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What changed in SHORE BANCSHARES INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of SHORE BANCSHARES INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+495 added−432 removedSource: 10-K (2024-03-15) vs 10-K (2023-03-30)

Top changes in SHORE BANCSHARES INC's 2023 10-K

495 paragraphs added · 432 removed · 233 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

100 edited+35 added−12 removed89 unchanged
Biggest changeAs noted above, Basel III integrates the capital requirements into the prompt corrective action category definitions set forth below. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Capital Category Total Risk-Based Capital Ratio ​ Tier 1 Risk-Based Capital Ratio ​ Common Equity Tier 1 (CET1) Capital Ratio ​ Leverage Ratio ​ Tangible Equity to Assets ​ Supplemental Leverage Ratio Well Capitalized 10% or greater ​ 8% or greater ​ 6.5% or greater ​ 5% or greater ​ n/a ​ n/a Adequately Capitalized 8% or greater ​ 6% or greater ​ 4.5% or greater ​ 4% or greater ​ n/a ​ 3% or greater Undercapitalized Less than 8% ​ Less than 6% ​ Less than 4.5% ​ Less than 4% ​ n/a ​ Less than 3% Significantly Undercapitalized Less than 6% ​ Less than 4% ​ Less than 3% ​ Less than 3% ​ n/a ​ n/a Critically Undercapitalized n/a ​ n/a ​ n/a ​ n/a ​ Less than 2% ​ n/a ​ As of December 31, 2022, the Bank and the Company exceeded all regulatory capital requirements and exceeded the minimum CET 1, Tier 1 and total capital ratio inclusive of the fully phased-in capital conservation buffer of 7.0%, 8.5%, and 10.5%, respectively.
Biggest changeCapital Category Total Risk-Based Capital Ratio Tier 1 Risk-Based Capital Ratio Common Equity Tier 1 (CET1) Capital Ratio Leverage Ratio Tangible Equity to Assets Supplemental Leverage Ratio Well Capitalized 10.0% or greater 8.0% or greater 6.5% or greater 5.0% or greater n/a n/a Adequately Capitalized 8.0% or greater 6.0% or greater 4.5% or greater 4.0% or greater n/a 3.0% or greater Undercapitalized Less than 8.0% Less than 6.0% Less than 4.5% Less than 4.0% n/a Less than 3.0% Significantly Undercapitalized Less than 6.0% Less than 4.0% Less than 3.0% Less than 3.0% n/a n/a Critically Undercapitalized n/a n/a n/a n/a Less than 2.0% n/a As of December 31, 2023, the Bank and the Company exceeded all regulatory capital requirements and exceeded the minimum CET 1, Tier 1 and total capital ratio inclusive of the fully phased-in capital conservation buffer of 7.0%, 8.5%, and 10.5%, respectively.
As fully phased-in on January 1, 2019, Basel III subjects banks to the following risk-based capital requirements: • a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer, or 7%; • a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, or 8.5%; • a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer, or 10.5%; and • a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures.
As fully phased-in on January 1, 2019, Basel III subjects banks to the following risk-based capital requirements: • a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer, or 7.0%; • a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, or 8.5%; • a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer, or 10.5%; and • a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures.
Community Reinvestment Act The Community Reinvestment Act (“CRA”) requires the federal banking regulatory agencies to assess all financial institutions that they regulate to determine whether these institutions are meeting the credit needs of the communities they serve, including their assessment area(s) (as established for these purposes in accordance with applicable regulations based principally on the location of branch offices).
Community Reinvestment Act The Community Reinvestment Act (the “CRA”) requires the federal banking regulatory agencies to assess all financial institutions that they regulate to determine whether these institutions are meeting the credit needs of the communities they serve, including their assessment area(s) (as established for these purposes in accordance with applicable regulations based principally on the location of branch offices).
In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities.
In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and the CRA into account when regulating and supervising other activities.
An institution can be subject to an enforcement action due to the failure to timely file required reports, the filing of false or misleading information, or the submission of inaccurate reports, or engaging in other unsafe or unsound banking practices.
An institution can be subject to an enforcement action due to the failure to timely file required reports, the filing of false or misleading information, the submission of inaccurate reports or engaging in other unsafe or unsound banking practices.
It also exempts insured depository institutions and insured credit unions that originated fewer than 500 closed-end mortgage loans or 500 open-end lines of credit in each of the two preceding years from a subset of disclosure requirements (recently imposed by the CFPB) under the Home Mortgage Disclosure Act (“HMDA”), provided they have received certain minimum CRA ratings in their most recent examinations.
It also exempts insured depository institutions and insured credit unions that originated fewer than 500 closed-end mortgage loans or 500 open-end lines of credit in each of the two preceding years from a subset of disclosure requirements (recently imposed by the CFPB) under the Home Mortgage Disclosure Act, provided they have received certain minimum CRA ratings in their most recent examinations.
AVAILABLE INFORMATION The Company maintains an Internet site at www.shorebancshares.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.
AVAILABLE INFORMATION The Company maintains an Internet site at www.shorebancshares.com on which it makes available, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.
The Company conducts business primarily through two wholly owned subsidiaries, Shore United Bank, N.A. (the “Bank”) and Mid-Maryland Title Company, Inc. (the “Title Company”). The Bank provides consumer and commercial banking products and services, including secondary mortgage lending, trust, wealth management and financial planning services. The Title Company engages in title work related to real estate transactions.
The Company conducts business primarily through two wholly -owned subsidiaries, Shore United Bank, N.A. (the “Bank”) and Mid-Maryland Title Company, Inc. (the “Title Company”). The Bank provides consumer and commercial banking products and services and secondary mortgage lending, trust, wealth management and financial planning services. The Title Company engages in title work related to real estate transactions.
These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10.0% of CET1 or all such categories in the aggregate exceed 15.0% of CET1.
In July 2019, the federal bank regulators adopted a final rule that simplifies the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Company and the Bank, that are not subject to the advanced approaches requirements.
In July 2019, the federal bank regulators adopted a final rule that simplifies the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Company and the Bank, which are not subject to the advanced approaches requirements.
Under the GLB Act, a bank holding company can elect, subject to certain qualifications, to become a “financial holding company.” The GLB Act provides that a financial holding company may engage in a full range of financial activities, including insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities, with new expedited notice procedures.
Under the GLB Act, a bank holding company can elect, subject to certain qualifications, to become a “financial holding company.” The GLB Act provides that a financial holding company may engage in a full range of financial activities, including insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities, with expedited notice procedures.
In addition, we offer our commercial customers packages which include cash management services and various checking opportunities and other cash sweep products. Trust Services The Bank has a trust department through which it offers trust, asset management and financial planning services to customers within our market areas using the trade name Wye Financial Partners.
In addition, we offer our commercial customers packages which include cash management services and various checking opportunities and other cash sweep products. Trust Services The Bank has a trust department through which it offers trust, asset management and financial planning services to customers within our market areas using the trade name Wye Trust.
In addition, Section 941 of the Dodd-Frank Act amended the Securities Exchange Act of 1934, as amended (the “Exchange Act”) to require sponsors of asset-backed securities (“ABS”) to retain at least 5% of the credit risk of the assets underlying the securities and generally prohibits sponsors from transferring or hedging that credit risk.
In addition, Section 941 of the Dodd-Frank Act amended the Securities Exchange Act of 1934, as amended (the “Exchange Act”) to require sponsors of asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities and generally prohibits sponsors from transferring or hedging that credit risk.
In addition, if the FRB believes that a company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the FRB could require the bank holding company to terminate the activities, liquidate the assets or divest the affiliates.
In addition, if the FRB believes that a company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the FRB could require the bank holding company to terminate the activities, liquidate the assets or divest its affiliates.
Under this methodology, the assessment rate schedules used to determine assessments due from insured depository institutions become progressively lower when the reserve ratio in the DIF exceeds 2% and 2.5%.
Under this methodology, the assessment rate schedules used to determine assessments due from insured depository institutions become progressively lower when the reserve ratio in the DIF exceeds 2.0% and 2.5%.
Effective as of January 1, 2015, the Basel III final capital framework, among other things, (i) introduced as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expands the scope of the adjustments as compared to existing regulations.
Effective as of January 1, 2015, the Basel III final capital framework (“Basel III”), among other things, (i) introduced as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expands the scope of the adjustments as compared to existing regulations.
The principal requirements for an insured depository institution include (i) establishment of an anti-money laundering program that includes training and audit components, 13 Table of Contents (ii) establishment of a “know your customer” program involving due diligence to confirm the identities of persons seeking to open accounts and to deny accounts to those persons unable to demonstrate their identities, (iii) the filing of currency transaction reports for deposits and withdrawals of large amounts of cash and suspicious activities reports for activity that might signify money laundering, tax evasion, or other criminal activities, (iv) additional precautions for accounts sought and managed for non-U.S. persons and (v) verification and certification of money laundering risk with respect to private banking and foreign correspondent banking relationships.
The principal requirements for an insured depository institution include (i) establishment of an anti-money laundering program that includes training and audit components, (ii) establishment of a “know your customer” program involving due diligence to confirm the identities of persons seeking to open accounts and to deny accounts to those persons unable to demonstrate their identities, (iii) the filing of currency transaction reports for deposits and withdrawals of large amounts of cash and suspicious activities reports for activity that might signify money laundering, tax evasion, or other criminal activities, (iv) additional precautions for accounts sought and managed for non-U.S. persons and (v) verification and certification of money laundering risk with respect to private banking and foreign correspondent banking relationships.
In addition to the reforms previously mentioned, the Dodd-Frank Act also: ● requires BHCs and banks to be both well capitalized and well managed in order to acquire banks located outside their home state and requires any BHC electing to be treated as a financial holding company to be both well managed and well capitalized; ● eliminates all remaining restrictions on interstate banking by authorizing national and state banks to establish de novo branches in any state that would permit a bank chartered in that state to open a branch at that location; and ● repeals Regulation Q, the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
In addition to the reforms previously mentioned, the Dodd-Frank Act also: • requires bank holding companies and banks to be both well capitalized and well managed in order to acquire banks located outside their home state and requires any bank holding company electing to be treated as a financial holding company to be both well managed and well capitalized; • eliminates all remaining restrictions on interstate banking by authorizing national and state banks to establish de novo branches in any state that would permit a bank chartered in that state to open a branch at that location; and • repeals Regulation Q, the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
Safety and Soundness Standards The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired.
Safety and Soundness Standards The federal banking agencies have adopted guidelines designed to assist such agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired.
For example, with respect to our lending practices, we are subject to the following laws and regulations, among several others: ● Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; ● HMDA, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; ● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit; ● Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures; ● Fair Debt Collection Practices Act, governing how consumer debts may be collected by collection agencies; ● Real Estate Settlement Procedures Act, requiring certain disclosures concerning loan closing costs and escrows, and governing transfers of loan servicing and the amounts of escrows for loans secured by one-to-four family residential properties; ● Rules and regulations established by the National Flood Insurance Program; ● Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws. ● Our deposit operations are subject to federal laws applicable to depository accounts, including: 17 Table of Contents ● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; ● Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts; ● Electronic Funds Transfer Act and Regulation E of the FRB, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and ● Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.
For example, with respect to our lending practices, we are subject to the following laws and regulations, among several others: • Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; • Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; • Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit; • Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures; • Fair Debt Collection Practices Act, governing how consumer debts may be collected by collection agencies; • Real Estate Settlement Procedures Act, requiring certain disclosures concerning loan closing costs and escrows, and governing transfers of loan servicing and the amounts of escrows for loans secured by one-to-four family residential properties; • Rules and regulations established by the National Flood Insurance Program; • Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws; • Our deposit operations are subject to federal laws applicable to depository accounts, including: ◦ Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; ◦ Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts; ◦ Electronic Funds Transfer Act and Regulation E of the FRB, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and ◦ Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.
However, the mandatory compliance date for the elimination of the Fannie/Freddie QM Alternative was subsequently extended until October of 2022. Despite this extension, Fannie and Freddie stopped buying loans, with application dates on or after July 1, 2021, that only qualified as QMs based on the Fannie/Freddie QM alternative.
However, the mandatory compliance date for the elimination of the Fannie/Freddie QM Alternative was subsequently extended until October 2022. Despite this extension, Fannie and Freddie stopped buying loans, with application dates on or after July 1, 2021, that only qualified as qualified mortgages based on the Fannie/Freddie QM Alternative.
The statute established a minimum designated reserve ratio (the “DFR”), for the DIF of 1.35% of the estimated insured deposits and required the FDIC to adopt a restoration plan should the reserve ratio fall below 1.35%. The financial ratios took effect when the DRR exceeded 1.15%.
The statute established a minimum designated reserve ratio, for the DIF of 1.35% of the estimated insured deposits and required the FDIC to adopt a restoration plan should the reserve ratio fall below 1.35%. The financial ratios took effect when the designated reserve ratio exceeded 1.15%.
The California Privacy Act, which covers businesses that obtain or access personal information on California resident consumers, grants consumers enhanced privacy rights and control over their personal information and imposes significant requirements on covered companies with respect to consumer data privacy rights.
The California Consumer Privacy Act of 2018, which covers businesses that obtain or access personal information on California resident consumers, grants consumers enhanced privacy rights and control over their personal information and imposes significant requirements on covered companies with respect to consumer data privacy rights.
Basel III also includes, as part of the definition of CET1 capital, a requirement that banking institutions include the amount of Accumulated Other Comprehensive Income (“AOCI”), which primarily consists of unrealized gains and losses on available-for-sale securities, which are not required to be treated as other-than-temporary impairment, net of tax) in calculating regulatory capital.
Basel III also includes, as part of the definition of CET1 capital, a requirement that banking institutions include the amount of Accumulated Other Comprehensive Income (“AOCI”) (which primarily consists of unrealized gains and non-credit related unrealized losses on available-for-sale securities, which are not required to be treated as other-than-temporary impairment, net of tax) in calculating regulatory capital.
Among other things, the Risk Retention Rule requires a securitizer to retain not less than 5% of the credit risk of any asset that the securitizer, through the issuance of an ABS, transfers, sells, or conveys to a third party; and prohibits a securitizer from directly or indirectly hedging or otherwise transferring the credit risk that the securitizer is required to retain.
Among other things, the Risk Retention Rule requires a securitizer to retain not less than 5% of the credit risk of any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party; and prohibits a securitizer from directly or indirectly hedging or otherwise transferring the credit risk that the securitizer is required to retain.
The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under federal regulations, bank holding companies and banks must meet certain risk-based capital requirements.
The Dodd-Frank Act additionally requires capital requirements to be counter cyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under federal regulations, bank holding companies and banks must meet certain risk-based capital requirements.
One of the amendments modifies the requirements for a loan to qualify as a QM as well as certain other provisions in the ATR/QM Rule, and eliminates the Fannie/Freddie QM Alternative.
One of the amendments modifies the requirements for a loan to qualify as a qualified mortgage as well as certain other provisions in the ATR/QM Rule, and eliminates the Fannie/Freddie QM Alternative.
Cannabis Related Business The Bank provides banking services to customers that are licensed by various states to do business in the cannabis industry as growers, processors and dispensaries. The Bank maintains stringent written policies and procedures related to the on-boarding of such businesses and to the monitoring and maintenance of such business accounts.
Cannabis Related Business 5 Table of Contents The Bank provides banking services to customers that are licensed by various states to do business in the cannabis industry as growers, processors and dispensaries. The Bank maintains stringent written policies and procedures related to the on-boarding of such businesses and to the monitoring and maintenance of such business accounts.
The proposed rule was adopted as final without change. ​ Also, in the final rule adopted on October 18, 2022, the FDIC incorporated Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures in the risk-based deposit insurance assessment system applicable to all large and highly complex insured depository institutions.
The proposed rule was adopted as final without change. 9 Table of Contents Also, in the final rule adopted on October 18, 2022, the FDIC incorporated Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures in the risk-based deposit insurance assessment system applicable to all large and highly complex insured depository institutions.
Under the Dodd-Frank Act and the implementing final rule adopted by the CFPB (the ATR/QM Rule), a financial institution may not make a residential mortgage loan to a consumer unless it first makes a “reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan.
Under the Dodd-Frank Act and the implementing final rule adopted by the CFPB (the “ATR/QM Rule”), a financial institution may not make a residential mortgage loan to a consumer unless it first makes a “reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan.
The Dodd-Frank Act also gives state attorneys general the ability to enforce federal consumer protection laws. Mortgage Loan Origination The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay.
The Dodd-Frank Act also gives state attorneys general the ability to enforce federal consumer protection laws. 14 Table of Contents Mortgage Loan Origination The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay.
These proposals touched on such areas as commercial real estate exposure, credit loss allowances under generally accepted accounting principles and capital requirements for covered swap entities, among others. Public statements by key agency officials have also suggested a revisiting of capital policy and supervisory approaches on a going-forward basis.
These proposals touched on such areas as CRE exposure, credit loss allowances under generally accepted accounting principles and capital requirements for covered swap entities, among others. Public statements by key agency officials have also suggested a revisiting of capital policy and supervisory approaches on a going-forward basis.
Enforcement Powers The federal regulatory agencies have substantial penalties available to use against depository institutions and certain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants, such as attorneys, accountants, and others who participate in the conduct of the financial institution’s affairs.
Enforcement Powers The federal regulatory agencies have substantial penalties available to enforce relative to depository institutions and certain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants, such as attorneys, accountants and others who participate in the conduct of the financial institution’s affairs.
Other laws tie the maximum amount that may be loaned to any one customer and its related interests to capital levels. 8 Table of Contents As part of the Federal Deposit Insurance Company Improvement Act of 1991 (“FDICIA”), each federal banking regulator adopted non-capital safety and soundness standards for institutions under its authority.
Other laws tie the maximum amount that may be loaned to any one customer and its related interests to capital levels. As part of the Federal Deposit Insurance Company Improvement Act of 1991, each federal banking regulator adopted non-capital safety and soundness standards for institutions under its authority.
With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment. 12 Table of Contents As an institution’s capital decreases, the regulators’ enforcement powers become more severe.
With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment. As an institution’s capital decreases, the regulators’ enforcement powers become more severe.
Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC. The Bank has implemented policies and procedures to comply with the foregoing requirements. Data Privacy and Cybersecurity The federal bank regulatory agencies have adopted guidelines for safeguarding confidential, personal, non-public customer information.
Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC. The Bank has implemented policies and procedures to comply with the foregoing requirements. 13 Table of Contents Data Privacy and Cybersecurity The federal bank regulatory agencies have adopted guidelines for safeguarding confidential, personal, non-public customer information.
The Dodd-Frank Act increases regulatory oversight, supervision and examination of banks, BHCs, and their respective subsidiaries by the appropriate regulatory agency. Federal Securities Laws The shares of the Company’s common stock are registered with the SEC under Section 12(b) of the Act and listed on the NASDAQ Global Select Market.
The Dodd-Frank Act increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. Federal Securities Laws The shares of the Company’s common stock are registered with the SEC under Section 12(b) of the Act and listed on the NASDAQ Global Select Market.
Additionally, a qualified mortgage may not: (i) contain excess upfront points and fees; (ii) have a term greater than 30 years; or (iii) include interest only or negative amortization payments.
Department of Agriculture. Additionally, a qualified mortgage may not: (i) contain excess upfront points and fees; (ii) have a term greater than 30 years; or (iii) include interest only or negative amortization payments.
In June 2018, the California legislature passed the California Consumer Privacy Act of 2018 (the “California Privacy Act”), which took effect on January 1, 2020.
In June 2018, the California legislature passed the California Consumer Privacy Act of 2018, which took effect on January 1, 2020.
Throughout the relationship, the Bank continues to monitor the business, including site visits, to ensure that the cannabis business continues to meet stringent requirements, including maintenance of required licenses. The Bank performs periodic financial reviews of the business and monitors the business in accordance with the Bank Secrecy Act (“BSA”) and Maryland Medical Cannabis Commission requirements.
Throughout the relationship, the Bank continues to monitor the business, including site visits, to ensure that the cannabis business continues to meet stringent requirements, including maintenance of required licenses. The Bank performs periodic financial reviews of the business and monitors the business in accordance with the Bank Secrecy Act of 1970 (“BSA”) and Maryland Cannabis Administration requirements.
Under this requirement, the Company could be required to provide financial assistance to the Bank should it experience financial distress. Federal Regulation of Banks The OCC may prohibit national banking associations, such as the Bank, from engaging in activities or investments that the OCC believes is unsafe or unsound banking practices.
Under this requirement, the Company could be required to provide financial assistance to the Bank should it experience financial distress. 8 Table of Contents Federal Regulation of Banks The OCC may prohibit national banking associations, such as the Bank, from engaging in activities or investments that the OCC believes are unsafe or unsound banking practices.
The monetary policies of the FRB authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future.
The FRB’s monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future.
The Basel III final framework provides for a number of deductions from and adjustments to CET1.
The Basel III provides for a number of deductions from and adjustments to CET1.
They also include risk weighting of equity exposures and past due loans; and higher (greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit risk profiles, including higher loan to value and equity components.
They also include risk weighting of equity exposures and past due loans, and higher (greater than 100%) risk weighting for certain CRE exposures that have higher credit risk profiles, including higher loan to value and equity components.
In addition, we must comply with privacy and data security laws and regulations at both the federal and state level. The banking industry is heavily regulated by regulatory agencies at the federal and state levels.
In addition, we must comply with privacy and data security laws and regulations at both the federal and state level. 16 Table of Contents The banking industry is heavily regulated by regulatory agencies at the federal and state levels.
This 2020 plan did not include an increase in the deposit insurance assessment rate. On June 21, 2022, however, the FDIC adopted an Amended Restoration Plan and notice of proposed rulemaking to increase the deposit insurance assessment rates as it was otherwise at risk of not reaching the statutory minimum by the statutory deadline of September 30, 2028.
On June 21, 2022, however, the FDIC adopted an Amended Restoration Plan and notice of proposed rulemaking to increase the deposit insurance assessment rates as it was otherwise at risk of not reaching the statutory minimum by the statutory deadline of September 30, 2028.
The Bank’s deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is an independent community bank that serves businesses and individuals in their respective market areas. Services offered are essentially the same as those offered by larger regional institutions that compete with the Bank.
The Bank’s deposits are insured up to applicable legal limits by the FDIC. The Bank is an independent community bank that serves businesses and individuals in their respective market areas. Services offered are essentially the same as those offered by larger regional institutions that compete with the Bank.
A second amendment creates a new class of QMs, called Seasoned QMs, which are essentially first-lien loans that could not be classified as QMs when originated for reason only that they had DTI ratios above 43%, but which have been held by the original creditor (or the first purchaser) for at least 36 months, during which time the borrower had no more than two 30-day delinquencies and no delinquencies of 60 days or more.
A second amendment creates a new class of qualified mortgages, called “seasoned qualified mortgages,”, which are essentially first-lien loans that could not be classified as qualified mortgages when originated for reason only that they had debt-to-income ratios above 43%, but which have been held by the original creditor (or the first purchaser) for at least 36 months, during which time the borrower had no more than two 30-day delinquencies and no delinquencies of 60 days or more.
The Risk Retention Rule also provides an exemption to the risk retention requirements for an ABS collateralized exclusively by Qualified Residential Mortgages (“QRMs”), and ties the definition of a QRM to the definition of a “qualified mortgage” established by the CFPB for purposes of evaluating a consumer’s ability to repay a mortgage loan.
The Risk Retention Rule also provides an exemption to the risk retention requirements for an asset-backed security collateralized exclusively by Qualified Residential Mortgages, and ties the definition of a Qualified Residential Mortgage to the definition of a “qualified mortgage” established by the CFPB for purposes of evaluating a consumer’s ability to repay a mortgage loan.
On October 18, 2022, the FDIC adopted a final rule that increases initial base deposit insurance assessment rates by 2 basis points, beginning with the first quarterly assessment period of 2023.
On October 18, 2022, the FDIC adopted a final rule that increased initial base deposit insurance assessment rates by 2 basis points, which began with the first quarterly assessment period of 2023.
This amendment essentially replaces the 43% DTI limit with an APR-based limitation, which for most loans 15 Table of Contents requires that the loan's annual percentage rate (APR) not exceed the average prime offer rate for a comparable transaction by 2.25 percentage points or more as of the date the interest rate is set.
This amendment essentially replaces the 43% debt-to-income limit with an annual percentage rate-based limitation, which for most loans requires that the loan’s annual percentage rate not exceed the average prime offer rate for a comparable transaction by 2.25 percentage points or more as of the date the interest rate is set.
Services to individuals include checking accounts, various savings programs, mortgage loans, home improvement loans, installment and other personal loans, credit cards, personal lines of credit, automobile and other consumer financing, safe deposit boxes, debit cards, 24-hour telephone banking, internet banking, mobile banking, and 24-hour automatic teller 4 Table of Contents machine services.
Services to individuals include checking accounts, various savings programs, mortgage loans, home improvement loans, installment and other personal loans, credit cards, personal lines of credit, automobile and other consumer financing, safe deposit boxes, debit cards, 24-hour telephone banking, internet banking, mobile banking and 24-hour ATM services.
The ATR/QM Rule defines a “qualified mortgage” to include a loan with a borrower debt-to-income (DTI) ratio of less than or equal to 43% or, alternatively, a loan eligible for purchase by Fannie Mae or Freddie Mac while they operate under federal conservatorship or receivership (the Fannie/Freddie QM Alternative), and loans that comply with similar ATR/QM rules established by the Federal Housing Administration, Veterans Administration, or United States Department of Agriculture.
The ATR/QM Rule defines a “qualified mortgage” to include a loan with a borrower debt-to-income ratio of less than or equal to 43% or, alternatively, a loan eligible for purchase by Fannie Mae or Freddie Mac while they operate under federal conservatorship or receivership (the “Fannie/Freddie QM Alternative”), and loans that comply with similar ATR/QM rules established by the Federal Housing Administration, Veterans Administration, or U.S.
The Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in 2018 (the “Regulatory Relief Act”) provides that for certain insured depository institutions and insured credit unions with less than $10 billion in total consolidated assets, mortgage loans that are originated and retained in portfolio will automatically be deemed to satisfy the “ability to repay” requirement.
The Regulatory Relief Act provides that for certain insured depository institutions and insured credit unions with less than $10 billion in total consolidated assets, mortgage loans that are originated and retained in portfolio will automatically be deemed to satisfy the “ability to repay” requirement.
Following a charter conversion occurring in 2021, the Bank is now a national banking association, chartered by and subject to the supervision of the Office of the Comptroller of the Currency (“OCC”). The deposits of the Bank are insured by the FDIC, so certain laws and regulations administered by the FDIC also govern its deposit taking operations.
The Bank is a national banking association, chartered by and subject to the supervision of the Office of the Comptroller of the Currency (the “OCC”). The deposits of the Bank are insured by the FDIC, so certain laws and regulations administered by the FDIC also govern its deposit-taking operations.
In particular, loans categorized as “high-volatility commercial real estate” loans (“HVCRE loans”), as defined pursuant to applicable federal regulations, are required to be assigned a 150% risk weighting, and require additional capital support.
In particular, loans categorized as “high-volatility CRE” loans, as defined pursuant to applicable federal regulations, are required to be assigned a 150% risk weighting, and require additional capital support.
State regulators have been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements.
The Regulatory Relief Act also directs the Comptroller of the Currency to conduct a study assessing the effect of the exemption described above on the amount of HMDA data available at the national and local level.
The Regulatory Relief Act also directs the OCC to conduct a study assessing the effect of the exemption described above on the amount of Home Mortgage Disclosure Act data available at the national and local level.
Loans sold in the secondary market are primarily sold to investors with which the Bank maintains a correspondent relationship. These loans are made in conformity with standard government-sponsored enterprise (“GSE”) underwriting criteria required by the investors to assure maximum eligibility for resale in the secondary market and are approved either by the Bank’s underwriter or the correspondent’s underwriter.
These loans are made in conformity with standard government-sponsored enterprise underwriting criteria required by the investors to assure maximum eligibility for resale in the secondary market and are approved either by the Bank’s underwriter or the correspondent’s underwriter.
The federal banking agencies have agreed to review the definition of QRMs in 2019, following the CFPB’s own review of its “qualified mortgage” regulation. For purposes of residential mortgage securitizations, the Risk Retention Rule took effect on December 24, 2015.
The federal banking agencies agreed to review the definition of Qualified Residential Mortgages in 2019, following the CFPB’s own review of its “qualified mortgage” regulation. For 15 Table of Contents purposes of residential mortgage securitizations, the Risk Retention Rule took effect on December 24, 2015. For all other securitizations, the rule took effect on December 24, 2016.
Deposit insurance is mandatory. We are required to pay assessments to the FDIC on a quarterly basis. The assessment amount is the product of multiplying the assessment base by the assessment amount.
Deposit Insurance Our deposits are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC. Deposit insurance is mandatory. We are required to pay assessments to the FDIC on a quarterly basis. The assessment amount is the product of multiplying the assessment base by the assessment amount.
Failure to submit or implement such a plan may subject the institution to regulatory sanctions. The Company, on behalf of the Bank, believes that the Bank meets substantially all standards that have been adopted. FDICIA also imposes capital standards on insured depository institutions. Deposit Insurance Our deposits are insured up to applicable limits by the DIF of the FDIC.
Failure to submit or implement such a plan may subject the institution to regulatory sanctions. The Federal Deposit Insurance Company Improvement Act of 1991 also imposes capital standards on insured depository institutions. The Company, on behalf of the Bank, believes that the Bank meets substantially all standards that have been adopted.
The risk of loss associated with real estate construction lending is controlled through conservative underwriting procedures such as loan to value ratios of 80% or less at origination, obtaining additional collateral when prudent, and closely monitoring construction projects to control disbursement of funds on loans. 5 Table of Contents The Bank originates residential mortgage loans that are to be held in our loan portfolio as well as loans that are intended for sale in the secondary market.
The risk of loss associated with real estate construction lending is controlled through conservative underwriting procedures such as loan to value ratios of 80% or less at origination, obtaining additional collateral when prudent, and closely monitoring construction projects to control disbursement of funds on loans. • Residential Mortgage Loans.
Site inspections are performed to determine pre-specified stages of completion before loan proceeds are disbursed. These loans typically have maturities of six to twelve months and may have fixed or variable rate features. Permanent financing options for individuals include fixed and variable rate loans with three- and five-year balloon features and one-, three- and five-year adjustable rate mortgage loans.
These loans typically have maturities of six to twelve months and may have fixed or variable rate features. Permanent financing options for individuals include fixed and variable rate loans with three- and five-year balloon features and one-, three- and five-year adjustable rate mortgage loans.
A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical 14 Table of Contents service providers fall victim to this type of cyber-attack.
A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.
Federal banking regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under applicable regulations, the Bank was “well capitalized,” which means it had a common equity Tier 1 capital ratio of 6.5% or higher; a Tier I risk-based capital ratio of 8.0% or higher; a total risk-based capital ratio of 10.0% or higher; a leverage ratio of 5.0% or higher; and was not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure.
Federal banking regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under applicable regulations, as of December 31, 2023, the Bank was “well capitalized,” which means it had a CET1 capital ratio of 6.5% or higher; a Tier I risk-based capital ratio of 8.0% or higher; a total risk-based capital ratio of 10.0% or higher; a leverage ratio of 5.0% or higher; and was not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. 11 Table of Contents As noted above, Basel III integrates the capital requirements into the prompt corrective action category definitions set forth below.
The Bank currently operates 31 full-service branches, 33 ATMs, 6 loan production offices, and provides a full range of commercial and consumer banking products and services to individuals, businesses, and other organizations in Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County, Anne Arundel County and Worcester County in Maryland, Kent County and Sussex County in Delaware and in Accomack County, Virginia.
The Bank currently operates 42 full-service branches, 42 automatic teller machines (an “ATM”), 3 interactive teller machines, 5 loan production offices, and provides a full range of commercial and consumer banking products and services to individuals, businesses, and other organizations in Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County, Anne Arundel County, Charles County, St Mary’s County, Calvert County and Worcester County in Maryland, Kent County and Sussex County in Delaware and Accomack County, Fredericksburg City, Stafford County and Spotsylvania County in Virginia.
Government securities, changes in the federal funds rate, changes in the discount rate of member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid for deposits.
These means are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid for deposits.
The Bank attempts to mitigate the risks associated with these loans through thorough financial analyses, conservative underwriting procedures, including loan to value ratio standards, obtaining additional collateral, closely monitoring construction projects to control disbursement of funds on loans, and management’s knowledge of the local economy in which the Bank lends.
The Bank attempts to mitigate the risks associated with these loans through thorough financial analyses, conservative underwriting procedures, including loan to value ratio standards, obtaining additional collateral and management’s knowledge of the local economy in which the Bank lends. • Residential Construction Loans. The Bank provides residential real estate construction loans to builders and individuals for single family dwellings.
Banking institutions had the option to opt out of including AOCI in CET1 capital if they elected to do so in their first 10 Table of Contents regulatory report following January 1, 2015. As permitted by Basel III, the Company and the Bank have elected to exclude AOCI from CET1.
Banking institutions had the option to opt out of including AOCI in CET1 capital if they elected to do so in their first regulatory report following January 1, 2015.
The FDIC final rule amends the assessment regulations to include a new term, “modifications to borrowers experiencing financial difficulty,” in two financial measures—the underperforming assets ratio and the higher-risk assets ratio—used to determine deposit insurance assessments for large and highly complex insured depository institutions. ​ 9 Table of Contents The Dodd-Frank Act also raised the limit for federal deposit insurance to $250,000 for most deposit accounts and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000.
The FDIC final rule amends the assessment regulations to include a new term, “modifications to borrowers experiencing financial difficulty,” in two financial measures—the underperforming assets ratio and the higher-risk assets ratio—used to determine deposit insurance assessments for large and highly complex insured depository institutions.
Due to the decline in the DIF reserve ratio below the statutory minimum of 1.35 percent as of June 30, 2020, caused by extraordinary growth in insured deposits during the first and second quarters of 2020, the FDIC established a Restoration Plan in September 2020 to restore the DIF reserve ratio to meet or exceed the statutory minimum of 1.35 percent within eight years.
Extraordinary growth in insured deposits during the first and second quarters of 2020 caused a decline in the DIF reserve ratio below the statutory minimum of 1.35% as of June 30, 2020.
Deposit Activities The Bank offers a full array of deposit products including checking, savings and money market accounts, and regular and IRA certificates of deposit. The Bank also offers the CDARS program, providing up to $50 million of FDIC insurance to our customers.
Deposit Activities The Bank offers a full array of deposit products including checking, savings and money market accounts, and regular and IRA certificates of deposit.
Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items. Under the Dodd-Frank Act, the FRB must apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions.
Under the Dodd-Frank Act, the FRB must apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions.
Repayment is often dependent upon the successful operation of the business and may be affected by adverse conditions in the local economy or real estate market.
Commercial loans generally involve a greater degree of credit risk than one to four family residential mortgage loans. Repayment is often dependent upon the successful operation of the business and may be affected by adverse conditions in the local economy or real estate market.
SUPERVISION AND REGULATION General The Company is a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the BHC Act and, as such, is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the FRB.
Our employees also play a significant role in maintaining existing relationships with customers while establishing new relationships to grow all areas of our businesses. 7 Table of Contents SUPERVISION AND REGULATION General The Company is a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the BHC Act and, as such, is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the FRB.
It is also the Bank’s general policy to obtain personal guarantees from the principals of the commercial loan borrowers. The Bank’s commercial real estate loans are primarily secured by land for residential and commercial development, agricultural purpose properties, service industry buildings such as restaurants and motels, retail buildings and general purpose business space.
The Bank’s CRE loans are primarily secured by land for residential and commercial development, agricultural purpose properties, service industry buildings such as restaurants and hotels, retail buildings and general purpose business space.
Anti-Terrorism, Money Laundering Legislation and OFAC The Bank is subject to the BSA and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”).
Most provisions of the final rule will become effective on January 1, 2026, and the data reporting requirements will become effective on January 1, 2027. Anti-Terrorism, Money Laundering Legislation and OFAC The Bank is subject to the BSA and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.
Governmental Monetary and Credit Policies and Economic Controls The earnings and growth of the banking industry and ultimately of the Company are affected by the monetary and credit policies of governmental authorities, including the FRB.
Governmental Monetary and Credit Policies and Economic Controls The earnings and growth of the banking industry and ultimately of the Company are affected by the monetary and credit policies of governmental authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures.
The Bank provides residential real estate construction loans to builders and individuals for single family dwellings. Residential construction loans are usually granted based upon “as completed” appraisals and are secured by the property under construction. Additional collateral may be taken if loan to value ratios exceed 80%.
Residential construction loans are usually granted based upon “as completed” appraisals and are secured by the property under construction. Additional collateral may be taken if loan to value ratios exceed 80%. Site inspections are performed to determine pre-specified stages of completion before loan proceeds are disbursed.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIf we are not able to successfully achieve these objectives, or if we have failed to accurately estimate the anticipated benefits of the proposed Merger, the anticipated benefits may not be realized fully or at all, they may take longer to realize than expected, and we may incur additional unforeseen expenses. ​ The integration process could result in the loss of key employees, diversion of management attention and resources, the disruption of the combined company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees. ​ Furthermore, the board of directors and executive leadership of the combined company will consist of former directors and executive officers from each of Shore and TCFC.
Biggest changeIt is possible that the process of merger integration of acquired companies could result in the loss of key employees, the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect the ability to maintain relationships with clients and employees or to achieve the anticipated benefits of the merger or acquisition.
These conditions could result in one or more of the following: • a decrease in the demand for our loans and leases and other products and services offered by us; • a decrease in our deposit balances due to overall reductions in the accounts of customers; • a decrease in the value of collateral securing our loans and leases; • an increase in the level of nonperforming and classified loans and leases; • an increase in provisions for credit losses and loan and lease charge-offs; • a decrease in net interest income derived from our lending and deposit gathering activities; • a decrease in the Company's stock price; • a decrease in our ability to access the capital markets; or • an increase in our operating expenses associated with attending to the effects of certain circumstances listed above.
These conditions could result in one or more of the following: • a decrease in the demand for our loans and other products and services offered by us; • a decrease in our deposit balances due to overall reductions in the accounts of customers; • a decrease in the value of collateral securing our loans and leases; • an increase in the level of nonperforming and classified loans and leases; • an increase in provisions for credit losses and loan and lease charge-offs; • a decrease in net interest income derived from our lending and deposit gathering activities; • a decrease in the Company’s stock price; • a decrease in our ability to access the capital markets; or • an increase in our operating expenses associated with attending to the effects of certain circumstances listed above.
While this provision has been re-enacted every year since 2014, and is expected to continue to be re-enacted in future federal spending bills, if Congress and the President fail to further renew the provision, then the ability of medical cannabis businesses to act in this area, and the Bank’s ability to provide banking products and services to such businesses, may be impeded.
While this provision has been re-enacted every year since 2014, and is expected to continue to be re-enacted in future federal spending bills, if Congress and the President fail to further renew the provision, then the ability of cannabis businesses to act in this area, and the Bank’s ability to provide banking products and services to such businesses, may be impeded.
The FRB and the FDIC, along with the other federal banking regulators, issued guidance in December 2006 entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” directed at institutions that have particularly high concentrations of commercial real estate loans within their lending portfolios.
The FRB and the FDIC, along with the other federal banking regulators, issued guidance in December 2006 entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” directed at institutions that have particularly high concentrations of CRE loans within their lending portfolios.
Because most of our loans are made to customers who reside in Maryland and Delaware, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose loan portfolios are geographically diverse.
Because most of our loans are made to customers who reside in Maryland, Delaware and Virginia, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose loan portfolios are geographically diverse.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions. The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions.
We are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions. The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions.
If we breach those representations and warranties, the buyers will be able to require us to repurchase the loans and we may incur a loss on the repurchase. We have not been required to repurchase any loans as of December 31, 2022.
If we breach those representations and warranties, the buyers will be able to require us to repurchase the loans and we may incur a loss on the repurchase. We have not been required to repurchase any loans as of December 31, 2023.
If sustained or 27 Table of Contents repeated, a system failure or service denial could result in a deterioration of our ability to provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
Federal bank regulatory guidelines identify institutions potentially exposed to commercial real estate concentration risk as those that have (i) experienced rapid growth in commercial real estate lending, (ii) notable exposure to a specific type of commercial real estate, (iii) total reported loans for construction, land development and other land loans representing 100% or more of the institution’s capital, or (iv) total commercial real estate loans representing 300% or more of the institution’s capital if the outstanding balance of the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
Federal bank regulatory guidelines identify institutions potentially exposed to CRE concentration risk as those that have (i) experienced rapid growth in CRE lending, (ii) notable exposure to a specific type of CRE, (iii) total reported loans for construction, land development and other land loans representing 100% or more of the institution’s capital or (iv) total CRE loans representing 300% or more of the institution’s capital if the outstanding balance of the institution’s CRE loan portfolio has increased 50% or more during the prior 36 months.
To the extent that any of the information contained in this document constitutes forward-looking statements, the risk factors below should be reviewed as cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.
To the extent that any of the information contained in this document constitutes forward-looking statements, the risk factors 17 Table of Contents below should be reviewed as cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. ​ 24 Table of Contents Income from mortgage-banking operations is volatile and we may incur losses with respect to our mortgage-banking operations that could negatively affect our earnings.
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. Income from mortgage-banking operations is volatile and we may incur losses with respect to our mortgage-banking operations that could negatively affect our earnings.
Any 29 Table of Contents regulatory action against us could have a material adverse effect on our business, financial condition and results of operations. Our FDIC deposit insurance premiums and assessments may increase. The deposits of the Bank are insured by the FDIC up to legal limits and, accordingly, subject to the payment of FDIC deposit insurance assessments.
Any regulatory action against us could have a material adverse effect on our business, financial condition and results of operations. Our FDIC deposit insurance premiums and assessments may increase. The deposits of the Bank are insured by the FDIC up to legal limits and, accordingly, subject to the payment of FDIC deposit insurance assessments.
The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, 26 Table of Contents result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability.
The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability.
You should consider carefully the risk factors included below together with all of the information included in or incorporated by reference into this annual report, as the same may be updated from time to time by our future filings with the SEC under the Exchange Act, before making a decision to invest in our common stock.
You should consider carefully the risk factors included below together with all of the information included in or incorporated by reference into this Annual Report on Form 10-K, as the same may be updated from time-to-time by our future filings with the SEC under the Exchange Act, before making a decision to invest in our common stock.
We may be subject to heightened supervisory scrutiny during future examinations and/or be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. Management cannot predict the extent to which this guidance will impact our operations or capital requirements.
We may be subject to heightened supervisory scrutiny during future examinations and/or be required to maintain higher levels of capital as a result of our CRE concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. Management cannot predict the extent to which this guidance will impact our operations or capital requirements.
This may lead to an increase in our nonperforming assets, a decrease in loan originations, or a reduction in the value of and income from our loans, any of which could have a material and negative effect on our results of operations.
This may lead to an increase in our nonperforming 18 Table of Contents assets, a decrease in loan originations, or a reduction in the value of and income from our loans, any of which could have a material and negative effect on our results of operations.
Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems, misappropriation of funds, and theft of proprietary Company or customer data.
Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems, misappropriation of funds, and theft 23 Table of Contents of proprietary Company or customer data.
To the extent that our activities, the activities of our customers, or the activities of our third-party service providers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities.
To the extent that our activities, the activities of our customers, or the activities of our third-party service providers involve the storage and transmission of confidential information, 24 Table of Contents security breaches and viruses could expose us to claims, litigation and other possible liabilities.
Additionally, as the possession and use of cannabis remains illegal under the CSA, we may be deemed to be aiding and abetting illegal activities through the services that we provide to these customers and could have legal action taken against us by the Federal government, including imprisonment and fines.
Additionally, as the possession and use of cannabis remains illegal under the Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services that we provide to these customers and could have legal action taken against us by the Federal government, including imprisonment and fines.
This guidance suggests that these institutions face a heightened risk of financial difficulties in the event of adverse changes in the economy and commercial real estate markets. Accordingly, the guidance suggests that institutions whose concentrations exceed certain percentages of capital should implement heightened risk management practices appropriate to their concentration risk.
This guidance suggests that these institutions face a heightened risk of financial difficulties in the event of adverse changes in the economy and CRE markets. Accordingly, the guidance suggests that institutions whose concentrations exceed certain percentages of capital should implement heightened risk management practices appropriate to their concentration risk.
ASC 320 requires that unrealized gains and losses in the estimated value of the available-for-sale portfolio be “marked to market” and reflected as a separate item in stockholders’ equity (net of tax) as accumulated other comprehensive income (loss). The remaining debt securities are classified as held-to-maturity in accordance with ASC 320 and are stated at amortized cost.
ASC 320 requires that unrealized gains and losses in the estimated value of the available-for-sale portfolio be “marked to market” and reflected as a separate item in stockholders’ equity (net of tax) as AOCI (loss). The remaining debt securities are classified as held-to-maturity in accordance with ASC 320 and are stated at amortized cost.
Department of Justice (“DOJ”) rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the CSA against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion.
Department of Justice (“DOJ”) rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the Controlled Substances Act against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion.
Under the terms of our Junior Subordinated Debt Securities due 2035 (the “2035 Debentures”), if (i) there has occurred and is continuing an event of default; (ii) we are in default with respect to payment of any obligations under the related guarantee; or (iii) we have given notice of our election to defer payments of interest on the 2035 Debentures by extending the interest distribution period as provided in the indenture governing the 2035 Debentures and such period, or any extension thereof, has commenced and is continuing, then we may not, among other things, declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of our capital stock, including our common stock.
Under the terms of our subordinated debentures, if (i) there has occurred and is continuing an event of default; (ii) we are in default with respect to payment of any obligations under the related guarantee; or (iii) we have given notice of our election to defer payments of interest on the subordinated debentures by extending the interest distribution period as provided in the indentures governing the subordinated debentures and such period, or any extension thereof, has commenced and is continuing, then we may not, among other things, declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of our capital stock, including our common stock.
All of these inflationary risks for our business customer base can be financially detrimental, leading to increased likelihood that the customer may default on a loan. In addition, sustained inflationary pressures have resulted in the FRB increasing interest rates by 475 basis points since January 1, 2022 with current federal funds rate range of between 4.75% to 5.00%.
All of these inflationary risks for our business customer base can be financially detrimental, leading to increased likelihood that the customer may default on a loan. In addition, sustained inflationary pressures have resulted in the FRB increasing interest rates by 525 basis points since January 1, 2022 with current federal funds rate range of between 5.25% to 5.50%.
At December 31, 2022, we had recorded goodwill of $63.3 million and other intangible assets of $5.5 million, representing approximately 17.4% and 1.5% of stockholders’ equity, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
At December 31, 2023, we had recorded goodwill of $63.3 million and other intangible assets of $48.1 million, representing approximately 12.4% and 9.4% of stockholders’ equity, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Equity securities with readily determinable fair values are recorded at fair value with changes in fair value recorded in earnings. Stockholders’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments. At December 31, 2022, the Company’s accumulated other comprehensive loss amounted to $9.0 million.
Equity securities with readily determinable fair values are recorded at fair value with changes in fair value recorded in earnings. Stockholders’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments. At December 31, 2023, the Company’s accumulated other comprehensive loss amounted to $7.5 million.
When negative evidence (e.g., cumulative losses in recent years, history of operating loss or tax credit carry forwards expiring unused) exists, more positive evidence than negative evidence will be necessary. At December 31, 2022, our gross deferred tax assets were approximately $15.1 million.
When negative evidence (e.g., cumulative losses in recent years, history of operating loss or tax credit carry forwards expiring unused) exists, more positive evidence than negative evidence will be necessary. At December 31, 2023, our gross deferred tax assets were approximately $67.8 million.
The guidance provides that banking regulators may require such institutions to reduce their concentrations and/or maintain higher capital ratios than institutions with lower concentrations in commercial real estate.
The guidance provides that banking regulators may require such institutions to reduce their concentrations and/or maintain higher capital ratios than institutions with lower concentrations in CRE.
These laws could delay or prevent an acquisition. ​ We may issue debt and equity securities that are senior to the common stock as to distributions and in liquidation, which could negatively affect the value of the common stock.
These laws include the BHC Act and the Change in Bank Control Act. These laws could delay or prevent an acquisition. We may issue debt and equity securities that are senior to the common stock as to distributions and in liquidation, which could negatively affect the value of the common stock.
In assessing whether the impairment of an investment security is other-than-temporary, 22 Table of Contents management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term.
In assessing whether the impairment of an investment security is a credit loss or other market factors, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term.
Our exposure to operational, technological and organizational risk may adversely affect us. We are exposed to many types of operational risks, including reputation, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, clerical or record-keeping errors, and errors resulting from faulty or disabled computer or telecommunications systems.
We are exposed to many types of operational risks, including reputation, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, clerical or record-keeping errors, and errors resulting from faulty or disabled computer or telecommunications systems.
There was a valuation allowance of deferred taxes of $791 thousand recorded at December 31, 2022 as management believes it is more likely than not that net operating losses for the parent company only will not be realized for state income tax purposes.
There was a valuation allowance of deferred taxes of $1.0 million recorded at December 31, 2023 as management believes it is more likely than not that net operating losses for the holding company only will not be realized for state income tax purposes.
Any change in the federal government’s enforcement position, could cause us to immediately cease providing banking services to the medical-use cannabis industry in Maryland.
Any change in the federal government’s enforcement position could cause us to immediately cease providing banking services to the medical and adult-use cannabis industry in states within the United States.
As climate risk is interconnected with all key risk types, we have developed and continue to enhance processes to embed climate risk considerations into our risk management strategies established for risks such as market, credit and operational risks; however, because the timing and severity of climate change may not be predictable, our risk management strategies may not be effective in mitigating climate risk exposure. ​ Risks Relating to the Regulation of our Industry We operate in a highly regulated environment, which could restrain our growth and profitability.
As climate risk is interconnected with all key risk types, we have developed and continue to enhance processes to embed climate risk considerations into our risk management strategies established for risks such as market, credit and operational risks; however, because the timing and severity of climate change may not be predictable, our risk management strategies may not be effective in mitigating climate risk exposure.
Finally, if we are required to place greater reliance on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our profitability would be adversely affected.
Finally, if we are required to place greater reliance on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our profitability would be adversely affected. The cost savings that we estimate for mergers and acquisitions may not be realized.
We have deposit and loan customers that are licensed by the state of Maryland to do business in the cannabis industry as growers, processors, and dispensaries. While cannabis is legal in the state of Maryland, it remains classified as a Schedule I controlled substance under the Federal Controlled Substances Act (“CSA”).
We have deposit and loan customers that are licensed in several states within the United States to do business in the cannabis industry as growers, processors, and dispensaries. While cannabis is legal in these states of operation, it remains classified as a Schedule I controlled substance under the Controlled Substances Act.
Sources of global economic and market instability include, but are not limited to, the potential economic slowdown in United Kingdom, Europe and the United States, the impact of trade negotiations, economic conditions in China, including the global economic impacts of the Chinese economy, China’s regulation of commerce, escalating military tensions in Europe as a result of Russia's invasion of Ukraine, and the effects of the recent pandemic or other health crises.
Sources of global economic and market instability include, but are not limited to, the potential economic slowdown in United Kingdom, Europe and the United States, the impact of trade negotiations, economic conditions in China, including the global economic impacts of the Chinese economy, China’s regulation of commerce, the war between Russia and Ukraine, the war in the Middle East and the effects of the recent pandemic or other health crises.
Federal prosecutors have significant discretion and there can be no assurance that the federal prosecutor for the District of Maryland will not choose to strictly enforce the federal laws governing cannabis, including medical-use cannabis, or that the federal courts in Maryland will follow the Ninth Circuit’s ruling in USA v. McIntosh .
Federal prosecutors have significant discretion and there can be no assurance that the federal prosecutor for any state in which our customers operate will not choose to strictly enforce the federal laws governing cannabis, including adult-use and medical-use cannabis, or that the federal courts in these states will follow the Ninth Circuit’s ruling in USA v. McIntosh.
The Department of Justice and other federal agencies are responsible for enforcing these laws and regulations.
The DOJ and other federal agencies are responsible for enforcing these laws and regulations.
Risks Relating to the Company’s Securities Our common stock is not insured by any governmental entity. Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental entity. Investment in our common stock is subject to risk, including possible loss.
Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental entity. Investment in our common stock is subject to risk, including possible loss. Our ability to pay dividends is limited by law and contract.
The BSA, the USA PATRIOT Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate.
The BSA, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate.
We rely on customer deposits, advances from the FHLB, and lines of credit at other financial institutions to fund our operations.
Our funding sources may prove insufficient to replace deposits and support our future growth. We rely on customer deposits, advances from the FHLB, and lines of credit at other financial institutions to fund our operations.
Further, any new laws, rules and regulations, such as the Dodd-Frank Act, could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition and results of operations. Federal regulators periodically examine our business, and we may be required to remediate adverse examination findings.
Further, any new laws, rules and regulations, such as the Dodd-Frank Act, could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition and results of operations.
As of December 31, 2022, we had classified 12.9% of our debt securities as available-for-sale pursuant to the Accounting Standards Codification (“ASC”) Topic 320 (“ASC 320”) of the Financial Accounting Standards Board (“FASB”) relating to accounting for investments.
As of December 31, 2023, we had classified 17.7% of our debt securities as available-for-sale pursuant to the Accounting Standards Codification Topic 320 (“ASC 320”) of the FASB relating to accounting for investments.
Our ability to pay dividends is limited by law and contract. The continued ability to pay dividends to shareholders depends in part on dividends from the Bank. The amount of dividends that the Bank may pay to the Company is limited by federal laws and regulations.
The continued ability to pay dividends to shareholders depends in part on dividends from the Bank. The amount of dividends that the Bank may pay to the Company is limited by federal laws and regulations. The ability of the Bank to pay dividends is also subject to its profitability, financial condition and cash flow requirements.
Furthermore, banking laws impose notice, approval, and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or its holding company. These laws include the BHC Act and the Change in Bank Control Act.
In addition, certain provisions of Maryland law may delay, discourage or prevent an attempted acquisition or change in control. Furthermore, banking laws impose notice, approval, and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or its holding company.
Drug Enforcement Administration from using funds appropriated by that bill to prevent states from implementing their medical-use cannabis laws. This provision was recently renewed as part of the Consolidated Appropriations Act of 2022.
Congress has enacted an omnibus spending bill that includes a provision prohibiting the DOJ and the U.S. Drug Enforcement Administration from using funds appropriated by that bill to prevent states from implementing their medical-use cannabis laws. This provision was recently renewed as part of the annual federal Consolidated Appropriations Act.
Political and electoral changes, developments, conflicts, and conditions have in the past introduced, and may in the future introduce, additional uncertainty which may also affect our operating results. 19 Table of Contents Our performance could be negatively affected to the extent there is deterioration in business and economic conditions, including persistent inflation, supply chain issues or labor shortages, which have direct or indirect material adverse impacts on us, our customers, and our counterparties.
Our performance could be negatively affected to the extent there is deterioration in business and economic conditions, including persistent inflation, supply chain issues or labor shortages, which have direct or indirect material adverse impacts on us, our customers, and our counterparties.
We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to customers, we may assume that a customer’s audited financial statements conform with U.S.
We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.
The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service.
FinCEN is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the DOJ, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the OFAC.
Any changes in these risk factors, in current accounting principles or interpretations of these principles could impact our assessment of fair value and thus the determination of other-than-temporary impairment of the securities in the investment securities portfolio. Write-downs of investment securities would negatively affect our earnings and regulatory capital ratios.
Any changes in these risk factors, in current accounting principles or interpretations of these principles could impact our assessment of fair value and thus the determination of credit losses of the securities in the investment securities portfolio.
In some cases, there could be a requirement to apply a new or revised accounting standard retroactively, resulting in the restatement of prior period financial statements. Our future success will depend on our ability to compete effectively in the highly competitive financial services industry. We face substantial competition in all phases of our operations from a variety of different competitors.
Our future success will depend on our ability to compete effectively in the highly competitive financial services industry. We face substantial competition in all phases of our operations from a variety of different competitors.
Future sales of our common stock or other securities may dilute the value and adversely affect the market price of our common stock. In many situations, the board of directors has the authority, without any vote of our shareholders, to issue shares of authorized but unissued stock, including shares authorized and unissued under our equity incentive plans.
In many situations, the board of directors has the authority, without any vote of our shareholders, to issue shares of authorized but unissued stock, including shares authorized and unissued under our equity incentive plans. In the future, additional securities may be issued, through public or private offerings, in order to raise additional capital.
The cost savings that we estimate for mergers and acquisitions may not be realized. ​ The success of our mergers and acquisitions may depend, in part, on the ability to realize the estimated cost savings from combining the acquired businesses with our existing operations.
The success of our mergers and acquisitions may depend, in part, on the ability to realize the estimated cost savings from combining the acquired businesses with our existing operations. It is possible that the potential cost savings could turn out to be more difficult to achieve than anticipated.
Any change in position or potential action taken against us could result in significant financial damage to us and our stockholders. 25 Table of Contents The FinCEN published guidelines in 2014 for financial institutions servicing state legal cannabis business.
Any change in the federal government’s position on adult-use cannabis enforcement, or a change in federal appropriations law, could result in significant financial damage to us and our stockholders. FinCEN published guidelines in 2014 for financial institutions servicing state legal cannabis business.
Stock market downturns often signal broader economic deterioration and/or a downward trend in business earnings which may adversely affect businesses’ ability to raise capital and/or service their debts.
Stock market downturns often signal broader economic deterioration and/or a downward trend in business earnings which may adversely affect businesses’ ability to raise capital and/or service their debts. Political and electoral changes, developments, conflicts, and conditions have in the past introduced, and may in the future introduce, additional uncertainty which may also affect our operating results.
GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or are materially misleading.
Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or are materially misleading. Our exposure to operational, technological and organizational risk may adversely affect us.
If the estimates turn out to be incorrect or there is an inability to combine successfully, the anticipated cost savings may not be realized fully or at all or may take longer to realize than expected. ​ Combining acquired businesses may be more difficult, costly, or time-consuming than expected, or could result in the loss of customers. ​ It is possible that the process of merger integration of acquired companies could result in the loss of key employees, the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect the ability to maintain relationships with clients and employees or to achieve the anticipated benefits of the merger or acquisition.
If the estimates turn out to be incorrect or there is an inability to combine successfully, the anticipated cost savings may not be realized fully or at all or may take longer to realize than expected. Combining acquired businesses may be more difficult, costly, or time-consuming than expected, or could result in the loss of customers.
The impact of the DOJ’s rescission of the Cole Memo and related memoranda is unclear, but may result in the DOJ increasing its enforcement actions against the regulated cannabis industry generally. As in past years, the U.S. Congress has enacted an omnibus spending bill that includes a provision prohibiting the DOJ and the U.S.
The impact of the DOJ’s rescission of the Cole Memo and related memoranda is unclear, but may result in the DOJ increasing its enforcement actions against the regulated cannabis industry generally.
Our results of operations are significantly impacted by the spread between the interest rates earned on assets and the interest rates paid on deposits and other interest-bearing liabilities (i.e., net interest income), including advances from the Federal Home Loan Bank (the “FHLB”) of Atlanta.
Our results of operations are significantly impacted by the spread between the interest rates earned on assets and the interest rates paid on deposits and other interest-bearing liabilities, including advances from the FHLB of Atlanta. Interest rate risk arises from mismatches (i.e., the interest sensitivity gap) between the dollar amount of repricing or maturing of assets and liabilities.
Congress will extend this provision or that U.S. Federal courts located outside the Ninth Circuit will follow the ruling in USA v. McIntosh . As of the date of filing this Annual Report on Form 10-K, we are aware of no federal or state court in or for Maryland that has addressed the merits of the McIntosh ruling.
As of the date of filing this Annual Report on Form 10-K, we are aware of no federal or state court in or for the states in which our customers operate that has addressed the merits of the McIntosh ruling.
To the extent such conditions exist or worsen, we could experience adverse effects on our business, financial condition, and results of operations. ​ Adverse developments affecting financial institutions or the financial services industry generally, such as actual events or concerns involving liquidity, defaults or non-performance, could adversely affect our operations and lidquidity. ​ Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions for the financial services industry generally, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions for the financial services industry generally, or concerns or rumors about any events of these kinds, including the resulting media coverage, have in the past and may in the future lead to market-wide liquidity problems and erode customer confidence in the banking system.
Lack of market activity with respect to some securities has, in certain circumstances, required us to base our fair market valuation on unobservable inputs.
At times,a lack of market activity with respect to some securities has, in certain circumstances, required us to base our fair market valuation on unobservable inputs (“Level 3” in fair value hierarchy). At December 31, 2023, the Bank had no Level 3 securities.
Failure to compete effectively to attract new or to retain existing, clients may reduce or limit our net income and our market share and may adversely affect our results of operations, financial condition and growth. 23 Table of Contents Our funding sources may prove insufficient to replace deposits and support our future growth.
Our future growth and success will depend on our ability to compete effectively in this highly competitive financial services environment. Failure to compete effectively to attract new or to retain existing, clients may reduce or limit our net income and our market share and may adversely affect our results of operations, financial condition and growth.
The U.S. Federal Reserve Board announced a program to provide up to $25 billion of loans to financial institutions secured by such government securities held by financial institutions to mitigate the risk of potential losses on the sale of such instruments.
The FRB announced a program to provide up to $25 billion of loans to financial institutions secured by such government securities held by financial institutions to mitigate the risk of potential losses on the sale of such instruments. However, widespread demands for customer withdrawals or other needs of financial institutions for immediate liquidity may exceed the capacity of such program.
It is possible that the potential cost savings could turn out to be more difficult to achieve than anticipated. The cost savings estimates also depend on the ability to combine the businesses in a manner that permits those cost savings to be realized.
The cost savings estimates also depend on the ability to combine the businesses in a manner that permits those cost 21 Table of Contents savings to be realized.
Further, we cannot guarantee that any risk management practices we implement will be effective in preventing losses resulting from concentrations in our commercial real estate portfolio. Interest rates and other economic conditions will impact our results of operations.
Further, we cannot guarantee that any risk management practices we implement will be effective in preventing losses resulting from concentrations in our CRE portfolio. The Bank may experience credit losses in excess of its allowances, which would adversely impact our financial condition and results of operations.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could 30 Table of Contents also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition and results of operations.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
Interest rate risk arises from mismatches (i.e., the interest sensitivity gap) between the dollar amount of repricing or maturing assets and liabilities. If more assets reprice or mature than liabilities during a falling interest rate environment, then our earnings could be negatively impacted.
If more assets reprice or mature than liabilities during a falling interest rate environment, then our earnings could be negatively impacted. Conversely, if more liabilities reprice or mature than assets during a rising interest rate environment, then our earnings could be negatively impacted.
Although we are currently unable to assess the ultimate impact of the transition from LIBOR, the failure to adequately manage the transition could have a material adverse effect on our business, financial condition, and results of operations. ​ Climate change manifesting as physical or transition risks could adversely affect our operations, businesses and customers. ​ There is an increasing concern over the risks of climate change and related environmental sustainability matters.
Climate change manifesting as physical or transition risks could adversely affect our operations, businesses and customers. There is an increasing concern over the risks of climate change and related environmental sustainability matters.
The decision may be made to limit the payment of dividends even when the legal ability to pay them exists, in order to retain earnings for other uses. Our 2035 Debentures contain restrictions on our ability to declare and pay dividends on or repurchase our common stock.
There is no assurance that the Bank will be able to pay dividends to the Company in the future. The decision may be made to limit the payment of dividends even when the legal ability to pay them exists, in order to retain earnings for other uses.
Banking is highly regulated under federal and state law. As such, we are subject to extensive regulation, supervision and legal requirements that govern almost all aspects of our operations. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional operating costs.
Risks Relating to the Regulation of our Industry We operate in a highly regulated environment, which could restrain our growth and profitability. Banking is highly regulated under federal and state law. As such, we are subject to extensive regulation, supervision and legal requirements that govern almost all aspects of our operations.
In addition, option holders may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable terms. 31 Table of Contents Provisions in our governing documents and Maryland law may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies. ​ Our corporate organizational documents and provisions of federal and state law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition that you may favor or an attempted replacement of our board of directors or management. ​ In addition, certain provisions of Maryland law may delay, discourage or prevent an attempted acquisition or change in control.
Our corporate organizational documents and provisions of federal and state law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition that you may favor or an attempted replacement of our board of directors or management.
For example, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. Similarly, on March 12, 2023, Signature Bank was placed into receivership. Despite subsequent actions taken by the U.S. Department of the Treasury, the U.S.
For example, on March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, on March 12, 2023, Signature Bank was closed by the New York State Department of Financial Services and on May 1, 2023, First Republic Bank was closed by the California Department of Financial Protection and Innovation, and in each case the FDIC was appointed as receiver for the failed institution.
We cannot guarantee that any risk management practices that we implement to address our geographic and loan concentrations will be effective in preventing losses relating to our loan portfolio.
We cannot guarantee that any risk management practices that we implement to address our geographic and loan concentrations will be effective in preventing losses relating to our loan portfolio. 19 Table of Contents Our concentrations of CRE loans could subject us to increased regulatory scrutiny and directives, which could force us to preserve or raise capital and/or limit our future commercial lending activities.
Impairment of investment securities, goodwill, other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations. We are required to record a non-cash charge to earnings when management determines that an investment security is other-than-temporarily impaired.
Write-downs of investment securities would negatively affect our earnings and regulatory capital ratios. 20 Table of Contents Impairment of investment securities, goodwill, other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.
In the future, additional securities may be issued, through public or private offerings, in order to raise additional capital. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of our common stock.
Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of our common stock. In addition, option holders may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable terms.
In response to inflationary pressures, the FRB has increased interest rates by 475 basis points since January 1, 2022 with a current federal funds rate range of between 4.75% to 5.00%. Increases in interest rates could adversely affect borrowers’ ability to pay the principal or interest on existing loans or reduce their desire to borrow more money.
Increases in interest rates could adversely affect borrowers’ ability to pay the principal or interest on existing loans or reduce their desire to borrow more money.
Federal Reserve and the FDIC will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions in a timely fashion or at all. ​ 20 Table of Contents If such levels of market disruption and volatility continue, there can be no assurance that we will not experience adverse effects, which may materially affect the market price of our common stock and/or our liquidity, financial condition and profitability. ​ A majority of our business is concentrated in Maryland and Delaware, a significant amount of which is concentrated in real estate lending, so a decline in the local economy and real estate markets could adversely impact our financial condition and results of operations.
If such levels of market disruption and volatility continue, there can be no assurance that we will not experience adverse effects, which may materially affect the market price of our common stock and/or our liquidity, financial condition and profitability.
Federal Reserve and the FDIC to ensure that all depositors of SVB had access to all of their cash deposits following the closure of SVB, uncertainty remains with respect to the health of the U.S. banking system, particularly around liquidity, uninsured deposits and deposit concentration. ​ Inflation and rapid increases in interest rates have led to a decline in the fair value of securities portfolios with yields below current market interest rates.
Inflation and rapid increases in interest rates have led to a decline in the fair value of securities portfolios with yields below current market interest rates.

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Item 2. Properties

Properties — owned and leased real estate

2 edited+4 added−4 removed0 unchanged
Biggest changeShore United Bank, N.A. ​ Branches ​ ​ ​ ​ ​ Main Office (1) ​ Elliott Road Branch (1) ​ Tred Avon Square Branch (1) 18 East Dover Street ​ 8275 Elliott Road ​ 212 Marlboro Road Easton, Maryland 21601 ​ Easton, Maryland 21601 ​ Easton, Maryland 21601 ​ ​ ​ ​ ​ St.
Biggest changeMaryland Branch Locations Main Office (1) Chester Branch (1) Crofton Branch (2) 18 East Dover Street 300 Castle Marina Road 2151 Defense Highway Easton, Maryland 21601 Chester, Maryland 21619 Crofton, Maryland 21114 Tred Avon Square Branch (1) Washington Square Branch (1) Waldorf Branch (1) 212 Marlboro Road 899 Washington Avenue 3035 Leonardtown Road Easton, Maryland 21601 Chestertown, Maryland 21620 Waldorf, Maryland 20601 St.
Item 2. Properties. Our offices are listed in the tables below. The address of the Company and Bank’s main office is 18 East Dover Street in Easton, Maryland. The Company owns the real property at 28969 Information Lane in Easton, Maryland, which also houses the Operations, Information Technology, and Human Resources departments of the Company and its subsidiaries.
Item 2. Properties. Our o ffices are listed in the tables below. The address of the Company and Bank’s main office is 18 East Dover Street in Easton, Maryland.
Removed
Michaels Branch (2) ​ Sunburst Branch (1) ​ Centreville Branch (1) 1013 South Talbot Street ​ 424 Dorchester Avenue ​ 109 North Commerce Street St.
Added
Michaels Branch (2) Arbutus Branch (1) Leonardtown Branch (1) 1013 South Talbot Street 1101 Maiden Choice Lane 25395 Point Lookout Road St.
Removed
Michaels, Maryland 21663 ​ Cambridge, Maryland 21613 ​ Centreville, Maryland 21617 ​ ​ ​ ​ ​ Route 213 South Branch (1) ​ Chester Branch (1) ​ Denton Branch (1) 2609 Centreville Road ​ 300 Castle Marina Road ​ 850 South 5 th Avenue Centreville, Maryland 21617 ​ Chester, Maryland 21619 ​ Denton, Maryland 21629 ​ ​ ​ ​ ​ Grasonville Branch (1) ​ Stevensville Branch (1) ​ Tuckahoe Branch (1) 202 Pullman Crossing ​ 408 Thompson Creek Road ​ 22151 WES Street Grasonville, Maryland 21638 ​ Stevensville, Maryland 21666 ​ Ridgely, Maryland 21660 ​ ​ ​ ​ ​ Washington Square Branch (1) ​ Felton Branch (2) ​ Milford Branch (2) 899 Washington Avenue ​ 120 West Main Street ​ 698-A North Dupont Boulevard Chestertown, Maryland 21620 ​ Felton, Delaware 19943 ​ Milford, Delaware 19963 ​ ​ ​ ​ ​ Camden Branch (1) ​ Dover Branch (1) ​ Arbutus Branch (1) 4580 South DuPont Highway ​ 800 S.
Added
Michaels, Maryland 21663 Baltimore, Maryland 21229 Leonardtown, Maryland 20650 Elliott Road Branch (1) Elkridge Branch (1) Bryan’s Road Branch (1) 8275 Elliott Road 6050 Marshalee Drive 8010 Matthews Road Easton, Maryland 21601 Elkridge, Maryland 21075 Bryans Road, MD 20616 Sunburst Branch (1) Owings Mills Branch (1) Dunkirk Branch (2) 424 Dorchester Avenue 9612 Reisterstown Road 10321 Southern Maryland Blvd Cambridge, Maryland 21613 Owings Mills, Maryland 21117 Dunkirk, Maryland 20754 West Ocean City Branch (2) Annapolis Branch (1) Lexington Park Branch (1) 12905-B Ocean Gateway 1917 West Street 22730 Three Notch Road Ocean City, Maryland 21842 Annapolis, Maryland 21401 California, Maryland 20619 Ocean City Branch (2) Edgewater Branch (2) La Plata Branch (1) 3409 Coastal Highway 3083 Solomon’s Island Road 101 Drury Drive Ocean City, Maryland 21842 Edgewater, Maryland 21037 La Plata, Maryland 20646 Centreville Branch (1) Westgate Branch (1) Charlotte Hall Branch (1) 109 North Commerce Street 200 Westgate Circle 30165 Three Notch Road Centreville, Maryland 21617 Annapolis, Maryland 21401 Charlotte Hall, Maryland 20622 Stevensville Branch (1) Glen Burnie Branch (1) Prince Frederick Branch (2) 408 Thompson Creek Road 413 Crain Highway, S.E. 200 Market Square Drive Stevensville, Maryland 21666 Glen Burnie, Maryland 21061 Prince Frederick, Maryland 20678 Tuckahoe Branch (1) Severna Park Branch (2) Lusby Branch (2) 22151 Wes Street 598 Benfield Road 11725 Rousby Hall Road Ridgely, Maryland 21660 Severna Park, Maryland 21146 Lusby, Maryland 20657 Route 213 South Branch (1) Lothian Branch (2) La Plata Downtown Branch (1) 2609 Centreville Road 5401 Southern Maryland Blvd 202 Centennial Street Centreville, Maryland 21617 Lothian, Maryland 20711 La Plata, Maryland 20646 Denton Branch (1) 850 South 5 th Avenue Denton, Maryland 21629 30 Table of Contents Delaware Branch Locations Felton Branch (2) Camden Branch (1) Rehoboth Beach Branch (2) 120 West Main Street 4580 South DuPont Highway 19358 Miller Road Felton, Delaware 19943 Camden, Delaware 19934 Rehoboth Beach, Delaware 19971 Milford Branch (2) Governors Ave Branch (1) 698-A North Dupont Boulevard 800 South Governors Avenue Milford, Delaware 19963 Dover, Delaware 19904 Virginia Branch Locations Onley Branch (2) Fredericksburg Downtown Branch (1) Fredericksburg Branch (1) 25306 Lankford Highway 425 William Street 5831 Plank Road Onley, Virginia 23418 Fredericksburg, Virginia 22401 Fredericksburg, Virginia 22407 ATMs (standalone) University of Maryland Shore Medical Center at Easton 219 South Washington Street Easton, Maryland 21601 Offices Administrative Office (1) Administrative Office (1) Administrative Office (2) 28969 Information Lane 23 South Harrison Street 405 West Bell Road, Unit 4 and 5 Easton, Maryland 21601 Easton, Maryland 21601 Ridgely, Maryland 21660 Commercial Lending Office (2) Charlottesville Commercial Lending Office (2) Fredericksburg Commercial Lending Office (2) Middletown 1434 Rolkin Court, Suite 301 10 Chatham Heights Road, Suite 104 102 Sleepy Hollow, Unit 204 Charlottesville, Virginia 22911 Fredericksburg, Virginia 22405 Middletown, Delaware 19709 Commercial Lending Office (2) Prince Frederick Mortgage Loan Office (2) Frederick Division Office - Wye Financial Partners (2) 995 N.
Removed
Governors Avenue ​ 1101 Maiden Choice Lane Camden, Delaware 19934 ​ Dover, Delaware 19904 ​ Baltimore, MD 21229 ​ ​ ​ ​ ​ Elkridge Branch (1) ​ Owings Mills Branch (1) ​ Onley Branch (2) 6050 Marshalee Drive ​ 9612 Reisterstown Road ​ 25306 Lankford Highway Elkridge, MD 21075 ​ Owings Mills, MD 21117 ​ Onley, VA 23418 ​ ​ ​ ​ ​ West Ocean City Branch (2) ​ Westgate Branch (1) ​ Annapolis Branch (1) 12905B Ocean Gateway ​ 200 Westgate Circle ​ 1917 West Street Ocean City, MD 21842 ​ Annapolis, MD 21401 ​ Annapolis, MD 21401 ​ ​ ​ ​ ​ Crofton Branch (2) ​ Edgewater Branch (2) ​ Glen Burnie Branch (1) 2151 Defense Highway ​ 3083 Solomon’s Island Road ​ 413 Crain Highway, S.E.
Added
Prince Frederick Blvd, Suite 105 5291 Corporate Drive, Suite 202 16 North Washington Street, Suite 1 Prince Frederick, Maryland 20678 Frederick, Maryland 21703 Easton, Maryland 21601 _______________________________ (1) Branch/Office is owned by Company. (2) Branch/Office is leased by Company.
Removed
Crofton, MD 21114 ​ Edgewater, MD 21037 ​ Glen Burnie, MD 21061 ​ ​ ​ ​ ​ Lothian Branch (2) ​ Severna Park Branch (2) ​ Ocean City Branch (2) 5401 Southern Maryland B Lothian, MD 20711 ​ 598 Benfield Road Severna Park, MD 21146 ​ 3409 Coastal Highway Ocean City, MD 21842 ​ ​ ​ ​ ​ Rehoboth Beach Branch (2) ​ ​ ​ ​ 19358 Miller Road Rehoboth Beach, DE 19971 ​ ​ ​ ​ ​ ​ 34 Table of Contents ATMs (standalone) University of Maryland Shore Medical Center at Easton ​ ​ ​ ​ 219 South Washington Street ​ ​ ​ ​ Easton, Maryland 21601 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Offices ​ ​ Division Office - Wye Financial Partners (2) 16 North Washington Street, Suite 1 Easton, Maryland 21601 ​ Loan Production Office – Middletown (2) 102 Sleepy Hollow Unit 204 Middletown, Delaware 19709 ​ ​ ​ ​ ​ ​ ​ Administrative Office (1) – 28969 Information Lane Easton, Maryland 21601 ​ Administrative Office (1) – 23 South Harrison Street Easton, Maryland 21601 ​ ​ ​ ​ ​ ​ ​ Mortgage Loan Office (2) – Greenbelt 5411 Ivy Lane Suite 5056 Greenbelt, MD 20770 ​ Mortgage Loan Office (2) – Frederick 5291 Corporate Drive Suite 202 Frederick, MD 21703 ​ Mortgage Loan Office (2) – Rehoboth Beach 19716 Sea Air Ave#3 Rehoboth Beach, DE 19971 (1) Branch/Office is owned by Company (2) Branch/Office is leased by Company ​ For information about rent expense for all leased premises, see Note 5 to the Consolidated Financial Statements appearing in Item 8 of Part II of this annual report. ​
Added
For information about rent expense for all leased premises, see Note 7 to the Consolidated Financial Statements appearing in Item 8 of Part II of this annual report.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

1 edited+0 added−0 removed1 unchanged
Biggest changeThis item is not applicable. ​ 35 Table of Contents PART II
Biggest changeThis item is not applicable. 31 Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+5 added−2 removed1 unchanged
Biggest changeThe transfer agent for the Company’s common stock is: Broadridge 51 Mercedes Way Edgewood, NY 11717 Investor Relations: 1-800-353-0103 E-mail for investor inquiries: shareholder@broadridge.com . www.broadridge.com ​ EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 2022, with respect to options outstanding and shares available for future awards under the Company’s active equity incentive plans. ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of securities ​ ​ Number of securities to be ​ Weighted-average ​ remaining available for future ​ ​ issued upon exercise of ​ exercise price of ​ issuance under equity ​ ​ outstanding options, warrants ​ outstanding options, ​ compensation plans [excluding ​ ​ and rights ​ warrants, and rights ​ securities reflected in Plan Category ​ (a) ​ (b) ​ column (a)] ( c) Equity compensation plans approved by security holders — — 499,870 ​ ​ ​ ​ ​ ​ ​ Equity compensation plans not approved by security holders — — — ​ ​ ​ ​ Total — — 499,870 ​ All other information required by this item is incorporated herein by reference to the section of the Company’s definitive proxy statement to be filed in connection with the 2023 Annual Meeting of Stockholders entitled “Beneficial Ownership of Common Stock”. ​ ​ 36 Table of Contents UNREGISTERED SALES OF EQUITY SECURITIES AND ISSUER PURCHASES OF EQUITY SECURITIES ​ There were no unregistered sales of the Company’s stock during the fourth quarter of 2022. ​ The Company announced a new stock repurchase program that was approved on July 6, 2022.
Biggest changePlan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants, and rights (b) Number of securities remaining available for future issuance under equity compensation plans [excluding securities reflected in column (a)] ( c) Equity compensation plans approved by security holders — — 455,530 Equity compensation plans not approved by security holders — — — Total — — 455,530 33 Table of Contents UNREGISTERED SALES OF EQUITY SECURITIES AND ISSUER PURCHASES OF EQUITY SECURITIES There were no unregistered sales of the Company’s common stock, par value $0.01 per share (Common Stock), during the year to date period ended December 31, 2023.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. MARKET INFORMATION, HOLDERS AND CASH DIVIDENDS The shares of the Company’s common stock are listed on the NASDAQ Global Select Market under the symbol “SHBI”. As of March 1, 2023, the Company had approximately 1,916 registered holders of record.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. MARKET INFORMATION, HOLDERS AND CASH DIVIDENDS The shares of the Company’s common stock are listed on the NASDAQ Global Select Market under the symbol “SHBI”. As of March 12, 2024, the Company had approximately 1,827 registered holders of record.
The program will expire March 31, 2023. There were no purchases made by or on behalf of us or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the fourth quarter of 2022. ​ ​ Item 6. Reserved ​ ​ 37 Table of Contents
The Company’s prior stock repurchase program expired on March 31, 2023. There were no purchases made by or on behalf of us or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the fourth quarter of 2023. Item 6. Reserved 34 Table of Contents
As a general matter, the payment of dividends is at the discretion of the Company’s Board of Directors, based on such factors as operating results, financial condition, capital adequacy, regulatory requirements, and stockholder return.
Quarterly dividends remained at $0.12 for the entire year of 2023. As a general matter, the payment of dividends is at the discretion of the Company’s Board of Directors, based on such factors as operating results, financial condition, capital adequacy, regulatory requirements, and stockholder return.
The Company anticipates continuing a regular quarterly cash dividend, although future dividend increases must be approved by TCFC prior to the planned merger in accordance with agreement and plan of merger signed December 14, 2022. However, we have no obligation to pay dividends and we may change our dividend policy at any time without notice to shareholders.
The Company anticipates continuing a regular quarterly cash dividend, although future dividend increases must be approved by Shore Bancshares Board of Directors. However, we have no obligation to pay dividends and we may change our dividend policy at any time without notice to shareholders.
Removed
Shareholders received quarterly cash dividends on shares of common stock totaling $9.5 million in 2022 and $6.6 million in 2021. Dividends remained at $0.12 for the entire year of 2022.
Added
The high and low sales prices for the shares of common stock of the Company, as reported on the NASDAQ Global Select market, and the cash dividends declared on those shares for each quarterly period of 2023 and 2022 are set forth in the table below. 2023 2022 Price Range Dividends Price Range Dividends High Low Paid High Low Paid 1st Quarter $ 18.15 $ 14.00 $ 0.12 $ 21.41 $ 19.34 $ 0.12 2nd Quarter 14.45 10.65 0.12 21.21 17.91 0.12 3rd Quarter 13.37 10.27 0.12 20.50 17.29 0.12 4th Quarter 14.51 9.66 0.12 20.85 17.04 0.12 $ 0.48 $ 0.48 Shareholders received quarterly cash dividends on shares of common stock totaling $12.7 million in 2023 and $9.5 million in 2022.
Removed
Under the new stock repurchase program, the Company is authorized to repurchase up to $5.0 million of the Company’s Common Stock, representing approximately 1.4% of its issued and outstanding Common Stock based on the closing price of the Company’s Common Stock on July 5, 2022. The program may be limited or terminated at any time without prior notice.
Added
The transfer agent for the Company’s common stock is: Broadridge Corporate Issuer Solutions, Inc. 51 Mercedes Way Edgewood, NY 11717 Investor Relations: +1 (800) 353-0103 E-mail for investor inquiries: shareholder@broadridge.com www.broadridge.com Stock Performance Graph The following graph and table show the cumulative total return on the common stock of the Company over the last five years, compared with the cumulative total return of a broad stock market index (the NASDAQ Composite Index), and a narrower index of the NASDAQ Bank Index and S&P SmallCap Banks Index.
Added
Cumulative total return on the stock or the index equals the total increase in value since December 31, 2018 assuming reinvestment of all dividends paid into the stock or the index.
Added
The graph and table were prepared assuming that $100 was invested on December 31, 2018, in the common stock and the securities included in the indexes. 32 Table of Contents Source: S&P Global Market Intelligence Period Ending Index 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Shore Bancshares, Inc. $ 100.00 $ 122.62 $ 107.59 $ 158.03 $ 135.34 $ 114.94 NASDAQ Composite Index $ 100.00 $ 136.69 $ 198.10 $ 242.03 $ 163.28 $ 236.17 KBW NASDAQ Bank Index $ 100.00 $ 136.13 $ 122.09 $ 168.88 $ 132.75 $ 131.57 S&P U.S.
Added
SmallCap Banks Index $ 100.00 $ 125.46 $ 113.94 $ 158.62 $ 139.85 $ 140.55 EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 2023, with respect to options outstanding and shares available for future awards under the Company’s active equity incentive plans.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

41 edited+166 added−139 removed8 unchanged
Biggest changeThe net interest spread, which is the difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities was 2.96% for 2022 and 2.80% for 2021. ​ ​ ​ ​ 40 Table of Contents The following table sets forth the major components of net interest income, on a tax-equivalent basis, for the presented years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 ​ 2021 ​ ​ ​ Average Interest Yield/ Average Interest Yield/ (Dollars in thousands) ​ Balance ​ (1) ​ Rate ​ Balance ​ (1) ​ Rate ​ Earning assets ​ ​ ​ ​ ​ Loans (2), (3) ​ $ 2,293,627 ​ $ 99,276 4.33 % $ 1,568,468 ​ $ 64,945 4.14 % Investment securities: ​ ​ ​ ​ ​ Taxable ​ 589,729 ​ 11,507 1.95 ​ 329,890 ​ 5,006 1.52 ​ Tax-exempt ​ 113 ​ 7 6.19 ​ — ​ — — ​ Interest-bearing deposits ​ 337,203 ​ 3,210 0.95 ​ 286,765 ​ 368 0.13 ​ Total earning assets ​ 3,220,672 ​ 114,000 3.54 % 2,185,123 ​ 70,319 3.21 % Cash and due from banks ​ 18,158 ​ ​ 19,838 ​ ​ Other assets ​ 221,592 ​ ​ 127,704 ​ ​ Allowance for credit losses ​ (15,441) ​ ​ (15,068) ​ ​ Total assets ​ $ 3,444,981 ​ ​ $ 2,317,597 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing liabilities ​ ​ ​ ​ ​ Demand deposits ​ $ 638,105 ​ 3,869 0.61 % $ 450,399 ​ 633 0.14 % Money market and savings deposits ​ 1,043,032 ​ 3,609 0.35 ​ 695,056 ​ 1,433 0.21 ​ Certificates of deposit $100,000 or more ​ 239,927 ​ 1,364 0.57 ​ 144,209 ​ 1,214 0.84 ​ Other time deposits ​ 204,536 ​ 1,141 0.56 ​ 151,429 ​ 1,181 0.78 ​ Interest-bearing deposits ​ 2,125,600 ​ 9,983 0.47 ​ 1,441,093 ​ 4,461 0.31 ​ Securities sold under retail repurchase agreements and federal funds purchased ​ 683 ​ 2 0.29 ​ 3,017 ​ 8 0.27 ​ Advances from FHLB - short-term ​ ​ 1,863 ​ ​ 72 ​ 3.86 ​ ​ — ​ ​ — ​ — ​ Advances from FHLB - long-term ​ ​ 7,701 ​ ​ 35 ​ 0.46 ​ ​ 1,671 ​ ​ 10 ​ 0.60 ​ Subordinated debt ​ 42,917 ​ 2,451 5.71 ​ 27,528 ​ 1,560 5.67 ​ Total interest-bearing liabilities ​ 2,178,764 ​ 12,543 0.58 % 1,473,309 ​ 6,039 0.41 % Noninterest-bearing deposits ​ 888,509 ​ ​ 574,531 ​ ​ Other liabilities ​ 21,858 ​ ​ 45,702 ​ ​ Stockholders’ equity ​ 355,850 ​ ​ 224,055 ​ ​ Total liabilities and stockholders’ equity ​ $ 3,444,981 ​ ​ $ 2,317,597 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest spread ​ ​ $ 101,457 2.96 % ​ $ 64,280 2.80 % Net interest margin ​ ​ 3.15 % ​ 2.94 % (1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21% for 2022 and 2021, exclusive of nondeductible interest expense.
Biggest changeTwelve Months Ended December 31, 2023 Twelve Months Ended December 31, 2022 (Dollars in thousands) Average Balance Interest (1),(4) Yield/ Rate Average Balance Interest (1),(4) Yield/ Rate Earning assets Loans (2), (3) Residential real estate $ 1,076,713 $ 54,583 5.07 % $ 699,192 $ 31,401 4.49 % Commercial real estate 2,039,153 110,058 5.40 1,182,845 51,821 4.38 Commercial 184,214 13,607 7.39 194,785 7,829 4.02 Consumer 322,033 15,298 4.75 195,542 7,560 3.87 State and political 1,025 41 4.00 1,613 64 3.97 Credit Cards 3,147 315 10.01 — — — Other 12,773 678 5.31 19,650 601 3.06 Total Loans 3,639,058 194,580 5.35 2,293,627 99,276 4.33 Investment securities: Taxable 674,203 16,832 2.50 589,729 11,507 1.95 Tax-exempt 663 58 8.75 113 7 6.19 Federal funds sold 1,899 92 4.84 — — — Interest-bearing deposits 41,032 2,770 6.75 337,203 3,210 0.95 Total earning assets 4,356,855 214,332 4.92 3,220,672 114,000 3.54 Cash and due from banks 43,555 18,158 Other assets 303,906 221,592 Allowance for credit losses (40,777) (15,441) Total assets $ 4,663,539 $ 3,444,981 Interest-bearing liabilities Demand deposits $ 883,976 $ 20,134 2.28 % $ 638,105 $ 3,869 0.61 % Money market and savings deposits 1,275,088 20,039 1.57 1,043,032 3,609 0.35 Brokered deposits 56,101 2,919 5.20 — — — Certificates of deposit $100,000 or more 492,226 16,583 3.37 239,927 1,364 0.57 Other time deposits 278,144 9,125 3.28 204,536 1,141 0.56 Interest-bearing deposits 2,985,535 68,800 2.30 2,125,600 9,983 0.47 Securities sold under retail repurchase agreements and federal funds purchased — — — 683 2 0.29 Advances from FHLB - short-term 111,392 5,518 4.95 1,863 72 3.86 Advances from FHLB - long-term — — — 7,701 35 0.45 Subordinated debt and guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") 57,708 4,454 7.72 42,917 2,451 5.71 Total interest-bearing liabilities 3,154,635 78,772 2.50 2,178,764 12,543 0.58 Noninterest-bearing deposits 1,043,479 888,509 Accrued expenses and other liabilities 23,635 21,858 Stockholders’ equity 441,790 355,850 Total liabilities and stockholders’ equity $ 4,663,539 $ 3,444,981 Net interest income $ 135,560 $ 101,457 39 Table of Contents Twelve Months Ended December 31, 2023 Twelve Months Ended December 31, 2022 (Dollars in thousands) Average Balance Interest (1),(4) Yield/ Rate Average Balance Interest (1),(4) Yield/ Rate Net interest spread 2.42 % 2.96 % Net interest margin ("NIM") 3.11 % 3.15 % Cost of Funds 1.88 % 0.41 % Cost of Deposits 1.71 % 0.33 % Cost of Debt 5.90 % 4.82 % ____________________________________ (1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense.
Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, and on an interim basis if circumstances dictate.
Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate.
Securities Sold Under Retail Repurchase Agreements Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial depositors. There were no securities sold under retail purchase agreements at the end of 2022.
Securities Sold Under Retail Repurchase Agreements Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial depositors. There were no securities sold under retail purchase agreements at the end of 2023 and 2022.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion compares the Company’s financial condition at December 31, 2022 to its financial condition at December 31, 2021 and the results of operations for the years ended December 31, 2022 and 2021.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion compares the Company’s financial condition at December 31, 2023 to its financial condition at December 31, 2022 and the results of operations for the years ended December 31, 2023 and 2022.
To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets.
To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funding markets.
Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for credit losses, accounting for loans acquired in business combinations, and goodwill are critical accounting policies.
Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for credit losses on loans, goodwill and bargain purchase gain, accounting for loans acquired in business combinations, and income taxes are critical accounting policies.
The efforts to accomplish this goal include frequently contacting borrowers until the delinquency is cured or until an acceptable payment plan has been agreed upon; obtaining updated appraisals; provisioning for credit losses; charging off loans; transferring loans to other real estate owned; aggressively marketing other real estate owned; and selling loans.
The efforts to accomplish this goal include frequently contacting borrowers until the delinquency is cured or until an acceptable payment plan has been agreed upon; obtaining updated appraisals; provisioning for credit losses; charging off loans; transferring loans to OREO; aggressively marketing OREO; and selling loans.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of CET 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1250%.
Loans Held for Sale We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value. At December 31, 2022, the fair value of loans held for sale amounted to $4.2 million and $37.7 million at December 31, 2021.
Loans Held for Sale We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value. At December 31, 2023 , the fair value of loans held for sale amounted to $8.8 million compared to $4.2 million at December 31, 2022.
We have arrangements with correspondent banks whereby we 55 Table of Contents have $15 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash.
The Bank has arrangements with other correspondent banks whereby it has $45.0 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements.
The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements.
Investment securities available for sale are stated at estimated fair value based on quoted prices and may be sold as part of the asset/liability management strategy or which may be sold in response to changing interest rates.
Debt securities are classified as either available for sale (“AFS”) or held to maturity (“HTM”). AFS investment securities are stated at estimated fair value based on market prices. They represent securities which may be sold as part of the asset/liability management strategy or in response to changing interest rates.
There were no long-term FHLB borrowings at the end of 2022. Subordinated Debt Legacy On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain accredited purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.
On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain accredited purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030. As a result of the acquisition of Severn Bancorp, Inc.
As of December 31, 2022, the Company had banking and mortgage reporting units. 39 Table of Contents RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS The Notes to the Consolidated Financial Statements discuss the expected impact of accounting policies recently issued or proposed but not yet required to be adopted.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS The Notes to the Consolidated Financial Statements discuss the expected impact of accounting policies recently issued or proposed but not yet required to be adopted.
Net unrealized holding gains and losses on available for sale debt securities are reported net of related income taxes as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Investment securities in the held to maturity category are stated at cost adjusted for amortization of premiums and accretion of discounts.
Net unrealized holding gains and losses on these securities are reported net of related income taxes as AOCI (loss), a separate component of stockholders’ equity. Investment securities in the HTM category are stated at cost adjusted for amortization of premiums and accretion of discounts and the ACL. We have the intent and ability to hold such securities until maturity.
The final rule currently applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $3 billion. The Company had total consolidated assets of more than $3 billion as of December 31, 2021, due to the acquisition of Severn in the fourth quarter of 2021.
The final rule currently applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $3 billion.
Acquired from Severn On October 31, 2021, the Company acquired from the Severn merger, Junior Subordinated Debt Securities due in 2035 (“2035 Debentures”) which had an outstanding principal balance of $20.6 million. The debt balance of $18.4 million is presented net of the remaining $2.2 million acquisition discount at December 31, 2022.
(“Severn”), effective October 31, 2021, the Company acquired Junior Subordinated Debt Securities due in 2035 which had an outstanding principal balance of $20.6 million. The debt balance of $18.6 million at December 31, 2023 and $18.4 million at December 31, 2022 was presented net of fair value adjustments of $2.0 million and $2.2 million, respectively.
To the extent the adoption of new accounting standards materially affects our financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of this discussion and Notes to the Consolidated Financial Statements. RESULTS OF OPERATIONS Net Interest Income and Net Interest Margin Net interest income remains the most significant factor affecting our results of operations.
To the extent the adoption of new accounting standards materially affects our financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of this discussion and Notes to the Consolidated Financial Statements. 36 Table of Contents 2023 PERFORMANCE OVERVIEW The Company recorded net income of $11.2 million for 2023 and net income of $31.2 million for 2022.
Capital Resources Management Total stockholders’ equity was $364.3 million at December 31, 2022, compared to $350.7 million at December 31, 2021.
Stockholders’ Equity Total stockholders’ equity was $511.1 million at December 31, 2023, compared to $364.3 million at December 31, 2022.
At December 31, 2022, the ratio of nonaccrual loans to total assets was 0.05%, a decrease from 0.06% at December 31, 2021. The ratio of accruing TDRs to total assets at December 31, 2022 was 0.13% improving from 0.16% at December 31, 2021. The Company continues to focus on the resolution of its nonperforming and problem loans.
The ratio of nonperforming assets to total assets at December 31, 2023 was 0.23% compared to 0.11% at December 31, 2022. The Company continues to focus on the resolution of its nonperforming and problem loans.
Short-Term and Long-Term Advances from the FHLB The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. We also borrow from FHLB on a short-term basis to meet short term liquidity needs. At the end of 2022 short-term advances from FHLB were $40 million.
Long-Term Debt The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. There were no long-term borrowings from the FHLB outstanding at December 31, 2023 and December 31, 2022.
When we sell mortgage loans we make certain representations to the purchaser related to loan ownership, loan compliance and legality, and accurate documentation, among other things.
When we sell mortgage loans we make certain representations to the purchaser related to loan ownership, loan compliance and legality, and accurate documentation, among other things. If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, we may be required to repurchase the loan or indemnify the purchaser.
The increase in nonperforming assets was primarily due to the increase in loans 90 days past due and still accruing, partially offset by a decrease in other real estate owned properties. Accruing TDRs were $4.4 million at December 31, 2022, a decrease of $1.3 million, or 22.3%, when compared to December 31, 2021.
The increase in nonperforming assets was primarily due to the increase in nonaccrual loans acquired in the merger, partially offset by a decrease in loans 90 days past due and still accruing. At December 31, 2023, the ratio of nonaccrual loans to total assets was 0.21%, an increase from 0.05% at December 31, 2022.
Average noninterest-bearing deposits increased $314.0 million, or 54.6%, in 2022, compared to an increase of $143.2 million, or 33.2%, in 2021.
Average noninterest-bearing deposits increased $155 million, or 17.44% in 2023, compared to an increase of $314.0 million, or 54.6%, in 2022. Deposits provided funding for approximately 92.5% and 93.6% of average earning assets for 2023 and 2022, respectively.
The Bank did not purchase any available for sale securities in 2022 and 2021. At year-end 2022, 21.7% of the available for sale securities in the portfolio were U.S. Government agencies, 76.0% of the securities were mortgage-backed securities and 2.3% were corporate bonds, compared to 19.1%, 79.2% and 1.7%, respectively, at year-end 2021.
At December 31, 2023, AFS securities consisted of 76.0% mortgage-backed, 18.5% U.S. Government agencies and 5.5% corporate bonds, compared to 76.0%, 21.8%, and 2.3%, respectively, at year-end 2022.
Loans Acquired in a Business Combination Acquired loans are classified as either (i) purchase credit-impaired (“PCI”) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition. 38 Table of Contents ​ PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments.
At acquisition, loans are classified as either (i) purchase credit-deteriorated (“PCD”) loans or (ii) non-PCD loans and are recorded at fair value on the date of acquisition. PCD loans are those for which there is more than insignificant evidence of credit deterioration since origination.
The tax-equivalent adjustment amounts used in the above table to compute yields aggregated $155 thousand in 2022 and $150 thousand in 2021. (2) Average loan balances include nonaccrual loans and loans held for sale. (3) Interest income on loans includes amortized loan fees, net of costs, and accretion of discounts on acquired loans, which are included in the yield calculations.
(2) Average loan balances include nonaccrual loans. (3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations. There were $11.8 million and $1.5 million of accretion interest on loans for the twelve months ended December 31, 2023 and 2022, respectively.
The following table sets forth the average balances of deposits and the percentage of each category to total average deposits for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average Balances (Dollars in thousands) 2022 2021 Noninterest-bearing demand ​ $ 888,509 29.5 % $ 574,531 28.5 % Interest-bearing deposits ​ ​ ​ Demand ​ 638,105 21.2 ​ 450,399 22.3 ​ Money market and savings ​ 1,043,032 34.6 ​ 695,056 34.5 ​ Certificates of deposit, $100,000 to $249,999 ​ 170,443 5.6 ​ 93,898 4.7 ​ Certificates of deposit, $250,000 or more ​ 69,484 2.3 ​ 50,311 2.5 ​ Other time deposits ​ 204,536 6.8 ​ 151,429 7.5 ​ Total ​ $ 3,014,109 100.0 % $ 2,015,624 100.0 % ​ Average interest-bearing deposits increased $684.5 million, or 47.5%, in 2022, compared to an increase of $384.5 million, or 36.4%, in 2021.
December 31, 2023 December 31, 2022 (Dollars in thousands) Average Balance % Average Balance % Noninterest-bearing demand $ 1,043,479 25.9 % $ 888,509 29.5 % Interest-bearing deposits Demand 883,976 21.9 % 638,105 21.2 % Money market and savings 1,275,088 31.6 % 1,043,032 34.6 % Certificates of deposit of $100,000 or more 492,226 12.2 % 239,927 8.0 % Other time deposits 334,245 8.3 % 204,536 6.8 % Total interest-bearing $ 2,985,535 74.1 % $ 2,125,600 70.5 % Total Deposits $ 4,029,014 100.0 % $ 3,014,109 100.0 % Average interest-bearing deposits increased $859.9 million, or 40.5%, in 2023, compared to an increase of $684.5 million, or 47.5%, in 2022.
This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing in Item 8 of Part II of this annual report. PERFORMANCE OVERVIEW The Company recorded net income of $31.2 million for 2022 and net income of $15.4 million for 2021.
This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing in Item 8 of Part II of this annual report. CRITICAL ACCOUNTING POLICIES The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the industries in which it operates.
The net interest margin was 3.15% for 2022 and 2.94% for 2021. The net interest margin increased when comparing 2022 to 2021 primarily due to an increase in the average yield on total earning assets of 33bps, partially offset by higher interest rates paid on interest bearing deposits and borrowings.
The decrease in the NIM was primarily due to an increase in the average balance and rates paid on interest-bearing liabilities of $975.9 million and 192 basis points, partially offset by an increase in the average balance and rates earned on total earning assets of $1.1 billion and 138 basis points.
Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of customers and to fund current and planned expenditures. Liquidity is derived through increased customer deposits, maturities in the investment portfolio, loan repayments and income from earning assets.
We derive liquidity through increased customer deposits, non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets.
On a tax-equivalent basis, total interest income was $114.0 million for 2022 compared to $70.3 million for 2021. The increase in interest income for 2022 compared to 2021 was primarily due to the increase in the average balance in earning assets of $1.04 billion which was due to both the acquisition of Severn and organic growth in 2022.
The increase in tax-equivalent net interest income was primarily due to an increase in total interest income of $100.2 million, or 88.0%, which included an increase in interest and fees on loans of $95.2 million, or 96.1%.
At December 31, 2022, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding loss, net of tax, of $9.0 million compared to net unrealized holding gain, net of tax, of $56 thousand at December 31, 2021. The Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies.
At December 31, 2023, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding loss, net of tax, of $7.5 million compared to a net unrealized holding loss, net of tax, of $9.1 million at December 31, 2022. 54 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Liquidity is our ability to fund operations and meet present and future financial obligations through the sale or repayment of existing assets or by obtaining additional funding through liability management.
A provision for loan losses may be required for any deterioration in these loans in future periods. ​ Allowance for Credit Losses The allowance for credit losses represents management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date.
The ACL represents management’s best estimate of expected lifetime credit losses within the Company's loan portfolio as of the balance sheet date. The ACL is established through a provision for credit losses and is increased by recoveries of loans previously charged off.
The basic and diluted income per share was $1.57 and $1.17 for fiscal year 2022 and 2021, respectively.
The basic and diluted income per share was $0.42 and $1.57 for fiscal year 2023 and 2022, respectively. Total assets were $6.0 billion at December 31, 2023, an increase of $2.5 billion or 72.9%, when compared to $3.5 billion at December 31, 2022.
(3) As of December 31, 2022 and December 31, 2021, these ratios included all loans held for investment, including PPP loans of $6.7 million and $85.5 million, respectively. ​ The following table sets forth the allocation of the allowance for credit losses and the percentage of loans in each category to total loans for the presented years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 ​ ​ 2021 ​ ​ ​ ​ ​ ​ % of ​ ​ ​ ​ % of ​ (Dollars in thousands) ​ ​ Amount ​ Loans ​ ​ Amount ​ Loans ​ Construction ​ $ 2,973 17.9 % $ 2,454 11.3 % Residential real estate ​ ​ 2,622 ​ 15.8 ​ ​ 2,858 30.9 ​ Commercial real estate ​ ​ 4,899 ​ 29.4 ​ ​ 4,598 42.3 ​ Commercial ​ ​ 1,652 ​ 9.9 ​ ​ 2,070 9.6 ​ Consumer ​ ​ 4,497 ​ 27.0 ​ ​ 1,964 5.9 ​ Total ​ $ $16,643 ​ 100.0 % $ $13,944 ​ 100.0 % ​ At December 31, 2022, nonperforming assets were $3.9 million, an increase of $902 thousand, or 29.6%, when compared to December 31, 2021.
December 31, 2023 December 31, 2022 (dollars in thousands) Amount % (1) Amount % (1) Construction $ 3,935 6.40 % $ 2,973 9.60 % Residential real estate 21,949 32.10 % 2,622 31.70 % Commercial real estate 20,975 49.30 % 4,899 41.70 % Commercial 2,671 5.00 % 1,652 5.80 % Consumer 7,601 7.10 % 4,497 11.20 % Credit Cards 220 0.10 % — — % Total allowance for credit losses $ 57,351 100.00 % $ 16,643 100.00 % ____________________________________ (1) Percent of loans in each category to total portfolio loans.
Total deposits decreased $16.5 million, or less than 1%, when compared to December 31, 2021. The decrease in total deposits was due to decreases in money market and savings accounts of $85.7 million, noninterest-bearing deposits of $65.5 million and time deposits of $35.2 million, partially offset by an increase in interest bearing checking accounts of $170.0 million.
The increase in total deposits was primarily due to the merger, which resulted in an increase in time deposits of $760.3 million, demand deposits of $471.4 million, money market and savings of $748.6 million, and noninterest-bearing deposits of $396.0 million. Total estimated uninsured deposits were $1.05 billion, or 19.5% of total deposits, at December 31, 2023.
Government agencies ​ — % 1.05 % 1.26 % 1.79 % Mortgage-backed ​ — ​ ​ (1.01) ​ ​ 0.43 ​ 1.54 ​ States and political subdivisions 2 ​ 5.20 ​ — ​ — ​ — ​ Other Debt Securities ​ 2.68 ​ 6.50 ​ 4.21 ​ — ​ Total held to maturity ​ 3.03 ​ 1.74 ​ 1.27 ​ 1.55 ​ 2 Yields have been adjusted to reflect a tax equivalent basis using the statutory federal tax rate of 21%.
Treasury and government agencies $ 7,000 3.50 % $ 110,163 2.44 % $ 15,418 1.48 % $ 10,861 3.02 % $ 143,442 $ 133,065 Mortgage-backed securities — — % 6,295 4.64 % 27,620 3.73 % 323,955 2.20 % 357,870 314,006 Obligations of states and political subdivisions (1) — — % 310 4.52 % — — % 1,160 4.53 % 1,470 1,508 Other debt securities — — % 3,000 10.35 % 7,500 4.63 % — — % 10,500 9,251 Total $ 7,000 3.50 % $ 119,768 2.76 % $ 50,538 3.18 % $ 335,976 2.24 % $ 513,282 $ 457,830 _____________________________________________ (1) Yields have been adjusted to reflect a tax equivalent basis using the statutory federal tax rate of 21%.
The effective tax rate was 26.0% for 2022 and 27.4% for 2021. The Company’s effective tax rate decreased in 2022 primarily due to nondeductible expenses related to the acquisition of Severn in 2021, higher pre-tax earnings and reapportionment of assets and revenue for state income tax purposes.
The primary drivers in the reduced effective tax rate for 2023 when compared to 2022, were due to the bargain purchase gain recorded in the third quarter and the reapportionment of assets and revenue for state income tax purposes, partially offset by nondeductible merger related costs, in connection with of the acquisition of TCFC.
If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, we may be required to repurchase the loan or indemnify the purchaser. ​ The Company was not required to repurchase any loans during 2021 or 2022. 45 Table of Contents ​ Loans Held for Investment The loan portfolio is the primary source of our income.
The Company was not required to repurchase any loans during 2023 or 2022. Loans Held for Investment The following table summarizes the Company’s loan portfolio at December 31, 2023 and December 31, 2022.
Government agencies, 74.8% of the securities were mortgage-backed securities, 3.6% of the securities were subordinated debt instruments and less than 1% were community reinvestment bonds. ​ 44 Table of Contents The following tables set forth the weighted average yields by maturity category of the bond investment portfolio as of December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 1 Year or Less ​ ​ 1-5 Years ​ ​ 5-10 Years ​ Over 10 Years ​ Average Average Average Average (Dollars in thousands) ​ Yield ​ ​ Yield ​ ​ Yield ​ Yield 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available for sale: ​ U.S.
Government agencies or government-sponsored agencies. The following tables set forth the weighted average yields by maturity category of the bond investment portfolio as of December 31, 2023.
Removed
When comparing net income for 2022 to 2021, earnings increased due to increases in net interest income $37.2 million and noninterest income of $9.6 million primarily offset by an increase in noninterest expense of $23.5 million related to increases in salaries and wages, employee benefits, and other loan and customer expenses primarily due to the acquisition of Severn Bancorp, Inc.
Added
Allowance for Credit Losses on Loans The Company adopted ASU No. 2026-13, “Financial Instruments – Credit Losses (Topic 326)”, as amended, on January 1, 2023 and in accordance with ASC 326, has recorded an ACL on loans carried at amortized cost.
Removed
(“Severn”) in the fourth quarter of 2021. Total assets were $3.477 billion at December 31, 2022, a $17.1 million, or less than 1.0%, increase when compared to $3.460 billion at the end of 2021. During 2022, the Company shifted its asset mix by deploying cash and cash equivalents into higher yielding loans and investment securities.
Added
Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. The calculation of expected credit losses is determined using cash flow methodology, and includes considerations of historical experience, current conditions, and reasonable and supportable economic forecasts that may affect collection of the recorded balances.
Removed
Total stockholders’ equity increased $13.6 million, or 3.9%, when compared to December 31, 2021, primarily due to current year earnings, partially offset by unrealized losses on available for sale securities of $9.1 million and dividends paid to common stockholders of $9.5 million.
Added
The Company assesses an ACL to groups of loans which share similar risk characteristics or on an individual basis, as deemed appropriate. Changes in the ACL on loans, and as a result, the related provision for credit losses, can materially affect financial results.
Removed
At December 31, 2022, the ratio of total equity to total assets was 10.48% and the ratio of total tangible equity to total tangible assets was 8.67%, compared to 10.14% and 8.25% for 2021. CRITICAL ACCOUNTING POLICIES The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the industries in which it operates.
Added
Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for loans in the portfolio.
Removed
When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status.
Added
The determination of the appropriate level of ACL on loans inherently involves a high degree of subjectivity and requires the Company to make significant judgments concerning credit risks and trends using quantitative and qualitative information, as well as reasonable and supportable forecasts of future economic conditions, all of which may undergo frequent and significant changes.
Removed
The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. ​ On a quarterly basis, we evaluate our estimate of cash flows expected to be collected on PCI loans.
Added
Changes in conditions, including unforeseen events, changes in asset-specific risk characteristics, and other economic factors, both within and outside the Company's control, may indicate the need for an increase or decrease in the ACL on loans.
Removed
Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses.
Added
While management makes every effort to utilize the best information available in making its assessment of the ACL estimate, the estimation process is inherently challenging as potential changes in any one factor or input may occur at different rates and/or impact pools of loans in different ways.
Removed
Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan, or pool(s) of loans.
Added
Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others. The Company’s management reviews the adequacy of the ACL on loans on at least a quarterly basis.
Removed
Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount. ​ PCI loans are not classified as nonperforming by the Company at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans. ​ The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows.
Added
Refer to Note 1, “Summary of Significant Accounting Policies”, of the Notes to the Consolidated Financial Statements for additional detail concerning the determination of the ACL on loans. Goodwill and Bargain Purchase Gain Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.
Removed
Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans.
Added
A bargain purchase gain represents the excess of the fair value of net assets acquired over the cost of an acquisition. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgement. Bargain purchase gain is recorded within noninterest 35 Table of Contents income in the period it was generated.
Removed
Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of similar loans based on historical loss experience, and consideration of current economic trends and conditions and other factors impacting the loan portfolio, all of which may be susceptible to significant change.
Added
An acquirer has a measurement period to finalize the accounting for a business combination which could adjust bargain purchase gain if material facts or circumstances arise. As of December 31, 2023, the Company had one reporting unit.
Removed
The loan portfolio also represents the largest asset type on the consolidated balance sheets. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the allowance for credit losses.
Added
Loans Acquired in a Business Combination The most significant assessment of fair value in our accounting for business combinations relates to the valuation of an acquired loan portfolio. Management made significant estimates and exercised significant judgement in accounting for the acquisition of loans acquired in our business combinations.
Removed
A discussion of the allowance determination and factors driving changes in the amount of the allowance for credit losses is included in the Asset Quality - Provision for Credit Losses and Risk Management section below. Goodwill Impairment Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.
Added
Fair values are determined primarily through a discounted cash flow approach which considers the acquired loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, timing of principal and interest payments, current market rates, and remaining balances. Estimates of fair value also include estimates of default, loss severity, and estimated prepayments.
Removed
Net interest income represents the excess of interest and fees earned on total average earning assets (loans, investment securities, federal funds sold and interest-bearing deposits with other banks) over interest owed on average interest-bearing liabilities (deposits and borrowings). Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments.
Added
The allowance for PCD loans is determined based upon the Company’s methodology for estimating the allowance under the current expected credit loss model (“CECL”), and is recorded as an adjustment to the acquired loan balance on the date of acquisition.
Removed
As shown in the table below, tax-equivalent net interest income for 2022 was $101.5 million. This represented a $37.2 million, or 57.8%, increase from 2021.
Added
The difference between the new amortized cost basis and the unpaid principal balance is either a noncredit discount or premium that will be amortized or accredited into the interest income over the remaining life of the loan.
Removed
The increase in net interest income when comparing 2022 to 2021 was primarily the result of higher average balances on earnings assets of $1.04 billion, or 47.4%, partially offset by an increase in interest bearing deposits of $684.5 million, higher rates paid on interest bearing deposits of 16bps, and additional interest on subordinated debt acquired in the 4 th quarter of 2021.
Added
Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records a reserve for credit losses based on the Company’s methodology for determining the allowance under CECL. The allowance for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans were purchased or acquired.
Removed
This was the result of a full year of integration with Severn, significant loan growth, and a rising interest rate environment resulting in higher yields on loans and deposits. Our net interest margin (i.e., tax-equivalent net interest income divided by average earning assets) is managed through loan and deposit pricing and asset/liability strategies.
Added
Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The Company accounts for income taxes using the liability method in accordance with required accounting guidance. Under this method, deferred tax assets and liabilities are determined by applying the applicable federal and state income tax rates to cumulative temporary differences.
Removed
The interest on loans had the most significant impact on total interest income, which increased $34.3 million in 2022, due to the increase in the average balance of loans of $725.2 million, or 46.2%, combined with accretion income of approximately $3.0 million in relation to acquired loans.
Added
These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities. Deferred taxes result from such temporary differences. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Removed
The increase in interest income on taxable investment securities and interest-bearing deposits was due to increases in their respective average balances of $259.8 million and $50.4 million. As a percentage of total average earning assets, loans, investment securities, and interest-bearing deposits were 71.2%, 18.3%, and 10.5%, respectively, for 2022. The comparable percentages for 2021 were 71.8%, 15.1%, and 13.1%, respectively.
Added
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
Removed
Interest expense was $12.5 million for 2022 compared to $6.0 million for 2021. The increase in interest expense for 2022 was primarily due to the increase in the average rates paid on interest-bearing deposits, and a full year of interest on subordinated debt acquired from Severn.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

0 edited+22 added−1 removed0 unchanged
Removed
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item may be found in Item 7 of Part II of this annual report under the caption “Market Risk Management and Interest Sensitivity”, which is incorporated herein by reference. ​ ​ 56 Table of Contents
Added
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest rate risk is defined as the exposure to changes in net interest income and capital that arises from movements in interest rates. Depending on the composition of the balance sheet, increasing or decreasing interest rates can negatively affect the Company’s results of operations and financial condition.
Added
The Company measures interest rate risk over the short and long term. The Company measures interest rate risk as the change in net interest income caused by a change in interest rates over twelve and twenty-four months. The Company’s net interest income simulations provide information about short-term interest rate risk exposure.
Added
The Company also measures interest rate risk by measuring changes in the values of assets and liabilities due to changes in interest rates. The economic value of equity is defined as the present value of future cash flows from existing assets, minus the present value of future cash flows from existing liabilities.
Added
Economic value of equity simulations reflect the interest rate sensitivity of assets and liabilities over a longer time period, considering the maturities, average life and duration of all balance sheet accounts. The Company’s net income is largely dependent on its net interest income.
Added
Net interest income is susceptible to interest rate risk to the extent that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income.
Added
Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders’ equity.
Added
The Company’s interest rate risk management goals are (1) to increase net interest income at a growth rate consistent with the growth rate of total assets, and (2) to minimize fluctuations in net interest margin as a percentage of interest-earning assets.
Added
Management attempts to achieve these goals by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets; by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched; by maintaining a pool of administered core deposits; and by adjusting pricing rates to market conditions on a continuing basis.
Added
The board of directors has approved the Company's interest rate risk policy and assigned oversight to the Board Risk Oversight Committee. The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income and economic value of equity resulting from changes in interest rates.
Added
Both net interest income and economic value of equity simulations assist in identifying, measuring, monitoring and controlling interest rate risk and along with mitigating strategies are used by management to maintain interest rate risk exposure within Board policy guidelines.
Added
The Company’s interest rate risk model uses assumptions which include factors such as call features, prepayment options and interest rate caps and floors included in investment and loan portfolio contracts. The interest rate risk model estimates the lives and interest rate sensitivity of the Company’s non-maturity deposits. These assumptions have a significant effect on model results.
Added
The assumptions are developed primarily based upon historical behavior of Bank customers. The Company also considers industry and regional data in developing interest rate risk model assumptions. There are inherent limitations in the Company’s interest rate risk model and underlying assumptions.
Added
When interest rates change, actual movements of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. The Company prepares a current base case and several alternative simulations at least quarterly. Current interest rates are shocked by +/- 100, 200, 300, and 400 basis points.
Added
In addition, the Company simulates additional rate curve scenarios. The Company may elect not to use particular scenarios that it determines are impractical in a current rate environment.
Added
The Company’s internal limits for parallel shock scenarios are as follows: Shock in Basis Points Net Interest Income Economic Value of Equity + - 400 +/- 40% +/- 25% + - 300 +/- 30% +/- 20% + - 200 +/- 20% +/- 15% + - 100 +/- 10% +/- 10% 59 Table of Contents It is management’s goal to manage the Bank's portfolios so that net interest income at risk over twelve and twenty-four-month periods and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.
Added
As of December 31, 2023, and 2022, the Company did not exceed any Board approved sensitivity limits for percentage change in net interest income. As of December 31, 2023, the Company exceeded Board approved limits for the percentage change in economic value of equity in the interest rate shocks of +400 and +300 due to extension rate risk on loans.
Added
As of December 31, 2022, the Company exceeded Board approved limits for the percentage change in economic value of equity in the interest rate shock scenario of +400. Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments.
Added
The below schedule estimates the changes in net interest income over a twelve-month period for parallel rate shocks for up 400, 300, 200, 100 and down 100, and 200 scenarios: Estimated Changes in Net Interest Income Change in Interest Rates: + 400 basis points + 300 basis points + 200 basis points + 100 basis points - 100 basis points - 200 basis points Policy Limit +/- 40% +/- 30% +/- 20% +/- 10% +/-10% +/- 20% December 31, 2023 (15.6) % (11.6) % (7.6) % (3.6) % 2.1 % 2.8 % December 31, 2022 (11.7) % (8.6) % (5.5) % (2.6) % (5.1) % (11.5) % Measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities.
Added
The below schedule estimates the changes in the economic value of equity at parallel shocks for up 400, 300, 200, 100 and down 100 and 200 scenarios: Estimated Changes in EVE Change in Interest Rates: + 400 bp + 300 bp + 200 bp + 100 bp - 100 bp - 200 bp Policy Limit +/- 25% +/- 20% +/- 15% +/- 10% +/-20% +/- 35% December 31, 2023 (27.7) % (20.9) % (13.8) % (6.6) % 4.1 % 5.8 % December 31, 2022 (25.3) % (18.9) % (12.4) % (6.0) % 0.1 % (2.6) % As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables.
Added
For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.
Added
Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.
Added
Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the tables. 60 Table of Contents

Other SHBI 10-K year-over-year comparisons