10-Q 1 glbz-20190930x10q.htm 10-Q

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly period ended September 30, 2019

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 November 4, 2019 was 2,827,473.

Table of Contents

GLEN BURNIE BANCORP AND SUBSIDIARY

TABLE OF CONTENTS

|  | Page
Part I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
| Consolidated Balance Sheets: As of September 30, 2019 (unaudited) and December 31, 2018 (audited) | 3
| Consolidated Statements of Income: Three and Nine Months Ended September 30, 2019 and 2018 (unaudited) | 4
| Consolidated Statements of Comprehensive Income(Loss): Three and Nine Months Ended September 30, 2019 and 2018 (unaudited) | 5
| Consolidated Statements of Changes in Stockholders’ Equity: Three and Nine Months Ended September 30, 2019 and 2018 (unaudited) | 6
| Consolidated Statements of Cash Flows: Nine Months Ended September 30, 2019 and 2018 (unaudited) | 7
| Notes to Consolidated Financial Statements | 8
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 39
Item 4. | Controls and Procedures | 40
Part II. | OTHER INFORMATION |
Item 1. | Legal Proceedings | 40
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 40
Item 3. | Defaults Upon Senior Securities | 40
Item 4. | Mine Safety Disclosures | 40
Item 5. | Other Information | 40
Item 6. | Exhibits | 41
| SIGNATURES | 42

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PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

|  | September 30, |  | December 31, |
|  | 2019 |  |  | 2018 |
|  |  | (unaudited) |  |  | (audited) |
ASSETS |  |  |  |  |  |  |
Cash and due from banks |  | $ | 3,678 |  | $ | 2,605 |
Interest-bearing deposits in other financial institutions |  |  | 15,893 |  |  | 13,349 |
Cash and Cash Equivalents |  |  | 19,571 |  |  | 15,954 |
Investment securities available for sale, at fair value |  |  | 64,817 |  |  | 81,572 |
Restricted equity securities, at cost |  |  | 1,225 |  |  | 2,481 |
Loans, net of deferred fees and costs |  |  | 283,889 |  |  | 299,120 |
Less: Allowance for loan losses |  |  | (2,307) |  |  | (2,541) |
Loans, net |  |  | 281,582 |  |  | 296,579 |
Real estate acquired through foreclosure |  |  | 705 |  |  | 705 |
Premises and equipment, net |  |  | 3,820 |  |  | 3,106 |
Bank owned life insurance |  |  | 7,982 |  |  | 7,860 |
Deferred tax assets, net |  |  | 1,013 |  |  | 1,392 |
Accrued interest receivable |  |  | 976 |  |  | 1,198 |
Accrued taxes receivable |  |  | 982 |  |  | 1,177 |
Prepaid expenses |  |  | 557 |  |  | 466 |
Other assets |  |  | 208 |  |  | 556 |
Total Assets |  | $ | 383,438 |  | $ | 413,046 |
LIABILITIES |  |  |  |  |  |  |
Noninterest-bearing deposits |  | $ | 111,453 |  | $ | 101,369 |
Interest-bearing deposits |  |  | 213,813 |  |  | 221,084 |
Total Deposits |  |  | 325,266 |  |  | 322,453 |
Short-term borrowings |  |  | 20,000 |  |  | 55,000 |
Defined pension liability |  |  | 311 |  |  | 285 |
Accrued expenses and other liabilities |  |  | 2,493 |  |  | 1,257 |
Total Liabilities |  |  | 348,070 |  |  | 378,995 |
STOCKHOLDERS' EQUITY |  |  |  |  |  |  |
Common stock, par value $1, authorized 15,000,000 shares, issued and outstanding 2,824,412 and 2,814,157 shares as of September 30, 2019 and December 31, 2018 , respectively. |  |  | 2,824 |  |  | 2,814 |
Additional paid-in capital |  |  | 10,495 |  |  | 10,401 |
Retained earnings |  |  | 22,280 |  |  | 22,066 |
Accumulated other comprehensive loss |  |  | (231) |  |  | (1,230) |
Total Stockholders' Equity |  |  | 35,368 |  |  | 34,051 |
Total Liabilities and Stockholders' Equity |  | $ | 383,438 |  | $ | 413,046 |

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 September 30, |  | Nine Months Ended September 30, |
|  | 2019 |  | 2018 |  | 2019 |  | 2018 |
INTEREST INCOME |  |  |  |  |  |  |  |  |  |  |  |  |
Interest and fees on loans |  | $ | 3,176 |  | $ | 3,269 |  | $ | 9,543 |  | $ | 9,100 |
Interest and dividends on securities |  |  | 326 |  |  | 526 |  |  | 1,061 |  |  | 1,585 |
Interest on deposits with banks and federal funds sold |  |  | 88 |  |  | 67 |  |  | 270 |  |  | 165 |
Total Interest Income |  |  | 3,590 |  |  | 3,862 |  |  | 10,874 |  |  | 10,850 |
INTEREST EXPENSE |  |  |  |  |  |  |  |  |  |  |  |  |
Interest on deposits |  |  | 336 |  |  | 362 |  |  | 1,001 |  |  | 997 |
Interest on short-term borrowings |  |  | 110 |  |  | 198 |  |  | 465 |  |  | 506 |
Total Interest Expense |  |  | 446 |  |  | 560 |  |  | 1,466 |  |  | 1,503 |
Net Interest Income |  |  | 3,144 |  |  | 3,302 |  |  | 9,408 |  |  | 9,347 |
Provision for loan losses |  |  | (139) |  |  | 246 |  |  | 65 |  |  | 601 |
Net interest income after provision for loan losses |  |  | 3,283 |  |  | 3,056 |  |  | 9,343 |  |  | 8,746 |
NONINTEREST INCOME |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 62 |  |  | 59 |  |  | 187 |  |  | 187 |
Other fees and commissions |  |  | 287 |  |  | 216 |  |  | 643 |  |  | 564 |
Gains on redemption of BOLI policies |  |  | — |  |  | — |  |  | — |  |  | 308 |
Gain on securities sold |  |  | — |  |  | — |  |  | 3 |  |  | — |
Income on life insurance |  |  | 42 |  |  | 41 |  |  | 122 |  |  | 130 |
Gains on sale of OREO |  |  | — |  |  | 15 |  |  | — |  |  | 15 |
Total Noninterest Income |  |  | 391 |  |  | 331 |  |  | 955 |  |  | 1,204 |
NONINTEREST EXPENSE |  |  |  |  |  |  |  |  |  |  |  |  |
Salary and benefits |  |  | 1,685 |  |  | 1,710 |  |  | 5,140 |  |  | 5,080 |
Occupancy and equipment expenses |  |  | 340 |  |  | 272 |  |  | 1,040 |  |  | 850 |
Legal, accounting and other professional fees |  |  | 259 |  |  | 212 |  |  | 794 |  |  | 721 |
Data processing and item processing services |  |  | 109 |  |  | 168 |  |  | 328 |  |  | 454 |
FDIC insurance costs |  |  | — |  |  | 64 |  |  | 116 |  |  | 187 |
Advertising and marketing related expenses |  |  | 27 |  |  | 16 |  |  | 79 |  |  | 65 |
Loan collection costs |  |  | 22 |  |  | 32 |  |  | 62 |  |  | 153 |
Telephone costs |  |  | 62 |  |  | 56 |  |  | 183 |  |  | 181 |
Other expenses |  |  | 352 |  |  | 329 |  |  | 1,181 |  |  | 1,014 |
Total Noninterest Expenses |  |  | 2,856 |  |  | 2,859 |  |  | 8,923 |  |  | 8,705 |
Income before income taxes |  |  | 818 |  |  | 528 |  |  | 1,375 |  |  | 1,245 |
Income tax expense |  |  | 212 |  |  | 89 |  |  | 315 |  |  | 73 |
NET INCOME |  | $ | 606 |  | $ | 439 |  | $ | 1,060 |  | $ | 1,172 |
Basic and diluted net income per share of common stock |  | $ | 0.21 |  | $ | 0.16 |  | $ | 0.38 |  | $ | 0.42 |

See accompanying notes to unaudited consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

|  | Three Months Ended |  | Nine Months Ended |
|  | September 30, |  | September 30, |
|  | 2019 |  | 2018 |  | 2019 |  | 2018 |
Net income |  | $ | 606 |  | $ | 439 |  | $ | 1,060 |  | $ | 1,172 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |
Net unrealized gain (loss) on securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |
Net unrealized gain (loss) on securities during the period |  |  | 301 |  |  | (662) |  |  | 2,132 |  |  | (2,237) |
Income tax (expense) benefit relating to item above |  |  | (83) |  |  | 182 |  |  | (586) |  |  | 616 |
Reclassification adjustment for gain on sales of securities included in net income |  |  | — |  |  | — |  |  | (2) |  |  | — |
Net effect on other comprehensive income (loss) |  |  | 218 |  |  | (480) |  |  | 1,544 |  |  | (1,621) |
Net unrealized (loss) gain on interest rate swap: |  |  |  |  |  |  |  |  |  |  |  |  |
Net unrealized (loss) gain on interest rate swap during the period |  |  | (134) |  |  | 118 |  |  | (753) |  |  | 664 |
Income tax benefit (expense) relating to item above |  |  | 37 |  |  | (33) |  |  | 208 |  |  | (183) |
Net effect on other comprehensive (loss) income |  |  | (97) |  |  | 85 |  |  | (545) |  |  | 481 |
Other comprehensive income (loss) |  |  | 121 |  |  | (395) |  |  | 999 |  |  | (1,140) |
Comprehensive income |  | $ | 727 |  | $ | 44 |  | $ | 2,059 |  | $ | 32 |

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, 2017 |  | $ | 2,801 |  | $ | 10,267 |  | $ | 21,605 |  | $ | (631) |  | $ | 34,042
Net income |  |  | — |  |  | — |  |  | 1,172 |  |  | — |  |  | 1,172
Cash dividends, $0.30 per share |  |  | — |  |  | — |  |  | (841) |  |  | — |  |  | (841)
Dividends reinvested under |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
dividend reinvestment plan |  |  | 10 |  |  | 101 |  |  | — |  |  | — |  |  | 111
Other comprehensive loss |  |  | — |  |  | — |  |  | — |  |  | (1,140) |  |  | (1,140)
Balance, September 30, 2018 |  | $ | 2,811 |  | $ | 10,368 |  | $ | 21,936 |  | $ | (1,771) |  | $ | 33,344

|  |  |  |  |  |  |  | Accumulated |  |
|  |  |  | Additional |  |  |  | Other |  |
|  | Common |  | Paid-in |  | Retained |  | Comprehensive |  |  |
|  | Stock |  | Capital |  | Earnings |  | (Loss) Gain |  | Total
Balance, December 31, 2018 |  | $ | 2,814 |  | $ | 10,401 |  | $ | 22,066 |  | $ | (1,230) |  | $ | 34,051
Net income |  |  | — |  |  | — |  |  | 1,060 |  |  | — |  |  | 1,060
Cash dividends, $0.30 per share |  |  | — |  |  | — |  |  | (846) |  |  | — |  |  | (846)
Dividends reinvested under |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
dividend reinvestment plan |  |  | 10 |  |  | 94 |  |  | — |  |  | — |  |  | 104
Other comprehensive income |  |  | — |  |  | — |  |  | — |  |  | 999 |  |  | 999
Balance, September 30, 2019 |  | $ | 2,824 |  | $ | 10,495 |  | $ | 22,280 |  | $ | (231) |  | $ | 35,368

See accompanying notes to unaudited consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

|  | Nine Months Ended September 30, |
|  | 2019 |  | 2018 |
Cash flows from operating activities: |  |  |  |  |  |  |
Net income |  | $ | 1,060 |  | $ | 1,172 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |  |
Depreciation, amortization, and accretion of premises and equipment |  |  | 757 |  |  | 828 |
Provision for loan losses |  |  | 65 |  |  | 601 |
Gain on life insurance |  |  | — |  |  | (308) |
Gain on disposals of assets, net |  |  | — |  |  | (15) |
(Decrease) increase in cash surrender value of bank owned life insurance |  |  | (122) |  |  | (130) |
Loss on write-down of MDF stock |  |  | 1 |  |  | — |
Increase in ground rents |  |  | — |  |  | 8 |
Decrease (increase) in accrued interest receivable |  |  | 223 |  |  | (100) |
Net decrease in other assets |  |  | 157 |  |  | 2,010 |
Net increase in accrued expenses and other liabilities |  |  | 16 |  |  | 5 |
Net cash provided by operating activities |  |  | 2,157 |  |  | 4,071 |
Cash flows from investing activities: |  |  |  |  |  |  |
Redemptions and maturities of investment securities available for sale |  |  | 7,322 |  |  | 8,048 |
Proceeds from sales of available for sale debt securities |  |  | 20,770 |  |  | — |
Purchases of investment securities available for sale |  |  | (9,641) |  |  | (5,440) |
Net sales (purchase) of Federal Home Loan Bank stock |  |  | 1,254 |  |  | (841) |
Net decrease (increase) in loans |  |  | 14,932 |  |  | (24,810) |
Proceeds from sale of real estate acquired through foreclosure |  |  | — |  |  | 114 |
Purchases of premises and equipment |  |  | (249) |  |  | (138) |
Net cash provided by (used in) investing activities |  |  | 34,388 |  |  | (23,067) |
Cash flows from financing activities: |  |  |  |  |  |  |
Net increase in deposits |  |  | 2,814 |  |  | 2,611 |
(Decrease) increase in short term borrowings |  |  | (35,000) |  |  | 20,000 |
Cash dividends paid |  |  | (846) |  |  | (841) |
Common stock dividends reinvested |  |  | 104 |  |  | 111 |
Net cash (used in) provided by financing activities |  |  | (32,928) |  |  | 21,881 |
Net increase in cash and cash equivalents |  |  | 3,617 |  |  | 2,885 |
Cash and cash equivalents at beginning of year |  |  | 15,954 |  |  | 12,605 |
Cash and cash equivalents at end of year |  | $ | 19,571 |  | $ | 15,490 |
Supplemental Disclosures of Cash Flow Information: |  |  |  |  |  |  |
Interest paid on deposits and borrowings |  | $ | 1,498 |  | $ | 1,455 |
Net income taxes paid (refunded) |  |  | 120 |  |  | (509) |
Net decrease (increase) in unrealized depreciation on available for sale securities |  |  | 2,132 |  |  | (2,237) |
Net (increase) decrease in unrealized appreciation on swaps |  |  | (754) |  |  | 664 |
Noncash Investing Activities: |  |  |  |  |  |  |
Transfer of loans to real estate acquired through foreclosure |  |  | — |  |  | 705 |

See accompanying notes to unaudited consolidated financial statements.

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GLEN BURNIE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATIONAL

Nature of Business

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

NOTE 2 – BASIS OF PRESENTATION

In management’s opinion, the accompanying unaudited consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim period reporting, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position at September 30, 2019 and December 31, 2018, the results of operations for the three- and nine-month periods ended September 30, 2019 and 2018, and the statements of cash flows for the nine-month period ended September 30, 2019 and 2018. The operating results for the three- and nine-month periods ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019 or any future interim period. The consolidated balance sheet at December 31, 2018 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 29, 2019. The unaudited consolidated financial statements for September 30, 2019 and 2018, the consolidated balance sheet at December 31, 2018, 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, 2018.

Principles of Consolidation

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

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

Cash Flow Presentation

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

Dividends paid for September 30, 2018 was recalculated from the originally reported amount of $944,000 to $841,000 due to the recalculation of Bancorp expenses from month-to-date to year-to-date at September 30, 2018.

This recalculation also resulted in a change to net income from $542,000 to $439,000 and $1.3 million to $1.2 million for the three- and nine-months ended September 30, 2018, respectively.

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Reclassifications

Certain items in the 2018 consolidated financial statements have been reclassified to conform to the 2019 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 loan losses (the “allowance”); the fair value of financial instruments, such as loans and investment securities; benefit plan obligations and expenses; and the valuation of deferred tax assets and liabilities.

NOTE 3 – EARNINGS PER SHARE

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

|  | Three Months Ended |  | Nine Months Ended |
|  | September 30, |  | September 30, |
|  | 2019 |  | 2018 |  | 2019 |  | 2018 |
Basic and diluted earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |
Net income |  | $ | 605,522 |  | $ | 439,045 |  | $ | 1,059,823 |  | $ | 1,172,199 |
Weighted average common shares outstanding |  |  | 2,823,271 |  |  | 2,809,834 |  |  | 2,819,952 |  |  | 2,806,341 |
Basic and dilutive net income per share |  | $ | 0.21 |  | $ | 0.16 |  | $ | 0.38 |  | $ | 0.42 |

Diluted earnings per share calculations were not required for the three- and nine-month periods ended September 30, 2019 and 2018, as there were no stock options outstanding.

NOTE 4 – INVESTMENT SECURITIES

Investment securities are accounted for according to their purpose and holding period. Trading securities are those that are bought and held principally for the purpose of selling them in the near term. The Company held no trading securities at September 30, 2019 or December 31, 2018. Available-for-sale investment securities, comprised of debt and mortgage-backed securities, are those that may be sold before maturity due to changes in the Company's interest rate risk profile or funding needs, and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income. Held-to-maturity investment securities are those that management has the positive intent and ability to hold to maturity and are reported at amortized cost. The Company held no held-to-maturity securities at September 30, 2019 or December 31, 2018.

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 September 30, 2019 and December 31, 2018:

|  | At September 30, 2019
|  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
(dollars in thousands) |  | Cost |  | Gains |  | Losses |  | Value
Collateralized mortgage obligations |  | $ | 23,650 |  | $ | 74 |  | $ | (141) |  | $ | 23,583
Agency mortgage-backed securities |  |  | 24,989 |  |  | 175 |  |  | (158) |  |  | 25,006
Municipal securities |  |  | 13,037 |  |  | 208 |  |  | (16) |  |  | 13,229
U.S. Government agency securities |  |  | 1,999 |  |  | — |  |  | — |  |  | 1,999
U.S. Treasury securities |  |  | 1,001 |  |  | — |  |  | (1) |  |  | 1,000
Total securities available for sale |  | $ | 64,676 |  | $ | 457 |  | $ | (316) |  | $ | 64,817

|  | At December 31, 2018
|  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
(dollars in thousands) |  | Cost |  | Gains |  | Losses |  | Value
Collateralized mortgage obligations |  | $ | 20,463 |  | $ | 6 |  | $ | (663) |  | $ | 19,806
Agency mortgage-backed securities |  |  | 25,895 |  |  | 6 |  |  | (914) |  |  | 24,987
Municipal securities |  |  | 34,205 |  |  | 78 |  |  | (453) |  |  | 33,830
U.S. Government agency securities |  |  | 1,999 |  |  | — |  |  | (40) |  |  | 1,959
U.S. Treasury securities |  |  | 1,001 |  |  | — |  |  | (11) |  |  | 990
Total securities available for sale |  | $ | 83,563 |  | $ | 90 |  | $ | (2,081) |  | $ | 81,572

The gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2019 and December 31, 2018 are as follows:

September 30, 2019 |  | Less than 12 months |  | 12 months or more |  | Total
Securities available for sale: |  | Fair |  | Unrealized |  | Fair |  | Unrealized |  | Fair |  | Unrealized
|  | Value |  | Loss |  | Value |  | Loss |  | Value |  | Loss
|  | (dollars in thousands)
Collateralized mortgage obligations |  | $ | 7,043 |  | $ | (18) |  | $ | 8,039 |  | $ | (123) |  | $ | 15,082 |  | $ | (141)
Agency mortgage-backed securities |  |  | 1,853 |  |  | (4) |  |  | 12,723 |  |  | (154) |  |  | 14,576 |  |  | (158)
Municipal securities |  |  | 2,253 |  |  | (8) |  |  | 871 |  |  | (8) |  |  | 3,124 |  |  | (16)
U.S. Government agency securities |  |  | — |  |  | — |  |  | 500 |  |  | — |  |  | 500 |  |  | —
U.S. Treasury securities |  |  | — |  |  | — |  |  | 1,000 |  |  | (1) |  |  | 1,000 |  |  | (1)
|  | $ | 11,149 |  | $ | (30) |  | $ | 23,133 |  | $ | (286) |  | $ | 34,282 |  | $ | (316)

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December 31, 2018 |  | 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 |  | $ | 1,625 |  | $ | (22) |  | $ | 17,546 |  | $ | (640) |  | $ | 19,171 |  | $ | (662)
Agency mortgage-backed securities |  |  | 3,399 |  |  | (74) |  |  | 21,417 |  |  | (840) |  |  | 24,816 |  |  | (914)
Municipal securities |  |  | 13,162 |  |  | (244) |  |  | 8,415 |  |  | (210) |  |  | 21,577 |  |  | (454)
U.S. Government agency securities |  |  | — |  |  | — |  |  | 1,959 |  |  | (40) |  |  | 1,959 |  |  | (40)
U.S. Treasury securities |  |  | — |  |  | — |  |  | 990 |  |  | (11) |  |  | 990 |  |  | (11)
|  | $ | 18,186 |  | $ | (340) |  | $ | 50,327 |  | $ | (1,741) |  | $ | 68,513 |  | $ | (2,081)

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

At September 30, 2019, the Company recorded unrealized losses in its portfolio of debt securities totaling $0.3 million related to 87 securities, which resulted from increases in market interest rates, spread volatility, and other factors that management deems to be temporary. Management does not believe the securities are impaired due to reasons of credit quality. Since management believes that it is more likely than not that the Company will not be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to be other-than-temporarily impaired.

At December 31, 2018, the Company recorded unrealized losses in its portfolio of debt securities totaling $2.1 million related to 142 securities, which resulted from increases in market interest rates, spread volatility, and other factors that management deems to be temporary. Management does not believe the securities are impaired due to reasons of credit quality. Since management believes that it is more likely than not that the Company will not be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to be other-than-temporarily impaired.

Shown below are contractual maturities of debt securities at September 30, 2019. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

|  | At September 30, 2019
|  | Amortized |  | Fair |  | Yield
(dollars in thousands) |  | Cost |  | Value |  | (1), (2)
Available for sale securities maturing: |  |  |  |  |  |  |  |  |  |
Within one year |  | $ | 2,191 |  | $ | 2,189 |  |  | 2.36 | %
Over one to five years |  |  | 2,095 |  |  | 2,102 |  |  | 2.40 | %
Over five to ten years |  |  | 12,934 |  |  | 12,850 |  |  | 1.82 | %
Over ten years |  |  | 47,456 |  |  | 47,676 |  |  | 2.46 | %
Total debt securities |  | $ | 64,676 |  | $ | 64,817 |  |  |  |

_____________________

(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.

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NOTE 5 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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

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

|  | September 30, |  | December 31, |
|  | 2019 |  | 2018 |
(dollars in thousands) |  | Amount |  | % |  | Amount |  | % |
Consumer |  | $ | 12,369 |  | 4 |  | $ | 13,071 |  | 4 |
Residential real estate |  |  | 80,211 |  | 28 |  |  | 82,637 |  | 28 |
Indirect |  |  | 106,088 |  | 38 |  |  | 116,698 |  | 39 |
Commercial |  |  | 11,350 |  | 4 |  |  | 14,284 |  | 5 |
Construction |  |  | 3,161 |  | 1 |  |  | 2,317 |  | 1 |
Commercial real estate |  |  | 70,710 |  | 25 |  |  | 70,113 |  | 23 |
Loans, net of deferred fees and costs |  |  | 283,889 |  | 100 |  |  | 299,120 |  | 100 |
Less: Allowance for loan losses |  |  | (2,307) |  |  |  |  | (2,541) |  |  |
Loans, net |  | $ | 281,582 |  |  |  | $ | 296,579 |  |  |

The Bank’s net loans totaled $281.6 million at September 30, 2019, compared to $296.6 million at December 31, 2018, a decrease of $15.0 million, or 5.06%. Consumer loans decreased from $13.1 million at December 31, 2018 to $12.4 million at September 30, 2019, a decrease of $0.7 million, or 5.37%. Residential real estate loans decreased by $2.4 million, or 2.94%, from $82.6 million at December 31, 2018 to $80.2 million at September 30, 2019. Indirect loans decreased from $116.7 million at December 31, 2018 to $106.1 million at September 30, 2019, a decrease of $10.6 million, or 9.09%. Commercial loans decreased $2.9 million, or 20.54%, to $11.4 million at September 30, 2019, compared to $14.3 million at December 31, 2018. Construction loans increased by $0.8 million, or 36.40% to $3.2 million at September 30, 2019, compared to $2.3 million at December 31, 2018. Commercial real estate loans increased from $70.1 million at December 31, 2018 to $70.7 million at September 30, 2019, an increase of $0.6 million or 0.85%.

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.

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The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance, based on evaluations of the collectability of loans and prior loan loss experience, is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The evaluations are performed for each class of loans and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, value of collateral securing the loans and current economic conditions and trends that may affect the borrowers’ ability to pay. For example, delinquencies in unsecured loans and indirect automobile installment loans will be reserved for at significantly higher ratios than loans secured by real estate. Based on that analysis, the Bank deems its allowance for loan losses in proportion to the total nonaccrual loans and past due loans to be sufficient.

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

| · |  | Consumer

| · |  | Residential Real Estate

| · |  | Indirect

| · |  | Commercial

| · |  | Construction

| · |  | Commercial Real Estate

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

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

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

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

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

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

| · |  | Changes in rate and direction of charge offs and recoveries.

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Transactions in the allowance for loan losses for the nine months ended September 30, 2019 and the year ended December 31, 2018 were as follows:

September 30, 2019 |  |  |  | Residential |  |  |  |  |  |  |  |  | Commercial |  |  |
(dollars in thousands) |  | Consumer |  | Real Estate |  | Indirect |  | Commercial |  | Construction |  | Real Estate |  | Total
Balance, beginning of year |  | $ | 161 |  | $ | 864 |  | $ | 988 |  | $ | 241 |  | $ | 4 |  | $ | 283 |  | $ | 2,541
Charge-offs |  |  | (69) |  |  | (16) |  |  | (407) |  |  | (27) |  |  | — |  |  | — |  |  | (519)
Recoveries |  |  | 15 |  |  | 1 |  |  | 194 |  |  | 10 |  |  | — |  |  | — |  |  | 220
Provision for loan losses |  |  | 46 |  |  | (210) |  |  | 164 |  |  | 2 |  |  | 3 |  |  | 60 |  |  | 65
Balance, end of quarter |  | $ | 153 |  | $ | 639 |  | $ | 939 |  | $ | 226 |  | $ | 7 |  | $ | 343 |  | $ | 2,307
Individually evaluated for impairment: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance in allowance |  | $ | 15 |  | $ | — |  | $ | — |  | $ | 195 |  | $ | — |  | $ | — |  | $ | 210
Related loan balance |  |  | 88 |  |  | 659 |  |  | — |  |  | 195 |  |  | — |  |  | 3,854 |  |  | 4,796
Collectively evaluated for impairment: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance in allowance |  | $ | 138 |  | $ | 639 |  | $ | 939 |  | $ | 31 |  | $ | 7 |  | $ | 343 |  | $ | 2,097
Related loan balance |  |  | 12,281 |  |  | 79,552 |  |  | 106,088 |  |  | 11,155 |  |  | 3,161 |  |  | 66,856 |  |  | 279,093

December 31, 2018 |  |  |  | Residential |  |  |  |  |  |  |  |  | Commercial |  |  |
(dollars in thousands) |  | Consumer |  | Real Estate |  | Indirect |  | Commercial |  | Construction |  | Real Estate |  | Total
Balance, beginning of year |  | $ | 214 |  | $ | 1,061 |  | $ | 774 |  | $ | 237 |  | $ | 12 |  | $ | 291 |  | $ | 2,589
Charge-offs |  |  | (208) |  |  | (589) |  |  | (341) |  |  | — |  |  | — |  |  | (13) |  |  | (1,151)
Recoveries |  |  | 48 |  |  | 2 |  |  | 183 |  |  | 14 |  |  | — |  |  | — |  |  | 247
Provision for loan losses |  |  | 107 |  |  | 390 |  |  | 372 |  |  | (10) |  |  | (8) |  |  | 5 |  |  | 856
Balance, end of year |  | $ | 161 |  | $ | 864 |  | $ | 988 |  | $ | 241 |  | $ | 4 |  | $ | 283 |  | $ | 2,541
Individually evaluated for impairment: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance in allowance |  | $ | 22 |  | $ | — |  | $ | — |  | $ | 204 |  | $ | — |  | $ | — |  | $ | 226
Related loan balance |  |  | 138 |  |  | 854 |  |  | — |  |  | 204 |  |  | — |  |  | 1,054 |  |  | 2,250
Collectively evaluated for impairment: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance in allowance |  | $ | 139 |  | $ | 864 |  | $ | 988 |  | $ | 37 |  | $ | 4 |  | $ | 283 |  | $ | 2,315
Related loan balance |  |  | 12,933 |  |  | 81,783 |  |  | 116,698 |  |  | 14,080 |  |  | 2,317 |  |  | 69,059 |  |  | 296,870

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

|  | September 30, |  | September 30,
(dollars in thousands) |  | 2019 |  | 2018
Average loans |  | $ | 293,958 |  |  | $ | 283,006 |
Net charge offs to average loans (annualized) |  |  | 0.14 | % |  |  | 0.35 | %

During the nine-month period ended September 30, 2019, loans to 47 borrowers and related entities totaling approximately $519,000 were determined to be uncollectible and were charged off. During the nine-month period ending September 30, 2018, loans to 43 borrowers and related entities totaling approximately $954,000 were determined to be uncollectible and were charged off.

Reserve for Unfunded Commitments. Loan commitments and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Bank generally requires collateral to support financial instruments with credit risk on the same basis as it does for on-balance sheet instruments. The collateral requirement is based on management's credit evaluation of the counter party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the

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commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis.

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

As of September 30, 2019 and 2018, the Bank had outstanding commitments totaling $35.5 million and $31.4 million, respectively. These outstanding commitments consisted of letters of credit, undrawn lines of credit, and other loan commitments. The following table shows the Bank’s reserve for unfunded commitments arising from these transactions:

|  | Nine Months Ended
|  | Ended September 30,
(dollars in thousands) |  | 2019 |  | 2018
Beginning balance |  | $ | 35 |  | $ | 24
Reduction of unfunded reserve |  |  | (23) |  |  | (45)
Provisions charged to operations |  |  | 25 |  |  | 46
Ending balance |  | $ | 37 |  | $ | 25

Contractual Obligations and Commitments. No material changes, outside the normal course of business, have been made during the third quarter 2019.

Asset Quality. The following tables set forth the amount of the Bank’s current, past due, and non-accrual loans by categories of loans and restructured loans, at the dates indicated.

At September 30, 2019 |  |  |  |  |  |  |  | 90 Days or |  |  |  |  |  |
(dollars in thousands) |  |  |  |  | 30-89 Days |  | More and |  |  |  |  |  |
|  | Current |  | Past Due |  | Still Accruing |  | Nonaccrual |  | Total
Consumer |  | $ | 12,171 |  | $ | 54 |  | $ | — |  | $ | 144 |  | $ | 12,369
Residential Real Estate |  |  | 79,370 |  |  | 63 |  |  | 22 |  |  | 756 |  |  | 80,211
Indirect |  |  | 105,517 |  |  | 535 |  |  | — |  |  | 36 |  |  | 106,088
Commercial |  |  | 11,350 |  |  | — |  |  | — |  |  | — |  |  | 11,350
Construction |  |  | 3,161 |  |  | — |  |  | — |  |  | — |  |  | 3,161
Commercial Real Estate |  |  | 67,417 |  |  | — |  |  | — |  |  | 3,293 |  |  | 70,710
|  | $ | 278,986 |  | $ | 652 |  | $ | 22 |  | $ | 4,229 |  | $ | 283,889

At December 31, 2018 |  |  |  |  |  |  |  | 90 Days or |  |  |  |  |  |
(dollars in thousands) |  |  |  |  | 30-89 Days |  | More and |  |  |  |  |  |
|  | Current |  | Past Due |  | Still Accruing |  | Nonaccrual |  | Total
Consumer |  | $ | 12,669 |  | $ | 216 |  | $ | — |  | $ | 186 |  | $ | 13,071
Residential Real Estate |  |  | 80,923 |  |  | 732 |  |  | 26 |  |  | 956 |  |  | 82,637
Indirect |  |  | 115,890 |  |  | 692 |  |  | — |  |  | 116 |  |  | 116,698
Commercial |  |  | 14,171 |  |  | 86 |  |  | — |  |  | 27 |  |  | 14,284
Construction |  |  | 2,317 |  |  | — |  |  | — |  |  | — |  |  | 2,317
Commercial Real Estate |  |  | 69,451 |  |  | — |  |  | — |  |  | 662 |  |  | 70,113
|  | $ | 295,421 |  | $ | 1,726 |  | $ | 26 |  | $ | 1,947 |  | $ | 299,120

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The balances in the above charts have not been reduced by the allowance for loan loss. For the period ending September 30, 2019, the allowance for loan loss is $2.3 million. For the period ending December 31, 2018, the allowance for loan loss is $2.5 million.

At September 30, 2019, there was $0.7 million in loans outstanding that were in an accrual status, but known information about possible credit problems of borrowers caused management to have doubts as to the ability of such borrowers to comply with present loan repayment terms. Such loans consist of loans which were not 90 days or more past due but where the borrower is in bankruptcy or has a history of delinquency, or the loan to value ratio is considered excessive due to deterioration of the collateral or other factors. The two loans outstanding, totaling $0.7 million are as follows: $546,000 Commercial Real Estate loan where the guarantor is in bankruptcy and the loan has an accelerated payoff since we have an assignment of rents from the property which has a very long-term national tenant; and a $195,000 Commercial loan with a loan to value ratio which has deteriorated, which has a complete specific reserve of $195,000. Both of these loans are classified with a risk rating of Substandard.

Non-accrual loans with specific reserves at September 30, 2019 are comprised of:

Consumer loans –One loan to one borrowers that totaled $41,641 with specific reserves of $15,260 established for the loan, which was also a Troubled Debt Restructured loan.

Below is a summary of the recorded investment amount and related allowance for losses of the Bank’s impaired loans at September 30, 2019 and December 31, 2018.

September 30, 2019 |  |  |  |  | Unpaid |  | Interest |  |  |  |  | Average
(dollars in thousands) |  | Recorded |  | Principal |  | Income |  | Specific |  | Recorded
|  | Investment |  | Balance |  | Recognized |  | Reserve |  | Investment
Impaired loans with specific reserves: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer |  | $ | 42 |  | $ | 42 |  | $ | 2 |  | $ | 15 |  | $ | 50
Commercial |  |  | 195 |  |  | 195 |  |  | 11 |  |  | 195 |  |  | 200
Total impaired loans with specific reserves |  |  | 237 |  |  | 237 |  |  | 13 |  |  | 210 |  |  | 250
Impaired loans with no specific reserve: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer |  | $ | 102 |  | $ | 102 |  | $ | — |  | $ | n/a |  | $ | 50
Residential Real Estate |  |  | 757 |  |  | 1,526 |  |  | 8 |  |  | n/a |  |  | 1,829
Indirect |  |  | 35 |  |  | 35 |  |  | — |  |  | n/a |  |  | —
Commercial Real Estate |  |  | 3,854 |  |  | 3,854 |  |  | 67 |  |  | n/a |  |  | 4,006
Total impaired loans with no specific reserve |  | $ | 4,748 |  | $ | 5,517 |  | $ | 75 |  |  | — |  | $ | 5,885

December 31, 2018 |  |  |  |  | Unpaid |  | Interest |  |  |  |  | Average
(dollars in thousands) |  | Recorded |  | Principal |  | Income |  | Specific |  | Recorded
|  | Investment |  | Balance |  | Recognized |  | Reserve |  | Investment
Impaired loans with specific reserves: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer |  | $ | 89 |  | $ | 89 |  | $ | 3 |  | $ | 22 |  | $ | 136
Commercial |  |  | 204 |  |  | 204 |  |  | 12 |  |  | 204 |  |  | 211
Total impaired loans with specific reserves |  |  | 294 |  |  | 294 |  |  | 15 |  |  | 226 |  |  | 347
Impaired loans with no specific reserve: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer |  | $ | 96 |  | $ | 300 |  | $ | 2 |  |  | n/a |  | $ | 50
Residential Real Estate |  |  | 956 |  |  | 1,545 |  |  | 4 |  |  | n/a |  |  | 1,981
Indirect |  |  | 116 |  |  | 457 |  |  | — |  |  | n/a |  |  | —
Commercial Real Estate |  |  | 1,267 |  |  | 1,267 |  |  | 39 |  |  | n/a |  |  | 1,148
Total impaired loans with no specific reserve |  | $ | 2,435 |  | $ | 3,569 |  | $ | 45 |  |  | — |  | $ | 3,179

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|  | September 30, |  | December 31,
(dollars in thousands) |  | 2019 |  | 2018
Troubled debt restructured loans |  | $ | 237 |  |  | $ | 248 |
Non-accrual and 90+ days past due and still accruing loans to average loans |  |  | 1.51 | % |  |  | 0.76 | %
Allowance for loan losses to nonaccrual & 90+ days past due and still accruing loans |  |  | 54.3 | % |  |  | 128.7 | %

At September 30, 2019, there were two troubled debt restructured loans consisting of a commercial loan of $195,000 and a consumer loan of $42,000. The consumer loan is in a nonaccrual status.

The following table shows the activity for non-accrual loans at September 30, 2018 and 2019.

|  |  |  | Residential |  |  |  |  |  |  |  | Commercial |  |
(dollars in thousands) |  | Consumer |  | Real Estate |  | Indirect |  | Commercial |  | Construction |  | Real Estate |  | Totals
December 31, 2017 |  | 185 |  | 2,124 |  | 88 |  | 48 |  | 318 |  | 507 |  | 3,270
Transfers into nonaccrual |  | 44 |  | 183 |  | 305 |  | — |  | — |  | 2,000 |  | 2,532
Loans paid down/payoffs |  | (15) |  | (41) |  | (51) |  | (48) |  | (8) |  | (136) |  | (299)
Loans returned to accrual status |  | — |  | — |  | (50) |  | — |  | — |  | — |  | (50)
Loans charged off |  | (92) |  | (513) |  | (163) |  | — |  | — |  | — |  | (768)
September 30, 2018 |  | 122 |  | 1,753 |  | 129 |  | — |  | 310 |  | 2,371 |  | 4,685
December 31, 2018 |  | 186 |  | 956 |  | 116 |  | 27 |  | — |  | 662 |  | 1,947
Transfers into nonaccrual |  | 135 |  | 572 |  | 467 |  | 86 |  | — |  | 2,746 |  | 4,006
Loans paid down/payoffs |  | (48) |  | (755) |  | (52) |  | (86) |  | — |  | (115) |  | (1,056)
Loans returned to accrual status |  | (88) |  | — |  | (105) |  | — |  | — |  | — |  | (193)
Loans charged off |  | (41) |  | (17) |  | (390) |  | (27) |  | — |  | — |  | (475)
September 30, 2019 |  | 144 |  | 756 |  | 36 |  | — |  | — |  | 3,293 |  | 4,229

Other Real Estate Owned. At September 30, 2019 and December 31, 2018, the Company had $705,000 in real estate acquired in partial or total satisfaction of debt. All such properties are initially recorded at the lower of cost or fair value (net realizable value) at the date acquired and carried on the balance sheet as other real estate owned. Losses arising at the date of acquisition are charged against the allowance for credit losses. Subsequent write-downs that may be required and expense of operation are included in noninterest expense. Gains and losses realized from the sale of other real estate owned were included in noninterest income.

Credit Quality Information

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

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The Bank’s internal risk ratings are as follows:

| 1 |  | Superior – minimal risk. (normally supported by pledged deposits, United States government securities, etc.)

| 2 |  | Above Average - low risk. (all of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

| 3 |  | Average – moderately low risk. (most of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

| 4 |  | Acceptable – moderate risk. (the weighted overall risk associated with this credit based on each of the bank’s creditworthiness criteria is acceptable)

| 5 |  | Other Assets Especially Mentioned – moderately high risk. (possesses deficiencies which corrective action by the bank would remedy; potential watch list)

| 6 |  | Substandard – (the bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected)

| 7 |  | Doubtful – (weaknesses make collection or liquidation in full, based on currently existing facts, improbable)

| 8 |  | Loss – (of little value; not warranted as a bankable asset)

The following tables provides information with respect to the Company's credit quality indicators by loan portfolio segment at September 30, 2019 and December 31, 2018:

September 30, 2019 |  |  |  | Residential |  |  |  |  |  |  |  | Commercial |  |  |
(dollars in thousands) |  | Consumer |  | Real Estate |  | Indirect |  | Commercial |  | Construction |  | Real Estate |  | Total
Pass |  | $ | 12,225 |  | $ | 79,453 |  | $ | 106,053 |  | $ | 11,155 |  | $ | 3,161 |  | $ | 66,856 |  | $ | 278,903
Special mention |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | —
Substandard |  |  | 144 |  |  | 758 |  |  | 4 |  |  | 195 |  |  | — |  |  | 3,854 |  |  | 4,955
Doubtful |  |  | — |  |  | — |  |  | 31 |  |  | — |  |  | — |  |  | — |  |  | 31
Loss |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | —
|  | $ | 12,369 |  | $ | 80,211 |  | $ | 106,088 |  | $ | 11,350 |  | $ | 3,161 |  | $ | 70,710 |  | $ | 283,889
Nonaccrual |  | $ | 144 |  | $ | 756 |  | $ | 36 |  | $ | — |  | $ | — |  | $ | 3,293 |  | $ | 4,229
Troubled debt restructures |  | $ | 42 |  | $ | — |  | $ | — |  | $ | 195 |  | $ | — |  | $ | — |  | $ | 237
Number of TDRs accounts |  |  | 1 |  |  | — |  |  | — |  |  | 1 |  |  | — |  |  | — |  |  | 2
Non-performing TDRs |  | $ | 42 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 42
Number of non-performing TDR accounts |  |  | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1

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December 31, 2018 |  |  |  | Residential |  |  |  |  |  |  |  | Commercial |  |  |
(dollars in thousands) |  | Consumer |  | Real Estate |  | Indirect |  | Commercial |  | Construction |  | Real Estate |  | Total
Pass |  | $ | 12,888 |  | $ | 82,111 |  | $ | 115,724 |  | $ | 14,284 |  | $ | 2,317 |  | $ | 69,900 |  | $ | 297,224
Special mention |  |  | — |  |  | 424 |  |  | 645 |  |  | — |  |  | — |  |  | — |  |  | 1,069
Substandard |  |  | 183 |  |  | 102 |  |  | 244 |  |  | — |  |  | — |  |  | 213 |  |  | 742
Doubtful |  |  | — |  |  | — |  |  | 85 |  |  | — |  |  | — |  |  | — |  |  | 85
Loss |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | —
|  | $ | 13,071 |  | $ | 82,637 |  | $ | 116,698 |  | $ | 14,284 |  | $ | 2,317 |  | $ | 70,113 |  | $ | 299,120
Nonaccrual |  | $ | 186 |  | $ | 956 |  | $ | 116 |  | $ | 27 |  | $ | — |  | $ | 662 |  | $ | 1,947
Troubled debt restructures |  | $ | 44 |  | $ | — |  | $ | — |  | $ | 204 |  | $ | — |  | $ | — |  | $ | 248
Number of TDRs accounts |  |  | 1 |  |  | — |  |  | — |  |  | 1 |  |  | — |  |  | — |  |  | 2
Non-performing TDRs |  | $ | 44 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 44
Number of non-performing TDR accounts |  |  | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1

NOTE 6 – FAIR VALUE

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

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

The Fair Value Hierarchy

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

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

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

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

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

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

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

Loans. At September 30, 2019, these assets included 19 loans, excluding $0.2 million of residential real estate, consumer and indirect loans. They have been classified as impaired and include nonaccrual, past due 90 days or more and still accruing, and a homogeneous pool of indirect loans all considered to be impaired loans, which are valued under Level 3 inputs. Impaired loans totaled $4.8 million with $210,000 of specific reserves as of September 30, 2019. Foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Company is predominantly a cash flow lender with real estate serving as collateral on a majority of loans. These loans totaled $4.6 million of the total impaired loans as of September 30, 2019. On a quarterly basis, the Company determines such fair values through a variety of data points and mostly rely on appraisals from independent appraisers. We obtain an appraisal on properties when they become impaired and have new appraisals at least every year. Typically, these appraisals do not include an inside inspection of the property as our loan documents do not require the borrower to allow access to the property. Therefore the most significant unobservable inputs is the details of the amenities included within the property and the condition of the property. Further, we cannot always accurately assess the amount of time it takes to gain ownership of our collateral through the foreclosure process and the damage, as well as potential looting, of the property further decreasing our value. Thus, in determining the fair values we discount the current independent appraisals, with a range from 0% to 16%, based on individual circumstances. The remaining impaired loans ($374,000 with $210,000 of specific reserves as of September 30, 2019) include mobile homes, commercial, consumer, and indirect auto loans, which are valued based on the value of the underlying collateral.

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

|  |  |  |  |  |  |  |  |  |  | Fair
(dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Value
September 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |
Collateralized mortgage obligations |  | $ | — |  | $ | 23,583 |  | $ | — |  | $ | 23,583
Agency mortgage-backed securities |  |  | — |  |  | 25,006 |  |  | — |  |  | 25,006
Municipal securities |  |  | — |  |  | 13,229 |  |  | — |  |  | 13,229
U.S. Government agency securities |  |  | — |  |  | 1,999 |  |  | — |  |  | 1,999
U.S. Treasury securities |  |  | — |  |  | 1,000 |  |  | — |  |  | 1,000
Interest rate swap |  |  | — |  |  | (460) |  |  | — |  |  | (460)
Non-recurring: |  |  |  |  |  |  |  |  |  |  |  |
Maryland Financial Bank stock |  |  | — |  |  | — |  |  | 4 |  |  | 4
Impaired loans |  |  | — |  |  | — |  |  | 4,775 |  |  | 4,775
OREO |  |  | — |  |  | 705 |  |  | — |  |  | 705
|  | $ | — |  | $ | 65,062 |  | $ | 4,779 |  | $ | 69,840
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |
Collateralized mortgage obligations |  | $ | — |  | $ | 19,806 |  | $ | — |  | $ | 19,806
Agency mortgage-backed securities |  |  | — |  |  | 24,987 |  |  | — |  |  | 24,987
Municipal securities |  |  | — |  |  | 33,830 |  |  | — |  |  | 33,830
U.S. Government agency securities |  |  | — |  |  | 1,959 |  |  | — |  |  | 1,959
U.S. Treasury securities |  |  | — |  |  | 990 |  |  | — |  |  | 990
Interest rate swap |  |  | — |  |  | 295 |  |  | — |  |  | 295
Non-recurring: |  |  |  |  |  |  |  |  |  |  |  |
Maryland Financial Bank stock |  |  | — |  |  | — |  |  | 5 |  |  | 5
Impaired loans |  |  | — |  |  | — |  |  | 2,501 |  |  | 2,501
OREO |  |  |  |  |  | 705 |  |  |  |  |  | 705
|  | $ | — |  | $ | 82,572 |  | $ | 2,506 |  | $ | 85,078

The estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018 are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

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|  | September 30, 2019 |  | December 31, 2018 |
(dollars in thousands) |  | Carrying |  | Fair |  | Carrying |  | Fair |
|  | Amount |  | Value |  | Amount |  | Value |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 3,678 |  | $ | 3,678 |  | $ | 2,605 |  | $ | 2,605 |
Interest-bearing deposits in other financial institutions |  |  | 14,991 |  |  | 14,991 |  |  | 12,468 |  |  | 12,468 |
Federal funds sold |  |  | 902 |  |  | 902 |  |  | 881 |  |  | 881 |
Investment securities available for sale |  |  | 64,817 |  |  | 64,817 |  |  | 81,572 |  |  | 81,572 |
Investments in restricted stock |  |  | 1,225 |  |  | 1,225 |  |  | 2,481 |  |  | 2,481 |
Ground rents |  |  | 143 |  |  | 143 |  |  | 143 |  |  | 143 |
Loans, less allowance for credit losses |  |  | 281,582 |  |  | 277,175 |  |  | 296,579 |  |  | 293,175 |
Accrued interest receivable |  |  | 976 |  |  | 976 |  |  | 1,198 |  |  | 1,198 |
Cash value of life insurance |  |  | 7,982 |  |  | 7,982 |  |  | 7,860 |  |  | 7,860 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 325,266 |  |  | 324,759 |  |  | 322,453 |  |  | 307,271 |
Short-term borrowings |  |  | 20,000 |  |  | 20,004 |  |  | 55,000 |  |  | 55,851 |
Accrued interest payable |  |  | 120 |  |  | 120 |  |  | 152 |  |  | 152 |
Unrecognized financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit |  |  | 33,503 |  |  | 33,503 |  |  | 23,494 |  |  | 23,494 |
Standby letters of credit |  |  | 1,059 |  |  | 1,059 |  |  | 1,059 |  |  | 1,059 |

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

(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | Carrying |  | Fair |  |  |  |  |  |  |  |
September 30, 2019 |  | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial instruments - Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 19,571 |  | $ | 19,571 |  | $ | 19,571 |  | — |  | $ | —
Loans receivable, net |  |  | 281,582 |  |  | 277,175 |  |  | — |  | — |  |  | 277,175
Cash value of life insurance |  |  | 7,982 |  |  | 7,982 |  |  | — |  | 7,982 |  |  | —
Financial instruments - Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 325,266 |  |  | 324,759 |  |  | 111,535 |  | 213,224 |  |  | —
Short-term debt |  |  | 20,000 |  |  | 20,004 |  |  | — |  | 20,004 |  |  | —

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

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

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

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NOTE 7 – RECENT ACCOUNTING PRONOUNCEMENTS

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") as of the required effective dates. The following accounting pronouncements should be read in conjunction with "Critical Accounting Policies" of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2018 Form 10-K.

Accounting Standards Update (“ASU”) 2014‑09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014‑09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014‑09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. ASU 2014‑09 was effective for the Company on January 1, 2018 and did not have a significant impact on our financial statements.

ASU 2016‑1, “Financial Instruments – Overall (Subtopic 825‑10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 is intended to improve the recognition and measurement of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured and amortized at cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU 2016-01 was effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU 2016-01 on January 1, 2018 and it did not have a material impact on the consolidated financial statement. The Bank’s equity securities are membership stocks in the Federal Home Loan Bank and Maryland Financial Bank and thereby excluded from fair value pricing. For exit pricing on loans, the Company used data on recent originations which captured expectations of the credit risk “premium” and an analysis of prepayments which captures the Company’s historical prepayment experience.

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

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relating to branch premises. As a result, the Company recognized a lease liability of $0.8 million and a related right-of-use asset of $0.8 million on its consolidated balance sheet on January 1, 2019.

ASU No. 2016‑13, “Financial Instruments—Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments” which updated guidance intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The updated guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires the consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. While the Company generally expects that the implementation of ASU 2016-13 will increase the allowance for loan losses balance, the Company is continuing to evaluate the potential impact on the Company’s financial statements.

ASU 2016‑15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016‑15”). ASU 2016 15 addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016‑15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early application is permitted, including adoption in an interim period. The Company’s adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

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

ASU 2017‑01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business.” ASU 2017‑01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017‑01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017‑01 was effective for the Company on January 1, 2018 and did not have a significant impact on our financial statements.

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

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interim periods beginning after December 15, 2018 and early adoption was permitted. ASU 2017-12 was effective for the Company on January 1, 2019 and did not have a significant impact on our financial statements.

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

ASU No. 2018-13, “Fair Value Measurement (Topic 820).” ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 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.

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

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

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

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

NOTE 8 – REVENUE RECOGNITION

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

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

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

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

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

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

When used in this discussion and elsewhere in this Form 10‑Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, those risks identified in the Company’s periodic reports filed with the Securities and Exchange Commission, including its most recent Annual Report on Form 10‑K.

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

OVERVIEW

Glen Burnie Bancorp, a Maryland corporation (the “Company”), through its subsidiary, The Bank of Glen Burnie, a Maryland banking corporation (the “Bank”), operates a commercial bank with eight offices in Anne Arundel County Maryland. The Bank’s loan portfolio decreased by $15.0 million or 5.06% in the first nine months of 2019 due to a slower pace of loan originations stemming primarily from a competitive and challenging economic environment. The Company has strong liquidity and capital positions that provide ample capacity for future growth, along with the Bank’s total regulatory capital to risk weighted assets of 13.18% at September 30, 2019, compared to 12.64% for the same period of 2018.

Return on average assets for the three- and nine-month periods ended September 30, 2019 were 0.63% and 0.37%, respectively, compared to 0.43% and 0.39% for the three- and nine-month periods ended September 30, 2018, respectively. Return on average equity for the three- and nine-month period ended September 30, 2019 were 6.77% and 4.06%, respectively, compared to 5.04% and 4.60% for the three- and nine-month period ended September 30, 2018, respectively. Lower provision for loan losses offset by lower net interest income and higher income tax expense primarily drove higher returns for the three-month period ended September 30, 2019. Lower gains on redemption of BOLI policies and higher noninterest expenses primarily drove the lower returns for the nine-month period ended September 30, 2019.

The book value per share of Bancorp’s common stock was $12.52 at September 30, 2019, compared to $11.86 per share at September 30, 2018.

At September 30, 2019, the Bank remained above all “well-capitalized” regulatory requirement levels. The Bank’s estimated tier 1 risk-based capital ratio was 12.36% at September 30, 2019, compared to 12.27% at December 31, 2018.

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

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RESULTS OF OPERATIONS

Net income available to common stockholders for the three-month period ended September 30, 2019 was $606,000, or $0.21 per basic and diluted common share compared to $439,000, or $0.16 per basic and diluted common share for the same period of 2018. The results recorded for the three-month period ending September 30, 2019 were higher than the same period of 2018 resulting primarily from $385,000 reduction in the provision for loan losses driven by lower net charge offs offset by a $272,000 reduction in total interest income in 2019 compared to 2018. Net income available to common stockholders for the nine-month period ended September 30, 2019 was $1,060,000, or $0.38 per basic and diluted common share compared to $1,172,000, or $0.42 per basic and diluted common share for the same period of 2018. The results recorded for the nine-month period ending September 30, 2019 were lower than the same period of 2018 resulting primarily from $218,000 higher noninterest expenses and $249,000 lower noninterest income, offset by a $597,000 decrease in the provision for loan losses.

Net Interest Income. The Company’s net interest income for the three-month period ended September 30, 2019 was $3.1 million, compared to $3.3 million for the same period in 2018, a decrease of $158,000, or 4.78%. The Company’s net interest income for the nine-month period ended September 30, 2019 was $9.4 million, compared to $9.3 million for the same period in 2018, an increase of $61,000 or 0.65%.

Total interest income for the third quarter 2019 decreased $272,000, or 7.05% when compared to the same period in 2018, from $3.9 million in 2018 to $3.6 million in 2019. The primary driver of the decrease was a decrease of $93,000 in interest and fees on loans and a $200,000 decrease in interest and dividends on investment securities due to lower portfolio balances in 2019 compared to 2018. Total interest income increased $24,000 for the nine-month period ended September 30, 2019, when compared to the same period in 2018 from $10.9 million in 2018 to $10.9 million in 2019, an increase of 0.22%. The primary driver of the increase in total interest income was an increase of $443,000 in interest and fees on loans and a $105,000 increase in interest on deposits with banks and federal funds sold, offset by a decrease of $524,000 in interest and dividends on securities which resulted from lower portfolio balances in 2019 compared to 2018.

Interest expense for the third quarter 2019 decreased $114,000 from $560,000 for the same period in 2018 to $446,000 in 2019, a decrease of 20.27%. The primary driver for the decrease was a $35.0 million decrease in short-term borrowings repaid using proceeds from the sale of investment securities. Interest expense decreased $37,000 for the nine-month period ended September 30, 2019 from $1.5 million for the same period in 2018 to $1.5 million in 2019, a decrease of 2.44%. The decrease was primarily due to decrease in the cost of short-term borrowings in 2019 compared to 2018 which had higher borrowings that were used to fund loan originations for the nine-month period ended September 30, 2018.

Net interest margin for the three-month period ended September 30, 2019 was 3.43% compared to 3.34% for the three-month period ended September 30, 2018. The increase was primarily due to lower average balances and interest rates on borrowed funds. The yield on interest earning assets increased by 0.01% from 3.91% for the three-month period ended September 30, 2018 to 3.92% for the same period of 2019. The cost of funds decreased 0.08% from 0.60% for the three-month period ended September 30, 2018 to 0.52% for the same period of 2019. N et interest margins for the nine-month period ended September 30, 2019 was 3.38% compared to 3.26% for the nine-month period ended September 30, 2018. The increase was primarily due to higher yields on interest earning assets partially offset by a higher cost of funds. The yield on interest earning assets increased by 0.12% from 3.79% for the nine-month period ended September 30, 2018 to 3.91% for the same period of 2019. The cost of funds increased 0.01% from 0.55% for the nine-month period ended September 30, 2018 to 0.56% for the same period of 2019.

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

|  | Three Months Ended September 30,
|  | 2019 |  | 2018 |
|  | Average |  |  |  |  | Yield/ |  | Average |  |  |  |  | Yield/ |
(dollars in thousands) |  | Balance |  | Interest |  | Cost |  | Balance |  | Interest |  | Cost |
ASSETS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits w/ banks & fed funds |  | $ | 13,949 |  | $ | 69 |  | 1.95 | % | $ | 7,360 |  | $ | 44 |  | 2.37 | %
Investment securities available for sale |  |  | 61,456 |  |  | 326 |  | 2.12 |  |  | 88,611 |  |  | 526 |  | 2.38 |
Restricted equity securities |  |  | 1,227 |  |  | 19 |  | 6.25 |  |  | 1,846 |  |  | 23 |  | 4.89 |
Total interest bearing deposits/investments |  |  | 76,632 |  |  | 414 |  | 2.14 |  |  | 97,817 |  |  | 593 |  | 2.40 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial & industrial |  |  | 11,761 |  |  | 192 |  | 6.49 |  |  | 12,797 |  |  | 202 |  | 6.27 |
Commercial real estate |  |  | 71,326 |  |  | 911 |  | 5.07 |  |  | 74,926 |  |  | 977 |  | 5.18 |
Residential real estate |  |  | 80,490 |  |  | 927 |  | 4.61 |  |  | 83,438 |  |  | 1,003 |  | 4.81 |
Indirect automobile |  |  | 108,354 |  |  | 867 |  | 3.20 |  |  | 105,802 |  |  | 792 |  | 2.99 |
Construction |  |  | 3,043 |  |  | 64 |  | 8.34 |  |  | 2,806 |  |  | 48 |  | 6.73 |
Consumer & other |  |  | 11,970 |  |  | 215 |  | 7.12 |  |  | 14,180 |  |  | 247 |  | 6.92 |
Total loans |  |  | 286,944 |  |  | 3,176 |  | 4.39 |  |  | 293,949 |  |  | 3,269 |  | 4.41 |
Total interest-earning assets |  |  | 363,576 |  |  | 3,590 |  | 3.92 |  |  | 391,766 |  |  | 3,862 |  | 3.91 |
Cash |  |  | 3,095 |  |  |  |  |  |  |  | 3,538 |  |  |  |  |  |
Allowance for loan losses |  |  | (2,380) |  |  |  |  |  |  |  | (2,358) |  |  |  |  |  |
Market valuation |  |  | 18 |  |  |  |  |  |  |  | (2,637) |  |  |  |  |  |
Other assets |  |  | 16,544 |  |  |  |  |  |  |  | 18,074 |  |  |  |  |  |
Total non-earning assets |  |  | 17,277 |  |  |  |  |  |  |  | 16,617 |  |  |  |  |  |
Total assets |  | $ | 380,853 |  |  |  |  |  |  | $ | 408,383 |  |  |  |  |  |
LIABILITIES AND STOCKHOLDER'S EQUITY: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing checking and savings |  | $ | 111,656 |  |  | 17 |  | 0.06 | % | $ | 112,405 |  |  | 20 |  | 0.07 | %
Money market |  |  | 19,827 |  |  | 2 |  | 0.05 |  |  | 19,589 |  |  | 2 |  | 0.05 |
Certificates of deposit |  |  | 82,777 |  |  | 317 |  | 1.52 |  |  | 100,385 |  |  | 340 |  | 1.34 |
Total interest-bearing deposits |  |  | 214,260 |  |  | 336 |  | 0.62 |  |  | 232,379 |  |  | 362 |  | 0.62 |
Borrowed Funds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal Funds Purchased |  |  | — |  |  | — |  | — |  |  | — |  |  | — |  | — |
FHLB advances |  |  | 20,000 |  |  | 110 |  | 2.19 |  |  | 34,487 |  |  | 198 |  | 2.28 |
Total borrowed funds |  |  | 20,000 |  |  | 110 |  | 2.19 |  |  | 34,487 |  |  | 198 |  | 2.28 |
Total interest-bearing liabilities |  |  | 234,260 |  |  | 446 |  | 0.76 |  |  | 266,866 |  |  | 560 |  | 0.83 |
Non-interest-bearing deposits |  |  | 108,633 |  |  |  |  |  |  |  | 106,033 |  |  |  |  |  |
Total cost of funds |  |  | 342,893 |  |  | 446 |  | 0.52 |  |  | 372,899 |  |  | 560 |  | 0.60 |
Other liabilities and accrued expenses |  |  | 2,471 |  |  |  |  |  |  |  | 929 |  |  |  |  |  |
Total liabilities |  |  | 345,364 |  |  |  |  |  |  |  | 373,828 |  |  |  |  |  |
Stockholder's equity |  |  | 35,489 |  |  |  |  |  |  |  | 34,555 |  |  |  |  |  |
Total liabilities and equity |  | $ | 380,853 |  |  |  |  |  |  | $ | 408,383 |  |  |  |  |  |
Net interest income |  |  |  |  | $ | 3,144 |  |  |  |  |  |  | $ | 3,302 |  |  |
Yield on earning assets |  |  |  |  |  |  |  | 3.92 | % |  |  |  |  |  |  | 3.91 | %
Cost of interest-bearing liabilities |  |  |  |  |  |  |  | 0.76 | % |  |  |  |  |  |  | 0.83 | %
Net interest spread |  |  |  |  |  |  |  | 3.16 | % |  |  |  |  |  |  | 3.08 | %
Net interest margin |  |  |  |  |  |  |  | 3.43 | % |  |  |  |  |  |  | 3.34 | %

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|  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |
|  | Average |  |  |  |  | Yield/ |  | Average |  |  |  |  | Yield/ |
(dollars in thousands) |  | Balance |  | Interest |  | Cost |  | Balance |  | Interest |  | Cost |
ASSETS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits w/ banks & fed funds |  | $ | 12,242 |  | $ | 189 |  | 2.07 | % | $ | 7,843 |  | $ | 103 |  | 1.75 | %
Investment securities available for sale |  |  | 64,338 |  |  | 1,062 |  | 2.20 |  |  | 90,783 |  |  | 1,585 |  | 2.33 |
Restricted equity securities |  |  | 1,535 |  |  | 80 |  | 7.01 |  |  | 1,562 |  |  | 62 |  | 5.29 |
Total interest bearing deposits/investments |  |  | 78,115 |  |  | 1,331 |  | 2.28 |  |  | 100,188 |  |  | 1,750 |  | 2.34 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial & industrial |  |  | 13,310 |  |  | 631 |  | 6.34 |  |  | 11,815 |  |  | 544 |  | 6.14 |
Commercial real estate |  |  | 71,338 |  |  | 2,678 |  | 5.02 |  |  | 73,987 |  |  | 2,756 |  | 4.98 |
Residential real estate |  |  | 81,169 |  |  | 2,768 |  | 4.55 |  |  | 82,535 |  |  | 2,822 |  | 4.56 |
Indirect automobile |  |  | 112,894 |  |  | 2,630 |  | 3.11 |  |  | 96,124 |  |  | 2,083 |  | 2.89 |
Construction |  |  | 2,807 |  |  | 175 |  | 8.32 |  |  | 3,664 |  |  | 170 |  | 6.19 |
Consumer & other |  |  | 12,440 |  |  | 661 |  | 7.11 |  |  | 14,880 |  |  | 726 |  | 6.52 |
Total loans |  |  | 293,958 |  |  | 9,543 |  | 4.34 |  |  | 283,006 |  |  | 9,100 |  | 4.30 |
Total interest-earning assets |  |  | 372,073 |  |  | 10,874 |  | 3.91 |  |  | 383,193 |  |  | 10,850 |  | 3.79 |
Cash |  |  | 2,617 |  |  |  |  |  |  |  | 2,925 |  |  |  |  |  |
Allowance for loan losses |  |  | (2,495) |  |  |  |  |  |  |  | (2,556) |  |  |  |  |  |
Market valuation |  |  | (891) |  |  |  |  |  |  |  | (2,325) |  |  |  |  |  |
Other assets |  |  | 16,581 |  |  |  |  |  |  |  | 17,747 |  |  |  |  |  |
Total non-earning assets |  |  | 15,812 |  |  |  |  |  |  |  | 15,791 |  |  |  |  |  |
Total assets |  | $ | 387,885 |  |  |  |  |  |  | $ | 398,984 |  |  |  |  |  |
LIABILITIES AND STOCKHOLDER'S EQUITY: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing checking and savings |  | $ | 112,444 |  |  | 50 |  | 0.06 | % | $ | 114,109 |  |  | 55 |  | 0.06 | %
Money market |  |  | 19,720 |  |  | 7 |  | 0.05 |  |  | 19,929 |  |  | 8 |  | 0.05 |
Certificates of deposit |  |  | 86,316 |  |  | 944 |  | 1.46 |  |  | 97,001 |  |  | 934 |  | 1.29 |
Total interest-bearing deposits |  |  | 218,480 |  |  | 1,001 |  | 0.61 |  |  | 231,039 |  |  | 997 |  | 0.58 |
Borrowed Funds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
FHLB advances |  |  | 27,323 |  |  | 465 |  | 2.28 |  |  | 27,878 |  |  | 506 |  | 2.43 |
Total borrowed funds |  |  | 27,323 |  |  | 465 |  | 2.28 |  |  | 27,878 |  |  | 506 |  | 2.43 |
Total interest-bearing liabilities |  |  | 245,803 |  |  | 1,466 |  | 0.80 |  |  | 258,917 |  |  | 1,503 |  | 0.78 |
Non-interest-bearing deposits |  |  | 105,257 |  |  |  |  |  |  |  | 105,089 |  |  |  |  |  |
Total cost of funds |  |  | 351,060 |  |  | 1,466 |  | 0.56 |  |  | 364,006 |  |  | 1,503 |  | 0.55 |
Other liabilities and accrued expenses |  |  | 1,887 |  |  |  |  |  |  |  | 882 |  |  |  |  |  |
Total liabilities |  |  | 352,947 |  |  |  |  |  |  |  | 364,888 |  |  |  |  |  |
Stockholder's equity |  |  | 34,938 |  |  |  |  |  |  |  | 34,096 |  |  |  |  |  |
Total liabilities and equity |  | $ | 387,885 |  |  |  |  |  |  | $ | 398,984 |  |  |  |  |  |
Net interest income |  |  |  |  | $ | 9,408 |  |  |  |  |  |  | $ | 9,347 |  |  |
Yield on earning assets |  |  |  |  |  |  |  | 3.91 | % |  |  |  |  |  |  | 3.79 | %
Cost of interest-bearing liabilities |  |  |  |  |  |  |  | 0.80 | % |  |  |  |  |  |  | 0.78 | %
Net interest spread |  |  |  |  |  |  |  | 3.11 | % |  |  |  |  |  |  | 3.01 | %
Net interest margin |  |  |  |  |  |  |  | 3.38 | % |  |  |  |  |  |  | 3.26 | %

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Provision for Credit Losses. The Company recognized provisions for credit losses in the amount of negative $139,000 and $246,000 for the three-month period ending September 30, 2019 and 2018, respectively. The decrease in provision for credit losses in the 2019 period was primarily the result of $437,000 lower net charge offs. As of September 30, 2019, the allowance for credit losses represented 0.81% of total loans compared to 0.83% at September 30, 2018 and is consistent with our improved credit quality. The Company recognized provisions for credit losses in the amount of $65,000 and $601,000 for the nine-month period ending September 30, 2019 and 2018, respectively. The decrease for the nine-month period ended September 30, 2019 as compared to the same period in 2018 primarily reflects lower net charge offs. As a result, the allowance for loan losses was $2.31 million at September 30, 2019, representing 0.81% of total loans, compared to $2.46 million, or 0.83% of total loans for the same period of 2018.

Noninterest Income. Noninterest income increased to $391,000 for the three-month period ended September 30, 2019, from $331,000 for the corresponding period in 2018, an increase of $60,000, or 18.13%. The increase was primarily due to an increase in other fees and commisions. Noninterest income decreased to $955,000 for the nine-month period ended September 30, 2019, from $1,204,000 for the corresponding period in 2018, a decrease of $249,000, or 20.67%. The decrease was primarily due to $308,000 lower gains on redemption of BOLI.

Noninterest Expenses. Noninterest expenses for the three-month periods ended September 30 did not materially change between 2018 and 2019, and were $2.9 million for each of the three-month periods ended September 30, 2018 and 2019. Noninterest expenses for the 2019 period decreased in salary and employee benefits cost, data processing and item processing services and FDIC insurance costs, but increased in occupancy and equipment expenses including investments in technology and infrastructure improvements and legal, accounting and other professional fees. Noninterest expenses increased from $8.7 million for the nine-month period ended September 30, 2018, to $8.9 million for the corresponding period in 2019, an increase of $218,000, or 2.50%. The increase was primarily due to increases in salary and employee benefits costs, occupancy and equipment expenses, legal, accounting and other professional fees, litigation settlement costs, and bank robbery and fraud losses, partially offset by decreases in data processing and item processing services, FDIC insurance costs and loan collection costs.

Income Taxes. During the three-month period ended September 30, 2019, the Company recorded income tax expense of $212,000 compared to $89,000 for the same period in 2018. During the nine-month period ended September 30, 2019, the Company recorded income tax expense of $315,000 compared to $73,000 for the same period in 2018. The Company’s annualized effective tax rate at September 30, 2019 was 22.32% compared to 7.62% for the prior year. The increase in the annualized effective tax rate between years for both the three- and nine-month periods was due to the gain on the redemptions of BOLI policies, which are tax exempt and sale of tax-exempt municipal securities in the first quarter 2019.

Comprehensive Income (Loss). In accordance with regulatory requirements, the Company reports comprehensive income (loss) in its financial statements. Comprehensive income (loss) consists of the Company’s net income, adjusted for unrealized gains and losses on the Bank’s portfolio of investment securities and interest rate swap contracts. For the third quarter of 2019, comprehensive income, net of tax, totaled $727,000 compared to comprehensive income of $44,000 for the same period in 2018. The increase was due to net unrealized gains on available for sale securities, offset by lower net unrealized losses on interest rate swaps. For the nine-month period ended September 30, 2019, comprehensive income, net of tax, totaled $2.1 million, compared to $32,000 for the same period in 2018. The increase was due to net unrealized gains on available for sale securities, offset by lower net income and net unrealized losses on interest rate swaps.

FINANCIAL CONDITION

General. The Company’s assets decreased to $383.4 million at September 30, 2019 from $413.0 million at December 31, 2018, a decrease of $29.6 million or 7.17%, primarily due to the sale of available for sale investment securities and net decrease in the loan portfolio. Proceeds from the sale of investment securities were used to repay short term borrowings. The Bank’s cash and cash equivalents as of September 30, 2019, totaled $19.6 million, an increase of $3.6 million, or 22.67% from $16.0 million at December 31, 2018.

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The Company’s investment securities available for sale totaled $64.8 million at September 30, 2019, a $16.8 million, or a 20.54% decrease from $81.6 million at December 31, 2018. The decrease resulted primarily from security sales; the proceeds from which were used to repay borrowings that funded 2018 loan originations.

The Bank’s net loans totaled $281.6 million at September 30, 2019 compared to $296.6 million at December 31, 2018, a decrease of $15.0 million or 5.06%, primarily attributable to an increase in construction and commercial real estate loans, offset by decreases in consumer, residential real estate, indirect and commercial loans.

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

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

At September 30, 2019, impaired loans totaled $5.0 million. Included in the impaired loans total were $4.2 million in loans classified as nonaccrual loans. At September 30, 2019, troubled debt restructurings included in impaired loans totaled $237,000. Borrowers under all other restructured loans are paying in accordance with the terms of the modified loan agreement and have been placed on accrual status after a period of performance with the restructured terms.

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

|  | September 30, |  | December 31,
(dollars in thousands) |  | 2019 |  | 2018
Nonaccrual loans |  | $ | 4,229 |  | $ | 1,947
TDR loans excluding those in nonaccrual loans |  |  | 195 |  |  | 204
Accruing loans past due 90+ days |  |  | 22 |  |  | 26
Total nonperforming loans |  |  | 4,446 |  |  | 2,177
Real estate acquired through foreclosure |  |  | 705 |  |  | 705
Total nonperforming assets |  | $ | 5,151 |  | $ | 2,882
Nonperforming assets to total assets |  |  | 1.34 | % |  |  | 0.70 | %

Deposits as of September 30, 2019 totaled $325.3 million, an increase of $2.8 million, or 0.87% from $322.5 million at December 31, 2018. Demand deposits as of September 30, 2019, totaled $111.5 million, an increase of $10.1 million, or 9.95% from $101.4 million at December 31, 2018. Interest-bearing checking accounts as of September 30, 2019, totaled $27.7 million, an increase of $1.0 million, or 3.87% from $26.7 million at December 31, 2018. Savings accounts as of September 30, 2019 totaled $82.1 million, a decrease of $2.0 million, or 2.33%, from $84.1 million at December 31, 2018. Money market accounts as of September 30, 2019, totaled $20.2 million, an increase of $1.7 million, or 9.02%, from $18.6 million at December 31, 2018. Time deposits under $100,000 totaled $48.0 million on September 30, 2019, a $2.1 million or a 4.29% decrease from $50.1 million at December 31, 2018. Time deposits over

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$100,000 totaled $35.8 million on September 30, 2019, a decrease of $5.9 million, or 14.09% from $41.7 million at December 31, 2018.

Deposits for the nine months ended September 30, 2019 and the year ended December 31, 2018 were as follows:

|  | September 30, 2019 |  |  | December 31, 2018 |  |  | 2019 vs 2018
(dollars in thousands) |  | Amount |  | % of Total |  | Amount |  | % of Total |  | $ Change |  | % Change
Noninterest-bearing deposits |  | $ | 111,453 |  | 34.3 | % |  | $ | 101,369 |  | 31.4 | % |  | $ | 10,084 |  | 9.9 | %
Interest-bearing deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Checking |  |  | 27,685 |  | 8.5 | % |  |  | 26,654 |  | 8.3 | % |  |  | 1,031 |  | 3.9 | %
Savings |  |  | 82,138 |  | 25.3 | % |  |  | 84,097 |  | 26.1 | % |  |  | (1,959) |  | (2.3) | %
Money market |  |  | 20,238 |  | 6.2 | % |  |  | 18,564 |  | 5.8 | % |  |  | 1,674 |  | 9.0 | %
Total interest-bearing checking, savings and money market deposits |  |  | 130,061 |  | 40.0 | % |  |  | 129,315 |  | 40.2 | % |  |  | 746 |  | 0.6 | %
Time deposits under $100,000 |  |  | 47,956 |  | 14.7 | % |  |  | 50,104 |  | 15.5 | % |  |  | (2,148) |  | (4.3) | %
Time deposits of $100,00 or more |  |  | 35,796 |  | 11.0 | % |  |  | 41,665 |  | 12.9 | % |  |  | (5,869) |  | (14.1) | %
Total time deposits |  |  | 83,752 |  | 25.7 | % |  |  | 91,769 |  | 28.4 | % |  |  | (8,017) |  | (8.7) | %
Total interest-bearing deposits |  |  | 213,813 |  | 65.7 | % |  |  | 221,084 |  | 68.6 | % |  |  | (7,271) |  | (3.3) | %
Total Deposits |  | $ | 325,266 |  | 100.0 | % |  | $ | 322,453 |  | 100.0 | % |  | $ | 2,813 |  | 0.9 | %

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

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

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Future minimum payments of the Bank’s operating leases as of September 30, 2019 are as follows:

Year ending December 31, |  | Amount
|  | (dollars in thousands)
2019 |  | $ | 114
2020 |  |  | 189
2021 |  |  | 158
2022 |  |  | 150
2023 |  |  | 153
2024 |  |  | 158
Total |  | $ | 921

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

For the nine months ended September 30, 2019, the Bank accrued $279,000 for its projected 401(k) match contribution as well as other profit sharing benefits.

MARKET RISK AND INTEREST RATE SENSITIVITY

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

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

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

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

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impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.

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

The statement of condition is subject to quarterly testing for eight alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/ - 100, 200, 300, and 400 basis points (“bp”), although we may elect not to use particular scenarios that we determine are impractical in the current rate environment. It is our goal to structure the balance sheet so that net interest-earnings at risk over a 12-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.

At September 30, 2019, the simulation analysis reflected that the Bank is in a neutral to slightly asset sensitive position. Management currently strives to manage higher costing fixed rate funding instruments, while seeking to increase assets that are more fluid in their repricing. An asset sensitive position, theoretically, is favorable in a rising rate environment since more assets than liabilities will re-price in a given time frame as interest rates rise. Similarly, a liability sensitive position, theoretically, is favorable in a declining interest rate environment since more liabilities than assets will re-price in a given time frame as interest rates decline. Management works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of the direction of interest rates.

The foregoing analysis assumes that the Company’s assets and liabilities move with rates at their earliest repricing opportunities based on final maturity. Mortgage backed securities are assumed to mature during the period in which they are estimated to prepay and it is assumed that loans and other securities are not called prior to maturity. Certificates of deposit and IRA accounts are presumed to reprice at maturity. NOW savings accounts are assumed to reprice within nine months although it is the Company’s experience that such accounts may be less sensitive to changes in market rates.

|  | Static Balance Sheet/Immediate Change in Rates
Estimated Changes in Net Interest Income |  | `-200 bp |  | `-100 bp |  | `+100 bp |  | `+200 bp
Policy Limit |  | (4) | % |  | (3) | % |  | (3) | % |  | (4) | %
September 30, 2019 |  | (12) | % |  | (6) | % |  | 6 | % |  | 11 | %
September 30, 2018 |  | (7) | % |  | (2) | % |  | 0 | % |  | 1 | %

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The following table sets forth the Company’s interest-rate sensitivity at September 30, 2019.

|  |  |  |  |  |  |  | Over 1 |  |  |  |  |  |
|  |  |  |  | Over 3 to |  | Through |  | Over |  |  |
|  | 0-3 Months |  | 12 Months |  | 5 Years |  | 5 Years |  | Total
|  | (dollars in thousands)
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 3,678
Federal funds and overnight deposits |  |  | 15,893 |  |  | — |  |  | — |  |  | — |  |  | 15,893
Securities |  |  | — |  |  | 2,189 |  |  | 2,102 |  |  | 60,526 |  |  | 64,817
Loans |  |  | 1,816 |  |  | 2,547 |  |  | 80,912 |  |  | 196,307 |  |  | 281,582
Fixed assets |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 3,820
Other assets |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 13,648
Total assets |  | $ | 17,709 |  | $ | 4,736 |  | $ | 83,014 |  | $ | 256,833 |  | $ | 383,438
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposit accounts |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 111,453
NOW accounts |  |  | 27,685 |  |  | — |  |  | — |  |  | — |  |  | 27,685
Money market deposit accounts |  |  | 20,238 |  |  | — |  |  | — |  |  | — |  |  | 20,238
Savings accounts |  |  | 82,138 |  |  | — |  |  | — |  |  | — |  |  | 82,138
IRA accounts |  |  | 3,072 |  |  | 10,463 |  |  | 14,297 |  |  | — |  |  | 27,832
Certificates of deposit |  |  | 8,538 |  |  | 29,537 |  |  | 17,845 |  |  | — |  |  | 55,920
Long-term borrowings |  |  | — |  |  | — |  |  | — |  |  | — |  |  | —
Short-term borrowings |  |  | 20,000 |  |  | — |  |  | — |  |  | — |  |  | 20,000
Other liabilities |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,804
Stockholders’ equity: |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 35,368
Total liabilities and stockholders' equity |  | $ | 161,671 |  | $ | 40,000 |  | $ | 32,142 |  | $ | — |  | $ | 383,438
GAP |  | $ | (143,962) |  | $ | (35,264) |  | $ | 50,872 |  | $ | 256,833 |  |  |
Cumulative GAP |  | $ | (143,962) |  | $ | (179,225) |  | $ | (128,353) |  | $ | 128,480 |  |  |
Cumulative GAP as a % of total assets |  |  | (37.54) | % |  | (46.74) | % |  | (33.47) | % |  | 33.51 | % |  |

As shown above, measures of net interest income at risk were more favorable at September 30, 2019 than at September 30, 2018 over a 12-month modeling period. All measures remained within prescribed policy limits in the up interest rate scenarios. Given the current rate environment, down shocks may not be meaningful as market rates can only be shocked down to zero. The primary contributor to the more favorable position was the more asset sensitive balance sheet.

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

|  | Static Balance Sheet/Immediate Change in Rates
Estimated Changes in Economic Value of Equity (EVE) |  | `-200 bp |  | `-100 bp |  | `+100 bp |  | `+200 bp
Policy Limit |  | (15) | % |  | (10) | % |  | (10) | % |  | (15) | %
September 30, 2019 |  | (15) | % |  | (6) | % |  | 28 | % |  | 50 | %
September 30, 2018 |  | 5 | % |  | 4 | % |  | (5) | % |  | (15) | %

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

LIQUIDITY AND CAPITAL RESOURCES

The Company currently has no business other than that of the Bank and does not currently have any material funding commitments. The Company’s principal sources of liquidity are cash on hand and dividends received from the Bank. The Bank is subject to various regulatory restrictions on the payment of dividends.

The Bank’s principal sources of funds for investments and operations are net income, deposits from its primary market area, principal and interest payments on loans, interest received on investment securities and proceeds from maturing investment securities. Its principal funding commitments are for the origination or purchase of loans and the payment of maturing deposits. Deposits are considered a primary source of funds supporting the Bank’s lending and investment activities.

The Bank’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, federal funds sold, certificates of deposit with other financial institutions that have an original maturity of nine months or less and money market mutual funds. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows. The Bank’s cash and cash equivalents (cash due from banks, interest-bearing deposits in other financial institutions, and federal funds sold), as of September 30, 2019, totaled $19.6 million, a decrease of $3.6 million, or 22.67% from the $16.0 million at December 31, 2018.

As of September 30, 2019, the Bank was permitted to draw on a $94.4 million line of credit from the FHLB of Atlanta. Borrowings under the line are secured by a floating lien on the Bank’s residential mortgage loans. At December 31, 2018, there were $55.0 million in short-term borrowings from FHLB and as of September 30, 2019, there were $20.0 million in short-term borrowings outstanding. The decrease in FHLB short-term borrowings resulted from the sale of available-for-sale investment securities, the proceeds of which were used to payoff $35.0 million in short-term borrowings. In addition, the Bank has two unsecured federal funds lines of credit in the amount of $9.0 million and $8.0 million, of which $0 was outstanding and a secured Discount Window line of credit at the Federal Reserve Bank in the amount of $10.4 million, of which $0 was outstanding as of September 30, 2019.

The Company’s stockholders’ equity increased $1,317,000, or 3.87% during the nine-month period ended September 30, 2019, primarily due to a decrease in accumulated other comprehensive loss, net of taxes (“AOCI”) associated with net unrealized losses in the available for sale investment portfolio, stock issuances under the dividend reinvestment program, and increases in retained earnings and unrealized losses on interest rate swap contracts. The Company’s AOCI increased by $1,000,000 or 81.26% from a loss of $1,230,000 at December 31, 2018 to a loss of $231,000 at September 30, 2019, resulting from lower net unrealized losses on the available for sale bond portfolio. Retained earnings increased by $214,000, or 0.97% as the result of dividends paid on common stock, offset by the Company’s net income for the nine-month period ended September 30, 2019.

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The Federal Reserve Board and the FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by bank holding companies and state non-member banks, respectively. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and banks to maintain a specified minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to “risk-weighted” assets. At September 30, 2019, the Bank was in full compliance with these guidelines with a Tier 1 leverage ratio of 9.26%, a Tier 1 risk-based capital ratio of 12.36%, a common equity Tier 1 risk-based capital ratio of 12.36%, and a total risk-based capital ratio of 13.18%. The Company’s capital amounts and ratios at September 30, 2019 and December 31, 2018 were as follows:

|  |  |  |  |  |  |  |  | To Be Well Capitalized |
|  |  |  |  |  |  | To Be Considered |  | Under Prompt Corrective |
|  | Actual |  | Adequately Capitalized |  | Action Provisions |
September 30, 2019 |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio |
|  | (dollars in thousands) |
Common equity tier 1 |  | $ | 35,216 |  | 12.36 | % | $ | 12,822 |  | 4.50 | % | $ | 18,520 |  | 6.50 | %
Total capital |  | $ | 37,561 |  | 13.18 | % | $ | 22,794 |  | 8.00 | % | $ | 28,493 |  | 10.00 | %
Tier 1 capital |  | $ | 35,216 |  | 12.36 | % | $ | 17,096 |  | 6.00 | % | $ | 22,794 |  | 8.00 | %
Tier 1 leverage |  | $ | 35,216 |  | 9.26 | % | $ | 15,215 |  | 4.00 | % | $ | 19,019 |  | 5.00 | %

|  |  |  |  |  |  |  |  |  | To Be Well Capitalized |
|  |  |  |  |  |  | To Be Considered |  | Under Prompt Corrective |
|  | Actual |  | Adequately Capitalized |  | Action Provisions |
December 31, 2018 |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio |
|  | (dollars in thousands) |
Common equity tier 1 |  | $ | 34,778 |  | 12.27 | % | $ | 12,757 |  | 4.50 | % | $ | 18,427 |  | 6.50 | %
Total capital |  | $ | 37,354 |  | 13.18 | % | $ | 22,679 |  | 8.00 | % | $ | 28,349 |  | 10.00 | %
Tier 1 capital |  | $ | 34,778 |  | 12.27 | % | $ | 17,009 |  | 6.00 | % | $ | 22,679 |  | 8.00 | %
Tier 1 leverage |  | $ | 34,778 |  | 8.52 | % | $ | 16,330 |  | 4.00 | % | $ | 20,413 |  | 5.00 | %

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s accounting policies are more fully described in its Annual Report on Form 10‑K for the fiscal year ended December 31, 2018 and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. As discussed there, the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment. Management has used the best information available to make the estimations necessary to value the related assets and liabilities based on historical experience and on various assumptions which are believed to be reasonable under the circumstances. Actual results could differ from those estimates, and such differences may be material to the financial statements. The Company reevaluates these variables as facts and circumstances change. Historically, actual results have not differed significantly from the Company’s estimates. The following is a summary of the more judgmental accounting estimates and principles involved in the preparation of the Company’s financial statements, including the identification of the variables most important in the estimation process:

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

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

Accrued Taxes. Management estimates income tax expense based on the amount it expects to owe various tax authorities. Accrued taxes represent the net estimated amount due or to be received from taxing authorities. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of the Company’s tax position.

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

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

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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ITEM 4.CONTROLS AND PROCEDURES

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

PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6.EXHIBITS

Exhibit No. |
3.1 | Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Registrant’s Form 8‑A filed December 27, 1999, File No. 0‑24047)
3.2 | Articles of Amendment, dated October 8, 2003 (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10‑Q for the Quarter ended September 30, 2003, File No. 0‑24047)
3.3 | Articles Supplementary, dated November 16, 1999 (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8‑K filed December 8, 1999, File No. 0‑24047)
3.4 | By-Laws (incorporated by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10‑Q for the Quarter ended September 30, 2003, File No. 0‑24047)
10.1 | Glen Burnie Bancorp Director Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S‑8, File No.33‑62280)
10.2 | The Bank of Glen Burnie Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S‑8, File No. 333‑46943)
10.3 | Amended and Restated Change-in-Control Severance Plan (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10‑K for the Fiscal Year Ended December 31, 2001, File No. 0‑24047)
31.1 | Rule 15d‑14(a) Certification of Chief Executive Officer (filed herewith)
31.2 | Rule 15d‑14(a) Certification of Chief Financial Officer (filed herewith)
32 | Section 1350 Certifications: Certification by the Principal Executive Officer and Principal Accounting Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith
101.INS | XBRL Instance Document (filed herewith)
101.SCH | XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  | GLEN BURNIE BANCORP
|  | (Registrant)
Date: November 14, 2019 | By: |  | /s/ John D. Long
|  |  | John D. Long
|  |  | President, Chief Executive Officer
| By: |  | /s/ Jeffrey D. Harris
|  |  | Jeffrey D. Harris
|  |  | Chief Financial Officer

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