Quarterly Report (10-q)

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Table of Contents

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 September 30, 2022

☐ 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 November 7, 2022, was 2,865,046.

Table of Contents

GLEN BURNIE BANCORP AND SUBSIDIARY

TABLE OF CONTENTS


		Page
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets: As of September 30, 2022 (unaudited) and December 31, 2021 (audited)	3

	Consolidated Statements of Income: Three and Nine months Ended September 30, 2022 and 2021 (unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss): Three and Nine months Ended September 30, 2022 and 2021 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity: Nine months Ended September 30, 2022 and 2021 (unaudited)	6

	Consolidated Statements of Cash Flows: Nine months Ended September 30, 2022 and 2021 (unaudited)	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4.	Controls and Procedures	42

Part II.	OTHER INFORMATION	42

Item 1.	Legal Proceedings	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	43

	SIGNATURES	44

- 2 -

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


	September 30,		December 31,
	2022			2021
		(unaudited)		(audited)
ASSETS
Cash and due from banks	$	2,572	$	2,111
Interest-bearing deposits in other financial institutions		51,597		60,070
Cash and Cash Equivalents		54,169		62,181

Investment securities available for sale, at fair value		144,980		155,927
Restricted equity securities, at cost		1,071		1,062

Loans, net of deferred fees and costs		194,080		210,392
Less: Allowance for credit losses⁽¹⁾		(2,275)		(2,470)
Loans, net		191,805		207,922

Premises and equipment, net		3,366		3,564
Bank owned life insurance		8,454		8,338
Deferred tax assets, net		9,126		956
Accrued interest receivable		1,253		1,085
Accrued taxes receivable		225		301
Prepaid expenses		517		347
Other assets		660		383
Total Assets	$	415,626	$	442,066

LIABILITIES
Noninterest-bearing deposits	$	149,171	$	155,624
Interest-bearing deposits		229,715		227,623
Total Deposits		378,886		383,247

Short-term borrowings		20,000		10,000
Long-term borrowings		—		10,000
Defined pension liability		315		304
Accrued expenses and other liabilities		2,085		2,799
Total Liabilities		401,286		406,350

STOCKHOLDERS' EQUITY
Common stock, par value $1, authorized 15,000,000 shares, issued and outstanding 2,861,615 and 2,853,880 shares as of September 30, 2022 and December 31, 2021, respectively.		2,862		2,854
Additional paid-in capital		10,836		10,759
Retained earnings		23,035		22,977
Accumulated other comprehensive loss		(22,393)		(874)
Total Stockholders' Equity		14,340		35,716

Total Liabilities and Stockholders' Equity	$	415,626	$	442,066

(1)

Effective January 1, 2021, the Company applied ASU 2016-13, Financial Instruments – Credit Losses (“ASC 326”), such that the allowance calculation is based on current expected credit loss methodology (“CECL”). Prior to January 1, 2021, the calculation was based on incurred loss methodology. See Note 5 “Loans Receivable and Allowance for Losses on Loans” for details.

See accompanying notes to unaudited consolidated financial statements.

- 3 -

Table of Contents

GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share amounts)

(unaudited)




	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
INTEREST INCOME
Interest and fees on loans	$	2,094	$	2,799	$	6,351	$	8,005
Interest and dividends on securities		943		773		2,435		1,976
Interest on deposits with banks and federal funds sold		271		32		468		75
Total Interest Income		3,308		3,604		9,254		10,056

INTEREST EXPENSE
Interest on deposits		116		148		361		474
Interest on short-term borrowings		147		116		338		349
Interest on long-term borrowings		8		—		34		—
Total Interest Expense		271		264		733		823

Net Interest Income		3,037		3,340		8,521		9,233

Provision (release) for credit losses		39		(122)		(178)		(593)
Net interest income after provision (release)		2,998		3,462		8,699		9,826

NONINTEREST INCOME
Service charges on deposit accounts		37		42		119		119
Other fees and commissions		240		276		596		635
Gain on securities sold/redeemed		—		1		1		1
Gains on sale of OREO		—		—		—		14
Income on life insurance		40		40		116		117
Total Noninterest Income		317		359		832		886

NONINTEREST EXPENSE
Salary and benefits		1,647		1,686		4,783		4,904
Occupancy and equipment expenses		291		306		939		912
Legal, accounting and other professional fees		299		121		884		516
Data processing and item processing services		242		206		703		710
FDIC insurance costs		28		47		83		130
Advertising and marketing related expenses		21		20		64		65
Loan collection costs		4		(30)		(51)		(2)
Telephone costs		35		42		119		173
Other expenses		353		293		1,016		903
Total Noninterest Expenses		2,920		2,691		8,540		8,311

Income before income taxes		395		1,130		991		2,401

Income tax expense		20		242		76		439

NET INCOME	$	375	$	888	$	915	$	1,962

Basic and diluted net income per share of common stock	$	0.13	$	0.31	$	0.32	$	0.69

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				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

Net income	$	375	$	888	$	915	$	1,962

Other comprehensive loss:

Net unrealized loss on securities available for sale:
Net unrealized loss on securities during the period		(9,842)		(1,560)		(30,335)		(2,887)
Income tax benefit relating to item above		2,709		428		8,348		795
Reclassification adjustment for gain on sales of securities included in net income		(1)		(1)		(1)		(1)
Net effect on other comprehensive loss		(7,134)		(1,133)		(21,988)		(2,093)

Net unrealized gain on interest rate swaps:
Net unrealized gain on interest rate swap during the period		125		87		647		315
Income tax expense relating to item above		(34)		(24)		(178)		(87)
Net effect on other comprehensive loss		91		63		469		228

Other comprehensive loss		(7,043)		(1,070)		(21,519)		(1,865)

Comprehensive (loss) income	$	(6,668)	$	(182)	$	(20,604)	$	97

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		Income (Loss)		Total


Balance, December 31, 2020	$	2,842	$	10,640	$	23,071	$	540	$	37,093

Net income		—		—		1,962		—		1,962
Cash dividends, $0.30 per share		—		—		(853)		—		(853)
Dividends reinvested under
dividend reinvestment plan		9		91		—		—		100
Transition adjustment pursuant to adoption
of ASU 2016-13		—		—		(1,472)		—		(1,472)
Other comprehensive loss		—		—		—		(1,865)		(1,865)

Balance, September 30, 2021	$	2,851	$	10,731	$	22,708	$	(1,325)	$	34,965




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

Balance, December 31, 2021	$	2,854	$	10,759	$	22,977	$	(874)	$	35,716

Net income		—		—		915		—		915
Cash dividends, $0.30 per share		—		—		(857)		—		(857)
Dividends reinvested under
dividend reinvestment plan		8		77		—		—		85
Other comprehensive loss		—		—		—		(21,519)		(21,519)

Balance, September 30, 2022	$	2,862	$	10,836	$	23,035	$	(22,393)	$	14,340

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)



	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	915	$	1,962
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion of premises and equipment		318		323
Amortization, and accretion of investment securities available for sale		528		995
Release for credit losses		(178)		(593)
Gain on disposals of assets, net		—		(14)
Increase in cash surrender value of bank owned life insurance		(116)		(117)
Loss on write-down of MFB stock		2		—
Increase in ground rents		—		4
Increase in accrued interest receivable		(167)		(2)
Net increase in other assets		(166)		(121)
Net (increase) decrease in accrued expenses and other liabilities		(153)		439

Net cash provided by operating activities		983		2,876

Cash flows from investing activities:
Redemptions and maturities of investment securities available for sale		11,624		20,244
Proceeds from sales of available for sale debt securities		1		—
Purchases of investment securities available for sale		(31,540)		(72,904)
Net (purchase) sale of Federal Home Loan Bank stock		(11)		137
Net decrease in loans		16,295		29,431
Proceeds from sale of real estate acquired through foreclosure		—		589
Purchases of premises and equipment		(231)		(225)

Net cash used in investing activities		(3,862)		(22,728)

Cash flows from financing activities:
Net (decrease) increase in deposits		(4,361)		24,889
Increase (decrease) in short term borrowings		10,000		(9,913)
Decrease in long term borrowings		(10,000)		—
Cash dividends paid		(857)		(853)
Common stock dividends reinvested		85		100

Net cash (used in) provided by financing activities		(5,133)		14,223

Net decrease in cash and cash equivalents		(8,012)		(5,629)

Cash and cash equivalents at beginning of period		62,181		37,093

Cash and cash equivalents at end of period	$	54,169	$	31,464

Supplemental Disclosures of Cash Flow Information:
Interest paid on deposits and borrowings	$	684	$	824
Net income taxes paid		—		415
Net decrease in unrealized depreciation on available for sale securities		(30,335)		(2,887)
Net decrease in unrealized depreciation on swaps		646		315

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 September 30, 2022 and December 31, 2021, the results of operations for the three- and nine-month periods ended September 30, 2022 and 2021, and the statements of cash flows for the nine-month period ended September 30, 2022 and 2021. The operating results for the three- and nine-month periods ended September 30, 2022, are not necessarily indicative of the results that may be expected for the full year ended December 31, 2022, or any future interim period. The consolidated balance sheet at December 31, 2021 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 25, 2022. The unaudited consolidated financial statements for September 30, 2022 and 2021, the consolidated balance sheet at December 31, 2021, 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, 2021.

Summary of Significant Accounting Policies

The significant accounting policies used in preparation of the Company's consolidated financial statements are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021. There have not been any significant changes in the Company's significant accounting policies.

Allowance for Credit Losses – Loans Receivable

Effective January 1, 2021, the Company applied ASU 2016-13, Financial Instruments - Credit Losses ("ASC 326"), such that the allowance calculation is based on CECL methodology. Prior to January 1, 2021, the calculation was based on incurred loss methodology. See Note 7 "Recent Accounting Pronouncements" and Note 5 "Loans Receivable and Allowance for Credit Losses" for details. The Company maintains an allowance for credit losses (“ACL”) for the expected credit losses of the loan portfolio as well as unfunded loan commitments. The amount of ACL is based on ongoing, quarterly assessments by management. The CECL methodology requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures) and replaces the incurred loss methodology’s threshold that delayed the recognition of a credit loss until it was probable a loss event was incurred.

The ACL consists of the allowance for credit losses and the reserve for unfunded commitments. The estimate of expected credit losses under the CECL methodology is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period that historical experience was based for each loan type. Finally, we consider forecasts about future economic conditions or changes in collateral values that are reasonable and supportable.

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Portfolio segment is defined as the level at which the Company develops and documents a systematic methodology to determine its ACL. The Company has designated three loan portfolio segments: loans secured by real estate, commercial and industrial loans, and consumer loans. These loan portfolio segments are further disaggregated into classes, which represent loans of similar type, risk characteristics, and methods for monitoring and assessing credit risk. The loans secured by the real estate portfolio segment is disaggregated into five classes: construction and land, farmland, single-family residential, multi-family, and commercial. The commercial and industrial loan portfolio segment is disaggregated into two classes: commercial and industrial, and SBA guaranty. The risk of loss for the commercial and industrial loan portfolio segment is generally most indicated by the credit risk rating assigned to each borrower. Commercial and industrial loan risk ratings are determined by experienced senior credit officers based on specific facts and circumstances and are subject to periodic review by an independent internal team of credit specialists. The consumer loan portfolio segment is disaggregated into two classes: consumer and automobile. The risk of loss for the consumer loan portfolio segment is generally most indicated by delinquency status and general economic factors. Each of the three loan portfolio segments may also be further segmented based on risk characteristics.

For most of our loan portfolio classes, the historical loss experience is determined using the Average Charge-Off Method. This method pools loans into groups (“cohorts”) sharing similar risk characteristics and tracks each cohort’s net charge-offs over the lives of the loans. The Average Charge-Off Method uses historical values by period (20-year look-back) to calculate losses and then applies the historical average to future balances over the life of the account. The historical loss rates for each cohort are then averaged to calculate an overall historical loss rate which is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance for credit losses for the respective loan portfolio class. For certain loan portfolio classes, the Company determined there was not sufficient historical loss information to calculate a meaningful historical loss rate using the average charge-off methodology. For any such loan portfolio class, peer group history contributes to the Company’s weighted average loss history. The peer group data is included in the weighted average loss history that is developed for each loan pool.

The Company also considers qualitative adjustments to the historical loss rate for each loan portfolio class. The qualitative adjustments for each loan class consider the conditions over the 20-year look-back period from which historical loss experience was based and are split into two components: 1) asset or class specific risk characteristics or current conditions at the reporting date related to portfolio credit quality, remaining payments, volume and nature, credit culture and management, business environment or other management factors; and 2) reasonable and supportable forecast of future economic conditions and collateral values.

The Company performs a quarterly asset quality review which includes a review of forecasted gross charge-offs and recoveries, nonperforming assets, criticized loans, risk rating migration, delinquencies, etc. The asset quality review is performed by management and the results are used to consider a qualitative overlay to the quantitative baseline.

When management deems it to be appropriate, the Company establishes a specific reserve for individually evaluated loans that do not share similar risk characteristics with the loans included in each respective loan pool. These individually evaluated loans are removed from their respective pools and typically represent collateral dependent loans but may also include other non-performing loans or troubled debt restructurings (“TDRs”).

Allowance for Credit Losses – Held-to-Maturity Debt Securities

For held-to-maturity (“HTM”) debt securities, the Company is required to utilize a CECL methodology to estimate expected credit losses. The Company does not own any HTM debt securities. Therefore, the Company did not record an allowance for credit losses for these types of securities.

Allowance for Credit Losses – Available-for-Sale Debt Securities

The impairment model for available-for-sale (“AFS”) debt securities differs from the CECL methodology applied for HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. Although ASC 326 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. For AFS debt securities in an unrealized loss position, the Company first

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assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities where neither of the criteria are met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited to the amount that the fair value is less than the amortized cost basis. Any remaining discount that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Under the new guidance, an entity may no longer consider the length of time fair value has been less than amortized cost. Changes in the allowance for credit losses are recorded as a provision (or release) for credit losses. Losses are charged against the allowance when management believes the collectability of an AFS security is considered below the amortized cost basis of the security. As of December 31, 2021 and September 30, 2022, the Company determined that the unrealized loss positions in AFS securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded.

Off-Balance-Sheet Credit Exposures

The only material off-balance-sheet credit exposures are unfunded loan commitments, which had a combined balance of $30.5 million on September 30, 2022. The reserve for unfunded commitments is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized through provision for credit losses in the consolidated statements of income. The reserve for unfunded commitments represents the expected lifetime credit losses on off-balance sheet obligations such as commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments that are unconditionally cancellable by the Company. The reserve for unfunded commitments is determined by estimating future draws, including the effects of risk mitigation actions, and applying the expected loss rates on those draws. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit losses related to the respective loan portfolio class.

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.

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 fiscal year 2021 consolidated financial statements have been reclassified to conform to the fiscal year 2022 classifications. The reclassifications had no effect on previously reported results of operations or retained earnings.

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 ACL; 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.

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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				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Basic and diluted earnings per share:
Net income	$	375,009	$	888,440	$	915,274	$	1,962,090
Weighted average common shares outstanding		2,860,352		2,850,124		2,857,759		2,847,042
Basic and dilutive net income per share	$	0.13	$	0.31	$	0.32	$	0.69

Diluted earnings per share calculations were not required for the three- and nine-month periods ended September 30, 2022 and 2021, 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 September 30, 2022 or December 31, 2021. 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 September 30, 2022 or December 31, 2021.

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.

The following table summarizes the amortized cost and estimated fair value of the Company’s investment securities portfolio at September 30, 2022 and December 31, 2021:


	At September 30, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value

Collateralized mortgage obligations	$	18,295	$	16	$	(2,124)	$	16,187
Agency mortgage-backed securities		60,630		—		(7,404)		53,226
Municipal securities		43,121		5		(12,272)		30,854
Corporate Securities		1,559		—		(160)		1,399
U.S. Government agency securities		45,483		1		(8,949)		36,535
U.S. Treasury securities		6,992		—		(213)		6,779

Total securities available for sale	$	176,080	$	22	$	(31,122)	$	144,980

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	At December 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value

Collateralized mortgage obligations	$	21,730	$	169	$	(211)	$	21,688
Agency mortgage-backed securities		56,252		356		(419)		56,189
Municipal securities		44,594		811		(180)		45,225
Corporate Securities		1,500		—		(26)		1,474
U.S. Government agency securities		32,616		4		(1,269)		31,351

Total securities available for sale	$	156,692	$	1,340	$	(2,105)	$	155,927

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 September 30, 2022 and December 31, 2021 are as follows:


September 30, 2022	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	$	9,719	$	(658)	$	4,375	$	(1,466)	$	14,094	$	(2,124)
Agency mortgage-backed securities		46,341		(5,622)		6,761		(1,782)		53,102		(7,404)
Municipal securities		17,838		(6,226)		12,256		(6,046)		30,094		(12,272)
Corporate Securities		58		(1)		1,340		(159)		1,398		(160)
U.S. Government agency securities		16,502		(1,101)		19,734		(7,848)		36,236		(8,949)
U.S. Treasury securities		6,779		(213)		—		—		6,779		(213)
	$	97,237	$	(13,821)	$	44,466	$	(17,301)	$	141,703	$	(31,122)


December 31, 2021	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	$	7,917	$	(194)	$	876	$	(17)	$	8,793	$	(211)
Agency mortgage-backed securities		42,109		(414)		197		(5)		42,306		(419)
Municipal securities		18,603		(180)		—		—		18,603		(180)
Corporate Securities		1,474		(26)		—		—		1,474		(26)
U.S. Government agency securities		13,976		(420)		15,942		(849)		29,918		(1,269)
U.S. Treasury securities		—		—		—		—		—		—
	$	84,079	$	(1,234)	$	17,015	$	(871)	$	101,094	$	(2,105)

The Company does not believe that the available-for-sale debt securities that were in an unrealized loss position have any credit loss impairment upon adoption of ASC 326 on January 1, 2021 or as of September 30, 2022. As of September 30, 2022, the Company did not intend to sell the investment securities that were in an unrealized loss position. It is more likely than not that the Company will not be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity. Available-for-sale debt securities issued by U.S. government agencies or U.S. government sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Municipal bonds are considered to have issuer(s) of high credit quality (rated A or higher) and the decline in fair value is due to changes in interest rates and other market conditions. Corporate securities are non-rated investments that are booked as a debt security where rating agencies do not provide a rating. The absence of a rating does not imply substandard quality. Non-rated corporate securities may be purchased

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from issuers operating in and around the Company’s operating footprint. The issuer(s) continues to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bond(s) approach maturity.

At September 30, 2022, the Company recorded unrealized losses in its portfolio of debt securities totaling $31,122,000 related to 246 securities, which resulted from decreases in market value, 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 have a credit loss impairment.

At December 31, 2021, the Company recorded unrealized losses in its portfolio of debt securities totaling $2,105,000 related to 116 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 have a credit loss impairment.

Shown below are contractual maturities of debt securities at September 30, 2022. 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 September 30, 2022

	Amortized		Fair		Yield
(dollars in thousands)	Cost		Value		(1), (2)
Available for sale securities maturing:
Within one year	$	—	$	—	—	%
Over one to five years		24,517		23,656	2.37	%
Over five to ten years		39,149		34,674	1.90	%
Over ten years		112,414		86,650	2.23	%
Total debt securities	$	176,080	$	144,980

_____________________

(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 CREDIT 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 credit losses by specific portfolio segments and classes, which are levels at which the Company develops and documents its systematic methodology to determine the allowance for credit losses. The Company believes each portfolio segment has unique risk characteristics. The Company's loans held for investment is divided into three portfolio segments: loans secured by real estate, commercial and industrial loans, and consumer loans. Each of these segments is further divided into loan classes for purposes of estimating the allowance for credit losses.

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For additional information, including the accounting policies and CECL methodology used to estimate the allowance for credit losses, see Note 2 “Basis of Presentation” and Note 7 “Recent Accounting Pronouncements.”

The following table is a summary of loans receivable by loan portfolio segment and class.


	September 30,			December 31,
	2022			2021
(dollars in thousands)	Amount		%	Amount		%
Loans Secured by Real Estate
Construction and land	$	5,362	3	$	4,087	2
Farmland		336	—		342	—
Single-family residential		80,134	40		78,119	37
Multi-family		5,337	3		5,428	3
Commercial		44,431	23		48,729	23
Total loans secured by real estate		135,600			136,705
Commercial and Industrial
Commercial and industrial		8,859	5		10,003	5
SBA guaranty		6,203	3		6,397	3
Comm SBA PPP		-	—		1,047	—
Total commercial and industrial loans		15,062			17,447
Consumer Loans
Consumer		1,523	1		2,090	1
Automobile		41,895	22		54,150	26
Total consumer loans		43,418			56,240

Loans, net of deferred fees and costs		194,080	100		210,392	100
Less: Allowance for credit losses		(2,275)			(2,470)
Loans, net	$	191,805		$	207,922

The Bank’s net loans totaled $191.8 million on September 30, 2022, compared to $207.9 million on December 31, 2021, a decrease of $16.1 million, or 7.75%. Construction and land loans increased from $4.1 million on December 31, 2021, to $5.4 million on September 30, 2022, an increase of $1.3 million, or 31.19%. Farmland loans were $0.3 million at September 30, 2022 and December 31, 2021. Single-family residential loans increased from $78.1 million on December 31, 2021, to $80.1 million on September 30, 2022, an increase of $2.0 million, or 2.58%. Multi-family residential loans were $5.3 million on September 30, 2022 and $5.4 million on December 31, 2021 a decrease of $0.1 million or 1.67%. Commercial real estate loans decreased $4.3 million, or 8.82%, to $44.4 million on September 30, 2022 compared to $48.7 million on December 31, 2021. Commercial and industrial loans decreased by $1.1 million, or 11.44%, to $8.9 million on September 30, 2022, compared to $10.0 million on December 31, 2021. SBA guaranty loans were $6.2 million on September 30, 2022, a decrease of $0.2 million, or 3.04%, compared to $6.4 million at December 31, 2021. The Commercial Small Business Administration (SBA) Paycheck Protection Program (PPP) loan balance was $0 on September 30, 2022, compared to $1.0 million on December 31, 2021, a decrease of $1.0 million or 100.00%. Consumer loans decreased by $0.6 million, or 27.13% to $1.5 million on September 30, 2022, compared to $2.1 million on December 31, 2021. Automobile loans decreased from $54.2 million on December 31, 2021, to $41.9 million on September 30, 2022, a decrease of $12.3 million or 22.63%.

Credit Risk and Allowance for Credit 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

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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.

On January 1, 2021, the Company early adopted ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”) which replaces the “incurred loss approach” for estimating credit losses with an expected loss methodology. The incurred loss model delayed the recognition of credit losses until it was probable that a loss had occurred, while the CECL model requires the immediate recognition of expected credit losses over the contractual term for financial instruments that fall within the scope of CECL at the date of origination or purchase of the financial instrument. The CECL model, which is applicable to the measurement of credit losses on financial assets measured at amortized cost and certain off-balance sheet credit exposures, affects the Company’s estimates of the allowance for credit losses for our loan portfolio and the reserve for our off-balance sheet credit exposures related to loan commitments. The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. The allowance, based on all available information from internal and external sources, relevant to assessing the collectability of loans over their contractual terms, adjusted for expected prepayments when appropriate, 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 factors such 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. Finally, the Company considers forecasts about future economic conditions or changes in collateral values that are reasonable and supportable. Based on that analysis, the Bank deems its allowance for credit losses in proportion to the total nonaccrual loans and past due loans to be sufficient.

Transactions in the allowance for credit losses for the nine months ended September 30, 2022 and the year ended December 31, 2021 were as follows:


	Loans Secured By Real Estate										Commercial and Industrial Loans						Consumer Loans
September 30, 2022	Construction				Single-family						Commercial				Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		SBA PPP		Consumer		Automobile		Total

Balance, beginning of year	$	5	$	11	$	1,357	$	105	$	278	$	115	$	30	$	—	$	36	$	533	$	2,470
Charge-offs		—		—		—		—		—		—		(9)		—		(10)		(132)		(151)
Recoveries		—		—		—		—		—		—		—		—		7		127		134
Release (provision) for credit losses		45		9		(119)		(4)		(57)		105		—		—		(9)		(148)		(178)

Balance, end of quarter	$	50	$	20	$	1,238	$	101	$	221	$	220	$	21	$	—	$	24	$	380	$	2,275

Individually evaluated for impairment:
Balance in allowance	$	—	$	—	$	18	$	—	$	109	$	—	$	—	$	—	$	—	$	—	$	127
Related loan balance		—		—		35		—		499		—		—		—		—		—		534

Collectively evaluated for impairment:
Balance in allowance	$	50	$	20	$	1,220	$	101	$	112	$	220	$	21	$	—	$	24	$	380	$	2,148
Related loan balance		5,362		336		80,099		5,337		43,932		8,859		6,203		—		1,523		41,895		193,546

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	Loans Secured By Real Estate										Commercial and Industrial Loans						Consumer Loans
December 31, 2021	Construction				Single-family						Commercial				Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		SBA PPP		Consumer		Automobile		Total

Balance, beginning of year	$	9	$	2	$	513	$	39	$	218	$	67	$	48	$	—	$	11	$	569	$	1,476
Impact of ASC 326 adoption		16		9		854		63		199		120		(6)		—		46		273		1,574
Charge-offs		—		—		—		—		—		—		—		—		(2)		(251)		(253)
Recoveries		—		—		408		—		—		—		—		—		—		240		648
Release (provision) for credit losses		(20)		—		(418)		3		(139)		(72)		(12)		—		(19)		(298)		(975)

Balance, end of the year	$	5	$	11	$	1,357	$	105	$	278	$	115	$	30	$	—	$	36	$	533	$	2,470

Individually evaluated for impairment:
Balance in allowance	$	—	$	—	$	10	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	10
Related loan balance		—		—		36		—		—		—		—		—		—		—		36

Collectively evaluated for impairment:
Balance in allowance	$	5	$	11	$	1,347	$	105	$	278	$	115	$	30	$	—	$	36	$	533	$	2,460
Related loan balance		4,087		342		78,083		5,428		48,729		10,003		6,397		1,047		2,090		54,150		210,356


	September 30,			September 30,
(dollars in thousands)	2022			2021
Average loans	$	197,199		$	239,492
Net charge offs to average loans (annualized)		0.00	%		(0.19)	%

During the nine-month period ended September 30, 2022, loans to 14 borrowers and related entities totaling approximately $151,000 were determined to be uncollectible and were charged off. During the nine-month period ended September 30, 2021, loans to 20 borrowers and related entities totaling approximately $193,000 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.

As of September 30, 2022, and 2021, the Bank had outstanding commitments totaling $30.5 million and $30.6 million, respectively. The reserve for unfunded commitments represents the expected lifetime credit losses on off-balance sheet obligations such as commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments that are unconditionally cancellable by the Company. The allowance for credit losses on unfunded commitments is determined by estimating future draws, including the effects of risk mitigation actions, and applying the expected loss rates on those draws. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit losses related to the respective loan portfolio class.

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The following table shows the Bank’s reserve for unfunded commitments arising from these transactions:


	Nine Months Ended
	Ended September 30,
(dollars in thousands)	2022		2021
Beginning balance	$	371	$	33
Impact of ASC 326 adoption		—		457
Reduction of unfunded reserve		(76)		(34)
Provisions charged to operations		174		—

Ending balance	$	469	$	456

Contractual Obligations and Commitments. No material changes, outside the normal course of business, have been made during the third quarter of 2022.

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 September 30, 2022					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total
Loans Secured by Real Estate
Construction and land	$	5,362	$	—	$	—	$	—	$	5,362
Farmland		336		—		—		—		336
Single-family residential		79,811		204		11		108		80,134
Multi-family		5,337		—		—		—		5,337
Commercial		44,431		—		—		—		44,431
Total loans secured by real estate		135,277		204		11		108		135,600
Commercial and Industrial
Commercial and industrial		8,360		499		—		—		8,859
SBA guaranty		6,203		—		—		—		6,203
Comm SBA PPP		—		—		—		—		—
Total commercial and industrial loans		14,563		499		—		—		15,062
Consumer Loans
Consumer		1,439		84		—		—		1,523
Automobile		41,636		184		—		75		41,895
Total consumer loans		43,075		268		—		75		43,418

	$	192,915	$	971	$	11	$	183	$	194,080

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At December 31, 2021					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total
Loans Secured by Real Estate
Construction and land	$	4,087	$	—	$	—	$	—	$	4,087
Farmland		342		—		—		—		342
Single-family residential		77,981		—		15		123		78,119
Multi-family		5,428		—		—		—		5,428
Commercial		48,729		—		—		—		48,729
Total loans secured by real estate		136,567		—		15		123		136,705
Commercial and Industrial										—
Commercial and industrial		10,003		—		—		—		10,003
SBA guaranty		6,326		—		—		71		6,397
Comm SBA PPP		1,047		—		—		—		1,047
Total commercial and industrial loans		17,376		—		—		71		17,447
Consumer Loans										—
Consumer		2,086		4		—		—		2,090
Automobile		53,655		351		—		144		54,150
Total consumer loans		55,741		355		—		144		56,240

	$	209,684	$	355	$	15	$	338	$	210,392

The balances in the above charts have not been reduced by the allowance for credit losses. For the period ended September 30, 2022, the allowance for credit loss is $2.3 million. For the period ended December 31, 2021, the allowance for credit loss is $2.5 million.

Non-accrual loans with specific reserves at September 30, 2022 are comprised of:

Single–family residential – One loan to one borrower that totaled $34,476 with specific reserves of $17,655 established for the loan. This loan was also a troubled debt restructured loan.

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Below is a summary of the recorded investment amount and related allowance for losses of the Bank’s impaired loans at September 30, 2022 and December 31, 2021.


September 30, 2022			Unpaid		Interest				Average
(dollars in thousands)	Recorded		Principal		Income		Specific		Recorded
	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	—	$	—
Farmland		—		—		—		—		—
Single-family residential		17		35		1		18		48
Multi-family		—		—		—		—		—
Commercial		—		—		—		—		—
Total loans secured by real estate		17		35		1		18		48
Commercial and Industrial
Commercial and industrial		390		499		19		109		499
SBA guaranty		—		—		—		—		—
Total commercial and industrial loans		390		499		19		109		499
Consumer Loans
Consumer		—		—		—		—		—
Automobile		—		—		—		—		—
Total consumer loans		—		—		—		—		—
Total impaired loans with specific reserves	$	407	$	534	$	20	$	127	$	547

Impaired loans with no specific reserve:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	n/a	$	—
Farmland		—		—		—		n/a		—
Single-family residential		73		73		1		n/a		80
Multi-family		—		—		—		n/a		—
Commercial		—		—		—		n/a		—
Total loans secured by real estate		73		73		1		—		80
Commercial and Industrial
Commercial and industrial		—		—		—		n/a		—
SBA guaranty		—		—		—		n/a		—
Total commercial and industrial loans		—		—		—		—		—
Consumer Loans
Consumer		—		—		—		n/a		—
Automobile		75		75		4		n/a		95
Total consumer loans		75		75		4		n/a		95
Total impaired loans with no specific reserve	$	148	$	148	$	5	$	—	$	175

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December 31, 2021			Unpaid		Interest				Average
(dollars in thousands)	Recorded		Principal		Income		Specific		Recorded
	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	—	$	—
Farmland		—		—		—		—		—
Single-family residential		26		36		2		10		49
Multi-family		—		—		—		—		—
Commercial		—		—		—		—		—
Total loans secured by real estate		26		36		2		10		49
Commercial and Industrial
Commercial and industrial		—		—		—		—		—
SBA guaranty		—		—		—		—		—
Total commercial and industrial loans		—		—		—		—		—
Consumer Loans
Consumer		—		—		—		—		—
Automobile		—		—		—		—		—
Total consumer loans		—		—		—		—		—
Total impaired loans with specific reserves	$	26	$	36	$	2	$	10	$	49

Impaired loans with no specific reserve:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	n/a	$	—
Farmland		—		—		—		n/a		—
Single-family residential		87		87		3		n/a		98
Multi-family		—		—		—		n/a		—
Commercial		—		—		—		n/a		—
Total loans secured by real estate		87		87		3		—		98
Commercial and Industrial
Commercial and industrial		—		—		—		n/a		—
SBA guaranty		71		71		1		n/a		71
Total commercial and industrial loans		71		71		1		—		71
Consumer Loans
Consumer		—		—		—		n/a		—
Automobile		143		143		8		n/a		181
Total consumer loans		143		143		8		n/a		181
Total impaired loans with no specific reserve	$	301	$	301	$	12	$	—	$	350


	September 30,			December 31,
(dollars in thousands)	2022			2021

Troubled debt restructured loans	$	34		$	36
Non-accrual and 90+ days past due and still accruing loans to average loans		0.10	%		0.16	%
Allowance for credit losses to nonaccrual & 90+ days past due and still accruing loans		1,171.4	%		703.7	%

At September 30, 2022, there was one troubled debt restructured loan consisting of a single-family residential loan in the amount of $34,476. This loan is in a nonaccrual status.

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The following table shows the activity for non-accrual loans for the nine months ended September 30, 2022 and 2021.


					Commercial and
	Loans Secured By Real Estate				Industrial Loans		Consumer Loans
	Single-family
(dollars in thousands)	Residential		Commercial		SBA Guaranty		Consumer		Automobile		Total

December 31, 2020	$	270	$	4,029	$	—	$	34	$	179	$	4,512
Transfers into nonaccrual		—		920		71		1		204		1,196
Loans paid down/payoffs		(138)		(1,881)		—		(1)		(68)		(2,088)
Loans returned to accrual status		—		(616)		—		(34)		—		(650)
Loans charged off		—		—		—		—		(189)		(189)

September 30, 2021	$	132	$	2,452	$	71	$	—	$	126	$	2,781


December 31, 2021	$	123	$	—	$	71	$	—	$	144	$	338
Transfers into nonaccrual		31		—		—		11		151		193
Loans paid down/payoffs		(46)		—		(61)		(11)		(73)		(191)
Loans returned to accrual status		—		—		—		—		(29)		(29)
Loans charged off		—		—		(10)		—		(118)		(128)

September 30, 2022	$	108	$	—	$	—	$	—	$	75	$	183

Other Real Estate Owned. The Company had no real estate acquired in partial or total satisfaction of debt at September 30, 2022, and December 31, 2021. 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:

1 – 4 (Pass) - Pass credits are loans in grades “superior” through “acceptable”. These are at least considered to be credits with acceptable risks and would be granted in the normal course of lending operations.

5 (Special Mention) - Special mention credits have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the Bank’s credit position at some future date. If weaknesses cannot be identified, classifying as special mention is not appropriate. Special mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification. No apparent loss of principal or interest is expected.

6 (Substandard) - Substandard credits are inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Credits so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

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7 (Doubtful) - A doubtful credit has all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded Substandard. The following tables provides information with respect to the Company's credit quality indicators by loan portfolio segment on September 30, 2022, and December 31, 2021:


	Loans Secured By Real Estate										Commercial and Industrial Loans						Consumer Loans
September 30, 2022	Construction				Single-family						Commercial				Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		SBA PPP		Consumer		Automobile		Total

Pass	$	5,362	$	336	$	80,026	$	5,337	$	44,431	$	8,360	$	6,203	$	—	$	1,523	$	41,820	$	193,398
Special mention		—		—		—		—		—		499		—		—		—		—		499
Substandard		—		—		108		—		—		—		—		—		—		71		179
Doubtful		—		—		—		—		—		—		—		—		—		4		4
Loss		—		—		—		—		—		—		—		—		—		—		—

	$	5,362	$	336	$	80,134	$	5,337	$	44,431	$	8,859	$	6,203	$	—	$	1,523	$	41,895	$	194,080

Nonaccrual	$	—	$	—	$	108	$	—	$	—	$	—	$	—	$	—	$	—	$	75	$	183
Troubled debt restructures	$	—	$	—	$	34	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	34
Number of TDRs accounts		—		—		1		—		—		—		—		—		—		—		1
Non-performing TDRs	$	—	$	—	$	34	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	34
Number of non-performing TDR accounts		—		—		1		—		—		—		—		—		—		—		1


	Loans Secured By Real Estate										Commercial and Industrial Loans						Consumer Loans
December 31, 2021	Construction				Single-family						Commercial				Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		SBA PPP		Consumer		Automobile		Total

Pass	$	4,072	$	342	$	77,996	$	5,428	$	45,307	$	10,003	$	6,326	$	1,047	$	2,084	$	54,006	$	206,611
Special mention		15		—		—		—		3,422		—		—		—		6		4		3,447
Substandard		—		—		123		—		—		—		71		—		—		50		244
Doubtful		—		—		—		—		—		—		—		—		—		90		90
Loss		—		—		—		—		—		—		—		—		—		—		—

	$	4,087	$	342	$	78,119	$	5,428	$	48,729	$	10,003	$	6,397	$	1,047	$	2,090	$	54,150	$	210,392

Nonaccrual	$	—	$	—	$	123	$	—	$	—	$	—	$	71	$	—	$	—	$	144	$	338
Troubled debt restructures	$	—	$	—	$	36	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	36
Number of TDRs accounts		—		—		1		—		—		—		—		—		—		—		1
Non-performing TDRs	$	—	$	—	$	36	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	36
Number of non-performing TDR accounts		—		—		1		—		—		—		—		—		—		—		1

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.

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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. Impaired loans totaled $682,614 with $127,108 of specific reserves as of September 30, 2022. These assets included single-family residential, commercial real estate and automobile 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. 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. 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 conduct 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 are the details of the amenities included within 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, within a range of 0% to 16%, based on individual circumstances.

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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
September 30, 2022
Recurring:
Securities available for sale
Collateralized mortgage obligations	$	—	$	16,187	$	—	$	16,187
Agency mortgage-backed securities		—		53,226		—		53,226
Municipal securities		—		30,854		—		30,854
Corporate securities		—		1,399		—		1,399
U.S. Government agency securities		—		36,535		—		36,535
U.S. Treasury securities		—		6,779		—		6,779
Interest rate swap		—		205		—		205

Non-recurring:
Maryland Financial Bank stock		—		—		—		—
Impaired loans		—		—		555		555
	$	—	$	145,185	$	555	$	145,740
December 31, 2021
Recurring:
Securities available for sale
Collateralized mortgage obligations	$	—	$	21,688	$	—	$	21,688
Agency mortgage-backed securities		—		56,189		—		56,189
Municipal securities		—		45,225		—		45,225
Corporate securities		—		1,474		—		1,474
U.S. Government agency securities		—		31,351		—		31,351
U.S. Treasury securities		—		—		—		—
Interest rate swap		—		(442)		—		(442)

Non-recurring:
Maryland Financial Bank stock		—		—		3		3
Impaired loans		—		—		317		317
	$	—	$	155,485	$	320	$	155,805

The estimated fair values of the Company’s financial instruments at September 30, 2022 and December 31, 2021 are summarized in the following table. 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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	September 30, 2022				December 31, 2021
(dollars in thousands)	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	2,572	$	2,572	$	2,111	$	2,111
Interest-bearing deposits in other financial institutions		50,245		50,245		56,434		56,434
Federal funds sold		1,352		1,352		3,636		3,636
Investment securities available for sale		144,980		144,980		155,927		155,927
Investments in restricted stock		1,071		1,071		1,062		1,062
Ground rents		131		131		131		131
Loans, less allowance for credit losses		191,805		187,248		207,922		211,541
Accrued interest receivable		1,253		1,253		1,085		1,085
Cash value of life insurance		8,454		8,454		8,338		8,338

Financial liabilities:
Deposits		378,886		316,406		383,247		383,910
Long-term borrowings		—		—		10,000		9,888
Short-term borrowings		20,000		19,896		10,000		10,000
Accrued interest payable		60		60		11		11
Unrecognized financial instruments:
Commitments to extend credit		30,494		30,494		28,167		28,167
Standby letters of credit		45		45		55		55

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
September 30, 2022	Amount		Value		Level 1		Level 2		Level 3

Financial instruments - Assets
Cash and cash equivalents	$	54,169	$	54,169	$	54,169	$	—	$	—
Loans receivable, net		191,805		187,248		—		—		187,248
Cash value of life insurance		8,454		8,454		—		8,454		—
Financial instruments - Liabilities
Deposits		378,886		316,406		—		316,406		—
Long-term debt		—		—		—		—		—
Short-term debt		20,000		19,896		—		19,896		—

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 the Commercial SBA PPP loans is equal to the carrying amounts. 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 noninterest-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 2021 Form 10-K.

ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13") requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans, and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ASU 2016-13, as updated, was adopted on January 1, 2021. Through the date of adoption, we held working group meetings that included individuals from various functional areas relevant to the implementation of CECL. Additionally, an assessment of our primary modeling tool was completed, which enabled us to complete parallel runs utilizing second and third quarter 2020 data, during which preliminary operational procedures and internal controls were designed. Management's working group also validated the appropriateness of, among other things, management’s decisions regarding portfolio segmentation, life of loan considerations, and reasonable and supportable forecasting methodology. The Company early adopted ASC 326 during the first quarter 2021 and based on the application of the modified retrospective method, it became effective on January 1, 2021 for all financial assets measured at amortized cost (primarily loans receivable) and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a decrease to retained earnings of $1,472,000 as of January 1, 2021 for the cumulative effect of adopting ASC 326 as further detailed below.


			CECL
	December 31, 2020		Adoption Impact		January 1, 2021
(dollars in thousands)
Allowance for credit losses:
Loans Secured by Real Estate
Construction and land	$	9	$	17	$	26
Farmland		2		9		11
Single-family residential		513		853		1,366
Multi-family		39		63		102
Commercial		218		199		417
Total loans secured by real estate		781		1,141		1,922
Commercial and Industrial
Commercial and industrial		67		120		187
SBA guaranty		48		(6)		42
Total commercial and industrial loans		115		114		229
Consumer Loans
Consumer		11		46		57
Automobile		569		273		842
Total consumer loans		580		319		899
Total allowance for credit losses		1,476		1,574		3,050
Reserve for unfunded commitments		33		457		490
Total allowance for credit losses	$	1,509	$	2,031	$	3,540

Retained earnings
Total pre-tax impact			$	2,031
Tax effect				(559)
Decrease to retained earnings			$	1,472

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ASU 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740).” The ASU 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, 2021. The adoption of this guidance did not have a material impact upon the Company’s financial position and results of operations.

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 amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of this guidance did not have a material impact upon the Company’s financial position and results of operations.

ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope.” The ASU clarifies that all derivative instruments affected by changes to the interest rates used for discounting, margining, or contract price alignment due to reference rate reform are in the scope of ASC 848. Entities may apply certain optional expedients in ASC 848 to derivative instruments that do not reference LIBOR or another rate expected to be discontinued as a result of reference rate reform if there is a change to the interest rate used for discounting, margining or contract price alignment. The ASU also clarifies other aspects of ASC 848 and provides new guidance on how to address the effects of the cash compensation adjustment that is provided as part of the above change on certain aspects of hedge accounting. The ASU is intended to reduce diversity in practice related to accounting for (1) modifications to the terms of affected derivatives; and (2) existing hedging relationships in which the affected derivatives are designated as hedging instruments. ASU 2021-01 is effective upon issuance and generally can be applied through December 31, 2022. Entities may elect to apply the guidance on contract modifications either (1) retrospectively as of any date from the beginning of any interim period that includes March 12, 2020; or (2) prospectively to new modifications from any date in an interim period that includes or is after January 7, 2021, up to the date that financial statements are available to be issued. The adoption of this guidance did not have a material impact upon the Company’s financial position and results of operations.

ASU No. 2022-01, “Derivative and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method.” The ASU clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets. The ASU amends the guidance in ASU 2017-12 (released on August 28, 2017) that, among other things, established the “last-of-layer” method for making the fair value hedge accounting for these portfolios more accessible. The ASU renames that method the “portfolio layer” method and addresses feedback from stakeholders regarding its application. The objective of the ASU is to better align the Company’s financial reporting with the results of its risk management strategy, and to improve the hedge accounting model by simplifying it. The ASU is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements.

ASU No. 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” The ASU eliminates the accounting guidance for troubled debt restructurings ("TDRs") in ASC 310-40, "Receivables - Troubled Debt Restructurings by Creditors" for entities that have adopted the current expected credit loss ("CECL") model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. It also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, "Financial Instruments—Credit Losses—Measured at Amortized Cost". The ASU is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements.

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NOTE 8 – SUBSEQUENT EVENTS

None.

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 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.

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 $802,000 to $9.3 million for the nine-month period ended September 30, 2022, as compared to the same period in 2021. The decrease was driven by lower interest income on loans, partially offset by increases in interest and dividends on securities and interest on deposits with banks and federal funds sold. The Bank’s loan portfolio decreased by $16.1 million or 7.75% during the first nine months of 2022. As a result of minimal charge-offs, recoveries on previously charged off loans, reduction in our loan portfolio and strong credit discipline, the Company continued to release portions of its allowance for credit losses in the amount of $178,000 for the nine months ended September 30, 2022. Shareholder’s equity decreased to $14.3 million on September 30, 2022, a $21.4 million or 59.85% decrease, as compared to $35.7 million on December 31, 2021. The decrease was primarily due to unrealized losses, net of taxes, on securities available for sale amounting to $22.5 million on September 30, 2022. The Company has strong liquidity and capital positions that provide ample capacity for future growth. The Bank’s total regulatory capital to risk weighted assets were 16.16% on September 30, 2022, as compared to 16.03% on December 31, 2021.

Return on average assets for the three- and nine-month periods ended September 30, 2022, was 0.35% and 0.28% compared to 0.81% and 0.62% for the three- and nine-month periods ended September 30, 2021. Return on average equity for the three- and nine-month periods ended September 30, 2022, was 6.76% and 4.53% compared to 9.56% and 7.30% for the three- and nine-month period ended September 30, 2021. Lower net income and lower average asset balances primarily drove the lower return on average assets comparing quarterly changes. Lower net income and higher average asset balances primarily drove the lower return on average assets comparing year-to-date changes. Lower net income and a lower average equity balance, primarily drove the lower return on average equity comparing quarterly and year-to-date changes.

The book value per share of Bancorp’s common stock was $5.01 on September 30, 2022, as compared to $12.26 per share on September 30, 2021. The decrease primarily resulted from the unrealized losses on the Company’s available for sale securities and the rapid rise in interest rates in 2022.

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At September 30, 2022, the Bank remained above all “well-capitalized” regulatory requirement levels. The Bank’s estimated tier 1 risk-based capital ratio was 15.34% at September 30, 2022, compared to 15.32% at December 31, 2021.

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

RESULTS OF OPERATIONS

Net income attributable to common stockholders for the three-month period ended September 30, 2022 was $375,000, or $0.13 per basic and diluted common share compared to $888,000, or $0.31 per basic and diluted common share for the same period of 2021. The results for the three-month period ended September 30, 2022, were lower than the same period of 2021 resulting primarily from $303,000 lower net interest income, a $161,000 lower release of allowance for loan losses and $229,000 higher noninterest expense when compared to the same period of 2021. Net income attributable to common stockholders for the nine-month period ended September 30, 2022 was $915,000, or $0.32 per basic and diluted common share compared to $2.0 million, or $0.69 per basic and diluted common share for the same period of 2021. The results recorded for the nine-month period ended September 30, 2022 were lower than the same period of 2021 resulting primarily from a $712,000 decrease in net interest income and $415,000 decrease in release of credit loss provision, and a $229,000 increase in noninterest expenses in 2022 when compared to the same period of 2021.

Net Interest Income. The Company’s net interest income for the three-month period ended September 30, 2022 was $3.0 million, as compared to $3.3 million for the same period in 2021, a decrease of $303,000, or 9.06%. The decrease in net interest income was due to lower interest income in the amount of $296,000. The decrease in interest income was primarily driven by lower interest and fees on loans resulting from a $30.6 million year-over-year decrease in loan portfolio balances, offset by higher interest and dividends on securities, and interest on deposits with banks and fed funds sold. Although deposit driven excess liquidity fueled average interest-earning asset growth, competitive loan origination pressures as well as a low interest rate environment drove the overall decrease in average interest-earning asset yields. The Company’s net interest income for the nine-month period ended September 30, 2022 was $8.5 million, compared to $9.2 million for the same period in 2021, a decrease of $712,000, or 7.71%. The decrease in net interest income was due to lower interest income in the amount of $802,000, offset by lower interest expense in the amount of $90,000. The decrease in interest income was primarily due to lower interest and fees on loans resulting from a decrease in the loan portfolio, partially offset by increases in interest and dividends on securities and interest on deposits with banks and federal funds sold. The decrease in interest expense was due to a decrease in the costs of interest-bearing deposits.

Total interest income for the third quarter of 2022 decreased $296,000, or 8.20% when compared to the same period in 2021, from $3.6 million in 2021 to $3.3 million in 2022. The primary driver of the decrease was a $705,000 decrease in interest and fees on loans due to lower average loan balances, offset by a $170,000 increase in interest and dividends on investment securities and a $239,000 increase in interest on deposits with banks and federal funds sold due to higher interest rates and average balances. Total interest income decreased $802,000 for the nine-month period ended September 30, 2022 when compared to the same period in 2021, from $10.1 million in 2021 to $9.3 million, a decrease of 7.98%. The primary driver of the decrease in total interest income was a decrease of $1.7 million in interest and fees on loans, offset by a $459,000 increase on interest and dividends on securities and a $393,000 increase in interest on deposits with banks and federal funds sold due to higher average balances. The overall decrease can be attributed to a decrease in the loan portfolio.

Interest expense for the third quarter 2022 increased $7,000 from $264,000 for the same period in 2021 to $271,000, an increase of 2.65%. The primary driver for the increase was a $39,000 net increase in interest expense on borrowings, offset by a $32,000 decrease in expense on interest-bearing deposits. The decrease in interest on deposits for the three-month period ended September 30, 2022 is attributed to the decline in the average balance of time deposits. Interest expense decreased $90,000 for the nine-month period ended September 30, 2022 from $823,000 for the same period in 2021 to $733,000 in 2022, a decrease of 10.94%. The decrease was primarily due to a $113,000 decrease in

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the cost of interest on deposits. The decreases for the three-and nine-month periods ended September 30, 2022 can be attributed to maturing times deposits that are renewing at a lower interest rate.

Net interest margin for the three-month period ended September 30, 2022 was 2.83% compared to 3.22% for the three-month period ended September 30, 2021. Higher average balances combined with lower yields on interest-earning assets, and lower cost of funds on interest-bearing liabilities and higher noninterest-bearing deposits were the primary drivers of the results. The yield on interest earning assets decreased by 0.38% from 3.47% for the three-month period ended September 30, 2021 to 3.09% from the same period of 2022 due to lower interest income on average loan balances. The cost of funds was unchanged at 0.27% for the three-month period ended September 30, 2021 and September 30, 2022. Net interest margin for the nine-month period ended September 30, 2022 were 2.66% compared to 3.01% for the nine-month period ended September 30, 2021. The decrease was primarily due to lower average yields and higher average balances on interest-earning assets combined with higher average interest-bearing funds, higher average noninterest-bearing funds, and lower cost of funds. The yield on interest earning assets decreased by 0.39% from 3.28% for the nine-month period ended September 30, 2021 to 2.89% for the same period of 2022. The cost of funds decreased 0.04% from 0.28% for the nine-month period ended September 30, 2021 to 0.24% for the same period of 2022 due to a decrease in total time deposits and the renewal of time deposits at lower interest rates in 2021.

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.

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	Three Months Ended September 30,
	2022						2021
	Average				Yield/		Average				Yield/
(dollars in thousands)	Balance		Interest		Cost		Balance		Interest		Cost
ASSETS:
Interest-earning assets:
Interest-bearing deposits w/ banks & fed funds	$	49,176	$	241	1.94	%	$	24,447	$	8	0.14	%
Investment securities available for sale		177,824		956	2.15			160,903		787	1.98
Restricted equity securities		1,071		17	6.31			1,062		10	3.63
Total interest-bearing deposits/investments		228,071		1,214	2.13			186,412		805	1.73

Loans Secured by Real Estate
Construction and land		4,855		39	3.19			3,844		36	3.81
Farmland		337		4	5.04			346		4	5.10
Single-family residential		79,896		823	4.12			78,539		834	4.25
Multi-family		4,889		68	5.56			5,221		76	5.79
Commercial		45,208		588	5.16			57,250		989	6.93
Total loans secured by real estate		135,185		1,522	4.47			145,200		1,939	5.36
Commercial and Industrial
Commercial and industrial		8,921		82	3.63			9,566		79	3.30
SBA guaranty		6,016		96	6.30			7,855		197	10.07
Comm SBA PPP		274		—	—			3,548		11	1.22
Total commercial and industrial loans		15,211		178	4.63			20,969		287	5.49
Consumer Loans
Consumer		1,907		7	1.47			2,473		7	1.12
Automobile		44,896		387	3.41			61,003		566	3.72
Total consumer loans		46,803		394	3.34			63,476		573	3.62
Total loans		197,199		2,094	4.21			229,645		2,799	4.89
Total interest-earning assets		425,270		3,308	3.09			416,057		3,604	3.47

Cash		2,345						2,284
Allowance for credit losses		(2,221)						(2,769)
Market valuation		(21,370)						870
Other assets		21,846						16,370
Total non-earning assets		600						16,755
Total assets	$	425,870					$	432,812

LIABILITIES AND STOCKHOLDER'S EQUITY:
Interest-bearing deposits:
Interest-bearing checking and savings	$	151,153		18	0.05	%	$	140,103		16	0.05	%
Money market		24,534		3	0.05			22,234		3	0.05
Certificates of deposit		56,586		95	0.66			64,933		129	0.79
Total interest-bearing deposits		232,273		116	0.20			227,270		148	0.26

Borrowed Funds:
PPPLF Term Funding		—		—	—			56		—	—
Federal Funds Purchased		—		—	—			—		—	—
FHLB advances		20,000		155	3.07			20,000		116	2.31
Total borrowed funds		20,000		155	3.07			20,056		116	2.32
Total interest-bearing liabilities		252,273		271	0.43			247,326		264	0.42

Non-interest-bearing deposits		149,561						145,741
Total cost of funds		401,834		271	0.27			393,067		264	0.27

Other liabilities and accrued expenses		1,995						2,888
Total liabilities		403,829						395,955

Stockholder's equity		22,041						36,857
Total liabilities and equity	$	425,870					$	432,812
Net interest income			$	3,037					$	3,340
Yield on earning assets					3.09	%					3.47	%
Cost of interest-bearing liabilities					0.43	%					0.42	%
Net interest spread					2.66	%					3.05	%
Net interest margin					2.83	%					3.22	%

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	Nine Months Ended September 30,
	2022						2021
	Average				Yield/		Average				Yield/
(dollars in thousands)	Balance		Interest		Cost		Balance		Interest		Cost
ASSETS:
Interest-earning assets:
Interest-bearing deposits w/ banks & fed funds	$	58,395	$	389	0.89	%	$	25,889	$	20	0.11	%
Investment securities available for sale		167,025		2,477	1.98			143,354		1,998	1.86
Restricted equity securities		1,069		37	4.59			1,102		33	3.98
Total interest-bearing deposits/investments		226,489		2,903	1.70			170,345		2,051	1.61

Loans Secured by Real Estate
Construction and land		4,056		97	3.19			3,502		88	3.35
Farmland		339		13	5.04			348		13	5.04
Single-family residential		78,558		2,404	4.08			80,182		2,595	4.31
Multi-family		4,916		203	5.47			5,435		238	5.84
Commercial		46,949		1,825	5.20			56,880		2,371	5.57
Total loans secured by real estate		134,818		4,542	4.50			146,347		5,305	4.85
Commercial and Industrial
Commercial and industrial		9,326		232	3.32			9,480		233	3.28
SBA guaranty		6,120		266	5.80			7,987		629	10.52
Comm SBA PPP		540		4	0.92			6,841		55	1.07
Total commercial and industrial loans		15,986		502	4.20			24,308		917	5.04
Consumer Loans
Consumer		2,165		18	1.10			2,639		23	1.17
Automobile		49,082		1,289	3.50			66,199		1,760	3.54
Total consumer loans		51,247		1,307	3.41			68,838		1,783	3.46
Total loans		202,051		6,351	4.20			239,493		8,005	4.47
Total interest-earning assets		428,540		9,254	2.89			409,838		10,056	3.28

Cash		2,128						2,169
Allowance for credit losses		(2,311)						(2,912)
Market valuation		(14,214)						171
Other assets		19,736						16,484
Total non-earning assets		5,339						15,912
Total assets	$	433,879					$	425,750

LIABILITIES AND STOCKHOLDER'S EQUITY:
Interest-bearing deposits:
Interest-bearing checking and savings	$	149,001		52	0.05	%	$	135,685		46	0.05	%
Money market		23,965		9	0.05			21,130		8	0.05
Certificates of deposit		58,702		300	0.68			66,423		420	0.85
Total interest-bearing deposits		231,668		361	0.21			223,238		474	0.28

Borrowed Funds:
PPPLF Term Funding		—		—	—			411		1	0.44
Federal Funds Purchased		1		—	—			1		—	—
FHLB advances		20,000		372	2.48			20,000		348	2.32
Total borrowed funds		20,001		372	2.48			20,412		349	2.29
Total interest-bearing liabilities		251,669		733	0.39			243,650		823	0.45

Non-interest-bearing deposits		152,987						143,317
Total cost of funds		404,656		733	0.24			386,967		823	0.28

Other liabilities and accrued expenses		2,232						2,852
Total liabilities		406,888						389,819

Stockholder's equity		26,991						35,931
Total liabilities and equity	$	433,879					$	425,750
Net interest income			$	8,521					$	9,233
Yield on earning assets					2.89	%					3.28	%
Cost of interest-bearing liabilities					0.39	%					0.45	%
Net interest spread					2.50	%					2.83	%
Net interest margin					2.66	%					3.01	%

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Provision for Credit Losses on Loans. The Company recognized a provision for credit losses on loans in the amount of $39,000 and a release of credit losses of $122,000 for the three-month periods ended September 30, 2022 and 2021, respectively. The increase in the allowance for the three-month period ended September 30, 2022, compared to the three-month period ended September 30, 2021, is due to a $350,000 increase in net charge offs, offset by a $29.4 million decrease in the reservable balance of the loan portfolio (excluding PPP loans) and an 0.07% decrease in the current expected credit loss percentage. The Company recognized a release of allowance for credit losses on loans in the amount of $178,000 and $593,000 for the nine-month periods ended September 30, 2022 and 2021, respectively. The decrease in the release for the nine-month period ended September 30, 2022, compared to the nine-month period ended September 30, 2021, is due to a $350,000 increase in net charge offs, offset by a $29.4 million decrease in the reservable balance of the loan portfolio (excluding PPP loans) and an 0.07% decrease in the current expected credit loss percentage. As of September 30, 2022, the allowance for credit losses represented 1.17% of total loans compared to 1.24% at September 30, 2021.

Noninterest Income. Noninterest income decreased to $317,000 for the three-month period ended September 30, 2022, from $359,000 for the corresponding period in 2021, a decrease of $42,000, or 11.70%. The decrease was primarily due to decreases in other fees and commissions. Noninterest income decreased to $832,000 for the nine-month period ended September 30, 2022, from $886,000 for the corresponding period in 2021, a decreased of $54,000, or 6.09%. The decrease was primarily due to decreases in other fees and commissions and lower gains on the sale of other real estate.

Noninterest Expenses. Noninterest expenses for the three-month period ended September 30, 2022 and 2021 were $2.9 million and $2.7 million, respectively, an increase of $229,000 or 8.52%. The increase was driven by decreases in salary and employee benefits and FDIC insurance costs, offset by increases in legal, accounting, data processing and item processing services, loan collection costs and other expenses. Noninterest expenses increased from $8.3 million for the nine-month period ended September 30, 2021, to $8.5 million for the corresponding period in 2022, an increase of $229,000. The increase was driven by increases in legal, accounting, and other professional fees, and other expenses, offset by decreases in salary and employee benefits cost, FDIC insurance costs, loan collection costs and telephone costs.

Income Taxes. During the three-month period ended September 30, 2022, the Company recorded income tax expense of $20,000 compared to $242,000 for the same period in 2021, a $222,000, or 91.70%, decrease. During the nine-month period ended September 30, 2022, the Company recorded income tax expense of $76,000 compared to $439,000 expense for the same period in 2021, a $363,000, or 82.69%, decrease. The Company’s annualized effective tax rate at September 30, 2022 was 9.06% compared to 18.29% for the prior year. The decrease in income tax expense was due to lower income before taxes at September 30, 2022, compared to September 30, 2021.

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 third quarter of 2022, comprehensive loss, net of tax, totaled $6,668,000 compared to a loss in the amount of $182,000 for the same period in 2021. The decrease was due to higher unrealized losses on available for sale securities, offset by higher net unrealized gains on interest rate swaps. For the nine months ended September 30, 2022, comprehensive loss, net of tax, totaled $20,604,000 compared to a comprehensive gain, net of tax, in the amount of $97,000 for the same period in 2021. The decrease was due to lower net income and higher unrealized losses on available for sale securities, offset by higher net unrealized gains on interest rate swaps.

FINANCIAL CONDITION

General. The Company’s assets decreased to $415.6 million at September 30, 2022 from $442.1 million at December 31, 2021, a decrease of $26.4 million or 5.98%, primarily due to an $8.0 million decrease in cash and cash equivalents, a $10.9 million decrease in investment securities available for sale, and a $16.1 million decrease and loans, net, offset by an $8.2 million increase in deferred tax assets, net. Loans totaled $191.8 million at September 30, 2022, a decrease of $16.1 million or 7.75%, from $207.9 million at December 31, 2021. The decrease was primarily attributable to decreases in commercial loans, commercial and industrial loans, consumer, and automobile loans, offset by an

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increase in construction and land loans and single-family residential loans. Investment securities available for sale as of September 30, 2022, totaled $145.0 million, a decrease of $10.9 million, or 7.02% from $155.9 million on December 31, 2021. Cash and cash equivalents as of September 30, 2022, totaled $54.2 million, a decrease of $8.0 million, or 12.88% from $62.2 million on December 31, 2021 resulting primarily from an increase in investment securities cost basis.

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 September 30, 2022, impaired loans totaled $0.6 million. Included in the impaired loans total were $0.2 million in loans classified as nonaccrual loans. At September 30, 2022, troubled debt restructurings included in impaired loans totaled $34,000. 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:


	September 30,			December 31,
(dollars in thousands)	2022			2021
Nonaccrual loans	$	183		$	338
TDR loans excluding those in nonaccrual loans		-			-
Accruing loans past due 90+ days		11			15

Total nonperforming loans		194			353

Real estate acquired through foreclosure		-			-

Total nonperforming assets	$	194		$	353

Nonperforming assets to total assets		0.05	%		0.08	%

Deposits as of September 30, 2022, totaled $378.9 million, a decrease of $4.4 million, or 1.14% from $383.2 million on December 31, 2021. Demand deposits as of September 30, 2022 totaled $149.2 million, a decrease of $6.5 million, or 4.15% from $155.6 million at December 31, 2021. Interest-bearing checking accounts as of September 30, 2022 totaled $36.3 million, a decrease of $1.0 million, or 2.78% from $37.3 million at December 31, 2021. Savings accounts as of September 30, 2022 totaled $113.5 million, an increase of $6.7 million, or 6.30%, from $106.8 million at December 31, 2021. Money market accounts as of September 30, 2022 totaled $25.2 million, an increase of $2.1 million, or 8.90%, from $23.1 million at December 31, 2021. Time deposits under $100,000 totaled $32.5 million on September 30, 2022, a $3.3 million or a 9.14% decrease from $35.8 million at December 31, 2021. Time deposits over $100,000 totaled $22.2 million on September 30, 2022, a $2.4 million, or 9.70% decrease from $24.6 million at December 31, 2021.

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Deposits on September 30, 2022, and December 31, 2021, were as follows:


	September 30, 2022				December 31, 2021				2022 vs 2021
(dollars in thousands)	Amount		% of Total		Amount		% of Total		$ Change		% Change
Noninterest-bearing deposits	$	149,171	39.4	%	$	155,624	40.6	%	$	(6,453)	(4.1)	%

Interest-bearing deposits:
Checking		36,269	9.6	%		37,305	9.7	%		(1,036)	(2.8)	%
Savings		113,548	30.0	%		106,818	28.0	%		6,730	6.3	%
Money market		25,158	6.6	%		23,103	6.0	%		2,055	8.9	%
Total interest-bearing checking, savings and money market deposits		174,975	46.2	%		167,226	43.7	%		7,749	4.6	%

Time deposits under $100,000		32,504	8.5	%		35,773	9.3	%		(3,269)	(9.1)	%
Time deposits of $100,000 or more		22,236	5.9	%		24,624	6.4	%		(2,388)	(9.7)	%
Total time deposits		54,740	14.4	%		60,397	15.7	%		(5,657)	(9.4)	%

Total interest-bearing deposits		229,715	60.6	%		227,623	59.4	%		2,092	0.9	%

Total Deposits	$	378,886	100.0	%	$	383,247	100.0	%	$	(4,361)	(1.1)	%

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. Management evaluates 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 September 30, 2022 are as follows:


Year ending December 31,	Amount
	(dollars in thousands)
2022	$	46
2023		181
2024		161
2025		3
2026		2
Thereafter		—
Total	$	393

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

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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 nine months ended September 30, 2022, the Bank accrued $173,000 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 Investment Committee (“IC”) 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 the Company 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 of Directors 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 IC. 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 alternative simulations at least once a quarter and report the analysis to the IC and 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 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 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.

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At September 30, 2022, the simulation analysis indicated that the Bank is in an asset sensitive position. Management 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)	%
September 30, 2022	(14)	%	(7)	%	2	%	5	%
September 30, 2021	(9)	%	(6)	%	4	%	11	%

The following table sets forth the Company’s interest-rate sensitivity at September 30, 2022.


							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	$	—		$	—		$	—		$	—		$	2,572
Federal funds and overnight deposits		51,597			—			—			—			51,597
Securities		—			—			23,656			121,324			144,980
Loans		71,778			—			71,778			48,249			191,805
Fixed assets		—			—			—			—			3,366
Other assets		—			—			—			—			21,306
Total assets	$	123,375		$	—		$	95,434		$	169,573		$	415,626

Liabilities:
Demand deposit accounts	$	—		$	—		$	—		$	—		$	149,171
NOW accounts		36,269			—			—			—			36,269
Money market deposit accounts		25,158			—			—			—			25,158
Savings accounts		113,548			—			—			—			113,548
IRA accounts		2,336			5,795			10,422			234			18,787
Certificates of deposit		7,715	0		10,773	0		17,336	0		129	-1		35,953
Long-term borrowings		—			—			—			—			—
Short-term borrowings		—			20,000			—			—			20,000
Other liabilities		—			—			—			—			2,400
Stockholders’ equity:		—			—			—			—			14,340
Total liabilities and stockholders' equity	$	185,026		$	36,568		$	27,758		$	363		$	415,626

GAP	$	(61,651)		$	(36,568)		$	67,676		$	169,210
Cumulative GAP	$	(61,651)		$	(98,219)		$	(30,543)		$	138,667
Cumulative GAP as a % of total assets		(14.83)	%		(23.63)	%		(7.35)	%		33.36	%

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As shown above, measures of net interest income at risk were less favorable on September 30, 2022 than on September 30, 2021 over a 12-month modeling period. All measures remained within prescribed policy limits in the up and down interest rate scenarios.

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)	%
September 30, 2022	2	%	2	%	(5)	%	(11)	%
September 30, 2021	(41)	%	(19)	%	(1)	%	(7)	%

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 September 30, 2022, totaled $54.2 million, a decrease of $8.0 million, or 12.88% from $62.2 million at December 31, 2021.

As of September 30, 2022, the Bank was permitted to draw on a $107.3 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 and investment securities. At December 31, 2021, there were $10.0 million in short-term borrowings and $10.0 million in long-term borrowings from FHLB. As of September 30, 2022, there were $20.0 million in short-term borrowings. 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 as of September 30, 2022.

The Company’s stockholders’ equity decreased $21.4 million, or 59.85% during the nine-month period ended September 30, 2022. The decrease was primarily due to an increase in the after-tax net unrealized holding loss on

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securities available for sale in the amount of $22.5 million, offset by unrealized market value gains on interest rate swap contracts in the amount of $0.2 million resulting from higher market interest rates.

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.

The Bank is subject to the Basel III Capital Rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules.

Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. The Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting principles. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The rules include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. The rules establish a capital conservation buffer above the regulatory minimum capital requirements. Since 2019, this capital conservation buffer is 2.5% The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required risk-weighted capital ratios. The rules also implemented strict eligibility criteria for regulatory capital instruments.

The rules also revise the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets. The Common Equity Tier 1, Tier 1 and Total Capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, with certain exclusions, allocated by risk weight category, and certain off-balance-sheet items, among other things. The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.

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 September 30, 2022, the Bank was in full compliance with these guidelines with a Tier 1 leverage ratio of 8.78%, a Tier 1 risk-based capital ratio of 15.34%, a common equity Tier 1 risk-based capital ratio of 15.34%, and a total risk-based capital ratio of 16.16%. The Company’s capital amounts and ratios at September 30, 2022 and December 31, 2021 were as follows:

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									To Be Well Capitalized
					To Be Considered				Under Prompt Corrective
	Actual				Adequately Capitalized				Action Provisions
September 30, 2022	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)
Common equity tier 1	$	37,391	15.34	%	$	10,972	4.50	%	$	15,848	6.50	%
Total capital	$	39,400	16.16	%	$	19,506	8.00	%	$	24,382	10.00	%
Tier 1 capital	$	37,391	15.34	%	$	14,629	6.00	%	$	19,506	8.00	%
Tier 1 leverage	$	37,391	8.78	%	$	17,039	4.00	%	$	21,299	5.00	%


									To Be Well Capitalized
					To Be Considered				Under Prompt Corrective
	Actual				Adequately Capitalized				Action Provisions
December 31, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)
Common equity tier 1	$	37,592	15.32	%	$	11,044	4.50	%	$	15,952	6.50	%
Total capital	$	39,329	16.03	%	$	19,634	8.00	%	$	24,542	10.00	%
Tier 1 capital	$	37,592	15.32	%	$	14,725	6.00	%	$	19,634	8.00	%
Tier 1 leverage	$	37,592	8.40	%	$	17,910	4.00	%	$	22,388	5.00	%

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s accounting policies are fully described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 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 allowance for credit losses (“ACL”) consists of the allowance for credit losses and the reserve for unfunded commitments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”). The ASC, as amended is intended to provide financial statement users with more decision useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income.

The Company early adopted ASC 326 during the second fiscal quarter 2021 and based on the application of the modified retrospective method it became effective on January 1, 2021 for all financial assets measured at amortized cost primarily loans receivable and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a decrease to retained earnings of $1,472,000 as of January 1, 2021 for the cumulative effect of adopting ASC 326.

As a result of our adoption of ASC 326, our methodology for estimating the ACL changed significantly from December 31, 2020. The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss (“CECL”). The CECL methodology requires an estimate of the credit losses expected over

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the life of an exposure (or pool of exposures) and it removes the incurred loss methodology’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was deemed to be “incurred.”

The estimate of expected credit losses under the CECL methodology is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was based. Finally, we consider forecasts about future economic conditions or changes in collateral values that are reasonable and supportable.

Management’s determination of the amount of the ACL is a critical accounting estimate as it requires significant reliance on the credit risk we ascribe to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on criticized loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Going forward, the impact of utilizing the CECL methodology to calculate the ACL will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the allowance for credit losses, and therefore, greater volatility in our reported earnings. For further information regarding the Bank’s allowance for credit losses, see “Allowance for Credit Losses”, above.

Valuation of the Securities Portfolio. The Company early adopted ASC 326 during the first fiscal quarter 2021 and based on the application of the modified retrospective method it became effective on January 1, 2021 for all financial assets measured at amortized cost. Under ASC 326, the Company is required to use an allowance approach when recognizing credit loss for its Available-For-Sale (“AFS”) debt securities. This is measured as the difference between the investment security’s amortized cost basis and the amount expected to be collected over the investment security’s lifetime. Specifically, the length of time the security has been in an unrealized loss position will no longer be used to determine whether a credit loss exists. Impairment must be evaluated at the individual security level during each reporting period, through a comparison of the present value of expected cash flows from the security with the amortized cost basis of the security.

The Company conducts its assessment at the individual security level. When an AFS investment security is considered impaired, the Company determines whether the decline is credit loss related or due to other factors. To evaluate the nature of the impairment, the Company compares, at the reporting date, the present value of future cash flows expected to be received to the amortized cost basis. An impairment more than the calculated allowance related to credit losses is then recorded through other comprehensive income in equity, net of applicable taxes.

AFS investment securities issued by U.S. government agencies or U.S. government sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Municipal bonds are considered to have issuer(s) of high credit quality (rated A or higher) and the decline in fair value is due to changes in interest rates and other market conditions.

Corporate securities are non-rated investments that are booked as a debt security where rating agencies do not provide a rating. The absence of a rating does not imply substandard quality. Non-rated corporate securities may be purchased from issuers operating in and around the Company’s operating footprint.

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

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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 is “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.

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

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None.

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	Inline XBRL Instance Document (filed herewith)

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

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

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

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

101.PRE 104	Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith) Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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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: November 10, 2022	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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