-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R8xVvnZcgspNFhnPTdkFxc4wrbdczo7yN8JCdgHC3ksjOhb8qJABLeLg316WPVnD 66pHkNeZsXC/r933A6tvKw== 0001024739-99-000177.txt : 19990331 0001024739-99-000177.hdr.sgml : 19990331 ACCESSION NUMBER: 0001024739-99-000177 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLEN BURNIE BANCORP CENTRAL INDEX KEY: 0000890066 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 521782444 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24047 FILM NUMBER: 99578141 BUSINESS ADDRESS: STREET 1: 101 CRAIN HIGHWAY SE CITY: GLEN BURNIE STATE: MD ZIP: 21061 BUSINESS PHONE: 4107663300 MAIL ADDRESS: STREET 1: 101 CRAIN HWY SE CITY: GLEN BURNIE STATE: MD ZIP: 21061 10-K 1 FORM 10-K =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 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 No. 0-24047 GLEN BURNIE BANCORP ----------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 52-1782444 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer 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: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $10.00 ------------------------------ (Title of Class) Common Stock Purchase Rights ---------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 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 statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 23, 1999, the aggregate market value of the registrant's voting stock held by non-affiliates was approximately $13.1 million based on the most recent sales price of $23.00 per share of the registrant's Common Stock as of such date as reported on the OTC Bulletin Board(R). For purposes of this calculation only, it is assumed that directors, executive officers and beneficial owners of more than 5% of the registrant's outstanding voting stock are affiliates. Number of shares of Common Stock outstanding as of March 23, 1999: 898,290 DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Proxy Statement for 1999 Annual Meeting of Stockholders. (Part III) ================================================================================ PART I Item 1. Business Glen Burnie Bancorp (the "Company") is a bank holding company organized in 1990 under the laws of the State of Maryland. It presently 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 Anne Arundel County and surrounding areas from its main office in Glen Burnie, Maryland and branch offices in Odenton, Riviera Beach, Crownsville, Severn and Ferndale, Maryland. The Bank is engaged in the commercial and retail banking business as authorized by the banking statutes of the State of Maryland, including the receiving of demand and time deposits, and the making of loans to individuals, associations, partnerships and corporations. 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'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. Market Area The Bank considers its principal market area for lending and deposit products to consist of Northern Anne Arundel County, Maryland. Northern Anne Arundel County is a mature suburb of the City of Baltimore which in recent years has experienced modest population growth and is 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 the nearby Baltimore Washington International airport. Anne Arundel County is generally considered to have more affordable housing than other suburban Baltimore areas and has begun to attract 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, equipment and automobile lease financing, 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 Bank 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 lease financing portfolio consists of loans purchased from third party originators. After several years of portfolio run-off, the Company's loan portfolio increased by $14.0 million, or 12.5%, as the result of the introduction of an indirect automobile lending program in 1998. The Bank's loan portfolio had decreased in size in prior years primarily due to declines in the size of construction loan portfolio and in its installment and commercial loan portfolios. The declines in the construction portfolio reflected the significant increase in such lending in fiscal year 1994 which was not sustained in subsequent years. The run-off in the commercial portfolio reflected the Bank's decision to decrease its equipment and automobile lease-based lending because of the difficulties encountered in monitoring the financial condition of borrowers on purchased leases. The declines in the installment and commercial loan portfolios also reflected in part the substantial charge-offs which the Bank took during fiscal years 1996 and 1995. 2 The following table provides information on the composition of the loan portfolio at the indicated dates.
At December 31, -------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------ ------------------- ------------------ ------------------ ----------------- $ % $ % $ % $ % $ % ------- ------- --------- ------- -------- ------- -------- ------- --------- ------ (Dollars in thousands) Mortgage: Residential............ $ 33,931 26.28% $ 38,048 32.68% $ 36,505 27.95% $ 38,142 24.60% $ 35,079 22.29% Commercial............. 43,915 34.02 43,276 37.17 47,757 36.57 46,888 30.24 39,398 25.04 Construction and land development........ 2,383 1.85 4,888 4.20 5,515 4.22 14,265 9.20 21,014 13.35 Installment.............. 41,749 32.34 18,862 16.20 22,281 17.06 27,898 17.99 32,352 20.66 Credit Card.............. 1,398 1.08 1,397 1.20 1,434 1.10 1,484 0.96 1,233 0.78 Commercial............... 5,714 4.43 9,964 8.56 17,095 13.09 26,366 17.01 28,278 17.97 -------- ------ -------- ------ ------- ------ ------- ------ ------- ------ Gross loans......... 129,090 100.00% 116,435 100.00% 130,587 100.00% 155,043 100.00% 157,354 100.00% ====== ====== ====== ====== ====== Unearned income on loans. (748) (751) (854) (873) (776) -------- -------- -------- -------- ------- Gross loans net of unearned income.. 128,342 115,684 129,733 154,170 156,578 Allowance for credit losses................ (2,841) (4,139) (5,061) (3,698) (2,764) -------- -------- -------- -------- -------- Loans, net .............. $125,501 $111,545 $124,672 $150,472 $153,814 ======== ======== ======== ======== ========
The following table sets forth the maturities for various categories of the loan portfolio at December 31, 1998. Demand loans and loans which have no stated maturity are treated as due in one year or less. At December 31, 1998, the Bank had $3,653,001 in loans due after one year with variable rates and $109,565,074 in such loans with fixed rates. The Bank's long-term real estate loans allow the Bank to call the loan after three years in order to adjust the interest rate if necessary. The Bank has generally not exercised its call option and the following table assumes no exercise of the Bank's call option.
Due Over Due Within One to Five Due Over One Year Years Five Years Total -------- ----- ---------- ----- (In thousands) Real estate -- mortgage: Residential......................... $ 3,521 $ 2,620 $ 27,790 $ 33,931 Commercial.......................... 3,283 6,478 34,154 43,915 Real estate -- construction........... 1,207 277 899 2,383 Installment........................... 1,958 36,663 3,128 41,749 Credit Card........................... 1,398 -- -- 1,398 Commercial............................ 4,505 959 250 5,714 --------- ----------- -------- ---------- $ 15,872 $ 46,997 $ 66,221 $ 129,090 ========= =========== ======== ==========
3 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. The Bank's long-term, fixed-rate mortgages include a provision allowing the Bank to call the loan after three years in order to adjust the interest rate. The Bank, however, has never exercised this right. 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 75%. The maximum permissible loan-to-value ratio for residential and commercial 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. Commercial Lending. The Bank's commercial loan portfolio consists principally of demand and time loans for commercial purposes and purchased lease financings. The Bank's business demand and time lending includes various working capital loans, lines of credit and letters of credit for commercial customers. Demand loans require the payment of interest until called while time loans require a single payment of principal and interest at maturity. 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. The Bank's lease financing portfolio includes leases on various types of commercial equipment that have been purchased from various vendors. The Bank has determined to de-emphasize lease financing because of the difficulties encountered in monitoring the financial condition of borrowers on purchased leases. 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, 1998, approximately 20% of the installment loans in the Bank's portfolio had been originated for commercial purposes and 80% had been originated for consumer purposes. Included in installment loans are approximately $24.6 million in automobile loans, net of dealer reserves. These loans were originated through the Bank's indirect automobile lending program which was introduced in January 1998. The Bank's indirect automobile loans are originated through selected local automobile dealers who receive a fee for each loan made to their customers. The dealer typically takes a credit application from their customer which is transmitted to the Bank for evaluation. If the loan is approved, the Bank will hold back a portion of the loan proceeds in a dealer reserve account which serves as a reserve for losses. Credit Card and Related Loans. Credit card and related loans consist of outstanding balances on credit cards and overdraft lines of credit. The Bank offers no annual fee VISA(R) and MasterCard(R) credit cards to qualified customers. Credit card billing and payment processing is done for the Bank by an unaffiliated third party which receives a fee for such services. The Bank's overdraft protection line of credit is offered as a convenience to qualified customers. 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 cost of production, 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 are affected primarily by domestic 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. 4 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 Senior Credit Officer to identify potential underperforming credits, estimate loss exposure and to ascertain compliance with the Bank's policies. On a quarterly basis, the internal auditor performs an independent loan review. For significant problem loans, management review consists of evaluation of the financial strengths of the borrower and the 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 lending authority granted by the Bank to any one individual is $500,000. 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 $1.0 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 reserve for possible loan losses. Under this authority, the Bank would have been permitted to lend up to $1.66 million to any one borrower at December 31, 1998. By interpretive ruling of the Commissioner, 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 would have been permitted to lend up to $1.91 million to any one borrower at December 31, 1998. It is currently the Bank's policy to limit its exposure to any one borrower to no more than $1.85 million in the aggregate unless the loan is approved by a 75% vote of the Board of Directors with respect to new borrowings. At December 31, 1998, the largest amount outstanding to any one borrower and their related interests was $2,554,450 which was within the Bank's lending limit at the time when made. Non-Performing Loans It is the current policy of the Bank to discontinue the accrual of interest when a loan becomes 90 days or more delinquent and circumstances indicate that collection is doubtful. For fiscal years prior to the 1997 fiscal year, the Bank's policy was to consider real estate loans on a case-by-case basis subject to collateral. For the year ended December 31, 1998, interest of approximately $269,112, would have been accrued on non-accrual loans if such loans had been current in accordance with their original terms. During such period there was no interest on such loans included in income. 5 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, ------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands) Restructured Loans........................... $ 294 $ 344 $ -- $ -- $ -- ======== ========= ========= ======== ========== Non-accrual Loans: Real estate -- mortgage: Residential............................. $ 336 $ 1,078 $ 2,065 $ 812 $ 347 Commercial.............................. 505 761 1,935 274 209 Real estate -- construction............... 316 608 0 0 0 Installment............................... 463 665 168 165 25 Credit card & related .................... 0 0 0 4 0 Commercial................................ 105 369 378 1,120 74 -------- --------- --------- --------- ---------- Total Non-accrual Loans............... 1,725 3,481 4,546 2,375 655 -------- --------- --------- --------- ---------- Accruing Loans Past Due 90 Days or More: Real estate -- mortgage: Residential............................. 0 5 87 1,467 1,153 Commercial.............................. 0 0 0 1,500 1,451 Real estate -- construction............... 0 0 0 0 0 Installment............................... 0 0 0 300 0 Credit card & related .................... 18 0 0 28 5 Commercial................................ 0 0 0 610 310 -------- --------- --------- --------- ---------- Total accruing loans past due 90 days or more............................. 18 5 87 3,905 2,919 -------- --------- --------- --------- ---------- Total non-accrual and past due loans.. $ 1,743 $ 3,486 $ 4,633 $ 6,280 $ 3,574 ======== ========= ========= ========= ========== Non-accrual and past due loans to gross loans......................... 1.35% 2.99% 3.55% 4.05% 2.27% ======== ========= ========= ========= ========== Allowance for credit losses to non-accrual and past due loans...... 179.58% 118.73% 109.24% 58.89% 77.34% ======== ========= ========= ========= ==========
During the year ended December 31, 1998, the Bank would have recorded $18,021 in interest on restructured loans if such loans were performing in accordance with their original terms. During 1998, the Bank recognized $16,765 in interest income on restructured loans. Approximately $1,538,163, or 89.18%, of the Bank's non-accrual loans at December 31, 1998 were attributable to ten borrowers. Charge-offs of $620,894 have previously been taken on these loans. Seven of these borrowers with loans totaling $1,138,899 were 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. Each of these loans is secured by collateral with a value well in excess of the principal amount of the Bank's loan. At December 31, 1998, there were no loans outstanding not reflected in the above table as to which known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms. Such loans consist of loans which were not 90 days or more past due but where the borrower is in bankruptcy or has a history of delinquency or the loan to value ratio is considered excessive due to deterioration of the collateral or other factors. At December 31, 1998, the Company had $1,099,326 in real estate acquired in partial or total satisfaction of debt compared to $748,231 and $602,000 in such properties at December 31, 1997 and 1996, respectively. 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 6 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, 1998, see "Item 2. -- Properties." Allowance for Credit Losses The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the collectibility of the principal is unlikely. The allowance, based on evaluations of the collectibility 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, and current economic conditions and trends that may affect the borrower's ability to pay. Transactions in the allowance for credit losses during the last five fiscal years were as follows:
At December 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands) Beginning balance........................... $ 4,139 $ 5,061 $ 3,698 $ 2,764 $ 2,552 --------- --------- --------- --------- --------- Loans charged off Real estate -- mortgage: Residential............................ 51 270 250 1,044 419 Commercial............................. 0 0 797 497 6 Real estate -- construction.............. 189 435 0 0 0 Installment.............................. 473 171 786 270 29 Credit card & related ................... 0 45 182 194 1 Commercial............................... 382 697 3,453 5,056 520 --------- --------- --------- --------- --------- Total............................. 1,095 1,618 5,468 7,061 975 --------- --------- --------- --------- --------- Recoveries Real estate -- mortgage: Residential............................ 51 25 22 23 15 Commercial............................. 26 17 81 10 3 Real estate -- construction.............. 1 0 0 0 0 Installment.............................. 116 89 57 11 20 Credit card & related ................... 4 5 2 0 0 Commercial............................... 99 290 73 26 29 --------- --------- --------- --------- --------- Total.............................. 297 426 235 70 67 --------- --------- --------- --------- --------- Net charge-offs............................. 798 1,192 5,233 6,991 908 Provisions charged to operations............ (500) 270 6,596 7,925 1,120 ----------- --------- --------- --------- --------- Ending balance.............................. $ 2,841 $ 4,139 $ 5,061 $ 3,698 $ 2,764 ========= ========= ========= ========= ========= Average loans............................... $ 118,372 $ 119,161 $ 146,922 $ 156,219 $ 151,933 Net charge-offs to average loans ........... 0.67% 1.00% 3.56% 4.48% 0.60%
The Bank's high level of loan charge-offs during fiscal years 1996 and 1995 was primarily attributable to its lending relationships with Mr. Brian Davis and various affiliated entities. Such loans primarily consisted of loans for purchases of trucks and other non-real estate secured loans which are categorized under commercial loans in the above table. In addition, during fiscal year 1996, the Bank began charging off all non-real estate secured loans upon 90 days delinquency which contributed to a continued high level of charge-offs. 7 The following table shows the allowance for credit losses broken down by loan category as of December 31, 1998, 1997 and 1996. Such information for earlier periods is not available.
At December 31, -------------------------------------------------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Reserve Percent of Loans Reserve Percent of Loans Reserve Percent of Loans for Each in Each Category for Each in Each Category for Each in Each Category Portfolio Category to Total Loans Category to Total Loans Category to Total Loans - --------- -------- --------------- -------- -------------- -------- -------------- (Dollars in thousands) Real estate -- mortgage: Residential................. $ 273 26.28% $ 389 32.68% $ 432 27.85% Commercial.................. 311 34.02 987 37.17 987 36.57 Real estate -- construction... 335 1.85 390 4.20 690 4.22 Installment................... 455 32.34 159 16.20 448 17.06 Credit Card.................. 60 1.08 47 1.20 49 1.10 Commercial................... 966 4.43 1,186 8.56 2,455 13.09 Unallocated................... 441 0.00 981 0.00 0 0.00 --------- ------- ------ ------- ------ -------- Total..................... $ 2,841 100.00% $4,139 100.00% $5,061 100.00% ========= ====== ====== ====== ====== ======
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 U.S. Treasury securities as well as securities issued by U.S. Government agencies including mortgage-backed securities. The Bank formerly maintained a substantial portfolio in obligations of certain states and their political subdivisions. This portfolio has been eliminated because the Company was no longer able to use the full tax advantages 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, ------------------------------------------------ 1998 1997 1996 ---- ---- ---- (In thousands) U.S. Treasury securities .......................... $ 5,082 $ 9,068 $ 13,061 U.S. Government agencies and mortgage-backed securities....................... 59,008 63,414 56,607 Obligations of states and political subdivisions..................................... -- 8,073 25,726 Other securities and stock......................... 936 936 748 --------- --------- --------- Total investment securities........................ $ 65,026 $ 81,491 $ 96,142 ========= ========= =========
8 The following table sets forth the scheduled maturities, book values and weighted average yields for the Company's investment securities portfolio at December 31, 1998.
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total ------------------ ----------------- ----------------- ------------------- ----------------- Weighted Weighted Weighted Weighted Weighted Book Average Book Average Book Average Book Average Book Average Value Yield Value Yield Value Yield Value Yield Value Yield ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) U.S. Treasury securities ........ $1,250 6.55% $ 3,338 6.23% $ 494 5.86% $ 0 0.00% $ 5,082 6.27% U.S. Government agencies and mortgage-backed securities..... 1,500 5.85 11,355 6.51 14,079 6.49 32,074 6.61 59,008 6.54 Other securities and stock....... 936 7.44 0 0.00 0 0.00 0 0.00 936 7.44 ------ ---- -------- ---- -------- ---- ------- ---- ------- ---- Total investment securities. $3,686 6.49% $ 14,693 6.45% $ 14,573 6.47% $32,074 6.61% $65,026 6.53% ====== ==== ======== ==== ======== ==== ======= ==== ======= ====
At December 31, 1998, 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 Sources of Funds The funds needed by the Bank to make loans are generated by deposit accounts solicited from the communities surrounding its main office and six branches in northern Anne Arundel County. Consolidated total deposits were $199,611,115 as of December 31, 1998. In addition, the Bank may borrow up to $26 million under a line of credit from the Federal Home Loan Bank of Atlanta. The Bank's deposit products include regular savings accounts (statements), money market deposit accounts, demand deposit accounts, NOW checking accounts, IRA accounts and certificates of deposit accounts. 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, automated teller machines, telephone banking, and a customer call center. The Bank obtains deposits principally through its network of seven offices. The Bank does not solicit brokered deposits. At December 31, 1998, the Bank had approximately $10.6 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, 1998.
Amount ------ (In thousands) Three months or less.................................. $ 2,946 Over three through six months......................... 1,404 Over six through 12 months............................ 1,386 Over 12 months........................................ 4,873 ---------- Total............................................. $ 10,609 ==========
9 Competition The Bank faces competition from other community banks and financial institutions and larger intra- and interstate banks and financial institutions which compete vigorously (currently, twelve financial institutions operate within two miles of the Bank's headquarters). Former directors of the Bank, including its former Chief Executive Officer, have established a new bank with a main office in Glen Burnie close to the Bank's headquarters. The Bank anticipates that this new bank will solicit a significant number of its customers. The Bank's interest rates, loan and deposit terms, and offered products and services are governed, 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, it believes, would welcome personal service and flexibility. While it believes it is the sixth largest deposit holder in Anne Arundel County, Maryland, with an estimated 5.74% market share as of June 1996 (the latest date for which the Bank has relevant data available), it believes its greatest competition comes from smaller community banks which offer similar personalized services. 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, 1998, the Bank had 125 full-time equivalent employees. Neither the Company nor GBB currently has any employees. SUPERVISION AND REGULATION 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. Effective September 29, 1995, the Riegle-Neal Interstate Banking and Branching Efficiency of 1994 (the "Riegle-Neal Act") authorized 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 10 been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. The Reigle-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 Reigle-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 Reigle-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 Commissioner. Additionally, beginning on June 1, 1997, 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 Reigle-Neal Act by adopting a law after the date of enactment of the Reigle-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. 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 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 11 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. 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 Commissioner 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 $100,000 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 credit terms and discrimination in credit transactions. 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. 12 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 with respect to 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. 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, 1998, 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 Reigle-Neal Act authorizes the FDIC to approve interstate branching de novo by state banks, only in states which specifically allow for such branching. The Reigle-Neal Act also requires the appropriate federal banking agencies to prescribe regulations by June 1, 1997 which prohibit any out-of-state bank from using the interstate branching authority primarily for the purpose of deposit production. These regulations must include guidelines to ensure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to meet the credit needs of the communities which they serve. 13 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 are required to pay an assessment to the FDIC in an amount equal to 1.3 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, is controlled by or is under common control with the state non-member bank. In a holding company context, the parent holding company of a state nonmember bank (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the state nonmember 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. 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 14 of $25,000 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. Executive Officers of the Registrant Set forth below is information about the Company's executive officers.
Name Age Positions ---- --- --------- F. William Kuethe, Jr. 66 President and Chief Executive Officer Michael P. Gavin 42 Executive Vice President and Chief Operating Officer Michael G. Livingston 44 Senior Vice President and Chief Lending Officer John E. Porter 44 Senior Vice President and Chief Financial Officer John I. Young 61 Senior Vice President
F. William Kuethe, Jr. has been President and Chief Executive Officer of the Company and the Bank since 1995. He also was director of the Bank from 1963 through 1989. He 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. Michael P. Gavin was appointed Executive Vice President and Chief Operating Officer effective January 12, 1998. He had previously been Senior Vice President, Director of Operations, Susquehanna Bank, Baltimore, Maryland since May 1997 and President, Atlantic Federal Savings Bank, Baltimore, Maryland from December 1991 to May 1997. Mr. Gavin has announced his resignation effective in June 1999. Michael G. Livingston was appointed Senior Vice President in January 1998 and has been Chief Lending Officer of the Bank since 1996. He was Regional Vice President and commercial loan officer with Citizens Bank from March 1993 until April 1996. He was Comptroller with Land Services Group from April 1992 through January 1993. 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. He has been Secretary/Treasurer of GBB since 1995. John I. Young was appointed Senior Vice President of the Bank in March 1999. Prior to joining the Bank, he had been president of Young-Harris, Inc., a financial industry consulting company since 1980. Mr. Young was president of American Bank Services Corp. from January 1977 to 1980 and was Senior Vice President of Operations of Equitable Trust Bank from 1958 until December 1976. Item 2. Properties The Bank owns its Banking Operations Center, its Executive Offices, its main banking facility in Glen Burnie, and four branch offices in various communities in Anne Arundel County, Maryland, all of which are unencumbered. The Bank leases two other branch offices. The Company owns no real estate at present. At December 31, 1998, GBB owned one parcel of real estate obtained from a foreclosure by the Bank. The book value of this property was $143,000. The property consists of office condominiums. GBB intends to sell this property. At December 31, 1998, the Bank owned four foreclosed real estate properties having a book value of $956,326, which consisted of residential property, a building lot and commercial property which the Bank is holding for sale. On March 23, 1999, the Bank completed the sale of the building lot. 15 Item 3. Legal Proceedings On March 20, 1996, McCafferty's Restaurant ("McCafferty's") commenced an adversary proceeding (McCafferty's, Inc. v. Bank of Glen Burnie Adversary Case, Case No. 96-5137-ESD, U.S. Bank. Ct., D. Md.) in McCafferty's pending Chapter 11 bankruptcy case (In re McCafferty's, Inc., Case No. 96-5-2444-SD, U.S. Bank. Ct., D. Md.) and the United States District Court for the District of Maryland assumed jurisdiction (Bank of Glen Burnie v. McCafferty's, Inc., Civil Action No. MJG-96-3656, D-Md. 1996). McCafferty's alleged that the Bank, acting in concert with Brian Davis (McCafferty's former treasurer and chief financial officer who has pled guilty to fraud against the Bank and various other banks), defrauded McCafferty's through alleged forgery of loan documents, improper payment of checks, wrongful diversion of loan proceeds, illegal overbilling and conspiracy to conceal illegal acts. McCafferty's sought $5,000,000 in compensatory damages, $50,000,000 in punitive damages and declaratory and injunctive relief under numerous counts, including one count pled under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). On December 4, 1997, the U.S. District Court dismissed McCafferty's claims under RICO but denied the Bank's motion to dismiss McCafferty's other claims which have been reduced to $1,700,000 in total. On November 17, 1998, the Bankruptcy Court approved a settlement in which all claims were settled for the payment of $450,000 by the Bank. In addition to the foregoing litigation, the Bank was a defendant in three suits filed in the Circuit Court for Baltimore County by creditors of a company controlled by Mr. Davis alleging in each case that the Bank improperly negotiated checks for loan proceeds over forged endorsements. The aggregate damages sought in First National Bank of Maryland v. The Bank of Glen Burnie (Case No. 03-C-96-001925 filed February 28, 1996), Elkridge National Bank v. The Bank of Glen Burnie (Case No.03-C-96-002064 filed March 4, 1996) and Commercial and Farmers Bank v. The Bank of Glen Burnie (Case No. 03-C-96-002941 filed March 25, 1996) totaled approximately $1,700,000. In Elkridge National Bank, a judgment in the amount of $284,000 was rendered in favor of plaintiffs and upheld on appeal. On July 2, 1998, the Company settled Commercial and Farmers Bank for $575,000. The Bank has filed a counter-claim in the First National Bank of Maryland suit seeking damages in excess of the amounts sought by the plaintiff. Accordingly, the Bank does not believe that the outcome of this suit will have a material adverse effect on the Bank. The Bank was also a defendant in Beal GMC v. The Bank of Glen Burnie (Case No. C96-32383OC filed October 2, 1996 in Anne Arundel County Circuit Court) in which it was alleged that employees of the Bank falsely represented to a third party that checks drawn on Mr. Davis's account and payable to plaintiff had cleared the Bank. Plaintiff sought compensatory damages of $500,000 and punitive damages of $5.0 million. On September 4, 1998, this suit was dismissed pursuant to a settlement agreement which did not require any payments by the Bank. A stockholder derivative suit was filed on March 6, 1998 against the Company, the Bank and each individual director in the Circuit Court for Baltimore County under the caption Williams v. Glen Burnie Bancorp, Civil Action No. C-98-2004. The suit alleged various breaches of fiduciary duty and sought total damages of $2,500,000 from each director plus unspecified punitive damages, the appointment of a receiver for the Bank and an order declaring the Company's Stockholders' Rights Plan invalid. On December 8, 1998, this suit was dismissed with prejudice by stipulation of the parties. The Bank is involved in various other legal actions relating to its business activities. These actions involve claims for money damages which do not exceed 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. The Company does not believe that any ultimate liability or risk of loss with respect to these actions will materially affect its consolidated financial position or results of operations. Item 4. Submission of Matters to Vote of Security-Holders. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1998. 16 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board(R) under the symbol "GLBZ." There is not currently an active trading market for the Common Stock. As of December 31, 1998, the number of record holders of the Common Stock was 500. The following table sets forth the high and low sales prices for the Common Stock for each full quarterly period during 1998 and 1997, based on trades reported on the OTC Bulletin Board(R) or by Legg Mason Wood Walker, Inc., the principal market maker for the Company's stock. Also shown are dividends declared per share for these periods. Prices have been adjusted to give retroactive effect to a six-for-five stock split effected through a stock dividend paid on January 10, 1998.
1998 1997 ------------------------------- ---------------------------------- Quarter Ended High Low Dividends High Low Dividends ------------- ---- --- --------- ----- --- --------- March 31, $24.75 $23.50 $ 0.10 $23.333 $17.917 $ 0.133 June 30, 25.62 25.12 0.10 20.833 18.333 0.050 September 30, 26.00 25.00 0.10 20.625 19.583 0.050 December 31, 28.00 20.00 0.20 20.833 20.260 0.075
The Company intends to pay dividends equal to 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. 17 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 stock splits and stock dividends accounted for as stock splits.
Year Ended December 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands except per share data) Operations Data: Net Interest Income......................... $ 9,794 $ 10,567 $ 10,884 $ 11,339 $ 11,868 Provision for Credit Losses................. (500) 270 6,596 7,925 1,120 Other Income................................ 3,122 1,728 2,230 1,904 1,515 Other Expense............................... 11,776 11,593 9,019 8,740 7,139 Net Income (Loss)........................... 833 747 (1,020) (1,727) 3,517 Share Data: Basic Net Income (Loss) Per Share........... $ 0.78 $ 0.68 $ (0.94) $ (1.62) $ 3.52 Diluted Net Income (Loss) Per Share......... 0.78 0.68 (0.94) (1.62) 3.52 Cash Dividends Declared Per Common Share......................... 0.50 0.30 0.77 0.78 0.65 Weighted Average Common Shares Outstanding: Basic............................... 1,071,026 1,092,768 1,089,495 1,064,650 1,010,625 Diluted............................. 1,071,388 1,092,768 1,089,495 1,064,650 1,010,625 Financial Condition Data: Total Assets................................ $ 217,571 $ 231,900 $ 254,325 $ 246,165 $ 232,935 Loans Receivable, net....................... 125,501 111,545 124,672 150,472 153,814 Total Deposits.............................. 199,611 207,110 232,746 221,121 208,566 Total Stockholders' Equity.................. 14,169 18,965 18,586 20,537 21,677 Performance Ratios: Return on Average Assets.................... 0.38% 0.32% (0.41)% (0.73)% 1.53% Return on Average Equity.................... 4.54 3.95 (5.29) (7.42) 17.24 Net Interest Margin(1)..................... 4.94 5.09 5.04 5.42 5.88 Dividend Payout Ratio....................... 64.10 44.12 * * 19.06 Capital Ratios: Average Equity to Average Assets.................................... 8.40% 8.01% 7.82% 9.89% 8.86% Leverage Ratio.............................. 5.96 7.60 7.20 8.20 9.40 Total Risk-Based Capital Ratio.................................... 10.92 16.00 14.00 13.70 15.30 Asset Quality Ratios: Allowance for Credit Losses to Gross Loans............................... 2.21% 3.55% 3.88% 2.39% 1.76% Non-accrual and Past Due Loans to Gross Loans............................... 1.36 2.99 3.55 4.05 2.27 Allowance for Credit Losses to Non-accrual and Past Due Loans............ 179.58 118.73 109.24 58.89 77.34 Net Loan Charge-offs to Average Loans............................. 0.67 1.00 3.56 4.48 0.60
- --------------- * Not meaningful (1) Presented on a tax-equivalent basis. 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- Overview The year 1998 saw the continuation of a favorable trend as asset quality continued to improve. Nonperforming loans declined to 1.36% of the loan portfolio at December 31, 1998 from 2.99% at December 31, 1997 and 3.55% at December 31, 1996. Net charge-offs declined to 0.67% of average loans for the year compared to 1.00% for 1997 and 3.56% for 1996. The improvements in asset quality were achieved primarily through the resolution of nonperforming loans and improved underwriting on new loans. The Bank's asset quality ratios were also helped by the reversal of what had been an unfavorable trend over the past several years, i.e., a shrinking loan portfolio. 1998 saw the first year over year increase in the size of the loan portfolio in the past three years. The Bank's loan growth came principally from the Bank's indirect automobile lending program which was introduced in January 1998 and had grown to a portfolio of $24.6 million by years' end. As a result of its improved asset quality, the Company was able to recapture into income $500,000 of allowances for credit losses. Improving asset quality also led to the termination of the Memorandum of Understanding into which the Board of Directors had previously entered with federal and state banking regulators to address asset quality concerns, among other things. Although the Memorandum of Understanding did not materially restrict day-to-day operations, the mere existence of the Memorandum of Understanding meant that the Bank was not able to obtain the regulatory approvals required to expand its business. Since the Memorandum of Understanding was lifted, the Bank has been able to open an additional branch. Despite these favorable developments, net income was only up slightly from 1997. The Company's earnings performance continues to be undermined by a high level of non-interest expense. As in prior years, a significant portion of the Company's non-interest expense was attributable to longstanding litigation related to the activities of Mr. Brian Davis, a former Bank customer who is now in prison for defrauding the Bank and other financial institutions. The Company also incurred a significant amount of legal and professional expense in connection with the attempted takeover of the Company by First Mariner Bancorp ("First Mariner"). By years' end, however, the Bank had resolved virtually all of the Brian Davis related litigation and the Company had entered into an agreement pursuant to which with First Mariner will cease its attempts to acquire control of the Company. 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," "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 to advise readers 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. Comparison of Results of Operations For the Years Ended December 31, 1998, 1997 and 1996 General. For the year ended December 31, 1998, the Company reported consolidated net income of $833,192 ($0.78 basic and diluted earnings per share) compared to a consolidated net profit of $747,247 ($0.68 basic and diluted earnings per share) for the year ended December 31, 1997 and a consolidated net loss of $1,020,177 ($0.94 basic and diluted loss per share) for the year ended December 31, 1996. The increase in net income during the 1998 period was 19 principally attributable to the receipt of $1,126,077 in proceeds from insurance settlements during the year and the recapture into income of $500,000 in allowances for credit losses. These increases in income offset a decrease in net interest income and an increase in non-interest expense which included amounts paid in settlement of various litigation. Earnings per share for 1998 were favorably affected by a reduction in the number of shares outstanding after the Company repurchased 213,168 shares from First Mariner in November 1998. Weighted average shares outstanding for 1998 were 1,071,026 compared to 1,092,768 for 1997. The increase in net income during the 1997 period over the 1996 period was principally attributable to a reduction in the provision for credit losses to $270,000 from $6,596,000 in 1996. 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 them. 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. Consolidated net interest income for the year ended December 31, 1998 was $9,793,550 compared to $10,567,211 for the year ended December 31, 1997 and $10,884,253 for the year ended December 31, 1996. The decrease in net interest income for the most recent year was primarily attributable to a significant decline in interest income which fell $1,587,696 (9.1%) for the year ended December 31, 1998. The decline in interest income was attributable primarily to a reduced average volume of earning assets and secondarily to a declining yield on assets. The most significant reductions in earning assets involved the investment securities portfolio. The Company has used the proceeds from maturing and called investment securities to cover deposit outflows. The Company also experienced a 66 basis point decline in the yield on the investment securities portfolio as the Company has shifted its investment securities portfolio into repricable GNMA securities from state, county and municipals. Interest expense declined $814,035, or 11.8%, for the year ended December 31, 1998. For the past several years, the Company's earnings performance has been impacted by a decline in earning assets and declining net interest margin. Net interest margin for the year ended December 31, 1998 was 4.94% compared to 5.09% for the year ended December 31, 1997. The Company expects additional pressure on its net interest margin as the result of its repurchase of 213,168 shares of its common stock in late 1998. Due to the repurchase, the Company will be required to fund a greater portion of its interest-earning assets with interest-bearing liabilities rather than equity. Consolidated net interest income decreased by $317,032 (2.91%) to $10,567,211 in 1997 from $10,884,243 in 1996. The decrease in net interest income in 1997 was primarily due to lower interest income attributable to continued run-off of the loan portfolio. Interest expense declined $852,315, or 10.98%, for the year ended December 31, 1997. The decrease in interest expense was attributable to deposit outflows in 1997. Net interest margin for the year ended December 31, 1997 was 5.09% compared to 5.04% for the year ended December 31, 1996. The increase in the net interest margin for fiscal 1997 was primarily due to the loss of accrued interest on loans charged off during fiscal 1996. 20 The following table allocates changes in income and expense attributable to the Bank'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, ------------------------------------------------------------------------------- 1998 vs. 1997 1997 vs. 1996 ------------------------------------ ---------------------------------------- Change Due to: Change Due to: Increase/ -------------------- Increase/ -------------------- Decrease Rate Volume Decrease Rate Volume -------- ---- ------ -------- ---- ------ (In thousands) Assets Interest-earning assets: Federal funds sold..................... $ (40) $ 30 $ (70) $ 41 $ 12 $ 29 ---------- -------- -------- -------- -------- --------- Interest-bearing deposits.............. 204 (7) 211 19 13 6 --------- --------- ------- -------- -------- --------- Investment securities: U.S. Treasury securities and obligations of U.S. government agencies........................... (911) (361) (550) 1,545 (74) 1,619 Obligations of states and political subdivisions(1)........ (1,177) 31 (1,208) (804) 4 (808) All other investment securities...... 191 (20) 211 9 (1) 10 --------- --------- ------- -------- -------- --------- Total investment securities....... (1,897) (350) (1,547) 750 (71) 821 ---------- -------- ------- -------- -------- --------- Loans, net of unearned income: Demand, time and lease .............. (509) 11 (520) (684) 89 (773) Mortgage and construction............ (360) (122) (238) (1,181) 86 (1,267) Installment and credit card.......... 609 (32) 641 (370) 47 (417) --------- --------- ------- -------- -------- --------- Total gross loans(2).............. (260) (143) (117) (2,235) 222 (2,457) --------- --------- -------- -------- -------- --------- Allowance for credit losses.......... -- -- -- -- -- -- --------- -------- ------- -------- -------- --------- Total net loans................... (260) (260) -- (2,235) 222 (2,457) ---------- --------- ------- -------- -------- --------- Total interest-earning assets............. $ (1,993) $ (470) $(1,523) $ (1,110) $ 23 $ (1,133) ========== ========= ======== ======== ======== ========= Liabilities Interest-bearing deposits: Savings and NOW........................ $ (248) $ (86) $ (162) $ (379) $ (286) $ (93) Money market........................... (76) (5) (71) (196) (50) (146) Other time deposits.................... (468) (12) (456) (296) (153) (143) ---------- --------- -------- -------- -------- --------- Total interest-bearing deposits... (792) (103) (689) (871) (490) (381) Non-interest-bearing deposits............. -- -- -- -- -- -- Borrowed funds............................ (21) 3 (24) 18 7 11 --------- -------- -------- -------- -------- --------- Total interest-bearing liabilities........ $ (813) $ (100) $ (713) $ (853) $ (483) $ (370) ========== ========= ======== ======== ======== =========
- --------------- (1) Tax equivalent basis. (2) Non-accrual loans included in average balances. 21 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, --------------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------------- -------------------------- --------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in thousands) Assets: Interest-earning assets: Federal funds sold................ $ 4,414 $ 262 5.94% $ 5,755 $ 302 5.25% $ 5,185 $ 261 5.03% Interest-bearing deposits......... 5,433 277 5.10 1,397 73 5.23 1,267 54 4.26 --------- --------- ------ --------- --------- ---- --------- ------ ---- Investment securities: U.S. Treasury securities and obligations of U.S. government agencies..................... 68,921 4,303 6.24 77,045 5,214 6.77 53,454 3,669 6.86 Obligations of States and political subdivisions(1)... 3,550 326 9.18 18,114 1,503 8.30 27,875 2,307 8.28 All other investment securities 3,789 254 6.70 871 63 7.23 737 54 7.33 --------- --------- ------ --------- --------- ---- --------- ----- ---- Total investment securities. 76,260 4,883 6.40 96,030 6,780 7.06 82,066 6,030 7.35 --------- --------- ------ --------- --------- ---- ---------- ----- ---- Loans, net of unearned income Demand, time and lease............ 7,909 751 9.50 13,459 1,260 9.36 22,343 1,944 8.70 Mortgage and construction......... 81,212 7,325 9.02 83,805 7,685 9.17 97,777 8,886 9.07 Installment and credit card....... 29,251 2,517 8.60 21,897 1,908 8.71 26,802 2,278 8.50 --------- --------- ----- --------- --------- ---- --------- ----- ---- Total gross loans(2)........ 118,372 10,593 8.95 119,161 10,853 9.11 146,922 13,088 8.91 Allowance for credit losses.................... 3,668 4,460 3,835 --------- --------- --------- Total net loans............. 114,704 10,593 9.24 114,701 10,853 9.46 143,087 13,088 9.15 --------- --------- ------ --------- --------- ---- --------- ------ ---- Total interest-earning assets.................... 200,811 16,015 7.98 217,883 18,008 8.26 231,605 19,433 8.39 --------- ------ --------- ---- ------ ---- Cash and due from banks.............. 3,540 7,125 7,936 Other assets......................... 14,073 11,170 7,318 --------- --------- --------- Total assets................ $ 218,424 $ 236,178 $ 246,859 ========= ========= ========= Liabilities and Stockholders' Equity: Interest-bearing deposits: Savings and NOW.................... $ 61,752 $ 1,448 2.34% $ 68,269 $ 1,696 2.48% $ 71,455 $ 2,075 2.90% Money market....................... 19,575 546 2.79 22,116 622 2.81 26,911 818 3.04 Other time deposits................ 72,834 4,055 5.57 81,006 4,523 5.58 83,486 4,819 5.77 --------- --------- ------ --------- --------- ---- --------- ------- ---- Total interest-bearing deposits.................. 154,161 6,049 3.92 171,391 6,841 3.99 181,852 7,712 4.24 Borrowed funds....................... 811 47 5.80 1,261 68 5.39 1,029 50 4.86 --------- --------- ----- --------- --------- ---- --------- ------- ---- Total interest-bearing liabilities............... 154,972 6,096 3.93 172,652 6,909 4.00 182,881 7,762 4.24 --------- --------- --------- ------- Non-interest-bearing deposits........ 42,095 43,543 44,570 Other liabilities.................... 3,014 1,056 110 Stockholders' equity................. 18,343 18,927 19,298 --------- --------- --------- Total liabilities and equity......... $ 218,424 $ 236,178 $ 246,859 ========= ========= ========= Net interest income.................. $ 9,919 $ 11,099 $ 11,671 ========= ========= ========= Net interest spread.................. 4.04% 4.26% 4.15% ======= ==== ==== Net interest margin.................. 4.94% 5.09% 5.04% ======= ==== ====
(1) Tax equivalent basis. The incremental tax rate applied was 38.62% for 1998, 37.42% for 1997 and 37.04% for 1996. (2) Non-accrual loans included in average balance. Provision for Credit Losses. During the year ended December 31, 1998, the Company had a provision for credit losses of $(500,000) due to the recapture of loss allowances during the third quarter compared to $270,000 and $6,596,000 in provisions during the years ended December 31, 1997 and 1996, respectively. The recapture of loss reserves reflects improved asset quality and lower charge-off activity during 1998. At December 31, 1998, the allowance for loan losses equaled 179.5% of non-accrual and past due loans compared to 118.7% and 109.2% at 22 December 31, 1997 and 1996, respectively. During the year ended December 31, 1998, the Company recorded net charge-offs of $798,336 compared to $1,191,196 and $5,233,679 in net charge-offs during the years ended December 31, 1997 and 1996. The higher provisions during fiscal years 1997 and 1996 reflect the amount determined by the Company to be necessary to maintain the allowance for credit losses to an adequate level after significant increases in loan charge-offs during these years. Other Income. Other income increased $1,394,555 (81%) during the year ended December 31, 1998 compared to the prior year period. The bulk of the increase in other income was attributable to $1,126,077 in proceeds from insurance settlements received during the year. Included in this figure was $1,125,000 received from the Bank's fidelity bond company in settlement of claims related to the activities of a former employee. The Company does not anticipate similar income during 1999. Other income during 1998 also benefitted from a $256,000, or 95%, increase in gains on sales and calls of investment securities. Other income for 1997 was lower than that recorded in 1996 because of $560,000 in insurance settlements received in 1996. The absence of such income during 1997 resulted in lower other income for the year notwithstanding improved income from other fees and commissions and higher gains on the sale of investment securities during 1997. In order to improve its interest rate sensitivity for fiscal 1998, the Bank sold $16.0 million in long-term, fixed-rate state, county and municipal securities which had been classified as available-for-sale and invested the proceeds in adjustable-rate, mortgage-backed securities issued by the Government National Mortgage Association ("GNMA"). Other Expenses. Other expenses increased by $183,418 or 1.6% for the year ended December 31, 1998. Included in other expenses for 1998 were $1,225,003 in litigation charges, a $228,842, or 23%, increase over 1997. These charges related to the settlement of claims against the Bank in connection with payment of checks over fraudulent endorsements. Also included in other expenses are $2,163,448 in professional service fees relating primarily to the litigation in which the Company was involved during the year. With the settlement of most of the major litigation, the Company hopes to reduce these expenses in 1999. For the year ended December 1997, other expense increased by $2,573,983, or 28.5%, primarily due to $996,161 in litigation and restructuring charges including a $284,000 accrual for a judgment rendered against the Bank in the third quarter of 1997 and a $700,000 expense incurred in connection with the settlement of certain litigation during the second quarter. In addition, the Company experienced increases in other expenses due to professional fees incurred in connection with other litigation in which the Company was involved. Income Taxes. During the year ended December 31, 1998, the Company recorded an income tax expense of $806,247 compared to tax benefits of $315,284 and $1,480,192 during the years ended December 31, 1997 and 1996. Due primarily to its holdings of tax-exempt state, county and municipal securities, the Company recorded tax losses during the 1997 and 1996 years. These net operating losses were applied to prior years' earnings resulting in tax benefits in each of the periods. During 1998, however, the Company reduced its holdings of tax-exempt state, county and municipal securities and reinvested the proceeds in U.S. Government agency securities the income on which is not exempt from federal taxation. Accordingly, the Company had taxable income during 1998 and was required to provide for federal income taxes. The Company's income tax expense for 1998 also included $351,738 in disallowed claims for refunds of prior years' state taxes. The Company does not anticipate similar tax expense during 1999 and accordingly expects a reduction in its effective tax rate. Comparison of Financial Condition at December 31, 1998, 1997 and 1996 The Company's total assets declined to $217,571,063 at December 31, 1998 after declining to $231,899,594 at December 31, 1997 from $254,324,701 at December 31, 1996. The reduction in assets during the year ended December 31, 1998 reflects a decline in the investment securities portfolio as the Company used the proceeds from maturing and called securities to fund deposit withdrawals. The reduction in assets during the year ended December 31, 1997 reflects a decline in the loan portfolio to $111,545,262 at December 31, 1997, net of allowances and unearned income, from $124,672,414 at December 31, 1996. During 1998, the Company's loan portfolio grew to $125,501,252 at December 31, 1998 compared to $111,545,262 at December 31, 1997 and $124,672,414 at December 31, 1996. The growth in the loan portfolio was 23 attributable almost entirely to the Bank's indirect automobile lending program which was introduced in January 1998 and grew to $24,630,402, net of dealer reserves at December 31, 1998. The Bank's other loan portfolios held steady or declined during the year. The decline in the loan portfolio during 1997 was largely due to a decrease in commercial and industrial loans during the period. Commercial mortgage loans increased during the period while residential mortgages decreased slightly and lease financing and installment loans also decreased. The Company's total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $65,485,827 at December 31, 1998, a $16,371,844 or 20.0%, decrease from $81,857,671 at December 31, 1997. The Company used the proceeds from maturing and called securities to fund deposit outflows during the period. During fiscal year 1997, the total investment securities portfolio declined by $14,716,000, or 15.2%, from $96,574,000 at December 31, 1996. Deposits as of December 31, 1998 totaled $199,611,115, a decrease of $7,499,157 (3.6%) for the year. Demand deposits as of December 31, 1998 totaled $45,360,776, a $2,290,599 (4.8%) decrease from $47,651,375 at December 31, 1997. NOW accounts as of December 31, 1998 remained basically the same at $20,600,751. Money market accounts increased by $172,752 (0.9%) for the year to total $20,049,677 on December 31, 1998. Savings deposits decreased by $2,287,000, or 5.3%. Meanwhile, time deposits over $100,000 totaled $8,104,000 on December 31, 1998, an increase of $640,000 (8.6%) from December 31, 1997. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $64,413,000 on December 31, 1998, a $4,061,000 (5.9%) decrease from December 31, 1997. The Company experienced a $4,795,917, or 25.3% decrease in total stockholders' equity for the year ended December 31, 1998. The decrease in stockholders' equity was attributable to the repurchase of 213,168 shares of common stock from First Mariner Bancorp for an aggregate purchase price of $5,580,764 in November 1998. The Company experienced a $378,220, or 2%, increase in total stockholders' equity during the year ended December 31, 1997 as net income during the period offset a decline in net unrealized appreciation on securities available for sale resulting from the disposition of certain available-for-sale securities. Surplus steadily increased, rising $382,153 (6.2%) during 1997 to $6,575,053. The increase in the surplus account was primarily a result of the reinvestment of dividends pursuant to the Dividend Reinvestment Plan and the payment of three one-percent stock dividends in lieu of cash dividends during the year ended December 31, 1997. Asset/Liability Management Net interest income, the primary component of the Company's net income, arises from the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative amounts of such assets and liabilities. The Company manages its assets and liabilities by coordinating the levels of and gap between interest-rate sensitive assets and liabilities to minimize changes in net interest income and in the economic value of its equity despite changes in market interest rates. The Bank's Asset/Liability and Risk Management Committee meets on a monthly basis to monitor compliance with the Board's objectives. Among other tools used by the Asset/Liability and Risk Management Committee to monitor interest rate risk is a "gap" report which measures the dollar difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing within a given time period. Generally, during a period of rising interest rates, a negative gap position would adversely affect net interest income, while a positive gap would result in an increase in net interest income, while, conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. During recent periods, the Company has maintained a negative gap position that has benefitted earnings as interest rates have fallen. In order to reduce its negative gap position, the Company has recently begun investing in mortgage-backed and other government securities which have rates that adjust to market rates. The Company also maintains a significant portfolio of available-for-sale securities that can be quickly converted to more liquid assets if needed. 24 The following table sets forth the Bank's interest-rate sensitivity at December 31, 1998.
Over 1 Over 3 to through Over 0-3 Months 12 Months 5 Years 5 Years Total ---------- --------- ------- ------- ----- Assets: Cash and due from banks.......... $ -- $ -- $ -- $ -- $ 8,197,344 Federal funds and overnight deposits...................... 7,821,972 -- -- -- 7,821,972 Securities....................... 7,157,580 21,774,571 17,596,334 18,957,342 65,485,827 Loans............................ 14,492,818 11,394,170 50,909,847 51,545,477 128,342,312 Fixed assets..................... -- -- -- -- 4,420,382 Other assets..................... -- -- -- -- 3,303,226 ------------- -------------- ------------ ------------- ------------ Total assets.................. $ 29,472,370 $ 33,168,741 $ 68,506,181 $ 70,502,819 $217,571,063 ============= ============== ============ ============= ============ Liabilities: Demand deposit accounts.......... $ -- $ -- $ -- $ -- $ 45,360,776 NOW accounts..................... 20,600,751 -- -- -- 20,600,751 Money market deposit accounts.... 20,049,677 -- -- -- 20,049,677 Savings accounts................. 40,965,942 -- -- -- 40,965,942 IRA accounts..................... 4,467,347 4,883,920 11,605,455 - 20,956,722 Certificates of deposit.......... 11,642,778 21,812,481 16,818,071 1,403,917 51,677,247 Other liabilities................ -- -- -- -- 3,791,275 Stockholders' equity.......... -- -- -- -- 14,168,673 ------------- -------------- ------------ ------------- ------------ Total liabilities and stockholders' equity........ $ 97,726,495 $ 26,696,401 $ 28,423,526 $ 1,403,917 $217,571,063 ============= ============== ============ ============= ============ GAP................................. $ (68,254,125) $ 6,472,340 $ 40,082,655 $ 69,098,902 Cumulative GAP...................... (68,254,125) (61,781,785) (21,699,130) 47,399,772 Cumulative GAP as a % of total assets...................... (31.4)% (28.4)% (10.0)% 21.8%
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 within three months although it is the Company's experience that such accounts may be less sensitive to changes in market rates. 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 a primary source of funds supporting the Bank's lending and investment activities. 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 25 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, 1998, totaled $16,019,316, an decrease of $12,517,295 (43.9%) from the December 31, 1997 total of $28,536,611. Most of this decrease was in Federal funds sold which totaled $2,863,635 at December 31, 1998 compared to $18,850,000 at the end of 1997. The larger balance in Federal funds sold at the end of 1997 reflects a decision to increase liquid assets in order to fund January securities purchase commitments. The Bank may draw on a $26,000,000 line of credit from the Federal Home Loan Bank of Atlanta. Borrowings under the line are secured by a lien on the Bank's residential mortgage loans. As of December 31, 1998, $1.0 million was outstanding under this line. In addition the Bank has a secured line of credit in the amount of $5.0 million from another commercial bank. Year 2000 Readiness Disclosure As the year 2000 approaches, an important business issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. For many years, software applications routinely conserved magnetic storage space by using only two digits to record calendar years; for example, the year 1999 is stored as "99". On January 1, 2000, the calendars in many software applications will change from "99" to "00". Many of these software applications, in their current form, will produce erroneous results or will fail to run at all since their logic cannot deal with this transaction. The Company's Year 2000 plan calls for the identification of all systems that could be affected by Year 2000 problem, the systematic assessment of their Year 2000 readiness and the institution of appropriate remedial measures and contingency planning. As part of its Year 2000 plan, the Company has ranked its various computer systems according to their importance to the continued functioning of the Bank. Assessment procedures range from actual testing for the Company's most mission critical systems to seeking written self assessments from individual borrowers. Based on these assessments, the Company has instituted appropriate remedial measures which include software upgrades and the replacement of vendors and hardware where necessary. The Company's Year 2000 plan includes contingency and back-up plans for mission critical systems. The Company's mainframe computer hardware and systems software are Year 2000 compliant. The Company primarily utilizes third-party vendor application software for all computer applications. The third-party vendors for the Company's banking applications are in the process of modifying, upgrading or replacing their computer applications to insure Year 2000 compliance. In addition, the Company has instituted a Year 2000 compliance program whereby the Company is reviewing the Year 2000 compliance issues that may be faced by its third-party vendors. Under such program, the Company will examine the need for modifications or replacement of all non-Year 2000 compliant pieces of software. The Company has spent approximately $400,000 in 1997 and 1998 to upgrade certain hardware and software and believes the cost of its Year 2000 compliance program will not be material to its financial condition. The Company believes it is in substantial compliance with its Year 2000 plan at year end 1998. In the event of unforseen disruptions with Year 2000 compliance, the Company business operations could be adversely affected. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The Company's Consolidated Financial Statements appear in this Annual Report on Form 10-K beginning on the page immediately following Item 14 hereof. 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------------------------------------------------------------------------ Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ For information concerning the Board of Directors and executive officers of the Company, the information contained under the section captioned "Proposal I -- Election of Directors" in the Company's definitive proxy statement for the Company's 1999 Annual Meeting of Stockholders (the "Proxy Statement") which was filed with the Commission on February 10, 1999 and is incorporated herein by reference. Item 11. Executive Compensation The information contained under the sections captioned "Director Compensation" and "Executive Compensation and Other Benefits" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Principal Holders Thereof" in the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the sections captioned "Securities Ownership of Management" in the Proxy Statement. (c) Changes in Control Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Certain Transactions" in the Proxy Statement. In addition, during 1998, the Company paid $83,000 to Young-Harris, Inc., a company controlled by Senior Vice President John I. Young for consulting services. 27 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) List of Documents Filed as Part of this Report (1) Financial Statements. The following is a list of the consolidated financial statements which are being filed as part of this Annual Report on Form 10-K.
Page ---- Independent Auditors' Report F-1 Consolidated Balance Sheets as of December 31, 1998, 1997 and 1996 F-3 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 F-4 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-7 Notes to Consolidated Financial Statements F-9
(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. (3) Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-K and is also the Exhibit Index. No. Description --- ----------- 3.1 Articles of Incorporation, as Amended 3.2 By-Laws 4.1 Rights Agreement, dated as of February 13, 1998, between Glen Burnie Bancorp and The Bank of Glen Burnie, as Rights Agent ** 10.1 Glen Burnie Bancorp Stockholder Purchase Plan *** 10.2 Glen Burnie Bancorp Dividend Reinvestment and Stock Purchase Plan *** 10.3 + Glen Burnie Bancorp Director Stock Purchase Plan *** 10.4 The Bank of Glen Burnie Employee Stock Purchase Plan *** 10.5 The Bank of Glen Burnie Pension Plan *** 10.6 + Employment Agreement with Michael P. Gavin **** 10.7 + Change-in-Control Severance Plan **** 21 Subsidiaries of the registrant *** 23 Consent of Trice & Geary LLC 27 Financial Data Schedule - --------------- + Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. * Incorporated herein by reference to similarly numbered exhibit to Registrant's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995. ** Incorporated by reference herein by reference from Exhibit 4 to Registrant's Current Report on Form 8-K filed March 2, 1998. *** Incorporated herein by reference from the similarly numbered exhibit to Registrant's Registration Statement on Form S-1 (Commission File No. 333-37073). **** Incorporated by reference to the similarly numbered exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 28 (b) Reports on Form 8-K. On November 24, 1998, the Company filed a current report on Form 8-K reporting under Item 5 that the Company had repurchased 213,169 shares of its common stock pursuant to a Stock Redemption Agreement dated November 17, 1998, between First Mariner Bancorp and the Company. No financial statements were filed with this report. (c) Exhibits. The exhibits required by Item 601 of Regulation S-K are either filed as part of this Annual Report on Form 10-K or incorporated by reference herein. (d) Financial Statements and Schedules Excluded from Annual Report. There are no other financial statements and financial statement schedules which were excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b)(1) which are required to be included herein. 29 INDEPENDENT AUDITORS' REPORT The 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, 1998, 1997, and 1996, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes 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, 1998, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Trice & Geary LLC - -------------------------- Trice & Geary LLC Salisbury, Maryland January 22, 1999 F-1 Glen Burnie Bancorp and Subsidiaries Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------- December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 8,197,344 $ 8,127,732 $ 10,665,680 Interest bearing deposits in other financial institutions 4,958,337 1,558,879 1,836,981 Federal funds sold 2,863,635 18,850,000 10,175,000 ------------ ------------ ------------ Cash and cash equivalents 16,019,316 28,536,611 22,677,661 Investment securities available for sale, at fair value 32,924,539 40,678,867 54,906,836 Investment securities held to maturity (fair value 1998 $32,539,731; 1997 $41,566,019; 1996 $41,998,402) 32,561,288 41,178,804 41,667,057 Ground rents, at cost 257,025 262,525 267,974 Loans, less allowance for credit losses 1998 $2,841,060; 1997 $4,139,396; 1996 $5,060,592 125,501,252 111,545,262 124,672,414 Premises and equipment, at cost, less accumulated depreciation 4,420,382 4,319,423 4,154,465 Accrued interest receivable 1,401,660 1,556,971 1,937,928 Prepaid income taxes -- 636,318 1,055,974 Deferred income tax benefits 892,912 1,385,395 1,380,966 Other real estate owned 1,099,326 748,231 602,285 Other assets 2,493,363 1,051,187 1,001,141 ------------ ------------ ------------ Total assets $217,571,063 $231,899,594 $254,324,701 ============ ============ ============ Liabilities and Stockholders' Equity Liabilities: Deposits Noninterest-bearing demand $ 45,360,776 $ 47,651,375 $ 49,412,930 Interest-bearing 154,250,339 159,458,897 183,333,045 ------------ ------------ ------------ Total deposits 199,611,115 207,110,272 232,745,975 Short-term borrowings 1,143,904 889,398 547,937 Dividends payable 123,039 81,146 44,193 Accrued interest payable on deposits 160,597 177,922 214,977 Other liabilities 2,363,735 4,676,266 2,185,249 ------------ ------------ ------------ Total liabilities 203,402,390 212,935,004 235,738,331 ------------ ------------ ------------ Commitments and contingencies Stockholders' equity: Common stock, par value $10, authorized 5,000,000 shares; issued and outstanding 1998 894,938 shares; 1997 1,092,768 shares; 1996 883,858 shares 8,949,388 10,927,688 8,838,588 Surplus 3,373,591 6,575,053 6,192,900 Retained earnings 1,563,336 1,236,917 3,290,077 Accumulated other comprehensive income 282,358 224,932 264,805 ------------ ------------ ------------ Total stockholders' equity 14,168,673 18,964,590 18,586,370 ------------ ------------ ------------ Total liabilities and stockholders' equity $217,571,063 $231,899,594 $254,324,701 ============ ============ ============
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, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Interest income on Loans, including fees $10,590,864 $10,845,819 $13,081,364 U.S. Treasury securities 461,808 662,237 822,215 U.S. Government agency securities 4,024,712 4,551,441 2,846,357 State and municipal securities 202,052 978,892 1,517,827 Federal funds sold 261,880 301,614 261,423 Other 347,525 136,534 116,708 ----------- ----------- ----------- Total interest income 15,888,841 17,476,537 18,645,894 ----------- ----------- ----------- Interest expense on Deposits 6,048,828 6,840,952 7,711,989 Short-term borrowings 46,463 68,374 49,652 ----------- ----------- ----------- Total interest expense 6,095,291 6,909,326 7,761,641 ----------- ----------- ----------- Net interest income 9,793,550 10,567,211 10,884,253 Provision for credit losses (500,000) 270,000 6,596,000 ----------- ----------- ----------- Net interest income after provision for credit losses 10,293,550 10,297,211 4,288,253 ----------- ----------- ----------- Other income Service charges on deposit accounts 908,733 945,613 1,042,355 Other fees and commissions 560,239 511,292 483,537 Gains on investment securities 527,320 270,909 144,565 Proceeds from insurance settlements 1,126,077 -- 560,000 ----------- ----------- ----------- Total other income 3,122,369 1,727,814 2,230,457 ----------- ----------- ----------- Other expenses Salaries and wages 3,742,152 3,712,206 3,346,927 Employee benefits 1,309,591 1,547,888 1,288,037 Occupancy 502,216 482,160 528,528 Furniture and equipment 884,599 781,664 739,115 Litigation charges 1,225,003 996,161 -- Other expenses 4,112,919 4,072,983 3,116,472 ----------- ----------- ----------- Total other expenses 11,776,480 11,593,062 9,019,079 ----------- ----------- ----------- Income (loss) before income taxes 1,639,439 431,963 (2,500,369) Federal and state income tax expense (benefits) 806,247 (315,284) (1,480,192) ----------- ----------- ----------- Net income (loss) $ 833,192 $ 747,247 $(1,020,177) =========== =========== =========== Basic and diluted earnings (loss) per share of common stock $ 0.78 $ 0.68 $ (0.94) =========== =========== ===========
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, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Net income (loss) $ 833,192 $ 747,247 $(1,020,177) ----------- ----------- ----------- Other comprehensive income (loss), net of tax Reclassification relating to adoption of SFAS No. 133 at October 1, 1998 270,038 -- -- Unrealized holding gains (losses) arising during the period (net of deferred tax 1998 $6,043; 1997 $64,325; 1996 $246,951) (9,644) 102,320 (392,818) Reclassification adjustment for gains included in net income (net of deferred tax 1998 $127,598; 1997 $89,391; 1996 $55,079) (202,968) (142,193) (87,613) ----------- ----------- ----------- Total other comprehensive income (loss) 57,426 (39,873) (480,431) ----------- ----------- ----------- Comprehensive income (loss) $ 890,618 $ 707,374 $(1,500,608) =========== =========== ===========
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, 1998, 1997, and 1996
Accumulated Other Total Common Stock Retained Comprehensive Stockholders' Shares Par Value Surplus Earnings Income Equity ------ --------- ------- -------- ------------- ------------- Balances, December 31, 1995 $ 872,838 $ 8,728,383 $ 5,917,043 $ 5,146,724 $ 745,236 $20,537,386 Net loss -- -- -- (1,020,177) -- (1,020,177) Shares issued under employee and director stock purchase plans 200 2,000 3,384 -- -- 5,384 Cash dividends, $.77 per share -- -- -- (836,470) -- (836,470) Dividends reinvested 10,820 108,205 272,473 -- -- 380,678 Other comprehensive loss, net of tax -- -- -- -- (480,431) (480,431) ----------- ----------- ----------- ----------- ------------ ----------- Balances, December 31, 1996 883,858 8,838,588 6,192,900 3,290,077 264,805 18,586,370 Net income -- -- -- 747,247 -- 747,247 Shares issued with stock dividends 26,782 267,820 382,153 (649,973) -- -- Stock split effected in form of 20% stock dividend 182,128 1,821,280 -- (1,821,280) -- -- Cash dividends, $.30 per share -- -- -- (329,154) -- (329,154) Other comprehensive loss, net of tax -- -- -- -- (39,873) (39,873) ----------- ----------- ----------- ----------- ------------ ----------- Balances, December 31, 1997 1,092,768 10,927,688 6,575,053 1,236,917 224,932 18,964,590 Net income -- -- -- 833,192 -- 833,192 Shares issued under employee stock purchase plan 935 9,350 10,519 -- -- 19,869 Shares issued under stockholder stock purchase plan 7,388 73,880 119,131 -- -- 193,011 Shares repurchased and retired (213,168) (2,131,680) (3,449,084) -- -- (5,580,764) Cash dividends, $.50 per share -- -- -- (506,773) -- (506,773) Dividends reinvested under dividend reinvestment plan 7,015 70,150 96,365 -- -- 166,515 Vested stock options -- -- 21,607 -- -- 21,607 Other comprehensive income, net of tax -- -- -- -- 57,426 57,426 ----------- ----------- ----------- ----------- ------------ ----------- Balances, December 31, 1998 $ 894,938 $ 8,949,388 $ 3,373,591 $ 1,563,336 $ 282,358 $14,168,673 =========== =========== =========== =========== ============ ===========
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, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income (loss) $ 833,192 $ 747,247 $ (1,020,177) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, amortization, and accretion 953,579 664,428 606,650 Compensation expense from vested stock options 21,607 -- -- Provision for credit losses (500,000) 270,000 6,596,000 Losses on real estate owned 6,000 64,214 13,192 Deferred income taxes (benefits) 456,350 20,659 (814,821) Gains on disposals of assets, net (478,839) (241,183) (144,318) Changes in assets and liabilities: Decrease in accrued interest receivable 155,311 380,957 216,671 (Increase) decrease in prepaid income taxes and other assets (732,269) 251,382 2,108,195 Decrease in accrued interest payable (17,325) (37,055) (14,738) Increase (decrease) in other liabilities 1,209,969 (1,031,483) (115,693) ------------ ------------ ------------ Net cash provided by operating activities 1,907,575 1,089,166 7,430,961 ------------ ------------ ------------ Cash flows from investing activities: Maturities of held to maturity mortgage-backed securities 674,870 -- -- Maturities of other held to maturity investment securities 20,485,350 23,405,000 4,984,661 Maturities of available for sale mortgage-backed securities 6,749,884 1,780,092 451,504 Maturities of other available for sale investment securities 1,525,000 7,785,900 8,557,219 Sales of debt securities 25,899,152 19,095,130 10,802,522 Purchases of held to maturity investment securities (27,992,219) (16,314,976) (40,650,194) Purchases of held to maturity mortgage-backed securities (9,521,417) -- -- Purchases of available for sale mortgage-backed securities -- (16,126,491) -- Purchases of other available for sale investment securities (4,527,891) (1,188,100) (6,711,564) (Increase) decrease in loans, net (13,453,506) 17,457,529 19,203,353 Purchases of loans from other financial institutions -- (4,779,164) -- Proceeds from sales of other real estate -- 420,577 -- Purchases of other real estate (359,579) (451,950) (182,551) Purchases of premises and equipment and computer software (993,614) (727,320) (449,275) ------------ ------------ ------------ Net cash provided (used) by investing activities (1,513,970) 30,356,227 (3,994,325) ------------ ------------ ------------ Cash flows from financing activities: Increase (decrease) in noninterest-bearing deposits, NOW accounts, money market accounts, and savings accounts, net (4,194,857) (15,436,924) 4,817,350 Increase (decrease) in time deposits, net (3,304,300) (10,198,779) 6,807,862 Increase (decrease) in short-term borrowings 254,506 341,461 (1,209,785) Cash dividends paid (464,880) (292,201) (1,010,485) Common stock dividends reinvested 166,515 -- 380,678 Repurchase and retirement of common stock (5,580,764) -- -- Issuance of common stock 212,880 -- 5,384 ------------ ------------ ------------ Net cash provided (used) by financing activities (12,910,900) (25,586,443) 9,791,004 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents (12,517,295) 5,858,950 13,227,640 Cash and cash equivalents, beginning of year 28,536,611 22,677,661 9,450,021 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 16,019,316 $ 28,536,611 $22,677,661 ============ ============ ===========
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, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Supplementary Cash Flow Information: Interest paid $ 6,112,616 $ 6,946,381 $ 7,776,379 Income taxes refunded -- (755,597) (1,718,184) Total increase (decrease) in unrealized appreciation (depreciation) on securities available for sale 93,559 (64,961) (782,715)
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 policies of the Bank conform to generally accepted accounting principles 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 (the Company) 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 21) of the Company account for the subsidiaries using the equity method of accounting. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles 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 and equity 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. 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. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 1. Summary of Significant Accounting Policies (continued) 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. 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 collectibility of the principal is unlikely. The allowance, based on evaluations of the collectibility 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, and current economic conditions and trends that may affect the borrower's ability to pay. While management believes it has established the allowance for credit losses in accordance with generally accepted accounting principles and has taken into account the views of its regulators and the current economic environment, there can be no assurance that in the future the Bank's regulators or its economic environment will not require further increases in the allowance. 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 expenses. Loans converted to OREO through foreclosure proceedings totaled $359,579, $610,557, and $182,551 for the years ended December 31, 1998, 1997, and 1996, respectively. Sales of OREO that were financed by the Bank totaled $178,787 for 1997. No sales of OREO were financed by the Bank for 1998 or 1996. 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 which 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. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 1. Summary of Significant Accounting Policies (continued) Intangible Assets: Cost incurred related to goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at dates of acquisition and is being amortized on the straight-line method over 10 years. The net book value of goodwill was approximately $368,000, $422,000, and $477,000 at December 31, 1998, 1997, and 1996, respectively. 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. 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 assets relate principally to the allowance for credit losses, unearned income on loans, other real estate owned, accrued compensation benefits, unused deductible expense, operating loss, and tax credit carryovers. Temporary differences which give rise to deferred tax liabilities relate principally to accumulated depreciation, accretion of discount on investment securities, and prepaid pension expense. Credit Risk: The Bank has deposits in other financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. The Bank had deposits and Federal funds sold of approximately $11,480,000 with one financial institution as of December 31, 1998. 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. Earnings (loss) per share: In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share which changed the earnings per share disclosure from primary and fully diluted per share amounts to basic and diluted earnings per share. Basic earnings per common share are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share is 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. In loss periods, dilutive common equivalent shares are excluded since the effect would be antidilutive. Earnings (loss) per share disclosures for 1996 were restated to conform to these new calculation methods. Financial Statement Presentation: Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 2. Restrictions on Cash and Due from Banks The Federal Reserve Board requires the Bank to maintain noninterest-bearing cash reserves against certain categories of average deposit liabilities. Such reserves averaged approximately $2,094,000, $2,464,000 and $2,200,000 during the years ended December 31, 1998, 1997 and 1996, respectively. Note 3. Investment Securities Investment securities are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1998 Cost Gains Losses Value ----------------- ----------- ----------- ----------- ----------- Available for sale U.S. Treasury $ 2,584,565 $ 129,844 $ -- $ 2,714,409 U.S. Government agency 16,430,674 249,927 8,340 16,672,261 Mortgage-backed 12,512,882 90,225 1,638 12,601,469 ----------- ----------- ----------- ----------- 31,528,121 469,996 9,978 31,988,139 Federal Home Loan Bank stock 936,400 -- -- 936,400 ----------- ----------- ----------- ----------- $32,464,521 $ 469,996 $ 9,978 $32,924,539 =========== =========== =========== =========== Held to maturity U.S. Treasury $ 2,497,627 $ 54,164 $ -- $ 2,551,791 U.S. Government agency 15,486,672 41,176 92,043 15,435,805 Mortgage-backed 14,576,989 19,248 44,102 14,552,135 ----------- ----------- ----------- ----------- $32,561,288 $ 114,588 $ 136,145 $32,539,731 =========== =========== =========== =========== Gross Gross Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains Losses Value ----------------- ----------- ----------- ----------- ----------- Available for sale U.S. Treasury $ 4,081,080 $ 58,197 $ 1,183 $ 4,138,094 U.S. Government agency 12,141,760 66,145 42,385 12,165,520 State and municipal 6,959,106 311,471 2,251 7,268,326 Mortgage-backed 16,194,063 26,140 49,676 16,170,527 ----------- ----------- ----------- ----------- 39,376,009 461,953 95,495 39,742,467 Federal Home Loan Bank stock 936,400 -- -- 936,400 ----------- ----------- ----------- ----------- $40,312,409 $ 461,953 $ 95,495 $40,678,867 =========== =========== =========== =========== Held to maturity U.S. Treasury $ 4,986,658 $ 69,633 $ 3,651 $ 5,052,640 U.S. Government agency 35,077,853 277,037 24,452 35,330,438 State and municipal 1,114,293 68,648 -- 1,182,941 ----------- ----------- ----------- ----------- $41,178,804 $ 415,318 $ 28,103 $41,566,019 =========== =========== =========== ===========
F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 3. Investment Securities (continued)
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1996 Cost Gains Losses Value ----------------- ----------- ----------- ----------- ----------- Available for sale U.S. Treasury $ 6,575,244 $ 54,518 $ 7,793 $ 6,621,969 U.S. Government agency 20,625,552 43,627 199,626 20,469,553 State and municipal 24,612,517 568,919 26,908 25,154,528 Mortgage-backed 1,913,804 24,355 25,673 1,912,486 ----------- ----------- ----------- ----------- 53,727,117 691,419 260,000 54,158,536 Federal Home Loan Bank stock 748,300 -- -- 748,300 ----------- ----------- ----------- ----------- $54,475,417 $ 691,419 $ 260,000 $54,906,836 =========== =========== =========== =========== Held to maturity U.S. Treasury $ 6,485,244 $ 59,711 $ 19,992 $ 6,524,963 U.S. Government agency 34,067,907 270,302 23,166 34,315,043 State and municipal 1,113,906 44,490 -- 1,158,396 ----------- ----------- ----------- ----------- $41,667,057 $ 374,503 $ 43,158 $41,998,402 =========== =========== =========== ===========
Effective October 1, 1998, the Bank adopted the provisions of SFAS No. 133 (see also Note 20), which provides for a special opportunity to reclassify held to maturity securities to available for sale. In connection therewith, the Bank reclassified held to maturity securities with amortized cost approximating $20,300,000 as available for sale, resulting in an increase in accumulated other comprehensive income of approximately $270,000, net of deferred taxes of approximately $170,000. Contractual maturities of investment securities at December 31, 1998, 1997, and 1996 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.
Available for Sale Held to Maturity Amortized Fair Amortized Fair December 31, 1998 Cost Value Cost Value ----------------- ----------- ----------- ----------- ----------- Due within one year $ 1,499,909 $ 1,509,844 $ 1,250,357 $ 1,259,844 Due over one to five years 13,445,861 13,690,797 1,247,271 1,291,953 Due over five to ten years 4,069,469 4,186,029 7,489,009 7,517,969 Due over ten years -- -- 7,997,662 7,917,830 Mortgage-backed, due in monthly installments 12,512,882 12,601,469 14,576,989 14,552,135 ----------- ----------- ----------- ----------- $31,528,121 $31,988,139 $32,561,288 $32,539,731 =========== =========== =========== ===========
F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 3. Investment Securities (continued)
Available for Sale Held to Maturity Amortized Fair Amortized Fair December 31, 1997 Cost Value Cost Value ----------------- ----------- ----------- ----------- ----------- Due within one year $ 1,615,229 $ 1,617,252 $ 1,000,000 $ 999,060 Due over one to five years 9,164,702 9,335,742 18,176,856 18,333,563 Due over five to ten years 6,735,960 6,946,219 15,888,529 16,046,560 Due over ten years 5,666,055 5,672,727 6,113,419 6,186,836 Mortgage-backed, due in monthly installments 16,194,063 16,170,527 -- -- ----------- ----------- ----------- ----------- $39,376,009 $39,742,467 $41,178,804 $41,566,019 =========== =========== =========== =========== Available for Sale Held to Maturity Amortized Fair Amortized Fair December 31, 1996 Cost Value Cost Value ----------------- ----------- ----------- ----------- ----------- Due within one year $ 2,728,910 $ 2,733,114 $ 1,500,791 $ 1,506,090 Due over one to five years 10,870,162 10,969,608 19,969,083 20,087,636 Due over five to ten years 12,578,991 12,838,012 15,113,223 15,265,730 Due over ten years 25,635,250 25,705,316 5,083,960 5,138,946 Mortgage-backed, due in monthly installments 1,913,804 1,912,486 -- -- ----------- ----------- ----------- ----------- $53,727,117 $54,158,536 $41,667,057 $41,998,402 =========== =========== =========== ===========
Proceeds from sales of securities available for sale prior to maturity were $25,889,152, $19,095,130 and $10,103,956 for the years ended December 31, 1998, 1997, and 1996, respectively. Gains of $418,519 and losses of $5,011 were realized on those sales for 1998. Gains of $251,535 and losses of $26,840 were realized on those sales for 1997. Gains of $154,119 and losses of $9,554 were realized on those sales for 1996. 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 was $127,598, $86,732, and $55,831 for the years ended December 31, 1998, 1997, and 1996, respectively. Securities with amortized costs of approximately $2,994,000, $2,997,000, and $4,999,000 were pledged as collateral for short-term borrowings and financial instruments with off-balance sheet risk at December 31, 1998, 1997, and 1996, respectively. Investment securities include obligations of the State of Maryland and its subdivisions with an amortized cost of $8,073,399 and $16,982,447 at December 31, 1997 and 1996, respectively. F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 4. Loans Major categories of loans are as follows:
1998 1997 1996 ------------ ------------ ------------ Mortgage Residential $ 33,931,494 $ 38,048,174 $ 36,504,904 Commercial 43,915,342 43,275,731 47,757,381 Construction and land development 2,382,657 4,888,634 5,514,565 Lease financing 1,059,382 3,285,439 7,537,563 Demand and time 4,654,006 6,678,218 9,557,470 Installment 43,147,377 20,259,198 23,714,889 ------------ ------------ ------------ 129,090,258 116,435,394 130,586,772 Unearned income on loans (747,946) (750,736) (853,766) ------------ ------------ ------------ 128,342,312 115,684,658 129,733,006 Allowance for credit losses (2,841,060) (4,139,396) (5,060,592) ------------ ------------ ------------ $125,501,252 $111,545,262 $124,672,414 ============ ============ ============
During 1998 the Bank instituted an automotive indirect lending program, where vehicle collateralized loans made by dealers to consumers are assigned to the Bank. The Bank's installment loan portfolio included approximately $24,630,000 of such loans at December 31, 1998. In December 1997, the Bank purchased a pool of thirty-year fixed rate residential mortgage loans totaling $4,779,164 from a local financial institution, with an average yield of 7.78%. 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, 1998, 1997, and 1996, the amounts of such loans outstanding were $1,495,082, $1,270,382, and $2,587,122, respectively. During 1998, loan additions and repayments were $506,645 and $281,945, respectively. The allowance for credit losses is as follows:
1998 1997 1996 ------------ ------------ ------------ Balance, beginning of year $ 4,139,396 $ 5,060,592 $ 3,698,271 Provision for credit losses (500,000) 270,000 6,596,000 Recoveries 296,617 426,604 234,614 Loans charged off (1,094,953) (1,617,800) (5,468,293) ------------ ------------ ------------ Balance, end of year $ 2,841,060 $ 4,139,396 $ 5,060,592 ============ ============ ============
Loans on which the accrual of interest has been discontinued amounted to $1,724,782, $3,481,434, and $4,545,581 at December 31, 1998, 1997, and 1996, respectively. Interest that would have been accrued under the terms of these loans was $269,112, $307,950, and $457,035 for the years ended December 31, 1998, 1997, and 1996, respectively. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 4. Loans (continued) Information regarding loans classified by the Bank as impaired are summarized as follows:
1998 1997 1996 ---------- ---------- ---------- Loans classified as impaired $2,528,851 $3,718,021 $5,953,621 Allowance for credit losses on impaired loans 423,571 718,787 1,232,366 Average balance of impaired loans 2,417,615 5,251,152 6,563,679
Following is a summary of cash receipts on impaired loans and how they were applied: Cash receipts applied to reduce principal balance $ 62,811 $ 107,155 $ 194,535 Cash receipts recognized as interest income 7,313 97,948 182,795 ---------- ---------- ---------- Total cash receipts $ 70,124 $ 205,103 $ 377,330 ========== ========== ==========
At December 31, 1998, the total recorded investment in troubled debt restructurings amounted to $293,821. The average recorded investment in troubled debt restructurings amounted to $290,924 for the year ended December 31, 1998. The allowance for credit losses relating to troubled debt restructurings was $68,000 at December 31, 1998. Interest income on troubled debt restructurings of $16,765 was recognized for cash payments received in 1998. All investments in troubled debt were performing under the terms of the modified agreements, with the exception of one loan classified as impaired in the amount of $156,947 as of December 31, 1998. At December 31, 1997, the total recorded investment in troubled debt restructurings amounted to $334,061. The average recorded investment in troubled debt restructurings amounted to $346,540 for the year ended December 31, 1997. The allowance for credit losses relating to troubled debt restructurings was $49,112 at December 31, 1997. Interest income on troubled debt restructurings of $16,408 was recognized for cash payments received in 1997. All investments in troubled debt were performing under the terms of the modified agreements. At December 31, 1996, the Bank had no recorded investments in troubled debt restructurings. The Bank has no commitments to loan additional funds to the borrowers of restructured, impaired or non-accrual loans. Note 5. Premises and Equipment A summary of premises and equipment is as follows:
Useful lives 1998 1997 1996 ---------- ------------ ----------- ----------- Land $ 509,803 $ 509,803 $ 509,803 Buildings 5-50 years 3,900,421 3,710,425 3,713,427 Equipment and fixtures 5-30 years 4,125,205 3,865,902 3,640,241 Construction in progress 21,675 102,879 46,505 ------------ ----------- ----------- 8,584,104 8,189,009 7,909,976 Accumulated depreciation (4,163,722) (3,869,586) (3,755,511) ------------ ----------- ----------- $ 4,420,382 $ 4,319,423 $ 4,154,465 ============ =========== ============
F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 5. Premises and Equipment (continued) Depreciation expense was $596,716, $532,637, and $543,393 for the years ended December 31, 1998, 1997, and 1996, respectively. Amortization of software and intangible assets was $179,369, $123,676, and $110,602 for the years ended December 31, 1998, 1997, and 1996, respectively. The Bank leases its South Crain Highway and Ferndale Shopping Center branches. Minimum obligations under the leases are $23,460 and $30,000 per year, respectively, until the leases expire in June 2000 and May 2003, respectively. The Bank is also required to pay all maintenance costs under both leasing arrangements. Total rent expense was $53,591, $32,153, and $37,188 for the years ended December 31, 1998, 1997, and 1996, respectively. Note 6. Short-term borrowings Short-term borrowings are as follows:
1998 1997 1996 ---------- ---------- -------- Notes payable - U.S. Treasury $ 143,904 $ 889,398 $547,937 FHLB advances 1,000,000 -- -- ---------- ---------- -------- $1,143,904 $ 889,398 $547,937 ========== ========== ========
The Bank owns shares of common stock of the Federal Home Loan Bank of Atlanta (FHLB). This investment was a condition for obtaining a $26 million variable rate credit facility with the FHLB. At December 31, 1998, the Bank had outstanding advances of $1,000,000, bearing interest at 5.15%, and maturing within the next year. There were no borrowings outstanding under this credit arrangement at December 31, 1997 or 1996. The credit facility is secured by a floating lien on the Bank's residential mortgage loan portfolio and by investment securities with amortized cost of approximately $1,000,000 at December 31, 1998. Notes payable to the U.S. Treasury are 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 a slight discount to the Federal funds rate. The note payable is secured by investment securities with an amortized cost of approximately $1,494,000 at December 31, 1998. The Bank also has available $5,000,000 in short-term secured credit and a $1,000,000 letter of credit facility from another bank for short term liquidity needs, if necessary. There were no borrowings outstanding at December 31, 1998, 1997, and 1996 under these credit lines. F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 7. Deposits Major classifications of interest-bearing deposits are as follows:
1998 1997 1996 ------------ ------------ ------------ NOW and SuperNOW $ 20,600,751 $ 20,581,703 $ 22,792,376 Money Market 20,049,677 19,876,925 26,210,655 Savings 40,965,943 43,062,001 48,192,967 Certificates of Deposit, $100,000 or more 5,758,269 5,260,809 6,753,155 Other time deposits 66,875,699 70,677,459 79,383,892 ------------ ------------ ------------ $154,250,339 $159,458,897 $183,333,045 ============ ============ ============
Interest expense on deposits is as follows:
1998 1997 1996 ------------- ------------ ------------ NOW and SuperNOW $ 377,632 $ 462,395 $ 599,089 Money Market 546,382 622,464 818,240 Savings 1,069,853 1,233,294 1,475,426 Certificates of Deposit, $100,000 or more 443,489 466,360 484,267 Other time deposits 3,611,472 4,056,439 4,334,967 ------------- ------------ ------------ $ 6,048,828 $ 6,840,952 $ 7,711,989 ============= ============ ============
At December 31, 1998, the scheduled maturities of time deposits are approximately as follows:
1998 ------------ 1999 43,053,000 2000 15,331,000 2001 10,706,000 2002 1,485,000 2003 and thereafter 2,059,000 ------------ $ 72,634,000 ============
Deposit balances of executive officers and directors and their affiliated interests totaled approximately $356,000, $485,000, and $1,067,000 at December 31, 1998, 1997, and 1996, respectively. The Bank had no brokered deposits at December 31, 1998, 1997, and 1996. F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 8. Income Taxes The components of income tax expense (benefits) for the years ended December 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996 ----------- ----------- ------------ Current Federal $ (1,841) $ (218) $ (398,491) State 351,738 (335,725) (266,880) ----------- ----------- ----------- Total current 349,897 (335,943) (665,371) ----------- ----------- ----------- Deferred income taxes (benefits) Federal 352,880 (27,040) (764,511) State 103,470 47,699 (50,310) ----------- ----------- ----------- Total Deferred 456,350 20,659 (814,821) ----------- ----------- ----------- Income tax expense (benefits) $ 806,247 $ (315,284) $(1,480,192) =========== =========== ===========
The 1998 current State provision consists of disallowed prior years' refund claims. A reconciliation of income tax expense (benefits) computed at the statutory rate of 34 percent to the actual income tax expense for the years ended December 31, 1998, 1997, and 1996 is as follows:
1998 1997 1996 ----------- ----------- ----------- Income (loss) before income taxes $ 1,639,439 $ 431,963 $(2,500,369) =========== =========== =========== Taxes computed at Federal income tax rate $ 557,409 $ 146,867 $ (850,125) Increase (decrease) resulting from Tax-exempt income (61,361) (296,323) (456,790) State income taxes, net of Federal income tax benefit 300,437 (221,579) (176,141) Other 9,762 55,751 2,864 ----------- ----------- ----------- Income tax expense (benefits) $ 806,247 $ (315,284) $(1,480,192) =========== =========== ===========
Sources of deferred income taxes and the tax effects of each for the years ended December 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996 ----------- ----------- ----------- Depreciation $ 13,318 $ (23,201) $ (30,990) Securities discount accretion (19,471) 4,280 9,380 Provision for credit losses 658,694 295,799 (241,077) Unearned income on loans -- 31,469 106,816 Deferred compensation and benefit plans (76,205) (61,589) (56,096) Charitable contributions (15,844) (9,971) (35,987) Write-downs on other real estate owned (2,317) 25,736 (28,192) AMT credits (16,764) (242,422) (538,117) Net operating loss carryover (85,061) -- -- Other -- 558 (558) ----------- ----------- ----------- Deferred income tax expense (benefits) $ 456,350 $ 20,659 $ (814,821) =========== =========== ===========
F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 8. Income Taxes (continued) The components of the net deferred income tax benefits as of December 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996 ----------- ----------- ----------- Deferred income tax benefits: Allowance for credit losses $ 123,966 $ 782,660 $ 1,078,459 Unearned income on loans -- -- 31,469 Deferred compensation and benefit plans 728,247 179,869 122,116 Other real estate owned 4,773 2,456 28,192 Charitable contributions 61,802 45,958 35,987 Alternative minimum tax credits 797,303 780,539 538,117 Net operating loss carryover 85,061 -- -- Other -- -- 558 ----------- ----------- ----------- Total deferred income tax benefits 1,801,152 1,791,482 1,834,898 ----------- ----------- ----------- Deferred income tax liabilities: Accumulated depreciation 204,328 191,010 214,211 Securities discount accretion 19,559 39,030 34,750 Prepaid pension contributions 506,694 34,521 38,357 Net unrealized appreciation on investment securities available for sale 177,659 141,526 166,614 ----------- ----------- ----------- Total deferred income tax liabilities 908,240 406,087 453,932 ----------- ----------- ----------- Net deferred income tax benefits $ 892,912 $ 1,385,395 $ 1,380,966 =========== =========== ===========
Management has determined that no valuation allowance is required as it is more likely than not that the net deferred income tax benefits will be fully realizable in future years. Note 9. Pension and Profit Sharing Plans Through 1998, the Bank had a defined benefit pension plan covering substantially all of its employees. Benefits are based on the employee's average rate of earnings for the five consecutive years before retirement. The Bank's funding policy is to contribute annually an amount between the minimum and maximum actuarially determined contribution, using the frozen entry age actuarial cost method. Assets of the plan are held in a trust fund principally comprised of growth and income mutual funds managed by another bank. The Bank decided to terminate this plan, effective December 31, 1998. The Bank has also established a defined contribution plan as a replacement plan, effective January 1, 1999. Upon termination of the plan all participants became 100% vested. All accrued benefits under the terminated pension plan will be provided to participants through the purchase of annuities, or, in the case of actively employed participants, at their option, in the form of a lump sum rollover to the defined contribution plan. Any excess assets remaining in the defined benefit plan after payment of all accrued benefits to active, terminated, and retired participants are to be transferred to the new defined contribution plan. As a result of the termination of the defined benefit plan and the ultimate funding of the defined contribution plan, the Bank has recorded a prepaid pension asset of $1,248,153 and an accrued liability of the same amount at December 31, 1998. F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 9. Pension and Profit Sharing Plans (continued) The following table sets forth the financial status of the pension plan at December 31, 1998, 1997, and 1996:
1998 1997 1996 ----------- ----------- ----------- Projected benefit obligation at January 1, $ 4,124,137 $ 3,804,330 $ 3,443,582 Service cost 208,699 218,504 208,566 Interest 346,128 317,295 292,704 Actual benefit payments (189,504) (138,314) (134,408) Interest on distributions (6,850) (9,232) (6,114) Decrease from curtailment\termination (1,435,130) -- -- Other adjustments (59,044) (68,446) -- ----------- ----------- ----------- Projected benefit obligation at December 31, $ 2,988,436 $ 4,124,137 $ 3,804,330 =========== =========== =========== Accumulated benefit obligation Vested $ 2,988,436 $ 2,671,233 $ 2,244,790 Nonvested -- 119,829 28,066 ----------- ----------- ----------- $ 2,988,436 $ 2,791,062 $ 2,525,451 =========== =========== =========== Plan assets at January 1, $ 4,670,182 $ 3,720,145 $ 3,399,653 Actual contributions -- 223,083 170,000 Actual distributions 189,504 138,314 134,408 Actual returns 1,218,395 865,268 284,900 ----------- ----------- ----------- Plan assets at December 31, $ 5,699,073 $ 4,670,182 $ 3,720,145 =========== =========== =========== Plan assets at fair value $ 5,699,073 $ 4,670,182 $ 3,720,145 Projected benefit obligation (2,988,436) (4,124,137) (3,804,330) ----------- ----------- ----------- Plan assets in excess of (less than) projected benefit obligation 2,710,637 546,045 (84,185) Unrecognized prior service cost -- 148,730 174,327 Unrecognized net (gain) loss (1,425,979) (556,714) 70,020 Unrecognized net asset from transition (36,505) (48,674) (60,843) ----------- ----------- ----------- Prepaid pension expense included in other assets $ 1,248,153 $ 89,387 $ 99,319 =========== =========== =========== Net pension expense includes the following: Service cost $ 201,699 $ 218,504 $ 208,566 Interest cost 339,278 311,064 286,590 Actual return on assets (1,218,395) (865,268) (284,900) Net amortization and deferral 830,649 568,715 15,472 ----------- ----------- ----------- Net pension expense $ 153,231 $ 233,015 $ 225,728 =========== =========== =========== Assumptions used in the accounting for net pension expense were: Discount rates 8.5% 8.5% 8.5% Rate of increase in compensation levels 6.5% 6.5% 6.5% Long-term rate of return on assets 8.5% 8.5% 8.5%
F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 9. Pension and Profit Sharing Plans (continued) 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 Bank's contributions to the plan are determined annually by the Board of Directors. The plan covers substantially all employees. The Bank's contributions to the plan included in expense were $102,757 and $83,500 for the years ended December 31, 1998 and 1997, respectively. No contributions were made for 1996. Effective January 1, 1999, the plan was amended to provide for discretionary employer matching contributions to be determined annually by the Board of Directors. Note 10. Post-Retirement Health Care Benefits The Bank provides health care benefits to employees who retire at age 65. The plan is funded only by the Bank's monthly payments of insurance premiums due. The following table sets forth the financial status of the plan at December 31, 1998, 1997, and 1996:
1998 1997 1996 --------- --------- --------- Accumulated post-retirement benefit obligation Retirees $ 239,773 $ 191,817 $ 229,258 Other active participants, fully eligible 27,741 -- -- Other active participants, not fully eligible 493,449 482,529 648,414 --------- --------- --------- 760,963 674,346 877,672 Unrecognized net gain 347,097 359,178 23,715 Unrecognized transition obligation (534,383) (567,782) (601,181) --------- --------- --------- Accrued post-retirement benefit cost $ 573,677 $ 465,742 $ 300,206 ========= ========= =========
Net post-retirement benefit expense for the years ended December 31, 1998, 1997, and 1996 includes the following: Service cost $ 56,771 $ 75,736 $ 71,381 Interest cost 48,979 72,930 69,792 Amortization of unrecognized transition obligation 33,399 33,399 33,399 Amortization of net gain (13,052) (1,669) -- --------- --------- --------- Net post-retirement benefit expense $ 126,097 $ 180,396 $ 174,572 ========= ========= =========
Assumptions used in the accounting for net post-retirement benefit expense were: Health care cost trend rate 5.0% 5.0% 8.0% Discount rate 6.8% 7.0% 8.5%
If the assumed health care cost trend rate were increased to 6% for 1998 and 1997 and 9% for 1996, the total of the service and interest cost components of net periodic post-retirement health care benefit cost would increase by $28,471, $36,820, and $36,816, for the years ended December 31, 1998, 1997, and 1996, respectively, and the accumulated post-retirement benefit obligation would increase to $154,568, $217,216, and $211,388 as of December 31, 1998, 1997, and 1996, respectively. F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 11. Other Benefit Plans (see also Note 14) In March 1998, the Bank established and funded a grantor trust for $1,500,000 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. In March 1998, the Company and Bank also established and the Bank funded a grantor trust for $2,000,000 for indemnification of the officers and directors of the Bank and/or Company for any litigation expenses incurred in connection with any "change of control" of the Company. Subsequent to the repurchase of the Company's common stock under a "Redemption Agreement" and entering into a standstill agreement (see Note 14), and effective as of December 31, 1998, all assets held by these trusts were returned to the Bank. The severance trust continues to exist on an unfunded status, while the litigation trust was terminated on December 31, 1998. In March 1998, the Bank established and funded a grantor trust for $285,000 as part of an employment agreement with the Chief Operating Officer of the Bank. The agreement provides for the payment of benefits upon termination of employment, for any reason other than just cause, after a "change in control" of the Company. Balances held in this trust of approximately $293,000 at December 31, 1998 are prepaid expenses and included in other assets. Note 12. Other Operating Expenses Other operating expenses include the following:
1998 1997 1996 ---------- ---------- ---------- Professional services $2,163,448 $1,995,049 $1,454,449 Stationery, printing and supplies 241,029 275,020 218,397 Postage and delivery 239,519 270,976 271,050 FDIC assessment 81,162 92,456 33,595 Directors fees and expenses 151,737 168,061 196,622 Marketing 305,794 249,958 124,897 Data processing 205,839 135,326 129,449 Correspondent bank services 114,689 119,479 115,864 Telephone 95,572 69,873 59,808 Liability insurance 89,149 89,146 71,015 Losses and expenses on real estate owned (OREO) 33,414 143,045 45,445 Other 391,567 464,594 395,881 ---------- ---------- ---------- $4,112,919 $4,072,983 $3,116,472 ========== ========== ==========
Note 13. Litigation Charges In 1997, the Company incurred losses of $996,161 relating to two claims involving fraudulent check endorsement issues. These nonrecurring charges are included in other expenses for 1997. In 1998, the Company incurred losses of $1,225,003 relating to claims involving fraudulent check endorsement issues and\or bankruptcies. These nonrecurring charges are included in other expenses for 1998. F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 14. Repurchase and Retirement of Company Common Stock During 1998, the Company was pursued by another competing financial institution (the institution) in a hostile take-over attempt. In November 1998, the Company reached an agreement with the institution to repurchase 213,168 shares of its common stock, or approximately 19.5% of its outstanding shares, for an aggregate purchase price of $5,580,764. In conjunction with the redemption agreement, the Company and the institution also entered into a standstill agreement through November 2008. Under the standstill agreement, the Company will make payments over five years totaling $675,510 beginning with the first payment of $150,000 in January 1999 and four subsequent annual payments of $131,378. Note 15. 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:
December 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Loan commitments Construction and land development $ 1,537,400 $ 150,000 $ 1,865,000 Other mortgage loans 1,671,050 330,500 185,000 ----------- ----------- ----------- $ 3,208,450 $ 480,500 $ 2,050,000 =========== =========== =========== Unused lines of credit Home-equity lines $ 3,029,929 $ 2,629,589 $ 2,944,867 Commercial lines 6,149,939 7,524,017 8,030,635 Unsecured consumer lines 851,390 799,826 3,434,501 ----------- ----------- ----------- $10,031,258 $10,953,432 $14,410,003 =========== =========== =========== Letters of credit $ 2,012,626 $ 2,221,173 $ 3,132,661 =========== =========== ===========
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 F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 15. Commitments and Contingencies (continued) 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, 1998, 1997, and 1996, $67,168, $70,168, and $139,382, respectively, have been provided as an allowance for credit losses related to these financial instruments with off-balance sheet risk, which is reflected as a reduction of loans. Legal proceedings: The Bank is a defendant in certain claims and legal actions arising in the ordinary course of business. The Bank is being sued for approximately $250,000 for allegedly honoring checks with invalid endorsements. The Bank's management is contesting the suit vigorously and asserting the Bank's counterclaim which seeks damages in an amount in excess of the damage sought by the plaintiff. Note 16. Stockholders' Equity Restrictions on dividends: The Bank is subject to certain restrictions on the amount of dividends that it may pay. Under Maryland banking law, the Board of Directors may declare cash dividends from undivided profits after providing for expenses, losses, interest and taxes accrued or due. In 1997 and 1996 the Bank's payment of dividends was restricted by a Memorandum of Understanding (M.O.U.) (see also Note 18) which required prior approval of the FDIC and the State Banking Commissioner of the State of Maryland for the payment of dividends by the Bank in excess of 50% of its net operating income or if the Bank's Tier 1 capital ratio would be reduced below 6%. This M.O.U. was lifted in June 1998. Employee stock purchase benefit plans: During 1998, the Company established a stock-based compensation plan, which is described below. The Bank applies Accounting Principles Board Opinion ("APB") No. 25 and related Interpretations in accounting for this plan. Compensation cost of $21,607 has been recognized in the accompanying consolidated financial statements for options granted in 1998. If compensation cost for the Company's stock-based compensation plan had been determined based on the fair value at the grant date for awards under this plan consistent with the methods outlined in SFAS No. 123 Accounting for Stock-Based Compensation, there would be no material change in reported net income. 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 the lesser of 85 percent of the fair market value of the stock on the date of grant or exercise. Options granted will expire no later than 27 months from the grant date or upon termination of employment. Activity under this plan is as follows: F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 16. Stockholders Equity (continued)
Grant Shares Price Granted on July 1, 1998, expiring October 1, 1999 5,794 $ 21.25 Expired (32) Exercised (935) ----- Outstanding December 31, 1998 4,827 $ 21.25 =====
At December 31, 1998, there were 24,065 shares of common stock reserved for issuance under the plan. 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 percent of the fair market value on the dividend payment date. In October 1996, the Company suspended participation in the dividend reinvestment and stock purchase plan until the Company completed additional filings with the Securities and Exchange Commission. The plan was reinstated in 1998. During 1998 and 1996, 7,015 and 10,820 shares of common stock, respectively, were purchased under the plan. At December 31, 1998, there were 199,335 shares of common stock reserved for issuance under the plan. 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 number of shares that may be purchased pursuant to options shall be determined by the Board of Directors. Options granted will expire no later than 3 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.
Grant Shares Price Granted on November 30, 1998, expiring January 29, 1999 110,396 $26.125 Exercised (7,388) ------- Outstanding December 31, 1998 103,008 $26.125 =======
At December 31, 1998 there were 112,612 shares of common stock reserved for issuance under the plan. The Board of Directors may suspend or discontinue the plan at its discretion. F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 16. Stockholders Equity (continued) 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 the Company's and Bank's 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. 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, 1998, 1997, and 1996, that the Company and Bank meet all capital adequacy requirements to which it is subject. As of December 31, 1998, the most recent notification from the FDIC categorized the Bank 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 are no conditions or events since that notification that management believes have changed the Bank's category. A comparison of capital as of December 31, 1998, 1997, and 1996 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, 1998 Total Capital (to Risk Weighted Assets) Company $14,785,000 10.5% $11,265,000 8.0% N/A Bank 14,495,000 10.4% 11,150,000 8.0% $13,938,000 10.0% Tier I Capital (to Risk Weighted Assets) Company 13,018,000 9.3% 5,599,000 4.0% N/A Bank 12,736,000 9.1% 5,598,000 4.0% 8,397,000 6.0% Tier I Capital (to Average Assets) Company 13,018,000 6.0% 8,722,000 4.0% N/A Bank 12,736,000 5.8% 8,723,000 4.0% 10,904,000 5.0%
F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 16. 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, 1997 Total Capital (to Risk Weighted Assets) Company $19,359,000 16.0% $ 9,656,000 8.0% N/A Bank 18,908,000 15.7% 9,649,000 8.0% $12,061,000 10.0% Tier I Capital (to Risk Weighted Assets) Company 17,818,000 14.8% 4,828,000 4.0% N/A Bank 17,368,000 14.4% 4,824,000 4.0% 7,237,000 6.0% Tier I Capital (to Average Assets) Company 17,818,000 7.6% 14,107,000 6.0% N/A Bank 17,368,000 7.4% 14,089,000 6.0% 11,741,000 5.0% As of December 31, 1996 Total Capital (to Risk Weighted Assets) Company 19,614,000 14.0% 11,221,000 8.0% N/A Bank 19,215,000 13.3% 11,590,000 8.0% 14,487,200 10.0% Tier I Capital (to Risk Weighted Assets) Company 17,845,000 12.7% 5,610,000 4.0% N/A Bank 17,367,000 12.0% 5,789,000 4.0% 8,683,500 6.0% Tier I Capital (to Average Assets) Company 17,845,000 7.2% 14,949,000 6.0% N/A Bank 17,367,000 7.0% 14,886,000 6.0% 12,405,000 5.0%
F-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 17. Earnings Per Common Share Earnings per common share are calculated as follows:
1998 1997 1996 ----------- ----------- ----------- Basic: Net income (loss) $ 833,192 $ 747,247 $(1,020,177) Weighted average common shares outstanding 1,071,026 1,092,768 1,089,495 Basic net income (loss) per share $ 0.78 $ 0.68 $ (0.94) Diluted: Net income $ 833,192 Weighted average common shares outstanding 1,071,026 Dilutive effect of stock options 362 ----------- Average common shares outstanding - diluted 1,071,388 Diluted net income per share $ 0.78
Diluted earnings per share calculations were not required for 1997 and 1996 due to the Company having a simple capital structure in 1997 and net losses in 1996. Options relating to the stockholder purchase plan have an anti-dilutive effect, and therefore were not included in the diluted calculation. Note 18. Regulatory Matters In June 1996, the Bank entered into a Memorandum of Understanding (M.O.U.) with the Federal Deposit Insurance Corporation and the State Bank Commissioner of the State of Maryland to accomplish corrective actions regarding matters including violations of law, loan collection and delinquencies, loan administration, methodology for allowance for credit loss calculations, management reporting, strategic planning, and maintenance of capital. In July 1997, the Bank entered into a revised M.O.U., which stipulated certain dividend restrictions and corrective actions regarding management, asset quality, earnings, capital, sensitivity to market risk, and risk management. In June 1998, the Bank was found to be in compliance with the revised M.O.U., resulting in termination of the agreement. F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 19. Fair Values of Financial Instruments In accordance with the disclosure requirements of Statement of Financial Accounting Standards No. 107, the estimated fair value and the related carrying values of the Company's financial instruments are as follows:
1998 1997 1996 ------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value ------------------------------------------------------------------------------------- Financial assets: Cash and due from banks $ 8,197,344 $ 8,197,344 $ 8,127,732 $ 8,127,732 $ 10,665,680 $ 10,665,680 Interest-bearing deposits in other financial institutions 4,958,337 4,958,337 1,558,879 1,558,879 1,836,981 1,836,981 Federal funds sold 2,863,635 2,863,635 18,850,000 18,850,000 10,175,000 10,175,000 Investment securities available for sale 32,924,539 32,924,539 40,678,867 40,678,867 54,906,836 54,906,836 Investment securities held to maturity 32,561,288 32,539,731 41,178,804 41,566,019 41,667,057 41,998,402 Loans, less allowance for credit losses 125,501,252 125,980,000 111,545,262 109,301,000 124,672,414 120,992,000 Ground rents 257,025 257,025 262,525 262,525 267,974 267,974 Accrued interest receivable 1,401,660 1,401,660 1,556,971 1,556,971 1,937,928 1,937,928 Financial liabilities: Deposits 199,611,115 201,124,000 207,110,272 207,622,000 232,745,975 232,702,000 Short-term borrowings 1,143,904 1,143,904 889,398 889,398 547,937 547,937 Dividends payable 123,039 123,039 81,146 81,146 44,193 44,193 Accrued interest payable 160,597 160,597 177,922 177,922 214,977 214,977 Unrecognized financial instruments: Commitments to extend credit 13,239,708 13,172,540 11,433,932 11,363,764 16,460,003 16,320,621 Standby letters of credit 2,012,626 2,012,626 2,221,173 2,221,173 3,132,661 3,132,661
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. 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. F-29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 19. Fair Values of Financial Instruments (continued) 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. Also, 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 20. Adoption of Recently Issued Accounting Pronouncements Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130), establishes additional standards for reporting and display of "comprehensive income" and its components on the Company's financial statements. Effective for 1998, the Bank retroactively adopted this pronouncement. Comprehensive income is defined as the change in equity of a business enterprise from transactions and other events and circumstances from non-owner sources (including net income). It includes all changes in equity except those resulting from investments by owners. Changes in unrealized appreciation (depreciation) on securities available for sale, net of taxes, are an item of comprehensive income. The column previously reported as "net unrealized depreciation on securities available for sale" on the Statements of Changes in Stockholders' Equity has been changed to "accumulated other comprehensive income." Statements of Financial Accounting Standards No. 132, Employers' Disclosure about Pensions and Other Post-retirement Benefits (SFAS No. 132), revised the disclosures about pension and other post-retirement benefit plans (see Note 9 and 10). Effective in 1998, it did not change the measurement or recognition of those plans. Statements of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Bank adopted this pronouncement effective October 1, 1998, and, while there were no derivative instruments held by the Bank and no hedging activities in 1998, the Bank elected to reclassify certain held to maturity securities to available for sale as allowed under this pronouncement (see also Note 3). F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 21. 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, 1998 1997 1996 ---------------------------------------------------------------------------------------------------- Assets Cash $ 239,226 $ 166,195 $ 122,167 Investment in The Bank of Glen Burnie 13,886,563 18,514,844 18,109,107 Investment in GBB Properties, Inc. 165,637 365,341 373,357 Due from affiliates 4,789 -- -- Other assets -- 1,259 25,932 ----------- ----------- ----------- Total assets $14,296,215 $19,047,639 $18,630,563 =========== =========== =========== Liabilities and Stockholders' Equity Dividend payable $ 123,039 $ 81,146 $ 44,193 Income taxes payable 4,503 -- -- Due to affiliates -- 1,903 -- ----------- ----------- ----------- Total liabilities 127,542 83,049 44,193 ----------- ----------- ----------- Stockholders' equity Common stock 8,949,388 10,927,688 8,838,588 Surplus 3,373,591 6,575,053 6,192,900 Retained earnings 1,563,336 1,236,917 3,290,077 Accumulated other comprehensive income, net of taxes (benefits) 282,358 224,932 264,805 ----------- ----------- ----------- Total stockholders' equity 14,168,673 18,964,590 18,586,370 ----------- ----------- ----------- Total liabilities and stockholders' equity $14,296,215 $19,047,639 $18,630,563 =========== =========== =========== Statements of Income ---------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 ---------------------------------------------------------------------------------------------------- Dividends and distributions from subsidiaries $ 5,740,764 $ 312,097 $ 885,000 Expenses, net of revenues of $279 in 1998 840 3,704 6,632 ----------- ---------- ----------- Income before income taxes and equity in undistributed net income of subsidiaries 5,739,924 308,393 878,368 Income tax benefit 286 1,259 2,255 Change in undistributed net income of subsidiaries (4,907,018) 437,595 (1,900,800) ----------- ---------- ----------- Net income (loss) $ 833,192 $ 747,247 $(1,020,177) =========== ========== ===========
F-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 21. Parent Company Financial Information (continued)
Statements of Cash Flows ---------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 ---------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 833,192 $ 747,247 $(1,020,177) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Decrease in other assets 1,259 24,674 1,210 Increase in due from subsidiaries (4,789) -- -- (Decrease) increase in due to subsidiaries (1,903) 1,903 (10,000) Increase in income taxes payable 4,503 -- -- Equity in net (income) losses of subsidiaries 4,907,018 (437,595) 1,900,800 ----------- ----------- ----------- Net cash provided by operating activities 5,739,280 336,229 871,833 ----------- ----------- ----------- Cash flows from investing activities: Capital contributed to subsidiary -- -- (390,000) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from dividend reinvestment plan 166,515 -- 380,678 Proceeds from sales of common stock 212,880 -- 5,384 Repurchase and retirement common stock (5,580,764) -- -- Dividends paid (464,880) (292,201) (1,010,485) ----------- ----------- ----------- Net cash used in financing activities (5,666,249) (292,201) (624,423) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 73,031 44,028 (142,590) Cash and cash equivalents, beginning of year 166,195 122,167 264,757 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 239,226 $ 166,195 $ 122,167 =========== =========== ===========
F-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 22. Quarterly Results of Operations (Unaudited) The following is a summary of the Company's unaudited quarterly results of operations:
1998 Three months ended, ----------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) December 31 September 30 June 30 March 31 ----------------------------------------------------------------------------------------------------------- Interest income $ 3,977 $ 3,986 $ 3,930 $ 3,996 Interest expense 1,499 1,537 1,520 1,540 Net interest income 2,478 2,449 2,410 2,456 Provision for credit losses -- (500) -- -- Net securities gains 111 165 219 32 Income (loss) before income taxes 460 895 371 (86) Net income 84 516 230 3 Net income per share (basic and diluted) $ 0.10 $ 0.47 $ 0.21 $ 0.00 1997 Three months ended, ----------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) December 31 September 30 June 30 March 31 ----------------------------------------------------------------------------------------------------------- Interest income $ 4,131 $ 4,290 $ 4,468 $ 4,587 Interest expense 1,621 1,697 1,755 1,836 Net interest income 2,510 2,593 2,713 2,751 Provision for credit losses -- -- -- 270 Net securities gains 44 223 1 3 Income (loss) before income taxes 184 140 (256) 364 Net income 168 193 11 375 Net income per share (basic and diluted) $ 0.15 $ 0.18 $ 0.01 $ 0.34 1996 Three months ended, ----------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) December 31 September 30 June 30 March 31 ----------------------------------------------------------------------------------------------------------- Interest income $ 4,567 $ 4,789 $ 4,466 $ 4,824 Interest expense 1,925 1,947 1,917 1,973 Net interest income 2,642 2,842 2,549 2,851 Provision for credit losses 3,771 375 2,075 375 Net securities gains 50 6 2 87 Income (loss) before income taxes (2,599) 585 (1,342) 856 Net income (loss) (1,436) 450 (671) 637 Net income (loss) per share (basic and diluted) $ (1.33) $ .41 $ (.61) $ .59
F-33 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 25, 1999 By: /s/ F. William Kuethe, Jr. ----------------------------------------- F. William Kuethe, Jr. President and Chief Executive Officer (Duly Authorized Representative) 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. By: /s/ F. William Kuethe, Jr. March 25, 1999 ------------------------------------------- F. William Kuethe, Jr. President and Chief Executive Officer (Principal Executive Officer) By: /s/ John E. Porter March 25, 1999 ------------------------------------------- John E. Porter Chief Financial Officer (Principal Financial and Accounting Officer) By: /s/ John E. Demyan March 25, 1999 ------------------------------------------- John E. Demyan Chairman of the Board By: /s/ Theodore L. Bertier, Jr. March 25, 1999 ------------------------------------------- Theodore L. Bertier, Jr. Director By: /s/ Shirley E. Boyer March 25, 1999 ------------------------------------------- Shirley E. Boyer Director By: /s/ Thomas Clocker March 25, 1999 ------------------------------------------- Thomas Clocker Director By: /s/ Alan E. Hahn March 25, 1999 ------------------------------------------- Alan E. Hahn Director By: /s/ Charles L. Hein March 25, 1999 ------------------------------------------- Charles L. Hein Director By: /s/ F. W. Kuethe, III March 25, 1999 ------------------------------------------- F. W. Kuethe, III Director By: /s/ Eugene P. Nepa March 25, 1999 ------------------------------------------- Eugene P. Nepa Director By: /s/ William N. Scherer, Sr. March 25, 1999 ------------------------------------------- William N. Scherer, Sr. Director By: /s/ Karen B. Thorwarth March 25, 1999 ------------------------------------------- Karen B. Thorwarth Director By: /s/ Mary Lou Wilcox March 25, 1999 ------------------------------------------- Mary Lou Wilcox Director EX-3.1 2 ARTICLES OF INCORPORATION Exhibit 3.1 ARTICLES OF INCORPORATION OF GLEN BURNIE BANCORP AS AMENDED THIS IS TO CERTIFY: ARTICLE ONE: I, the undersigned, Henry L. Hein, whose post office address is 101 Crain Highway, SE, Glen Burnie, Maryland 21061, being at least eighteen (18) years of age, hereby form a corporation under and by virtue of the General Laws of the State of Maryland. ARTICLE TWO: The name of the Corporation, which is hereinafter called The Corporation is: GLEN BURNIE BANCORP ARTICLE THREE: The purposes for which the Corporation is formed are as follows: (a) To engage in the business of a bank holding company, as allowed under applicable Federal Statutes and the rules and regulations of the Federal Reserve Board. (b) To acquire, hold, own, sell, assign, exchange, transfer or otherwise dispose of or deal in and with any of the shares of capital stock and other securities and interest issued or created by any banking institution or association organized under the laws of the United States of America, any state, other political subdivision or any foreign government, or any other firm or corporation to the extent permitted by applicable laws or regulations. (c) To do any acts necessary or advisable for their preservation, protection, improvement and enhancement in value. (d) To do anything permitted by Section 2-103 of the Corporations and Associations Article of the Annotated Code of Maryland as amended from time to time. ARTICLE FOUR: The post office address of the principal office of The Corporation in this State is: 101 Crain Highway, SE Glen Burnie, MD 21061 The name and post office address of the resident agent of The Corporation in this State is: Henry L. Hein 101 Crain Highway, SE Glen Burnie, MD 21061 ARTICLE FIVE: The total number of shares of capital stock which The Corporation has authority to issue is five million (5,000,000) with a par value of Ten Dollars ($10.00) per share. The total par value of the shares shall be Fifty Million Dollars ($50,000,000.00). ARTICLE SIX: The number of directors of the Corporation shall not be less than five (5) nor more than thirty (30), the exact number of directors to be fixed from time to time in the manner provided in the By-Laws. The names of the directors who shall act until the first annual meeting or until their successors are duly elected and qualify are: Theodore L. Bertier, Jr., Jan W. Clark, F. Ward DeGrange, Sr., John E. DeGrange, Sr., John E. Demyan, Louis J. Doetsch, F. Paul Dorr, Jr., Carl L. Hein, Jr., Henry L. Hein, Frederick W. Kuethe, III, Murray D. O'Malley, William A. Pumphrey, Jr., Edward M. Webster, Katherine P. Wellford. ARTICLE SEVEN: The affirmative vote of the holders of not less than 80% of the outstanding shares of stock of The Corporation entitled to vote shall be required for the approval or authorization with respect to the following: (a) The amendment of Articles of Incorporation. (b) The consolidation of the Corporation with one or more corporations to form a new consolidated corporation. (c) The merger of The Corporation with another corporation or the merger of one or more corporations into The Corporation. (d) The sale, lease, exchange or other transfer of all, or substantially all, of the property and assets of The Corporation, including its good will. (e) The participation of The Corporation in a share-exchange (as defined in the Corporations & Associations Article of the Annotated Code of Maryland) the stock of which is to be acquired. (f) The voluntary liquidation, dissolution or winding up of The Corporation. ARTICLE EIGHT: (a) As used in this Article any word or words that are defined in Section 2-418 of the Corporations and Associations Article of the Annotated Code of Maryland, (the "indemnification section") as amended from time to time, shall have the same meaning as provided in the "indemnification section". 2 (b) The Corporation shall indemnify a present or former director or officer of the Corporation in connection with a proceeding to the fullest extent permitted by and in accordance with the indemnification section. (c) With respect to any corporate representative other than a present or former director or officer, the Corporation may indemnify such corporate representative in connection with a proceeding to the fullest extent permitted by and in accordance with the indemnification section; provided, however, that to the extent a corporate representative other than a present or former director or officer successfully defends on the merits or otherwise, any proceeding referred to in Subsection (b) or (c) of the indemnification section or any claim, issue or matter raised in such proceeding, the corporation shall not indemnify such corporation representative other than a present or former director or officer of the indemnification section, unless until it shall have been determined and authorized in specific case by (a) an affirmative vote at a duly constituted meeting at a majority of the Board of Directors who were not parties to the proceeding or (b) an affirmative vote, at a duly constituted meeting of a majority of all the votes cast by stockholders who were not parties to the proceedings, an indemnification of such corporate representative other than a present or former director or officer is proper in the circumstances. ARTICLE NINE: The duration of the corporation shall be perpetual. ARTICLE TEN: The holders of the capital stock of the Corporation shall have no preemptive rights to subscribe for any shares of any class of stock of the Corporation, whether now or hereafter authorized. ARTICLE ELEVEN: At the 1999 Annual Meeting of Stockholders, the Directors elected by the Stockholders shall be divided into three classes (denominated as Class A, Class B and Class C), as nearly equal in number as reasonably possible, with the term of office of the Class A Directors to expire at the year 2000 Annual Meeting of Stockholders, the term of office of the Class B Directors to expire at the year 2001 Annual Meeting of Stockholders, and the term of office of the Class C Directors to expire at the year 2002 Annual Meeting of Stockholders. At each Annual Meeting of Stockholders following such initial classification and election, Directors elected to succeed those Directors whose terms expire shall be elected for a three (3) year term of office, provided that the Stockholders electing new or replacement Directors may from time to time specify a term of less than three years in order to maintain the number of Directors in each class as nearly equal as possible. 3 IN WITNESS WHEREOF, I have signed these Articles of Incorporation this 20th day of December, 1990. /s/ Barbara Elswick /s/ Henry L. Hein (SEAL) - ----------------------------- ------------------------------ Witness HENRY L. HEIN 4 EX-3.2 3 BY-LAWS OF GLEN BURNIE BANCORP Exhibit 3.2 BY-LAWS OF GLEN BURNIE BANCORP ARTICLE I OFFICES The principal office of the corporation shall be at 101 Crain Highway, SE, Glen Burnie, Anne Arundel County, State of Maryland. The corporation may also have offices at such other places within the State of Maryland as the Board of Directors may from time to time determine or the business of the corporation may require, provided permission is obtained from applicable regulators. ARTICLE II STOCKHOLDERS 1. Place of Meetings Meetings of stockholders shall be held at the principal office of the corporation or at such place within the State of Maryland as the Board of Directors shall authorize. 2. Annual Meeting The Annual Meeting of Stockholders shall be held on the second Thursday of May at 2:00 p.m. in each year if not a legal holiday, and if a legal holiday, then on the next business day following at the same hour, when the stockholders shall elect a board and transact such other business as may properly come before the meeting. In the event of extremely inclement weather, an act of God, or other emergency situations, the meeting may be postponed from day to day until said situation is alleviated. 3. Special Meetings A special meeting of the stockholders may be called at any time by the Chairman of the Board of Directors, the President, a majority of the Board of Directors then serving or at the request in writing by stockholders entitled to cast at least twenty five percent (25%) of all the votes entitled to be cast at the meeting. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at a special meeting shall be confined to the purposes stated in the notice. Notice of special meetings shall be given by the Secretary not less than ten (10) nor more then ninety (90) days before the date of such meeting in writing to each stockholder entitled to vote at the meeting. 4. Fixing Record Date For the purpose of making any proper determination with respect to stockholders including which stockholders are entitled to: a) notice of a meeting; b) vote at a meeting; c) receipt of a dividend; d) be allotted other rights, the stock transfer books of the corporation may be closed for a period not to exceed twenty (20) days. The record date shall not be more than ninety (90) days before the date on which the action requiring the determination will be taken or less than ten (10) days before the date of the meeting. The Board of Directors may choose the record date, however if no record date is 1 fixed, it shall be determined in accordance with the provisions of the Corporations & Associations Article of the Annotated Code of Maryland as it may be amended from time to time. 5. Notice of Meeting of Stockholders Written notice of each meeting of stockholders shall state the purpose or purposes for which the meeting is called, the place, date and hour of the meeting and unless it is the annual meeting, shall indicate that it is being issued by or at the direction of the person or persons calling the meeting. Notice shall be given either personally or by mail to each stockholder entitled to vote at such meeting, not less than ten (10) nor more than thirty (30) days before the date of the meeting. If action is proposed to be taken that might entitle stockholders to payment for their shares, the notice shall include a statement of that purpose and to that effect. If mailed, the notice is given when deposited in the United States mail, with postage thereon prepaid, directed to the stockholder at the stockholder's address as it appears on the record of stockholders, or, if the stockholder has filed with the Secretary a written request that any notices be mailed to some other address, then directed to such other address. 6. Waivers Notice of any meeting need not be given to any stockholder who signs a waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any stockholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by the stockholder. 7. Quorum of Stockholders Unless the Articles of Incorporation provide otherwise, the holders of a majority of the shares entitled to vote thereat shall constitute a quorum at a meeting of stockholders for the transaction of any business. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any stockholders. The stockholders present may adjourn the meeting despite the absence of a quorum. 8. Proxies Every stockholder entitled to vote at a meeting of stockholders or to express consent or dissent without a meeting may authorize another person or persons to act for that stockholder by proxy. Every proxy must be signed by the stockholder or the stockholder's attorney-in-fact. Proxies shall not be valid after the meeting for which they are granted or continuation thereof and the purposes therein contained. Every proxy shall be revocable at the pleasure of the stockholder executing it, except as otherwise provided by law. 9. Qualification of Voters Every stockholder of record shall be entitled at every meeting of stockholders to 2 one (1) vote for every share standing in that stockholder's name on the record of stockholders. 10. Vote of Stockholders Except as otherwise required by statute or by the Articles of Incorporation: a) Directors shall be elected by a plurality of the votes cast at a meeting of stockholders by the holders of shares entitled to vote in the election; b) The affirmative vote of the holders of not less than 80% of the outstanding shares of stock of the corporation entitled to vote shall be required for the approval or authorization with respect to the following: 1) The amendment of Articles of Incorporation. 2) The consolidation of the corporation with one or more corporations to form a new consolidated corporation. 3) The merger of the corporation with another corporation or the merger of one or more corporations into the corporation. 4) The sale, lease, exchange or other transfer of all, or substantially all, of the property and assets of the corporation, including its goodwill. 5) The participation of the corporation in a share-exchange (as defined in the Corporations & Association Article of the Annotated Code of Maryland) the stock of which is to be acquired. 6) The voluntary liquidation, dissolution or winding up of the corporation. c) All other corporate action shall be authorized by a majority of the votes cast. 11. Written Consent of Stockholders Any action that may be taken by vote may be taken without a meeting on written consent, setting forth the action so taken, signed by the holders of all the outstanding shares entitled to vote thereon or signed by such lessor number of holders as may be provided for in the Articles of Incorporation. ARTICLE III DIRECTORS 1. Board of Directors Subject to any provision in the Articles of Incorporation, the business of the corporation shall be managed by its Board of Directors, each of whom shall be a citizen of the United States and the State of Maryland and be at least the age of majority and be stockholders with sufficient 3 shares to qualify under the provisions Section 3-403 of the Financial Institutions Article of the Annotated Code of Maryland as it may be amended from time to time. Former Directors may be elected by the Board of Directors to an honorary position of Director Emeritus, however such Directors will not have a vote and will not be required to attend regular Board of Directors meetings. The Directors Emeritus will receive such compensation as the Board of Directors may determine. 2. Number of Directors The property, business and affairs of this corporation shall be managed by a Board of not less than nine (9) Directors, nor more than sixteen (16). However, two (2) of the directorships may be left vacant to be filled at the discretion of the Board of Directors. Directors appointed under this provision shall hold office until the next Annual Meeting where they will be subject to election by the stockholders for another term, if the stockholders wish to fill all directorships. The number of directors to serve each year shall be determined at the Annual Meeting of the Stockholders of the corporation. 3. Election and Term of Directors At the 1999 Annual Meeting of Stockholders, the Directors elected by the Stockholders shall be divided into three classes (denominated as Class A, Class B and Class C), as nearly equal in number as reasonably possible, with the term of office of the Class A Directors to expire at the year 2000 Annual Meeting of Stockholders, the term of office of Class B Directors to expire at the year 2001 Annual Meeting of Stockholders, and the term of office of the Class C Directors to expire at the year 2002 Annual Meeting of Stockholders. At each Annual Meeting of Stockholders following such initial classification and election, Directors elected to succeed those Directors whose terms expire shall be elected for three (3) year term of office, provided that the Stockholders electing new of replacement Director may from time to time specify a term of less than three years in order to maintain the number of Directors in each class as nearly equal as possible. 4. Vacancies Any vacancy on the Board of Directors may be filled by the Board of Directors. A Director elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next Annual Meeting of Stockholders and until his successor has been elected and qualified. 5. Removal of Directors The stockholders may remove the entire Board of Directors or any individual Director from office by an affirmative vote of eighty percent (80%) of all votes entitled to be cast at an election of Directors. In case the Board or any one or more Directors be so removed, new Directors may be elected at the same meeting. The Board of Directors may remove a Director for cause or physical disability of long duration by a vote of eighty percent (80%) of the members then serving on the Board of Directors. 6. Resignation A Director may resign at any time by giving written notice to the Board, the 4 President, the Treasurer or Secretary of the corporation. Unless otherwise specified in the notice, the resignation shall take effect upon receipt thereof by the Board or such officer and the acceptance of the resignation shall not be necessary to make it effective. 7. Quorum of Directors At all meetings of the Board of Directors, a majority of the Directors serving shall be necessary and a quorum for the transaction of business, and every act of the majority of the Directors present at a meeting at which a quorum is present, shall be regarded as the act of the Board of Directors, unless a greater number is required by law or under the provisions of these By-Laws. In absence of a quorum, a majority of the Directors present may adjourn from day to day until the time fixed for the next regular meeting of the Board of Directors or until a quorum shall attend. 8. Action of the Board of Directors Unless otherwise required by law, the vote of a majority of the Directors present at the time of the vote, if a quorum is present at such time, shall be the act of the Board of Directors. Each Director present shall have one vote regardless of the number of shares that Director may hold. 9. Place and Time of Board Meeting The Board of Directors may hold its meetings at the office of the corporation or at such other place, within the State of Maryland, as it may from time to time determine. 10. Regular Annual Meeting A regular Annual Meeting of the Board of Directors shall be held immediately following the Annual Meeting of the Stockholders at the place of such Annual Meeting of Stockholders. 11. Notice of Meetings of the Board, Adjournment Regular meetings of the Board of Directors may be held without written notice at such time and place as it shall from time to time determine. Special meetings of the Board of Directors shall be held upon notice to the Directors and may be called by the President upon three (3) days notice to each Director either personally or by mail, or by wire. Special meetings shall be called by the President or by the Secretary, and/or the Treasurer in a like manner on written request of two (2) Directors. Notice of a meeting need not be given to any Director who submits a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement, the lack of notice. 12. Chairman The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors and the stockholders of the corporation. The Chairman shall be an ex officio member of all standing committees. The Chairman's main duties shall consist of relations between the Board of Directors and the Officers and the Board of Directors and the stockholders. Also, the Chairman may exercise such other and further authority as the Board of Directors may, from time to time, delegate to the Chairman. 5 13. Compensation The Board of Directors shall provide for compensation to be paid to Directors, Committee members and the Secretary attending meetings of the Board and any Committees. ARTICLE IV OFFICERS 1. Offices, Election, Term The officers of the corporation shall consist of: President (who may also be Chairman of the Board of Directors), Vice Presidents, Secretary and Treasurer. All of said officers shall be elected by the Board of Directors. New Officer positions may be created and filled by the Board of Directors at any regular or special Board meeting. 2. President The President shall be the Chief Executive Officer of the corporation. The President shall carry into effect all legal directions of the Executive Committee and the Board of Directors and shall at all times exercise general supervision over the interests, affairs, and operations of the corporation and perform all duties with reference thereto or incident to office of President. Also, the President may perform such duties as the Board of Directors may designate from time to time. The President shall be an ex officio member of all standing Committees. 3. Vice President During the absence or disability of the President, the Vice President shall have all the duties and powers and functions of the President. The Vice President shall perform such duties as may be prescribed by the Board of Directors from time to time. 4. Assistant Vice President The Board of Directors may appoint an Assistant Vice President or more than one Assistant Vice President. Each Assistant Vice President shall have power to perform all duties of the Vice President in the absence or disability of the Vice President and shall have such other powers and shall perform such other duties as may be assigned by the Board of Directors or the President. 5. Treasurer The Treasurer shall have custody of all the funds and securities of the corporation, and shall keep full and accurate account of receipts and disbursements in books belonging to the corporation. The Treasurer shall deposit all monies and other valuables in the name and to the credit of the corporation in such despository or despositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements. The Treasurer shall render to the President and the Board of Directors, whenever either of them so request, an account of all transactions as Treasurer and of the financial condition of the corporation. 6 Duties generally incident to the office of Treasurer, subject to the control of the Board of Directors and the President. During the absence or disability of the Treasurer, the Board of Directors may select an Acting Treasurer to serve, who shall have all the powers and functions of the Treasurer. The Acting Treasurer would serve until, in the judgment of the Board of Directors, the Treasurer could return to duty. 6. Secretary The Secretary shall have the custody of the seal of the corporation and shall affix the same to all instruments requiring it, when authorized by the Board of Directors or the President and attest the same. In general, the Secretary shall perform all duties generally incident to the office of Secretary, subject to the control of the Board of Directors and the President. During the absence or disability of the Secretary, the Board of Directors may elect an Acting Secretary to serve, who shall have all the powers and duties of the Secretary. The Acting Secretary will serve until, in the judgment of the Board of Directors, the Secretary could return to duty. 7. Counsel The Board of Directors shall have the power to appoint a Counsel. The Counsel of this corporation shall have such powers and perform such duties as the Board of Directors shall prescribe. ARTICLE V CERTIFICATES FOR SHARES 1. Certificates The shares of the corporation shall be represented by certificates unless represented by book entries (Statement of Account). They shall be numbered and entered in the books of the corporation as they are issued. They shall exhibit the holder's name and the number of shares and shall be signed by the officers designated in these By-Laws, and shall bear the corporate seal. The President and Secretary, shall sign all certificates of stock and shall have power to make any and all transfers of the stock of this corporation which may be authorized. In the absence of the President the Vice President shall perform the duties and in the absence of the Secretary the Assistant Secretary shall perform these duties in reference to said certificates. 2. Lost or Destroyed Certificates The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by corporation alleged to have been lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or give the corporation a bond in such sum and with such surety or sureties as it may 7 direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. 3. Transfer of Shares a. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person or persons entitled thereto, and cancel the old certificate. Every such transfer shall be entered on the transfer book of the corporation which shall be kept at its principal office. No transfer shall be made within twenty (20) days next preceding the Annual Meeting of the Stockholders. b. The corporation shall be entitled to treat the holder of record of any share as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Maryland. 4. Transfer Books The Board of Directors may prescribe a period not exceeding twenty (20) days prior to any meeting of the stockholders, during which time no transfer of stock on the books of the corporation may be made. ARTICLE VI DIVIDENDS The Board of Directors, at their discretion, may, when the surplus profits justify, declare dividends (or distribution of surplus profits) to the holders of shares of capital stock. ARTICLE VII INVESTMENTS, LOANS AND EXPENDITURES The funds of this corporation may be invested, loaned or expended in such manner and on such terms as the Board of Directors or Executive Committee may determine, subject to applicable State and Federal laws and regulations. To acquire, hold, own, sell, assign, exchange, transfer or otherwise dispose of or deal in and with any of the shares of capital stock and other securities and interest issued or created by any banking institution or association organized under the laws of the United States of America, any state, other political subdivision or any foreign government, or any other firm or corporation to the extent permitted by applicable laws or regulations. ARTICLE VIII CORPORATE SEAL The seal of the corporation shall be circular in form and bear the name of the corporation, the year of its organization and the words "Corporate Seal - Maryland." The seal may be used by causing it to be impressed directly on the instrument or writing to be sealed or upon adhesive substance affixed thereto. The seal on the certificates for shares or on any corporate obligation for the payment of money may be a facsimile, engraved, or printed. 8 ARTICLE IX EXECUTION OF INSTRUMENTS All corporate instruments and document, except stock certificates, shall be signed or countersigned, executed, verified or acknowledged by such officer or officers or other person or persons as the Board of Directors may from time to time designate. ARTICLE X FISCAL YEAR The fiscal year shall begin the first day of January in each year and end on the following 31st day of December in each year. ARTICLE XI REFERENCES TO CERTIFICATE OF INCORPORATION AND ARTICLES OF INCORPORATION Reference to the Certificate of Incorporation and the Articles of Incorporation in these By-Laws shall include all amendments thereto or changes thereof unless specifically exempted. ARTICLE XII BY-LAW CHANGES 1. Amendment, Repeal, Adoption, Election of Directors Except as otherwise provided in the Articles of Incorporation, the By-Laws may be amended by the stockholder of the corporation by an affirmative vote of eighty 80% of all the votes entitled to be cast on the matter. The By-Laws may be amended or repealed at any Special Meeting called for that purpose or at any regular Annual Meeting, provided however that notice, as required, is given to all stockholders entitled to said notice. ARTICLE XIII INDEMNIFICATION OF OFFICERS AND DIRECTORS As used in this Article XIII, any word or words defined in Section 2-418 of the Corporations & Associations Article of the Annotated Code of Maryland, as amended from time to time, (the is Indemnification Section) shall have the same meaning as provided in the Indemnification Section. The corporation may indemnify and advance expenses to a Director, officer, employee, Committee member of the Corporation in connection with a proceeding to the fullest extent permitted by and in accordance with the Indemnification Section. ARTICLE XIV PUBLICATION OF NOTICE TO STOCKHOLDERS Notice of the time, place and purpose of such meeting shall be given by publication in at least one (1) newspaper published in Anne Arundel County, Maryland, not less than ten (10) days prior to the 9 meeting, in which said notice shall set forth the time and place of said meeting and also the fact that the meeting is an Annual Meeting and that the annual election of directors will then be held. ARTICLE XV ANNUAL REPORT OF THE PRESIDENT At every Annual Meeting of the Stockholders, the President shall submit full reports of the financial condition of the corporation and the results of its operations during the preceding year. ARTICLE XVI INSPECTORS OF ELECTION At the meeting, the Chairman of the meeting shall appoint two (2) or more persons to act as inspectors of election. However, the failure to appoint such inspectors shall not in any way affect the validity of the election or other proceedings taken at the meeting. 10 EX-23 4 LETTER OF CONSENT Exhibit 23 [TRICE & GEARY LLC LETTERHEAD] Board of Directors Glen Burnie Bancorp We hereby consent to the incorporation by reference of our report, dated January 22, 1999, included in this annual report on Form 10-K, into the Company's Registration Statements on Forms S-3 and S-8 (SEC File Nos. 333-37073, 333- 46943, 33-62280 and 33-62278). /s/ TRICE & GEARY, LLC - ----------------------- TRICE & GEARY LLC March 26, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
9 0000890066 GLEN BURNIE BANCORP 1,000 U.S. Dollars 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1.000 8,197 4,958 2,864 0 32,925 32,561 32,540 128,342 2,841 217,571 199,611 1,144 2,364 0 0 0 5,219 8,949 217,571 11,151 4,950 347 15,899 6,049 6,095 9,794 (500) 527 11,776 1,639 833 0 0 833 0.78 0.78 4.94 1,725 18 294 2,529 4,139 1,095 297 2,841 2,400 0 441
-----END PRIVACY-ENHANCED MESSAGE-----