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GLEN BURNIE BANCORP - Annual Report: 2010 (Form 10-K)

Unassociated Document
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2010 or
¨  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                to              .

Commission file number:   0-24047

GLEN BURNIE BANCORP
(Exact name of registrant as specified in its charter)

MARYLAND
 
52-1782444
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)
     
101 Crain Highway, S.E., Glen Burnie, Maryland
 
21061
(Address of principal executive offices)
 
(Zip Code)
     
Registrant’s telephone number, including area code
 
(410) 766-3300

Securities registered pursuant to Section 12(b) of the Act:

Title of Class
Name of Each Exchange on Which Registered
       None     
         None        

Securities registered pursuant to Section 12(g) of the Act:

Title of Class
Common Stock, $1.00 par value
Common Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨  No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  ¨   No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨   Accelerated Filer ¨   Non-Accelerated Filer ¨   Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨  No x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2010 was $18,771,806.

The number of shares of common stock outstanding as of February 28, 2011 was 2,702,093.
   
documents incorporated by reference

To the extent specified, Part III of this Form 10-K incorporates information by reference to the Registrant’s definitive proxy statement for its 2011 Annual Meeting of Shareholders (to be filed).
 
 
 

 

GLEN BURNIE BANCORP
2010 ANNUAL REPORT ON FORM 10-K

Table of Contents

     
 PART I 
     
Item 1.
Business
3
Item 2.
Properties
16
Item 3.
Legal Proceedings
17
 
Executive Officers of the Registrant
17
     
PART II
     
Item 5.
Market for Registrant’s Common Equity, Related
 
 
Stockholder Matters and Issuer Purchases of Equity Securities
    18
Item 6.
Selected Financial Data
19
Item 7.
Management’s Discussion and Analysis of Financial
 
 
Condition and Results of Operations
20
Item 8.
Financial Statements and Supplementary Data
28
Item 9.
Changes in and Disagreements with Accountants
 
 
on Accounting and Financial Disclosure
28
Item 9A.
Controls and Procedures
29
Item 9B.
Other Information
29
     
PART III
     
Item 10.
Directors, Executive Officers and Corporate Governance
30
Item 11.
Executive Compensation
30
Item 12.
Security Ownership of Certain Beneficial Owners
 
 
and Management and Related Stockholder Matters
30
Item 13.
Certain Relationships and Related Transactions, and Director Independence
30
Item 14.
Principal Accountant Fees and Services
30
     
PART IV
     
Item 15.
Exhibits and Financial Statement Schedules
31
     
Signatures
32

 
2

 
 
PART I

ITEM 1.  BUSINESS

General

Glen Burnie Bancorp (the “Company”) is a bank holding company organized in 1990 under the laws of the State of Maryland. The Company owns all the outstanding shares of capital stock of The Bank of Glen Burnie (the “Bank”), a commercial bank organized in 1949 under the laws of the State of Maryland, serving northern Anne Arundel County and surrounding areas from its main office and branch in Glen Burnie, Maryland and branch offices in Odenton, Riviera Beach, Crownsville, Severn (two locations), Linthicum and Severna Park, Maryland. The Bank also maintains two remote Automated Teller Machine (“ATM”) locations in Ferndale and Pasadena, Maryland. The Bank maintains a website at www.thebankofglenburnie.com. The Bank is the oldest independent commercial bank in Anne Arundel County. The Bank is engaged in the commercial and retail banking business as authorized by the banking statutes of the State of Maryland, including the acceptance of demand and time deposits, and the origination of loans to individuals, associations, partnerships and corporations. The Bank’s real estate financing consists of residential first and second mortgage loans, home equity lines of credit and commercial mortgage loans. Commercial lending consists of both secured and unsecured loans.  The Bank also originates automobile loans through arrangements with local automobile dealers.  The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”).

The Company’s principal executive office is located at 101 Crain Highway, S.E., Glen Burnie, Maryland 21061. Its telephone number at such office is (410) 766-3300.

Information on the Company and its subsidiary Bank may be obtained from the Company’s website www.thebankofglenburnie.com. Copies of the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto are available free of charge on the website as soon as they are filed with the SEC through a link to the SEC’s EDGAR reporting system. Simply select the “Investor Relations” menu item, then click on the “All SEC Filings” or “Insider Transactions” link.

Economic and Credit Turmoil of 2008, 2009 and 2010

The turmoil and economic downturn of 2008, which continued in 2009, has engulfed the United States and world financial services industry. The ensuing overall consequences to numerous industries and the U.S. economy is well known and discussed daily in the media.  The Bank and, as a result, the Company, have not been immune to the impact of these difficult economic times.  While, due to conservative lending decisions, the Bank has no exposure to the credit issues affecting the sub-prime residential mortgage market, the economic slowdown resulted in the necessity of our contributing $2,442,976 to the provision for loan losses in 2009, in addition to the $1,145,649 provision made in 2008, primarily due to valuation issues in our commercial mortgage portfolio and continuing delinquency in our indirect automobile portfolio combined with adjustments we made to the risk factors in our calculation of required loan loss reserves. In addition, the economic downturn also resulted in an FDIC insurance premium assessment for 2009 of $549,716 which increased rates continued for 2010, a more than 1,400% increase from the 2008 assessment of $35,544.  In 2008, the economic downturn also resulted in the necessity of the Bank taking in our first OREO (Other Real Estate Owned) property on a defaulted mortgage since 1999.  Also in 2008, the Federal Housing Finance Agency was named conservator over both the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), two government sponsored agencies in which we had invested through the purchase of $3,000,000 of AAA rated preferred stock.  As a result, in 2008 we wrote down the value of those investments to $184,000 by taking a charge to earnings in third quarter of 2008 of $2,816,000.  Each of these factors will be discussed as appropriate elsewhere in this report.  Nevertheless, despite the continuing economic downturn and these events, which are unusual for us in any year, we realized net income of $1,262,462 for 2009, and $403,962 net income for 2008.  The Bank and others believe that the economy showed signs of improvement in 2010, although economic weakness continues in the real estate and other markets.  For 2010, we realized net income of $2,064,785.  We remain well capitalized and did not need to apply for any funding from the U.S. Department of Treasury’s Troubled Asset Relief Program (TARP).  During the past three years, we continued to lend money and, we believe, meet the needs of our customers and neighbors through a difficult time.  We believe we are a sound, conservatively run financial institution that has been profitable in 2008, 2009 and 2010 despite the deterioration in the economic environment and the outside forces that have affected us these past three years.
 
 
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Market Area

The Bank considers its principal market area for lending and deposit products to consist of Northern Anne Arundel County, Maryland, which consists of those portions of the county north of U.S. Route 50. Northern Anne Arundel County includes mature suburbs of the City of Baltimore, which in recent years have experienced modest population growth and are characterized by an aging population. Management believes that the majority of the working population in its market area either commutes to Baltimore or is employed at businesses located at or around the nearby Baltimore Washington International Airport. Anne Arundel County is generally considered to have more affordable housing than other suburban Baltimore areas and attracts younger persons and minorities on this basis. This inflow, however, has not been sufficient to affect current population trends.

Lending Activities

The Bank offers a full range of consumer and commercial loans. The Bank’s lending activities include residential and commercial real estate loans, construction loans, land acquisition and development loans, commercial loans and consumer installment lending including indirect automobile lending. Substantially all of the Bank’s loan customers are residents of Anne Arundel County and surrounding areas of Central Maryland. The Bank solicits loan applications for commercial loans from small to medium sized businesses located in its market area. The Company believes that this is a market in which a relatively small community bank, like the Bank, has a competitive advantage in personal service and flexibility. The Bank’s consumer lending currently consists primarily of indirect automobile loans originated through arrangements with local dealers.

The Company’s total loan portfolio decreased in 2010 and increased during the 2009, 2008, 2007, and 2006 fiscal years. In 2010, the decrease in the loan portfolio was primarily due to decreases in indirect loans, commercial mortgages, secured demand commercial loans and commercial loans, partially offset by increases in refinance and purchase money mortgage loans and land development loans.  Mortgage participations purchased decreased but so did mortgage participations sold.  In 2009, the increase in the loan portfolio was primarily due to increases in refinanced mortgage loans, purchase money mortgage loans, home equity and commercial mortgages, partially offset by a decrease in indirect loans and mortgage participations purchased. In 2008, the increase in the loan portfolio was primarily due to increases in refinanced mortgage loans, commercial and residential construction loans and mortgage participations purchased, partially offset by additional mortgage participations sold and a decrease in indirect loans.  In 2007, the increases were due to residential and commercial mortgages and construction, offset by a decrease in indirect lending and mortgage participations purchased and an increase in mortgage participations sold.  In 2006, the increases were primarily due to an increase in commercial mortgages (due to an increase in participations), offset by decreases in residential mortgages and indirect automobile loans.

The following table provides information on the composition of the loan portfolio at the indicated dates.

    
At December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
(Dollars in Thousands)
 
 $
   
 %
   
 $
   
 %
   
 $
   
 %
   
 $
   
 %
   
 $
   
 %
 
Mortgage:
                                                           
Residential
  $ 102,199       43.62 %   $ 95,683       39.81 %   $ 87,708       36.85 %   $ 76,781       37.98 %   $ 68,341       34.88 %
Commercial
    72,670       31.02       79,845       33.23       76,153       31.99       47,843       23.66       53,164       27.13  
Construction and land development
    5,363       2.29       1,743       0.73       6,590       2.77       5,876       2.91       1,609       0.83  
                                                                                 
Consumer:
                                                                               
Installment
    16,407       7.00       15,965       6.64       16,451       6.91       17,087       8.45       15,044       7.67  
Credit card
    168       0.07       166       0.07       173       0.07       143       0.07       144       0.08  
Indirect automobile
    30,286       12.93       37,092       15.44       43,970       18.47       49,260       24.37       52,539       26.81  
Commercial
    7,193       3.07       9,801       4.08       6,974       2.94       5,184       2.56       5,077       2.60  
Gross loans
    234,286       100.00 %     240,295       100.00 %     238,019       100.00 %     202,174       100.00 %     195,918       100.00 %
Unearned income on loans
    (1,035 )             (839 )             (864 )             (816 )             (743 )        
Gross loans net of unearned income
    233,251               239,456               237,155               201,357               195,175          
Allowance for credit losses
    (3,400 )             (3,573 )             (2,022 )             (1,604 )             (1,839 )        
Loans, net
  $ 229,851             $ 235,883             $ 235,133             $ 199,753             $ 193,336          

The following table sets forth the maturities for various categories of the loan portfolio at December 31, 2010. Demand loans and loans which have no stated maturity, are treated as due in one year or less. At December 31, 2010, the Bank had $42,552,709 in loans due after one year with variable rates and $155,319,356 in such loans with fixed rates.

 
4

 

 
   
Due Within
One Year
   
Due Over One To
Five Years
   
Due Over
Five Years
   
Total
 
         
(In Thousands)
             
Real Estate - mortgage:
                       
Residential
  $ 8,633     $ 2,666     $ 90,900     $ 102,199  
Commercial
    19,039       33,336       20,295       72,670  
Construction and land development
    2,393       2,163       807       5,363  
Installment
    1,120       8,254       7,033       16,407  
Credit Card
    37       14       117       168  
Indirect automobile
    1,237       22,784       6,265       30,286  
Commercial
    3,954       3,239       -       7,193  
    $ 36,413     $ 72,456     $ 125,417     $ 234,286  

Real Estate Lending.  The Bank offers long-term mortgage financing for residential and commercial real estate as well as shorter term construction and land development loans.  Residential mortgage and residential construction loans are originated with fixed rates, while commercial mortgages may be originated on either a fixed or variable rate basis.  Commercial construction loans are generally originated on a variable rate basis.  Substantially all of the Bank’s real estate loans are secured by properties in Anne Arundel County, Maryland.  Under the Bank’s loan policies, the maximum permissible loan-to-value ratio for owner-occupied residential mortgages is 80% of the lesser of the purchase price or appraised value.  For residential investment properties, the maximum loan-to-value ratio is 80%.  The maximum permissible loan-to-value ratio for residential and residential construction loans is 80%.  The maximum loan-to-value ratio for permanent commercial mortgages is 75%.  The maximum loan-to-value ratio for land development loans is 70% and for unimproved land is 65%.  The Bank also offers home equity loans secured by the borrower’s primary residence, provided that the aggregate indebtedness on the property does not exceed 80% of its value.  Because mortgage lending decisions are based on conservative lending policies, the Company has no exposure to the credit issues affecting the sub-prime residential mortgage market.

Commercial Lending.  The Bank’s commercial loan portfolio consists of demand, installment and time loans for commercial purposes.  The Bank’s business demand, installment and time lending includes various working capital loans, equipment, vehicles, lines of credit and letters of credit for commercial customers.  Demand loans require the payment of interest until called, while installment loans require a monthly payment of principal and interest, and time loans require at maturity a single payment of principal and interest due monthly.  Such loans may be made on a secured or an unsecured basis.  All such loans are underwritten on the basis of the borrower’s creditworthiness rather than the value of the collateral.

Installment Lending.  The Bank makes consumer and commercial installment loans for the purchase of automobiles, boats, other consumer durable goods, capital goods and equipment.  Such loans provide for repayment in regular installments and are secured by the goods financed.  Also included in installment loans are overdraft loans and other credit repayable in installments.  As of December 31, 2010, approximately 57.34% of the installment loans in the Bank’s portfolio (other than indirect automobile lending) had been originated for commercial purposes and 42.66% had been originated for consumer purposes.

Indirect Automobile Lending.  The Bank commenced its indirect automobile lending program in January 1998.  The Bank finances new automobiles for terms of up to 72 months and used automobiles for terms of up to 66 months.    The Bank does not lend more than the MSRP on new vehicles. On used vehicles, the Bank will not lend more than 110% of the average wholesale published in a nationally recognized used vehicle pricing guide.  The Bank requires all borrowers to obtain vendor’s single interest coverage protecting the Bank against loss in the case a borrower’s automobile insurance lapses.  The Bank originates indirect loans through a network of approximately 50 dealers which are primarily new car dealers located in Anne Arundel County and the surrounding counties.  Participating dealers take loan applications from their customers and transmit them to the Bank for approval.

Other Loans.  The Bank offers overdraft protection lines of credit, tied to checking accounts, as a convenience to qualified customers.

 
5

 

Although the risk of non-payment for any reason exists with respect to all loans, certain other specific risks are associated with each type of loan.  The primary risks associated with commercial loans, including commercial real estate loans, are the quality of the borrower’s management and a number of economic and other factors which induce business failures and depreciate the value of business assets pledged to secure the loan, including competition, insufficient capital, product obsolescence, changes in the borrowers’ cost, environmental hazards, weather, changes in laws and regulations and general changes in the marketplace.  Primary risks associated with residential real estate loans include fluctuating land and property values and rising interest rates with respect to fixed-rate, long-term loans.  Residential construction lending exposes the Company to risks related to builder performance.  Consumer loans, including indirect automobile loans, are affected primarily by domestic economic instability and a variety of factors that may lead to the borrower’s unemployment, including deteriorating economic conditions in one or more segments of a local or broader economy.  Because the Bank deals with borrowers through an intermediary on indirect automobile loans, this form of lending potentially carries greater risks of defects in the application process for which claims may be made against the Bank.  Indirect automobile lending may also involve the Bank in consumer disputes under state “lemon” or other laws.  The Bank seeks to control these risks by following strict underwriting and documentation guidelines. In addition, dealerships are contractually obligated to indemnify the Bank for such losses for a limited period of time.

The Bank’s lending activities are conducted pursuant to written policies approved by the Board of Directors intended to ensure proper management of credit risk.  Loans are subject to a well defined credit process that includes credit evaluation of borrowers, establishment of lending limits and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances, as well as procedures for on-going identification and management of credit deterioration.  Regular portfolio reviews are performed by the Bank’s Senior Credit Officer to identify potential underperforming loans and other credit facilities, estimate loss exposure and to ascertain compliance with the Bank’s policies.  On a quarterly basis, the Bank’s Internal Auditor performs an independent loan review in accordance with the Bank’s loan review policy.  For significant problem loans, management review consists of evaluation of the financial strengths of the borrower and any guarantor, the related collateral, and the effects of economic conditions.

The Bank’s loan approval policy provides for various levels of individual lending authority.  The maximum aggregate lending authority granted by the Bank to any one Lending Officer is $750,000.  A combination of approvals from certain officers may be used to lend up to an aggregate of $1,000,000.  The Bank’s Executive Committee is authorized to approve loans up to $3.0 million.  Larger loans must be approved by the full Board of Directors.

Under Maryland law, the maximum amount which the Bank is permitted to lend to any one borrower and their related interests may generally not exceed 10% of the Bank’s unimpaired capital and surplus, which is defined to include the Bank’s capital, surplus, retained earnings and 50% of its allowance for possible loan losses.  Under this authority, the Bank would have been permitted to lend up to $2.86 million to any one borrower at December 31, 2010.  By interpretive ruling of the Commissioner of Financial Regulation, Maryland banks have the option of lending up to the amount that would be permissible for a national bank which is generally 15% of unimpaired capital and surplus (defined to include a bank’s total capital for regulatory capital purposes plus any loan loss allowances not included in regulatory capital).  Under this formula, the Bank is permitted to lend up to $4.49 million to any one borrower from and after January 1, 2011. At December 31, 2010, the largest amount outstanding to any one borrower and its related interests was $4,618,000.

Non-Performing Loans

It will be the policy of The Bank of Glen Burnie that any loan that is ninety (90) days or more delinquent in the payment of principal and/or interest be placed into non-accrual status.   Notwithstanding the aforementioned, it is determined that there appears to be a substantial amount of risk of not collecting all of the agreed upon interest that would normally accrue to a loan, the loan should be placed into Non-Accrual status even if the determination is made prior to ninety (90) days delinquent.  A variance to this rule would be if the asset is both well secured and in the process of collection.  An asset is “well secured” if it is secured by (1) by collateral in the form of liens on or  pledges of real or personal property, including securities that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party.  An asset is “in the process of collection” if collection of the asset is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in prepayment of the debt or in its restoration to a current status in the near future.

The Bank seeks to control delinquencies through diligent collection procedures.  For consumer loans, the Bank sends out payment reminders on the seventh and twelfth days after a payment is due.  If a consumer loan becomes 15 days past due, the account is transferred to the Bank’s collections department, which will contact the borrower by telephone and/or  letter before the account becomes 30 days past due.  If a consumer loan becomes more than 30 days past due, the Bank will continue its collection efforts and will move to repossession or foreclosure by the 45th day if the Bank has reason to believe that the collateral may be in jeopardy or the borrower has failed to respond to prior communications.  The Bank will move to repossess or foreclose in all instances in which a consumer loan becomes more than 60 days delinquent.  After repossession of a motor vehicle, the borrower has a 15-day statutory right to redeem the vehicle and is entitled to 10 days’ notice before the sale of a repossessed vehicle.  The Bank sells the vehicle as promptly as feasible after the expiration of these periods.  If the amount realized from the sale of the vehicle is less than the loan amount, the Bank will seek a deficiency judgment against the borrower.  The Bank follows similar collection procedures with respect to commercial loans.
 
 
6

 
 
While the Bank has weathered the economic and credit turbulence during 2010 and remains strong, the Bank experienced a significant increase in non-accrual loans as of December 31, 2010.  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 December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars In Thousands)
 
Restructured Loans
  $ -     $ 87     $ -     $ 578     $ -  
                                         
Non-accrual loans:
                                       
Real estate – mortgage:
                                       
Residential
  $ 976     $ 215     $ -     $ -     $ 3  
Commercial
    4,522       2,626       659       -       -  
Real estate - construction
    -       -       -       -       -  
Installment
    125       176       208       212       46  
Commercial
    1,360       -       -       -       8  
Total non-accrual loans
    6,983       3,017       867       212       57  
                                         
Accruing loans past due 90 days or more
                                       
Real estate – mortgage:
                                       
Residential
    -       8       3       512       2  
Commercial
    -       -       -       -       -  
Real estate - construction
    -       -       5       -       -  
Installment
    -       1       26       -       -  
Commercial
    -       12       -       128       -  
Total accruing loans past due 90 days or more
    -       21       34       640       2  
Total non-accrual and past due loans
  $ 6,983     $ 3,038     $ 901     $ 852     $ 59  
Non-accrual and past due loans to gross loans
    2.99 %     1.26 %     0.38 %     0.43 %     0.03 %
Allowance for credit losses to non-accrual and past due loans
    48.69 %     117.61 %     224.42 %     188.27 %     3,116.95 %

For the year ended December 31, 2010, interest of $145,148 would have been accrued on non-accrual loans if such loans had been current in accordance with their original terms. During that period, interest on non-accrual loans was not included in income. $6,361,029, or 91.1%, of the Bank’s total $6,983,004 non-accrual loans at December 31, 2010 were attributable to 5 borrowers.  None of these borrowers was in bankruptcy at that date. Because of the legal protections afforded to borrowers in bankruptcy, collections on such loans are difficult and the Bank anticipates that such loans may remain delinquent for an extended period of time.

At December 31, 2010, there were loans outstanding, totaling $4,440,733, not reflected in the above table as to which known information about the borrower’s possible credit problems caused management to have serious doubts as to the ability of the borrowers to comply with present loan repayment terms.  These 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.

At December 31, 2010, the Company had $215,000 in real estate acquired in partial or total satisfaction of debt, compared to $25,000 and $550,000 in such properties at each of December 31, 2009 and 2008.  This increase was the result of a property acquired in 2010.  The $25,000 balance at December 31, 2009 reflects the deposit on OREO acquired during 2009, which was awaiting ratification by the court.  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. For a description of the properties comprising other real estate owned at December 31, 2010, see “Item 2. — Properties.”
 
 
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Allowance For Credit Losses

The Bank’s allowance for credit losses is based on the probable estimated losses that may be sustained in its loan portfolio.  The allowance is based on two basic principles of accounting.  (1) ASC Topic 450, formerly Statement of Financial Accountings Standards (SFAS) No. 5 “Accounting for Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC Topic 310, formerly SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

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 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, and current economic conditions and trends that may affect the borrower’s ability to pay.  Because mortgage lending decisions are based on conservative lending policies, the Company has no exposure to the credit issues affecting the sub-prime residential mortgage market.

In 2010, the Bank decreased its provision for credit losses even with net charge offs on indirect loans of $406,000 and on commercial mortgages of $814,000.  Many of the loans already had specific reserves from the previous year.

Transactions in the allowance for credit losses during the last five fiscal years were as follows:

   
Year Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars In Thousands)
 
Beginning Balance
  $ 3,573     $ 2,022     $ 1,604     $ 1,839     $ 2,201  
                                         
Loans charged off
                                       
Real estate - mortgage:
                                       
Residential
    66       85       -       -       1  
Commercial
    825       -       -       -       -  
Real estate - construction
    -       -       -       -       -  
Installment
    959       1,070       1,079       591       528  
Credit card & related
    -       -       -       -       -  
Commercial
    12       133       2       -       253  
Total
    1,862       1,288       1,081       591       782  
                                         
Recoveries
                                       
Real estate - mortgage:
                                       
Residential
    85       -       -       -       1  
Commercial
    11       -       -       -       -  
Real estate - construction
    -       -       -       -       -  
Installment
    497       359       333       258       335  
Credit card & related
    -       -       -       -       -  
Commercial
    46       37       20       48       22  
Total
    639       396       353       306       358  
Net charge offs/(recoveries)
    1,223       892       728       285       424  
Provisions (credited) charged to operations
    1,050       2,443       1,146       50       62  
Ending balance
  $ 3,400     $ 3,573     $ 2,022     $ 1,604     $ 1,839  
Average loans
  $ 234,495     $ 239,788     $ 219,485     $ 199,632     $ 186,706  
Net charge-offs to average loans
    0.53 %     0.37 %     0.33 %     0.14 %     0.23 %
 
 
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The following table shows the allowance for credit losses broken down by loan category as of December 31, 2010, 2009, 2008, 2007, and 2006:
 
   
At December 31,
 
   
2010
   
2009
 
Portfolio
 
Allowance For
Each Category
   
Percentage Of Loans In
Each Category To
Total Loans
   
Allowance For
Each Category
   
Percentage Of Loans In
Each Category To
Total Loans
 
   
(Dollars In Thousands)
 
Real Estate - mortgage:
                       
Residential
  $ 196       43.62 %   $ 162       39.81 %
Commercial
    2,096       31.02       2,377       33.23  
Real Estate — construction
    12       2.29       4       0.73  
Installment
    196       7.00       146       6.64  
Credit Card
    -       0.07       -       0.07  
Indirect automobile
    634       12.93       697       15.44  
Commercial
    263       3.07       237       4.08  
Unallocated
    3       -       (50 )     -  
Total
  $ 3,400       100.00 %   $ 3,573       100.00 %
 
    
At December 31,
 
   
2008
   
2007
   
2006
 
Portfolio
 
Allowance For
Each Category
   
Percentage Of
Loans In Each
Category To
Total Loans
   
Allowance For
Each Category
   
Percentage Of
Loans In Each
Category To
Total Loans
   
Allowance For
Each Category
   
Percentage Of
Loans In Each
Category To
Total Loans
 
   
(Dollars In Thousands)
 
Real Estate – mortgage:
                                   
Residential
  $ 123       36.85 %   $ 117       37.98 %   $ 149       34.88 %
Commercial
    460       31.99       163       23.66       314       27.13  
Real Estate – construction
    63       2.77       102       2.91       14       0.83  
Installment
    161       6.91       55       8.45       103       7.67  
Credit Card
    -       0.07       -       0.07       -       0.08  
Indirect automobile
    942       18.47       892       24.37       1,119       26.81  
Commercial
    240       2.94       257       2.56       260       2.60  
Unallocated
    33       -       18       -       120       -  
Total
  $ 2,022       100.00 %   $ 1,604       100.00 %   $ 1,839       100.00 %
 
Investment Securities
The Bank maintains a substantial portfolio of investment securities to provide liquidity as well as a source of earnings. The Bank’s investment securities portfolio consists primarily of securities issued by U.S. Government agencies including mortgage-backed securities, securities issued by certain states and their political subdivisions, and corporate trust preferred securities.  The tax treatment of the Bank’s portfolio of securities issued by certain states and their political subdivisions allows the Company to use the full tax advantage of this portfolio.

The following table presents at amortized cost the composition of the investment portfolio by major category at the dates indicated.

   
At December 31,
 
   
2010
   
2009
   
2008
 
   
(In Thousands)
 
U.S. Treasury securities
  $ -     $ -     $ -  
U.S. Government agencies and mortgage backed securities
    52,365       54,030       25,571  
Obligations of states and political subdivisions
    34,776       30,073       31,466  
Corporate trust preferred
    1,793       2,080       2,169  
Total investment securities
  $ 88,935     $ 86,183     $ 59,206  
 
 
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The following table sets forth the scheduled maturities, amortized costs and weighted average yields for the Company’s investment securities portfolio at December 31, 2010:

    
One Year Or Less
   
One To Five Years
   
Five to Ten Years
   
More Than Ten Years
   
Total
 
   
Amort.
Cost
   
Weighted
Average
Yield
   
Amort.
Cost
   
Weighted
Average
Yield
   
Amort.
Cost
   
Weighted
Average
Yield
   
Amort.
Cost
   
Weighted
Average
Yield
   
Amort.
Cost
   
Weighted
Average
Yield
 
U.S. Treasury securities
  $ -       - %   $ -       - %   $ -       - %   $ -       - %   $ -       - %
U.S. Government agencies and mortgage backed securities
    -       -       -       -       1,125       5.00       51,241       4.50       52,366       4.51  
Obligations of states and political subdivisions
    -       -       1,589       3.51       305       3.43       32,882       4.47       34,776       4.42  
Corporate trust preferred
    -       -       -       -       -       -       1,793       8.60       1,793       8.60  
Total investment securities
  $ -       - %   $ 1,589       3.51 %   $ 1,430       4.67 %   $ 85,916       4.58 %   $ 88,935       4.56 %

At December 31, 2010, the Bank had no investments in securities of a single issuer (other than the U.S. Government securities and securities of federal agencies and government-sponsored enterprises), which aggregated more than 10% of stockholders’ equity.

Deposits And Other Sources of Funds

The funds needed by the Bank to make loans are primarily generated by deposit accounts solicited from the communities surrounding its branches in northern Anne Arundel County. Consolidated total deposits were $294,444,828 as of December 31, 2010. The Bank uses borrowings from the Federal Home Loan Bank (“FHLB”) of Atlanta to supplement funding from deposits. The Bank was permitted to borrow up to $55.47 million under a line of credit from the FHLB of Atlanta as of December 31, 2010.

Deposits. The Bank’s deposit products include regular savings accounts (statements), money market deposit accounts, demand deposit accounts, NOW checking accounts, IRA and SEP accounts, Christmas Club accounts and certificates of deposit. Variations in service charges, terms and interest rates are used to target specific markets. Ancillary products and services for deposit customers include safe deposit boxes, money orders and travelers checks, night depositories, automated clearinghouse transactions, wire transfers, ATMs, telephone banking, and a customer call center. The Bank is a member of the Cirrus(R) and Star(R) ATM networks.

As stated above, the Bank obtains deposits principally through its network of branch offices. The Bank does not solicit brokered deposits. At December 31, 2010, the Bank had approximately $44.2 million in certificates of deposit and other time deposits of $100,000 or more, including IRA accounts. The following table provides information as to the maturity of all time deposits of $100,000 or more at December 31, 2010:

   
Amount
(In Thousands)
 
Three months or less
  $ 7,517  
Over three through six months
    6,504  
Over six through 12 months
    7,736  
Over 12 months
     22,436  
Total
  $ 44,193  

Borrowings. In addition to deposits, the Bank from time to time obtains advances from the FHLB of Atlanta of which it is a member. FHLB of Atlanta advances may be used to provide funds for residential housing finance, for small business lending, and to meet specific and anticipated needs.  The Bank may draw on a $55.47 million line of credit from the FHLB of Atlanta, which is secured by a floating lien on the Bank’s residential first mortgage loans and various federal and agency securities.   There was a $4 million daily rate credit line advance outstanding at December 31, 2010, with a variable rate.  This advance can be paid back in whole or partially.  The interest is computed daily on the advance and charged at the end of the month.  This advance is scheduled to mature on November 22, 2011 and the rate was 0.47% at December 31, 2010.  There was $10 million in a convertible advance under this credit arrangement at December 31, 2010. The advance matures in November 1, 2017, is callable monthly, and bears a 3.28% rate of interest. There was a $5 million convertible advance settled July 21, 2008 with a final maturity of July 23, 2018.  This advance has a 2.73% rate of interest and was callable quarterly, starting July 23, 2009. There was a $5 million convertible advance taken out August 22, 2008 which has a final maturity of August 22, 2018.  This advance has a 3.344% rate of interest and is callable quarterly, starting August 22, 2011. The Bank also has an unsecured line of credit in the amount of $3 million from another commercial bank but currently has no balance outstanding.  The Bank paid off the mortgage note on the 103 Crain Highway address.
 
 
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Competition

The Bank faces competition for deposits and loans from other community banks, branches or affiliates of larger banks, savings and loan associations, savings banks and credit unions, which compete vigorously (currently, sixteen FDIC-insured depository institutions operate within two miles of the Bank’s headquarters). With respect to indirect lending, the Bank faces competition from other banks and the financing arms of automobile manufacturers. The Bank competes in this area by offering competitive rates and responsive service to dealers.

The Bank’s interest rates, loan and deposit terms, and offered products and services are impacted, to a large extent, by such competition. The Bank attempts to provide superior service within its community and to know, and facilitate services, to, its customers. It seeks commercial relationships with small to medium size businesses, which the Bank believes would welcome personal service and flexibility.  The bank believes its greatest competition comes from larger intra- and inter-state financial institutions.

Other Activities

The Company also owns all outstanding shares of capital stock of GBB Properties, Inc. (“GBB”), another Maryland corporation which was organized in 1994 and which is engaged in the business of acquiring, holding and disposing of real property, typically acquired in connection with foreclosure proceedings (or deeds in lieu of foreclosure) instituted by the Bank or acquired in connection with branch expansions by the Bank.

Employees

At December 31, 2010, the Bank had 118 full-time equivalent employees. Neither the Company nor GBB currently has any employees.

Regulation of the Company

General.  The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “BHCA”). As such, the Company is registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and subject to Federal Reserve Board regulation, examination, supervision and reporting requirements. As a bank holding company, the Company is required to furnish to the Federal Reserve Board annual and quarterly reports of its operations at the end of each period and to furnish such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Company is also subject to regular inspection by Federal Reserve Board examiners.

Under the BHCA, a bank holding company must obtain the prior approval of the Federal Reserve Board before: (1) acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) authorizes the Federal Reserve Board to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal Reserve Board may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. The Riegle-Neal Act also prohibits the Federal Reserve Board from approving such an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch. The Riegle-Neal Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the Riegle-Neal Act. Under Maryland law, a bank holding company is prohibited from acquiring control of any bank if the bank holding company would control more than 30% of the total deposits of all depository institutions in the State of Maryland unless waived by the Maryland Commissioner of Financial Regulation.
 
 
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Additionally, the federal banking agencies are authorized to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks opted out of the Riegle-Neal Act by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. The State of Maryland did not pass such a law during this period. Interstate acquisitions of branches will be permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions will also be subject to the nationwide and statewide insured deposit concentration amounts described above.

The BHCA also prohibits, with certain exceptions, a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The activities of the Company are subject to these legal and regulatory limitations under the BHCA and the Federal Reserve Board’s regulations thereunder. Notwithstanding the Federal Reserve Board’s prior approval of specific nonbanking activities, the Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.

Effective with the enactment of the Gramm-Leach-Bliley Act (“G-L-B”) on November 12, 1999, bank holding companies whose financial institution subsidiaries are well capitalized and well managed and have satisfactory Community Reinvestment Act records can elect to become “financial holding companies” which will be permitted to engage in a broader range of financial activities than are currently permitted to bank holding companies. Financial holding companies are authorized to engage in, directly or indirectly, financial activities. A financial activity is an activity that is: (i) financial in nature; (ii) incidental to an activity that is financial in nature; or (iii) complementary to a financial activity and that does not pose a safety and soundness risk. The G-L-B Act includes a list of activities that are deemed to be financial in nature. Other activities also may be decided by the Federal Reserve Board to be financial in nature or incidental thereto if they meet specified criteria. A financial holding company that intends to engage in a new activity to acquire a company to engage in such an activity is required to give prior notice to the Federal Reserve Board. If the activity is not either specified in the G-L-B Act as being a financial activity or one that the Federal Reserve Board has determined by rule or regulation to be financial in nature, the prior approval of the Federal Reserve Board is required.

The Maryland Financial Institutions Code prohibits a bank holding company from acquiring more than 5% of any class of voting stock of a bank or bank holding company without the approval of the Commissioner of Financial Regulation except as otherwise expressly permitted by federal law or in certain other limited situations. The Maryland Financial Institutions Code additionally prohibits any person from acquiring voting stock in a bank or bank holding company without 60 days’ prior notice to the Commissioner if such acquisition will give the person control of 25% or more of the voting stock of the bank or bank holding company or will affect the power to direct or to cause the direction of the policy or management of the bank or bank holding company. Any doubt whether the stock acquisition will affect the power to direct or cause the direction of policy or management shall be resolved in favor of reporting to the Commissioner. The Commissioner may deny approval of the acquisition if the Commissioner determines it to be anti-competitive or to threaten the safety or soundness of a banking institution. Voting stock acquired in violation of this statute may not be voted for five years.

Capital Adequacy. The Federal Reserve Board has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See “Regulation of the Bank — Capital Adequacy.”

Dividends and Distributions. The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.
 
 
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Bank holding companies are required to give the Federal Reserve Board notice of any purchase or redemption of their outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the bank holding company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would violate any law, regulation, Federal Reserve Board order, directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Bank holding companies whose capital ratios exceed the thresholds for “well capitalized” banks on a consolidated basis are exempt from the foregoing requirement if they were rated composite 1 or 2 in their most recent inspection and are not the subject of any unresolved supervisory issues.

Regulation of the Bank

General. As a state-chartered bank with deposits insured by the FDIC but which is not a member of the Federal Reserve System (a “state non-member bank”), the Bank is subject to the supervision of the Maryland Commissioner of Financial Regulation and the FDIC. The Commissioner and FDIC regularly examine the operations of the Bank, including but not limited to capital adequacy, reserves, loans, investments and management practices. These examinations are for the protection of the Bank’s depositors and not its stockholders. In addition, the Bank is required to furnish quarterly and annual call reports to the Commissioner and FDIC. The FDIC’s enforcement authority includes the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent a bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business.

The Bank’s deposits are insured by the FDIC to the legal maximum of $250,000 for each insured depositor. Some of the aspects of the lending and deposit business of the Bank that are subject to regulation by the Federal Reserve Board and the FDIC include reserve requirements and disclosure requirements in connection with personal and mortgage loans and savings deposit accounts. In addition, the Bank is subject to numerous Federal and state laws and regulations which set forth specific restrictions and procedural requirements with respect to the establishment of branches, investments, interest rates on loans, credit practices, the disclosure of customer information, the disclosure of credit terms and discrimination in credit transactions.
 
Patriot Act.  The USA Patriot Act (the “Patriot Act”), includes provisions pertaining to domestic security, surveillance procedures, border protection, and terrorism laws to be administered by the Secretary of the Treasury.  Title III of the Patriot Act entitled, “International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001” includes amendments to the Bank Secrecy Act which expand the responsibilities of financial institutions in regard to anti-money laundering activities with particular emphasis upon international money laundering and terrorism financing activities through designated correspondent and private banking accounts.
 
Section 313(a) of the Patriot Act prohibits any insured financial institution such as the Bank, from providing correspondent accounts to foreign banks which do not have a physical presence in any country (designated as “shell banks”), subject to certain exceptions for regulated affiliates of foreign banks.  Section 313(a) also requires financial institutions to take reasonable steps to ensure that foreign bank correspondent accounts are not being used to indirectly provide banking services to foreign shell banks, and Section 319(b) requires financial institutions to maintain records of the owners and agent for service of process of any such foreign banks with whom correspondent accounts have been established.
 
Section 312 of the Patriot Act creates a requirement for special due diligence for correspondent accounts and private banking accounts.  Under Section 312, each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and record instances of money laundering through those accounts.
 
The Company and the Bank are not currently aware of any account relationships between the Bank and any foreign bank or other person or entity as described above under Sections 313(a) or 312 of the Patriot Act.

The terrorist attacks on September 11, 2001 have realigned national security priorities of the United States and it is reasonable to anticipate that the United States Congress may enact additional legislation in the future to combat terrorism including modifications to existing laws such as the Patriot Act to expand powers as deemed necessary.  The enactment of the Patriot Act has increased the Bank’s compliance costs, and the impact of any additional legislation enacted by Congress may have upon financial institutions is uncertain.  However, such legislation would likely increase compliance costs and thereby potentially have an adverse effect upon the Company’s results of operations.
 
 
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Community Reinvestment Act.  Community Reinvestment Act (“CRA”) regulations evaluate banks’ lending to low and moderate income individuals and businesses across a four-point scale from “outstanding” to “substantial noncompliance,” and are a factor in regulatory review of applications to merge, establish new branch offices or form bank holding companies.  In addition, any bank rated in “substantial noncompliance” with the CRA regulations may be subject to enforcement proceedings.  The Bank has a current rating of “satisfactory” for CRA compliance.

Capital Adequacy. 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.

The regulations of the Federal Reserve Board and the FDIC require bank holding companies and state non-member banks, respectively, to maintain a minimum leverage ratio of “Tier 1 capital” (as defined in the risk-based capital guidelines discussed in the following paragraphs) to total assets of 3.0%. Although setting a minimum 3.0% leverage ratio, the capital regulations state that only the strongest bank holding companies and banks, with composite examination ratings of 1 under the rating system used by the Federal bank regulators, would be permitted to operate at or near such minimum level of capital. All other bank holding companies and banks are expected to maintain a leverage ratio of at least 1% to 2% above the minimum ratio, depending on the assessment of an individual organization’s capital adequacy by its primary regulator. Any bank or bank holding company experiencing or anticipating significant growth would be expected to maintain capital well above the minimum levels. In addition, the Federal Reserve Board has indicated that whenever appropriate, and in particular when a bank holding company is undertaking expansion, seeking to engage in new activities or otherwise facing unusual or abnormal risks, it will consider, on a case-by-case basis, the level of an organization’s ratio of tangible Tier 1 capital (after deducting all intangibles) to total assets in making an overall assessment of capital.

The risk-based capital rules of the Federal Reserve Board and the FDIC require bank holding companies and state non-member banks, respectively, to maintain minimum regulatory capital levels based upon a weighting of their assets and off-balance sheet obligations according to risk. Risk-based capital is composed of two elements: Tier 1 capital and Tier 2 capital. Tier 1 capital consists primarily of common stockholders’ equity, certain perpetual preferred stock (which must be noncumulative in the case of banks), and minority interests in the equity accounts of consolidated subsidiaries; less all intangible assets, except for certain purchased mortgage servicing rights and credit card relationships. Tier 2 capital elements include, subject to certain limitations, the allowance for losses on loans and leases; perpetual preferred stock that does not qualify as Tier 1 capital and long-term preferred stock with an original maturity of at least 20 years from issuance; hybrid capital instruments, including perpetual debt and mandatory convertible securities; and subordinated debt and intermediate-term preferred stock.

The risk-based capital regulations assign balance sheet assets and credit equivalent amounts of off-balance sheet obligations to one of four broad risk categories based principally on the degree of credit risk associated with the obligor. The assets and off-balance sheet items in the four risk categories are weighted at 0%, 20%, 50% and 100%. These computations result in the total risk-weighted assets. The risk-based capital regulations require all banks and bank holding companies to maintain a minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets of 8%, with at least 4% as Tier 1 capital. For the purpose of calculating these ratios: (i) Tier 2 capital is limited to no more than 100% of Tier 1 capital; and (ii) the aggregate amount of certain types of Tier 2 capital is limited. In addition, the risk-based capital regulations limit the allowance for loan losses includable as capital to 1.25% of total risk-weighted assets.

FDIC regulations and guidelines additionally specify that state non-member banks with significant exposure to declines in the economic value of their capital due to changes in interest rates may be required to maintain higher risk-based capital ratios. The Federal banking agencies, including the FDIC, have proposed a system for measuring and assessing the exposure of a bank’s net economic value to changes in interest rates. The Federal banking agencies, including the FDIC, have stated their intention to propose a rule establishing an explicit capital charge for interest rate risk based upon the level of a bank’s measured interest rate risk exposure after more experience has been gained with the proposed measurement process. Federal Reserve Board regulations do not specifically take into account interest rate risk in measuring the capital adequacy of bank holding companies.
 
 
14

 
 
The FDIC has issued regulations which classify state non-member banks by capital levels and which authorize the FDIC to take various prompt corrective actions to resolve the problems of any bank that fails to satisfy the capital standards. Under such regulations, a well-capitalized bank is one that is not subject to any regulatory order or directive to meet any specific capital level and that has or exceeds the following capital levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of 5%. An adequately capitalized bank is one that does not qualify as well-capitalized but meets or exceeds the following capital requirements: a total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest composite examination rating. A bank not meeting these criteria is treated as undercapitalized, significantly undercapitalized, or critically undercapitalized depending on the extent to which the bank’s capital levels are below these standards. A state non-member bank that falls within any of the three undercapitalized categories established by the prompt corrective action regulation will be subject to severe regulatory sanctions. As of December 31, 2010, the Bank was well capitalized as defined by the FDIC’s regulations.

Branching.  Maryland law provides that, with the approval of the Commissioner, Maryland banks may establish branches within the State of Maryland without geographic restriction and may establish branches in other states by any means permitted by the laws of such state or by federal law. The Riegle-Neal Act authorizes the FDIC to approve interstate branching de novo by state banks, only in states that specifically allow for such branching.

Dividend Limitations.  Pursuant to the Maryland Financial Institutions Code, Maryland banks may only pay dividends from undivided profits or, with the prior approval of the Commissioner, their surplus in excess of 100% of required capital stock. The Maryland Financial Institutions Code further restricts the payment of dividends by prohibiting a Maryland bank from declaring a dividend on its shares of common stock until its surplus fund equals the amount of required capital stock or, if the surplus fund does not equal the amount of capital stock, in an amount in excess of 90% of net earnings. In addition, the Bank is prohibited by federal statute from paying dividends or making any other capital distribution that would cause the Bank to fail to meet its regulatory capital requirements. Further, the FDIC also has authority to prohibit the payment of dividends by a state non-member bank when it determines such payment to be an unsafe and unsound banking practice.

Deposit Insurance. The Bank is required to pay semi-annual assessments based on a percentage of its insured deposits to the FDIC for insurance of its deposits by the Bank Insurance Fund (“BIF”). Under the Federal Deposit Insurance Act, the FDIC is required to set semi-annual assessments for BIF-insured institutions to maintain the designated reserve ratio of the BIF at 1.25% of estimated insured deposits or at a higher percentage of estimated insured deposits that the FDIC determines to be justified for that year by circumstances raising a significant risk of substantial future losses to the BIF.

Under the risk-based deposit insurance assessment system adopted by the FDIC, the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC, which is determined by the institution’s capital level and supervisory evaluations. Based on the data reported to regulators for the date closest to the last day of the seventh month preceding the semi-annual assessment period, institutions are assigned to one of three capital groups — “well capitalized, adequately capitalized or undercapitalized.” Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution’s primary supervisory authority and such other information as the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance fund. Under the current assessment schedule, well-capitalized banks with the best supervisory ratings are not required to pay any premium for deposit insurance. All BIF-insured banks, however, will be required to begin paying an assessment to the FDIC in an amount equal to 2.12 basis points times their assessable deposits to help fund interest payments on certain bonds issued by the Financing Corporation, an agency established by the federal government to finance takeovers of insolvent thrifts.

Transactions with Affiliates. A state non-member bank or its subsidiaries may not engage in “covered transactions” with any one affiliate in an amount greater than 10% of such bank’s capital stock and surplus, and for all such transactions with all affiliates a state non-member bank is limited to an amount equal to 20% of capital stock and surplus. All such transactions must also be on terms substantially the same, or at least as favorable, to the bank or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. An affiliate of a state non-member bank is any company or entity which controls or is under common control with the state non-member bank and, for purposes of the aggregate limit on transactions with affiliates, any subsidiary that would be deemed a financial subsidiary of a national bank. In a holding company context, the parent holding company of a state non-member bank (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the state non-member bank. The BHCA further prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain limited exceptions.
 
 
15

 
 
Loans to Directors, Executive Officers and Principal Stockholders. Loans to directors, executive officers and principal stockholders of a state non-member bank must be made on substantially the same terms as those prevailing for comparable transactions with persons who are not executive officers, directors, principal stockholders or employees of the Bank unless the loan is made pursuant to a compensation or benefit plan that is widely available to employees and does not favor insiders. Loans to any executive officer, director and principal stockholder together with all other outstanding loans to such person and affiliated interests generally may not exceed 15% of the bank’s unimpaired capital and surplus and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Loans to directors, executive officers and principal stockholders, and their respective affiliates, in excess of the greater of $100,000 or 5% of capital and surplus (up to $500,000) must be approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. State non-member banks are prohibited from paying the overdrafts of any of their executive officers or directors. In addition, loans to executive officers may not be made on terms more favorable than those afforded other borrowers and are restricted as to type, amount and terms of credit.

ITEM 2.  PROPERTIES

The following table sets forth certain information with respect to the Bank’s offices:
 
 
Year
Opened
 
Owned/
Leased
 
Book Value
   
Approximate
Square Footage
   
Deposits
 
Main Office:
                       
101 Crain Highway, S.E.
Glen Burnie, MD  21061
1953
 
Owned
  $ 699,341       10,000     $ 86,441,035  
                               
Branches:
                             
Odenton
1405 Annapolis Road
Odenton, MD  21113
1969
 
Owned
    167,783       6,000       38,975,886  
                               
Riviera Beach
8707 Ft. Smallwood Road
Pasadena, MD  21122
1973
 
Owned
    228,426       2,500       31,055,075  
                               
Crownsville
1221 Generals Highway
Crownsville, MD  21032
1979
 
Owned
    315,033       3,000       51,986,175  
                               
Severn
811 Reece Road
Severn, MD  21144
1984
 
Owned
    142,713       2,500       26,756,463  
                               
New Cut Road
740 Stevenson Road
Severn, MD  21144
1995
 
Owned
    1,397,720       2,600       25,193,939  
                               
Linthicum
Burwood Village Shopping Center
Glen Burnie, MD  21060
2005
 
Leased
    107,903       2,500       15,938,661  
                               
Severna Park
534 Ritchie Highway
Severna Park, MD   21146
2002
 
Leased
    60,684       2,184       18,626,494  
                               
Operations Centers:
                             
106 Padfield Blvd.
Glen Burnie, MD  21061
1991
 
Owned
    736,177       16,200       N/A  
                               
103 Crain Highway, S.E.
Glen Burnie, MD 21061
2000
 
Owned
    267,835       3,727       N/A  
 

 
At December 31, 2010, the Bank owned one foreclosed real estate property with a total book value of $215,000.
 
 
16

 
 
ITEM 3.  LEGAL PROCEEDINGS

From time to time, the Company and the Bank are involved in various legal actions relating to their business activities. At December 31, 2010, there were no actions to which the Company or the Bank was a party which involved claims for money damages exceeding 10% of the Company’s consolidated current assets in any one case or in any group of proceedings presenting in large degree the same legal and factual issues.

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is information about the Company’s executive officers.
 
NAME
 
AGE
 
POSITIONS
         
F. William Kuethe, Jr.
 
78
 
President Emeritus
Michael G. Livingston
 
57
 
President and Chief Executive Officer
John E. Porter
 
57
 
Senior Vice President and Chief Financial Officer

F. WILLIAM KUETHE, JR. was appointed to the honorary position of President Emeritus of the Company and the Bank effective January 1, 2008 when he retired from full-time employment and stepped down from his positions of President and Chief Executive Officer of the Company and the Bank which he held since 1995.  Mr. Kuethe has been a director of the Company and the Bank since 1995 and was President of Glen Burnie Mutual Savings Bank from 1960 through 1995. Mr. Kuethe is a former licensed appraiser and real estate broker with banking experience from 1960 to present, at all levels. He is the father of Frederick W. Kuethe, III, a director of the Company.

MICHAEL G. LIVINGSTON was appointed President and Chief Executive Officer of the Company and the Bank effective January 1, 2008.  Prior to that date, Mr. Livingston was Deputy Chief Executive Officer and Executive Vice President since August 2004, Chief Operating Officer since January 2004, Deputy Chief Operating Officer from February 2003 through December 2003, Senior Vice President from January 1998 until August 2004, and Chief Lending Officer of the Bank from 1996 until August 2004.  Mr. Livingston was elected as a director of the Company and the Bank on January 1, 2005.

JOHN E. PORTER was appointed Senior Vice President in January 1998.  He has been Treasurer and Chief Financial Officer of the Company since 1995 and Vice President, Treasurer and Chief Financial Officer of the Bank since 1990.

 
17

 
 
PART II

ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Common Stock is traded on the Nasdaq Capital Market under the symbol “GLBZ”.  As of February 22, 2011, there were 424 record holders of the Common Stock.  The closing price for the Common Stock on that date was $8.62.

 The following table sets forth the high and low sales prices for the Common Stock for each full quarterly period during 2010 and 2009 as reported by Nasdaq. The quotations represent prices between dealers and do not reflect the retailer markups, markdowns or commissions, and may not represent actual transactions.  Also shown are dividends declared per share for these periods.

   
2010
   
2009
 
Quarter Ended
 
High
   
Low
   
Dividends
   
High
   
Low
   
Dividends
 
                                     
March 31,
  $ 11.70     $ 8.50     $ 0.10     $ 10.96     $ 8.41     $ 0.10  
June 30,
    10.95       9.00       0.10       9.40       7.80       0.10  
September 30
    10.10       7.74       0.10       9.25       7.70       0.10  
December 31
    9.60       7.75       0.10       9.76       8.09       0.10  

A regular dividend of $0.10 was declared for stockholders’ of record on December 27, 2010, payable on January 6, 2011.

The Company intends to pay dividends approximating forty percent (40%) of its profits for each quarter. However, dividends remain subject to declaration by the Board of Directors in its sole discretion and there can be no assurance that the Company will be legally or financially able to make such payments. Payment of dividends may be limited by federal and state regulations which impose general restrictions on a bank’s and bank holding company’s right to pay dividends (or to make loans or advances to affiliates which could be used to pay dividends). Generally, dividend payments are prohibited unless a bank or bank holding company has sufficient net (or retained) earnings and capital as determined by its regulators. See “Item 1. Business - Supervision and Regulation - Regulation of the Company - Dividends and Distributions” and “Item 1. Business — Supervision and Regulation - Regulation of the Bank - Dividend Limitations.” The Company does not believe that those restrictions will materially limit its ability to pay dividends.

 
18

 

ITEM 6.  SELECTED FINANCIAL DATA

The following table presents consolidated selected financial data for the Company and its subsidiaries for each of the periods indicated. Dividends and earnings per share have been adjusted to give retroactive effect to a 20% stock dividend paid on January 18, 2008, and one paid on January 23, 2006.

    
Year Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars In Thousand Except Per Share Data)
 
Operations Data:
                             
Net Interest Income
  $ 12,880     $ 12,102     $ 11,922     $ 11,866     $ 11,821  
Provision for Credit Losses
    1,050       2,443       1,146       50       62  
Other Income
    1,899       2,365       2,051       2,157       2,244  
Other Expense
    11,178       10,995       13,102       10,433       10,682  
Net Income
    2,065       1,262       404       2,782       2,720  
                                         
Share Data:
                                       
Basic Net Income Per Share
  $ 0.76     $ 0.46     $ 0.14     $ 0.93     $ 0.92  
Diluted Net Income Per Share
    0.76       0.46       0.14       0.93       0.92  
Cash Dividends Declared Per Common Share
    0.40       0.40       0.45       0.45       0.45  
Weighted Average Common Shares Outstanding:
                                       
Basic
    2,690,218       2,734,524       2,981,124       2,988,796       2,972,362  
Diluted
    2,690,218       2,734,524       2,981,124       2,988,796       2,972,362  
                                         
Financial Condition Data:
                                       
Total Assets
  $ 347,067     $ 353,397     $ 332,502     $ 307,274     $ 317,746  
Loans Receivable, Net
    229,851       235,883       235,133       199,753       193,337  
Total Deposits
    294,445       294,358       269,768       252,917       274,833  
Long Term Borrowings
    20,000       27,034       27,072       17,107       7,140  
Junior Subordinated Debentures
    -       5,155       5,155       5,155       5,155  
Total Stockholders’ Equity
    26,333       25,149       27,908       29,736       28,201  
                                         
Performance Ratios:
                                       
Return on Average Assets
    0.58 %     0.36 %     0.13 %     0.89 %     0.84 %
Return on Average Equity
    7.75       4.87       1.49       9.60       10.00  
Net Interest Margin (1)
    4.05       4.29       4.31       4.39       4.31  
Dividend Payout Ratio
    52.11       85.59       332.98       48.33       49.18  
                                         
Capital Ratios:
                                       
Average Equity to Average Assets
    7.45 %     7.37 %     8.99 %     9.28 %     8.36 %
Leverage Ratio
    7.64       8.86       10.50       11.34       10.30  
Total Risk-Based Capital Ratio
    12.58       14.40       14.93       17.50       17.07  
                                         
Asset Quality Ratios:
                                       
Allowance for Credit Losses to Gross Loans
    1.45 %     1.18 %     0.85 %     0.80 %     0.94 %
Non-accrual and Past Due Loans to Gross Loans
    2.99 %     1.26 %     0.38 %     0.43 %     0.03 %
Allowance for Credit Losses to Non-Accrual and Past Due Loans
    48.69 %     117.61 %     224.42 %     188.27 %     3,116.95 %
Net Loan Charge-offs  (Recoveries) to Average Loans
    0.53 %     0.37 %     0.33 %     0.14 %     0.23 %


(1) Presented on a tax-equivalent basis
 
 
19

 
 
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 2010, net interest income before provision for credit losses increased to $12,880,012 from $12,101,787 in 2009, a 6.43% increase. Total interest income decreased from $18,644,297 in 2009 to $18,178,967 in 2010, a 2.50% decrease. Interest expense for 2010 totaled $5,298,955, a 19.01% decrease from $6,542,510 in 2009. Net income in 2010 was $2,064,785 compared to $1,262,462 in 2009. The increase in net income was primarily due to the reduction in interest expense and in the provision for loan losses which declined from $2,442,976 in 2009 to $1,050,000 for 2010.

The Bank and, as a result, the Company, experienced improved performance in 2010.  In spite of the continuing economic downturn, our long standing policy of conservative lending decisions and having no exposure to the sub-prime residential mortgage market resulted in minimal charge offs in residential real estate and a decrease in installment loan charge offs combined with an increase in recoveries on installment loans.  Although we took a charge off in 2010 on commercial real estate that we had reserved for in 2009, the Bank’s loan portfolio remained stable in 2010 with net charge offs of $1,223,012 for the year.

In September 2010, the Company repaid $5,155,000 plus accrued interest and prepayment penalties of $546,690 on its 10.6% Junior Subordinated Deferrable Interest Debentures issued to Glen Burnie Statutory Trust I, a Connecticut statutory trust subsidiary of the Company, and the Bank repaid $7 million plus accrued interest of $104,471 on a 5.84% FHLB advance that had come due.  The repayment of the Junior Subordinated Deferrable Interest Debentures will result in a $546,430 reduction in annual interest expense for the Company.  The Bank’s repayment of the FHLB advance will result in an annual reduction of $408,800 in interest expense on long-term borrowings.

All per share amounts throughout this report have been adjusted to give retroactive effect to a 20% stock dividend paid on January 23, 2006 and to a 20% stock dividend paid on January 18, 2008.

Comparison of Results of Operations for the Years Ended December 31, 2010, 2009 and 2008

General. For the year ended December 31, 2010, the Company reported consolidated net income of  $2,064,785 ($0.76 basic and diluted earnings per share) compared to consolidated net income of $1,262,462 ($0.46 basic and diluted earnings per share) for the year ended December 31, 2009 and consolidated net income of $403,962 ($0.14 basic and diluted earnings per share) for the year ended December 31, 2008.  The increase in the 2010 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 gains on investment securities.  The increase in 2009 consolidated net income was due to the write down on Fannie Mae and Freddie Mac preferred stock in 2008, offset by an increase in the provision for loan losses and the increased FDIC insurance premium assessment (discussed earlier in this Report, on page 3), and an increase in deposit and long term borrowings expense in 2009.

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.
 
 
20

 
 
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 2010, the Bank continued its strategy of reducing its portfolio of above market rate savings products and achieved a significant reduction in interest expense on deposits.  The Bank also continued its efforts to increase the portfolio of higher yielding commercial loans and, while successful, was impacted by increased competition from large competitors.  At the same time, we continued to reduce our exposure to lower yielding indirect automobile loans.

Consolidated net interest income for the year ended December 31, 2010 was $12,880,012 compared to $12,101,787 for the year ended December 31, 2009 and $11,922,003 for the year ended December 31, 2008.  The $778,225 increase for the most recent year was primarily due to an increase in interest income on securities and decreases in interest expense on deposits and long-term borrowings, partially offset by a decrease in loan income. The $179,784 increase for 2009 compared to 2008 was primarily due to an increase in loan income partially offset by a decrease in interest income on securities and increases in interest expense on deposits and long-term borrowings.   The interest income, net of tax, for 2010 was $13,618,449, a $811,390 or 6.33% increase from the after tax net interest income for 2009, which was $12,807,059, a $212,720 or 1.69% increase from the $12,594,339 after tax net interest income for 2008.

Interest expense decreased from $6,542,510 in 2009 to $5,298,955 in 2010, a $1,243,555 or a 19.01% decrease, primarily due to a decrease in deposit expense and long-term borrowings (due to the repayment of the $7 million Federal Home Loan Bank of Atlanta loan in September 2010), partially offset by a $273,215 early repayment penalty on the Trust Preferred Securities.   Interest expense increased from $6,254,033 in 2008 to $6,542,510 in 2009, a $288,477 or a 4.62% increase, primarily due to a full year of interest expense on the long-term borrowings and an increase in deposit expense.   Net interest margin for the year ended December 31, 2010 was 4.05% compared to 4.29% and 4.31% for the years ended December 31, 2009 and 2008, respectively.
 
 
21

 
 
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,
 
   
2010
   
VS.
   
2009
   
2009
   
VS.
   
2008
 
         
Change Due To:
         
Change Due To:
 
   
Increase/
Decrease
   
 
Rate
   
 
Volume
   
Increase/
Decrease
   
 
Rate
   
 
Volume
 
   
(In Thousands)
 
ASSETS:
                                   
Interest-earning assets:
                                   
Federal funds sold
  $ (2 )   $ -     $ (2 )   $ 7     $ (44 )   $ 51  
Interest-bearing deposits
    1       2       (1 )     (115 )     (229 )     114  
                                                 
Investment securities:
                                               
U.S. Treasury securities, obligations of U.S. government agencies and mortgage-backed securities
      62       (461 )       523       (109 )     (404 )       295  
Obligations of states and political subdivisions(1)
    121       -       121       (121 )     68       (189 )
All other investment securities
    (23 )     (10 )     (13 )     (4 )     (1 )     (3 )
Total investment securities
    160       (471 )     631       (234 )     (337 )     103  
                                                 
Loans, net of unearned income:
                                               
Demand, time and lease
    76       36       40       9       (122 )     131  
Mortgage and construction
    (177 )     (307 )     130       995       (436 )     1,431  
Installment and credit card
    (501 )     77       (578 )     (212 )     54       (266 )
Total gross loans(2)
    (602 )     (194 )     (408 )     792       (504 )     1,296  
Allowance for credit losses
    -       -       -       -       -       -  
Total net loans
    (602 )     (194 )     (408 )     792       (504 )     1,296  
Total interest-earning assets
  $ (443 )   $ (663 )   $ 220     $ 450     $ (1,114 )   $ 1,564  
                                                 
LIABILITIES:
                                               
Interest-bearing deposits:
                                               
Savings and NOW
  $ 14     $ -     $ 14     $ (22 )   $ (23 )   $ 1  
Money market
    10       -       10       (5 )     (8 )     3  
Other time deposits
    (1,264 )     (1,225 )     (39 )     184       (958 )     1,142  
Total interest-bearing deposits
    (1,240 )     (1,225 )     (15 )     157       (989 )     1,146  
Non-interest-bearing deposits
    -       -       -       -       -       -  
Borrowed funds
    (3 )     169       (172 )     130       (147 )     277  
Total interest-bearing liabilities
  $ (1,243 )   $ (1,056 )   $ (187 )   $ 287     $ (1,136 )   $ 1,423  
 
(1) Tax equivalent basis.
(2) Non-accrual loans included in average balances.

 
22

 
 
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,
 
   
2010
   
2009
   
2008
 
   
Average
Balance
   
Interest
   
Yield/
Cost
   
Average
Balance
   
Interest
   
Yield/
Cost
   
Average
Balance
   
Interest
   
Yield/
Cost
 
   
(Dollars In Thousands)
 
ASSETS:
                                                     
Interest-earning assets:
                                                     
Federal funds sold
  $ 3,797     $ 10       0.25 %   $ 4,843     $ 12       0.26 %   $ 433     $ 5       1.15 %
Interest-bearing deposits
    11,188       16       0.14       12,337       15       0.12       6,560       130       1.98  
                                                                         
Investment securities:
                                                                       
U.S. Treasury securities, obligations of U.S. government agencies and mortgage-backed securities
    56,868       1,916       3.37       44,367       1,854       4.18       38,532       1,963       5.09  
Obligations of states and political subdivisions(1)
    31,341       2,134       6.81       29,557       2,013       6.81       32,421       2,134       6.58  
All other investment securities
    1,995       166       8.32       2,138       189       8.84       2,168       193       8.90  
Total investment securities
    90,204       4,216       4.67       76,062       4,056       5.33       73,121       4,290       5.87  
                                                                         
Loans, net of unearned income:
                                                                       
Demand, time and lease
    8,946       475       5.31       8,132       399       4.91       6,082       390       6.41  
Mortgage and construction
    175,812       10,593       6.03       173,741       10,770       6.20       151,656       9,775       6.45  
Installment and credit card
    49,737       3,578       7.19       57,915       4,079       7.04       61,747       4,291       6.95  
Total gross loans(2)
    234,495       14,646       6.25       239,788       15,248       6.36       219,485       14,456       6.59  
Allowance for credit losses
    (3,874 )                     (2,037 )                     (1,479 )                
Total net loans
    230,621       14,646       6.35       237,751       15,248       6.41       218,006       14,456       6.63  
Total interest-earning assets
    335,810       18,888       5.62       330,993       19,331       5.84       298,120       18,881       6.33  
Cash and due from banks
    3,182                       4,488                       7,891                  
Other assets
    18,696                       16,709                       14,740                  
Total assets
  $ 357,688                     $ 352,192                     $ 320,751                  
                                                                         
LIABILITIES AND STOCKHOLDERS’ EQUITY:
                                                                       
Interest-bearing deposits:
                                                                       
Savings and NOW
  $ 75,541       176       0.23 %   $ 71,124       162       0.23 %   $ 69,468       184       0.26 %
Money market
    16,756       67       0.40       14,363       57       0.40       13,751       62       0.45  
Other time deposits
    136,822       3,454       2.52       137,764       4,718       3.42       110,049       4,534       4.12  
Total interest-bearing deposits
    229,119       3,697       1.61       223,251       4,937       2.21       193,268       4,780       2.47  
Short-term borrowed funds
    522       1       0.29       262       0       0.02       2,209       51       2.31  
Long-term borrowed funds
    28,747       1,601       5.57       32,206       1,605       4.98       26,287       1,424       5.42  
Total interest-bearing liabilities
    258,389       5,299       2.05       255,719       6,542       2.56       221,764       6,255       2.82  
                                                                         
Non-interest-bearing deposits
    71,212                       67,572                       68,340                  
Other liabilities
    1,451                       2,957                       1,806                  
Stockholders’ equity
    26,636                       25,944                       28,841                  
Total liabilities and equity
  $ 357,688                     $ 352,192                     $ 320,751                  
Net interest income
            13,589                     $  12,789                        12,626               
Net interest spread
                    3.57 %                     3.28 %                     3.51 %
Net interest margin
                    4.05 %                     4.29 %                     4.31 %

1  Tax equivalent basis.  The incremental tax rate applied was 14.88% for 2010 and (13.45%) for 2009.
2  Non-accrual loans included in average balance.

Provision for Credit Losses.  During the year ended December 31, 2010, the Company made a provision of $1,050,000 for credit losses, compared to a provision of $2,442,976 and $1,145,649 for credit losses for the years ended December 31, 2009 and 2008, respectively.  The decrease in 2010 was primarily due to many of the delinquent commercial real estate loans already having specific provisions made in 2009.  At December 31, 2010, the allowance for credit losses equaled 48.69% of non-accrual and past due loans compared to 117.61% and 224.42% at December 31, 2009 and 2008, respectively.  During the year ended December 31, 2010, the Company recorded net charge-offs of $1,223,000 compared to $892,000 and $728,000 in net charge-offs during the years ended December 31, 2009 and 2008, respectively.
 
 
23

 
 
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 $2,365,249 in 2009 to $1,898,607 in 2010, a $466,642, or 19.73% decrease. The decrease was primarily due to a decrease in gains on securities, with a lesser decrease in service charges.  Other income increased from $2,050,587 in 2008 to $2,365,249 in 2009, a $314,662, or 15.34% increase.   The increase was primarily due to an increase in gains on securities, partially offset by decreases in service charges and other fees and commissions.

Other Expenses. Other expenses, which consist of non-interest operating expenses, increased from $10,994,851 in 2009 to $11,178,323 in 2010, an $183,470 or 1.67% increase. This increase was primarily due to an increase in employee benefits and a lesser increase in salaries and an additional write-down of one Fannie Mae, two Freddie Macs and two Regional Diversified Funding (Reg. Div.) securities during 2010.  This was primarily offset by a decrease in other expenses and a lesser decrease in occupancy expense.  Other expenses decreased from $13,102,341 in 2008 to $10,994,851 in 2009, a $2,107,490 or 16.08% decrease. This decrease was primarily due to the write-down of one Fannie Mae and two Freddie Mac securities in the amount of $2,816,000 in 2008, offset by increases in salary and employee benefits and FDIC assessments in 2009.

Income Taxes.  During the year ended December 31, 2010, the Company recorded an income tax expense of $485,511, compared to an income tax benefit of $233,253 for the year ended December 31, 2009.  This increase was due to a lesser amount contributed to provision for credit losses in 2010 and less interest expense paid on deposits.  During the year ended December 31, 2009, the Company recorded an income tax benefit of $233,253, compared to an income tax benefit of $679,362 for the year ended December 31, 2008.  This decrease was primarily due to a tax benefit of $1,110,770 from the write-down of $2,816,000 for the Fannie Mae and Freddie Mac securities in 2008.  In addition to this, the amount of tax exempt income on municipal securities decreased and there was a larger amount contributed to provision for credit losses in 2009.

Comparison of Financial Condition at December 31, 2010, 2009 and 2008

The Company’s total assets decreased to $347,067,276 at December 31, 2010 from $353,396,697 at December 31, 2009.  The Company’s total assets increased to $353,396,697 at December 31, 2009 from $332,502,215 at December 31, 2008.

The Company’s net loan portfolio decreased to $229,850,888 at December 31, 2010 compared to $235,882,862 at December 31, 2009 and $235,132,621 at December 31, 2008. The decrease in the loan portfolio during the 2010 period is primarily due to a decrease in indirect automobile loans, commercial mortgages, demand secured commercial loans and participation loans, both those purchased and sold.  They were partially offset by refinance mortgages, purchase money mortgages, land development loans and home equity loans. The increase in the loan portfolio during the 2009 period is primarily due to an increase in commercial mortgages, purchase money mortgages, refinances, home equity and demand commercial secured loans. They were partially offset by a decline in indirect automobile loans and mortgage participations purchased besides a larger provision for credit losses.

During 2010, the Company’s total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $87,268,359, a $2,805,754 or 3.33%, increase from $84,462,605 at December 31, 2009.  This increase is primarily attributable to an increase in municipal securities.  During 2009, the Company’s total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $84,462,605, a $26,513,960 or 45.75%, increase from $57,948,645 at December 31, 2008.  This increase is primarily attributable to an increase in mortgage backed securities and Government Agency collateralized mortgage obligations (CMO) partially offset by a decrease in U.S. Government Agencies and non-Maryland municipal securities.

Deposits as of December 31, 2010 totaled $294,444,828, an increase of $86,991, or 0.03%, from the $294,357,837 total as of December 31, 2009.  Deposits as of December 31, 2009 totaled $294,357,837, an increase of $24,590,239, or 9.12%, from the $269,767,598 total as of December 31, 2008.  Demand deposits as of December 31, 2010 totaled $68,056,610, a $248,911, or 0.37%, increase from $67,807,699 at December 31, 2009.  NOW and Super NOW accounts, as of December 31, 2010, increased by $1,330,322, or 5.96% from their 2009 level to $23,683,375. Money market accounts increased by $1,426,388, or 9.34%, from their 2009 level, to total $16,710,611 at December 31, 2010. Savings deposits increased by $4,628,974, or 9.57%, from their 2009 level, to $53,007,293 at December 31, 2010. Time deposits over $100,000 totaled $44,193,229 on December 31, 2010, a decrease of $1,052,857, or 2.33% from December 31, 2009. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $88,793,710 on December 31, 2010, a $6,494,747 or 6.82% decrease from December 31, 2009.
 
 
24

 
 
Total stockholders’ equity as of December 31, 2010 increased by $1,183,524, or 4.71%, from the 2009 period.  The increase was attributed to an increase in earnings less the cash dividends paid, net of dividends reinvested.  Total stockholders’ equity as of December 31, 2009 decreased by $2,759,130, or 9.89%, from the 2008 period.  The decrease was attributed to an increase in accumulated other comprehensive loss, net of tax, and the excess of the cash dividends paid and common stock shares repurchased and retired over the net income for 2009. 

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, 2010, 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, 2010.
 
 
25

 
 
    
0-3 Months
   
Over 3 To
12 Months
   
Over 1
Through 5 Years
   
Over 5
Years
   
Total
 
   
(Dollars In Thousands)
 
Assets:
                             
Cash and due from banks
  $ -     $ -     $ -     $ -     $ 8,060  
Federal funds and overnight deposits
    940       -       -       -       940  
Securities
    -       555       1,054       85,659       87,268  
Loans
    13,697       18,282       72,455       125,417       229,851  
Fixed Assets
    -       -       -       -       4,124  
Other Assets
    -       -       -       -       16,824  
                                         
Total assets
  $ 14,637     $ 18,837     $ 73,509     $ 211,076     $ 347,067  
                                         
Liabilities:
                                       
Demand deposit accounts
  $ -     $ -     $ -     $ -     $ 68,056  
NOW accounts
    23,683       -       -       -       23,683  
Money market deposit accounts
    16,711       -       -       -       16,711  
Savings accounts
    53,007       244       -       -       53,251  
IRA accounts
    3,818       9,624       23,904       1,114       38,460  
Certificates of deposit
    21,968       36,594       35,252       469       94,283  
Short-term borrowings
    4,274       -       -       -       4,274  
Long-term borrowings
    -       -       -       -       20,000  
Other liabilities
    -       -       -       -       2,016  
Stockholders’ equity
    -       -       -       -       26,333  
                                         
Total liabilities and Stockholders’ equity
  $ 123,461     $ 46,462     $ 59,156     $ 1,583     $ 347,067  
                                         
GAP
  $ (110,407 )   $ (27,625 )   $ 14,353     $ 209,493          
Cumulative GAP
    (110,407 )     (138,032 )     (123,679 )     85,814          
Cumulative GAP as a % of total assets
    (31.81 %)     (39.77 %)     (35.64 %)     24.73 %        

The foregoing analysis assumes that the Bank’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 and, in the Bank’s experience, the changes historically realized have been narrower than those projected by the model.  However, the Bank believes that the model is a prudent forecasting tool.  As of December 31, 2010, 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
    -3.5 %     -1.9 %     0.4 %     -1.8 %
% Change in Economic Value of Equity
    -19.8 %     -11.2 %     0.4 %     -11.7 %

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 the primary source of funds supporting the Bank’s lending and investment activities.  The Bank also uses borrowings from the FHLB of Atlanta to supplement deposits, residential and small business lending, and to meet specific and anticipated needs.
 
 
26

 
 
The Bank’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, federal funds sold 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.

Cash and cash equivalents (cash due from banks, interest-bearing deposits in other financial institutions, and federal funds sold), as of December 31, 2010, totaled $9,000,303, a decrease of $2,433,519 or 21.29%, from the December 31, 2009 total of $11,433,822.  This decrease comes from the payoff of a $7 million advance at FHLB and the payoff of over $5 million in junior subordinated debentures during the month of September 2010. 

As of December 31, 2010, the Bank was permitted to draw on a $55.47 million 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 and its portfolio of U.S. Government and agency securities.  As of December 31, 2010, there was a $4 million daily rate credit borrowing advance outstanding under this line.  This was a short term borrowing due in November 2011 and had a rate of 0.49% at December 31, 2010 but this is a daily variable rate borrowing.  There was also a $10 million convertible advance (callable monthly and with a final maturity of November 1, 2017.) There was a $5 million convertible advance settled July 21, 2008 with a final maturity of July 23, 2018.  This advance has a 2.73% rate of interest and was callable quarterly, starting July 23, 2009. There was a $5 million convertible advance taken out August 22, 2008 which has a final maturity of August 22, 2018.  This advance has a 3.344% rate of interest and is callable quarterly, starting August 22, 2011. In addition the Bank has unsecured lines of credit totaling $3 million from a commercial bank on which there is no outstanding balances at December 31, 2010.

Federal banking regulations require the Company and the Bank to maintain specified levels of capital.  At December 31, 2010, the Company was in compliance with these requirements with a leverage ratio of 7.64%, a Tier 1 risk-based capital ratio of 11.33% and total risk-based capital ratio of 12.58%.  At December 31, 2010, the Bank met the criteria for designation as a well capitalized depository institution under FDIC regulations.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation.  Unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary in nature.  As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Critical Accounting Policies

The Company’s accounting policies are more fully described in Note 1 of the Notes to the Consolidated Financial Statements, starting on page F-8 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 important in the estimation process:

Allowance for Credit Losses.  The Bank’s allowance for credit losses is determined based upon estimates that can and do change when the actual events occur, including historical losses as an indicator of future losses, fair market value of collateral, and various general or industry or geographic specific economic events.  The use of these estimates and values is inherently subjective and the actual losses could be greater or less than the estimates.  For further information regarding our allowance for credit losses, see “Allowance for Credit Losses” under Item 1- “Business” of this Annual Report.
 
 
27

 

 
Accrued Taxes.  Management estimates income tax expense based on the amount it expects to owe various tax authorities.  Income taxes are discussed in more detail in Note 10 to the consolidated financial statements.  Accrued taxes represent the net estimated amount due or to be received from taxing authorities.  In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of the Company’s tax position.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06 - Fair Value Measurements and Disclosures amending Topic 820. The ASU provides for additional disclosures of transfers between assets and liabilities valued under Level 1 and 2 inputs as well as additional disclosures regarding those assets and liabilities valued under Level 3 inputs. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for those provisions addressing Level 3 fair value measurements which provisions are effective for fiscal years, and interim periods therein, beginning after December 15, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09 amending FASB ASC Topic 855 to exclude SEC reporting entities from the requirement to disclose the date on which subsequent events have been evaluated. It further modifies the requirement to disclose the date on which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively. The Company has complied with ASU No. 2010-09.

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The main objective of this ASU is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The ASU requires that entities provide additional information to assist financial statement users in assessing their credit risk exposures and evaluating the adequacy of its allowance for credit losses. For the Company, the disclosures as of the end of a reporting period are required for the annual reporting periods ending on December 31, 2010.  Required disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning January 1, 2011. The adoption of this ASU will result in additional disclosures in the Company’s financial statements regarding its loan portfolio and related allowance for loan losses but does not change the accounting for loans or the allowance. The Company has complied with this ASU for the annual reporting period ending December 31, 2010 and will comply for interim and annual reporting periods thereafter.

The FASB has issued several exposure drafts which, if adopted, would significantly alter the Company’s (and all other financial institutions’) method of accounting for, and reporting, its financial assets and some liabilities from a historical cost method to a fair value method of accounting as well as the reported amount of net interest income. Also, the FASB has issued an exposure draft regarding a change in the accounting for leases. Under this exposure draft, the total amount of “lease rights” and total amount of future payments required under all leases would be reflected on the balance sheets of all entities as assets and debt. If the changes under discussion in either of these exposure drafts are adopted, the financial statements of the Company could be materially impacted as to the amounts of recorded assets, liabilities, capital, net interest income, interest expense, depreciation expense, rent expense and net income. The Company has not determined the extent of the possible changes at this time. The exposure drafts are in different stages of review, approval and possible adoption.

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this Item 8 are included in the Company’s Consolidated Financial Statements and set forth in the pages indicated in Item 15 of this Annual Report.

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.
 
 
28

 
 
ITEM 9A.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures

The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner.  The Company’s Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this annual report, and have concluded that the system is effective.

Management’s Annual Report on Internal Control over Financial Reporting
 
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (GAAP).  Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

 Management (with the participation of the Company’s Chief Executive Officer and Chief Financial Officer) conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.
   
Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.
OTHER INFORMATION

Not applicable.
 
 
29

 

PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information with respect to the identity and business experience of the directors of the Company and their remuneration set forth in the section captioned “Proposal I — Election of Directors” in the Company’s definitive Proxy Statement to be filed pursuant to Regulation 14A and issued in conjunction with the 2011 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.  The information with respect to the identity and business experience of executive officers of the Company is set forth in Part I of this Form 10-K.  The information with respect to the Company’s Audit Committee is incorporated herein by reference to the section captioned “Meetings and Committees of the Board of Directors” in the Proxy Statement.  The information with respect to compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.  The information with respect to the Company’s Code of Ethics is incorporated herein by reference to the section captioned “Code of Ethics” in the Proxy Statement.

ITEM 11.
EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the sections captioned “Director Compensation” and “Executive Compensation” in the Proxy Statement.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to the sections captioned “Voting Securities and Principal Holders Thereof” and “Securities Ownership of Management” in the Proxy Statement.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the section captioned “Election of Directors” and “Transactions with Management” in the Proxy Statement.

ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the section captioned “Authorization for Appointment of Auditors – Disclosure of Independent Auditor Fees” in the Proxy Statement.

 
30

 

PART IV

ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  1. Financial Statements.
 
Page
Report of Independent registered Public Accounting Firm
F-1
Consolidated Balance Sheets as of December 31, 2010, 2009 and 2008
F-2
Consolidated Statements of Income for the Years Ended December 31, 2010, 2009 and 2008
F-3
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2010, 2009 and 2008
F-4
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008
F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008
F-6
Notes to Consolidated Financial Statements
F-8

(a) 2. Financial Statement Schedules.

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.

(a)  3. Exhibits required to be filed by Item 601 of Regulation S-K.
 
Exhibit No.
 
3.1
Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Registrant’s Form 8-A filed December 27, 1999, File No. 0-24047)
3.2
Articles of Amendment, dated October 8, 2003 (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2003, File No. 0-24047)
3.3
Articles Supplementary, dated November 16, 1999 (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed December 8, 1999, File No. 0-24047)
3.4
By-Laws (incorporated by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2003, File No. 0-24047)
4.1
Rights Agreement, dated as of February 13, 1998, between Glen Burnie Bancorp and The Bank of Glen Burnie, as Rights Agent, as amended and restated as of December 27, 1999 (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s Form 8-A filed December 27, 1999, File No. 0-24047)
10.1
Glen Burnie Bancorp Director Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-8, File No.33-62280)
10.2
The Bank of Glen Burnie Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-8, File No. 333-46943)
10.3
Amended and Restated Change-in-Control Severance Plan (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2001, File No. 0-24047)
10.4
The Bank of Glen Burnie Executive and Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999, File No. 0-24047)
21
Subsidiaries of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2001, File No. 0-24047)
23
Consent of TGM Group LLC
31.1
Rule 15d-14(a) Certification of Chief Executive Officer
31.2
Rule 15d-14(a) Certification of Chief Financial Officer
32.1
Section 1350 Certifications
 
 
31

 
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
GLEN BURNIE BANCORP
     
March 10, 2011
By:
/s/ Michael G. Livingston
   
Michael G. Livingston
   
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature
 
Title
 
Date
         
/s/ Michael G. Livingston
 
President, Chief Executive Officer
 
March 10, 2011
  Michael G. Livingston
 
and Director
   
         
/s/ F. William Kuethe, Jr.
 
President Emeritus and Director
 
March 10, 2011
F. William Kuethe, Jr.
       
         
/s/ John E. Porter
 
Senior Vice President and Chief
 
March 10, 2011
John E. Porter
 
Financial Officer
   
         
/s/ John E. Demyan
 
Chairman of the Board and Director
 
March 10, 2011
John E. Demyan
       
         
/s/ Shirley E. Boyer
 
Director
 
March 10, 2011
Shirley E. Boyer
       
         
/s/ Thomas Clocker
 
Director
 
March 10, 2011
Thomas Clocker
       
         
/s/ Norman E. Harrison, Jr.
 
Director
 
March 10, 2011
Norman E. Harrison, Jr.
       
         
/s/ F. W. Kuethe, III
 
Director
 
March 10, 2011
F. W. Kuethe, III
       
         
/s/ Charles Lynch
 
Director
 
March 10, 2011
Charles Lynch
       
         
/s/ Edward L. Maddox
 
Director
 
March 10, 2011
Edward L. Maddox
       
         
/s/  William N. Scherer, Sr.
 
Director
 
March 10, 2011
William N. Scherer, Sr.
       
 
 
32

 

 
/s/ Karen B. Thorwarth
 
Director
 
March 10, 2011
Karen B. Thorwarth
       
         
/s/ Mary Lou Wilcox
 
Director
 
March 10, 2011
Mary Lou Wilcox
       

 
33

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Glen Burnie Bancorp and Subsidiaries
Glen Burnie, Maryland

We have audited the accompanying consolidated balance sheets of Glen Burnie Bancorp and subsidiaries as of December 31, 2010, 2009, and 2008, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years then ended.  Glen Burnie Bancorp and subsidiaries’ management is responsible for these consolidated financial statements.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Glen Burnie Bancorp and subsidiaries as of December 31, 2010, 2009, and 2008, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.


Salisbury, Maryland
March 10, 2011


 
F-1

 

Glen Burnie Bancorp and Subsidiaries

Consolidated Balance Sheets
 

  
December 31,
 
2010
   
2009
   
2008
 
                   
Assets
                 
Cash and due from banks
  $ 6,492,313     $ 6,993,811     $ 6,960,377  
Interest-bearing deposits in other financial institutions
    1,567,673       3,748,387       7,883,816  
Federal funds sold
    940,317       691,624       6,393,710  
Cash and cash equivalents
    9,000,303       11,433,822       21,237,903  
Investment securities available for sale, at fair value
    87,268,359       84,462,605       57,948,645  
Federal Home Loan Bank stock, at cost
    1,745,100       1,858,300       1,767,600  
Maryland Financial Bank stock, at cost
    100,000       100,000       100,000  
Common stock in the Glen Burnie Statutory Trust I
    -       155,000       155,000  
Ground rents, at cost
    178,200       184,900       184,900  
Loans, less allowance for credit losses
                       
2010 $3,399,516; 2009 $3,572,528; 2008 $2,021,690;
    229,850,888       235,882,862       235,132,621  
Premises and equipment, at cost, less accumulated depreciation
    4,123,616       4,120,597       3,099,448  
Accrued interest receivable on loans and investment securities
    1,538,883       1,626,792       1,680,392  
Deferred income tax benefits
    3,348,974       3,129,435       2,286,483  
Other real estate owned
    215,000       25,000       550,000  
Cash value of life insurance
    7,954,062       7,702,656       7,434,573  
Other assets
    1,743,891       2,714,728       924,650  
                         
Total assets
  $ 347,067,276     $ 353,396,697     $ 332,502,215  
                         
Liabilities and Stockholders' Equity
                       
Liabilities:
                       
Deposits:
                       
Noninterest-bearing
  $ 68,056,159     $ 67,807,699     $ 63,538,759  
Interest-bearing
    226,388,669       226,550,138       206,228,839  
Total deposits
    294,444,828       294,357,837       269,767,598  
Short-term borrowings
    4,273,948       81,290       629,855  
Long-term borrowings
    20,000,000       27,033,711       27,071,712  
Junior subordinated debentures owed to unconsolidated subsidiary trust
    -       5,155,000       5,155,000  
Dividends payable
    231,579       230,285       385,794  
Accrued interest payable on deposits
    55,131       112,599       139,579  
Accrued interest payable on junior subordinated debentures
    -       171,518       171,518  
Other liabilities
    1,729,144       1,105,335       1,272,907  
Total liabilities
    320,734,630       328,247,575       304,593,963  
                         
Commitments and contingencies
                       
                         
Stockholders' equity:
                       
Common stock, par value $1, authorized 15,000,000 shares; issued and outstanding 2010 2,702,091 shares; 2009 2,683,015 shares; 2008 2,967,727 shares;
    2,702,091       2,683,015       2,967,727  
Surplus
    9,334,810       9,190,911       11,568,241  
Retained earnings
    15,300,344       14,311,508       14,129,637  
Accumulated other comprehensive loss, net of tax benefits
    (1,004,599 )     (1,036,312 )     (757,353 )
Total stockholders' equity
    26,332,646       25,149,122       27,908,252  
                         
Total liabilities and stockholders' equity
  $ 347,067,276     $ 353,396,697     $ 332,502,215  

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 
F-2

 
 
Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Income
 

  
Years Ended December 31,
 
2010
   
2009
   
2008
 
                   
Interest income on:
                 
Loans, including fees
  $ 14,646,011     $ 15,248,717     $ 14,456,017  
U.S. Government agency securities
    1,915,845       1,854,201       1,962,553  
State and municipal securities
    1,400,651       1,308,116       1,410,676  
Corporate trust preferred securities
    166,085       189,012       192,749  
Federal funds sold
    9,632       12,428       5,034  
Other
    40,743       31,823       149,007  
Total interest income
    18,178,967       18,644,297       18,176,036  
                         
Interest expense on:
                       
Deposits
    3,696,631       4,937,282       4,780,185  
Short-term borrowings
    1,492       49       50,567  
Long-term borrowings
    952,705       1,058,749       877,101  
Junior subordinated debentures
    648,127       546,430       546,180  
Total interest expense
    5,298,955       6,542,510       6,254,033  
                         
Net interest income
    12,880,012       12,101,787       11,922,003  
                         
Provision for credit losses
    1,050,000       2,442,976       1,145,649  
                         
Net interest income after provision for credit losses
    11,830,012       9,658,811       10,776,354  
                         
Other income:
                       
Service charges on deposit accounts
    648,183       693,725       737,070  
Other fees and commissions
    823,854       817,559       849,417  
Gains on investment securities, net
    175,164       585,882       190,930  
Income on life insurance
    251,406       268,083       273,170  
Total other income
    1,898,607       2,365,249       2,050,587  
                         
Other expenses:
                       
Salaries and wages
    4,856,835       4,792,480       4,694,461  
Employee benefits
    1,823,669       1,503,848       1,525,023  
Occupancy
    830,105       871,081       903,976  
Furniture and equipment
    761,997       761,462       754,191  
Other expenses
    2,643,509       2,989,201       2,408,690  
Total impairment losses on investment securities
    979,322       1,179,652       3,640,644  
Portion of impairment losses recognized in other comprehensive income (before taxes)
    (717,114 )     (1,102,873 )     (824,644 )
Net impairment loss on investment securities
    262,208       76,779       2,816,000  
Total other expenses
    11,178,323       10,994,851       13,102,341  
                         
Income (loss) before income taxes (benefits)
    2,550,296       1,029,209       (275,400 )
                         
Federal and state income taxes (benefits)
    485,511       (233,253 )     (679,362 )
                         
Net income
  $ 2,064,785     $ 1,262,462     $ 403,962  
                         
Basic and diluted earnings per share of common stock
  $ 0.76     $ 0.46     $ 0.14  

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 
F-3

 
 
Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income
 


Years Ended December 31,
 
2010
   
2009
   
2008
 
                   
Net income
  $ 2,064,785     $ 1,262,462     $ 403,962  
                         
Other comprehensive income (loss), net of tax
                       
Unrealized holding gains (losses) arising during the period (net of deferred taxes (benefits) 2010 ($13,677); 2009 $18,260; 2008 ($1,264,081));
    (20,709 )     27,648       (1,913,998 )
Reclassification adjustment for impairment loss included in net income (net of deferred tax benefits 2010 $104,293; 2009 $30,539; 2008 $1,110,771)
    157,915       46,240       1,705,229  
Reclassification adjustment for gains included in net income (net of deferred taxes 2010 $69,671; 2009 $233,034; 2008 $75,942;)
    (105,493 )     (352,847 )     (114,988 )
Total other comprehensive income (loss)
    31,713       (278,959 )     (323,757 )
                         
Comprehensive income
  $ 2,096,498     $ 983,503     $ 80,205  

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 
F-4

 

Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2010, 2009, and 2008
 

                            
Accumulated
       
                           
Other
       
                           
Comprehensive
   
Total
 
   
Common Stock
         
Retained
   
(Loss)
   
Stockholders'
 
   
Shares
   
Par Value
   
Surplus
   
Earnings
   
Income
   
Equity
 
                                     
Balances, December 31, 2007
    2,498,465     $ 2,498,465     $ 11,921,129     $ 15,750,156     $ (433,596 )   $ 29,736,154  
                                                 
Net income
    -       -       -       403,962       -       403,962  
Cummulative effect of adoption of EITF 06-04
    -       -       -       (179,794 )     -       (179,794 )
Shares repurchased and retired
    (50,300 )     (50,300 )     (526,939 )     -       -       (577,239 )
Cash dividends, $.45 per share
    -       -       -       (1,345,128 )     -       (1,345,128 )
Dividends reinvested under dividend reinvestment plan
    20,003       20,003       174,051       -       -       194,054  
Stock split effected in form of 20% stock dividend
    499,559       499,559       -       (499,559 )     -       -  
Other comprehensive loss, net of tax
    -       -       -       -       (323,757 )     (323,757 )
                                                 
Balances, December 31, 2008
    2,967,727       2,967,727       11,568,241       14,129,637       (757,353 )     27,908,252  
                                                 
Net income
    -       -       -       1,262,462       -       1,262,462  
Shares repurchased and retired
    (305,083 )     (305,083 )     (2,530,626 )     -       -       (2,835,709 )
Cash dividends, $.40 per share
    -       -       -       (1,080,591 )     -       (1,080,591 )
Dividends reinvested under dividend reinvestment plan
    20,371       20,371       153,296       -       -       173,667  
Other comprehensive loss, net of tax
    -       -       -       -       (278,959 )     (278,959 )
                                                 
Balances, December 31, 2009
    2,683,015       2,683,015       9,190,911       14,311,508       (1,036,312 )     25,149,122  
                                                 
Net income
    -       -       -       2,064,785       -       2,064,785  
Cash dividends, $.40 per share
    -       -       -       (1,075,949 )     -       (1,075,949 )
Dividends reinvested under dividend reinvestment plan
    19,076       19,076       143,899       -       -       162,975  
Other comprehensive income, net of tax
    -       -       -       -       31,713       31,713  
                                                 
Balances, December 31, 2010
    2,702,091     $ 2,702,091     $ 9,334,810     $ 15,300,344     $ (1,004,599 )   $ 26,332,646  

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 
F-5

 
 
Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Cash Flows
 

  
Years Ended December 31,
 
2010
   
2009
   
2008
 
                   
Cash flows from operating activities:
                 
Net income
  $ 2,064,785     $ 1,262,462     $ 403,962  
Adjustments to reconcile net income to net cash provided by operating activities
                       
Depreciation, amortization, and accretion
    1,001,488       652,780       421,229  
Provision for credit losses
    1,050,000       2,442,976       1,145,649  
Deferred income tax benefits, net
    (240,485 )     (658,719 )     (1,605,603 )
Gains on disposals of assets, net
    (248,221 )     (569,428 )     (173,393 )
Impairment losses on investment securities
    262,208       76,779       2,816,000  
Income on investment in life insurance
    (251,406 )     (268,083 )     (273,170 )
Changes in assets and liabilities:
                       
Decrease (increase) in accrued interest receivable
    87,909       53,600       (171,752 )
Decrease (increase) in other assets
    869,991       (1,838,514 )     (118,962 )
(Decrease) increase in accrued interest payable
    (228,986 )     (26,980 )     5,305  
Increase (decrease) in other liabilities
    623,809       (167,572 )     (72,369 )
                         
Net cash provided by operating activities
    4,991,092       959,301       2,376,896  
                         
Cash flows from investing activities:
                       
Maturities of available for sale mortgage-backed securities
    13,219,687       7,612,135       4,402,208  
Sales of available for sale debt securities
    9,073,406       24,920,635       25,977,280  
Purchases of available for sale mortgage-backed securities
    (18,958,955 )     (54,787,147 )     (981,811 )
Purchases of other available for sale investment securities
    (6,748,849 )     (4,456,293 )     (13,318,481 )
Purchase of FHLB stock
    113,200       (90,700 )     (385,700 )
Redemption of common stock in the Glen Burnie Staturtory Trust I
    155,000       -       -  
(Decrease) increase in loans, net
    4,469,727       (3,218,217 )     (37,075,138 )
Proceeds from sales of other real estate
    450,827       548,994       50,000  
Purchases of premises and equipment
    (377,912 )     (1,398,320 )     (501,717 )
                         
Net cash provided (used) by investing activities
    1,396,131       (30,868,913 )     (21,149,259 )
                         
Cash flows from financing activities:
                       
Increase (decrease) in noninterest-bearing deposits, NOW accounts, money market accounts, and savings accounts, net
    248,460       4,268,940       (5,221,614 )
(Decrease) increase in time deposits, net
    (161,469 )     20,321,299       22,072,446  
Increase (decrease) in short-term borrowings
    4,192,658       (548,565 )     127,326  
Proceeds from long-term borrowings
    -       -       10,000,000  
Repayments of long-term borrowings
    (7,033,711 )     (38,001 )     (35,423 )
Cash dividends paid
    (1,074,655 )     (1,236,100 )     (1,344,344 )
Common stock dividends reinvested
    162,975       173,667       194,054  
Redemption of guaranteed preferred beneficial interests in
                       
Glen Burnie Bancorp junior subordinated debentures
    (5,155,000 )     -       -  
Repurchase and retirement of common stock
    -       (2,835,709 )     (577,239 )
                         
Net cash (used) provided by financing activities
    (8,820,742 )     20,105,531       25,215,206  
                         
(Decrease) increase in cash and cash equivalents
    (2,433,519 )     (9,804,081 )     6,442,843  
                         
Cash and cash equivalents, beginning of year
    11,433,822       21,237,903       14,795,060  
                         
Cash and cash equivalents, end of year
  $ 9,000,303     $ 11,433,822     $ 21,237,903  

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 
F-6

 
 
Glen Burnie Bancorp and Subsidiaries

Consolidated Statements of Cash Flows
(Continued)
 

   
Years Ended December 31,
 
2010
   
2009
   
2008
 
                   
Supplementary Cash Flow Information:
                 
Interest paid
  $ 5,527,941     $ 6,569,490     $ 6,248,728  
Income taxes paid
    275,000       1,125,000       600,000  
Total decrease (increase) in unrealized depreciation on available for sale securities
    52,659       (463,192 )     (551,125 )
                         
Supplementary Noncash Investing Activities:
                       
Loans converted to other real estate
    512,247       25,000       550,000  

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
 
 
F-7

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies

The Bank of Glen Burnie (the “Bank”) provides financial services to individuals and corporate customers located in Anne Arundel County and surrounding areas of Central Maryland, and is subject to competition from other financial institutions.  The Bank is also subject to the regulations of certain Federal and State of Maryland (the “State”) agencies and undergoes periodic examinations by those regulatory authorities.  The accounting and financial reporting policies of the Bank conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the banking industry.

Significant accounting policies not disclosed elsewhere in the consolidated financial statements are as follows:

Principles of Consolidation:

The consolidated financial statements include the accounts of Glen Burnie Bancorp and its subsidiaries, The Bank of Glen Burnie and GBB Properties, Inc., a company engaged in the acquisition and disposition of other real estate.  Intercompany balances and transactions have been eliminated.  The Parent Only financial statements (see Note 20) of the Company account for the subsidiaries using the equity method of accounting.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States.  Voting interest entities are entities, in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities.  The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest.  As defined in applicable accounting standards, variable interest entities (VIE’s) are entities that lack one or more of the characteristics of a voting interest entity.  A controlling financial interest in an entity is present when an enterprise has a variable interest, or a combination of variable interest, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.  The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE.  The Company’s wholly owned subsidiary, Glen Burnie Statutory Trust I, is a VIE for which the Company is not the primary beneficiary.  Accordingly, the accounts of this entity are not included in the Company’s consolidated financial statements.

Accounting Standards Codification:

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective for interim and annual periods ending after September 15, 2009.  At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (“GAAP”) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literatures.  Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  All other accounting literature is considered non-authoritative.  The switch to ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.  Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

 
F-8

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies (continued)

Use of Estimates:

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted within the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Securities Held to Maturity:

Bonds, notes, and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the effective interest rate method over the period to maturity.  Securities transferred into held to maturity from the available for sale portfolio are recorded at fair value at time of transfer with unrealized gains or losses reflected in equity and amortized over the remaining life of the security.

Securities Available for Sale:

Marketable debt securities not classified as held to maturity are classified as available for sale.  Securities available for sale may be sold in response to changes in interest rates, loan demand, changes in prepayment risk, and other factors.  Changes in unrealized appreciation (depreciation) on securities available for sale are reported in other comprehensive income, net of tax.  Realized gains (losses) on securities available for sale are included in other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income.  The gains and losses on securities sold are determined by the specific identification method.  Premiums and discounts are recognized in interest income using the effective interest rate method over the period to maturity.  Additionally, declines in the fair value of individual investment securities below their cost that are other than temporary are reflected as realized losses in the consolidated statements of income.

Other Securities:

Federal Home Loan Bank (“FHLB”) and Maryland Financial Bank (“MFB”) stocks are equity interests that do not necessarily have readily determinable fair values for purposes of the ASC Topic 320, formerly, Statement of Financial Accounting Standards (“SFAS”) No 115, Accounting for Certain Investments in Debt and Equity Securities, because their ownership is restricted and they lack a market.  FHLB stock can be sold back only at its par value of $100 per share and only to the FHLB or another member institution.

Loans and Allowance for Credit Losses:

Loans are generally carried at the amount of unpaid principal, adjusted for deferred loan fees, which are amortized over the term of the loan using the effective interest rate method.  Interest on loans is accrued based on the principal amounts outstanding.  It is the Bank’s policy to discontinue the accrual of interest when a loan is specifically determined to be impaired or when principal or interest is delinquent for ninety days or more.  When a loan is placed on nonaccrual status all interest previously accrued but not collected is reversed against current period interest income.  Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote.  Cash collections on such loans are applied as reductions of the loan principal balance and no interest income is recognized on those loans until the principal balance has been collected.  Interest income on other nonaccrual loans is recognized only to the extent of interest payments received.  The carrying value of impaired loans is based on the present value of the loan’s expected future cash flows or, alternatively, the observable market price of the loan or the fair value of the collateral.

 
F-9

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies (continued)

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions.  Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change.  Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance.  A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.  Evaluations are conducted at least quarterly and more often if deemed necessary.

The allowance for loan losses typically consists of an allocated component and an unallocated component.  The components of the allowance for loan losses represent an estimation done pursuant to either ASC Topic 450, formerly SFAS No 5, Accounting for Contingencies, or ASC Topic 310, formerly SFAS No 114, Accounting by Creditors for Impairment of a Loan.  The allocated component of the allowance for loan losses reflects expected losses resulting from analyses developed through specific credit allocations for individual loans and historical loss experience for each loan category.  The specific credit allocations are based on regular analyses of all loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification.  The historical loan loss element is determined statistically using a loss migration analysis that examines loss experience and the related internal gradings of loans charged off.  The loss migration analysis is performed quarterly and loss factors are updated regularly based on actual experience.  The allocated component of the allowance for loan losses also includes consideration of concentrations and changes in portfolio mix and volume.

Any unallocated portion of the allowance reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors.  In addition, the unallocated allowance includes a component that explicitly accounts for the inherent imprecision in loan loss migration models.  The historical losses used in the migration analysis may not be representative of actual unrealized losses inherent in the portfolio.  At December 31, 2010, there was no unallocated component of the allowance reflected in the allowance for credit losses.

Reserve for Unfunded Commitments:

The reserve for unfunded commitments is established through a provision for unfunded commitments charged to other expenses.  The reserve is calculated by utilizing the same methodology and factors as  the allowance for credit losses.  The reserve, based on evaluations of the collectibiltiy of loans and prior loan loss experience, is an amount that management believes will be adequate to absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may become uncollectible in the future.

Other Real Estate Owned (“OREO”):

OREO comprises properties acquired in partial or total satisfaction of problem loans.  The properties are recorded at the lower of cost or fair value (appraised value) at the date acquired.  Losses arising at the time of acquisition of such properties are charged against the allowance for credit losses.  Subsequent write-downs that may be required and expenses of operation are included in other income or expenses.  Gains and losses realized from the sale of OREO are included in other income or expenses.  Loans converted to OREO through foreclosure proceedings totaled $512,247 and $25,000 for the years ended December 31, 2010 and 2009, respectively.  The Bank financed no sales of OREO for 2010, 2009, or 2008.

 
F-10

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies (continued)

Bank Premises and Equipment:

Bank premises and equipment are stated at cost less accumulated depreciation.  The provision for depreciation is computed using the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are depreciated over the lesser of the terms of the leases or their estimated useful lives.  Expenditures for improvements that extend the life of an asset are capitalized and depreciated over the asset’s remaining useful life.  Gains or losses realized on the disposition of premises and equipment are reflected in the consolidated statements of income.  Expenditures for repairs and maintenance are charged to other expenses as incurred.  Computer software is recorded at cost and amortized over three to five years.

Long-Lived Assets:

The carrying value of long-lived assets and certain identifiable intangibles, including goodwill, is reviewed by the Bank for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, as prescribed in ASC Topic 360, formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset.  As of December 31, 2010, 2009, and 2008, certain loans existed which management considered impaired (See Note 4).  During the years ended December 31, 2010 and 2009, management deemed certain investment securities were impaired and recorded an impairment loss on these securities (See Note 3).

Income Taxes:

The provision for Federal and state income taxes is based upon the results of operations, adjusted for tax-exempt income.  Deferred income taxes are provided by applying enacted statutory tax rates to temporary differences between financial and taxable bases.

Temporary differences which give rise to deferred tax benefits relate principally to accrued deferred compensation, accumulated impairment losses on investment securities, allowance for credit losses, unused alternative minimum tax credits, net unrealized depreciation on investment securities available for sale, accumulated depreciation, OREO, and reserve for unfunded commitments.

Temporary differences which give rise to deferred tax liabilities relate principally to accumulated depreciation, and accumulated securities discount accretion.

Credit Risk:

The Bank has unsecured deposits and Federal funds sold with several other financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation (“FDIC”).

Cash and Cash Equivalents:

The Bank has included cash and due from banks, interest-bearing deposits in other financial institutions, and Federal funds sold as cash and cash equivalents for the purpose of reporting cash flows.

 
F-11

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies (continued)

Accounting for Stock Options:

The Company follows ASC Topic 718, formerly SFAS No. 123R, Share-Based Payments, for accounting and reporting for stock-based compensation plans.  ASC Topic 718 defines a fair value at grant date based method of accounting for measuring compensation expense for stock-based plans to be recognized in the statement of income.

Earnings per share:

Basic earnings per common share are determined by dividing net income by the weighted average number of shares of common stock outstanding.  Diluted earnings per share are calculated including the average dilutive common stock equivalents outstanding during the period.  Dilutive common equivalent shares consist of stock options, calculated using the treasury stock method.

Financial Statement Presentation:

Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation.

Note 2.  Restrictions on Cash and Due from Banks

The Federal Reserve requires the Bank to maintain noninterest-bearing cash reserves against certain categories of average deposit liabilities.  Such reserves averaged approximately $4,700,000, $5,026,000, and $4,781,000 during the years ended December 31, 2010, 2009, and 2008, respectively.

Note 3.  Investment Securities

Investment securities are summarized as follows:
 
                         
   
 
   
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2010
 
Cost
   
Gains
   
Losses
   
Value
 
                         
Available for sale:
                       
U.S. Government agencies
  $ 1,028,360     $ 51,640     $ 200     $ 1,079,800  
State and municipal
    34,775,927       54,285       1,960,277       32,869,935  
Corporate trust preferred
    1,793,287       64,898       717,115       1,141,070  
Mortgage-backed
    51,337,038       984,851       144,335       52,177,554  
                                 
    $ 88,934,612     $ 1,155,674     $ 2,821,927     $ 87,268,359  

   
 
   
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2009
 
Cost
   
Gains
   
Losses
   
Value
 
                         
Available for sale:
                       
U.S. Government agencies
  $ 3,180,360     $ 14,060     $ 135,330     $ 3,059,090  
State and municipal
    30,073,170       335,146       664,647       29,743,669  
Corporate trust preferred
    2,080,282       33,521       1,102,874       1,010,929  
Mortgage-backed
    50,849,527       368,642       569,252       50,648,917  
                                 
    $ 86,183,339     $ 751,369     $ 2,472,103     $ 84,462,605  

 
F-12

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3.  Investment Securities (continued)

December 31, 2008
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
Available for sale:
                       
U.S. Government agencies
  $ 8,686,877     $ 191,455     $ 140,280     $ 8,738,052  
State and municipal
    31,466,012       235,128       979,935       30,721,205  
Corporate trust preferred
    2,168,928       -       971,426       1,197,502  
Mortgage-backed
    16,884,368       413,682       6,164       17,291,886  
                                 
    $ 59,206,185     $ 840,265     $ 2,097,805     $ 57,948,645  

The gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010 are as follows:

   
Less than 12 months
   
12 months or more
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
Obligations of U.S. Government agencies
  $ 9,000     $ 200     $ -     $ -     $ 9,000     $ 200  
State and Municipal
    24,187,563       1,489,402       3,045,857       470,875       27,233,420       1,960,277  
Corporate trust preferred
    -       -       121,070       717,115       121,070       717,115  
Mortgaged-backed
    7,309,166       85,522       3,244,475       58,813       10,553,641       144,335  
                                                 
    $ 31,505,729     $ 1,575,124     $ 6,411,402     $ 1,246,803     $ 37,917,131     $ 2,821,927  

At December 31,2010, the Company owned one pooled trust preferred security issued by Regional Diversified Funding, Senior notes with a Fitch credit rating of B, which is included in the securities described above.  The market for these securities at December 31, 2010 was not active and markets for similar securities were also not active.

The market values for these securities (and any securities other than those issued or guaranteed by the U.S. Treasury) are very depressed relative to historical levels.  Therefore, a low market price for a particular security may only provide evidence of stress in the credit markets overall rather than being an indicator of credit problems with a particular issuer.

During 2010, the Company took a write down of $110,208 on these trust preferred securities to bring the book value into alignment with the present value of $838,136 which was arrived at as the result of cash flow testing performed by an unrelated third party in order to measure the extent of other-than-temporary-impairment (“OTTI”).  This testing assumed defaults of 75 basis points applied annually with a 15% recovery with a two year lag.

During 2010, the Company also took an additional write down of $152,000 on the Freddie Mac and Fannie Mae securities already written down in 2008.  In management’s judgment the decline in the market value of these securities are permanent in nature and therefore were written down to the current market value as provided by third party repricing provider.

During 2009, the Company took a write down of $76,779 on these trust preferred securities to bring the book value into alignment with the current and performing principal balance outstanding, which we considered to be a prudent action to take in the current environment based on defaults by three of the twenty-nine financial institutions in the pool.  In addition, cash flow testing was performed by an unrelated third party in order to measure the extent of other-than-temporary-impairment (“OTTI”).  This testing, assumed a 15% recovery with a two year lag on two of the previously defaulting financial institutions, with future defaults on the currently performing financial institutions of 150 basis points applied annually with no future recovery.  This testing resulted in a net present value of $1,142,047, compared to the book value of $1,127,965 at December 31, 2009.

 
F-13

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3.  Investment Securities (continued)

During 2008, Freddie Mac and Fannie Mae government sponsored entities entered into conservatorship agreements with the U.S. Treasury Department.  This conservatorship precludes these entities from paying preferred stock dividends.  As a result, the market values declined significantly and the Company recorded an impairment loss of $2,816,000 during the year ended December 31, 2008.  The write down represented 94% of the initial investment in these securities.

Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

As of December 31, 2010, management had the ability and intent to hold the securities classified as available for sale for a period of time sufficient for a recovery of cost.  On December 31, 2010, the Bank held 15 investment securities having continuous unrealized loss positions for more than 12 months.  Management has determined that all unrealized losses are either due to increases in market interest rates over the yields available at the time the underlying securities were purchased, current call features that are nearing, and the effect the sub-prime market has had on all mortgaged-backed securities.  The Bank has no mortgaged-backed securities collateralized by sub-prime mortgages.  The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.  Management does not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of December 31, 2010, management believes the impairments detailed in the table above are temporary and no additional impairment loss is required to be realized in the Company’s consolidated income statement.

A rollforward of the cumulative other-than-temporary credit losses recognized in earnings for all debt securities for which a portion of an other-then-temporary loss is recognized in accumulated other comprehensive loss is as follows:

   
2010
   
2009
   
2008
 
                   
Estimated credit losses, beginning of year
  $ 2,892,779     $ 2,816,000     $ -  
Credit losses - no previous OTTI recognized
    -       76,779       2,816,000  
Credit losses - previous OTTI recognized
    262,208       -       -  
                         
Estimated credit losses, end of year
  $ 3,154,987     $ 2,892,779     $ 2,816,000  

Contractual maturities of investment securities at December 31, 2010, 2009, and 2008 are shown below.  Actual maturities may differ from contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties.  Mortgage-backed securities have no stated maturity and primarily reflect investments in various Pass-through and Participation Certificates issued by the Federal National Mortgage Association and the Government National Mortgage Association.  Repayment of mortgage-backed securities is affected by the contractual repayment terms of the underlying mortgages collateralizing these obligations and the current level of interest rates.

 
F-14

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3.  Investment Securities (continued)

   
Available for Sale
 
   
Amortized
   
Fair
 
December 31, 2010
 
Cost
   
Value
 
             
Due within one year
  $ -     $ -  
Due over one to five years
    1,589,004       1,609,925  
Due over five to ten years
    304,997       312,135  
Due over ten years
    35,703,573       33,168,745  
Mortgage-backed, due in monthly installments
    51,337,038       52,177,554  
                 
    $ 88,934,612     $ 87,268,359  
                 
December 31, 2009
               
                 
Due within one year
  $ 649,998     $ 650,982  
Due over one to five years
    1,825,146       1,850,726  
Due over five to ten years
    565,946       571,123  
Due over ten years
    32,292,722       30,740,857  
Mortgage-backed, due in monthly installments
    50,849,527       50,648,917  
                 
    $ 86,183,339     $ 84,462,605  
                 
December 31, 2008
               
                 
Due within one year
  $ -     $ -  
Due over one to five years
    4,577,077       4,560,487  
Due over five to ten years
    5,563,224       5,685,637  
Due over ten years
    32,181,516       30,410,635  
Mortgage-backed, due in monthly installments
    16,884,368       17,291,886  
                 
    $ 59,206,185     $ 57,948,645  

Proceeds from sales of available for sale securities prior to maturity totaled $9,073,406, $24,920,635, and $25,977,280 for the years ended December 31, 2010, 2009, and 2008, respectively.  The Bank realized gains of $176,046 and losses of $882 on those sales for 2010.  The Bank realized gains of $600,696 and losses of $14,815 on those sales for 2009.  The Bank realized gains of $195,780 and losses of $4,850 on those sales for 2008.  Realized gains and losses were calculated based on the amortized cost of the securities at the date of trade.  Income tax expense relating to net gains on sales of investment securities totaled $69,674, $233,034, and $75,942 for the years ended December 31, 2010, 2009, and 2008, respectively.

In July 2008, the Company sold its remaining two positions in securities classified as held to maturity.  Inasmuch as these positions were liquidated prior to maturity in a manner which did not meet the prescribed requirements of ASC Topic 320, the Company may be precluded for a period of time from classifying any securities positions as held to maturity.

The Bank has no derivative financial instruments required to be disclosed under ASC Topic 815, formerly SFAS No. 149, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments.
 
 
F-15

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4.  Loans

Major categories of loans are as follows:

   
2010
   
2009
   
2008
 
Mortgage:
                 
Residential
  $ 102,199,134     $ 95,683,441     $ 87,707,878  
Commercial
    72,669,909       79,845,030       76,152,837  
Construction and land development
    5,363,232       1,742,515       6,589,673  
Demand and time
    7,193,070       9,800,625       6,974,607  
Installment
    46,860,351       53,222,692       60,593,752  
      234,285,696       240,294,303       238,018,747  
Unearned income on loans
    (1,035,292 )     (838,913 )     (864,436 )
      233,250,404       239,455,390       237,154,311  
Allowance for credit losses
    (3,399,516 )     (3,572,528 )     (2,021,690 )
                         
    $ 229,850,888     $ 235,882,862     $ 235,132,621  

The Bank has an automotive indirect lending program where vehicle collateralized loans made by dealers to consumers are acquired by the Bank.  The Bank’s installment loan portfolio included approximately $30,286,000, $37,092,000, and $43,970,000 of such loans at December 31, 2010, 2009, and 2008, respectively.

The Bank makes loans to customers located primarily in Anne Arundel County and surrounding areas of Central Maryland.  Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.

Executive officers, directors, and their affiliated interests enter into loan transactions with the Bank in the ordinary course of business.  These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with unrelated borrowers.  They do not involve more than normal risk of collectibility or present other unfavorable terms.  At December 31, 2010, 2009, and 2008, the amounts of such loans outstanding totaled $5,109,539, $5,137,397, and $4,344,974, respectively.  During 2010, loan additions and repayments totaled $1,184,500 and $1,212,358, respectively.

The allowance for credit losses is as follows:

   
Commercial
         
Consumer
                   
   
and
   
Commercial
   
and
   
Residential
             
2010
 
Industrial
   
Real Estate
   
Indirect
   
Real Estate
   
Unallocated
   
Total
 
                                     
Balance, beginning of year
  $ 237,461     $ 2,380,024     $ 842,901     $ 162,142     $ (50,000 )   $ 3,572,528  
Provision for credit losses
    (7,822 )     542,416       448,197       14,959       52,250       1,050,000  
Recoveries
    45,731       10,593       497,479       85,195       -       638,998  
Loans charged off
    (12,119 )     (824,810 )     (959,060 )     (66,021 )     -       (1,862,010 )
                                                 
Balance, end of year
  $ 263,251     $ 2,108,223     $ 829,517     $ 196,275     $ 2,250     $ 3,399,516  

 
F-16

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4.  Loans (continued)

   
2009
   
2008
 
   
 
   
 
 
Balance, beginning of year
  $ 2,021,690     $ 1,604,491  
Provision for credit losses
    2,442,976       1,145,649  
Recoveries
    395,584       352,933  
Loans charged off
    (1,287,722 )     (1,081,383 )
                 
Balance, end of year
  $ 3,572,528     $ 2,021,690  

Loans classified by the Bank as impaired by categories of loans at December 31, 2010 are as follows:

   
Commercial
         
Consumer
             
   
and
   
Commercial
   
and
   
Residential
       
   
Industrial
   
Real Estate
   
Indirect
   
Real Estate
   
Total
 
Individually evaluated impaired balance:
                             
Balance, beginning of year
  $ 757,553     $ 7,870,847     $ 5,969     $ 189,260     $ 8,823,629  
Originations
    -       125,117       -       -       125,117  
Sales/repayments
    (101,676 )     (2,765,713 )     (4,823 )     (2,566 )     (2,874,778 )
Charge-offs
    -       (824,810 )     -       (59,000 )     (883,810 )
Transfers to/from collectively impaired
    137,776       4,593,949       77,358       1,035,279       5,844,362  
                                         
Balance, end of year
  $ 793,653     $ 8,999,390     $ 78,504     $ 1,162,973     $ 11,034,520  
Fair value of ending Balance
  $ 610,821     $ 7,298,090     $ 57,124     $ 1,129,114     $ 9,095,149  
                                         
Collectively evaluated impaired balance:
                                       
Balance, beginning of year
  $ -     $ -     $ 475,008     $ 215,000     $ 690,008  
Originations
    -       -       -       -       -  
Sales/repayments
    -       -       (16,550 )     -       (16,550 )
Charge-offs
    (12,119 )     -       (959,060 )     (7,021 )     (978,200 )
Transfers to/from collectively impaired
    12,119       -       889,819       (207,979 )     693,959  
                                         
Balance, end of year
  $ -     $ -     $ 389,217     $ -     $ 389,217  
Fair value of ending Balance
  $ -     $ -     $ 381,298     $ -     $ 381,298  
 
 
F-17

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4.  Loans (continued)

The allowance for credit losses on loans classified by the Bank as impaired by categories of loans at December 31, 2010 is as follows:

   
Commercial
         
Consumer
             
   
and
   
Commercial
   
and
   
Residential
       
   
Industrial
   
Real Estate
   
Indirect
   
Real Estate
   
Total
 
Allowance for individually evaluated impaired:
                             
Balance, beginning of year
  $ 47,290     $ 2,122,715     $ 3,588     $ 5,387     $ 2,178,980  
Provision for credit losses
    101,930       392,802       17,792       9,298       521,822  
Recoveries
    45,731       10,593       -       85,195       141,519  
Loans charged off
    (12,119 )     (824,810 )     -       (66,021 )     (902,950 )
                                         
Balance, end of year
  $ 182,832     $ 1,701,300     $ 21,380     $ 33,859     $ 1,939,371  
                                         
Allowance for collectively evaluated impaired:
                                       
Balance, beginning of year
  $ -     $ -     $ 8,719     $ -     $ 8,719  
Provision for credit losses
    -       -       460,781       -       460,781  
Recoveries
    -       -       497,479       -       497,479  
Loans charged off
    -       -       (959,060 )     -       (959,060 )
                                         
Balance, end of year
  $ -     $ -     $ 7,919     $ -     $ 7,919  

Risk ratings of loans by categories of loans at December 31, 2010 are as follows:

   
Commercial
         
Consumer
             
   
and
   
Commercial
   
and
   
Residential
       
   
Industrial
   
Real Estate
   
Indirect
   
Real Estate
   
Total
 
                               
Pass
  $ 5,852,779     $ 66,763,903     $ 44,931,931     $ 102,281,090     $ 219,829,703  
Special mention
    642,248       686,338       1,543,756       809,127       3,681,469  
Substandard
    698,043       8,999,390       259,939       692,427       10,649,799  
Doubtful
    -       -       124,725       -       124,725  
Loss
    -       -       -       -       -  
                                         
    $ 7,193,070     $ 76,449,631     $ 46,860,351     $ 103,782,644     $ 234,285,696  

Current, past due, and nonaccrual loans by categories of loans at December 31, 2010 are as follows:

               
90 Days or
             
         
30-89 Days
   
More and
             
   
Current
   
Past Due
   
Still Accruing
   
Nonaccrual
   
Total
 
                               
Commercial and industrial
  $ 5,735,517     $ 97,999     $ -     $ 1,359,554     $ 7,193,070  
Commercial real estate
    70,675,983       1,251,402       -       4,522,246       76,449,631  
Consumer and indirect
    45,155,344       1,580,082       -       124,925       46,860,351  
Residential real estate
    102,706,757       99,608       -       976,279       103,782,644  
                                         
    $ 224,273,601     $ 3,029,091     $ -     $ 6,983,004     $ 234,285,696  

 
F-18

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4.  Loans (continued)

Loans on which the accrual of interest has been discontinued totaled $6,983,004, $3,016,727, and $866,912 at December 31, 2010, 2009, and 2008, respectively.  Interest that would have been accrued under the terms of these loans totaled $145,148, $105,365, and $29,807 for the years ended December 31, 2010, 2009, and 2008, respectively.  Loans past due 90 days or more and still accruing interest totaled $0, $0 and $22,551 at December 31, 2010, 2009 and 2008, respectively.

Information regarding loans classified by the Bank as impaired is summarized as follows:

   
2010
   
2009
   
2008
 
Loans classified as impaired with a valuation allowance
  $ 11,423,737     $ 9,513,637     $ 1,387,043  
Allowance for credit losses on impaired loans
    1,947,290       2,187,699       629,036  
Average balance of impaired loans
    12,466,887       10,111,516       1,458,245  
                         
Following is a summary of cash receipts on impaired loans and how they were applied:
 
                         
Cash receipts applied to reduce principal balance
  $ 498,629     $ 2,604,832     $ 131,730  
Cash receipts recognized as interest income
    589,625       380,190       41,062  
                         
Total cash receipts
  $ 1,088,254     $ 2,985,022     $ 172,792  

At December 31, 2010, the recorded investment in new troubled debt restructurings totaled $0.  During 2010, one troubled debt restructuring transpired totaling $2,808,466, however did not perform under the terms of the modified agreement and is included in impaired and nonaccrual loans above.  All prior investments in troubled debt were performing under the terms of the modified agreement and are no longer considered to be troubled debt restructurings.

At December 31, 2009, the recorded investment in new troubled debt restructurings totaled $86,707.  The allowance for credit losses relating to troubled debt restructurings totaled $954 at December 31, 2009.  The average recorded investment in troubled debt restructurings totaled $100,747 for the year ended December 31, 2009.  The Bank recognized $7,552 in interest income on troubled debt restructurings for cash payments received in 2009.  All prior investments in troubled debt were performing under the terms of the modified agreement and are no longer considered to be troubled debt restructurings.

No troubled debt restructurings transpired in 2008.  All prior investments in troubled debt were performing under the terms of the modified agreement and are no longer considered to be troubled debt restructurings.

The Bank has no commitments to loan additional funds to the borrowers of restructured, impaired, or non-accrual loans.

 
F-19

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5.  Premises and Equipment

A summary of premises and equipment is as follows:

 
Useful
                 
 
lives
 
2010
   
2009
   
2008
 
                     
Land
    $ 684,977     $ 684,977     $ 684,977  
Buildings
5-50 years
    5,937,856       5,864,145       4,796,309  
Equipment and fixtures
5-30 years
    5,200,693       5,093,759       5,056,015  
Construction in progress
      39,704       322       121,973  
        11,863,230       11,643,203       10,659,274  
Accumulated depreciation
      (7,739,614 )     (7,522,606 )     (7,559,826 )
                           
      $ 4,123,616     $ 4,120,597     $ 3,099,448  

Depreciation expense totaled $368,248, $334,465, and $347,040 for the years ended December 31, 2010, 2009, and 2008, respectively.  Amortization of software and intangible assets totaled $58,668, $75,694, and $96,312 for the years ended December 31, 2010, 2009, and 2008, respectively.

The Bank leases its Severna Park and Linthicum branches.  Minimum lease obligations under the Severna Park branch are $30,000 per year through September 2012.  Minimum lease obligations under the Linthicum branch are $104,335 per year through December 2014, adjusted annually on a pre-determined basis, with one ten year extension option.  The Bank is also required to pay all maintenance costs under all these leasing arrangements.  Rent expense totaled $134,081, $227,479, and $257,467 for the years ended December 31, 2010, 2009, and 2008, respectively.

Note 6.  Short-term Borrowings

Short-term borrowings are as follows:
                 
                   
   
2010
   
2009
   
2008
 
                   
Notes payable - U.S. Treasury
  $ 273,948     $ 81,290     $ 629,855  
FHLB
    4,000,000       -       -  
                         
    $ 4,273,948     $ 81,290     $ 629,855  

Notes payable to the U.S. Treasury represents Federal treasury tax and loan deposits accepted by the Bank from its customers to be remitted on demand to the Federal Reserve Bank.  The Bank pays interest on these balances at or below the Federal funds rate.  This arrangement is secured by investment securities with an amortized cost of approximately $1,000,000 over each of the years ended December 31, 2010, 2009, and 2008.

The Bank owned 17,451 shares of common stock of the FHLB at December 31, 2010.  The Bank is required to maintain an investment of 0.2% of total assets, adjusted annually, plus 4.5% of total advances, adjusted for advances and repayments.  The credit available under this facility is determined at 20% of the Bank’s total assets, or approximately $55,470,000 at December 31, 2010.  Short-term advances totaled $4,000,000 under this credit arrangement at December 31, 2010.  This advance is a daily rate credit, adjustable daily, and due by November 2011.  Long-term advances totaled $20,000,000 under this credit arrangement at December 31, 2010 (see Note 7).  This credit facility is secured by a floating lien on the Bank’s residential mortgage loan portfolio.  Average short-term borrowings under this facility approximated $307,000, $11,000 and $1,924,000 for 2010, 2009, and 2008, respectively.

 
F-20

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6.  Short-term Borrowings (continued)

The Bank also has available $3,000,000, $9,000,000, and $9,000,000 at December 31, 2010, 2009, and 2008, respectively, in a short-term credit facility, an unsecured line of credit, from another bank for short-term liquidity needs, if necessary.  No outstanding borrowings existed under this credit arrangement at December 31, 2010, 2009, and 2008.

Note 7.  Long-term Borrowings

Long-term borrowings are as follows:

   
2010
   
2009
   
2008
 
                   
Federal Home Loan Bank of Atlanta, convertible advances
  $ 20,000,000     $ 27,000,000     $ 27,000,000  
Mortgage payable-individual, interest at 7%, payments of $3,483, including principal and interest, due monthly through October 2010, secured by real estate
    -       33,711       71,712  
                         
    $ 20,000,000     $ 27,033,711     $ 27,071,712  

The Federal Home Loan Bank of Atlanta, convertible advances total includes the following:

A $10,000,000 convertible advance issued in 2007, which has a final maturity of November, 1, 2017, but is callable monthly.  This advance has a 3.28% interest rate, with interest payable monthly.  The proceeds of the convertible advance were used to fund loans and purchase investment securities.

A $5,000,000 convertible advance issued in 2008, which has a final maturity of July 23, 2018, but is callable quarterly starting July 23, 2009.  This advance has a 2.73% interest rate, with interest payable quarterly.  The proceeds of the convertible advance were used to fund loans.

A $5,000,000 convertible advance issued in 2008, which has a final maturity of August 22, 2018, but is callable quarterly starting August 22, 2011.  This advance has a 3.34% interest rate, with interest payable quarterly.  The proceeds of the convertible advance were used to fund loans.

At December 31, 2010, the scheduled maturities of long-term borrowings are approximately as follows:

   
2010
 
       
2016 and thereafter
    20,000,000  

Note 8.  Junior Subordinated Debentures Owed To Unconsolidated Subsidiary Trust

The Bancorp sponsored a trust, Glen Burnie Statutory Trust I, of which 100% of the common equity is owned by the Company.  The trust was formed for the purpose of issuing Company-obligated mandatorily redeemable capital securities (the capital securities) to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of the Company (the debentures).  The debentures held by the trust are the sole assets of that trust.  Distributions on the capital securities issued by the trust are payable semi-annually at a 10.6% rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust.  The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures.  The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees.  The Bancorp exercised its right to call both the capital securities of the statutory trust and the junior subordinated debentures on September 7, 2010.  As a result, the Company realized a $250,000 early call premium, which is included in interest expense on junior subordinated debentures for the year ended December 31, 2010.
 
 
F-21

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8.  Junior Subordinated Debentures Owed To Unconsolidated Subsidiary Trust (continued)

At December 31, 2009 and 2008, despite the fact that the Trust I was not included in the Company’s consolidated financial statements, the trust preferred securities issued by these subsidiary trusts were included in the Tier 1 capital of the Company for regulatory capital purposes.  Federal Reserve Board rules limit the aggregate amount of restricted core capital elements (which includes trust preferred securities, among other things) that may be included in the Tier 1 capital of most bank holding companies to 25% of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability.  Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital.  The current quantitative limits did not preclude the Company from including the $5.0 million in trust preferred securities outstanding in Tier 1 capital as of December 31, 2009 and 2008.

Note 9.  Deposits

Major classifications of interest-bearing deposits are as follows:

   
2010
   
2009
   
2008
 
                   
NOW and SuperNOW
  $ 23,683,375     $ 22,353,053     $ 21,079,314  
Money Market
    16,710,611       15,284,223       12,764,167  
Savings
    53,007,293       48,378,319       45,801,719  
Certificates of Deposit, $100,000 or more
    30,885,936       31,576,905       27,882,777  
Other time deposits
    102,101,454       108,957,638       98,700,862  
                         
    $ 226,388,669     $ 226,550,138     $ 206,228,839  

Interest expense on deposits is as follows:

   
2010
   
2009
   
2008
 
                   
NOW and SuperNOW
  $ 27,833     $ 27,702     $ 30,618  
Money Market
    66,840       57,280       62,475  
Savings
    147,998       134,607       153,301  
Certificates of Deposit, $100,000 or more
    734,355       1,063,174       976,446  
Other time deposits
    2,719,605       3,654,519       3,557,345  
                         
    $ 3,696,631     $ 4,937,282     $ 4,780,185  

 
F-22

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9.  Deposits (continued)

At December 31, 2010, the scheduled maturities of time deposits are approximately as follows:
 
       
   
2010
 
       
2011
  $ 72,247,000  
2012
    21,714,000  
2013
    17,761,000  
2014
    7,190,000  
2015
    12,493,000  
2016 and thereafter
    1,582,000  
         
    $ 132,987,000  

Deposit balances of executive officers and directors and their affiliated interests totaled approximately $2,131,000, $2,215,000, and $2,611,000 at December 31, 2010, 2009, and 2008, respectively.

The Bank had no brokered deposits at December 31, 2010, 2009, and 2008.

Note 10.  Income Taxes

The components of income tax expense for the years ended December 31, 2010, 2009, and 2008 are    as follows:

   
2010
   
2009
   
2008
 
Current:
                 
Federal
  $ 472,423     $ 268,693     $ 655,129  
State
    253,573       156,773       271,112  
                         
Total current
    725,996       425,466       926,241  
Deferred income taxes (benefits):
                       
Federal
    (231,837 )     (509,545 )     (1,275,873 )
State
    (8,648 )     (149,174 )     (329,730 )
                         
Total deferred
    (240,485 )     (658,719 )     (1,605,603 )
                         
Income tax expense (benefit)
  $ 485,511     $ (233,253 )   $ (679,362 )

 
F-23

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Income Taxes (continued)

A reconciliation of income tax expense computed at the statutory rate of 34% to the actual income tax expense for the years ended December 31, 2010, 2009, and 2008 is as follows:

   
2010
   
2009
   
2008
 
   
 
   
 
   
 
 
Income (loss) before income tax expense (benefit)
  $ 2,550,296     $ 1,029,209     $ (275,400 )
                         
Taxes computed at Federal income tax rate
  $ 867,102     $ 349,925     $ (93,636 )
Increase (decrease) resulting from:
                       
Tax-exempt income
    (530,509 )     (502,488 )     (547,038 )
State income taxes, net of Federal income tax benefit
    161,650       (80,690 )     (38,688 )
Other
    (12,732 )     -       -  
                         
Income tax expense (benefit)
  $ 485,511     $ (233,253 )   $ (679,362 )

The relationship between pre-tax loss and income tax benefits for 2008 is affected by increased deferred tax benefits attributable to tax methodologies utilized for loan loss provisions.

The components of the net deferred income tax benefits as of December 31, 2010, 2009, and 2008 are as follows:

   
2010
   
2009
   
2008
 
                   
Deferred income tax benefits:
                 
Accrued deferred compensation
  $ 99,454     $ 90,594     $ 82,049  
Impairment loss on investment securities
    1,176,090       1,072,662       1,110,771  
Allowance for credit losses
    1,077,153       1,206,604       563,737  
Nonaccrual interest
    69,103       11,849       -  
Alternative minimum tax credits
    199,140       -       66,371  
Net unrealized depreciation on investment securities available for sale
    663,477       684,422       500,186  
Accumulated depreciation
    39,916       35,692        -  
Other real estate owned
    2,644       -       -  
Reserve for unfunded commitments
    78,890       78,890       78,890  
Total deferred income tax benefits
    3,405,867       3,180,713       2,402,004  
                         
Deferred income tax liabilities:
                       
Accumulated depreciation
    -       -       41,113  
Accumulated securities discount accretion
    56,893       51,278       74,408  
Total deferred income tax liabilities
    56,893       51,278       115,521  
                         
Net deferred income tax benefits
  $ 3,348,974     $ 3,129,435     $ 2,286,483  

Management has determined that no valuation allowance is required as it believes it is more likely then not that all of the deferred tax assets will be fully realizable in the future.  At December 31, 2010, 2009, and 2008, management believes there are no uncertain tax positions under ASC Topic 740 Income Taxes (formerly FIN 48, Accounting for Uncertainty in Income Taxes).
 
 
F-24

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Income Taxes (continued)

The Company’s federal income tax returns for 2009, 2008, and 2007 are subject to examinations by the IRS generally for three years after they were filed.  In addition, the Company’s state tax returns for the same years are subject to examination by state tax authorities for similar time periods.

Note 11.  Pension and Profit Sharing Plans

The Bank has a money purchase pension plan, which provides for annual employer contributions based on employee compensation, and covers substantially all employees.  Annual contributions, included in employee benefit expense, totaled $328,268, $231,538 and $220,000 for the years ended December 31, 2010, 2009 and 2008, respectively.  The Bank is also making additional contributions under this plan for the benefit of certain employees, whose retirement funds were negatively affected by the termination of a prior defined benefit pension plan.  These additional contributions, also included in employee benefit expense, totaled $16,116,  $26,992, and $33,452 for the years ended December 31, 2010, 2009, and 2008, respectively.

The Bank also has a defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue Code that is funded through a profit sharing agreement and voluntary employee contributions.

The plan provides for discretionary employer matching contributions to be determined annually by the Board of Directors.  The plan covers substantially all employees.  The Bank’s contributions to the plan, included in employee benefit expense, totaled $301,116, $200,858, and $116,027 for the years ended December 31, 2010, 2009, and 2008, respectively.

 Note 12.  Other Benefit Plans

The Bank has life insurance contracts on several officers and is the sole owner and beneficiary of the policies.  Cash value totaled $7,954,062, $7,702,656, and $7,434,573 at December 31, 2010, 2009, and 2008, respectively.  Income on their insurance investment totaled $251,406, $268,083, and $273,170 for 2010, 2009, and 2008, respectively.

The Bank has an unfunded grantor trust, as part of a change in control severance plan, covering substantially all employees.  Participants in the plan are entitled to cash severance benefits upon termination of employment, for any reason other than just cause, should a “change in control” of the Company occur.

 
F-25

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13.  Other Operating Expenses

Other operating expenses include the following:

   
2010
   
2009
   
2008
 
                   
Professional services
  $ 454,147     $ 489,485     $ 485,685  
Stationery, printing and supplies
    202,796       189,446       214,815  
Postage and delivery
    167,922       162,782       187,017  
FDIC assessment
    464,585       549,716       35,544  
Directors fees and expenses
    203,833       200,765       198,939  
Marketing
    227,883       246,947       255,921  
Data processing
    61,008       82,743       100,562  
Correspondent bank services
    54,399       87,249       60,706  
Telephone
    172,507       173,550       160,242  
Liability insurance
    63,383       67,264       71,497  
(Gains) losses and expenses on OREO
    (121,876 )     64,790       8,343  
Other ATM expense
    110,899       155,818       232,670  
Other
    582,023       518,646       396,749  
                         
    $ 2,643,509     $ 2,989,201     $ 2,408,690  

Note 14.  Commitments and Contingencies

Financial instruments:

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.

Outstanding loan commitments, unused lines of credit and letters of credit are as follows:

   
2010
   
2009
   
2008
 
Loan commitments:
                 
Construction and land development
  $ -     $ 1,155,200     $ 400,000  
Other mortgage loans
    2,013,000       2,270,000       2,590,000  
                         
    $ 2,013,000     $ 3,425,200     $ 2,990,000  
Unused lines of credit:
                       
Home-equity lines
  $ 8,130,179     $ 6,404,113     $ 6,395,182  
Commercial lines
    10,738,826       11,335,335       13,380,292  
Unsecured consumer lines
    808,053       805,479       785,487  
                         
    $ 19,677,058     $ 18,544,927     $ 20,560,961  
                         
Letters of credit:
  $ 71,762     $ 79,250     $ 196,530  

 
F-26

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14.  Commitments and Contingencies (continued)

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, 2010, the Bank has accrued $200,000 as a reserve for losses on unfunded commitments related to these financial instruments with off balance sheet risk, which is included in other liabilities.

Note 15.  Stockholders’ Equity

Restrictions on dividends:

Banking regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agencies.  Regulatory approval is required to pay dividends that exceed the Bank’s net profits for the current year plus its retained net profits for the preceding two years.

Retained earnings from which dividends may not be paid without prior approval totaled approximately $15,251,000, $13,813,000, and $12,430,000 at December 31, 2010, 2009, and 2008, respectively, based on the earnings restrictions and minimum capital ratio requirements noted below.

Stock repurchase program:

In February 2008, the Company instituted a Stock Repurchase Program which expired in December 2009.  Under the program, as extended and increased, the Company could spend up to $4,127,309 to repurchase its outstanding stock.  The repurchases may be made from time to time at a price not to exceed $12.50 per share.  During 2009, the Company repurchased 305,083 shares at an average price of $9.29.  During 2008, the Company repurchased 50,300 shares at an average price of $11.48.

Employee stock purchase benefit plans:

The Company has a stock-based compensation plan, which is described below.  There were no options issued during the years ended December 31, 2010, 2009 and 2008.

 
F-27

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15.  Stockholders’ Equity (continued)

Employees who have completed one year of service are eligible to participate in the employee stock purchase plan.  The number of shares of common stock granted under options will bear a uniform relationship to compensation.  The plan allows employees to buy stock under options granted at 85% of the fair market value of the stock on the date of grant.  Options are vested when granted and will expire no later than 27 months from the grant date or upon termination of employment.  Activity under this plan is as follows:

At December 31, 2010, shares of common stock reserved for issuance under the plan totaled 48,011.

The Board of Directors may suspend or discontinue the plan at its discretion.

Dividend reinvestment and stock purchase plan:

The Company’s dividend reinvestment and stock purchase plan allows all participating stockholders the opportunity to receive additional shares of common stock in lieu of cash dividends at 95% of the fair market value on the dividend payment date.

During 2010, 2009, and 2008, shares of common stock purchased under the plan totaled 19,076, 20,371, and 20,003, respectively.  At December 31, 2010, shares of common stock reserved for issuance under the plan totaled 106,397.

The Board of Directors may suspend or discontinue the plan at its discretion.

Stockholder purchase plan:

The Company’s stockholder purchase plan allows participating stockholders an option to purchase newly issued shares of common stock.  The Board of Directors shall determine the number of shares that may be purchased pursuant to options.  Options granted will expire no later than three months from the grant date.  Each option will entitle the stockholder to purchase one share of common stock, and will be granted in proportion to stockholder share holdings.  At the discretion of the Board of Directors, stockholders may be given the opportunity to purchase unsubscribed shares.

There was no activity under this plan for the years ended December 31, 2010, 2009, and 2008.

At December 31, 2010, shares of common stock reserved for issuance under the plan totaled 313,919.

The Board of Directors may suspend or discontinue the plan at its discretion.

Under all three plans, options granted, exercised, and expired, shares issued and reserved, and grant prices have been restated for the effects of any stock dividends or stock splits.

Regulatory capital requirements:

The Company and Bank are subject to various regulatory capital requirements administered by Federal and State banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.  The Company and Bank must meet specific capital guidelines that involve quantitative measures of their respective assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting principles.  The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 
F-28

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15.  Stockholders’ Equity (continued)

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets.  Management believes, as of December 31, 2010, 2009, and 2008, that both the Company and Bank meet all capital adequacy requirements to which they are subject.

The Bank has been notified by its regulator that, as of its most recent regulatory examination, it is regarded as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

As discussed in Note 8, the capital securities held by the Glen Burnie Statutory Trust I qualifies as Tier I capital for the Company as of December 31, 2009 and 2008, under Federal Reserve Board guidelines.

A comparison of capital as of December 31, 2010, 2009, and 2008 with minimum requirements is approximately as follows:

                           
To Be Well Capitalized
 
               
For Capital
   
Under Prompt Corrective
 
   
Actual
   
Adequacy Purposes
   
Action Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
                                     
As of December 31, 2010
                                   
Total Capital
                                   
(to Risk Weighted Assets)
                                   
Company
  $ 30,361,000       12.6 %   $ 19,307,000       8.0 %  
N/A
 
Bank
    29,974,000       12.4 %     19,307,000       8.0 %   $ 24,134,000       10.0 %
                                                 
Tier I Capital
                                               
(to Risk Weighted Assets)
                                               
Company
    27,337,000       11.3 %     9,651,000       4.0 %  
N/A
 
Bank
    26,951,000       11.2 %     9,651,000       4.0 %     14,477,000       6.0 %
                                                 
Tier I Capital
                                               
(to Average Assets)
                                               
Company
    27,337,000       7.6 %     14,313,000       4.0 %  
N/A
 
Bank
    26,951,000       7.7 %     13,928,000       4.0 %     17,410,000       5.0 %

 
F-29

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15.  Stockholders’ Equity (continued)

                           
To Be Well Capitalized
 
               
For Capital
   
Under Prompt Corrective
 
   
Actual
   
Adequacy Purposes
   
Action Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
                                     
As of December 31, 2009
                                   
Total Capital
                                   
(to Risk Weighted Assets)
                                   
Company
  $ 34,048,000       14.5 %   $ 18,798,000       8.0 %  
N/A
 
Bank
    33,745,000       14.4 %     18,786,000       8.0 %   $ 23,483,000       10.0 %
                                                 
Tier I Capital
                                               
(to Risk Weighted Assets)
                                               
Company
    31,100,000       13.2 %     9,403,000       4.0 %  
N/A
 
Bank
    30,799,000       13.1 %     9,390,000       4.0 %     14,085,000       6.0 %
                                                 
Tier I Capital
                                               
(to Average Assets)
                                               
Company
    31,100,000       8.9 %     14,041,000       4.0 %  
N/A
 
Bank
    30,799,000       8.7 %     14,193,000       4.0 %     14,741,000       5.0 %
                                                 
As of December 31, 2008
                                               
Total Capital
                                               
(to Risk Weighted Assets)
                                               
Company
  $ 35,687,000       14.9 %   $ 19,122,000       8.0 %  
N/A
 
Bank
    35,707,000       15.0 %     19,107,000       8.0 %   $ 23,884,000       10.0 %
                                                 
Tier I Capital
                                               
(to Risk Weighted Assets)
                                               
Company
    33,665,000       14.1 %     9,564,000       4.0 %  
N/A
 
Bank
    33,485,000       14.0 %     9,553,000       4.0 %     14,330,000       6.0 %
                                                 
Tier I Capital
                                               
(to Average Assets)
                                               
Company
    33,665,000       10.5 %     12,825,000       4.0 %  
N/A
 
Bank
    33,485,000       10.2 %     13,196,000       4.0 %     16,495,000       5.0 %

 
F-30

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16.  Earnings Per Common Share

Earnings per common share are calculated as follows:
             
                   
   
2010
   
2009
   
2008
 
Basic:
                 
Net income
  $ 2,064,785     $ 1,262,462     $ 403,962  
Weighted average common shares outstanding
    2,690,218       2,734,524       2,981,124  
Basic net income per share
  $ 0.76     $ 0.46     $ 0.14  

Diluted earnings per share calculations were not required for 2010, 2009, and 2008 as there were no options outstanding at December 31, 2010, 2009, and 2008.

In January 2008, the Company declared a six for five stock split effected in the form of a 20% stock dividend.

Note 17.  Fair Values of Financial Instruments

ASC Topic 825, Disclosure about Fair Value of Financial Instruments, formerly SFAS No. 107, requires the disclosure of the estimated fair values of financial instruments.  Quoted market prices, where available, are shown as estimates of fair values.  Because no quoted market prices are available or a significant part of the Company’s financial instruments, the fair values of such instruments have been derived based on the amount and timing of future cash flows and estimated discount rates.

Present value techniques used in estimating the fair value of the Company’s financial instruments are significantly affected by the assumptions used.  Fair values derived from using present value techniques are not substantiated by comparisons to independent markets, and in many cases, could not be realized in immediate settlement of the instruments.

ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

 
F-31

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17.  Fair Values of Financial Instruments (continued)

The following table shows the estimated fair value and the related carrying values of the Company’s financial instruments as December 31, 2010, 2009, and 2008.  Items that are not financial instruments are not included.

    
2010
   
2009
   
2008
 
   
Carrying
   
Fair
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
   
Amount
   
Value
 
Financial assets:
                                   
Cash and due from banks
  $ 6,492,313     $ 6,492,313     $ 6,993,811     $ 6,993,811     $ 6,960,377     $ 6,960,377  
Interest-bearing deposits in other financial institutions
    1,567,673       1,567,673       3,748,387       691,624       7,883,816       7,883,816  
Federal funds sold
    940,317       940,317       691,624       6,393,710       6,393,710       6,393,710  
Investment securities available for sale
    87,268,359       87,268,359       84,462,605       84,462,605       57,948,645       57,948,645  
Federal Home Loan Bank Stock
    1,745,100       1,745,100       1,858,300       1,858,300       1,767,600       1,767,600  
Maryland Financial Bank Stock
    100,000       100,000       100,000       100,000       100,000       100,000  
Common stock-Statutory Trust I
    -       -       155,000       155,000       155,000       155,000  
Ground rents
    178,200       178,200       184,900       184,900       184,900       184,900  
Loans, less allowance for credit losses
    229,850,888       234,426,000       235,882,862       239,915,000       235,132,621       239,446,000  
Accrued interest receivable
    1,538,883       1,538,883       1,626,792       1,626,792       1,680,392       1,680,392  
                                                 
Financial liabilities:
                                               
Deposits
    294,444,828       269,480,000       294,357,837       267,358,000       269,767,598       272,091,000  
Short-term borrowings
    4,273,948       4,273,948       81,290       81,290       629,855       629,855  
Long-term borrowings
    20,000,000       19,611,000       27,033,711       25,979,000       27,071,712       27,162,000  
Dividends payable
    231,579       231,579       230,285       230,285       385,794       385,794  
Accrued interest payable
    55,131       55,131       112,599       112,599       139,579       139,579  
Accrued interest payable on junior subordinated debentures
    -       -       171,518       171,518       171,518       171,518  
Junior subordinated debentures owed to unconsolidated subsidiary trust
    -       -       5,155,000       5,707,615       5,155,000       5,281,827  
Unrecognized financial instruments:
                                               
Commitments to extend credit
    21,690,058       21,690,058       21,970,127       21,970,127       23,550,961       23,550,961  
Standby letters of credit
    71,762       71,762       79,250       79,250       196,530       196,530  

For purposes of the disclosures of estimated fair value, the following assumptions were used.

Loans:

The estimated fair value for loans is determined by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Investment securities:

Estimated fair values are based on quoted market prices.

 
F-32

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17.  Fair Values of Financial Instruments (continued)

Deposits:

The estimated fair value of deposits with no stated maturity, such as noninterest-bearing demand  deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on  demand at the reporting date (that is, their carrying amounts).  The fair value of certificates of deposit is based on the rates currently offered for deposits of similar maturities.  The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities   compared to the cost of borrowing funds in the market.

Borrowings:

The estimated fair value approximates carrying value for short-term borrowings.  The fair value of long-term fixed rate borrowings is estimated by discounting future cash flows using current interest rates currently offered for similar financial instruments.

Junior Subordinated Debentures:

Fair value is estimated based on quoted market prices of similar instruments.

Other assets and liabilities:

The estimated fair values for cash and due from banks, interest-bearing deposits in other financial institutions, Federal funds sold, accrued interest receivable and payable, and short-term borrowings are considered to approximate cost because of their short-term nature.

Other assets and liabilities of the Bank that are not defined as financial instruments are not included in the above disclosures, such as property and equipment.  In addition, non-financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures.  These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill, and similar items.
 
Note 18.  Fair Value Measurements

Effective January 1, 2008, the Company adopted ASC Topic 820, formerly SFAS No. 157, Fair Value Measurements which provides a framework for measuring and disclosing fair value under generally accepted accounting principles.  ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis or on a nonrecurring basis.

ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value.

Fair Value Hierarchy
Level 1 – Quoted prices in active markets for identical assets or liabilities
Level 2 – Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)
Level 3 – Significant unobservable inputs (including the Bank’s own assumptions in determining the fair value of assets or liabilities)
 
 
F-33

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18.  Fair Value Measurements (continued)

In determining the appropriate levels, the Company performs a detailed analysis of assets and liabilities that are subject to ASC Topic 820.  The Bank’s securities available-for-sale are the only assets or liabilities subject to fair value measurements on a recurring basis.  The Bank may also be required, from time to time, to measure certain other financial and non-financial assets and liabilities at fair value on a non-recurring basis in accordance with GAAP.  At December 31, 2010 these non-recurring assets consisted of 22 loans classified as nonaccrual and a homogeneous pool of indirect and consumer loans considered to be impaired, which are valued under Level 3 inputs and one property classified as OREO valued under Level 2 inputs.

Fair value measurements on a recurring and non-recurring basis at December 31, 2010 are as follows:

                     
Fair
 
December 31, 2009
 
Level 1
   
Level 2
   
Level 3
   
Value
 
Recurring:
                       
Securities available for sale
  $ -     $ 84,462,605     $ -     $ 84,462,605  
                                 
Non-recurring:
                               
Impaired loans
    -       -       7,325,938       7,325,938  
OREO
    -       25,000       -       25,000  
      -       84,487,605       7,325,938       91,813,543  
Activity:
                               
Securities available for sale:
                               
Purchases of securities
    -       25,707,804       -       25,707,804  
Sales, calls, and maturities of securities
    -       (22,117,929 )     -       (22,117,929 )
Net amortization/accretion of premium/discount
    -       (574,572 )     -       (574,572 )
Increase in market value
    -       52,659       -       52,659  
OTTI on investments
    -       (262,208 )     -       (262,208 )
                                 
Impaired loans:
                               
New impaired loans
    -       -       6,228,366       6,228,366  
Payments and other loan reductions
    -       -       (1,377,911 )     (1,377,911 )
Change in total provision
    -       -       (240,409 )     (240,409 )
Loans converted to OREO
    -       -       (512,247 )     (512,247 )
                                 
OREO:
                               
OREO converted from loans
    -       512,247       -       512,247  
Sales of OREO
    -       (322,247 )     -       (322,247 )
                                 
December 31, 2010
                               
Recurring:
                               
Securities available for sale
    -       87,268,359       -       87,268,359  
                                 
Non-recurring:
                               
Impaired loans
    -       -       11,423,737       11,423,737  
OREO
    -       215,000       -       215,000  
                                 
    $ -     $ 87,483,359     $ 11,423,737     $ 98,907,096  

 
F-34

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18.  Fair Value Measurements (continued)

Securities available-for-sale are based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Measured on a Non-Recurring Basis:

Financial Assets and Liabilities

The Bank is predominantly a cash flow lender with real estate serving as collateral on a majority of loans.  Loans which are deemed to be impaired and foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral.  The Bank determines such fair values from independent appraisals.

Non-Financial Assets and Non-Financial Liabilities

Application of ASC Topic 820 to non-financial assets and non-financial liabilities became effective January 1, 2009.  The Corporation has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis.  Certain non-financial assets and non-financial liabilities typically measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

Foreclosed real estate were adjusted to their fair values, resulting in an impairment charge, which was included in earnings for the year.  Foreclosed real estate, which are considered to be non-financial assets, have been valued using a market approach.  The values were determined using market prices of similar real estate assets, which the Bank considers to be level 2 inputs.

Note 19.  Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06 - Fair Value Measurements and Disclosures amending Topic 820.  The ASU provides for additional disclosures of transfers between assets and liabilities valued under Level 1 and 2 inputs as well as additional disclosures regarding those assets and liabilities valued under Level 3 inputs.  The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for those provisions addressing Level 3 fair value measurements which provisions are effective for fiscal years, and interim periods therein, beginning after December 15, 2010.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09 amending FASB ASC Topic 855 to exclude SEC reporting entities from the requirement to disclose the date on which subsequent events have been evaluated.  It further modifies the requirement to disclose the date on which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively.  The Company has complied with ASU No. 2010-09.

 
F-35

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19.  Recently Issued Accounting Pronouncements (continued)

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  The main objective of this ASU is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables.  The ASU requires that entities provide additional information to assist financial statement users in assessing their credit risk exposures and evaluating the adequacy of its allowance for credit losses.  For the Company, the disclosures as of the end of a reporting period are required for the annual reporting periods ending on December 31, 2010.  Required disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning January 1, 2011.  The adoption of this ASU will result in additional disclosures in the Company’s financial statements regarding its loan portfolio and related allowance for loan losses but does not change the accounting for loans or the allowance.  The Company has complied with this ASU for the annual reporting period ending December 31, 2010 and will comply for interim and annual reporting periods thereafter.

The FASB has issued several exposure drafts which, if adopted, would significantly alter the Company’s (and all other financial institutions’) method of accounting for, and reporting, its financial assets and some liabilities from a historical cost method to a fair value method of accounting as well as the reported amount of net interest income.  Also, the FASB has issued an exposure draft regarding a change in the accounting for leases.  Under this exposure draft, the total amount of “lease rights” and total amount of future payments required under all leases would be reflected on the balance sheets of all entities as assets and debt.  If the changes under discussion in either of these exposure drafts are adopted, the financial statements of the Company could be materially impacted as to the amounts of recorded assets, liabilities, capital, net interest income, interest expense, depreciation expense, rent expense and net income.  The Company has not determined the extent of the possible changes at this time.  The exposure drafts are in different stages of review, approval and possible adoption.

 
F-36

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20.  Parent Company Financial Information

 
The Balance Sheets, Statements of Income, and Statements of Cash Flows for Glen Burnie Bancorp (Parent Only) are presented below:

Balance Sheets
 
December 31,
 
2010
   
2009
   
2008
 
Assets
                 
                   
Cash
  $ 355,922     $ 348,515     $ 338,902  
Investment in The Bank of Glen Burnie
    25,946,536       29,848,797       32,727,244  
Investment in GBB Properties, Inc.
    255,770       260,184       261,999  
Investment in the Glen Burnie Statutory Trust I
    -       155,000       155,000  
Due from subsidiaries
    1,414       43,996       22,878  
Other assets
    4,583       49,433       114,541  
                         
Total assets
  $ 26,564,225     $ 30,705,925     $ 33,620,564  
                         
Liabilities and Stockholders’ Equity
                       
                         
Dividends payable
  $ 231,579     $ 230,285     $ 385,794  
Accrued interest payable on borrowed funds
    -       171,518       171,518  
Borrowed funds from subsidiary
    -       5,155,000       5,155,000  
Total liabilities
    231,579       5,556,803       5,712,312  
                         
Stockholders’ equity:
                       
Common stock
    2,702,091       2,683,015       2,967,727  
Surplus
    9,334,810       9,190,911       11,568,241  
Retained earnings
    15,300,344       14,311,508       14,129,637  
Accumulated other comprehensive loss, net of benefits
    (1,004,599 )     (1,036,312 )     (757,353 )
Total stockholders’ equity
    26,332,646       25,149,122       27,908,252  
                         
Total liabilities and stockholders’ equity
  $ 26,564,225     $ 30,705,925     $ 33,620,564  

 
The borrowed funds from subsidiary balance represented the junior subordinated debt securities payable to the wholly-owned subsidiary trust that was deconsolidated as a result of applying the provisions of ASC Topic 810, formerly FIN 46.  The Company repaid this balance in September 2010 (See Note 8).
 
 
F-37

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 Note 20.  Parent Company Financial Information (continued)

Statements of Income
 
Years Ended December 31,
 
2010
   
2009
   
2008
 
                   
Dividends and distributions from subsidiaries
  $ 1,455,000     $ 4,269,844     $ 1,902,239  
Other income
    24,645       16,430       16,430  
Interest expense on junior subordinated debentures
    (648,127 )     (546,430 )     (546,180 )
Other expenses
    (105,785 )     (122,096 )     (69,468 )
Income before income tax benefit and equity in undistributed net income of subsidiaries
    725,733       3,617,748       1,303,021  
Income tax benefit
    277,440       246,018       226,356  
Change in undistributed equity of subsidiaries
    1,061,612       (2,601,304 )     (1,125,415 )
                         
Net income
  $ 2,064,785     $ 1,262,462     $ 403,962  
 
 
F-38

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20.  Parent Company Financial Information (continued)

Statements of Cash Flows
 
Years Ended December 31,
 
2010
   
2009
   
2008
 
                   
Cash flows from operating activities:
                 
Net income
  $ 2,064,785     $ 1,262,462     $ 403,962  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Decrease in other assets
    44,850       65,108       5,001  
Decrease (increase) in due from subsidiaries
    42,582       (21,118 )     (169 )
Decrease in accrued interest payable
    (171,518 )     -       -  
Change in undistributed equity of subsidiaries
    (1,061,612 )     2,601,304       1,125,415  
                         
Net cash provided by operating activities
    919,087       3,907,756       1,534,209  
                         
Cash flows from investing activities:
                       
Sale of common stock in the Glen Burnie Statutory Trust I
    155,000       -       -  
Capital contributed from subsidiary
    5,000,000       -       -  
                         
Net cash provided by investing activities
    5,155,000       -       -  
                         
Cash flows from financing activities:
                       
Proceeds from dividend reinvestment plan
    162,975       173,667       194,054  
Redemption of guaranteed preferred beneficial interest in Glen Burnie Bancorp junior subordinated debentures
    (5,155,000 )     -       -  
Repurchase and retirement of common stock
    -       (2,835,709 )     (577,239 )
Dividends paid
    (1,074,655 )     (1,236,101 )     (1,344,344 )
                         
Net cash used in financing activities
    (6,066,680 )     (3,898,143 )     (1,727,529 )
                         
Increase (decrease) in cash
    7,407       9,613       (193,320 )
                         
Cash, beginning of year
    348,515       338,902       532,222  
                         
Cash, end of year
  $ 355,922     $ 348,515     $ 338,902  
 
 
F-39

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 21.  Quarterly Results of Operations (Unaudited)

The following is a summary of consolidated unaudited quarterly results of operations:

2010
 
(Dollars in thousands,
 
Three months ended,
 
 except per share amounts)
 
December 31
   
September 30
   
June 30
   
March 31
 
                         
Interest income
  $ 4,387     $ 4,608     $ 4,612     $ 4,572  
Interest expense
    993       1,397       1,431       1,478  
Net interest income
    3,394       3,211       3,181       3,094  
Provision for credit losses
    -       300       450       300  
Net securities gains
    (1 )     176       -       -  
Income before income taxes
    881       900       318       451  
Net income
    655       689       322       399  
Net income per share (basic and diluted)
  $ 0.24     $ 0.25     $ 0.12     $ 0.15  
                                 
2009
 
(Dollars in thousands,
 
Three months ended,
 
 except per share amounts)
 
December 31
   
September 30
   
June 30
   
March 31
 
                                 
Interest income
  $ 4,673     $ 4,749     $ 4,689     $ 4,533  
Interest expense
    1,570       1,649       1,655       1,668  
Net interest income
    3,103       3,100       3,034       2,865  
Provision for credit losses
    1,747       337       209       150  
Net securities gains
    402       135       51       (2 )
Income before income taxes
    (699 )     648       570       510  
Net income
    (210 )     527       490       455  
Net income per share (basic and diluted)
  $ (0.08 )   $ 0.20     $ 0.18     $ 0.16  
                                 
2008
 
(Dollars in thousands,
 
Three months ended,
 
except per share amounts)
 
December 31
   
September 30
   
June 30
   
March 31
 
                                 
Interest income
  $ 4,604     $ 4,667     $ 4,492     $ 4,413  
Interest expense
    1,661       1,546       1,499       1,548  
Net interest income
    2,943       3,121       2,993       2,865  
Provision for credit losses
    700       239       152       55  
Net securities gains
    50       86       48       7  
Income before income taxes
    272       (1,915 )     743       625  
Net income
    1,382       (2,118 )     604       536  
Net income per share (basic and diluted)
  $ 0.47     $ (0.71 )   $ 0.20     $ 0.18  

 
F-40