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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 June 30, 2021


☐	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 - 12,864,339 shares outstanding as of August 12, 2021

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SEVERN BANCORP, INC. AND SUBSIDIARIES

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		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of June 30, 2021 and December 31, 2020 (unaudited)	5

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)	6

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)	7

	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)	8

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4.	Controls and Procedures	55

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	56

Item 1A.	Risk Factors	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3.	Defaults Upon Senior Securities	56

Item 4.	Mine Safety Disclosures	56

Item 5.	Other Information	56

Item 6.	Exhibits	56

EXHIBIT INDEX		57

SIGNATURES		58

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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
GSE	Government-sponsored enterprises
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
NPAs	Nonperforming assets
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
TBA	To be announced
TDR(s)	Troubled debt restructure(s)
Title Company	Mid Maryland Title Company, Inc.
Trust	Severn Capital Trust 1
U.S.	United States of America

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

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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 the Company’s March 31, 2021 Quarterly Report on Form 10-Q, 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)


	June 30,		December 31,
	2021		2020
ASSETS
Cash and due from banks	$	4,057	$	4,819
Federal funds sold and interest-bearing deposits in other banks		305,746		151,790
Cash and cash equivalents		309,803		156,609
CDs held for investment		844		3,580
AFS securities, at fair value		21,278		65,098
HTM securities (fair value of $134,052 and $16,603 at June 30, 2021 and December 31, 2020, respectively)		133,657		15,943
LHFS, at fair value		32,869		36,299
Loans receivable		613,329		642,882
Allowance		(7,878)		(8,670)
Loans, net		605,451		634,212
Real estate acquired through foreclosure		1,010		1,010
Restricted stock investments		970		1,236
Premises and equipment, net		20,278		20,940
Accrued interest receivable		2,336		2,576
Deferred income taxes		692		1,145
BOLI		5,583		5,517
Goodwill		770		1,104
Other assets		8,160		7,284
Total assets	$	1,143,701	$	952,553
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing	$	354,855	$	245,093
Interest-bearing		640,867		561,363
Total deposits		995,722		806,456
Long-term borrowings		10,000		10,000
Subordinated debentures		20,619		20,619
Accrued expenses and other liabilities		4,725		5,831
Total liabilities		1,031,066		842,906
Stockholders' Equity:
Common stock, $0.01 par value, 20,000,000 shares authorized; 12,858,339 and 12,843,349 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		129		128
Additional paid-in capital		66,392		66,251
Retained earnings		47,561		43,216
Accumulated other comprehensive (loss) income		(1,447)		52
Total stockholders' equity		112,635		109,647
Total liabilities and stockholders' equity	$	1,143,701	$	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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020

Interest income:
Loans	$	7,378	$	8,078	$	15,622	$	16,416
Securities		426		216		718		435
Other earning assets		79		67		152		426
Total interest income		7,883		8,361		16,492		17,277
Interest expense:
Deposits		707		1,383		1,491		3,180
Borrowings and subordinated debentures		166		333		333		697
Total interest expense		873		1,716		1,824		3,877
Net interest income		7,010		6,645		14,668		13,400
(Reversal of) provision for loan losses		(325)		—		(1,075)		750
Net interest income after (reversal of) provision for loan losses		7,335		6,645		15,743		12,650
Noninterest income:
Mortgage-banking revenue		2,300		1,990		6,696		3,624
Real estate commissions		7		130		168		440
Real estate management fees		—		155		—		320
Deposit service charges		605		570		1,206		1,131
Title Company revenue		442		226		777		464
ATM surcharges		108		71		195		133
Income from BOLI		33		36		66		73
Loss on sales of AFS securities		—		—		(5)		—
Other noninterest income		261		59		406		77
Total noninterest income		3,756		3,237		9,509		6,262
Noninterest expense:
Compensation and related expenses		5,829		5,171		12,051		10,632
Occupancy		486		445		957		963
Legal fees		34		17		34		183
Write-downs, losses, and costs of real estate acquired through foreclosure, net of gains		44		16		46		90
FDIC insurance premiums		88		37		144		37
Professional fees		156		171		307		474
Advertising		196		231		394		451
Data processing		458		396		920		856
Credit report and appraisal fees		131		36		191		103
Licensing and software		294		238		534		456
Loss on disposal of premises and equipment		—		—		—		76
Internal audit and compliance		200		71		333		135
Office expenses, printing, and postage		46		139		134		248
Telecommunications		105		85		210		190
Merger expenses		91		—		329		—
Other noninterest expense		514		434		888		845
Total noninterest expense		8,672		7,487		17,472		15,739
Net income before income tax provision		2,419		2,395		7,780		3,173
Income tax provision		699		658		2,149		871
Net income	$	1,720	$	1,737	$	5,631	$	2,302
Net income per common share - basic	$	0.13	$	0.14	$	0.44	$	0.18
Net income per common share - diluted	$	0.13	$	0.14	$	0.44	$	0.18

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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Net income	$	1,720	$	1,737	$	5,631	$	2,302
Other comprehensive income item:
Unrealized holding gains (losses) on AFS securities arising during the period (net of tax expense (benefit) of $172, $1, $(571), and $57)		453		1		(1,503)		150
Realized losses on AFS securities arising during the period (net of tax benefit of $1)		—		—		4		—
Total other comprehensive income (loss)		453		1		(1,499)		150
Total comprehensive income	$	2,173	$	1,738	$	4,132	$	2,452

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 June 30, 2021
	Number of							Accumulated
	Shares of			Additional				Other		Total
	Common	Common		Paid-In		Retained		Comprehensive		Stockholders'
	Stock	Stock		Capital		Earnings		Loss		Equity
Balance at April 1, 2021	12,856,989	$	129	$	66,359	$	46,485	$	(1,900)	$	111,073
Net income	—		—		—		1,720		—		1,720
Stock-based compensation	—		—		23		—		—		23
Dividends paid on common stock at $0.05 per share	—		—		—		(644)		—		(644)
Exercise of stock options	1,350		—		10		—		—		10
Other comprehensive income	—		—		—		—		453		453
Balance at June 30, 2021	12,858,339	$	129	$	66,392	$	47,561	$	(1,447)	$	112,635


	Three Months Ended June 30, 2020
	Number of							Accumulated
	Shares of			Additional				Other		Total
	Common	Common		Paid-In		Retained		Comprehensive		Stockholders'
	Stock	Stock		Capital		Earnings		Income		Equity
Balance at April 1, 2020	12,812,976	$	128	$	65,992	$	38,612	$	104	$	104,836
Net income	—		—		—		1,737		—		1,737
Stock-based compensation	—		—		34		—		—		34
Dividends paid on common stock at $0.04 per share	—		—		—		(511)		—		(511)
Other comprehensive income	—		—		—		—		1		1
Balance at June 30, 2020	12,812,976	$	128	$	66,026	$	39,838	$	105	$	106,097


	Six Months Ended June 30, 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	—		—		—		5,631		—		5,631
Stock-based compensation	—		—		46		—		—		46
Dividends paid on common stock at $0.10 per share	—		—		—		(1,286)		—		(1,286)
Exercise of stock options	14,990		1		95		—		—		96
Other comprehensive loss	—		—		—		—		(1,499)		(1,499)
Balance at June 30, 2021	12,858,339	$	129	$	66,392	$	47,561	$	(1,447)	$	112,635


	Six Months Ended June 30, 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	—		—		—		2,302		—		2,302
Stock-based compensation	—		—		68		—		—		68
Dividends paid on common stock at $0.08 per share	—		—		—		(1,024)		—		(1,024)
Exercise of stock options	2,050		—		14		—		—		14
Other comprehensive income	—		—		—		—		150		150
Balance at June 30, 2020	12,812,976	$	128	$	66,026	$	39,838	$	105	$	106,097

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)


	Six Months Ended June 30,
	2021		2020

Cash flows from operating activities:
Net income	$	5,631	$	2,302
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		778		788
Amortization of deferred loan fees		(1,511)		(1,024)
Net amortization (accretion) of premiums and discounts on securities		431		(36)
(Reversal of) provision for loan losses		(1,075)		750
Write-downs and losses on real estate acquired through foreclosure, net of gains		—		551
Gain on sale of mortgage loans		(6,696)		(3,624)
Loss on disposal of property		—		76
Loss on sale of Hyatt Commercial assets		34		—
Loss on sale of AFS securities		5		—
Proceeds from sale of LHFS		198,761		126,925
Originations of LHFS		(188,895)		(123,820)
Stock-based compensation		46		68
Increase in cash surrender value of BOLI		(66)		(73)
Deferred income taxes		1,023		(25)
Decrease (increase) in accrued interest receivable		240		(20)
Increase in other assets		(910)		(358)
(Decrease) increase in accrued expenses and other liabilities		(1,106)		1,167
Net cash provided by operating activities		6,690		3,647
Cash flows from investing activities:
Redemption of CDs held for investment		2,736		1,466
Loan principal repayments, net of (disbursements)		31,607		(14,382)
Redemption of restricted stock investments		266		132
Purchases of premises and equipment, net		(116)		(262)
Activity in HTM securities:
Purchases		(1,967)		—
Maturities/calls/repayments		2,812		4,603
Activity in AFS securities:
Purchases		(90,889)		(7,857)
Sales		4,634		—
Maturities/calls/repayments		9,011		5,247
Proceeds from sale of Hyatt Commercial		334		—
Proceeds from sales of real estate acquired through foreclosure		—		826
Net cash used in investing activities		(41,572)		(10,227)
Cash flows from financing activities:
Net increase in deposits		189,266		87,867
Common stock dividends		(1,286)		(1,024)
Exercise of stock options		96		14
Net cash provided by financing activities		188,076		86,857
Increase in cash and cash equivalents		153,194		80,277
Cash and cash equivalents at beginning of period		156,609		88,193
Cash and cash equivalents at end of period	$	309,803	$	168,470
Supplemental Noncash Disclosures:
Interest paid on deposits and borrowed funds	$	1,829	$	3,918
Income taxes paid		2,352		493
Transfers of mortgage loans held for sale to loan portfolio		260		—
Transfers of securities from AFS to HTM		118,659		—

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 and six months ended June 30, 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 for state 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. In this Quarterly Report on Form 10-Q, the correction of this immaterial accounting error is reflected in the opening retained earnings and total stockholders’ equity balances for 2020, which are $885,000 lower than the amounts previously report in the Quarterly Report on Form 10-Q for the three and six months ended June 30, 2020.

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 in different variants 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. In March 2020, the Federal Open Market Committee reduced the target federal funds rate to a target range of 0% to 0.25% to assist the deteriorating economy brought about by the pandemic. The reduction in interest rates and other effects of the COVID-19 outbreak have not significantly negatively impacted our financial condition or results of operations to date. However, the pandemic persists and effects of it may adversely affect the Company’s financial condition and results of operations in the future. 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. We continue to monitor the environment and, in particular, our loan portfolio, including segments that are most vulnerable to the effects of the pandemic.

In May 2021, the Governor of Maryland lifted all COVID-19 related restrictions. The State of Emergency in Maryland declared at the beginning of the pandemic ended July 1, 2021.

Due to the COVID-19 Delta Variant and the uptick in positive cases of the virus, at the beginning of August, certain local jurisdictions (including Anne Arundel County, Maryland, our primary market area) have issued indoor mask mandates for all government buildings, libraries, and senior centers and strongly encourage mask wearing in all other indoor areas. At this time, it is unknown how long the mandates will stay in place.

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

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must obtain the approval of the OCC to convert to a national banking association. The Merger is expected to be completed in the fourth quarter of 2021.

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.

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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. 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:


	June 30, 2021
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value

	(dollars in thousands)
U.S. government agency notes	$	4,731	$	67	$	—	$	4,798
Corporate obligations		2,000		33		—		2,033
MBS		14,435		69		57		14,447
	$	21,166	$	169	$	57	$	21,278


	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:


	June 30, 2021
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(dollars in thousands)
U.S. government agency notes	$	8,702	$	141	$	10	$	8,833
MBS		124,955		500		236		125,219
	$	133,657	$	641	$	246	$	134,052


	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

Near the end of the second quarter of 2021, we transferred $118.7 million in AFS securities that had unrealized losses of $2.1 million at the time the securities were transferred. The unrealized losses at the time of transfer continue to be reported in accumulated other comprehensive loss and will be amortized over the remaining lives of the securities.

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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:


	June 30, 2021
	Less than 12 months					12 months or more					Total
	# of	Fair		Unrealized		# of	Fair		Unrealized		# of	Fair		Unrealized
	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses

	(dollars in thousands)
MBS	6	$	8,477	$	57	—	$	—	$	—	6	$	8,477	$	57
	6	$	8,477	$	57	—	$	—	$	—	6	$	8,477	$	57


	December 31, 2020
	Less than 12 months					12 months or more					Total
	# of	Fair		Unrealized		# of	Fair		Unrealized		# of	Fair		Unrealized
	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses

	(dollars in thousands)
U.S. government agency notes	5	$	4,015	$	25	—	$	—	$	—	5	$	4,015	$	25
MBS	27		27,454		320	—		—		—	27		27,454		320
	32	$	31,469	$	345	—	$	—	$	—	32	$	31,469	$	345

Gross unrealized losses and fair value by length of time that the individual HTM securities have been in an unrealized loss position at the dates indicated are presented in the following table as of June 30, 2021:


	Less than 12 months					12 months or more					Total
	# of	Fair		Unrealized		# of	Fair		Unrealized		# of	Fair		Unrealized
	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses

	(dollars in thousands)
U.S. government agency notes	3	$	3,822	$	10	—	$	—	$	—	3	$	3,822	$	10
MBS	51		95,965		231	3		1,579		5	54		97,544		236
	54	$	99,787	$	241	3	$	1,579	$	5	57	$	101,366	$	246

We did not have any HTM securities in an unrealized loss position at December 31, 2020. While there were no securities classified as HTM in an unrealized loss position at December 31, 2020, certain securities are shown as being in an unrealized loss position for 12 months or more at June 30, 2021, due to the transfer of securities from AFS to HTM, as previously mentioned.

All of the securities that are currently in a gross unrealized loss position are so due to declines in fair values resulting from changes in interest rates or increased liquidity spreads since the time they were purchased. We have the intent and ability to hold these debt securities to maturity (including the AFS securities) and do not intend to sell, nor do we believe it will be more likely than not that we will be required to sell, any impaired securities prior to a recovery of amortized cost. We expect these securities will be repaid in full, with no losses realized. As such, management considers any impairment to be temporary.

Contractual maturities of debt securities at June 30, 2021 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.


	AFS Securities				HTM Securities
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

	(dollars in thousands)
Due after one through five years	$	117	$	119	$	2,644	$	2,757
Due after five years through ten years		5,771		5,866		3,178		3,169
Due after 10 years		843		846		2,880		2,907
MBS		14,435		14,447		124,955		125,219
	$	21,166	$	21,278	$	133,657	$	134,052

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During the three and six months ended June 30, 2021, we sold $4.6 million in securities and recognized $34,000 and $39,000 in gross realized gains and losses, respectively. We did not sell any securities during the three or six months ended June 30, 2020.

We had $3.0 million and $3.1 million fair value of securities pledged as collateral against certain deposits as of June 30, 2021 and December 31, 2020, respectively.

Note 3 - Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized as follows:


	June 30,		December 31,
	2021		2020

	(dollars in thousands)
Residential mortgage	$	171,484	$	209,659
Commercial		72,073		63,842
Commercial real estate		244,563		243,435
ADC		112,814		112,938
Home equity/2nds		15,011		14,712
Consumer		1,070		1,485
Total loans receivable, before net unearned fees		617,015		646,071
Unearned loan fees		(3,686)		(3,189)
Loans receivable	$	613,329	$	642,882

Certain loans in the amount of $106.9 million have been pledged under a blanket floating lien to the FHLB as collateral against advances at June 30, 2021.

At June 30, 2021, the Bank was servicing $279.1 million in loans for FNMA and $49.5 million in loans for FHLMC. At December 31, 2020, the Bank was servicing $159.8 million in loans for FNMA and $36.9 in loans for FHLMC. These loans are not included in the table above. Also not included in the table above were MSRs of $3.6 million and $1.5 million as of June 30, 2021 and December 31, 2020, respectively.

Credit Quality

An Allowance is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible based on evaluations of the collectability of loans and prior loan loss experience. Management has an established methodology to determine the adequacy of the Allowance that assesses the risks and losses inherent in the loan portfolio. The methodology takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. Determining the amount of the Allowance requires the use of estimates and assumptions. Actual results could differ significantly from those estimates. While management uses all available information to estimate losses on loans, future additions to the Allowance may be necessary based on changes in economic conditions and our actual loss experience. In addition, various regulatory agencies periodically review the Allowance as an integral part of their examination process. Such agencies may require us to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as of June 30, 2021 and December 31, 2020.

For purposes of determining the Allowance, we have segmented our loan portfolio by product type. Our portfolio loan segments are residential mortgage, commercial, commercial real estate, ADC, Home equity/2nds, and consumer. We have looked at all segments and have determined that no additional subcategorization is warranted based upon our consideration of risk. Our portfolio classes are the same as our portfolio segments.

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Inherent Credit Risks

The inherent credit risks within the loan portfolio vary depending upon the loan class as follows:

Residential mortgage - secured by one to four family dwelling units. The loans generally have limited risk as they are secured by first mortgages on the unit, which are generally the primary residence of the borrower, and are generally at an LTV of 80% or less.

Commercial - underwritten in accordance with our policies and include evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment. These loans are viewed primarily as cash flow dependent and, secondarily, as loans secured by real-estate and/or other assets. Repayment of these loans is generally dependent upon the principal business conducted on the property securing the loan. Line of credit loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates line of credit loans based on collateral and risk-rating criteria.

SBA PPP - We have participated in the PPP and have originated such loans that are expected to be 100% guaranteed by the SBA. These loans have a 2 year (origination prior to June 5, 2020) or 5 year (originated after June 5, 2020) term at a 1.0% rate of interest with forgiveness by the SBA at the end of the term. This loan program was designed to assist our commercial customers in remaining operational during this time of uncertainty surrounding the COVID-19 pandemic. As of June 30, 2021, we held $36.9 million in PPP loans in our loan portfolio, all of which have interest forbearance.

Commercial real estate - subject to the underwriting standards and processes similar to commercial, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as loans secured by real estate and secondarily as cash flow dependent. As repayment of these loans is generally dependent upon the successful operation of the property securing the loan, we look closely at the cash flows generated by the property securing the loan, although the primary underwriting criteria for these loan types is the sufficient value of the underlying collateral. Commercial real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate loans based on collateral and risk-rating criteria. The Bank also utilizes third-party experts to provide environmental and market valuations. The nature of commercial real estate loans makes them more difficult to monitor and evaluate.

ADC - underwritten in accordance with our underwriting policies which include a financial analysis of the developers, property owners, construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project rather than the ability of the borrower or guarantor to repay principal and interest. Additionally, land is underwritten according to our policies which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development. These cost and valuation estimates may be inaccurate.

The sources of repayment of these loans is typically permanent financing expected to be obtained upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.

If the Bank is forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of the loan as well as related foreclosure and holding costs. In addition, the Bank may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time.

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Home equity/2nds - subject to the underwriting standards and processes similar to residential mortgages and secured by one to four family dwelling units. Home equity/2nds loans have greater risk than residential mortgages as a result of the Bank generally being in a second lien position.

Consumer - consist of loans to individuals through the Bank’s retail network and typically unsecured or secured by personal property. Consumer loans have a greater credit risk than residential loans because of the lower value of the underlying collateral, if any.

COVID-19 - The COVID-19 pandemic has created additional risk for all loan segments due to the economic downturn, both nationally and locally. Many businesses were temporarily shut down and many people were unemployed during the national and local “stay at home” orders that were in place in many areas during the beginning of the second quarter of 2020. Although the Governor of the State of Maryland has lifted all COVID-19 related restrictions, many businesses are operating at reduced capacities and many people remain unemployed. During this continuing time of economic uncertainty, borrowers have faced and could continue to face extended periods of unemployment and may not be able to meet their loan obligations. Additionally, real estate collateral values could significantly decline and full repayment of loans could be in doubt. At this time, we have not experienced any negative impact to asset quality as a result of the pandemic. However, the ongoing pandemic could still result in a deterioration in credit quality. The effects of the pandemic may require us to fund additional increases in the Allowance in future periods. Management will continue to evaluate the adequacy of the Allowance as more economic data becomes available and as changes within our portfolio are known.

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP in certain circumstances. In addition, OCC Bulletin 2020-35 provides more limited circumstances in which a loan modification is not subject to classification as a TDR.

CARES Act Section 4013 and OCC Bulletin 2020-35 forbearance agreements are available to both qualified commercial and consumer loan borrowers. Due to the widespread impact of COVID-19, we have had loan borrowers seek loan forbearance or loan modification agreements under the CARES Act. As the COVID-19 restrictions have ended and the State of Maryland is returning to relatively normal capacities, such loans have significantly reduced. We held $1.4 million in loans modified under the CARES Act as of June 30, 2021 compared to $23.4 million at December 31, 2020. These loans have an interest deferral component the range of which is from one month to six months. We have recorded $88,000 in interest that has not yet been collected on $6.2 million in loans due to the forbearance agreements.

The following tables present, by portfolio segment, the changes in the Allowance and the recorded investment in loans:


	Three Months Ended June 30, 2021
	Residential				Commercial				Home Equity/
	Mortgage		Commercial		Real Estate		ADC		2nds		Consumer		Unallocated		Total

	(dollars in thousands)
Beginning Balance	$	1,799	$	1,780	$	1,453	$	2,705	$	219	$	—	$	179	$	8,135
Charge-offs		—		—		—		—		—		(154)		—		(154)
Recoveries		2		4		21		—		182		13		—		222
Net recoveries (charge-offs)		2		4		21		—		182		(141)		—		68
(Reversal of) provision for loan losses		(326)		(22)		(84)		245		(218)		142		(62)		(325)
Ending Balance	$	1,475	$	1,762	$	1,390	$	2,950	$	183	$	1	$	117	$	7,878

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	Six Months Ended June 30, 2021
	Residential				Commercial				Home Equity/
	Mortgage		Commercial		Real Estate		ADC		2nds		Consumer		Unallocated		Total

	(dollars in thousands)
Beginning Balance	$	2,259	$	1,670	$	1,516	$	2,947	$	168	$	—	$	110	$	8,670
Charge-offs		—		—		—		(34)		—		(154)		—		(188)
Recoveries		67		9		195		—		186		14		—		471
Net recoveries (charge-offs)		67		9		195		(34)		186		(140)		—		283
(Reversal of) provision for loan losses		(851)		83		(321)		37		(171)		141		7		(1,075)
Ending Balance	$	1,475	$	1,762	$	1,390	$	2,950	$	183	$	1	$	117	$	7,878

Ending balance - individually evaluated for impairment	$	—	$	—	$	—	$	29	$	—	$	—	$	—	$	29
Ending balance - collectively evaluated for impairment		1,475		1,762		1,390		2,921		183		1		117		7,849
	$	1,475	$	1,762	$	1,390	$	2,950	$	183	$	1	$	117	$	7,878

Ending loan balance -individually evaluated for impairment	$	6,150	$	—	$	624	$	288	$	513	$	61			$	7,636
Ending loan balance -collectively evaluated for impairment		165,334		72,073		243,939		112,526		14,498		1,009				609,379
	$	171,484	$	72,073	$	244,563	$	112,814	$	15,011	$	1,070			$	617,015


	December 31, 2020
	Residential				Commercial					Home Equity/
	Mortgage		Commercial		Real Estate		ADC		2nds		Consumer		Unallocated		Total

	(dollars in thousands)
Ending balance - individually evaluated for impairment	$	542	$	—	$	—	$	29	$	—	$	—	$	—	$	571
Ending balance - collectively evaluated for impairment		1,717		1,670		1,516		2,918		168		—		110		8,099
	$	2,259	$	1,670	$	1,516	$	2,947	$	168	$	—	$	110	$	8,670

Ending loan balance - individually evaluated for impairment	$	10,131	$	—	$	547	$	308	$	491	$	63			$	11,540
Ending loan balance - collectively evaluated for impairment		199,528		63,842		242,888		112,630		14,221		1,422				634,531
	$	209,659	$	63,842	$	243,435	$	112,938	$	14,712	$	1,485			$	646,071


	Three Months Ended June 30, 2020
	Residential				Commercial				Home Equity/
	Mortgage		Commercial		Real Estate		ADC		2nds		Consumer		Unallocated		Total

	(dollars in thousands)
Beginning Balance	$	2,484	$	1,565	$	1,040	$	2,615	$	151	$	—	$	63	$	7,918
Charge-offs		—		—		—		—		—		—		—		—
Recoveries		177		3		70		—		1		—		—		251
Net recoveries		177		3		70		—		1		—		—		251
(Reversal of) provision for loan losses		(239)		109		(32)		174		13		—		(25)		—
Ending Balance	$	2,422	$	1,677	$	1,078	$	2,789	$	165	$	—	$	38	$	8,169

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	Six Months Ended June 30, 2020
	Residential				Commercial				Home Equity/
	Mortgage		Commercial		Real Estate		ADC		2nds		Consumer		Unallocated		Total

	(dollars in thousands)
Beginning Balance	$	2,264	$	1,421	$	984	$	2,286	$	134	$	—	$	49	$	7,138
Charge-offs		—		—		—		—		—		(15)		—		(15)
Recoveries		180		8		102		—		3		3		—		296
Net recoveries (charge-offs)		180		8		102		—		3		(12)		—		281
(Reversal of) provision for loan losses		(22)		248		(8)		503		28		12		(11)		750
Ending Balance	$	2,422	$	1,677	$	1,078	$	2,789	$	165	$	—	$	38	$	8,169

Ending balance - individually evaluated for impairment	$	675	$	—	$	60	$	29	$	—	$	—	$	—	$	764
Ending balance - collectively evaluated for impairment		1,747		1,677		1,018		2,760		165		—		38		7,405
	$	2,422	$	1,677	$	1,078	$	2,789	$	165	$	—	$	38	$	8,169

Ending loan balance - individually evaluated for impairment	$	12,713	$	—	$	1,278	$	385	$	526	$	65			$	14,967
Ending loan balance - collectively evaluated for impairment		224,553		87,931		224,310		100,427		11,501		1,319				650,041
	$	237,266	$	87,931	$	225,588	$	100,812	$	12,027	$	1,384			$	665,008

The following tables present the credit quality breakdown of our loan portfolio by class:


	June 30, 2021
			Special
	Pass		Mention		Substandard		Total

	(dollars in thousands)
Residential mortgage	$	170,181	$	—	$	1,303	$	171,484
Commercial		70,763		1,310		—		72,073
Commercial real estate		243,691		83		789		244,563
ADC		112,385		—		429		112,814
Home equity/2nds		14,920		—		91		15,011
Consumer		1,070		—		—		1,070
	$	613,010

SEVERN BANCORP INC 10-Q