Item 2. Management’s Discussion and Analysis
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context clearly suggests otherwise, references to “the Company,” “we,” “our” and “us” in the remainder of this Quarterly Report on Form 10-Q are to Shore Bancshares, Inc. and its consolidated subsidiaries.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements. The statements contained herein that are not historical facts are forward-looking statements (as defined by the Private Securities Litigation Reform Act of 1995) based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. These statements are evidenced by terms such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions. Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not prove true. These projections involve risk and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements:
• general economic conditions, (including the interest rate environment, government economic and monetary policies, the strength of global financial markets and inflation/deflation and supply chain issues), whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products, our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans;
• adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments;
• the ability to effectively manage the information technology systems, including third-party vendors, cyber or data privacy incidents or other failures, disruptions or security breaches, and risk related to the development and use of artificial intelligence;
• the ability to develop and use technologies to provide products and services that will satisfy customer demands;
• results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for credit losses or to write-down assets;
• changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, which could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;
• changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet;
• our liquidity requirements could be adversely affected by changes in our assets and liabilities;
• our ability to prudently manage our growth and execute our strategy;
• impairment of our goodwill and intangible assets;
• competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;
• the effect of acquisitions we have made or may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations;
• the growth and profitability of noninterest or fee income being less than expected;
• the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;
• the effect of any change in federal government enforcement of federal laws affecting the cannabis industry;
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• the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies;
• changes in U.S. trade policies, including the implementation of tariffs and other protectionist trade policies;
• the impact of governmental efforts to restructure or adjust the U.S. financial regulatory system;
• a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;
• the impact of recent or future changes in Federal Deposit Insurance Corporation (the “FDIC”) insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount, including any special assessments;
• the effect of fiscal and governmental policies of the U.S. federal government;
• climate change and other catastrophic events or disasters; and
• geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts of terrorism, and/or military conflicts, which could impact business and economic conditions in the United States and abroad.
Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 (the “2024 Annual Report”) filed with SEC and available at the SEC’s website (www.sec.gov).
The Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.
INTRODUCTION
The following management’s discussion and analysis of financial condition and results of operations is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented elsewhere in this report, as well as the audited consolidated financial statements and related notes included in the 2024 Annual Report.
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 Anne Arundel County, Baltimore County, Charles County, Calvert County, St. Mary’s County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County and Worcester County in Maryland, Kent and Sussex County in Delaware, and in Accomack County, Stafford County, Spotsylvania County, and Fredericksburg city in 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 offers title services through its wholly-owned subsidiary, Mid-Maryland Title Company, Inc. (the “Title Company”), which engages in residential and commercial real estate settlement activities and offers title insurance policies, title search and lien satisfaction services. The Title Company ceased conducting real estate closings effective March 31, 2025. Operations will continue for as long as necessary to ensure that work in progress is adequately addressed. Upon successful completion of outstanding matters, the Title Company will complete any regulatory filings necessary to discontinue the business and dissolve the corporation.
The shares of common stock of Shore Bancshares, Inc. are listed on the NASDAQ Global Select Market under the symbol “SHBI.”
Shore Bancshares, Inc. maintains an Internet site at www.shorebancshares.com on which it makes available free of charge its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.
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CRITICAL ACCOUNTING POLICIES
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 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. of the 2024 Annual Report. 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 policy for the allowance for credit losses (“ACL”) on loans is a critical accounting policy. This policy is considered critical because it relates to an accounting area that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.
Allowance for Credit Losses on Loans
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 effort to utilize the best information available in making its assessment of the ACL estimate, the estimation process is inherently challenging as potential changes in any one factor or input may occur at different rates and/or impact pools of loans in different ways. 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 Consolidated Financial Statements” included in Part II, Item 8. of the 2024 Annual Report for additional details concerning the determination of the ACL on loans.
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OVERVIEW
The Company’s net income for the first quarter of 2025 was $13.8 million, or $0.41 per diluted common share, compared to $13.3 million, or $0.40 per diluted common share, for the fourth quarter of 2024. The Company had net income of $8.2 million, or $0.25 per diluted common share, for the first quarter of 2024.
First Quarter 2025 Highlights
• Improved Return on Average Assets (“ROAA”) – The Company reported ROAA of 0.91% for the first quarter of 2025, compared to 0.86% for the fourth quarter of 2024 and 0.57% for the first quarter of 2024. Non-U.S. generally accepted accounting principles (“GAAP”) ROAA (1) was 1.02% for the first quarter of 2025, compared to 0.94% for the fourth quarter of 2024 and first quarter of 2024.
• Increased Net Interest Income (“NII”) and Net Interest Margin (“NIM”) – NII for the first quarter of 2025 increased $2.0 million to $46.0 million from $44.0 million for the fourth quarter of 2024. NIM increased 21 basis points (“bps”) to 3.24% during the first quarter of 2025 from 3.03% in the fourth quarter of 2024. NIM, excluding net accretion income (“core NIM”) increased from 2.85% to 3.02%. Excluding accretion interest, loan yields increased 17 bps and funding costs decreased 10 bps, for the comparable periods. Interest expense for the first quarter of 2025 decreased $2.4 million when compared to the fourth quarter of 2024. All products repriced at favorable rates, and were partially offset by the seasonal run off of municipal deposits. NII and NIM were $41.1 million and 3.08%, respectively, for the first quarter of 2024.
• Net Income Growth – Net income for the first quarter of 2025 increased $482 thousand to $13.8 million, from $13.3 million in the fourth quarter of 2024. Net income increased due primarily to higher net interest income, which was partially offset by lower non-interest income due to lower mortgage banking activity and the absence of the one-time gain on sale of other assets in the fourth quarter of 2024. Net income for the first quarter of 2024 was $8.2 million.
• Stable Asset Quality – Nonperforming assets to total assets were 0.31% for the first quarter of 2025, a decrease from 0.40% for the fourth quarter of 2024 and an increase from 0.28% for the first quarter of 2024. Classified assets to total assets were 0.36% in the first quarter of 2025, a decrease when compared to 0.45% for the fourth quarter of 2024 and an increase when compared to 0.26% for the first quarter of 2024. The allowance for credit losses (“ACL”) was $58.0 million at March 31, 2025 compared to $57.9 million at December 31, 2024 and $57.3 million at March 31, 2024. The ACL as a percentage of loans remained flat at 1.21% at March 31, 2025, compared to December 31, 2024 and decreased compared to 1.23% at March 31, 2024.
• Improved Operating Leverage – The efficiency ratio for the first quarter of 2025 was 63.64% when compared to 64.21% in the fourth quarter of 2024 and 76.93% for the first quarter of 2024. The non-GAAP efficiency ratio (1) , which excludes amortization, was 59.25% for the first quarter of 2025, compared to 60.28% for the fourth quarter of 2024 and 62.37% for the first quarter of 2024.
(1) See the Reconciliation of GAAP and non-GAAP Measures tables.
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SUMMARY OF OPERATING RESULTS
A comparison of the results of operations for the three months ended March 31, 2025 and 2024 is presented below.
Three Months Ended March 31,
($ in thousands) 2025 2024
OPERATING DATA
Interest income $ 76,063 $ 71,139
Interest expense 30,034 30,004
Net interest income 46,029 41,135
Provision for credit losses 1,028 407
NII after provision for credit losses 45,001 40,728
Noninterest income 7,003 6,567
Noninterest expense 33,747 36,698
Income before income taxes 18,257 10,597
Income tax expense 4,493 2,413
Net income $ 13,764 $ 8,184
Three Months Ended March 31,
2025 2024
KEY OPERATING RATIOS
ROAA 0.91 % 0.57 %
Return on average common equity (“ROACE”) 10.20 6.38
Return on average tangible common equity (“ROATCE”) Non-GAAP (1)
14.05 13.39
Average total equity to average total assets 8.93 8.93
Interest rate spread 2.30 2.34
Net interest margin 3.24 3.08
Efficiency ratio (2)
63.64 76.93
Noninterest income to average assets 0.46 0.46
Noninterest expense to average assets 2.23 2.56
Net operating expense to average assets (3)
1.77 2.10
COMMON SHARE DATA
Basic net income per common share $ 0.41 $ 0.25
Diluted net income per common share $ 0.41 $ 0.25
Cash dividends paid per common share $ 0.12 $ 0.12
Common dividend payout ratio 29.27 % 48.00 %
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(1) ROATCE is computed by dividing net earnings applicable to common stockholders by average tangible common stockholders’ 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.
(2) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.
(3) Net operating expense is the sum of noninterest expense offset by noninterest income.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2025 AND 2024
Summary of Financial Results
The Company reported net income for the three months ended March 31, 2025 of $13.8 million, or $0.41 diluted earnings per common share, compared to $8.2 million, or diluted earnings per common share of $0.25, for the three months ended March 31, 2024. The Company’s ROAA, ROACE and ROATCE were 0.91%, 10.20% and 14.05%, respectively, for the three months ended March 31, 2025, compared to 0.57%, 6.38% and 13.39%, respectively, for the three months ended March 31, 2024.
The following table presents selected consolidated statement of operations data for each of the periods indicated.
Three Months Ended March 31,
($ in thousands) 2025 2024 $ Change % Change
Interest and dividend income $ 76,063 $ 71,139 $ 4,924 6.9 %
Interest expense 30,034 30,004 30 0.1
Net interest income 46,029 41,135 4,894 11.9
Provision for credit losses 1,028 407 621 152.6
Noninterest income 7,003 6,567 436 6.6
Noninterest expense 33,747 36,698 (2,951) (8.0)
Income before income taxes 18,257 10,597 7,660 72.3
Income tax expense 4,493 2,413 2,080 86.2
Net income $ 13,764 $ 8,184 $ 5,580 68.2
Net Interest Income
Tax-equivalent NII is NII adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, tax-equivalent NII was $46.1 million for the first quarter of 2025 and $41.2 million for the first quarter of 2024. The increase was primarily due to increases in interest and fees on loans of $1.9 million, interest on deposits at other banks of $2.4 million and interest on investment securities of $582 thousand.
Three Months Ended March 31,
($ in thousands) 2025 2024 $ Change % Change
Interest and dividend income
Loans, including fees $ 67,647 $ 65,754 $ 1,893 2.9 %
Interest and dividends on investment securities
5,007 4,425 582 13.2
Interest on deposits with banks 3,409 960 2,449 255.1
Total interest and dividend income $ 76,063 $ 71,139 $ 4,924 6.9
Interest expense
Deposits $ 28,070 $ 28,497 $ (427) (1.5)
Short-term borrowings — 56 (56) (100.0)
Long-term debt 1,964 1,451 513 35.4
Total interest expense $ 30,034 $ 30,004 $ 30 0.1
Taxable-equivalent adjustment $ 81 $ 79 $ 2 2.5
Tax-equivalent net interest income $ 46,110 $ 41,214 $ 4,896 11.9
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Average Balances and Yields
The following table presents the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the three months ended March 31, 2025 and 2024.
Three Months Ended March 31,
2025 2024
($ in thousands) Average Balance Interest (1), (4)
Yield/Rate Average Balance Interest (1), (4)
Yield/Rate
Earning assets
Loans (2), (3)
Commercial real estate $ 2,541,527 $ 35,889 5.73 % $ 2,518,884 $ 35,633 5.69 %
Residential real estate 1,347,035 18,462 5.56 1,276,191 17,241 5.43
Construction 352,323 5,526 6.36 300,117 4,404 5.90
Commercial 232,900 3,705 6.45 221,356 4,114 7.48
Consumer 304,520 4,058 5.40 331,178 4,272 5.19
Credit cards 6,686 86 5.22 7,457 167 9.01
Total loans 4,784,991 67,726 5.74 4,655,183 65,831 5.69
Investment securities
Taxable 664,002 5,001 3.01 654,663 4,419 2.70
Tax-exempt 653 8 4.90 660 8 4.85
Interest-bearing deposits 318,434 3,409 4.34 77,276 960 5.00
Total earning assets 5,768,080 $ 76,144 5.35 5,387,782 $ 71,218 5.32
Cash and due from banks 43,526 49,499
Other assets 375,929 395,023
Allowance for credit losses (58,294) (57,480)
Total assets $ 6,129,241 $ 5,774,824
Interest-bearing liabilities
Interest-bearing checking $ 859,698 $ 7,025 3.31 % $ 1,110,524 $ 6,362 2.30 %
Money market and savings 1,799,707 10,015 2.26 1,669,074 10,160 2.45
Time deposits 1,208,250 11,030 3.70 1,179,572 11,724 4.00
Brokered deposits — — — 20,465 251 4.93
Interest-bearing deposits 3,867,655 28,070 2.94 3,979,635 28,497 2.88
FHLB advances 50,000 598 4.85 4,000 56 5.63
Subordinated debt and guaranteed preferred beneficial interest in junior subordinated debentures (“TRUPS”) 73,840 1,366 7.50 72,418 1,451 8.06
Total interest-bearing liabilities 3,991,495 30,034 3.05 4,056,053 30,004 2.98
Noninterest-bearing deposits 1,549,859 1,163,023
Accrued expenses and other liabilities 40,444 39,772
Stockholders’ equity 547,443 515,976
Total liabilities and stockholders’ equity $ 6,129,241 $ 5,774,824
Net interest income $ 46,110 $ 41,214
Net interest spread 2.30 2.34
Net interest margin 3.24 3.08
Cost of funds 2.20 2.31
Cost of deposits 2.10 2.23
Cost of debt 6.43 7.93
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(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense.
(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 $3.7 million and $4.2 million of accretion interest on loans for the three months ended March 31, 2025 and 2024, respectively.
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(4) Interest expense on deposits and borrowing includes amortization of deposit premiums and amortization of borrowing fair value adjustment. There were $334 thousand and $367 thousand of amortization of deposits premium, and $232 thousand and $220 thousand of amortization of borrowing fair value adjustment for the three months ended March 31, 2025 and 2024, respectively.
Rate and Volume Analysis
The following table presents changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.
Three Months Ended March 31, 2025 Compared to the Three Months Ended March 31, 2024
($ in thousands) Volume Due to Rate Total
Interest income from earning assets:
Loans
Commercial real estate $ 8 $ 248 $ 256
Residential real estate 812 409 1,221
Construction 782 340 1,122
Commercial 153 (562) (409)
Consumer (385) 171 (214)
Credit cards (11) (70) (81)
Taxable investment securities 75 507 582
Interest-bearing deposits 2,575 (126) 2,449
Total interest income $ 4,009 $ 917 $ 4,926
Interest-bearing liabilities:
Interest-bearing checking deposits $ (2,103) $ 2,766 $ 663
Money market and savings deposits 637 (782) (145)
Time deposits 176 (1,121) (945)
Advances from FHLB 550 (8) 542
Subordinated debt 15 (100) (85)
Total interest-bearing liabilities $ (725) $ 755 $ 30
Net change in net interest income $ 4,734 $ 162 $ 4,896
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.
NII was $46.0 million for the first quarter of 2025, compared to $41.1 million for the first quarter of 2024. The increase was primarily due to increases in interest and fees on loans of $1.9 million , interest on deposits at other banks of $2.4 million and interest on investment securities of $582 thousand.
The Company’s NIM increased to 3.24% for the first quarter of 2025 from 3.08% for the first quarter of 2024. Comparing the first quarter of 2025 to the first quarter of 2024, the Company’s interest-earning asset yields remained flat at 5.35% while the cost of funds repriced at a faster pace resulting in a decrease of 11 basis points to 2.20% from 2.31% for the same period.
Provision for Credit Losses (“PCL”) and ACL
See 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.
Noninterest Income
Total noninterest income for the first quarter of 2025 was $7.0 million, an increase of $436 thousand from $6.6 million for the first quarter of 2024. The increase was primarily due to an increase in mortgage banking activity, driven by increased mortgage servicing activity and lower prepayment rates.
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Noninterest Expense
Total noninterest expense of $33.7 million for the first quarter of 2025 decreased $3.0 million when compared to the first quarter of 2024 total noninterest expense of $36.7 million. The decrease in total noninterest expense from the first quarter of 2024 was primarily due to the absence of the fraud losses incurred in connection with the credit card fraud incident in the first quarter of 2024 partially offset by higher salaries and benefits expense and software and data processing costs.
Income Taxes
The Company reported income tax expense of $4.5 million and $2.4 million for the three months ended March 31, 2025 and 2024, respectively. The effective tax rate for the first quarter of 2025 and 2024 was 24.6% and 22.8%, respectively.
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LIQUIDITY
Liquidity is our ability to meet cash demands as they arise. Cash needs may come from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations, resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers, are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.
The Company’s principal sources of liquidity are cash on hand and dividends received from the Bank. The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent upon the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows. Customer deposits are considered the primary source of funds supporting the Bank’s lending and investment activities.
Based on management’s going concern evaluation, we believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s or the Bank’s ability to continue as a going concern, within one year of the date of the issuance of the financial statements.
The Bank’s principal sources of funds for investment and operations are net income, deposits, sales of loans, borrowings, principal and interest payments on loans, principal and interest received on investment securities and proceeds from the maturity and sale of investment securities. The Bank’s principal funding commitments are for the origination or purchase of loans, the purchase of securities and the payment of maturing deposits.
The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows.
Liquidity is provided by access to funding sources, which include core deposits and brokered deposits. Other sources of funds include our ability to borrow, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB. The Bank uses wholesale funding (brokered deposits and other sources of funds) to supplement funding when loan growth exceeds core deposit growth and for asset-liability management purposes.
We derive liquidity through increased customer deposits, non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets. As seen in the consolidated statements of cash flows, the net decrease in cash and cash equivalents was $70.8 million for the first three months of 2025, compared to a net decrease of $257.9 million for the first three months of 2024. The decrease in cash and cash equivalents in the first three months of 2025 was mainly due to the decrease of $70.5 million in interest-bearing deposits, partially offset by an increase of $2.2 million in noninterest-bearing deposits.
To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term fund markets. At March 31, 2025, the Bank had approximately $1.35 billion of available liquidity, including $389.0 million in cash and cash equivalents, $319.0 million in unpledged securities, $729.5 million in secured borrowing capacity at the FHLB of Atlanta, partially offset by FHLB advances and a letter of credit of $50.0 million and $39.1 million, respectively. The Bank has arrangements with other correspondent banks whereby it has $95.0 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash. Through the FHLB, the Bank had available lendable collateral of approximately $729.5 million and $743.6 million at March 31, 2025 and December 31, 2024, respectively. The Bank has pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB of Atlanta. The following table presents the Company’s liquidity in use and liquidity available as of March 31, 2025.
March 31, 2025
($ in thousands) Liquidity in Use Liquidity Available
FHLB secured borrowings (1)
$ 89,100 $ 729,543
Unsecured federal fund purchase lines — 95,000
Unpledged assets
Cash and cash equivalents n/a $ 389,006
Investment securities n/a 319,008
Total $ 89,100 $ 1,532,557
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(1) The Bank has pledged a portion of the commercial real estate and residential loan portfolio to the FHLB to secure the line of credit.
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For information about risks relating to liquidity, see “Risk Factors – Risks Relating to Our Business” included in Part I, Item 1A. in the 2024 Annual Report.
CAPITAL RESOURCES
The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum ratios of common equity Tier 1 (“CET1”), Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 12.50%. The Bank and Company are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. The Bank was deemed “well-capitalized” under applicable regulatory capital requirements at March 31, 2025.
The Company evaluates capital resources by the ability to maintain adequate regulatory capital ratios. The Company and the Bank annually update its strategic plan, which includes a three-year capital plan. In developing its plan, the Company considers the impact to capital of asset growth, loan concentrations, income accretion, dividends, holding company liquidity, investment in markets and people and stress testing.
The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of CET1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 12.50%. The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.
In July 2013, federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with certain standards that were developed by Basel III and certain provisions of the Dodd-Frank Act. The final rule currently applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $3 billion.
As of March 31, 2025, the Bank and the Company were in compliance with all applicable regulatory capital requirements to which they were subject, and the Bank was classified as “well-capitalized” for purposes of the prompt corrective action regulations. The following tables present the applicable capital ratios for the Company and the Bank as of March 31, 2025 and December 31, 2024.
March 31, 2025 Tier 1 Leverage Ratio Common Equity Tier 1 Ratio Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio
The Company 8.27 % 9.75 % 10.37 % 12.52 %
The Bank 8.84 11.09 11.09 12.33
December 31, 2024 Tier 1 Leverage Ratio Common Equity Tier 1 Ratio Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio
The Company 8.02 % 9.44 % 10.06 % 12.18 %
The Bank 8.58 10.75 10.75 11.97
On May 1, 2025, the Company announced that its Board of Directors declared a cash dividend of $0.12 per share, payable on May 23, 2025, to holders of record of shares of common stock as of May 12, 2025.
See Note 10 – “Regulatory Capital Requirements” in the “Notes to Consolidated Financial Statements” included in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information about the regulatory capital positions of the Bank and the Company.
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
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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. While the Company is providing banking services to customers that are engaged in growing, processing, and sales of both medical and adult-use cannabis in a manner that complies with applicable state law, such customers engaged in those activities currently violate federal law. The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers. While we are not aware of any instance of a federally-insured financial institution being subject to such aiding and abetting liability, the strict enforcement of federal laws regarding cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the Company’s consolidated financial statements if the federal government takes actions against the Company. As of March 31, 2025, the Company has not accrued an amount for the potential impact of any such actions.
The following is a summary of the level of business activities with our cannabis customers:
• Deposit and loan balances at March 31, 2025 were approximately $175.9 million, or 3.2% of total deposits, and $83.0 million, or 1.7% of total gross loans, respectively. Deposit and loan balances at December 31, 2024 were approximately $151.4 million, or 2.7% of total deposits, and $82.6 million, or 1.7% of total gross loans, respectively.
• Interest and noninterest income for the three months ended March 31, 2025, were approximately $1.1 million and $241 thousand, respectively. Interest and noninterest income for the three months ended March 31, 2024, were approximately $1.0 and $293 thousand, respectively.
For information about risks relating to liquidity, see “Risk Factors – Risks Relating to Our Business” included in Part I, Item 1A. in the 2024 Annual Report.
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ANALYSIS OF FINANCIAL CONDITION
Balance Sheet Summary
Total assets were $6.18 billion at March 31, 2025, a decrease of $54.2 million, or 0.9%, when compared to $6.23 billion at December 31, 2024. The aggregate decrease was primarily due to decreases in cash and cash equivalents of $70.8 million and held to maturity (“HTM”) securities of $11.5 million, partially offset by increases in available for sale (“AFS”) securities of $29.9 million and loans held for investment of $5.5 million. The ratio of the ACL as a percentage of loans was 1.21% and 1.21% at March 31, 2025 and December 31, 2024, respectively.
Cash and Cash Equivalents
Cash and cash equivalents totaled $389.0 million at March 31, 2025, compared to $459.9 million at December 31, 2024. 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.
Investment Securities
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 (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 March 31, 2025, 27.6% of the portfolio of debt securities was classified as AFS and 72.4% was classified as HTM, compared to 23.7% and 76.3% respectively, at December 31, 2024. 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 our investment portfolio.
Investment securities, including restricted stock and equity securities, totaled $675.1 million at March 31, 2025, an $18.7 million or 2.9% increase, compared to $656.4 million at December 31, 2024.
At March 31, 2025, AFS securities, carried at fair value, totaled $179.1 million, compared to $149.2 million at December 31, 2024. At March 31, 2025, AFS securities consisted of 84.9% mortgage-backed, 11.4% U.S. government agencies and 3.7% corporate bonds, compared to 82.0%, 13.5% and 4.4%, respectively, at December 31, 2024. At March 31, 2025, the accumulated other comprehensive loss was $6.3 million, compared to $7.5 million at December 31, 2024.
At March 31, 2025, HTM securities, carried at amortized cost, totaled $469.6 million, compared to $481.1 million at December 31, 2024. At March 31, 2025, HTM securities consisted of 70.0% mortgage-backed, 27.5% U.S. government agencies and 2.5% other debt securities, compared to 70.0%, 27.6% and 2.5%, respectively, at December 31, 2024.
At March 31, 2025 and December 31, 2024, 97.2% and 97.1%, respectively, of the Bank’s carrying value of its investment portfolio consisted of securities issued or guaranteed by U.S. government agencies or government-sponsored agencies.
The Company monitors the credit quality of HTM securities through credit ratings provided by Standard & Poor’s Rating Services and Moody’s Investor Services. Credit ratings express opinions about the credit quality of a security, and are updated at each quarter end. Investment grade securities are rated BBB- or higher by S&P and Baa3 or higher by Moody’s and are generally considered by the rating agencies and market participants to be of low credit risk. Conversely, securities rated below investment grade, which are labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade securities. There were no speculative grade HTM securities at March 31, 2025 or December 31, 2024. HTM securities that are not rated are agency mortgage-backed securities sponsored by U.S. government agencies, as well as direct obligations of the agencies, with the remainder being sub-debt of other banks.
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The following table shows the amortized cost of HTM securities based on their lowest publicly available credit rating as of March 31, 2025.
March 31, 2025
Investment Grade
($ in thousands) Aaa Aa1 A3 Baa1 Baa2 NR Total
U.S. Treasury and government agency securities $ 129,327 $ — $ — $ — $ — $ — $ 129,327
Mortgage-backed securities 328,459 — — — — — 328,459
Other debt securities — 1,464 4,000 4,000 500 2,000 11,964
Total held to maturity securities $ 457,786 $ 1,464 $ 4,000 $ 4,000 $ 500 $ 2,000 $ 469,750
The following table shows the amortized cost of HTM securities based on their lowest publicly available credit rating as of December 31, 2024.
December 31, 2024
Investment Grade
($ in thousands) Aaa Aa1 A3 Baa1 Baa2 NR Total
U.S. Treasury and government agency securities $ 132,560 $ — $ — $ — $ — $ — $ 132,560
Mortgage-backed securities 336,755 — — — — — 336,755
Other debt securities — 1,465 4,000 4,000 500 2,000 11,965
Total held to maturity securities $ 469,315 $ 1,465 $ 4,000 $ 4,000 $ 500 $ 2,000 $ 481,280
Loans Held for Sale
We originate residential mortgage loans for sale on the secondary market, which are recorded at fair value. At March 31, 2025 and December 31, 2024 , the fair value of loans held for sale amounted to $15.7 million and $19.6 million, respectively. The Bank makes certain representations to purchasers in the sale of the 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. At March 31, 2025 the Bank repurchased one loan of $415 thousand. No loans were repurchased as of December 31, 2024 .
Loans Held for Investment
The following table summarizes the Company’s loan portfolio at March 31, 2025 and December 31, 2024.
($ in thousands) March 31, 2025 % December 31, 2024 % $ Change % Change
Commercial real estate $ 2,544,107 53.2 % $ 2,557,806 53.6 % $ (13,699) (0.5) %
Residential real estate 1,325,858 27.8 1,329,406 27.9 (3,548) (0.3) %
Construction 366,218 7.7 335,999 7.0 30,219 9.0 %
Commercial 234,499 4.9 237,932 5.0 (3,433) (1.4) %
Consumer 300,007 6.3 303,746 6.4 (3,739) (1.2) %
Credit cards 6,800 0.1 7,099 0.1 (299) (4.2) %
Total loans 4,777,489 100.0 % 4,771,988 100.0 % 5,501 0.1 %
Allowance for credit losses on loans (58,042) (57,910) (132) 0.2 %
Total loans, net $ 4,719,447 $ 4,714,078 $ 5,369 0.1 %
CRE Loan Portfolio
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 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
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higher levels of capital. The Bank has a concentration in CRE loans, and experienced significant growth in its CRE portfolio with its acquisition of The Community Financial Corporation and its wholly-owned subsidiary, Community Bank of the Chesapeake. Non-owner occupied CRE loans totaled $2.12 billion and $2.08 billion at March 31, 2025 and December 31, 2024, respectively, and as a percentage of the Bank’s Tier 1 Capital + ACL were 357.37% and 359.52%, respectively. Construction loans totaled $365.7 million and $336.0 million at March 31, 2025 and December 31, 2024, respectively, and as a percentage of the Bank’s Tier 1 Capital + ACL were 61.69% and 57.99%, respectively.
The CRE portfolio has increased in the past two years. Management has extensive experience in CRE lending, and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its CRE portfolio. Monitoring practices are part of the Bank’s credit and risk departments’ annual test plans and are adjusted as needed on a quarterly basis if external or internal conditions merit changes. The Bank’s CRE monitoring plans include stress testing analysis to evaluate changes in collateral values and changes in cash flow debt service coverage ratios as a result of increasing interest rates or declines in customer net operating revenues. We may be required to maintain higher levels of capital as a result of our CRE concentrations, which could require us to obtain additional capital or be required to sell/participate portions of loans, which may adversely affect shareholder returns.
Non-Owner Occupied CRE Loans
March 31, 2025
($ in thousands) Amount Average Loan Size % of Non-Owner Occupied CRE Loans % of Total Portfolio Loans, Gross
Loan Type:
Retail $ 456,056 $ 2,413 21.5 % 9.5 %
Office/Office Condo 367,899 1,552 17.4 7.7
Multi-Family (5+ Units) 271,812 2,303 12.8 5.7
Industrial/Warehouse 208,714 1,502 9.9 4.4
Motel/Hotel 196,400 4,092 9.3 4.1
Commercial - Improved 184,833 1,349 8.7 3.9
Other (1)
433,006 525 20.4 9.1
Total non-owner occupied CRE loans (2)
2,118,720 1,251 100.0 % 44.4 %
Total portfolio loans, gross (3)
$ 4,777,489
____________________________________
(1) Other non-owner occupied CRE loans include 1-4 family dwelling loans of $164.9 million, lot/land loans of $94.5 million, self-storage loans of $72.5 million and other loans of $100.7 million.
(2) The balances for our non-owner occupied CRE portfolio as of March 31, 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 $15.7 million.
Owner Occupied CRE Loans
March 31, 2025
($ in thousands) Amount Average Loan Size % of Owner Occupied CRE Loans % of Total Portfolio Loans, Gross
Loan Type:
Commercial - Improved $ 161,926 $ 975 23.0 % 3.4 %
Office/Office Condo 133,591 522 18.9 2.8
Industrial/Warehouse 97,645 655 13.8 2.0
Church 63,500 894 9.0 1.3
Retail 62,905 605 8.9 1.3
Other (1)
186,540 1,124 26.4 3.9
Total owner occupied CRE loans 706,107 774 100.0 % 14.7 %
Total portfolio loans, gross (2)
$ 4,777,489
____________________________________
(1) Other owner occupied CRE loans include marine/boat slips of $44.1 million, restaurant loans of $60.0 million, fire/CMS building loans of $25.7 million and other loans of $56.7 million.
(2) Excludes loans held for sale of $15.7 million.
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Office CRE Loan Portfolio
The Bank’s office CRE loan portfolio, which includes owner occupied and non-owner occupied CRE loans, was $501.5 million, or 10.5% of total loans of $4.78 billion at March 31, 2025. The Bank’s office CRE loan portfolio included $136.8 million, or 27.3% of the total with medical tenants, and $54.6 million, or 10.9% of the total with government or government contractor tenants. There were 493 loans in the office CRE loan portfolio with an average and median loan size of $1.0 million and $388 thousand, respectively. Loan to Value (“LTV”) estimates are less than 50% for $180.1 million, or 35.9% of the office CRE loan portfolio, and greater than 80% for $10.6 million, or 2.1% of the office CRE loan portfolio. LTV collateral values are based on the most recent appraisal, which varies from the initial loan boarding to interim credit reviews. LTV estimates for the office CRE loan portfolio are summarized below and LTV collateral values are based on the most recent appraisal, which may vary from the appraised value at loan origination.
LTV Range ($ in thousands)
Loan Count Loan Balance % of Office CRE
Less than or equal to 50% 244 $ 180,087 35.9 %
50%-60% 74 114,897 22.9
60%-70% 92 120,333 24.0
70%-80% 70 75,618 15.1
Greater than 80% 13 10,555 2.1
Grand total 493 $ 501,490 100.0 %
The Bank had 18 office CRE loans totaling $163.6 million that were greater than $5.0 million at March 31, 2025, compared to 18 office CRE loans totaling $164.5 million at December 31, 2024. The decrease in this portfolio segment was the result of normal amortization and two large loan payoffs in the first quarter of 2025. For the office CRE portfolio, at March 31, 2025, the average loan debt-service coverage ratio was 1.8x and the average LTV was 49.0%. Of the office CRE portfolio balance, 74.3% is secured by properties in rural or suburban areas with limited exposure to metropolitan cities and 97.1% are secured by properties with five stories or less. Of the office CRE loans, $26.8 million will mature and $15.1 million will reprice prior to December 31, 2025. Of the office CRE loans, $2.2 million are special mention or substandard.
Maturity of Loan Portfolio
The following table below sets forth the maturities and interest rate sensitivity of the loan portfolio at March 31, 2025. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
($ in thousands) Maturing Within One Year Maturing After One But Within Five Years Maturing After Five But Within 15 Years Maturing After 15 Years Total
Commercial real estate $ 178,494 $ 746,703 $ 794,095 $ 824,815 $ 2,544,107
Residential real estate 38,908 132,740 125,354 1,028,856 1,325,858
Construction 234,090 94,262 35,702 2,164 366,218
Commercial 75,263 83,609 59,273 16,354 234,499
Consumer 1,372 73,386 109,534 115,715 300,007
Credit cards 2,245 2,699 1,856 — 6,800
Totals $ 530,372 $ 1,133,399 $ 1,125,814 $ 1,987,904 $ 4,777,489
Rate Terms:
Fixed-interest rate loans $ 369,342 $ 991,057 $ 709,382 $ 367,143 $ 2,436,924
Adjustable-interest rate loans 161,030 142,342 416,432 1,620,761 2,340,565
Total $ 530,372 $ 1,133,399 $ 1,125,814 $ 1,987,904 $ 4,777,489
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Asset Quality
The following table summarizes asset quality information and ratios at March 31, 2025 and December 31, 2024.
($ in thousands) March 31, 2025 December 31, 2024
ASSET QUALITY
Total portfolio loans $ 4,777,489 $ 4,771,988
Classified loans 19,434 24,679
Other real estate owned 179 179
Repossessed assets 2,429 3,315
Total classified assets (1)
22,042 28,173
Allowance for credit losses on loans
(58,042) (57,910)
Past due loans - 31 to 89 days 9,380 8,807
Past due loans >= 90 days 894 294
Total past due (delinquency) loans 10,274 9,101
Nonaccrual loans 15,402 21,008
Past due loans >= 90 days 894 294
Other real estate owned (“OREO”) 179 179
Repossessed assets 2,429 3,315
Total nonperforming assets 18,904 24,796
Accruing borrowers experiencing financial difficulty (“BEFD”) modifications (2)
1,642 1,362
Nonaccrual loans, OREO, repossessed assets and BEFD modifications $ 20,546 $ 26,158
($ in thousands) March 31, 2025 December 31, 2024
ASSET QUALITY RATIOS
Classified assets to total assets (1)
0.36 % 0.45 %
Classified assets to risk-based capital (1)
3.65 4.77
Past due loans - 31 to 89 days to total portfolio loans 0.20 0.18
Past due loans >=90 days and nonaccrual to total loans 0.34 0.45
Total past due (delinquency) and nonaccrual to total portfolio loans 0.54 0.63
Nonaccrual loans to total portfolio loans 0.32 0.44
Nonperforming assets to total assets 0.31 0.40
____________________________________
(1) Classified assets are substandard loans, OREO and other repossessed assets. Classified assets do not include special mention loans.
(2) BEFD modification loans include both nonaccrual and accruing performing loans. All BEFD modification loans are included in the calculation of asset quality financial ratios. Nonaccrual BEFD modification loans are included in the nonaccrual balance and accruing BEFD modification loans are included in the accruing BEFD modification balance.
Allowance for Credit Losses on Loans
The ACL was $58.0 million at March 31, 2025, $57.9 million at December 31, 2024 and $57.3 million at March 31, 2024. There were net charge-offs of $554 thousand for the three months ended March 31, 2025, compared to net charge-offs of $565 thousand for the three months ended March 31, 2024. The ratio of annualized net charge-offs to average loans was 0.05% for the three months ended March 31, 2025 and 2024.
Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming loans to enable the Company to maintain overall credit quality. The ACL as a percentage of period-end loans was 1.21% at March 31, 2025 and December 31, 2024.
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The following table allocates the ACL by portfolio loan category as of the dates indicated. The allocation of the ACL to each category is not necessarily indicative of future losses and does not restrict the use of the ACL to absorb losses in any category.
March 31, 2025 December 31, 2024
($ in thousands) ACL Average Balance % (1)
ACL Average Balance % (1)
Commercial real estate $ 21,988 $2,541,527 0.87 % $ 22,846 $2,551,903 0.90 %
Residential real estate 22,393 1,347,035 1.66 21,776 1,358,066 1.60
Construction 3,842 352,323 1.09 2,854 336,094 0.85
Commercial 2,855 232,900 1.23 3,138 229,676 1.37
Consumer 6,574 304,520 2.16 6,889 313,686 2.20
Credit cards 390 6,686 5.83 407 6,820 5.97
Total $ 58,042 $4,784,991 1.21 $ 57,910 $4,796,245 1.21
____________________________________
(1) Percent of loans in each category to total portfolio loans.
The following table presents the net charge-offs or recoveries by average loan portfolio category for the three months ended March 31, 2025 and 2024.
Three Months Ended
March 31, 2025 March 31, 2024
($ in thousands) Net (Charge-offs) Recoveries Average Balance (1)
Net (Charge-off) Recovery % Net (Charge-offs) Recoveries Average Balance (1)
Net (Charge-off) Recovery %
Commercial real estate $ 78 $ 2,541,527 (0.01) % $ — $ 2,279,899 — %
Residential real estate 1 1,347,035 — 1 1,512,805 —
Construction 1 352,323 — (10) 292,803 0.01
Commercial 4 232,900 (0.01) 1 230,844 —
Consumer (396) 304,520 0.53 (449) 325,258 0.56
Credit cards (242) 6,686 14.68 (108) 4,196 10.35
Total (554) 4,784,991 0.05 (565) 4,645,805 0.05
Allowance for credit losses — (58,042) — — (57,336) —
Total net charge-off and average loans $ (554) $ 4,726,949 0.05 $ (565) $ 4,588,469 0.05
____________________________________
(1) Excludes loans held for sale.
Classified Assets and Special Mention Assets
Classified assets decreased $6.1 million to $22.0 million, or 0.4% of total assets, at March 31, 2025, from $28.2 million, or 0.5% of total assets, at December 31, 2024. Classified assets are substandard loans, repossessed assets and OREO. The decrease was primarily due to decrease in substandard loans of $5.2 million and repossessed assets of $886 thousand. Management considers classified assets to be an important measure of asset quality. Decreases in classified and special mention loan categories were due to loans related to our marine lending portfolio and residential mortgages, all of which are diverse in origination date. The Company’s risk rating process for classified loans is an important input into the Company’s allowance methodology. Risk ratings are an important input into the Company’s ACL qualitative framework.
Nonperforming Assets
Nonperforming assets were $18.9 million, or 0.3% of total assets, at March 31, 2025, compared to $24.8 million, or 0.4% of total assets, at December 31, 2024. The balance of nonperforming assets decreased primarily due to a decrease of nonaccrual loans of $5.6 million and a decrease of $886 thousand of repossessed assets, partially offset by an increase in loans 90 days or more past due of $600 thousand.
Off-Balance Sheet Credit Exposure Reserve
The Company’s reserve for off-balance sheet credit exposure was $1.5 million and $1.1 million at March 31, 2025 and December 31, 2024, respectively. The Company is monitoring line of credit usage and has not seen substantive increases in usage or expected usage. The
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Company will continue to monitor activity for potential increases in the off-balance sheet reserve in future quarters as customers use available liquidity.
Deposits
The following is a breakdown of the Company’s deposit portfolio at March 31, 2025 and December 31, 2024:
($ in thousands) March 31, 2025 December 31, 2024
Balance % Balance % $ Change % Change
Noninterest-bearing $ 1,565,017 28.7 % $ 1,562,815 28.3 % $ 2,202 0.1 %
Interest-bearing:
Interest-bearing checking 852,480 15.6 978,076 17.7 (125,596) (12.8)
Money market and savings 1,800,529 32.9 1,805,884 32.6 (5,355) (0.3)
Time deposits 1,242,319 22.8 1,181,561 21.4 60,758 5.1
Total interest-bearing 3,895,328 71.3 3,965,521 71.7 (70,193) (1.8)
Total deposits $ 5,460,345 100.0 % $ 5,528,336 100.0 % $ (67,991) (1.2)
Total deposits decreased $68.0 million, or 1.2%, to $5.46 billion at March 31, 2025 when compared to December 31, 2024. The decrease in total deposits was primarily due to a decrease in interest bearing demand deposits of $125.6 million, partially offset by an increase in time deposits of $60.8 million. The decrease in deposits is attributable to seasonal municipal runoff and a decrease in interest rate-sensitive cannabis-related deposits.
Total estimated uninsured deposits were $940.6 million, or 17.2% of total deposits, at March 31, 2025 and $905.3 million, or 16.4% of total deposits, at December 31, 2024. At March 31, 2025, there were $165.0 million included in uninsured deposits that the Bank secured using the market value of pledged collateral. The Bank’s uninsured deposits, excluding the market value of pledged collateral, at March 31, 2025 were $775.6 million, or 14.2% of total deposits.
The Bank is required to monitor large deposit relationships and concentration risks in accordance with regulatory guidance. This includes monitoring deposit concentrations and maintaining fund management policies and strategies that take into account potentially volatile concentrations and significant deposits that mature simultaneously. Regulatory guidance defines a large depositor as a customer or entity that owns or controls 2% or more of the Bank’s total deposits. At March 31, 2025, the Bank had one local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $221.7 million, which represented 4.1% of total deposits of $5.47 billion. At December 31, 2024, there were three customer deposit relationships that exceeded 2% of total deposits, totaling $547.4 million, which represented 9.9% of total deposits of $5.54 billion.
Wholesale Funding – Short-Term Borrowings and Brokered Deposits
The Company’s wholesale funding, which includes FHLB advances and brokered deposits, was $50.0 million at March 31, 2025 and December 31, 2024. The $50.0 million FHLB advance was for an initial term of 18-months at a rate of 4.79%. This advance has the option to be called by FHLB at any time and matures on November 7, 2025. At March 31, 2025 and December 31, 2024, the Company had no brokered deposits and securities sold under agreements to repurchase or overnight borrowings from correspondent banks.
For FDIC call reporting purposes, reciprocal deposits are classified as brokered deposits when they exceed 20% of a bank’s liabilities or $5.0 billion . Reciprocal deposits decreased $189.8 million to $1.46 billion at March 31, 2025, compared to $1.65 billion at December 31, 2024. Reciprocal deposits as a percentage of the Bank’s liabilities at March 31, 2025 and December 31, 2024 were 26.2% and 29.3%, respectively. For call reporting purposes, $344.4 million of reciprocal deposits were considered brokered at March 31, 2025, compared to $520.5 million at December 31, 2024.
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Long-Term Debt
The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. Currently, the Company has no long term borrowing with FHLB as of March 31, 2025.
On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% of Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.
As a result of the merger with Severn Bancorp, Inc., effective October 31, 2021, the Company acquired Junior Subordinated Debt Securities due in 2035 which had an outstanding principal balance of $20.6 million. The debt balances of $18.8 million at March 31, 2025 and $18.8 million at December 31, 2024 were presented net of fair value adjustments of $1.8 million and $1.8 million, respectively.
Additionally, as a result of the merger with The Community Financial Corporation in 2023 , the Company acquired Junior Subordinated Debt Securities, which had an outstanding principal balance of $12.4 million. The debt b alance of $11.1 million at March 31, 2025 was presented net of a fair value adjustment of $1.3 million. In addition, the Company acquired 4.75% fixed-to-floating rate subordinated notes with a carrying value of $19.5 million at March 31, 2025. The notes’ aggregate balance of $19.1 million at March 31, 2025 was presented net of fair value adjustment of $396 thousand.
Stockholders’ Equity
($ in thousands, except per share amounts) March 31, 2025 December 31, 2024 $ Change % Change
Common stock, $0.01 par value per share $ 333 $ 333 $ — — %
Additional paid in capital 358,572 358,112 460 0.1
Retained earnings 199,898 190,166 9,732 5.1
Accumulated other comprehensive loss (6,333) (7,545) 1,212 (16.1)
Total stockholders’ equity $ 552,470 $ 541,066 $ 11,404 2.1
Total stockholders’ equity increased $11.4 million, or 2.1%, to $552.5 million at March 31, 2025 when compared to December 31, 2024, primarily due to $13.8 million of net income and accumulated other comprehensive income of $1.2 million, partially offset by dividends declared of $4.0 million.
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USE OF NON-GAAP FINANCIAL MEASURES
Statements included in the management’s discussion and analysis of financial condition and results of operations include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company’s management uses these non-GAAP financial measures and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP. See non-GAAP reconciliation schedules that immediately follow.
Reconciliation of Non-GAAP Measures
This Quarterly Report on Form 10-Q, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with GAAP. This financial information includes certain performance measures, which exclude intangible assets. These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.
($ in thousands, except per share amounts) March 31, 2025 December 31, 2024 March 31, 2024
Total assets $ 6,176,563 $ 6,230,763 $ 5,825,704
Less: intangible assets
Goodwill 63,266 63,266 63,266
Core deposit intangibles 36,033 38,311 45,515
Total intangible assets 99,299 101,577 108,781
Tangible assets $ 6,077,264 $ 6,129,186 $ 5,716,923
Total common equity $ 552,470 $ 541,066 $ 515,228
Less: intangible assets 99,299 101,577 108,781
Tangible common equity $ 453,171 $ 439,489 $ 406,447
Common shares outstanding at end of period 33,374,265 33,332,177 33,210,522
Common equity to assets 8.94 % 8.68 % 8.84 %
Tangible common equity to tangible assets 7.46 7.17 7.11
Common book value per share $ 16.55 $ 16.23 $ 15.51
Tangible common book value per share 13.58 13.19 12.24
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Return on Average Common Equity
ROACE is a financial ratio that measures the profitability of a company in relation to the average stockholders’ equity. This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average stockholders’ equity for a specific period of time.
Three Months Ended March 31,
($ in thousands) 2025 2024
Net income (as reported) $ 13,764 $ 8,184
ROACE 10.20 % 6.38 %
Average Equity $ 547,443 $ 515,976
Return on Average Tangible Common Equity
ROATCE is computed by dividing net earnings applicable to common stockholders by average tangible common shareholders’ equity. Management believes that ROATCE is meaningful because it measures the performance of a business consistently, whether acquired or internally-developed. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.
Three Months Ended March 31,
($ in thousands) 2025 2024
Net income (as reported) $ 13,764 $ 8,184
Core deposit intangible amortization (net of tax) (1)
1,717 1,989
Net earnings applicable to common stockholders
$ 15,481 $ 10,173
ROATCE 14.05 % 10.08 %
Average equity $ 547,443 $ 515,976
Less: Average goodwill and core deposit intangible (100,514) (110,167)
Average tangible common equity $ 446,929 $ 405,809
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(1) The Company utilized an effective tax rate of 24.6% and 22.8% for the three months ended March 31, 2025 and 2024, respectively.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.