UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly period ended March 31, 2021

OR

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

Commission file number 0-24047

GLEN BURNIE BANCORP

(Exact name of registrant as specified in its charter)

Maryland

    

52-1782444

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

101 Crain Highway, S.E.

Glen Burnie, Maryland

21061

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (410) 766-3300

Inapplicable

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

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

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

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

Large accelerated filer

Accelerated filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging growth company

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

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

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $1.00 per share

GLBZ

The Nasdaq Stock Market LLC

The number of shares of the registrant’s common stock outstanding as of May 4, 2021 was 2,848,168.


GLEN BURNIE BANCORP AND SUBSIDIARY

TABLE OF CONTENTS

Page

Part I.

FINANCIAL INFORMATION

Item 1.

Financial Statements:

Consolidated Balance Sheets: As of March 31, 2021 (unaudited) and December 31, 2020 (audited)

3

Consolidated Statements of Income (Loss): Three Months Ended March 31, 2021 and 2020 (unaudited)

4

Consolidated Statements of Comprehensive Income (Loss): Three Months Ended March 31, 2021 and 2020 (unaudited)

5

Consolidated Statements of Changes in Stockholders’ Equity: Three Months Ended March 31, 2021 and 2020 (unaudited)

6

Consolidated Statements of Cash Flows: Three Months Ended March 31, 2021 and 2020 (unaudited)

7

Notes to Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

42

Item 4.

Controls and Procedures

42

Part II.

OTHER INFORMATION

43

Item 1.

Legal Proceedings

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

Defaults Upon Senior Securities

43

Item 4.

Mine Safety Disclosures

43

Item 5.

Other Information

43

Item 6.

Exhibits

45

SIGNATURES

46

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PART I – FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

March 31, 

December 31, 

2021

2020

(unaudited)

(audited)

ASSETS

Cash and due from banks

$

2,130

$

2,117

Interest-bearing deposits in other financial institutions

 

38,344

 

34,976

Cash and Cash Equivalents

 

40,474

 

37,093

Investment securities available for sale, at fair value

 

134,897

 

114,049

Restricted equity securities, at cost

1,062

1,199

Loans, net of deferred fees and costs

 

246,853

 

253,772

Less: Allowance for credit losses(1)

(2,921)

(1,476)

Loans, net

243,932

252,296

Real estate acquired through foreclosure

575

575

Premises and equipment, net

 

3,793

 

3,853

Bank owned life insurance

 

8,219

 

8,181

Deferred tax assets, net

1,646

142

Accrued interest receivable

 

1,277

 

1,302

Accrued taxes receivable

 

75

 

116

Prepaid expenses

 

410

 

318

Other assets

 

364

 

362

Total Assets

$

436,724

$

419,486

LIABILITIES

Noninterest-bearing deposits

$

147,822

$

132,626

Interest-bearing deposits

 

221,101

 

216,994

Total Deposits

 

368,923

 

349,620

Short-term borrowings

 

31,244

 

29,912

Defined pension liability

290

285

Accrued expenses and other liabilities

 

2,792

 

2,576

Total Liabilities

403,249

382,393

STOCKHOLDERS' EQUITY

Common stock, par value $1, authorized 15,000,000 shares, issued and outstanding 2,845,104 and 2,842,040 shares as of March 31, 2021 and December 31, 2020, respectively.

 

2,845

 

2,842

Additional paid-in capital

 

10,670

 

10,640

Retained earnings

 

21,909

 

23,071

Accumulated other comprehensive (loss) gain

 

(1,949)

540

Total Stockholders' Equity

33,475

37,093

Total Liabilities and Stockholders' Equity

$

436,724

$

419,486

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

See accompanying notes to unaudited consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share amounts)

(unaudited)

    

Three Months Ended March 31, 

    

2021

    

2020

    

INTEREST INCOME

 

  

 

  

 

Interest and fees on loans

$

2,637

$

3,071

Interest and dividends on securities

505

381

Interest on deposits with banks and
federal funds sold

 

19

 

47

Total Interest Income

 

3,161

 

3,499

INTEREST EXPENSE

 

  

 

  

Interest on deposits

 

168

 

325

Interest on short-term borrowings

 

116

 

126

Total Interest Expense

 

284

 

451

Net Interest Income

 

2,877

 

3,048

(Release)/provision for credit losses

 

(404)

 

(80)

Net interest income after release/provision

 

3,281

 

3,128

NONINTEREST INCOME

 

  

 

  

Service charges on deposit accounts

 

40

 

56

Other fees and commissions

 

169

 

159

Gain on securities sold/redeemed

 

1

Income on life insurance

 

38

 

39

Total Noninterest Income

 

247

 

255

NONINTEREST EXPENSE

 

  

 

  

Salary and benefits

 

1,630

 

1,705

Occupancy and equipment expenses

302

331

Legal, accounting and other professional fees

213

252

Data processing and item processing services

257

234

FDIC insurance costs

42

51

Advertising and marketing related expenses

22

25

Loan collection costs

6

67

Telephone costs

 

77

 

47

Other expenses

 

279

 

328

Total Noninterest Expenses

 

2,828

 

3,040

Income before income taxes

 

700

 

343

Income tax expense

 

106

 

75

NET INCOME

$

594

$

268

Basic and diluted net income per share of common stock

$

0.21

$

0.09

See accompanying notes to unaudited consolidated financial statements.

- 4 -


GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

Three Months Ended

March 31, 

    

2021

    

2020

    

Net income

$

594

$

268

Other comprehensive (loss) income:

 

  

 

  

Net unrealized (loss) gain on securities available for sale:

 

Net unrealized (loss) gain on securities during the period

(3,574)

918

Income tax benefit (expense) relating to item above

 

983

 

(252)

Reclassification adjustment for gain on sales of securities included in net income

 

 

(1)

Net effect on other comprehensive (loss) income

 

(2,591)

 

665

Net unrealized gain (loss) on interest rate swaps:

Net unrealized gain (loss) on interest rate swap during the period

140

(696)

Income tax (expense) benefit relating to item above

(38)

191

Net effect on other comprehensive income (loss)

102

(505)

Other comprehensive (loss) income

(2,489)

160

Comprehensive (loss) income

$

(1,895)

$

428

See accompanying notes to unaudited consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands)

(unaudited)

    

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

Stock

Capital

Earnings

(Loss)

Total

Balance, December 31, 2019

 

$

2,827

$

10,525

$

22,537

$

(209)

$

35,680

Net income

 

 

 

 

268

 

 

268

Cash dividends, $0.10 per share

 

 

 

 

(283)

 

 

(283)

Dividends reinvested under

dividend reinvestment plan

 

 

3

 

29

 

 

 

32

Other comprehensive income

 

 

 

 

 

160

 

160

Balance, March 31, 2020

 

$

2,830

$

10,554

$

22,522

$

(49)

$

35,857

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

Stock

Capital

Earnings

Income (Loss)

Total

Balance, December 31, 2020

 

$

2,842

$

10,640

$

23,071

$

540

$

37,093

Net income

 

 

 

 

594

 

 

594

Cash dividends, $0.10 per share

 

 

 

 

(284)

 

 

(284)

Dividends reinvested under

dividend reinvestment plan

 

 

3

 

30

 

 

 

33

Transition adjustment pursuant to adoption

of ASU 2016-3

(1,472)

(1,472)

Other comprehensive loss

 

 

 

 

 

(2,489)

 

(2,489)

Balance, March 31, 2021

 

$

2,845

$

10,670

$

21,909

$

(1,949)

$

33,475

See accompanying notes to unaudited consolidated financial statements.

- 6 -


GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

    

    

Three Months Ended March 31, 

    

2021

    

2020

Cash flows from operating activities:

 

  

 

  

 

Net income

$

594

$

268

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

Depreciation, amortization, and accretion of premises and equipment

 

104

 

100

Amortization, and accretion of investment securities available for sale

107

62

Release for credit losses

 

(404)

 

(80)

Increase in cash surrender value of bank owned life insurance

 

(38)

 

(39)

Decrease (increase) in accrued interest receivable

 

25

 

(8)

Net (increase) decrease in other assets

 

(54)

 

166

Net increase in accrued expenses and other liabilities

 

(51)

 

(613)

Net cash provided by (used in) operating activities

 

283

 

(144)

Cash flows from investing activities:

 

  

 

  

Redemptions and maturities of investment securities available for sale

 

4,938

 

3,878

Purchases of investment securities available for sale

 

(29,467)

 

(1,709)

Net sale of Federal Home Loan Bank stock

 

137

 

238

Net decrease in loans

 

7,194

 

7,711

Purchases of premises and equipment

(88)

(282)

Net cash (used in) provided by investing activities

 

(17,286)

 

9,836

Cash flows from financing activities:

 

  

 

  

Net increase in deposits

 

19,303

 

341

Increase (decrease) in short term borrowings

1,332

(5,000)

Cash dividends paid

 

(284)

 

(283)

Common stock dividends reinvested

 

33

 

31

Net cash provided by (used in) financing activities

 

20,384

 

(4,911)

Net increase in cash and cash equivalents

 

3,381

 

4,781

Cash and cash equivalents at beginning of year

 

37,093

 

13,290

Cash and cash equivalents at end of year

$

40,474

$

18,071

Supplemental Disclosures of Cash Flow Information:

 

  

 

  

Interest paid on deposits and borrowings

$

282

$

456

Net income taxes paid (refunded)

65

(31)

Net (decrease) increase in unrealized appreciation on available for sale securities

 

(3,574)

 

918

Net decrease in unrealized depreciation on swaps

140

696

See accompanying notes to unaudited consolidated financial statements.

- 7 -


GLEN BURNIE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATIONAL

Nature of Business

Glen Burnie Bancorp (the “Company”) is a bank holding company organized in 1990 under the laws of the State of Maryland. The Company owns all the outstanding shares of capital stock of The Bank of Glen Burnie (the “Bank”), a commercial bank organized in 1949 under the laws of the State of Maryland (the “State”). The Bank provides financial services to individuals and corporate customers located in Anne Arundel County and surrounding areas of Central Maryland, and is subject to competition from other financial institutions. The Bank is also subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

NOTE 2 – BASIS OF PRESENTATION

In management’s opinion, the accompanying unaudited consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim period reporting, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position at March 31, 2021 and December 31, 2020, the results of operations for the three-month period ended March 31, 2021 and 2020, and the statements of cash flows for the three-month period ended March 31, 2021 and 2020. The operating results for the three-month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021 or any future interim period. The consolidated balance sheet at December 31, 2020 has been derived from the audited financial statements included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 26, 2021. The unaudited consolidated financial statements for March 31, 2021 and 2020, the consolidated balance sheet at December 31, 2020, and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Summary of Significant Accounting Policies

The significant accounting policies used in preparation of the Company's consolidated financial statements are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020. Other than the adoption of the current expected credit loss (“CECL”) methodology discussed below, there have not been any significant changes in the Company's significant accounting policies.

Allowance for Credit Losses – Loans Receivable

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

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

- 8 -


exist over the period that historical experience was based for each loan type. Finally, we consider forecasts about future economic conditions or changes in collateral values that are reasonable and supportable.

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

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

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

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

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

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

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

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

The impairment model for available-for-sale (“AFS”) debt securities differs from the CECL methodology applied for HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. Although ASC

- 9 -


326 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities where neither of the criteria are met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited to the amount that the fair value is less than the amortized cost basis. Any remaining discount that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Under the new guidance, an entity may no longer consider the length of time fair value has been less than amortized cost. Changes in the allowance for credit losses are recorded as a provision (or release) for credit losses. Losses are charged against the allowance when management believes the collectability of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. As of January 1, 2021, the Company determined that the unrealized loss positions in AFS securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded.

Off-Balance-Sheet Credit Exposures

The only material off-balance-sheet credit exposures are unfunded loan commitments, which had a combined balance of $31.8 million at March 31, 2021. The reserve for unfunded commitments is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized through provision for credit losses in the consolidated statements of income. The reserve for unfunded commitments represents the expected lifetime credit losses on off-balance sheet obligations such as commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments that are unconditionally cancellable by the Company. The reserve for unfunded commitments is determined by estimating future draws, including the effects of risk mitigation actions, and applying the expected loss rates on those draws. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit losses related to the respective loan portfolio class.

Principles of Consolidation

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

Cash Flow Presentation

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

Reclassifications

Certain items in the 2020 consolidated financial statements have been reclassified to conform to the 2021 classifications. The reclassifications had no effect on previously reported results of operations or retained earnings.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for credit losses (the “ACL”); the fair value of financial instruments,

- 10 -


such as loans and investment securities; benefit plan obligations and expenses; and the valuation of deferred tax assets and liabilities.

NOTE 3 – EARNINGS PER SHARE

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

Three Months Ended

March 31, 

    

2021

    

2020

    

Basic and diluted earnings per share:

Net income

$

593,993

$

268,384

Weighted average common shares outstanding

 

2,843,775

 

2,829,375

Basic and dilutive net income per share

$

0.21

$

0.09

Diluted earnings per share calculations were not required for the three-month period ended March 31, 2021 and 2020, as there were no stock options outstanding.

NOTE 4 – INVESTMENT SECURITIES

Investment securities are accounted for according to their purpose and holding period. Trading securities are those that are bought and held principally for the purpose of selling them in the near term. The Company held no trading securities at March 31, 2021 or December 31, 2020. Available-for-sale investment securities, comprised of debt and mortgage-backed securities, are those that may be sold before maturity due to changes in the Company's interest rate risk profile or funding needs, and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income. Held-to-maturity investment securities are those that management has the positive intent and ability to hold to maturity and are reported at amortized cost. The Company held no held-to-maturity securities at March 31, 2021 or December 31, 2020.

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

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The following table summarizes the amortized cost and estimated fair value of the Company’s investment securities portfolio at March 31, 2021 and December 31, 2020:

    

At March 31, 2021

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

(dollars in thousands)

Cost

Gains

Losses

Value

Collateralized mortgage obligations

$

26,747

$

349

$

(76)

$

27,020

Agency mortgage-backed securities

34,993

606

(329)

35,270

Municipal securities

30,962

384

(349)

30,997

U.S. Government agency securities

44,074

(2,464)

41,610

Total securities available for sale

$

136,776

$

1,339

$

(3,218)

$

134,897

    

At December 31, 2020

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

(dollars in thousands)

Cost

Gains

Losses

Value

Collateralized 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

Total securities available for sale

$

112,354

$

2,031

$

(336)

$

114,049

The gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2021 and December 31, 2020 are as follows:

March 31, 2021

Less than 12 months

12 months or more

Total

Securities available for sale:

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

Value

    

Loss

    

Value

    

Loss

    

Value

    

Loss

(dollars in thousands)

Collateralized mortgage obligations

 

$

2,749

 

$

(66)

 

$

1,136

$

(10)

 

$

3,885

 

$

(76)

Agency mortgage-backed securities

13,534

(319)

555

(10)

14,089

(329)

Municipal securities

20,188

(349)

20,188

(349)

U.S. Government agency securities

41,142

(2,462)

468

(2)

41,610

(2,464)

 

$

77,613

 

$

(3,196)

 

$

2,159

$

(22)

 

$

79,772

 

$

(3,218)

- 12 -


December 31, 2020

Less than 12 months

12 months or more

Total

Securities available for sale:

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

Value

    

Loss

    

Value

    

Loss

    

Value

    

Loss

(dollars in thousands)

Collateralized mortgage obligations

 

$

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)

The Company does not believe that the available-for-sale debt securities that were in an unrealized loss position have any credit loss impairment upon adoption of ASC 326 on January 1, 2021 or as of March 31, 2021. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity. Available-for-sale debt securities issued by U.S. government agencies or U.S. government sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Municipal bonds are considered to have issuer(s) of high credit quality (rated AA or higher) and the decline in fair value is due to changes in interest rates and other market conditions. The issuer(s) continues to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bond(s) approach maturity.

At March 31, 2021, the Company recorded unrealized losses in its portfolio of debt securities totaling $3,218,000 related to 116 securities, which resulted from decreases in market value, spread volatility, and other factors that management deems to be temporary. Management does not believe the securities are impaired due to reasons of credit quality. Since management believes that it is more likely than not that the Company will not be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to have a credit loss impairment.

At December 31, 2020, the Company recorded unrealized losses in its portfolio of debt securities totaling $336,000 related to 49 securities, which resulted from decreases in market interest rates, spread volatility, and other factors that management deems to be temporary. Management does not believe the securities are impaired due to reasons of credit quality. Since management believes that it is more likely than not that the Company will not be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to have a credit loss impairment.

Shown below are contractual maturities of debt securities at March 31, 2021. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

At March 31, 2021

Amortized

Fair

Yield

(dollars in thousands)

    

Cost

Value

    

(1), (2)

Available for sale securities maturing:

 

 

  

 

  

Within one year

$

453

$

456

2.00

%

Over one to five years

2,042

2,074

1.99

%

Over five to ten years

 

11,565

 

11,603

 

1.30

%

Over ten years

 

122,716

 

120,764

 

1.96

%

Total debt securities

$

136,776

$

134,897

 

_____________________

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

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

- 13 -


NOTE 5 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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

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

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

- 14 -


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

March 31, 

December 31, 

2021

  

2020

(dollars in thousands)

    

Amount

    

%

    

Amount

    

%

    

Loans Secured by Real Estate

Construction and land

$

3,174

1

$

2,553

1

Farmland

349

350

Single-family residential

82,820

34

82,520

33

Multi-family

6,069

2

6,105

2

Commercial

55,723

23

57,027

23

Total loans secured by real estate

148,135

148,555

Commercial and Industrial

Commercial and industrial

9,521

4

10,800

4

SBA guaranty

7,192

3

7,200

3

Comm SBA PPP

11,244

5

9,912

4

Total commercial and industrial loans

27,957

27,912

Consumer Loans

Consumer

2,482

1

3,063

1

Automobile

68,279

27

74,242

29

Total consumer loans

70,761

77,305

Loans, net of deferred fees and costs

246,853

100

253,772

100

Less: Allowance for loan losses

$

(2,921)

$

(1,476)

Loans, net

243,932

252,296

The Bank’s net loans totaled $243.9 million at March 31, 2021, compared to $252.3 million at December 31, 2020, a decrease of $8.4 million, or 3.32%. Construction and land loans increased from $2.6 million at December 31, 2020 to $3.2 million at March 31, 2021, a decrease of $0.6 million, or 24.34%. Farmland loans decreased by $0.1 million, or 0.42%, from $0.4 million at December 31, 2020 to $0.3 million at March 31, 2021. Single-family residential loans increased from $82.5 million at December 31, 2020 to $82.8 million at March 31, 2021, an increase of $0.3 million, or 0.36%. Multi-family residential loans were $6.1 million at March 31, 2021 and December 31, 2020. Commercial real estate loans decreased by $1.3 million to $55.7 million at March 31, 2021 from $57.0 million at December 31, 2020, a decrease of 2.29%. Commercial and industrial loans decreased by $1.3 million, or 11.84%, to $9.5 million at March 31, 2021 compared to $10.8 million at December 31, 2021. SBA guaranty loans were $7.2 million at March 31, 2021 and December 31, 2020. The Commercial Small Business Administration (SBA) Paycheck Protection Program (PPP) loan balance was $11.2 million at March 31, 2021 compared to $9.9 million at December 31, 2020, an increase of $1.3 million or 13.44%. This loan type is discussed in “Item 5. Other Information.” Consumer loans decreased by $0.6 million, or 18.97% to $2.5 million at March 31, 2021, compared to $3.1 million at December 31, 2020. Automobile loans decreased from $74.2 million at December 31, 2020 to $68.3 million at March 31, 2021, a decrease of $6.0 million or 8.03%.

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

- 15 -


On January 1, 2021, the Company early adopted ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”) which replaces the “incurred loss approach” for estimating credit losses with an expected loss methodology. The incurred loss model delayed the recognition of credit losses until it was probable that a loss had occurred, while the CECL model requires the immediate recognition of expected credit losses over the contractual term for financial instruments that fall within the scope of CECL at the date of origination or purchase of the financial instrument. The CECL model, which is applicable to the measurement of credit losses on financial assets measured at amortized cost and certain off-balance sheet credit exposures, affects the Company’s estimates of the allowance for credit losses for our loan portfolio and the reserve for our off-balance sheet credit exposures related to loan commitments. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance, based on evaluations of the collectability of loans and prior loan loss experience, is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The evaluations are performed for each class of loans and take into consideration factors such as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, value of collateral securing the loans and current economic conditions and trends that may affect the borrowers’ ability to pay. For example, delinquencies in unsecured loans and indirect automobile installment loans will be reserved for at significantly higher ratios than loans secured by real estate. Finally, the Company considers forecasts about future economic conditions or changes in collateral values that are reasonable and supportable. Based on that analysis, the Bank deems its allowance for loan losses in proportion to the total nonaccrual loans and past due loans to be sufficient.

As a result of the adoption of ASC 326 in the first quarter of 2021, with an effective date of January 1, 2021, there is a lack of comparability in both the allowance and provisions for credit losses for the periods presented. Results for reporting periods beginning after January 1, 2021 are presented using the CECL methodology, while comparative period information continues to be reported in accordance with the incurred loss methodology in effect for prior years.

Transactions in the allowance for credit losses for the three months ended March 31, 2021 and the year ended December 31, 2020 were as follows:

Loans Secured By Real Estate

Commercial and Industrial Loans

Consumer Loans

 

March 31, 2021

Construction

Single-family

Commercial

Commercial

 

(dollars in thousands)

    

and Land

Farmland

Residential

Multi-family

Commercial

    

and Industrial

SBA Guaranty

SBA PPP

Consumer

Automobile

Total