SHBI 10-K & 10-Q changes, risk factors and insider trading
Shore Bancshares Inc. · Nasdaq · National Commercial Banks · CIK 1035092 · All filings on SEC.gov
At a glance
What changed in the latest 10-K
Risk Factors
New heading “Risks Related to the Economy, Financial Markets, Interest Rates and Liquidity”
New heading “The geographic concentration of our operations makes us susceptible to downturns in local economic conditions.”
New heading “Inflation can have an adverse impact on our business and on our customers.”
New heading “Insufficient liquidity could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.”
New heading “Our business may be adversely affected by unfavorable economic, market, and political conditions.”
New heading “Our allowance for credit losses may not be adequate to cover our actual credit losses; additions to the allowance for credit losses could adversely affect our financial condition and results of operations.”
New heading “We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.”
New heading “Our commercial real estate lending activities expose us to increased lending risks and related loan losses.”
New heading “Imposition of limits by the bank regulators on commercial real estate lending activities could curtail our growth and adversely affect our earnings.”
New heading “Our concentration of residential mortgage loans exposes us to increased lending risks.”
New heading “An increase in nonperforming assets would adversely impact earnings.”
New heading “Appraisals may not accurately describe the value of our collateral.”
New heading “Strategic and Other Risks”
New heading “The loss of key personnel could disrupt our business.”
New heading “Acquisitions could disrupt our business.”
New heading “Operational Risks”
New heading “Any delays in our ability to foreclose on delinquent mortgage loans may increase our costs and expose us to greater losses.”
New heading “Our risk management framework may not be effective in mitigating risks and/or losses to us.”
New heading “Risks Related to our Financial Statements”
New heading “We may incur impairment charges on our investment securities, which could adversely impact our results of operations, liquidity, financial condition, or growth prospects.”
New heading “Impairment goodwill, other intangible assets, or deferred tax assets could require charges to earnings, which would adversely impact on our results of operations.”
New heading “Changes in accounting standards or interpretation of new or existing standards may affect how we report our financial condition and results of operations.”
New heading “The Current Expected Credit Loss (“CECL”) accounting standard could require us to increase our allowance for credit losses and may have a material adverse effect on our financial condition and results of operations.”
New heading “Our accounting estimates and risk management processes rely on analytical and forecasting models.”
New heading “We have previously identified material weaknesses in our internal controls.”
New heading “Operational risks, including system failures, human error, and third-party dependencies could adversely affect our business.”
New heading “Risks Related to Cybersecurity and Technology”
New heading “Failure to comply with privacy and information security laws could expose us to liability.”
New heading “We are at risk of increased losses from fraud.”
New heading “Failure to keep up with technological change in the financial services industry could have a material adverse effect on our competitive position or profitability.”
New heading “The market price for our stock may be volatile.”
New heading “General Risk Factors”
New heading “Severe weather, earthquakes, other natural disasters, pandemics, acts of war or terrorism and other external and geopolitical events could significantly impact the business.”
New heading “Climate change could have a material adverse impact on us and our clients.”
New heading “Negative public opinion regarding us or failure to maintain our reputation in the communities we serve could adversely affect our business and prevent us from growing our business.”
New heading “Changes in tax laws and regulations and differences in interpretation of tax laws and regulations may negatively impact our financial performance.”
Removed heading “Risks Relating to Our Business”
Removed heading “Interest rates and other economic conditions will impact our results of operations.”
Removed heading “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 liquidity.”
Removed heading “A majority of our business is concentrated in Maryland, Delaware and Virginia, 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.”
Removed heading “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.”
Removed heading “The Bank may experience credit losses in excess of its allowances, which would adversely impact our financial condition and results of operations.”
Removed heading “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.”
Removed heading “Acquisitions may disrupt our business.”
Removed heading “The loss of key personnel could disrupt our operations and result in reduced earnings.”
Removed heading “Risks Related to Our Operations, Cybersecurity and Technology”
Removed heading “Our exposure to operational, technological and organizational risk may adversely affect us.”
Removed heading “Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements.”
Removed heading “Severe weather, earthquakes, other natural disasters, climate change, pandemics, acts of war or terrorism and other external and geopolitical events could significantly impact the business.”
Removed heading “We have previously identified material weaknesses in our internal controls, and cannot provide assurances that additional material weaknesses will not occur in the future.”
Removed heading “We are subject to evolving and extensive regulations and requirements. Our failure to adhere to these requirements or the failure or circumvention of our controls and procedures could seriously harm our business.”
Largest changes
“Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. …”see in full comparison
“Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act and for evaluating and reporting on that system of internal control. In the past, material weaknesses have been identified in our internal control over financial reporting. …”see in full comparison
“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 liquidity.”see in full comparison
“Although the previously identified material weaknesses have been remediated as of the date of this report, there can be no absolute assurances that future material weaknesses will not arise. In the future, we may identify additional material weaknesses or otherwise fail to maintain an effective system of internal control over financial reporting or adequate disclosure controls and procedures, which may result in material errors in our financial statements or cause us to fail to meet our period reporting obligations. …”see in full comparison
“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. …”see in full comparison
“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.”see in full comparison
Full comparison: every changed paragraph (171)
Investing in our common stock involves risks, including the possibility that the value of the investment could fall substantially and that dividends or other distributions could be reduced or eliminated. Investors should carefully consider the following risk factors before making an investment decision regarding our stock. The following risk factors may cause our future earnings to be lower or our financial condition to be less favorable than expected, which could adversely affect the value of, and return on, an investment in the Company. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may cause earnings to be lower or may adversely impact our financial condition. Investors should also consider the other information in this Annual Report on Form 10-K, as well as in the documents incorporated by reference into this Form 10-K, as the same may be updated from time to time by our future filings with the SEC under the Exchange Act.
Risks Related to the Economy, Financial Markets, Interest Rates and Liquidity
The geographic concentration of our operations makes us susceptible to downturns in local economic conditions.
Our banking operations are concentrated in eastern and southern Maryland, Delaware and northern Virginia. Our success depends in part upon economic conditions in these markets. The Washington, D.C. metropolitan area is characterized by a significant number of businesses that are federal government contractors or subcontractors, or that depend on such businesses for a significant portion of their revenues. In addition, federal government employees make up a significant proportion of the population of the Washington, D.C. metropolitan area. Reductions in the federal workforce through layoffs and buyouts, furloughs of government employees or government contractors, as well as cancelling government contracts and other impacts from declining government spending, lapses in appropriations, or changes in fiscal appropriations could have adverse impacts on other businesses in our market and the general economy of the greater Washington, D.C. metropolitan area. Adverse changes in economic conditions in our markets could limit growth in loans and deposits, impair our ability to collect amounts due on loans, increase problem loans and charge-offs and otherwise negatively affect our performance and financial condition. Declines in real estate values could cause some of our residential and commercial real estate loans to be inadequately collateralized, which would expose us to a greater risk of loss if the recovery on amounts due on defaulted loans is resolved by selling the real estate collateral under duress or to expedite payment.
An investment in our common stock involves significant risks. 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. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also have a material adverse effect on our business, financial condition and results of operations. If any of the matters included in the following information about risk factors were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially and adversely affected. In such case, you may lose all or a substantial part of your investment. 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. See “Cautionary note regarding forward-looking statements.”
Risks Relating to Our Business
OurChanges businessin isinterest rates may adversely affectedaffect byour unfavorable economic, market,earnings and politicalfinancial conditions.condition.
Our net income depends to a great extent upon the level of net interest income, which is the difference between the interest income earned on loans, investments, and other interest-earning assets, and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income.
Changes in market interest rates are affected by many factors beyond our control, including inflation, unemployment, money supply, fiscal policies of the U.S. government, domestic and international events, and events in U.S. and other financial markets. We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, re-pricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our results of operations. Changes in the market interest rates for types of products and services in various markets also may vary significantly from location to location and over time based upon competition and local or regional economic factors.
For further discussion regarding the impact of interest rate movements on net interest income, see Item 7A of this report. The results of any interest rate sensitivity simulation model depend upon a number of assumptions regarding customer behavior, movement of interest rates and cash flows, any of which may prove to be inaccurate.
Inflation can have an adverse impact on our business and on our customers.
Inflation generally increases the cost of goods and services we use in our business operations, as well as labor costs. We may find that we need to give higher than normal raises to employees and start new employees at a higher wage. Furthermore, our clients are also affected by elevated inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us. Historically, the Federal Reserve has increased the federal funds target rate in an effort to combat elevated inflation. Market interest rates generally increase in response to the Federal Reserve's actions. Higher market interest rates increase borrowing costs and depress loan demand. As market interest rates rise, the value of our investment securities generally decreases, although this effect can be less pronounced for floating rate instruments. Higher interest rates increase the attractiveness of alternative investment and savings products, like U.S. Treasury securities and money market funds, which can make it difficult to attract and retain deposits. Sustained higher interest could weaken economic activity. A deterioration in economic conditions in the United States and our markets could result in a further increase in loan delinquencies and nonperforming assets, decreases in loan collateral values, and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition, and results of operations.
Insufficient liquidity could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.
We require sufficient liquidity to fund loan commitments, satisfy depositor withdrawal requests, make payments on our debt obligations as they become due, and meet other cash commitments. Liquidity risk is the potential that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost, in a timely manner, and without adverse conditions or consequences. Our sources of liquidity consist primarily of cash, assets readily convertible to cash (such as investment securities), increases in deposits, advances, as needed, from the FHLB, borrowings, as needed, from the Federal Reserve Bank of Richmond, and other borrowings. Our access to funding sources in amounts adequate to finance our activities or on acceptable terms could be impaired by factors that affect our organization specifically or the financial services industry or economy generally. Core deposits and FHLB advances are our primary source of funding. A significant decrease in core deposits, an inability to renew FHLB advances, an inability to obtain alternative funding to core deposits or FHLB advances, or a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a negative effect on our business, financial condition and results of operations.
Our business may be adversely affected by unfavorable economic, market, and political conditions.
InOur results of operations could be adversely affected in the event of an economic recession, our operating results could be adversely affectedrecession because we could experience higher loan and lease charge-offs and higher operating costs. GlobalAdverse economic conditionsconditions, alsoboth affect our operating results because global economic conditions directly influencein the U.S. economicand conditions,globally, including persistent inflation, rising interest rates, supply chain issues, labor shortages or changes in United States trade policies, including the imposition of tariffs and retaliatory tariffs.tariffs, Certaincould changesadversely affect our results of operations. Changes in interest rates, inflation, or the financial markets could affect demand for our products. Real estate market conditions directly affect performance of our loans secured by real estate. Debt markets affect the availability of creditcredit, which impacts the rates and terms at which we offer loans and leases.loans. Stock market downturns often signal broader economic deterioration and/or a downward trend in business earningsearnings, 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 whichthat may also affect our operatingresults results.of operations.
OurUnfavorable performanceeconomic, could be negatively affected to the extent there is deterioration in businessmarket and economicpolitical conditions,conditions including persistent inflation, supply chain issues or labor shortages, whichcould have direct or indirect material adverse impacts on us, our customers, and our counterparties.counterparties These conditionsand could result in one or more of the following:
•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 thenet Company’sinterest stock priceincome;
•a decrease in our ability to access the capital markets; orand
Continued inflation poses risk to the economy overall, and could indirectly pose challenges to our clients and to our business. Elevated inflation can impact our business customers through the loss of purchasing power for their customers, leading to lower sales. Rising inflation can also increase input and inventory costs for our customers, forcing them to raise their prices or lower their profitability. Supply chain disruption, also leading to inflation, can delay our customers’ shipping ability, or timing on receiving inputs for their production or inventory. Inflation can lead to higher wages for our business customers, increasing costs. 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. To the extent such conditions exist or worsen, we could experience adverse effects on our business, financial condition, and results of operations.
Interest rates and other economic conditions will impact our results of operations.
Our results of operations may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate values, rapid changes in interest rates and the monetary and fiscal policies of the federal government. 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. 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.
Changes in market interest rates are affected by many factors beyond our control, including inflation, unemployment, money supply, international events and events in world financial markets. Throughout 2022, 2023 and 2024, the FRB raised the target range for the federal funds rate in an effort to curb inflation. In September 2024 and November 2024, the FRB lowered the target range for the federal funds rate to its current range of 4.50% to 4.75% in light of the progress on inflation. Notwithstanding, the inflationary outlook in the United States remains uncertain. 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. 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.
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 liquidity.
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. For example, the closures of Silicon Valley Bank and Signature Bank in March 2023, and First Republic Bank in May 2023, led to market volatility, a greater focus by institutions, investors and regulators on the on-balance sheet liquidity of and funding sources for financial institutions, the composition of their deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management. Although the industry has since stabilized, risks remain that customers may choose to invest in higher yielding and higher-rated short-term fixed income securities or maintain deposits with larger more systematically important financial institutions, all of which could materially and adversely impact our liquidity, loan funding capacity, net interest margin, capital, and results of operations. In addition, the banking operating environments and public trading prices of banking institutions can be highly correlated, in particular during times of stress, which could adversely impact the trading prices of our common stock and potentially, our results of operations. Separately, banking regulators have announced a more stringent supervisory posture after the bank failures.
A majority of our business is concentrated in Maryland, Delaware and Virginia, 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.
The Trump administration and certain governmental agencies have announced plans to reduce government spending and the size of the federal government workforce. The Washington, D.C. metropolitan area is characterized by a significant number of businesses that are federal government contractors or subcontractors, or which depend on such businesses for a significant portion of their revenues. In addition, federal government employees make up a significant proportion of the population of the Washington, D.C. metropolitan area. Reductions in the federal workforce through layoffs and buyouts, furloughs of government employees or government contractors as well as cancelling government contracts and other impacts from declining government spending, lapses in appropriations, or changes in fiscal appropriations could have adverse impacts on other businesses in the Company’s market and the general economy of the greater Washington, D.C. metropolitan area. This may directly or indirectly lead to a loss of revenues by the Company’s customers, including vendors and lessors to the federal government and government contractors or to their employees, as well as a wide variety of commercial and retail businesses. Accordingly, such potential federal government actions could lead to increases in past due loans, nonperforming loans, credit loss reserves and charge-offs and a decline in liquidity.
In addition, substantially all of our loan portfolio is secured by real estate. Real estate loans are in greater demand when interest rates are low and economic conditions are good. Accordingly, a decline in local economic conditions would likely have an adverse impact on our financial condition and results of operations, and the impact on us would likely be greater than the impact felt by larger financial institutions whose loan portfolios are geographically diverse. 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.
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.
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. 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. 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. 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. Due to our emphasis on CRE and construction lending, as of December 31, 2024, non-owner-occupied CRE loans (including construction, land and land development loans) represented 359.52% of the Bank’s Tier 1 Capital + the allowance for credit losses (“ACL”). Construction, land and land development loans represent 57.99% of the Bank’s Tier 1 Capital + ACL. 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. 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.
The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. Management at the Bank bases the ACL upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. If management’s assumptions and judgments prove to be incorrect and the allowance for credit losses is inadequate to absorb future losses, or if the bank regulatory authorities, as a part of their examination process, require the Bank to increase its allowance for credit losses, our earnings and capital could be significantly and adversely affected. We estimate losses inherent in our loan portfolio, the adequacy of our allowance for credit losses and the values of certain assets by using estimates based on difficult, subjective, and complex judgments, including estimates as to the effects of economic conditions and how those economic conditions might affect the ability of our borrowers to repay their loans or the value of assets. Material additions to the allowance for credit losses at the Bank would result in a decrease in the Bank’s net income and capital and could have a material adverse effect on our financial condition.
Our investment securities portfolio is subject to credit risk, market riskrisk, and liquidity risk.
As of December 31, 2024, we had classified 23.7% of our debt securities as available for sale (“AFS”) pursuant to the Accounting Standards Codification Topic 320 (“ASC 320”) of the FASB relating to accounting for investments. ASC 320 requires that unrealized gains and losses in the estimated value of the AFS 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 (“HTM”) in accordance with ASC 320 and are stated at amortized cost. 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, 2024, the Company’s AOCI (loss) amounted to $7.5 million and were due to changes in interest rates. 97.1% or $611.9 million of the Company’s AFS and HTM portfolios are invested in U.S. government guaranteed investments or government sponsored enterprises (“GSEs”). There can be no assurance that the market value of our investment portfolio will not continue to decline due to changes in interest rates or a deterioration in credit quality, causing a corresponding decline in stockholders’ equity.
The Bank is a member of the FHLB of Atlanta and our investments include stock issued by the FHLB of Atlanta. These investments could be subject to future impairment charges and there can be no guaranty of future dividends.
ManagementOur believesinvestment securities portfolio has risk factors beyond our control that severalmay factorssignificantly willinfluence affectits thefair market values of our investment portfolio.value. These risk factors include, but are not limited to, changes in interest rates, rating agency downgrades of the securities, defaults of the issuers of the securities, lack of market pricing of the securities, and instability in the credit markets. At times, a lackLack 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, 2024, the Bank had no Level 3 securities.inputs. Any changes in these risk factors, in current accounting principles or interpretations of these principles could impact our assessment of fair valuevalue. andAdjustments thusto the determinationallowance offor credit losses ofon the securities in the investment securities portfolio. Write-downs ofheld-to-maturity investment securities would negatively affect our earnings and regulatory capital ratios.
Credit Risks
Our allowance for credit losses may not be adequate to cover our actual credit losses; additions to the allowance for credit losses could adversely affect our financial condition and results of operations.
We maintain an allowance for credit losses in an amount that is believed to be appropriate to provide for expected losses inherent in the portfolio. We monitor credit quality and seek to identify loans that may become nonperforming; however, at any time there could be loans in the portfolio that may result in losses, but that have not been identified as nonperforming or potential problem credits. We may be unable to identify all deteriorating credits prior to them becoming nonperforming assets, or to limit losses on those loans that are identified. As a result, future additions to the allowance may be necessary. Additionally, future additions to the allowance may be required based on changes in forecasted economic conditions, changes in the loans comprising the portfolio and changes in the financial condition of borrowers, or as a result of assumptions used by management in determining the allowance. Additionally, banking regulators, as an integral part of their supervisory function, periodically review the adequacy of our allowance for credit losses. These regulatory agencies may require an increase in the provision for expected credit losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for credit losses could have a negative effect on our financial condition and results of operations.
We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid timely, or at all, or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure. These risks may be affected by the strength of the borrower’s business sector and local, regional and national market and economic conditions. Many of our loans are made to small- to medium-sized businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. Our risk management practices, such as monitoring the concentration of loans within specific industries and credit approval practices, may not adequately reduce credit risk, and credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. A failure to effectively measure and limit the credit risk associated with our loan portfolio could lead to unexpected losses and have a material adverse effect on our business, financial condition and results of operations.
Our commercial real estate lending activities expose us to increased lending risks and related loan losses.
At December 31, 2025, our commercial real estate loan portfolio totaled $2.64 billion, or 53.95% of our total loan portfolio. Commercial real estate loans generally expose a lender to greater risk of non-payment and loss than one-to-four family residential mortgage loans because repayment of the loans often depends on the successful operation of the properties and the income stream of the borrowers. These loans involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential mortgage loans. Some segments have shown some signs of weakness as rising expenses and debt costs and lower valuations have impacted credit quality metrics. Vacancy rates have risen in the office sector, which is experiencing significant structural shifts that could take several years to fully materialize as remote work practices normalize. To the extent that borrowers have more than one commercial real estate loan outstanding, an adverse development with respect to one loan or one credit relationship could expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential real estate loan. Moreover, if loans that are collateralized by commercial real estate become troubled and the value of the real estate has deteriorated significantly, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan. A decline in the value of the collateral for a loan may require us to increase our allowance for credit losses, which would adversely affect our financial condition and results of operations.
Imposition of limits by the bank regulators on commercial real estate lending activities could curtail our growth and adversely affect our earnings.
A bank’s commercial real estate lending exposure could receive increased supervisory scrutiny when total commercial investor real estate loans, including loans secured by apartment buildings, nonowner-occupied investor real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. At December 31, 2025, our total commercial investor real estate loans, including loans secured by apartment buildings, nonowner-occupied commercial real estate, and construction and land loans represented 342.55% of the Bank’s total risk-based capital. Management has established a commercial real estate lending framework to monitor specific exposures and limits by types within the commercial real estate loan portfolio and takes appropriate actions, as necessary. If the OCC, the Bank’s primary federal regulator, were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, it could curtail or growth and adversely affect our earnings. If we are required to maintain higher levels of capital as a result of our commercial real estate loan concentrations, we may need to obtain additional capital, which may adversely affect shareholder returns.
Our concentration of residential mortgage loans exposes us to increased lending risks.
At December 31, 2025, 33.60% of our total loan portfolio was secured by one-to-four family real estate, a significant majority of which is located in Maryland, Delaware and northern Virginia. One-to-four family residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Declines in real estate values could cause some of our residential mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.
An increase in nonperforming assets would adversely impact earnings.
Nonperforming assets adversely affect net income in various ways. Interest income is not accrued on nonaccrual loans, other real estate owned or repossessed assets. We must record a reserve for expected credit losses, which is established through a current period charge in the form of a provision for expected credit losses, and from time to time we must write down the value of properties in our other real estate owned and repossessed assets portfolios to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to other real estate owned and repossessed assets. Further, the resolution of nonperforming assets requires the active involvement of management, which can distract them from more profitable activities. Finally, if the estimate for the recorded allowance for credit losses proves to be incorrect and the allowance is inadequate, the allowance will have to be increased and, as a result, our earnings would be adversely affected.
Appraisals may not accurately describe the value of our collateral.
When making a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made and does not guarantee that the appraised value could be realized upon sale of the property. Real estate values can change significantly in relatively short periods of time, especially in periods of changing interest rates and economic uncertainty. If the amount realizable upon the sale of the collateral is less than the appraised value, we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan. In addition, we rely on appraisals and other valuation techniques to establish the value of foreclosed real estate and to determine certain loan impairments. If any of these valuations are incorrect, our consolidated financial statements may reflect the incorrect value of our other real estate owned and our allowance for credit losses may not accurately reflect loan impairments.
Strategic and Other Risks
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 establish a reserve in the ACL when management determines that an investment security is impaired due to a credit loss. The amount of the impairment related to credit losses, limited by the amount by which the specific security’s amortized cost basis exceeds its fair value, is recorded in the ACL. Changes in the ACL are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value of debt securities AFS not resulting from credit losses are recorded in other comprehensive income (loss). 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.
Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. Intangible assets other than goodwill are also subject to impairment tests at least annually. A decline in the price of the Company’s common stock or occurrence of a triggering event following any of our quarterly earnings releases and prior to the filing of the periodic report for that period could, under certain circumstances, cause us to perform goodwill and other intangible assets impairment tests and result in an impairment charge being recorded for that period which was not reflected in such earnings release. In the event that we conclude that all or a portion of our goodwill or other intangible assets may be impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. At December 31, 2024, we had recorded goodwill of $63.3 million and other intangible assets of $38.3 million, representing approximately 11.7% and 7.1% 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. Assessing the need for, or the sufficiency of, a valuation allowance requires management to evaluate all available evidence, both negative and positive, including the recent trend of quarterly earnings. Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carryback and carryforward periods is available under the tax law, including the use of tax planning strategies. 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, 2024, our gross deferred tax assets were approximately $55.8 million. There was a valuation allowance of deferred taxes of $1.9 million recorded at December 31, 2024 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. The holding company files a separate return with the state of Maryland and does not expect that the holding company will generate sufficient taxable income to utilize its deferred tax assets. No valuation allowance is currently recorded for state deferred income taxes of the Company’s subsidiaries or at the federal level where the Company files consolidated tax return.
Management's Discussion & Analysis (MD&A)
New heading “Provision for Credit Losses (“PCL”) and ACL”
New heading “Loans Related to Cannabis Business”
New heading “Classified Assets”
New heading “Special Mention Loans”
New heading “Efficiency Ratio – Non-GAAP”
Removed heading “PERFORMANCE OVERVIEW”
Removed heading “Classified Assets and Special Mention Assets”
Removed heading “Comparison of Cash Flows for the Years Ended December 31, 2024 and 2023”
Largest changes
“The Company provides banking services to customers who do business in the cannabis industry. Prior to the second quarter of 2022, the Company restricted these businesses to include only those in the medical-use cannabis industry in the state of Maryland. During the second quarter of 2022, the Company expanded its cannabis banking program to include both medical and adult-use licensees in other states, with an initial offering of the Company’s existing Maryland customers with multi-state operations. …”see in full comparison
“Comparison of Cash Flows for the Years Ended December 31, 2024 and 2023”see in full comparison
Full comparison: every changed paragraph (139)
The discussion comparing the Company’s financial condition at December 31, 2024 to its financial condition at December 31, 2023 and the results of operations for the years ended December 31, 2024 and 2023 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024.
The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.
The Company’s most significant accounting policies that we follow are presented in Note 1 – “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8.8 of this Annual Report on Form 10-K. These policies, along with the disclosures presented in the notes to consolidated financial statements and in this management’s discussion and analysis of financial condition and results of operations, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. 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 policiespolicy for the allowance for credit losses (“ACL”) on loans, loans acquired inis a business combination, and income taxes are critical accounting policies.policy. TheseThis policiespolicy areis considered critical because theyit relaterelates to an accounting areasarea that requirerequires the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.
The Company adopted ASU No. 2016-13, “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. 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. 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 a 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. 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 the related provision for credit losses can materially affect financial results. 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.
The determination of the appropriate level of the 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. 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. While management makes every effortseeks 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. 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. Refer to Note 1 – “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” included in Part II, Item 8.8 of this Annual Report on Form 10-K for additional details concerning the determination of the ACL on loans.
PERFORMANCE OVERVIEW
The Company recorded net income of $43.9 million and $11.2 million for the years ended December 31, 2024 and 2023, respectively. The basic and diluted net income per share was $1.32 and $0.42 for the years ended December 31, 2024 and 2023, respectively.
Total assets were $6.23 billion at December 31, 2024, an increase of $219.8 million or 3.7%, when compared to $6.01 billion at December 31, 2023. The aggregate increase was primarily due to increases year-over-year in loans held for investment of $131.0 million, or 2.8%, and cash and cash equivalents of $87.4 million.
Total liabilities were $5.69 billion at December 31, 2024, an increase of $189.9 million or 3.45%, when compared to $5.50 billion at December 31, 2023, primarily due to an increase in deposits and borrowings.
Total borrowings were $123.7 million at December 31, 2024, an increase of $51.0 million or 70.2%, when compared to $72.7 million at December 31, 2023. Total borrowings at December 31, 2024 were comprised of $50.0 million long-term FHLB advances, $43.9 million of subordinated debt and $29.8 million of trust preferred debentures. The increase in total borrowings at December 31, 2024 when compared to December 31, 2023 was primarily due to a $50.0 million long-term FHLB advance that was obtained in 2024. Total deposits increased $142.2 million, or 2.6% to $5.53 billion at December 31, 2024 when compared to December 31, 2023. The increase in total deposits when compared to December 31, 2023 was primarily due to increases in noninterest-bearing deposits of $304.8 million and money market and savings of $28.0 million, partially offset by decreases in interest-bearing checking of $187.5 million and and time deposits of $3.0 million.
Total stockholder’s equity amounted to $541.1 million at December 31, 2024, an increase of $29.9 million or 5.9%, when compared to $511.1 million at December 31, 2023. This increase was due to net income of $43.9 million, partially offset by cash dividends of $16.0 million.
The Company reported net income for the year ended December 31, 20242025 of $59.5 million, or $1.78 diluted earnings per common share, compared to $43.9 million, or diluted earnings per share of $1.32, compared to net income of $11.2 million, or$1.32 diluted earnings per sharecommon of $0.42,share, for the year ended December 31, 2023.2024. The Company’s return on average assets, return on average common equity and return on average tangible common equity were 0.74%,0.98%, 8.35%10.52% and 13.00%,14.09%, respectively, for the year ended December 31, 2024,2025, compared to 0.24%,0.74%, 2.54%8.35% and 7.74%,12.21%, respectively, for the year ended December 31, 2023.2024. For additional details, see “Reconciliation of Non-GAAP Measures.” The increase in net income in 20242025 compared to 20232024 was primarily due to higher net interest income (“NII”) driven by loan growth in 2024,2025 coupled with loans and adeposits lowerrepricing provision for credit losses.favorably. These were partially offset by thea absencehigher provision for credit losses of the$3.6 one-time bargain purchase gain of $8.8 million in 2023, higher noninterest expense driven by expanded operation of the newly-combined company and the $4.7 million credit card fraud event in 2024.million.
The following table presents selected consolidated statement of operations data for each of the periods indicated.
A comparison of key operating ratios and common share data for the years ended December 31, 2025, 2024 and 2023 is presented below.
(1)ROAA – non-GAAP is computed by dividing (i) net income (excluding net of tax adjustments for the amortization of other intangible assets, credit card fraud losses and the sale and fair value of held for sale assets) by (ii) average assets.
(2)ROATCE is computed by dividing net earnings applicable to common stockholders by average tangible common equity. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. Refer to Use of Non-GAAP Financial Measures for additional details.
(3)Efficiency ratio – GAAP is computed by dividing (i) noninterest expense by (ii) the sum of NII and noninterest income.
(4)Efficiency ratio – non-GAAP is computed by dividing (i) noninterest expense less amortization of other intangible assets and credit card fraud losses by (ii) the sum of taxable-equivalent NII and noninterest income less the sale and the fair value of held for sale assets.
Tax-equivalent netNII interestis NII adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, tax-equivalent NII increased $35.3$21.8 million to $192.7 million for the year ended December 31, 2025, compared to $170.9 million for 2024the comparedyear toended $135.6December million31, for 2023.2024. The increase in tax-equivalent net interest incomeNII was primarily due to an increase in total interest income of $81.3$14.7 million, or 38.0%,5.0%, which included an increase in interest and fees on loans of $75.3$11.0 million, or 38.7%.4.1%, and an increase in interest on deposits with other banks of $2.8 million, or 44.6%. The increase in interest and fees on loans was primarily due to the increase in the average balance of loans of $1.08$130.3 billion,million, or 29.8%,2.8%, andcoupled anwith increaseloans repricing favorably during the year. The decrease in nettotal accretioninterest incomeexpense ofwas $5.1 millionprimarily due to thea mergerdecrease within TCFCinterest (theon “merger”).deposits Theseof were$6.1 partiallymillion offsetand bya an increasedecrease in interest expense on long-term borrowings of $46.0$1.0 million,million. primarilyThe duedecrease in expense on borrowings was related to increaseslower FHLB advances in the cost of funds and the average balance of interest-bearing deposits of $749.2 million, or 25.1%. All of the increases in average balances were primarily due to the merger.2025.
The following table presents taxable-equivalent net interest income for each of the periods indicated.
The following tablestable presentpresents the distribution of the average consolidated balance sheets, interest income/expense,income, interest expense and annualized yields earned and rates paid for the years ended December 31, 2025, 2024 and 2023.
(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 $15.4 million, $16.9 million and $11.8 million of accretion interest on loans for the years ended December 31, 2025, 2024 and 2023, respectively.
(4) Interest expense on deposits and borrowingborrowings includes amortization of deposit premiumsdiscounts and amortization of borrowing fair value adjustment.adjustments. There were $2.2 million, $1.5 million and $1.8 million of amortization of depositsdeposit premium,discounts and $865 thousand, $926 thousand and $557 thousand of amortization of borrowing fair value adjustmentadjustments for the years ended December 31, 2025, 2024 and 2023, respectively.
The following table presents changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.
Fluctuations in NII can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities.
The Company’s NIM increased from 3.10% for the year ended December 31, 2024 to 3.36% for the year ended December 31, 2025. Margins were higher due to a $211.0 million increase in interest-earning asset balances and a 5 basis point increase in interest-earning asset yields. These positive movements were coupled with lower cost interest-bearing deposits. The increase in the average balances of interest-bearing deposits of $49.9 million was offset by a 20 basis point decrease in the associated rates paid, as well as a $27.2 million decrease in the average balance of FHLB advances and a 44 basis point decrease in the associated rates paid. Net accretion income impacted net interest margin by 21 basis points and 27 basis points for the years ended December 31, 2025 and 2024, respectively, which resulted in NIMs excluding accretion of 3.15% and 2.83% for the same periods.
Provision for Credit Losses (“PCL”) and ACL
Refer to the discussion of the Bank’s PCL and ACL in the asset quality discussion in the analysis of financial condition in this management’s discussion and analysis of financial condition and results of operations.
The Company’s NIM decreased to 3.10% for 2024, from 3.11% for 2023. The decrease in the NIM was primarily due to an increase in the average balance and rates paid on interest-bearing liabilities of $723.3 million and 72 basis points, respectively, partially offset by an increase in the average balance and rates earned on total earning assets of $1.16 billion and 44 basis points, respectively. Margins were flat as more rapid increases in rates on interest-bearing liabilities were offset by increases in interest-earning asset yields and larger balances in noninterest-bearing deposits. The average balances of noninterest-bearing deposits increased $410.6 million, or 39.35%, from 24.86% of average funding for the year ended December 31, 2023 to 27.27% for the year ended December 31, 2024. Net accretion income impacted NIM by 27 bps and 21 bps for the years ended December 31, 2024 and 2023, respectively, which resulted in core NIMs of 2.83% and 2.90% for the same periods
Total noninterest income for the year ended December 31, 2025 was $32.7 million, an increase of $1.5 million, or 4.9%, when compared to the same period in 2024. The increase was primarily due to a $631 thousand decrease in other noninterest income driven by one-time insurance proceeds, a $344 thousand increase in interchange credits and a $338 thousand increase in trust and investment fee income.
Total noninterest income for 2024 of $31.1 million decreased $2.0 million, or 6.1%, from $33.2 million for 2023. The decrease was primarily due to a one-time bargain purchase gain of $8.8 million in the third quarter of 2023, partially offset by $2.2 million of losses on the sale of investment securities, which were both a direct result of the merger with TCFC in the third quarter of 2023. These were offset by increases in gains on sale of other assets, other noninterest income and interchange fees.
Total noninterest expense was $138.0 million for the year ended December 31, 2025, a decrease of $219 thousand, or 0.2%, when compared to the same period in 2024. Noninterest expense line items decreased primarily due to the absence of the $4.7 million credit card fraud event during the year ended December 31, 2024 and lower amortization of intangible assets of $1.2 million, which was partially offset by higher salaries and employee benefit expenses of $4.8 million and an increase of $2.4 million of software and data processing expense in the year ended December 31, 2025. Noninterest expense as a percentage of average assets decreased to 2.26% for the year ended December 31, 2025 from 2.34% for the year ended December 31, 2024.
Total noninterest expense of $138.3 million for 2024 increased $14.9 million, or 12.1%, when compared to $123.3 million for 2023. Almost all noninterest expense line items increased as a result of the expanded operations of the newly-combined Company from the merger. In addition fraud costs increase by $4.1 million driven by the credit card fraud in the first quarter 2024. There were no merger-related expenses for 2024, compared to $17.4 million for 2023. Excluding merger and merger-related expenses, core deposit intangible amortization of $9.8 million for 2024 and $6.1 million for 2023, noninterest expense for the comparable periods was $128.5 million and $99.9 million, respectively. Noninterest expense as a percentage of average assets decreased to 2.3% for 2024 from 2.6% for 2023. Excluding merger and merger-related expenses and core deposit intangible amortization for the comparable periods, noninterest expense as a percentage of average assets increased to 2.2% for 2024 compared to 2.1% for 2023. Management continues to focus on further streamlining processes, unlocking operational efficiencies and reducing overall noninterest expense.
The Company reported income tax expense of $19.1 million and $14.8 million for the years ended December 31, 2025 and 2024, respectively. The effective tax rates were 24.35% and 25.24% for the years ended December 31, 2025 and 2024, respectively. Deferred tax assets were $29.8 million and $31.9 million as of December 31, 2025 and 2024, respectively.
The Company reported income tax expense of $14.8 million and $3.0 million for the years ended December 31, 2024 and 2023, respectively. The effective tax rate was 25.2% for 2024 and 20.8% for 2023. The primary drivers of the increased effective tax rate for 2024 when compared to 2023 were the bargain purchase gain recorded and nondeductible merger-related costs, in connection with the acquisition of TCFC. As of December 31, 2024 the Company recorded net deferred tax assets of $31.9 million compared to $40.7 million in 2023. The decrease was primarily due to the utilization of the federal NOLs and the decrease attributable to acquisition-related adjustments in 2024 compared to 2023.
REVIEWANALYSIS OF FINANCIAL CONDITION
Total assets were $6.26 billion at December 31, 2025, an increase of $28.1 million, or 0.5%, when compared to $6.23 billion at December 31, 2024. The increase was primarily due to an increase in our loan portfolio of $128.3 million and an increase in our investment securities portfolio of $5.3 million, which were partially offset by a decrease in cash and cash equivalents of $104.3 million. The decrease in cash and cash equivalents was primarily driven by loan growth. The ratio of the ACL as a percentage of loans was 1.20% and 1.21% at December 31, 2025 and 2024, respectively.
Total assets were $6.23 billion at December 31, 2024, an increase of $219.8 million or 3.7%, when compared to $6.01 billion at December 31, 2023. The increase was primarily due to increases in loans held for investment of $131.0 million, or 2.8%, and cash and cash equivalents of $87.4 million or 23.50%, partially offset by an increase in the ACL of $559 thousand.
The investment portfolio includes debt and equity securities. Debt securities are classified as either AFS or 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. Net unrealized holding gains and losses on these securities are reported net of related income taxes as accumulated other comprehensive income (“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. At December 31, 2024,2025, 23.7%34.7% of the portfolio of debt securities was classified as AFS and 76.3%65.3% was classified as HTM, compared to 17.7%23.7% and 82.3%76.3%, respectively, at December 31, 2023.2024. See Note 2 – “Investment Securities” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report on Form 10-K for additional details on the composition of the investment portfolio.
See Note 3 – “Investment Securities” in the “Notes to the Consolidated Financial Statements” included in Part II, Item 8. of this Annual Report on Form 10-K for additional details on the composition of our investment portfolio.
Investment securities, including restricted stock and equity securities, totaled $659.4 million at December 31, 2025, an increase of $3.0 million, or 0.5%, compared to $656.4 million at December 31, 2024, a $9.0 million, or 1.4%, increase compared to $647.3 million at December 31, 2023.2024. At December 31, 2024,2025, AFS securities, carried at fair value, totaled $149.2$220.4 millionmillion, compared to $110.5$149.2 million at December 31, 2023.2024. At December 31, 2024,2025, AFS securities consisted of 82.0%88.5% mortgage-backed, 13.5%9.4% U.S. government agency securitiesagencies and 4.4%2.1% corporate bonds, compared to 76.0%,82.0%, 18.5%,13.5% and 5.5%,4.4%, respectively, at December 31, 2023.2024. At December 31, 2024,2025, AFS securitiesthe gross unrealized losses on AFS securities were all related to changes in interest rates and were $10.9$7.1 million, or less than 1% of total assets and 2% of stockholder’stotal stockholders’ equity. At December 31, 2025, the AOCI (loss) was $4.6 million, compared to $7.5 million at December 31, 2024.
At December 31, 2024,2025, HTM securities, carried at amortized cost, totaled $481.1$414.8 million, compared to $513.2$481.1 million at December 31, 2023.2024. At December 31, 2024,2025, HTM securities consisted of 70.0%73.1% mortgage-backed, 27.6%25.3% U.S. government agency securities,securities 2.1%and 1.7% other debt securities and 0.3% state and political entities,securities, compared to 69.7%,70.0%, 28.0%, 2.0%27.6% and 0.3%,2.5%, respectively, at December 31, 2023. At December 31, 2024, the HTM securities had an allowance for credit losses of $203 thousand for the year ended December 31, 2024, compared to $94 thousand for the year ended December 31, 2023.2024.
At December 31, 20242025 and 2023,2024, 97.1%98.2% and 97.1%, respectively, of the Bank’s carrying value of its investment portfolio consisted of securities issued or guaranteed by U.S. government agencies or government-sponsored agencies.
_____________________________________________ (1)Yields have been adjusted to reflect a tax equivalent basis using the statutory federal tax rate of 21%.
The Company monitors the credit quality of HTM securities through credit ratings provided by Standard & Poor’s Rating Services and Moody’s Investor Services. Credit ratings express opinions about the credit quality of a security,security and are updated at each quarter end. Investment grade securities are rated BBB- or higher by S&P and Baa3 or higher by Moody’s and are generally considered by the rating agencies and market participants to be of low credit risk. Conversely, securities rated below investment grade, which are labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade securities. There were no speculative grade HTM securities at December 31, 20242025 or 2023.2024. HTM securities that are not rated are agency mortgage-backed securities sponsored by U.S. government agencies, as well as direct obligations of the agencies, with the remainder being sub-debt of other banks.
The following tabletables presentspresent the amortized cost of HTM securities based on their lowest publicly available credit rating as of December 31, 2025 and 2024.
We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value. At December 31, 2024, the fair value of loans held for sale amounted to $19.6 million, compared to $8.8 million at December 31, 2023.
WhenThe weCompany selloriginates residential mortgage loans,loans wefor makesale on the secondary market, which are recorded at fair value. At December 31, 2025 and 2024, the fair value of loans held for sale amounted to $32.5 million and $19.6 million, respectively. The Bank makes certain representations to purchasers in the purchasersale of mortgage loans related to loan ownership, loan compliance and legality, and accurate documentation, among other things.documentation. If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, wethe Bank may be required to repurchase the loan or indemnify the purchaser. During the year ended December 31, 2025, the Bank repurchased two loans with an aggregate value of $938 thousand. No loans were repurchased during the year ended December 31, 2024.
The Company was not required to repurchase any loans during the years ended December 31, 2024 or 2023.
Our loan portfolio has a CRE loan concentration, which is generally defined as a combination of certain construction and CRE loans. The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in CRE lending. Pursuant to the supervisory criteria contained in the guidance for identifying instructionsinstitutions with a potential CRE concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied CRE loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied CRE loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential CRE concentration risk. Institutions which are deemed to have concentrations in CRE lending are expected to employ heightened levels of risk management with respect to their CRE portfolios,portfolios and may be required to hold higher levels of capital. The Bank has a concentration in CRE loans, and experienced significant growth in its CRE portfolio with its acquisition of TCFC and its wholly-owned subsidiarysubsidiary, CBTC. Non-owner occupied CRE loans including construction totaled $2.08$2.15 billion and $2.02$2.08 billion at December 31, 20242025 and 2023,2024, respectively, and as a percentage of the Bank’s Tier 1 Capital +plus ACL were 359.5%342.55% and 382.6%,359.52%, respectively. Construction loans totaled $336.0 million and $299.0 million at December 31, 2024 and 2023, respectively, and as a percentage of the Bank’s Tier 1 Capital + ACL were 58.0% and 56.7%, respectively.
The CRE portfolio has increased in the past two years. Management has extensive experience in CRE lending,lending and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its CRE portfolio. Monitoring practices are part of the Bank’s credit and risk departments’ annual test plans and are adjusted as needed on a quarterly basis if external or internal conditions merit changes. The Bank’s CRE monitoring plans include stress testing analysis to evaluate changes in collateral values and changes in cash flow debt service coverage ratios as a result of increasing interest rates or declines in customer net operating revenues. We may be required to maintain higher levels of capital as a result of our CRE concentrations, which could require us to obtain additional capitalcapital, or be required to sell/participate portions of loans, either of which may adversely affect shareholder returns.
(1) Other non-owner occupied CRE loans include 1-4commercial family– dwellingimproved loans of $138.6$164.4 million, lot/land loans of $94.3$82.4 million, self-storageself storage loans of $72.6$71.9 million and other loans of $102.3$97.0 million.
(2) The balances for ourthe non-owner occupied commercial real estateCRE portfolio as of December 31, 2024,2025, as presented in this table, coincide with our internal evaluation of risk for the purpose of monitoring loan concentrations in accordance with internal and regulatory guidelines.
(3) Excludes loans held for sale of $19.6$32.5 million.
(1) Other owner occupied CRE loans include marine/boat slips of $59.1 million, restaurantchurch loans of $58.4$59.7 million, marina/boat slip loans of $38.8 million, fire/CMSEMS building loans of $25.9$38.3 million and other loans of $56.7$82.0 million.
(2) Excludes loans held for sale of $19.6$32.5 million.
The Bank’s office CRE loan portfolio, which includes owner occupied and non-owner occupied CRE loans, was $506.0$485.9 millionmillion, or 10.6%9.9% of total loans of $4.77$4.90 billion at December 31, 2024.2025. At December 31, 2024, theThe Bank’s office CRE loan portfolio included $129.1 million, or 26.6% of total office CRE loans, with medical tenant loans were $138.7 milliontenants, and $51.5 million, or 10.6%, of total office CRE loans, with government or government contractor tenant loans were $55.0 million, which equaled 27.4% and 10.9%, respectively, of the total office CRE loan portfolio.tenants. There were 501481 loans in the office CRE loan portfolio with an average and median loan size of $1.0 million and $375$365 thousand, respectively. Loan-to-value (“LTV”) estimates are less than 50% for $182.3$170.5 million, or 36.0%,35.0%, of the office CRE loan portfolioportfolio, and greater than 80% for $9.7$9.1 million, or 1.9%, of the office CRE loan portfolio. LTV collateral values are based on the most recent appraisal, which varies from the initial loan boarding to interim credit reviews. LTV estimates for the office CRE loan portfolio are summarized in the table below and LTV collateral values are based on the most recent appraisal, which may vary from the appraised value at loan origination.
The Bank had 1817 office CRE loans totaling $164.5$166.1 million that were greater than $5.0 million at December 31, 2024,2025, compared to 2418 office CRE loans totaling $189.8$164.5 million at December 31, 2023.2024. The decreaseincrease in the loan balance of this portfolio segment was the result of addition of a new loan partially offset by normal amortizationamortization, the payoff of a $5.6 million loan and onethe closedchange in purpose of collateral of an $11.8 million loan totalingfrom $10.4 million, and adjustments totaling $13.9 millionoffice to remove non-bank-owned participation balances.school. For the office CRE portfolioportfolio, at December 31, 2024,2025, the average loan debt-service coverage ratio was 1.9x1.7x and the average LTV was 49.3%.47.6%. Of the office CRE portfolio balance, 75%80.5% wasare secured by properties in rural or suburban areas with limited exposure to metropolitan cities and 97%97.1% wereare secured by properties with five stories or less. Of the office CRE loans, $33.6$45.0 million will mature and $17.5$26.7 million will reprice prior to December 31, 2025.2026. Of the office CRE loans, $2.3$30.7 million are special mention or substandard. In the fourth quarter of 2025 there was a charge-off of $2.6 million related to the office CRE portfolio. There were no other office CRE portfolio charge-offs during 2025.
The following table below sets forth the maturities and interest rate sensitivity of the loan portfolio at December 31, 2024.2025. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as duematuring inwithin one year or less.year.
What changed in the latest 10-Q
Risk Factors
There have been no material changes to the risk factors as previously disclosed under Part I, Item 1A in our 2025 Annual Report.
No wording changes found in this section.
Full comparison: every changed paragraph (0)
Management's Discussion & Analysis (MD&A)
New heading “Noninterest Income”
New heading “Noninterest Expense”
New heading “RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2026 AND 2025”
New heading “Summary of Financial Results”
New heading “Net Interest Income”
New heading “Average Balances and Yields”
New heading “Rate and Volume Analysis”
New heading “Provision for Credit Losses and ACL”
New heading “Return on Average Assets (“ROAA”)”
Removed heading “ACL and Provision for Credit Losses”
Largest changes
“RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2026 AND 2025”see in full comparison
Full comparison: every changed paragraph (105)
Shore Bancshares, Inc. is headquartered on the Eastern Shore of Maryland. It is the parent company of Shore United Bank, N.A. (the “Bank”). The Bank currently operates 40 full-service branches in Maryland, Delaware and Virginia. The Company, through Wye Financial Partners, a division of the Bank, offers full-service investment, insurance and financial planning services through our broker/dealer, LPL Financial. The Company, through Wye Trust, a division of the Bank, offers wealth management, corporate trustee services and trust administration to customers within our market areas and nationwide.
The Company’s net income for the firstsecond quarter of 2026 was $17.1$18.9 million, or $0.51$0.56 per diluted common share, compared to $15.9$17.1 million, or $0.48 per diluted common share, for the fourth quarter of 2025. The Company had net income of $13.8 million, or $0.41$0.51 per diluted common share, for the first quarter of 2026. The Company had net income of $15.5 million, or $0.46 per diluted common share, for the second quarter of 2025.
FirstSecond Quarter 2026 Highlights
•Net Income – Net income for the firstsecond quarter of 2026 increased $1.2$1.8 million to a$18.9 record $17.1 millionmillion, from $15.9$17.1 million in the fourthfirst quarter of 2025.2026. Net income increased primarily due to a decrease in interest expense of $1.3 million, an increase in netother interestnoninterest income of $2.4$1.2 million and a decrease in thesalaries and employee benefits of $1.2 million, which were partially offset by a decrease in interest on deposits with other banks of $858 thousand and a higher provision for credit losses of $2.7$811 thousand. Net income for the six months ended June 30, 2026 was $36.0 million, partiallycompared offsetto by lower noninterest income of $1.7$29.3 million and an increase in noninterest expense of $1.6 million. The lower noninterest income was due to a one-time receipt of insurance proceeds infor the fourthsix quartermonths ofended June 30, 2025.
•Return on Average Assets (“ROAA”) – The Company reported ROAA of 1.24% for the second quarter of 2026, compared to 1.12% for the first quarter of 2026,2026 comparedand to 1.02%1.03% for the fourth quarter of 2025 and 0.91% for the firstsecond quarter of 2025. Adjusted ROAA – non-U.S. generally accepted accounting principles (“GAAP”)(1), whichwas excludes1.34% amortizationfor the second quarter of other2026, intangiblecompared assets (net of tax), wasto 1.22% for the first quarter of 2026,2026 comparedand to 1.11%1.15% for the fourth quarter of 2025 and 1.02% for the firstsecond quarter of 2025.
•Net Interest Margin (“NIM”) – Net interest income (“NII”) for the second quarter of 2026 increased $364 thousand to $52.9 million compared to the first quarter of 2026 increased $2.4 million to $52.6 million compared to the fourth quarter of 2025.2026. NIM increased 216 basis points (“bps”) to 3.64%3.70% during the firstsecond quarter of 2026 compared to the fourthfirst quarter of 2025.2026. NIM excluding accretion(1) increased for the comparable periods from 3.24%3.35% to 3.35%.3.45%. Excluding accretion interest, loan yields decreased 1 bp and funding costs decreased 138 bps for the comparable periods. Net interest income increased due to acceleratedadditional accretioninterest dueincome tofrom loan payoffs coupled with a lower cost of depositsdeposits. Loan payoffs resulted in accelerated accretion and lowerinterest long-termincome borrowing expenses. These favorable changes were partially offset by lower yieldsrecovery on interest-bearingnonaccrual deposits with other institutions.loans.
•Capital Management – Book value per share increased to $18.44 at June 30, 2026 from $18.02 at March 31, 2026 and $16.94 at June 30, 2025. During the quarter ended June 30, 2026, the Company announced a $30 million share repurchase program and repurchased 40,093 shares of its outstanding common stock for approximately $891 thousand. During the second quarter of 2026, the Company declared a dividend of $0.14 per share, which represents a $0.02, or 16.7%, increase from the dividend paid in the prior quarter.
•Book Value per Share – Book value per share increased to $18.02 at March 31, 2026 from $17.65 at December 31, 2025 and $16.55 at March 31, 2025.
•Asset Quality – Nonperforming assets were 1.10%1.09% of total assets at June 30, 2026, a decrease from 1.10% at March 31, 2026,2026 and an increase from 0.69%0.33% at DecemberJune 31, 2025 and 0.31% at March 31,30, 2025. Classified assets were 1.38%1.41% of total assets at MarchJune 31,30, 2026, an increase when compared to 0.96% at December 31, 2025 and 0.36%1.38% at March 31, 2026 and 0.37% at June 30, 2025. The allowance for credit losses (“ACL”)was was$58.7 million at June 30, 2026, compared to $58.5 million at March 31, 2026,2026 compared to $58.8 millionand at DecemberJune 31, 2025 and $58.0 million at March 31,30, 2025. The ACL as a percentage of loans increaseddecreased to 1.20% at June 30, 2026 compared to 1.21% at March 31, 2026 compared to 1.20%and at DecemberJune 31, 2025 and remained flat compared to March 31,30, 2025.
•Operating Leverage – The efficiency ratio for the firstsecond quarter of 2026 was 61.97%,57.76%, compared to 60.06% in the fourth quarter of 2025 and 63.64%61.97% for the first quarter of 2026 and 60.83% for the second quarter of 2025. The adjusted efficiency ratio – non-GAAP(1), which excludes amortization of intangibles, was 54.49% for the second quarter of 2026, compared to 58.57% for the first quarter of 2026,2026 comparedand to 56.59%56.73% for the fourth quarter of 2025 and 59.25% for the firstsecond quarter of 2025. Management anticipates ongoing expense management of professional services and technology investments will result in continued improvements in operating leverage over time.
(1) See the Reconciliation of GAAP and non-GAAPNon-GAAP Measures tables.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCHJUNE 31,30, 2026 AND 2025
The Company reported net income for the three months ended MarchJune 31,30, 2026 of $17.1$18.9 million, or $0.51$0.56 per diluted common share, compared to $13.8$15.5 million, or $0.41$0.46 per diluted common share, for the three months ended MarchJune 31,30, 2025.
Taxable-equivalent NII is NII adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, taxable-equivalent NII wasincreased $52.6$5.8 million to $53.0 million for the firstsecond quarter of 20262026, andcompared $46.0to $47.2 million for the firstsecond quarter of 2025. The increase in net interest income was primarily due to a decrease in interest expense on deposits of $3.8$4.4 million, an increase in interest and fees on loans of $3.3$849 millionthousand and a decrease in interest expense on short-term borrowings of $391$589 thousand,thousand. These favorable changes were partially offset by aan increase in interest expense on long-term borrowings of $177 thousand. The decrease in interest expense on deposits withis other banksreflective of $951rate thousand.reductions during 2026.
The following table presents taxable-equivalent net interest incomeNII for each of the periods indicated.
The following table presents the distribution of the average consolidated balance sheets, interest income, interest expense and annualized yields earned and rates paid for the three months ended MarchJune 31,30, 2026 and 2025.
(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 $4.3$3.8 million and $3.7$4.2 million of accretion interest on loans for the three months ended MarchJune 31,30, 2026 and 2025, respectively.
(4) Interest expense on deposits and borrowings includes amortization of deposit discounts and amortization of borrowing fair value adjustments. There were zero and $334$435 thousand of amortization of deposit discounts and $79 thousand and $232 thousand of amortization of borrowing fair value adjustments for the three months ended MarchJune 31,30, 2026 and 2025, respectively. All deposit discounts have been fully amortized as of December 31, 2025.
The following table presents changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.
The Company’s NIM increased to 3.64%3.70% for the three months ended MarchJune 31,30, 2026, from 3.21%3.34% for the three months ended MarchJune 31,30, 2025. Comparing the three months ended MarchJune 31,30, 2026 to the three months ended MarchJune 31,30, 2025, the Company’s interest-earning asset yields increasedwere toflat 5.44%at from 5.32%,5.42%, while the cost of funds repriced at a faster pace, which resulted in a decrease of 3036 bps, to 1.90%1.81% from 2.20%,2.17%, for the same periods.
ACL and Provision for Credit Losses (“PCL”) and ACL
Refer to the discussion of the Bank’s ACL and PCL in the asset quality discussion in the analysis of financial condition in this management’s discussion and analysis of financial condition and results of operations.
Noninterest Income
Total noninterest income for the three months ended June 30, 2026 was $8.8 million, a decrease of $576 thousand, or 6.1%, from $9.4 million for the three months ended June 30, 2025. The decrease was primarily due to a decrease in mortgage banking revenue of $825 thousand and other noninterest income, partially offset by increases in service charges on deposit accounts, trust and investment fee income and interchange credits.
Noninterest Expense
Total noninterest expense was $35.7 million for the three months ended June 30, 2026, an increase of $1.3 million, or 3.7%, when compared to $34.4 million for the three months ended June 30, 2025. The increase was primarily due to higher salaries and employee benefits expense of $720 thousand and higher software and data processing costs of $516 thousand, partially offset by the decrease in the amortization of other intangible assets of $297 thousand.
Income Taxes
The Company reported income tax expense of $6.3 million and $5.1 million for the three months ended June 30, 2026 and 2025, respectively. The effective tax rate was 25.09% and 24.84% for the three months ended June 30, 2026 and 2025, respectively.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2026 AND 2025
Summary of Financial Results
The Company reported net income for the six months ended June 30, 2026 of $36.0 million, or $1.07 diluted earnings per common share, compared to $29.3 million, or $0.88 diluted earnings per common share, for the six months ended June 30, 2025.
The following table presents selected consolidated statement of operations data for each of the periods indicated.
Net Interest Income
As shown in the table below, taxable-equivalent NII increased $12.4 million to $105.6 million for the six months ended June 30, 2026, compared to $93.2 million for the six months ended June 30, 2025. The increase in net interest income was primarily due to an increase in total interest income of $3.4 million, or 2.2%, which included an increase in interest on loans of $4.1 million, or 3.0%, a decrease in interest on deposits with other banks of $939 thousand, or 18.8%, and an increase in interest income on taxable investments of $169 thousand. The increase in interest on loans was primarily due to the increase in the average balance of loans of $70.6 million, or 1.5%. The decrease in total interest expense was primarily due to a decrease in interest on deposits of $8.2 million and lower short-term borrowings of $1.2 million. These were partially offset by the increase in interest expense on long-term borrowings of $384 thousand as a result of lower FHLB borrowings and subordinated debt-related expenses that were classified as short-term borrowings in 2025.
The following table presents taxable-equivalent NII for each of the periods indicated.
Average Balances and Yields
The following table presents the distribution of the average consolidated balance sheets, interest income, interest expense and annualized yields earned and rates paid for the six months ended June 30, 2026 and 2025.
(1) All amounts are reported on a taxable-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense.
(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 $8.1 million and $8.0 million of accretion interest on loans for the six months ended June 30, 2026 and 2025, respectively.
(4) Interest expense on deposits and borrowings includes amortization of deposit discounts and amortization of borrowing fair value adjustments. There were zero and $769 thousand of amortization of deposit discounts and $159 thousand and $463 thousand of amortization of borrowing fair value adjustments for the six months ended June 30, 2026 and 2025, respectively. All deposit discounts have been fully amortized as of December 31, 2025.
Rate and Volume Analysis
The following table presents changes in volume and rate related to interest income and interest expense for the periods indicated.
The Company’s NIM increased from 3.28% for the six months ended June 30, 2025 to 3.67% for the six months ended June 30, 2026. Margins were higher due to a $64.8 million increase in interest-earning asset balances and a 6 bp increase in interest-earning asset yields. These positive movements were coupled with a lower cost of interest-bearing deposits. The increase in the average balances of interest-bearing deposits of $4.6 million was offset by a 44 basis point decrease in the associated rates paid, as well as a $49.2 million decrease in the average balance of FHLB advances and a 99 basis point decrease in the associated rates paid. Net accretion income impacted net interest margin by 27 basis points and 24 basis points for the six months ended June 30, 2026 and 2025, respectively, which resulted in NIM excluding accretion of 3.40% and 3.04% for the same periods.
Provision for Credit Losses and ACL
Total noninterest income for the six months ended June 30, 2026 decreased $466 thousand, or 2.8%, when compared to the same period in 2025. The decrease was primarily due to an $833 thousand decrease in other noninterest income and a $615 thousand decrease in mortgage banking revenue, partially offset by a $475 thousand increase in trust and investment fee income and a $293 thousand increase in interchange credits.
Total noninterest income for the three months ended March 31, 2026 was $7.2 million, an increase of $110 thousand from $7.1 million for the three months ended March 31, 2025. The increase was primarily due to an increase in trust and investment fee income of $314 thousand, an increase in mortgage banking revenue of $210 thousand driven by increased mortgage servicing activity, and a $121 thousand increase in interchange credits. These favorable changes were partially offset by a decrease in other noninterest income of $617 thousand due to the absence of one-time bank-owned life insurance income recorded in the first quarter of 2025.
NoninterestTotal noninterest expense of $37.1 million for the threesix months ended MarchJune 31,30, 2026 increased $3.3$4.6 millionmillion, or 6.7%, when compared to the $33.7same millionperiod for the three months ended March 31,in 2025. TheNoninterest increaseexpense wasline items increased primarily due to higher salaries and employee benefitsbenefit expenseexpenses of $3.2$3.9 million and highera $1.0 million increase in software and data processing costsexpense. ofThese $449increases thousand,were partially offset by the decrease in thelower amortization of other intangible assets of $298$595 thousand.thousand during the six months ended June 30, 2026.
The Company reported income tax expense of $5.6$11.9 million and $4.5$9.6 million for the threesix months ended MarchJune 31,30, 2026 and 2025, respectively. The effective tax rate was 24.58%24.85% and 24.61%24.73% for the threesix months ended MarchJune 31,30, 2026 and 2025, respectively.
Total assets were $6.21$6.15 billion at MarchJune 31,30, 2026, a decrease of $52.8$107.4 million, or 0.8%,1.7%, when compared to $6.26 billion at December 31, 2025. The decrease was primarily due to a decrease in our loan portfolio of $52.3$22.6 million and a decrease in cash and cash equivalents of $14.7$97.9 million, which were partially offset by an increase in our investment securities portfolio of $22.5$18.4 million. The ratio of the ACL as a percentage of loans was 1.21%1.20% and 1.20% at MarchJune 31,30, 2026 and December 31, 2025, respectively.
Cash and cash equivalents totaled $340.8$257.7 million at MarchJune 31,30, 20262026, compared to $355.6 million at December 31, 2025. Total cash and cash equivalents fluctuate due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and wholesale funding sources, and the portions of the investment and loan portfolios that mature within one year. The decrease in cash and cash equivalents was primarily driven by seasonal run-off of the municipal deposits.
The investment portfolio includes debt and equity securities. Debt securities are classified as either available for sale (“AFS”) or HTM.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. Net unrealized holding gains and losses on these securities are reported net of related income taxes as accumulated other comprehensive income (“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. At MarchJune 31,30, 2026, 40.15%43.97% of the portfolio of debt securities was classified as AFS and 59.85%56.03% was classified as HTM, compared to 34.69% and 65.31%, respectively, at December 31, 2025. See Note 2 – “Investment Securities” in the “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details on the composition of the investment portfolio.
Investment securities, including restricted stock and equity securities, totaled $681.8$677.8 million at MarchJune 31,30, 2026, an increase of $22.5$18.4 million, or 3.4%,2.80%, compared to $659.4 million at December 31, 2025. At MarchJune 31,30, 2026, AFS securities, carried at fair value, totaled $264.0$287.4 millionmillion, compared to $220.4 million at December 31, 2025. At MarchJune 31,30, 2026, AFS securities consisted of 87.37%85.95% mortgage-backed securities, 7.71%7.05% U.S. government agency securities and 4.92%7.00% corporate bonds, compared to 88.50%, 9.36% and 2.14%, respectively, at December 31, 2025. At MarchJune 31,30, 2026, the gross unrealized losses on AFS securities were all related to changes in interest rates and were $7.9$9.1 million, or less than 1% of total assets and 2% of total stockholders’ equity. At MarchJune 31,30, 2026, the AOCI loss was $5.3$6.1 million, compared to $4.6 million at December 31, 2025.
At MarchJune 31,30, 2026, HTM securities, carried at amortized cost,cost net of allowance, totaled $393.6$366.2 million, compared to $414.8 million at December 31, 2025. At MarchJune 31,30, 2026, HTM securities consisted of 74.74%77.69% mortgage-backed securities, 23.49%20.41% U.S. government agency securities and 1.77%1.90% other debt securities, compared to 73.06%, 25.26% and 1.68%, respectively, at December 31, 2025.
At MarchJune 31,30, 2026 and December 31, 2025, 96.98%83.22% and 98.18%,86.82%, respectively, of the Bank’s carrying value of its investment portfolio consisted of securities issued or guaranteed by U.S. government agencies or government-sponsored agencies.
The Company monitors the credit quality of HTM securities through credit ratings provided by Standard & Poor’s Rating Services and Moody’s Investor Services. Credit ratings express opinions about the credit quality of a security and are updated at each quarter end. Investment grade securities are rated BBB- or higher by S&P and Baa3 or higher by Moody’s and are generally considered by the rating agencies and market participants to be of low credit risk. Conversely, securities rated below investment grade, which are labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade securities. There were no speculative grade HTM securities at MarchJune 31,30, 2026 or December 31, 2025. HTM securities that are not rated are agency mortgage-backed securities sponsored by U.S. government agencies, as well as direct obligations of the agencies, with the remainder being subordinated debt securities of other banks.
The following tables present the amortized cost of HTM securities based on their lowest publicly available credit rating as of MarchJune 31,30, 2026 and December 31, 2025.
The Company originates residential mortgage loans for sale on the secondary market, which are recorded at fair value. At MarchJune 31,30, 2026 and December 31, 2025, the fair value of loans held for sale amounted to $24.0$30.8 million and $32.5 million, respectively. The Bank makes certain representations to purchasers in the sale of mortgage loans related to loan ownership, loan compliance and legality, and accurate documentation. If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, the Bank may be required to repurchase the loan or indemnify the purchaser. During the three months ended MarchJune 31,30, 2026 and 2025 and six months ended June 30, 2026, the Bank repurchased no loans. During the threesix months ended MarchJune 31,30, 2025, the Bank repurchased one loan with an aggregate value of $415 thousand.
The following table summarizes the Company’s loan portfolio at MarchJune 31,30, 2026 and December 31, 2025.
The Company’s loan portfolio has a CRE loan concentration, which is generally defined as a combination of certain construction and CRE loans. The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in CRE lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential CRE concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied CRE loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied CRE loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential CRE concentration risk. Institutions which are deemed to have concentrations in CRE lending are expected to employ heightened levels of risk management with respect to their CRE portfolios and may be required to hold higher levels of capital. Non-owner occupied CRE loans, includingexcluding land and construction loans, totaled $2.14 billion and $2.15$1.87 billion at MarchJune 31,30, 2026 and $1.84 billion at December 31, 2025, respectively, and as a percentage of the Bank’s Tier 1 Capital plus ACL were 332.94%326.63% and 342.55%, respectively.
SHBI insider buying and selling (Form 4)
Since 2026-04-11, insiders reported open-market purchases in 2 Form 4 filings (2 insiders, 2 trade dates, 475 shares, about $10.9K) and open-market sales in 0 filings. Net open-market shares: 475 (purchases minus sales); net value about $10.9K.Totals add up every open-market (code P and S) line in those filings, using the prices reported in the filings. Awards, option exercises, tax withholding and gifts are listed below but not counted.
| Trade date | Insider | Transaction | Shares | Price | Value |
|---|---|---|---|---|---|
| 2026-08-21 | Stayton Noah Edward |
Option exercise | 3,692 | — | — |
| 2026-08-21 | Stayton Noah Edward |
Shares withheld for tax | 1,251 | — | — |
| 2026-08-21 | Cullum Charles S |
Option exercise | 1,581 | — | — |
| 2026-08-21 | Cullum Charles S |
Shares withheld for tax | 533 | — | — |
| 2026-08-03 | Lamon John |
Open-market purchase | 300 | $24.57 | $7.4K |
| 2026-07-29 | Adams Michael Brian |
Option exercise | 2,310 | — | — |
| 2026-07-29 | Clemmer R. Michael |
Option exercise | 2,310 | — | — |
| 2026-07-29 | Hyatt Alan J |
Option exercise | 2,310 | — | — |
| 2026-07-29 | Jenkins Louis P Jr |
Option exercise | 2,310 | — | — |
| 2026-07-29 | Jones David S. |
Option exercise | 2,310 | — | — |
| 2026-07-29 | Lamon John |
Option exercise | 2,310 | — | — |
| 2026-07-29 | Mcdonald Rebecca Middleton |
Option exercise | 2,310 | — | — |
| 2026-07-29 | Sanders Edward Lawrence Iii |
Option exercise | 2,310 | — | — |
| 2026-07-29 | Wayson Konrad |
Option exercise | 2,310 | — | — |
| 2026-07-29 | Cullum Charles S |
Option exercise | 4,161 | — | — |
| 2026-07-29 | Cullum Charles S |
Shares withheld for tax | 1,413 | — | — |
| 2026-05-26 | Adams Michael Brian |
Open-market purchase | 175 | $20.29 | $3.6K |
Well-known investors holding SHBI (13F)
| Investor | Quarter | Shares | Reported value | % of their 13F | Change vs prior quarter |
|---|---|---|---|---|---|
| AQR Capital Management (Cliff Asness) | 2026-06-30 | 476,221 | $10.9M | 0.0% | Added 9% |
| Renaissance Technologies | 2026-06-30 | 279,515 | $6.4M | 0.01% | Reduced 20% |
| Millennium Management (Israel Englander) | 2026-06-30 | 218,636 | $5.0M | 0.0% | Reduced 5% |
| Citadel Advisors (Ken Griffin) | 2026-06-30 | 184,514 | $4.2M | 0.0% | Added 493% |
| Two Sigma Investments | 2026-06-30 | 97,290 | $2.2M | 0.0% | Added 85% |
| D. E. Shaw & Co. | 2026-06-30 | 55,940 | $1.3M | 0.0% | Added 13% |