GLEN BURNIE BANCORP - Quarter Report: 2020 June (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended June 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 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

Inapplicable

(Former name, former address and former fiscal year if changed from last report.)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ☐

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-Accelerated Filer	⌧	Smaller Reporting Company	⌧
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.00 per share	GLBZ	The Nasdaq Stock Market LLC

The number of shares of the registrant’s common stock outstanding as of August 4, 2020 was 2,838,357.

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GLEN BURNIE BANCORP AND SUBSIDIARY

TABLE OF CONTENTS


		Page
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets: As of June 30, 2020 (unaudited) and December 31, 2019 (audited)	3

	Consolidated Statements of (Loss) Income: Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss): Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity: Six Months Ended June 30, 2020 and 2019 (unaudited)	6

	Consolidated Statements of Cash Flows: Six Months Ended June 30, 2020 and 2019 (unaudited)	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	40

Part II.	OTHER INFORMATION	40

Item 1.	Legal Proceedings	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	42

	SIGNATURES	43

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PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


	June 30,		December 31,
	2020			2019
		(unaudited)		(audited)
ASSETS
Cash and due from banks	$	2,387	$	2,420
Interest-bearing deposits in other financial institutions		32,592		10,870
Cash and Cash Equivalents		34,979		13,290

Investment securities available for sale, at fair value		84,534		71,486
Restricted equity securities, at cost		1,199		1,437

Loans, net of deferred fees and costs		284,963		284,738
Less: Allowance for loan losses		(2,392)		(2,066)
Loans, net		282,571		282,672

Real estate acquired through foreclosure		705		705
Premises and equipment, net		3,904		3,761
Bank owned life insurance		8,101		8,023
Deferred tax assets, net		476		672
Accrued interest receivable		1,226		961
Accrued taxes receivable		—		1,221
Prepaid expenses		329		406
Other assets		176		308
Total Assets	$	418,200	$	384,942

LIABILITIES
Noninterest-bearing deposits	$	127,621	$	107,158
Interest-bearing deposits		214,316		214,282
Total Deposits		341,937		321,440

Short-term borrowings		37,367		25,000
Defined pension liability		294		317
Accrued Taxes Payable		1		—
Accrued expenses and other liabilities		2,734		2,505
Total Liabilities		382,333		349,262

STOCKHOLDERS' EQUITY
Common stock, par value $1, authorized 15,000,000 shares, issued and outstanding 2,834,325 and 2,827,473 shares as of June 30, 2020 and December 31, 2019, respectively.		2,834		2,827
Additional paid-in capital		10,582		10,525
Retained earnings		22,145		22,537
Accumulated other comprehensive gain (loss)		306		(209)
Total Stockholders' Equity		35,867		35,680

Total Liabilities and Stockholders' Equity	$	418,200	$	384,942

See accompanying notes to unaudited consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(dollars in thousands, except per share amounts)

(unaudited)




	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
INTEREST INCOME
Interest and fees on loans	$	2,980	$	3,176	$	6,051	$	6,366
Interest and dividends on securities		317		336		698		736
Interest on deposits with banks and federal funds sold		39		62		86		182
Total Interest Income		3,336		3,574		6,835		7,284

INTEREST EXPENSE
Interest on deposits		289		333		614		665
Interest on short-term borrowings		109		117		235		355
Total Interest Expense		398		450		849		1,020

Net Interest Income		2,938		3,124		5,986		6,264

Provision for loan losses		487		30		407		204
Net interest income after provision for loan losses		2,451		3,094		5,579		6,060

NONINTEREST INCOME
Service charges on deposit accounts		38		64		94		124
Other fees and commissions		151		177		311		356
Gain on securities sold		—		—		1		3
Income on life insurance		39		41		78		81
Total Noninterest Income		228		282		484		564

NONINTEREST EXPENSE
Salary and benefits		1,597		1,685		3,302		3,455
Occupancy and equipment expenses		295		386		626		700
Legal, accounting and other professional fees		252		304		504		535
Data processing and item processing services		184		44		417		219
FDIC insurance costs		48		60		99		116
Advertising and marketing related expenses		19		25		44		52
Loan collection costs		21		26		88		40
Telephone costs		43		55		90		121
Other expenses		348		405		676		829
Total Noninterest Expenses		2,807		2,990		5,846		6,067

(Loss) Income before income taxes		(128)		386		217		557

Income tax (benefit) expense		(32)		67		43		103

NET (LOSS) INCOME	$	(96)	$	319	$	174	$	454

Basic and diluted net (loss) income per share of common stock	$	(0.03)	$	0.11	$	0.06	$	0.16

See accompanying notes to unaudited consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019

Net (loss) income	$	(96)	$	319	$	174	$	454

Other comprehensive income (loss):

Net unrealized gain (loss) on securities available for sale:
Net unrealized gain on securities during the period		568		899		1,485		1,831
Income tax expense relating to item above		(156)		(247)		(408)		(503)
Reclassification adjustment for gain on sales of securities included in net income		—		—		(1)		(2)
Net effect on other comprehensive income		412		652		1,076		1,326

Net unrealized (loss) gain on interest rate swap:
Net unrealized loss on interest rate swap during the period		(78)		(398)		(774)		(619)
Income tax benefit relating to item above		21		109		213		171
Net effect on other comprehensive income		(57)		(289)		(561)		(448)

Other comprehensive income		355		363		515		878

Comprehensive income	$	259	$	682	$	689	$	1,332

See accompanying notes to unaudited consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands)

(unaudited)





							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive
	Stock		Capital		Earnings		(Loss)		Total


Balance, December 31, 2018	$	2,814	$	10,401	$	22,066	$	(1,230)	$	34,051

Net income		—		—		454		—		454
Cash dividends, $0.20 per share		—		—		(563)		—		(563)
Dividends reinvested under
dividend reinvestment plan		7		63		—		—		70
Other comprehensive loss		—		—		—		878		878

Balance, June 30, 2019	$	2,821	$	10,464	$	21,957	$	(352)	$	34,890




							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive
	Stock		Capital		Earnings		(Loss) Gain		Total

Balance, December 31, 2019	$	2,827	$	10,525	$	22,537	$	(209)	$	35,680

Net income		—		—		174		—		174
Cash dividends, $0.20 per share		—		—		(566)		—		(566)
Dividends reinvested under
dividend reinvestment plan		7		57		—		—		64
Other comprehensive income		—		—		—		515		515

Balance, June 30, 2020	$	2,834	$	10,582	$	22,145	$	306	$	35,867

See accompanying notes to unaudited consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)



	Six Months Ended June 30,
	2020		2019
Cash flows from operating activities:
Net income	$	174	$	454
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion of premises and equipment		301		550
Provision for loan losses		407		204
Decrease in cash surrender value of bank owned life insurance		(78)		(81)
Decrease (increase) in ground rents		3		(3)
(Increase) decrease in accrued interest receivable		(265)		206
Net decrease (increase) in other assets		206		(338)
Net increase in accrued expenses and other liabilities		704		177

Net cash provided by operating activities		1,452		1,169

Cash flows from investing activities:
Redemptions and maturities of investment securities available for sale		8,230		25,125
Purchases of investment securities available for sale		(19,900)		(3,255)
Net sales of Federal Home Loan Bank stock		238		1,254
Net (increase) decrease in loans		(305)		7,596
Purchases of premises and equipment		(388)		(137)

Net cash (used in) provided by investing activities		(12,125)		30,583

Cash flows from financing activities:
Net increase (decrease) in deposits		20,497		(2,275)
Increase (decrease) in short term borrowings		12,367		(35,000)
Cash dividends paid		(566)		(563)
Common stock dividends reinvested		64		70

Net cash provided by (used in) financing activities		32,362		(37,768)

Net increase in cash and cash equivalents		21,689		(6,016)

Cash and cash equivalents at beginning of year		13,290		15,954

Cash and cash equivalents at end of year	$	34,979	$	9,938

Supplemental Disclosures of Cash Flow Information:
Interest paid on deposits and borrowings	$	890	$	1,048
Net income taxes (refunded) paid		(1,176)		120
Net decrease in unrealized depreciation on available for sale securities		1,485		1,831
Net increase in unrealized appreciation on swaps		(774)		(619)

See accompanying notes to unaudited consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATIONAL

Nature of Business

Glen Burnie Bancorp (the “Company”) is a bank holding company organized in 1990 under the laws of the State of Maryland. The Company owns all the outstanding shares of capital stock of The Bank of Glen Burnie (the “Bank”), a commercial bank organized in 1949 under the laws of the State of Maryland (the “State”). 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 agencies and undergoes periodic examinations by those regulatory authorities.

NOTE 2 – BASIS OF PRESENTATION

In management’s opinion, the accompanying unaudited consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim period reporting, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position at June 30, 2020 and December 31, 2019, the results of operations for the three- and six-month period ended June 30, 2020 and 2019, and the statements of cash flows for the six-month period ended June 30, 2020 and 2019. The operating results for the three-and six-month period ended June 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020 or any future interim period. The consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2020. The unaudited consolidated financial statements for June 30, 2020 and 2019, the consolidated balance sheet at December 31, 2019, and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, The Bank of Glen Burnie. Consolidation resulted in the elimination of all intercompany accounts and transactions.

On January 10, 2019, the Board of Directors (the “Board”) of the Company and the Bank approved the contribution from the Company to the Bank of all of the common stock of GBB Properties, Inc. (“GBB”). The contribution and assignment of 3,600 shares of common stock occurred on January 22, 2019 and was treated as a capital contribution. Prior to the contribution, the Company owned all of the outstanding shares of common stock of GBB, a 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.

Cash Flow Presentation

In the statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, Federal Home Loan Bank of Atlanta (“FHLB Atlanta”) overnight deposits, and federal funds sold. Generally, federal funds are sold for one-day periods.

Reclassifications

Certain items in the 2019 consolidated financial statements have been reclassified to conform to the 2020 classifications. The reclassifications had no effect on previously reported results of operations or retained earnings.

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Use of Estimates

The preparation of financial statements 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses (the “allowance”); the fair value of financial instruments, such as loans and investment securities; benefit plan obligations and expenses; and the valuation of deferred tax assets and liabilities.

NOTE 3 – EARNINGS PER SHARE

Basic earnings per common share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average common shares outstanding, plus the effect of common stock equivalents (for example, stock options computed using the treasury stock method).


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Basic and diluted earnings per share:
Net (loss) income	$	(94,592)	$	319,275	$	173,793	$	454,300
Weighted average common shares outstanding		2,832,974		2,819,994		2,831,174		2,818,266
Basic and dilutive net (loss) income per share	$	(0.03)	$	0.11	$	0.06	$	0.16

Diluted earnings per share calculations were not required for the three- and six-month period ended June 30, 2020 and 2019, as there were no stock options outstanding.

NOTE 4 – INVESTMENT SECURITIES

Investment securities are accounted for according to their purpose and holding period. Trading securities are those that are bought and held principally for the purpose of selling them in the near term. The Company held no trading securities at June 30, 2020 or December 31, 2019. Available-for-sale investment securities, comprised of debt and mortgage-backed securities, are those that may be sold before maturity due to changes in the Company's interest rate risk profile or funding needs, and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income. Held-to-maturity investment securities are those that management has the positive intent and ability to hold to maturity and are reported at amortized cost. The Company held no held-to-maturity securities at June 30, 2020 or December 31, 2019.

Realized gains and losses are recorded in noninterest income and are determined on a trade date basis using the specific identification method. Interest and dividends on investment securities are recognized in interest income on an accrual basis. Premiums and discounts are amortized or accreted into interest income using the interest method over the expected lives of the individual securities.

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The following table summarizes the amortized cost and estimated fair value of the Company’s investment securities portfolio at June 30, 2020 and December 31, 2019:


	At June 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value

Collateralized mortgage obligations	$	27,193	$	354	$	(36)	$	27,511
Agency mortgage-backed securities		31,780		887		(12)		32,655
Municipal securities		12,210		357		(9)		12,558
U.S. Government agency securities		11,816		13		(19)		11,810

Total securities available for sale	$	82,999	$	1,611	$	(76)	$	84,534


	At December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value

Collateralized mortgage obligations	$	27,618	$	52	$	(187)	$	27,483
Agency mortgage-backed securities		27,823		149		(135)		27,837
Municipal securities		12,301		191		(17)		12,475
U.S. Government agency securities		3,195		1		(5)		3,191
U.S. Treasury securities		500		—		—		500

Total securities available for sale	$	71,437	$	393	$	(344)	$	71,486

The gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2020 and December 31, 2019 are as follows:


June 30, 2020	Less than 12 months				12 months or more				Total
Securities available for sale:	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss

	(dollars in thousands)
Collateralized mortgage obligations	$	3,811	$	(9)	$	1,337	$	(27)	$	5,148	$	(36)
Agency mortgage-backed securities		965		(4)		300		(8)		1,265		(12)
Municipal securities		856		(6)		546		(3)		1,402		(9)
U.S. Government agency securities		4,703		(19)		—		—		4,703		(19)
	$	10,335	$	(38)	$	2,183	$	(38)	$	12,518	$	(76)


December 31, 2019	Less than 12 months				12 months or more				Total
Securities available for sale:	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss

	(dollars in thousands)
Collateralized mortgage obligations	$	11,792	$	(65)	$	7,330	$	(122)	$	19,122	$	(187)
Agency mortgage-backed securities		4,577		(20)		10,918		(115)		15,495		(135)
Municipal securities		1,806		(7)		864		(10)		2,670		(17)
U.S. Government agency securities		591		(5)		—		—		591		(5)
	$	18,766	$	(97)	$	19,112	$	(247)	$	37,878	$	(344)

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

At June 30, 2020, the Company recorded unrealized losses in its portfolio of debt securities totaling $76,000 related to 25 securities, which resulted from decreases in market interest rates, spread volatility, and other factors that management deems to be temporary. Management does not believe the securities are impaired due to reasons of credit quality. Since management believes that it is more likely than not that the Company will not be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to be other-than-temporarily impaired.

At December 31, 2019, the Company recorded unrealized losses in its portfolio of debt securities totaling $344,000 related to 97 securities, which resulted from decreases in market interest rates, spread volatility, and other factors that management deems to be temporary. Management does not believe the securities are impaired due to reasons of credit quality. Since management believes that it is more likely than not that the Company will not be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to be other-than-temporarily impaired.

Shown below are contractual maturities of debt securities at June 30, 2020. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	At June 30, 2020

	Amortized		Fair		Yield
(dollars in thousands)	Cost		Value		(1), (2)
Available for sale securities maturing:
Within one year	$	1,871	$	1,877	1.79	%
Over one to five years		1,593		1,631	2.36	%
Over five to ten years		15,727		15,858	1.45	%
Over ten years		63,808		65,168	1.79	%
Total debt securities	$	82,999	$	84,534

_____________________

(1) Yields are stated as book yields which are adjusted for amortization and accretion of purchase premiums and discounts, respectively.

(2) Yields on tax-exempt obligations are computed on a tax-equivalent basis.

NOTE 5 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The fundamental lending business of the Company is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. The Company's loan portfolio is subject to varying degrees of credit risk. These risks entail both general risks, which are inherent in the lending process, and risks specific to individual borrowers. The Company's credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type.

The Company currently manages its credit products and the respective exposure to loan losses by the following specific portfolio segments, which are levels at which the Company develops and documents its systematic methodology to determine the allowance for loan losses. The Company considers each loan type to be a portfolio segment having unique risk characteristics.

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	June 30,			December 31,
	2020			2019
(dollars in thousands)	Amount		%	Amount		%
Consumer	$	12,221	4	$	12,076	4
Residential real estate		83,089	29		81,033	28
Indirect		87,168	31		102,384	36
Commercial		11,809	4		11,907	4
Commercial SBA PPP		17,367	6		—	0
Construction		2,928	1		3,317	1
Commercial real estate		70,381	25		74,021	27
Loans, net of deferred fees and costs		284,963	100		284,738	100
Less: Allowance for loan losses		(2,392)			(2,066)
Loans, net	$	282,571		$	282,672

The Bank’s net loans totaled $282.6 million at June 30, 2020, compared to $282.7 million at December 31, 2019, a decrease of $101,000, or 0.04%. Consumer loans increased from $12.1 million at December 31, 2019 to $12.2 million at June 30, 2020, an increase of $145,000, or 1.20%. Residential real estate loans increased by $2.1 million, or 2.54%, from $81.0 million at December 31, 2019 to $83.1 million at June 30, 2020. Indirect loans decreased from $102.4 million at December 31, 2019 to $87.2 million at June 30, 2020, a decrease of $15.2 million, or 14.86%. Commercial loans decreased $98,000, or 0.82%, to $11.8 million at June 30, 2020, compared to $11.9 million at December 31, 2019. The Commercial Small Business Administration (SBA) Paycheck Protection Program (PPP) loan balance was $17.4 million at June 30, 2020. This new loan type is discussed in “Item 5. Other Information.” Construction loans decreased by $389,000, or 11.72% to $2.9 million at June 30, 2020, compared to $3.3 million at December 31, 2019. Commercial real estate loans decreased from $74.0 million at December 31, 2019 to $70.4 million at June 30, 2020, a decrease of $3.6 million or 4.92%.

Credit Risk and Allowance for Loan Losses. Credit risk is the risk of loss arising from the inability of a borrower to meet his or her obligations and entails both general risks, which are inherent in the process of lending, and risks specific to individual borrowers. Credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type. Residential mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans secured by personal property, such as auto loans, generally experience medium credit losses. Unsecured loan products, such as personal revolving credit, have the highest credit loss experience and for that reason, the Bank has chosen not to engage in a significant amount of this type of lending. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times. Inconsistent economic conditions may have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan 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 loan losses in proportion to the total nonaccrual loans and past due loans to be sufficient.

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For purposes of determining the allowance for loan losses, the Bank segments the loan portfolio into the following classifications:

●

Consumer

●

Residential Real Estate

●

Indirect

●

Commercial

●

Commercial SBA PPP

●

Construction

●

Commercial Real Estate

Each of these segments are reviewed and analyzed quarterly using the average historical charge-offs over a forty-eight to sixty month period for their respective segments as well as the following qualitative factors:

●

Changes in asset quality metrics including past due loans (30 - 89 days), nonaccrual loans, classified assets, watch list loans all in relation to total loans. Also policy exceptions in relationship to loan volume.

●

Changes in the rate and direction of the loan volume by portfolio segment.

●

Concentration of credit including the concentration percentages, changes in concentration and concentrations relative to goals.

●

Changes in macro-economic factors including the rates and direction of unemployment, median income and population.

●

Changes in internal factors including external loan review required reserve changes, internal review penetration, internal required reserve changes, and weighted required reserve trends.

●

Changes in rate and direction of charge offs and recoveries.

Transactions in the allowance for loan losses for the three months ended June 30, 2020 and the year ended December 31, 2019 were as follows:



June 30, 2020			Residential						Commercial				Commercial
(dollars in thousands)	Consumer		Real Estate		Indirect		Commercial		SBA PPP		Construction		Real Estate		Total

Balance, beginning of year	$	122	$	589	$	917	$	38	$	—	$	11	$	389	$	2,066
Charge-offs		—		—		(171)		—		—		—		—		(171)
Recoveries		8		9		53		20		—		—		—		90
Provision for loan losses		21		155		84		47		—		5		95		407

Balance, end of quarter	$	151	$	753	$	883	$	105	$	—	$	16	$	484	$	2,392

Individually evaluated for impairment:
Balance in allowance	$	11	$	—	$	—	$	—	$	—	$	—	$	—	$	11
Related loan balance		40		535		—		—		—		—		3,570		4,145

Collectively evaluated for impairment:
Balance in allowance	$	140	$	753	$	883	$	105	$	—	$	16	$	484	$	2,381
Related loan balance		12,181		82,554		87,168		11,809		17,367		2,928		66,811		280,818

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December 31, 2019			Residential						Commercial				Commercial
(dollars in thousands)	Consumer		Real Estate		Indirect		Commercial		SBA PPP		Construction		Real Estate		Total

Balance, beginning of year	$	161	$	864	$	988	$	241	$	—	$	4	$	283	$	2,541
Charge-offs		(69)		(16)		(504)		(27)		—		—		—		(616)
Recoveries		16		5		225		10		—		—		—		256
Provision for loan losses		14		(264)		208		(186)		—		7		106		(115)

Balance, end of year	$	122	$	589	$	917	$	38	$	—	$	11	$	389	$	2,066

Individually evaluated for impairment:
Balance in allowance	$	15	$	—	$	—	$	—	$	—	$	—	$	—	$	15
Related loan balance		86		631		—		—		—		—		3,680		4,397

Collectively evaluated for impairment:
Balance in allowance	$	107	$	589	$	917	$	38	$	—	$	11	$	389	$	2,051
Related loan balance		11,990		80,402		102,384		11,907		—		3,317		70,341		280,341

Management believes the allowance for credit losses is at an appropriate level to absorb inherent probable losses in the portfolio.


	June 30,			June 30,
(dollars in thousands)	2020			2019
Average loans	$	284,168		$	295,425
Net charge offs to average loans (annualized)		0.02	%		0.24	%

During the six-month period ended June 30, 2020, loans to 20 borrowers and related entities totaling approximately $171,000 were determined to be uncollectible and were charged off. During the six-month period ending June 30, 2019, loans to 39 borrowers and related entities totaling approximately $435,000 were determined to be uncollectible and were charged off.

Reserve for Unfunded Commitments. Loan commitments and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Bank generally requires collateral to support financial instruments with credit risk on the same basis as it does for on-balance sheet instruments. The collateral requirement is based on management's credit evaluation of the counter party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

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As of June 30, 2020, and 2019, the Bank had outstanding commitments totaling $31.8 million and $25.3 million, respectively. 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:


	Six Months Ended
	Ended June 30,
(dollars in thousands)	2020		2019
Beginning balance	$	37	$	35
Reduction of unfunded reserve		—		(23)
Provisions charged to operations		60		—

Ending balance	$	97	$	12

Contractual Obligations and Commitments. No material changes, outside the normal course of business, have been made during the second quarter of 2020.

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.


At June 30, 2020					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total

Consumer	$	12,069	$	66	$	—	$	86	$	12,221
Residential Real Estate		81,244		1,196		18		631		83,089
Indirect		86,549		467		—		152		87,168
Commercial		11,809		—		—		—		11,809
Commercial SBA PPP		17,367		—		—		—		17,367
Construction		2,928		—		—		—		2,928
Commercial Real Estate		65,900		1,409		—		3,072		70,381

	$	277,866	$	3,138	$	18	$	3,941	$	284,963


At December 31, 2019					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total

Consumer	$	11,865	$	74	$	—	$	137	$	12,076
Residential Real Estate		80,192		92		21		728		81,033
Indirect		101,605		656		—		123		102,384
Commercial		11,907		—		—		—		11,907
Commercial SBA PPP		—		—		—		—		—
Construction		3,317		—		—		—		3,317
Commercial Real Estate		70,882		—		—		3,139		74,021

	$	279,768	$	822	$	21	$	4,127	$	284,738

The balances in the above charts have not been reduced by the allowance for loan loss. For the period ending June 30, 2020, the allowance for loan loss is $2.4 million. For the period ending December 31, 2019, the allowance for loan loss is $2.1 million.

At June 30, 2020, there was $484,000 in loans outstanding that were in an accrual status, but known information about possible credit problems of borrowers caused management to have 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

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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. The one loan outstanding, totaling $484,000 was as follows: $484,000 Commercial Real Estate loan where the guarantor is in bankruptcy and the loan has an accelerated payoff since we have an assignment of rents from the property which has a very long-term national tenant.

Non-accrual loans with specific reserves at June 30, 2020 are comprised of:

Consumer loans – One loan to one borrower that totaled $39,711 with specific reserves of $10,808 established for the loan, which was also a Troubled Debt Restructured loan.

Below is a summary of the recorded investment amount and related allowance for losses of the Bank’s impaired loans at June 30, 2020 and December 31, 2019.

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June 30, 2020			Unpaid		Interest				Average
(dollars in thousands)	Recorded		Principal		Income		Specific		Recorded
	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Consumer	$	40	$	40	$	1	$	11	$	50
Total impaired loans with specific reserves		40		40		1		11		50


Impaired loans with no specific reserve:
Consumer	$	45	$	45	$	2	$	n/a	$	67
Residential Real Estate		630		768		2		n/a		1,826
Indirect		153		153		4		n/a		194
Commercial Real Estate		3,570		3,570		61		n/a		3,737
Total impaired loans with no specific reserve	$	4,398	$	4,536	$	69		—	$	5,824


December 31, 2019			Unpaid		Interest				Average
(dollars in thousands)	Recorded		Principal		Income		Specific		Recorded
	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Consumer	$	26	$	41	$	2	$	15	$	50
Total impaired loans with specific reserves	$	26	$	41	$	2	$	15	$	50

Impaired loans with no specific reserve:
Consumer	$	96	$	96	$	8		n/a	$	122
Residential Real Estate		728		1,497		14		n/a		1,928
Indirect		123		123		6		n/a		—
Commercial Real Estate		3,680		3,680		81		n/a		3,845
Total impaired loans with no specific reserve	$	4,627	$	5,396	$	109		—	$	5,895


	June 30,			December 31,
(dollars in thousands)	2020			2019

Troubled debt restructured loans	$	40		$	41
Non-accrual and 90+ days past due and still accruing loans to average loans		1.39	%		1.45	%
Allowance for loan losses to nonaccrual & 90+ days past due and still accruing loans		60.4	%		49.8	%

At June 30, 2020, there was one troubled debt restructured loan consisting of a consumer loan in the amount of $40,000. The consumer loan is in a nonaccrual status.

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The following table shows the activity for non-accrual loans for the six months ended June 30, 2019 and 2020.



		Residential			Commercial
(dollars in thousands)	Consumer	Real Estate	Indirect	Commercial	Real Estate	Totals

December 31, 2018	186	956	116	27	662	1,947
Transfers into nonaccrual	134	571	334	86	2,746	3,871
Loans paid down/payoffs	(16)	(628)	(21)	—	(105)	(770)
Loans returned to accrual status	(48)	—	(102)	—	—	(150)
Loans charged off	(40)	(16)	(297)	(27)	—	(380)

June 30, 2019	216	883	30	86	3,303	4,518


December 31, 2019	137	728	123	—	3,139	4,127
Transfers into nonaccrual	1	—	253	—	577	831
Loans paid down/payoffs	(52)	(97)	(36)	—	(67)	(252)
Loans returned to accrual status	—	—	(17)	—	(577)	(594)
Loans charged off	—	—	(171)	—	—	(171)

June 30, 2020	86	631	152	—	3,072	3,941

Other Real Estate Owned. At June 30, 2020 and December 31, 2019, the Company had $705,000 in real estate acquired in partial or total satisfaction of debt. All such properties are initially 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 noninterest expense. Gains and losses realized from the sale of other real estate owned were included in noninterest income.

Credit Quality Information

In addition to monitoring the performance status of the loan portfolio, the Company utilizes a risk rating scale (1-8) to evaluate loan asset quality for all loans. Loans that are rated 1-4 are classified as pass credits. For the pass rated loans, management believes there is a low risk of loss related to these loans and, as necessary, credit may be strengthened through improved borrower performance and/or additional collateral.

The Bank’s internal risk ratings are as follows:

Superior – minimal risk. (normally supported by pledged deposits, United States government securities, etc.)

Above Average - low risk. (all of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

Average – moderately low risk. (most of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

Acceptable – moderate risk. (the weighted overall risk associated with this credit based on each of the bank’s creditworthiness criteria is acceptable)

Other Assets Especially Mentioned – moderately high risk. (possesses deficiencies which corrective action by the bank would remedy; potential watch list)

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Substandard – (the bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected)

Doubtful – (weaknesses make collection or liquidation in full, based on currently existing facts, improbable)

Loss – (of little value; not warranted as a bankable asset)

The following tables provides information with respect to the Company's credit quality indicators by loan portfolio segment at June 30, 2020 and December 31, 2019:



June 30, 2020			Residential						Commercial				Commercial
(dollars in thousands)	Consumer		Real Estate		Indirect		Commercial		SBA PPP		Construction		Real Estate		Total

Pass	$	12,136	$	82,459	$	87,015	$	11,809	$	17,367	$	2,928	$	66,811	$	280,525
Special mention		—		—		—		—		—		—		—		—
Substandard		85		630		35		—		—		—		3,570		4,320
Doubtful		—		—		118		—		—		—		—		118
Loss		—		—		—		—		—		—		—		—

	$	12,221	$	83,089	$	87,168	$	11,809	$	17,367	$	2,928	$	70,381	$	284,963

Nonaccrual	$	86	$	631	$	152	$	—	$		$	—	$	3,072	$	3,941
Troubled debt restructures	$	40	$	—	$	—	$	—	$	—	$	—	$	—	$	40
Number of TDRs accounts		1		—		—		—		—		—		—		1
Non-performing TDRs	$	40	$	—	$	—	$	—	$	—	$	—	$	—	$	40
Number of non-performing TDR accounts		1		—		—		—		—		—		—		1



December 31, 2019			Residential						Commercial				Commercial
(dollars in thousands)	Consumer		Real Estate		Indirect		Commercial		SBA PPP		Construction		Real Estate		Total

Pass	$	11,939	$	80,305	$	102,261	$	11,907	$	—	$	3,317	$	70,341	$	280,070
Special mention		—		—		—		—		—		—		—		—
Substandard		137		728		44		—		—		—		3,680		4,589
Doubtful		—		—		79		—		—		—		—		79
Loss		—		—		—		—		—		—		—		—

	$	12,076	$	81,033	$	102,384	$	11,907	$	—	$	3,317	$	74,021	$	284,738

Nonaccrual	$	137	$	728	$	123	$	—	$	—	$	—	$	3,139	$	4,127
Troubled debt restructures	$	41	$	—	$	—	$	—	$	—	$	—	$	—	$	41
Number of TDRs accounts		1		—		—		—		—		—		—		1
Non-performing TDRs	$	41	$	—	$	—	$	—	$	—	$	—	$	—	$	41
Number of non-performing TDR accounts		1		—		—		—		—		—		—		1

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NOTE 6 – FAIR VALUE

ASC Topic 820 provides a framework for measuring and disclosing fair value under GAAP. ASC 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or a nonrecurring basis (for example, impaired loans).

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

The Fair Value Hierarchy

ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below:

●

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

●

Level 2 – Other significant observable inputs (including quoted prices in active markets for similar securities).

●

Level 3 – Significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investment Securities Available-for-Sale and Interest Rate Swaps. Investment securities available-for-sale and interest rate swap contracts are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities, and interest rate swap contracts. Securities classified as Level 3 include asset-backed securities in illiquid markets.

The Bank may be required, from time to time, to measure certain other financial and non-financial assets and liabilities at fair value on a non-recurring basis in accordance with GAAP.

Loans. At June 30, 2020, these assets included 17 loans, excluding $293,000 of residential real estate, consumer and indirect loans. They have been classified as impaired and include nonaccrual, past due 90 days or more and still accruing, and a homogeneous pool of indirect loans all considered to be impaired loans, which are valued under Level 3 inputs. Impaired loans totaled $4.1 million with $11,000 of specific reserves as of June 30, 2020. Foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Company is predominantly a cash flow lender with real estate serving as collateral on a majority of loans. These loans totaled $4.2 million of the total impaired loans as of June 30, 2020. On a quarterly basis, the Company determines such fair values through a variety of data points and mostly rely on appraisals from independent appraisers. We obtain an appraisal on properties when they become impaired and have new appraisals at least every year. Typically, these appraisals do not include an inside inspection of the property as our loan documents do not require the borrower to allow access to the property. Therefore, the most significant unobservable inputs is the details of the amenities included within

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the property and the condition of the property. Further, we cannot always accurately assess the amount of time it takes to gain ownership of our collateral through the foreclosure process and the damage, as well as potential looting, of the property further decreasing our value. Thus, in determining the fair values we discount the current independent appraisals, with a range from 0% to 16%, based on individual circumstances. The remaining impaired loans ($238,000 with $11,000 of specific reserves as of June 30, 2020) include mobile homes, commercial, consumer, and indirect auto loans, which are valued based on the value of the underlying collateral.

The changes in the assets subject to fair value measurements are summarized below by level:


							Fair
(dollars in thousands)	Level 1		Level 2		Level 3		Value
June 30, 2020
Recurring:
Securities available for sale
Collateralized mortgage obligations	$	—	$	27,511	$	—	$	27,511
Agency mortgage-backed securities		—		32,655		—		32,655
Municipal securities		—		12,558		—		12,558
U.S. Government agency securities		—		11,810		—		11,810
U.S. Treasury securities		—		—		—		—
Interest rate swap		—		(1,112)		—		(1,112)

Non-recurring:
Maryland Financial Bank stock		—		—		3		3
Impaired loans		—		—		4,427		4,427
OREO		—		705		—		705
	$	—	$	84,127	$	4,430	$	88,557
December 31, 2019
Recurring:
Securities available for sale
Collateralized mortgage obligations	$	—	$	27,483	$	—	$	27,483
Agency mortgage-backed securities		—		27,837		—		27,837
Municipal securities		—		12,475		—		12,475
U.S. Government agency securities		—		3,191		—		3,191
U.S. Treasury securities		—		500		—		500
Interest rate swap		—		(336)		—		(336)

Non-recurring:
Maryland Financial Bank stock		—		—		3		3
Impaired loans		—		—		4,638		4,638
OREO				705				705
	$	—	$	71,855	$	4,641	$	76,496

The estimated fair values of the Company’s financial instruments at June 30, 2020 and December 31, 2019 are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

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	June 30, 2020				December 31, 2019
(dollars in thousands)	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	2,387	$	2,387	$	2,420	$	2,420
Interest-bearing deposits in other financial institutions		31,550		31,550		10,017		10,017
Federal funds sold		1,042		1,042		853		853
Investment securities available for sale		84,534		84,534		71,486		71,486
Investments in restricted stock		1,199		1,199		1,437		1,437
Ground rents		140		140		143		143
Loans, less allowance for credit losses		282,571		286,728		282,672		282,583
Accrued interest receivable		1,226		1,226		961		961
Cash value of life insurance		8,101		8,101		8,023		8,023

Financial liabilities:
Deposits		341,937		343,402		321,440		300,944
Short-term borrowings		37,367		37,383		25,000		25,386
Accrued interest payable		59		59		100		100
Unrecognized financial instruments:
Commitments to extend credit		30,770		30,770		26,297		26,297
Standby letters of credit		1,044		1,044		1,059		1,059

The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments that were estimated using an exit pricing notion.


(dollars in thousands)
	Carrying		Fair
June 30, 2020	Amount		Value		Level 1		Level 2		Level 3

Financial instruments - Assets
Cash and cash equivalents	$	34,979	$	34,979	$	34,979	$	—	$	—
Loans receivable, net		282,571		286,728		—		—		286,728
Cash value of life insurance		8,101		8,101		—		8,101		—
Financial instruments - Liabilities
Deposits		341,937		343,402		113,328		230,074		—
Short-term debt		37,367		37,383		—		37,383		—

Fair values are based on quoted market prices for similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs and optionality of such instruments.

The fair value of cash and due from banks, federal funds sold, investments in restricted stocks and accrued interest receivable are equal to the carrying amounts. The fair values of investment securities are determined using market quotations if available, or measured using pricing models or other model-based valuation techniques such as present value and future value cash flows. The fair value of loans receivable is estimated using discounted cash flow analysis. For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. Cash surrender value of life insurance is reported in the Level 2 fair value category. The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discounted rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 2 fair value category.

The fair value of non-interest bearing deposits, interest-bearing checking, savings, and money market deposit accounts, securities sold under agreements to repurchase, and accrued interest payable are equal to the carrying amounts. The fair value of fixed-maturity time deposits is estimated using discounted cash flow analysis.

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NOTE 7 – RECENT ACCOUNTING PRONOUNCEMENTS

New accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") with required effective dates. The following accounting pronouncements should be read in conjunction with "Critical Accounting Policies" of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2019 Form 10-K.

ASU 2016-02, “Leases (Topic 842).” In February 2016, the FASB issued ASU No. 2016-02. This guidance provides that lessees will be required to recognize the following for all operating leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The Company adopted the provisions of ASU No. 2016-02 on January 1, 2019 and elected several practical expedients made available by the FASB. Specifically, the Company elected the transition practical expedient to not recast comparative periods upon the adoption of the new guidance. In addition, the Company elected the package of practical expedients which among other things, requires no reassessment of whether existing contracts are or contain leases as well as no reassessment of lease classification for existing leases and the practical expedient which permits the Company to not separate non-lease components from lease components in determining the consideration in the lease agreement when the Company is a lessee and a lessor. The Company identified the primary lease agreements in scope of this new guidance as those relating to branch premises. As a result, the Company recognized a lease liability of $0.8 million and a related right-of-use asset of $0.8 million on its consolidated balance sheet on January 1, 2019.

ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.” This update, commonly referred to as the current expected credit losses methodology (“CECL”), will change the accounting for credit losses on loans and debt securities. Under the new guidance, the Company’s measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. For loans, this measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model previously required, but still permitted, under GAAP, which delays recognition until it is probable a loss has been incurred. In addition, the guidance will modify the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which will allow for reversal of credit impairments in future periods. At the FASB's October 16, 2019 meeting, the Board affirmed its decision to amend the effective date of this ASU for many companies. Public business entities that are SEC filers, excluding those meeting the smaller reporting company definition, will retain the initial required implementation date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. All other entities will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 31, 2022. The Company is currently evaluating the implementation of ASU 2016-13 due to the change in implementation dates for smaller reporting companies included in the FASB's Exposure Draft. While the Company generally expects that the implementation of ASU 2016-13 will increase the allowance for loan losses balance, the Company is continuing to evaluate the potential impact on the Company’s financial statements.

ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash.” ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for the Company on January 1, 2018 and did not have a significant impact on our financial statements.

ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 was effective for interim and annual reporting periods

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beginning after December 15, 2018. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ASU 2017-08 was effective for the Company on January 1, 2019 and did not have a significant impact on our financial statements.

ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” This standard better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedge instruments and the hedged item in the financial statements. Adoption for this ASU is required for fiscal years and interim periods beginning after December 15, 2018 and early adoption was permitted. ASU 2017-12 was effective for the Company on January 1, 2019 and did not have a significant impact on our financial statements.

ASU No. 2018-11, “Leases - Targeted Improvements.” ASU No. 2018-11 provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company elected both transition options. ASU 2018-11 did not have a material impact on the Company’s Consolidated Financial Statements.

ASU No. 2018-13, “Fair Value Measurement (Topic 820).” ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. Entities are also allowed to elect early adoption the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it did not have a material impact on the Company’s Consolidated Financial Statements.

ASU No. 2018-14, “Compensation – Retirement Benefit Plans – General (Subtopic 715-20).” ASU 2018-14 makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020; early adoption is permitted. As ASU 2018-14 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

ASU No. 2019-01, Leases (Topic 842): “Codification Improvements.” On March 5, 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which amends certain aspects of the Board’s new leasing standard, ASU 2016-02 to address two lessor implementation issues and clarify when lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new leases standard, Topic 842, Leases. ASU 2019-01 aligns the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in Topic 820, Fair Value Measurement) should be applied. The ASU also requires lessors within the scope of Topic 942, Financial Services—Depository and Lending, to present all “principal payments received under leases” within investing activities. Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. As ASU 2019-01 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

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ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” was issued in April 2019 by the FASB. With respect to Topic 815, Derivatives and Hedging, ASU 2019-04 clarifies that the reclassification of a debt security from held-to-maturity (“HTM”) to available-for-sale (“AFS”) under the transition guidance in ASU 2017-12 would not (1) call into question the classification of other HTM securities, (2) be required to actually designate any reclassified security in a last-of-layer hedge, or (3) be restricted from selling any reclassified security. As part of the transition of ASU 2019-04, entities may reclassify securities that would qualify for designation as the hedged item in a last-of-layer hedging relationship from HTM to AFS; however, entities that already made such a reclassification upon their adoption of ASU 2017-12 are precluded from reclassifying additional securities. All Company securities were AFS at June 30, 2020.

ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief” was issued on May 15, 2019. The ASU amends the transition guidance in the new credit losses standard, ASC 326, Financial Instruments—Credit Losses. The amendment provides entities with an option upon adoption of ASC 326-20, to irrevocably elect the fair value option for certain financial instruments that are both: (a) within the scope of ASC 326-20 (the current expected credit loss or “CECL” model) and (b) eligible for the fair value option in ASC 825-10, Financial Instruments—Overall. This election should be applied on an instrument-by-instrument basis for eligible financial assets. The fair value option election is not applicable to debt securities classified as available for sale or held to maturity. In addition, the amendment does not provide the option to discontinue or “unelect” the fair value option on instruments when an entity previously elected to apply it. If the fair value option is elected, an entity would recognize the difference between the carrying amount and the fair value of the financial instrument as part of the cumulative effect adjustment associated with the adoption of ASC 326. Subsequently, the financial instrument would be measured at fair value with changes in fair value reported in current earnings. The updated guidance is effective for interim and annual reporting periods beginning after December 31, 2022, with early adoption permitted. The Company is continuing to evaluate the extent of the potential impact upon adoption to the Company’s financial statements in January of 2023.

ASU 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740).” Was issued in December 2019. The amendments in this Update are meant to simplify the accounting for income taxes by removing certain exceptions to GAAP. The amendments also improve consistent application of and simplify GAAP by modifying and/or revising the accounting for certain income tax transactions and by clarifying certain existing codification. The amendments in the update are effective for public business entities for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. The Company is currently assessing the impact of adoption of this guidance, but does not expect the update to have a material impact upon its financial position and results of operations.

ASU 2020-01, “Investments – Equity Securities (Topic 321)”, Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force).” The ASU clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, and the amendments are to be applied prospectively. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

ASU No. 2020-04, “Reference Rate Reform (Topic 848)”: The ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The

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amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

NOTE 8 – REVENUE RECOGNITION

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees and merchant income. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts. Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.

Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts.

Other Noninterest Income. Other noninterest income consists of: fees, exchange, other service charges, safety deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily comprised of debit card income, ATM fees, merchant services income, and other service charges. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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

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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 factors identified in the Company’s periodic reports filed with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K. Please refer to Part II, Item 5, “Other Information”, for a discussion of the impact of the COVID-19 pandemic on the Company.

The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

OVERVIEW

Glen Burnie Bancorp, a Maryland corporation (the “Company”), through its subsidiary, The Bank of Glen Burnie, a Maryland banking corporation (the “Bank”), operates a commercial bank with eight offices in Anne Arundel County Maryland. Total interest income declined $449,000 to $6.8 million for the six-month period ending June 30, 2020, compared to the same period in 2019. This was driven by decreases in interest income on loans and investment securities consistent with declining loan balances, and lower interest earned on overnight funds, mainly attributable to lower market rates. Beyond pricing pressure/competition and the absolute low level of rates, the current economic outlook and prospects of a sustained historic low interest rate environment will likely continue to place pressure on net interest margin. Exacerbating the above, the Company maintained significantly higher levels of excess balance sheet liquidity during the first half of 2020 year as compared to the same period in 2019. The Bank’s loan portfolio decreased by $101,000 or 0.04% in the first six months of 2020. The Company has strong liquidity and capital positions that provide ample capacity for future growth, along with the Bank’s total regulatory capital to risk weighted assets of 12.95% at June 30, 2020, compared to 12.91% for the same period of 2019.

Return on average assets for the three- and six-month period ended June 30, 2020 were -0.10% and 0.09% compared to 0.33% and 0.23% for the three- and six-month period ended June 30, 2019, respectively. Return on average equity for the three- and six-month period ended June 30, 2020 were -1.05% and 0.95% compared to 3.66% and 2.64% for the three-and six-month period ended June 30, 2019, respectively. The impact of the lower interest rate environment and higher allowance for credit losses primarily drove the lower returns in 2020 compared to 2019.

The book value per share of Bancorp’s common stock was $12.65 at June 30, 2020, compared to $12.37 per share at June 30, 2019.

At June 30, 2020, the Bank remained above all “well-capitalized” regulatory requirement levels. The Bank’s estimated tier 1 risk-based capital ratio was 12.10% at June 30, 2020, compared to 12.47% at December 31, 2019.

Our liquidity position remained strong due to managed cash and cash equivalents, borrowing lines with the FHLB of Atlanta, the Federal Reserve and correspondent banks, and the size and composition of the bond portfolio.

RESULTS OF OPERATIONS

Net loss attributable to common stockholders for the three-month period ended June 30, 2020 was $96,000, or $-0.03 per basic and diluted common share compared to net income of $319,000, or $0.11 per basic and diluted common share for the same period of 2019. The results recorded for the three-month period ending June 30, 2020 were lower than the same period of 2019 resulting primarily from a $457,000 increase in the provision for loan losses due to higher unemployment rates and the economic uncertainty associated with the COVID-19 pandemic, combined with lower interest income and expenses resulting from the low interest rate environment, lower non-interest income and expenses, and lower tax expenses. Net income available to common stockholders for the six-month period ended June 30, 2020 was $174,000, or $0.06 per basic and diluted common share compared to $454,000, or $0.16 per basic and diluted common share for the same period of 2019. The results recorded for the six-month period ending June 30, 2020 were lower than the same period of 2019 resulting primarily from a $203,000 increase in the provision for loan losses due to higher unemployment rates and the economic uncertainty associated with the COVID-19 pandemic, combined with lower interest income and expenses resulting from the low interest rate environment, lower non-interest income and expenses, and lower tax expenses.

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Net Interest Income. The Company’s net interest income for the three-month period ended June 30, 2020 was $2.9 million, compared to $3.1 million for the same period in 2019, a decrease of $186,000, or 5.95%. The Company’s net interest income for the six-month period ended June 30, 2020 was $6.0 million, compared to $6.3 million for the same period in 2019, a decrease of $278,000 or 4.44%. The decrease in net interest income was due to lower interest income in the amount of $449,000 and lower interest expense in the amount of $171,000. These decreases were primarily due to a decrease in loan balances, offset by interest income and fees recognized for the Commercial SBA PPP loans, and a decrease in the costs of interest-bearing deposits and borrowings.

Total interest income for the second quarter 2020 decreased $238,000, or 6.67% when compared to the same period in 2019, from $3.6 million in 2019 to $3.3 million in 2020. The primary driver of the decrease was a decrease of $196,000 in interest and fees on loans due to lower average loan balances, a $19,000 decrease in interest and dividends on investment securities due to lower yields, and a $23,000 decrease in interest on deposits with banks and federal funds sold due to lower interest rates. Total interest income decreased $449,000 for the six-month period ended June 30, 2020, when compared to the same period in 2019 from $7.3 million in 2019 to $6.8 million in 2020, a decrease of 6.17%. The primary driver of the decrease in total interest income was a decrease of $315,000 in interest and fees on loans, a decrease in interest and dividends on investment securities in the amount of $38,000 and a $96,000 decrease in interest on deposits with banks and federal funds sold. The decreases can be attributed to a decrease in the loan portfolio and the lower interest rate environment, and a large increase in the amount of cash in interest-bearing deposits held at other financial institutions.

Interest expense for the second quarter 2020 decreased $52,000 from $450,000 for the same period in 2019 to $398,000 in 2020, a decrease of 11.56%. The primary driver for the decrease was a $44,000 decrease of expense in interest-bearing deposits. Interest expense decreased $171,000 for the six-month period ended June 30, 2019 from $1.0 million for the same period in 2019 to $849,000 in 2020, a decrease of 16.77%. The decrease was primarily due to a $120,000 decrease in the cost of short-term borrowings. The decreases for the three-and six-month periods ended June 30, 2020 can be attributed to the lower interest rate environment.

Net interest margin for the three-month period ended June 30, 2020 was 3.12% compared to 3.41% for the three-month period ended June 30, 2019. The decrease was primarily due to increased margin pressure during the recent decrease in interest rates across the yield curve. The yield on interest earning assets decreased by 0.37% from 3.91% for the three-month period ended June 30, 2019 to 3.54% for the same period of 2020 primarily due to a decrease in interest-earning assets, coupled with lower interest rates. The cost of funds decreased 0.07% from 0.52% for the three-month period ended June 30, 2019 to 0.45% for the same period of 2020 due to a decrease in total time deposits and the renewal of matured time deposits at a lower interest rates in 2020. Net interest margins for the six-month period ended June 30, 2020 were 3.23% compared to 3.36% for the six-month period ended June 30, 2019. The decrease was primarily due to lower yields on interest earning assets and lower cost of funds resulting from the lower interest rate environment. The yield on interest earning assets decreased by 0.21% from 3.90% for the six-month period ended June 30, 2019 to 3.69% for the same period of 2020. The cost of funds decreased 0.09% from 0.58% for the six-month period ended June 30, 2019 to 0.49% for the same period of 2020 due to a decrease in total time deposits and the renewal of time deposits at a lower interest rates in 2020.

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The following tables set forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities.



	Three Months Ended June 30,
	2020						2019
	Average				Yield/		Average				Yield/
(dollars in thousands)	Balance		Interest		Cost		Balance		Interest		Cost
ASSETS:
Interest-earning assets:
Interest-bearing deposits w/ banks & fed funds	$	23,665	$	23	0.39	%	$	8,696	$	41	1.89	%
Investment securities available for sale		69,729		317	1.82			61,621		336	2.18
Restricted equity securities		1,199		16	5.40			1,260		21	6.60
Total interest bearing deposits/investments		94,593		356	1.51			71,577		398	2.23

Loans:
Commercial & industrial		9,767		227	9.36			13,497		213	6.34
Commercial SBA PPP		16,107		32	0.81			—		—	—
Commercial real estate		69,571		879	5.08			72,377		874	4.85
Residential real estate		83,001		918	4.42			80,843		921	4.56
Indirect automobile		91,028		705	3.10			113,191		889	3.14
Construction		2,776		53	7.69			2,980		61	8.20
Consumer & other		11,919		166	5.58			12,537		218	6.96
Total loans		284,169		2,980	4.22			295,425		3,176	4.31
Total interest-earning assets		378,762		3,336	3.54			367,002		3,574	3.91

Cash		2,329						2,325
Allowance for loan losses		(2,278)						(2,528)
Market valuation		1,219						(862)
Other assets		16,601						16,722
Total non-earning assets		17,871						15,657
Total assets	$	396,633					$	382,659

LIABILITIES AND STOCKHOLDER'S EQUITY:
Interest-bearing deposits:
Interest-bearing checking and savings	$	117,912		18	0.06	%	$	113,272		18	0.06	%
Money market		18,222		2	0.05			20,074		2	0.05
Certificates of deposit		76,887		269	1.41			86,288		313	1.45
Total interest-bearing deposits		213,021		289	0.54			219,634		333	0.61

Borrowed Funds:
PPPLF Term Funding		948		—	—			—		—	—
Federal Funds Purchased		1		—	—			11		—	3.07
FHLB advances		20,000		109	2.20			20,778		117	2.26
Total borrowed funds		20,949		109	2.10			20,789		117	2.27
Total interest-bearing liabilities		233,970		398	0.68			240,423		450	0.75

Non-interest-bearing deposits		123,308						105,402
Total cost of funds		357,278		398	0.45			345,825		450	0.52

Other liabilities and accrued expenses		2,592						1,869
Total liabilities		359,870						347,694

Stockholder's equity		36,763						34,965
Total liabilities and equity	$	396,633					$	382,659
Net interest income			$	2,938					$	3,124
Yield on earning assets					3.54	%					3.91	%
Cost of interest-bearing liabilities					0.68	%					0.75	%
Net interest spread					2.86	%					3.16	%
Net interest margin					3.12	%					3.41	%

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	Six Months Ended June 30,
	2020						2019
	Average				Yield/		Average				Yield/
(dollars in thousands)	Balance		Interest		Cost		Balance		Interest		Cost
ASSETS:
Interest-earning assets:
Interest-bearing deposits w/ banks & fed funds	$	18,084	$	57	0.63	%	$	11,388	$	121	2.14	%
Investment securities available for sale		70,254		698	1.99			65,780		736	2.24
Restricted equity securities		1,289		29	4.59			1,689		61	7.30
Total interest bearing deposits/investments		89,627		784	1.76			78,857		918	2.35

Loans:
Commercial & industrial		11,254		411	7.34			14,085		439	6.28
Commercial SBA PPP		8,053		32	0.81			—		—	—
Commercial real estate		70,581		1,788	5.09			71,344		1,766	4.99
Residential real estate		82,996		1,830	4.41			81,508		1,841	4.52
Indirect automobile		94,958		1,502	3.16			115,163		1,763	3.06
Construction		2,809		108	7.73			2,689		111	8.31
Consumer & other		12,100		380	6.31			12,676		446	7.10
Total loans		282,751		6,051	4.30			297,465		6,366	4.32
Total interest-earning assets		372,378		6,835	3.69			376,322		7,284	3.90

Cash		2,327						2,379
Allowance for loan losses		(2,152)						(2,552)
Market valuation		911						(1,345)
Other assets		16,707						16,599
Total non-earning assets		17,793						15,081
Total assets	$	390,171					$	391,403

LIABILITIES AND STOCKHOLDER'S EQUITY:
Interest-bearing deposits:
Interest-bearing checking and savings	$	115,264		34	0.06	%	$	112,837		33	0.06	%
Money market		18,206		5	0.05			19,667		5	0.05
Certificates of deposit		78,580		575	1.47			88,085		627	1.43
Total interest-bearing deposits		212,050		614	0.58			220,589		665	0.61

Borrowed Funds:
PPLF Term Funding		474		—	—			—		—	—
Federal Funds Purchased		1		—	—			—		—	—
FHLB advances		21,846		235	2.16			30,985		355	2.31
Total borrowed funds		22,321		235	2.12			30,985		355	2.31
Total interest-bearing liabilities		234,371		849	0.73			251,574		1,020	0.82

Non-interest-bearing deposits		116,418						103,570
Total cost of funds		350,789		849	0.49			355,144		1,020	0.58

Other liabilities and accrued expenses		2,540						1,597
Total liabilities		353,329						356,741

Stockholder's equity		36,842						34,662
Total liabilities and equity	$	390,171					$	391,403
Net interest income			$	5,986					$	6,264
Yield on earning assets					3.69	%					3.90	%
Cost of interest-bearing liabilities					0.73	%					0.82	%
Net interest spread					2.96	%					3.09	%
Net interest margin					3.23	%					3.36	%

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Provision for Credit Losses. The Company recognized provisions for credit losses in the amount of $487,000 and $30,000 for the three-month period ending June 30, 2020 and 2019, respectively. The increase in provision for credit losses in the 2020 period was primarily due to elevated unemployment rates, a factor in the Bank’s provision for loan loss model, resulting from the on-going COVID-19 pandemic. A provision was not recognized for the Commercial SBA PPP loans as these loans are 100% guaranteed by the SBA. As of June 30, 2020, the allowance for credit losses represented 0.84% of total loans compared to 0.84% at June 30, 2019 and is consistent with our improved credit quality. The Company recognized provisions for credit losses in the amount of $407,000 and $204,000 for the six-month period ending June 30, 2020 and 2019, respectively. The increase for the six-month period ended June 30, 2020 as compared to the same period in 2019 was primarily due to elevated unemployment rates, a factor in the Bank’s provision for loan loss model, resulting from the on-going COVID-19 pandemic.

Noninterest Income. Noninterest income decreased to $228,000 for the three-month period ended June 30, 2020, from $282,000 for the corresponding period in 2019, a decrease of $54,000, or 19.15%. The decrease was primarily due to a decrease in service charges on deposit accounts and other fees and commissions. Noninterest income decreased to $484,000 for the six-month period ended June 30, 2020, from $564,000 for the corresponding period in 2019, a decreased of $80,000, or 14.18%. The decrease was primarily due to decreases in service charges on deposit accounts and other fees and commissions.

Noninterest Expenses. Noninterest expenses for the three-month period ended June 30, 2020 and 2019 were $2.8 million and $3.0 million, respectively, a decrease of $183,000 or 6.13%. The decrease was driven by decreases in salary and employee benefits cost, occupancy and equipment, legal, accounting and other professional fees, and other expenses, offset by increases in data and item processing services. Noninterest expenses decreased from $6.1 million for the six-month period ended June 30, 2019, to $5.8 million for the corresponding period in 2020, a decrease of $221,000, or 3.62%. The decrease was driven by decreases in salary and employee benefits cost, occupancy and equipment, and other expenses, offset by increases in data and item processing services.

Income Taxes. During the three-month period ended June 30, 2020, the Company recorded income tax benefit of $32,000 compared to $67,000 expense for the same period in 2019, a $99,000, or 147.76%, decrease. During the six-month period ended June 30, 2020, the Company recorded income tax expense of $43,000 compared to $103,000 for the same period in 2019, a $60,000, or 58.25% decrease. The Company’s annualized effective tax rate at June 30, 2020 was 20.05% compared to 20.96% for the prior year. The decrease in income tax expense and the annualized effective tax rate for the three- and six-month period was due to lower income before taxes at June 30, 2020 compared to June 30, 2019 and the sale of tax-exempt municipal securities in the first quarter of 2019.

Comprehensive Income (Loss). In accordance with regulatory requirements, the Company reports comprehensive income (loss) in its financial statements. Comprehensive income (loss) consists of the Company’s net income, adjusted for unrealized gains and losses on the Bank’s portfolio of investment securities and interest rate swap contracts. For the second quarter of 2020, comprehensive income, net of tax, totaled $259,000 compared to comprehensive income of $682,000 for the same period in 2019. The decrease was due to lower net income, lower net unrealized gains on available for sale securities and lower net unrealized losses on interest rate swaps. For the six-month period ended June 30, 2020, comprehensive income, net of tax, totaled $689,000, compared to $1.3 million for the same period in 2019. The decrease was due to lower net income, lower net unrealized gains on available for sale securities, offset by higher net unrealized losses on interest rate swaps.

FINANCIAL CONDITION

General. The Company’s assets increased to $418.2 million at June 30, 2020 from $384.9 million at December 31, 2019, an increase of $34.5 million or 8.99%, primarily due to the net increases in cash and cash equivalents and an increase in investment securities available for sale. Loans totaled $282.6 million at June 30, 2020, a decrease of $101,000, or 0.04%, from $282.7 million at December 31, 2019. The decrease was primarily attributable to decreases in indirect and commercial real estate loans, offset by increases in residential real estate loans and commercial SBA PPP loans. Investment securities available for sale as of June 30, 2020, totaled $84.5 million, an increase of $13.0 million, or 18.25% from $71.5 million at December 31, 2019. The increase resulted primarily from the purchase of available for sale investments in the quarter due to an increase in excess liquidity from deposit growth. Cash and cash equivalents as

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of June 30, 2020, totaled $35.0 million, an increase of $21.7 million, or 163.19% from $13.3 million at December 31, 2019 resulting from an increase in short-term borrowings to fund PPP loans and deposits, offset by the purchase of available for sale investments in 2020.

Loans are placed on nonaccrual status when they are past due 90 days as to either principal or interest or when, in the opinion of management, the collection of all interest and/or principal is in doubt. Placing a loan on nonaccrual status means that we no longer accrue interest or amortize deferred fees or costs on such loans and reverse any interest previously accrued but not collected. Management may grant a waiver from nonaccrual status for a 90 day past due loan that is both well secured and in the process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and the borrower has demonstrated the ability to make payments in accordance with the terms of the loan and remain current.

A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the fair value of the collateral for collateral dependent loans and at the present value of expected future cash flows using the loans’ effective interest rates for loans that are not collateral dependent.

At June 30, 2020, impaired loans totaled $4.4 million. Included in the impaired loans total were $3.9 million in loans classified as nonaccrual loans. At June 30, 2020, troubled debt restructurings included in impaired loans totaled $40,000. Borrowers under all other restructured loans are paying in accordance with the terms of the modified loan agreement and have been placed on accrual status after a period of performance with the restructured terms.

The following table presents details of our nonperforming loans and nonperforming assets, as these asset quality metrics are evaluated by management, at the dates indicated:


	June 30,			December 31,
(dollars in thousands)	2020			2019
Nonaccrual loans	$	3,941		$	4,127
TDR loans excluding those in nonaccrual loans		-			-
Accruing loans past due 90+ days		18			21

Total nonperforming loans		3,959			4,148

Real estate acquired through foreclosure		705			705

Total nonperforming assets	$	4,664		$	4,853

Nonperforming assets to total assets		1.12	%		1.26	%

Deposits as of June 30, 2020 totaled $341.9 million, an increase of $20.5 million, or 6.38% from $321.4 million at December 31, 2019. Demand deposits as of June 30, 2020 totaled $127.6 million, an increase of $20.5 million, or 19.10% from $107.2 million at December 31, 2019. This increase is was due to deposits to existing accounts resulting from SBA PPP loan fundings in the second quarter 2020. Interest-bearing checking accounts as of June 30, 2020 totaled $30.0 million, a decrease of $2.1 million, or 6.62% from $32.2 million at December 31, 2019. Savings accounts as of June 30, 2020 totaled $90.4 million, an increase of $7.6 million, or 9.12%, from $82.8 million at December 31, 2019. Money market accounts as of June 30, 2020 totaled $18.6 million, an increase of $1.3 million, or 7.52%, from $17.3 million at December 31, 2019. Time deposits under $100,000 totaled $43.7 million on June 30, 2020, a $3.6 million or a 7.59% decrease from $47.3 million at December 31, 2019. Time deposits over $100,000 totaled $31.6 million on June 30, 2020, a decrease of $3.1 million, or 8.93% from $34.7 million at December 31, 2019.

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Deposits at June 30, 2020 and December 31, 2019 were as follows:


	June 30, 2020				December 31, 2019				2020 vs 2019
(dollars in thousands)	Amount		% of Total		Amount		% of Total		$ Change		% Change
Noninterest-bearing deposits	$	127,621	37.3	%	$	107,158	33.3	%	$	20,463	19.1	%

Interest-bearing deposits:
Checking		30,042	8.8	%		32,171	10.0	%		(2,129)	(6.6)	%
Savings		90,400	26.4	%		82,845	25.8	%		7,555	9.1	%
Money market		18,550	5.4	%		17,253	5.4	%		1,297	7.5	%
Total interest-bearing checking, savings and money market deposits		138,992	40.6	%		132,269	41.2	%		6,723	5.1	%

Time deposits under $100,000		43,690	12.8	%		47,277	14.7	%		(3,587)	(7.6)	%
Time deposits of $100,00 or more		31,634	9.3	%		34,736	10.8	%		(3,102)	(8.9)	%
Total time deposits		75,324	22.1	%		82,013	25.5	%		(6,689)	(8.2)	%

Total interest-bearing deposits		214,316	62.7	%		214,282	66.7	%		34	0.0	%

Total Deposits	$	341,937	100.0	%	$	321,440	100.0	%	$	20,497	6.4	%

Lease Commitments. The Financial Accounting Standards Board (“FASB”) issued guidance, Leases, which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The Bank adopted this guidance on January 1, 2019. It was applied using a modified retrospective approach which allows entities to either apply the new lease standard to the beginning of the earliest period presented or only to the current period consolidated financial statements. For leases where the Bank is the lessee, operating leases are included in premises and equipment, net, and accrued expenses and other liabilities on the Consolidated Balance Sheet. The Bank currently does not have any finance leases. The initial adoption of this guidance had no material effect on the Bank and there was no cumulative-effect adjustment to beginning retained earnings. The Bank will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in Accounting Standards Codification Topic 840, "Leases". Management will evaluate the effects of the lease guidance on a quarterly basis.

Operating lease Right-of-Use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised.

Future minimum payments of the Bank’s operating leases as of June 30, 2020 are as follows:


Year ending December 31,	Amount
	(dollars in thousands)
2020	$	94
2021		183
2022		150
2023		153
2024		158
Total	$	738

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Pension and Profit Sharing Plans. The Bank has a defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue Code that is funded through a profit sharing agreement and voluntary employee contributions. The plan provides for discretionary employer matching contributions to be determined annually by the Board of Directors. The plan covers substantially all employees.

For the six months ended June 30, 2020, the Bank accrued $132,000 for its projected 401(k) match contribution as well as other profit sharing benefits.

MARKET RISK AND INTEREST RATE SENSITIVITY

Our primary market risk is interest rate fluctuation. Interest rate risk results primarily from the traditional banking activities in which the Bank engages, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on liabilities. Our interest rate risk represents the level of exposure we have to fluctuations in interest rates and is primarily measured as the change in earnings and the theoretical market value of equity that results from changes in interest rates. The Asset Liability Committee (“ALCO”) oversees our management of interest rate risk. The objective of the management of interest rate risk is to maximize stockholder value, enhance profitability and increase capital, serve customer and community needs, and protect us from any material financial consequences associated with changes in interest rate risk.

Interest rate risk is that risk to earnings or capital arising from movement of interest rates. It arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships across yield curves that affect bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest rate related options embedded in certain bank products (option risk). Changes in interest rates may also affect a bank’s underlying economic value. The value of a bank’s assets, liabilities, and interest-rate related, off-balance sheet contracts is affected by a change in rates because the present value of future cash flows, and in some cases the cash flows themselves, is changed.

We believe that accepting some level of interest rate risk is necessary in order to achieve realistic profit goals. Management and the Board have chosen an interest rate risk profile that is consistent with our strategic business plan.

The Company’s Board of Directors has established a comprehensive interest rate risk management policy, which is administered by our ALCO. The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury interest rates. We measure the potential adverse impacts that changing interest rates may have on our short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology we employ. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.

We prepare a current base case and eight alternative simulations at least once a quarter and report the analysis to the Board of Directors. In addition, more frequent forecasts are produced when the direction or degree of change in interest rates are particularly uncertain to evaluate the impact of balance sheet strategies or when other business conditions so dictate.

The statement of condition is subject to quarterly testing for eight alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/ - 100, 200, 300, and 400 basis points (“bp”), although we may elect not to use particular scenarios that we determine are impractical in the current rate

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environment. It is our goal to structure the balance sheet so that net interest-earnings at risk over a 12-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.

At June 30, 2020, the simulation analysis reflected that the Bank is in a neutral to slightly asset sensitive position. Management currently strives to manage higher costing fixed rate funding instruments, while seeking to increase assets that are more fluid in their repricing. An asset sensitive position, theoretically, is favorable in a rising rate environment since more assets than liabilities will re-price in a given time frame as interest rates rise. Similarly, a liability sensitive position, theoretically, is favorable in a declining interest rate environment since more liabilities than assets will re-price in a given time frame as interest rates decline. Management works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of the direction of interest rates.

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 within three months although it is the Company’s experience that such accounts may be less sensitive to changes in market rates.


	Static Balance Sheet/Immediate Change in Rates
Estimated Changes in Net Interest Income	`-200 bp		`-100 bp		`+100 bp		`+200 bp
Policy Limit	(15)	%	(10)	%	(10)	%	(15)	%
June 30, 2020	(6)	%	(4)	%	7	%	13	%
June 30, 2019	(9)	%	(5)	%	4	%	9	%

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The following table sets forth the Company’s interest-rate sensitivity at June 30, 2020.


							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	$	—		$	—		$	—		$	—		$	2,387
Federal funds and overnight deposits		32,592			—			—			—			32,592
Securities		—			1,877			1,631			81,026			84,534
Loans		787			1,353			95,814			184,617			282,571
Fixed assets		—			—			—			—			3,904
Other assets		—			—			—			—			12,212
Total assets	$	33,379		$	3,230		$	97,445		$	265,643		$	418,200

Liabilities:
Demand deposit accounts	$	—		$	—		$	—		$	—		$	127,621
NOW accounts		30,042			—			—			—			30,042
Money market deposit accounts		18,550			—			—			—			18,550
Savings accounts		90,400			—			—			—			90,400
IRA accounts		2,158	0		7,900	0		11,698	0		938	0		22,694
Certificates of deposit		13,514	0		18,495	0		19,908	0		713	(1)		52,630
Short-term borrowings		37,367			—			—			—			37,367
Other liabilities		—			—			—			—			3,029
Stockholders’ equity:		—			—			—			—			35,867
Total liabilities and stockholders' equity	$	192,031		$	26,395		$	31,606		$	1,651		$	418,200

GAP	$	(158,652)		$	(23,165)		$	65,839		$	263,992
Cumulative GAP	$	(158,652)		$	(181,817)		$	(115,978)		$	148,014
Cumulative GAP as a % of total assets		(37.94)	%		(43.48)	%		(27.73)	%		35.39	%

As shown above, measures of net interest income at risk were more favorable at June 30, 2020 than at June 30, 2019 over a 12-month modeling period. All measures remained within prescribed policy limits in the up and down interest rate scenarios. Given the current rate environment, down shocks may not be meaningful as market rates can only be shocked down to zero. The primary contributor to the more favorable position was the more asset sensitive balance sheet.

The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of the Company’s net assets.


	Static Balance Sheet/Immediate Change in Rates
Estimated Changes in Economic Value of Equity (EVE)	`-200 bp		`-100 bp		`+100 bp		`+200 bp
Policy Limit	(15)	%	(10)	%	(10)	%	(15)	%
June 30, 2020	(23)	%	(23)	%	27	%	45	%
June 30, 2019	(12)	%	(4)	%	26	%	46	%

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Inasmuch as a large portion of the Company’s deposits are non-interest bearing, in an increasing interest rate environment the Company’s interest income increases at a proportionally greater rate than its total interest expense, thereby resulting in higher net interest income. Conversely, in a declining interest rate environment the decreases in the Company’s interest income will be greater than decreases in its already low interest expense, thereby resulting in lower net interest income. In a rising interest rate environment, the Company is positioned to generate less economic value of equity as asset values fall faster than funding sources because the liabilities reprice much slower than our assets, especially considering our interest earning assets are much greater than our interest bearing liabilities. The Company’s economic value of equity worsens in declining interest rate environments as the majority of our liabilities cannot continue to decrease much from their current low levels thus the economic value of liabilities and assets both worsen.

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 nine 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 June 30, 2020, totaled $35.0 million, an increase of $21.7 million, or 163.19% from the $13.3 million at December 31, 2019.

As of June 30, 2020, the Bank was permitted to draw on a $95.1 million line of credit from the FHLB of Atlanta. Borrowings under the line are secured by a floating lien on the Bank’s residential mortgage loans. At December 31, 2019, there were $25.0 million in short-term borrowings from FHLB and as of June 30, 2020, there were $20.0 million in short-term borrowings outstanding. The decrease in FHLB short-term borrowings resulted from an increase in cash and cash equivalents. During the second quarter of 2020 the Bank borrowed $17.4 million under the Payroll Protection Program Liquidity Facility (“PPPLF”) to fund $17.4 million in Commercial SBA PPP loans. See Item 5. Other information for further details on the PPPLF. In addition, the Bank has two unsecured federal funds lines of credit in the amount of $9.0 million and $8.0 million, of which $0 was outstanding, and a secured Discount Window line of credit at the Federal Reserve Bank in the amount of $10.5 million, of which $0 was outstanding as of June 30, 2020.

The Company’s stockholders’ equity increased $187,000, or 0.52% during the six-month period ended June 30, 2020, primarily due to an increase in accumulated other comprehensive income, net of taxes (“AOCI”) associated with net unrealized gains in the available for sale investment portfolio, stock issuances under the dividend reinvestment program, and increases in retained earnings and unrealized losses on interest rate swap contracts. The Company’s AOCI increased by $515,000 from a loss of $209,000 at December 31, 2019 to a gain of $306,000 at June 30, 2020, resulting from higher unrealized losses on interest rate swaps, and higher unrealized gains on the available for sale bond portfolio. Retained earnings decreased by $392,000, or 1.74% as the result of dividends paid on common stock, offset by the Company’s net income for the six-month period ended June 30, 2020.

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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. 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 our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

In July 2015, federal bank regulatory agencies issued final results to revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (“Basel III”). Effective January 1, 2015, the final rules required the Company and the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. These are the initial capital requirements, which were phased in over a four-year period. The rules were fully phased in on January 1, 2019, and require the Company and the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

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 June 30, 2020, the Bank was in full compliance with these guidelines with a Tier 1 leverage ratio of 9.32%, a Tier 1 risk-based capital ratio of 12.10%, a common equity Tier 1 risk-based capital ratio of 12.10%, and a total risk-based capital ratio of 12.95%. The Company’s capital amounts and ratios at June 30, 2020 and December 31, 2019 were as follows:


									To Be Well Capitalized
					To Be Considered				Under Prompt Corrective
	Actual				Adequately Capitalized				Action Provisions
June 30, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)
Common equity tier 1	$	35,386	12.10	%	$	13,157	4.50	%	$	19,004	6.50	%
Total capital	$	37,875	12.95	%	$	23,389	8.00	%	$	29,237	10.00	%
Tier 1 capital	$	35,386	12.10	%	$	17,542	6.00	%	$	23,389	8.00	%
Tier 1 leverage	$	35,386	9.32	%	$	15,180	4.00	%	$	18,975	5.00	%


									To Be Well Capitalized
					To Be Considered				Under Prompt Corrective
	Actual				Adequately Capitalized				Action Provisions
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)
Common equity tier 1	$	35,693	12.47	%	$	12,878	4.50	%	$	18,602	6.50	%
Total capital	$	37,797	13.21	%	$	22,895	8.00	%	$	28,619	10.00	%
Tier 1 capital	$	35,693	12.47	%	$	17,171	6.00	%	$	22,895	8.00	%
Tier 1 leverage	$	35,693	9.26	%	$	15,414	4.00	%	$	19,268	5.00	%

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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, 2019 and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. As discussed there, the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment. Management has used the best information available to make the estimations necessary to value the related assets and liabilities based on historical experience and on various assumptions which are believed to be reasonable under the circumstances. Actual results could differ from those estimates, and such differences may be material to the financial statements. The Company reevaluates these variables as facts and circumstances change. Historically, actual results have not differed significantly from the Company’s estimates. The following is a summary of the more judgmental accounting estimates and principles involved in the preparation of the Company’s financial statements, including the identification of the variables most important in the estimation process:

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

Valuation of the Securities Portfolio. Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of an investment. We review other criteria such as magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

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.

Deferred Income Taxes. Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets are recognized only to the extent that it is more likely than not that such amount will be realized based on consideration of available evidence.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. We recognize a tax position as a benefit only if it “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination presumed to occur. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The judgment about the level of future taxable income is inherently subjective and is reviewed on a continual basis as regulatory and business factors change.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a “smaller reporting company” and, as such, disclosure pursuant to this Item 3 is not required.

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ITEM 4.

CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report, and have concluded that the system is effective. There have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

In the normal course of business, we are party to litigation arising from the banking, financial, and other activities we conduct. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results, or liquidity.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic has negatively impacted the global economy and the markets in which the Company operates. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future country and state restrictions regarding virus containment. An extended period of global supply chain, workforce availability and economic disruption could materially affect the Company’s business, the results of operations, and financial condition. While this business disruption is expected to be temporary, the current circumstances change from one day to the next and the impacts of COVID-19 on the Company’s business operations, including the duration, its impact on assets, liabilities and net income, cannot be reasonably estimated at this time. During the second quarter of 2020, at the request of borrowers facing financial difficulties, the Bank modified and deferred payment on 225 loans totaling approximately $39.8 million in principal and approximately $598,800 in principal and interest payments. The Company anticipates that the COVID-19 pandemic will continue to have a material impact on the Company’s business, results of operations, financial position and cash flows in the third quarter of 2020, and this impact may continue into the fourth quarter or beyond.

The Company has business continuity plans that cover a variety of potential impacts to business operations. These plans are periodically reviewed and tested and have been designed to protect the ongoing viability of bank operations in the event of a disruption such as a pandemic. In the beginning of March 2020, the Bank began implementing social

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distancing protocols. Following recommendations from the Centers for Disease Control and Prevention and the State of Maryland, the Company implemented enhanced cleaning of bank facilities and provided guidance to employees and customers on best practices to minimize the spread of the virus. At that time the Company modified delivery channels with a shift to drive thru only service at the banking offices, supplemented by appointments for service in the office lobbies. The Company also encouraged the use of online and mobile channels.

Approximately 30% of employees began working remotely from home as the Company has enhanced its remote work capabilities by providing additional laptops and various audio and video meeting technologies Those employees that still report to their respective offices and branches have been assigned work spaces that align with the six feet social distancing guidance, as well as wear protective face masks.

During this time, the Bank installed plexiglass shields at all teller stations with a standard pass-through for documents, marked floors to ensure proper social distancing, and set procedures for identifying customers before entering a branch. The Bank also limited the number of customers at a time allowed in a branch, cleaning procedures for open branches, and 100% mask use by customers and employees. The Bank re-opened the branches on July 1, 2020 for regular customer use with these modifications and procedures in place.

In response to the COVID-19 pandemic, Congress created, and on March 27, 2020 the President signed into law, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Included in the CARES Act was the creation of the Paycheck Protection Program (PPP) pursuant to which Small Business Administration (SBA) eligible lenders provide low-interest, SBA guaranteed loans to borrowers who meet the requirements of the PPP so that the borrowers can keep their workers on the payroll. To bolster the effectiveness of the PPP, the Federal Reserve System has supplied liquidity to participating financial institutions, including the Bank, through term financing backed by PPP loans to small businesses. The PPP Liquidity Facility (the “PPPL Facility”) extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. To support the use of the PPPL Facility, the banking regulatory agencies are allowing banking organizations to exclude loans pledged as collateral to the PPPL Facility from a banking organization's total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets, as applicable. The Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System and Office of the Comptroller of the Currency issued an interim final rule on April 7, 2020, that allows banking organizations to neutralize the regulatory capital effects of participating in the PPPL Facility. In addition, loans made under the PPP receive a zero percent risk weight under the agencies' regulatory capital rules regardless of whether they are pledged as collateral to the PPPL Facility. However, such loans will be included in a banking organization's leverage ratio requirement unless they are pledged as collateral to the PPPL Facility. The Bank worked with existing customers to provide PPP loans, and between April 3, 2020 and May 21, 2020 the Bank approved, and obtained SBA approval, for 133 loan requests totaling $17.4 million under the PPP. These loans are listed as loan type Commercial SBA PPP loans in the Bank’s loan portfolio in “Note 5 – Loans Receivable and Allowance for Loan Losses” in this report.

The Company is highly focused on navigating the current challenges brought on by the COVID-19 pandemic. While it is expected to see continued adverse impact to earnings in the near term, the Company is confident in its leadership, solid balance sheet and strong risk management to manage it through this time.

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ITEM 6.

EXHIBITS


Exhibit No.
3.1	Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Registrant’s Form 8-A filed December 27, 1999, File No. 0-24047)

3.2	Articles of Amendment, dated October 8, 2003 (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2003, File No. 0-24047)

3.3	Articles Supplementary, dated November 16, 1999 (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed December 8, 1999, File No. 0-24047)

3.4	By-Laws (incorporated by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2003, File No. 0-24047)

10.1	Glen Burnie Bancorp Director Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-8, File No.33-62280)

10.2	The Bank of Glen Burnie Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-8, File No. 333-46943)

10.3	Amended and Restated Change-in-Control Severance Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2001, File No. 0-24047)

31.1	Rule 15d-14(a) Certification of Chief Executive Officer (filed herewith)

31.2	Rule 15d-14(a) Certification of Chief Financial Officer (filed herewith)

32	Section 1350 Certifications: Certification by the Principal Executive Officer and Principal Accounting Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101.INS	XBRL Instance Document (filed herewith)

101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith)

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)

101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith)

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)

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SIGNATURES

Pursuant to the requirements 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
		(Registrant)

Date: August 14, 2020	By:		/s/ John D. Long
			John D. Long
			President, Chief Executive Officer

	By:		/s/ Jeffrey D. Harris
			Jeffrey D. Harris
			Chief Financial Officer

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