What changed in this filing

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Item 1. Business

2023-03-30 compared with 2022-03-31 · 59 added, 59 removed, 367 unchanged (24% of the section changed)

7 unchanged sentences

The Company, Bank and Title Company are Affirmative Action/Equal Opportunity Employers.

HS West, LLC (“HS”) is a subsidiary of the Bank which constructed a building in Annapolis, Maryland that serves as a branch office of the Bank and leases space to five unrelated companies and to a law firm of which the Chairman of the Board of the Company and Bank is a partner.

Recent Acquisition

On October 31, 2021, the Company completed the acquisition of Severn Bancorp, Inc.

(“Severn”), the savings and loan holding company of Severn Savings Bank, FSB, a federally charted savings bank headquartered in Annapolis, Maryland.

In connection with the merger, the Bank consummated its conversion to a national bank on October 29, 2021.

This transaction created the third largest community bank headquartered in Maryland.

This transaction (i) expanded the Company’s Maryland market area with branches in the greater Annapolis market area, (ii) provides increased opportunities for additional products and services and (iii) enhances the Company’s scale to drive efficiency and profitability.

Additionally, this transaction creates a competitive position in the Columbia/Baltimore/Towson MSA, while filling in the Company’s current market footprint.

Under the terms of the merger agreement, each share of Severn common stock was converted into the right to receive 0.6207 shares of Company common stock and $1.59 in cash.

The value of the total deal consideration was approximately $169.8 million, which was based upon the closing price of the Company’s common stock on October 29, 2021, the last trading day prior to the closing, and included aggregate cash consideration of approximately $20.9 million.

Pending Merger

On December 14, 2022, the Company and TCFC entered into a definitive agreement pursuant to which TCFC will be merged with and into the Company, with the Company as the surviving corporation (the "Merger").

Promptly following the Merger, TCFC’s wholly-owned bank subsidiary, the Community Bank of the Chesapeake, will be merged with and into the Bank, with the Bank as the surviving bank.

Under the terms of the agreement, TCFC shareholders will have the right to receive 2.3287 shares of Shore common stock and cash in lieu of any fractional shares of Shore common stock.

Upon closing, shareholders of Shore will own approximately 60% of the combined company and shareholders of TCFC will own approximately 40% of the combined company.

The transaction is subject to satisfaction of customary closing conditions, including approval from Shore and TCFC shareholders.

Shore and TCFC have received all required regulatory approvals and waivers.

The transaction is expected to close late in the second quarter or early in the third quarter of 2023.

As of December 31, 2022, TCFC had more than $2.4 billion in assets and operated ten full-service offices in Maryland and two full-service offices in Virginia.

Banking Products and Services

The Bank is a national banking association chartered under the laws of the United States with trust powers that can trace its origin to 1876.

The Bank currently operates 29 full-service branches, 30 ATMs, 5 loan production offices, and provides a full range of commercial and consumer banking products and services to individuals, businesses, and other organizations in Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County, Anne Arundel County and Worcester County in Maryland, Kent County, Delaware and in Accomack County, Virginia.

The Bank currently operates 31 full-service branches, 33 ATMs, 6 loan production offices, and provides a full range of commercial and consumer banking products and services to individuals, businesses, and other organizations in Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County, Anne Arundel County and Worcester County in Maryland, Kent County and Sussex County in Delaware and in Accomack County, Virginia.

The Bank’s deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation (the “FDIC”).

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Merchant credit card clearing services are available as well as direct deposit of payroll, internet banking and telephone banking services.

Services to individuals include checking accounts, various savings programs, mortgage loans, home improvement loans, installment and other personal loans, credit cards, personal lines of credit, automobile and other consumer financing, safe deposit boxes, debit cards, 24-hour telephone banking, internet banking, mobile banking, and 24-hour automatic teller machine services.

machine services.

The Bank also offers non-deposit products, such as mutual funds and annuities, and discount brokerage services to their customers.

Additionally, the Bank has Saturday hours and extended hours on certain evenings during the week for added customer convenience.

Medical-Use Cannabis Related Business

As of October 31, 2021, in connection with our acquisition of Severn, the Bank began providing banking services to customers that are licensed by the state of Maryland to do business in the medical-use cannabis industry as growers, processors and dispensaries.

Cannabis Related Business

The Bank provides banking services to customers that are licensed by various states to do business in the cannabis industry as growers, processors and dispensaries.

The Bank maintains stringent written policies and procedures related to the on-boarding of such businesses and to the monitoring and maintenance of such business accounts.

In accordance with Federal regulatory guidance, and industry best practices, the Bank performs a multilayered due diligence review of a medical-use cannabis business before the business is on-boarded, including site visits and confirmation that the business is properly licensed by the state of Maryland.

Throughout the relationship, the Bank continues to monitor the business, including site visits, to ensure that the medical-use cannabis business continues to meet our stringent requirements, including maintenance of required licenses.

The Bank performs periodic financial reviews of the business and monitor the business in accordance with the Bank Secrecy Act (“BSA”) and Maryland Medical Cannabis Commission requirements.

See Note 23 to the Consolidated Financial Statements for a summary of the level of business activities with the Bank’s medical-use cannabis customers.

In accordance with Federal regulatory guidance, and industry best practices, the Bank performs a multilayered due diligence review of a cannabis business before the business is on-boarded, including site visits and confirmation that the business is properly licensed by the state in which it is conducting business.

Throughout the relationship, the Bank continues to monitor the business, including site visits, to ensure that the cannabis business continues to meet stringent requirements, including maintenance of required licenses.

The Bank performs periodic financial reviews of the business and monitors the business in accordance with the Bank Secrecy Act (“BSA”) and Maryland Medical Cannabis Commission requirements.

See Note 23 to the Consolidated Financial Statements for a summary of the level of business activities with the Bank’s cannabis customers.

Lending Activities

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Site inspections are performed to determine pre-specified stages of completion before loan proceeds are disbursed.

These loans typically have maturities of six to 12 months and may have fixed or variable rate features.

These loans typically have maturities of six to twelve months and may have fixed or variable rate features.

Permanent financing options for individuals include fixed and variable rate loans with three- and five-year balloon features and one-, three- and five-year adjustable rate mortgage loans.

The risk of loss associated with real estate construction lending is controlled through conservative underwriting

procedures such as loan to value ratios of 80% or less at origination, obtaining additional collateral when prudent, and closely monitoring construction projects to control disbursement of funds on loans.

The risk of loss associated with real estate construction lending is controlled through conservative underwriting procedures such as loan to value ratios of 80% or less at origination, obtaining additional collateral when prudent, and closely monitoring construction projects to control disbursement of funds on loans.

The Bank originates residential mortgage loans that are to be held in our loan portfolio as well as loans that are intended for sale in the secondary market.

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As of December 31, 2022, the Bank was servicing $343.8 million in loans for FNMA and $74.1 million in loans for FHLMC.

A variety of consumer loans are offered to customers, including home equity loans, credit cards and other secured and unsecured lines of credit and term loans.

A variety of consumer loans are offered to customers, including home equity loans, credit cards, marine loans and other secured and unsecured lines of credit and term loans.

Careful analysis of an applicant’s creditworthiness is performed before granting credit, and ongoing monitoring of loans outstanding is performed in an effort to minimize risk of loss by identifying problem loans early.

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None of our employees are represented by any collective bargaining unit or are a party to a collective bargaining agreement.

We believe the relationship with our employees to be excellent and were recently named a Best Bank to Work for by American Banker.

We believe the relationship with our employees to be excellent.

Our ability to attract and retain employees is a key to our success.

We offer a competitive total rewards program to our employees and monitor the competitiveness of our compensation and benefits programs in our various market areas.

The Company prides itself on being a values-driven organization, where employees are empowered to share ideas that keep the organization connected.

The Company prides itself on being a values-driven organization, supporting diversity, equity and inclusion.

Employees are empowered to share ideas that keep the organization connected.

Our company core values guide each team member to:

•Act as an Owner,

•Practice Balanced Risk Management,

•Leverage the Team, and

• Create a positive impact.

•Integrity – Honesty, Commitment, Ethics

•Family – Teamwork, Open, Engage, Communicate

•Performance – Effort, Knowledge, Quality, Results

• Dedication – Passion, Motivated, Tireless, Perseverance

• Empowerment – Innovative, Initiative, Accountable

We believe that these values enable our success with our customers and have helped us build an inspiring, vibrant and accountability driven culture.

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levels of leadership within the organization.

This includes identifying future leaders and preparing them for leadership opportunities.

The safety, health and wellness for our employees is a top priority and consists of policies, procedures, guidelines, and mandates all tasks be conducted in a safe and efficient manner complying with all local, state and federal safety and health regulations.

At the onset of the COVID-19 pandemic, we successfully moved to a virtual-workplace and had 85% of our people working remotely, but most employees returned to the workplace in 2021.

Employees are subject to policies and procedures put in place to protect them including a full stock of PPE.

The organization has continually provided guidelines to employees to promote healthy habits and ways to stay connected while working remotely.

This includes career development as well as identifying future leaders and preparing them for leadership opportunities.

Shore Bancshares, Inc.

and its subsidiaries operate in a highly competitive environment.

Our competitors include community banks, commercial banks, credit unions, thrifts, mortgage banking companies, credit card issuers, investment advisory firms, brokerage firms, mutual fund companies, title companies and e-commerce and other internet-based companies.

Our competitors include community banks, commercial banks, credit unions, thrifts, mortgage banking companies, credit card issuers, investment advisory firms, brokerage firms, mutual fund companies, fintechs, title companies and e-commerce and other internet-based companies.

We compete on a local and regional basis for banking and investment products and services.

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The Dodd-Frank Act has increased the regulatory burden and compliance costs of the Company.

Moreover, bank regulatory agencies can be more aggressive in responding to concerns and trends identified in

examinations, which could result in an increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management, and capital adequacy, as well as other safety and soundness concerns.

Moreover, bank regulatory agencies can be more aggressive in responding to concerns and trends identified in examinations, which could result in an increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management, and capital adequacy, as well as other safety and soundness concerns.

Regulation of Financial Holding Companies

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Under this methodology, the assessment rate schedules used to determine assessments due from insured depository institutions become progressively lower when the reserve ratio in the DIF exceeds 2% and 2.5%.

On October 18, 2022, the FDIC adopted a final rule that increases initial base deposit insurance assessment rates by 2 basis points, beginning with the first quarterly assessment period of 2023.

Due to the decline in the DIF reserve ratio below the statutory minimum of 1.35 percent as of June 30, 2020, caused by extraordinary growth in insured deposits during the first and second quarters of 2020, the FDIC established a Restoration Plan in September 2020 to restore the DIF reserve ratio to meet or exceed the statutory minimum of 1.35 percent within eight years.

This 2020 plan did not include an increase in the deposit insurance assessment rate.

On June 21, 2022, however, the FDIC adopted an Amended Restoration Plan and notice of proposed rulemaking to increase the deposit insurance assessment rates as it was otherwise at risk of not reaching the statutory minimum by the statutory deadline of September 30, 2028.

The proposed rule was adopted as final without change.

Also, in the final rule adopted on October 18, 2022, the FDIC incorporated Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures in the risk-based deposit insurance assessment system applicable to all large and highly complex insured depository institutions.

In March 2022, the FASB issued ASU 2022-02, which eliminates accounting guidance for troubled debt restructurings (“TDRs”) and introduces new disclosures and enhances existing disclosures concerning certain loan refinancings and restructurings when a borrower is experiencing financial difficulty.

The FDIC final rule amends the assessment regulations to include a new term, “modifications to borrowers experiencing financial difficulty,” in two financial measures—the underperforming assets ratio and the higher-risk assets ratio—used to determine deposit insurance assessments for large and highly complex insured depository institutions.

The Dodd-Frank Act also raised the limit for federal deposit insurance to $250,000 for most deposit accounts and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000.

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Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items.

Under the Dodd-

Frank Act, the FRB must apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions.

Under the Dodd-Frank Act, the FRB must apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions.

The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.

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These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Basel III also includes, as part of the definition of CET1 capital, a requirement that banking institutions include the amount of Additional Other Comprehensive Income (“AOCI”), which primarily consists of unrealized gains and losses on available-for-sale securities, which are not required to be treated as other-than-temporary impairment, net of tax) in calculating regulatory capital.

Banking institutions had the option to opt out of including AOCI in CET1 capital if they elected to do so in their first regulatory report following January 1, 2015.

Basel III also includes, as part of the definition of CET1 capital, a requirement that banking institutions include the amount of Accumulated Other Comprehensive Income (“AOCI”), which primarily consists of unrealized gains and losses on available-for-sale securities, which are not required to be treated as other-than-temporary impairment, net of tax) in calculating regulatory capital.

Banking institutions had the option to opt out of including AOCI in CET1 capital if they elected to do so in their first

regulatory report following January 1, 2015.

As permitted by Basel III, the Company and the Bank have elected to exclude AOCI from CET1.

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They also include risk weighting of equity exposures and past due loans;

and higher (greater than 100%) risk weighting for certain commercial real estate exposures

that have higher credit risk profiles, including higher loan to value and equity components.

and higher (greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit risk profiles, including higher loan to value and equity components.

In particular, loans categorized as “high-volatility commercial real estate” loans (“HVCRE loans”), as defined pursuant to applicable federal regulations, are required to be assigned a 150% risk weighting, and require additional capital support.

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Basel III is currently applicable to the Bank and the Company.

Overall, the Comapny believes that implementation of the Basel III Rule has not had and will not have a material adverse effect on the Comapny’s or the Bank’s capital ratios, earnings, shareholder’s equity, or its ability to pay dividends, effect stock repurchases or pay discretionary bonuses to executive officers.

Overall, the Company believes that implementation of the Basel III Rule has not had and will not have a material adverse effect on the Company’s or the Bank’s capital ratios, earnings, stockholders’ equity, or its ability to pay dividends, effect stock repurchases or pay discretionary bonuses to executive officers.

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”).

Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.

Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027.

Under the Basel framework, these standards were generally effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027.

Under the current U.S.

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federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of CECL accounting standard.

Additionally, in March 2020, the U.S.

Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S.

economy as a result of the COVID-19 pandemic.

The capital relief in the interim is calibrated to approximate the difference in allowances under CECL relative to the incurred loss methodology for the first two years of the transition period using a 25% scaling factor.

The cumulative difference at the end of the second year of the transition period is then phased in to regulatory capital at 25% per year over a three-year transition period.

The final rule was adopted and became effective in September 2020.

As a result, entities may gradually phase in the full effect of CECL on regulatory capital over a five-year transition period.

The Company is not required to implement the CECL model until January 1, 2023.

As a result, entities may gradually phase in the full effect of CECL on regulatory capital over a three-year transition period.

The requirement to implement the CECL model was effective January 1, 2023.

Prompt Corrective Action

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These statutes and related rules and regulations impose requirements and limitations on specified financial transactions and accounts and other relationships intended to guard against money laundering and terrorism financing.

The principal requirements for an insured depository institution include (i) establishment of an anti-money laundering program that includes training and audit components, (ii) establishment of a “know your customer” program involving due diligence to confirm the identities of persons seeking to open accounts and to deny accounts to those persons unable to demonstrate their identities, (iii) the filing of currency transaction reports for deposits and withdrawals of large amounts of cash and suspicious activities reports for activity that might signify money laundering, tax evasion, or other criminal activities, (iv) additional precautions for accounts sought and managed for non-U.S.

persons and (v) verification and certification of money laundering risk with respect to private

banking and foreign correspondent banking relationships.

The principal requirements for an insured depository institution include (i) establishment of an anti-money laundering program that includes training and audit components,

(ii) establishment of a “know your customer” program involving due diligence to confirm the identities of persons seeking to open accounts and to deny accounts to those persons unable to demonstrate their identities, (iii) the filing of currency transaction reports for deposits and withdrawals of large amounts of cash and suspicious activities reports for activity that might signify money laundering, tax evasion, or other criminal activities, (iv) additional precautions for accounts sought and managed for non-U.S.

persons and (v) verification and certification of money laundering risk with respect to private banking and foreign correspondent banking relationships.

For many of these tasks a bank must keep records to be made available to its primary federal regulator.

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The Bank otherwise has implemented policies and procedures to comply with the foregoing requirements.

The Treasury Department’s Office of Foreign Assets Control (“OFAC”), administers and enforces economic and trade sanctions against targeted foreign countries and persons, as defined by various Executive Orders and Acts of Congress.

The U.S Department of Treasury’s Office of Foreign Assets Control (“OFAC”), administers and enforces economic and trade sanctions against targeted foreign countries and persons, as defined by various Executive Orders and Acts of Congress.

OFAC publishes lists of persons that are the target of sanctions, including the List of Specially Designated Nationals and Blocked Persons.

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The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware.

A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack.

service providers fall victim to this type of cyber-attack.

If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.

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One of the amendments modifies the requirements for a loan to qualify as a QM as well as certain other provisions in the ATR/QM Rule, and eliminates the Fannie/Freddie QM Alternative.

This amendment essentially replaces the 43% DTI limit with an APR-based limitation, which for most loans requires that the loan's annual percentage rate (APR) not exceed the average prime offer rate for a comparable transaction by 2.25 percentage points or more as of the date the interest rate is set.

This amendment essentially replaces the 43% DTI limit with an APR-based limitation, which for most loans

requires that the loan's annual percentage rate (APR) not exceed the average prime offer rate for a comparable transaction by 2.25 percentage points or more as of the date the interest rate is set.

A second amendment creates a new class of QMs, called Seasoned QMs, which are essentially first-lien loans that could not be classified as QMs when originated for reason only that they had DTI ratios above 43%, but which have been held by the original creditor (or the first purchaser) for at least 36 months, during which time the borrower had no more than two 30-day delinquencies and no delinquencies of 60 days or more.

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The earnings and growth of the banking industry and ultimately of the Company are affected by the monetary and credit policies of governmental authorities, including the FRB.

An important function of the FRB is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures.

An important function of the FRB is to regulate the national

supply of bank credit in order to control recessionary and inflationary pressures.

Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S.

8 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business