| GLEN BURNIE BANCORP ITEM 1A RISK FACTORS An investment in the Common Stock is subject to risks inherent to the Bank’s business |
| The material risk and uncertainties that management believes affect the Bank are described below |
| Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations |
| Risk Factors Relating to our Business Generally Fluctuations in interest rates could reduce the Bank’s profitability and affect the value of its assets |
| Like other financial institutions, the Bank is subject to interest rate risk |
| The Company’s income and cash flow depend to a great extent on the difference between the interest rates earned on the Bank’s interest-earning assets such as loans and investment securities, and the interest rates paid on the Bank’s interest-bearing liabilities such as deposits and borrowings |
| These rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and the policies of various government agencies, in particular the Federal Reserve Bank |
| Changes in interest rates will influence the origination of loans, the prepayment speed of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding |
| The impact of these changes may be magnified if the Company does not effectively manage the relative sensitivity of its assets and liabilities to changes in market interest rates |
| Fluctuations in these areas may adversely affect the Company and its shareholders |
| Until recently, interest rates have been at historically low levels |
| However, since June 30, 2004, the Federal Reserve has increased its target for Federal funds rate numerous times |
| While these short-term market interest rates (which are used as a guide for pricing deposits) have increased, longer-term market interest rates (which are used as a guide for pricing longer-term loans and leases) have not |
| This “flattening” of the market yield curve has had a negative impact on the Bank’s interest rate spread and net interest margin to date |
| If short-term interest rates continue to rise, and if rates on its deposits and borrowings continue to reprice upwards faster than the rates on long-term loans and investments, the Bank could experience compression of its interest rate spread and net interest margin, which could have a negative effect on the Bank’s profitability |
| 16 _________________________________________________________________ The Bank is subject to credit risks relating to its loan portfolio |
| The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk |
| Management reviews and approves these policies and procedures on a regular basis |
| A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, and nonperforming and potential problem loans |
| Diversification in the loan portfolio is a means of managing risk associated with fluctuations and economic conditions |
| The Bank maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis |
| Results of these reviews are presented to management |
| The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures |
| In the financial services industry, there is always a risk that certain borrowers may not repay borrowings |
| The Bank’s allowance for credit losses may not be sufficient to cover the loan losses that it may actually incur |
| If the Bank experiences defaults by borrowers in any of its businesses, the Bank’s earnings could be negatively affected |
| Changes in local economic conditions could adversely affect credit quality, particularly in its local business loan portfolio |
| Changes in national economic conditions could also adversely affect the quality of its loan portfolio |
| Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans |
| Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy |
| The Bank seeks to minimize these risks through its underwriting standards |
| The Bank obtains financial information and performs credit risk analysis on its customers |
| Underwriting standards are designed to promote relationship banking rather than transactional banking |
| Most commercial and industrial loans are secured by the assets being financed or other business assets; however, some loans may be made on an unsecured basis |
| The Bank’s credit policy sets different maximum exposure limits both by business sector and its current and historical relationship and previous experience with each customer |
| The Bank offers both fixed-rate and adjustable-rate consumer mortgage loans secured by properties, substantially all of which are located in the Bank’s primary market area |
| Adjustable-rate mortgage loans help reduce the Bank’s exposure to changes in interest rates; however, during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase as a result of repricing and the increased payments required from the borrower |
| Consumer loans are primarily all other non-real estate loans to individuals in the Bank’s regional market area |
| Consumer loans can entail risk, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets |
| In these cases, any repossessed collateral may not provide an adequate source of repayment of the outstanding loan balance |
| The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment |
| In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy |
| General economic conditions nationally and in the Bank’s market area are less than favorable |
| The Company is affected by general economic conditions in the United States and, in particular, in the Bank’s market area |
| These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, and the strength of both the US economy and the local economy in which the Bank operates, all of which are beyond the Company’s control |
| Deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for the bank’s products and services, any of which could have a material adverse impact on the Company’s financial condition and results of operations |
| 17 _________________________________________________________________ The financial services industry is very competitive |
| The Bank faces competition in attracting and retaining deposits, making loans, and providing other financial services throughout the Bank’s market area |
| The Bank’s competitors include other community banks, larger banking institutions, and wide range of other financial institutions such as credit unions, government sponsored enterprises, mutual fund companies, insurance companies and other non-bank enterprises |
| Many of these competitors have substantially greater resources than the Company |
| If the Bank is unable to compete effectively, it will lose market share and income from deposits, loans, and other products may be reduced |
| Legislative or regulatory changes or actions, or significant litigation, could adversely impact the Company or the businesses in which the Company is engaged |
| The Company and the Bank are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of operations |
| Law and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds |
| The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business |
| Additionally, actions by regulatory agencies or significant litigation against the Company or the Bank may cause the Company to devote significant time and resources to defending itself and may lead to penalties that materially affect the Company and its shareholders |
| Future changes in the laws or regulations or their interpretations or enforcement could be materially adverse to the Company and its stockholders |
| The Company is subject to environmental liability risk associated with lending activities |
| A portion of the Bank’s loan portfolio is secured by real property |
| During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans |
| In doing so, there is a risk that hazardous or toxic substances could be found on these properties |
| If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage |
| Environmental laws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property |
| In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability |
| Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards |
| The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations |
| The Bank’s information systems may experience an interruption or breach in security |
| The Bank relies heavily on communications and information systems to conduct its business |
| Any failure interruption or breach in security of these systems could result in failures or disruptions in the Bank’s customer relationship management, general ledger, deposit, loan and other system |
| While the Bank has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur, or if they do occur, that they will be adequately addressed |
| The occurrence, of any failures, interruptions or security breaches of the Bank’s information systems could damage the Bank’s reputation, result in a loss of customer business, subject the Bank to additional regulatory scrutiny, or expose the Bank to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operation |
| Financial services companies depend on the accuracy and completeness of information about customers and counterparties |
| In deciding whether to extend credit or enter into other transactions, the Bank may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information |
| The Bank may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information |
| Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on the Bank’s business and, in turn, the Company’s financial condition and results of operations |
| 18 _________________________________________________________________ The inability to hire or retain certain key professionals, management and staff could adversely affect the Company’s revenues and net income |
| The Bank relies on key personnel to manage and operate our business, including major revenue generating functions such as our loan and deposit portfolios |
| The loss of key staff may adversely affect the Bank’s ability to maintain and mange these portfolios effectively, which could negatively affect the Company’s revenues |
| In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in the Company’s net income |
| Severe weather, acts of war and terrorism and other adverse external events could significantly impact the Company’s business Severe weather, acts of war or terrorism and other adverse external events could have a significant impact on the Bank’s ability to conduct business |
| Such events could affect the stability of the Bank’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses |
| The occurrence of any such event could have a material adverse effect on the Bank’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations |
| The close proximity of the all of the Company’s branch locations to Washington, DC may put it at an especially high risk of being impacted by terrorism |
| Risk Factors Relating to the Company’s Articles of Incorporation and the Common Stock The liability of our directors is limited |
| Our Articles of Incorporation limit the liability of directors to the maximum extent permitted by Maryland law |
| The trading volume in the Common Stock is less than that of other larger services companies |
| Although the Common Stock is listed for trading on the Nasdaq SmallCap Market, the trading volume in the Common Stock is less than that of other larger financial services companies |
| A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Common Stock at any given time |
| This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control |
| Given the lower trading volume of the Common Stock, significant sales of the Common Stock, or the expectation of these sales, could negatively impact the Company’s stock price |
| It may be difficult for a third party to acquire the Company, which could affect the price of the Common Stock |
| In addition, the Company has a shareholders rights plan that could make it more difficult to acquire the Company |
| As a result, we may be a less attractive target to a potential acquirer who otherwise may be willing to pay a premium for our common stock above its market price |
| These provisions effectively inhibit a non-negotiated merger or other business combination, even if doing so would be perceived to be beneficial to the Company’s stockholders and could adversely affect the market price of the Common Stock |