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GLBZ > SEC Filings for GLBZ > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for GLEN BURNIE BANCORP


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Glen Burnie Bancorp, a Maryland corporation (the "Company"), through its subsidiary, The Bank of Glen Burnie, a Maryland banking corporation (the "Bank"), operates a commercial bank with eight offices in Anne Arundel County Maryland. The Company had consolidated net income of $670,000 ($0.24 basic and diluted earnings per share) for the third quarter of 2012, compared to the third quarter of 2011 consolidated net income of $770,000 ($0.29 basic and diluted income per share), a 12.99% decrease. Year-to-date net income was $2,056,000 ($0.75 basic and diluted earnings per share), compared to the 2011 consolidated net income of $2,237,000 ($0.83 basic and diluted income per share), an 8.09% decrease. The decreases in net income for the third quarter and year-to-date were primarily due to decreases in income on loans, U.S. Government agency securities, service charges and gains on investment securities. These decreases were partially offset by decreases in other expenses, decreases in interest expense on deposits and decreases in provision for loan losses for the respective periods. During the nine months ended September 30, 2012, the Bank increased deposits by $12.2 million and increased net loans by $18.9 million.

Results Of Operations

Net Interest Income. The Company's consolidated net interest income prior to provision for credit losses for the three and nine months ended September 30, 2012 was $3,195,000 and $9,501,000 respectively, compared to $3,434,000 and $10,177,000 for the same period in 2011, a decrease of $239,000 (6.96%) for the three months and a decrease of $676,000 (6.65%) for the nine months.

Interest income for the third quarter decreased from $4,349,000 in 2011 to $4,005,000 in 2012, a 7.91% decrease. Interest income for the nine months decreased from $12,958,000 in 2011 to $11,989,000 in 2012, a 7.48% decrease. While the Bank's net loans increased during these periods, interest income decreased for the three and nine month periods due to a decline in the interest rates on loans and U.S. Government agency securities, partially offset by an increase in income on state and municipal securities.

Interest expense for the third quarter decreased from $915,000 in 2011 to $810,000 in 2012, a 11.48% decrease. Interest expense for the nine months decreased from $2,781,000 in 2011 to $2,488,000 in 2012, a 10.54% decrease. While total deposits increased during the nine months ended September 30, 2012, interest paid on deposit balances for the three and nine month periods ended September 30, 2012 decreased due to lower interest rates paid on deposit balances.

Net interest margins on a tax equivalent basis for the three and nine months ended September 30, 2012 was 3.84% and 3.91%, compared to 4.41% and 4.41% for the three and nine months ended September 30, 2011. The decrease of the net interest margin from the 2011 to 2012 period was primarily due to the continuing decline in the interest rates on loans and U.S. Government Agency securities partially offset by the reduction in interest expense, as noted above.

Provision for Credit Losses. The Company made a provision for credit losses of $150,000 during the three and nine month periods ended September 30, 2012 and $150,000 and $375,000 for credit losses during the three and nine month periods ended September 30, 2011. As of September 30, 2012, the allowance for credit losses equaled 111.10% of non-accrual and past due loans compared to 77.38% at December 31, 2011 and 72.43% at September 30, 2011. During the three and nine month periods ended September 30, 2012, the Company recorded net (recoveries) charge-offs of ($12,000) and $137,000, compared to net (recoveries) charge-offs of ($80,000) and $110,000 during the corresponding period of the prior year. On an annualized basis, net charge-offs for the 2012 period represent 0.08% of the average loan portfolio.

- 13 -

Other Income. Other income decreased from $501,000 for the three month period ended September 30, 2011, to $496,000 for the corresponding 2012 period, a $5,000 (1.00%) decrease. For the nine month period, other income decreased from $1,601,000 at September 30, 2011, to $1,336,000 for the corresponding 2012 period, a $265,000 (16.55%) decrease. The decrease for the three and nine month period was due mainly to a decrease in gains on investment securities.

Other Expenses. Other expenses decreased from $2,776,000 for the three month period ended September 30, 2011, to $2,708,000 for the corresponding 2012 period, a $68,000 (2.45%) decrease. Other expenses decreased from $8,474,000 for the nine month period ended September 30, 2011, to $8,109,000 for the corresponding 2012 period, a $365,000 (4.31%) decrease. The decrease for the three month period was primarily due to the decrease in occupancy and FDIC expenses. The decrease for the nine month period was due mainly to a decrease in FDIC expenses, partially offset by an increase in salaries and employee benefits.

Income Taxes. During the three and nine months ended September 30, 2012, the Company recorded income tax expense of $163,000 and $522,000, compared to income tax expense of $239,000 and $692,000 for the same respective periods in 2011. The Company's effective tax rate for the three and nine month period in 2012 was 19.57% and 20.25%, respectively, compared to 23.69% and 23.63% for the prior year period. The decrease in the effective tax rate for the three and nine month period was due to an increase in the proportion of tax exempt income included in net interest income.

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 third quarter of 2012, comprehensive income, net of tax, totaled $1,212,000, compared to the September 30, 2011 comprehensive income of $1,559,000. Year-to-date, comprehensive income, net of tax, totaled $2,789,000, as of September 30, 2012, compared to the September 30, 2011 comprehensive income of $4,765,000. The decrease was due to a decrease in net income and a decrease in the net unrealized gains on securities arising during the three and nine month periods.

Financial Condition

General. The Company's assets increased to $379,292,000 at September 30, 2012 from $365,260,000 at December 31, 2011, primarily due to an increase in loans and cash and cash equivalents, partially offset by a decrease in securities. The Bank's net loans totaled $251,628,000 at September 30, 2012, compared to $232,734,000 at December 31, 2011, an increase of $18,894,000 (8.12%), primarily attributable to an increase in indirect lending with a lesser increase in commercial mortgages and a reduction in participations purchased.

The Company's total investment securities portfolio (investment securities available for sale) totaled $95,461,000 at September 30, 2012, a $7,406,000 (7.20%) decrease from $102,867,000 at December 31, 2011. 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 September 30, 2012, totaled $13,126,000, an increase of $3,172,000 (31.87%) from the December 31, 2011 total of $9,954,000. The decrease in securities was used to pay-off short-term borrowings and put into cash.

Deposits as of September 30, 2012, totaled $324,181,000, which is an increase of $12,236,000 (3.77%) from $311,945,000 at December 31, 2011. Demand deposits as of September 30, 2012, totaled $82,747,000, which is an increase of $9,408,000 (12.83%) from $73,339,000 at December 31, 2011. NOW accounts as of September 30, 2012, totaled $23,539,000, which is a decrease of $500,000 (2.08%) from $24,039,000 at December 31, 2011. Money market accounts as of September 30, 2012, totaled $21,008,000, which is an increase of $2,924,000 (16.17%), from $18,084,000 at December 31, 2011. Savings deposits as of September 30, 2012, totaled $67,366,000, which is an increase of $7,302,000 (12.16%) from $60,064,000 at December 31, 2011. Certificates of deposit over $100,000 totaled $28,010,000 on September 30, 2012, which is a decrease of $3,405,000 (10.84%) from $31,415,000 at December 31, 2011. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $101,511,000 on September 30, 2012, which is a $3,493,000 (3.33%) decrease from the $105,004,000 total at December 31, 2011.

Asset Quality. The following tables set forth the amount of the Bank's current, past due, and non-accrual loans by categories of loans and restructured loans, at the dates indicated.

- 14 -

The following table analyzes the age of past due loans, including both accruing and non-accruing loans, segregated by class of loans as of the three months ended September 30, 2012 and the year ended December 31, 2011.

   At September 30, 2012                                         90 Days or
  (Dollars in Thousands)                      30-89 Days          More and
                               Current         Past Due        Still Accruing       Nonaccrual        Total

Commercial and industrial     $    4,582     $        979     $              -     $      1,290     $    6,851
Commercial real estate            72,471                -                    -            1,370         73,841
Consumer and indirect             65,613            1,221                    2               78         66,914
Residential real estate          106,023            2,231                  257              553        109,064

                              $  248,689     $      4,431     $            259     $      3,291     $  256,670




   At December 31, 2011                                          90 Days or
  (Dollars in Thousands)                      30-89 Days          More and
                               Current         Past Due        Still Accruing        Nonaccrual        Total

Commercial and industrial     $    7,135     $         38     $               -     $         20     $    7,193
Commercial real estate            66,590                -                     -            4,484         71,074
Consumer and indirect             48,745            1,298                     -               75         50,118
Residential real estate          108,703              135                    18              482        109,338

                              $  231,173     $      1,471     $              18     $      5,061     $  237,723

The balances in the above charts have not been reduced by the allowance for loan loss and the unearned income on loans. For the period ending September 30, 2012, the allowance for loan loss is $3,944,000 and the unearned income is $1,098,000. For the period ending December 31, 2011, the allowance for loan loss is $3,931,000 and the unearned income is $1,058,000.

                                                                   At                 At
                                                              September 30,      December 31,
                                                                  2012               2011
                                                                  (Dollars in Thousands)

Restructured loans                                           $         2,650     $       4,108
Non-accrual and 90 days or more and still accruing loans
to gross loans                                                          1.38 %            2.15 %
Allowance for credit losses to non-accrual and 90 days or
more and still accruing loans                                         111.10 %           77.38 %

At September 30, 2012, there was $4,040,000 in loans outstanding, included in the current and 30-89 days past due columns 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.

Non-accrual loans with specific reserves at September 30, 2012 are comprised of:

Residential Real Estate - Four loans to one borrower in the amount of $514,000, secured by residential properties with a specific reserve of $227,000 established for the loans.

Commercial loans - Two loans to one borrower totaling $18,000 with $18,000 of specific reserves established.

- 15 -

Commercial Real Estate - Two loans to two borrowers in the amount of $2,642,000, secured by commercial and/or residential properties with a specific reserve of $652,000 established for the loans.

Below is a summary of the recorded investment amount and related allowance for losses of the Bank's impaired loans at September 30, 2012 and December 31, 2011.

   (Dollars in thousands)
                                                   Unpaid          Interest                         Average
                                  Recorded        Principal         Income         Specific         Recorded
     September 30, 2012          Investment        Balance        Recognized        Reserve        Investment
Impaired loans with specific
reserves:
Real-estate - mortgage:
Residential                     $      2,191           2,191               67             872            2,192
Commercial                             4,997           5,597               87           1,105            6,409
Consumer                                  76              76                6              20               76
Installment                                -               -                -               -                -
Home Equity                                -               -                -               -                -
Commercial                               702             702               28             448              721
Total impaired loans with
specific reserves               $      7,966           8,566              188           2,445            9,398

Impaired loans with no
specific reserve:
Real-estate - mortgage:
Residential                     $        302             302               30             n/a              283
Commercial                               175             175                8             n/a              182
Consumer                                   6               6                -             n/a                -
Installment                              236             236                -             n/a                -
Home Equity                                -               -                -             n/a                -
Commercial                               167             167               12             n/a              201
Total impaired loans with no
specific reserve                $        886             886               50               -              666




   (Dollars in thousands)
                                                   Unpaid          Interest                         Average
                                  Recorded        Principal         Income         Specific         Recorded
      December 31, 2011          Investment        Balance        Recognized        Reserve        Investment
Impaired loans with specific
reserves:
Real-estate - mortgage:
Residential                     $      1,703           1,703               62             411            1,708
Commercial                             6,503           7,103              219           1,642            6,559
Consumer                                 100             100               10              44              104
Installment                                -               -                -               -                -
Home Equity                                -               -                -               -                -
Commercial                               731             731               41             456              755
Total impaired loans with
specific reserves               $      9,037           9,637              332           2,553            9,126

Impaired loans with no
specific reserve:
Real-estate - mortgage:
Residential                     $        260             260                7             n/a              245
Commercial                             1,036           1,036               50             n/a            1,051
Consumer                                  25              25                -             n/a                -
Installment                              265             265                -             n/a                -
Home Equity                                -               -                -             n/a                -
Commercial                               253             253               21             n/a              304
Total impaired loans with no
specific reserve                $      1,839           1,839               78               -            1,600

- 16 -

Loans that were restructured by the Bank by categories of loans at September 30, 2012 are as follows:

            At September 30, 2012
           (Dollars in Thousands)                                   Pre-Modification       Post-Modification
                                                                      Outstanding             Outstanding
                                                  Number of             Recorded               Recorded
                                                  Contracts            Investment             Investment

Troubled Debt Restructurings:
Real Estate - Residential                                    1     $            1,280     $             1,280
Real Estate - Commercial                                     1                  2,759                   1,370
Commercial                                                   -                      -                       -
Finance leases                                               -                      -                       -




Troubled Debt Restructurings     Number of       Recorded
That Subsequently Defaulted      Contracts      Investment

Troubled Debt Restructurings:
Real Estate - Residential                 1     $     1,280
Real Estate - Commercial                  1           1,370
Commercial                                -               -
Finance leases                            -               -

At September 30, 2012, the Bank has one modified residential loan (done in 2011) in the amount of $1,280,423 which modifications qualify the loan as Troubled Debt Restructuring (TDR). The loan is included in the schedule above of accruing impaired loans. This borrower is no longer in compliance with the modified term. The Bank has one modified commercial real estate loan (done in 2010) in the amount of $1,370,000 which modifications qualify the loan as Troubled Debt Restructuring (TDR). The loan is included in the schedule above of non-accruing impaired loans. This borrower is not in compliance with the modified term and is not accruing interest. The reduction in the outstanding recorded amount is due to the sale of part of the building.

Credit Quality Information

The following tables represent credit exposures by creditworthiness category for the quarter ending September 30, 2012 and the year ended December 31, 2011. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The Bank's internal creditworthiness is based on experience with similarly graded credits. Loans that trend upward toward higher credit grades typically have less credit risk and loans that migrate downward typically have more credit risk.

The Bank's internal risk ratings are as follows:

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

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

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

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

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

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

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

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

- 17 -

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

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

                          Commercial                       Consumer
  September 30, 2012         and           Commercial         and         Residential
(Dollars in Thousands)    Industrial      Real Estate      Indirect       Real Estate        Total

Pass                     $      5,660     $     64,636     $  65,496     $     105,697     $ 241,489
Special mention                   322            5,402         1,106             1,905         8,735
Substandard                       869            3,803           234             1,462         6,368
Doubtful                            -                -            78                 -            78
Loss                                -                -             -                 -             -

                         $      6,851     $     73,841     $  66,914     $     109,064     $ 256,670




                          Commercial                       Consumer
  December 31, 2011          and           Commercial         and         Residential
(Dollars in Thousands)    Industrial      Real Estate      Indirect       Real Estate        Total

Pass                     $      5,883     $     58,799     $  48,528     $     106,302       219,512
Special mention                   327            4,736         1,325             1,333         7,721
Substandard                       983            7,539           190             1,703        10,415
Doubtful                            -                -            75                 -            75
Loss                                -                -             -                 -             -

                         $      7,193     $     71,074     $  50,118     $     109,338     $ 237,723

Other Real Estate Owned. At September 30, 2012, the Company had $865,000 in real estate acquired in partial or total satisfaction of debt, compared to $1,111,000 at December 31, 2011. This decrease for 2012 was the result of sales of units in a property acquired in 2011, partially offset by properties acquired in the third quarter of 2012. 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.

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 collectability of the principal is unlikely. The allowance, based on evaluations of the collectability of loans and prior loan loss experience, is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The evaluations are performed for each class of loans and 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 securing the loans and current economic conditions and trends that may affect the borrowers' ability to pay. For example, delinquencies in unsecured loans and indirect automobile installment loans will be reserved for at significantly higher ratios than loans secured by real estate. Based on that analysis, the Bank deems its allowance for credit losses in proportion to the total non-accrual loans and past due loans to be sufficient.

- 18 -

Transactions in the allowance for credit losses for the six months ended September 30, 2012 and the year ended December 31, 2011 were as follows:

                              Commercial                        Consumer
    September 30, 2012           and           Commercial          and          Residential
  (Dollars in Thousands)      Industrial      Real Estate       Indirect        Real Estate       Unallocated        Total

Balance, beginning of year   $        557     $      2,013     $       889     $         596     $        (124 )   $    3,931
Provision for credit
losses                                 75             (610 )           172               591               (78 )          150
Recoveries                             10               67             244                 6                 -            327
Loans charged off                     (55 )              -            (300 )            (109 )               -           (464 )

Balance, end of quarter      $        587     $      1,470     $     1,005     $       1,084     $        (202 )   $    3,944

Individually evaluated for
impairment:
Balance in allowance         $        448     $      1,105     $        20     $         872     $           -     $    2,445
Related loan balance                  702            4,997              76             2,191                 -          7,966

Collectively evaluated for
impairment:
Balance in allowance         $        139     $        365     $       985     $         212     $        (202 )   $    1,499
Related loan balance                6,149           68,844          66,838           106,873                 -        248,704

Management is comfortable with the level of unallocated allowance for credit losses shortfall since the residual special reserve on one of the commercial real estate properties is based on a 2010 appraisal. The appraisal is low compared to the actual market value. This is based upon the recent sale of the 2nd and 3rd floors of the building. Negotiations on a sales contract on this . . .

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