Due Within One Year			Due Over One To Five Years			Due Over Five Years			Total
					(In Thousands)
Real Estate - mortgage:
Residential		$	4,843		$	3,138		$	68,800		$	76,781
Commercial			10,010			20,667			17,166			47,843
Construction and land development			1,299			1,712			2,865			5,876
Installment			1,227			10,971			4,889			17,087
Credit Card			143			-			-			143
Indirect automobile			1,265			40,693			7,302			49,260
Commercial			5,177			7			-			5,184
		$	23,964		$	77,188		$	101,022		$	202,174

Real Estate Lending. The Bank offers long-term mortgage financing for residential and commercial real estate as well as shorter term construction and land development loans. Residential mortgage and residential construction loans are originated with fixed rates, while commercial mortgages may be originated on either a fixed or variable rate basis. Commercial construction loans are generally originated on a variable rate basis. Substantially all of the Bank’s real estate loans are secured by properties in Anne Arundel County, Maryland. Under the Bank’s loan policies, the maximum permissible loan-to-value ratio for owner-occupied residential mortgages is 80% of the lesser of the purchase price or appraised value. The Bank, however, will make loans secured by owner-occupied residential real estate with loan-to-value ratios up to 95% (some restrictions may apply), provided the borrower obtains private mortgage insurance for the portion of the loan in excess of 80%. For residential investment properties, the maximum loan-to-value ratio is 80%. The maximum permissible loan-to-value ratio for residential and residential construction loans is 80%. The maximum loan-to-value ratio for permanent commercial mortgages is 75%. The maximum loan-to-value ratio for land development loans is 70% and for unimproved land is 65%. The Bank also offers home equity loans secured by the borrower’s primary residence, provided that the aggregate indebtedness on the property does not exceed 80% of its value. Because mortgage lending decisions are based on conservative lending policies, the Company has no exposure to the credit issues affecting the sub-prime residential mortgage market.

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

 

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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, 2007, approximately 65.71% of the installment loans in the Bank’s portfolio (other than indirect automobile lending) had been originated for commercial purposes and 34.29% had been originated for consumer purposes.

Indirect Automobile Lending. The Bank commenced its indirect automobile lending program in January 1998. The Bank finances new automobiles for terms of up to 72 months and used automobiles for terms of up to 60 months. For used vehicles, the age of the vehicle plus the term of the loan cannot exceed eight years. The Bank does not lend more than the MSRP on new vehicles. On used vehicles, the Bank will not lend more than 110% of the average wholesale published in a nationally recognized used vehicle pricing guide. The Bank requires all borrowers to obtain vendor’s single interest coverage protecting the Bank against loss in the case a borrower’s automobile insurance lapses. The Bank originates indirect loans through a network of approximately 48 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.

 

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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 $3.49 million to any one borrower at December 31, 2007. By interpretive ruling of the Commissioner of Financial Regulation, Maryland banks have the option of lending up to the amount that would be permissible for a national bank which is generally 15% of unimpaired capital and surplus (defined to include a bank’s total capital for regulatory capital purposes plus any loan loss allowances not included in regulatory capital). Under this formula, the Bank would have been permitted to lend up to $5.22 million to any one borrower at December 31, 2007. At December 31, 2007, the largest amount outstanding to any one borrower and its related interests was $4,121,000.

Non-Performing Loans

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

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

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,
		2007			2006			2005			2004			2003
		(Dollars In Thousands)
Restructured Loans		$	578		$	-		$	-		$	95		$	-
Non-accrual loans:
Real estate – mortgage:
Residential		$	-		$	3		$	14		$	122		$	34
Commercial			-			-			-			255			265
Real estate - construction			-			-			-			-			-
Installment			212			46			159			205			250
Commercial			-			8			12			16			23
Total non-accrual loans			212			57			185			598			572
Accruing loans past due 90 days or more
Real estate – mortgage:
Residential			512			2			1			1			5
Commercial			-			-			-			-			-
Real estate - construction			-			-			3			6			6
Installment			-			-			-			-			-
Commercial			128			-			-			-			-
Total accruing loans past due 90 days or more			640			2			4			7			11
Total non-accrual and past due loans		$	852		$	59		$	189		$	605		$	583
Non-accrual and past due loans to gross loans			0.43	%		0.03	%		0.10	%		0.33	%		0.33	%
Allowance for credit losses to non-accrual and past due loans			188.27	%		3,116.95	%		1,164.55	%		398.68	%		385.25	%

For the year ended December 31, 2007, interest of $20,037 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. $209,789, or 99%, of the Bank’s total $212,416 non-accrual loans at December 31, 2007 were attributable to 12 borrowers. No charge-offs have previously been taken on these loans. One of these borrowers with a loan totaling $508 was in bankruptcy at that date. Because of the legal protections afforded to borrowers in bankruptcy, collections on such loans are difficult and the Bank anticipates that such loans may remain delinquent for an extended period of time. Each of these loans is secured by collateral with a value well in excess of the current active balance of the Bank’s loan.

 

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At December 31, 2007, there were no loans outstanding not reflected in the above table as to which known information about the borrower’s possible credit problems caused management to have serious doubts as to the ability of the borrowers to comply with present loan repayment terms. These loans consist of loans which were not 90 days or more past due but where the borrower is in bankruptcy or has a history of delinquency or the loan to value ratio is considered excessive due to deterioration of the collateral or other factors.

At December 31, 2007, the Company had $50,000 in real estate acquired in partial or total satisfaction of debt, compared to the same amount in such properties at December 31, 2006 and 2005, respectively. All such properties are recorded at the lower of cost or fair value at the date acquired and carried on the balance sheet as other real estate owned. Losses arising at the date of acquisition are charged against the allowance for credit losses. Subsequent write-downs that may be required and expense of operation are included in non-interest expense. Gains and losses realized from the sale of other real estate owned are included in non-interest income or expense. For a description of the properties comprising other real estate owned at December 31, 2007, see “Item 2. — Properties.”

Allowance For Credit Losses

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

The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the collectibility of the principal is unlikely. The allowance, based on evaluations of the collectibility of loans and prior loan loss experience, is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, value of collateral, and current economic conditions and trends that may affect the borrower’s ability to pay. Because mortgage lending decisions are based on conservative lending policies, the Company has no exposure to the credit issues affecting the sub-prime residential mortgage market.

 

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

		Year Ended December 31,
		2007			2006			2005			2004			2003
		(Dollars In Thousands)
Beginning Balance		$	1,839		$	2,201		$	2,412		$	2,246		$	2,515
Loans charged off
Real estate - mortgage:
Residential			0			1			-			-			-
Commercial			-			-			-			-			-
Real estate - construction			-			-			-			-			-
Installment			591			528			495			502			687
Credit card & related			-			-			-			-			42
Commercial			-			253			127			49			29
Total			591			782			622			551			758
Recoveries
Real estate - mortgage:
Residential			-			1			-			35			1
Commercial			-			-			-			-			-
Real estate - construction			-			-			-			-			-
Installment			258			335			276			293			369
Credit card & related			-			-			-			-			30
Commercial			48			22			185			49			49
Total			306			358			461			377			449
Net charge offs/(recoveries)			285			424			161			174			308
Provisions (credited) charged to operations			50			62			(50	)		340			40
Ending balance		$	1,604		$	1,839		$	2,201		$	2,412		$	2,246
Average loans		$	199,632		$	186,706		$	191,706		$	181,881		$	166,786
Net charge-offs to average loans			0.14	%		0.23	%		0.09	%		0.10	%		0.18	%

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The following table shows the allowance for credit losses broken down by loan category as of December 31, 2007, 2006, 2005, 2004, and 2003:

		At December 31,
		2007						2006
Portfolio		Allowance For Each Category			Percentage Of Loans In Each Category To Total Loans			Allowance For Each Category			Percentage Of Loans In Each Category To Total Loans
		(Dollars In Thousands)
Real Estate - mortgage:
Residential		$	117			37.98	%	$	149			34.88	%
Commercial			163			23.66			314			27.13
Real Estate — construction			102			2.91			14			0.83
Installment			55			8.45			103			7.67
Credit Card			-			0.07			-			0.08
Indirect automobile			892			24.37			1,119			26.81
Commercial			257			2.56			260			2.60
Unallocated			18			-			120			-
Total		$	1,604			100.00	%	$	1,839			100.00	%

 

		At December 31,
		2005						2004						2003
Portfolio		Allowance For Each Category			Percentage Of Loans In Each Category To Total Loans			Allowance For Each Category			Percentage Of Loans In Each Category To Total Loans			Allowance For Each Category			Percentage Of Loans In Each Category To Total Loans
		(Dollars In Thousands)
Real Estate – mortgage:
Residential		$	153			37.17	%	$	153			38.27	%	$	143			36.62	%
Commercial			277			19.50			328			17.23			314			16.20
Real Estate – construction			8			0.73			13			1.12			29			1.77
Installment			103			8.15			136			10.25			137			11.23
Credit Card			-			0.07			-			0.10			-			0.10
Indirect automobile			1,260			31.31			1,254			30.00			1,357			30.61
Commercial			264			3.07			343			3.03			271			3.47
Unallocated			136			-			185			-			(5	)		-
Total		$	2,201			100.00	%	$	2,412			100.00	%	$	2,246			100.00	%

 

Investment Securities

 

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

 

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

		At December 31,
		2007			2006			2005
		(In Thousands)
U.S. Treasury securities		$	-		$	-		$	-
U.S. Government agencies and mortgage backed securities			44,094			57,119			52,402
Obligations of states and political subdivisions			32,311			36,811			30,277
Corporate trust preferred			2,167			3,080			4,976
Total investment securities		$	78,572		$	97,010		$	87,655

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The following table sets forth the scheduled maturities, book values and weighted average yields for the Company’s investment securities portfolio at December 31, 2007:

		One Year Or Less						One To Five Years						Five to Ten Years						More Than Ten Years						Total
		Book Value			Weighted Average Yield			Book Value			Weighted Average Yield			Book Value			Weighted Average Yield			Book Value			Weighted Average Yield			Book Value			Weighted Average Yield
U.S. Treasury securities		$	-			-	%	$	-			-	%	$	-			-	%	$	-			-	%	$	-			-	%
U.S. Government agencies and mortgage backed securities			1,000			3.53			2,495			4.28			5,235			5.01			35,364			5.13			44,094			5.03
Obligations of states and political subdivisions			-			-			7,144			3.29			3,092			3.78			22,075			4.54			32,311			4.19
Corporate trust preferred			-			-			-			-			-			-			2,167			8.70			2,167			8.70
Total investment securities		$	1,000			3.53	%	$	9,639			3.55	%	$	8,327			4.55	%	$	59,606			5.04	%	$	78,572			4.79	%

At December 31, 2007, 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 $252,917,000 as of December 31, 2007. The Bank uses borrowings from the Federal Home Loan Bank (“FHLB”) of Atlanta to supplement funding from deposits. The Bank was permitted to borrow up to $36.85 million under a line of credit from the FHLB of Atlanta as of December 31, 2007.

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.

		Year Opened			Owned/ Leased			Book Value			Approximate Square Footage			Deposits
Main Office:
101 Crain Highway, S.E. Glen Burnie, MD 21061			1953			Owned		$	614,545			10,000		$	78,055,586
Branches:
Odenton 1405 Annapolis Road Odenton, MD 21113			1969			Owned			182,985			6,000			35,628,870
Riviera Beach 8707 Ft. Smallwood Road Pasadena, MD 21122			1973			Owned			132,438			2,500			28,698,788
Crownsville 1221 Generals Highway Crownsville, MD 21032			1979			Owned			316,735			3,000			43,152,583
Severn 811 Reece Road Severn, MD 21144			1984			Owned			189,541			2,500			27,135,168
South Crain 7984 Crain Highway Glen Burnie, MD 21061			1995			Leased			90,031			2,600			20,905,285
Linthicum Burwood Village Shopping Center Glen Burnie, MD 21060			2005			Leased			196,650			2,500			8,525,456
Severna Park 534 Ritchie Highway Severna Park, MD 21146			2002			Leased			153,546			2,184			10,815,029
Operations Centers:
106 Padfield Blvd. Glen Burnie, MD 21061			1991			Owned			927,468			16,200			N/A
103 Crain Highway, S.E. Glen Burnie, MD 21061			2000			Owned			283,969			3,727			N/A

__________________________________

 

At December 31, 2007, the Bank owned one foreclosed real estate property with a total book value of $50,000. The Bank is awaiting settlement on this commercial property. 

The Common Stock is traded on the Nasdaq SmallCap Market under the symbol “GLBZ”. As of January 29, 2008, there were 460 record holders of the Common Stock. The closing price for the Common Stock on that date was $10.55. A 20% stock dividend has been declared for stockholders’ of record on January 12, 2008, payable January 18, 2008.

The following table sets forth the high and low sales prices for the Common Stock for each full quarterly period during 2007 and 2006 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.

		2007									2006
Quarter Ended		High			Low			Dividends			High			Low			Dividends
March 31,		$	18.50		$	17.05		$	0.12		$	17.61		$	16.42		$	0.12
June 30,			17.75			17.25			0.12			17.22			16.32			0.12
September 30			17.78			15.41			0.12			17.49			16.49			0.12
December 31			17.00			15.37			0.18			17.25			17.00			0.18

A regular dividend of $0.12 and a bonus dividend of $0.06 were declared for stockholders’ of record on December 28, 2007, payable on January 10, 2008 and January 14, 2008, respectively.

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

Performance Graph

The following graph compares the cumulative total return on the Common Stock during the five years ended December 31, 2007 with that of a broad market index (Nasdaq Composite), and a peer group consisting of publicly traded Maryland, Virginia and District of Columbia commercial banks with total assets between $200 million and $500 million (“Peer Group”). The Peer Group is comprised of Fauquier Bankshares, Inc., BOE Financial Services of Virginia, Inc., Central Virginia Bankshares, Inc., Bay National Corp., Annapolis Bancorp, Inc., Shore Financial Corporation, Abigail Adams National Bancorp, Inc., and Carrollton Bancorp. The graph assumes $100 was invested on December 31, 2002 in the Common Stock and in each of the indices and assumes reinvestment of dividends. The following information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically incorporates it by reference into a later filing with the SEC.

 

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Total Return Analysis

 

		12/31/2002			12/31/2003			12/31/2004			12/31/2005			12/31/2006			12/31/2007
Glen Burnie Bancorp		$	100.00		$	173.89		$	168.68		$	152.60		$	149.89		$	139.62
Peer Group		$	100.00		$	148.42		$	170.81		$	168.41		$	171.05		$	133.20
Nasdaq Composite		$	100.00		$	150.79		$	164.60		$	168.08		$	185.55		$	211.29

 

Source: Zacks Investment Research.

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ITEM 6.

SELECTED FINANCIAL DATA

		Year Ended December 31,
		2007			2006			2005			2004			2003
		(Dollars In Thousand Except Per Share Data)
Operations Data:
Net Interest Income		$	11,866		$	11,821		$	11,966		$	12,016		$	11,263
Provision for Credit Losses			50			62			(50	)		340			40
Other Income			2,157			2,244			2,114			2,372			2,289
Other Expense			10,433			10,682			10,625			10,360			9,748
Net Income			2,782			2,720			2,775			3,056			3,077
Share Data:
Basic Net Income Per Share		$	1.12		$	1.10		$	1.13		$	1.25		$	1.27
Diluted Net Income Per Share			1.12			1.10			1.13			1.25			1.27
Cash Dividends Declared Per Common Share			0.54			0.54			0.49			0.43			0.36
Weighted Average Common Shares Outstanding:
Basic			2,489,237			2,472,803			2,456,723			2,442,944			2,430,603
Diluted			2,489,237			2,472,803			2,456,723			2,442,944			2,430,603
Financial Condition Data:
Total Assets		$	307,274		$	317,746		$	306,561		$	302,312		$	302,252
Loans Receivable, Net			199,753			193,337			190,205			182,291			172,819
Total Deposits			252,917			274,833			265,248			261,674			256,908
Long Term Borrowings			17,107			7,140			7,171			7,200			7,227
Junior Subordinated Debentures			5,155			5,155			5,155			5,155			5,155
Total Stockholders’ Equity			29,736			28,201			26,625			25,744			23,948
Performance Ratios:
Return on Average Assets			0.89	%		0.84	%		0.89	%		1.00	%		1.05	%
Return on Average Equity			9.60			10.00			10.50			12.51			13.56
Net Interest Margin (1)			4.39			4.31			4.46			4.61			4.48
Dividend Payout Ratio			48.33			49.18			43.52			34.67			29.53
Capital Ratios:
Average Equity to Average Assets			9.28	%		8.36	%		8.47	%		8.16	%		7.76	%
Leverage Ratio			11.34			10.30			10.17			9.85			9.25
Total Risk-Based Capital Ratio			17.50			17.07			16.98			16.40			15.79
Asset Quality Ratios:
Allowance for Credit Losses to Gross Loans			0.80	%		0.94	%		1.14	%		1.30	%		1.28	%
Non-accrual and Past Due Loans to Gross Loans			0.43	%		0.03	%		0.10	%		0.33	%		0.33	%
Allowance for Credit Losses to Non-Accrual and Past Due Loans			188.27	%		3,116.95	%		1,164.55	%		398.68	%		385.25	%
Net Loan Charge-offs (Recoveries) to Average Loans			0.14	%		0.23	%		0.09	%		0.10	%		0.18	%

 

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(1) Presented on a tax-equivalent basis

 

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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 2007, net interest income before provision for credit losses increased to $11,866,208 from $11,821,431 in 2006, and net income increased to $2,782,141 from $2,720,045 in 2006. In 2007, the Company saw continued growth in the loan portfolio. The loan portfolio increased by $6,417,000, primarily due to increases in residential mortgage, construction and land development and installment loans. 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.

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

Comparison of Results of Operations for the Years Ended December 31, 2007, 2006 and 2005

General. For the year ended December 31, 2007, the Company reported consolidated net income of $2,782,141 ($1.12 basic and diluted earnings per share) compared to consolidated net income of $2,720,045 ($1.10 basic and diluted earnings per share) for the year ended December 31, 2006 and consolidated net income of $2,774,741 ($1.13 basic and diluted earnings per share) for the year ended December 31, 2005.

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 mortgage and construction loans secured by real estate and indirect automobile loans secured by automobiles. These types of loans are made at interest rates lower than unsecured loans. While the Bank’s loan volume increased in 2005, this loan mix produced lower yields on the Company’s interest-earning assets. Meanwhile, market forces resulted in higher rates of interest being paid by the Bank on deposits and borrowings used to fund income producing assets resulting in a decline in net interest income for 2005. In January of 2006, the Bank initiated a plan to increase net interest income by reducing its portfolio of lower yielding loans, acquiring additional deposits, expanding its customer base and increasing the Bank’s higher yielding commercial loan portfolio. As part of this plan, the Bank attracted additional deposits by temporarily offering above market rate savings products which resulted in over $27 million in additional deposits which were invested in marketable securities and overnight deposits making them readily available to fund loans. The Bank also hired a new commercial loan officer to increase its ability to reach this market segment. In accordance with this plan, the Bank successfully increased its higher yield commercial loans resulting in increased loan volume and yield on commercial mortgages, although the commercial loan volume increase was less than anticipated. Over the same period, yields on new indirect automobile loans increased as outstanding lower interest indirect loans matured. As a result, the Bank earned higher yields on its interest earning assets. However, market forces required us to pay higher rates of interest on deposits and borrowings used to fund income producing assets resulting in an overall decline in net interest income for 2006.

 

25

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In 2007, the Bank reduced its portfolio of above market rate savings products and continued to direct its efforts to increase higher yielding commercial loans. This strategy produced significant increases in the Bank’s commercial loan portfolio through the first three quarters of 2007. While the Bank has no exposure to the credit issues affecting the sub-prime residential mortgage market, the overall credit tightening due to the mortgage crisis in the fourth quarter, made it more difficult for the Bank to replace maturing commercial mortgages with new loans. As a result, the Bank saw a decline in its portfolio of commercial mortgages as of December 31, 2007 from the prior year. At the same time the Bank realized an increase in construction and land development secured loans.

Consolidated net interest income for the year ended December 31, 2007 was $11,866,208 compared to $11,821,431 for the year ended December 31, 2006 and $11,966,103 for the year ended December 31, 2005. The $44,777 increase for the most recent year was primarily due to an increase in loan income partially offset by decreases in interest income on securities and increases in interest expense on deposits, short term borrowings and long term borrowings. The $114,672 decrease for 2006 compared to 2005 was primarily due to an increase in deposit expense partially offset by increases in U.S. Government agency securities, state and municipal securities, other income and loan income. The after tax net interest income for 2007 was $12,623,208, a $117,935 or 0.92% decrease from the after tax net interest income for 2006, which was $12,741,143, a $9,019 or 0.07% decrease from the $12,750,162 after tax net interest income for 2005.

Interest expense increased from $5,833,765 in 2006 to $5,971,048 in 2007, a $137,283 or a 2.35% increase, primarily due to increased borrowings used to fund the outflow from maturing higher rate 15-month certificates of deposit and IRAs and the interest paid on the 15-month certificates of deposit and IRAs. Interest expense increased from $4,131,459 in 2005 to $5,833,765 in 2006, a $1,702,306 or a 41.21 % increase, primarily due to an increase in deposit expense due to rates rising and a special offered on 15-month certificates of deposit and IRAs. Net interest margin for the year ended December 31, 2007 was 4.39% compared to 4.31% and 4.46% for the years ended December 31, 2006 and 2005, respectively.

 

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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,
		2007			VS.			2006			2006			VS.			2005
					Change Due To:									Change Due To:
		Increase/ Decrease			Rate			Volume			Increase/ Decrease			Rate			Volume
		(In Thousands)
ASSETS:
Interest-earning assets:
Federal funds sold		$	(61	)	$	0		$	(61	)	$	87		$	82		$	5
Interest-bearing deposits			(134	)		7			(141	)		156			45			111
Investment securities:
U.S. Treasury securities, obligations of U.S. government agencies and mortgage-backed securities			(793	)		14			(807	)		933			352			581
Obligations of states and political subdivisions(1)			(307	)		(20	)		(287	)		258			(27	)		285
All other investment securities			(124	)		1			(125	)		(3	)		53			(56	)
Total investment securities			(1,224	)		(5	)		(1,219	)		1,188			378			810
Loans, net of unearned income:
Demand, time and lease			(8	)		17			(25	)		24			65			(41	)
Mortgage and construction			719			(265	)		984			339			178			161
Installment and credit card			406			504			(98	)		(157	)		218			(375	)
Total gross loans(2)			1,117			256			861			206			461			(255	)
Allowance for credit losses			-			-			-			-			-			-
Total net loans			1,117			256			861			206			461			(255	)
Total interest-earning assets		$	(302	)	$	258		$	(560	)	$	1,637		$	966		$	671
LIABILITIES:
Interest-bearing deposits:
Savings and NOW		$	(11	)	$	0		$	(11	)	$	(7	)	$	23		$	(30	)
Money market			(3	)		0			(3	)		1			16			(15	)
Other time deposits			57			298			(241	)		1,696			953			743
Total interest-bearing deposits			43			298			(255	)		1,690			992			698
Non-interest-bearing deposits			-			-			-			-			-			-
Borrowed funds			94			(71	)		165			13			23			(10	)
Total interest-bearing liabilities		$	137		$	227		$	(90	)	$	1,703		$	1,015		$	688

(1) Tax equivalent basis. (2) Non-accrual loans included in average balances.

 

27

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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,
		2007									2006									2005
		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		$	2,665		$	139			5.22	%	$	3,848		$	200			5.20	%	$	3,682		$	113			3.07	%
Interest-bearing deposits			1,929			99			5.13			4,901			233			4.76			2,008			77			3.84
Investment securities:
U.S. Treasury securities, obligations of U.S. government agencies and mortgage-backed securities			50,392			2,554			5.07			66,501			3,347			5.04			53,521			2,414			4.51
Obligations of states and political subdivisions(1)			34,288			2,209			6.45			38,723			2,516			6.50			34,391			2,258			6.57
All other investment securities			2,839			251			8.84			4,257			375			8.81			4,996			378			7.57
Total investment securities			87,519			5,014			5.73			109,481			6,238			5.70			92,908			5,050			5.44
Loans, net of unearned income:
Demand, time and lease			4,788			448			9.36			5,064			456			9.01			5,597			432			7.72
Mortgage and construction			126,391			8,026			6.35			111,426			7,307			6.56			109,025			6,968			6.40
Installment and credit card			68,453			4,474			6.54			70,216			4,068			5.80			77,084			4,225			5.49
Total gross loans(2)			199,632			12,948			6.49			186,706			11,831			6.34			191,706			11,625			6.07
Allowance for credit losses			(1,766	)								(2,071	)								(2,301	)
Total net loans			197,866			12,948			6.54			184,635			11,831			6.41			189,404			11,625			6.14
Total interest-earning assets			289,979			18,200			6.28			302,865			18,502			6.11			288,002			16,865			5.86
Cash and due from banks			8,862									9,493									11,020
Other assets			13,661									13,045									13,275
Total assets		$	312,502								$	325,403								$	312,297
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing deposits:
Savings and NOW		$	72,831			263			0.36	%	$	77,761			274			0.36	%	$	85,005			281			0.33	%
Money market			15,918			103			0.65			16,415			106			0.65			19,389			105			0.55
Other time deposits			103,491			4,458			4.31			109,499			4,401			4.02			86,051			2,705			3.15
Total interest-bearing deposits			192,240			4,824			2.51			203,675			4,781			2.35			190,445			3,091			1.63
Short-term borrowed funds			2,294			119			5.19			1,603			81			5.06			1,815			66			3.64
Long-term borrowed funds			13,949			1,028			7.37			12,309			972			7.90			12,339			974			7.90
Total interest-bearing liabilities			208,483			5,971			2.86			217,587			5,834			2.69			204,599			4,131			2.02
Non-interest-bearing deposits			73,415									79,199									79,843
Other liabilities			1,609									1,407									1,395
Stockholders’ equity			28,995									27,210									26,460
Total liabilities and equity		$	312,502								$	325,403								$	312,297
Net interest income					$	12,229								$	12,668								$	12,734
Net interest spread									3.42	%								3.42	%								3.84	%
Net interest margin									4.39	%								4.31	%								4.46	%

 

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1 Tax equivalent basis. The incremental tax rate applied was 34.27% for 2007 and 35.90% for 2006. 2 Non-accrual loans included in average balance.

Provision For Credit Losses. During the year ended December 31, 2007, the Company made a provision of $50,000 for credit losses, compared to a provision of $62,000 for credit losses for the year ended December 31, 2006, and a reverse provision of $50,000 for the year ended December 31, 2005. At December 31, 2007, the allowance for credit losses equaled 188.27% of non-accrual and past due loans compared to 3,116.95% and 1,164.55% at December 31, 2006 and 2005, respectively. During the year ended December 31, 2007, the Company recorded net charge-offs of $285,000 compared to $424,256 and $160,544 in net charge-offs during the years ended December 31, 2006 and 2005, respectively.

 

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Other Income. Other income includes service charges on deposit accounts, other fees and commissions, net gains on investment securities, and income on life insurance. Other income decreased from $2,244,390 in 2006 to $2,157,292 in 2007, an $87,098, or 3.88% decrease. The decrease was primarily due to a decrease in gains on investment securities with lesser decreases in service charges and other fees and commissions. Other income increased from $2,113,824 in 2005 to $2,244,390 in 2006, a $130,566, or 6.18% increase. The increase was primarily due to an increase in other fees and commissions and an increase in gains on investment securities.

Other Expenses. Other expenses decreased from $10,596,661 in 2006 to $10,433,019 in 2007, a $163,190 or 1.55% decrease. This decrease, which consists of non-interest operating expenses, was primarily due to a decrease in salaries, employee benefits, and furniture and equipment costs partially offset by an increase in occupancy and other miscellaneous expenses. Other expenses decreased from $10,624,797 in 2005 to $10,596,661 in 2006, a $28,136 or 0.26% decrease. This decrease, which consists of non-interest operating expenses, was primarily due to a decrease in employee benefits and other miscellaneous expenses partially offset by an increase in salaries and occupancy costs.

Income Taxes. During the year ended December 31, 2007, the Company recorded income tax expense of $758,340, compared to income tax expense of $687,115 for the year ended December 31, 2006. This increase was primarily due to less tax exempt income on municipal securities. During the year ended December 31, 2006, the Company recorded income tax expense of $687,115, compared to income tax expense of $730,389 for the year ended December 31, 2005 due to an increase in tax exempt income on municipal securities.

Comparison of Financial Condition at December 31, 2007, 2006 and 2005

The Company’s total assets decreased to $307,273,868 at December 31, 2007 from $317,745,601 at December 31, 2006. The Company’s total assets increased to $317,745,601 at December 31, 2006 from $306,560,991 at December 31, 2005.

The Company’s net loan portfolio increased to $199,753,132 at December 31, 2007 compared to 193,336,604 at December 31, 2006 and $190,204,998 at December 31, 2005. The increase in the loan portfolio during the 2007 period is primarily due to an increase in refinanced mortgage loans, commercial and residential construction loans, personal and commercial secured installment loans. They were partially offset by a decline in indirect automobile loans and mortgage participations purchased. The increase in the loan portfolio during the 2006 period is primarily due to an increase in commercial mortgages, and mortgage participations purchased partially offset by a decline in indirect automobile loans.

During 2007, the Company’s total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $77,866,013, a $18,628,646 or 19.31%, decrease from $96,494,659 at December 31, 2006. This decrease is primarily attributable to a decrease in mortgage backed securities and government agencies. During 2006, the Company’s total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $96,494,659, a $9,214,772 or 10.56%, increase from $87,279,887 at December 31, 2005. This increase is primarily attributable to an increase in state and municipal securities and mortgage backed securities, offset by a decrease in corporate trust preferred securities.

Deposits as of December 31, 2007 totaled $252,916,766, a decrease of $21,916,691, or 7.98%, from the $274,833,457 total as of December 31, 2006. Deposits as of December 31, 2006 totaled $274,833,457, an increase of $9,585,189, or 3.61%, from the $265,248,268 total as of December 31, 2005. Demand deposits as of December 31, 2007 totaled $68,760,373, a $5,968,925, or 8.00%, decrease from $74,729,298 at December 31, 2006. NOW and Super NOW accounts, as of December 31, 2007, increased by $880,525, or 3.95% from their 2006 level to $23,154,540. Money market accounts decreased by $2,392,879, or 15.60%, from their 2006 level, to total $12,948,352 at December 31, 2007. Savings deposits decreased by $2,852,625, or 5.68%, from their 2006 level, to $47,381,613 at December 31, 2007. Time deposits over $100,000 totaled $27,883,774 on December 31, 2007, a decrease of $2,294,965, or 7.60% from December 31, 2006. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $72,786,723 on December 31, 2007, a $9,290,223 or 11.32% decrease from December 31, 2006.

Total stockholders’ equity as of December 31, 2007 increased by $1,535,641, or 5.45%, from the 2006 period. The increase was attributed to an increase in retained earnings, common stock and surplus, offset by a decrease in accumulated other comprehensive income, net of tax.  Total stockholders’ equity as of December 31, 2006 increased by $1,575,072, or 5.92%, from the 2005 period. The increase was attributed to an increase in retained earnings, common stock and surplus, offset by a decrease in accumulated other comprehensive income, net of tax.

 

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Off-Balance Sheet Arrangements, Contractual Obligations, and Commitments

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

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

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

The Bank’s exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. As of December 31, 2007, 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.

Contractual Obligations. The following table presents, as of December 31, 2007, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

					PAYMENTS DUE IN
(IN THOUSANDS)		NOTE REFERENCE			ONE YEAR OR LESS			ONE TO THREE YEARS			THREE TO FIVE YEARS			OVER FIVE YEARS			TOTAL
Deposits without a stated maturity (a),(c)			9		$	152,245		$	-		$	-		$	-		$	152,245
Time deposits (a)			9			63,671			27,924			6,862			2,214			100,671
Short-term borrowings (a)			6			503			-			-			-			503
Long-term borrowings (b)			7,8			582			13,319			-			10,000			23,901
Operating leases			5			244			352			271			1,618			2,485

(a)	Excludes interest

(b)	Includes Junior Subordinated Debentures and semi-annual payments (made in March and September) of $273,215. This is also assuming that the Debentures will be paid off in September 2010. Includes convertible advance which can be called at any time but has a final maturity of 11/1/2017

(c)	Includes non-interest bearing deposits

 

Commitments. The following table details the amounts and expected maturities of significant commitments as of December 31, 2007. Further discussion of these commitments is included in Note 16 to the consolidated financial statements.

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		PAYMENTS DUE IN
(IN THOUSANDS)		ONE YEAR OR LESS			ONE TO THREE YEARS			THREE TO FIVE YEARS			OVER FIVE YEARS			TOTAL
Loan commitments:
Other mortgage loans		$	685		$	-		$	-		$	-		$	685
Construction & land development			-			-			-			-			-
Unused lines of credit:
Home-equity lines			630			298			582			4,898			5,778
Commercial lines			18,336			-			-			-			18,336
Unsecured consumer lines			816			-			-			-			816
Secured consumer lines			11			-			-			-			11
Letters of credit			11			-			-			186			197

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, 2007.

		0-3 Months			Over 3 To 12 Months			Over 1 Through 5 Years			Over 5  Years			Total
		(Dollars In Thousands)
Assets:
Cash and due from banks		$	-		$	-		$	-		$	-		$	14,068
Federal funds and overnight deposits			727			-			-			-			727
Securities			-			996			9,635			67,235			77,866
Loans			12,197			11,467			79,188			101,022			202,174
Fixed Assets			-			-			-			-			3,088
Other Assets			-			-			-			-			9,351
Total assets		$	13,224		$	12,463		$	86,823		$	168,257		$	307,274
Liabilities:
Demand deposit accounts		$	-		$	-		$	-		$	-		$	68,760
NOW accounts			23,155			-			-			-			23,155
Money market deposit accounts			12,948			-			-			-			12,948
Savings accounts			47,382			193			-			-			47,575
IRA accounts			1,362			11,040			14,779			2,094			29,275
Certificates of deposit			12,731			38,345			20,006			120			71,202
Other liabilities			-			-			-			-			19,467
Junior Subordinated Debenture			-			-			-			-			5,155
Stockholders’ equity			-			-			-			-			29,736
Total liabilities and Stockholders’ equity		$	97,579		$	49,578		$	34,785		$	2,214		$	307,274
GAP		$	(84,355	)	$	(37,115	)	$	52,038		$	166,043
Cumulative GAP			(84,355	)		(121,470	)		(69,432	)		96,611
Cumulative GAP as a % of total assets			(27.46	%)		(39.54	%)		(22.60	%)		31.45	%

 

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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, 2007, 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			-9.8	%		-3.4	%		-1.1	%		-2.3	%
% Change in Economic Value of Equity			-17.8	%		-7.9	%		-1.3	%		-6.2	%

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, 2007, totaled $14,795,060, an increase of $1,475,082 or 11.07%, from the December 31, 2006 total of $13,319,978. Most of this increase was due to interest-bearing deposits in FHLB but was offset by a decrease in federal funds sold.

As of December 31, 2007, the Bank was permitted to draw on a $36.85 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, 2007, a $7 million long-term convertible advance was outstanding under this line. There was also a $10 million convertible advance (callable monthly and with a final maturity of November 1, 2017.) In addition the Bank has an unsecured line of credit in the amount of $7 million from another commercial bank on which there is no outstanding balance at December 31, 2007. Furthermore, on September 7, 2000, the Company issued $5,155,000 of its 10.6% Junior Subordinated Deferrable Interest Debentures to Glen Burnie Statutory Trust I, a Connecticut statutory trust wholly owned by the Company. The Trust, in turn, issued $5,000,000 of its 10.6% capital securities to institutional investors. The debentures are scheduled to mature on September 7, 2030, unless called by the Company not earlier than September 7, 2010. As of December 31, 2007, the full $5,155,000 was outstanding.

 

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Federal banking regulations require the Company and the Bank to maintain specified levels of capital. At December 31, 2007, the Company was in compliance with these requirements with a leverage ratio of 11.26%, a Tier 1 risk-based capital ratio of 16.80% and total risk-based capital ratio of 17.57 %. At December 31, 2007, the Bank met the criteria for designation as a well capitalized depository institution under FDIC regulations.

Impact of Inflation and Changing Prices

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

Critical Accounting Policies

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

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

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

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141 Revised 2007 (SFAS 141R), Business Combinations. SFAS 141R’s objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after December 31, 2008. The Company does not expect the implementation of SFAS 141R to have a material impact on its consolidated financial statements.

In February 2006, the FASB issued Statement No. 155 (SFAS 155), Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. SFAS No. 155 simplifies accounting for certain hybrid instruments currently governed by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, by allowing fair value remeasurement of hybrid instruments that contain an embedded derivative that otherwise would require bifurcation. SFAS No. 155 also eliminates the guidance in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets, which provides such beneficial interests are not subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125, by eliminating the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. On January 1, 2007, the Company adopted SFAS No. 155. The Company has determined that the adoption of this pronouncement did not have a significant impact on the financial statements.

 

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In March 2006, the FASB issued Statement No. 156 (SFAS 156), Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. Additionally, the servicing asset or servicing liability shall be initially measured at fair value; however, an entity may elect the “amortization method” or “fair value method” for subsequent balance sheet reporting periods. On January 1, 2007, the Company adopted SFAS No. 156. The Company has determined that the adoption of this pronouncement did not have a significant impact on the financial statements.

In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions should be applied prospectively, except for certain specifically identified financial instruments. The Company is currently reviewing this pronouncement.

In February 2007, the FASB issued Statement No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115 which is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Management will continue to evaluate the impact of adopting this Statement on the Company’s financial statements for future periods.

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

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company is subject to the provisions of FIN 48 as of January 1, 2007, and has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company's financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. FASB Technical Bulletin No. 85-4 requires that the amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset. Since the issuance of FASB Technical Bulletin No. 85-4, questions arose regarding whether “the amount that could be realized” should consider 1) any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value and 2) the contractual ability to surrender all of the individual-life policies (or certificates in a group policy) at the same time. EITF 06-5 determined that “the amount that could be realized” should 1) consider any additional amounts included in the contractual terms of the policy and 2) assume the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). Any amount that is ultimately realized by the policy holder upon the assumed surrender of the final policy (or final certificate in a group policy) shall be included in the “amount that could be realized.” An entity should apply the provisions of EITF 06-5 through either a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or a change in accounting principle through retrospective application to all prior periods. On January 1, 2007, the Company adopted EITF 06-5. The Company has determined that the adoption of this pronouncement did not have a significant impact on the financial statements.

 

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

The consensus in this Issue is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. Entities should recognize the effects of applying the consensus in this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The effects of this Issue have been analyzed by the Company and disclosed in Note 23. The Company will apply option (a) as a cumulative-effect adjustment to retained earnings effective January 1, 2008.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.

CONTROLS AND PROCEDURES

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 believe 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.

 

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 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, 2007.

 

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

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2007 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.

 

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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 2008 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.

 

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(a) 2. Financial Statement Schedules.

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

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

 

Exhibit No.

3.1	Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Registrant’s Form 8-A filed December 27, 1999, File No. 0-24047)

3.2	Articles of Amendment, dated October 8, 2003 (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2003, File No. 0-24047)

3.3	Articles Supplementary, dated November 16, 1999 (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed December 8, 1999, File No. 0-24047)

3.4	By-Laws (incorporated by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2003, File No. 0-24047)

4.1

Rights Agreement, dated as of February 13, 1998, between Glen Burnie Bancorp and The Bank of Glen Burnie, as Rights Agent, as amended and restated as of December 27, 1999 (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s Form 8-A filed December 27, 1999, File No. 0-24047)

10.1	Glen Burnie Bancorp Director Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-8, File No.33-62280)

10.2	The Bank of Glen Burnie Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-8, File No. 333-46943)

10.3	Amended and Restated Change-in-Control Severance Plan (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2001, File No. 0-24047)

10.4	The Bank of Glen Burnie Executive and Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999, File No. 0-24047)

21	Subsidiaries of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2001, File No. 0-24047)

23	Consent of Trice Geary & Myers LLC

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

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

32.1	Section 1350 Certifications

  

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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 13, 2008	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 13, 2008
Michael G. Livingston		and Director
/s/ F. William Kuethe, Jr.		President Emeritus and Director		March 13, 2008
F. William Kuethe, Jr.
/s/ John E. Porter		Senior Vice President and Chief		March 13, 2008
John E. Porter		Financial Officer
/s/ John E. Demyan		Chairman of the Board and Director		March 13, 2008
John E. Demyan
/s/ Shirley E. Boyer		Director		March 13, 2008
Shirley E. Boyer
/s/ Thomas Clocker		Director		March 13, 2008
Thomas Clocker
/s/ Norman E. Harrison, Jr.		Director		March 13, 2008
Norman E. Harrison, Jr.
/s/ F. W. Kuethe, III		Director		March 13, 2008
F. W. Kuethe, III
/s/ Charles Lynch		Director		March 13, 2008
Charles Lynch
/s/ Edward L. Maddox		Director		March 13, 2008
Edward L. Maddox

/s/ William N. Scherer, Sr.		Director		March 13, 2008
William N. Scherer, Sr.

 

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/s/ Karen B. Thorwarth		Director		March 13, 2008
Karen B. Thorwarth
/s/ Mary Lou Wilcox		Director		March 13, 2008
Mary Lou Wilcox

 

 

 

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PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements.

	Page
Independent Auditors’ Report	F-1
Consolidated Balance Sheets as of December 31, 2007, 2006 and 2005	F-2
Consolidated Statements of Income for the Years Ended December 31, 2007, 2006 and 2005	F-3
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005	F-4
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005	F-6
Notes to Consolidated Financial Statements	F-8

 

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, 2007, 2006, and 2005, 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, 2007, 2006, and 2005, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

Salisbury, Maryland

March 13, 2008

 

F-1

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