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GLBZ > SEC Filings for GLBZ > Form 10-K on 18-Mar-2014All Recent SEC Filings

Show all filings for GLEN BURNIE BANCORP

Form 10-K for GLEN BURNIE BANCORP


18-Mar-2014

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 2013, net interest income before provision for credit losses increased to $12,620,060 from $12,562,134 in 2012, a 0.46% increase. Total interest income decreased from $15,817,230 in 2012 to $15,281,865 in 2013, a 3.38% decrease. Interest expense for 2013 totaled $2,661,805, an 18.23% decrease from $3,255,096 in 2012. Net income in 2013 was $2,614,177 compared to $2,665,080 in 2012. The decrease in the 2013 consolidated net income was mainly due to decreases in loan income, which was offset by a decrease in deposit expense and an increase in gains on investment securities, an increase in impairment of securities and an increase in other expenses.

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, we believe that 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 $7,398,293 in 2012 to $5,908,796 in 2013.

Comparison of Results of Operations for the Years Ended December 31, 2013, 2012 and 2011

General. For the year ended December 31, 2013, the Company reported consolidated net income of $2,614,177 ($0.95 basic and diluted earnings per share) compared to consolidated net income of $2,665,080 ($0.98 basic and diluted earnings per share) for the year ended December 31, 2012 and consolidated net income of $2,993,093 ($1.10 basic and diluted earnings per share) for the year ended December 31, 2011. The decrease in the 2013 consolidated net income was mainly due to decreases in loan income, an increase in impairment of securities and an increase in other expenses, which was offset by a decrease in deposit expense and an increase in gains on investment securities. 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.

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.

Consolidated net interest income for the year ended December 31, 2013 was $12,620,060 compared to $12,562,134 for the year ended December 31, 2012 and $13,449,385 for the year ended December 31, 2011. The $57,926 increase for the most recent year was primarily due to the decline in the interest expense on deposits being greater than the decline in interest income on loans and securities. The $887,251 decrease for 2012 compared to 2011 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 interest income, net of tax, for 2013 was $13,481,000, a $199,000 or 1.50% increase from the after tax net interest income for 2012, which was $13,282,000, a $1,012,000 or 7.08% decrease from the after tax net interest income for 2011.

Interest expense decreased from $3,255,096 in 2012 to $2,661,805 in 2013, a $593,291 or an 18.23% decrease, primarily due to a decrease in deposit rates. Interest expense decreased from $3,682,580 in 2011 to $3,255,096 in 2012, a $427,484 or an 11.61% decrease, primarily due to a decrease in deposit expense. Net interest margin for the year ended December 31, 2013 was 3.72% compared to 3.98% and 4.39% for the years ended December 31, 2012 and 2011, 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, 2013 VS. 2012 2012 VS. 2011

                                             Change Due To:                               Change Due To:
                         Increase/                                    Increase/
                         Decrease          Rate         Volume        Decrease          Rate         Volume
                                                           (In Thousands)
ASSETS:
Interest-earning
assets:
 Federal funds sold     $        (1 )    $       -     $      (1 )   $        (2 )    $       -     $      (2 )
 Interest-bearing
deposits                         12             14            (2 )            13             15            (2 )

Investment
securities:
 U.S. Treasury
securities,
obligations of U.S.
government agencies
and mortgage-backed
securities                      (37 )            1           (38 )          (580 )         (635 )          55
Obligations of states
and political
subdivisions(1)                 (73 )           73          (146 )           142           (368 )         510
All other investment
securities                      (25 )           (9 )         (16 )           (56 )            5           (61 )
   Total investment
securities                     (135 )           65          (200 )          (494 )         (998 )         504

Loans, net of
unearned income:
 Demand, time and
lease                          (130 )           (5 )        (125 )            17             40           (23 )
 Mortgage and
construction                    146           (406 )         552            (844 )         (956 )         112
 Installment and
personal unsecured
lines                          (286 )           (2 )        (284 )          (129 )       (1,111 )         982
   Total gross
loans(2)                       (270 )         (413 )         143            (956 )       (2,027 )       1,071
 Allowance for credit
losses                            -              -             -               -              -             -
   Total net loans             (270 )         (413 )         143            (956 )       (2,027 )       1,071
Total
interest-earning
assets                  $      (394 )    $    (334 )   $     (60 )   $    (1,439 )    $  (3,010 )   $   1,571

LIABILITIES:
Interest-bearing
deposits:
 Savings and NOW        $       (68 )    $     (80 )   $      12     $       (52 )    $     (87 )   $      35
 Money market                   (15 )          (17 )           2             (28 )          (36 )           8
 Other time deposits           (514 )         (321 )        (193 )          (347 )         (237 )        (110 )
   Total
interest-bearing
deposits                       (597 )         (418 )        (179 )          (427 )         (360 )         (67 )
Non-interest-bearing
deposits                          -              -             -               -              -             -
Borrowed funds                    4             (3 )           7               -              2            (2 )
Total
interest-bearing
liabilities             $      (593 )    $    (421 )   $    (172 )   $      (427 )    $    (358 )   $     (69 )

(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,
                                                                        2013                                         2012                                          2011
                                                       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                                    $    1,197     $        3           0.25 %   $     1,760     $        4           0.25 %   $     2,258     $        6           0.25 %
Interest-bearing deposits                                  8,433             44           0.52           8,945             32           0.35          10,477             19           0.19

Investment securities:
U.S. Treasury securities, obligations of U.S.
government agencies and mortgage-backed securities        56,850            871           1.53          59,359            908           1.53          57,259          1,488           2.60
Obligations of states and political subdivisions(1)       38,644          2,519           6.52          40,959          2,592           6.33          35,602          2,450           6.88
All other investment securities                              345             33           9.68             479             58          12.04           1,033            114          11.07
Total investment securities                               95,839          3,423           3.57         100,797          3,558           3.53          93,894          4,052           4.49

Loans, net of unearned income:
 Demand, time and lease                                    4,478            240           5.37           6,744            370           5.48           7,195            353           4.90
 Mortgage and construction                               191,969          9,634           5.02         181,311          9,488           5.23         179,271         10,332           5.76
Installment and personal unsecured lines                  63,519          2,799           4.41          60,725          3,085           5.08          46,544          3,214           6.91
Total gross loans(2)                                     259,966         12,673           4.87         248,780         12,943           5.20         233,010         13,899           5.96
Allowance for credit losses                               (3,146 )                                      (3,875 )                                      (3,630 )
Total net loans                                          256,820         12,673           4.93         244,905         12,943           5.28         229,380         13,899           6.06
Total interest-earning assets                            362,289         16,143           4.46         356,407         16,537           4.64         336,009         17,976           5.35
Cash and due from banks                                    2,936                                         2,920                                         3,097
Other assets                                              19,348                                        17,583                                        18,914
Total assets                                          $  384,573                                   $   376,910                                   $   358,020

LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing deposits:
Savings and NOW                                       $   99,085             69           0.07 %   $    90,813            137           0.15 %   $    80,707            189           0.23 %
Money market                                              21,249             11           0.05          19,957             26           0.13          17,578             54           0.31
Other time deposits                                      120,574          1,934           1.60         131,047          2,448           1.87         135,755          2,795           2.06
Total interest-bearing deposits                          240,908          2,014           0.84         241,817          2,611           1.08         234,040          3,038           1.30
Short-term borrowed funds                                  1,876              7           0.37             428              2           0.46           1,024              4           0.37
Long-term borrowed funds                                  20,000            641           3.20          20,000            642           3.21          20,000            640           3.20
Total interest-bearing liabilities                       262,784          2,662           1.01         262,245          3,255           1.24         255,064          3,682           1.44

Non-interest-bearing deposits                             86,542                                        80,373                                        72,280
Other liabilities                                          2,838                                         1,457                                         1,907
Stockholders' equity                                      32,409                                        32,835                                        28,769
Total liabilities and equity                          $  384,573                                   $   376,910                                   $   358,020
Net interest income                                                  $   13,481                                    $   13,282                                    $   14,294
Net interest spread                                                                       3.45 %                                        3.40 %                                        3.91 %
Net interest margin                                                                       3.72 %                                        3.98 %                                        4.39 %

1 Tax equivalent basis. The incremental tax rate applied was 34.42% for 2013 and 37.11% for 2012. 2 Non-accrual loans included in average balance.

Provision for Credit Losses. During the year ended December 31, 2013, the Company made a provision of $260,000 for credit losses, compared to a provision of $250,000 and $663,000 for credit losses for the years ended December 31, 2012 and 2011, respectively. The increase in 2013 was primarily due to additional loans being put on non-accrual. At December 31, 2013, the allowance for credit losses equaled 68.78% of non-accrual and past due loans compared to 58.84% and 77.38% at December 31, 2012 and 2011, respectively. During the year ended December 31, 2013, the Company recorded net charge-offs of $596,000 compared to $873,000 and $132,000 in net charge-offs during the years ended December 31, 2012 and 2011, 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 increased from $1,822,072 in 2012 to $2,001,216 in 2013, a $179,144, or 9.83% increase. The increase was primarily due to a increase in gains on securities with a lesser increase in service charges on deposit accounts. 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 Expenses. Other expenses, which consist of non-interest operating expenses, increased from $10,795,319 in 2012 to $11,113,244 in 2013, a $317,925 or 2.95% increase. This increase was primarily due to an increase in the FDIC Assessment and other professional expenses, with lesser increases in telephone and office supplies, furniture and equipment and impairment on securities, partially offset by decreases in salaries and wages, employee benefits, and occupancy. Other 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 the FDIC Assessment and the impairment on securities, partially offset by an increase in employee benefits.

Income Taxes. During the year ended December 31, 2013, the Company recorded an income tax expense of $633,855, compared to an income tax expense of $673,807 for the year ended December 31, 2012. This decrease was due to the decrease in net income before 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.

Comparison of Financial Condition at December 31, 2013, 2012 and 2011

The Company's total assets decreased to $377,193,573 at December 31, 2013 from $387,438,269 at December 31, 2012. 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 net loan portfolio increased to $270,684,120 at December 31, 2013 compared to $249,631,525 at December 31, 2012 and $232,734,257 at December 31, 2011. In 2013, the increase in the loan portfolio was primarily due to increases in indirect loans, refinance mortgage loans, non-home owner residential construction loans, home equity and purchase money mortgages, partially offset by decreases in secured business installment loans, home-owner residential construction, commercial and industrial mortgages, and demand secured business loans. 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.

During 2013, the Company's total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $74,313,682, a $26,176,585 or 26.05%, decrease from $100,490,267 at December 31, 2012. This decrease is primarily attributable to a decrease in mortgage backed securities and municipal securities in order to fund growth in the loan portfolio. 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 a decrease in mortgage backed securities, partially offset by an increase in non-Maryland municipal bonds.

Deposits as of December 31, 2013 totaled $323,803,356, a decrease of $8,485,530, or 2.55%, from the $332,288,886 total as of December 31, 2012. 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. Demand deposits as of December 31, 2013 totaled $86,747,525, a $2,459,040, or 2.92%, increase from $84,288,485 at December 31, 2012. NOW and Super NOW accounts, as of December 31, 2013, decreased by $3,708,181, or 11.70% from their 2012 level to $27,991,553. Money market accounts decreased by $1,515,296, or 7.31%, from their 2012 level, to total $19,219,579 at December 31, 2013. Savings deposits increased by $2,727,492, or 3.97%, from their 2012 level, to $71,404,572 at December 31, 2013. Time deposits over $100,000 totaled $45,901,474 on December 31, 2013, a decrease of $647,670, or 1.39% from December 31, 2012. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $72,538,653 on December 31, 2013, a $7,800,915 or 9.71% decrease from December 31, 2012.

Total stockholders' equity as of December 31, 2013 decreased by $2,004,503, or 5.97%, from the 2012 period. The decrease was attributed to an increase in accumulated other comprehensive loss and cash dividends paid, net of dividends reinvested, offset by the increase in earnings. 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.

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, 2013, 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, 2013.

                                                                   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           $         -     $        -     $        -     $       -     $   9,215
Federal funds and overnight
deposits                                1,739              -              -             -         1,739
Securities                                  -              -            419        73,895        74,314
Loans                                  10,812         12,956         66,167       180,749       270,684
Fixed assets                                -              -              -             -         3,697
Other assets                                -              -              -             -        17,545

Total assets                      $    12,551     $   12,956     $   66,586     $ 254,644     $ 377,194

Liabilities:
Demand deposit accounts           $         -     $        -     $        -     $       -     $  86,747
NOW accounts                           27,991              -              -             -        27,991
Money market deposit accounts          19,220              -              -             -        19,220
Savings accounts                       71,279            126              -             -        71,405
IRA accounts                            3,700          9,362         24,677         2,764        40,503
Certificates of deposit                11,712         24,625         39,468         2,132        77,937
Long-term borrowings                        -              -         20,000             -        20,000
Other liabilities                           -              -              -             -         1,808
Stockholders' equity:                       -              -              -             -        31,583

Total liabilities and
stockholders' equity              $   133,902     $   34,113     $   84,145     $   4,896     $ 377,194

GAP                               $  (121,351 )   $  (21,157 )   $  (17,559 )   $ 249,748
Cumulative GAP                    $  (121,351 )   $ (142,508 )   $ (160,067 )   $  89,681
. . .
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