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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

or

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

For the transition period from                           to                          .

Commission File Number 0-49731

SEVERN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland

52-1726127

(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification no.)

200 Westgate Circle, Suite 200
Annapolis, Maryland

21401

(Address of principal executive offices)

(Zip Code)

410-260-2000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and formal fiscal year, if changed since last report)

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

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

 

SVBI

 

The NASDAQ Stock Market, LLC

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

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

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

Large accelerated filer ☐

    

Accelerated filer  ☐

 

 

Non- accelerated filer

Smaller reporting company

 

 

Emerging growth company  

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $0.01 par value - 12,858,339 shares outstanding as of May 13, 2021

Table of Contents

SEVERN BANCORP, INC. AND SUBSIDIARIES

Table of Contents

 

    

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Statements of Financial Condition as of March 31, 2021 and December 31, 2020 (unaudited)

5

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

6

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

7

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

8

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

9

Notes to Consolidated Financial Statements (unaudited)

10

Item 2.

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

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

Item 4.

Controls and Procedures

51

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3.

Defaults Upon Senior Securities

52

Item 4.

Mine Safety Disclosures

52

Item 5.

Other Information

52

Item 6.

Exhibits

52

EXHIBIT INDEX 

53

SIGNATURES

54

1

Table of Contents

Glossary of Defined Terms

The following terms may be used throughout this Quarterly Report on Form 10-Q, including the unaudited consolidated financial statements and related notes.

2035 Debentures

Junior Subordinated Debt Securities

2035 Indenture

Indenture dated December 17, 2004 pursuant to which the 2035 Debentures were issued

ADC

Acquisition, development, and construction loans

AFS

Available for sale

Allowance

Allowance for loan losses

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

Bank

Severn Savings Bank and subsidiaries

Basel III

Certain provisions of the Dodd-Frank Act

BOLI

Bank owned life insurance

Capital Securities

Corporation-obligated mandatorily redeemable capital securities

CARES Act

Coronavirus Aid, Relief and Economic Security Act

CDs

Certificates of deposit

CECL

Current expected credit losses

CEO

Chief executive officer

CFO

Chief financial officer

Commitments

Commitments to extend credit and unused portions of lines of credit, collectively.

Company

Severn Bancorp, Inc. and subsidiaries

COVID-19

Novel coronavirus

Crownsville

Crownsville Development Corporation

DTAs

Deferred tax assets

EVE

Economic value of equity

Exchange Act

Securities Exchange Act of 1934

FASB

Financial Accounting Standards Board

FDIC

Federal Deposit Insurance Corporation

FHLB

Federal Home Loan Bank of Atlanta

FHLMC

Federal Home Loan Mortgage Corporation

FNMA

Federal National Mortgage Association

FRB

Federal Reserve Board

GAAP

Accounting principles generally accepted in the United States of America

HTM

Held to maturity

IRLC(s)

Interest rate lock commitment(s)

LCM

Lower of cost or market

LHFS

Mortgage loans held for sale

LTV

Loan to value

MBS

Mortgage-backed securities

MSELF

Main Street expanded Loan Facility

MSNLF

Main Street New Loan Facility

MSRs

Mortgage servicing rights

NOLs

Net operating losses

NPA(s)

Nonperforming asset(s)

OCC

Office of the Comptroller of the Currency

OTTI

Other than temporary impairment

Plan

Stock compensation plan of Severn Bancorp, Inc.

PPP

Paycheck Protection Program

PPPLF

PPP Loan Facility

SBA

United States Small Business Administration

SBI

SBI Mortgage Company

SEC

Securities and Exchange Commission

Shore

Shore Bancshares, Inc. and subsidiaries

TDR(s)

Troubled debt restructuring(s)

Title Company

Mid-Maryland Title Company, Inc.

Trust

Severn Capital Trust 1

U.S.

United States of America

2

Table of Contents

Unless the context otherwise requires, the terms “we,” “us,” “our,” and “Company” refer to Severn Bancorp, Inc. and its subsidiaries.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as other periodic reports filed with the SEC, and written or oral communications made from time to time by or on behalf of the Company, may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend,” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.” Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth, and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.

Forward-looking statements reflect our expectation or prediction of future conditions, events, or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 2020 Annual Report on Form 10-K, Item 1A of Part II of this Quarterly Report on Form 10-Q, and the following:

general business and economic conditions nationally or in the markets that the Company serves could adversely affect, among other things, real estate prices, unemployment levels, and consumer and business confidence, which could lead to decreases in the demand for loans, deposits, and other financial services that we provide and increases in loan delinquencies and defaults;
changes or volatility in the capital markets and interest rates may adversely impact the value of securities, loans, deposits, and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity;
our liquidity requirements could be adversely affected by changes in our assets and liabilities;
our investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates we use to value certain of the securities in our portfolio;
the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance, and other aspects of the financial services industry;
competitive factors among financial services companies, including product and pricing pressures, and our ability to attract, develop, and retain qualified banking professionals;
the effect of fiscal and governmental policies of the U.S. federal government;
the effect of any mergers, acquisitions, or other transactions to which we or our subsidiaries may from time to time be a party;
potential delays or the failure to obtain the necessary regulatory and stockholder approvals for the merger with Shore;
costs and potential disruption or interruption of operations due to cyber-security incidents;
the effect of any change in federal government enforcement of federal laws affecting the medical-use cannabis industry;
costs and potential disruption or interruption of operations due to global pandemics such as COVID-19;

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the effect of changes in accounting policies and practices, as may be adopted by FASB, the SEC, the Public Company Accounting Oversight Board, and other regulatory agencies; and;
geopolitical conditions, including acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of terrorism, and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad.

Forward-looking statements speak only as of the date of this report. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.

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PART I – FINANCIAL INFORMATION

Item 1.     Financial Statements

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

(unaudited)

March 31, 

December 31, 

    

2021

    

2020

ASSETS

  

Cash and due from banks

$

6,248

$

4,819

Federal funds sold and interest-bearing deposits in other banks

 

250,847

 

151,790

Cash and cash equivalents

 

257,095

 

156,609

CDs held for investment

3,330

3,580

AFS securities, at fair value

 

132,698

 

65,098

HTM securities (fair value of $15,094 and $16,603 at March 31, 2021 and December 31, 2020, respectively)

 

14,516

 

15,943

LHFS, at fair value

 

50,124

 

36,299

Loans receivable

 

621,512

 

642,882

Allowance

 

(8,135)

 

(8,670)

Loans, net

 

613,377

 

634,212

Real estate acquired through foreclosure

 

1,010

 

1,010

Restricted stock investments

 

970

 

1,236

Premises and equipment, net

 

20,653

 

20,940

Accrued interest receivable

 

2,439

 

2,576

Deferred income taxes

882

1,145

BOLI

 

5,550

 

5,517

Goodwill

 

770

 

1,104

Other assets

 

9,555

 

7,284

Total assets

$

1,112,969

$

952,553

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Noninterest bearing

$

337,141

$

245,093

Interest-bearing

 

626,955

 

561,363

Total deposits

 

964,096

 

806,456

Long-term borrowings

 

10,000

 

10,000

Subordinated debentures

 

20,619

 

20,619

Accrued expenses and other liabilities

 

7,181

 

5,831

Total liabilities

 

1,001,896

 

842,906

Stockholders' Equity:

 

  

 

  

Common stock, $0.01 par value, 20,000,000 shares authorized; 12,856,989 and 12,843,349 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

 

129

 

128

Additional paid-in capital

 

66,359

 

66,251

Retained earnings

 

46,485

 

43,216

Accumulated other comprehensive (loss) income

 

(1,900)

 

52

Total stockholders' equity

 

111,073

 

109,647

Total liabilities and stockholders' equity

$

1,112,969

$

952,553

See accompanying notes to consolidated financial statements

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Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share data)

(unaudited)

Three Months Ended March 31, 

2021

    

2020

Interest income:

Loans

$

8,244

$

8,338

Securities

 

292

 

219

Other earning assets

 

73

 

359

Total interest income

 

8,609

 

8,916

Interest expense:

 

 

Deposits

 

784

 

1,797

Borrowings and subordinated debentures

 

167

 

364

Total interest expense

 

951

 

2,161

Net interest income

 

7,658

 

6,755

(Reversal of) provision for loan losses

 

(750)

 

750

Net interest income after (reversal of) provision for loan losses

 

8,408

 

6,005

Noninterest income:

 

 

Mortgage-banking revenue

 

4,396

 

1,634

Real estate commissions

 

161

 

310

Real estate management fees

 

 

165

Deposit service charges

 

601

 

561

Title company revenue

 

335

 

238

ATM surcharges

87

62

Income from BOLI

33

37

Other noninterest income

146

 

18

Total noninterest income

 

5,759

 

3,025

Noninterest expense:

 

 

Compensation and related expenses

 

6,222

 

5,461

Occupancy

 

471

 

518

Legal fees

 

 

166

Write-downs, losses, and costs of real estate acquired through foreclosure, net of gains

 

2

 

74

FDIC insurance premiums

 

56

 

Professional fees

 

151

 

303

Advertising

 

198

 

220

Data processing

 

462

 

460

Credit report and appraisal fees

 

60

 

67

Licensing and software

 

240

 

218

Loss on disposal of premises and equipment

76

Internal audit and compliance

133

64

Office expenses, printing, and postage

88

109

Telecommunications

105

105

Merger expenses

238

Other noninterest expense

 

380

 

411

Total noninterest expense

 

8,806

 

8,252

Net income before income tax provision

 

5,361

 

778

Income tax provision

 

1,450

 

213

Net income

$

3,911

$

565

Net income per common share - basic

$

0.30

$

0.04

Net income per common share - diluted

$

0.30

$

0.04

See accompanying notes to consolidated financial statements

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Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)

Three Months Ended March 31, 

 

2021

    

2020

Net income

$

3,911

$

565

Other comprehensive income item:

 

 

Unrealized holding (losses) gains on AFS securities arising during the period (net of tax (benefit) expense of $(742) and $56)

 

(1,956)

 

149

Realized losses on AFS securities arising during the period (net of tax benefit of $1)

4

Total other comprehensive (loss) income

 

(1,952)

 

149

Total comprehensive income

$

1,959

$

714

See accompanying notes to consolidated financial statements

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Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands, except per share data)

(unaudited)

Three Months Ended March 31, 2021

    

Number of

    

    

    

    

Accumulated

    

Shares of

Additional

Other

Total

Common

Common

Paid-In

Retained

Comprehensive

Stockholders'

Stock

Stock

Capital

 Earnings 

Income (Loss)

Equity

Balance at January 1, 2021

 

12,843,349

$

128

$

66,251

$

43,216

$

52

$

109,647

Net income

 

 

 

 

3,911

 

 

3,911

Stock-based compensation

 

 

 

23

 

 

 

23

Dividends paid on common stock at $0.05 per share

 

 

 

 

(642)

 

 

(642)

Exercise of stock options

13,640

1

85

86

Other comprehensive loss

 

 

 

 

 

(1,952)

 

(1,952)

Balance at March 31, 2021

 

12,856,989

$

129

$

66,359

$

46,485

$

(1,900)

$

111,073

Three Months Ended March 31, 2020

    

Number of

    

    

    

    

Accumulated

    

Shares of

Additional

Other

Total

Common

Common

Paid-In

Retained

Comprehensive

Stockholders'

Stock

Stock

Capital

 Earnings 

(Loss) Income

Equity

Balance at January 1, 2020

 

12,810,926

$

128

$

65,944

$

38,560

$

(45)

$

104,587

Net income

 

 

 

 

565

 

 

565

Stock-based compensation

 

 

 

34

 

 

 

34

Dividends paid on common stock at $0.04 per share

 

 

 

 

(513)

 

 

(513)

Exercise of stock options

2,050

14

14

Other comprehensive income

 

 

 

 

 

149

 

149

Balance at March 31, 2020

 

12,812,976

$

128

$

65,992

$

38,612

$

104

$

104,836

See accompanying notes to consolidated financial statements

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Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

Three Months Ended March 31, 

    

2021

    

2020

Cash flows from operating activities:

Net income

$

3,911

$

565

Adjustments to reconcile net income to net cash from operating activities:

 

 

Depreciation and amortization

 

389

 

394

Amortization of deferred loan fees

 

(875)

 

(506)

Net amortization (accretion) of premiums and discounts on securities

 

435

 

(83)

(Reversal of) provision for loan losses

 

(750)

 

750

Write-downs and losses on real estate acquired through foreclosure, net of gains

 

 

80

Gain on sale of mortgage loans

 

(4,396)

 

(1,634)

Loss on disposal of property

 

 

76

Loss on sale of Hyatt Commercial assets

34

Proceeds from sale of LHFS

 

91,625

 

33,764

Originations of LHFS

 

(101,314)

 

(43,216)

Stock-based compensation

 

23

 

34

Increase in cash surrender value of bank-owned life insurance

 

(33)

 

(37)

Deferred income taxes

 

1,004

 

1

Decrease in accrued interest receivable

 

137

 

183

Increase in other assets

 

(2,304)

 

(1,160)

Increase in accrued expenses and other liabilities

 

1,349

 

1,024

Net cash used in operating activities

 

(10,765)

 

(9,765)

Cash flows from investing activities:

 

 

Redemption of CDs held for investment

250

Loan principal repayments, net of (disbursements)

 

22,720

 

10,271

Redemption of restricted stock investments

 

266

 

132

Purchases of premises and equipment, net

 

(102)

 

(57)

Activity in HTM securities:

 

 

Maturities/calls/repayments

 

1,198

 

3,202

Activity in AFS securities:

 

Purchases

 

(80,454)

 

(7,852)

Sales

4,451

Maturities/calls/repayments

5,504

2,225

Proceeds from sale of Hyatt Commercial

334

Proceeds from sales of real estate acquired through foreclosure

 

 

623

Net cash (used in) provided by investing activities

 

(45,833)

 

8,544

Cash flows from financing activities:

 

 

Net increase in deposits

 

157,640

 

29,163

Common stock dividends

 

(642)

 

(513)

Exercise of stock options

 

86

 

14

Net cash provided by financing activities

 

157,084

 

28,664

Increase in cash and cash equivalents

 

100,486

 

27,443

Cash and cash equivalents at beginning of period

 

156,609

 

88,193

Cash and cash equivalents at end of period

$

257,095

$

115,636

Supplemental Noncash Disclosures:

 

 

Interest paid on deposits and borrowed funds

$

955

$

2,170

Income taxes paid

 

 

493

Transfers of mortgage loans held for sale to loan portfolio

 

260

 

See accompanying notes to consolidated financial statements

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Severn Bancorp, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

See the Glossary of Defined Terms at the beginning of this Quarterly Report on Form 10-Q for terms used throughout the consolidated financial statements and related notes of this Quarterly Report on Form 10-Q.

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accounting and reporting policies of the Company conform to GAAP and prevailing practices within the financial services industry for interim financial information and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. In the opinion of management, all adjustments (comprising only of those of a normal recurring nature) necessary for a fair presentation of the results of operations for the interim periods presented have been made. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021 or any other interim or future period. Events occurring after the date of the financial statements up to the date the financial statements were available to be issued were considered in the preparation of the consolidated financial statements.

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2020 Annual Report on Form 10-K as filed with the SEC.

Principles of Consolidation

The unaudited consolidated financial statements include the accounts of Severn Bancorp, Inc., and its wholly-owned subsidiaries, Mid-Maryland Title Company, Inc., SBI Mortgage Company, and Severn Savings Bank, FSB, along with the Bank’s subsidiaries, Homeowners Title and Escrow Corporation, Severn Financial Services Corporation, SSB Realty Holdings, LLC, SSB Realty Holdings II, LLC, and HS West, LLC. Also included are the accounts of SBI Mortgage Company’s subsidiary, Crownsville Development Corporation, and its subsidiary, Crownsville Holdings I, LLC. All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.

Use of Estimates

The preparation of the financial statements requires management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The accounting policies we view as critical are those relating to the Allowance, the valuation of real estate acquired through foreclosure, and the valuation of deferred tax assets and liabilities.

Cash Flows

For reporting purposes, assets grouped in the Consolidated Statements of Financial Condition under the captions “Cash and due from banks” and “Federal funds sold and interest-bearing deposits in other banks” are considered cash or cash equivalents. For financial statement purposes, these assets are carried at cost. Federal funds sold and interest-bearing deposits in other banks generally have overnight maturities and are in excess of amounts that would be recoverable under FDIC insurance.

Reclassifications

Certain reclassifications have been made to amounts previously reported to conform to current period presentation.

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2020 Correction of Prior Period Immaterial Error

As disclosed in the Company’s 2020 Annual Report on Form 10-K, during 2020, the Company corrected an immaterial accounting error related to $885,000 of DTAs related to NOLs recorded in years prior to 2020 by the holding company and which accumulated over the span of many years. As the holding company has not previously generated taxable income and continues to generate no taxable income, it has no ability to utilize the NOLs. To correct this immaterial accounting error, the Company recorded an adjustment to reduce 2019's opening retained earnings in the amount of $793,000 and additional tax expense of $92,000 (the amounts deemed applicable for 2019) for the year ended December 31, 2019. These adjustments then affected the beginning balances of March 31, 2020 retained earnings and total stockholders’ equity, both of which amounts are shown in this Quarterly Report on Form 10-Q reduced by $885,000 from the amounts previously stated.

COVID-19 Risks and Uncertainties

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the U.S. and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 has adversely impacted and could continue to adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to a target range of 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak has affected and may continue to adversely affect the Company’s financial condition and results of operations. As a result of the spread of COVID-19, economic uncertainties have arisen which could negatively impact net interest income, noninterest income, credit quality, the Allowance, and the provision for loan losses. Additionally, there could be a potential for goodwill impairment. Other financial impact could occur though such potential impact is unknown at this time.

On May 12, 2021, the Governor of Maryland lifted all remaining COVID-19 related restrictions, with the exception of wearing masks indoors, effective May 15, 2021. On May 14, 2021, the Governor also lifted the mask mandate effective May 15, 2021.

Asset Sale

On January 1, 2021, we sold the majority of the assets of our real estate company, Hyatt Commercial, with the exception of cash and certain fixed assets. At the time of the sale, Hyatt Commercial had $1.6 million in assets, $1.1 million of which was in cash that stayed with the Company. The remainder of the net assets were sold for $334,000 and we realized a loss of approximately $34,000.

Proposed Merger with Shore Bancshares, Inc.

On March 3, 2021, the Company and Shore entered into an agreement and plan of merger that provides that the Company will merge with and into Shore, with Shore as the surviving corporation (the “Merger”). Following the Merger, the Bank will merge with and into Shore’s wholly-owned bank subsidiary, Shore United Bank, with Shore United Bank as the surviving bank (the “Bank Merger”). At the effective time of the Merger, each outstanding share of the Company’s common stock will be converted into the right to receive (i) 0.6207 shares of Shore common stock and (ii) $1.59 in cash, together with cash in lieu of fractional shares, if any. The merger consideration is 85% stock and 15% cash.

The completion of the Merger and the Bank Merger are subject to customary closing conditions, including approval by the Company’s stockholders, Shore’s stockholders and the receipt of regulatory approvals or waivers from the OCC and the Board of Governors of the Federal Reserve System. Prior to the completion of the Bank Merger, Shore United Bank must obtain the approval of the OCC to convert to a national banking association. The Merger is expected to be completed in the third quarter of 2021.

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Recent Accounting Pronouncements

Pronouncements Adopted

In December 2019, FASB issued ASU No. 2019-12, Simplifying the Accounting for Taxes, which simplifies the accounting for incomes taxes by removing certain exceptions in the current codification. The standard was effective for fiscal years beginning after December 15, 2020. The adoption of ASU No. 2019-12 did not have a material impact on our financial position, results of operations, or cash flows.

In January 2020, FASB issued ASU No. 2020-01, Investments – Equity securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which clarifies the interaction between the three Topics. The standard was effective for fiscal years beginning after December 15, 2020. The adoption of ASU No. 2020-01 did not have a material impact on our financial position, results of operations, or cash flows.

Pronouncements Issued

In September 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, which sets forth the CECL model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU was originally effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In July 2019, the FASB issued a proposal to delay the implementation for smaller reporting companies such as us until January 2023. In October, 2019, that proposal was finalized with the issuance of ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief. ASU 2019-05 was issued to address concerns with the adoption of ASU 2016-13. ASU 2019-05 gives entities the ability to irrevocably elect the fair value option in Subtopic 825-10 for certain existing financial assets upon transition to ASU 2016-03. Financial assets that are eligible for this fair value election are those that qualify under Subtopic 825-10 and are within the scope of Subtopic 326-10, Financial Instruments - Credit Losses - Measured at Amortized Costs. An exception to this is HTM debt securities, which do not qualify for this transition election. The effective date for the amendment is the same as the effective date in ASU 2016-03. In November 2019, FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. ASU 2019-10 was issued to defer the effective dates for certain guidance for certain entities. The amendments in this update amend the mandatory effective dates for ASC 326, Financial Instruments - Credit Losses, for entities eligible to be smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2022, including interim reporting periods within that reporting period.

We have contracted with a third party vendor to assist in the transition to CECL. The Bank has purchased the third party vendor’s CECL software and has separately contracted with their advisory services group to help with the installation and transition. As the Bank has been using other software of this specific vendor, they have access to the Bank’s historical data. As the third party vendor has many financial institution clients, they will be able to provide peer group data to the extent the Bank’s data is not sufficient to make the many determinations required under CECL. We are continuing the process of determining appropriate loan pools and economic factors to be used for CECL calculations. Although the implementation of CECL has been delayed, the Bank is continuing with the implementation at a pace to ensure that we will be in position to completely transition to CECL by the required date.

While we are still in the process of evaluating the impact of the amended guidance on our Consolidated Financial Statements, it is quite possible that the Allowance will increase upon adoption given that the Allowance will be required to cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of our loan portfolio at the time of adoption.

In November 2019, FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. ASU 2019-11 was issued to address issues raised by stakeholders during the implementation of ASU 2016-13.

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ASU 2019-11 provides transition relief when adjusting the effective interest rate for TDRs that exist as of the adoption date, extends the disclosure relief in ASU 2019-04 to disclose accrued interest receivable balances separately from the amortized cost basis to additional disclosures involving amortized cost basis, and provides clarification regarding application of the guidance in paragraph 326-20-35-6 for financial assets secured by collateral maintenance provisions that provide a practical expedient to measure the estimate of expected credit losses by comparing the amortized cost basis of a financial asset and the fair value of collateral securing the financial asset as of the reporting date. The effective date and transition requirements for the amendment are the same as the effective date and transition requirements in ASU 2016-13.

 

Note 2 - Securities

The amortized cost and fair values of our AFS securities portfolio were as follows:

    

March 31, 2021

Amortized

    

Unrealized

    

Unrealized

    

Cost

Gains

Losses

Fair Value

(dollars in thousands)

U.S. government agency notes

$

9,366

$

1

$

192

$

9,175

Corporate obligations

2,000

21

2,021

MBS

123,953

82

2,533

121,502

$

135,319

$

104

$

2,725

$

132,698

    

December 31, 2020

Amortized

    

Unrealized

    

Unrealized

    

Cost

Gains

Losses

Fair Value

(dollars in thousands)

U.S. government agency notes

$

6,640

$

45

$

25

$

6,660

Corporate obligations

2,000

34

2,034

MBS

56,385

339

320

56,404

$

65,025

$

418

$

345

$

65,098

The amortized cost and fair values of our HTM securities portfolio were as follows:

March 31, 2021

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

Cost

Gains

Losses

Value

(dollars in thousands)

U.S. government agency notes

$

1,987

$

130

$

$

2,117

MBS

 

12,529

 

448

 

 

12,977

$

14,516

$

578

$

$

15,094

December 31, 2020

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

Cost

Gains

Losses

Value

(dollars in thousands)

U.S. government agency notes

$

1,986

$

145

$

$

2,131

MBS

 

13,957

 

515

 

 

14,472

$

15,943

$

660

$

$

16,603

13

Table of Contents

Gross unrealized losses and fair value by length of time that the individual AFS securities have been in an unrealized loss position at the dates indicated are presented in the following tables:

March 31, 2021

Less than 12 months

12 months or more

Total

    

# of

    

Fair

    

Unrealized