investments have a negative short-term impact on earnings, we believe that our increased presence in fast-growing markets will translate into stronger long-term performance and enhanced shareholder value.
      The future is not without its challenges. Over the past few years, we have seen significant pressure on our net interest margin. The net interest margin is most easily defined as the difference between what we earn on our loans and securities, and what we pay in interest for our deposits. Most community banks, First United included, earn most of their revenue from this source. Increased competition from banks and also from other, less-regulated financial service providers has caused an erosion of the margin. Management of the margin has also been hampered by a nearly flat yield curve, which has caused there to be very little difference between the interest paid on a short-term deposit and the interest earned on a long-term loan. It was not too many years ago that the margin was near 5%. It is now closer to 3.5%. While a 1.5 percentage point difference may not seem like much, it grows to a very large number when it is applied to several hundred million dollars! I am pleased to report that, through the strong and strategic efforts of our Treasury Committee; First United bucked a national trend of decline and actually improved

its net interest margin last year from 3.43% to 3.49%.
      As mentioned, we have been challenged by myriad of competition throughout the financial services arena. Many products, most notably mortgages, have become almost commodities which are readily available from sources all over the country. This competition is essentially good for consumers, but requires those in community banks to both reprioritize their product lines and play to their strengths.
      The heavy hand of regulation continues to place a significant burden on community banks. Over the years, waves of regulation have left mountains of required paperwork, logs and disclosures in their wake. Dealing with these innumerable requirements has become a way of life for community banks. Only rarely are cost-benefit analyses conducted on these regulations, and even more rarely are the responsibilities annulled or reduced. Over the last two years, your company has felt the impact of two major laws. The first, the U.S. Patriot Act, requires the company to dramatically increase its surveillance of customer activities. We certainly understand the gravity of our responsibilities as corporate citizens in the post-9/11 world. However, with this law, unlike many other national security initiatives, the financial services