GLEN BURNIE BANCORP FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this Form 10-Q, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, those factors identified in the Company's periodic reports filed with theSecurities and Exchange Commission , including its most recent Annual Report on Form 10-K.
The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
OVERVIEW
Glen Burnie Bancorp , aMaryland corporation (the "Company"), through its subsidiary, TheBank of Glen Burnie , aMaryland banking corporation (the "Bank"), operates a commercial bank with eight offices inAnne Arundel County Maryland . Total interest income declined$802,000 to$9.3 million for the nine-month period endedSeptember 30, 2022 , as compared to the same period in 2021. The decrease was driven by lower interest income on loans, partially offset by increases in interest and dividends on securities and interest on deposits with banks and federal funds sold. The Bank's loan portfolio decreased by$16.1 million or 7.75% during the first nine months of 2022. As a result of minimal charge-offs, recoveries on previously charged off loans, reduction in our loan portfolio and strong credit discipline, the Company continued to release portions of its allowance for credit losses in the amount of$178,000 for the nine months endedSeptember 30, 2022 . Shareholder's equity decreased to$14.3 million onSeptember 30, 2022 , a$21.4 million or 59.85% decrease, as compared to$35.7 million onDecember 31, 2021 . The decrease was primarily due to unrealized losses, net of taxes, on securities available for sale amounting to$22.5 million onSeptember 30, 2022 . The Company has strong liquidity and capital positions that provide ample capacity for future growth. The Bank's total regulatory capital to risk weighted assets were 16.16% onSeptember 30, 2022 , as compared to 16.03% onDecember 31, 2021 . Return on average assets for the three- and nine-month periods endedSeptember 30, 2022 , was 0.35% and 0.28% compared to 0.81% and 0.62% for the three- and nine-month periods endedSeptember 30, 2021 . Return on average equity for the three- and nine-month periods endedSeptember 30, 2022 , was 6.76% and 4.53% compared to 9.56% and 7.30% for the three- and nine-month period endedSeptember 30, 2021 . Lower net income and lower average asset balances primarily drove the lower return on average assets comparing quarterly changes. Lower net income and higher average asset balances primarily drove the lower return on average assets comparing year-to-date changes. Lower net income and a lower average equity balance, primarily drove the lower return on average equity comparing quarterly and year-to-date changes. The book value per share of Bancorp's common stock was$5.01 onSeptember 30, 2022 , as compared to$12.26 per share onSeptember 30, 2021 . The decrease primarily resulted from the unrealized losses on the Company's available for sale securities and the rapid rise in interest rates in 2022. - 28 -
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AtSeptember 30, 2022 , the Bank remained above all "well-capitalized" regulatory requirement levels. The Bank's estimated tier 1 risk-based capital ratio was 15.34% atSeptember 30, 2022 , compared to 15.32% atDecember 31, 2021 . Our liquidity position remained strong due to managed cash and cash equivalents, borrowing lines with the FHLB ofAtlanta and correspondent banks, and the size and composition of the bond portfolio.
RESULTS OF OPERATIONS
Net income attributable to common stockholders for the three-month period endedSeptember 30, 2022 was$375,000 , or$0.13 per basic and diluted common share compared to$888,000 , or$0.31 per basic and diluted common share for the same period of 2021. The results for the three-month period endedSeptember 30, 2022 , were lower than the same period of 2021 resulting primarily from$303,000 lower net interest income, a$161,000 lower release of allowance for loan losses and$229,000 higher noninterest expense when compared to the same period of 2021. Net income attributable to common stockholders for the nine-month period endedSeptember 30, 2022 was$915,000 , or$0.32 per basic and diluted common share compared to$2.0 million , or$0.69 per basic and diluted common share for the same period of 2021. The results recorded for the nine-month period endedSeptember 30, 2022 were lower than the same period of 2021 resulting primarily from a$712,000 decrease in net interest income and$415,000 decrease in release of credit loss provision, and a$229,000 increase in noninterest expenses in 2022 when compared to the same period of 2021. Net Interest Income. The Company's net interest income for the three-month period endedSeptember 30, 2022 was$3.0 million , as compared to$3.3 million for the same period in 2021, a decrease of$303,000 , or 9.06%. The decrease in net interest income was due to lower interest income in the amount of$296,000 . The decrease in interest income was primarily driven by lower interest and fees on loans resulting from a$30.6 million year-over-year decrease in loan portfolio balances, offset by higher interest and dividends on securities, and interest on deposits with banks and fed funds sold. Although deposit driven excess liquidity fueled average interest-earning asset growth, competitive loan origination pressures as well as a low interest rate environment drove the overall decrease in average interest-earning asset yields. The Company's net interest income for the nine-month period endedSeptember 30, 2022 was$8.5 million , compared to$9.2 million for the same period in 2021, a decrease of$712,000 , or 7.71%. The decrease in net interest income was due to lower interest income in the amount of$802,000 , offset by lower interest expense in the amount of$90,000 . The decrease in interest income was primarily due to lower interest and fees on loans resulting from a decrease in the loan portfolio, partially offset by increases in interest and dividends on securities and interest on deposits with banks and federal funds sold. The decrease in interest expense was due to a decrease in the costs of interest-bearing deposits. Total interest income for the third quarter of 2022 decreased$296,000 , or 8.20% when compared to the same period in 2021, from$3.6 million in 2021 to$3.3 million in 2022. The primary driver of the decrease was a$705,000 decrease in interest and fees on loans due to lower average loan balances, offset by a$170,000 increase in interest and dividends on investment securities and a$239,000 increase in interest on deposits with banks and federal funds sold due to higher interest rates and average balances. Total interest income decreased$802,000 for the nine-month period endedSeptember 30, 2022 when compared to the same period in 2021, from$10.1 million in 2021 to$9.3 million , a decrease of 7.98%. The primary driver of the decrease in total interest income was a decrease of$1.7 million in interest and fees on loans, offset by a$459,000 increase on interest and dividends on securities and a$393,000 increase in interest on deposits with banks and federal funds sold due to higher average balances. The overall decrease can be attributed to a decrease in the loan portfolio. Interest expense for the third quarter 2022 increased$7,000 from$264,000 for the same period in 2021 to$271,000 , an increase of 2.65%. The primary driver for the increase was a$39,000 net increase in interest expense on borrowings, offset by a$32,000 decrease in expense on interest-bearing deposits. The decrease in interest on deposits for the three-month period endedSeptember 30, 2022 is attributed to the decline in the average balance of time deposits. Interest expense decreased$90,000 for the nine-month period endedSeptember 30, 2022 from$823,000 for the same period in 2021 to$733,000 in 2022, a decrease of 10.94%. The decrease was primarily due to a$113,000 decrease in - 29 -
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the cost of interest on deposits. The decreases for the three-and nine-month periods endedSeptember 30, 2022 can be attributed to maturing times deposits that are renewing at a lower interest rate. Net interest margin for the three-month period endedSeptember 30, 2022 was 2.83% compared to 3.22% for the three-month period endedSeptember 30, 2021 . Higher average balances combined with lower yields on interest-earning assets, and lower cost of funds on interest-bearing liabilities and higher noninterest-bearing deposits were the primary drivers of the results. The yield on interest earning assets decreased by 0.38% from 3.47% for the three-month period endedSeptember 30, 2021 to 3.09% from the same period of 2022 due to lower interest income on average loan balances. The cost of funds was unchanged at 0.27% for the three-month period endedSeptember 30, 2021 andSeptember 30, 2022 . Net interest margin for the nine-month period endedSeptember 30, 2022 were 2.66% compared to 3.01% for the nine-month period endedSeptember 30, 2021 . The decrease was primarily due to lower average yields and higher average balances on interest-earning assets combined with higher average interest-bearing funds, higher average noninterest-bearing funds, and lower cost of funds. The yield on interest earning assets decreased by 0.39% from 3.28% for the nine-month period endedSeptember 30, 2021 to 2.89% for the same period of 2022. The cost of funds decreased 0.04% from 0.28% for the nine-month period endedSeptember 30, 2021 to 0.24% for the same period of 2022 due to a decrease in total time deposits and the renewal of time deposits at lower interest rates in 2021. The following tables set forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities. - 30 - Table of Contents Three Months Ended September 30, 2022 2021 Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Cost Balance Interest Cost ASSETS: Interest-earning assets: Interest-bearing deposits w/ banks & fed funds$ 49,176 $ 241 1.94 %$ 24,447 $ 8 0.14 % Investment securities available for sale 177,824 956 2.15 160,903 787 1.98 Restricted equity securities 1,071 17 6.31 1,062 10 3.63 Total interest-bearing deposits/investments 228,071 1,214 2.13 186,412 805 1.73 Loans Secured by Real Estate Construction and land 4,855 39 3.19 3,844 36 3.81 Farmland 337 4 5.04 346 4 5.10 Single-family residential 79,896 823 4.12 78,539 834 4.25 Multi-family 4,889 68 5.56 5,221 76 5.79 Commercial 45,208 588 5.16 57,250 989 6.93 Total loans secured by real estate 135,185 1,522 4.47 145,200 1,939 5.36 Commercial and Industrial Commercial and industrial 8,921 82 3.63 9,566 79 3.30 SBA guaranty 6,016 96 6.30 7,855 197 10.07 Comm SBA PPP 274 - - 3,548 11 1.22 Total commercial and industrial loans 15,211 178 4.63 20,969 287 5.49 Consumer Loans Consumer 1,907 7 1.47 2,473 7 1.12 Automobile 44,896 387 3.41 61,003 566 3.72 Total consumer loans 46,803 394 3.34 63,476 573 3.62 Total loans 197,199 2,094 4.21 229,645 2,799 4.89 Total interest-earning assets 425,270 3,308
3.09 416,057 3,604 3.47
Cash 2,345 2,284 Allowance for credit losses (2,221) (2,769) Market valuation (21,370) 870 Other assets 21,846 16,370 Total non-earning assets 600 16,755 Total assets$ 425,870 $ 432,812 LIABILITIES AND STOCKHOLDER'S EQUITY: Interest-bearing deposits: Interest-bearing checking and savings$ 151,153 18 0.05 %$ 140,103 16 0.05 % Money market 24,534 3 0.05 22,234 3 0.05 Certificates of deposit 56,586 95 0.66 64,933 129 0.79 Total interest-bearing deposits 232,273 116 0.20 227,270 148 0.26 Borrowed Funds: PPPLF Term Funding - - - 56 - - Federal Funds Purchased - - - - - - FHLB advances 20,000 155 3.07 20,000 116 2.31 Total borrowed funds 20,000 155 3.07 20,056 116 2.32 Total interest-bearing liabilities 252,273 271 0.43 247,326 264 0.42 Non-interest-bearing deposits 149,561
145,741
Total cost of funds 401,834 271 0.27 393,067 264 0.27 Other liabilities and accrued expenses 1,995 2,888 Total liabilities 403,829 395,955 Stockholder's equity 22,041 36,857 Total liabilities and equity$ 425,870 $ 432,812 Net interest income$ 3,037 $ 3,340 Yield on earning assets 3.09 % 3.47 % Cost of interest-bearing liabilities 0.43 % 0.42 % Net interest spread 2.66 % 3.05 % Net interest margin 2.83 % 3.22 % - 31 - Table of Contents Nine Months Ended September 30, 2022 2021 Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Cost Balance Interest Cost ASSETS: Interest-earning assets: Interest-bearing deposits w/ banks & fed funds$ 58,395 $ 389 0.89 %$ 25,889 $ 20 0.11 % Investment securities available for sale 167,025 2,477 1.98 143,354 1,998 1.86 Restricted equity securities 1,069 37 4.59 1,102 33 3.98 Total interest-bearing deposits/investments 226,489 2,903 1.70 170,345 2,051 1.61 Loans Secured by Real Estate Construction and land 4,056 97 3.19 3,502 88 3.35 Farmland 339 13 5.04 348 13 5.04 Single-family residential 78,558 2,404 4.08 80,182 2,595 4.31 Multi-family 4,916 203 5.47 5,435 238 5.84 Commercial 46,949 1,825 5.20 56,880 2,371 5.57
Total loans secured by real estate 134,818 4,542 4.50
146,347 5,305 4.85
Commercial and Industrial
Commercial and industrial 9,326 232 3.32 9,480 233 3.28
SBA guaranty 6,120 266 5.80 7,987 629 10.52
Comm SBA PPP 540 4 0.92 6,841 55 1.07Total commercial and industrial loans 15,986 502 4.20
24,308 917 5.04
Consumer Loans
Consumer 2,165 18 1.10 2,639 23 1.17
Automobile 49,082 1,289 3.50 66,199 1,760 3.54
Total consumer loans 51,247 1,307 3.41 68,838 1,783 3.46
Total loans 202,051 6,351 4.20 239,493 8,005 4.47Total interest-earning assets 428,540 9,254 2.89
409,838 10,056 3.28
Cash 2,128 2,169
Allowance for credit losses (2,311) (2,912)
Market valuation (14,214) 171
Other assets 19,736 16,484
Total non-earning assets 5,339 15,912
Total assets $ 433,879 $ 425,750
LIABILITIES AND STOCKHOLDER'S EQUITY:
Interest-bearing deposits:
Interest-bearing checking and savings $ 149,001 52 0.05%$ 135,685 46 0.05 % Money market 23,965 9 0.05 21,130 8 0.05 Certificates of deposit 58,702 300 0.68 66,423 420 0.85
Total interest-bearing deposits 231,668 361 0.21
223,238 474 0.28
Borrowed Funds:
PPPLF Term Funding - - - 411 1 0.44
Federal Funds Purchased 1 - - 1 - -
FHLB advances 20,000 372 2.48 20,000 348 2.32
Total borrowed funds 20,001 372 2.48 20,412 349 2.29Total interest-bearing liabilities 251,669 733 0.39
243,650 823 0.45
Non-interest-bearing deposits 152,987 143,317
Total cost of funds 404,656 733 0.24 386,967 823 0.28
Other liabilities and accrued
expenses 2,232 2,852
Total liabilities 406,888 389,819
Stockholder's equity 26,991 35,931
Total liabilities and equity $ 433,879 $ 425,750
Net interest income $ 8,521 $ 9,233
Yield on earning assets 2.89 % 3.28 %Cost of interest-bearing liabilities 0.39
% 0.45 %
Net interest spread 2.50 % 2.83 %
Net interest margin 2.66 % 3.01 %
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Provision for Credit Losses on Loans. The Company recognized a provision for
credit losses on loans in the amount of $39,000 and a release of credit losses
of $122,000 for the three-month periods ended September 30, 2022 and 2021,
respectively. The increase in the allowance for the three-month period ended
September 30, 2022 , compared to the three-month period ended September 30, 2021 ,
is due to a $350,000 increase in net charge offs, offset by a $29.4 million
decrease in the reservable balance of the loan portfolio (excluding PPP loans)
and an 0.07% decrease in the current expected credit loss percentage. The
Company recognized a release of allowance for credit losses on loans in the
amount of $178,000 and $593,000 for the nine-month periods ended September 30,
2022 and 2021, respectively. The decrease in the release for the nine-month
period ended September 30, 2022 , compared to the nine-month period ended
September 30, 2021 , is due to a $350,000 increase in net charge offs, offset by
a $29.4 million decrease in the reservable balance of the loan portfolio
(excluding PPP loans) and an 0.07% decrease in the current expected credit loss
percentage. As of September 30, 2022 , the allowance for credit losses
represented 1.17% of total loans compared to 1.24% at September 30, 2021 .
Noninterest Income. Noninterest income decreased to $317,000 for the three-month
period ended September 30, 2022 , from $359,000 for the corresponding period in
2021, a decrease of $42,000 , or 11.70%. The decrease was primarily due to
decreases in other fees and commissions. Noninterest income decreased to
$832,000 for the nine-month period ended September 30, 2022 , from $886,000 for
the corresponding period in 2021, a decreased of $54,000 , or 6.09%. The decrease
was primarily due to decreases in other fees and commissions and lower gains on
the sale of other real estate.
Noninterest Expenses. Noninterest expenses for the three-month period ended
September 30, 2022 and 2021 were $2.9 million and $2.7 million , respectively, an
increase of $229,000 or 8.52%. The increase was driven by decreases in salary
and employee benefits and FDIC insurance costs, offset by increases in legal,
accounting, data processing and item processing services, loan collection costs
and other expenses. Noninterest expenses increased from $8.3 million for the
nine-month period ended September 30, 2021 , to $8.5 million for the
corresponding period in 2022, an increase of $229,000 . The increase was driven
by increases in legal, accounting, and other professional fees, and other
expenses, offset by decreases in salary and employee benefits cost, FDIC
insurance costs, loan collection costs and telephone costs.
Income Taxes. During the three-month period ended September 30, 2022 , the
Company recorded income tax expense of $20,000 compared to $242,000 for the same
period in 2021, a $222,000 , or 91.70%, decrease. During the nine-month period
ended September 30, 2022 , the Company recorded income tax expense of $76,000
compared to $439,000 expense for the same period in 2021, a $363,000 , or 82.69%,
decrease. The Company's annualized effective tax rate at September 30, 2022 was
9.06% compared to 18.29% for the prior year. The decrease in income tax expense
was due to lower income before taxes at September 30, 2022 , compared to
September 30, 2021 .
Comprehensive Income (Loss). In accordance with regulatory requirements, the
Company reports comprehensive income (loss) in its financial statements.
Comprehensive income (loss) consists of the Company's net income, adjusted for
unrealized gains and losses on the Bank's portfolio of investment securities and
interest rate swap contracts. For the third quarter of 2022, comprehensive loss,
net of tax, totaled $6,668,000 compared to a loss in the amount of $182,000 for
the same period in 2021. The decrease was due to higher unrealized losses on
available for sale securities, offset by higher net unrealized gains on interest
rate swaps. For the nine months ended September 30, 2022 , comprehensive loss,
net of tax, totaled $20,604,000 compared to a comprehensive gain, net of tax, in
the amount of $97,000 for the same period in 2021. The decrease was due to lower
net income and higher unrealized losses on available for sale securities, offset
by higher net unrealized gains on interest rate swaps.
FINANCIAL CONDITION
General. The Company's assets decreased to$415.6 million atSeptember 30, 2022 from$442.1 million atDecember 31, 2021 , a decrease of$26.4 million or 5.98%, primarily due to an$8.0 million decrease in cash and cash equivalents, a$10.9 million decrease in investment securities available for sale, and a$16.1 million decrease and loans, net, offset by an$8.2 million increase in deferred tax assets, net. Loans totaled$191.8 million atSeptember 30, 2022 , a decrease of$16.1 million or 7.75%, from$207.9 million atDecember 31, 2021 . The decrease was primarily attributable to decreases in commercial loans, commercial and industrial loans, consumer, and automobile loans, offset by an - 33 -
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increase in construction and land loans and single-family residential loans. Investment securities available for sale as ofSeptember 30, 2022 , totaled$145.0 million , a decrease of$10.9 million , or 7.02% from$155.9 million onDecember 31, 2021 . Cash and cash equivalents as ofSeptember 30, 2022 , totaled$54.2 million , a decrease of$8.0 million , or 12.88% from$62.2 million onDecember 31, 2021 resulting primarily from an increase in investment securities cost basis.
Loans are placed on nonaccrual status when they are past due 90 days as to either principal or interest or when, in the opinion of management, the collection of all interest and/or principal is in doubt. Placing a loan on nonaccrual status means that we no longer accrue interest or amortize deferred fees or costs on such loans and reverse any interest previously accrued but not collected. Management may grant a waiver from nonaccrual status for a 90 day past due loan that is both well secured and in the process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and the borrower has demonstrated the ability to make payments in accordance with the terms of the loan and remain current. A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the fair value of the collateral for collateral dependent loans and at the present value of expected future cash flows using the loans' effective interest rates for loans that are not collateral dependent. AtSeptember 30, 2022 , impaired loans totaled$0.6 million . Included in the impaired loans total were$0.2 million in loans classified as nonaccrual loans. AtSeptember 30, 2022 , troubled debt restructurings included in impaired loans totaled$34,000 . Borrowers under all other restructured loans are paying in accordance with the terms of the modified loan agreement and have been placed on accrual status after a period of performance with the restructured terms.
The following table presents details of our nonperforming loans and nonperforming assets, as these asset quality metrics are evaluated by management, at the dates indicated:
September 30 , December
31,
(dollars in thousands) 2022 2021
Nonaccrual loans $ 183 $ 338
TDR loans excluding those in nonaccrual loans - -
Accruing loans past due 90+ days 11 15
Total nonperforming loans 194 353
Real estate acquired through foreclosure - -
Total nonperforming assets $ 194 $ 353
Nonperforming assets to total assets 0.05 % 0.08 %
Deposits as ofSeptember 30, 2022 , totaled$378.9 million , a decrease of$4.4 million , or 1.14% from$383.2 million onDecember 31, 2021 . Demand deposits as ofSeptember 30, 2022 totaled$149.2 million , a decrease of$6.5 million , or 4.15% from$155.6 million atDecember 31, 2021 . Interest-bearing checking accounts as ofSeptember 30, 2022 totaled$36.3 million , a decrease of$1.0 million , or 2.78% from$37.3 million atDecember 31, 2021 . Savings accounts as ofSeptember 30, 2022 totaled$113.5 million , an increase of$6.7 million , or 6.30%, from$106.8 million atDecember 31, 2021 . Money market accounts as ofSeptember 30, 2022 totaled$25.2 million , an increase of$2.1 million , or 8.90%, from$23.1 million atDecember 31, 2021 . Time deposits under$100,000 totaled$32.5 million onSeptember 30, 2022 , a$3.3 million or a 9.14% decrease from$35.8 million atDecember 31, 2021 . Time deposits over$100,000 totaled$22.2 million onSeptember 30, 2022 , a$2.4 million , or 9.70% decrease from$24.6 million atDecember 31, 2021 . - 34 -
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Deposits on
September 30, 2022 December 31, 2021 2022 vs 2021
(dollars in thousands) Amount % of Total Amount
% of Total $ Change % Change
Noninterest-bearing deposits
Interest-bearing deposits: Checking 36,269 9.6 % 37,305 9.7 % (1,036) (2.8) % Savings 113,548 30.0 % 106,818 28.0 % 6,730 6.3 % Money market 25,158 6.6 % 23,103 6.0 % 2,055 8.9 % Total interest-bearing checking, savings and money market deposits 174,975 46.2 % 167,226 43.7 % 7,749 4.6 % Time deposits under$100,000 32,504 8.5 % 35,773 9.3 % (3,269) (9.1) % Time deposits of$100,000 or more 22,236 5.9 % 24,624 6.4 % (2,388) (9.7) % Total time deposits 54,740 14.4 %
60,397 15.7 % (5,657) (9.4) %
Total interest-bearing deposits 229,715 60.6 % 227,623 59.4 % 2,092 0.9 % Total Deposits$ 378,886 100.0 %$ 383,247 100.0 %$ (4,361) (1.1) %
Lease Commitments. TheFinancial Accounting Standards Board ("FASB") issued guidance, Leases, which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The Bank adopted this guidance onJanuary 1, 2019 . It was applied using a modified retrospective approach which allows entities to either apply the new lease standard to the beginning of the earliest period presented or only to the current period consolidated financial statements. For leases where the Bank is the lessee, operating leases are included in premises and equipment, net, and accrued expenses and other liabilities on the Consolidated Balance Sheet. The Bank currently does not have any finance leases. The initial adoption of this guidance had no material effect on the Bank and there was no cumulative-effect adjustment to beginning retained earnings. Management evaluates the effects of the lease guidance on a quarterly basis. Operating lease Right-of-Use ("ROU") assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as the Company's leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised. Future minimum payments of the Bank's operating leases as ofSeptember 30, 2022 are as follows: Year ending December 31, Amount (dollars in thousands) 2022 $ 46 2023 181 2024 161 2025 3 2026 2 Thereafter - Total $ 393 Pension and Profit Sharing Plans. The Bank has a defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue Code that is funded through a profit sharing agreement and voluntary employee - 35 -
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contributions. The plan provides for discretionary employer matching contributions to be determined annually by the Board of Directors. The plan covers substantially all employees.
For the nine months ended
MARKET RISK AND INTEREST RATE SENSITIVITY
Our primary market risk is interest rate fluctuation. Interest rate risk results
primarily from the traditional banking activities in which the Bank engages,
such as gathering deposits and extending loans. Many factors, including economic
and financial conditions, movements in interest rates and consumer preferences
affect the difference between the interest earned on our assets and the interest
paid on liabilities. Our interest rate risk represents the level of exposure we
have to fluctuations in interest rates and is primarily measured as the change
in earnings and the theoretical market value of equity that results from changes
in interest rates. The Investment Committee ("IC") oversees our management of
interest rate risk. The objective of the management of interest rate risk is to
maximize stockholder value, enhance profitability and increase capital, serve
customer and community needs, and protect the Company from any material
financial consequences associated with changes in interest rate risk.
Interest rate risk is that risk to earnings or capital arising from movement of
interest rates. It arises from differences between the timing of rate changes
and the timing of cash flows (repricing risk); from changing rate relationships
across yield curves that affect bank activities (basis risk); from changing rate
relationships across the spectrum of maturities (yield curve risk); and from
interest rate related options embedded in certain bank products (option risk).
Changes in interest rates may also affect a bank's underlying economic value.
The value of a bank's assets, liabilities, and interest-rate related,
off-balance sheet contracts is affected by a change in rates because the present
value of future cash flows, and in some cases the cash flows themselves, is
changed.
We believe that accepting some level of interest rate risk is necessary in order
to achieve realistic profit goals. Management and the Board of Directors have
chosen an interest rate risk profile that is consistent with our strategic
business plan.
The Company's Board of Directors has established a comprehensive interest rate
risk management policy, which is administered by our IC. The policy establishes
limits on risk, which are quantitative measures of the percentage change in net
interest income (a measure of net interest income at risk) and the fair value of
equity capital (a measure of economic value of equity or "EVE" at risk)
resulting from a hypothetical change in U.S. Treasury interest rates. We measure
the potential adverse impacts that changing interest rates may have on our
short-term earnings, long-term value, and liquidity by employing simulation
analysis through the use of computer modeling. The simulation model captures
optionality factors such as call features and interest rate caps and floors
imbedded in investment and loan portfolio contracts. As with any method of
gauging interest rate risk, there are certain shortcomings inherent in the
interest rate modeling methodology we employ. When interest rates change, actual
movements in different categories of interest-earning assets and
interest-bearing liabilities, loan prepayments, and withdrawals of time and
other deposits, may deviate significantly from assumptions used in the model.
Finally, the methodology does not measure or reflect the impact that higher
rates may have on adjustable-rate loan customers' ability to service their
debts, or the impact of rate changes on demand for loan and deposit products.
We prepare a current base case and alternative simulations at least once a
quarter and report the analysis to the IC and Board of Directors. In addition,
more frequent forecasts are produced when the direction or degree of change in
interest rates are particularly uncertain to evaluate the impact of balance
sheet strategies or when other business conditions so dictate.
The statement of condition is subject to quarterly testing for alternative
interest rate shock possibilities to indicate the inherent interest rate risk.
Average interest rates are shocked by +/ - 100, 200, 300, and 400 basis points
("bp"), although we may elect not to use particular scenarios that we determine
are impractical in the current rate environment. It is our goal to structure the
balance sheet so that net interest-earnings at risk over a 12-month period and
the economic value of equity at risk do not exceed policy guidelines at the
various interest rate shock levels.
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AtSeptember 30, 2022 , the simulation analysis indicated that the Bank is in an asset sensitive position. Management strives to manage higher costing fixed rate funding instruments, while seeking to increase assets that are more fluid in their repricing. An asset sensitive position, theoretically, is favorable in a rising rate environment since more assets than liabilities will re-price in a given time frame as interest rates rise. Similarly, a liability sensitive position, theoretically, is favorable in a declining interest rate environment since more liabilities than assets will re-price in a given time frame as interest rates decline. Management works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of the direction of interest rates. The foregoing analysis assumes that the Company's assets and liabilities move with rates at their earliest repricing opportunities based on final maturity. Mortgage backed securities are assumed to mature during the period in which they are estimated to prepay and it is assumed that loans and other securities are not called prior to maturity. Certificates of deposit and IRA accounts are presumed to reprice at maturity. NOW savings accounts are assumed to reprice within three months although it is the Company's experience that such accounts may be less sensitive to changes in market rates. Static Balance Sheet/Immediate Change in Rates Estimated Changes in Net Interest Income `-200 bp
`-100 bp `+100 bp `+200 bp
Policy Limit (15) % (10) % (10) % (15) %
September 30, 2022 (14) % (7) % 2 % 5 %
September 30, 2021 (9) % (6) % 4 % 11 %
The following table sets forth the Company's interest-rate sensitivity at
September 30, 2022 .
Over 1
Over 3 to Through Over
0-3 Months 12 Months 5 Years 5 Years Total
(dollars in thousands)
Assets:
Cash and due from banks $ - $ - $ - $ - $ 2,572
Federal funds and overnight
deposits 51,597 - - - 51,597
Securities - - 23,656 121,324 144,980
Loans 71,778 - 71,778 48,249 191,805
Fixed assets - - - - 3,366
Other assets - - - - 21,306
Total assets $ 123,375 $ - $ 95,434 $ 169,573 $ 415,626
Liabilities:
Demand deposit accounts $ - $ - $ - $ - $ 149,171
NOW accounts 36,269 - - - 36,269
Money market deposit accounts 25,158 - - - 25,158
Savings accounts 113,548 - - - 113,548
IRA accounts 2,336 5,795 10,422 234 18,787
Certificates of deposit 7,715 0 10,773 0 17,336 0 129 -1 35,953
Long-term borrowings - - - - -
Short-term borrowings - 20,000 - - 20,000
Other liabilities - - - - 2,400
Stockholders' equity: - - - - 14,340
Total liabilities and
stockholders' equity $ 185,026 $ 36,568 $
27,758
GAP$ (61,651) $ (36,568) $ 67,676 $ 169,210 Cumulative GAP$ (61,651) $ (98,219) $ (30,543) $ 138,667 Cumulative GAP as a % of total assets (14.83) % (23.63) % (7.35) % 33.36 % - 37 - Table of Contents
As shown above, measures of net interest income at risk were less favorable onSeptember 30, 2022 than onSeptember 30, 2021 over a 12-month modeling period. All measures remained within prescribed policy limits in the up and down interest rate scenarios. The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company's cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of the Company's net assets.
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