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| GLBZ > SEC Filings for GLBZ > Form 10-Q on 28-Apr-2009 | All Recent SEC Filings |
28-Apr-2009
Quarterly Report
FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this Form 10-Q, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors 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. While it is impossible to identify all such factors, such factors include, but are not limited to, those risks identified in the Company's periodic reports filed with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K.
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
Net interest income before provision for credit losses, for the first quarter, was $2,865,000 in 2008 compared to $2,865,000 in 2009. Interest income for the first quarter increased from $4,413,000 in 2008 to $4,533,000 in 2009, a 2.722% increase. Total interest expense for the quarter increased from $1,548,000 in 2008 to $1,668,000 in 2009, a 7.75% increase. The Company realized consolidated net income of $455,000 for the first quarter of 2009 compared to consolidated net income $536,000 for the first quarter of 2008, a 15.11% decrease. The decrease was primarily due to a larger provision for loan losses, a write-down recognized on a security and a decrease in income on service charges and other fees and commissions. This was partially offset by a decrease in salaries and employee benefits and a decrease in income tax expense.
While the Bank has not been directly impacted by many of the difficulties facing other financial institutions in the current economic downturn, the turbulence in the U.S. economy and in the stock market has had significant impact on the Bank in specific identifiable areas. Overall deposits have increased as stock market investors seek more secure places to invest their funds, and there has been an overall decline in interest rates in response to stock market turbulence. Both rates of interest paid by the Bank on deposits and rates of interest earned by the Bank on loans and other interest earning assets have declined; however, the rates earned by the Bank on loans and other interest earning assets have declined faster than the rates paid on deposits.
results of operations
General. Glen Burnie Bancorp, a Maryland corporation (the "Company"), and its subsidiaries, The Bank of Glen Burnie (the "Bank") and GBB Properties, Inc., both Maryland corporations, and Glen Burnie Statutory Trust I, a Connecticut business trust, had consolidated net income of $455,000 ($0.16 basic and diluted loss per share) for the first quarter of 2009, compared to the first quarter 2008 consolidated net income of $536,000 ($0.18 basic and diluted earnings per share). The decrease in consolidated net income for the three month period was due to an increase in the provision for loan losses and a write-down of a security held in the Bank's investment portfolio, offset by a decrease in salaries and employee benefits and income tax expense.
Net Interest Income. The Company's consolidated net interest income prior to provision for credit losses for the three months ended March 31, 2009 was $2,865,000, compared to $2,865,000 for the same period in 2008.
Interest income increased $120,000 (2.72%) for the three months ended March 31, 2009, compared to the same period in 2008. Interest income increased for the three month period due to an increase in loan income, partially offset by a decrease in interest income on U.S. Government agency securities, as a result of recent sales and maturities, and a decrease in other income.
Interest expense increased $120,000 (7.75%) for the three months ended March 31, 2009, compared to the same 2008 period. The increase in interest expense for the three month period ended March 31, 2009 was due to an increase in interest paid on increased deposit balances and interest on long-term borrowings used to fund maturing higher rate deposits and loan growth.
Net interest margin for the three months ended March 31, 2009 was 4.04%, compared to tax equivalent net interest margin of 4.43% for the three months ended March 31, 2008. This decline is due to the narrowing of the gap between the interest rates offered by the Bank on increasing customer deposits and the rates the Bank is able to obtain on loans and other interest earning assets. Accordingly, while net interest income before provision for credit losses for the quarters ended March 31, 2008 and 2009 are identical, the net interest margin for 2009 was lower than in 2008.
Provision for Credit Losses. The Company made a provision for credit losses of $150,000 during the three month period ended March 31, 2009 and $55,000 for credit losses during the three month period ended March 31, 2008. As of March 31, 2009, the allowance for credit losses equaled 180.05% of non-accrual and past due loans compared to 224.42% at December 31, 2008 and 181.56% at March 31, 2008. During the three month period ended March 31, 2009, the Company recorded net charge-offs of $195,000, compared to net charge-offs of $310,000 during the corresponding period of the prior year. On an annualized basis, net charge-offs for the 2009 period represent 0.33% of the average loan portfolio.
Other Income. Other income decreased from $468,000 for the three month period ended March 31, 2008, to $414,000 for the corresponding 2009 period, a $54,000 (11.54%) decrease. The decrease for the three month period was primarily due to a decrease in service charges and other fees.
Other Expenses. Other expenses decreased from $2,653,000 for the three month period ended March 31, 2008, to $2,619,000 for the corresponding 2009 period, a $34,000 (1.28%) decrease. The decrease for the three month period was primarily due to a decrease in salaries and employee benefits and a $30,000 write-down on the value of a Trust Preferred security held by the Bank due to a default by one of the financial institutions in the Trust Preferred pool.
Income Taxes. Income tax expense for the quarter ended March 31, 2009 was $55,000 compared to $89,000 for the same period in 2008 reflecting the effect of the increased provision for loan losses. The effective tax rate for the quarter in 2009 was 10.78%, compared to 14.24% for the prior year period. The decrease in the effective tax rate for the three month period was due to a decrease in the amount of income subject to the marginal tax rate.
Comprehensive Income. In accordance with regulatory requirements, the Company reports comprehensive income in its financial statements. Comprehensive income consists of the Company's net income, adjusted for unrealized gains and losses on the Bank's investment portfolio of investment securities. For the first quarter of 2009, comprehensive (loss) income, net of tax, totaled ($10,000), compared to the March 31, 2008 total of $783,000. The decrease for the three month period was due primarily to the increase in unrealized losses on securities.
FINANCIAL CONDITION
General. The Company's assets increased to $346,100,000 at March 31, 2009 from $332,502,000 at December 31, 2008, primarily due to an increase in loans and in securities. The Bank's net loans totaled $237,748,000 at March 31, 2009, compared to $235,133,000 at December 31, 2008, an increase of $2,615,000 (1.11%), primarily attributable to an increase in refinanced mortgages with lesser increase in mortgage participations purchased and demand loans, partially offset by a decrease in indirect loans (primarily auto loans).
The Company's total investment securities portfolio (investment securities available for sale) totaled $68,300,000 at March 31, 2009, a $10,351,000 (17.86%) increase from $57,949,000 at December 31, 2008. This increase was funded by the increase in deposits received during the quarter that exceeded the amount needed to fund loan growth. The Bank's cash and due from banks (cash due from banks, interest-bearing deposits in other financial institutions, and federal funds sold), as of March 31, 2009, totaled $21,658,000, an increase of $420,000 (1.98%) from the December 31, 2008 total of $21,238,000.
Deposits as of March 31, 2009 totaled $287,433,000, which is an increase of $17,665,000 (6.55%) from $269,768,000 at December 31, 2008. Demand deposits as of March 31, 2009 totaled $66,697,000, which is an increase of $3,158,000 (4.97%) from $63,539,000 at December 31, 2008. NOW accounts as of March 31, 2009 totaled $23,789,000, which is an increase of $2,710,000 (12.86%) from $21,079,000 at December 31, 2008. Money market accounts as of March 31, 2009 totaled $13,997,000, which is an increase of $1,233,000 (9.66%), from $12,764,000 at December 31, 2008. Savings deposits as of March 31, 2009 totaled $47,327,000, which is an increase of $1,525,000 (3.33%) from $45,802,000 at December 31, 2008. Certificates of deposit over $100,000 totaled $31,108,000 on March 31, 2009, which is an increase of $3,225,000 (11.57%) from $27,883,000 at December 31, 2008. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $104,515,000 on March 31, 2009, which is a $5,814,000 (5.90%) increase from the $98,701,000 total at December 31, 2008. Management believes that the growth in deposits was due in part to the recent instability in the stock market and the resulting reallocation of investment portfolios by the Bank's customers.
Asset Quality. 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 March 31, At December 31,
2009 2008
(Dollars in Thousands)
Restructured loans $ - $ -
Non-accrual loans:
Real-estate - mortgage:
Residential $ - $ -
Commercial 659 659
Real-estate - construction - -
Installment 342 208
Home Equity - -
Commercial - -
Total non-accrual loans 1,001 867
Accruing loans past due 90 days or more:
Real-estate - mortgage:
Residential 3 3
Commercial - -
Real-estate - construction - 5
Installment 20 26
Credit card and related - -
Commercial 74 -
Other - -
Total accruing loans past due 90 days or more 97 34
Total non-accrual loans and past due loans $ 1,098 $ 901
Non-accrual and past due loans to gross loans 0.47 % 0.38 %
Allowance for credit losses to non-accrual and past due loans 180.05 % 224.42 %
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At March 31, 2009, there were $282,000 in loans outstanding, other than those reflected in the above table, as to which known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms. Such 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. Reflected in the above table are $0 of prior period troubled debt restructurings that are now not performing under the terms of their modified agreements.
Allowance For Credit Losses. 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, and current economic conditions and trends that may affect the borrowers' ability to pay.
Transactions in the allowance for credit losses for the three months ended March 31, 2009 and 2008 were as follows:
Three Months Ended March 31,
2009 2008
(Dollars in Thousands)
Beginning balance $ 2,022 $ 1,604
Charge-offs (268 ) (399 )
Recoveries 73 89
Net charge-offs (195 ) (310 )
Provisions charged to operations 150 55
Ending balance $ 1,977 $ 1,349
Average loans $ 235,942 $ 201,688
Net charge-offs to average loans (annualized) 0.33 % 0.61 %
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Reserve for Unfunded Commitments. As of March 31, 2009, the Bank had outstanding commitments totaling $22,829,000. These outstanding commitments consisted of letters of credit, undrawn lines of credit, and other loan commitments. The following table shows the Bank's reserve for unfunded commitments arising from these transactions:
Three Months Ended March 31,
2009 2008
(Dollars in Thousands)
Beginning balance $ 200 $ 200
Provisions charged to operations - -
Ending balance $ 200 $ 200
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Contractual Obligations and Commitments. No material changes, outside the normal course of business, have been made during the first quarter of 2009.
MARKET RISK AND INTEREST RATE SENSITIVITY
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 Company's interest-rate sensitivity at March 31, 2009.
Over 1
Over 3 to Through Over
0-3 Months 12 Months 5 Years 5 Years Total
(Dollars in Thousands)
Assets:
Cash and due from banks $ - $ - $ - $ - $ 17,056
Federal funds and overnight
deposits 4,602 - - - 4,602
Securities - - 4,072 64,228 68,300
Loans 12,601 6,774 88,232 130,141 237,748
Fixed assets - - - - 3,326
Other assets - - - - 15,068
Total assets $ 17,203 $ 6,774 $ 92,304 $ 194,369 $ 346,100
Liabilities:
Demand deposit accounts $ - $ - $ - $ - $ 66,697
NOW accounts 23,789 - - - 23,789
Money market deposit accounts 13,997 - - - 13,997
Savings accounts 47,327 - - - 47,327
IRA accounts 3,145 11,535 20,934 728 36,342
Certificates of deposit 16,792 50,651 31,669 169 99,281
Short-term borrowings 180 - - - 180
Long-term borrowings 9 29 7,024 20,000 27,062
Other liabilities - - - - 1,365
Junior subordinated debenture - - 5,155 - 5,155
Stockholders' equity: - - - - 24,905
Total liabilities and
stockholders' equity $ 105,239 $ 62,215 $ 64,782 $ 20,897 $ 346,100
GAP $ (88,036 ) $ (55,441 ) $ 27,522 $ 173,472
Cumulative GAP $ (88,036 ) $ (143,477 ) $ (115,955 ) $ 57,517
Cumulative GAP as a % of total
assets -25.44 % -41.46 % -33.50 % 16.62 %
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The foregoing analysis assumes that the Company'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. As of December 31, 2008, 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 4.0 % 1.5 % 2.2 % 1.1 %
% Change in Economic Value of Equity -25.5 % -11.6 % 7.9 % -0.9 %
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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 a primary source of funds supporting the Bank's lending and investment activities.
The Bank's most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, federal funds sold, certificates of deposit with other financial institutions that have an original maturity of three months or less 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. The Bank's cash and cash equivalents (cash due from banks, interest-bearing deposits in other financial institutions, and federal funds sold), as of March 31, 2009, totaled $21,658,000, an increase of $420,000 (1.98%) from the December 31, 2008 total of $21,238,000.
As of March 31, 2009, the Bank was permitted to draw on a $66,460,000 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. As of March 31, 2009, there were $27.0 million in long-term convertible advances outstanding with various monthly and quarterly call features and with final maturities ranging from November 2017 through August 2018. In addition, the Bank has two unsecured federal funds lines of credit in the amount of $10.0 million from two commercial banks, of which nothing was outstanding as of March 31, 2009. Furthermore, as of March 31, 2009, the Company had outstanding $5,155,000 of its 10.6% Junior Subordinated Deferrable Interest Debentures issued to Glen Burnie Statutory Trust I, a Connecticut statutory trust subsidiary of the Company.
The Company's stockholders' equity decreased $3,003,000 (10.76%) during the three months ended March 31, 2009, due mainly to an increase in accumulated other comprehensive loss, net of tax benefits, and an increase in retained earnings, offset by decreases in common stock and surplus. The Company's accumulated other comprehensive loss, net of tax benefits increased by $465,000 (61.43%) from ($757,000) at December 31, 2008 to ($1,222,000) at March 31, 2009, as a result of a decrease in the market value of securities classified as available for sale. Retained earnings increased by $186,000 (1.32%) as the result of the Company's net income for the three months, partially offset by dividends. Common stock and surplus declined due to the repurchase of 297,679 shares of the Company's common stock for a total of $2,769,067. In addition, $45,156 was transferred within stockholders' equity in consideration for shares to be issued under the Company's dividend reinvestment plan in lieu of cash dividends.
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. At March 31, 2009, the Bank was in full compliance with these guidelines with a Tier 1 leverage ratio of 9.77%, a Tier 1 risk-based capital ratio of 13.74% and a total risk-based capital ratio of 14.64%.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's accounting policies are more fully described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2008 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 . . .
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