Glen Burnie Bancorp(GLBZ) - 2019 Q4 - Annual Report

PART I Business Glen Burnie Bancorp operates The Bank of Glen Burnie, a commercial and retail bank primarily serving Anne Arundel County, Maryland, focusing on personalized service for small to medium-sized businesses and operating under extensive federal and state regulation General, Market Area, and Strategy Glen Burnie Bancorp, through its wholly-owned subsidiary The Bank of Glen Burnie, serves northern Anne Arundel County, Maryland, by providing personalized commercial and retail banking services to small and medium-sized businesses and individual consumers - The Company is a bank holding company for The Bank of Glen Burnie, a commercial bank established in 1949, serving northern Anne Arundel County, Maryland, and surrounding areas[18] - The Bank's business model focuses on accepting deposits and originating various loans, including residential and commercial mortgages, commercial loans, and automobile loans, with profitability primarily driven by the net interest spread[19] - The company's strategy is to capitalize on banking industry consolidation by offering personalized service and local decision-making to small-to-medium-sized businesses, a segment it believes is inadequately served by large national and regional banks[27][28] Products and Services The Bank offers a comprehensive suite of lending and deposit products, including residential and commercial real estate loans, construction and land development loans, commercial loans, and consumer installment loans, with a significant focus on indirect automobile lending, all governed by structured credit policies and complemented by treasury, mobile, and internet banking services - The Bank's lending activities are governed by written policies approved by the Board of Directors, with a well-defined credit process including evaluation, lending limits, and ongoing portfolio reviews[31] - Lending authority is tiered: individual officers up to $750,000, the Officer's Loan Committee up to $1,000,000, the Executive Committee up to $3,000,000, and the Board of Directors for amounts greater than $3,000,000[32] - The indirect automobile lending program, started in 1998, finances new and used vehicles through a network of approximately 65 dealers, primarily in Anne Arundel County and surrounding areas[44] - Deposit products include demand, money market, savings, and time deposits, complemented by treasury services like wire transfers, ACH, debit cards, and online/mobile banking[52][53] Supervision and Regulation The Company and the Bank are subject to extensive regulation by multiple authorities, including the Federal Reserve Board, Maryland Commissioner of Financial Regulation, and FDIC, adhering to strict capital adequacy standards under Basel III rules, limitations on loans-to-one-borrower, and regulations governing dividends, consumer financial protection, and community reinvestment - The Company is a bank holding company regulated by the Federal Reserve Board, while the Bank is a state-chartered non-member bank supervised by the Maryland Commissioner of Financial Regulation and the FDIC[56][57] - The Bank must comply with Basel III capital requirements, mandating minimum ratios for Common Equity Tier 1 (4.5%), Tier 1 (6.0%), and Total Capital (8.0%) to risk-weighted assets, plus a capital conservation buffer of 2.5%[74] - Under Prompt Corrective Action regulations, the Bank was categorized as "well capitalized" as of December 31, 2019, exceeding all minimum capital ratio requirements[80] - The ability of the Bank to pay dividends is limited by state and federal laws, generally requiring prior approval if dividends exceed the sum of net income for the current year and retained net income for the previous two years[86] Properties The Bank operates from a main office, seven branch locations, and two operations centers, mostly owned, with the Linthicum and Severna Park branches leased, and as of December 31, 2019, its subsidiary GBB Properties owned one foreclosed real estate property Location Type and Property Details | Location Type | Address | Owned/Leased | Book Value (thousands) | Square Footage | Deposits (thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Main Office | 101 Crain Highway, S.E., Glen Burnie | Owned | $312 | 10,000 | $85,608 | | Branches | | | | | | | Odenton | 1405 Annapolis Road, Odenton | Owned | $120 | 6,000 | $31,640 | | Riviera Beach | 8707 Ft. Smallwood Road, Pasadena | Owned | $164 | 2,500 | $33,026 | | Crownsville | 1221 Generals Highway, Crownsville | Owned | $329 | 3,000 | $72,473 | | Severn | 811 Reece Road, Severn | Owned | $70 | 2,500 | $33,338 | | New Cut Road | 740 Stevenson Road, Severn | Owned | $974 | 2,600 | $34,583 | | Linthicum | Burwood Village Shopping Center, Glen Burnie | Leased | $50 | 2,500 | $18,444 | | Severna Park | 534 Ritchie Highway, Severna Park | Leased | $29 | 2,184 | $12,328 | | Operations Centers | | | | | | | Glen Burnie | 106 Padfield Blvd., Glen Burnie | Owned | $620 | 16,200 | N/A | | Glen Burnie | 103 Crain Highway, S.E., Glen Burnie | Owned | $256 | 3,727 | N/A | - As of December 31, 2019, the Bank's subsidiary, GBB Properties, held one foreclosed real estate property[96] Legal Proceedings The Company and the Bank are involved in routine legal proceedings arising in the ordinary course of business, with management not expecting any pending or threatened actions to have a material adverse effect on financial condition or results of operations - Management believes there are no pending or threatened legal proceedings that are expected to have a material adverse effect on the Company's financial condition or operations[97] Mine Safety Disclosures This item is not applicable to the Company - Not applicable[98] Executive Officers of the Registrant The report lists the executive officers of the company as of December 31, 2019, including their names, ages, and positions, with key executives being John D Long, Andrew J Hines, and Jeffrey D Harris Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | John D. Long | 64 | President and Chief Executive Officer | | Andrew J. Hines | 58 | Executive Vice President and Chief Lending Officer | | Jeffrey D. Harris | 64 | Senior Vice President and Treasurer and Chief Financial Officer | | Michelle R. Stambaugh | 60 | Senior Vice President and HR Director | | Donna L. Smith | 57 | Senior Vice President and Director of Branch and Deposit Operations | PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock trades on the Nasdaq Capital Market under the symbol "GLBZ", with 348 record holders as of March 13, 2020, and a consistent quarterly dividend of $0.10 per share paid throughout 2018 and 2019, which is not expected to be materially limited by regulatory restrictions - The Common Stock is traded on the Nasdaq Capital Market under the symbol "GLBZ"; as of March 13, 2020, there were 348 record holders and the closing price was $10.02[105] Stock Price and Dividends | Quarter Ended | 2019 High | 2019 Low | 2019 Dividends | 2018 High | 2018 Low | 2018 Dividends | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | March 31 | $10.74 | $10.61 | $0.10 | $12.10 | $12.03 | $0.10 | | June 30 | $11.10 | $10.94 | $0.10 | $11.36 | $10.99 | $0.10 | | September 30 | $10.95 | $10.80 | $0.10 | $12.30 | $12.25 | $0.10 | | December 31 | $11.50 | $11.50 | $0.10 | $10.43 | $10.22 | $0.10 | - The ability to pay dividends depends on the Bank's dividends to the Company and is subject to regulatory limits, though the Company does not anticipate these restrictions will materially limit its ability to pay dividends[108] Selected Financial Data This item is not applicable to the Company - Not applicable[109] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for 2019 compared to 2018, highlighting stable net income at $1.6 million, a 6.8% decrease in total assets to $384.9 million, an increase in nonperforming assets, and the bank's well-capitalized and liquid position with active interest rate risk management Comparison of Results of Operations for 2019 and 2018 For the year ended December 31, 2019, net income was $1.6 million, nearly unchanged from 2018, driven by stable net interest income of $12.6 million and a significant decrease in the provision for loan losses to a negative $0.1 million, offset by lower noninterest income and higher operating expenses and taxes Key Financial Metrics | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Net Income | $1.6 million | $1.6 million | +$16,000 | | Basic and Diluted EPS | $0.57 | $0.56 | +$0.01 | | Net Interest Income | $12.6 million | $12.6 million | Stable | | Provision for Loan Losses | ($0.1 million) | $0.9 million | -$1.0 million | | Noninterest Income | $1.3 million | $1.5 million | -$0.2 million | | Noninterest Expense | $11.9 million | $11.5 million | +$0.4 million | | Income Tax Expense | $0.4 million | $0.1 million | +$0.3 million | - The net interest margin increased to 3.39% in 2019 from 3.26% in 2018[121] - The decrease in the provision for loan losses was primarily due to a $544,000 decrease in net loan charge-offs and a $14.4 million decrease in loan balances[128] Financial Condition As of December 31, 2019, total assets decreased by 6.8% to $384.9 million from $413.0 million in 2018, mainly due to declines in investment securities and net loans, while nonperforming loans increased by 90.5% to $4.1 million, primarily from three commercial real estate loans, increasing total nonperforming assets to $4.9 million, despite stable total deposits - Total assets decreased by $28.1 million (6.80%) to $384.9 million at year-end 2019, driven by decreases in investment securities and loans[132] - Net loans decreased by $13.9 million to $282.7 million, primarily due to paydowns outpacing new originations, with the indirect auto loan portfolio seeing the largest decrease[142] - Total nonperforming assets increased by $2.0 million to $4.9 million at year-end 2019, representing 1.26% of total assets, up from 0.70% in 2018, mainly due to three commercial real estate loans totaling $3.3 million being added to nonaccrual status[149] - The allowance for loan losses decreased to $2.1 million (0.73% of total loans) from $2.5 million (0.85% of total loans) in 2018[128][156] - Total deposits decreased slightly by $1.0 million to $321.4 million, with a shift from time deposits to noninterest-bearing and interest-bearing checking accounts[161] Capital Resources and Liquidity The company's capital position remains strong, with stockholders' equity increasing to $35.7 million at year-end 2019, and the Bank is classified as "well capitalized" under all regulatory measures, maintaining adequate liquidity through its deposit base, loan and security repayments, and access to external funding sources including a $10.4 million line with the Federal Reserve Bank and a $95.9 million line with the FHLB - Stockholders' equity increased by $1.6 million (4.78%) to $35.7 million at December 31, 2019[168] Capital Ratios (Bank) | Capital Ratios (Bank) | Dec 31, 2019 (Actual) | Well Capitalized Minimum | | :--- | :--- | :--- | | Common Equity Tier 1 Ratio | 12.47% | 6.50% | | Tier 1 Risk-Based Capital Ratio | 12.47% | 8.00% | | Total Risk-Based Capital Ratio | 13.21% | 10.00% | | Tier 1 Leverage Ratio | 9.26% | 5.00% | - Primary liquidity sources include the deposit base, amortization of loans and securities, and operations; external sources include a $95.9 million FHLB line of credit ($70.9 million available) and a $10.4 million Federal Reserve discount window line[180][183] Market Risk and Critical Accounting Policies The company's primary market risk is interest rate fluctuation, managed by the Asset/Liability Management Committee (ALCO), with simulation analysis showing a 100 basis point increase in rates would increase net interest income by 6%, while critical accounting policies include the allowance for loan losses, fair value measurements, and accounting for income taxes - The primary market risk is interest rate risk, managed by the ALCO; the company was in an asset-sensitive position as of December 31, 2019[194][201] Estimated Change in Net Interest Income (12-month horizon) | Estimated Change in Net Interest Income (12-month horizon) | -200 bp | -100 bp | +100 bp | +200 bp | | :--- | :--- | :--- | :--- | :--- | | Policy Limit | (4)% | (3)% | (3)% | (4)% | | December 31, 2019 | (10)% | (6)% | 6% | 11% | - Critical accounting policies identified are: Allowance for Loan Losses, Fair Value Measurements, and Accounting for Income Taxes, all requiring significant management estimates and judgments[207] Controls and Procedures Management, including the CEO and CFO, concluded that as of December 31, 2019, the company's disclosure controls and procedures and its internal control over financial reporting were effective in providing reasonable assurance regarding financial reporting reliability and timely disclosure, with no material changes reported during the fourth quarter of 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[218] - Based on an evaluation using the COSO framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2019[220] - There were no changes in internal control over financial reporting during the fourth quarter of 2019 that materially affected, or are reasonably likely to materially affect, these controls[222] PART III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10 through 14, including details on directors, executive officers, corporate governance, executive compensation, security ownership, certain relationships and transactions, director independence, and principal accountant fees and services, is incorporated by reference from the Company's definitive Proxy Statement for the 2020 Annual Meeting of Stockholders - Information regarding Directors, Executive Officers, and Corporate Governance (Item 10) is incorporated by reference from the 2020 Proxy Statement[226] - Information regarding Executive Compensation (Item 11) is incorporated by reference from the 2020 Proxy Statement[227] - Information regarding Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accountant Fees and Services (Item 14) is incorporated by reference from the 2020 Proxy Statement[228][229][230] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, including a reference to the consolidated financial statements and notes, and a list of exhibits such as corporate governance documents, compensation plans, and required certifications - This item provides an index to the Consolidated Financial Statements, which begin on page F-3 of the report[233] - All required financial statement schedules are omitted as they are not applicable or the information is included elsewhere in the financial statements[234] - A list of exhibits filed with the report is provided, including corporate governance documents, compensation plans, and certifications by the CEO and CFO[235] Consolidated Financial Statements Consolidated Balance Sheets, Statements of Income, and Cash Flows The consolidated financial statements present the financial position and performance of Glen Burnie Bancorp, with total assets at $384.9 million and net income of $1.6 million for 2019, consistent with 2018, and net cash from operating activities of $3.0 million, while investing activities provided $26.3 million and financing activities used $32.0 million Consolidated Balance Sheet Highlights (As of Dec 31) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total Assets | $384,942 | $413,046 | | Net Loans | $282,672 | $296,579 | | Total Deposits | $321,440 | $322,453 | | Short-term borrowings | $25,000 | $55,000 | | Total Stockholders' Equity | $35,680 | $34,051 | Consolidated Statement of Income Highlights (Year Ended Dec 31) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net Interest Income | $12,587 | $12,591 | | Provision for loan losses | ($115) | $856 | | Total Noninterest Income | $1,295 | $1,517 | | Total Noninterest Expenses | $11,946 | $11,539 | | Net Income | $1,599 | $1,583 | | Basic and diluted EPS | $0.57 | $0.56 | Notes to Consolidated Financial Statements The notes provide detailed disclosure on the company's significant accounting policies and the composition of accounts in the financial statements, covering investment securities, allowance for loan losses, credit quality, lease accounting, derivatives, regulatory capital, and fair value measurements, confirming the Bank is well-capitalized and providing specifics on loan portfolio composition, nonperforming assets, and commitments Note 1. Summary of Significant Accounting Policies This note outlines the fundamental accounting policies used in preparing the financial statements, covering basis of presentation, use of estimates, and specific policies for investment securities, loans, nonaccrual and impaired loans, allowance for loan losses, OREO, income taxes, and fair value measurements, also detailing the adoption of ASU 2016-02 for leases and the evaluation of ASU 2016-13 (CECL model) - The allowance for loan losses is based on historical loss experience over the current and previous four years, adjusted by six qualitative factors, including changes in asset quality, loan volume, economic conditions, and internal factors[289] - The company adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing a lease liability and a right-of-use asset of $0.7 million on the consolidated balance sheet[311] - The company is evaluating the impact of ASU 2016-13 (CECL model), which is effective for reporting periods after December 15, 2022; the company expects the allowance for loan losses to increase upon adoption[312] Note 3. Investment Securities The company's available-for-sale investment portfolio totaled $71.5 million at fair value as of December 31, 2019, a decrease from $81.6 million in 2018, primarily composed of mortgage-backed securities (77.4%) and municipal securities (17.5%), with $37.9 million in securities having temporary unrealized losses of $0.3 million, which management does not consider other-than-temporary impairment Composition of Investment Securities (Available for Sale) | (in thousands) | 2019 Amount | 2019 % | 2018 Amount | 2018 % | | :--- | :--- | :--- | :--- | :--- | | U.S. Treasury | $500 | 0.6% | $990 | 1.2% | | U.S. Government agency | $3,191 | 4.5% | $1,959 | 2.4% | | Residential mortgage-backed securities | $55,320 | 77.4% | $44,793 | 54.9% | | State and municipal | $12,475 | 17.5% | $33,830 | 41.5% | | Total | $71,486 | 100.0% | $81,572 | 100.0% | - At December 31, 2019, securities with a total fair value of $37.9 million had gross unrealized losses of $0.3 million; management considers these losses temporary and related to market interest rates[328][336] Note 4. Loans and Allowance for Loan Losses Total gross loans decreased to $284.7 million in 2019 from $299.1 million in 2018, with the portfolio concentrated in indirect auto loans (36%), residential real estate (28%), and commercial real estate (27%), while nonaccrual loans significantly increased to $4.1 million, and the allowance for loan losses decreased to $2.1 million, with one troubled debt restructuring (TDR) on nonaccrual status Loan Portfolio Composition (Gross Loans) | (in thousands) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Consumer | $12,076 | $13,071 | | Residential real estate | $81,033 | $82,637 | | Indirect | $102,384 | $116,698 | | Commercial | $11,907 | $14,284 | | Construction | $3,317 | $2,317 | | Commercial real estate | $74,021 | $70,113 | | Total gross loans | $284,738 | $299,120 | Allowance for Loan Losses Activity (2019) | (in thousands) | Amount | | :--- | :--- | | Beginning Balance (Jan 1, 2019) | $2,541 | | Charge-offs | ($616) | | Recoveries | $256 | | Provision for loan losses | ($115) | | Ending Balance (Dec 31, 2019) | $2,066 | - Nonaccrual loans increased from $1.9 million at year-end 2018 to $4.1 million at year-end 2019[366] Note 6. Federal Home Loan Bank and Short-term Borrowings The Bank utilizes short-term borrowings from the FHLB of Atlanta to manage funding, with $25.0 million in advances outstanding and $95.9 million in total credit availability at December 31, 2019, and uses three interest rate swaps with a total notional value of $20.0 million to hedge interest rate risk on these borrowings, converting variable-rate FHLB advances to fixed rates between 2.105% and 2.246%, resulting in a negative fair value of $336,000 - At Dec 31, 2019, the Bank had $25.0 million in short-term FHLB advances and total available credit of $95.9 million from the FHLB[373] - The Bank has three outstanding interest rate swaps with a total notional value of $20.0 million, designated as cash flow hedges to manage interest rate risk on FHLB advances[384] Interest Rate Swap Details (as of Dec 31, 2019) | Notional Amount (thousands) | Pay Rate (Fixed) | Receive Rate (Variable) | Maturity | | :--- | :--- | :--- | :--- | | $10,000 | 2.105% | 3M LIBOR | Oct 2022 | | $5,000 | 2.235% | 3M LIBOR | Jul 2023 | | $5,000 | 2.246% | 3M LIBOR | Aug 2023 | Note 13. Commitments and Contingencies In the normal course of business, the Bank enters into off-balance sheet financial instruments to meet customer financing needs, including $2.8 million in loan commitments, $23.5 million in unused lines of credit, and $1.1 million in standby letters of credit outstanding as of December 31, 2019, with a reserve of $37,386 accrued for potential losses on these unfunded commitments Off-Balance Sheet Commitments (as of Dec 31) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Loan commitments | $2,816 | $3,589 | | Unused lines of credit | $23,482 | $19,905 | | Letters of credit | $1,059 | $1,059 | - The Bank has accrued a reserve of $37,386 as of December 31, 2019, for potential losses on these unfunded commitments[405] Note 14. Stockholders' Equity This note details components of stockholders' equity, including restrictions on dividends and various stock plans, with approximately $21.4 million of retained earnings not available for dividends without prior approval as of year-end 2019, and the company maintaining an Employee Stock Purchase Plan, a Dividend Reinvestment and Stock Purchase Plan (DRIP), and a Stockholder Purchase Plan, with 13,316 shares purchased through the DRIP in 2019 - Banking regulations limit dividend payments; as of Dec 31, 2019, approximately $21.4 million of retained earnings could not be paid as dividends without prior regulatory approval[408] - The company offers a Dividend Reinvestment and Stock Purchase Plan (DRIP) allowing stockholders to receive shares at 95% of fair market value in lieu of cash dividends; in 2019, 13,316 shares were issued under this plan[413] Note 17. Fair Value Measurements This note describes the framework for measuring fair value using a three-level hierarchy, with recurring measurements for securities available for sale and interest rate swaps primarily using Level 2 inputs, and non-recurring measurements for impaired loans using Level 3 inputs and foreclosed real estate (OREO) using Level 2 inputs Fair Value Measurements (as of Dec 31, 2019) | (in thousands) | Level 1 | Level 2 | Level 3 | Total Fair Value | | :--- | :--- | :--- | :--- | :--- | | Recurring: | | | | | | Securities available for sale | $0 | $58,511 | $0 | $58,511 | | Interest rate swap | $0 | ($336) | $0 | ($336) | | Non-recurring: | | | | | | Impaired loans | $0 | $0 | $4,638 | $4,638 | | OREO | $0 | $705 | $0 | $705 | - Securities available for sale and interest rate swaps are valued on a recurring basis, primarily using Level 2 inputs[442][443] - Impaired loans are valued on a non-recurring basis using Level 3 inputs, mainly independent appraisals of the underlying collateral[444]