When used in this discussion and elsewhere in this Form 10-Q, 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 readers are advised that various 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. While it is impossible to identify all such factors, such factors include, but are not limited to, those risks identified in the Company's periodic reports filed with the
Securities and Exchange Commission, including its most recent Annual Report on Form 10-K.
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.
Glen Burnie Bancorp, a Marylandcorporation (the "Company"), through its subsidiary, The Bank of Glen Burnie, a Marylandbanking corporation (the "Bank"), operates a commercial bank with eight offices in Anne Arundel County Maryland. The Company had consolidated net income of $473,000( $0.17basic and diluted earnings per share) for the first quarter of 2014, compared to the first quarter of 2013 consolidated net income of $529,000( $0.19basic and diluted income per share), a 10.59% decrease. The decrease in net income for the first quarter was primarily due to increases in other expenses and provision for loan loss, partially offset by decreases in interest expense and an increase in gains on investment securities. During the three months ended March 31, 2014, deposits increased by $13,120,000and net loans increased by $7,864,000.
Results Of Operations
Net Interest Income. The Company's consolidated net interest income prior to provision for credit losses for the three months ended
March 31, 2014was $3,087,000, compared to $2,913,000for the same period in 2013, an increase of $174,000(5.98%) for the three months.
Interest income for the first quarter increased from
Interest expense for the first quarter decreased from
Net interest margins on a tax equivalent basis for the three months ended
March 31, 2014was 3.74%, compared to 3.56% for the three months ended March 31, 2013. The increase of the net interest margin for the first quarter was primarily due to improvement in the yields on earning assets and a decline in the rates paid on deposits. Provision for Credit Losses. The Company made a provision for credit losses of $38,000during the three month period ending March 31, 2014and $0during the three month period ending March 31, 2013. As of March 31, 2014, the allowance for credit losses equaled 71.33% of non-accrual and past due loans compared to 68.78% at December 31, 2013and 57.82% at March 31, 2013. During the three month period ended March 31, 2014, the Company recorded a net charge-off of $34,000, compared to net charge-offs of $17,000during the corresponding period of the prior year. On an annualized basis, net charge-offs for the 2014 period represent 0.04% of the average loan portfolio. Other Income. Other income increased from $379,000for the three month period ended March 31, 2013, to $433,000for the corresponding 2014 period, an $54,000(14.25%) increase. The increase for the three month period was due to an increase in gains on investment securities, partially offset by a reduction
in service charges. - 12 - Other Expenses. Other expenses increased from
$2,685,000for the three month period ended March 31, 2013, to $2,915,000for the corresponding 2014 period, a $230,000(8.57%) increase. The increase for the three month period was primarily due to an increase in losses on other real estate of $78,000, a $56,000increase in the FDICassessment and a $33,000increase in other professional services along with increases in other loan expenses and salaries and employee benefits. Income Taxes. During the three months ended March 31, 2014, the Company recorded income tax expense of $94,000, compared to income tax expense of $78,000for the same respective period in 2013. The Company's effective tax rate for the three month period in 2014 was 16.58%, compared to 12.85% for the prior year period. The increase in the effective tax rate for the three month period was due to a decrease in state and municipal income. Comprehensive Income. In accordance with regulatory requirements, the Company reports comprehensive income in its financial statements. Comprehensive income consists of the Company's net income, adjusted for unrealized gains and losses on the Bank's investment portfolio of investment securities. For the first quarter of 2014, comprehensive income, net of tax, totaled $1,648,000, compared to the March 31, 2013comprehensive income of $120,000. The increase was due to an increase in the net unrealized gain on securities during the three month period.
General. The Company's assets increased to
$391,385,000at March 31, 2014from $377,194,000at December 31, 2013, primarily due to an increase in cash and cash equivalents and an increase in loans funded primarily by deposit growth. The Bank's net loans totaled $278,548,000at March 31, 2014, compared to $270,684,000at December 31, 2013, an increase of $7,864,000(2.91%), primarily attributable to an increase in purchase money mortgages and indirect lending, offset by decreases primarily in commercial and industrial mortgages and refinance loans. The Company's total investment securities portfolio (investment securities available for sale) totaled $73,464,000at March 31, 2014, an $850,000(1.15%) decrease from $74,314,000at December 31, 2013. The Bank's cash and due from banks (cash due from banks, interest-bearing deposits in other financial institutions, and federal funds sold), as of March 31, 2014, totaled $19,379,000, an increase of $8,426,000(76.93%) from the December 31, 2013total of $10,953,000. The increase in cash and cash equivalents was a result of the excess in deposits not used to fund loans. Deposits as of March 31, 2014, totaled $336,923,000, which is an increase of $13,120,000(4.05%) from $323,803,000at December 31, 2013. Demand deposits as of March 31, 2014, totaled $90,437,000, which is an increase of $3,689,000(4.25%) from $86,748,000at December 31, 2013. NOW accounts as of March 31, 2014, totaled $29,219,000, which is an increase of $1,227,000(4.38%) from $27,992,000at December 31, 2013. Money market accounts as of March 31, 2014, totaled $20,309,000, which is an increase of $1,089,000(5.67%), from $19,220,000at December 31, 2013. Savings deposits as of March 31, 2014, totaled $72,658,000, which is an increase of $1,379,000(1.93%) from $71,279,000at December 31, 2013. Certificates of deposit over $100,000totaled $32,541,000on March 31, 2014, which is an increase of $3,624,000(12.53%) from $28,917,000at December 31, 2013. Other time deposits (made up of certificates of deposit less than $100,000and individual retirement accounts) totaled $91,759,000on March 31, 2014, which is a $2,110,000(2.35%) increase from the $89,649,000total at December 31, 2013. Asset Quality. The following tables set forth the amount of the Bank's current, past due, and non-accrual loans by categories of loans and restructured loans, at the dates indicated. - 13 -
The following table analyzes the age of past due loans, including both accruing and non-accruing loans, segregated by class of loans as of the three months ended
March 31, 201490 Days
(Dollars in Thousands) 30-89 Days More
Current Past Due Still
Accruing Nonaccrual Total
Commercial and industrial
- $ 14
$ 3,925Commercial real estate 65,725 15 1,167 1,191 68,098 Consumer and indirect 78,734 699 - 309 79,742 Residential real estate 127,791 1,646 43 1,448 130,928 $ 275,990 $ 2,531$ 1,210 $ 2,962 $ 282,693
At December 31, 2013 90 Days or (Dollars in Thousands) 30-89 Days More and Current Past Due Still
Accruing Nonaccrual Total
Commercial and industrial
- $ 14
$ 4,173Commercial real estate 66,191 173 1,177 1,238 68,779 Consumer and indirect 71,755 1,137 - 338 73,230 Residential real estate 126,934 157 431 1,123 128,645 $ 269,039 $ 1,467$ 1,608 $ 2,713 $ 274,827
The balances in the above charts have not been reduced by the allowance for loan loss and the unearned income on loans. For the period ending
March 31, 2014, the allowance for loan loss is $2,976,000and the unearned income is $1,170,000. For the period ending December 31, 2013, the allowance for loan loss is $2,972,000and the unearned income is $1,171,000. At At March 31, December 31, 2014 2013 (Dollars in Thousands) Restructured loans $ - $ -
Non-accrual and 90 days or more and still accruing
loans to gross loans 1.48 %
Allowance for credit losses to non-accrual and 90
days or more and still accruing loans 71.33 %
March 31, 2014, there was $2,623,000in loans outstanding, included in the current and 30-89 days past due columns 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.
Non-accrual loans with specific reserves at
Consumer loans - Four loans to four borrowers in the amount of
Commercial loans - Two loans to one borrower totaling
- 14 - Commercial Real Estate - Two loans to two borrowers in the amount of
$1,191,000, secured by commercial and/or residential properties with a specific reserve of $241,000established for the loans.
Below is a summary of the recorded investment amount and related allowance for losses of the Bank's impaired loans at
March 31, 2014and December 31, 2013. (Dollars in thousands) Unpaid Average Recorded Principal Interest Specific Recorded March 31, 2014 Investment Balance Income Recognized Reserve Investment Impaired loans with specific reserves: Real-estate - mortgage: Residential $ 1,5741,574 8 553 1,578 Commercial 1,191 1,191 - 241 1,213 Consumer 393 393 6 179 393 Installment - - - - - Home Equity - - - - - Commercial 276 276 3 276 277 Total impaired loans with specific reserves $ 3,4343,434 17 1,249 3,461 Impaired loans with no specific reserve: Real-estate - mortgage: Residential $ 43 43 - n/a 50 Commercial 2,112 2,112 48 n/a 2,118 Consumer - - - n/a - Installment 141 141 - n/a - Home Equity - - - n/a - Commercial - - - n/a - Total impaired loans with no specific reserve $ 2,2962,296 48 - 2,168 - 15 - (Dollars in thousands) Unpaid Average Recorded Principal Interest Specific Recorded December 31, 2013 Investment Balance Income Recognized Reserve Investment Impaired loans with specific reserves: Real-estate - mortgage: Residential $ 559 559 16 155 564 Commercial 2,187 2,187 56 551 2,272 Consumer 394 394 21 179 394 Installment - - - - - Home Equity - - - - - Commercial 279 279 11 279 287 Total impaired loans with specific reserves $ 3,4193,419 104 1,164 3,517 Impaired loans with no specific reserve: Real-estate - mortgage: Residential $ 1,0701,070 39 n/a 1,071 Commercial 1,177 1,177 47 n/a 1,232 Consumer 11 11 - n/a - Installment 180 180 - n/a - Home Equity 52 52 - n/a 51 Commercial - - - n/a - Total impaired loans with no specific reserve $ 2,4902,490 86 - 2,354 Credit Quality Information The following tables represent credit exposures by creditworthiness category for the quarter ending March 31, 2014and the year ended December 31, 2013. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The Bank's internal creditworthiness is based on experience with similarly graded credits. Loans that trend upward toward higher credit grades typically have less credit risk and loans that migrate downward typically have more credit risk.
The Bank's internal risk ratings are as follows:
1 Superior - minimal risk (normally supported by pledged deposits,
United States governmentsecurities, etc.) 2 Above Average - low risk. (all of the risks associated with this credit based on each of the bank's creditworthiness criteria are minimal) 3 Average - moderately low risk. (most of the risks associated with this credit based on each of the bank's creditworthiness criteria are minimal) 4 Acceptable - moderate risk. (the weighted overall risk associated with this credit based on each of the bank's creditworthiness criteria is acceptable)
5 Other Assets Especially Mentioned - moderately high risk. (possesses
deficiencies which corrective action by the bank would remedy; potential
6 Substandard - (the bank is inadequately protected and there exists the
distinct possibility of sustaining some loss if not corrected) 7 Doubtful - (weaknesses make collection or liquidation in full, based on currently existing facts, improbable) 8 Loss - (of little value; not warranted as a bankable asset)
Loans rated 1-4 are considered "Pass" for purposes of the risk rating chart below.
- 16 -
Risk ratings of loans by categories of loans are as follows:
March 31, 2014 and Commercial and
(Dollars in Thousands)
$ 3,544 $ 59,354 $ 78,136 $ 129,207 $ 270,241Special mention 15 1,299 1,032 476 2,822 Substandard 366 7,445 508 1,245 9,564 Doubtful - - 66 - 66 Loss - - - - - $ 3,925 $ 68,098 $ 79,742 $ 130,928 $ 282,693Non-accrual 14 1,191 309 1,448 2,962
Troubled debt restructures - -
- - - Number of TDRs contracts - - - - - Non-performing TDRs - - - - - Number of TDR accounts - - - - - Commercial Consumer December 31, 2013 and Commercial and Residential
(Dollars in Thousands)
$ 3,595 $ 59,915 $ 71,554 $ 126,774 $ 261,838Special mention 299 5,500 1,102 1,312 8,213 Substandard 279 3,364 508 559 4,710 Doubtful - - 66 - 66 Loss - - - - - $ 4,173 $ 68,779 $ 73,230 $ 128,645 $ 274,827Non-accrual 14 1,238 338 1,123 2,713
Troubled debt restructures - - - - - Number of TDRs contracts - -
- - - Non-performing TDRs - - - - - Number of TDR accounts - - - - - Other Real Estate Owned. At
March 31, 2014, the Company had $863,000in real estate acquired in partial or total satisfaction of debt, compared to $1,171,000at December 31, 2013. This decrease for 2014 was the result of $78,000being written off on three properties and two properties with a value of $230,000being sold. Currently two properties are left on OREO at March 31, 2014. One of these properties sold on April 2, 2014in the amount of $700,000. All such properties are recorded at the lower of cost or fair value (net realizable value) at the date acquired and carried on the balance sheet as other real estate owned. Losses arising at the date of acquisition are charged against the allowance for credit losses. Subsequent write-downs that may be required and expense of operation are included in non-interest expense. Gains and losses realized from the sale of other real estate owned are included in non-interest income or expense. 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 collectability of the principal is unlikely. The allowance, based on evaluations of the collectability of loans and prior loan loss experience, is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The evaluations are performed for each class of loans and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, value of collateral securing the loans and current economic conditions and trends that may affect the borrowers' ability to pay. For example, delinquencies in unsecured loans and indirect automobile installment loans will be reserved for at significantly higher ratios than loans secured by real estate. Based on that analysis, the Bank deems its allowance for credit losses in proportion to the total non-accrual loans and past due loans to be sufficient. - 17 -
Transactions in the allowance for credit losses for the three months ended
Commercial Consumer March 31, 2014 and Commercial and Residential (Dollars in Thousands) Industrial Real Estate Indirect Real Estate Unallocated Total
Balance, beginning of year
$ 413 $ 898 $ 1,188$ 593 $ (120 ) $ 2,972Provision for credit losses (2 ) (528 ) 12 412 144 38 Recoveries 1 22 66 - - 89 Loans charged off - - (123 ) - - (123 ) Balance, end of quarter $ 412 $ 392 $ 1,143 $ 1,005$ 24 $ 2,976Individually evaluated for impairment: Balance in allowance $ 276 $ 241 $ 179$ 553 $ - $ 1,249Related loan balance 276 3,303 534 1,617 - 5,730 Collectively evaluated for impairment: Balance in allowance $ 136 $ 151 $ 964$ 452 $ 24 $ 1,727Related loan balance 3,649 64,795 79,208 129,311 - 276,963 Commercial Consumer December 31, 2013 and Commercial and Residential (Dollars in Thousands) Industrial Real Estate Indirect Real Estate Unallocated Total Balance, beginning of year $ 542 $ 1,183 $ 1,057$ 393 $ 133 $ 3,308Provision for credit losses 46 (374 ) 469 372 (253 ) 260 Recoveries 27 89 314 7 - 437 Loans charged off (202 ) - (652 ) (179 ) - (1,033 ) Balance, end of year $ 413 $ 898 $ 1,188$ 593 $ (120 ) $ 2,972Individually evaluated for impairment: Balance in allowance $ 279 $ 551 $ 179$ 155 $ - $ 1,164Related loan balance 279 3,364 637 1,629 - 5,909 Collectively evaluated for impairment: Balance in allowance $ 134 $ 347 $ 1,009$ 438 $ (120 ) $ 1,808Related loan balance 3,894 65,415 72,593 127,016 - 268,918 - 18 - As of March 31, 2014and December 31, 2013, the allowance for loan losses included an unallocated excess (shortfall) in the amount of $24,000and ( $120,000), respectively. Management is comfortable with these amounts as they feel the amounts are adequate to absorb additional inherent potential losses in the loan portfolio. At At March 31, March 31, 2014 2013 (Dollars in Thousands) Average loans $ 274,766 $ 251,084
Net charge-offs to average loans (annualized) 0.04 % 0.03 %
During 2014, loans to 19 borrowers and related entities totaling approximately
Reserve for Unfunded Commitments. As of
March 31, 2014, the Bank had outstanding commitments totaling $24,761,000. These outstanding commitments consisted of letters of credit, undrawn lines of credit, and other loan commitments. The following table shows the Bank's reserve for unfunded commitments arising from these transactions: Three Months Ended March 31, 2014 2013 (Dollars in Thousands) Beginning balance $ 200 $ 200 Provisions charged to operations - - Ending balance $ 200 $ 200
Contractual Obligations and Commitments. No material changes, outside the normal course of business, have been made during the first quarter of 2014.
Market Risk and Interest Rate Sensitivity
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates or equity pricing. The Company's principal market risk is interest rate risk that arises from its lending, investing and deposit taking activities. The Company's profitability is dependent on the Bank's net interest income. Interest rate risk can significantly affect net interest income to the degree that interest bearing liabilities mature or reprice at different intervals than interest earning assets. The Bank's
Asset/Liability and Risk Management Committeeoversees the management of interest rate risk. The primary purpose of the committee is to manage the exposure of net interest margins to unexpected changes due to interest rate fluctuations. The Company does not utilize derivative financial or commodity instruments or hedging strategies in its management of interest rate risk. The primary tool used by the committee to monitor interest rate risk is a "gap" report which measures the dollar difference between the amount of interest bearing assets and interest bearing liabilities subject to repricing within a given time period. These efforts affect the loan pricing and deposit rate policies of the Company as well as the asset mix, volume guidelines, and liquidity and capital planning. - 19 - The following table sets forth the Company's interest-rate sensitivity at March 31, 2014. Over 1 Over 3 to Through Over 0-3 Months 12 Months 5 Years 5 Years Total (Dollars in Thousands) Assets: Cash and due from banks $ - $ - $ - $ - $ 8,237Federal funds and overnight deposits 11,142 - - - 11,142 Securities - - 369 73,095 73,464 Loans 14,522 11,196 64,949 187,881 278,548 Fixed assets - - - - 3,723 Other assets - - - - 16,271 Total assets $ 25,664 $ 11,196 $ 65,318 $ 260,976 $ 391,385Liabilities: Demand deposit accounts $ - $ - $ - $ - $ 90,437NOW accounts 29,219 - - - 29,219
Money market deposit accounts 20,309 - -
- 20,309 Savings accounts 72,658 - - - 72,658 IRA accounts 3,617 9,939 25,307 2,882 41,745 Certificates of deposit 11,003 24,901 43,180 3,471 82,555 Long-term borrowings - - 20,000 - 20,000 Other liabilities - - - - 1,466 Stockholders' equity: - - - - 32,996 Total liabilities and stockholders' equity
$ 136,806 $ 34,840 $ 88,487 $ 6,353 $ 391,385GAP $ (111,142 ) $ (23,644 ) $ (23,169 ) $ 254,623Cumulative GAP $ (111,142 ) $ (134,786 ) $ (157,955 ) $ 96,668Cumulative GAP as a % of total assets -28.40 % -34.44 % -40.36 % 24.70 % The foregoing analysis assumes that the Company's assets and liabilities move with rates at their earliest repricing opportunities based on final maturity. Mortgage backed securities are assumed to mature during the period in which they are estimated to prepay and it is assumed that loans and other securities are not called prior to maturity. Certificates of deposit and IRA accounts are presumed to reprice at maturity. NOW savings accounts are assumed to reprice at within three months although it is the Company's experience that such accounts may be less sensitive to changes in market rates. In addition to GAP analysis, the Bank utilizes a simulation model to quantify the effect a hypothetical immediate plus or minus 200 basis point change in rates would have on net interest income and the economic value of equity. The model takes into consideration the effect of call features of investments as well as prepayments of loans in periods of declining rates. When actual changes in interest rates occur, the changes in interest earning assets and interest bearing liabilities may differ from the assumptions used in the model. As of March 31, 2014, the model produced the following sensitivity profile for net interest income and the economic value of equity. Immediate Change in Rates -200 -100 +100 +200 Basis Points Basis Points Basis Points Basis Points
% Change in Net Interest Income -1.8 % -0.4 % 2.4 % 4.1 % % Change in Economic Value of Equity -10.3 % -2.6
% -4.3 % -11.8 % - 20 -
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, certificates of deposit with other financial institutions that have an original maturity of three months or less and money market mutual funds. The levels of such assets are dependent on the Bank's operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows. The Bank's cash and cash equivalents (cash due from banks, interest-bearing deposits in other financial institutions, and federal funds sold), as of
March 31, 2014, totaled $19,379,000, an increase of $8,426,000(76.93%) from the December 31, 2013total of $10,953,000. As of March 31, 2014, the Bank was permitted to draw on a $63,865,000line of credit from the FHLB of Atlanta. Borrowings under the line are secured by a floating lien on the Bank's residential mortgage loans. At March 31, 2014, there was nothing outstanding in short-term borrowings from FHLB. As of March 31, 2014, there were $20.0 millionin long-term convertible advances outstanding with various monthly and quarterly call features and with final maturities through August 2018. In addition, the Bank has three unsecured federal funds lines of credit in the amount of $3.0 million, $5.0 millionand $8.0 million, of which nothing was outstanding as of March 31, 2014. The Company's stockholders' equity increased $1,412,000(4.47%) during the three months ended March 31, 2014, due mainly to a decrease in other comprehensive loss, net of taxes, and an increase in retained net income from the period. The Company's accumulated other comprehensive loss, net of taxes decreased by $1,175,000(99.75%) from ( $1,178,000) at December 31, 2013to ( $3,000) at March 31, 2014, as a result of an increase in the market value of securities classified as available for sale. Retained earnings increased by $197,000(0.97%) as the result of the Company's net income for the three months, partially offset by dividends. The Federal Reserve Boardand the FDIChave 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. At March 31, 2014, the Bank was in full compliance with these guidelines with a Tier 1 leverage ratio of 8.61%, a Tier 1 risk-based capital ratio of 12.66% and a total risk-based capital ratio of 13.89%.
Critical Accounting Policies and Estimates
The Company's accounting policies are more fully described in its Annual Report on Form 10-K for the fiscal year ended
December 31, 2013and are essential to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations. As discussed there, the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment. Management has used the best information available to make the estimations necessary to value the related assets and liabilities based on historical experience and on various assumptions which are believed to be reasonable under the circumstances. Actual results could differ from those estimates, and such differences may be material to the financial statements. The Company reevaluates these variables as facts and circumstances change. Historically, actual results have not differed significantly from the Company's estimates. The following is a summary of the more judgmental accounting estimates and principles involved in the preparation of the Company's financial statements, including the identification of the variables most important in the estimation process: - 21 - Allowance for Credit Losses. The Bank's allowance for credit losses is determined based upon estimates that can and do change when the actual events occur, including historical losses as an indicator of future losses, fair market value of collateral, and various general or industry or geographic specific economic events. The use of these estimates and values is inherently subjective and the actual losses could be greater or less than the estimates. For further information regarding the Bank's allowance for credit losses, see "Allowance for Credit Losses", above. Accrued Taxes. Management estimates income tax expense based on the amount it expects to owe various tax authorities. Accrued taxes represent the net estimated amount due or to be received from taxing authorities. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of the Company's tax position.