Glen Burnie Bancorp 10K 2020 Annual report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

⌧	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2020 or

◻	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

Commission file number: 0-24047

GLEN BURNIE BANCORP

(Exact name of registrant as specified in its charter)


MARYLAND		52-1782444
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

101 Crain Highway, S.E., Glen Burnie, Maryland		21061
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code		(410) 766-3300

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

Title of Class		Name of Each Exchange on Which Registered
None		None

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

	Title of Class
Common Stock, $1.00 par value
Common Stock Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ◻ No ⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ◻ No ⌧

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 disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ◻

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes‐Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. 

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

The aggregate market value of the registrant’s outstanding common equity held by non-affiliates was $19,147,937, computed by reference to the closing sales price of such equity as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2020). For the purposes of this calculation, directors, executive officers, and the controlling investor are considered affiliates.

The number of shares of common stock outstanding as of March 21, 2021 was 2,845,103.

Documents Incorporated By Reference

Portions of the registrant’s definitive proxy statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A are incorporated by reference into Part III of this Annual Report on Form 10-K.

GLEN BURNIE BANCORP

2020 ANNUAL REPORT ON FORM 10-K

Table of Contents

			Page
PART I

Item 1.	Business		3
Item 2.	Properties		16
Item 3.	Legal Proceedings		16
Item 4.	Mine Safety Disclosures		17
	Executive Officers of the Registrant		17


PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		17
Item 6.	Selected Financial Data		18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		38
Item 8.	Financial Statements and Supplementary Data		38
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		38
Item 9A.	Controls and Procedures		38
Item 9B.	Other Information		39

PART III

Item 10.	Directors, Executive Officers and Corporate Governance		40
Item 11.	Executive Compensation		40
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		40
Item 13.	Certain Relationships and Related Transactions, and Director Independence		40
Item 14.	Principal Accountant Fees and Services		40

PART IV

Item 15.	Exhibits and Financial Statement Schedules		41

Signatures		42

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PART I

As used in this Annual Report, the term “the Company” refers to Glen Burnie Bancorp and, unless the context clearly requires otherwise, the terms “we,” “us,” and “our,” refer to Glen Burnie Bancorp and its consolidated subsidiary.

ITEM 1. BUSINESS

GENERAL

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, serving northern Anne Arundel County and surrounding areas from its main office and branch in Glen Burnie, Maryland and branch offices in Odenton, Riviera Beach, Crownsville, Severn (two locations), Linthicum and Severna Park, Maryland. The Bank also maintains a remote Automated Teller Machine (“ATM”) located in Pasadena, Maryland. The Bank maintains a website at www.thebankofglenburnie.com. It is the oldest independent commercial bank in Anne Arundel County. The Bank is engaged in the commercial and retail banking business as authorized by the banking statutes of the State of Maryland, including the acceptance of demand and time deposits, and the origination of loans to individuals, associations, partnerships and corporations.

The Bank’s real estate financing consists of residential first and second mortgage loans, home equity lines of credit and commercial mortgage loans. Commercial lending consists of both secured and unsecured loans. The Bank also originates automobile loans through arrangements with local automobile dealers. The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). We attract deposit customers from the general public and use such funds, together with other borrowed funds, to make loans. Our results of operations are primarily determined by the difference between interest incomes earned on our interest-earning assets, primarily interest and fee income on loans, and interest paid on our interest-bearing liabilities, including deposits and borrowings.

The Company’s principal executive office is located at 101 Crain Highway, S.E., Glen Burnie, Maryland 21061. Its telephone number at such office is (410) 766-3300.

On January 10, 2019, the Board of Directors (the “Board”) of the Company and the Bank approved the contribution from the Company to the Bank of all of the common stock of GBB Properties, Inc. (“GBB”). The contribution and assignment of 3,600 shares of common stock occurred on January 22, 2019 and was treated as a capital contribution. Prior to the contribution, the Company owned all of the outstanding shares of common stock of GBB a Maryland corporation which was organized in 1994 and which is engaged in the business of acquiring, holding and disposing of real property, typically acquired in connection with foreclosure proceedings (or deeds in lieu of foreclosure) instituted by the Bank.

AVAILABILITY OF INFORMATION

Information on the Company and its subsidiary Bank may be obtained from the Company’s website www.thebankofglenburnie.com. Copies of the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto are available free of charge on the website as soon as practicable after they are filed with the Securities and Exchange Commission (SEC) through a link to the SEC’s EDGAR reporting system. Simply select the “Investor Relations” menu item, then click on the “All SEC Filings” or “Insider Transactions” link.

MARKET AREA

The Bank considers its principal market area for lending and deposit products to consist of Anne Arundel County, Maryland. Anne Arundel County includes the suburbs of the City of Baltimore and maintains a diverse set of economic drivers such as a large international airport, the defense industry, a large number of large private sector

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employers as well as telecommunications, retail, and distribution operations. The population of Anne Arundel County has been growing steadily since 2000 and projected to continue such growth through 2021. The largest population demographic of Anne Arundel County is in the 20-44 age category. Management believes that the majority of the working population in its market area either commutes to Baltimore or is employed at businesses located at or around the nearby Baltimore Washington International Airport. Lending activities are broader, including the entire State of Maryland, and, to a limited extent, the surrounding states. All of our revenue is generated within the United States.

COMPETITION

Our principal competitors for deposits are other financial institutions, including other savings institutions, commercial banks, credit unions, and local banks and branches or affiliates of other larger banks located in our primary market area. Competition among these institutions is based primarily on interest rates and other terms offered, service charges imposed on deposit accounts, the quality of services rendered, and the convenience of banking facilities. Additional competition for depositors' funds comes from mutual funds, U.S. Government securities, insurance companies and private issuers of debt obligations and suppliers of other investment alternatives for depositors such as securities firms. Competition from credit unions has intensified in recent years as historical federal limits on membership have been relaxed. Because federal law subsidizes credit unions by giving them a general exemption from federal income taxes, credit unions have a significant cost advantage over banks and savings associations, which are fully subject to federal income taxes. Credit unions may use this advantage to offer rates that are highly competitive with those offered by banks and thrifts.

The Bank’s interest rates, loan and deposit terms, and offered products and services are impacted, to a large extent, by competition. With respect to indirect lending, the Bank faces competition from other banks and the financing arms of automobile manufacturers. We compete in this area by offering competitive rates and responsive service to dealers. The Bank attempts to provide superior service within its community and to know, and facilitate services to its customers. It seeks commercial relationships with small to medium size businesses, which the Bank believes would welcome personal service and flexibility. The Bank believes its greatest competition comes from larger intra- and inter-state financial institutions.

STRATEGY

We operate on the premise that the consolidation activities in the banking industry have created an opportunity for a well-capitalized community bank to satisfy banking needs that are no longer being adequately met in the local market. Large national and regional banks are catering to larger customers and provide an impersonal experience, while typical community banks, because of their limited capacity, are able to meet the needs of many small-to-medium-sized businesses. Specifically, as a result of bank mergers, many banks in the Baltimore metropolitan area became local branches of large regional and national banks. Although size gave the larger banks some advantages in competing for business from large corporations, including economies of scale and higher lending limits, we believe that these larger, national banks remain focused on a mass market approach which de-emphasizes personal contact and service. We also believe that the centralization of decision-making power at these large institutions has resulted in a lack of customer service. At many of these institutions, determinations are made at the out-of-state “home office" by individuals who lack personal contact with customers as well as an understanding of the customers' needs and scope of the relationship with the institution. We believe that this trend is ongoing, and continues to be particularly frustrating to owners of small and medium-sized businesses, business professionals and individual consumers who traditionally have been accustomed to dealing directly with a bank executive who had an understanding of their banking needs with the ability to deliver a prompt response.

We attempt to differentiate ourselves from the competition through personalized service, flexibility in meeting the needs of customers, prompt decision making and the availability of senior management to meet with customers and prospective customers.

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PRODUCTS AND SERVICES

General

Our primary market focus is on making loans to and gathering deposits from small and medium-sized businesses and their owners, professionals and executives, real estate investors and individual consumers in our primary market area. We lend to customers throughout Maryland, with our core market being Northern Anne Arundel County and surrounding areas of Central Maryland. To a limited extent, we lend to customers in neighboring states. The Bank offers a full range of consumer and commercial loans. The Bank’s lending activities include residential and commercial real estate loans, construction loans, land acquisition and development loans, commercial loans and consumer installment lending including indirect automobile lending. Substantially all of the Bank’s loan customers are residents of Anne Arundel County and surrounding areas of Central Maryland. The Bank solicits loan applications for commercial loans from small to medium sized businesses located in its market area. The Company believes that this is a market in which a relatively small community bank, like the Bank, has a competitive advantage in personal service and flexibility. The Bank’s consumer lending currently consists primarily of indirect automobile loans originated through arrangements with local dealers.

Lending Activities

Credit Policies and Administration

The Bank’s lending activities are conducted pursuant to written policies approved by the Board of Directors (“Board”) intended to ensure proper management of credit risk. Loans are subject to a well-defined credit process that includes credit evaluation of borrowers, establishment of lending limits and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances, as well as procedures for on-going identification and management of credit deterioration. Regular portfolio reviews are performed by the Bank’s senior credit officer to identify potential underperforming loans and other credit facilities, estimate loss exposure and to ascertain compliance with the Bank’s policies. For significant problem loans, management review consists of evaluation of the financial strengths of the borrower and any guarantor, the related collateral, and the effects of economic conditions.

The Bank’s loan approval policy provides for various levels of individual lending authority. The maximum aggregate lending authority granted by the Bank to any one Lending Officer is $750,000. A combination of approvals from certain officers may be used to lend up to an aggregate of $1,000,000. We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. Our lending staff follows pricing guidelines established periodically by our management team. The Bank maintains two committees, separate from the Board of Directors, which have authorization to approve extensions of credit. The two committees are called the Officer’s Loan Committee (“OLC”) and the Executive Committee (“EC”). The OLC is authorized to approve extensions of credit where the total aggregate amount of credit to the borrower or guarantor is less than or equal to $1,000,000. The OLC consists of the President/Chief Executive Officer (“President/CEO”), Chief Financial Officer (“CFO”), and Chief Lending Officer (“CLO”) plus two additional loan officers. The EC approves extensions of credit where the aggregate amount of credit to an existing borrower is less than or equal to $3,000,000. The EC is comprised of the Chairman of the Board, or the President/CEO plus two (2) outside Directors. Extensions of credit greater than $3,000,000 must be approved by the Board of Directors. Under the leadership of our executive management team, we believe that we employ experienced lending officers, secure appropriate collateral and carefully monitor the financial conditions of our borrowers and the concentration of loans in our portfolio.

All loans by the Bank to our directors and executive officers and their affiliates require pre-approval by the Bank’s Board of Directors to ensure, among other things, compliance with Section 23A and Section 23B of the Federal Reserve Act and Regulation O promulgated thereunder. It is the Bank’s policy that all approved loans must be made on substantially the same terms as loans made to persons who are unrelated to the Bank.

In addition to the normal repayment risks, all loans in the portfolio are subject to the state of the economy and the related effects on the borrower and/or the real estate market. Generally, longer-term loans have periodic interest

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rate adjustments and/or call provisions. Senior management through the collections department monitors the loan portfolio closely to ensure that we minimize past due loans and that we swiftly deal with potential problem loans.

The Bank also retains an outside, independent firm to review the loan portfolio. This firm performs a detailed annual review. We use the results of the firm’s report primarily to validate the risk ratings applied to loans in the portfolio and identify any systemic weaknesses in underwriting, documentation or management of the portfolio. Results of the annual review are presented to Executive Management, Audit Committee of the Board and the full Board of Directors and are available to and used by regulatory examiners when they review the Bank’s asset quality.

The Bank maintains the normal checks and balances on the loan portfolio not only through the underwriting process but through the utilization of an internal credit administration group that both assists in the underwriting and serves as an additional reviewer of underwriting. The separately managed loan administration group also has oversight for documentation, compliance and timeliness of collection activities. Our internal audit department also reviews documentation, compliance and file management.

Real Estate Lending

The Bank offers long-term mortgage financing for residential and commercial real estate as well as shorter term construction and land development loans. Residential mortgage and residential construction loans are originated with fixed rates, while commercial mortgages may be originated on either a fixed or variable rate basis. Commercial construction loans may be originated on either a fixed or a variable rate basis. Substantially all of the Bank’s real estate loans are secured by properties in Anne Arundel County, Maryland. Under the Bank’s loan policies, the maximum permissible loan-to-value ratio for owner-occupied residential mortgages is 80% of the lesser of the purchase price or appraised value. For residential investment properties, the maximum loan-to-value ratio is 80%. The maximum permissible loan-to-value ratio for residential and residential construction loans is 80%. The maximum loan-to-value ratio for permanent commercial mortgages is 75%. The maximum loan-to-value ratio for land development loans is 70% and for unimproved land is 65%. The Bank also offers home equity loans secured by the borrower’s primary residence, provided that the aggregate indebtedness on the property does not exceed 80% of its value for loan commitments greater than $100,000. Because mortgage lending decisions are based on conservative lending policies, the Company has no exposure to the credit issues affecting the sub-prime residential mortgage market.

Primary risks associated with residential real estate loans include fluctuating land and property values and rising interest rates with respect to fixed-rate, long-term loans. Residential construction lending exposes the Company to risks related to builder performance.

Commercial Lending

The Bank’s commercial loan portfolio consists of demand, installment and time loans for commercial purposes. The Bank’s business demand, installment and time lending includes various working capital loans, equipment, vehicles, lines of credit and letters of credit for commercial customers. Demand loans require the payment of interest until called, while installment loans require a monthly payment of principal and interest, and time loans require at maturity a single payment of principal and interest due monthly. Such loans may be made on a secured or an unsecured basis. All such loans are underwritten on the basis of the borrower’s creditworthiness rather than the value of the collateral.

The primary risks associated with commercial loans, including commercial real estate loans, are the quality of the borrower’s management and a number of economic and other factors which induce business failures and depreciate the value of business assets pledged to secure the loan, including competition, insufficient capital, product obsolescence, changes in the borrowers’ cost, environmental hazards, weather, changes in laws and regulations and general changes in the marketplace.

Installment Lending

The Bank makes consumer and commercial installment loans for the purchase of automobiles, boats, other consumer durable goods, capital goods and equipment. Such loans provide for repayment in regular installments and

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are secured by the goods financed. Also included in installment loans are other types of credit repayable in installments.

Indirect Automobile Lending

The Bank commenced its indirect lending program in January 1998. The Bank finances new and used automobiles for terms of no more than 72 months except for vehicles with original purchase prices greater than $60,000 which may be written for terms up to 84 months if approved by a Senior Loan Officer, CLO, CFO, CEO, or President. The Bank will lend a maximum of 90% of invoice on new vehicles. On used vehicles, the Bank will lend no more than 90% of the average retail value as defined by a major national publication approved by the Bank. The Bank requires all borrowers to obtain vendors single interest coverage protecting the Bank against loss in the case a borrower’s automobile insurance lapses. The Bank originates indirect loans through a network of approximately 60 dealers which are primarily new car dealers located in Anne Arundel County and the surrounding counties. Participating dealers take loan applications from their customers and transmit them to the Bank for approval.

Indirect automobile loans, are affected primarily by a variety of factors that may lead to the borrower’s unemployment, including deteriorating economic conditions in one or more segments of a local or broader economy. Because the Bank deals with borrowers through an intermediary on indirect automobile loans, this form of lending potentially carries greater risks of defects in the application process for which claims may be made against the Bank. Indirect automobile lending may also involve the Bank in consumer disputes under state “lemon” or other laws. The Bank seeks to control these risks by following strict underwriting and documentation guidelines. In addition, dealerships are contractually obligated to indemnify the Bank for such losses for a limited period of time.

Consumer Lending

We offer various types of secured and unsecured consumer loans. Generally, our consumer loans are made for personal, family or household purposes as a convenience to our customer base. As a general guideline, a consumer’s total debt service should not exceed 40% of their gross income. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan.

Consumer loans may present greater credit risk than residential real estate loans because many consumer loans are unsecured or are secured by rapidly depreciating assets. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections also depend on the borrower’s continuing financial stability. If a borrower suffers personal financial difficulties, the loan may not be repaid. Also, various federal and state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such loans.

Personal Unsecured Lines

The Bank offers overdraft protection lines of credit, tied to checking accounts, as a convenience to qualified customers.

Loan Originations, Purchases, Sales, Participations and Servicing

All loans that we originate are underwritten pursuant to our policies and procedures, which incorporate standard underwriting guidelines. We originate both fixed and variable rate loans. Our loan origination activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand. We occasionally sell participations in commercial loans to correspondent banks if the amount of the loan exceeds our internal limits. More rarely, we purchase loan participations from correspondent banks in the local market as well. Those loans are underwritten in-house with the same standards as loans directly originated.

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Loan Approval Procedures and Authority

Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan, and the adequacy of the value of the collateral that will secure the loan, if applicable. To assess a business borrower’s ability to repay, we review and analyze, among other factors: current income, credit history including the Bank’s prior experience with the borrower, cash flow, any secondary sources of repayment, other debt obligations in regards to the equity/net worth of the borrower and collateral available to the Bank to secure the loan.

We require appraisals or valuations of all real property securing one-to-four family residential and commercial real estate loans and home equity loans and lines of credit. All appraisers are state licensed or state certified appraisers, and a list of approved appraisers is maintained and updated on an annual basis.

Deposit Activities

Deposits are the major source of our funding. We offer a broad array of consumer and business deposit products that include demand, money market, and savings accounts, as well as time deposits. We offer a competitive array of commercial cash management products, which allow us to attract demand deposits. We believe that we pay competitive rates on our interest-bearing deposits. As a relationship-oriented organization, we generally seek to obtain deposit relationships with our loan clients.

Other Banking Products

We offer our customers treasury services products that include wire transfer and ACH services, debit card and automated teller machines and safe deposit boxes at all branches. In addition to traditional deposit services, we offer telephone banking services, mobile banking, internet banking services and internet bill paying services to our customers.

EMPLOYEES

At December 31, 2020, the Bank had 90 full-time equivalent employees. Neither the Company nor GBB currently has any employees. None of our employees are represented by a union or covered under a collective bargaining agreement. Management considers its employee relations to be excellent.

SUPERVISON AND REGULATION

General

The Company and the Bank are extensively regulated under federal and state law. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on our business and our prospective business. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. We are unable to predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, economic controls, or new federal or state legislation may have in the future.

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “BHCA”). As such, the Company is registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and subject to Federal Reserve Board regulation, examination, supervision and reporting requirements. As a bank holding company, the Company is required to furnish to the Federal Reserve Board annual and quarterly reports of its operations at the end of each period and to furnish such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Company is also subject to regular inspection by Federal Reserve Board examiners. As a publicly traded company whose common stock is registered under Section 12(g) of the Exchange Act, we are under the jurisdiction of the SEC and subject to the disclosure and regulatory requirements of the

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Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. We are listed on the NASDAQ Global Select Market and we are subject to the rules of NASDAQ for listed companies.

As a state-chartered bank with deposits insured by the FDIC but which is not a member of the Federal Reserve System (a “state non-member bank”), the Bank is subject to the supervision of the Maryland Commissioner of Financial Regulation (“Commissioner”) and the FDIC. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance funds and depositors, and not for the protection of stockholders. The Commissioner and FDIC regularly examine the operations of the Bank, including but not limited to capital adequacy, assets, earnings, liquidity, sensitivity to market interest rates, reserves, loans, investments and management practices. In addition, the Bank is required to furnish quarterly Call Reports to the Commissioner and FDIC. The FDIC’s enforcement authority includes the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent a bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business.

Some of the aspects of the lending and deposit business of the Bank that are subject to regulation by the Federal Reserve Board and the FDIC include reserve requirements and disclosure requirements in connection with personal and mortgage loans and savings deposit accounts. In addition, the Bank is subject to numerous federal and state laws and regulations which set forth specific restrictions and procedural requirements with respect to the establishment of branches, investments, interest rates on loans, credit practices, the disclosure of customer information, the disclosure of credit terms and discrimination in credit transactions.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank (“FHLB”), which is one of 11 regional banks in the Federal Home Loan Bank System. The FHLB System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. The Bank is required to acquire and hold shares of capital stock of the FHLB as a condition of membership. As of December 31, 2020, the Bank was in compliance with this requirement.

Consumer Financial Protection Laws

The Bank is subject to a number of federal and state consumer financial protection laws and regulations that extensively govern its transactions with consumers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, and the Service Members Civil Relief Act. The Bank must also comply with applicable state usury laws and other laws prohibiting unfair and deceptive acts and practices. These laws, among other things, require disclosures of the cost of credit and the terms of deposit accounts, prohibit discrimination in credit transactions, regulate the use of credit report information, restrict the Bank’s ability to raise interest rates and subject the Bank to substantial regulatory oversight. Violations of these laws may expose us to liability from potential lawsuits brought by affected customers. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce these consumer financial protection laws, in which case we may be subject to regulatory sanctions, civil money penalties, and customer rescission rights.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Act, which was signed into law in 2010, significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that profoundly affected the regulation of community banks, thrifts, and small bank and thrift holding companies. Among other things, these provisions relaxed rules on interstate branching, allow financial institutions to pay interest on business checking accounts, and impose heightened capital requirements on bank and thrift holding companies. The Dodd-Frank Act also includes several corporate governance provisions that apply to all public companies, not just financial institutions. These include provisions mandating certain disclosures regarding executive compensation and provisions addressing proxy access by shareholders.

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The Dodd-Frank Act also establishes the Consumer Financial Protection Bureau (“CFPB”) as an independent entity within the Federal Reserve and transferred to the CFPB primary responsibility for administering substantially all of the consumer compliance protection laws formerly administered by other federal agencies. The Dodd-Frank Act also authorizes the CFPB to promulgate consumer protection regulations that will apply to all entities, including banks that offer consumer financial services or products. It also includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payment penalties.

The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, including some that may affect our business in substantial and unpredictable ways. We have incurred higher operating costs in complying with the Dodd-Frank Act, and we expect that these higher costs will continue for the foreseeable future. Our management continues to monitor the ongoing implementation of the Dodd-Frank Act and as new regulations are issued, will assess their effect on our business, financial condition, and results of operations.

The Volcker Rule

The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and from investing and sponsoring hedge funds and private equity funds. The provision of the statute imposing these restrictions is commonly called the “Volcker Rule.” The regulations implementing the Volcker Rule require institutions to conform their activities to the requirements of the Volcker Rule by July 21, 2015, and to conform their investments in certain “legacy covered funds” by July 21, 2017. These regulations exempt the Bank, as a bank with less than $10 billion in total consolidated assets that does not engage in any covered activities.

Liquidity Requirements

Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio, or LCR, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio, or NSFR, is designed to promote more medium and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements are expected to incentivize banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.

In September 2015, the federal bank regulators approved final rules implementing the LCR for advanced approaches banking organizations (i.e., banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure) and a modified version of the LCR for bank holding companies with at least $50 billion in total consolidated assets that are not advanced approach banking organizations, neither of which would apply to the Company or the Bank.

Bank Holding Company Act (BHCA)

Under the BHCA our activities are limited to business closely related to banking, managing, or controlling banks. We are also subject to capital requirements applied on a consolidated basis in a form substantially similar to those required of the Bank. The BHCA also requires a bank holding company to obtain approval from the Federal Reserve before (i) acquiring, or holding more than 5% voting interest in any bank or bank holding company, (ii) acquiring all or substantially all of the assets of another bank or bank holding company, or (iii) merging or consolidating with another bank holding company. The BHCA also restricts non-bank activities to those which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.

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Gramm-Leach-Bliley Act of 1999 (GLBA)

The GLBA removed barriers to affiliations among banks, insurance companies, the securities industry, and other financial service providers, and provides greater flexibility to these organizations in structuring such affiliations. The GLBA also expanded the types of financial activities a bank may conduct through a financial subsidiary and established a distinct type of bank holding company, known as a financial holding company, which may engage in an expanded list of activities that are “financial in nature.” These activities include securities and insurance brokerage, securities underwriting, insurance underwriting, and merchant banking. A bank holding company may become a financial holding company only if all of its subsidiary financial institutions are well-capitalized and well-managed and have at least a satisfactory Community Reinvestment Act (CRA) rating. While we meet these standards, we do not currently intend to file notice with the Federal Reserve to become a financial holding company or to engage in expanded financial activities through a financial subsidiary of the Bank. The GLBA also includes privacy protections for nonpublic personal information held by financial institutions regarding their customers, and establishes a system of functional regulation that makes the Federal Reserve the “umbrella supervisor” for holding companies, and other federal and state agencies the supervisor of the holding company’s subsidiary.

Financial Privacy

In accordance with the GLBA, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about customers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLBA affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We are also subject to various state laws that generally require us to notify any customer whose personal financial information may have been released to an unauthorized person as the result of a breach of our data security policies and procedures.

Under Maryland law, a bank holding company is prohibited from acquiring control of any bank if the bank holding company would control more than 30% of the total deposits of all depository institutions in the State of Maryland unless waived by the Commissioner. The Maryland Financial Institutions Code prohibits a bank holding company from acquiring more than 5% of any class of voting stock of a bank or bank holding company without the approval of the Commissioner except as otherwise expressly permitted by federal law or in certain other limited situations. The Maryland Financial Institutions Code additionally prohibits any person from acquiring voting stock in a bank or bank holding company without 60 days’ prior notice to the Commissioner if such acquisition will give the person control of 25% or more of the voting stock of the bank or bank holding company or will affect the power to direct or to cause the direction of the policy or management of the bank or bank holding company. Any doubt whether the stock acquisition will affect the power to direct or cause the direction of policy or management shall be resolved in favor of reporting to the Commissioner. The Commissioner may deny approval of the acquisition if the Commissioner determines it to be anti-competitive or to threaten the safety or soundness of a banking institution. Voting stock acquired in violation of this statute may not be voted for five years.

Capital Standards

In July 2013, the Federal Reserve and other federal banking agencies approved final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for all U.S. banks and for bank holding companies with greater than $500 million in assets. The Federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks. If capital falls below the minimum levels established by these guidelines, a bank holding company or bank must submit an acceptable plan for achieving compliance with the capital guidelines and, until its capital sufficiently improves, will be subject to denial of applications and appropriate supervisory enforcement actions. Under these final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. The final rules also require a common equity Tier 1 capital conservation

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buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. A three-year phase in period for the capital buffer requirement began in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis. These capital requirements were effective January 1, 2015.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiary. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

The final rules also increase the required capital for certain categories of assets, including higher-risk construction real estate loans and certain exposures related to securitizations. The final rules adopt the risk weights for residential mortgages under the existing general risk-based capital rules, which assign a risk weight of either 50% (for most first-lien exposures) or 100% for other residential mortgage exposures.

As of December 31, 2020, we were in compliance with all applicable regulatory capital requirements.

Loans-to-One Borrower

Under Maryland law, the maximum amount which the Bank is permitted to lend to any one borrower and their related interests may generally not exceed 10% of the Bank’s unimpaired capital and surplus, which is defined to include the Bank’s capital, surplus, retained earnings and 50% of its allowance for possible loan losses. By interpretive ruling of the Commissioner of Financial Regulation, Maryland banks have the option of lending up to the amount that would be permissible for a national bank which is generally 15% of unimpaired capital and surplus (defined to include a bank’s total capital for regulatory capital purposes plus any loan loss allowances not included in regulatory capital). As of December 31, 2020, the Bank was in compliance with the loans-to-one-borrower limitations.

Prompt Corrective Action Regulations

The FDIC’s prompt corrective action regulations establish five capital levels for financial institutions (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”), and impose mandatory regulatory scrutiny and limitations on institutions that are less than adequately capitalized. At December 31, 2020, the Bank was categorized as “well capitalized,” meaning that our total risk-based capital ratio exceeded 10.00%, our Tier 1 risk-based capital ratio exceeded 8.00%, our common equity Tier-1 risk-based capital ratio exceeded 6.50%, our leverage ratio exceeded 5.00%, and we are not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure.

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Dividends and Distributions

The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.

Bank holding companies are required to give the Federal Reserve Board notice of any purchase or redemption of their outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the bank holding company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would violate any law, regulation, Federal Reserve Board order, directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Bank holding companies whose capital ratios exceed the thresholds for “well capitalized” banks on a consolidated basis are exempt from the foregoing requirement if they were rated composite 1 or 2 in their most recent inspection and are not the subject of any unresolved supervisory issues.

USA Patriot Act of 2001

The USA Patriot Act of 2001 (the “Patriot Act”) substantially broadened the scope of anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations on financial institutions. The regulations adopted by the Treasury under the Patriot Act require financial institutions to maintain appropriate controls to combat money laundering activities, perform due diligence of private banking and correspondent accounts, establish standards for verifying customer identity, and provide records related to suspected anti-money laundering activities upon request from federal authorities. A financial institution’s failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches, and could also have other serious legal and reputational consequences for the institution. We have established policies, procedures and systems designed to comply with these regulations. However, it is reasonable to anticipate that the United States Congress may enact additional legislation in the future to combat terrorism including modifications to existing laws such as the Patriot Act to expand powers as deemed necessary. The enactment of the Patriot Act has increased the Bank’s compliance costs, and the impact of any additional legislation enacted by Congress may have upon financial institutions is uncertain. However, such legislation would likely increase compliance costs and thereby potentially have an adverse effect upon the Company’s results of operations.

Community Reinvestment Act

The Community Reinvestment Act of 1977 (“CRA”) requires that, in connection with examinations of financial institutions, federal banking regulators must evaluate the record of the financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of the bank. Federal banking regulators are required to consider a financial institution’s performance in these areas as they review applications filed by the institution to engage in mergers or acquisitions or to open a branch or facility. In addition, any bank rated in “substantial noncompliance” with the CRA regulations may be subject to enforcement proceedings. The Bank has a current rating of “satisfactory” for CRA compliance.

Interstate Branching

The Dodd-Frank Act expanded the authority of a state or national bank to open offices in other states. A state or national bank may now open a de novo branch in a state where the bank does not already operate a branch if the law of the state where the branch is to be located would permit a state bank chartered by that state to open the branch. This provision removed restrictions under prior law that restricted a state or national bank from expanding into another state

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unless the laws of the bank’s home state and the laws of the other state both permitted out-of-state banks to open de novo branches.

Dividend Limitations

The ability of the Bank to pay dividends is limited by state and federal laws and regulations that require the Bank to obtain the prior approval before paying a dividend that, together with other dividends it has paid during a calendar year, would exceed the sum of its net income for the year to date combined with its retained net income for the previous two years. Pursuant to the Maryland Financial Institutions Code, Maryland banks may only pay dividends from undivided profits or, with the prior approval of the Commissioner, their surplus in excess of 100% of required capital stock. The Maryland Financial Institutions Code further restricts the payment of dividends by prohibiting a Maryland bank from declaring a dividend on its shares of common stock until its surplus fund equals the amount of required capital stock or, if the surplus fund does not equal the amount of capital stock, in an amount in excess of 90% of net earnings. In addition, the Bank is prohibited by federal statute from paying dividends or making any other capital distribution that would cause the Bank to fail to meet its regulatory capital requirements. Further, the FDIC also has authority to prohibit the payment of dividends by a state non-member bank when it determines such payment to be an unsafe and unsound banking practice.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (“SOX”) includes provisions intended to enhance corporate responsibility and protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws, and which increase penalties for accounting and auditing improprieties at publicly traded companies. The SOX generally applies to all companies that file or are required to file periodic reports with the SEC under the Exchange Act.

Among other things, the SOX creates the Public Company Accounting Oversight Board (“PCAOB”) as an independent body subject to SEC supervision with responsibility for setting auditing, quality control, and ethical standards for auditors of public companies. The SOX also requires public companies to make faster and more-extensive financial disclosures, requires the chief executive officer and the chief financial officer of public companies to provide signed certifications as to the accuracy and completeness of financial information filed with the SEC, and provides enhanced criminal and civil penalties for violations of the federal securities laws.

The SOX also addresses functions and responsibilities of audit committees of public companies. The statute, by mandating certain stock exchange listing rules, makes the audit committee directly responsible for the appointment, compensation, and oversight of the work of the company’s outside auditor, and requires the auditor to report directly to the audit committee. The SOX authorizes each audit committee to engage independent counsel and other advisors, and requires a public company to provide the appropriate funding, as determined by its audit committee, to pay the company’s auditors and any advisors that its audit committee retains. The SOX also requires public companies to prepare an internal control report and assessment by management, along with an attestation to this report prepared by the company’s independent registered public accounting firm, in their annual reports to stockholders.

FDIC Deposit Insurance Assessment

The Dodd-Frank Act which was signed into law on July 21, 2010, changed how the FDIC calculates deposit insurance premiums payable by insured depository institutions. The Dodd-Frank Act directs the FDIC to calculate the deposit insurance assessments payable by each insured depository institution based generally upon the institution’s average total consolidated assets minus its average tangible equity during the assessment period. Previously, an institution’s assessments were based on the amount of its insured deposits. The minimum deposit insurance fund rate increased from 1.15% to 1.35% on September 30, 2020, and the cost of the increase is borne by depository institutions with assets of $10 billion or more. The Dodd-Frank Act also provides the FDIC with discretion to determine whether to pay rebates to insured depository institutions when its deposit insurance reserves exceed certain thresholds.

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Transactions with Affiliates

A state non-member bank or its subsidiary may not engage in “covered transactions” with any one affiliate in an amount greater than 10% of such bank’s capital stock and surplus, and for all such transactions with all affiliates a state non-member bank is limited to an amount equal to 20% of capital stock and surplus. All such transactions must also be on terms substantially the same, or at least as favorable, to the bank or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. An affiliate of a state non-member bank is any company or entity which controls or is under common control with the state non-member bank and, for purposes of the aggregate limit on transactions with affiliates, any subsidiary that would be deemed a financial subsidiary of a national bank. In a holding company context, the parent holding company of a state non-member bank (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the state non-member bank. The BHCA further prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain limited exceptions.

Loans to Directors, Executive Officers and Principal Stockholders

Loans to directors, executive officers and principal stockholders of a state non-member bank must be made on substantially the same terms as those prevailing for comparable transactions with persons who are not executive officers, directors, principal stockholders or employees of the Bank unless the loan is made pursuant to a compensation or benefit plan that is widely available to employees and does not favor insiders. Loans to any executive officer, director and principal stockholder together with all other outstanding loans to such person and affiliated interests generally may not exceed 15% of the bank’s unimpaired capital and surplus and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Loans to directors, executive officers and principal stockholders, and their respective affiliates, in excess of the greater of $100,000 or 5% of capital and surplus (up to $500,000) must be approved in advance by a majority of the Board of Directors of the Bank with any “interested” director not participating in the voting. State non-member banks are prohibited from paying the overdrafts of any of their executive officers or directors. In addition, loans to executive officers may not be made on terms more favorable than those afforded other borrowers and are restricted as to type, amount and terms of credit.

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ITEM 2. PROPERTIES

The following table sets forth certain information with respect to the Bank’s offices (dollars in thousands):


	Year	Owned/			Approximate
	Opened	Leased	Book Value		Square Footage	Deposits
Main Office:
101 Crain Highway, S.E.	1953	Owned	$	312	10,000	$	95,395
Glen Burnie, MD 21061

Branches:
Odenton	1969	Owned		120	6,000		34,144
1405 Annapolis Road
Odenton, MD 21113

Riviera Beach	1973	Owned		164	2,500		37,274
8707 Ft. Smallwood Road
Pasadena, MD 21122

Crownsville	1979	Owned		329	3,000		72,379
1221 Generals Highway
Crownsville, MD 21032

Severn	1984	Owned		70	2,500		36,083
811 Reece Road
Severn, MD 21144

New Cut Road	1995	Owned		974	2,600		38,445
740 Stevenson Road
Severn, MD 21144

Linthicum	2005	Leased		50	2,500		22,608
Burwood Village Shopping Center
Glen Burnie, MD 21060

Severna Park	2002	Leased		29	2,184		13,292
534 Ritchie Highway
Severna Park, MD 21146

Operations Centers:
106 Padfield Blvd.	1991	Owned		620	16,200		N/A
Glen Burnie, MD 21061

103 Crain Highway, S.E.	2000	Owned		256	3,727		N/A
Glen Burnie, MD 21061

At December 31, 2020, the Bank owned one foreclosed real estate property under its subsidiary GBB Properties Inc.

ITEM 3. LEGAL PROCEEDINGS

The Company and the Bank from time to time are involved in legal proceedings related to collection suits and other actions that arise in the ordinary course of business against their borrowers and are defendants in legal actions arising from normal business activities. The Company’s management, after consultation with legal counsel, believe there are no pending or threatened legal proceedings that, upon resolution, are expected to have a material adverse effect upon the Company’s or the Bank’s financial condition or results of operations based on all known information at this time.

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is information about the Company’s executive officers as of December 31, 2020.


NAME	AGE	POSITIONS

John D. Long	65	President and Chief Executive Officer
Andrew J. Hines	59	Executive Vice President and Chief Lending Officer
Jeffrey D. Harris	65	Senior Vice President and Treasurer and Chief Financial Officer
Michelle R. Stambaugh	61	Senior Vice President and HR Director
Donna L. Smith	58	Senior Vice President and Director of Branch and Deposit Operations

JOHN D. LONG was appointed President and Chief Executive Officer of the Company and the Bank effective April 1, 2016. From February 8, 2016 to that date, Mr. Long was Executive Vice President. From October 2014 until February 2016, Mr. Long was an independent consultant advising commercial banks.

ANDREW J. HINES was appointed Chief Lending Officer of the Bank effective March 1, 2014. He was appointed Senior Lending Officer and Senior Vice President effective January 2, 2014. Effective January 12, 2017, he was appointed Executive Vice President.

JEFFREY D. HARRIS was appointed Senior Vice President, Treasurer of the Company and Senior Vice President, Chief Financial Officer, and CRA and Compliance Officer of the Bank effective March 30, 2017. Prior to that, he was the SVP – Controller at Bay Bank.

MICHELLE R. STAMBAUGH was appointed Senior Vice President effective February 2, 2011. Effective November 28, 2016, she assumed the role of Corporate Secretary of the Company and Bank. Prior to that, she was Vice President and Director of Human Resources for 18 years.

DONNA L. SMITH was appointed Senior Vice President – Director of Retail Banking / Information/Physical Security Officer on October 26, 2015. In 2017 she was also appointed to Director of Branch and Deposit Operations. Prior to that, she was the SVP – Enterprise Risk Manager at Bay Bank.

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ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our authorized common stock consists of 15,000,000 shares, of which 2,842,040 shares are issued and outstanding as of December 31, 2020. The Common Stock is traded on the Nasdaq Capital Market under the symbol “GLBZ”. As of February 26, 2021, there were 342 record holders of the Common Stock. The closing price for the Common Stock on that date was $11.00.

The following table sets forth the high and low sales prices for the Common Stock for each full quarterly period during 2020 and 2019 as reported by Nasdaq. The quotations represent prices between dealers and do not reflect the

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retailer markups, markdowns or commissions, and may not represent actual transactions. Also shown are dividends declared per share for these periods.


	2020						2019
Quarter Ended	High		Low		Dividends		High		Low		Dividends

March 31,	$	7.98	$	7.98	$	0.10	$	10.74	$	10.61	$	0.10
June 30,		8.49		8.49		0.10		11.10		10.94		0.10
September 30,		10.30		10.27		0.10		10.95		10.80		0.10
December 31,		11.00		10.76		0.10		11.50		11.50		0.10

A regular dividend of $0.10 was declared for stockholders of record on January 25, 2021, payable on February 8, 2021.

The payment of dividends by the Company depends upon the ability of the Bank to declare and pay dividends to the Company because the principal source of the Company's revenue will be dividends paid by the Bank. The Company recognizes the importance of dividends to its shareholders and intends to evaluate a variety of factors, on a quarterly basis, in determining whether dividend payments are prudent as well as the amount of the dividend. However, dividends remain subject to declaration by the Board of Directors in its sole discretion and there can be no assurance that the Company will be legally or financially able to make such payments. Payment of dividends may be limited by federal and state regulations which impose general restrictions on a bank’s and bank holding company’s right to pay dividends (or to make loans or advances to affiliates which could be used to pay dividends). Generally, dividend payments are prohibited unless a bank or bank holding company has sufficient net (or retained) earnings and capital as determined by its regulators. See “Item 1. Business - Supervision and Regulation - Regulation of the Company - Dividends and Distributions” and “Item 1. Business – Supervision and Regulation - Regulation of the Bank - Dividend Limitations.” The Company does not believe that those restrictions will materially limit its ability to pay dividends.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include projections, predictions, expectations or statements as to beliefs or future events or results, or refer to other matters that are not purely statements of historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking statements contained in this Annual Report are based on various factors and were derived using numerous assumptions. In some cases, you can identify these forward-looking statements by words like “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “intend”, “believe”, “estimate”, “predict”, “potential”, or “continue” or the negative of those words and other comparable words. You should be aware that those statements reflect only our predictions. If known or unknown risks or uncertainties should materialize, or if underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. Further, factors or events that could cause our actual results to differ from our forward-looking statements may emerge from time to time, and it is not possible for us to predict all of them. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Factors that might cause such differences include, but are not limited to:

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changes in our plans and strategies and the results thereof;

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the impact of acquisitions and other strategic transactions;

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unexpected changes in the housing market, business markets, and/or general economic conditions in our market area;

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unexpected changes in market interest rates or monetary policy;

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the impact of new laws, regulations and governmental policies and guidelines that might require changes to our business model;

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changes in laws, regulations and governmental policies and guidelines that might impact our ability to collect on outstanding loans or otherwise negatively impact our business;

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higher than anticipated loan losses or the insufficiency of the allowance for credit losses;

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our potential exposure to various types of market risks, such as interest rate risk and credit risk;

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our ability to recover the fair values of available for sale securities;

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our obligation to fund commitments to extend credit and unused lines of credit;

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changes in consumer confidence, spending and savings habits relative to the services we provide;

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continued relationships with major customers;

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competition from other financial institutions in originating loans, attracting deposits, and providing various financial services that may affect our profitability;

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the ability to continue to grow our business internally and through acquisition and successful integration of bank entities while controlling our costs;

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changes in competitive, governmental, regulatory, accounting, technological and other factors that may affect us specifically or the banking industry generally, including as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”);

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changes in our sources and availability of liquidity;

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the impact of pending and future legal proceedings; and

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losses that we may realize from off-balance sheet arrangements.

You should also carefully consider additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

OVERVIEW

This section is intended to help investors understand the financial performance of the Company through a discussion of the factors affecting our financial condition at December 31, 2020 and 2019 and our results of operations for the years ended December 31, 2020 and 2019. This section should be read in conjunction with the consolidated financial statements and notes thereto that appear elsewhere in this Annual Report on Form 10-K.

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Net interest income was $12.2 million for the year ended December 31, 2020 and $12.6 million for the year ended December 31, 2019. Total interest income decreased from $14.5 million in 2019 to $13.7 million in 2020, a 5.82% decrease. Interest expense for 2020 totaled $1.5 million, a 21.38% decrease from $1.9 million in 2019. Net income at December 31, 2020 was $1.7 and $1.6 million at December 31, 2019.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

General. For the year ended December 31, 2020, the Company reported consolidated net income of $1.7 million ($0.59 per basic and diluted earnings per share) compared to consolidated net income of $1.6 million ($0.57 per basic and diluted earnings per share) for the year ended December 31, 2019. The $69,000 increase in the 2020 consolidated net income as compared to 2019 was primarily due to a $574,000 increase in the negative provision for loan losses and $250,000 decrease in noninterest expenses, offset by decreases of $433,000 in net interest income and $283,000 in noninterest income. The increase in the negative provision for loan losses was due to decreases in qualitative factors driven by macro-economic conditions, a decrease in the size of the loan portfolio, and the overall credit-quality of the loan portfolio. Annualized return on average assets was 0.42% at December 31, 2020 compared to 0.41% at December 31, 2019. Annualized return on average equity was 4.49% and 4.55% at December 31, 2020 and 2019, respectively. The dividend payout ratio was 68% at December 31, 2020 and 71% at December 31, 2019. The equity to asset ratio was 8.84% and 9.27% at December 31, 2020 and 2019, respectively.

Net Interest Income. The primary component of the Company’s net income is its net interest income, which is the difference between income earned on assets and interest paid on the deposits and borrowings used to fund income producing assets. Net interest income is determined by the spread between the yields earned on the Company’s interest-earning assets and the rates paid on interest-bearing liabilities as well as the relative amounts of such assets and liabilities.

The Company’s net interest margin is determined by dividing net interest income by the Company’s average interest-earning assets.

Net interest income is affected by the mix of loans in the Bank’s loan portfolio. Currently a majority of the Bank’s loans are residential and commercial mortgage loans secured by real estate, and indirect automobile loans secured by automobiles.

Consolidated net interest income for the year ended December 31, 2020 was $12.2 million and $12.6 million for the year ended December 31, 2019. Total interest income decreased from $14.5 million for 2019 to $13.7 million for 2020, an $845,000, or 5.82% decrease, primarily due to a $774,000 decrease in interest and fees on loans and a $221,000 decrease in interest on deposits with banks and federal funds sold, offset by a $150,000 increase in interest and dividends on securities.

Total interest expense decreased from $1.9 million in 2019 to $1.5 million in 2020, a $412,000 or a 21.38% decrease, primarily due to a $306,000 decrease in interest on deposits and $114,000 decrease in interest on short-term borrowings, offsetting an increase of $8,000 in interest on long-term borrowings. Net interest margin for the year ended December 31, 2020 was 3.18% compared to 3.39% for the year ended December 31, 2019.

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The following table allocates changes in income and expense attributable to the Company’s interest-earning assets and interest-bearing liabilities for the periods indicated between changes due to changes in rate and changes in volume. Changes due to rate/volume are allocated to changes due to volume.


	Year Ended December 31,
	2020		VS.		2019		2019		VS.		2018
	Change Due To:						Change Due To:
	Increase/						Increase/
(dollars in thousands)	Decrease		Rate		Volume		Decrease		Rate		Volume
ASSETS:
Interest-earning assets:
Interest-bearing deposits w/ banks & fed funds	$	(175)	$	(190)	$	15	$	93	$	14	$	79

Investment securities:
Investment securities available for sale		150		(258)		408		(672)		(146)		(526)
Restricted equity securities		(47)		(43)		(4)		1		17		(16)
Total investment securities		103		(301)		404		(671)		(129)		(542)

Loans, net of unearned income
Consumer		(219)		(196)		(23)		(86)		67		(153)
Residential Real Estate		67		42		25		(68)		(9)		(59)
Indirect		(670)		63		(733)		538		218		320
Commercial		191		201		(10)		27		(5)		32
Commercial SBA PPP		107		—		107		—		—		—
Construction		(64)		(24)		(40)		29		62		(33)
Commercial Real Estate		(185)		(25)		(160)		(41)		34		(75)
Total net loans		(773)		61		(834)		399		367		32
Total interest-earning assets	$	(845)	$	(430)	$	(415)	$	(179)	$	252	$	(431)

LIABILITIES:
Interest-bearing deposits:
Interest-bearing checking and savings	$	4	$	0	$	4	$	(6)	$	(6)	$	—
Money market		—	—	—	—	—		—		—		—
Other time deposits		(308)		(166)		(142)		6		172		(166)
Total interest-bearing deposits		(304)		(166)		(138)		0		166		(166)
Borrowed funds		(108)		(86)		(22)		(175)		(45)		(130)
Total interest-bearing liabilities	$	(412)	$	(252)	$	(160)	$	(175)	$	121	$	(296)

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The following table provides information for the designated periods with respect to the average balances, income and expense and annualized yields and costs associated with various categories of interest-earning assets and interest-bearing liabilities.


	Year Ended December 31,
	2020						2019
	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost

	(dollars In thousands)
ASSETS:
Interest-earning assets:
Interest-bearing deposits w/ banks & fed funds	$	16,159	$	63	0.39	%	$	12,419	$	237	1.90	%

Investment securities:
Investment securities available for sale		88,088		1,579	1.79			65,315		1,429	2.19
Restricted equity securities		1,350		54	3.98			1,461		101	6.94
Total investment securities		89,438		1,633	1.83			66,776		1,530	2.29

Loans
Consumer		12,015		670	5.57			12,428		889	7.16
Residential Real Estate		81,765		3,758	4.60			81,214		3,691	4.55
Indirect		87,906		2,813	3.20			110,798		3,484	3.14
Commercial		12,736		992	7.79			12,856		801	6.23
Commercial SBA PPP		11,594		107	0.93			—		—	—
Construction		2,430		181	7.45			2,969		245	8.25
Commercial Real Estate		68,628		3,452	5.03			71,810		3,637	5.06
Total gross loans(1)		277,074		11,973	4.32			292,075		12,747	4.36
Total interest-earning assets		382,671		13,669	3.57			371,270		14,514	3.91
Cash and due from banks		2,258						2,634
Allowance for credit losses		(2,069)						(2,454)
Other assets		17,602						15,865
Total assets	$	400,462					$	387,315

LIABILITIES AND STOCKHOLDER'S EQUITY:
Interest-bearing deposits:
Interest-bearing checking and savings	$	120,356		69	0.06	%	$	112,990		65	0.06	%
Money market		18,622		9	0.05			19,482		10	0.05
Certificates of deposit		74,667		965	1.29			85,627		1,274	1.49
Total interest-bearing deposits		213,645		1,043	0.49			218,099		1,349	0.62
Borrowed funds:
Federal funds purchased		1		—	—			137		5	3.30
PPPLF Term Funding		888		3	0.32			—		—	—
FHLB advances		23,428		469	2.01			25,436		573	2.25
Total interest-bearing liabilities		237,962		1,515	0.64			243,672		1,927	0.79

Non-interest-bearing deposits		122,749						106,466
Other liabilities		2,684						2,073

Stockholder's equity		37,067						35,104
Total liabilities and equity	$	400,462					$	387,315
Net interest income			$	12,154					$	12,587
Net interest spread					2.93	%					3.12	%
Net interest margin					3.18	%					3.39	%

1	Nonaccrual loans included in average balance.

Provision for Credit Losses. The Company’s loan portfolio is subject to varying degrees of credit risk and an allowance for loan losses is maintained to absorb losses inherent in its loan portfolio. Credit risk includes, but is not limited to, the potential for borrower default and the failure of collateral to be worth what the Bank determined it was worth at the time of the granting of the loan. The Bank monitors its loan portfolio loan delinquencies monthly. All loans that are delinquent and all loans within the various categories of the Bank’s portfolio as a group are evaluated. The Bank’s management estimates an allowance for loan losses. Included in determining the calculation are such

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factors as historical losses for each loan portfolio, current market value of the loan’s underlying collateral, inherent risk contained within the portfolio after considering the state of the general economy, economic trends, consideration of particular risks inherent in different kinds of lending and consideration of known information that may affect loan collectability.

During the year ended December 31, 2020, the Company recognized a negative loan loss provision of $0.7 million, compared to a negative loan loss provision of $0.1 million for loan losses for the year ended December 31, 2019. The decrease was primarily driven by decreases in qualitative factors driven by macro-economic conditions, a decrease in the size of the loan portfolio, and the overall credit-quality of the loan portfolio. No provision for loan losses on the Commercial SBA PPP loans was recognized as the SBA guarantees 100% of loans funded under the program. The allowance for loan losses was $1.5 million, or 0.58% of total loans at December 31, 2020, compared to $2.1 million, or 0.73% of total loans at December 31, 2019. At December 31, 2020, the allowance for loan losses equaled 32.6% of nonaccrual and past due loans compared to 49.8% at December 31, 2019. During the year ended December 31, 2020, the Company recorded net recoveries of $0.1 million compared to $0.4 million in net charge-offs during the year ended December 31, 2019.

Noninterest Income. Noninterest income includes service charges on deposit accounts, other fees and commissions, net gains on investment securities sold, and income on Bank Owned Life Insurance (“BOLI”). Noninterest income decreased from $1.3 million in 2019 to $1.0 million in 2020, a $0.3 million, or 21.85% decrease. The decrease was primarily due to $0.2 million lower ATM interchange fees related to the COVID-19 related cancellation of the Renaissance Festival.

Noninterest Expenses. Non-interest expenses decreased from $11.9 million in 2019 to $11.7 million in 2020, a $0.2 million or 2.09% decrease. Salary and employee benefits decreased by $0.1 million, or 1.22%, to $6.7 million at December 31, 2020, compared to $6.8 million at December 31, 2019 due to decreases in the number of employees and the cost of benefits. Occupancy and equipment expenses decreased to $1.2 million at December 31, 2020 from $1.4 million at December 31, 2019, a 12.74% decrease. The decrease was associated with lower investments in technology and infrastructure improvements in 2020. Legal, accounting and other professional fees decreased from $1.0 million in 2019 to $0.9 million in 2020, a $0.1 million, or 10.89%, decrease. Other expenses decreased to $1.2 million at December 31, 2020, compared to $1.5 million at December 31, 2019, a $0.3 million or 19.31% decrease. The decrease was primarily due to litigation costs and write-downs on OREO. Data processing and item processing services expense increased to $0.9 million at December 31, 2020 from $0.5 million at December 31, 2019, a $0.4 million or 77.65% increase. The increase is due to payment of 2019 core processing system implementation expenses in 2020. FDIC insurance costs increased by $0.1 million, or 41.98%, to $0.2 million at December 31, 2020, compared to $0.1 million at December 31, 2019. The increase was due to the application of small bank assessment credit in 2019.

Income Taxes. During the year ended December 31, 2020, the Company recorded an income tax expense of $0.49 million, compared to an income tax expense of $0.45 million for the year ended December 31, 2019, a $0.04 million or 8.63% increase. This increase was primarily due to $0.1 million higher income before taxes in 2020.

FINANCIAL CONDITION

Total assets increased by $34.5 million, or 8.97% to $419.5 million at December 31, 2020, compared to $384.9 million at December 31, 2019. The increase was primarily a result of increases in cash and investments due to deposit growth and loan balance declines. The Company’s participation in the PPP program had a further positive impact on the year-over-year growth.

Cash and cash equivalents at December 31, 2020 were $37.1 million compared to $13.3 million at December 31, 2019. At year end 2020, investment securities had increased 59.5% to $114.0 million compared to year end 2019. Total loans at December 31, 2020 were $252.3 million compared to $282.7 million at December 31, 2019. At December 31, 2020, total deposits were $349.6 million compared to $321.4 million at the end of 2019, an 8.77% increase during the period. Total borrowings were $29.9 million at December 31, 2020 compared to $25.0 million at December 31, 2019.

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Net loans on December 31, 2020 included $9.9 million of loans funded under the SBA PPP. These PPP loans directly benefitted the businesses and employees in our local communities. The Company funded 133 PPP loans totaling approximately $17.4 million in the second quarter of 2020. Unearned fees net of origination costs totaled $600,000 and are being accreted based on the estimated life of the loans. The SBA began forgiving PPP loans in October 2020 at which point recognition of fee income was accelerated.

Cash

Cash and cash equivalents increased by $23.8 million primarily due to the receipt of borrowed funds under the PPP Loan Funding program in the amount of $9.9 million. A decrease in loans net of deferred fees and costs in the amount of $30.4 million and increases in deposits in the amount of $28.2 million, offset by an increase in the investment portfolio in the amount of $42.6 million that drove the increase in 2020.

Investment Securities

The Company’s investment policy authorizes management to invest in traditional securities instruments in order to provide ongoing liquidity, income and a ready source of collateral that can be pledged in order to access other sources of funds. The investment portfolio consists solely of securities available for sale. Securities available for sale are those securities that we intend to hold for an indefinite period of time but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability management strategy, liquidity management, interest rate risk management, regulatory capital management or other similar factors.

The investment portfolio consists primarily of U.S. Treasury securities, U.S. Government agency securities, residential mortgage-backed securities and state and municipal obligations. The income from state and municipal obligations may be taxable or tax-exempt from federal and state income tax. State and municipal obligations from the State of Maryland are exempt from state income taxes. We use the investment portfolio as a source of both liquidity and earnings. Management continuously evaluates investment options that will produce income without assuming significant credit or interest rate risk and looks for opportunities to use liquidity from maturing investments to reduce our use of high cost time deposits and borrowed funds.

During 2020, the Company’s investment securities portfolio totaled $114.0 million, a $42.6 million, or 59.54%, an increase from $71.5 million at December 31, 2019. This increase was primarily driven by $66.9 million of purchases of available for sale securities, offset by $26.3 million of paydowns and redemptions of investment securities.

The composition of investment securities, at carrying value, at December 31, 2020 and 2019 are presented in the following table:


	2020					2019
(dollars in thousands)	Amount		%			Amount		%
Available for sale securities:
U.S. Treasury	$	—		—	%	$	500		0.6	%
U.S. Government agency		33,045		29.0	%		3,191		4.5	%
Residential mortgage-backed securities		51,591		45.2	%		55,320		77.4	%
State and municipal		29,413		25.8	%		12,475		17.5	%
Total debt securities	$	114,049		100.0	%	$	71,486		100.0	%

At December 31, 2020, the Bank had no investments in securities of a single issuer (other than the U.S. Government securities and securities of federal agencies and government-sponsored enterprises), which aggregated more than 10% of stockholders’ equity.

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Maturities and weighted average yields for investment securities at December 31, 2020 are presented in the following table:


	2020

	Amortized		Fair		Yield
(dollars in thousands)	Cost		Value		(1), (2)
Maturing Available for sale securities:
Within one year	$	456	$	461	2.49	%
Over one to five years		2,071		2,110	2.05	%
Over five to ten years		8,484		8,620	1.34	%
Over ten years		101,343		102,858	1.91	%
Total debt securities	$	112,354	$	114,049

________________________

(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 have been computed on a tax-equivalent basis.

Restricted Equity Securities

Restricted equity securities were $1.2 million and $1.4 million at December 31, 2020 and 2019.

Loans

A comparison of the loan portfolio for the years indicated is presented in the following table:


	December 31,
	2020				2019				2018				2017				2016
(dollars in thousands)	$		%		$		%		$		%		$		%		$		%
Consumer	$	11,548	5	%	$	12,076	4	%	$	13,071	4	%	$	16,112	6	%	$	14,739	5	%
Residential real estate		75,653	30			81,033	28			82,637	28			81,926	30			93,468	35
Indirect		74,644	29			102,384	36			116,698	39			85,186	32			71,656	27
Commercial		14,121	6			11,907	4			14,284	5			11,257	4			12,351	5
Commercial SBA PPP		9,912	4			—	—			—	—			—	—			—	—
Construction		900	0			3,317	1			2,317	1			3,536	1			4,397	2
Commercial real estate		66,994	26			74,021	27			70,113	23			73,595	27			68,447	26
Gross loans		253,772	100	%		284,738	100	%		299,120	100	%		271,612	100	%		265,058	100	%
Allowance for credit losses		(1,476)				(2,066)				(2,541)				(2,589)				(2,484)
Net loans	$	252,296			$	282,672			$	296,579			$	269,023			$	262,574

The Company’s net loan receivables decreased by $30.3 million to $252.3 million at December 31, 2020 from $282.7 million at December 31, 2019 primarily due to pay downs outpacing $55.8 million in new originations. This change in the composition of the loan portfolio resulted primarily from the $42.9 million decrease in consumer, indirect, residential real estate, commercial real estate and construction loans, offset by a $12.1 million increase in commercial and commercial SBA PPP (this new loan type is discussed at the beginning of this section and in Note 1. Nature of Business) and a $0.6 million decrease in the allowance for loan losses. As a specific strategy, the Company will increase the loan portfolio opportunistically through the addition of indirect consumer loans, which provide shorter-term loans. This strategy mitigates the negative impact on the net interest margin of the runoff of other loan product with higher yields.

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The following table summarizes the scheduled repayments of our loan portfolio, both by loan category and by fixed and adjustable rates, at December 31, 2020. Demand loans and loans which have no stated maturity, are treated as due in one year or less.


	Due Within		Due Over One To		Due Over
	One Year		Five Years		Five Years		Total

	(dollars in thousands)
By Loan Category:
Consumer	$	105	$	486	$	10,957	$	11,548
Residential real estate		96		1,728		73,829		75,653
Indirect automobile		919		58,974		14,751		74,644
Commercial & industrial		741		1,590		11,790		14,121
Commercial SBA PPP		—		9,912		—		9,912
Construction		584		316		—		900
Commercial real estate		589		7,991		58,414		66,994
Total		3,034		80,997		169,741		253,772

By Rate Term:
Fixed rate		2,958		80,300		119,809		203,067
Adjustable rate		76		697		49,932		50,705
Total	$	3,034	$	80,997	$	169,741	$	253,772

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 on such loan 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. An asset is “well secured” if it is secured by (1) collateral in the form of liens on or pledges of real or personal property, including securities that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) the guarantee of a financially responsible party. An asset is “in the process of collection” if collection of the asset is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in prepayment of the debt or in its restoration to a current status in the near future. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to make payments in accordance with the terms of the loan and remains 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.

The Bank seeks to control delinquencies through diligent collection efforts. For consumer loans, the Bank sends out payment reminders on the seventh and twelfth days after a payment is due. If a consumer loan becomes 15 days past due, the account is transferred to the Bank’s collections department, which will contact the borrower by telephone and/or letter before the account becomes 30 days past due. If a consumer loan becomes more than 30 days past due, the Bank will continue its collection efforts and will move to repossession or foreclosure by the 45th day if the Bank has reason to believe that the collateral may be in jeopardy or the borrower has failed to respond to prior communications. The Bank may move to repossess or foreclose in all instances in which a consumer loan becomes more than 60 days delinquent. After repossession of a motor vehicle, the borrower has a 15-day statutory right to redeem the vehicle and is entitled to 10 days’ notice before the sale of a repossessed vehicle. The Bank sells the vehicle as promptly as feasible after the expiration of these periods. If the amount realized from the sale of the vehicle

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is less than the loan amount, the Bank may seek a deficiency judgment against the borrower. The Bank follows similar collection procedures with respect to commercial loans.

Our current charge-off policy is as follows:

When the probability for full payment of a loan is unlikely, the Bank will initiate a full charge-off or a partial write-down of the asset based upon the status of the loan. The following guidelines apply:

●

Consumer loans less than $25,000 for which payments of principal and/or interest are past due ninety (90) days are charged-off and referred for collection. Consumer loans of $25,000 or more shall be evaluated for charge-off or partial write-down at the discretion of Bank management.

●

Any other loan over 120 days past due shall be evaluated for charge-off or partial write-down at the discretion of Bank management. Any non-consumer unsecured loan more than 180 days delinquent in payment of principal and/or interest (or sooner if deemed uncollectible) is charged-off in full.

●

If secured, a charge-off is made to reduce the loan balance to a level equal to the anticipated liquidation value of the collateral when payment of principal and/or interest is more than 180 days delinquent, or prior to that if deemed uncollectible.

●

Generally, real estate secured loans are charged-off on a deficiency basis after liquidation of the collateral. In some cases, Bank management may determine that a charge-off or write-down is appropriate prior to liquidation of the collateral, when the full loan balance is clearly uncollectible and some loss is anticipated. In order to make this determination, an updated evaluation or appraisal of the property is obtained.

The Bank experienced a $0.4 million or 9.2% increase in the total nonperforming loans in 2020. The following table presents details of our nonperforming loans and nonperforming assets, as these asset quality metrics are evaluated by management, for the years indicated:


	As of December 31,
	2020			2019			2018			2017			2016
(dollars in thousands)
Nonaccrual loans	$	4,512		$	4,127		$	1,947		$	3,270		$	3,751
TDR loans excluding those in nonaccrual loans		-			-			204			217			229
Accruing loans past due 90+ days		18			21			26			60			36

Total nonperforming loans		4,530			4,148			2,177			3,547			4,016

Real estate acquired through foreclosure		575			705			705			114			114

Total nonperforming assets	$	5,105		$	4,853		$	2,882		$	3,661		$	4,130

Nonperforming loans to gross loans		1.8	%		1.5	%		0.7	%		1.3	%		1.5	%

Allowance for credit losses to nonperforming loans		32.6	%		49.8	%		116.7	%		73.0	%		61.8	%

Nonperforming assets, which consist of nonaccrual loans, troubled debt restructurings, accruing loans past due 90 days or more, and real estate acquired through foreclosure, increased $0.2 million at December 31, 2020 from $4.9 million at December 31, 2019 to $5.1 million at December 31, 2020. Nonperforming assets represented 1.21% of total assets at December 31, 2020, compared to 1.26% at December 31, 2019. The level of nonperforming assets increased primarily due to the addition of commercial real estate loans that were not individually evaluated totaling $1.0 million, offset by the payoff of various nonperforming loans. Management has worked diligently to identify borrowers that

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may be facing difficulties in order to restructure terms where appropriate, secure additional collateral or pursue foreclosure and other secondary sources of repayment.

Allowance for Loan Losses and Credit Risk Management

The Bank’s allowance for credit losses is based on the probable estimated losses that may be sustained in its loan portfolio. The allowance is based on two basic principles of accounting: (1) ASC Topic 450, “Accounting for Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC Topic 310, “Accounting by Creditors for Impairment of a Loan”, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

The allowance for loan losses is established to estimate losses that may occur on loans by recording a provision for loan losses that is charged to earnings in the current period. The allowance is evaluated on at least a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historic experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Measured impairment and credit losses are charged against the allowance when management believes the loan or a portion of the loan’s balance is not collectable. Subsequent recoveries, if any, are credited to the allowance.

The allowance consists of specific and general components. The specific component relates to individual loans that are classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement and primarily includes nonaccrual and TDRs. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price, whichever is appropriate, of the impaired loan is lower than the carrying value of the loan. For collateral-dependent impaired loans, any measured impairment is properly charged off against the loan and allowance in the applicable reporting period. The specific component may fluctuate from period to period if changes occur in the nature and volume of impaired loans.

The general component covers pools of similar loans and is based upon historical loss experience of the Bank or peer bank group if the Bank’s loss experience is deemed by management to be insufficient and several qualitative factors. These qualitative factors address various risk characteristics in the Bank’s loan portfolio after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss data. The general component may fluctuate from period to period if changes occur in the mix of the Bank’s loan portfolio, economic conditions, or specific industry conditions.

A test of the adequacy of the allowance, using the methodology outlined above, is performed by management and reported to the Board of Directors on at least a quarterly basis. The complex evaluations involved in such testing require significant estimates. Management uses available data to establish the allowance at a prudent level, recognizing that the determination is inherently subjective, and that future adjustments may be necessary, depending upon many items including a change in economic conditions affecting specific borrowers, or in general economic conditions, and new information that becomes available. However, there are no assurances that the allowance will be sufficient to absorb losses on nonperforming loans, or that the allowance will be sufficient to cover losses on nonperforming loans in the future.

The allowance was $1.5 million at December 31, 2020, compared to $2.1 million at December 31, 2019. The allowance as a percentage of total portfolio loans was 0.58% at December 31, 2020 and 0.73% at December 31, 2019.

During the year ended December 31, 2020, we recorded net recoveries of $0.10 million, compared to net charge offs of $0.36 million during the year ended December 31, 2019.

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The following table reflects activity in the allowance for loan losses for the periods indicated:


	Year Ended December 31,
	2020			2019			2018			2017			2016

	(dollars in thousands)
Beginning Balance	$	2,066		$	2,541		$	2,589		$	2,484		$	3,150

Loans charged-off
Consumer		—			69			208			96			18
Residential Real Estate		—			16			589			3			853
Indirect		392			504			341			458			677
Commercial		—			27			—			9			—
Construction		—			—			—			—			—
Commercial Real Estate		—			—			13			—			364
Total		392			616			1,151			566			1,912

Recoveries
Consumer		9			16			48			8			17
Residential Real Estate		266			5			2			27			34
Indirect		196			225			183			286			318
Commercial		20			10			14			—			9
Construction		—			—			—			—			—
Commercial Real Estate		—			—			—			14			—
Total		491			256			247			335			378

Net (recoveries) charge offs		(99)			360			904			231			1,534
Provisions for loan loss		(689)			(115)			856			336			686
Balance at end of year	$	1,476		$	2,066		$	2,541		$	2,589		$	2,484


Allowance as a percentage of total loans at the end of the year		0.58	%		0.73	%		0.85	%		0.95	%		0.94	%
Net (recoveries) charge offs as a percentage of average loans during the year		(0.04)	%		0.12	%		0.32	%		0.09	%		0.59	%

The following table reflects the amount and percentage of loan loss allowance for each category for the periods indicated:


	At December 31,
	2020				2019				2018				2017				2016
			Percentage				Percentage				Percentage				Percentage				Percentage
			Of Loans				Of Loans				Of Loans				Of Loans				Of Loans
	Allowance		In Each		Allowance		In Each		Allowance		In Each		Allowance		In Each		Allowance		In Each
	For Each		Category To		For Each		Category To		For Each		Category To		For Each		Category To		For Each		Category To
Portfolio	Category		Total Loans		Category		Total Loans		Category		Total Loans		Category		Total Loans		Category		Total Loans
(dollars in thousands)
Consumer	$	123	8.34	%	$	122	5.92	%	$	161	8.27	%	$	214	8.27	%	$	182	7.33	%
Residential Real Estate		431	29.18			589	28.49			864	40.99			1,061	40.99			1,042	41.97
Indirect		574	38.86			917	44.37			988	29.90			774	29.90			693	27.90
Commercial		92	6.25			38	1.84			241	9.15			237	9.15			284	11.43
Construction		3	0.22			11	0.54			4	0.45			12	0.45			10	0.39
Commercial Real Estate		253	17.15			389	18.84			283	11.24			291	11.24			259	10.42
Unallocated		—	—			—	—			—	—			—	-			14	0.56
Total	$	1,476	100.00	%	$	2,066	100.00	%	$	2,541	100.00	%	$	2,589	100.00	%	$	2,484	100.00	%

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Deposits

The funds needed by the Bank to make loans are primarily generated by deposit accounts solicited from the communities in Anne Arundel County. The Bank’s deposit products include savings accounts, money market deposit accounts, demand deposit accounts, NOW checking accounts, IRA and SEP accounts and certificates of deposit. The Bank does not solicit brokered deposits. Variations in service charges, terms and interest rates are used to target specific markets. Ancillary products and services for deposit customers include safe deposit boxes, money orders, night depositories, automated clearinghouse transactions, wire transfers, ATMs, electronic banking (telephone banking, online banking, bill pay, card control, mobile app, merchant source capture, mobile deposit capture, Zelle, etc.). The Bank is a member of the Accel(R) and MoneyPass(R) ATM networks.

The following deposit table presents the composition of deposits at December 31, 2020 and 2019:


	2020				2019				2020 vs 2019
	Amount in		% of		Amount in		% of		$		%
	thousands		Total		thousands		Total		Change		Change
Noninterest-bearing deposits	$	132,626	37.9	%	$	107,158	33.3	%	$	25,468	23.8	%

Interest-bearing deposits:
Checking		32,601	9.3	%		32,171	10.0	%		430	1.3	%
Savings		97,036	27.8	%		82,845	25.8	%		14,191	17.1	%
Money market		19,077	5.5	%		17,253	5.4	%		1,824	10.6	%
Total interest-bearing checking, savings and money market deposits		148,714	42.6	%		132,269	41.2	%		16,445	12.4	%

Time deposits under $100,000		40,010	11.4	%		47,277	14.7	%		(7,267)	(15.4)	%
Time deposits of $100,00 or more		28,270	8.1	%		34,736	10.8	%		(6,466)	(18.6)	%
Total time deposits		68,280	19.5	%		82,013	25.5	%		(13,733)	(16.7)	%

Total interest-bearing deposits		216,994	62.1	%		214,282	66.7	%		2,712	1.3	%

Total Deposits	$	349,620	100.0	%	$	321,440	100.0	%	$	28,180	8.8	%

Total deposits were $349.6 million at December 31, 2020, an increase of $28.2 million, or 8.8%, when compared to the $321.4 million recorded at December 31, 2019. Within the deposit base, noninterest bearing deposits balances increased $25.5 million, or 23.8%, interest bearing checking account balances increased $0.4 million, or 1.3%, interest bearing savings account balances increased by $14.2 million, or 17.1%, money market balances increased $1.8 million, or 10.6%, and time deposit balances decreased by $13.7 million, or 16.7%, when compared to the amounts at December 31, 2019.

The following table presents the maturity distribution for time deposits of $100,000 or more at December 31, 2020:


(dollars in thousands)	Amount
Three months or less	$	2,414
Over three months through twelve months		12,884
Over twelve months through twenty-four months		4,612
Over twenty-four months		8,360
Total Time Deposits of $100,000 or More	$	28,270

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Borrowings

The Bank uses borrowings from the Federal Home Loan Bank (“FHLB”) of Atlanta, of which it is a member, to supplement funding from deposits. The Bank’s total credit availability is $107.7 million at December 31, 2020 and it may draw $38.6 million which is secured by a floating lien on the Bank’s residential first mortgage loans. There was a $5.0 million adjustable rate advance issued on July 27, 2020, which has a final maturity of December 27, 2021. This advance has a 0.386% interest rate at December 31, 2020, with interest payable quarterly. The proceeds of the adjustable rate advance were used to fund loan demand. There was a $5.0 million adjustable rate advance issued on August 24, 2020, which has a final maturity of December 24, 2021. This advance has a 0.33813% interest rate at December 31, 2020, with interest payable quarterly. The proceeds of the adjustable rate advance were used to fund loan demand. There was a $10.0 million adjustable rate advance issued on November 2, 2020, which has a final maturity of December 31, 2021. This advance had a 0.34388% interest rate at December 31, 2020, with interest payable quarterly. The proceeds of the adjustable advance were used to fund loan demand.

The pay-fixed swap executed November 1, 2017 is based on a $10.0 million notional amount, matures on October 30, 2022 (5 years) and has a floating received leg based on 3-month LIBOR and a fixed rate payment of 2.105%. The Bank also entered into two $5.0 million variable rate (3-month Libor) borrowings that were converted into a 2.235% and 2.246% fixed rate payment using a pay-fixed swap that matures on July 23, 2023 and August 22, 2023, respectively. The market value of the derivative contracts at December 31, 2020 was a loss of $949,000.

At December 31, 2020 the Bank borrowed $9.9 million at a fixed rate of 0.35% under the Federal Reserve’s Discount Window PPPLF program.

The Bank also had available unsecured federal funds lines of credit from two financial institutions for $9.0 million and $8.0 million and a Discount Window line of credit in the amount of $10.6 million at the Federal Reserve Bank of Richmond at December 31, 2020.

CAPITAL RESOURCES

Ample capital is necessary to sustain growth, provide a measure of protection against unanticipated declines in asset values and safeguard the funds of depositors. Capital also provides a source of funds to meet loan demand and enables us to manage assets and liabilities effectively.

Stockholders’ equity increased to $37.1 million at December 31, 2020, compared to $35.7 million at December 31, 2019. The $1.4 million , or 3.96%, increase for the year ended December 31, 2020 resulted primarily from $442,000 net unrealized losses on interest rate swap contracts, $535,000 increase in retained earnings, $130,000 stock issuances under the dividend reinvestment program, offset by a $1.2 million increase in net unrealized gains on the available for sale bond portfolio. The book value of the Company’s common stock was $13.05 at December 31, 2020 and $12.62 at December 31, 2019.

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, 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 practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

In July 2013, federal bank regulatory agencies issued a final rule that revises their risk based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. These Basel III Capital Rules were applicable to the Bank effective January 1, 2015, but they do not apply to the Company since it is a small bank holding company with less than $1.0 billion in total consolidated assets. The Federal Reserve Board raised the threshold for the small bank holding company exclusion from $500 million to $1 billion in April 2015.

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The rule imposes higher risk based capital and leverage requirements than those in place at the time the rule was issued. Specifically, the rule imposes the following minimum capital requirements to be considered adequately capitalized:

●

A new common equity Tier 1 risk based capital ratio of 4.50%;

●

A Tier 1 risk-based capital ratio of 6.00% (increased from the previous 4% requirement);

●

A total risk-based capital ratio of 8.00% (unchanged from previous requirements); and

●

A leverage ratio of 4.00%.

The rule also includes changes in what constitutes regulatory capital, some of which were subject to a transition period. These changes include the phasing out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Certain deferred tax assets over designated percentages of common stock are required to be deducted from capital, subject to a transition period. Finally, common equity Tier 1 capital includes accumulated other comprehensive income (which includes all unrealized net gains and losses on available for sale debt and equity securities and all unrealized net gain or loss on defined benefit pension plan), subject to a transition period and a one-time opt-out election. The Bank elected to opt-out of this provision. As such, accumulated comprehensive income is not included in determining the Bank’s regulatory capital ratios.

The rule also includes changes in the risk weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisitions, development and construction loans and non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status, a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable, a 250% risk weight (up from 100%) for deferred tax assets that are not deducted from capital and increased risk weights (from 0% to up to 600%) for certain equity exposures.

Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.50% of common equity Tier 1 capital to risk weighted assets in addition to the amount necessary to meet its minimum risk based capital requirements.

The final rule became effective on January 1, 2015, and the requirements in the rule were fully phased-in by January 1, 2019.

For regulatory capital purposes as of March 31, 2015, deferred tax assets that arise from net operating loss and tax credit carryforwards (net of any related valuations allowances and net of deferred tax liabilities) are excluded from regulatory capital, in addition to certain overall limits on net deferred tax assets as a percentage of common equity Tier 1 capital. At December 31, 2020, none of the Bank’s net deferred tax asset was excluded from common equity Tier 1, Tier 1 and total regulatory capital. We will continue to evaluate the realizability of our net deferred tax asset on a quarterly basis for both financial reporting and regulatory capital purposes. This evaluation may result in the inclusion of a deferred tax asset in regulatory capital in an amount that is different from the amount determined under GAAP.

In addition, the Bank is required to maintain a minimum level of Tier 1 capital to average total assets excluding intangibles. This measure is known as the leverage ratio. The current regulatory minimum for the leverage ratio for institutions to be considered “well capitalized” is 5.00%, but an individual institution could be required to maintain a higher level.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of total, common equity Tier 1 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio of Tier 1 capital (as defined) to average tangible assets (as defined). At December 31, 2020 and 2019, the Bank had regulatory capital in excess of that required under each requirement and was classified as “well capitalized”.

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Actual capital amounts and ratios for the Bank are presented in the following tables (dollars in thousands):


									To Be Well Capitalized
					To Be Considered				Under Prompt Corrective
	Actual				Adequately Capitalized				Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2020
Common Equity Tier 1 Capital	$	36,442	13.09	%	$	12,532	4.50	%	$	18,101	6.50	%
Total Risk-Based Capital	$	37,951	13.63	%	$	22,278	8.00	%	$	27,848	10.00	%
Tier 1 Risk-Based Capital	$	36,442	13.09	%	$	16,709	6.00	%	$	22,278	8.00	%
Tier 1 Leverage	$	36,442	9.12	%	$	15,980	4.00	%	$	19,975	5.00	%


									To Be Well Capitalized
					To Be Considered				Under Prompt Corrective
	Actual				Adequately Capitalized				Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2019
Common Equity Tier 1 Capital	$	35,693	12.47	%	$	12,878	4.50	%	$	18,602	6.50	%
Total Risk-Based Capital	$	37,797	13.21	%	$	22,895	8.00	%	$	28,619	10.00	%
Tier 1 Risk-Based Capital	$	35,693	12.47	%	$	17,171	6.00	%	$	22,895	8.00	%
Tier 1 Leverage	$	35,693	9.26	%	$	15,414	4.00	%	$	19,268	5.00	%

Federal bank regulatory agencies are required to take certain supervisory actions against an undercapitalized bank, the severity of which depends upon the bank’s degree of capitalization. Failure to maintain an appropriate level of capital could cause the regulator to take any one or more of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

LIQUIDITY

Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the Company’s customers, as well as to meet current and planned expenditures. Management monitors the liquidity position daily.

Our liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations and capital. Additionally, liquidity is provided through our portfolios of cash and interest-bearing deposits in other banks, federal funds sold and securities available for sale. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by the Bank’s competitors.

The borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit, which totaled $32.6 million at December 31, 2020. Management notes that, historically, a small percentage of unused lines of credit are actually drawn down by customers within a 12-month period.

Our most liquid assets are cash and assets that can be readily converted into cash, including interest-bearing deposits with banks and federal funds sold, and investment securities. At December 31, 2020, we had $2.1 million in cash and due from banks, $35.0 million in interest-bearing deposits with banks and federal funds sold, and $114.0 million in investment securities available for sale.

The Bank also has external sources of funds through the Federal Reserve Bank and FHLB, which can be drawn upon when required. The Bank has a discount window line of credit with the Federal Reserve Bank totaling approximately $10.6 million and a line of credit totaling approximately $107.7 million with the FHLB of which $87.7 million was available to be drawn on December 31, 2020 based on qualifying loans and securities pledged as collateral.

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At December 31, 2020, there were outstanding balances of $20.0 million under the Bank’s FHLB line of credit and $9.9 million under the Federal Reserve Bank’s PPPLF.

Additionally, the Bank has unsecured federal funds lines of credit totaling $17.0 million with two institutions. The proceeds of the Company’s line of credit may be used for general corporate purposes.

To further aid in managing liquidity, the Bank’s Board of Directors has approved and formed an Asset/Liability Management Committee (“ALCO”) to review and discuss recommendations for the use of available cash and to maintain an investment portfolio. By limiting the maturity of securities and maintaining a conservative investment posture, management can rely on the investment portfolio to help meet any short-term funding needs.

We believe the Bank has adequate cash on hand and available through liquidation of investment securities and available borrowing capacity to meet our liquidity needs. Although we believe sufficient liquidity exists, if economic conditions and consumer confidence deteriorate, this liquidity could be depleted, which would then materially affect our ability to meet operating needs and to raise additional capital.

OFF-BALANCE SHEET ARRANGEMENTS

The Bank is a party to financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements.

Loan commitments and lines of credit are agreements to lend to customers as long as there is no violation of any conditions of the contracts. Loan commitments generally have interest rates fixed at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Many of the loan commitments and lines of credit are expected to expire without being drawn upon; accordingly, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral or other security obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include deposits held in financial institutions, U.S. Treasury securities, other marketable securities, accounts receivable, inventory, property and equipment, personal residences, income-producing commercial properties, and land under development. Personal guarantees are also obtained to provide added security for certain commitments.

Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to guarantee the installation of real property improvements and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral and obtains personal guarantees supporting those commitments for which collateral or other securities is deemed necessary.

The Bank’s exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment.

Currently, we break-out our unfunded commitments into the following categories:

●

Unfunded Construction Commitments

●

Unfunded Commercial Lines of Credit and Other

●

Unfunded Home Equity LOC

●

Unfunded Demand Deposit Overdraft LOC

●

Committed Loans Which Have Not Closed

●

Letters of Credit

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Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. As of December 31, 2020, the Bank has accrued $32,881 as a reserve for loan losses on unfunded commitments, a decrease of $4,505 from the $37,386 accrued as of December 31, 2019. Unfunded commitments related to these financial instruments with off balance sheet risk, are included in other liabilities. The additional provision amount is included in ‘other expense’.

MARKET RISK MANAGEMENT

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 ALCO oversees our management of interest rate risk. The objective of the management of interest rate risk is to maximize stockholder value, enhance profitability and increase capital, serve customer and community needs, and protect us from any material financial consequences associated with changes in interest rate risk.

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

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

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

We prepare a current base case and up to eight alternative simulations at least once a quarter and report the analysis to the Board of Directors. In addition, more frequent forecasts may be produced when interest rates are particularly uncertain or when other business conditions or strategy analysis so dictate.

The statement of condition is subject to quarterly testing for up to eight alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/ - 100, 200, 300, and 400 basis points (“bp”), although we may elect not to use particular scenarios that we determine are impractical in the current rate environment. It is our goal to structure the balance sheet so that net interest-earnings at risk over a twelve-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 December 31, 2020, we were in a neutral to slightly asset sensitive position. Management continuously strives to reduce higher costing fixed rate funding instruments, while increasing 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 reprice 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 reprice 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.


	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	%
December 31, 2020	-7	%	-5	%	6	%	15	%
December 31, 2019	-10	%	-6	%	6	%	11	%

As shown above, measures of net interest income at risk were slightly more favorable at December 31, 2020 than at December 31, 2019 over a 12 month modelling period. All measures remained within prescribed policy limits, however, down interest-rate scenarios are less meaningful as our model cannot shock below zero.

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	%
December 31, 2020	-37	%	-26	%	8	%	12	%
December 31, 2019	-11	%	-3	%	21	%	38	%

The EVE at risk declined at December 31, 2020 when compared to December 31, 2019 in the down interest rate shock levels and in the up interest rate shock levels. The Company’s economic value of equity has a negative effect in a declining interest rate environment and a positive effect in an increasing interest rate environment because the liabilities reprice at a much slower rate than our assets, and 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 from their current levels thus the economic value of our liabilities and our assets both worsen in a declining rate environment i.e., given the current rate environment, down shocks may not be meaningful as market rates can only be shocked down to zero.

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) and follow general practices within the industries in which we operate. All intercompany transactions are eliminated in consolidation and certain reclassifications are made when necessary in order to conform

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the previous year’s financial statements to the current year’s presentation. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates or judgments reflect management’s view of the most appropriate manner in which to record and report our overall financial performance. Because these estimates or judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. As such, changes in these estimates, judgments, and/or assumptions may have a significant impact on our financial statements. All accounting policies are important, and all policies described in Part II, Item 8, Financial Statements and Supplementary Data, Note 1, should be reviewed for a greater understanding of how our financial performance is recorded and reported.

We have identified the following three policies as being critical because they require management to make particularly difficult, subjective, and/or complex estimates or judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the determination of the allowance for loan losses, fair value measurements and the accounting for income taxes. Management believes it has used the best information available to make the estimations or judgments necessary to value the related assets and liabilities. Actual performance that differs from estimates or judgments and future changes in the key variables could change future valuations and impact net income. Management has reviewed the application of these policies with the Audit Committee of the Board of Directors. Following is a discussion of the areas we view as our most critical accounting policies, including the identification of the variables most important in the estimation process.

Allowance for Loan Losses

The reserve for loan losses represents management’s estimate of probable losses inherent in the loan portfolio and the establishment of a reserve that is sufficient to absorb those losses. In determining an appropriate reserve, management makes numerous judgments, assumptions, and estimates based on continuous review of the loan portfolio, estimates of client performance, collateral values, and disposition, as well as historical loss rates and expected cash flows. In assessing these factors, management benefits from a lengthy organizational history and experience with credit decisions and related outcomes. Nonetheless, if management’s underlying assumptions prove to be inaccurate, the reserve for loan losses would have to be adjusted. Our accounting policy related to the reserve is disclosed in Note 1 under the heading “Allowance for Loan Losses.”

Fair Value Measurements

We use fair value measurements to record certain financial instruments and to determine fair value disclosures. Available for sale securities and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets. GAAP establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement. Fair value is discussed further in Note 1 under the heading “Fair Value Measurements” and in Note 16, “Fair Value of Financial Instruments”.

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Accounting for Income Taxes

We use the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We exercise significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. Realization of deferred tax assets is dependent on generating sufficient taxable income in the future.

Other significant accounting policies are presented in Note 1 to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10K. We have not substantively changed any aspect of our overall approach in the application of the foregoing policies. However, the Financial Accounting Standards Board adopted a new accounting standard for determining the amount of our allowance for credit losses (ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) that will be adopted early for our fiscal year ending December 31, 2021, referred to as Current Expected Credit Loss ("CECL"). Implementation of CECL will require that we determine periodic estimates of lifetime expected future credit losses on loans in the provision for loan losses in the period when the loans are booked. Based on our fourth quarter parallel run, review of the portfolio, including the composition, characteristics and quality of the underlying loans, and the prevailing economic conditions and forecasts as of the adoption date, we believe that adoption of ASU 2016-13 will result in a material increase of approximately 107% to our allowance for credit losses. This is consistent with our expectations given that our current portfolio is of shorter duration and commercially focused. The ongoing impact of CECL will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Should these factors materially change, we may be required to increase or decrease our allowance for loan losses, decreasing or increasing our reported income, and introducing additional volatility into our reported earnings.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DICLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this Item 8 are included in the Company’s Consolidated Financial Statements and set forth in the pages indicated in Item 15 of this Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and

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forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner. The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated this system of disclosure controls and procedures as of the end of the period covered by this annual report, and have concluded that the system is effective.

Management’s Annual Report on Internal Control over Financial Reporting

The Company’s management, including its CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (GAAP). Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Management (with the participation of the Company’s CEO and CFO) conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2020.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information with respect to the identity and business experience of the directors of the Company and their remuneration set forth in the section captioned “Proposal I — Election of Directors” in the Company’s definitive Proxy Statement to be filed pursuant to Regulation 14A and issued in conjunction with the 2021 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference. The information with respect to the identity and business experience of executive officers of the Company is set forth in Part I of this Form 10-K. The information with respect to the Company’s Audit Committee is incorporated herein by reference to the section captioned “Meetings and Committees of the Board of Directors” in the Proxy Statement. The information with respect to compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. The information with respect to the Company’s Code of Ethics is incorporated herein by reference to the section captioned “Code of Ethics” in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the sections captioned “Director Compensation” and “Executive Compensation” in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to the sections captioned “Voting Securities and Principal Holders Thereof” and “Securities Ownership of Management” in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the section captioned “Proposal I — Election of Directors” and “Transactions with Management” in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the section captioned “Proposal II — Authorization for Appointment of Auditors” “Disclosure of Independent Auditor Fees” in the Proxy Statement.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements.


	Page
Report of Independent registered Public Accounting Firm	F-3
Consolidated Balance Sheets as of December 31, 2020 and 2019	F-5
Consolidated Statements of Income for the Years Ended December 31, 2020 and 2019	F-6
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020 and 2019	F-7
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2020 and 2019	F-8
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019	F-9
Notes to Consolidated Financial Statements	F-10

(a) 2. Financial Statement Schedules.

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.

(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K.


Exhibit No.		Description
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)
10.4		The Bank of Glen Burnie Executive and Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999, File No. 0-24047)
21		Subsidiary of the Registrant (incorporated by reference to Exhibit 21 to the Registrant’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2001, File No. 0-24047)
23		Consent of TGM Group LLC (filed herewith)
31.1		Rule 15d-14(a) Certification by the Principal Executive Officer (filed herewith)
31.2		Rule 15d-14(a) Certification by the Principal Accounting Officer (filed herewith)
32		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		Interactive Data Files pursuant to Rule 405 of Regulation S-T (filed herewith)

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	GLEN BURNIE BANCORP


March 26, 2021	By:	/s/ John D. Long
		John D. Long
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ John D. Long	President, Chief Executive Officer	March 26, 2021
John D. Long	and Director

/s/ Jeffrey D. Harris	Senior Vice President and Chief Financial Officer	March 26, 2021
Jeffrey D. Harris

/s/ John E. Demyan	Chairman of the Board and Director	March 26, 2021
John E. Demyan

/s/ Thomas Clocker	Director	March 26, 2021
Thomas Clocker

/s/ Julie M. Mussog	Director	March 26, 2021
Julie M. Mussog

/s/ F. W. Kuethe, III	Director	March 26, 2021
F. W. Kuethe, III

/s/ Charles Lynch	Director	March 26, 2021
Charles Lynch

/s/ Andrew Cooch	Director	March 26, 2021
Andrew Cooch

/s/ Joan M. Rumenap	Director	March 26, 2021
Joan M. Rumenap

/s/ Mary Louise Wilcox	Director	March 26, 2021
Mary Louise Wilcox

/s/ Stanford D. Hess	Director	March 26, 2021
Stanford D. Hess

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Glen Burnie Bancorp and Subsidiary

Consolidated Financial Statements

December 31, 2020

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CONTENTS

	Page(s)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F - 3

FINANCIAL STATEMENTS
Consolidated Balance Sheets	F - 5
Consolidated Statements of Income	F - 6
Consolidated Statements of Comprehensive Income (Loss)	F - 7
Consolidated Statements of Changes in Stockholders’ Equity	F - 8
Consolidated Statements of Cash Flows	F - 9
Notes to Consolidated Financial Statements	F - 10 – F - 49

F - 2

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Herbert J. Geary III

Ray J. Geiser

Chris A. Hall‌

Ronald W. Hickman

Mark. Welsh

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Glen Burnie Bancorp and Subsidiaries

Glen Burnie, Maryland

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Glen Burnie Bancorp and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

F - 3

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Qualitative Factors used in the Allowance for Loan Losses – Refer to Notes 1 and 4 to the Consolidated Financial Statements

Critical Audit Matter Description

As described in Notes 1 and 4 to the Company’s consolidated financial statements, the Company had a gross loan portfolio of approximately $254 million and related allowance for loan losses of approximately $1.5 million as of December 31, 2020. The allowance for loan losses includes a reserve for loans collectively evaluated for impairment of approximately $1.5 million and loans individually evaluated for impairment of approximately $11,000. The estimate of the collectively evaluated component of the allowance for loan losses considers the Company’s historical loss experience by loan segment. Each loan segment is reviewed and analyzed using the average historical charge-offs over the current and preceding four- year periods for their respective segments as well as adjusted for the qualitative factors.

These qualitative factors include changes in trends in volume and terms of loans, changes in loan concentrations, changes in the trends and severity of problem loans, current local and national economic conditions and trends including unemployment, changes in the banking industry including legal and regulatory requirements, changes in lending staff, policies and procedures, changes in the charge-offs and recoveries adjusted for rate and direction, changes in the trends and severity of findings and downgrades from independent loan reviews.

These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in the Company’s historic loss experience.

We identified the qualitative factors used in the allowance for loan losses as a critical audit matter because of the necessary judgement applied by us to evaluate management’s significant estimates and subjective assumptions in determining qualitative adjustments.

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures related to the qualitative factors used in the allowance for loan losses included the following, among others:

●

We obtained an understanding of management’s processes for identifying relevant qualitative factors and quantifying related adjustments.

●

We evaluated the design of controls over management’s evaluation of the allowance related to the qualitative factors used in the allowance for loan losses, including controls addressing management’s review of the qualitative and quantitative analysis related to the qualitative risk factors.

●

We evaluated the of reasonableness of management’s judgments related to qualitative adjustments in comparison to management’s policies.

●

We considered whether qualitative factors were consistently applied period over period, where applicable.

●

We evaluated whether management factors were supported by evidence from internal and external sources and loan portfolio performance.

●

We analytically evaluated the allowance related to loans collectively evaluated for impairment by loan segment period over period for reasonableness against overall trends in the economy, industry, and loan portfolio performance.

We have served as the Company’s auditor since 1996.

Salisbury, Maryland

March 25, 2021

955 Mt. Hermon Road | Salisbury, MD 21804 | 410-742-1328 | 1-888-546-1574

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)



		December 31,
		2020		2019

ASSETS
Cash and due from banks		$	2,117	$	2,420
Interest-bearing deposits in other financial institutions			34,976		10,870
Cash and Cash Equivalents			37,093		13,290
Investment securities available for sale, at fair value			114,049		71,486
Restricted equity securities, at cost			1,199		1,437
Loans, net of deferred fees and costs			253,772		284,738
Less: Allowance for loan losses			(1,476)		(2,066)
Loans, net			252,296		282,672
Real estate acquired through foreclosure			575		705
Premises and equipment, net			3,853		3,761
Bank owned life insurance			8,181		8,023
Deferred tax assets, net			142		672
Accrued interest receivable			1,302		961
Accrued taxes receivable			116		1,221
Prepaid expenses			318		406
Other assets			362		308
Total Assets		$	419,486	$	384,942

LIABILITIES
Noninterest-bearing deposits	��	$	132,626	$	107,158
Interest-bearing deposits			216,994		214,282
Total Deposits			349,620		321,440
Short-term borrowings			29,912		25,000
Defined pension liability			285		317
Accrued expenses and other liabilities			2,576		2,505
Total Liabilities			382,393		349,262

STOCKHOLDERS' EQUITY
Common stock, par value $1, authorized 15,000,000 shares, issued and outstanding 2,842,040 and 2,827,473 shares as of December 31, 2020 and December 31, 2019, respectively.			2,842		2,827
Additional paid-in capital			10,640		10,525
Retained earnings			23,071		22,537
Accumulated other comprehensive gain (loss)			540		(209)
Total Stockholders' Equity			37,093		35,680

Total Liabilities and Stockholders' Equity		$	419,486	$	384,942

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share data)



	Year Ended December 31,
	2020		2019

INTEREST INCOME
Interest and fees on loans	$	11,973	$	12,747
Interest and dividends on securities		1,579		1,429
Interest on deposits with banks and federal funds sold		117		338
Total Interest Income		13,669		14,514

INTEREST EXPENSE
Interest on deposits		1,043		1,349
Interest on short-term borrowings		464		578
Interest on long-term borrowings		8		—
Total Interest Expense		1,515		1,927

Net Interest Income		12,154		12,587

Provision for loan losses		(689)		(115)

Net interest income after provision for loan losses		12,843		12,702

NONINTEREST INCOME
Service charges on deposit accounts		176		255
Other fees and commissions		672		874
Gain on securities called or sold		6		3
Income on life insurance		158		163
Total Noninterest Income		1,012		1,295

NONINTEREST EXPENSE
Salary and employee benefits		6,743		6,826
Occupancy and equipment expenses		1,247		1,429
Legal, accounting and other professional fees		941		1,056
Data processing and item processing services		944		531
FDIC insurance costs		186		131
Advertising and marketing related expenses		88		107
Loan collection costs		126		107
Telephone costs		199		244
Other expenses		1,222		1,515
Total Noninterest Expenses		11,696		11,946

Income before income taxes		2,159		2,051

Income tax expense		491		452

NET INCOME	$	1,668	$	1,599

Basic and diluted net income per share of common stock	$	0.59	$	0.57

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)


	Year Ended
	December 31,
	2020		2019

Net income	$	1,668	$	1,599

Other comprehensive income (loss):

Net unrealized gain (loss) on securities available for sale:
Net unrealized gain on securities during the period		1,646		2,040
Income tax expense relating to item above		(452)		(560)
Reclassification adjustment for gain on sales of securities included in net income		(3)		(2)
Net effect on other comprehensive income		1,191		1,478

Net unrealized (loss) gain on interest rate swap:
Net unrealized loss on interest rate swap during the period		(611)		(631)
Income tax benefit relating to item above		169		174
Net effect on other comprehensive loss		(442)		(457)

Other comprehensive income		749		1,021

Comprehensive income	$	2,417	$	2,620

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands)


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


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

Net income		—		—		1,599		—		1,599
Cash dividends, $0.40 per share		—		—		(1,128)		—		(1,128)
Dividends reinvested under dividend reinvestment plan		13		124		—		—		137
Other comprehensive income		—		—		—		1,021		1,021

Balance, December 31, 2019		2,827		10,525		22,537		(209)		35,680
Net income		—		—		1,668		—		1,668
Cash dividends, $0.40 per share		—		—		(1,134)		—		(1,134)
Dividends reinvested under dividend reinvestment plan		15		115		—		—		130
Other comprehensive income		—		—		—		749		749

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

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in the thousands)


	Year Ended
	December 31,
	2020		2019

Cash flows from operating activities:
Net income	$	1,668	$	1,599
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion of premises and equipment		59		932
Provision for loan losses		(689)		(115)
Deferred income taxes, net		245		333
Increase in cash surrender value of bank owned life insurance		(158)		(163)
Loss on writedown other real estate owned		130		—
Loss on write-down of Maryland Financial Bank stock		—		2
Net decrease in other assets		798		206
Net (increase) decrease in accrued expenses and other liabilities		(451)		198

Net cash provided by operating activities		1,602		2,992

Cash flows from investing activities:
Redemptions and maturities of investment securities available for sale		26,323		32,584
Purchases of investment securities available for sale		(66,941)		(20,962)
Net redemption of Federal Home Loan Bank stock		238		1,041
Net decrease in loans		31,065		14,021
Purchases of premises and equipment		(573)		(336)

Net cash (used in) provided by investing activities		(9,888)		26,348

Cash flows from financing activities:
Net increase (decrease) in deposits		28,180		(1,013)
Increase (decrease) in short term borrowings		4,913		(30,000)
Cash dividends paid		(1,134)		(1,128)
Common stock dividends reinvested		130		137

Net cash provided by (used in) financing activities		32,089		(32,004)

Net increase (decrease) in cash and cash equivalents		23,803		(2,664)

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

Cash and cash equivalents at end of year	$	37,093	$	13,290

Supplemental Disclosures of Cash Flow Information:
Interest paid on deposits and borrowings	$	1,599	$	1,979
Income taxes (refunded) paid		(856)		160
Net decrease in unrealized depreciation on available for sale securities		1,646		2,040
Increase in unrealized depreciation on Swaps		(611)		(631)

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

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 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. The accounting and financial reporting policies of the Bank conform, in all material respects, to accounting principles generally accepted in the United States (“U.S. GAAP”) and to general practices within the banking industry.

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic has negatively impacted the global economy and the markets in which the Company operates. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future country and state restrictions regarding virus containment. An extended period of global supply chain, workforce availability and economic disruption could materially affect the Company’s business, the results of operations, and financial condition. While this business disruption is expected to be temporary, the current circumstances change from one day to the next and the impacts of COVID-19 on the Company’s business operations, including the duration, its impact on assets, liabilities and net income, cannot be reasonably estimated at this time. During the second quarter of 2020, at the request of borrowers facing financial difficulties, the Bank modified and deferred payment on 225 loans totaling approximately $39.8 million in principal and approximately $598,800 in principal and interest payments. As of September 30, 2020, all deferred payment loans are again paying as agreed. In October 2020, the Company began processing payments for loans that have been forgiven under SBA guidelines. The COVID-19 pandemic had a negative material impact on the Company’s business, results of operations, financial position and cash flows in the fourth quarter of 2020, and this impact may continue into 2021 and beyond.

The Company has business continuity plans that cover a variety of potential impacts to business operations. These plans are periodically reviewed and tested and have been designed to protect the ongoing viability of bank operations in the event of a disruption such as a pandemic. In the beginning of March 2020, the Bank began implementing social distancing protocols. Following recommendations from the Centers for Disease Control and Prevention and the State of Maryland, the Company implemented enhanced cleaning of bank facilities and provided guidance to employees and customers on best practices to minimize the spread of the virus. At that time the Company modified delivery channels with a shift to drive thru only service at the banking offices, supplemented by appointments for service in the office lobbies. The Company also encouraged the use of online and mobile channels.

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

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

In response to the November and December 2020 holiday-driven resurgence of COVID-19 cases, all branch lobbies were closed on December 5, 2020. The Bank has been operating drive thru window services only at all locations since then. On December 26, 2020, the Glen Burnie and Riviera Beach branch locations closed their drive thru window sevices after employees from these locations tested positive for the virus. The employees from these branches were quarantined at that time. The branches were cleaned and disinfected on December 26 and 27, 2020 and remained vacant until the employees returned to work on January 4, 2021.

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In response to the COVID-19 pandemic, Congress created, and on March 27, 2020 the President signed into law, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Included in the CARES Act was the creation of the Paycheck Protection Program (PPP) pursuant to which Small Business Administration (SBA) eligible lenders provide low-interest, SBA guaranteed loans to borrowers who meet the requirements of the PPP so that the borrowers can keep their workers on the payroll. To bolster the effectiveness of the PPP, the Federal Reserve System has supplied liquidity to participating financial institutions, including the Bank, through term financing backed by PPP loans to small businesses. The PPP Liquidity Facility (the “PPPL Facility”) extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. To support the use of the PPPL Facility, the banking regulatory agencies are allowing banking organizations to exclude loans pledged as collateral to the PPPL Facility from a banking organization's total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets, as applicable. The Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System and Office of the Comptroller of the Currency issued an interim final rule on April 7, 2020, that allows banking organizations to neutralize the regulatory capital effects of participating in the PPPL Facility. In addition, loans made under the PPP receive a zero percent risk weight under the agencies' regulatory capital rules regardless of whether they are pledged as collateral to the PPPL Facility. However, such loans will be included in a banking organization's leverage ratio requirement unless they are pledged as collateral to the PPPL Facility. The Bank worked with existing customers to provide PPP loans, and between April 3, 2020 and May 21, 2020 the Bank approved, and obtained SBA approval, for 133 loan requests totaling $17.4 million under the PPP. These loans are listed as loan type Commercial SBA PPP loans in the Bank’s loan portfolio in “Note 4 – Loans and Allowance for Loan Losses” in this report. In October 2020, the Company began processing loans that have been forgiven under SBA guidelines.

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

Basis of Presentation

The consolidated financial statements include the accounts of Glen Burnie Bancorp, The Bank of Glen Burnie and GBB Properties, Inc., a company engaged in the acquisition and disposition of other real estate. All significant intercompany transactions are eliminated in consolidation and certain reclassifications are made when necessary in order to conform the previous year’s financial statements to the current year’s presentation. In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting periods and related disclosures. These estimates that require application of management's subjective or complex judgments often result in the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Management has made significant estimates in several areas, including the valuation of certain loans held for investment (Note 4, Loans and Allowance); allowance for credit losses (Note 4, Loans and Allowance); valuation of investment securities (Note 3, Investment Securities); the fair value of financial instruments (Note 16, Fair Value of Financial Instruments); benefit plan obligations and expenses (Note 10, Pension and Profit Sharing Plans); and the valuation of deferred tax assets (Note 9, Income Taxes). Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation. The Parent Only financial statements (see Note 19, Parent Company Financial Information) of the Company account for the subsidiary using the equity method of accounting.

Investment Securities

We classify investment securities as trading, held to maturity ("HTM"), or available for sale ("AFS") at the date of acquisition. Purchases and sales of securities are generally recorded on a trade-date basis.

Investment securities that we might not hold until maturity are classified as AFS and are reported at fair value in the statement of financial condition. Fair value measurement is based upon quoted market prices in active markets, if available. If quoted prices in active markets are not available, fair value is measured using pricing models or other model-based valuation techniques such as the present value of future cash flows, which consider prepayment assumptions and other factors such as credit losses and market liquidity. Unrealized gains and losses are excluded from

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earnings and reported, net of tax, in other comprehensive income (“OCI”). Purchase premiums and discounts are recognized in interest income using the effective interest method over the life of the securities. Purchase premiums or discounts related to mortgage-backed securities are amortized or accreted using projected prepayment speeds. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

AFS investment securities in unrealized loss positions are evaluated for other-than-temporary impairment (“OTTI”) at least quarterly. For AFS securities, a decline in fair value is considered to be other-than-temporary if the Company does not expect to recover the entire amortized cost basis of the security.

Debt securities are classified as HTM if the Company has both the intent and ability to hold those securities to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of purchase premiums and accretion of purchase discounts.

Transfers of securities from available for sale to held to maturity are accounted for at fair value as of the date of the transfer. The difference between the fair value and the par value at the date of transfer is considered a premium or discount and is accounted for accordingly. Any unrealized gain or loss at the date of the transfer is reported in OCI, and is amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount, and will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held to maturity security.

Impairment may result from credit deterioration of the issuer or collateral underlying the security. In performing an assessment of recoverability, all relevant information is considered, including the length of time and extent to which fair value has been less than the amortized cost basis, the cause of the price decline, credit performance of the issuer and underlying collateral, and recoveries or further declines in fair value subsequent to the balance sheet date.

For debt securities, the Company measures and recognizes OTTI losses through earnings if (1) the Company has the intent to sell the security or (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. In these circumstances, the impairment loss is equal to the full difference between the amortized cost basis and the fair value of the security. For securities that are considered other-than-temporarily-impaired that the Company has the intent and ability to hold in an unrealized loss position, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to other factors, which is recognized as a component of OCI.

For equity securities, the Company recognizes OTTI losses through earnings if the Company intends to sell the security. The Company also considers other relevant factors, including its intent and ability to retain the security for a period of time sufficient to allow for any anticipated recovery in market value, and whether evidence exists to support a realizable value equal to or greater than the carrying value. Any impairment loss on an equity security is equal to the full difference between the amortized cost basis and the fair value of the security.

Federal Home Loan Bank Stock

As a borrower from the Federal Home Loan Bank of Atlanta ("FHLB"), the Bank is required to purchase an amount of FHLB stock based on our outstanding borrowings with the FHLB. This stock is used as collateral to secure the borrowings from the FHLB and is accounted for as a cost-method investment. FHLB stock is an equity interest that does not necessarily have a readily determinable fair value for purposes of the ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities, because its ownership is restricted and lacks a market. FHLB stock can be sold back only at its par value of $100 per share and only to the FHLB or another member institution.

Other Securities

Maryland Financial Bank Dissolution Trust ("the Trust"), is a "liquidating trust" for U.S. federal income tax purposes. The sole purpose of the Trust is to liquidate the remaining assets, resolve the remaining liabilities, and to distribute the net proceeds to the Trust's beneficiaries. This an equity interest that does not necessarily have a readily

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determinable fair value for purposes of the ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities, because its ownership is restricted and lacks a market. This stock is accounted for as a cost-method investment.

Loans Held for Investment

Loans held for investment are reported at the principal amount outstanding, net of cumulative charge-offs, interest applied to principal (for loans accounted for using the cost recovery method), unamortized net deferred loan origination fees and costs and unamortized premiums or discounts on purchased loans. Interest on loans is accrued and recognized as interest income at the contractual rate of interest. When a loan is designated as held for investment, the intent is to hold these loans for the foreseeable future or until maturity or pay off.

From time to time, the Company will originate loans to facilitate the sale of other real estate owned (OREO). Such loans are accounted for using the installment method and any gain on sale is deferred. The Bank financed no sales of OREO for 2020 or 2019.

Loan Fees and Costs

Loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over the contractual term of the loan.

Nonaccrual Loans

Loans are placed on nonaccrual status when the full and timely collection of principal and interest is doubtful, generally when the loan becomes 90 days or more past due for principal or interest payment or if part of the principal balance has been charged off. When a loan is placed on nonaccrual status all interest previously accrued but not collected is reversed against current period interest income.

All payments received on nonaccrual loans are accounted for using the cost recovery method. Under the cost recovery method, all cash collected is applied to first reduce the principal balance. A loan may be returned to accrual status if all delinquent principal and interest payments are brought current and the collectability of the remaining principal and interest payments in accordance with the loan agreement is reasonably assured. Loans that are well-secured and in the process of collection are maintained on accrual status, even if they are 90 days or more past due.

Impaired Loans

A loan is considered impaired when it is probable that all contractual principal and interest payments due will not be collected in accordance with the terms of the loan agreement. Factors considered by management in determining whether a loan is impaired include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. The carrying value of impaired loans is based on the present value of the loan’s expected future cash flows or, alternatively, the observable market price of the loan or the fair value of the collateral.

Troubled Debt Restructurings

A loan is accounted for and reported as a troubled debt restructuring (“TDR”) when, for economic or legal reasons, we grant a concession to a borrower experiencing financial difficulty that we would not otherwise consider. Management strives to identify borrowers in financial difficulty early and works with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. A restructuring that results in only an insignificant delay in payment is not considered a concession. A delay may be considered insignificant if the payments subject to the delay are insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in timing of the restructured payment period is insignificant relative to the frequency of payments, the debt's original contractual maturity or original expected duration.

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TDRs are designated as impaired because interest and principal payments will not be received in accordance with the original contract terms. TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR and impaired regardless of the accrual or performance status until the loan is paid off. However, if the TDR loan has been modified in a subsequent restructure with market terms and the borrower is not currently experiencing financial difficulty, then the loan may be de-designated as a TDR.

Allowance for Loan Losses

Credit quality within the loan portfolio is continuously monitored by management and is reflected within the allowance for loan losses. The allowance for loan losses is maintained at a level that, in management's judgment, is appropriate to cover losses inherent within the Company’s loan portfolio, including unfunded credit commitments, as of the balance sheet date. The allowance for loan losses, as reported in our consolidated statements of financial condition, is adjusted by a provision for loan losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries.

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary.

Loan Loss Measurement

Allowance levels are influenced by loan volumes, internal asset quality ratings, delinquency status, historic loss experience and other conditions influencing loss expectations, such as economic conditions. The methodology for evaluating the adequacy of the allowance for loan losses has two basic components: First, an asset-specific component involving the identification of impaired loans and the measurement of impairment for each individual loan identified; and second, a formula-based component for estimating probable loan principal losses for all other loans.

Impaired Loans

The specific credit allocations are based on regular analysis of all loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. When a loan is identified as impaired, impairment is measured based on net realizable value, and the recorded investment balance of the loan. For impaired loans, we recognize impairment if we determine that the net realizable value of the impaired loan is less than the recorded investment of the loan (net of previous charge-offs and deferred loan fees and costs), except when the sole remaining source of collection is the underlying collateral. In these cases impairment is measured as the difference between the recorded investment balance of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.

Once the impairment amount is determined, an asset-specific allowance is provided that is equal to the calculated impairment and included in the allowance for loan losses. If the calculated impairment is determined to be permanent or not recoverable, the impairment will be charged off. Factors considered by management in determining if

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impairment is permanent or not recoverable include whether management judges the loan to be uncollectible, repayment is deemed to be protracted beyond reasonable time frames or the loss becomes evident owing to the borrower’s lack of assets.

Estimate of Probable Loan Losses

In estimating the formula-based component of the allowance for loan losses, loans are segregated into loan classes based on product types and similar risk characteristics or areas of risk concentration. Loans of similar type and purpose, not meeting the criteria for an asset-specific allocation, are aggregated into loan classes, and a reserve factor is applied to each loan class based on the historical loss experience of that class and six qualitative factors. Qualitative factors are expressed in basis points and are adjusted downward or upward based on management’s judgment as to the potential loss impact of each qualitative factor to a particular loan class at the date of the analysis. To determine the amount of allowance for credit losses, the Bank uses the current year’s loss data and the previous four years of loss data for each homogenous portfolio on a non-weighted basis. The current year’s data is annualized to a twelve-month basis to determine a loss percentage. The average for each portfolio’s historical losses are then adjusted by six qualitative factors applied to each of the loan classes. The historical loss analysis is performed quarterly and loss factors are updated monthly based on actual experience.

Reserve for Unfunded Commitments

The Company maintains a separate allowance for losses on unfunded loan commitments, which is included in accrued expenses and other liabilities on the consolidated statements of financial condition. The reserve for unfunded commitments (off-balance sheet financial instruments) is established through a provision for losses — unfunded commitments, the changes of which are recorded in noninterest expense. The reserve for unfunded commitments is an amount that management believes will be adequate to absorb probable losses inherent in existing commitments, including unused portions of revolving lines of credit and other loans, standby letters of credit, and unused deposit account overdraft privileges. The reserve for unfunded commitments is based on evaluations of the collectability, and prior loss experience of unfunded commitments. The evaluations take into consideration such factors as changes in the nature and size of the loan portfolio, overall loan portfolio quality, loan concentrations, specific problem loans and related unfunded commitments, and current economic conditions that may affect the borrower’s or depositor’s ability to pay.

Other Real Estate Owned

Other real estate owned ("OREO") represents real estate acquired in partial or total satisfaction of debts previously contracted with the Company, generally through the foreclosure of loans. These properties are initially recorded at the net realizable value (fair value of collateral less estimated costs to sell). Upon transfer of a loan to OREO, an appraisal is obtained and any excess of the loan balance over the net realizable value is charged against the allowance for loan losses. Subsequent declines in net realizable value identified from the ongoing analysis of such properties as well as gains and losses realized from the sale of OREO are recognized in current period earnings within noninterest expense as foreclosed property expense. The net realizable value of these assets is reviewed and updated as circumstances warrant. Loans transferred to OREO through foreclosure proceedings totaled $575,000 for the year ended December 31, 2020. There were no loans transferred to OREO for the year ended December 31, 2020.

Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation and depreciated over the estimated useful life of the related asset or the term of the lease using the straight-line method. Expenditures for improvements that extend the life of an asset are capitalized and depreciated over the asset’s remaining useful life. Gains or losses realized on the disposition of premises and equipment are reflected in the consolidated statements of income. Expenditures for repairs and maintenance are charged to occupancy and equipment expense as incurred. Computer software is recorded at cost and amortized over three to five years. Management periodically evaluates the carrying value of long-lived assets and certain identifiable intangibles, including goodwill, furniture and equipment and leasehold improvements for impairment.

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Income Taxes

Our income tax expense, and deferred tax assets and liabilities reflect management’s best assessment of estimated current and future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes and are reflected as discrete tax items in the Company’s tax provision.

The Company records net deferred tax assets to the extent it is believed that these assets will more likely than not be realized. In making this determination, the Company considers all available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent financial operations. A tax position that meets the more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority.

The Company files a consolidated federal income tax return and separate company state tax returns.

For a more detailed description of income taxes see Note 9, Income Taxes of the Notes to Consolidated Financial Statements.

Interest Rate Swap Agreements

For asset/liability management purposes, the Company periodically uses interest rate swap agreements to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. All interest rate swap agreements are recorded at fair value. The Company records cash flow hedges at the inception of the derivative contract based on the Company’s intentions and belief as to its likelihood of effectiveness as a hedge. Cash flow hedges represent a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. The changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

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When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Fair Value Measurement

The term "fair value" is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company’s approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The degree of management judgment involved in estimating the fair value of a financial instrument or other asset is dependent upon the availability of quoted market prices or observable market value inputs for internal valuation models used for estimating fair value. For financial instruments that are actively traded in the marketplace or whose values are based on readily available market data, little judgment is necessary when estimating the instrument’s fair value. When observable market prices and data are not readily available, significant management judgment often is necessary to estimate fair value. In those cases, different assumptions could result in significant changes in valuation. See Note 17, Fair Value Measurement.

Cash and Cash Equivalents

The Bank has included cash and due from banks, interest-bearing deposits in other financial institutions, and federal funds sold as cash and cash equivalents for the purpose of reporting cash flows. The carrying value of cash and cash equivalents approximates its fair value due to its short-term nature.

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).

Advertising Expense

Advertising costs, which we consider to be media and marketing materials, are expensed as incurred. We incurred $0.1 million in advertising expense during the years ended December 31, 2020 and 2019.

Bank Owned Life Insurance

The Company has purchased bank owned life insurance policies on certain current and former employees as a means to generate tax-exempt income which is used to offset a portion of current and future employee benefit costs. Bank owned life insurance is recorded at the cash surrender value of the policies. Changes in the cash surrender value are included in noninterest income.

Other Comprehensive Income (Loss)

The Company records unrealized gains and losses on available for sale securities and cash flow hedges in accumulated other comprehensive income, net of taxes. Unrealized gains and losses on available for sale securities and cash flow hedges are reclassified into earnings as the gains or losses are realized upon sale of the securities and determination of the ineffective portion of the hedge. The credit component of unrealized losses on available for sale securities that are determined to be other-than-temporary impaired are reclassified into earnings at the time the determination is made.

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Recent Accounting Pronouncements and Developments

ASU 2016‑02, “Leases (Topic 842).” In February 2016, the FASB issued ASU No. 2016-02. This guidance provides that lessees will be required to recognize the following for all operating leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The Company adopted the provisions of ASU No. 2016-02 on January 1, 2019 and elected several practical expedients made available by the FASB. Specifically, the Company elected the transition practical expedient to not recast comparative periods upon the adoption of the new guidance. In addition, the Company elected the package of practical expedients which among other things, requires no reassessment of whether existing contracts are or contain leases as well as no reassessment of lease classification for existing leases and the practical expedient which permits the Company to not separate nonlease components from lease components in determining the consideration in the lease agreement when the Company is a lessee and a lessor. The Company identified the primary lease agreements in scope of this new guidance as those relating to branch premises. As a result, the Company recognized a lease liability of $0.7 million and a related right-of-use asset of $0.7 million on its consolidated balance sheet on January 1, 2019.

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. Based on our fourth quarter parallel run, review of the portfolio, including the composition, characteristics and quality of the underlying loans, and the prevailing economic conditions and forecasts as of the adoption date, we believe that adoption of ASU 2016-13 will result in a material increase of approximately 107% to our allowance for credit losses. This is consistent with our expectations given that our current portfolio is of shorter duration and commercially focused.

ASU 2017‑08, “Receivables – Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities.” ASU 2017‑08 shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017‑08 was effective for interim and annual reporting periods beginning after December 15, 2018. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ASU 2017-08 was effective for the Company on January 1, 2019 and did not have a significant impact on our financial statements.

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

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

ASU No. 2018-13, “Fair Value Measurement (Topic 820).” ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

In August, 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20).” ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

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

ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” was issued in April 2019 by the FASB. With respect to Topic 815, Derivatives and Hedging, ASU 2019-04 clarifies that the reclassification of a debt security from held-to-maturity (“HTM”) to available-for-sale (“AFS”) under the transition guidance in ASU 2017-12 would not (1) call into question the classification of other HTM securities, (2) be required to actually designate any reclassified security in a last-of-layer hedge, or (3) be restricted from selling any reclassified security. As part of the transition of ASU 2019-04, entities may reclassify securities that would qualify for designation as the hedged item in a last-of-layer hedging relationship from HTM to AFS; however, entities that already made such a reclassification upon their adoption of ASU 2017-12 are precluded from reclassifying additional securities. All of the Company’s securities were AFS at December 31, 2019.

ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief” was issued on May 15, 2019. The ASU amends the transition guidance in the new credit losses standard, ASC 326, Financial Instruments—Credit Losses. The amendment provides entities with an option upon adoption of ASC 326-20, to irrevocably elect the fair value option for certain financial instruments that are both: (a) within the scope of ASC 326-20 (the current expected credit loss or “CECL” model) and (b) eligible for the fair value option in ASC 825-10, Financial

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Instruments—Overall. This election should be applied on an instrument-by-instrument basis for eligible financial assets. The fair value option election is not applicable to debt securities classified as available for sale or held to maturity. In addition, the amendment does not provide the option to discontinue or “unelect” the fair value option on instruments when an entity previously elected to apply it. If the fair value option is elected, an entity would recognize the difference between the carrying amount and the fair value of the financial instrument as part of the cumulative effect adjustment associated with the adoption of ASC 326. Subsequently, the financial instrument would be measured at fair value with changes in fair value reported in current earnings. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is continuing to evaluate the extent of the potential impact upon adoption to the Company’s financial statements

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

ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force).” In January 2020, the FASB issued ASU 2020-01, which clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company does not expect adoption to have a material impact on the consolidated financial statements.

ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

ASU No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs.” The amendments in this update clarify the guidance for the reevaluation of whether a callable debt security’s amortized cost basis exceeds the amount repayable by the issuer at the next call date. The amendments in this update are effective beginning after December 15, 2020. The adoption of these amendments will not have a material effect on our consolidated financial statements.

ASU No. 2020-10, “Codification Improvements.” The ASU improves reporting consistency by amending the Codification to include all disclosure guidance in the appropriate disclosure sections. It clarifies the application of various provisions in the Codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. The amendments are effective for annual periods beginning after December 15, 2020, and early application is permitted. The Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.

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Note 2. Restrictions on Cash and Amounts Due from Banks

At the beginning of the year the Bank was required to maintain cash balances on hand or with the Federal Reserve Bank based on average deposit liabilities. On March 26, 2020 the Board of Governors of the Federal Reserve System set the reserve requirement ratios to zero percent and reserve requirements were no longer administered. On December 22, 2020 the zero percent reserve requirement ratio was extended for three years. At December 31, 2020 and 2019, the average reserve balances were $0.4 million and $1.5 million, respectively.

Note 3. Investment Securities

A summary of the amortized cost and market value of securities available for sale at December 31, 2020 and 2019 is as follows:


	At December 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value

Collaterized mortgage obligations	$	24,261	$	396	$	(14)	$	24,643
Agency mortgage-backed securities		26,072		886		(10)		26,948
Municipal securities		28,675		740		(2)		29,413
U.S. Government agency securities		33,346		9		(310)		33,045
U.S. Treasury securities		—		—		—		—

Total securities available for sale	$	112,354	$	2,031	$	(336)	$	114,049


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

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

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

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The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2020 and 2019:


	At December 31, 2020
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Loss		Value		Loss		Value		Loss

Collaterized mortgage obligations	$	201	$	—	$	1,188	$	(14)	$	1,389	$	(14)
Agency mortgage-backed securities		—		—		566		(10)		566		(10)
Municipal securities		851		(2)		—		—		851		(2)
U.S. Government agency securities		24,160		(308)		481		(2)		24,641		(310)

	$	25,212	$	(310)	$	2,235	$	(26)	$	27,447	$	(336)


	At December 31, 2019
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Loss		Value		Loss		Value		Loss

Collaterized mortgage obligations	$	11,792	$	(65)	$	7,330	$	(122)	$	19,122	$	(187)
Agency mortgage-backed securities		4,577		(20)		10,918		(115)		15,495		(135)
Municipal securities		1,806		(7)		864		(10)		2,670		(17)
U.S. Government agency securities		591		(5)		—		—		591		(5)

	$	18,766	$	(97)	$	19,112	$	(247)	$	37,878	$	(344)

At December 31, 2020 and 2019, the Company did not have any securities that had impairment charges.

The Company's investment securities portfolio consists primarily of debt securities issued by U.S. Government agencies, U.S. Government-sponsored agencies, state governments and local municipalities. There were no private label mortgage-backed securities ("MBS") or collateralized mortgage obligations ("CMO") held in the investment securities portfolio as of December 31, 2020 and December 31, 2019.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in shareholders' equity as a component of accumulated other comprehensive income or loss, net of tax. An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis.

The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An other-than-temporary impairment ("OTTI") loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified as available for sale.

The Company held forty-two U.S. Government agency, four collateralized mortgage obligations, and two agency mortgage-backed securities that were in an unrealized loss position at December 31, 2020. Principal and

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interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of December 31, 2020.

All municipal securities held in the investment portfolio are reviewed on at least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody's or Standard & Poor's. In addition the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Maryland and Texas and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At December 31, 2020, the investment portfolio included one municipal securities that was in an unrealized loss position. Management believes the unrealized losses were the result of movements in long-term interest rates and are not reflective of any credit deterioration.

At December 31, 2020 and 2019, investment securities in the amount of approximately $0.9 and $0.8 million, respectively were pledged as collateral for interest rate swap contracts.

Unrealized losses on securities in the investment portfolio amounted to $0.3 million with a total fair value of $27.4 million as of December 31, 2020 compared to unrealized losses of $0.3 million with a total fair value of $37.9 million as of December 31, 2019. The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in a particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.

In 2018, the Board of Directors at Maryland Financial Bank (“MFB”) determined that it was advisable and in the best interests of stockholders to undertake the liquidation and dissolution of MFB. In 2018, the Bank recognized an impairment loss of $25,000 on the 5,000 shares of MFB stock that it owned. On July 16, 2019, all remaining assets and liabilities of MFB were transferred to the MFB Dissolution Trust (the “Trust”). The purpose of the Trust is to liquidate the remaining assets, resolve the remaining liabilities, and to distribute the net proceeds. The Trust is intended to be a "liquidating trust" for U.S. federal income tax purposes. At December 31, 2019, the Trust was unable to complete all its activities and make cash liquidating distributions to its stockholders due to the bankruptcy of a borrower that has a commercial real estate loan. In 2019, the Bank reduced its investment in the Trust to the projected value of $0.53 per share and decreased the value of its Trust units from $5,000 to $2,650, a $2,350 decrease in value.

The following table presents investment securities by stated maturity at December 31, 2020. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties and, therefore, these securities are classified separately with no specific maturity date.


	At December 31, 2020
	Amortized		Fair
(dollars in thousands)	Cost		Value



Due within one year	$	456	$	461
Due over one to five years		1,380		1,409
Due over five to ten years		483		481
Due over ten years		59,702		60,107
Collaterized mortgage obligations		24,261		24,643
Agency mortgage-backed securities		26,072		26,948

Total securities available for sale	$	112,354	$	114,049

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Proceeds from sales of available for sale securities prior to maturity totaled $21.4 million for the year ended December 31, 2019. No investment securities were sold in 2020. The Bank realized net gains of $6,000 and $3,000 for the years ended December 31, 2020 and 2019, respectively. Realized gains and losses were calculated based on the amortized cost of the securities at the date of trade.

Note 4. Loans and Allowance for Loan Losses

The following table sets forth the Company's gross loans by major categories as of December 31, 2020 and 2019:


	December 31,
(dollars in thousands)	2020		2019

Consumer	$	11,548	$	12,076
Residential real estate		75,653		81,033
Indirect		74,644		102,384
Commercial		14,121		11,907
Commercial SBA PPP		9,912		—
Construction		900		3,317
Commercial real estate		66,994		74,021
Total loans receivable		253,772		284,738
Allowance for loan losses		(1,476)		(2,066)
Net loans receivable	$	252,296	$	282,672

The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for loan losses and monitoring and assessing credit quality.

The Company's loan groups include consumer, residential real estate, indirect automobile, commercial, commercial SBA PPP, construction and commercial real estate. The Bank has an automotive indirect lending program where vehicle collateralized loans made by dealers to consumers are acquired by the Bank. The Bank’s indirect loan group included $74.6 million and $102.4 million of such loans at December 31, 2020 and 2019, respectively. The Commercial Small Business Administration (SBA) Paycheck Protection Program (PPP) loan balance was $9.9 million at December 31, 2020. This new loan type is discussed in “Note 1. Nature of Business.”

The Bank makes loans to customers located primarily in Anne Arundel County and surrounding areas of Central Maryland. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.

Included in loans are loans due from directors, executive officers and other related parties of $0.3 million at December 31, 2020, and $0.4 million at December 31, 2019. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with unrelated borrowers. The Board of Directors approves loans to directors, executive officers and other related parties to confirm that collateral requirements, terms and rates are comparable to other borrowers and are in compliance with underwriting policies. The following presents the activity in amount due from directors and other related parties for the years ended December 31, 2020 and 2019.

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	December 31,
(dollars in thousands)	2020		2019

Balance at beginning of year	$	371	$	504
Additions		368		582
Repayments		(463)		(715)
Balance at end of year	$	276	$	371

Allowance for Loan Losses

To control and monitor credit risk, management has an internal credit process in place to determine whether credit standards are maintained along with in-house loan administration accompanied by oversight and review procedures. Oversight and review procedures include the monitoring of the portfolio credit quality, early identification of potential problem credits and the management of problem credits. As part of the oversight and review process, the Company maintains an allowance for loan losses to absorb estimated and probable losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented the loan portfolio into the following classifications:

●

Consumer

●

Residential Real Estate

●

Indirect

●

Commercial

●

Construction

●

Commercial Real Estate

A provision was not recognized for the Commercial SBA PPP loans as these loans are 100% guaranteed by the SBA.

The analysis for determining the allowance is consistent with guidance set forth in GAAP and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. Pursuant to Bank policy, the allowance is evaluated quarterly by management and is based upon management's review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral and prevailing economic conditions. Each loan segment is reviewed and analyzed using the average historical charge-offs over the current and preceding four-year periods for their respective segments as well as the following qualitative factors:

●

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

●

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

●

Concentration of credit including the percentage, changes, and relative to goals.

●

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

●

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

●

Changes in the charge offs and recoveries adjusted for rate and direction.

The allowance consists of specific and general reserves. The specific reserves relate to loans classified as impaired, primarily including nonaccrual and troubled debt restructurings (“TDRs”). The reserve for these loans is established when the discounted cash flows, collateral value, or observable market price, whichever is appropriate, of the

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impaired loan is lower than the carrying value. For impaired loans, any measured impairment is charged off against the loan and allowance for those loans that are collateral dependent in the applicable reporting period.

The general reserve covers loans that are not classified as impaired and primarily includes new loan originations. The general reserve requirement is based on historical loss experience and the qualitative factors noted above that have been determined to have an effect on the probability and magnitude of a loss.

The following table presents the total allowance by loan segment:



December 31, 2020			Residential						Commercial				Commercial
(dollars in thousands)	Consumer		Real Estate		Indirect		Commercial		SBA PPP		Construction		Real Estate		Total

Balance, beginning of year	$	122	$	589	$	917	$	38	$	—	$	11	$	389	$	2,066
Charge-offs		—		—		(392)		—		—		—		—		(392)
Recoveries		9		266		196		20		—		—		—		491
Provision for loan losses		(8)		(424)		(147)		34		—		(8)		(136)		(689)

Balance, end of year	$	123	$	431	$	574	$	92	$	—	$	3	$	253	$	1,476

Individually evaluated for impairment:
Balance in allowance	$	11	$	—	$	—	$	—	$	—	$	—	$	—	$	11
Related loan balance		39		132		—		—		—		—		4,493		4,664

Collectively evaluated for impairment:
Balance in allowance	$	112	$	431	$	574	$	92	$	—	$	3	$	253	$	1,465
Related loan balance		11,509		75,521		74,644		14,121		9,912		900		62,501		249,108



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

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

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

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

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

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

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The following table rolls forward the Company’s activity for nonaccrual loans during the years 2020 and 2019:




		Residential			Commercial
	Consumer	Real Estate	Indirect	Commercial	Real Estate	Totals
(dollars in thousands)
December 31, 2018	186	956	116	27	662	1,947
Transfers into nonaccrual	135	571	702	86	2,746	4,240
Loans paid down/payoffs	(55)	(782)	(76)	(86)	(269)	(1,268)
Loans returned to accrual status	(88)	—	(133)	—	—	(221)
Loans charged off	(41)	(17)	(486)	(27)	—	(571)

December 31, 2019	137	728	123	—	3,139	4,127
Transfers into nonaccrual	64	—	551	—	1,619	2,234
Loans paid down/payoffs	(67)	(557)	(104)	—	(152)	(880)
Loans returned to accrual status	—	—	(17)	—	(577)	(594)
Loans charged off	—	—	(375)	—	—	(375)

December 31, 2020	134	171	178	—	4,029	4,512

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. Loans rated a 5 (Special Mention) are pass credits, but are loans that have been identified that warrant additional attention and monitoring and represent “criticized” assets. Loans rated a 6 (Substandard) or higher are considered “criticized” loans and represent an increased level of credit risk. The use and application of these risk ratings by the Bank conform to the Bank's policy and regulatory definitions.

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.

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

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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.

In the normal course of loan portfolio management, loan originators are responsible for continuous assessment of credit risk arising from the individual borrowers within their portfolio and assigning appropriate risk ratings. Credit Administration is responsible for ensuring the integrity and operation of the risk rating system and maintenance of the watch list. The Bank contracts with an independent 3^rd party loan review firm that reviews and validates the internal credit risk program on an annual basis. Results of these reviews are presented to the Audit Committee for approval and then to management for implementation. The loan review process compliments and reinforces the risk identification and assessment decisions made by the lenders and credit personnel as well as the Bank’s policies and procedures.

The following table provides information with respect to the Company's risk ratings by loan portfolio segment:



December 31, 2020			Residential						Commercial				Commercial
(dollars in thousands)	Consumer		Real Estate		Indirect		Commercial		SBA PPP		Construction		Real Estate			Total

Pass	$	11,475	$	75,482	$	74,467	$	14,121	$	9,912	$	900	$	62,501	$	248,857
Special mention		—		—		—		—		—		—		—		—
Substandard		73		171		61		—		—		—		4,493		4,798
Doubtful		—		—		116		—		—		—		—		116
Loss		—		—		—		—		—		—		—		—

	$	11,548	$	75,653	$	74,644	$	14,121	$	9,912	$	900	$	66,994	$	253,772

Nonaccrual		134		171		178		—				—		4,029		4,512
Troubled debt restructures		39		—		—		—		—		—		—		39
Number of TDRs accounts		1		—		—		—		—		—		—		1
Non-performing TDRs		39		—		—		—		—		—		—		39
Number of non-performing TDR accounts		1		—		—		—		—		—		—		1

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

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

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

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

Troubled Debt Restructurings

The restructuring of a loan constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction of interest rate or the forgiveness of principal and/or accrued interest. If the debtor is experiencing financial difficulty and the creditor has granted a concession, the Company will make the necessary disclosures related to the TDR. In certain cases, a modification may be made in an effort to retain a customer who is not experiencing financial difficulty. This type of modification is not considered to be a TDR. Once a loan has been modified and is considered a TDR, it is reported as an impaired loan. All TDRs are evaluated individually for impairment on a quarterly basis as part of the allowance for credit losses calculation. A specific allowance for TDR loans is established when the discounted cash flows, collateral value or observable market price, whichever is appropriate, of the TDR is lower than the carrying value. If a loan deemed a TDR has performed for at least six months at the level prescribed by the modification, it is not considered to be non-performing; however, it will generally continue to be reported as impaired, but may be returned to accrual status. A TDR is deemed in default on its modified terms once a contractual payment is 30 or more days past due.

There were no new loans modified as TDRs for the years ended December 31, 2020 and 2019.

At December 31, 2020, the recorded investment in TDR’s reflected one loan in the amount of $38,711 which is on nonaccrual. At December 31, 2019, the recorded investment in TDR’s reflected one loan in the amount of $40,951 which was on nonaccrual.

The Bank has no commitments to loan additional funds to the borrowers of restructured, impaired, or nonaccrual loans.

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Asset Quality

The following table presents the loan portfolio segments summarized by aging categories of performing loans and nonaccrual loans as of December 31, 2020 and 2019:

		n
					90 Days or
			30-89 Days		More and
December 31, 2020	Current		Past Due		Still Accruing		Nonaccrual		Total
(dollars in thousands)
Consumer	$	11,414	$	—	$	—	$	134	$	11,548
Residential Real Estate		73,715		1,749		18		171		75,653
Indirect		74,014		452		—		178		74,644
Commercial		14,121		—		—		—		14,121
Commercial SBA PPP		9,912		—		—		—		9,912
Construction		900		—		—		—		900
Commercial Real Estate		62,965		—		—		4,029		66,994

	$	247,040	$	2,201	$	18	$	4,512	$	253,772


					90 Days or
			30-89 Days		More and
December 31, 2019	Current		Past Due		Still Accruing		Nonaccrual		Total
(dollars in thousands)
Consumer	$	11,865	$	74	$	—	$	137	$	12,076
Residential Real Estate		80,192		92		21		728		81,033
Indirect		101,605		656		—		123		102,384
Commercial		11,907		—		—		—		11,907
Commercial SBA PPP		—		—		—		—		—
Construction		3,317		—		—		—		3,317
Commercial Real Estate		70,882		—		—		3,139		74,021

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

Loans on which the accrual of interest has been discontinued totaled $4.5 million and $4.1 million at December 31, 2020 and 2019, respectively. The Bank recognizes interest income on non-accrual loans using a cash basis method for the time they are on non-accrual. Interest income that was recognized on these non-accrual loans totaled $0.2 million and $0.1 million for the years ended December 31, 2020 and 2019. Loans past due 90 days or more and still accruing interest totaled $18,000, and $21,000 at December 31, 2020 and 2019, respectively. Management believes these particular loans are well secured and in the process of full collection of all amounts owed.

Nonaccrual loans with specific reserves at December 31, 2020 are comprised of:

Consumer – One loan to in the amount of $38,711 with $10,710 of specific reserves established for the loans.

Impaired Loans

The following table presents information with respect to impaired loans. Management determined the specific reserve in the allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less estimated selling costs is used to determine the specific allowance recorded.

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			Unpaid		Interest				Average
December 31, 2020	Recorded		Principal		Income		Specific		Recorded
(dollars in thousands)	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Consumer	$	28	$	39	$	2	$	11	$	50
Residential Real Estate		—		—		—		—		—
Indirect		—		—		—		—		—
Commercial		—		—		—		—		—
Construction		—		—		—		—		—
Commercial Real Estate		—		—		—		—		—
Total impaired loans with specific reserves	$	28	$	39	$	2	$	11	$	50

Impaired loans with no specific reserve:
Consumer	$	34	$	34	$	4		n/a	$	44
Residential Real Estate		171		322		—		n/a		544
Indirect		178		178		10		n/a		226
Commercial		—		—		—		n/a		—
Construction		—		—		—		n/a		—
Commercial Real Estate		4,493		4,493		185		n/a		4,315
Total impaired loans with no specific reserve	$	4,876	$	5,027	$	199		—	$	5,129


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

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

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Note 5. Premises and Equipment

A summary of premises and equipment is as follows:


	Useful	December 31,
	lives	2020		2019

(dollars in thousands)

Land		$	685	$	685
Buildings	5-50 years		6,672		6,555
Equipment and fixtures	5-30 years		8,055		7,596
Construction in progress			99		103
Operating Lease Assets			623		745
			16,134		15,684
Accumulated depreciation			(12,281)		(11,923)

		$	3,853	$	3,761

Depreciation expense totaled $0.3 million for the years ended December 31, 2020 and 2019. Amortization of software totaled $0.1 million for the years ended December 31, 2020 and 2019.

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 Bank leases its Severna Park and Linthicum branches. Minimum lease obligations under the Severna Park branch are $33,000 per year through September 2021. Minimum lease obligations under the Linthicum branch are $144,424 per year through December 2024, adjusted annually on a pre-determined basis. The Bank is also required to pay all maintenance costs under all these leasing arrangements. Income from rent totaled $65,383 and $45,082 and rent expense totaled $173,593 and $165,459 for the years ended December 31, 2020 and 2019, respectively. The Bank 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 December 31, 2020 are as follows:


Year ending December 31,	Amount
	(dollars in thousands)
2021	$	185
2022		153
2023		156
2024		161
2025		3
Thereafter		2
Total	$	660

Note 6. Federal Home Loan Bank and Short-term Borrowings

The Bank owned 11,965 shares of common stock of the FHLB at December 31, 2020. The Bank is required to maintain an investment of 0.09% of total assets with a dollar cap of $15.0 million, adjusted annually, plus 4.25% of total advances, adjusted for advances and repayments. The credit available under this facility is determined at 25% of the Bank’s total assets, or approximately $107.7 million at December 31, 2020. Short-term advances totaled $20.0 million under this credit arrangement at December 31, 2020. This credit facility is secured by a floating lien on the Bank’s

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residential mortgage loan portfolio. Average short-term borrowings approximated $24.3 million and $25.6 million for 2020 and 2019, respectively and the weighted average interest rate was 1.94% and 2.26%, respectively.

The Federal Home Loan Bank of Atlanta, convertible and adjustable advances total include the following:

A $5.0 million adjustable rate advance issued in 2020, which has a final maturity of December 27, 2021. This advance has a 0.39% interest rate at December 31, 2020, with interest payable quarterly. The proceeds of the adjustable rate advance were used to fund loans.

A $5.0 million adjustable rate advance issued in 2020, which has a final maturity of December 24, 2021. This advance has a 0.34% interest rate at December 31, 2020, with interest payable quarterly. The proceeds of the adjustable rate advance were used to fund loans.

A $10.0 million adjustable rate advance issued in 2020, which has a final maturity of December 31, 2021. This advance had a 0.34% interest rate at December 31, 2020, with interest payable quarterly. The proceeds of the adjustable advance were used to fund loans.

At December 31, 2020 the Bank borrowed $9.9 million at a fixed rate of 0.35% under the Federal Reserve’s Discount Window PPPLF program. The Bank also had available unsecured federal funds lines of credit from two financial institutions for $9.0 million and $8.0 million, and a Discount Window line of credit at the Federal Reserve Bank of Richmond in the amount of $10.6 million at December 31, 2020.

Derivatives

During the fourth quarter of 2017, the Company entered into interest rate swaps to manage interest rate risk. These derivative contract involves the receipt of floating rate interest from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. These instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. The change in the fair value of this hedging instrument is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.

For derivative financial instruments accounted for as hedging instruments, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which the effectiveness of the hedge will be assessed. We formally assess both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in cash flows of the related underlying exposures. Any ineffective portion of the changes in cash flow of the instruments is recognized immediately into earnings.

ASC 815-10, Derivatives and Hedging (“ASC 815”) requires companies to recognize all derivative instruments as assets or liabilities at fair value in the consolidated balance sheets. In accordance with ASC 815, we designated our interest rate swaps as cash flow hedges of certain active and forecasted variable rate FHLB advances. Changes in the fair value of the hedging instrument, except any ineffective portion, were recorded in accumulated other comprehensive income (loss) until earnings were impacted by the hedged instrument. No components of our hedging instruments were excluded from the assessment of hedge effectiveness in hedging exposure to variability in cash flows.

Classification of the gain or loss in the consolidated statements of income upon release from accumulated other comprehensive income (loss) is the same as that of the underlying exposure. We discontinue the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. When we discontinue hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, or within an additional two-month period thereafter, changes to fair value that were recorded in accumulated other comprehensive income (loss) are recognized immediately in earnings.

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As of December 31, 2020, the Company had three outstanding interest rate swaps designated as a cash flow hedges with an aggregate notional value of $20.0 million. The agreements have five year terms and stipulates that the counterparty will pay the Company interest at three-month LIBOR and the Company will pay fixed rates of interest at 2.105%, 2.235% and 2.246% on the $10.0 million, $5.0 million and $5.0 million notional amounts, respectively. These interest rate swaps of $10.0 million, $5.0 million and $5.0 million mature on October 2022, July 2023, and August 2023, respectively, and hedge three-month FHLB advances that will be renewed every year at the LIBOR interest rate at that time. The $10.0 million contract is an interest rate swap that became effective in November 2020 and the two $5.0 million contracts are interest rate swaps that became effective in July 2020 and August 2020. After-tax unrealized losses of $281,000, $204,000 and $204,000 were recognized in accumulated other comprehensive income for the year ended December 31, 2020 and unrealized losses of $94,000, $75,000 and $77,000 were recognized in accumulated other comprehensive income for the year ended December 31, 2019. There was no ineffective portion of these hedges. The Company pays or receives the net interest amount quarterly and includes this amount as part of FHLB advances interest expense on the consolidated income statements.

The cash flow hedges were determined to be fully effective during all periods presented. As such, no ineffectiveness has been included in net income.

The following table reflects information about swaps designated as cash flow hedges as of December 31, 2020 and 2019:


							At December 31,
							2020				2019
									Unrealized				Unrealized
	Notional		Pay		Receive		Assets/		Loss		Assets/		Loss
(dollars in thousands)	Amount		Rate		Rate	Term	Liabilities		AOCI		Liabilities		AOCI

Interest rate swap on FHLB advance	$	10,000	2.105	%	3M LIBOR	11/2017 - 10/2022	$	(387)	$	(281)	$	(129)	$	(94)

Interest rate swap on FHLB advance		5,000	2.235	%	3M LIBOR	7/2018 - 7/2023		(281)		(204)		(102)		(75)

Interest rate swap on FHLB advance		5,000	2.246	%	3M LIBOR	8/2018 - 8/2023		(281)		(204)		(105)		(77)

Total	$	20,000					$	(949)	$	(689)	$	(336)	$	(246)

The following table reflects the total interest expense recorded on these swap transactions in the consolidated statements of income during the year ended December 31, 2020 and the interest income recorded during the year ended December 31, 2019:


		Years Ended December 31,
(dollars in thousands)	Bank Position	2020		2019

Interest rate swap on FHLB advance	Pay fixed/receive variable	$	(113)	$	28

Interest rate swap on FHLB advance	Pay fixed/receive variable		(63)		9

Interest rate swap on FHLB advance	Pay fixed/receive variable		(65)		11

Total		$	(241)	$	48

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The Bank is required to pledge securities as collateral for all swaps with dealer counterparties. The fair value of cash or investment securities pledged as collateral by the Bank totaled $949,000 and $750,000 at and December 31, 2020 and 2019.

Note 7. Long-term Borrowings

The Bank had no long-term borrowings at December 31, 2020 and 2019.

Note 8. Deposits

The following table summarizes the major classifications of deposit balances as of the dates indicated:


	December 31,
	2020		2019

(dollars in thousands)
Noninterest-bearing deposits	$	132,626	$	107,158

Interest-bearing deposits:
Interest-bearing checking		32,601		32,171
Money Market		19,077		17,253
Savings		97,036		82,845
Time deposits, $100,000 or more		28,270		34,736
Time deposits below $100,000		40,010		47,277
Total interest- bearing deposits		216,994		214,282

Total Deposits	$	349,620	$	321,440

Interest expense on deposits for the years ended December 31, 2020 and 2019 is as follows:


	2020		2019

(dollars in thousands)
Interest-bearing checking	$	9	$	8
Money Market		9		10
Savings		60		57
Time deposits, $100,000 or more		440		622
Time deposits below $100,000		525		652
Total Interest Expense	$	1,043	$	1,349

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The Bank recognized $0.2 million and $0.3 million of fee income from deposits for the years ended December 31, 2020 and 2019.

At December 31, 2020, the scheduled maturities of time deposits are approximately as follows:


(dollars in thousands)	Amount
Maturing in:
2021	$	37,252
2022		10,722
2023		5,743
2024		9,039
2025		4,172
2026 and thereafter		1,352
Total Time Deposits	$	68,280

Deposit balances of executive officers and directors and their affiliated interests totaled approximately $2.8 million and $1.6 million at December 31, 2020 and 2019, respectively.

The Bank had no brokered deposits at December 31, 2020 and 2019.

Note 9. Income Taxes

The components of income tax expense are as follows for the years ended December 31, 2020 and 2019:


	2020		2019

(dollars in thousands)
Current income tax expense:
Federal	$	89	$	—
State		157		119

Total current tax expense		246		119

Deferred income tax expense:
Federal		217		291
State		28		42

Total deferred tax expense		245		333

Total Income tax expense	$	491	$	452

A reconciliation of income tax expense computed at the statutory rate of 21% at December 31, 2020 and December 31, 2019 to the actual income tax expense for the years ended December 31, 2020 and 2019 is as follows:


	2020		2019

(dollars in thousands)
Income tax expense at federal statutory rate	$	453	$	431
(Decrease) increase resulting from:
Tax-exempt income		(75)		(72)
Bank owned life insurance		(33)		(34)
State income taxes, net of Federal income tax benefit		146		127
Other		—		—
Total income tax expense	$	491	$	452

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Deferred tax assets and liabilities resulting from the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes at December 31, 2020 and 2019 are as follows:


	2020		2019

(dollars in thousands)
Deferred income tax benefits:
Accrued deferred compensation	$	78	$	87
Allowance for credit losses		143		243
Net operating loss carryforward credits		—		153
Accumulated depreciation		(16)		(13)
Other real estate owned		36		—
Reserve for unfunded commitments		9		10
Accounting standard 310-20		(117)		(103)
Right of use asset		(171)		(205)
Lease liability		171		205
Accumulated securities premium accretion		214		215
Net unrealized depreciation on investment securities available for sale		(466)		—
Net unrealized loss on Swaps		261		80

Net deferred income tax benefits	$	142	$	672

Management has determined that no valuation allowance is required as it believes it is more likely than not that all of the deferred tax assets will be fully realizable in the future. At December 31, 2020 and 2019, management believes there are no uncertain tax positions under ASC Topic 740 Income Taxes. We file income tax returns in the US federal jurisdictions. We are no longer subject to US federal income tax examinations by tax authorities for years before 2017.

Income tax expense was $0.49 million and $0.45 million at December 2020 and 2019, respectively.

Note 10. Pension and Profit Sharing Plans

The Bank has a defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue Code that is funded through a profit sharing agreement and voluntary employee contributions. Annual contributions, included in employee benefit expense, totaled $451,000 and $362,000 for the years ended December 31, 2020 and 2019, respectively.

Note 11. Other Benefit Plans

The Company is the owner and beneficiary of BOLI policies on certain current and former employees. Cash value totaled $8.2 million and $8.0 million at December 31, 2020 and 2019, respectively. Income on insurance investment totaled $0.2 for years ended 2020 and 2019.

The Bank has an unfunded grantor trust, as part of a change in control severance plan, covering substantially all employees. Participants in the plan are entitled to cash severance benefits upon termination of employment, for any reason other than just cause, should a “change in control” of the Company occur.

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Note 12. Other Noninterest Expenses

Other noninterest expenses include the following:


	Year Ended December 31,
	2020		2019
(dollars in thousands)
Loan related expenses	$	115	$	128
Other ATM expenses		77		168
Director, executive and audit committee fees and expenses		168		197
Postage, delivery and courier expenses		39		157
Stationery, printing and supplies		5		66
Office supplies expenses		54		70
Credit report fees		32		55
Dues and subscription fees		95		87
Examination and assessment fees		58		36
Federal Reserve and correspondent bank services		36		43
Foreclosed property expenses		147		65
Liability insurance		64		76
Other		332		367

Total Other Noninterest Expense	$	1,222	$	1,515

Note 13. Commitments and Contingencies

Financial instruments:

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Outstanding loan commitments, unused lines of credit and letters of credit are as follows:


	December 31,
	2020		2019
(dollars in thousands)
Loan commitments:
Other mortgage loans	$	2,229	$	2,816

Unused lines of credit:
Home-equity lines	$	8,672	$	7,825
Commercial lines		19,982		15,003
Unsecured consumer lines		678		654

	$	29,332	$	23,482

Letters of credit:	$	1,044	$	1,059

The Bank’s exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. As of December 31, 2020, the Bank has accrued $32,881 as a reserve for losses on unfunded commitments related to these financial instruments with off balance sheet risk, which is included in other liabilities.

Note 14. Stockholders’ Equity

Restrictions on Dividends

The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. Banking regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agencies. Regulatory approval is required to pay dividends that exceed the Bank’s net profits for the current year plus its retained net profits for the preceding two years.

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Retained earnings from which dividends may not be paid without prior approval totaled approximately $21.2 million at December 31, 2020 and $21.4 million at December 31, 2019 based on the earnings restrictions and minimum capital ratio requirements noted below.

The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any dividends by the subsidiary banks if the Federal Reserve determines such payment would constitute an unsafe or unsound practice.

Employee Stock Purchase Benefit Plans

The Company has a stock-based compensation plan, which is described below. There were no options issued or activity under this plan since August 2007.

Employees who have completed one year of service are eligible to participate in the employee stock purchase plan. The number of shares of common stock granted under options will bear a uniform relationship to compensation. The plan allows employees to buy stock under options granted at 85% of the fair market value of the stock on the date of grant. Options are vested when granted and will expire no later than 27 months from the grant date or upon termination of employment.

At December 31, 2020, shares of common stock reserved for issuance under the plan totaled 25,739.

The Board of Directors may suspend or discontinue the plan at its discretion.

Dividend Reinvestment and Stock Purchase Plan

The Company’s dividend reinvestment and stock purchase plan allows all participating stockholders the opportunity to receive additional shares of common stock in lieu of cash dividends at 95% of the fair market value on the dividend payment date.

During 2020 and 2019, shares of common stock purchased under the plan totaled 14,566 and 13,316, respectively. At December 31, 2020, shares of common stock reserved for issuance under the plan totaled 76,538.

The Board of Directors may suspend or discontinue the plan at its discretion.

Stockholder Purchase Plan

The Company’s stockholder purchase plan allows participating stockholders the option to purchase newly issued shares of common stock. The Board of Directors shall determine the number of shares that may be purchased pursuant to options. Options granted will expire no later than three months from the grant date. Each option will entitle the stockholder to purchase one share of common stock, and will be granted in proportion to stockholder share holdings. At the discretion of the Board of Directors, stockholders may be given the opportunity to purchase unsubscribed shares.

There was no activity under this plan since June 23, 2000.

At December 31, 2020, shares of common stock reserved for issuance under the plan totaled 183,348.

The Board of Directors may suspend or discontinue the plan at its discretion.

Under all three plans, options granted, exercised, and expired, shares issued and reserved, and grant prices have been restated for the effects of any stock dividends or stock splits.

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Regulatory Capital Requirements

The Bank’s primary regulator is the Federal Deposit Insurance Corporation (“FDIC”) and is subject to regulation, supervision and regular examination by the Maryland Commissioner of Financial Regulation (the “Commissioner”) and the FDIC. The Company is subject to regulation, examination and supervision by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the regulations of the Federal Reserve Board.

On January 1, 2015, the Bank became subject to the new Basel III Capital Rules with full compliance with all of the final rule's requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. However, the new Basel III Capital Rules do not apply to the Company since it is a small bank holding company with less than $1.0 billion in total consolidated assets. In July 2013, the final rules were published establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the previous U.S. risk-based 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 new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the 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%. A new capital conservation buffer is also established above the regulatory minimum capital requirements. This capital conservation buffer began its phase-in period beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. 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. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

The final 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.

As of December 31, 2020 and 2019, the Bank was well-capitalized under the regulatory framework for prompt corrective action under the new Basel III Capital Rules. Management believes, as of December 31, 2020 and 2019, that the Bank met all capital adequacy requirements to which they were subject. The following table presents actual and required capital ratios as of December 31, 2020 and 2019 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2020 and December 31, 2019 based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

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The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Management has determined that the Company’s risk-based capital ratios are not materiality different than the Bank’s and are not reflected in the table below.


									To Be Well Capitalized
					To Be Considered				Under Prompt Corrective
	Actual				Adequately Capitalized				Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2020
Common Equity Tier 1 Capital	$	36,442	13.09	%	$	12,532	4.50	%	$	18,101	6.50	%
Total Risk-Based Capital	$	37,951	13.63	%	$	22,278	8.00	%	$	27,848	10.00	%
Tier 1 Risk-Based Capital	$	36,442	13.09	%	$	16,709	6.00	%	$	22,278	8.00	%
Tier 1 Leverage	$	36,442	9.12	%	$	15,980	4.00	%	$	19,975	5.00	%


									To Be Well Capitalized
					To Be Considered				Under Prompt Corrective
	Actual				Adequately Capitalized				Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2019
Common Equity Tier 1 Capital	$	35,693	12.47	%	$	12,878	4.50	%	$	18,602	6.50	%
Total Risk-Based Capital	$	37,797	13.21	%	$	22,895	8.00	%	$	28,619	10.00	%
Tier 1 Risk-Based Capital	$	35,693	12.47	%	$	17,171	6.00	%	$	22,895	8.00	%
Tier 1 Leverage	$	35,693	9.26	%	$	15,414	4.00	%	$	19,268	5.00	%

Note 15. Earnings Per Common Share

The calculation of net income per common share for the years ended December 31, 2020 and 2019 are as follows:


	Year Ended
	December 31,
	2020		2019
Basic earnings per share:
Net income	$	1,667,741	$	1,598,632
Weighted average common shares outstanding		2,835,037		2,821,608
Basic net income per share	$	0.59	$	0.57

Diluted earnings per share calculations were not required for 2020 and 2019 as there were no options outstanding at December 31, 2020 and 2019.

Note 16. Fair Values of Financial Instruments

ASC Topic 825, Disclosure about Fair Value of Financial Instruments, requires the disclosure of the estimated fair values of financial instruments. Quoted market prices, where available, are shown as estimates of fair values. Because no quoted market prices are available for a significant part of the Company’s financial instruments, the fair values of such instruments have been derived based on the amount and timing of future cash flows and estimated discount rates.

Present value techniques used in estimating the fair value of the Company’s financial instruments are significantly affected by the assumptions used. Fair values derived from using present value techniques are not substantiated by comparisons to independent markets, and in many cases, could not be realized in immediate settlement of the instruments.

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ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following table presents the estimated fair value and the related carrying values of the Company’s financial instruments as December 31, 2020 and 2019. Items that are not financial instruments are not included.


	December 31, 2020				December 31, 2019
(dollars in thousands)	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	2,117	$	2,117	$	2,420	$	2,420
Interest-bearing deposits in other financial institutions		29,730		29,730		10,017		10,017
Federal funds sold		5,246		5,246		853		853
Investment securities available for sale		114,049		114,049		71,486		71,486
Investments in restricted stock		1,199		1,199		1,437		1,437
Ground rents		140		140		143		143
Loans, less allowance for credit losses		252,296		253,946		282,672		282,583
Accrued interest receivable		1,302		1,302		961		961
Cash value of life insurance		8,181		8,181		8,023		8,023

Financial liabilities:
Deposits		349,620		350,666		321,440		300,944
Short-term borrowings		29,912		29,935		25,000		25,386
Accrued interest payable		16		16		100		100
Unrecognized financial instruments:
Commitments to extend credit		31,561		31,561		26,297		26,297
Standby letters of credit		1,044		1,044		1,059		1,059

The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments.


(dollars in thousands)
	Carrying		Fair
December 31, 2020	Amount		Value		Level 1		Level 2	Level 3

Financial instruments - Assets
Cash and cash equivalents	$	37,093	$	37,093	$	37,093	—	$	—
Loans receivable, net		252,296		253,946		—	—		253,946
Cash value of life insurance		8,181		8,181		—	8,181		—
Financial instruments - Liabilities
Deposits		349,620		350,666		217,898	132,768		—
Short-term debt		29,912		29,935		—	29,935		—

For purposes of the disclosures of estimated fair value, the following assumptions were used.

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Loans. The estimated fair value for loans is determined by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Investment securities. Fair values for investment securities are based on quoted market prices, where applicable. When quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Deposits. The estimated fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair value of certificates of deposit is based on the rates currently offered for deposits of similar maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

Borrowings. The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed rate borrowings is estimated by discounting future cash flows using current interest rates currently offered for similar financial instruments over the same maturities.

Other assets and liabilities. The estimated fair values for cash and due from banks, interest-bearing deposits in other financial institutions, Federal funds sold, accrued interest receivable and payable, and short-term borrowings are considered to approximate cost because of their short-term nature. Other assets and liabilities of the Bank that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. In addition, non-financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill, and similar items.

Note 17. Fair Value Measurements

The Company follows ASC Topic 820, Fair Value Measurements which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC Topic 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 or on a nonrecurring basis.

ASC Topic 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 Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

The Fair Value Hierarchy

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets and liabilities.

Level 2 – Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

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In determining the appropriate levels, the Company performs a detailed analysis of assets and liabilities that are subject to ASC Topic 820. The Bank’s securities available for sale and interest rate swaps are the only assets or liabilities subject to fair value measurements on a recurring basis. The Bank may also 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.

Fair value measurements on a recurring and non-recurring basis at December 31, 2020 and 2019 are as follows:


							Fair
(dollars in thousands)	Level 1		Level 2		Level 3		Value
December 31, 2020
Recurring:
Securities available for sale
U.S. Treasury	$	—	$	—	$	—	$	—
State and Municipal		—		29,413		—		29,413
Mortgaged-backed		—		84,636		—		84,636
Interest rate swap		—		(949)		—		(949)

Non-recurring:
Maryland Financial Bank stock		—		—		3		3
Impaired loans		—		—		4,893		4,893
OREO		—		575		—		575
	$	—	$	113,675	$	4,896	$	118,571
December 31, 2019
Recurring:
Securities available for sale
U.S. Treasury	$	—	$	500	$	—	$	500
State and Municipal		—		12,475		—		12,475
Mortgaged-backed		—		58,511		—		58,511
Interest rate swap		—		(336)		—		(336)

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

Securities available for sale and interest rate swaps are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Measured on a Non-Recurring Basis:

Financial Assets and Liabilities

The Bank is predominantly a cash flow lender with real estate serving as collateral on a majority of loans. Loans which are deemed to be impaired and foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Bank determines such fair values from independent appraisals. Based on these appraisals, management has applied a specific valuation allowance allocation of $11,000 and $15,000 in 2020 and 2019, respectively, to the impaired loans, which management considers to be level 3 inputs.

Fair Value Measurements

We obtain fair values for our impaired loans through a variety of data points and mostly rely on appraisals from independent appraisers. These appraisals do not include an inside inspection of the property as our loan documents do not require the borrower to allow access to the property. Therefore the most significant unobservable inputs is the

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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.

We typically get independent appraisals of properties within three months from the time we determine there may be a collateral shortfall from an impaired loan. The appraisals are typically updated every 12 months from the independent appraiser and more frequently if we feel material changes in value may have occurred for this specific property. During interim periods, typically at the end of each calendar quarter, we review other data points such as a comparable from other like properties or changes in tax assessment values.

Non-Financial Assets and Non-Financial Liabilities

Application of ASC Topic 820 to non-financial assets and non-financial liabilities became effective January 1, 2009. The Corporation has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities typically measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

Foreclosed real estate, which are considered to be non-financial assets, have been valued using a market approach. The values were determined using market prices of similar current real estate assets in the same geographical area, which the Bank considers to be level 2 inputs.

Note 18. Revenue Recognition

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

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

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

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

Other Noninterest Income. Other noninterest income consists of: fees, exchange, other service charges, safety deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily comprised of debit income, ATM fees, merchant services income, and other service charges. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit card

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transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment.

Note 19. Parent Company Financial Information

The Balance Sheets, Statements of Income, and Statements of Cash Flows for Glen Burnie Bancorp (Parent Only) are presented below:

___________________________________________Balance Sheets________________________________________


December 31,	2020		2019

(dollars in thousands)
Assets

Cash	$	111	$	43
Investment in The Bank of Glen Burnie		36,982		35,637

Total assets	$	37,093	$	35,680

Liabilities and Stockholders’ Equity

Stockholders’ equity:
Common stock		2,842		2,827
Surplus		10,640		10,525
Retained earnings		23,071		22,537
Accumulated other comprehensive income (loss), net of benefits		540		(209)
Total stockholders’ equity		37,093		35,680

Total liabilities and stockholders’ equity	$	37,093	$	35,680

__________________________________________Statements of Income___________________________________


Year Ended December 31,	2020		2019

(dollars in thousands)

Dividends and distributions from subsidiary	$	1,265	$	1,070
Other expenses		(236)		(206)
Income before income tax benefit and equity in undistributed net income of subsidiary		1,029		864
Income tax benefit		43		32
Change in undistributed equity of subsidiary		596		703

Net income	$	1,668	$	1,599

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___________________________________Statements of Cash Flows_______________________________________


Year Ended December 31,	2020		2019

	(dollars in thousands)
Cash flows from operating activities:
Net income	$	1,668	$	1,599
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in other assets		—		2
Change in undistributed equity of subsidiary		(596)		(703)

Net cash provided by operating activities		1,072		898

Cash flows from financing activities:
Proceeds from dividend reinvestment plan		130		138
Dividends paid		(1,134)		(1,128)

Net cash used in financing activities		(1,004)		(990)

(Decrease) increase in cash		68		(92)

Cash, beginning of year		43		135

Cash, end of year	$	111	$	43

Note 20. Quarterly Results of Operations (Unaudited)

The following is a summary of consolidated unaudited quarterly results of operations:

__________________________________________2020__________________________________


(dollars in thousands,	Three months ended
except per share amounts)	December 31,		September 30,		June 30,		March 31,

Interest income	$	3,485	$	3,349	$	3,336	$	3,499
Interest expense		313		353		398		451
Net interest income		3,172		2,996		2,938		3,048
Provision for credit losses		(427)		(669)		487		(80)
Net securities gains		6		—		—		—
Income before income taxes		712		1,232		(128)		343
Net income		547		949		(96)		268
Net income per share (basic and diluted)	$	0.20	$	0.33	$	(0.03)	$	0.09

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___________________________________________2019______________________________


(dollars in thousands,	Three months ended
except per share amounts)	December 31,		September 30,		June 30,		March 31,

Interest income	$	3,641	$	3,590	$	3,574	$	3,709
Interest expense		461		446		450		570
Net interest income		3,180		3,144		3,124		3,139
Provision for credit losses		(179)		(139)		30		173
Net securities gains		—		—		—		3
Income before income taxes		676		818		386		171
Net income		539		606		319		135
Net income per share (basic and diluted)	$	0.19	$	0.21	$	0.11	$	0.05

Note 21. Subsequent Events

The Bank early adopted ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”) during the first quarter of 2021 based on the application of the modified retrospective method for all financial assets measured at amortized cost primarily loans receivable and off-balance sheet credit exposures. 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 the life of an exposure 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.” 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 generally accepted accounting principles. The Company recorded a decrease to retained earnings of $1,140,848 as of January 1, 2021 for the cumulative effect of adopting ASC 326.

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.

Under ASC 326-30, the Bank is required to use an allowance approach when recognizing credit loss for its Available-For-Sale (“AFS”) debt securities and will replace the quarterly OTTI analysis that is performed (Note 3. Investment Securities). The allowance 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. Using this approach each quarter, the Bank will record impairment related to credit losses through earnings offset with an allowance for credit losses account.

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Glen Burnie Bancorp (GLBZ) 10-K2020 FY Annual report

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