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~~June 30, ~~2017~~2018

☐ 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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	☐ (Do not check if a smaller reporting company)	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 ☒

~~At November 9, 2017, the~~The number of shares ~~outstanding~~ of the registrant’s common stock outstanding as of August 3, 2018 was ~~2,801,149.~~2,810,961.

Table of Contents

GLEN BURNIE BANCORP AND SUBSIDIARIES

TABLE OF CONTENTS


		Page
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets ~~September~~: As of June 30, ~~2017~~2018 (unaudited) and December 31, ~~2016~~2017 (audited)	3

	Consolidated Statements of Income ~~for the~~ : Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	4

	Consolidated Statements of Comprehensive Income ~~(Loss) for the~~ : Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity: Three and Six Months Ended June 30, 2018 and 2017 (unaudited)	6

	Consolidated Statements of Cash Flows ~~for the Nine~~: Three and Six Months Ended ~~September 30,~~June, 2018 and 2017 ~~and 2016~~ (unaudited)	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2025

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2736

Item 4.	Controls and Procedures	3036

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	3137

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3137

Item 3.	Defaults Upon Senior Securities	3137

Item 4.	Mine Safety Disclosures	3137

Item 5.	Other Information	3137

Item 6.	Exhibits	3238

	SIGNATURES	3339

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Table of Contents

PART I -– FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

GLEN BURNIE BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


	September 30,				June 30,		December 31,
	2017		December 31,		2018			2017
	(unaudited)		2016			(unaudited)		(audited)
ASSETS
Cash and due from banks	$	4,371	$	3,195	$	2,584	$	2,610
Interest-bearing deposits in other financial institutions		7,126		7,427		5,498		9,995
Cash and cash equivalents		11,497		10,622
Cash and Cash Equivalents						8,082		12,605

Investment securities available for sale, at fair value		89,903		94,607		87,314		89,349
Restricted equity securities, at cost		1,228		1,230		1,443		1,232

Loans, net of deferred fees and costs		271,463		265,058		289,408		271,612
Less: Allowance for loan losses		(2,623)		(2,484)		(2,284)		(2,589)
Loans, net		268,840		262,574		287,124		269,023

Real estate acquired through foreclosure		114		114		114		114
Premises and equipment, at cost, less accumulated depreciation		3,451		3,638
Premises and equipment, net						3,195		3,371
Bank owned life insurance		9,479		9,328		7,780		8,713
Deferred tax assets, net		2,847		3,160		2,713		2,429
Accrued interest receivable		1,140		1,134		1,142		1,133
Accrued taxes receivable		638		674		—		465
Prepaid expenses		512		546		471		433
Other assets		235		814		2,093		583
Total Assets	$	389,884	$	388,441	$	401,471	$	389,450

LIABILITIES
Noninterest-bearing	$	104,571	$	100,099
Interest-bearing		229,534		233,147
Total deposits		334,105		333,246
Noninterest-bearing deposits					$	108,414	$	104,017
Interest-bearing deposits						233,393		230,221
Total Deposits						341,807		334,238

Short-term borrowings		20,000		10,000		25,000		20,000
Long-term borrowings		—		10,000
Defined pension liability		328		369		317		335
Accrued interest payable on deposits		815		1,011
Accrued Taxes Payable						28		—
Accrued expenses and other liabilities						775		835
Total Liabilities		355,248		354,626		367,927		355,408

STOCKHOLDERS' EQUITY
Common stock, par value $1, authorized 15,000,000 shares, issued and outstanding 2,797,477 and 2,786,855 shares as of September 30, 2017 and December 31, 2016 , respectively.		2,797		2,787
Common stock, par value $1, authorized 15,000,000 shares, issued and outstanding 2,807,819 and 2,801,149 shares as of June 30, 2018 and December 31, 2017 , respectively.						2,808		2,801
Additional paid-in capital		10,233		10,130		10,335		10,267
Retained earnings		21,935		21,708		21,778		21,605
Accumulated other comprehensive loss, net of tax		(329)		(810)
Accumulated other comprehensive loss						(1,377)		(631)
Total Stockholders' Equity		34,636		33,815		33,544		34,042

Total Liabilities and Stockholders' Equity	$	389,884	$	388,441	$	401,471	$	389,450

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

GLEN BURNIE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share amounts)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
INTEREST INCOME
Loans, including fees	$	2,883	$	2,795	$	8,503	$	8,380
Interest and fees on loans									$	2,958	$	2,842	$	5,830	$	5,616
Interest and dividends on securities		498		492		1,523		1,467		535		507		1,059		1,025
Federal funds sold		53		31		115		91
Total interest income		3,434		3,318		10,141		9,938
Interest on deposits with banks and federal funds sold										50		31		98		62
Total Interest Income										3,543		3,380		6,987		6,703

INTEREST EXPENSE
Deposits		324		364		984		1,133
Short-term borrowings		142		—		309		—
Long-term borrowings		33		162		185		481
Total interest expense		499		526		1,478		1,614
Interest on deposits										325		327		634		659
Interest on short-term borrowings										165		84		308		167
Interest on long-term borrowings										—		76		—		152
Total Interest Expense										490		487		942		978

Net interest income		2,935		2,792		8,663		8,324
Net Interest Income										3,053		2,893		6,045		5,725

Provision for credit losses		78		116		243		233

Net interest income after provision for credit losses		2,857		2,676		8,420		8,091
Provision for loan losses										(5)		(30)		355		165
Net interest income after provision for loan losses										3,058		2,923		5,690		5,560

NONINTEREST INCOME
Service charges on deposit accounts		72		83		208		247		61		68		128		136
Other fees and commissions		245		191		573		521		179		168		347		328
Gains on investment securities, net		—		—		1		1
Gains on redemption of BOLI policies										101		—		308		—
Income on life insurance		51		54		151		161		45		51		89		100
Other income		—		12		2		12		—		1		—		3
Total other income		368		340		935		942
Total Noninterest Income										386		288		872		567

NONINTEREST EXPENSE
Salaries and wages		1,579		1,743		4,615		4,782
Salary and benefits										1,649		1,615		3,371		3,036
Occupancy and equipment expenses										274		286		579		584
Legal, accounting and other professional fees		180		173		648		595		277		197		509		403
Data processing and item processing services		130		184		442		519		154		143		286		312
FDIC insurance costs		64		79		188		232		65		63		122		123
Advertising and marketing related expenses		38		12		110		49		32		42		49		73
Loan collection costs		25		37		73		158		80		29		121		47
Telephone costs		98		50		212		145		67		59		124		114
Occupancy		382		272		865		801
Other expenses		217		406		944		1,023		413		376		685		689
Total other expenses		2,713		2,956		8,097		8,304
Total Noninterest Expenses										3,011		2,810		5,846		5,381

Income before income taxes		512		60		1,258		729		433		401		716		746

Income tax expense (benefit)		101		(55)		194		23
Income tax (benefit) expense										(45)		63		(17)		92

NET INCOME	$	411	$	115	$	1,064	$	706	$	478	$	338	$	733	$	654

Basic and diluted earnings per share of common stock	$	0.15	$	0.04	$	0.38	$	0.25
Basic and diluted net income per share of common stock									$	0.17	$	0.12	$	0.26	$	0.23

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

GLEN BURNIE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

Net income

$
411

$
115

$
1,064

$
706

Other comprehensive income (loss), net of tax









Net unrealized gains on securities available for sale:

Net unrealized (loss) gain on securities during the period

(67)

(304)

482

793

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

—

—

(1)

(1)

Total other comprehensive  (loss) income

(67)

(304)

481

792

Comprehensive income (loss)

$
344

$
(189)

$
1,545

$
1,498


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017

Net income	$	478	$	338	$	733	$	654

Other comprehensive income (loss):

Net unrealized gain (loss) on securities available for sale:
Net unrealized gain (loss) on securities during the period		15		507		(1,576)		549
Income tax (expense) benefit relating to item above		(6)		—		434		—
Reclassification adjustment for gain on sales of securities included in net income		—		(1)		—		(1)
Net effect on other comprehensive income (loss)		9		506		(1,142)		548

Net unrealized gain on interest rate swap:
Net unrealized gain on interest rate swap during the period		107		—		546		—
Income tax expense relating to item above		(41)		—		(150)		—
Net effect on other comprehensive income		66		—		396		—

Other comprehensive income (loss)		75		506		(746)		548

Comprehensive income	$	553	$	844	$	(13)	$	1,202

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

GLEN BURNIE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

~~For the Nine Months Ended September 30, 2017 and 2016 (unaudited)~~

(dollars in thousands)

(unaudited)

Accumulated

Other

Additional

Comprehensive

Common

Paid-in

Retained

(Loss)

Stock

Capital

Earnings

Income

Total

Balances, December 31, 2015

$
2,773

$
9,986

$
21,718

$
(301)

$
34,176

Net income

—

—

706

—

706
Cash dividends, $.30 per share

—

—

(833)

—

(833)
Dividends reinvested under dividend reinvestment plan

10

111

—

—

121
Other comprehensive income, net of tax

—

—

—

791

791

Balance, September 30, 2016

$
2,783

$
10,097

$
21,591

$
490

$
34,961




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


Balance, December 31, 2016	$	2,787	$	10,130	$	21,708	$	(810)	$	33,815

Net income		—		—		654		—		654
Cash dividends, $0.20 per share		—		—		(559)		—		(559)
Dividends reinvested under
dividend reinvestment plan		7		69		—		—		76
Other comprehensive income		—		—		—		548		548

Balance, June 30, 2017		2,794		10,199		21,803		(262)		34,534

Accumulated

Other

Additional

Comprehensive

Common

Paid-in

Retained

(Loss)

Stock

Capital

Earnings

Income

Total

Balances, December 31, 2016

$
2,787

$
10,130

$
21,708

$
(810)

$
33,815

Net income

—

—

1,064

—

1,064
Cash dividends, $.30 per share

—

—

(837)

—

(837)
Dividends reinvested under dividend reinvestment plan

10

103

—

—

113
Other comprehensive income, net of tax

—

—

—

481

481

Balance, September 30, 2017

$
2,797

$
10,233

$
21,935

$
(329)

$
34,636



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

Balance, December 31, 2017	$	2,801	$	10,267	$	21,605	$	(631)	$	34,042

Net income		—		—		733		—		733
Cash dividends, $0.20 per share		—		—		(560)		—		(560)
Dividends reinvested under
dividend reinvestment plan		7		68		—		—		75
Other comprehensive loss		—		—		—		(746)		(746)

Balance, June 30, 2018	$	2,808	$	10,335	$	21,778	$	(1,377)	$	33,544

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

GLEN BURNIE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

Nine Months Ended September 30,


2017

2016

Cash flows from operating activities:





Net income

$
1,064

$
706

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





Depreciation, amortization, and accretion

793

902

Provision for credit losses

243

233

Gains on disposals of assets, net

(1)

(2)

Provision on losses of other real estate owned

—

36

Income on investment in life insurance

(151)

(161)

Changes in assets and liabilities:





Decrease in ground rents

7

—

(Increase) decrease in accrued interest receivable

(6)

21

Decrease  in other assets

955

82

(Decrease) increase  in accrued interest payable

74

(5)

  Increase (decrease) in other liabilities

(311)

313

Net cash provided by operating activities

2,667

2,125

Cash flows from investing activities:





Maturities  and principal paydowns of available for sale mortgage-backed securities

9,603

13,524

Proceeds from sales of available for sale debt securities

3,010

3,767

Purchases of available for sale mortgage-backed securities

—

(8,187)

Purchases of other available for sale investment securities

(7,868)

(8,150)

Sale of FHLB stock

2

3

(Increase) decrease in loans, net

(6,509)

1,498

Proceeds from sales of other real estate

—

166

Purchases of premises and equipment

(165)

(207)

Net cash provided (used) by investing activities

(1,927)

2,414

Cash flows from financing activities:





Increase in noninterest-bearing deposits, NOW accounts, money market accounts, and savings accounts, net

8,022

9,396

Decrease in time deposits, net

(7,163)

(8,918)

Increase in short term borrowings

10,000

—

Decrease in long term borrowings

(10,000)

—

Cash dividends paid

(837)

(833)

Common stock dividends reinvested

113

121

Net cash (used) provided  by financing activities

135

(234)

Increase  in cash and cash equivalents

875

4,305

Cash and cash equivalents, beginning of year

10,622

12,371

Cash and cash equivalents, end of year

$
11,497

$
16,676

Supplementary Cash Flow Information:





Interest paid on deposits and borrowings

$
499

$
526

Income taxes paid

73

80



	Six Months Ended June 30,
	2018		2017
Cash flows from operating activities:
Net income	$	733	$	654
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion of premises and equipment		579		518
Provision for loan losses		355		165
Gain on life insurance		(308)		—
Gain on disposals of assets, net		—		(1)
Decrease (increase) in cash surrender value of bank owned life insurance		935		(100)
Decrease in ground rents		3		7
(Increase) decrease in accrued interest receivable		(9)		42
Net (increase) decrease in other assets		(232)		730
Net decrease in accrued expenses and other liabilities		(51)		(269)

Net cash provided by operating activities		2,005		1,746

Cash flows from investing activities:
Redemptions and maturities of investment securities available for sale		5,557		9,209
Purchases of investment securities available for sale		(5,440)		(4,659)
Net purchase of Federal Home Loan Bank stock		(211)		(210)
Net increase in loans		(18,457)		(6,012)
Purchases of premises and equipment		(61)		(119)

Net cash used in investing activities		(18,612)		(1,791)

Cash flows from financing activities:
Net increase in deposits		7,569		2,244
Increase in short term borrowings		5,000		15,000
Decrease in long term borrowings		—		(10,000)
Cash dividends paid		(560)		(559)
Common stock dividends reinvested		75		76

Net cash provided by financing activities		12,084		6,761

Net (decrease) increase in cash and cash equivalents		(4,523)		6,716

Cash and cash equivalents at beginning of year		12,605		10,622

Cash and cash equivalents at end of year	$	8,082	$	17,338

Supplemental Disclosures of Cash Flow Information:
Interest paid on deposits and borrowings	$	908	$	1,122
Net income taxes (refunded) paid		(573)		49
Net (increase) decrease in unrealized depreciation on available for sale securities		(1,576)		905
Net (increase) decrease in unrealized depreciation on Swaps		546		—

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

GLEN BURNIE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~(unaudited)~~

NOTE 1 – ORGANIZATIONAL

Nature of ~~Business.~~ Business

Glen Burnie Bancorp (the “Company”) is a bank holding company organized in 1990 under the laws of the State of Maryland. ~~Glen Burnie Bancorp~~The Company owns all the outstanding shares of capital stock of The Bank of Glen Burnie (the “Bank”), a commercial bank organized in 1949 under the laws of the State of Maryland ~~serving northern~~(the “State”). The Bank provides financial services to individuals and corporate customers located in Anne Arundel County and surrounding areas ~~from its main office and branch in Glen Burnie,~~of Central Maryland, and ~~branch offices in Odenton, Riviera Beach, Crownsville, Severn (two locations), Linthicum and Severna Park, Maryland.~~is subject to competition from other financial institutions. The Bank is ~~engaged in~~also subject to the ~~commercial~~regulations of certain federal and ~~retail banking business as authorized~~state agencies and undergoes periodic examinations by the banking statues of the State of Maryland, including the acceptance of demand and time deposits, and the origination of loans to individuals, associations, partnerships and corporations. The Bank’s real estate financing consists of residential first and second mortgage loans, home equity lines of credit and commercial mortgage loans. Commercial lending consists of both secured and unsecured loans. The Bank also originates automobile loans through arrangements with local automobile dealers.those regulatory authorities.

NOTE 2 – BASIS OF PRESENTATION

~~The consolidated financial statements include the accounts of Glen Burnie Bancorp and the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.~~

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~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the results of operations for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, and the statements of cash flows for the ~~nine-month~~three- and six-month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017. The operating results offor the ~~three-month~~three- and ~~nine-month periods~~six-month period ended ~~September~~June 30, ~~2017~~2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, ~~2017~~2018 or any future interim period. The ~~condensed~~ consolidated balance sheet at December 31, ~~2016~~2017 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, 2017.~~April 2, 2018. The unaudited consolidated financial statements for ~~September~~June 30, 2018 and 2017, ~~and 2016,~~ the ~~condensed~~ consolidated balance sheet at December 31, ~~2016,~~2017, 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, ~~2016.~~2017.

Principles of Consolidation

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

Cash Flow Presentation

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

Reclassifications

Certain items in the ~~unaudited 2016~~2017 consolidated financial statements have been reclassified to conform to the ~~2017~~2018 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,

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such as loans and investment securities; benefit plan obligations and expenses; and the valuation of deferred tax assets and ~~real estate acquired through foreclosure; and the estimate of expected cash flows for loans acquired with deteriorated credit quality.~~liabilities.

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~~Table of Contents~~

NOTE 3 – EARNINGS PER SHARE

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Basic and diluted earnings per share:
Net income	$	477,685	$	337,927	$	733,154	$	653,713
Weighted average common shares outstanding		2,806,599		2,792,656		2,804,565		2,791,824
Basic and dilutive net income per share	$	0.17	$	0.12	$	0.26	$	0.23

Diluted earnings per share calculations were not required for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, 2018 and 2017, ~~and 2016, since~~as there were no stock options outstanding.

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

Basic:

Net income

$
411,000

$
115,000

$
1,064,000

$
706,000

Weighted average common shares outstanding

2,796,099

2,782,923

2,792,544

2,781,371

Basic net income per share

$
0.15

$
0.04

$
0.38

$
0.25

NOTE 4 – INVESTMENT SECURITIES

Investment securities are accounted for according to their purpose and holding period. Trading securities are those that are bought and held principally for the purpose of selling them in the near term. The Company held no trading securities at June 30, 2018 or December 31, 2017. Available-for-sale investment securities, comprised of debt and mortgage-backed securities, are those that may be sold before maturity due to changes in the Company's interest rate risk profile or funding needs, and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income. Held-to-maturity investment securities are those that management has the positive intent and ability to hold to maturity and are reported at amortized cost. The Company held no held-to-maturity securities at June 30, 2018 or December 31, 2017.

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

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The following table summarizes the amortized cost and estimated fair value of the Company’s investment securities portfolio at June 30, 2018 and December 31, 2017:


	At June 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value

Collateralized mortgage obligations	$	22,923	$	13	$	(918)	$	22,018
Agency mortgage-backed securities		28,055		4		(1,056)		27,003
Municipal securities		35,330		75		(533)		34,872
U.S. Government agency securities		1,999		—		(64)		1,935
U.S. Treasury securities		1,501		—		(15)		1,486

Total securities available for sale	$	89,808	$	92	$	(2,586)	$	87,314


	At December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value

Collateralized mortgage obligations	$	24,063	$	20	$	(569)	$	23,514
Agency mortgage-backed securities		25,725		4		(500)		25,229
Municipal securities		35,453		339		(159)		35,633
U.S. Government agency securities		3,526		—		(46)		3,480
U.S. Treasury securities		1,501		—		(8)		1,493

Total securities available for sale	$	90,268	$	363	$	(1,282)	$	89,349

The gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2018 and December 31, 2017 are as follows:


June 30, 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	$	6,053	$	(169)	$	14,783	$	(749)	$	20,836	$	(918)
Agency mortgage-backed securities		8,799		(273)		18,019		(783)		26,818		(1,056)
Municipal securities		17,130		(310)		6,099		(223)		23,229		(533)
U.S. Government agency securities		1,935		(64)		—		—		1,935		(64)
U.S. Treasury securities		1,485		(15)		—		—		1,485		(15)
	$	35,402	$	(831)	$	38,901	$	(1,755)	$	74,303	$	(2,586)


December 31, 2017	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	$	6,531	$	(62)	$	15,678	$	(507)	$	22,209	$	(569)
Agency mortgage-backed securities		6,802		(80)		18,218		(420)		25,020		(500)
Municipal securities		2,396		(11)		6,230		(148)		8,626		(159)
U.S. Government agency securities		2,965		(37)		515		(9)		3,480		(46)
U.S. Treasury securities		1,494		(8)		—		—		1,494		(8)
	$	20,188	$	(198)	$	40,641	$	(1,084)	$	60,829	$	(1,282)

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

At June 30, 2018, the Company recorded unrealized losses in its portfolio of debt securities totaling $2.6 million related to 148 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, 2017, the Company recorded unrealized losses in its portfolio of debt securities totaling $1.3 million related to 114 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.

Contractual maturities of debt securities at June 30, 2018 are shown below. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	At June 30, 2018

	Amortized		Fair		Yield
(dollars in thousands)	Cost		Value		(1), (2)
Available for sale securities maturing:
Within one year	$	1,198	$	1,204	3.72	%
Over one to five years		1,815		1,791	1.50	%
Over five to ten years		19,145		18,603	2.12	%
Over ten years		67,650		65,716	2.79	%
Total debt securities	$	89,808	$	87,314

_____________________

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

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

NOTE 5 – LOANS RECEIVABLE AND ~~ASSET QUALITY~~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

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to determine the allowance for loan losses. The Company considers each loan type to be a portfolio segment having unique risk characteristics.


	June 30,			December 31,
	2018			2017
(dollars in thousands)	Amount		%	Amount		%
Consumer	$	14,453	5	$	16,112	6
Residential real estate		82,144	29		81,926	30
Indirect		101,181	35		85,186	32
Commercial		12,028	4		11,257	4
Construction		3,472	1		3,536	1
Commercial real estate		76,130	26		73,595	27
Loans, net of deferred fees and costs		289,408	100		271,612	100
Less: Allowance for loan losses		(2,284)			(2,589)
Loans, net	$	287,124		$	269,023

The Bank’s net loans totaled$287.1 million at June 30, 2018, compared to $269.0 million at December 31, 2017, an increase of $18.1 million, or 6.73%. Consumer loans decreased from $16.1 million at December 31, 2017 to $14.5 million, a decrease of $1.6 million, or 10.30%. Residential real estate loans increased by $0.2 million, or 0.27%, from $81.9 at December 31, 2017 to $82.1 at June 30, 2018. Indirect loans increased from $85.2 million to $101.2 million, an increase of $16.0 million, or 18.78%. Commercial loans increased $0.7 million, or 6.86%, to $12.0 million at June 30, 2018 compared to $11.3 million at December 31, 2017. Commercial real estate loans increased from $73.6 million to $76.1 million, an increase of $2.5 million or 3.44%.

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

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

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

Consumer

Residential Real Estate

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Indirect

Commercial

Construction

Commercial Real Estate

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

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

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

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

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

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

Changes in rate and direction of charge offs and recoveries.

Transactions in the allowance for loan losses for the six months ended June 30, 2018 and the year ended December 31, 2017 were as follows:



June 30, 2018			Residential								Commercial
(dollars in thousands)	Consumer		Real Estate		Indirect		Commercial		Construction		Real Estate		Unallocated		Total

Balance, beginning of year	$	214	$	1,061	$	774	$	237	$	12	$	291	$	—	$	2,589
Charge-offs		(92)		(514)		(163)		—		—		—		—		(769)
Recoveries		12		2		95		—		—		—		—		109
Provision for loan losses		43		112		93		9		(1)		99		—		355

Balance, end of year	$	177	$	661	$	799	$	246	$	11	$	390	$	—	$	2,284

Individually evaluated for impairment:
Balance in allowance	$	27	$	—	$	—	$	211	$	—	$	—	$	—	$	238
Related loan balance		96		2,006		—		211		—		3,016		—		5,329

Collectively evaluated for impairment:
Balance in allowance	$	150	$	661	$	799	$	35	$	11	$	390	$	—	$	2,046
Related loan balance		14,357		80,138		101,181		11,817		3,472		73,114		—		284,079

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December 31, 2017			Residential								Commercial
(dollars in thousands)	Consumer		Real Estate		Indirect		Commercial		Construction		Real Estate		Unallocated		Total

Balance, beginning of year	$	182	$	1,042	$	693	$	284	$	10	$	259	$	14	$	2,484
Charge-offs		(96)		(3)		(458)		(9)		—		—		—		(566)
Recoveries		8		27		286		—		—		14		—		335
Provision for loan losses		120		(5)		253		(38)		2		18		(14)		336

Balance, end of year	$	214	$	1,061	$	774	$	237	$	12	$	291	$	—	$	2,589

Individually evaluated for impairment:
Balance in allowance	$	52	$	513	$	—	$	217	$	—	$	—	$	—	$	782
Related loan balance		160		2,345		—		217		—		1,176		—		3,898

Collectively evaluated for impairment:
Balance in allowance	$	162	$	548	$	774	$	20	$	12	$	291	$	—	$	1,807
Related loan balance		15,952		79,580		85,186		11,040		3,536		72,420		—		267,714

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


	June 30,			June 30,
(dollars in thousands)	2018			2017
Average loans	$	281,104		$	269,533
Net charge offs to average loans (annualized)		0.48	%		0.04	%

During the six-month period ending June 30, 2018, loans to 25 borrowers and related entities totaling approximately $769,000 were determined to be uncollectible and were charged off. During the six-month period ending June 30, 2017, loans to 38 borrowers and related entities totaling approximately $254,000 were determined to be uncollectible and were charged off.

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

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

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As of June 30, 2018 and 2017, the Bank had outstanding commitments totaling $33.8 million and $24.0 million, respectively. These outstanding commitments consisted of letters of credit, undrawn lines of credit, and other loan commitments. The following table shows the Bank’s reserve for unfunded commitments arising from these transactions:


	Six Months
	Ended June 30,
(dollars in thousands)	2018		2017
Beginning balance	$	24	$	25
Reduction of unfunded reserve		(18)		(20)
Provisions charged to operations		37		17

Ending balance	$	43	$	22

Contractual Obligations and Commitments. No material changes, outside the normal course of business, have been made during 2018.

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, 2017

90 Days or

(dollars in thousands)

30-89 Days

More and


Current

Past Due

Still Accruing

Nonaccrual

Total

Commercial and industrial

$
3,989

$
8

$
—

$
48

$
4,045
Commercial real estate

68,267

—

—

499

68,766
Consumer and indirect

94,578

1,085

—

385

96,048
Residential real estate

100,256

326

71

2,934

103,587

$
267,090

$
1,419

$
71

$
3,866

$
272,446


At June 30, 2018					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total

Consumer	$	14,094	$	237	$	—	$	122	$	14,453
Residential Real Estate		80,232		159		—		1,753		82,144
Indirect		100,453		599		—		129		101,181
Commercial		12,023		—		5		—		12,028
Construction		3,133		—		29		310		3,472
Commercial Real Estate		73,759		—		—		2,371		76,130

	$	283,694	$	995	$	34	$	4,685	$	289,408

At December 31, 2016

90 Days or

(dollars in thousands)

30-89 Days

More and


Current

Past Due

Still Accruing

Nonaccrual

Total

Commercial and industrial

$
4,679

$
—

$
—

$
—

$
4,679
Commercial real estate

68,775

—

—

647

69,422
Consumer and indirect

82,134

992

—

456

83,582
Residential real estate

103,941

1,798

36

2,648

108,423

$
259,529

$
2,790

$
36

$
3,751

$
266,106


At December 31, 2017					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total

Consumer	$	15,823	$	80	$	24	$	185	$	16,112
Residential Real Estate		79,205		597		—		2,124		81,926
Indirect		83,932		1,166		—		88		85,186
Commercial		11,203		—		6		48		11,257
Construction		3,188		—		30		318		3,536
Commercial Real Estate		73,088		—		—		507		73,595

	$	266,439	$	1,843	$	60	$	3,270	$	271,612

The balances in the above charts have not been reduced by the allowance for loan ~~loss and the unearned income on loans.~~loss. For the period ending ~~September~~June 30, 2018, the allowance for loan loss is $2.3 million. For the period ending December 31, 2017, the allowance for loan loss is $2.6 ~~million and the unearned income~~

~~- 9 -~~

~~Table of Contents~~

~~is $983,000. For the period ending December 31, 2016, the allowance for loan loss is $2,484,000 and the unearned income is $1,048,000.~~

September 30,

December 31,


2017

2016

(dollars in thousands)

Troubled debt restructured loans

$
299

$
312

Non-accrual and 90 days or more and still accruing loans to gross loans

1.46
%

1.43
%
Allowance for credit losses to non-accrual and 90 days or more and still accruing loans

66.10
%

65.59
%

million.

At ~~September~~June 30, 2017 there were three troubled debt restructured loans consisting of a commercial loan of $219,500, a residential real estate loan of $46,692 and a consumer loan of $32,696. The consumer and residential real estate loans are both on nonaccrual.

~~At September 30, 2017,~~2018, there was ~~$1,088,970~~$1.0 million in loans outstanding, ~~included~~that were in ~~the current and 30‑89 days past due columns in the above table, as to which~~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 three loans outstanding, totaling ~~$1,088,0970~~$1.0 million are as

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follows: ~~$706,974~~$646,000 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; ~~$162,496~~$159,000 Home Equity Line of Credit which is paying as agreed, however the borrower has defaulted on other commercial loans which have been satisfied; and a ~~$219,500~~$211,000 Commercial loan with a loan to value ratio which has deteriorated, which has a complete specific reserve of ~~$219,500.~~$211,000. All three of these loans are classified with a risk rating of Substandard.

Non-accrual loans with specific reserves at ~~September~~June 30, ~~2017~~2018 are comprised of:

Consumer loans ~~– Three loans to three borrowers in the amount of $174,589 with a specific reserve of $57,797 established for the loans.~~

~~Residential Real Estate~~– Two loans to two borrowers in the amount of ~~$1,344,654, secured by residential property~~$96,109 with a specific ~~reserve~~reserves of ~~$532,378~~$26,827 established for the loans.

Below is a summary of the recorded investment amount and related allowance for losses of the Bank’s impaired loans at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


June 30, 2018													Unpaid		Interest				Average
(dollars in thousands)									Average		Recorded		Principal		Income		Specific		Recorded
	Recorded		Principal		Income		Specific		Recorded		Investment		Balance		Recognized		Reserve		Investment
September 30, 2017	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Real-estate - mortgage:
Residential	$	1,345	$	1,374	$	—	$	532	$	1,364
Commercial		—		—		—		—		—
Consumer		175		175		4		58		230	$	96	$	96	$	1	$	27	$	137
Installment		—		—		—		—		—
Home Equity		—		—		—		—		—
Commercial		219		219		8		220		224		211		211		6		211		214
Total impaired loans with specific reserves	$	1,739	$	1,768	$	12	$	810	$	1,818		307		307		7		238		351


Impaired loans with no specific reserve:
Residential Real Estate											$	1,735	$	2,161	$	4	$	—	$	2,871
Indirect												129		129		—		—		—
Construction												228		228		—		—		236
Commercial Real Estate												3,099		3,409		95		—		4,758
Total impaired loans with no specific reserve											$	5,191	$	5,927	$	99		—	$	7,865


December 31, 2017			Unpaid		Interest				Average
(dollars in thousands)	Recorded		Principal		Income		Specific		Recorded
	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Consumer	$	160	$	160	$	5	$	52	$	205
Residential Real Estate		1,294		1,322		—		513		1,312
Commercial		217		217		—		217		223
Total impaired loans with specific reserves		1,671		1,699		5		782		1,740

Impaired loans with no specific reserve:
Consumer	$	49	$	49	$	—		—	$	—
Residential Real Estate		992		1,760		11		—		1,572
Indirect		88		88		—		—		—
Commercial		2		2		—		—		2
Construction		318		318		—		—		322
Commercial Real Estate		1,194		1,194		39		—		1,632
Total impaired loans with no specific reserve	$	2,643	$	3,411	$	50		—	$	3,528

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Impaired loans with no specific reserve:










Real-estate - mortgage:










Residential

$
1,203

$
2,011

$
13

n/a

$
2,377
Commercial

1,312

1,312

29

n/a

1,244
Consumer

108

108

—

n/a

104
Installment

146

146

—

n/a

130
Home Equity

—

—

—

n/a

—
Commercial

529

529

—

n/a

531
Total impaired loans with no specific reserve

$
3,298

$
4,106

$
42

—

$
4,386

      (dollars in thousands)



Unpaid

Interest



Average

Recorded

Principal

Income

Specific

Recorded
December 31, 2016

Investment

Balance

Recognized

Reserve

Investment
Impaired loans with specific reserves:










Real-estate - mortgage:










Residential

$
1,393

$
1,422

$
58

$
252

$
1,442
Commercial

—

—

—

—

—
Consumer

128

128

—

50

167
Installment

—

—

—

—

—
Home Equity

—

—

—

—

—
Commercial

229

229

8

228

235
Total impaired loans with specific reserves

$
1,750

$
1,779

$
66

$
530

$
1,844










Impaired loans with no specific reserve:










Real-estate - mortgage:










Residential

$
1,479

$
2,219

$
21

n/a

$
2,463
Commercial

1,413

1,565

59

n/a

1,594
Consumer

182

182

—

n/a

75
Installment

193

193

—

n/a

—
Home Equity

—

—

—

n/a

—
Commercial

—

—

—

n/a

—
Total impaired loans with no specific reserve

$
3,267

$
4,159

$
80

—

$
4,132


	June 30,			December 31,
(dollars in thousands)	2018			2017

Troubled debt restructured loans	$	256		$	263
Non-accrual and 90+ days past due and still accruing loans to average loans		1.48	%		1.32	%
Allowance for loan losses to nonaccrual & 90+ days past due and still accruing loans		58.6	%		77.7	%

~~Following are tables for September 2017~~At June 30, 2018, there were two troubled debt restructured loans consisting of a commercial loan of $211,000 and ~~December 2016 showing the provision for each group~~a consumer loan of ~~loans.~~$45,000. The consumer loan is in a nonaccrual status.

Commercial



Consumer






September 30, 2017

and

Commercial

and

Residential

(dollars in thousands)

Industrial

Real Estate

Indirect

Real Estate

Unallocated

Total












Balance, beginning of year

$
284

$
259

$
876

$
1,051

$
14

$
2,484
Provision for credit losses

(37)

4

246

44

(14)

243
Recoveries

—

14

212

27

—

253
Loans charged off

—

—

(354)

(3)

—

(357)












Balance, end of year

$
247

$
277

$
980

$
1,119

$
—

$
2,623












Individually evaluated for impairment:












Balance in allowance

$
220

$
—

$
58

$
532

$
—

$
810
Related loan balance

220

—

175

1,345

—

1,740












Collectively evaluated for impairment:












Balance in allowance

$
27

$
277

$
922

$
587

$
—

$
1,813
Related loan balance

3,824

68,766

95,873

102,242

—

270,705

- 1117 -

Table of Contents

Commercial



Consumer






December 31,

and

Commercial

and

Residential

(dollars in thousands)

Industrial

Real Estate

Indirect

Real Estate

Unallocated

Total












Balance, beginning of year

$
305

$
262

$
804

$
1,631

$
148

$
3,150
Provision for credit losses

(30)

361

431

240

(134)

868
Recoveries

9

—

336

34

—

379
Loans charged off

—

(364)

(695)

(854)

—

(1,913)












Balance, end of year

$
284

$
259

$
876

$
1,051

$
14

$
2,484












Individually evaluated for impairment:












Balance in allowance

$
229

$
—

$
50

$
252

$
—

$
531
Related loan balance

229

1,413

503

2,872

—

5,017












Collectively evaluated for impairment:












Balance in allowance

$
56

$
259

$
826

$
799

$
13

$
1,953
Related loan balance

4,451

68,009

83,078

105,552

—

261,090

~~Following is a~~The following table ~~showing~~shows the activity for non-accrual loans for the quarters ended ~~September~~June 30, 2017 and ~~September~~2018.



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

December 31, 2016	403	2,508	193	—	—	647	3,751
Transfers into nonaccrual	4	40	349	—	84	132	609
Loans paid down/payoffs	(67)	(82)	(96)	—	(84)	(6)	(335)
Loans returned to accrual status	—	(132)	(112)	—	—	—	(244)
Loans charged off	(4)	(3)	(247)	—	—	—	(254)

June 30, 2017	336	2,331	87	—	—	773	3,527


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)

June 30, 2018	122	1,753	129	—	310	2,371	4,685

Other Real Estate Owned. At June 30, ~~2016.~~2018, the Company had $114,000 in real estate acquired in partial or total satisfaction of debt, unchanged from $114,000 at December 31, 2017. 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 are included in noninterest expense.

Commercial

Consumer

and

Commercial

and

Residential


Industrial

Real Estate

Indirect

Real Estate

Totals










December 31, 2016 Balance

—

647

456

2,648

3,751










Transfers into non-accrual

48

—

586

605

1,239
Transfers to OREO

—

—

—

—

—
Loans paid down/payoffs

—

(16)

(144)

(316)

(476)
Loans returned to accrual status

—

(132)

(159)

—

(291)
Loans charged off

—

—

(354)

(3)

(357)










September 30, 2017

48

499

385

2,934

3,866

December 31, 2015

—

300

831

2,575

3,706
Transfers into non-accrual

—

325

759

103

1,187
Transfers to OREO

—

—

—

—

—
Loans paid down/payoffs

—

(10)

(482)

(354)

(846)
Loans returned to accrual status

—

—

(177)

(135)

(312)
Loans charged off

—

—

(524)

(854)

(1,378)










September 30, 2016

—

615

407

1,335

2,357

Credit Quality Information

~~The following tables represent credit exposures by creditworthiness category~~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 the quarter ending September 30, 2017 and the year ended December 31, 2016. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The Bank’s internal creditworthiness is based on experience with similarly graded credits.all loans. Loans that ~~trend upward toward higher~~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 ~~grades typically have less credit risk and loans that migrate downward typically have more credit risk.~~

~~- 12 -~~

~~Table of Contents~~

may be strengthened through improved borrower performance and/or additional collateral.

The Bank’s internal risk ratings are as follows:

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

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

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

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

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

- 18 -

Table of Contents

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

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

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

~~Loans rated 1‑4 are considered “Pass” for purposes of~~The following table provides information with respect to the ~~risk rating chart below.~~

~~Risk ratings of loans~~Company's credit quality indicators by ~~categories of loans are as follows:~~loan portfolio segment at June 30, 2018:


September 30, 2017	Commercial				Consumer
	and		Commercial		and		Residential
June 30, 2018													Residential								Commercial
(dollars in thousands)	Industrial		Real Estate		Indirect		Real Estate		Total		Consumer		Real Estate		Indirect		Commercial		Construction		Real Estate		Total

Pass	$	3,825	$	67,124	$	94,619	$	100,210	$	265,778	$	14,119	$	79,828	$	100,143	$	11,817	$	3,472	$	73,031	$	282,410
Special mention		—		437		834		479		1,750		187		215		610		—		—		—		1,012
Substandard		219		1,122		514		2,898		4,753		146		2,101		355		211		—		3,099		5,912
Doubtful		—		83		82		—		165		1		—		73		—		—		—		74
Loss		—		—		—		—		—		—		—		—		—		—		—		—

	$	4,044	$	68,766	$	96,049	$	103,587	$	272,446	$	14,453	$	82,144	$	101,181	$	12,028	$	3,472	$	76,130	$	289,408

Non-accrual		48		499		385		2,934		3,866
Nonaccrual												122		1,753		129		—		310		2,371		4,685
Troubled debt restructures		219		—		33		47		299		45		—		—		211		—		—		256
Number of TDRs accounts		1		—		1		1		3		1		—		—		1		—		—		2
Non-performing TDRs		—		—		33		47		80		45		—		—		—		—		—		45
Number of non-performing TDR accounts		—		—		1		1		2		1		—		—		—		—		—		1



December 31, 2017			Residential								Commercial
(dollars in thousands)	Consumer		Real Estate		Indirect		Commercial		Construction		Real Estate		Total

Pass	$	15,823	$	79,060	$	83,756	$	11,038	$	3,218	$	72,074	$	264,969
Special mention		77		384		1,027		2		—		327		1,817
Substandard		188		2,482		362		217		318		1,194		4,761
Doubtful		24		—		41		—		—		—		65
Loss		—		—		—		—		—		—		—

	$	16,112	$	81,926	$	85,186	$	11,257	$	3,536	$	73,595	$	271,612

Nonaccrual		185		2,124		88		48		318		507		3,270
Troubled debt restructures		46		—		—		217		—		—		263
Number of TDRs accounts		1		—		—		1		—		—		2
Non-performing TDRs		46		—		—		—		—		—		46
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

- 1319 -

Table of Contents

December 31, 2016

Commercial

Consumer

and

Commercial

and

Residential

(dollars in thousands)

Industrial

Real Estate

Indirect

Real Estate

Total










Pass

$
4,357

$
64,208

$
82,943

$
105,225

$
256,733
Special mention

94

3,801

276

527

4,698
Substandard

228

1,413

327

2,493

4,461
Doubtful

—

—

36

178

214
Loss

—

—

—

—

—









$
4,679

$
69,422

$
83,582

$
108,423

$
266,106










Non-accrual

—

647

456

2,648

3,751
Troubled debt restructures

228

—

36

48

312
Number of TDRs accounts

1

—

1

1

3
Non-performing TDRs

—

—

36

48

84
Number of non-performing TDR accounts

—

—

1

1

2

~~NOTE 5 – FAIR VALUE~~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 ~~820‑10~~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 ~~framework for~~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 and expands disclosure of fair value measurements.~~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 – ~~Quoted~~Unadjusted quoted prices in active markets for identical ~~securities~~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)

~~In determining the appropriate levels, the Company performs~~The following is a ~~detailed analysis~~description of ~~the~~valuation methodologies used for assets and liabilities ~~that~~recorded at fair value:

Investment Securities Available-for-Sale. Investment securities available-for-sale and interest rate swap contracts are ~~subject to ASC 820 10.~~

~~The Company’s bond holdings in the investment securities portfolio are the only asset or liability subject to~~recorded at fair value ~~measurements~~ 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 ~~also~~ be required, from time to time, to measure certain other financial and non-financial assets and liabilities at fair value on a non-recurring basis in accordance with GAAP.

Loans.At ~~September~~June 30, ~~2017,~~2018, these assets include 2922 loans, excluding ~~$226,000~~$168,000 of ~~consumer~~residential real estate and indirect loans, classified as impaired, which include nonaccrual, past due 90 days or more and still accruing, and a homogeneous pool of indirect loans all considered to be impaired loans, which are valued under Level 3 inputs. Loans which are deemed to be impaired ($~~5.0~~5.3 million of loans with ~~$810,000~~$237,000 of specific reserves as of ~~September~~June 30, ~~2017)~~2018) and foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Company is predominantly a cash flow lender with real estate serving as collateral on a majority of loans ($~~3.8~~5.0 million of the total impaired loans as of ~~September~~June 30, ~~2017)~~2018). 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

~~- 14 -~~

~~Table of Contents~~

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 ($~~1.2~~ 475,000

- 20 -

Table of Contents

million with ~~$292,000~~$226,000 of specific reserves as of ~~September~~June 30, ~~2017)~~2018) include mobile homes, commercial, consumer, and indirect auto loans, which are valued based on the value of the underlying collateral.

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


							Fair								Fair
(dollars in thousands)	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
September 30, 2017
June 30, 2018
Recurring:
Securities available for sale
U.S. Treasury	$	—	$	1,504	$	—	$	1,504
Agency		—		1,992		—		1,992
State and Municipal		—		36,835		—		36,835
Mortgaged-backed		—		49,572		—		49,572
Collateralized mortgage obligations									$	—	$	22,018	$	—	$	22,018
Agency mortgage-backed securities										—		27,003		—		27,003
Municipal securities										—		34,872		—		34,872
U.S. Government agency securities										—		1,935		—		1,935
U.S. Treasury securities										—		1,486		—		1,486
Interest rate swap										—		431		—		431

Non-recurring:
Maryland Financial Bank stock		—		—		30		30		—		—		30		30
Impaired loans		—		—		4,227		4,227		—		—		5,260		5,260
OREO		—		114		—		114		—		114		—		114
	$	—	$	90,017	$	4,257	$	94,274	$	—	$	87,859	$	5,290	$	93,149
December 31, 2016
December 31, 2017
Recurring:
Securities available for sale
U.S. Treasury	$	—	$	1,507	$	—	$	1,507
Agency		—		—		—		—
State and Municipal		—		33,845		—		33,845
Mortgaged-backed		—		59,255		—		59,255

Collateralized mortgage obligations									$	—	$	23,514	$	—	$	23,514
Agency mortgage-backed securities										—		25,229		—		25,229
Municipal securities										—		35,633		—		35,633
U.S. Government agency securities										—		3,480		—		3,480
U.S. Treasury securities										—		1,493		—		1,493
Non-recurring:
Maryland Financial Bank stock		—		—		30		30		—		—		30		30
Impaired loans		—		—		2,891		2,891		—		—		3,532		3,532
OREO		—		114		—		114		—		114		—		114
	$	—	$	94,721	$	2,921	$	97,642	$	—	$	89,463	$	3,562	$	93,025

The estimated fair values of the Company’s financial instruments at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 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

- 1521 -

Table of Contents

estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.


	September 30, 2017				December 31, 2016				June 30, 2018				December 31, 2017
(dollars in thousands)	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value		Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	4,371	$	4,371	$	3,195	$	3,195	$	2,584	$	2,584	$	2,610	$	2,610
Interest-bearing deposits in other financial institutions		7,117		7,117		4,230		4,230		5,498		5,498		9,846		9,846
Federal funds sold		9		9		3,197		3,197		197		197		149		149
Investment securities available for sale		89,903		89,903		94,607		94,607		87,314		87,314		89,349		89,349
Investments in restricted stock		30		30		1,230		1,230		1,443		1,443		1,232		1,232
Ground rents		156		156		164		164		150		150		153		153
Loans, less allowance for credit losses		268,840		266,254		262,574		259,017		287,124		285,394		269,023		275,819
Accrued interest receivable		1,140		1,140		1,134		1,134		1,142		1,142		1,133		1,133
Cash value of life insurance		9,479		9,479		9,328		9,328		7,780		7,780		8,713		8,713

Financial liabilities:
Deposits		334,105		316,619		333,246		315,418		341,807		319,687		334,238		324,512
Long-term borrowings		—		—		10,000		10,257		—		—		—		—
Short-term borrowings		20,000		20,917		10,000		10,188		25,000		25,110		20,000		20,739
Dividends payable		—		—		—		—
Accrued interest payable										136		136		101		101
Unrecognized financial instruments:
Commitments to extend credit										33,796		33,796		19,109		19,109
Standby letters of credit										1,025		1,025		71		71

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


(dollars in thousands)
	Carrying		Fair							Carrying		Fair
September 30, 2017	Amount		Value		Level 1		Level 2	Level 3
June 30, 2018										Amount		Value		Level 1		Level 2	Level 3

Financial instruments - Assets
Cash and cash equivalents	$	11,497	$	11,497	$	11,497	—	$	—	$	8,279	$	8,279	$	8,279	—	$	—
Loans receivable, net		268,840		266,254		—	—		266,254		287,124		285,394		—	—		285,394
Cash value of life insurance		9,479		9,479		—	9,479		—		7,780		7,780		—	7,780		—
Financial instruments - Liabilities
Deposits		334,105		316,619		219,478	97,141		—		341,807		319,687		—	319,687		—
Long-term debt		—		—		—	—		—
Short-term debt		20,000		20,917		—	20,917		—		25,000		25,110		—	25,110		—

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. The fair value of loans receivable is estimated using discounted cash flow analysis.

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.

- 1622 -

Table of Contents

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, 2017 and December 31, 2016 are as follows:

September 30, 2017

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)
U.S. Treasury

$
499

$
1

$
—

$
—

$
499

$
1
Agency

1,992

7

848

12

2,840

19
State and Municipal

5,133

62

4,862

167

9,995

229
Mortgage Backed

33,466

422

9,446

232

42,912

654

$
41,090

$
492

$
15,156

$
411

$
56,246

$
903

December 31, 2016

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)
U.S. Treasury

$
—

$
—

$
—

$
—

$
—

$
—
Agency

—

—

986

16

986

16
State and Municipal

19,200

580

—

—

19,200

580
Mortgage Backed

43,094

575

9,603

277

52,697

852

$
62,294

$
1,155

$
10,589

$
293

$
72,883

$
1,448

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 it’s investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

As of September 30, 2017, management had the ability and intent to hold the securities classified as available for sale for a period of time sufficient for a recovery of cost. On September 30, 2017, the Bank held 30investment securities that were in a continuous unrealized loss position for more than 12 months. Management does not believe the securities are impaired due to reasons of credit quality. As of September 30, 2017, management believes the impairment detailed in the table above is temporary and no impairment loss has been recognized in the Company’s consolidated income statement.

NOTE 67 – RECENT ACCOUNTING PRONOUNCEMENTS

The FASB has issued several exposure drafts which, if adopted, would significantly alter the Company’s (and all other financial institutions’) method of accounting for, and reporting, its financial assets and some liabilities from a historical cost method to a fair value method of accounting as well as the reported amount of net interest income. The Company has not determined the extent of the possible changes at this time. The exposure drafts are in different stages of review, approval and possible adoption.

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. ASU 2014‑09 iswas effective for the Company on January 1, ~~2018. The Company is still evaluating the potential~~2018 and did not have a significant impact on ~~the Company’s~~our financial statements.

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~~Table of Contents~~

ASU 2016‑1, “No. 2016‑01, Financial Instruments – Overall (Subtopic 825‑10): Recognition and Measurement of Financial Assets and Financial Liabilities.”ASU ~~2016‑1, among other things, (i) requires~~2016-01 is intended to improve the recognition and measurement of financial instruments by requiring equity investments ~~with certain exceptions,~~ to be measured at fair value with changes in fair value recognized in net ~~income, (ii) simplifies~~income; requiring public business entities to use the ~~impairment assessment~~exit price notion when measuring the fair value of ~~equity investments without readily determinable fair values~~financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by ~~requiring a qualitative assessment~~measurement category and form of financial asset on the balance sheet or the accompanying notes to ~~identify impairment, (iii) eliminates~~the financial statements; eliminating the requirement for public business entities to disclose the ~~methods~~method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured and amortized at ~~amortized~~ cost on the balance ~~sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity~~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 ~~entity~~organization has elected to measure the liability at fair value in accordance with the fair value option for financial ~~instruments, (vi) requires separate presentation~~instruments. ASU 2016-01 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of ~~financial assets and financial liabilities by measurement category and form of financial asset on~~a cumulative-effect adjustment to the balance sheet oras of the ~~accompanying notes to~~beginning of the ~~financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset~~fiscal year of adoption. The amendments related to ~~available-for-sale.~~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 ~~2016‑1 will be effective for us~~2016-01 on January 1, 2018 and isit did not ~~expected to~~ have a ~~significant~~material impact on ~~our~~the consolidated financial ~~statements.~~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).” ASU 2016‑02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and 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. ASU 2016‑02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU ~~2016��~~2016‑2 will be effective for us on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the potential impact of ASU 2016‑02 on our financial statements.

ASU 2016‑05 “Derivatives and Hedging (Topic 815) Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.”ASU 2016‑05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016‑05 ~~was effective for us on January 1, 2017 and did not have a significant impact on our financial statements.~~

ASU 2016‑07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. ASU 2016‑07 simplifies the transition to the equity method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. ASU 2016‑07 was effective for us on January 1, 2017 and did not have a significant impact on our financial statements.

ASU 2016‑08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” ASU 2016‑08 was issued to clarify certain principal versus agent considerations within the implementation guidance

- 23 -

Table of ~~ASC Topic 606, “Revenue from Contracts with Customers.”~~ ~~The effective date and transition of ASU 2016‑08 is the same as the effective date and transition of~~ ~~ASU 2014‑09, Revenue from Contracts with Customers (Topic 606), as discussed above. The Company is currently evaluating the potential impact of ASU 2016‑08 on our financial statements.~~Contents

ASU 2016‑09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016‑09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was

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~~Table of Contents~~

previously the case. ASU 2016‑09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016‑09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. ASU ~~2016‑~~016‑09 was effective on January 1, 2017 and did not have a significant impact on our ~~financial statements.~~

~~ASU No. 2016‑10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU 2016‑10 was issued to clarify~~ ~~ASC Topic 606, “Revenue from Contracts with Customers”~~ related to (i) identifying performance obligations; and (ii) the licensing implementation guidance. The effective date and transition of ASU 2016‑10 is the same as the effective date and transition of ~~ASU 2014‑09, “Revenue from Contracts with Customers (Topic 606),”~~ ~~as discussed above. The Company is currently evaluating the potential impact of ASU 2016‑10 on our financial statements.~~

ASU No. 2016‑12, “Revenue From Contracts With Customers (Topic 606) Narrow-Scope and Practical Expedients” which updated guidance intended to clarify the guidance previously issued in May 2014 related to the recognition of revenue from contracts with customers. The updated guidance includes narrow-scope improvements intended to address implementation issues and to provide additional practical expedients in the guidance. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

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. The Company is currently assessing the impact of the new guidance on its ~~condensed~~ consolidated financial statements.

ASU 2016‑15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016‑15”). This ~~Accounting Standards Update~~ASU 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~~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 does not expect the~~Company’s adoption of this guidance todid not have a material effect on the Company’s consolidated ~~financial statements.~~

ASU 2016‑16, “Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory.” ASU 2016‑16 provides guidance stating that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016‑16 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our 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 ~~will be~~was effective for us on January 1, 2018 and isdid not ~~expected to~~ have a significant impact on our financial statements.

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~~Table of Contents~~

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 ~~will be~~was effective for us on January 1, 2018 and isdid not ~~expected to~~ have a significant impact on our financial statements.

ASU 2017‑08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU 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 is effective for interim and annual reporting periods beginning after December 15, 2018; early

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adoption is permitted. 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. The Company is currently ~~evaluating~~assessing the ~~provisions~~impact of the new guidance on its consolidated financial statements.

ASU No. ~~2017‑08~~2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to ~~determine~~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 ~~potential impact~~designation and measurement guidance for qualifying hedging relationships and the ~~new standard will have on~~presentation of hedge results. To meet that objective, the ~~Company’s Consolidated Financial Statements.~~

~~ASU 2017‑09, “Compensation-Stock Compensation (Topic 718): Scope of Modification”. ASU 2017‑09 was issued to provide clarity~~amendments expand and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. Diversity in practice has arisen in part because some entities apply modification accounting under Topic 718 for modifications to terms and conditions that they consider substantive, but do not when they conclude that particular modifications are not substantive. Others apply modificationrefine hedge accounting for ~~any change to an award, except for changes that they consider purely administrative in nature. Still others apply modification accounting when a change to an award changes~~both nonfinancial and financial risk components and align the ~~fair value, the vesting, or the classification~~recognition and presentation of the ~~award. In practice, it appears that~~effects of the ~~evaluation of a change~~hedge instruments and the hedged item in ~~fair value, vesting, or classification may be used to evaluate whether a change~~the financial statements. Adoption for this ASU is ~~substantive. ASU 2017‑09 include guidance on determining which changes to the terms~~required for fiscal years and ~~conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. ASU 2017‑09 is effective for the annual period, and~~ interim ~~periods within the annual~~ periods beginning after December 15, ~~2017.~~2018 and early adoption is permitted. The Company is currently assessing the impact of the new guidance on its consolidated financial statements.

ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU does not have any impact on the underlying ASC 740 guidance that requires the effect of a change in tax law be included in income from continuing operations. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted ~~including adoption in any interim period for: (a) public business entities for reporting periods for which financial statements have not yet been issued,~~ and ~~(b) all other entities for reporting periods for which financial statements have not yet been made available for issuance. ASU 2017‑09~~ should be applied ~~prospectively~~either in the period of adoption or retrospectively to ~~an award modified on or after~~each period (or periods) in which the ~~adoption date.~~effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company ~~is currently~~adopted the guidance in the ~~process of evaluating the impact of~~ ASU ~~2017‑09 on~~in its December 31, 2017 consolidated financial statements ~~but does~~resulting in a reclassification of $0.1 million of stranded tax effects related to net unrealized losses on investment securities. The impact was not ~~expect the adoption of ASU 2017‑09 to have material impact on it consolidated financial statements.~~material.

ITEM ~~2. MANAGEMENT’S~~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.

~~- 20 -~~

~~Table of Contents~~

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 grew by ~~$6.3~~$18.1 million or ~~2.4%~~6.73% in the first ~~nine~~six months of ~~2017.~~2018. Overall deposits increased by ~~$859,000~~$7.6 million or ~~0.26%~~2.26%. The Company has a very strong capital position and capacity for future growth with estimated total regulatory capital to risk weighted assets of ~~14.68%~~12.78% as of ~~September~~June 30, ~~2017.~~2018. At ~~September~~June 30, ~~2017,~~2018, the Bank remained above all “well-capitalized” regulatory requirement levels. The Bank’s estimated tier 1 risk-based

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capital ratio was ~~13.63%~~11.94% at ~~September~~June 30, ~~2017~~2018 compared to ~~13.63%~~12.83% at December 31, ~~2016.~~2017. Our liquidity position remained strong due to available cash and cash equivalents, borrowing lines with the FHLB of Atlanta and correspondent banks, and the size and composition of the investment portfolio. Net income available to common stockholders for the ~~three- and nine-month periods~~three-month period ended ~~September~~June 30, ~~2017 were $411,000 and $1.06 million, respectively,~~2018 was $478,000, or ~~$0.15 and $0.38~~$0.17 per basic and diluted share compared to ~~$115,000 and $706,000,~~$338,000, or ~~$0.04 and $0.25~~$0.12 per basic and diluted share for the same ~~periods~~period of ~~2016.~~2017.Net income available to common stockholders for the six-month period ended June 30, 2018 was $733,000, or $0.26 per basic and diluted share compared to $654,000, or $0.23 per basic and diluted share for the same period of 2017. The results recorded for the first three- and ~~nine-month~~six-month periods of ~~2017~~2018 exceeded ~~the same period of 2016 due primarily to strong loan growth and materially improving efficiency metrics. Our ongoing efficiency efforts continue in 2017.For the three- and nine-month periods ended September 30, 2017, noninterest expense was $2.7 million and $8.1 million, respectively, compared to $3.0 million and $8.3 million for~~ the same periods of ~~2016. The primary contributor to the decrease when compared to the three-~~2017 resulting primarily from higher total interest income, gains on redemption of BOLI policies and ~~nine-month periods ended September 30, 2016 was an decrease in salaries~~lower income tax expense, offset by higher noninterest expenses and ~~employee benefits, and a decrease in other expenses.~~provision for loan losses.

RESULTS OF OPERATIONS

Net Interest Income. The Company’s net interest income for the ~~three- and nine-month periods~~three-month period ended ~~September~~June 30, ~~2017~~2018 was ~~$2.9~~$3.1 million, ~~and $8.7 million, respectively,~~ compared to ~~$2.8~~$2.9 million ~~and $8.3 million, respectively,~~ for the same period in ~~2016,~~2017, an increase of ~~$143,000,~~$160,000, or ~~5.13%~~5.53%. The Company’s net interest income for the ~~three months and~~six-month period ended June 30, 2018 was $6.0 million, compared to $5.7 million for the same period in 2017, an increase of ~~$339,000,~~$320,000, or ~~4.08% for the nine months.~~5.59%.

~~Interest~~Total interest income for the ~~third~~second quarter 2018 increased ~~$116,000~~$163,000 from ~~$3.3 million in 2016 to~~ $3.4 million in 2017 ~~a 3.5% increase. Interest income for the nine months increased $203,000 from $9.9~~to $3.5 million in ~~2016~~2018, an increase of 4.82%. The primary driver of the 2018 increase when compared to ~~$10.1 million~~the same period in 2017 ~~a 2.04% increase. The primary reason for the~~was an increase of $116,000 in interest and fees on loans. Total interest income for the ~~2017 periods~~six months ended June 30, 2018 increased $284,000 when compared to the ~~2016 periods was~~same period in 2017 from $6.7 million in 2017 to $7.0 million in 2018, an increase of 4.24%. The primary driver of the ~~$123,000~~ increase in ~~loan~~total interest income ~~and a $56,0000~~was an increase of $214,000 in interest ~~income for state~~ and ~~municipal and Treasury and agency securities.~~fees on loans due to loan growth in the amount of $18.1 million during the period.

Interest expense for the ~~third~~second quarter ~~decreased~~2018 increased $3,000 from ~~$526,000 in 2016 to $499,000~~$487,000 for the same period in 2017 ~~a 5.14% decrease.~~to $490,000 in 2018, an increase of 0.62%. Interest expense for the ~~nine~~six months ended June 30, 2018 decreased $36,000 from ~~$1.6 million in 2016 to $1.5 million~~$978,000 for the same period in 2017 ~~an 8.43% decrease.~~to $942,000 in 2018, a decrease of 3.68%. Interest expense for the ~~third quarter and nine months~~six-month period of ~~2017~~2018 was lower than the comparable ~~periods~~period of ~~2016~~2017 primarily due to ~~the~~a decrease in ~~rates paid on our deposit accounts and a change~~the cost of deposits caused by changes in the mix from interest bearing ~~accounts~~ to non-interest bearing ~~accounts, offset by an~~deposits.

Net interest margin for the three-month period ended June 30, 2018 was3.21% compared to 3.09% for the three-month period ended June 30, 2017. The increase was primarily due to a $6.5 million increase in the average balance of interest ~~paid~~earning assets. The yield on ~~borrowings.~~

interest earning assets increased by 0.11% from 3.62% for the three-month period ended June 30, 2017 to 3.73% for the same period of 2018. While the cost of funds decreased 0.01% from 0.55% for the three-month period ended June 30, 2017 to 0.54% for the same period of 2018. Net interest margins for the ~~three- and nine-month periods~~six-month period ended ~~September~~June 30, ~~2017~~2018 was ~~3.10% and 3.09%~~3.22% compared to ~~2.97%~~3.08% for the ~~three- and nine-month periods~~six-month period ended ~~September~~June 30, ~~2016.~~2017. The increase ~~in the net interest margin for the third quarter 2017 as compared to the same period in 2016~~ was primarily due to ~~increasing yields~~a $4.5 million increase in the average balance of interest earning assets and a 0.02% reduction in the total cost of funds. The yield on ~~investment securities and lower funding costs, offset~~interest earning assets increased by ~~lower yields on~~0.11% from 3.61% for the ~~loan portfolio primarily due~~six-month period ended June 30, 2017 to ~~principal curtailments on higher yielding 1-4 Family Loans combined with increasing balances on lower yielding Indirect Automobile Loans.~~3.72% for the same period of 2018.

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The ~~net interest margin calculations on the Bank~~following tables sets forth, for the ~~three-~~periods indicated, information regarding the average balances of interest earning assets and ~~nine-month periods ended September 30, 2017~~interest bearing liabilities, the amount of interest income and ~~2016 are below:~~interest expense and the resulting yields on average interest earning assets and rates paid on average interest bearing liabilities.



	Three Months Ended September 30,												Three Months Ended June 30,
	2017						2016						2018						2017
	Average				Yield/		Average				Yield/		Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost
	(Dollars In Thousands)
(dollars in thousands)													Balance		Interest		Cost		Balance		Interest		Cost
ASSETS:
Interest-earning assets:
Interest-bearing deposits w/ banks & fed funds	$	12,765	$	38	1.16	%	$	15,467	$	18	0.46	%	$	7,514	$	26	1.39	%	$	11,811	$	24	0.83	%
Investment securities available for sale		90,028		498	2.21			100,565		492	1.96			91,290		535	2.35			92,364		507	2.20
Restricted equity securities		1,384		15	4.43			1,230		13	4.50			1,500		24	6.36			1,282		7	2.18
Total interest bearing deposits/investments		104,177		551	2.10			117,262		523	1.78			100,304		585	2.34			105,457		538	2.05

Loans:
Commercial & industrial		11,721		173	5.85			12,446		160	5.13			11,481		178	6.23			11,809		163	5.53
Commercial real estate		67,159		848	5.01			67,694		792	4.66			73,647		897	4.89			66,157		826	5.01
Residential real estate		85,468		975	4.57			91,976		1,125	4.89			82,171		905	4.42			88,567		1,019	4.61
Indirect automobile		84,163		546	2.60			64,315		418	2.60			94,997		685	2.89			81,685		524	2.57
Construction		7,186		106	5.88			4,082		61	5.96			4,032		60	5.95			6,423		91	5.69
Consumer & other		15,276		235	6.10			16,070		239	5.92			14,776		233	6.33			14,892		219	5.89
Total loans		270,973		2,883	4.22			256,583		2,795	4.33			281,104		2,958	4.22			269,533		2,842	4.23
Total interest-earning assets		375,150		3,434	3.63			373,845		3,318	3.53			381,408		3,543	3.73			374,990		3,380	3.62

Cash		3,526						3,870						2,587						3,254
Allowance for loan losses		(2,657)						(2,318)						(2,688)						(2,661)
Market valuation		(441)						1,051						(2,557)						(818)
Other assets		18,299						17,217						17,283						18,194
Total non-earning assets		18,727						19,820						14,625						17,969
Total assets	$	393,877					$	393,665					$	396,033					$	392,959

LIABILITIES AND STOCKHOLDER'S EQUITY:
Interest-bearing deposits:
Interest-bearing checking and savings	$	112,446		15	0.05	%	$	111,132		14	0.05	%	$	113,890		18	0.07	%	$	112,150		16	0.06	%
Money market		19,332		2	0.05			18,534		2	0.05			19,710		2	0.05			19,304		2	0.05
Certificates of deposit		98,962		306	1.23			109,720		348	1.26			96,009		305	1.28			101,557		309	1.22
Total interest-bearing deposits		230,740		323	0.56			239,386		364	0.61			229,609		325	0.57			233,011		327	0.56

Borrowed Funds:
Federal Funds Purchased		—		—	—			—		—	—
FHLB advances		23,667		176	2.94			20,000		162	3.21			26,394		165	2.50			21,278		160	3.01
Total borrowed funds		23,667		176	2.94			20,000		162	3.21			26,394		165	2.50			21,278		160	3.01
Total interest-bearing liabilities		254,407		499	0.78			259,386		526	0.81			256,003		490	0.77			254,289		487	0.77

Non-interest-bearing deposits		103,999						98,345						105,870						103,713
Total cost of funds		358,406		499	0.55			357,731		526	0.58			361,873		490	0.54			358,002		487	0.55

Other liabilities and accrued expenses		1,093						1,088						822						940
Total liabilities		359,499						358,819						362,695						358,942

Stockholder's equity		34,378						34,846						33,338						34,017
Total liabilities and equity	$	393,877					$	393,665					$	396,033					$	392,959
Net interest income			$	2,935					$	2,792					$	3,053					$	2,893
Yield on earning assets					3.63	%					3.54	%					3.73	%					3.62	%
Cost of interest-bearing liabilities					0.78	%					0.81	%					0.77	%					0.77	%
Net interest spread					2.85	%					2.73	%					2.96	%					2.85	%
Net interest margin					3.10	%					2.97	%					3.21	%					3.09	%

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	Nine Months Ended September 30,												Six Months Ended June 30,
	2017						2016						2018						2017
	Average				Yield/		Average				Yield/		Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost
	(Dollars In Thousands)
(dollars in thousands)													Balance		Interest		Cost		Balance		Interest		Cost
ASSETS:
Interest-earning assets:
Interest-bearing deposits w/ banks & fed funds	$	11,869	$	80	0.90	%	$	16,044	$	49	0.41	%	$	8,084	$	58	1.44	%	$	11,422	$	42	0.75	%
Investment securities available for sale		92,151		1,523	2.20			99,710		1,467	1.96			91,870		1,059	2.32			93,213		1,025	2.22
Restricted equity securities		1,304		35	3.58			1,231		42	4.61			1,419		40	5.63			1,264		20	3.14
Total interest bearing deposits/investments		105,324		1,638	2.08			116,985		1,558	1.78			101,373		1,157	2.30			105,899		1,087	2.07

Loans:
Commercial & industrial		11,974		500	5.58			12,534		479	5.11			11,324		342	6.08			12,101		327	5.46
Commercial real estate		67,328		2,479	4.92			67,777		2,327	4.59			73,517		1,779	4.88			67,412		1,632	4.88
Residential real estate		87,897		3,011	4.57			94,075		3,426	4.86			82,084		1,818	4.47			89,112		2,035	4.61
Indirect automobile		80,553		1,556	2.58			62,397		1,219	2.61			91,286		1,291	2.85			78,748		1,010	2.59
Construction		6,514		277	5.69			4,588		201	5.85			4,093		122	6.01			6,178		171	5.60
Consumer & other		15,067		680	6.03			16,414		728	5.93			15,230		478	6.33			14,963		441	5.95
Total loans		269,333		8,503	4.22			257,785		8,380	4.34			277,534		5,830	4.24			268,514		5,616	4.22
Total interest-earning assets		374,657		10,141	3.62			374,770		9,938	3.54			378,907		6,987	3.72			374,413		6,703	3.61

Cash		3,264						3,549						2,641						3,241
Allowance for loan losses		(2,628)						(2,598)						(2,655)						(2,614)
Market valuation		(861)						512						(2,169)						(1,072)
Other assets		18,298						17,309						17,210						18,295
Total non-earning assets		18,073						18,772						15,027						17,850
Total assets	$	392,730					$	393,542					$	393,934					$	392,263

LIABILITIES AND STOCKHOLDER'S EQUITY:
Interest-bearing deposits:
Interest-bearing checking and savings	$	111,724		45	0.05	%	$	109,615		42	0.05	%	$	114,960		35	0.06	%	$	111,363		29	0.05	%
Money market		19,341		7	0.05			19,137		7	0.05			20,099		5	0.05			19,346		5	0.05
Certificates of deposit		101,636		932	1.23			112,776		1,084	1.28			95,309		594	1.26			102,972		625	1.22
Total interest-bearing deposits		232,701		984	0.57			241,528		1,133	0.63			230,368		634	0.56			233,681		659	0.57

Borrowed Funds:
Federal Funds Purchased		—		—	—			—		—	—
FHLB advances		21,777		494	3.03			20,000		481	3.21			24,573		308	2.53			20,832		319	3.08
Total borrowed funds		21,777		494	3.03			20,000		481	3.21			24,573		308	2.53			20,832		319	3.08
Total interest-bearing liabilities		254,478		1,478	0.78			261,528		1,614	0.82			254,941		942	0.75			254,513		978	0.78

Non-interest-bearing deposits		103,269						96,470						104,617						102,904
Total cost of funds		357,747		1,478	0.55			357,998		1,614	0.60			359,558		942	0.53			357,417		978	0.55

Other liabilities and accrued expenses		1,027						979						858						994
Total liabilities		358,774						358,977						360,416						358,411

Stockholder's equity		33,956						34,565						33,518						33,852
Total liabilities and equity	$	392,730					$	393,542					$	393,934					$	392,263
Net interest income			$	8,663					$	8,324					$	6,045					$	5,725
Yield on earning assets					3.62	%					3.54	%					3.72	%					3.61	%
Cost of interest-bearing liabilities					0.78	%					0.82	%					0.75	%					0.78	%
Net interest spread					2.84	%					2.72	%					2.97	%					2.84	%
Net interest margin					3.09	%					2.97	%					3.22	%					3.08	%

Provision for Credit Losses. The Company recognized negative provisions for credit losses of $5,000 and $30,000 for the three-month periods ending June 30, 2018 and 2017, respectively. The decrease in provision for credit losses in the 2018 period was primarily the result of the positive resolution of a single problem loan, offset by the negative effect on the loss history rate used to establish the required reserves for residential real estate loans of a single loan charge off. The Company made a provision for credit losses of ~~$78,000 and a provision of $243,000 during~~$355,000 for the ~~three- and nine-month periods~~six-month period ending ~~September~~June 30, 2017 and $116,000 and $233,000 during the three- and nine-month periods ending September 30, 2016. As of September 30, 2017, the allowance for credit losses equaled 66.10% of non-accrual and past due loans compared to 65.59% at December 31, 2016 and 91.57% at

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~~September~~2018 and $165,000 during the six-month period ending June 30, ~~2016.~~2017. The increase in provision for credit losses in the 2018 period was the result of the deteriorated credit quality of a single participated loan. As of June 30, 2018, the allowance for credit losses equaled 58.6% of non-accrual and 90+ days past due loans compared to 72.5% at June 30, 2017. During the ~~three- and nine-month periods~~six-month period ended ~~September~~June 30, ~~2017,~~2018, the Company recorded net charge-offs of ~~$54,000 and $104,000~~$660,000 compared to net charge-offs of ~~$93,000 and $1.1 million~~$50,000 during the corresponding period of the prior year.

Noninterest Income. Noninterest income increased to ~~$368,000~~$386,000 for the three-month period ended ~~September~~June 30, ~~2017,~~2018, from ~~$340,000~~$288,000 for the corresponding ~~2016~~ period ~~a $28,000,~~in 2017, an increase of $98,000, or ~~8.24% increase.~~34.03%. The increase is due to an increase in other fees and commissions. Noninterest income decreased to $935,000 for the nine-month period ended September 30, 2017, from $942,000 for the corresponding 2016 period, a $7,000, or 0.74% decrease. The decrease for the nine-month period was primarily due to ~~decreased service charges~~gains on ~~deposit accounts and other~~the redemptions of bank-owned life insurance policies. Noninterest income ~~with lesser decreases~~increased to $872,000 for the six-month period ended June 30, 2018, from $567,000 for the corresponding period in ~~other areas.~~2017, an increase of $305,000, or 53.79%. The increase was primarily due to gains on the redemption of bank-owned life insurance policies.

Noninterest Expenses. Noninterest expenses ~~decreased~~increased from ~~$3.0~~$2.8 million for the three-month period ended ~~September~~June 30, ~~2016,~~2017, to ~~$2.7~~$3.0 million for the corresponding ~~2017~~ period ~~a $243,000,~~in 2018, an increase of $201,000, or ~~8.24% decrease.~~7.15%. The ~~decrease for the three-month period~~increase was primarily due to ~~lower~~higher salaries and employee ~~benefit expenses, data processing services, FDIC insurance~~benefits costs, legal, accounting and other professional fees driven by higher IT costs related to the development of new loan and deposit products, and loan collection costs, offset by ~~higher, marketing costs, telephone costs and~~decreases in occupancy and equipment ~~costs.~~expenses, and advertising and marketing related expenses. Noninterest expenses ~~decreased~~increased from ~~$8.3~~$5.4 million for the ~~nine month~~six-month period ended ~~September~~June 30, ~~2016,~~2017, to ~~$8.1~~$5.8 million for the corresponding ~~2017~~ period ~~a $207,000,~~in 2018, an increase of $465,000, or ~~2.49% decrease.~~8.64%. The ~~decrease for the nine-month period~~increase was also primarily due to ~~lower~~higher salaries and employee ~~benefit expenses, data processing services, FDIC insurance~~benefits costs, legal, accounting and other professional fees driven by higher IT costs related to the development of new loan and deposit products, and loan collection costs, offset by ~~higher professional fees,~~decreases in data processing and item processing services, and advertising and marketing ~~costs, telephone costs and occupancy and equipment costs.~~related expenses.

Income Taxes. During the ~~three- and nine-month periods~~three-month period ended ~~September~~June 30, ~~2017,~~2018, the Company recorded an income tax ~~expenses~~benefits of ~~$101,000 and $194,000, respectively,~~$45,000 compared to income tax ~~(benefit)~~ expense of ~~($55,000) and $23,000~~$63,000 for the same ~~respective periods~~period in ~~2016.~~2017. The Company’s effective tax rate for the ~~three- and nine-month periods~~three-month period in ~~2017~~2018 was ~~19.77% and 15.43%, respectively,~~negative 10.39% compared to ~~(91.67%) and 3.16%~~15.71% for the prior year period. During the six-month period ended June 30, 2018, the Company recorded income tax benefits of $17,000 compared to income tax expense of $92,000 for the same period in 2017. The Company’s effective tax rate for the six-month period ending June 30, 2018 was negative 2.37% compared to 12.33% for the prior year period. The ~~increases~~significant difference in the effective tax rate for ~~the three- and nine-month~~both periods was ~~due to higher income driven by the improved credit~~a result of the ~~overall loan portfolio resulting~~gain on the redemptions of Bank Owned Life Insurance policies in ~~a higher~~the period which is tax ~~provision.~~exempt.

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.~~securities and interest rate swap contracts. For the ~~third~~second quarter of ~~2017,~~2018, comprehensive income, net of tax, totaled ~~$344,000,~~$553,000, compared to ~~a loss~~income of ~~($189,000)~~$844,000 for the same period in ~~2016. Year-to-date~~2017. The decrease was due to lower net unrealized gains on available for sale securities driven by rising interest rates. For the six months ended June 30, 2018, comprehensive ~~income,~~loss, net of tax, totaled ~~$1,545,000,~~$13,000, compared to ~~$1,498,000~~income in the amount of $1.2 million for the same period in ~~2016.~~2017. The ~~increases~~decrease was driven by $1.1 million of net unrealized losses on available for ~~the three- and nine-month periods were~~sale securities driven by rising interest rates, offset by $396,000 of net gains on interest rate swap contracts.

FINANCIAL CONDITION

General. The Company’s assets increased to $401.5 million at June 30, 2018 from $389.5 million at December 31, 2017, an increase of $12.0 million or 3.09%, primarily due to increases in net ~~income compared to previous comparative periods.~~

~~FINANCIAL CONDITION~~

~~General.~~ loans, offset by decreases in cash and cash equivalents. The ~~Company’s assets increased to $389.9~~ Bank’s cash and cash equivalents as of June 30, 2018, totaled $8.1million, ~~at September 30, 2017~~a decrease of $4.5 million, or 35.88% from ~~$388.4~~$12.6 million at December 31, 2016, primarily due to an increase in cash and cash equivalents and loans, offset by a decrease in investment securities. The Bank’s net loans totaled $268.8 million at September 30, 2017, compared to $262.6 million at December 31, 2016, ~~an increase of $6.3 million, or 2.39%~~, primarily attributable to an increase in indirect, multifamily, land and smaller increases in various other loan categories. These increases were partially offset by decreases in purchase money mortgages, refinance loans and commercial and industrial mortgages. There was also an increase in mortgage participations sold.2017.

The Company’s investment securities available for sale totaled ~~$89.9~~$87.3 million at ~~September~~June 30, ~~2017,~~2018, a ~~$4.7~~$2.0 million, or ~~4.98%~~2.28% decrease from ~~$94.6~~$89.3 million at December 31, ~~2016,~~2017, primarily due to principle and interest payments received offset by the purchase of six new investment securities. The Bank’s cash and due from banks (cash due from banks, interest-bearing deposits in other financial institutions, and federal funds sold), as of September 30, 2017, totaled $11.5~~million, an increase of $875,000, or 8.24% from the December 31, 2016 total of $10.6 million.~~

Deposits as of September 30, 2017 totaled $334.1 million, which is an increase of $0.8 million, or 0.24% from $333.2 million at December 31, 2016. Demand deposits as of September 30, 2017, totaled $104.5 million, which is an increase of $4.4 million, or 4.40% from $100.1 million at December 31, 2016. NOW accounts as of September 30, 2017,

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~~Table of Contents~~

totaled $28.9 million, which is a decrease of $0.5 million, or 1.70% from $29.4 million at December 31, 2016. Money market accounts as of September 30, 2017, totaled $18.8 million, which is an increase of $0.5 million, or 2.73%, from $18.3 million at December 31, 2016. Savings deposits as of September 30, 2017, totaled $83.2 million, which is an increase of $3.3 million, or 4.13% from $80.0 million at December 31, 2016. Certificates of deposit over $100,000 totaled $29.2 million on September 30, 2017, which is a decrease of $1.7 million, or 5.5% from $30.9 million at December 31, 2016. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $69.3 million on September 30, 2017, which is a $5.2 million, or 6.98% decrease from the $74.5 million total at December 31, 2016.

~~Loans. The following tables set forth the amount of the Bank’s loans by categories at the dates indicated.~~

September 30,

December 31,

2017

2016

(Dollars in Thousands)

$

%

$

%

Mortgage:

Residential

$
101,330

37.19
%
$
105,878

39.79
%
Commercial

62,657

23.00

66,756

25.09

Construction and land development

8,366

3.07

5,211

1.96

Consumer:





Installment

13,855

5.09

13,591

5.11

Personal unsecured lines

105

0.04

89

0.03

Indirect automobile

82,089

30.13

69,902

26.27

Commercial

4,044

1.48

4,679

1.76

Gross loan

272,446

100.00
%

266,106

100.00
%
Unearned income on loans

(983)



(1,048)

Gross loans net of unearned income

271,463



265,058

Allowance for credit losses

(2,623)



(2,484)

Loans, net

$
268,840



$
262,574

~~The Bank’s net loans totaled~~$268.8 million at September 30, 2017, compared to $262.6 million at December 31, 2016, an increase of $6.3 million, or 2.36%. Construction loans increased from $5.2 million to $8.4 million ($3.2 million or 60.54%). Commercial real estate loans decreased from $66.8 million to $62.7 million ($4.1 million or 6.14%) as loan payoffs outpaced loan originations.

~~Other Real Estate Owned.~~ At September 30, 2017, the Company had $114,000 in real estate acquired in partial or total satisfaction of debt, compared to $114,000 at December 31, 2016. All such properties are 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 non-interest expense. Gains and losses realized from the sale of other real estate owned are included in non-interest income or expense.

~~Allowance For Credit Losses~~. The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. The allowance, based on 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~~securities and ~~take into consideration such factors as changes~~increases 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’ abilityunrealized losses due 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 credit losses in proportion to the total non-accrual loans and past due loans to be sufficient.rising interest rates.

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~~Transactions~~The Bank’s net loans totaled $287.1 million at June 30, 2018, compared to $269.0 million at December 31, 2017, an increase of $18.1 million, or 6.73%, primarily attributable to an increase in indirect, residential real estate and commercial real estate, partially offset by decreases in consumer and construction loans.

Loans are placed on nonaccrual status when they are past due 90 days as to either principal or interest or when, in the ~~allowance~~opinion of management, the collection of all interest and/or principal is in doubt. Placing a loan on nonaccrual status means that we no longer accrue interest on such loan and reverse any interest previously accrued but not collected. Management may grant a waiver from nonaccrual status for ~~credit losses for~~a 90 day past due loan that is both well secured and in the ~~nine months ended September 30, 2017~~process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and the ~~year ended~~borrower has demonstrated the ability to make payments in accordance with the terms of the loan and remain current.

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

At June 30, 2018, impaired loans totaled $5.5 million. Included in the impaired loans total were $4.7 million in loans classified as nonaccrual loans. At June 30, 2018, troubled debt restructurings included in impaired loans totaled $256,000. Borrowers under all other restructured loans are paying in accordance with the terms of the modified loan agreement and have been placed on accrual status after a period of performance with the restructured terms.

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


	June 30,			December 31,
(dollars in thousands)	2018			2017
Nonaccrual loans	$	4,685		$	3,270
TDR loans excluding those in nonaccrual loans		211			217
Accruing loans past due 90+ days		34			60

Total nonperforming loans		4,930			3,547

Real estate acquired through foreclosure		114			114

Total nonperforming assets	$	5,044		$	3,661

Nonperforming assets to total assets		1.26	%		0.94	%

Deposits as of June 30, 2018 totaled $341.8 million, an increase of $7.6 million, or 2.3% from $334.2 million at December 31, ~~2016 were~~2017. Demand deposits as ~~follows:~~

Commercial




Consumer









September 30, 2017

and

Commercial

and

Residential

(dollars in thousands)

Industrial

Real Estate

Indirect

Real Estate

Unallocated

Total












Balance, beginning of year

$
284

259

$
876

$
1,051

$
14

$
2,484
Provision for credit losses

(37)

4

246

44

(14)

243
Recoveries

—

14

212

27

—

253
Loans charged off

—

—

(354)

(3)

—

(357)












Balance, end of quarter

$
247

$
277

$
980

$
1,119

$
—

$
2,623












Individually evaluated for impairment:












Balance in allowance

$
220

$
—

$
58

$
532

$
—

$
810
Related loan balance

220

—

175

1,345

—

1,740












Collectively evaluated for impairment:












Balance in allowance

$
28

$
277

$
921

$
587

$
—

$
1,813
Related loan balance

3,825

��
68,766

95,873

102,242

—

270,706

Commercial




Consumer









December 31, 2016

and

Commercial

and

Residential

(dollars in thousands)

Industrial

Real Estate

Indirect

Real Estate

Unallocated

Total












Balance, beginning of year

$
305

$
262

$
804

$
1,631

$
148

$
3,150
Provision for credit losses

(30)

361

431

240

(134)

868
Recoveries

9

—

336

34

—

379
Loans charged off

—

(364)

(695)

(854)

—

(1,913)












Balance, end of quarter

$
284

$
259

$
876

$
1,051

$
14

$
2,484












Individually evaluated for impairment:












Balance in allowance

$
229

$
—

$
50

$
251

$
—

$
530
Related loan balance

229

1,413

503

2,872

—

5,017












Collectively evaluated for impairment:












Balance in allowance

$
56

$
259

$
826

$
799

$
14

$
1,954
Related loan balance

4,451

68,009

83,078

105,552

—

261,090

As of ~~September~~June 30, ~~2017, and~~2018, totaled $108.4 million, an increase of $4.4 million, or 4.2% from $104.0 million at December 31, ~~2016,~~2017. Interest-bearing checking accounts as of June 30, 2018, totaled $27.1 million, a decrease of $1.7 million, or 5.8% from $28.8 million at December 31, 2017. Savings accounts as of June 30, 2018 totaled $86.3 million, an increase of $0.4 million, or 0.5%, from $85.9 million at December 31, 2017. Money market accounts as of June 30, 2018, totaled $19.8 million, a decrease of $0.1 million, or 0.5%, from $19.9 million at December 31, 2017. Time deposits under $100,000 totaled $52.6 million on June 30, 2018, a $0.4 million, or 0.7% increase from the ~~allowance for loan losses included~~$52.3 million at December 31, 2017. Time deposits over $100,000 totaled $47.6 million on June 30, 2018, an ~~unallocated portion in the amount~~increase of$0 and $14,000, respectively. The unallocated portion of the allowance for credit losses is available to absorb further losses that may not necessarily be accounted for in the current model. Management believes the allowance for credit losses is $4.2 million, or 9.6% from $43.5 million at ~~an appropriate level to absorb inherent probable losses in the portfolio.~~

September 30,

September 30,

2017

2016

(dollars in thousands)

Average loans

$
266,715

$
255,170

Net charge-offs to average  loans (annualized)

0.05
%

0.32
%

December 31, 2017.

~~During 2017, loans to 48 borrowers and related entities totaling approximately $356,000 were determined to be uncollectible and were charged off.~~

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Deposits for the six months ended June 30, 2018 and the year ended December 31, 2017 were as follows:


	June 30, 2018				December 31, 2017				2018 vs 2017
(dollars in thousands)	Amount		% of Total		Amount		% of Total		$ Change		% Change
Noninterest-bearing deposits	$	108,414	31.7	%	$	104,017	31.1	%	$	4,397	4.2	%

Interest-bearing deposits:
Checking		27,109	7.9	%		28,774	8.6	%		(1,665)	(5.8)	%
Savings		86,310	25.3	%		85,890	25.7	%		420	0.5	%
Money market		19,758	5.8	%		19,855	5.9	%		(97)	(0.5)	%
Total interest-bearing checking, savings and money market deposits		133,177	39.0	%		134,519	40.2	%		(1,342)	(1.0)	%

Time deposits under $100,000		52,602	15.4	%		52,250	15.7	%		352	0.7	%
Time deposits of $100,00 or more		47,614	13.9	%		43,452	13.0	%		4,162	9.6	%
Total time deposits		100,216	29.3	%		95,702	28.7	%		4,514	4.7	%

Total interest-bearing deposits		233,393	68.3	%		230,221	68.9	%		3,172	1.4	%

Total Deposits	$	341,807	100.0	%	$	334,238	100.0	%	$	7,569	2.3	%

Pension and Profit Sharing Plans. The Bank has a defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue Code that is funded through a profit sharing agreement and voluntary employee contributions.

The plan provides for discretionary employer matching contributions to be determined annually by the Board of Directors. The plan covers substantially all employees.

For the six months ended June 30, 2018, the Bank accrued $189,000 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.

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

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

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

At June 30, 2018, 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 six months although it is the Company’s experience that such accounts may be less sensitive to changes in market rates.

The Bank utilizes a simulation model to quantify the effect a hypothetical immediate plus or minus 200 basis point change in rates would have on net interest income and the economic value of equity. The model takes into consideration the effect of call features of investments as well as prepayments of loans in periods of declining rates. When actual changes in interest rates occur, the changes in interest earning assets and interest bearing liabilities may differ from the assumptions used in the model. As of June 30, 2018, the model produced the following sensitivity profile for net interest income and the economic value of equity.


	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)	%
June 30, 2018	(12)	%	(4)	%	1	%	2	%
June 30, 2017	(16)	%	(8)	%	5	%	9	%

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The following table sets forth the Company’s interest-rate sensitivity at June 30, 2018.


							Over 1
				Over 3 to			Through			Over
	0-3 Months			12 Months			5 Years			5 Years			Total
	(dollars in thousands)
Assets:
Cash and due from banks	$	—		$	—		$	—		$	—		$	2,584
Federal funds and overnight deposits		5,498			—			—			—			5,498
Securities		—			3,529			2,491			81,294			87,314
Loans		17,994			3,916			94,178			171,036			287,124
Fixed assets		—			—			—			—			3,195
Other assets		—			—			—			—			15,756
Total assets	$	23,492		$	7,445		$	96,669		$	252,330		$	401,471

Liabilities:
Demand deposit accounts	$	—		$	—		$	—		$	—		$	108,414
NOW accounts		27,109			—			—			—			27,109
Money market deposit accounts		19,758			—			—			—			19,758
Savings accounts		86,616			—			—			—			86,616
IRA accounts		2,606			12,511			17,304			286			32,707
Certificates of deposit		6,712			37,284			23,028			178			67,202
Long-term borrowings		—			—			—			—			—
Short-term borrowings		25,000			—			—			—			25,000
Other liabilities		—			—			—			—			1,121
Stockholders’ equity:		—			—			—			—			33,544
Total liabilities and stockholders' equity	$	167,801		$	49,795		$	40,332		$	464		$	401,471

GAP	$	(144,309)		$	(42,350)		$	56,337		$	251,867
Cumulative GAP	$	(144,309)		$	(186,659)		$	(130,321)		$	121,545
Cumulative GAP as a % of total assets		(35.94)	%		(46.49)	%		(32.46)	%		30.27	%

As shown above, measures of net interest income at risk were less favorable at June 30, 2018 than at June 30, 2017 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 less favorable position was the less asset sensitive balance sheet.

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


	Static Balance Sheet/Immediate Change in Rates
Estimated Changes in Economic Value of Equity (EVE)	`-200 bp		`-100 bp		`+100 bp		`+200 bp
Policy Limit	(15)	%	(10)	%	(10)	%	(15)	%
June 30, 2018	(2)	%	(2)	%	(7)	%	(17)	%
June 30, 2017	(15)	%	(3)	%	5	%	1	%

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

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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 ~~accrued $328,000~~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 six 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~~June 30, ~~2017in anticipation~~2018, totaled $8.1 million, a decrease of ~~funding this contribution.~~$4.5 million, or 35.88% from the $12.6 million at December 31, 2017.

~~Reserve for Unfunded Commitments~~. As of ~~September~~June 30, ~~2017,~~2018, the Bank ~~had outstanding commitments totaling $21.3 million. These outstanding commitments consisted of letters~~was permitted to draw on a $97.6 million line of credit ~~undrawn~~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, 2017, there were $20.0 million in short-term borrowings from FHLB and as of June 30, 2018, there were $25.0 million in short-term borrowings outstanding with various monthly and quarterly call features. The increase in FHLB short-term borrowings was used to fund higher than projected loan growth in the first six months of 2018, during which period deposits grew at a much slower pace. In addition, the Bank has two unsecured federal funds lines of credit in the amount of $5.0 million and $6.0 million, of which nothing was outstanding as of June 30, 2018.

The Company’s stockholders’ equity decreased $498,000, or 1.46% during the six-month period ended June 30, 2018, primarily due to a decrease in accumulated other comprehensive loss, net of taxes (“AOCI”), partially offset by increases in retained earnings and issuances of common stock under the Company’s dividend reinvestment plan. The Company’s AOCI decreased by $746,000, or 118.23% from a loss of $631,000 at December 31, 2017 to a loss of $1.4 million at June 30, 2018, resulting from market value losses on securities available for sale and increases in the fair value of interest rate swap contracts. Retained earnings increased by $173,000, or 0.80% as the result of the Company’s net income for the six-month period ended June 30, 2018, offset by dividends paid on common stock.

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 ~~loan commitments.~~ 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

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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 will be phased in over a four-year period. When fully phased in on January 1, 2019, the rules will 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 ~~following table shows~~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 ~~Bank’s reserve for unfunded commitments arising from~~maintenance of specified minimum ratios of capital to “risk-weighted” assets. At June 30, 2018, the Bank was in full compliance with these ~~transactions:~~guidelines with a Tier 1 leverage ratio of 8.39%, a Tier 1 risk-based capital ratio of 11.94%, a common equity Tier 1 risk-based capital ratio of 11.94%, and a total risk-based capital ratio of 12.78%. The Company’s capital amounts and ratios at June 30, 2018 and December 31, 2017 were as follows:

Nine Months

Ended September 30,

2017

2016

(Dollars in Thousands)

Beginning balance

$
25

$
12
Reduction of unfunded reserve

(21)

(6)
Provisions charged to operations

9

19

Ending balance

$
13

$
25


									To Be Well Capitalized
					To Be Considered				Under Prompt Corrective
	Actual				Adequately Capitalized				Action Provisions
June 30, 2018	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Common equity tier 1 (to risk-weighted assets)	$	33,335	11.94	%	$	12,559	4.50	%	$	18,140	6.50	%
Total capital (to risk weighted assets)	$	35,662	12.78	%	$	22,326	8.00	%	$	27,908	10.00	%
Tier 1 capital (to risk weighted assets)	$	33,335	11.94	%	$	16,745	6.00	%	$	22,326	8.00	%
Tier 1 leverage (to average assets)	$	33,335	8.39	%	$	15,883	4.00	%	$	19,854	5.00	%


									To Be Well Capitalized
					To Be Considered				Under Prompt Corrective
	Actual				Adequately Capitalized				Action Provisions
December 31, 2017	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Common equity tier 1 (to risk-weighted assets)	$	32,946	12.83	%	$	11,553	4.50	%	$	16,687	6.50	%
Total capital (to risk weighted assets)	$	35,543	13.84	%	$	20,538	8.00	%	$	25,673	10.00	%
Tier 1 capital (to risk weighted assets)	$	32,946	12.83	%	$	15,404	6.00	%	$	20,538	8.00	%
Tier 1 leverage (to average assets)	$	32,928	8.43	%	$	15,617	4.00	%	$	19,521	5.00	%

~~Contractual Obligations~~

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, 2017 and ~~Commitments.~~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

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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. ~~No material changes, outside~~The Bank’s allowance for credit losses is determined based upon estimates that can and do change when the ~~normal course~~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 ~~have been made during the Third quarter of 2017.~~factors change.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~MARKET RISK AND INTEREST RATE SENSITIVITY~~

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates or equity pricing. The Company’s principal market risk is interest rate risk that arises from its lending, investing and deposit taking activities. The Company’s profitability is dependent on the Bank’s net interest income. Interest rate risk can significantly affect net interest income to the degree that interest bearing liabilities mature or reprice at different intervals than interest earning assets. The Bank’s Asset/Liability and Risk Management Committee oversees the management of interest rate risk. The primary purpose of the committee is to manage the exposure of net interest margins to unexpected changes due to interest rate fluctuations. The Company ~~does not utilize derivative financial or commodity instruments or hedging strategies in its management of interest rate risk. The primary tool used by the committee to monitor interest rate risk~~ is a ~~“gap” report which measures the dollar difference between the amount of interest bearing assets~~“smaller reporting company” and, ~~interest bearing liabilities subject~~as such, disclosure pursuant to ~~repricing within a given time period. These efforts affect the loan pricing and deposit rate policies of the Company as well as the asset mix, volume guidelines, and liquidity and capital planning.~~

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~~Table of Contents~~

~~The following table sets forth the Company’s interest-rate sensitivity at September 30, 2017.~~

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

$
—

$
—

$
—

$
—

$
10,440
Federal funds and overnight deposits

1,057

—

—

—

1,057
Securities

—

500

2,739

86,664

89,903
Loans

20,104

5,411

80,899

162,426

268,840
Fixed assets

—

—

—

—

3,451
Other assets

—

—

—

—

16,193
Total assets

$
21,161

$
5,911

$
83,638

$
249,090

$
389,884










Liabilities:










Demand deposit accounts

$
—

$
—

$
—

$
—

$
104,571
NOW accounts

28,880

—

—

—

28,880
Money market deposit accounts

18,835

—

—

—

18,835
Savings accounts

83,714

—

—

—

83,714
IRA accounts

1,641

6,292

25,012

764

33,709
Certificates of deposit

6,112

13,209

44,954

121

64,396
Long-term borrowings

—

—

—

—

—
Short-term borrowings

10,000

10,000

—

—

20,000
Other liabilities

—

—

—

—

1,143
Stockholders’ equity:

—

—

—

—

34,636
Total liabilities and stockholders' equity

$
149,182

$
29,501

$
69,966

$
885

$
389,884










GAP

$
(128,021)

$
(23,590)

$
13,672

$
248,205


Cumulative GAP

$
(128,021)

$
(151,611)

$
(137,939)

$
110,266


Cumulative GAP as a % of total assets

-32.84
%

-38.89
%

-35.38
%

28.28
%

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 itthis Item 3 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 at within six months although it is the Company’s experience that such accounts may be less sensitive to changes in market rates.required.

In addition to GAP analysis, the Bank utilizes a simulation model to quantify the effect a hypothetical immediate plus or minus 200 basis point change in rates would have on net interest income and the economic value of equity. The model takes into consideration the effect of call features of investments as well as prepayments of loans in periods of declining rates. When actual changes in interest rates occur, the changes in interest earning assets and interest bearing liabilities may differ from the assumptions used in the model. As of September 30, 2017, the model produced the following sensitivity profile for net interest income and the economic value of equity.

Immediate Change in Rates


`-200

`-100

`+100

`+200

Basis Points

Basis Points

Basis Points

Basis Points









% Change in Net Interest Income

-15.5
%
-7.7
%
4.0
%
7.1
%
% Change in Economic Value of Equity

-12.4
%
-0.7
%
1.2
%
-7.8
%

~~- 28 -~~

~~Table of Contents~~

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 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 six 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, 2017, totaled $11.5 million, an increase of $875,000, or 8.24% from the December 31, 2016 total of $10.6 million.

As of September 30, 2017, the Bank was permitted to draw on a $54.1 million line of credit from the FHLB of Atlanta. Borrowings under the line are secured by a floating lien on the Bank’s residential mortgage loans. At December 31, 2016, there were $10.0 million in short-term borrowings and $10.0 million in long-term borrowings from FHLB. As of September 30, 2017, there were $20.0 million in short-term convertible advances outstanding with various monthly and quarterly call features. In addition, the Bank has three unsecured federal funds lines of credit in the amount of $3.0 million, $5.0 million and $8.0 million, ~~of which nothing was outstanding as of September 30, 2017.~~

The Company’s stockholders’ equity increased $821,000, or 2.43% during the nine months ended September 30, 2017, due to a decrease in accumulated other comprehensive loss, net of taxes and an increase in additional paid-in capital and retained earnings. The Company’s accumulated other comprehensive loss, net of taxes decreased by $481,000, or 59.38% from ($810,000) at December 31, 2016 to ($329,000) at September 30, 2017, as a result of an increase in the market value of securities classified as available for sale. Retained earnings increased by $227,000, or 1.05% as the result of the Company’s net income for the nine months, offset by dividends.

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. 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, 2017, the Bank was in full compliance with these guidelines with a Tier 1 leverage ratio of 8.56%, a Tier 1 risk-based capital ratio of 13.63%, a common equity

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~~Table of Contents~~

~~Tier 1 risk-based capital ratio of 13.63%, and a total risk-based capital ratio of 14.68%. The Company’s capital amounts and ratios at September 30, 2017 and December 31, 2016 were as follows:~~

Minimum capital

To be well

Actual

adequacy

capitalized

September 30, 2017

Amount

Ratio

Amount

Ratio

Amount

Ratio

(dollars in thousands)

Common equity tier 1 (to risk-weighted assets)

$
34,064

13.63
%
$
11,250

4.50
%
$
16,251

6.50
%
Total capital (to risk weighted assets)

$
36,699

14.68
%
$
20,001

8.00
%
$
25,001

10.00
%
Tier 1 capital (to risk weighted assets)

$
34,064

13.63
%
$
15,001

6.00
%
$
20,001

8.00
%
Tier 1 leverage (to average assets)

$
34,064

8.56
%
$
15,919

4.00
%
$
19,898

5.00
%

Minimum capital

To be well

Actual

adequacy

capitalized

December 31, 2016

Amount

Ratio

Amount

Ratio

Amount

Ratio

(dollars in thousands)

Common equity tier 1 (to risk-weighted assets)

$
33,962

13.63
%
$
11,213

4.50
%
$
16,197

6.50
%
Total capital (to risk weighted assets)

$
36,471

14.64
%
$
19,935

8.00
%
$
24,918

10.00
%
Tier 1 capital (to risk weighted assets)

$
33,962

13.63
%
$
14,951

6.00
%
$
19,935

8.00
%
Tier 1 leverage (to average assets)

$
33,962

8.68
%
$
15,659

4.00
%
$
19,574

5.00
%

~~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, 2016 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.

~~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.

ITEM ~~4. CONTROLS~~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

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~~Table of Contents~~

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.

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Table of Contents

PART II - OTHER INFORMATION

ITEM ~~1. LEGAL~~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~~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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Table of Contents

ITEM ~~6. EXHIBITS~~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 ~~March 31,~~June 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 ~~March 31,~~June 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)
~~32.1~~32	Section 1350 ~~Certifications~~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	Interactive ~~data files providing financial information from the Registrant’s Quarterly Report on Form 10‑Q for the quarter ended September 30, 2017 in XBRL (eXtensible Business Reporting Language)~~Data Files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets, September 30, 2017 and December 31, 2016, (ii) Condensed Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2017 and 2016, (iii) Condensed Consolidated Statements of Comprehensive Income for the six and nine months ended September 30, 2017 and 2016, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2017 and 2016, (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016,and (vi) Notes to Unaudited Condensed Consolidated Financial StatementsS-T (filed herewith)

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Table of Contents

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~~August 14, ~~2017~~2018	By:		/s/ John D. Long
			John D. Long
			President, Chief Executive Officer

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

- 3339 -


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

Net income	$	411	$	115	$	1,064	$	706

Other comprehensive income (loss), net of tax
Net unrealized gains on securities available for sale:
Net unrealized (loss) gain on securities during the period		(67)		(304)		482		793
Reclassification adjustment for gain on sales of securities included in net income		—		—		(1)		(1)
Total other comprehensive (loss) income		(67)		(304)		481		792

Comprehensive income (loss)	$	344	$	(189)	$	1,545	$	1,498


At September 30, 2017					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total

Commercial and industrial	$	3,989	$	8	$	—	$	48	$	4,045
Commercial real estate		68,267		—		—		499		68,766
Consumer and indirect		94,578		1,085		—		385		96,048
Residential real estate		100,256		326		71		2,934		103,587

	$	267,090	$	1,419	$	71	$	3,866	$	272,446


At December 31, 2016					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total

Commercial and industrial	$	4,679	$	—	$	—	$	—	$	4,679
Commercial real estate		68,775		—		—		647		69,422
Consumer and indirect		82,134		992		—		456		83,582
Residential real estate		103,941		1,798		36		2,648		108,423

	$	259,529	$	2,790	$	36	$	3,751	$	266,106


	Nine Months
	Ended September 30,
	2017		2016
	(Dollars in Thousands)

Beginning balance	$	25	$	12
Reduction of unfunded reserve		(21)		(6)
Provisions charged to operations		9		19

Ending balance	$	13	$	25


	Immediate Change in Rates
	`-200		`-100		`+100		`+200
	Basis Points		Basis Points		Basis Points		Basis Points

% Change in Net Interest Income	-15.5	%	-7.7	%	4.0	%	7.1	%
% Change in Economic Value of Equity	-12.4	%	-0.7	%	1.2	%	-7.8	%


						Minimum capital			To be well
	Actual				adequacy				capitalized
September 30, 2017	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Common equity tier 1 (to risk-weighted assets)	$	34,064	13.63	%	$	11,250	4.50	%	$	16,251	6.50	%
Total capital (to risk weighted assets)	$	36,699	14.68	%	$	20,001	8.00	%	$	25,001	10.00	%
Tier 1 capital (to risk weighted assets)	$	34,064	13.63	%	$	15,001	6.00	%	$	20,001	8.00	%
Tier 1 leverage (to average assets)	$	34,064	8.56	%	$	15,919	4.00	%	$	19,898	5.00	%