34			640
Total non-accrual and past due loans	$	5,080		$	6,983		$	3,038		$	901		$	852
Non-accrual and past due loans to gross loans		2.15	%		2.99	%		1.26	%		0.38	%		0.43	%
Allowance for credit losses to non-accrual and past due loans		77.38	%		48.69	%		117.61	%		224.42	%		188.27	%

For the year ended December 31, 2011, interest of $268,407 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. $4,723,624, or 93.3%, of the Bank’s total $5,060,693 non-accrual loans at December 31, 2011 were attributable to 4 borrowers. Two of these borrowers were in bankruptcy at that date. Because of the legal protections afforded to borrowers in bankruptcy, collections on such loans are difficult and the Bank anticipates that such loans may remain delinquent for an extended period of time.

At December 31, 2011, there were loans outstanding, totaling $4,455,029, 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, 2011, the Company had $1,111,000 in real estate acquired in partial or total satisfaction of debt, compared to $215,000 and $25,000 in such properties at each of December 31, 2010 and 2009. This increase for 2011 was the result of a property acquired in 2011, offset by the sale of units in that property, and a write-down on the property acquired in 2010. The increase from 2009 to 2010 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, 2011, 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 2011, the Bank decreased its provision for credit losses even with net charge offs on indirect loans of $142,000. 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,
	2011			2010			2009			2008			2007
	(Dollars In Thousands)
Beginning Balance	$	3,400		$	3,573		$	2,022		$	1,604		$	1,839

Loans charged off
Real estate - mortgage:
Residential		4			66			85			-			-
Commercial		-			825			-			-			-
Real estate - construction		-			-			-			-			-
Installment		606			959			1,070			1,079			591
Credit card & related		-			-			-			-			-
Commercial		6			12			133			2			-
Total		616			1,862			1,288			1,081			591

Recoveries
Real estate - mortgage:
Residential		1			85			-			-			-
Commercial		70			11			-			-			-
Real estate - construction		-			-			-			-			-
Installment		409			497			359			333			258
Credit card & related		-			-			-			-			-
Commercial		4			46			37			20			48
Total		484			639			396			353			306
Net charge offs		132			1,223			892			728			285
Provisions charged to operations		663			1,050			2,443			1,146			50
Ending balance	$	3,931		$	3,400		$	3,573		$	2,022		$	1,604
Average loans	$	233,011		$	234,495		$	239,788		$	219,485		$	199,632
Net charge-offs to average loans		0.06	%		0.53	%		0.37	%		0.33	%		0.14	%

The following table shows the allowance for credit losses broken down by loan category as of December 31, 2011, 2010, 2009, 2008, and 2007:

	At December 31,
	2011						2010
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	$	584			45.29	%	$	196		43.62	%
Commercial		2,013			28.46			2,096		31.02
Real Estate — construction		12			2.14			12		2.29
Installment		228			7.59			196		7.00
Credit Card		-			0.07			-		0.07
Indirect automobile		661			13.42			634		12.93
Commercial		557			3.03			263		3.07
Unallocated		(124	)		-			3		-
Total	$	3,931			100.00	%	$	3,400		100.00	%

	At December 31,
	2009						2008					2007
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	$	162			39.81	%	$	123		36.85	%	$	117		37.98	%
Commercial		2,377			33.23			460		31.99			163		23.66
Real Estate – construction		4			0.73			63		2.77			102		2.91
Installment		146			6.64			161		6.91			55		8.45
Credit Card		-			0.07			-		0.07			-		0.07
Indirect automobile		697			15.44			942		18.47			892		24.37
Commercial		237			4.08			240		2.94			257		2.56
Unallocated		(50	)		-			33		-			18		-
Total	$	3,573			100.00	%	$	2,022		100.00	%	$	1,604		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,
	2011		2010		2009
	(In Thousands)
U.S. Treasury securities	$	-	$	-	$	-
U.S. Government agencies and mortgage backed securities		62,001		52,365		54,030
Obligations of states and political subdivisions		37,165		34,776		30,073
Corporate trust preferred		635		1,793		2,080
Total investment securities	$	99,801	$	88,935	$	86,183

The following table sets forth the scheduled maturities, amortized costs and weighted average yields for the Company’s investment securities portfolio at December 31, 2011:

	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		-		-		-		-			7,234		4.85			54,767		4.15			62,001		4.24
Obligations of states and political subdivisions		-		-		1,033		3.60			305		3.43			35,827		4.47			37,165		4.44
Corporate trust preferred		-		-		-		-			-		-			635		9.25			635		9.25
Total investment securities	$	-		-%	$	1,033		3.60	%	$	7,539		4.79	%	$	91,229		4.30	%	$	99,801		4.34	%

At December 31, 2011, 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 $311,944,661 as of December 31, 2011. 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 $52.45 million under a line of credit from the FHLB of Atlanta as of December 31, 2011.

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, 2011, the Bank had approximately $48.0 million in certificates of deposit and other time deposits of $100,000 or more, including IRA accounts. The following table provides information as to the maturity of all time deposits of $100,000 or more at December 31, 2011:

	Amount (In Thousands)
Three months or less	$	7,193
Over three through six months		4,349
Over six through 12 months		8,057
Over 12 months		28,407
Total	$	48,006

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 $52.45 million line of credit from the FHLB of Atlanta, which is secured by a floating lien on the Bank’s residential first mortgage loans and various federal and agency securities. There was $10 million in a convertible advance under this credit arrangement at December 31, 2011. 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 also has an additional unsecured line of credit in the amount of $5 million from a financial bank, of which nothing was outstanding at December 31. 2011.

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, 2011, the Bank had 108 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.

Since the September 11, 2001 terrorist attacks, governments worldwide have enacted and tightened regulations which can assist in fighting terrorism. 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, 2011, 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	$	647,839		10,000	$	92,487,273

Branches:

Odenton 1405 Annapolis Road Odenton, MD 21113		1969		Owned		181,111		6,000		39,131,227

Riviera Beach 8707 Ft. Smallwood Road Pasadena, MD 21122		1973		Owned		265,174		2,500		33,448,632

Crownsville 1221 Generals Highway Crownsville, MD 21032		1979		Owned		345,704		3,000		54,701,778

Severn 811 Reece Road Severn, MD 21144		1984		Owned		142,872		2,500		27,464,238

New Cut Road 740 Stevenson Road Severn, MD 21144		1995		Owned		1,341,771		2,600		25,501,223

Linthicum Burwood Village Shopping Center Glen Burnie, MD 21060		2005		Leased		115,275		2,500		19,102,477

Severna Park 534 Ritchie Highway Severna Park, MD 21146		2002		Leased		73,388		2,184		20,107,813

Operations Centers:
106 Padfield Blvd. Glen Burnie, MD 21061		1991		Owned		730,983		16,200		N/A

103 Crain Highway, S.E. Glen Burnie, MD 21061		2000		Owned		263,590		3,727		N/A

At December 31, 2011, the Bank owned two foreclosed real estate properties with a total book value of $1,111,000.

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, 2011, 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.	79	President Emeritus
Michael G. Livingston	58	President and Chief Executive Officer
John E. Porter	58	Senior Vice President and Chief Financial Officer
Barbara J. Elswick	60	Senior Vice President and Chief Lending Officer
Joyce A. Ohmer	58	Senior Vice President and Branch Administrator

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.

BARBARA J. ELSWICK was appointed Senior Vice President in February 2005. She has been Chief Lending Officer of the Bank since 2004.

JOYCE A. OHMER was appointed Senior Vice President in November 2004. She has been Branch Administrator of the Bank since 2002.

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 March 8, 2012, there were 416 record holders of the Common Stock. The closing price for the Common Stock on that date was $10.00.

The following table sets forth the high and low sales prices for the Common Stock for each full quarterly period during 2011 and 2010 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.

	2011						2010
Quarter Ended	High		Low		Dividends		High		Low		Dividends

March 31,	$	8.88	$	7.30	$	0.10	$	11.70	$	8.50	$	0.10
June 30,		8.82		7.33		0.10		10.95		9.00		0.10
September 30		9.77		7.85		0.10		10.10		7.74		0.10
December 31		8.24		7.84		0.10		9.60		7.75		0.10

A regular dividend of $0.10 was declared for stockholders’ of record on December 27, 2011, payable on January 5, 2012.

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.

	Year Ended December 31,
	2011			2010			2009			2008			2007
	(Dollars In Thousand Except Per Share Data)
Operations Data:
Net Interest Income	$	13,449		$	12,880		$	12,102		$	11,922		$	11,866
Provision for Credit Losses		663			1,050			2,443			1,146			50
Other Income		2,090			1,899			2,365			2,051			2,157
Other Expense		11,115			11,178			10,995			13,102			10,433
Net Income		2,993			2,065			1,262			404			2,782

Share Data:
Basic Net Income Per Share	$	1.10		$	0.76		$	0.46		$	0.14		$	0.93
Diluted Net Income Per Share		1.10			0.76			0.46			0.14			0.93
Cash Dividends Declared Per Common Share		0.40			0.40			0.40			0.45			0.45
Weighted Average Common Shares Outstanding:
Basic		2,710,455			2,690,218			2,734,524			2,981,124			2,988,796
Diluted		2,710,455			2,690,218			2,734,524			2,981,124			2,988,796

Financial Condition Data:
Total Assets	$	365,260		$	347,067		$	353,397		$	332,502		$	307,274
Loans Receivable, Net		232,734			229,851			235,883			235,133			199,753
Total Deposits		311,945			294,445			294,358			269,768			252,917
Long Term Borrowings		20,000			20,000			27,034			27,072			17,107
Junior Subordinated Debentures		-			-			5,155			5,155			5,155
Total Stockholders’ Equity		31,211			26,333			25,149			27,908			29,736

Performance Ratios:
Return on Average Assets		0.84	%		0.58	%		0.36	%		0.13	%		0.89	%
Return on Average Equity		10.11			7.75			4.87			1.49			9.60
Net Interest Margin (1)		4.39			4.05			4.29			4.31			4.39
Dividend Payout Ratio		36.22			52.11			85.59			332.98			48.33

Capital Ratios:
Average Equity to Average Assets		8.26	%		7.45	%		7.37	%		8.99	%		9.28	%
Leverage Ratio		8.20			7.64			8.86			10.50			11.34
Total Risk-Based Capital Ratio		14.35			12.58			14.40			14.93			17.50

Asset Quality Ratios:
Allowance for Credit Losses to Gross Loans		1.66	%		1.45	%		1.18	%		0.85	%		0.80	%
Non-accrual and Past Due Loans to Gross Loans		2.15	%		2.99	%		1.26	%		0.38	%		0.43	%
Allowance for Credit Losses to Non-Accrual and Past Due Loans		77.38	%		48.69	%		117.61	%		224.42	%		188.27	%
Net Loan Charge-offs (Recoveries) to Average Loans		0.06	%		0.53	%		0.37	%		0.33	%		0.14	%

(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 2011, net interest income before provision for credit losses increased to $13,449,385 from $12,880,012 in 2010, a 4.42% increase. Total interest income decreased from $18,178,967 in 2010 to $17,131,965 in 2011, a 5.76% decrease. Interest expense for 2011 totaled $3,682,580, a 30.50% decrease from $5,298,955 in 2010. Net income in 2011 was $2,993,093 compared to 2,064,785 in 2010. The increase in net income was primarily due to the reduction in interest expense and in the provision for loan losses (from $1,050,000 in 2010 to $663,000 in 2011) offset by a reduction in interest income and an increase in income taxes.

The Bank and, as a result, the Company, experienced continued performance improvement in 2011. In spite of the continued lackluster performance of the economy in general, our continued conservative lending decisions resulted in a marked improvement in loan charge offs in 2011. In fact, we had declines in charge offs across all loan types. As a result, our net charge offs declined from $1,223,000 for 2010 to $132,000 in 2011, while outstanding loans, net of the allowance for loan losses, increased from $229,851,000 to $232,734,000.

Comparison of Results of Operations for the Years Ended December 31, 2011, 2010 and 2009

General. For the year ended December 31, 2011, the Company reported consolidated net income of $2,993,093 ($1.10 basic and diluted earnings per share) compared to consolidated net income of $2,064,785 ($0.76 basic and diluted earnings per share) for the year ended December 31, 2010 and consolidated net income of $1,262,462 ($0.46 basic and diluted earnings per share) for the year ended December 31, 2009. The increase in the 2011 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 loan and U.S. Government agency securities income and an increase in income taxes. 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.

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.

Over the past several years, the Bank had in place a strategy of reducing its portfolio of above market rate savings products and achieved a significant reduction in interest expense on deposits. In 2011, the Bank was able to continue this trend of interest expense reduction by focusing on the accumulation and retention of core deposits by offering rates appropriate for our market place. The Bank was also able to increase the portfolio of higher yielding commercial loans and our mortgage loan portfolio.

Consolidated net interest income for the year ended December 31, 2011 was $13,449,385 compared to $12,880,012 for the year ended December 31, 2010 and $12,101,787 for the year ended December 31, 2009. The $569,373 increase for the most recent year was primarily due to decreases in most areas of interest income, except for state and municipal securities, offset by greater decreases in interest expense (especially junior subordinated debentures). The $778,225 increase for 2010 compared to 2009 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 interest income, net of tax, for 2011 was $14,294,000, a $675,406 or 4.96% increase from the after tax net interest income for 2010, which was $13,618,449, a $811,390 or 6.33% increase from the $12,807,059 after tax net interest income for 2009.

Interest expense decreased from $5,298,955 in 2010 to $3,682,580 in 2011, a $1,616,375 or a 30.50% decrease, primarily due to a decrease in deposit expense, long-term borrowings (due to the repayment of the $7 million Federal Home Loan Bank of Atlanta loan in September 2010), and the repayment in 2010 of the junior subordinated debentures. 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. Net interest margin for the year ended December 31, 2011 was 4.39% compared to 4.05% and 4.29% for the years ended December 31, 2010 and 2009, 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,
	2011			VS.			2010			2010			VS.			2009
				Change Due To:									Change Due To:
	Increase/ Decrease			Rate			Volume			Increase/ Decrease			Rate			Volume
	(In Thousands)
ASSETS:
Interest-earning assets:
Federal funds sold	$	(4	)	$	-		$	(4	)	$	(2	)	$	-		$	(2	)
Interest-bearing deposits		3			4			(1	)		1			2			(1	)

Investment securities:
U.S. Treasury securities, obligations of U.S. government agencies and mortgage-backed securities		(428	)		(442	)		14			62			(461	)		523
Obligations of states and political subdivisions(1)		316			26			290			121			-			121
All other investment securities		(52	)		28			(80	)		(23	)		(10	)		(13	)
Total investment securities		(164	)		(388	)		224			160			(471	)		631

Loans, net of unearned income:
Demand, time and lease		(122	)		(29	)		(93	)		76			36			40
Mortgage and construction		(261	)		(478	)		217			(177	)		(307	)		130
Installment and credit card		(364	)		(132	)		(232	)		(501	)		77			(578	)
Total gross loans(2)		(747	)		(639	)		(108	)		(602	)		(194	)		(408	)
Allowance for credit losses		-			-			-			-			-			-
Total net loans		(747	)		(639	)		(108	)		(602	)		(194	)		(408	)
Total interest-earning assets	$	(912	)	$	(1,023	)	$	111		$	(443	)	$	(663	)	$	220

LIABILITIES:
Interest-bearing deposits:
Savings and NOW	$	13		$	-		$	13		$	14		$	-		$	14
Money market		(13	)		(16	)		3			10			-			10
Other time deposits		(659	)		(626	)		(33	)		(1,264	)		(1,225	)		(39	)
Total interest-bearing deposits		(659	)		(642	)		(17	)		(1,240	)		(1,225	)		(15	)
Non-interest-bearing deposits		-			-			-			-			-			-
Borrowed funds		(958	)		(473	)		(485	)		(3	)		169			(172	)
Total interest-bearing liabilities	$	(1,617	)	$	(1,115	)	$	(502	)	$	(1,243	)	$	(1,056	)	$	(187	)

(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,
	2011								2010								2009
	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	$	2,258		$	6		0.25	%	$	3,797		$	10		0.25	%	$	4,843		$	12		0.26	%
Interest-bearing deposits		10,477			19		0.19			11,188			16		0.14			12,337			15		0.12

Investment securities:
U.S. Treasury securities, obligations of U.S. government agencies and mortgage-backed securities		57,259			1,488		2.60			56,868			1,916		3.37			44,367			1,854		4.18
Obligations of states and political subdivisions(1)		35,602			2,450		6.88			31,341			2,134		6.81			29,557			2,013		6.81
All other investment securities		1,033			114		11.07			1,995			166		8.32			2,138			189		8.84
Total investment securities		93,894			4,052		4.49			90,204			4,216		4.67			76,062			4,056		5.33

Loans, net of unearned income:
Demand, time and lease		7,195			353		4.90			8,946			475		5.31			8,132			399		4.91
Mortgage and construction		179,271			10,332		5.76			175,812			10,593		6.03			173,741			10,770		6.20
Installment and credit card		46,544			3,214		6.91			49,737			3,578		7.19			57,915			4,079		7.04
Total gross loans(2)		233,010			13,899		5.96			234,495			14,646		6.25			239,788			15,248		6.36
Allowance for credit losses		(3,630	)							(3,874	)							(2,037	)
Total net loans		229,380			13,899		6.06			230,621			14,646		6.35			237,751			15,248		6.41
Total interest-earning assets		336,009			17,976		5.35			335,810			18,888		5.62			330,993			19,331		5.84
Cash and due from banks		3,097								3,182								4,488
Other assets		18,914								18,696								16,709
Total assets	$	358,020							$	357,688							$	352,192

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing deposits:
Savings and NOW	$	80,707			189		0.23	%	$	75,541			176		0.23	%	$	71,124			162		0.23	%
Money market		17,578			54		0.31			16,756			67		0.40			14,363			57		0.40
Other time deposits		135,755			2,795		2.06			136,822			3,454		2.52			137,764			4,718		3.42
Total interest-bearing deposits		234,040			3,038		1.30			229,119			3,697		1.61			223,251			4,937		2.21
Short-term borrowed funds		1,024			4		0.37			522			1		0.29			262			0		0.02
Long-term borrowed funds		20,000			640		3.20			28,747			1,601		5.57			32,206			1,605		4.98
Total interest-bearing liabilities		255,064			3,682		1.44			258,389			5,299		2.05			255,719			6,542		2.56

Non-interest-bearing deposits		72,280								71,212								67,572
Other liabilities		1,907								1,451								2,957
Stockholders’ equity		28,769								26,636								25,944
Total liabilities and equity	$	358,020							$	357,688							$	352,192
Net interest income				$	14,294							$	13,589							$	12,789
Net interest spread							3.91	%							3.57	%							3.28	%
Net interest margin							4.39	%							4.05	%							4.29	%

1 Tax equivalent basis. The incremental tax rate applied was 25.64% for 2011 and 14.88% for 2010.

2 Non-accrual loans included in average balance.

Provision for Credit Losses. During the year ended December 31, 2011, the Company made a provision of $663,000 for credit losses, compared to a provision of $1,050,000 and $2,442,976 for credit losses for the years ended December 31, 2010 and 2009, respectively. The decrease in 2011 was primarily due to many of the delinquent commercial real estate loans already having specific provisions. At December 31, 2011, the allowance for credit losses equaled 77.38% of non-accrual and past due loans compared to 48.69% and 117.61% at December 31, 2010 and 2009, respectively. During the year ended December 31, 2011, the Company recorded net charge-offs of $132,000 compared to $1,223,000 and $892,000 in net charge-offs during the years ended December 31, 2010 and 2009, 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 increased from $1,898,607 in 2010 to $2,089,530 in 2011, a $190,923, or 10.06% increase. The increase was primarily due to an increase in gains on securities. 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 Expenses. Other expenses, which consist of non-interest operating expenses, decreased from $11,178,323 in 2010 to $11,115,412 in 2011, a $62,911 or 0.57% decrease. This decrease was primarily due to a decrease in employee benefits and impairment on securities offset by increases in salaries and wages and other expenses (primarily FDIC Assessments and legal expenses). Other 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.

Income Taxes. During the year ended December 31, 2011, the Company recorded an income tax expense of $767,410, compared to an income tax expense of $485,511 for the year ended December 31, 2010. This increase was due to a lesser amount contributed to provision for credit losses in 2011 and an increase in net interest income. 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.

Comparison of Financial Condition at December 31, 2011, 2010 and 2009

The Company’s total assets increased to $365,260,263 at December 31, 2011 from $347,067,276 at December 31, 2010. 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 net loan portfolio increased to $232,734,257 at December 31, 2011 compared to $229,850,888 at December 31, 2010 and $235,882,862 at December 31, 2009. The increase in the loan portfolio during the 2011 period is primarily due to an increase in indirect automobile loans, residential mortgages, and installment loans. They were partially offset by decreases in commercial mortgages. 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.

During 2011, the Company’s total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $102,866,555, a $15,598,196 or 17.88%, increase from $87,268,359 at December 31, 2010. This increase is primarily attributable to an increase in mortgage backed securities, Government agency CMO’s and Non-MD municipals. These were partially offset by decreases in U.S. Government agencies and corporate trust preferred. 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.

Deposits as of December 31, 2011 totaled $311,944,661, an increase of $17,499,833, or 5.95%, from the $294,444,828 total as of December 31, 2010. 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. Demand deposits as of December 31, 2011 totaled $73,339,463, a $5,283,304, or 7.76%, increase from $68,056,159 at December 31, 2010. NOW and Super NOW accounts, as of December 31, 2011, increased by $355,681, or 1.51% from their 2010 level to $24,039,056. Money market accounts increased by $1,373,506, or 8.22%, from their 2010 level, to total $18,084,117 at December 31, 2011. Savings deposits increased by $7,056,225, or 13.31%, from their 2010 level, to $60,290,687 at December 31, 2011. Time deposits over $100,000 totaled $48,006,372 on December 31, 2011, an increase of $3,813,143, or 8.63% from December 31, 2010. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $88,183,704 on December 31, 2011, a $610,006 or 0.69% decrease from December 31, 2010.

Total stockholders’ equity as of December 31, 2011 increased by $4,878,184, or 18.53%, from the 2010 period. The increase was attributed to an increase in earnings less the cash dividends paid, net of dividends reinvested and the increase in accumulated other comprehensive income. 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.

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, 2011, 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, 2011.

	0-3 Months			Over 3 To 12 Months			Over 1 Through 5 Years			Over 5 Years			Total
	(Dollars In Thousands)
Assets:
Cash and due from banks	$	-		$	-		$	-		$	-		$	9,300
Federal funds and overnight deposits		654			-			-			-			654
Securities		-			220			826			101,821			102,867
Loans		12,826			12,037			68,358			139,513			232,734
Fixed Assets		-			-			-			-			4,108
Other Assets		-			-			-			-			15,597

Total assets	$	13,480		$	12,257		$	69,184		$	241,334		$	365,260

Liabilities:
Demand deposit accounts	$	-		$	-		$	-		$	-		$	73,339
NOW accounts		24,039			-			-			-			24,039
Money market deposit accounts		18,084			-			-			-			18,084
Savings accounts		60,070			221			-			-			60,291
IRA accounts		2,463			10,440			27,522			1,544			41,969
Certificates of deposit		17,617			34,389			41,342			874			94,222
Short-term borrowings		255			-			-			-			255
Long-term borrowings		-			-			-			20,000			20,000
Other liabilities		-			-			-			-			1,850
Stockholders’ equity		-			-			-			-			31,211

Total liabilities and Stockholders’ equity	$	122,528		$	45,050		$	68,864		$	22,418		$	365,260

GAP	$	(109.048	)	$	(32.793	)	$	320		$	218,916
Cumulative GAP		(109.048	)		(141.841	)		(141,521	)		77,395
Cumulative GAP as a % of total assets		(29.87	)%		(38.86	)%		(38.77	)%		21.20	%

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, 2011, 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		-6.9	%		-4.5	%		1.9	%		1.5	%
% Change in Economic Value of Equity		-21.1	%		-13.9	%		-1.2	%		-10.5	%

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, 2011, totaled $9,953,590, an increase of $953,287 or 10.60%, from the December 31, 2010 total of $9,000,303. This increase was due to the sales of mortgage backed securities, in the month of December, in the normal course of business.

As of December 31, 2011, the Bank was permitted to draw on a $52.45 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, 2011, there was nothing outstanding under the daily rate credit. 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, 2011 and a $5 million unsecured line of credit from a financial bank.

Federal banking regulations require the Company and the Bank to maintain specified levels of capital. At December 31, 2011, the Company was in compliance with these requirements with a leverage ratio of 8.20%, a Tier 1 risk-based capital ratio of 13.09% and total risk-based capital ratio of 14.35%. At December 31, 2011, 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 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 Company’s compliance with this ASU resulted in additional disclosures in the Company’s consolidated financial statements regarding its loan portfolio and related allowance for loan losses but did not change the accounting for loans or the allowance.

In April 2011, the FASB issued ASU No. 2011-02, Receivable (Topic 310), A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The main objective of the ASU is to clarify a creditor’s evaluation of whether in modifying a loan it has granted a concession in circumstances that qualify the loan as a Troubled Debt Restructured (TDR) loan. These loans are subject to various accounting and disclosure requirements. The ASU is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Certain disclosures are required for loans considered as TDR loans resulting from the application of the ASU that were not considered TDR loans under prior guidance. The Company’s compliance with ASU No. 2011-02 did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The main objective of the ASU is to conform the requirements for measuring fair value and the disclosure information under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for the disclosure about fair value measurements. Other amendments clarify existing requirements and change particular principles or requirements for measuring fair value or disclosing information about fair value measurements. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011, early application for public entities is not permitted. The Company will review the requirements of ASU No. 2011-04 and comply with its requirements. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements

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, 2011.

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 2011 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 2012 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-2
Consolidated Balance Sheets as of December 31, 2011, 2010 and 2009	F-3
Consolidated Statements of Income for the Years Ended December 31, 2011, 2010 and 2009	F-4
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2010 and 2009	F-5
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2011, 2010 and 2009	F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009	F-7
Notes to Consolidated Financial Statements	F-10

(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 15, 2012	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 15, 2012
Michael G. Livingston	and Director

/s/ F. William Kuethe, Jr.	President Emeritus and Director	March 15, 2012
F. William Kuethe, Jr.

/s/ John E. Porter	Senior Vice President and Chief	March 15, 2012
John E. Porter	Financial Officer

	Chairman of the Board and Director	March __, 2012
John E. Demyan

	Director	March __, 2012
Shirley E. Boyer

/s/ Thomas Clocker	Director	March 15, 2012
Thomas Clocker

/s/ Norman E. Harrison, Jr.	Director	March 15, 2012
Norman E. Harrison, Jr.

/s/ F. W. Kuethe, III	Director	March 15, 2012
F. W. Kuethe, III

	Director	March __, 2012
Charles Lynch

/s/ Edward L. Maddox	Director	March 15, 2012
Edward L. Maddox

/s/ William N. Scherer, Sr.	Director	March 15, 2012
William N. Scherer, Sr.

	Director	March __, 2012
Karen B. Thorwarth

	Director	March __, 2012
Mary Lou Wilcox

CONTENTS

	Page(s)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2

FINANCIAL STATEMENTS
Consolidated Balance Sheets	F-3
Consolidated Statements of Income	F-4
Consolidated Statements of Comprehensive Income	F-5
Consolidated Statements of Changes in Stockholders’ Equity	F-6
Consolidated Statements of Cash Flows	F-7 - F-8
Notes to Consolidated Financial Statements	F-9 - F-44

F-1

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, 2011, 2010, and 2009, 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, 2011, 2010, and 2009, 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.

TGM GROUP LLC

Salisbury, Maryland

March 8, 2012

F-2

Glen Burnie Bancorp and Subsidiaries

Consolidated Balance Sheets

December 31,	2011		2010			2009

Assets
Cash and due from banks	$	6,877,110	$	6,492,313		$	6,993,811
Interest-bearing deposits in other financial institutions		2,422,579		1,567,673			3,748,387
Federal funds sold		653,901		940,317			691,624
Cash and cash equivalents		9,953,590		9,000,303			11,433,822
Investment securities available for sale, at fair value		102,866,555		87,268,359			84,462,605
Federal Home Loan Bank stock, at cost		1,520,400		1,745,100			1,858,300
Maryland Financial Bank stock		30,000		100,000			100,000
Common stock in the Glen Burnie Statutory Trust I		-		-			155,000
Ground rents, at cost		175,200		178,200			184,900
Loans, less allowance for credit losses 2011 $3,930,924; 2010 $3,399,516; 2009 $3,572,528;		232,734,257		229,850,888			235,882,862
Premises and equipment, at cost, less accumulated depreciation		4,107,707		4,123,616			4,120,597
Accrued interest receivable on loans and investment securities		1,541,519		1,538,883			1,626,792
Deferred income tax benefits		1,680,899		3,348,974			3,129,435
Other real estate owned		1,110,696		215,000			25,000
Cash value of life insurance		8,433,155		7,954,062			7,702,656
Other assets		1,106,285		1,743,891			2,714,728

Total assets	$	365,260,263	$	347,067,276		$	353,396,697

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	73,339,463	$	68,056,159		$	67,807,699
Interest-bearing		238,605,198		226,388,669			226,550,138
Total deposits		311,944,661		294,444,828			294,357,837
Short-term borrowings		254,749		4,273,948			81,290
Long-term borrowings		20,000,000		20,000,000			27,033,711
Junior subordinated debentures owed to unconsolidated subsidiary trust		-		-			5,155,000
Dividends payable		271,791		231,579			230,285
Accrued interest payable on deposits		48,101		55,131			112,599
Accrued interest payable on junior subordinated debentures		-		-			171,518
Other liabilities		1,530,131		1,729,144			1,105,335
Total liabilities		334,049,433		320,734,630			328,247,575

Commitments and contingencies

Stockholders' equity:
Common stock, par value $1, authorized 15,000,000 shares; issued and outstanding 2011 2,717,909 shares; 2010 2,702,091 shares; 2009 2,683,015 shares;		2,717,909		2,702,091			2,683,015
Surplus		9,437,605		9,334,810			9,190,911
Retained earnings		17,209,386		15,300,344			14,311,508
Accumulated other comprehensive income (loss), net of tax		1,845,930		(1,004,599	)		(1,036,312	)
Total stockholders' equity		31,210,830		26,332,646			25,149,122

Total liabilities and stockholders' equity	$	365,260,263	$	347,067,276		$	353,396,697

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 Income

Years Ended December 31,	2011			2010			2009

Interest income on:
Loans, including fees	$	13,898,411		$	14,646,011		$	15,248,717
U.S. Government agency securities		1,488,467			1,915,845			1,854,201
State and municipal securities		1,605,648			1,400,651			1,308,116
Corporate trust preferred securities		114,312			166,085			189,012
Federal funds sold		5,705			9,632			12,428
Other		19,422			40,743			31,823
Total interest income		17,131,965			18,178,967			18,644,297

Interest expense on:
Deposits		3,038,340			3,696,631			4,937,282
Short-term borrowings		3,764			1,492			49
Long-term borrowings		640,476			952,705			1,058,749
Junior subordinated debentures		-			648,127			546,430
Total interest expense		3,682,580			5,298,955			6,542,510

Net interest income		13,449,385			12,880,012			12,101,787

Provision for credit losses		663,000			1,050,000			2,442,976

Net interest income after provision for credit losses		12,786,385			11,830,012			9,658,811

Other income:
Service charges on deposit accounts		626,935			648,183			693,725
Other fees and commissions		814,425			823,854			817,559
Gains on investment securities, net		408,646			175,164			585,882
Income on life insurance		239,524			251,406			268,083
Total other income		2,089,530			1,898,607			2,365,249

Other expenses:
Salaries and wages		4,931,266			4,856,835			4,792,480
Employee benefits		1,643,581			1,823,669			1,503,848
Occupancy		846,591			830,105			871,081
Furniture and equipment		814,006			761,997			761,462
Other expenses		2,788,040			2,643,509			2,989,201
Total impairment losses on investment securities		291,943			979,322			1,179,652
Portion of impairment losses recognized in other comprehensive income (before taxes)		(200,015	)		(717,114	)		(1,102,873	)
Net impairment loss on investment securities		91,928			262,208			76,779
Total other expenses		11,115,412			11,178,323			10,994,851

Income before income taxes		3,760,503			2,550,296			1,029,209

Federal and state income taxes (benefits)		767,410			485,511			(233,253	)

Net income	$	2,993,093		$	2,064,785		$	1,262,462

Basic and diluted earnings per share of common stock	$	1.10		$	0.76		$	0.46

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 Comprehensive Income

Years Ended December 31,	2011			2010			2009

Net income	$	2,993,093		$	2,064,785		$	1,262,462

Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) arising during the period (net of deferred taxes (benefits) 2011 $2,008,578; 2010 ($13,677); 2009 $18,260);		3,041,274			(20,709	)		27,648
Reclassification adjustment for impairment loss included in net income (net of deferred tax benefits 2011 $8,722 2010 $104,293; 2009 $30,539);		13,206			157,915			46,240
Reclassification adjustment for gains included in net income (net of deferred taxes 2011 $134,696; 2010 $69,671; 2009 $233,034)		(203,950	)		(105,493	)		(352,847	)
Total other comprehensive income (loss)		2,850,530			31,713			(278,959	)

Comprehensive income	$	5,843,623		$	2,096,498		$	983,503

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 Changes in Stockholders' Equity

Years Ended December 31, 2011, 2010, and 2009

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

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 loss, 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

Net income		-			-			-			2,993,093			-			2,993,093
Cash dividends, $.40 per share		-			-			-			(1,084,051	)		-			(1,084,051	)
Dividends reinvested under dividend reinvestment plan		15,818			15,818			102,795			-			-			118,613
Other comprehensive income, net of tax		-			-			-			-			2,850,529			2,850,529

Balances, December 31, 2011		2,717,909		$	2,717,909		$	9,437,605		$	17,209,386		$	1,845,930		$	31,210,830

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

Years Ended December 31,	2011			2010			2009

Cash flows from operating activities:
Net income	$	2,993,093		$	2,064,785		$	1,262,462
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization, and accretion		1,310,578			1,001,488			652,780
Provision for credit losses		663,000			1,050,000			2,442,976
Deferred income tax benefits, net		(214,529	)		(240,485	)		(658,719	)
Gains on disposals of assets, net		(421,217	)		(248,221	)		(569,428	)
Provision on losses of other real estate owned		40,000			-			-
Impairment losses on investment securities		91,928			262,208			76,779
Income on investment in life insurance		(479,093	)		(251,406	)		(268,083	)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable		(2,636	)		87,909			53,600
Decrease (increase) in other assets		632,311			869,991			(1,838,514	)
(Decrease) increase in accrued interest payable		(7,030	)		(228,986	)		(26,980	)
(Decrease) increase in other liabilities		(199,013	)		623,809			(167,572	)

Net cash provided by operating activities		4,407,392			4,991,092			959,301

Cash flows from investing activities:
Maturities of available for sale mortgage-backed securities		14,206,384			13,219,687			7,612,135
Sales of available for sale debt securities		21,796,185			9,073,406			24,920,635
Purchases of available for sale mortgage-backed securities		(39,052,520	)		(18,958,955	)		(54,787,147	)
Purchases of other available for sale investment securities		(8,306,325	)		(6,748,849	)		(4,456,293	)
Purchase of FHLB stock		224,700			113,200			(90,700	)
Redemption of common stock in the Glen Burnie Staturtory Trust I		-			155,000			-
(Increase) decrease in loans, net		(4,853,572	)		4,469,727			(3,218,217	)
Proceeds from sales of other real estate		371,507			450,827			548,994
Proceeds from sales of premises and equipment		15,932			-			-
Purchases of premises and equipment		(411,804	)		(377,912	)		(1,398,320	)

Net cash (used) provided by investing activities		(16,009,513	)		1,396,131			(30,868,913	)

Cash flows from financing activities:
Increase (decrease) in noninterest-bearing deposits, NOW accounts, money market accounts, and savings accounts, net		5,283,304			248,460			4,268,940
Increase (decrease) in time deposits, net		12,216,529			(161,469	)		20,321,299
(Decrease) increase in short-term borrowings		(4,019,199	)		4,192,658			(548,565	)
Repayments of long-term borrowings		-			(7,033,711	)		(38,001	)
Cash dividends paid		(1,043,839	)		(1,074,655	)		(1,236,100	)
Common stock dividends reinvested		118,613			162,975			173,667
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	)

Net cash provided (used) by financing activities		12,555,408			(8,820,742	)		20,105,531

Increase (decrease) in cash and cash equivalents		953,287			(2,433,519	)		(9,804,081	)

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

Cash and cash equivalents, end of year	$	9,953,590		$	9,000,303		$	11,433,822

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

F-7

Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

(Continued)

Years Ended December 31,	2011		2010		2009

Supplementary Cash Flow Information:
Interest paid	$	3,689,610	$	5,527,941	$	6,569,490
Income taxes paid		900,000		275,000		1,125,000
Total decrease (increase) in unrealized depreciation on available for sale securities		4,733,133		52,659		(463,192	)

Supplementary Noncash Investing Activities:
Loans converted to other real estate		1,307,203		512,247		25,000

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

F-8

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-9

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-10

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.

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.

Troubled Debt Restructurings:

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a troubled debt restructuring. Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches non-accrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.

Summary of Significant Accounting Policies (continued)

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 $1,307,203, $512,247, and $25,000 for the years ended December 31, 2011, 2010, and 2009, respectively. The Bank financed no sales of OREO for 2011, 2010, or 2009, respectively.

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, 2011, 2010, and 2009, certain loans existed which management considered impaired (See Note 4). During the years ended December 31, 2011 and 2010, 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, accumulated securities discount accretion, and net unrealized appreciation on investment securities available for sale.

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.

Summary of Significant Accounting Policies (continued)

Credit Risk:

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

Cash and Cash Equivalents:

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

Accounting for Stock Options:

The Company follows 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 $4,573,000, $4,700,000, and $5,026,000 during the years ended December 31, 2011, 2010, and 2009, respectively.

Note 3. Investment Securities

Investment securities are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2011	Cost		Gains		Losses		Value

Available for sale:
U.S. Government agencies	$	28,360	$	-	$	-	$	28,360
State and municipal		37,165,358		1,808,576		46,811		38,927,123
Corporate trust preferred		635,239		-		200,015		435,224
Mortgage-backed		61,972,542		1,606,338		103,032		63,475,848

	$	99,801,499	$	3,414,914	$	349,858	$	102,866,555

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Investment Securities (continued)

			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

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, 2011 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	$	-	$	-	$	-	$	-	$	-	$	-
State and Municipal		408,048		3,701		512,670		43,110		920,718		46,811
Corporate trust preferred		-		-		435,249		200,015		435,249		200,015
Mortgaged-backed		10,066,939		91,792		715,338		11,240		10,782,277		103,032

	$	10,474,987	$	95,493	$	1,663,257	$	254,365	$	12,138,244	$	349,858

At December 31, 2011, 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, 2011 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.

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Investment Securities (continued)

During the first quarter of 2011, the Company took an additional write down of $21,928 on the trust preferred securities to bring the book value into alignment with the net present value of $635,228 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 future defaults on the currently performing financial institutions of 75 basis points applied annually with a 15% recovery after a two year lag on both current and future defaulting financial institutions. At year-end, the Company retested for possible OTTI by using a more stringent test by recalculating the net present value using a default rate of 150 basis points applied annually with a 0% recovery. The testing resulted in a net present value above the current book value.

The stock of Maryland Financial Bank is not readily marketable. During 2011, the stock was written down $70,000 due to the price of a new stock offering, which price was a discount to par.

During 2010, the Company also took a write down of $110,208 on the same trust preferred securities, 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.

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 the same trust preferred securities above 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.

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, 2011, 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, 2011, the Bank held 5 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, 2011, 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.

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Investment Securities (continued)

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

	2011		2010		2009

Estimated credit losses, beginning of year	$	3,154,987	$	2,892,779	$	2,816,000
Credit losses - no previous OTTI recognized		70,000		-		76,779
Credit losses - previous OTTI recognized		21,928		262,208		-

Estimated credit losses, end of year	$	3,246,915	$	3,154,987	$	2,892,779

Contractual maturities of investment securities at December 31, 2011, 2010, and 2009 are shown below. Actual maturities may differ from contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities have no stated maturity and primarily reflect investments in various Pass-through and Participation Certificates issued by the Federal National Mortgage Association and the Government National Mortgage Association. Repayment of mortgage-backed securities is affected by the contractual repayment terms of the underlying mortgages collateralizing these obligations and the current level of interest rates.

	Available for Sale
	Amortized		Fair
December 31, 2011	Cost		Value

Due within one year	$	-	$	-
Due over one to five years		1,032,792		1,046,248
Due over five to ten years		304,998		334,044
Due over ten years		36,491,167		38,010,415
Mortgage-backed, due in monthly installments		61,972,542		63,475,848

	$	99,801,499	$	102,866,555

December 31, 2010

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

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Investment Securities (continued)

Proceeds from sales of available for sale securities prior to maturity totaled $21,796,185, $9,073,406, and $24,920,635 for the years ended December 31, 2011, 2010, and 2009, respectively. The Bank realized gains of $434,113 and losses of $25,467 on those sales for 2011. 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. 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 $161,190, $69,674, and $233,034 for the years ended December 31, 2011, 2010, and 2009, respectively.

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.

Note 4. Loans and Allowance

Major categories of loans are as follows:

	2011			2010			2009
Mortgage:
Residential	$	107,664,598		$	102,199,134		$	95,683,441
Commercial		67,655,908			72,669,909			79,845,030
Construction and land development		5,091,870			5,363,232			1,742,515
Demand and time		7,193,074			7,193,070			9,800,625
Installment		50,118,030			46,860,351			53,222,692
		237,723,480			234,285,696			240,294,303
Unearned income on loans		(1,058,299	)		(1,035,292	)		(838,913	)
		236,665,181			233,250,404			239,455,390
Allowance for credit losses		(3,930,924	)		(3,399,516	)		(3,572,528	)

	$	232,734,257		$	229,850,888		$	235,882,862

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 $31,907,000, $30,286,000, and $37,092,000 of such loans at December 31, 2011, 2010, and 2009, 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.

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans and Allowance (continued)

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, 2011, 2010, and 2009, the amounts of such loans outstanding totaled $4,887,753, $5,109,539, and $5,137,397, respectively. During 2011, loan additions and repayments totaled $1,453,522 and $1,675,308, respectively.

Allowance for Loan Losses

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented the loan portfolio into the following classifications:

Commercial and Industrial;

Commercial Real Estate;

Consumer and Indirect;

Residential Real Estate.

Each of these segments are reviewed and analyzed quarterly using the average historical charge-offs over a current three year period for their respective segments as well as the following qualitative factors:

Changes in the levels and trends in delinquencies, nonaccruals, classified assets and troubled debt restructurings

Changes in the nature and volume of the portfolio

Effects of any changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices

Changes in the experience, ability, and depth of management and staff

Changes in national and local economic conditions and developments, including the condition of various market segments

Changes in the concentration of credits within each pool

Changes in the quality of the Bank’s loan review system and the degree of oversight by the Board

Changes in external factors such as competition and the legal environment including Regulation B

Changes in the underlying collateral for collateral dependent loans

The above factors result in a FAS 5, as codified in FASB ASC 450-10- 20, calculated reserve for environmental factors.

All credit exposures graded at or above a rating of “4” with outstanding balances (see ratings on page 21) are to be reviewed no less than quarterly for the purpose of determining if a specific allocation is needed for that credit. The determination for a specific reserve is evaluated relative to the general reserve factor for assets of the same type and grade. If a specific reserve is appropriate and exceeds the general reserve factor, a specific reserve is to be established. Otherwise, the asset is included in the portfolio of assets that comprise the base upon which the general reserve is calculated. The establishment of a specific reserve does not necessarily mean that the credit with the specific reserve will definitely incur loss at the reserve level. It is only an estimation of potential loss based upon anticipated events. A specific reserve will not be established unless loss elements can be determined and quantified based on known facts. The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio as of December 31, 2011.

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans and Allowance (continued)

The following table presents the total allowance by loan segment:

	Commercial						Consumer
	and			Commercial			and			Residential
2011	Industrial			Real Estate			Indirect			Real Estate			Unallocated			Total

Balance, beginning of year	$	263,251		$	2,108,223		$	829,517		$	196,275		$	2,250		$	3,399,516
Provision for credit losses		295,525			(165,691	)		256,886			402,163			(125,883	)		663,000
Recoveries		4,010			70,430			408,889			1,475			-			484,804
Loans charged off		(5,617	)		-			(606,678	)		(4,101	)		-			(616,396	)

Balance, end of year	$	557,169		$	2,012,962		$	888,614		$	595,812		$	(123,633	)	$	3,930,924

Individually evaluated for impairment:
Balance in allowance	$	455,735		$	1,641,711		$	44,235		$	411,423		$	-		$	2,553,104
Related loan balance		730,061			6,502,986			100,455			1,703,322			-			9,036,824

Collectively evaluated for impairment:
Balance in allowance	$	101,434		$	371,251		$	844,379		$	184,389		$	(123,633	)	$	1,377,820
Related loan balance		6,463,013			64,570,908			50,017,575			107,635,160			-			228,686,656

	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

Individually evaluated for impairment:
Balance in allowance	$	180,736		$	1,691,887		$	20,000		$	32,146		$	-		$	1,924,769
Related loan balance		481,847			6,605,317			77,358			427,204			-			7,591,726

Collectively evaluated for impairment:
Balance in allowance	$	82,515		$	416,336		$	809,517		$	164,129		$	2,250		$	1,474,747
Related loan balance		6,711,223			69,844,314			46,782,993			103,355,240			-			226,693,770

	2009
Balance, beginning of year	$	2,021,690
Provision for credit losses		2,442,976
Recoveries		395,584
Loans charged off		(1,287,722	)

Balance, end of year	$	3,572,528

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans and Allowance (continued)

Credit Quality Information

The following table represents credit exposures by creditworthiness category for the year ending December 31, 2011. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The Bank’s internal creditworthiness is based on experience with similarly graded credits. Loans that trend upward toward higher credit grades typically have less credit risk and loans that migrate downward typically have more credit risk.

The Bank’s internal risk ratings are as follows:

Superior – minimal risk. (normally supported by pledged deposits, United States government securities, etc.)

Above Average – low risk. (all of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

Average – moderately low risk. (most of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

Acceptable – moderate risk. (the weighted overall risk associated with this credit based on each of the bank’s creditworthiness criteria is acceptable)

Other Assets Especially Mentioned – moderately high risk. (possesses deficiencies which corrective action by the bank would remedy; potential watch list)

Substandard – (the bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected)

Doubtful – (weaknesses make collection or liquidation in full, based on currently existing facts, improbable)

Loss – (of little value; not warranted as a bankable asset)

Loans rated 1-4 are considered “Pass” for purposes of the risk rating chart below.

Risk ratings of loans by categories of loans are as follows:

	Commercial				Consumer
	and		Commercial		and		Residential
2011	Industrial		Real Estate		Indirect		Real Estate		Total

Pass	$	5,882,615	$	58,798,799	$	48,528,582	$	106,301,944		219,511,940
Special mention		327,048		4,736,458		1,324,580		1,333,217		7,721,303
Substandard		983,411		7,538,637		190,044		1,703,321		10,415,413
Doubtful		-		-		74,824		-		74,824
Loss		-		-		-		-		-

	$	7,193,074	$	71,073,894	$	50,118,030	$	109,338,482	$	237,723,480

Non-accrual		20,286		4,484,260		74,824		481,323		5,060,693
Troubled debt restructures		9,491		2,818,295		-		1,280,423		4,108,209
Number of TDRs contracts		1		1		-		1		3
Non-performing TDRs		-		2,818,295		-		-		2,818,295
Number of TDR accounts		-		1		-		-		1

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans and Allowance (continued)

	Commercial				Consumer
	and		Commercial		and		Residential
2010	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

Non-accrual		1,359,554		4,522,246		124,925		976,279		6,983,004
Troubled debt restructures		35,711		2,808,466		-		-		2,844,177
Number of TDRs accounts		1		1		-		-		2

At December 31, 2011, the recorded investment in new troubled debt restructurings totaled $1,280,423. During 2011, this troubled debt restructuring has continued to perform under the terms of the modified agreement.

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.

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

Current, past due, and nonaccrual loans by categories of loans are as follows:

					90 Days or
			30-89 Days		More and
2011	Current		Past Due		Still Accruing		Nonaccrual		Total

Commercial and industrial	$	7,134,672	$	38,116	$	-	$	20,286	$	7,193,074
Commercial real estate		66,589,634		-		-		4,484,260		71,073,894
Consumer and indirect		48,744,945		1,298,261		-		74,824		50,118,030
Residential real estate		108,703,963		134,591		18,605		481,323		109,338,482

	$	231,173,214	$	1,470,968	$	18,605	$	5,060,693	$	237,723,480

					90 Days or
			30-89 Days		More and
2010	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-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans and Allowance (continued)

Loans on which the accrual of interest has been discontinued totaled $5,060,693, $6,983,004, and $3,016,727 at December 31, 2011, 2010, and 2009, respectively. Interest that would have been accrued under the terms of these loans totaled $268,407, $145,148, and $105,365 for the years ended December 31, 2011, 2010, and 2009, respectively. Loans past due 90 days or more and still accruing interest totaled $18,605, $0 and $0 at December 31, 2011, 2010 and 2009, respectively.

Non-accrual loans with specific reserves at December 31, 2011 are comprised of:

Commercial loans – Two loans to one borrower totaling $20,286 with $20,286 of specific reserves established.

Residential Real Estate – One loan secured by residential property in the amount of $239,364 with a specific reserve established for this loan in the amount of $26,000.

Commercial Real Estate – Three loans to two borrowers in the amount of $4,484,261 secured by commercial and/or residential properties with specific reserves of $1,142,032 established for the loans.

Impaired Loans

When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases management used the current fair value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method.

The following table includes the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable. Management determined the specific reserve in the allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded.

Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method.

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans and Allowance (continued)

			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
2011	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Real-estate - mortgage:
Residential	$	1,703,322		1,703,322		62,320		411,423		1,708,158
Commercial		6,502,986		7,102,986		218,564		1,641,711		6,559,298
Consumer		100,455		100,455		10,423		44,235		103,733
Installment		-		-		-		-		-
Home Equity		-		-		-		-		-
Commercial		730,061		730,061		40,445		455,735		755,371
Total impaired loans with specific reserves	$	9,036,824		9,636,824		331,752		2,553,104		9,126,560

Impaired loans with no specific reserve:
Real-estate - mortgage:
Residential	$	260,564		260,564		7,149		n/a		245,128
Commercial		1,035,652		1,035,652		50,036		n/a		1,051,139
Consumer		25,000		25,000		-		n/a		-
Installment		264,868		264,868		-		n/a		-
Home Equity		-		-		-		n/a		-
Commercial		253,350		253,350		20,937		n/a		303,606
Total impaired loans with no specific reserve	$	1,839,434		1,839,434		78,122		-		1,599,873

			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
2010	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Real-estate - mortgage:
Residential	$	427,204		427,204		19,326		32,146		431,575
Commercial		6,605,317		7,205,317		417,554		1,691,887		6,513,982
Consumer		77,358		77,358		2,605		20,000		77,358
Installment		-		-		-		-		-
Home Equity		-		-		-		-		-
Commercial		481,847		481,847		30,651		180,736		502,870
Total impaired loans with specific reserves	$	7,591,726		8,191,726		470,136		1,924,769		7,525,785

Impaired loans with no specific reserve:
Real-estate - mortgage:
Residential	$	230,947		230,947		12,204		n/a		231,090
Commercial		2,394,073		2,394,073		67,082		n/a		3,285,175
Consumer		389,217		389,217		-		n/a		513,901
Installment		-		-		-		n/a		-
Home Equity		-		-		-		n/a		-
Commercial		853,485		853,485		45,407		n/a		973,839
Total impaired loans with no specific reserve	$	3,867,722		3,867,722		124,693		-		5,004,005

F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Premises and Equipment

A summary of premises and equipment is as follows:

	Useful
	lives		2011			2010			2009

Land			$	684,977		$	684,977		$	684,977
Buildings		5-50 years		5,962,830			5,937,856			5,864,145
Equipment and fixtures		5-30 years		5,182,979			5,200,693			5,093,759
Construction in progress				19,232			39,704			322
				11,850,018			11,863,230			11,643,203
Accumulated depreciation				(7,742,311	)		(7,739,614	)		(7,522,606	)

			$	4,107,707		$	4,123,616		$	4,120,597

Depreciation expense totaled $392,493, $368,248, and $334,465 for the years ended December 31, 2011, 2010, and 2009, respectively. Amortization of software and intangible assets totaled $40,154, $58,668, and $75,694 for the years ended December 31, 2011, 2010, and 2009, 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 and $33,000 through September 2013. There is a one year renewal option at the same rent amount. 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 $137,204, $134,081, and $227,479 for the years ended December 31, 2011, 2010, and 2009, respectively.

Note 6. Short-term Borrowings

Short-term borrowings are as follows:

	2011		2010		2009

Notes payable - U.S. Treasury	$	254,749	$	273,948	$	81,290
FHLB		-		4,000,000		-

	$	254,749	$	4,273,948	$	81,290

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 $996,392 for the year ended December 31, 2011. This security replaced one that was called in 2011.

The Bank owned 15,204 shares of common stock of the FHLB at December 31, 2011. 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 $52,450,000 at December 31, 2011. Long-term advances totaled $20,000,000 under this credit arrangement at December 31, 2011 (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 $811,000, $307,000 and $11,000 for 2011, 2010, and 2009, respectively.

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Short-term Borrowings (continued)

The Bank also has available $3,000,000, $3,000,000, and $9,000,000 at December 31, 2011, 2010, and 2009, 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, 2011, 2010, and 2009.

The Bank has a $5,000,000 federal funds line of credit from a financial bank with nothing outstanding as of December 31, 2011.

Note 7. Long-term Borrowings

Long-term borrowings are as follows:

	2011		2010		2009

Federal Home Loan Bank of Atlanta, convertible advances	$	20,000,000	$	20,000,000	$	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

	$	20,000,000	$	20,000,000	$	27,033,711

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, 2011, the scheduled maturities of long-term borrowings are approximately as follows:

	2011

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-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

At December 31, 2009, 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.

Note 9. Deposits

Major classifications of interest-bearing deposits are as follows:

	2011		2010		2009

NOW and SuperNOW	$	24,039,056	$	23,683,375	$	22,353,053
Money Market		18,084,117		16,710,611		15,284,223
Savings		60,063,518		53,007,293		48,378,319
Certificates of Deposit, $100,000 or more		31,414,705		30,885,936		31,576,905
Other time deposits		105,003,802		102,101,454		108,957,638

	$	238,605,198	$	226,388,669	$	226,550,138

Interest expense on deposits is as follows:

	2011		2010		2009

NOW and SuperNOW	$	28,819	$	27,833	$	27,702
Money Market		54,006		66,840		57,280
Savings		160,446		147,998		134,607
Certificates of Deposit, $100,000 or more		558,538		734,355		1,063,174
Other time deposits		2,236,531		2,719,605		3,654,519

	$	3,038,340	$	3,696,631	$	4,937,282

F-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Deposits (continued)

At December 31, 2011, the scheduled maturities of time deposits are approximately as follows:

	2011

2012	$	65,136,000
2013		33,294,000
2014		10,042,000
2015		11,939,000
2016		13,589,000
2017 and thereafter		2,419,000

	$	136,419,000

Deposit balances of executive officers and directors and their affiliated interests totaled approximately $2,053,000, $2,131,000, and $2,215,000 at December 31, 2011, 2010, and 2009, respectively.

The Bank had no brokered deposits at December 31, 2011, 2010, and 2009.

Note 10. Income Taxes

The components of income tax expense for the years ended December 31, 2011, 2010, and 2009 are as follows:

	2011			2010			2009
Current:
Federal	$	720,259		$	472,423		$	268,693
State		261,679			253,573			156,773

Total current		981,938			725,996			425,466
Deferred income taxes (benefits):
Federal		(156,652	)		(231,837	)		(509,545	)
State		(57,876	)		(8,648	)		(149,174	)

Total deferred		(214,528	)		(240,485	)		(658,719	)

Income tax expense (benefit)	$	767,410		$	485,511		$	(233,253	)

F-27

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, 2011, 2010, and 2009 is as follows:

	2011			2010			2009

Income (loss) before income tax expense (benefit)	$	3,760,503		$	2,550,296		$	1,029,209

Taxes computed at Federal income tax rate	$	1,278,569		$	867,102		$	349,925
Increase (decrease) resulting from:
Tax-exempt income		(600,429	)		(530,509	)		(502,488	)
State income taxes, net of Federal income tax benefit		134,510			161,650			(80,690	)
Other		(45,240	)		(12,732	)		-

Income tax expense (benefit)	$	767,410		$	485,511		$	(233,253	)

The components of the net deferred income tax benefits as of December 31, 2011, 2010, and 2009 are as follows:

	2011		2010		2009

Deferred income tax benefits:
Accrued deferred compensation	$	108,861	$	99,454	$	90,594
Impairment loss on investment securities		1,212,351		1,176,090		1,072,662
Allowance for credit losses		1,275,889		1,077,153		1,206,604
Nonaccrual interest		69,103		69,103		11,849
Alternative minimum tax credits		136,952		199,140		-
Net unrealized depreciation on investment securities available for sale		-		663,477		684,422
Accumulated depreciation		62,144		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		2,944,190		3,405,867		3,180,713

Deferred income tax liabilities:
Accumulated securities discount accretion		44,165		56,893		51,278
Net unrealized appreciation on investment securities available for sale		1,219,126		-		-
Total deferred income tax liabilities		1,263,291		56,893		51,278

Net deferred income tax benefits	$	1,680,899	$	3,348,974	$	3,129,435

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Income Taxes (continued)

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, 2011, 2010, and 2009, management believes there are no uncertain tax positions under ASC Topic 740 Income Taxes (formerly FIN 48, Accounting for Uncertainty in Income Taxes).

The Company’s federal income tax returns for 2010, 2009, and 2008 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. The 2011 income tax return will be filed in 2012.

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 $242,296, $328,268 and $231,538 for the years ended December 31, 2011, 2010 and 2009, 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, $16,116, and $26,992 for the years ended December 31, 2011, 2010, and 2009, 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 $327,715, $301,116, and $200,858 for the years ended December 31, 2011, 2010, and 2009, 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 $8,433,155, $7,954,062, and $7,702,656 at December 31, 2011, 2010, and 2009, respectively. Income on their insurance investment totaled $239,524, $251,406, and $268,083 for 2011, 2010, and 2009, 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-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13. Other Operating Expenses

Other operating expenses include the following:

	2011		2010			2009
Professional services	$	509,073	$	454,147		$	489,485
Stationery, printing and supplies		187,080		202,796			189,446
Postage and delivery		154,110		167,922			162,782
FDIC assessment		572,425		464,585			549,716
Directors fees and expenses		212,954		203,833			200,765
Marketing		219,737		227,883			246,947
Data processing		40,565		61,008			82,743
Correspondent bank services		49,316		54,399			87,249
Telephone		181,328		172,507			173,550
Liability insurance		71,893		63,383			67,264
Losses (gains) and expenses on OREO		148,227		(121,876	)		64,790
Other ATM expense		124,105		110,899			155,818
Other		317,227		582,023			518,646

	$	2,788,040	$	2,643,509		$	2,989,201

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:

	2011		2010		2009
Loan commitments:
Construction and land development	$	260,000	$	-	$	1,155,200
Other mortgage loans		3,070,000		2,013,000		2,270,000

	$	3,330,000	$	2,013,000	$	3,425,200
Unused lines of credit:
Home-equity lines	$	9,232,242	$	8,130,179	$	6,404,113
Commercial lines		9,368,770		10,738,826		11,335,335
Secured consumer line		19,175		-		-
Unsecured consumer lines		753,845		808,053		805,479

	$	19,374,032	$	19,677,058	$	18,544,927

Letters of credit:	$	32,000	$	71,762	$	79,250

F-30

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, 2011, 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

$14,130,000, $15,251,000, and $13,813,000 at December 31, 2011, 2010, and 2009, 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, 2011, 2010 and 2009.

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

F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15. Stockholders’ Equity (continued)

At December 31, 2011, 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 2011, 2010, and 2009, shares of common stock purchased under the plan totaled 15,818, 19,076, and 20,371, respectively. At December 31, 2011, shares of common stock reserved for issuance under the plan totaled 90,579.

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, 2011, 2010, and 2009.

At December 31, 2011, 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.

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, 2011, 2010, and 2009, that both the Company and Bank meet all capital adequacy requirements to which they are subject.

F-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15. Stockholders’ Equity (continued)

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, under Federal Reserve Board guidelines.

A comparison of capital as of December 31, 2011, 2010, and 2009 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, 2011
Total Capital (to Risk Weighted Assets)
Company	$	32,186,000		14.4	%	$	17,943,415		8.0	%		N/A
Bank		31,884,000		14.2	%		17,962,817		8.0	%	$	22,453,521		10.0	%

Tier I Capital (to Risk Weighted Assets)
Company	$	26,365,000		13.1	%	$	8,973,262		4.0	%		N/A
Bank		29,061,000		12.9	%		8,983,308		4.0	%	$	13,474,961		6.0	%

Tier I Capital (to Average Assets)
Company	$	29,365,000		8.2	%	$	14,324,390		4.0	%		N/A
Bank		29,061,000		8.0	%		14,530,500		4.0	%	$	18,163,125		5.0	%

F-33

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, 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	%

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	%

Note 16. Earnings Per Common Share

Earnings per common share are calculated as follows:

	2011		2010		2009
Basic:
Net income	$	2,993,093	$	2,064,785	$	1,262,462
Weighted average common shares outstanding		2,710,455		2,690,218		2,734,524
Basic net income per share	$	1.10	$	0.76	$	0.46

Diluted earnings per share calculations were not required for 2011, 2010, and 2009 as there were no options outstanding at December 31, 2011, 2010, and 2009.

F-34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The following table shows the estimated fair value and the related carrying values of the Company’s financial instruments as December 31, 2011, 2010, and 2009. Items that are not financial instruments are not included.

	2011				2010				2009
	Carrying		Fair		Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	6,877,110	$	6,877,110	$	6,492,313	$	6,492,313	$	6,993,811	$	6,993,811
Interest-bearing deposits in other financial institutions		2,422,579		2,422,579		1,567,673		1,567,673		3,748,387		3,748,387
Federal funds sold		653,901		653,901		940,317		940,317		691,624		691,624
Investment securities available for sale		102,866,555		102,866,555		87,268,359		87,268,359		84,462,605		84,462,605
Federal Home Loan Bank Stock		1,520,400		1,520,400		1,745,100		1,745,100		1,858,300		1,858,300
Maryland Financial Bank Stock		30,000		30,000		100,000		100,000		100,000		100,000
Common stock-Statutory Trust I		-		-		-		-		155,000		155,000
Ground rents		175,200		175,200		178,200		178,200		184,900		184,900
Loans, less allowance for credit losses		232,734,257		231,912,000		229,850,888		234,426,000		235,882,862		239,915,000
Accrued interest receivable		1,541,519		1,541,519		1,538,883		1,538,883		1,626,792		1,626,792

Financial liabilities:
Deposits		311,944,661		293,713,000		294,444,828		269,480,000		294,357,837		267,358,000
Short-term borrowings		254,749		254,749		4,273,948		4,273,948		81,290		81,290
Long-term borrowings		20,000,000		21,425,000		20,000,000		19,611,000		27,033,711		25,979,000
Dividends payable		271,791		271,791		231,579		231,579		230,285		230,285
Accrued interest payable		48,101		48,101		55,131		55,131		112,599		112,599
Accrued interest payable on junior subordinated debentures		-		-		-		-		171,518		171,518
Junior subordinated debentures owed to unconsolidated subsidiary trust		-		-		-		-		5,155,000		5,707,615
Unrecognized financial instruments:
Commitments to extend credit		22,704,032		22,704,032		21,690,058		21,690,058		21,970,127		21,970,127
Standby letters of credit		32,000		32,000		71,762		71,762		79,250		79,250

F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17. Fair Values of Financial Instruments (continued)

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:

Fair values for investment securities are based on quoted market prices, where applicable. When quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

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 over the same maturities.

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.

F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18. Fair Value Measurements

The Company follows 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)

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, 2011 these non-recurring assets consisted of 23 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18. Fair Value Measurements (continued)

Fair value measurements on a recurring and non-recurring basis at December 31, 2011 are as follows:

December 31, 2010	Level 1		Level 2			Level 3			Fair Value
Recurring:
Securities available for sale	$	-	$	87,268,359		$	-		$	87,268,359

Non-recurring:
Maryland Financial Bank stock		-		-			100,000			100,000
Impaired loans		-		-			11,423,737			11,423,737
OREO		-		215,000			-			215,000
	$	-	$	87,483,359		$	11,523,737		$	99,007,096
Activity:
Securities available for sale:
Purchases of securities		-		47,358,845			-			47,358,845
Sales, calls, and maturities of securities		-		(35,593,923	)		-			(35,593,923	)
Net amortization/accretion of premium/discount		-		(877,931	)		-			(877,931	)
Increase in market value		-		4,733,133			-			4,733,133
OTTI on investments		-		(21,928	)		-			(21,928	)

Maryland Financial Bank stock
OTTI on stock		-		-			(70,000	)		(70,000	)

Impaired loans:
New impaired loans		-		-			4,614,677			4,614,677
Payments and other loan reductions		-		-			(4,475,152	)		(4,475,152	)
Change in total provision		-		-			620,199			620,199
Loans converted to OREO		-		-			(1,307,203	)		(1,307,203	)

OREO:
OREO converted from loans		-		1,307,203			-			1,307,203
Sales of OREO		-		(411,507	)		-			(411,507	)

December 31, 2011
Recurring:
Securities available for sale		-		102,866,555			-			102,866,555

Non-recurring:
Maryland Financial Bank stock		-		-			30,000			30,000
Impaired loans		-		-			10,876,258			10,876,258
OREO		-		1,110,696			-			1,110,696

	$	-	$	103,977,251		$	10,906,258		$	114,883,509

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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, which management considers to be level 3 inputs. In addition, the Maryland Financial Bank stock was written down by $70,000 to a value of $30,000 in 2011 due to the price of a new stock offering, which was discounted to par, which management considered level 3 inputs.

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 in the same geographical area, which the Bank considers to be level 2 inputs.

Note 19. 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 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 Company’s compliance with this ASU resulted in additional disclosures in the Company’s consolidated financial statements regarding its loan portfolio and related allowance for loan losses but did not change the accounting for loans or the allowance.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19. Recently Issued Accounting Pronouncements (continued)

In April 2011, the FASB issued ASU No. 2011-02, Receivable (Topic 310), A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The main objective of the ASU is to clarify a creditor’s evaluation of whether in modifying a loan it has granted a concession in circumstances that qualify the loan as a Troubled Debt Restructured (TDR) loan. These loans are subject to various accounting and disclosure requirements. The ASU is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Certain disclosures are required for loans considered as TDR loans resulting from the application of the ASU that were not considered TDR loans under prior guidance. The Company believes compliance with ASU No. 2011-02 did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The main objective of the ASU is to conform the requirements for measuring fair value and the disclosure information under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for the disclosure about fair value measurements. Other amendments clarify existing requirements and change particular principles or requirements for measuring fair value or disclosing information about fair value measurements. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011, early application for public entities is not permitted. The Company will review the requirements of ASU No. 2011-04 and comply with its requirements. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements

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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,	2011		2010			2009

Assets

Cash	$	314,322	$	355,922		$	348,515
Investment in The Bank of Glen Burnie		30,907,210		25,946,536			29,848,797
Investment in GBB Properties, Inc.		255,770		255,770			260,184
Investment in the Glen Burnie Statutory Trust I		-		-			155,000
Due from subsidiaries		1,027		1,414			43,996
Other assets		4,292		4,583			49,433

Total assets	$	31,482,621	$	26,564,225		$	30,705,925

Liabilities and Stockholders’ Equity

Dividends payable	$	271,791	$	231,579		$	230,285
Accrued interest payable on borrowed funds		-		-			171,518
Borrowed funds from subsidiary		-		-			5,155,000
Total liabilities		271,791		231,579			5,556,803

Stockholders’ equity:
Common stock		2,717,909		2,702,091			2,683,015
Surplus		9,437,605		9,334,810			9,190,911
Retained earnings		17,209,386		15,300,344			14,311,508
Accumulated other comprehensive loss, net of benefits		1,845,930		(1,004,599	)		(1,036,312	)
Total stockholders’ equity		31,210,830		26,332,646			25,149,122

Total liabilities and stockholders’ equity	$	31,482,621	$	26,564,225		$	30,705,925

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-41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20. Parent Company Financial Information (continued)

Statement of Income
Years Ended December 31,	2011			2010			2009


Dividends and distributions from subsidiaries	$	920,000		$	1,455,000		$	4,269,844
Other income		-			24,645			16,430
Interest expense on junior subordinated debentures		-			(648,127	)		(546,430	)
Other expenses		(58,172	)		(105,785	)		(122,096	)
Income before income tax benefit and equity in undistributed net income of subsidiaries		861,828			725,733			3,617,748
Income tax benefit		21,120			277,440			246,018
Change in undistributed equity of subsidiaries		2,110,145			1,061,612			(2,601,304	)

Net income	$	2,993,093		$	2,064,785		$	1,262,462

F-42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20. Parent Company Financial Information (continued)

Statements of Cash Flows
Years Ended December 31,	2011			2010			2009

Cash flows from operating activities:
Net income	$	2,993,093		$	2,064,785		$	1,262,462
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease in other assets		291			44,850			65,108
Decrease (increase) in due from subsidiaries		387			42,582			(21,118	)
Decrease in accrued interest payable		-			(171,518	)		-
Change in undistributed equity of subsidiaries		(2,110,145	)		(1,061,612	)		2,601,304

Net cash provided by operating activities		883,626			919,087			3,907,756

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		118,613			162,975			173,667
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	)
Dividends paid		(1,043,839	)		(1,074,655	)		(1,236,101	)

Net cash used in financing activities		(925,226	)		(6,066,680	)		(3,898,143	)

Increase (decrease) in cash		(41,600	)		7,407			9,613

Cash, beginning of year		355,922			348,515			338,902

Cash, end of year	$	314,322		$	355,922		$	348,515

F-43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 21. Quarterly Results of Operations (Unaudited)

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

2011
(Dollars in thousands,	Three months ended,
except per share amounts)	December 31		September 30		June 30		March 31

Interest income	$	4,174	$	4,349	$	4,323	$	4,286
Interest expense		902		915		927		939
Net interest income		3,272		3,434		3,396		3,347
Provision for credit losses		288		150		-		225
Net securities gains		63		85		73		188
Income before income taxes		831		1,009		998		922
Net income		756		770		758		709
Net income per share (basic and diluted)	$	0.28	$	0.28	$	0.28	$	0.26

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

F-44