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GLBZ > SEC Filings for GLBZ > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for GLEN BURNIE BANCORP


29-Mar-2013

Annual Report


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 2012, net interest income before provision for credit losses decreased to $12,562,134 from $13,449,385 in 2011, a 6.60% decrease.Total interest income decreased from $17,131,965 in 2011 to $15,817,230 in 2012, a 7.68% decrease.Interest expense for 2012 totaled $3,255,096, an 11.61% decrease from $3,682,580 in 2011.Net income in 2012 was $2,665,080 compared to $2,993,093 in 2011. The decrease in net income was primarily due to the reduction in interest income on loans and U.S. Government agency securities offset by a reduction in interest expense on deposits and a reduction in the provision for loan losses.

In spite of the continued lackluster performance of the economy in general, and the continued low interest rate environment due to continued Federal Reserve stimulus, our continued conservative lending decisions led to a substantial increase in outstanding loans and continued improvement in asset quality as reflected in our Total Impaired Loans, which declined from $10,876,258 in 2011 to $7,398,293 in 2012.

Comparison of Results of Operations for the Years Ended December 31, 2012, 2011 and 2010

General. For the year ended December 31, 2012, the Company reported consolidated net income of $2,665,080 ($0.98 basic and diluted earnings per share) compared to consolidated net income of $2,993,093 ($1.10 basic and diluted earnings per share) for the year ended December 31, 2011 and consolidated net income of $2,064,785 ($0.76 basic and diluted earnings per share) for the year ended December 31, 2010. The decrease in the 2012 consolidated net income was mainly due to decreases in interest income on U.S. Government agency securities, loan income, and gains on investment securities. These decreases were partially offset by decreases in interest expense on deposits, other expenses and provision for loan losses, while employee benefits slightly increased. The increase in the 2011 consolidated net income was mainly due to a decrease in interest expense on deposits and a decrease in provision for loan losses. This was partially offset by a decrease in loan and U.S. Government agency securities income and an increase in income taxes.

Net Interest Income.The primary component of the Company's net income is its net interest income, which is the difference between income earned on assets and interest paid on the deposits and borrowings used to fund income producing assets. Net interest income is determined by the spread between the yields earned on the Company's interest-earning assets and the rates paid on interest-bearing liabilities as well as the relative amounts of such assets and liabilities. Net interest income, divided by average interest-earning assets, represents the Company's net interest margin.

Net interest income is affected by the mix of loans in the Bank's loan portfolio. Currently a majority of the Bank's loans are residential and commercial mortgage loans secured by real estate and indirect automobile loans secured by automobiles.

In 2012, the Bank continued a strategy of reducing its portfolio of above market rate time deposits and other savings products and continuing to focus on the accumulation and retention of core deposits by offering rates appropriate for our marketplace. As a result of these efforts, the Bank realized an increase in the balances of low volatility deposits and a further decrease in interest paid on deposits.

Consolidated net interest income for the year ended December 31, 2012 was $12,562,134 compared to $13,449,385 for the year ended December 31, 2011 and $12,880,012 for the year ended December 31, 2010. The $887,251 decrease for the most recent year was primarily due to decreases in most areas of interest income, except for state and municipal securities and other income, partially offset by a decrease in interest expense on deposits. The $569,373 increase for 2011 compared to 2010 was primarily due to decreases in most areas of interest income, except for state and municipal securities, offset by greater decreases in interest expense (especially junior subordinated debentures). The interest income, net of tax, for 2012 was $13,282,000, a $1,012,000 or 7.08% decrease from the after tax net interest income for 2011, which was $14,294,000, a $675,406 or 4.96% increase from the after tax net interest income for 2010.

Interest expense decreased from $3,682,580 in 2011 to $3,255,096 in 2012, a $427,484 or a 11.61% decrease, primarily due to a decrease in deposit expense. Interest expense decreased from $5,298,955 in 2010 to $3,682,580 in 2011, a $1,616,375 or a 30.50% decrease, primarily due to a decrease in deposit expense, long-term borrowings (due to the repayment of the $7 million Federal Home Loan Bank of Atlanta loan in September 2010), and the repayment in 2010 of the junior subordinated debentures. Net interest margin for the year ended December 31, 2012 was 3.98% compared to 4.39% and 4.05% for the years ended December 31, 2011 and 2010, respectively.

The following table allocates changes in income and expense attributable to the Company's interest-earning assets and interest-bearing liabilities for the periods indicated between changes due to changes in rate and changes in volume. Changes due to rate/volume are allocated to changes due to volume.

Year Ended December 31, 2012 VS. 2011 2011 VS. 2010

                                            Change Due To:                               Change Due To:
                         Increase/                                   Increase/
                         Decrease         Rate         Volume        Decrease         Rate          Volume
                                                           (In Thousands)
ASSETS:
Interest-earning
assets:
Federal funds sold      $        (2 )   $       -     $      (2 )   $        (4 )   $       -     $       (4 )
Interest-bearing
deposits                         13            15            (2 )             3             4             (1 )

Investment
securities:
U.S. Treasury
securities,
obligations of U.S.
government agencies
and mortgage-backed
securities                     (580 )        (635 )          55            (428 )        (442 )           14
Obligations of states
and political
subdivisions(1)                 142          (368 )         510             316            26            290
All other investment
securities                      (56 )           5           (61 )           (52 )          28            (80 )
Total investment
securities                     (494 )        (998 )         504            (164 )        (388 )          224

Loans, net of
unearned income:
Demand, time and
lease                            17            40           (23 )          (122 )         (29 )          (93 )
Mortgage and
construction                   (844 )        (956 )         112            (261 )        (478 )          217
Installment and
credit card                    (129 )      (1,111 )         982            (364 )        (132 )         (232 )
Total gross loans(2)           (956 )      (2,027 )       1,071            (747 )        (639 )         (108 )
Allowance for credit
losses                            -             -             -               -             -              -
Total net loans                (956 )      (2,027 )       1,071            (747 )        (639 )         (108 )
Total
interest-earning
assets                  $    (1,439 )   $  (3,010 )   $   1,571     $      (912 )   $  (1,023 )   $      111

LIABILITIES:
Interest-bearing
deposits:
Savings and NOW         $       (52 )   $     (87 )   $      35     $        13     $       -     $       13
Money market                    (28 )         (36 )           8             (13 )         (16 )            3
Other time deposits            (347 )        (237 )        (110 )          (659 )        (626 )          (33 )
Total
interest-bearing
deposits                       (427 )        (360 )         (67 )          (659 )        (642 )          (17 )
Non-interest-bearing
deposits                          -             -             -               -             -              -
Borrowed funds                    -             2            (2 )          (958 )        (473 )         (485 )
Total
interest-bearing
liabilities             $      (427 )   $    (358 )   $     (69 )   $    (1,617 )   $  (1,115 )   $     (502 )

(1) Tax equivalent basis.

(2) Non-accrual loans included in average balances.

The following table provides information for the designated periods with respect to the average balances, income and expense and annualized yields and costs associated with various categories of interest-earning assets and interest-bearing liabilities.

                                                                       Year Ended December 31,
                                       2012                                      2011                                     2010
                        Average                      Yield/       Average                     Yield/       Average                     Yield/
                        Balance       Interest        Cost        Balance      Interest        Cost        Balance      Interest        Cost
                                                                        (Dollars In Thousands)
ASSETS:
Interest-earning
assets:
Federal funds sold     $   1,760     $        4         0.25 %   $   2,258     $       6         0.25 %   $   3,797     $      10          0.25 %
Interest-bearing
deposits                   8,945             32         0.35        10,477            19         0.19        11,188            16          0.14

Investment
securities:
U.S. Treasury
securities,
obligations of U.S.
government agencies
and mortgage-backed
securities                59,359            908         1.53        57,259         1,488         2.60        56,868         1,916          3.37
Obligations of
states and political
subdivisions(1)           40,959          2,592         6.33        35,602         2,450         6.88        31,341         2,134          6.81
All other investment
securities                   479             58        12.04         1,033           114        11.07         1,995           166          8.32
Total investment
securities               100,797          3,558         3.53        93,894         4,052         4.49        90,204         4,216          4.67

Loans, net of
unearned income:
Demand, time and
lease                      6,744            370         5.48         7,195           353         4.90         8,946           475          5.31
Mortgage and
construction             181,311          9,488         5.23       179,271        10,332         5.76       175,812        10,593          6.03
Installment and
credit card               60,725          3,085         5.08        46,544         3,214         6.91        49,737         3,578          7.19
Total gross loans(2)     248,780         12,943         5.20       233,010        13,899         5.96       234,495        14,646          6.25
Allowance for credit
losses                    (3,875 )                                  (3,630 )                                 (3,874 )
Total net loans          244,905         12,943         5.28       229,380        13,899         6.06       230,621        14,646          6.35
Total
interest-earning
assets                   356,407         16,537         4.64       336,009        17,976         5.35       335,810        18,888          5.62
Cash and due from
banks                      2,920                                     3,097                                    3,182
Other assets              17,583                                    18,914                                   18,696
Total assets           $ 376,910                                 $ 358,020                                $ 357,688

LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Interest-bearing
deposits:
Savings and NOW        $  90,813            137         0.15 %   $  80,707           189         0.23 %   $  75,541           176          0.23 %
Money market              19,957             26         0.13        17,578            54         0.31        16,756            67          0.40
Other time deposits      131,047          2,448         1.87       135,755         2,795         2.06       136,822         3,454          2.52
Total
interest-bearing
deposits                 241,817          2,611         1.08       234,040         3,038         1.30       229,119         3,697          1.61
Short-term borrowed
funds                        428              2         0.46         1,024             4         0.37           522             1          0.29
Long-term borrowed
funds                     20,000            642         3.21        20,000           640         3.20        28,747         1,601          5.57
Total
interest-bearing
liabilities              262,245          3,255         1.24       255,064         3,682         1.44       258,389         5,299          2.05

Non-interest-bearing
deposits                  80,373                                    72,280                                   71,212
Other liabilities          1,457                                     1,907                                    1,451
Stockholders' equity      32,835                                    28,769                                   26,636
Total liabilities
and equity             $ 376,910                                 $ 358,020                                $ 357,688
Net interest income                  $   13,282                                $  14,294                                $  13,589
Net interest spread                                     3.40 %                                   3.91 %                                    3.57 %
Net interest margin                                     3.98 %                                   4.39 %                                    4.05 %

1 Tax equivalent basis. The incremental tax rate applied was 37.11% for 2012 and 25.64% for 2011.

2 Non-accrual loans included in average balance.

Provision for Credit Losses. During the year ended December 31, 2012, the Company made a provision of $250,000 for credit losses, compared to a provision of $663,000 and $1,050,000 for credit losses for the years ended December 31, 2011 and 2010, respectively. The decrease in 2012 was primarily due to many of the delinquent commercial real estate loans already having specific loan loss provisions. At December 31, 2012, the allowance for credit losses equaled 58.84% of non-accrual and past due loans compared to 77.38% and 48.69% at December 31, 2011 and 2010, respectively. During the year ended December 31, 2012, the Company recorded net charge-offs of $873,000 compared to $132,000 and $1,223,000 in net charge-offs during the years ended December 31, 2011 and 2010, respectively.

Other Income.Other income includes service charges on deposit accounts, other fees and commissions, net gains on investment securities, and income on Bank owned life insurance (BOLI). Other income decreased from $2,089,530 in 2011 to $1,822,072 in 2012, a $267,458, or 12.80% decrease. The decrease was primarily due to a decrease in gains on securities with a lesser decrease in service charges on deposit accounts. Other income increased from $1,898,607 in 2010 to $2,089,530 in 2011, a $190,923, or 10.06% increase. The increase was primarily due to an increase in gains on securities.

Other Expenses. Other expenses, which consist of non-interest operating expenses, decreased from $11,115,412 in 2011 to $10,795,319 in 2012, a $320,093 or 2.88% decrease. This decrease was primarily due to a decrease in other expenses (included in this decrease in other expenses is the decrease in the FDIC Assessment as discussed on page 3 of this Report under Economic and Credit Turmoil from 2009 to 2012) and impairment on securities, partially offset by an increase in employee benefits. Other expenses decreased from $11,178,323 in 2010 to $11,115,412 in 2011, a $62,911 or 0.57% decrease. This decrease was primarily due to a decrease in employee benefits and impairment on securities offset by increases in salaries and wages and other expenses (primarily FDIC Assessments and legal expenses).

Income Taxes.During the year ended December 31, 2012, the Company recorded an income tax expense of $673,807, compared to an income tax expense of $767,410 for the year ended December 31, 2011. This decrease was due to the increase in tax exempt income earned on state and municipal securities and a decrease in net interest income. During the year ended December 31, 2011, the Company recorded an income tax expense of $767,410, compared to an income tax expense of $485,511 for the year ended December 31, 2010. This increase was due to a lesser amount contributed to provision for credit losses in 2011 and an increase in net interest income.

Comparison of Financial Condition at December 31, 2012, 2011 and 2010

The Company's total assets increased to $387,438,269 at December 31, 2012 from $365,260,263 at December 31, 2011. The Company's total assets increased to $365,260,263 at December 31, 2011 from $347,067,276 at December 31, 2010.

The Company's net loan portfolio increased to $249,631,525 at December 31, 2012 compared to $232,734,257 at December 31, 2011 and $229,850,888 at December 31, 2010. The increase in the loan portfolio during the 2012 period was primarily due to increases in indirect loans, commercial and industrial mortgages, home equity and purchase money mortgages, partially offset by decreases in refinance mortgage loans, construction loans for commercial and industrial loans and demand secured business loans. In 2012, mortgage participations purchased also decreased. The increase in the loan portfolio during the 2011 period is primarily due to an increase in indirect automobile loans, residential mortgages, and installment loans. They were partially offset by decreases in commercial mortgages.

During 2012, the Company's total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $100,490,267, a $2,376,288 or 2.31%, decrease from $102,866,555 at December 31, 2011. This decrease is primarily attributable to an decrease in mortgage backed securities, partially offset by an increase in Non-MD municipals. During 2011, the Company's total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $102,866,555, a $15,598,196 or 17.88%, increase from $87,268,359 at December 31, 2010.This increase is primarily attributable to an increase in mortgage backed securities, Government agency CMO's and Non-MD municipals. These were partially offset by decreases in U.S. Government agencies and corporate trust preferred.

Deposits as of December 31, 2012 totaled $332,288,886, an increase of $20,344,225, or 6.53%, from the $311,944,661 total as of December 31, 2011. Deposits as of December 31, 2011 totaled $311,944,661, an increase of $17,499,833, or 5.95%, from the $294,444,828 total as of December 31, 2010. Demand deposits as of December 31, 2012 totaled $84,288,485, a $10,949,022, or 14.93%, increase from $73,339,463 at December 31, 2011. NOW and Super NOW accounts, as of December 31, 2012, increased by $7,660,678, or 31.87% from their 2011 level to $31,699,734. Money market accounts increased by $2,650,758, or 14.66%, from their 2011 level, to total $20,734,875 at December 31, 2012. Savings deposits increased by $8,386,393, or 13.91%, from their 2011 level, to $68,677,080 at December 31, 2012. Time deposits over $100,000 totaled $46,549,144 on December 31, 2012, a decrease of $1,457,228, or 3.04% from December 31, 2011. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $80,339,568 on December 31, 2012, a $7,844,136 or 8.90% decrease from December 31, 2011.

Total stockholders' equity as of December 31, 2012 increased by $2,376,835, or 7.62%, from the 2011 period. The increase was attributed to an increase in earnings less the cash dividends paid, net of dividends reinvested and the increase in accumulated other comprehensive income. Total stockholders' equity as of December 31, 2011 increased by $4,878,184, or 18.53%, from the 2010 period. The increase was attributed to an increase in earnings less the cash dividends paid, net of dividends reinvested and the increase in accumulated other comprehensive income.

Off-Balance Sheet Arrangements

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

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

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

The Bank's exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. As of December 31, 2012, the Bank has accrued $200,000 for unfunded commitments related to these financial instruments with off balance sheet risk, which is included in other liabilities.

Market Risk Management

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates or equity pricing. The Company's principal market risk is interest rate risk that arises from its lending, investing and deposit taking activities. The Company's profitability is dependent on the Bank's net interest income. Interest rate risk can significantly affect net interest income to the degree that interest bearing liabilities mature or reprice at different intervals than interest earning assets. The Bank's Asset/Liability and Risk Management Committee oversees the management of interest rate risk. The primary purpose of the committee is to manage the exposure of net interest margins to unexpected changes due to interest rate fluctuations. The Company does not utilize derivative financial or commodity instruments or hedging strategies in its management of interest rate risk. The primary tool used by the committee to monitor interest rate risk is a "gap" report which measures the dollar difference between the amount of interest bearing assets and interest bearing liabilities subject to repricing within a given time period. These efforts affect the loan pricing and deposit rate policies of the Company as well as the asset mix, volume guidelines, and liquidity and capital planning.

The following table sets forth the Bank's interest-rate sensitivity at December 31, 2012.

                                                                        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                $         -     $        -     $        -     $       -     $  15,959
Federal funds and overnight deposits         2,669              -              -             -         2,669
Securities                                       -            126              -       100,364       100,490
Loans                                       13,602         10,074         66,275       159,680       249,631
Fixed assets                                     -              -              -             -         3,873
Other assets                                     -              -              -             -        14,816

Total assets                           $    16,271     $   10,200     $   66,275     $ 260,044     $ 387,438

Liabilities:
Demand deposit accounts                $         -     $        -     $        -     $       -     $  84,288
NOW accounts                                31,700              -              -             -        31,700
Money market deposit accounts               20,735              -              -             -        20,735
Savings accounts                            68,516            161              -             -        68,677
IRA accounts                                 3,791         16,631         21,785         1,074        43,281
Certificates of deposit                     13,233         34,152         35,716           507        83,608
Long-term borrowings                             -              -              -        20,000        20,000
Other liabilities                                -              -              -             -         1,561
Stockholders' equity:                            -              -              -             -        33,588

Total liabilities and stockholders'
equity                                 $   137,975     $   50,944     $   57,501     $  21,581     $ 387,438

GAP                                    $  (121,704 )   $  (40,744 )   $    8,774     $ 238,463
Cumulative GAP                         $  (121,704 )   $ (162,448 )   $ (153,674 )   $  84,789
Cumulative GAP as a % of total
assets                                      -31.41 %       -41.93 %       -39.66 %       21.88 %

The foregoing analysis assumes that the Bank's assets and liabilities move with . . .

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