PTRS Partners Bancorp - 10-K

Filed Mar 29, 2023 for fiscal period ending Dec 31, 2022. See issuer overview · financials · original on SEC.gov ↗

Accession

0001558370-23-004858

Signal

Neutral

YoY shift: Unscored

Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K.

Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.

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Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.

Risk Factors (Item 1A)

13,961 words

Item 1A. Risk Factors.

Risk Factors Summary.

Risk’s Related to the Company’s Pending Merger with LINK

Because the market price of LINK common stock will fluctuate, the value of the merger consideration to be received by our shareholders may change.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.

Failure of the merger to be completed, the termination of the LINK Merger Agreement or a significant delay in the consummation of the merger could negatively impact the Company.

The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.

The LINK Merger Agreement contains provisions that may discourage other companies from pursuing, announcing or submitting a business combination proposal to the Company that might result in greater value to Company shareholders.

Litigation against the Company or LINK, or the members of the Company’s or LINK’s board of directors, could prevent or delay the completion of the LINK merger.

Risks Related to Our Business

The COVID-19 pandemic could adversely affect our business, financial condition and results of operations, the extent of which is not now known or predictable.

Changes in interest rates could adversely impact the Company’s financial condition and results of operations.

The Company’s operations and profitability may be adversely affected by general economic, social, political and health conditions.

If the Company has higher credit losses than it has allowed for, the Company’s earnings could materially decrease.

The Company’s profitability will depend significantly on economic conditions in the States of Delaware, New Jersey, and Maryland and the Commonwealth of Virginia.

Because the Company emphasizes commercial real estate and commercial loan originations, its credit risk may increase and future downturns in the local real estate market or economy could adversely affect its earnings.

The severity and duration of a future economic downturn and the composition of the Company’s loan portfolio could impact the level of loan charge-offs and provision for credit losses and may adversely affect the Company’s net income or loss.

Changes in real estate values may adversely impact the Company’s loans that are secured by real estate.

The Company’s ability to pay dividends depends primarily on receiving dividends from the Affiliate Banks, which is subject to regulatory limits on such bank’s performance.

Competition from other traditional and nontraditional financial institutions and service providers may adversely affect the Company’s profitability.

The Company is subject to an extensive body of accounting rules and best practices. Periodic changes to such rules may change the treatment and recognition of critical financial line items and affect the Company’s profitability.

The soundness of other financial institutions may adversely affect the Company.

Market volatility may have materially adverse effects on the Company’s liquidity and financial condition.

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Maryland business corporation law and various anti-takeover provisions under the Company’s governing documents could impede the takeover of the Company.

If the Company concludes that the decline in value of any of its investment securities is an other-than-temporary impairment, the Company is required to write down the value of that security through a charge to earnings.

Liquidity risk could impair the Company’s ability to fund operations and meet its obligations as they become due and failure to maintain sufficient liquidity could materially adversely affect the Company’s growth, business, profitability and financial condition.

The Company is subject to environmental liability risk associated with lending activities.

The Company depends on the accuracy and completeness of information about customers and counterparties, and our financial condition could be adversely affected if we rely on misleading information.

Consumers may decide not to use banks to complete their financial transactions, which could have a material adverse impact on the Company’s business, financial condition and results of operations.

Risks Related to Bank and Bank Holding Company Regulation

The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on the Company’s operations.

The Company is required to maintain capital to meet regulatory requirements, and the Company’s failure to maintain sufficient capital, whether due to losses, an inability to raise capital or otherwise could adversely affect the Company’s financial condition, liquidity, results or operations and ability to maintain regulatory compliance.

The Company may need or be compelled to raise additional capital in the future which could dilute shareholders or be unavailable when needed or at unfavorable terms.

Risks Related to the Company’s Common Stock

The Company’s ownership is concentrated in one significant shareholder.

Risks Related to Information Technology

The Company’s business conduct, including its transactions with customers, are increasingly done via electronic means, and this has increased its risks related to cybersecurity.

The Company’s financial performance may suffer if its information technology is unable to keep pace with growth or industry developments.

The increasing use of social media platforms presents new risks and challenges and the inability or failure to recognize, respond to, and effectively manage the accelerated impact of social media could materially adversely impact the Company’s business.

General Risk Factors

The Company’s stock price may be volatile, and you could lose part or all of your investment as a result.

New lines of business or new products and services may subject the Company to additional risks.

The Company may not be able to attract and retain skilled people.

Litigation and regulatory actions, including possible enforcement actions, could subject the Company to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on its business activities.

Severe weather, natural disasters, acts of war or terrorism, other external events, including the ongoing COVID-19 pandemic or the outbreak of another highly infectious or contagious disease, could significantly impact the Company’s business.

The Company is subject to ESG risks that could adversely affect the Company’s reputation, trading price of the Company’s common stock and/or business, operations and earnings.

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Risk Factors

An investment in the Company’s securities involves risks and uncertainties. Below are the material risks and uncertainties, of which the Company is currently aware, that could have a material adverse effect on the Company’s business, results of operations, financial condition, liquidity and capital position, but do not necessarily include all risks that the Company may face. An investor in our securities should not interpret the disclosure of a risk in the following risk factors to state that the risk has not already materialized. These factors could cause the Company’s actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, in which case the trading price of the Company’s common stock could decline. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this Annual Report on Form 10-K, please see “Forward-Looking Statements” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Risks Related to the Company’s Pending Merger with LINK

Because the market price of LINK common stock will fluctuate, the value of the merger consideration to be received by our shareholders may change.

On February 22, 2023, the Company announced the signing of the LINK Merger Agreement, pursuant to which the Company will be acquired by LINK. Under the terms of the LINK Merger Agreement, each share of Company common stock (other than certain shares held by the Company or LINK), will be converted into the right to receive 1.150 shares of common stock of LINK. The closing price of LINK common stock on the date that the merger is completed may vary from the closing price of LINK common stock on the date LINK and the Company announced the signing of the LINK Merger Agreement and the date of the special meeting of Company shareholders regarding the merger. Because the merger consideration is determined by a fixed exchange ratio, Company shareholders will not know or be able to calculate the value of the shares of LINK common stock they will receive upon completion of the merger. Any change in the market price of LINK common stock prior to completion of the merger may affect the value of the merger consideration. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the companies’ respective businesses, operations and prospects, and regulatory considerations, among other things. Many of these factors are beyond the control of LINK and the Company.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.

Before the transactions contemplated by the LINK Merger Agreement may be completed, various approvals must be obtained from bank regulatory authorities. In determining whether to grant these approvals, the applicable regulatory authorities consider a variety of factors, including the competitive impact of the proposal in the relevant geographic markets; financial, managerial and other supervisory considerations of each party; convenience and needs of the communities to be served and the record of the insured depository institution subsidiaries under the Community Reinvestment Act of 1977 and the regulations promulgated thereunder; effectiveness of the parties in combating money laundering activities; any significant outstanding supervisory matters; and the extent to which the proposal would result in greater or more concentrated risks to the stability of the United States banking or financial system. These regulatory authorities may impose conditions on the granting of such approvals. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying completion of the merger or of imposing additional costs or limitations on the combined company following the merger. The regulatory approvals may not be received at all, may not be received in a timely fashion, or may contain conditions on the completion of the mergers that are not anticipated or cannot be met. Furthermore, such conditions or changes may constitute a burdensome condition that may allow LINK to terminate the LINK Merger Agreement and LINK may exercise its right to terminate the LINK Merger Agreement. If the consummation of the mergers is delayed, including by a delay in receipt of necessary regulatory approvals, the business, financial condition and results of operations of the Company may also be materially and adversely affected.

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Failure of the merger to be completed, the termination of the LINK Merger Agreement or a significant delay in the consummation of the merger could negatively impact the Company.

The LINK Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the mergers. These conditions to the consummation of the merger may not be fulfilled and, accordingly, the merger may not be completed. In addition, if the merger is not completed by February 22, 2024, either LINK or the Company may choose to terminate the LINK Merger Agreement at any time after that date if the failure of the effective time to occur on or before that date is not caused by any breach of the LINK Merger Agreement by the party electing to terminate the merger agreement. If the merger is not consummated, the ongoing business, financial condition and results of operations of the Company may be materially adversely affected and the market price of the Company’s common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the merger will be consummated.

In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the LINK Merger Agreement. If the merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the merger. Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the merger, including the diversion of management attention from pursuing other opportunities and the constraints in the merger agreement on the ability to make significant changes to the Company’s ongoing business during the pendency of the merger, could have a material adverse effect on the Company’s business, financial condition and results of operations. If the LINK Merger Agreement is terminated and the Company’s board of directors seeks another merger or business combination, Company shareholders cannot be certain that the Company will be able to find a party willing to engage in a transaction on more attractive terms than the merger with LINK.

The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees, customers (including depositors and borrowers), suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel and customers (including depositors and borrowers) pending the consummation of the merger, as such personnel and customers may experience uncertainty about their future roles and relationships following the consummation of the merger. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with the Company to seek to change existing business relationships with the Company or fail to extend an existing relationship with the Company. In addition, competitors may target the Company’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger.

The pursuit of the merger and the preparation for the integration may place a burden on the Company’s management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on the Company’s business, financial condition and results of operations. In addition, the LINK Merger Agreement restricts each party from taking certain actions without the other party’s consent while the merger is pending. These restrictions could have a material adverse effect on the Company’s business, financial condition and results of operations.

The LINK Merger Agreement contains provisions that may discourage a third party from pursuing, announcing or submitting a business combination proposal to the Company that might result in greater value to Company shareholders than the merger with LINK. These provisions include a general prohibition on the Company from soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions. Furthermore, if the merger agreement is terminated, under certain

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circumstances, the Company may be required to pay LINK a termination fee equal to $6.5 million. The Company also has an obligation to submit its merger-related proposals to a vote by its shareholders, including if the Company receives an unsolicited proposal that the Company board of directors believes is superior to the merger, unless the merger agreement is terminated by the Company under certain conditions described in the merger agreement.

Litigation against the Company or LINK, or the members of the Company’s or LINK’s board of directors, could prevent or delay the completion of the LINK merger.

Purported shareholder plaintiffs may assert legal claims related to the LINK merger. The results of any such potential legal proceeding would be difficult to predict and such legal proceedings could delay or prevent the merger from being completed in a timely manner. Moreover, any litigation could be time consuming and expensive, and could divert attention of the Company’s and LINK’s respective management teams away from their companies’ regular business. Any lawsuit adversely resolved against the Company, LINK or members of their respective boards of directors, could have a material adverse effect on each party’s business, financial condition and results of operations.

One of the conditions to the consummation of the merger is the absence of any law, order, decree or injunction (whether temporary, preliminary or permanent) or other action taken by the governmental authority of competent jurisdiction that restricts, enjoins or prohibits or makes illegal the consummation of the transactions contemplated by the merger agreement, including the merger. Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a governmental authority issues an order or other directive restricting, prohibiting or making illegal the completion of the transactions contemplated by the merger agreement, including the merger, then such injunctive or other relief may prevent the merger from being completed in a timely manner or at all.

Risks Related to Our Business

The COVID-19 pandemic could adversely affect our business, financial condition and results of operations, the extent of which is not now known or predictable.

The COVID-19 pandemic has caused negative economic conditions and disruptions, which have adversely impacted the Company’s financial results to varying degrees and in varying respects. The COVID-19 pandemic’s impact on economic conditions and activity remains uncertain and will continue to evolve by region, country and state, and it is possible that new or evolving variants of COVID-19 could contribute to a potential economic downturn. Additionally, the COVID-19 pandemic and certain responses to the pandemic have contributed to higher inflation in the United States during 2022 and early 2023, which could contribute to a prolonged period of higher inflation. Efforts to combat this inflation could result in an economic recession.

Since the COVID-19 pandemic is ongoing, it is difficult to predict the full impact the pandemic may have on the Company’s business, financial condition and results of operations. Among the factors outside the Company’s control that may affect the impact the COVID-19 pandemic will ultimately have on the Company’s business are, without limitation:

the direct and indirect results of the pandemic, such as recessionary economic trends, including with respect to employment, wages and benefits, commercial activity, the residential housing market, consumer spending and real estate and investment securities market values;

volatility in financial and capital markets, interest rates and exchange rates;

effects on the Company’s liquidity position due to changes in customers’ deposit and loan activity in response to the pandemic and its economic effects;

increase risks of loan delinquencies, defaults and foreclosures and declines in the value of collateral for loans;

the ability of the Company’s employees to work effectively during the course of the pandemic;

the ability of the Company’s third-party vendors to maintain a high-quality and effective level of service;

the possibility of increased fraud, cybercrime and similar incidents, due to vulnerabilities posed by the significant increase in the Company employees and customers handling their banking interactions remotely from home, or otherwise;

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required changes to the Company’s internal controls over financial reporting to reflect a rapidly changing work environment;

potential longer-term shifts toward mobile banking, telecommuting and telecommerce; and

geographic variation in the severity and duration of the COVID-19 pandemic, including in states in which we operate physically such as Maryland, Virginia, Delaware, and New Jersey.

If the COVID-19 pandemic results in a continuation or worsening of current economic conditions and commercial environments, our business, financial condition and results of operations could be materially adversely affected. Additional ongoing and potential risks and effects related to the COVID-19 pandemic are discussed in the other risk factors contained in this report.

Changes in interest rates could adversely impact the Company’s financial condition and results of operations.

The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies, in particular, the Federal Reserve. Since the beginning of 2022, in response to elevated inflation, the Federal Open Market Committee of the Federal Reserve has increased the target range for the federal funds rate to a range of 4.25% to 4.50% as of December 31, 2022, and further increased it to a current range of 4.75% to 5.00% in March 2023. The Federal Open Market Committee has indicated that further increases are to be expected in 2023. As a result, the Company expects overall interest rates to continue to rise in 2023, which is expected to positively impact our net interest income, but may negatively impact the housing market by reducing refinancing activity, new home purchases, commercial lending activity, and the U.S. economy generally. Fluctuations in market interest rates could have a material adverse effect on the Company’s business, financial condition and results of operations. Additionally, inflationary pressures could increase the Company’s operating costs and could have a significant negative effect on the Company’s borrowers and the values of collateral securing loans, which could negatively impact the Company’s business, financial condition and results of operations.

Changes in monetary policy, including changes in interest rates, could influence not only the amount of interest the Company receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain and retain deposits, (ii) the fair value of the Company’s financial assets and liabilities, (iii) the average duration of the Company’s mortgage-backed investment securities portfolio, and (iv) the availability and cost of capital and liquidity. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected.

The Company’s operations and profitability may be adversely affected by general economic, social, political and health conditions.

The Company’s operations and profitability are impacted by general economic, social, political and health conditions in the United States and abroad. These conditions include the levels and volatility of short-term and long-term interest rates, inflation, money supply, consumer spending, employment levels, labor shortages, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which the Company operates, all of which are beyond the Company’s control. In addition, geopolitical developments, international trade disputes, public health crises, such as the COVID-19 pandemic, extreme weather events or natural disasters, cyberattacks or campaigns, military conflict, including the war in Ukraine, and other events beyond our control, can increase levels of political and economic unpredictability globally and increase the volatility of economic conditions on a local, national, and global scale. Deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values, and a decrease in demand for the Company’s products and services, among other things, any of which could have a material adverse impact on the Company’s business, financial condition and results of operations.

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If the Company has higher credit losses than it has allowed for, the Company’s earnings could materially decrease.

The Company maintains an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of the following: industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity, including forecasting how borrowers will perform in changing and unprecedented economic conditions, and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of the Company’s control, may require an increase in the allowance for credit losses. In addition, bank regulatory agencies periodically review the allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. Further, if charge-offs in future periods exceed the allowance for credit losses, the Company will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income, and possibly capital, and may have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company’s profitability will depend significantly on economic conditions in the States of Delaware, New Jersey, and Maryland and the Commonwealth of Virginia.

The Company’s success depends primarily on the general economic conditions of the States of Delaware, New Jersey and Maryland and the Commonwealth of Virginia, and the specific local markets in which Delmarva and Partners operate. Unlike larger financial institutions that are more geographically diversified, the Affiliate Banks have relatively compact geographic footprints. Delmarva provides banking and financial services to customers primarily in the eastern regions in Delaware and Maryland and in the Camden and Burlington counties of New Jersey. Partners serves the communities in and around the Greater Fredericksburg, Virginia area, the Greater Washington, D.C. area and Anne Arundel County and the three counties of Southern Maryland. The local economic conditions in these areas, which may be different from, and in some instances worse than, the economic conditions in the United States as a whole, have a significant impact on the demand for the Affiliate Banks’ products and services, as well as the ability of the Affiliate Banks’ customers to repay loans, the value of the collateral securing the loans, and the stability of the Affiliate Banks’ deposit funding sources. Like most states and local economies, these areas have been significantly impacted by the COVID-19 pandemic and related governmental and societal actions. A significant decline in general economic conditions caused by rising interest rates, inflation, recession, acts of terrorism, outbreak of hostilities (including the war in Ukraine) or other international or domestic occurrences, unemployment, changes in securities markets, or other factors, including the continuation of the COVID-19 pandemic, could impact these local economic conditions and, in turn, have a material adverse effect on the Affiliate Banks’, and therefore the Company’s, financial condition and results of operations.

Commercial real estate and commercial loans are generally viewed as having more inherent risk than residential real estate loans. Because the repayment of commercial real estate and commercial loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial loans also may involve relatively large loan balances to individual borrowers or groups of related borrowers, so a deterioration in one or a few of these loans could cause a significant increase in the percentage of nonperforming loans. A future downturn in the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As the Company’s commercial real estate and commercial loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase. Additionally, banking regulators generally subject commercial real estate loans to greater scrutiny and may require banks with higher levels of such loans to implement enhanced risk management practices. It may also be difficult to

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assess the future performance of newly originated commercial loans, as such loans may have delinquency or charge-off levels above our historical experience, which could adversely affect the Company’s future performance.

Lending money is a substantial part of the Company’s businesses. However, every loan that the Company makes carries a certain risk of non-payment. The Company cannot assure that its allowance for credit losses will be sufficient to absorb actual loan losses. The Company also cannot assure that it will not experience significant losses in its loan portfolio that may require significant increases to the allowance for credit losses in the future.

Although the Company evaluates every loan that it makes against its underwriting criteria, the Company may experience losses by reasons of factors beyond its control, including from occurrences and circumstances unrelated to the underwriting criteria applied to a particular borrower, such as current inflationary conditions, rising interest rates, the COVID-19 pandemic, the war in Ukraine, the closure of Silicon Valley Bank (“SVB”) by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver, the closure of Signature Bank by the New York State Department of Financial Services, which also appointed the FDIC as receiver and the winding down and voluntary liquidation of Silvergate Capital Corp., each of which has a high potential for negative impact on financial markets generally as well as the local markets in which we conduct business. Some of these factors include changes in market conditions affecting the value of real estate and unexpected problems affecting the creditworthiness of the Company’s borrowers.

The Company determines the adequacy of its allowance for credit losses by considering various factors, including:

• An analysis of the risk characteristics of various classifications of loans

• Geographic and industry loan concentrations

• Reports of loan reviews conducted by internal or independent organizations

• Previous loan loss experience

• Specific loans that would have loan loss potential

• Delinquency trends

• Estimated fair value of the underlying collateral

• Current economic conditions

• The views of the Company’s and the Affiliate Banks’ respective regulators

• Reports of internal auditors

• Reports of external auditors

Local economic conditions could impact the Company’s loan portfolio. For example, an increase in unemployment, a decrease in real estate values, or increases in interest rates, as well as other factors, could weaken the economies of the communities that the Company serves. Weakness in the market areas served by the Company could depress its earnings and, consequently, its financial condition because:

Borrowers may not be able to repay their loans;

The value of the collateral securing the Company’s loans to borrowers may decline; and/or

The quality of the Company’s loan portfolio may decline.

A downturn in local economic conditions may have a greater effect on the Company’s earnings and capital than on the earnings and capital of other financial institutions whose commercial real estate portfolios are more geographically diverse.

Although, based on the aforementioned procedures implemented by the Company, management believes the current allowance for credit losses is adequate, the Company may have to increase its provision for credit losses should local economic conditions deteriorate, which could negatively impact the Company’s business, financial condition and results of operations.

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Changes in real estate values may adversely impact the Company’s loans that are secured by real estate.

A significant portion of the Company’s loan portfolio consists of residential and commercial mortgages, as well as consumer loans, secured by real estate. These properties are concentrated within the local markets served by Delmarva and Partners. Real estate values and real estate markets generally are affected by, among other things, changes in national, regional or local economic conditions, fluctuations in interest rates, the availability of loans to potential purchasers, changes in the tax laws and other government statutes, regulations and policies, as well as other factors outside of our control such as extreme weather events, natural disasters, geopolitical events (such as the war in Ukraine), and public health crises (such as the COVID-19 pandemic). If real estate prices decline, particularly in the Company’s market area, the value of the real estate collateral securing the Company’s loans could be reduced. This reduction in the value of the collateral could increase the number of non-performing loans and could have a material adverse impact on the Company’s business, financial condition and results of operations.

The Company’s ability to pay dividends depends primarily on receiving dividends from the Affiliate Banks, which is subject to regulatory limits on such bank’s performance.

The Company is a bank holding company and its operations are conducted through its subsidiaries, Delmarva and Partners. The Company’s ability to pay dividends depends on its receipt of dividends from Delmarva and Partners. Dividend payments from Delmarva and Partners are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of Delmarva or Partners to pay dividends is also subject to their profitability, financial condition, capital requirements, and their respective cash flow requirements. For more information on these regulatory restrictions on the ability of the Affiliate Banks to pay dividends, see “Supervision and Regulation” in Item 1, Business. There is no assurance that Delmarva or Partners will be able to pay dividends in the future or that the Company will generate adequate cash flow from Delmarva and Partners to pay dividends in the future. The Company’s failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock. For additional information, please see Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Any declaration or payment of dividends will also depend on the evaluation of a number of factors, including our earnings and financial condition, liquidity and capital requirements, general economic and regulatory conditions and other factors deemed relevant by our Board of Directors. Additionally, we have made, and may make in the future, capital management decisions that could adversely impact the amount of dividends, if any, paid to our shareholders.

Competition from other traditional and nontraditional financial institutions and service providers may adversely affect the Company’s profitability.

The financial services business is highly competitive. The Company competes as a financial intermediary with commercial banks, savings banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the Affiliate Banks’ respective markets, as well as nontraditional competitors such as fintech companies and internet-based lenders, depositories and payment systems. The Company’s profitability depends upon its continued ability to successfully compete with traditional and new financial services providers, some of which maintain a physical presence in the Affiliate Banks’ market areas and others of which maintain only a virtual presence.

Many of the Company’s competitors have substantially greater resources and lending limits than the Company has, and offer certain services, such as extensive and established branch networks and trust services, that the Company does not currently provide or currently expect to provide in the near future. Moreover, larger institutions operating in their respective market areas have access to borrowed funds at lower cost than will be available to the Company. Additionally, many nonbank competitors are not subject to the same extensive federal regulations that apply to bank holding companies and federally insured banks. As a result, some of the Company’s competitors may have the ability to offer products and services that the Company is unable to offer or to offer products and services at more competitive rates.

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The Company’s failure to compete effectively in its markets could restrain the Company’s growth or cause it to lose market share, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The nature of the Company’s business makes it sensitive to the large body of accounting rules in the United States. From time to time, the governing bodies that oversee changes to accounting rules and reporting requirements may release new guidance for the preparation of our financial statements. These changes can materially impact how the Company records and reports its financial condition and results of operations. In some instances, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Beginning in 2023, the Company is required to calculate the allowance for credit losses on the basis of the current expected credit losses over the lifetime of our loans, or the Current Expected Credit Losses (“CECL”), which may result in increases in its allowance for credit losses and future provisions for credit losses.

Under the CECL model, banks are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current accounting principles generally accepted in the United States (“U.S. GAAP”) through December 31, 2022, which delayed recognition until it was probable a loss had been incurred. The Company must recognize a one-time cumulative-effect adjustment to the allowance for credit losses as of the beginning of 2023, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. Accordingly, the adoption of the CECL model will materially affect how the Company determines its allowance for credit losses, and could require it to significantly increase its allowance. Moreover, the CECL model may create more volatility in the level of the allowance for credit losses. If the Company is required to materially increase the level of its allowance for credit losses for any reason, such increase could adversely affect its capital, regulatory capital ratios, ability to make larger loans, earnings and performance metrics. Any such changes could have a material adverse effect on the Company’s business, financial condition, results of operations and stock price.

The soundness of other financial institutions may adversely affect the Company.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and institutional clients. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In the past, defaults by, or even speculation about, one or more financial services institutions or the financial services industry generally during moments of economic crisis have led to market-wide liquidity problems which could result in defaults and, as a result, impair the confidence of our counterparties and ultimately affect our ability to effect transactions. For example, on March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, and the FDIC was appointed as receiver, on March 12, 2023, Signature Bank was closed by the New York State Department of Financial Services, which also appointed the FDIC as receiver, and on March 8, 2023, Silvergate Bank announced it will voluntarily liquidate its assets and wind down its operations, in each case due primarily to liquidity concerns. Although the Department of the Treasury, the Federal Reserve and the FDIC stated that all depositors of SVB would have access to all deposits after only one business day of closure, including uninsured deposits, borrowers under credit agreements, letters of credit and certain other financial instruments with SVB, Signature Bank or any other financial institution that is placed into receivership by the FDIC may be unable to access undrawn amounts thereunder.In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit exposure due to the Company. Any such losses could have a material adverse effect on the Company’s financial condition and results of operations.

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Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, deposit outflows, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations and its financial condition and results of operations.

Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems and/or deposit outflows. For example, on March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the the FDIC as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. Although a statement by the Department of the Treasury, the Federal Reserve and the FDIC stated that all depositors of SVB would have access to all of their deposits after only one business day of closure, including uninsured deposits, borrowers under credit agreements, letters of credit and certain other financial instruments with SVB, Signature Bank or any other financial institution that is placed into receivership by the FDIC may be unable to access undrawn amounts thereunder. If any parties with whom we conduct business are unable to access deposits with another financial institution, funds pursuant to such instruments or lending arrangements with such a financial institution, such parties’ credit quality, ability to pay their obligations to us, or to enter into new commercial arrangements requiring additional payments to us could be adversely affected. In this regard, counterparties to SVB credit agreements and arrangements, and third parties such as beneficiaries of letters of credit (among others), may experience direct impacts from the closure of SVB and uncertainty remains over liquidity concerns in the broader financial services industry. Additionally, confidence in the safety and soundness of regional or community banks specifically or the banking system generally could impact where customers choose to maintain deposits, which could materially adversely impact our liquidity, loan funding capacity, ability to raise funds, and results of operations.

Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Although the U.S. Department of Treasury, FDIC and Federal Reserve Board have announced a program to provide up to $25 billion of loans to financial institutions secured by certain of such government securities held by financial institutions to mitigate the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other liquidity needs of financial institutions for immediate liquidity may exceed the capacity of such program. There is no guarantee that the U.S. Department of Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions, or that they would do so in a timely fashion.

Although we assess our funding relationships as we believe necessary or appropriate, our access to funding sources and other arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect us, our customers, the financial institutions with which we have arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform our obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could involve financial institutions or financial services industry companies with which we or our customers have financial or business relationships, but could also include factors involving financial markets or the financial services industry generally.

Additionally, we could be impacted by current or future negative perceptions and expectations about the prospects for the financial services industry (including the impact of Moody’s Investors Service’s rating change of the outlook of the US banking system from “stable” to “negative”), which could worsen over time and result in downward pressure on, and continued or accelerated volatility of, bank securities.

Market volatility may have materially adverse effects on the Company’s liquidity and financial condition.

The capital and credit markets have experienced extreme volatility and disruption. Inflationary pressures have been increasing, and since the beginning of 2022, in response to this elevated inflation, the Federal Open Market Committee of the Federal Reserve has increased the target range for the federal funds rate to its current range of 4.75%

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to 5.00% in March 2023, with further increases expected in 2023. Additionally, over the last several years, in some cases, the markets have exerted downward pressure on stock prices, security prices, and credit capacity for certain issuers without regard to those issuers’ underlying financial strength. Moreover, the COVID-19 pandemic continues to disrupt supply chains, affecting production and sales across a range of industries (including businesses and industries in the geographies served by our Affiliate Banks) and has caused a significant amount of market disruption and volatility. The extent of the impact of the COVID-19 pandemic on our liquidity and financial condition will depend on certain developments, including the effects of new and evolving variants of COVID-19, the impact to our customers, employees and vendors, and the impact to the financial services and banking industry and the economy as a whole – all of which are uncertain and cannot be predicted at this time due to the ongoing and dynamic nature of the COVID-19 pandemic. If the market disruption and volatility associated with the above factors continues, there can be no assurance that the Company will not experience adverse effects, which may be material, on its liquidity, financial condition, and profitability.

The Company reviews its investment securities portfolio at each quarter-end to determine whether the fair value is below the current carrying value. When the fair value of any of its investment securities has declined below its carrying value, the Company is required to assess whether the decline is an other-than-temporary impairment. If the Company determines that the decline is an other-than-temporary impairment, it is required to write down the value of that security through a charge to earnings for credit related impairment. Non-credit related reductions in the value of a security do not require a write down of the value through earnings unless the Company intends to, or is required to, sell the security. Changes in the expected cash flows related to the credit related piece of the investment of a security in the Company’s investment portfolio or a prolonged price decline may result in the Company’s conclusion in future periods that an impairment is other than temporary, which would require a charge to earnings to write down the security to fair value. Due to the complexity of the calculations and assumptions used in determining whether an asset has an impairment that is other than temporary, the impairment disclosed may not accurately reflect the actual impairment in the future.

Liquidity is essential to the Company’s business. Liquidity risk is the potential that the Company will be unable to meet its obligations as they become due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost, in a timely manner and without adverse conditions or consequences. The Company requires sufficient liquidity to fund asset growth, meet customer loan requests, customer deposit maturities and withdrawals, payments on its debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. Liquidity risk can increase due to a number of factors, including an over-reliance on a particular source of funding or market-wide phenomena such as inflation, rising interest rates, market dislocation and major disasters, including public health crises, such as the COVID-19 pandemic, and geopolitical events, such as the war in Ukraine. Factors that could detrimentally impact access to liquidity sources include, but are not limited to, a decrease in the level of the Company’s business activity as a result of a downturn in the markets in which its loans are concentrated, adverse regulatory actions against the Company, or changes in the liquidity needs of depositors. Market conditions or other events could also negatively affect the level or cost of funding, affecting its ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a reasonable cost, in a timely manner, and without adverse consequences. The Company’s inability to raise funds through deposits, borrowings, the sale of loans, and other sources could have a substantial negative effect on its business, and could result in the closure of the Company or either of the Affiliate Banks. The Company’s access to funding sources in amounts adequate to finance its activities or on acceptable terms could be impaired by factors that affect its organization specifically or the financial services industry or economy in general. Any substantial, unexpected, and/or prolonged change in the level or cost of liquidity could impair the Company’s ability to fund operations and meet its obligations as they become due and could have a material adverse effect on its business, financial condition and results of operations.

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The Company relies on customer deposits, advances from the FHLB and brokered deposits to fund its operations. Although the Company has historically been able to replace maturing deposits and advances if desired, including throughout the most recent recession, it may not be able to replace such funds in the future if its financial condition, the financial condition of the FHLB or market conditions were to change. FHLB borrowings and other current sources of liquidity may not be available or, if available, sufficient to provide adequate funding for operations.

The Company is subject to environmental liability risk associated with lending activities.

A significant portion of the Company’s loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that the Company could be subject to environmental liabilities with respect to these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expense and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations and in turn, the Company’s financial condition, results of operations and stock price.

The Company depends on the accuracy and completeness of information about customers and counterparties, and our financial condition could be adversely affected if we rely on misleading information.

In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could have a material adverse impact on the Company’s business, financial condition and results of operations.

Consumers may decide not to use banks to complete their financial transactions, which could have a material adverse impact on the Company’s business, financial condition and results of operations.

Technology and other changes are allowing parties to complete financial transactions, which historically have involved banks, through alternative methods, and these changes toward digital financial transactions have accelerated due to the COVID-19 pandemic. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds, reloadable pre-paid cards, or other types of assets, including cryptocurrencies and other digital assets. Consumers can also complete transactions such as obtaining loans, paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of loans, customer deposits and the related income generated from those transactions. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Company’s business, financial condition and results of operations.

Risks Related to Bank and Bank Holding Company Regulation

The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on the Company’s operations.

The banking industry is highly regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, customers, the public, the banking system as a whole and the FDIC DIF, not for the protection of our shareholders and creditors. The Company is subject to primary regulation and supervision by the Federal Reserve, Delmarva is subject to primary regulation and supervision by the Federal Reserve and the Delaware Commissioner, and Partners is subject to primary regulation by the Federal Reserve and the Virginia

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Bureau. Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance costs. The federal, state and local laws and regulations applicable to the Affiliate Banks govern a variety of matters, including permissible types, amounts and terms of loans and investments it may make, the maximum interest rate that may be charged, the amount of reserves it must hold against deposits it takes, the types of deposits it may accept and the rates it may pay on such deposits, maintenance of adequate capital and liquidity, changes in control of the Company and the Affiliate Banks, transactions between the Company and the Affiliate Banks, handling of nonpublic information, restrictions on dividends, establishment of new offices, and the monitoring and reporting of suspicious activity and customers who are perceived to present a heightened risk of money laundering or other illegal activity. The Company and the Affiliate Banks must obtain approval from their regulators before engaging in certain activities, and there is risk that such approvals may not be granted, either in a timely manner or at all. These requirements may constrain the Company’s operations, and the adoption of new laws and changes to or repeal of existing laws may have a further impact on the Company’s business, financial condition and results of operations. Also, the burden imposed by those federal and state regulations may place banks in general, including the Affiliate Banks in particular, at a competitive disadvantage compared to non-bank competitors. The Company’s failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Bank holding companies and financial institutions currently face an uncertain regulatory environment. Applicable laws, regulations, interpretations, enforcement policies and accounting principles have been subject to significant changes in recent years, and may be subject to significant future changes. Future changes may have a material adverse effect on the Company’s business, financial condition and results of operations.

Federal, state and local legislative bodies and regulatory agencies may adopt changes to their laws or regulations or change the manner in which existing regulations are applied. We cannot predict the substance or effect of pending or future legislation or regulation or the application of laws and regulations to us. Compliance with current and potential regulation, as well as regulatory scrutiny, may significantly increase our costs, impede the efficiency of our internal business processes, require the Company to increase its regulatory capital, and limit its ability to pursue business opportunities in an efficient manner by requiring the Company to expend significant time, effort and resources to ensure compliance and respond to any regulatory inquiries or investigations.

In addition, regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, risk management or other operational practices for financial service companies in a manner that impacts the Company’s ability to implement its strategy and could affect the Company in substantial and unpredictable ways, and could have a material adverse effect on the Company’s business, financial condition and results of operations. Furthermore, the regulatory agencies have extremely broad discretion in their interpretation of laws and regulations and their assessment of the quality of our loan portfolio, investment securities portfolio and other assets. If any regulatory agency’s assessment of the quality of our assets, operations, lending practices, investment practices, capital structure or other aspects of the Company’s business differs from the Company’s assessment, the Company may be required to take additional charges or undertake, or refrain from taking, actions that could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company and the Affiliate Banks each must meet regulatory capital requirements and maintain sufficient liquidity. The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing significant internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Our regulatory capital ratios currently are in excess of the levels established for “well-capitalized” institutions. Regulators may, from time to time, implement changes to regulatory capital adequacy guidelines. Furthermore, regulators may require that the Company and/or Affiliate Banks maintain higher levels of regulatory capital based on their condition, risk profile, growth plans or conditions in the banking industry or economy. Bank

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regulatory agencies have been (and are expected to continue to be) very proactive in responding to both market and supervisory concerns with respect to capital requirements. Any new or revised standards adopted in the future may require us to maintain materially more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities to comply with formulaic liquidity requirements and could result in regulatory actions if the Company or Affiliate Banks were unable to comply with such requirements. The Company may not be able to raise additional capital at all, or on terms acceptable to it. Failure to maintain capital to meet current or future regulatory requirements could have a significant material adverse effect on the Company’s business, financial condition and results of operations. For additional information, please see “Supervision and Regulation” in Item 1, Business.

The Company may need or be compelled to raise additional capital in the future which could dilute shareholders or be unavailable when needed or at unfavorable terms.

The Company generally may issue additional shares of the Company’s common stock up to the number of shares authorized in the Company’s articles of incorporation. The Company may issue additional shares of the Company’s common stock in the future for a number of reasons, including to finance the Company’s operations and business strategy (including mergers and acquisitions) or to address regulatory capital concerns, among others. If the Company raises capital by selling shares of the Company’s common stock for any reason, the issuance would have a dilutive effect on the current holders of the Company’s common stock and could have a material adverse effect on the market price of such securities. New investors may also have rights, preferences and privileges senior to the Company’s shareholders, which may adversely impact its shareholders. The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. Accordingly, the Company cannot be assured of its ability to raise additional capital on terms and time frames acceptable to it or to raise additional capital at all. If the Company cannot raise additional capital in sufficient amounts when needed, its ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect the Company’s business, financial condition, and results of operations.

Risks Related to the Company’s Common Stock

The Company’s ownership is concentrated in one significant shareholder.

Kenneth R. Lehman beneficially owns approximately 41.1% of the Company’s common stock. As a result, Mr. Lehman has the ability to exercise significant control over the Company’s business policies and affairs, such as the composition of the Company’s board of directors and any action requiring the approval of the Company’s shareholders, including the adoption of amendments to its articles of incorporation and the approval of a merger, share exchange or sale of substantially all of its assets. Mr. Lehman is able to vote his shares in favor of his interests that may not always coincide with the interests of the other shareholders.

For additional information, please see Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Maryland business corporation law and various anti-takeover provisions in the Company’s governing documents could impede the takeover of the Company.

Various Maryland laws affecting business corporations may have the effect of discouraging offers to acquire the Company, even if the acquisition would be advantageous to shareholders. In addition, the Company has various anti-takeover measures in place under its articles of incorporation and bylaws, including a staggered Board of Directors, and the absence of cumulative voting. Any one or more of these measures may impede the takeover of the Company without the approval of the Board of Directors and may prevent shareholders from taking part in a transaction in which they could realize a premium over the current market price of the Company common stock.

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Risks Related to Information Technology

The Company’s business operations, including its transactions with customers, are increasingly done via electronic means, and this has increased its risks related to cybersecurity.

The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Although the Company maintains insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. The Company is exposed to the risk of cyber-attacks in the normal course of business. In addition, the Company is exposed to cyber-attacks on vendors and merchants that affect the Company and its customers. In general, cyber incidents can result from deliberate attacks or unintentional events. The Company has observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. To combat against these attacks, policies and procedures are in place to prevent or limit the effect of the possible security breach of its information systems. While the Company maintains insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. As cyber threats continue to evolve, the Company also may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of the Company’s systems and implement controls, processes, policies and other protective measures, the Company may not be able to anticipate all security breaches, nor may it be able to implement guaranteed preventive measures against such security breaches. Cyber threats are rapidly evolving, and the Company may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.

The Company also faces direct and indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties with whom it does business or upon whom the Company relies to facilitate or enable its business activities. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber-attack or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including the Company. Additionally, the existence of cyber-attacks or security breaches at third party service providers with access to our data may not be disclosed to us in a timely manner.

Cyber-attacks and other information or security breaches, whether directed at the Company or third parties, may result in a material loss or have material consequences. Moreover, the public perception that a cyber-attack on the Company’s systems has been successful, whether or not this perception is correct, may damage the Company’s reputation with customers and third parties with whom the Company does business. While the Company has not incurred any material losses related to cyber-attacks, the Company is subject to cyber-attacks from time to time, including data mining incidents. Such cyber-attacks may cause the Company to incur substantial costs and suffer other negative consequences, and there can be no assurance that the Company will not suffer such losses in the future. Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; deploying additional personnel and protection technologies, training employees, and engaging third-party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; disruption or failures of physical infrastructure, operating systems or networks that support the Company’s business and customers resulting in the loss of customers and business opportunities; additional regulatory scrutiny and possible regulatory penalties; litigation; and, reputational damage adversely affecting customer or investor confidence.

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The Company’s financial performance may suffer if its information technology is unable to keep pace with growth or industry developments.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services, and the Company expects that new technologies will continue to emerge. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. Additionally, developing or acquiring access to new technologies and incorporating those technologies into the Company’s products and services, or using them to expand the Company’s products and services, may require significant investments, may take considerable time to complete, and ultimately, may not be successful. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on Delmarva’s and Partners’ businesses and, in turn, the Company’s business, financial condition and results of operations.

There has been a marked increase in the use of social media platforms, including weblogs (blogs), social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Social media practices in the banking industry are evolving, which creates uncertainty and risk of noncompliance with regulations applicable to the Company’s business. Consumers value readily available information concerning businesses and their goods and services and often act on such information without further investigation and without regard to its accuracy. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to the Company’s interests and/or may be inaccurate. The dissemination of information online could harm the Company’s business, prospects, financial condition, and results of operations, regardless of the information’s accuracy. The harm may be immediate without affording the Company an opportunity for redress or correction.

Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about the Company’s business, exposure of personally identifiable information, fraud, out-of-date information, and improper use by employees and customers. The inappropriate use of social media by the Company’s customers or employees could result in negative consequences such as remediation costs including training for employees, additional regulatory scrutiny and possible regulatory penalties, litigation, or negative publicity that could damage the Company’s reputation adversely affecting customer or investor confidence.

General Risk Factors

The Company’s stock price may be volatile, and you could lose part or all of your investment as a result.

Stock price volatility may negatively impact the price at which our common stock may be sold, and may also negatively impact the timing of any sale. The Company’s stock price may fluctuate widely in response to a variety of factors, some of which are unrelated to the Company’s financial performance, including the risk factors described herein and, including, among other things:

actual or anticipated variations in quarterly operating results, financial conditions or credit quality;

changes in business or economic conditions;

recommendations or research reports about the Company, the Affiliate Banks or the financial services industry in general published by securities analysts;

changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to the Company, the Affiliate Banks or other financial institutions;

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news reports relating to trends, concerns and other issues in the financial services industry, such as the recent closings of SVB, Signature Bank and Silvergate Bank;

perceptions in the marketplace regarding the Company or the Affiliate Banks and their competitors;

significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company, the Affiliate Banks or their competitors;

additions or departures of key personnel;

future sales or issuance of additional shares of stock;

fluctuations in the stock price and operating results of the Company’s competitors;

changes or proposed changes in laws or regulations, or differing interpretations thereof affecting the businesses of the Company or the Affiliate Banks, or enforcement of these laws or regulations;

new technology used, or services offered, by competitors;

additional investments from third parties; and

geo-political conditions such as acts or threats of terrorism, public health crises and pandemics (including the COVID-19 pandemic) or military conflicts.

General market fluctuations, including real or anticipated changes in the strength of the local economy; industry factors and general economic and political conditions and events, such as economic slowdowns or recessions; interest rate changes, oil price volatility or credit loss trends could also cause a decorate in the Company’s stock price regardless of operating results.

New lines of business or new products and services may subject the Company to additional risks.

From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, shifting market preferences, natural disasters, geopolitical events (such as the war in Ukraine), and public health crises (such as the COVID-19 pandemic) may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and new products or services could have a material adverse effect on the Company’s business, financial condition, and results of operations.

The Company may not be able to attract and retain skilled people.

The Company’s success depends, in large part, on its ability to attract and retain members of management and other key employees. Competition for the best people in most activities engaged in by the Company can be intense, and the Company may not be able to hire people or to retain them. The loss of any of the Company’s senior management or key employees could materially and adversely affect the Company’s business and ability to execute its business plan, and the Company may not be able to find adequate replacements. The loss of personnel with extensive customer relationships may also cause business loss if the customers were to follow that employee to a competitor. The Company’s ability to attract and retain employees could also be impacted by changing workforce concerns, expectations, practices and preferences, including remote and hybrid work preferences largely created by the COVID-19 pandemic, and increasing labor shortages and competition for labor, which could increase labor costs. If the Company is unable to attract and retain skilled employees, its business and results of operations could be adversely affected.

In the normal course of business, from time to time, the Company or the Affiliate Banks may be named as a defendant in various legal actions, arising in connection with their current and/or prior business activities. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages.

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Whether such claims and legal actions are legitimate or unfounded, if such claims and legal actions are not resolved in the Company’s favor, they may result in significant financial lability and/or adversely affect the Company’s reputation and products and services, as well as negatively impact customer demands for those products and services. Certain claims may seek injunctive relief, which could disrupt the ordinary conduct of the Company’s business and operations or increase the Company’s cost of doing business.

Further, the Company or the Affiliate Banks may in the future be subject to consent orders or other formal or informal enforcement agreements with their regulators. They may also, from time to time, be the subject of subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding current and/or prior business activities. Any such legal or regulatory actions may subject the Company to substantial compensatory or punitive damages, significant fines, penalties, obligations to change business practices or other requirements resulting in increased expenses, diminished income and damage to its reputation. Involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in their favor, could also cause significant harm to the Company’s reputation and divert management attention from the operation of their business. Further, any settlement, consent order, other enforcement agreement or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material adverse effect on the Company’s business, financial condition and results of operations.

Severe weather, natural disasters, acts of war or terrorism, other external events, including the COVID-19 pandemic or the outbreak of another highly infectious or contagious disease, could significantly impact the Company’s business.

The unpredictable nature of events such as severe weather, natural disasters, pandemics or other public health issues, acts of war or terrorism, other adverse external events, including the COVID-19 pandemic or the outbreak of another highly infectious or contagious disease could have a significant impact on the Company’s ability to conduct business. If any of its financial, accounting, network or other information processing systems fail or have other significant shortcomings due to such external events, the Company could be materially adversely affected. Third parties with which the Company does business could also be sources of operational risk to the Company, including the risk that the third parties’ own network and information processing systems could fail. Any of these occurrences could materially diminish the Company’s ability to operate its business, or result in potential liability to clients, reputational damage, and regulatory intervention, any of which could materially adversely affect the Company. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, impair the Company’s liquidity, cause significant property damage, result in loss of revenue, and/or cause the Company to incur additional expenses.

The Company may be subject to disruptions or failures of the financial, accounting, network and other information processing systems arising from events that are wholly or partially beyond the Company’s control, which may include, for example, computer viruses, electrical or telecommunications outages, natural disasters, public health crises and disease pandemics (including the current COVID-19 pandemic), damage to property or physical assets, acts of war (such as the war in Ukraine) or terrorist acts. The Company has developed a comprehensive business continuity plan which includes plans to maintain or resume operations in the event of an emergency, such as a power outage or disease pandemic, and contingency plans in the event that operations or systems cannot be resumed or restored. The business continuity plan is updated as needed, periodically reviewed, and components are regularly tested. The Company also reviews and evaluates the business continuity plans of critical third-party service providers. While the Company believes its business continuity plan and efforts to evaluate the business continuity plans of critical third-party service providers help mitigate risks, disruptions or failures affecting any of these systems may cause interruptions in service to customers, damage to the Company’s reputation, and loss or liability to the Company.

The Company is subject to ESG risks that could adversely affect the Company’s reputation, trading price of the Company’s common stock and/or business, operations and earnings.

Investors, regulators, customers and the general public are increasingly focused on ESG practices and disclosures, which also extends to the practices and disclosures of the customers, counterparties and service providers

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with whom the Company chooses to do business. Certain organizations that provide corporate governance and other corporate risk information to investors and shareholders have also developed scores and ratings to evaluate companies based on ESG metrics. Currently, no universal standards for such scores or ratings exist, but the importance of ESG matters is becoming more broadly accepted by investors and regulators. Views about ESG are diverse, dynamic and rapidly changing, and if the Company fails to maintain appropriate ESG practices and disclosures or is subject to a low ESG score or rating, this could result in potential negative ESG-related publicly in traditional and social media. If the Company or its relationships with customers, service providers or suppliers were to become the subject of such negative publicity or low ESG scores or ratings, the Company’s ability to attract and retain customers and employees may be negatively impacted, and the Company’s stock price may also be adversely impacted. New government regulations could also result in new or more stringent forms of ESG oversight and expanded mandatory and voluntary reporting, diligence and disclosure. ESG-related costs, including with respect to compliance with any additional regulatory or disclosure requirements or expectations, could adversely impact the Company’s results of operations.

Furthermore, investors have begun to consider how corporations are addressing ESG matters when making investment decisions. Any negative publicity regarding ESG, low ESG scores or ratings, or shifts in investing priorities may result in adverse effects on the Company’s stock price and/or the Company’s business, operations and earnings if investors, shareholders or other stakeholders determine that the Company has not adequately considered or addressed ESG matters.

MD&A (Item 7)

18,421 words

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion compares the Company’s financial condition at December 31, 2022 to its financial condition at December 31, 2021 and the results of operations for the years ended December 31, 2022 and 2021. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing in Item 8 of Part II of this Annual Report on Form 10-K.

Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include, without limitation, projections, predictions, expectations, or beliefs about future events or results that are not statements of historical fact. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties, and other factors, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as “anticipate,” “contemplate,” “expect,” “believe,” “estimate,” “foresee,” “plan,” “project,” “predict,” “anticipate,” “intend,” “indicate,” “likely,” “target,” “will,” “may,” “view,” “opportunity,” “potential,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to:

the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the LINK Merger Agreement between the Company and LINK;

the outcome of any legal proceedings that may be instituted against the Company or LINK;

the possibility that the proposed transaction will not close when expected or at all because required regulatory, shareholder or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated (and the risk that required regulatory approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the proposed transaction);

the ability of the Company and LINK to meet expectations regarding the timing, completion and accounting and tax treatments of the proposed transaction;

the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of the common stock of either or both parties to the proposed transaction;

the possibility that the anticipated benefits of the proposed transaction will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where the Company and LINK do business;

certain restrictions during the pendency of the proposed transaction that may impact the parties’ ability to pursue certain business opportunities or strategic transactions;

the possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

diversion of management’s attention from ongoing business operations and opportunities;

the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the merger within the expected timeframes or at all and to successfully integrate the Company’s operations and those of LINK, which may be more difficult, time-consuming or costly than expected;

revenues following the proposed transaction may be lower than expected;

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the Company’s and LINK’s success in executing their respective business plans and strategies and managing the risks involved in the foregoing;

the dilution caused by LINK’s issuance of additional shares of its capital stock in connection with the proposed transaction;

effects of the announcement, pendency or completion of the proposed transaction on the ability of the Company and LINK to retain customers and retain and hire key personnel and maintain relationships with their suppliers, and on their operating results and businesses generally;

potential adverse consequences related to the Termination Agreement with OCFC;

changes in interest rates, such as volatility in yields on U.S. Treasury bonds and increases or volatility in mortgage rates, and the impacts on macroeconomic conditions, customer and client spending and saving behaviors, the Company’s funding costs and the Company’s loan and investment securities portfolios;

monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve, and the effect of these policies on interest rates and business in our markets;

general business conditions, as well as conditions within the financial markets, including the impact thereon of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, geopolitical conflicts (such as the military conflict between Russia and Ukraine) or public health events (such as the COVID-19 pandemic), and of governmental and societal responses thereto;

general economic conditions, in the United States generally and particularly in the markets in which the Company operates and which its loans are concentrated, including the effects of declines in real estate values, increases in unemployment levels and inflation, recession and slowdowns in economic growth;

changes in the value of securities held in the Company’s investment portfolios;

changes in the quality or composition of the loan portfolios and the value of the collateral securing those loans;

changes in the level of net charge-offs on loans and the adequacy of our allowance for credit losses;

demand for loan products;

deposit flows;

the strength of the Company’s counterparties;

competition from both banks and non-banks;

demand for financial services in the Company’s market areas;

reliance on third parties for key services;

changes in the commercial and residential real estate markets;

cyber threats, attacks or events;

expansion of Delmarva’s and Partners’ product offerings;

changes in accounting principles, standards, rules and interpretations, and elections by the Company thereunder, and the related impact on the Company’s financial statements, including the implementation of CECL;

potential claims, damages, and fines related to litigation or government actions;

the effects of the COVID-19 pandemic, the severity and duration of the pandemic, the uncertainty regarding new variants of COVID-19 that may emerge, the distribution and efficacy of vaccines, and the heightened impact it has on many of the risks described herein;

any indirect exposure related to the closings of SVB, Signature Bank and Silvergate Bank and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with SVB, Signature Bank and Silvergate Bank may also adversely impact, directly or indirectly, other financial institutions and market participants with which Partners has commercial or deposit relationships with;

legislative or regulatory changes and requirements;

the discontinuation of London Interbank Offered Rate (“LIBOR”) and its impact on the financial markets, and the Company’s ability to manage operational, legal and compliance risks related to the discontinuation of LIBOR and implementation of one or more alternative reference rates; and

other factors, many of which are beyond the control of the Company.

These factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this Annual Report on Form 10-K including those discussed in Item 1A. “Risk Factors.” All of the

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forward-looking statements made in this Annual Report are expressly qualified by the cautionary statements contained or referred to in this Annual Report. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses or operations. Readers are cautioned not to place undue reliance on the forward-looking statements contained in this Annual Report. Forward-looking statements speak only as of the date they are made and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise.

Overview

The Company, a bank holding corporation, through its wholly owned subsidiaries, Delmarva and Partners, each of which are commercial banking corporations, engages in general commercial banking operations, with nineteen branches throughout Wicomico, Charles, Anne Arundel, and Worcester Counties in Maryland, Sussex County in Delaware, Camden and Burlington Counties in New Jersey, the cities of Fredericksburg and Reston, Virginia, and Spotsylvania County, Virginia.

The Company derives the majority of its income from interest received on our loans and investment securities. The primary source of funding for making these loans and purchasing investment securities are deposits and secondarily, borrowings. Consequently, one of the key measures of the Company’s success is the amount of net interest income, or the difference between the income on interest earning assets, such as loans and investment securities, and the expense on interest bearing liabilities, such as deposits and borrowings. The resulting ratio of that difference as a percentage of average interest earning assets represents the net interest margin. Another key measure is the spread between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, which is called the net interest spread. In addition to earning interest on loans and investment securities, the Company earns income through fees and other charges to customers. Also included is a discussion of the various components of this noninterest income, as well as of noninterest expense.

There are risks inherent in all loans, so the Company maintains an allowance for credit losses to absorb probable losses on existing loans that may become uncollectible. The Company maintains this allowance for credit losses by charging a provision for credit losses as needed against our operating earnings for each period. The Company has included a detailed discussion of this process, as well as several tables describing its allowance for credit losses.

On February 22, 2023, the Company and LINK, parent company of LINKBANK, announced that they have entered into the LINK Merger Agreement pursuant to which the Company will merge into LINK, with LINK surviving, and following which Delmarva and Partners will each successively merge with and into LINKBANK, with LINKBANK surviving. Upon completion of the transaction, the Company’s shareholders will own approximately 56% and LINK shareholders, inclusive of shares issued in a concurrent private placement of common stock by LINK, will own approximately 44% of the combined company. The mergers are subject to receiving the requisite approval of the Company’s and LINK’s stockholders, receipt of all required regulatory approvals, and fulfillment of other customary closing conditions.

Also, on November 9, 2022, the Company and OCFC entered into the Termination Agreement pursuant to which, among other things, the parties mutually agreed to terminate the OCFC Merger Agreement entered into on November 4, 2021 and transactions completed thereby. Each party will bear its own costs and expenses in connection with the terminated transaction, and neither party will pay a termination fee in connection with the termination of the OCFC Merger Agreement. The Termination Agreement also mutually released the parties from any claims of liability to one another relating to the OCFC Merger Agreement and the terminated transaction.

The Company believes that it is well-positioned to be successful in its banking markets, including the highly competitive Greater Washington market. The Company’s financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent on the business environment in the Company’s primary markets where the Company operates and in the United States as a whole.

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The ongoing COVID-19 pandemic has severely disrupted supply chains and adversely affected production, demand, sales and employee productivity across a range of industries, and previously resulted in orders directing the closing or limited operation of certain businesses and restrictions on public gatherings. These events affected the Company’s operations during fiscal year 2021 and 2022, and, along with economic uncertainties caused by geopolitical conflicts such as the war in Ukraine, the closings of SVB, Signature Bank and Silvergate Bank by bank regulators and other events, are expected to impact the Company’s financial results continuing on into 2023.

Please refer to the “Provision and Allowance for Credit Losses” section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information related to payment deferrals, concentrations in higher risk industries, and the impact on the allowance for credit losses.

The following discussion and analysis also identifies significant factors that have affected the Company's financial position and operating results during the periods included in the consolidated financial statements accompanying this report. You are encouraged to read this section in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in Item 8 in this Annual Report on Form 10-K, and the other statistical and financial information included in this Form 10-K.

Critical Accounting Policies and Estimates

Certain critical accounting policies affect significant judgments and estimates used in the preparation of the Company's consolidated financial statements. These significant accounting policies are described in the notes to the consolidated financial statements included in Item 8 in this Annual Report on Form 10-K. The accounting principles the Company follows and the methods of applying these principles conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general banking industry practices. The Company's most critical accounting policy relates to the determination of the allowance for credit losses, which reflects the estimated losses resulting from the inability of borrowers to make loan payments. The determination of the adequacy of the allowance for credit losses involves significant judgment and complexity and is based on many factors. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for credit losses may be required. Note 3, “Loans, Allowance for Credit Losses and Impaired Loans”, to the notes of the consolidated financial statements.

Another of the Company’s critical accounting policies, with the acquisitions of Liberty Bell Bank (“Liberty”) in 2018 and Partners in 2019, relates to the valuation of goodwill and intangible assets. The Company accounted for the merger between the Company and Liberty in 2018 (the “Liberty Merger “) and the Partners Share Exchange in accordance with Accounting Standards Codification (“ASC”) Topic No. 805, which requires the use of the acquisition method of accounting. Under this method, assets acquired, including intangible assets, and liabilities assumed, are recorded at their fair value. Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions. Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective. Resulting goodwill from the Liberty Merger and the Partners Share Exchange, which totaled approximately $5.2 million and $4.4 million, respectively, under the acquisition method of accounting represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings, which is limited to the amount of goodwill allocated to that reporting unit. In evaluating the goodwill on its consolidated balance sheet for impairment after the consummation date of the Liberty Merger and the Partners Share Exchange, the Company will first assess qualitative factors to determine whether it is more likely than not that the fair value of our acquired assets is less than the carrying amount of the acquired assets, as allowed under ASU 2017-04. After making the assessment based on several factors, which will include, but is not limited to, the current economic environment, the economic outlook in our markets, our financial performance and common stock value as compared to our peers, we will determine if it is more likely than not that the fair value of our assets is greater than their carrying amount and, accordingly, will determine whether impairment of goodwill should be recorded as a charge to earnings in years subsequent to the Liberty Merger and the Partners Share Exchange. This assessment was performed during the fourth quarter of 2022, and resulted in no impairment of goodwill. Depending on the severity of the economic consequences of the COVID-19 pandemic and recent bank closures by federal regulators, and their impact on the

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Company, management may determine that goodwill is required to be evaluated for impairment due to the presence of a triggering event, which may have a negative impact on the Company’s results of operations.

In addition to the Company’s policies related to the valuation of goodwill, intangible assets and other acquisition accounting adjustments, ongoing accounting for acquired loans is considered a critical accounting policy. Acquired loans are classified as either purchased credit impaired (“PCI”) loans or purchased performing loans and are recorded at fair value on the date of acquisition. PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Periodically, we evaluate our estimate of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for credit losses resulting in an increase to the allowance for credit losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for credit losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan, or pool(s) of loans. The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for credit losses established at the acquisition date for purchased performing loans, but a provision for credit losses may be required for any deterioration in these loans in future periods. The Company evaluates purchased performing loans quarterly for deterioration and records any required additional provision for credit losses.

Another critical accounting policy relates to deferred tax assets and liabilities. The Company records deferred tax assets and deferred tax liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits, such as net operating loss carry forwards available from the Liberty Merger, are recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of our assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided when it is more likely than not that a portion or the full amount of the deferred tax asset will not be realized. In assessing the ability to realize the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Such a deferred tax liability will only be recognized when it becomes apparent that those temporary differences will reverse in the foreseeable future. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than fifty (50) percent more likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

Results of Operations

Net income attributable to the Company for the year ended December 31, 2022 totaled $13.6 million, or $0.76 per basic and diluted share, as compared to $7.4 million, or $0.42 per basic and diluted share, for the year ended December 31, 2021, a $6.2 million or 83.7% increase.

The Company’s results of operations for the twelve months ended December 31, 2022 were directly impacted by the following:

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Positive Impacts:

An increase in net interest income due primarily to lower average balances of and rates paid on interest-bearing deposits, a decrease in average borrowings balances, an increase in average loan balances, an increase in yields earned on average cash and cash equivalents balances, and an increase in average investment securities balances and yields earned, which were partially offset by lower average balances of cash and cash equivalents, lower loan yields due to lower net loan fees earned related to the forgiveness of loans originated and funded under the Paycheck Protection Program (“PPP”) of the Small Business Administration, and an increase in rates paid on average borrowings balances;

A higher net interest margin (tax equivalent basis);

A significantly lower provision for credit losses due to the current economic environment and the milder impact of the COVID-19 pandemic compared to December 31, 2021, which was partially offset by organic loan growth;

Lower expenses associated with the Company’s terminated merger with OCFC, including recording no accelerated stock-based compensation expense during the twelve months ended December 31, 2022 as compared to recording $896 thousand in accelerated stock-based compensation expense during the same period of 2021 related to the accelerated vesting of restricted stock awards, which accelerated vesting was subject to the prior approval of the Company and was not contingent on the closing of the merger, and incurring $1.4 million in merger related expenses during the twelve months ended December 31, 2022 as compared to $979 thousand during the same period of 2021; and

Recording gains on other real estate owned as compared to losses for the same period of 2021.

Negative Impacts:

Recording losses on sales and calls of investment securities as compared to gains for the same period of 2021;

Reduced operating results from Partners’ majority owned subsidiary JMC and lower mortgage division fees at Delmarva;

Recording losses on sales of other assets as compared to gains for the same period of 2021; and

Expenses associated with Partners’ new key hires and expansion into the Greater Washington market, including opening its new full-service branch and commercial banking office in Reston, Virginia during the third quarter of 2021, and Delmarva opening its new full-service branch at 26th Street in Ocean City, Maryland during the second quarter of 2021.

For the twelve months ended December 31, 2022, the Company’s return on average assets, return on average equity and efficiency ratio were 0.82%, 10.04% and 68.16%, respectively, as compared to 0.46%, 5.44% and 76.95%, respectively, for the same period in 2021.

The increase in net income attributable to the Company for the twelve months ended December 31, 2022, as compared to the same period in 2021, was driven by an increase in net interest income, a lower provision for credit losses, and lower other expenses, and was partially offset by a decrease in other income and higher federal and state income taxes.

Financial Condition

Total assets as of December 31, 2022 were $1.57 billion, a decrease of $70.4 million, or 4.3%, from December 31, 2021. The key driver of this change was a decrease in cash and cash equivalents, which was partially offset by increases in investment securities available for sale, at fair value, and total loans held for investment. Changes in key balance sheet components as of December 31, 2022 compared to December 31, 2021 were as follows:

Interest bearing deposits in other financial institutions as of December 31, 2022 were $103.9 million, a decrease of $194.0 million, or 65.1%, from December 31, 2021. Key drivers of this change were an increase in investment securities available for sale, at fair value, and total loan growth outpacing total deposit growth;

Federal funds sold as of December 31, 2022 were $23.0 million, a decrease of $5.0 million, or 18.0%, from December 31, 2021. Key drivers of this change were the aforementioned items noted in the analysis of interest bearing deposits in other financial institutions;

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Investment securities available for sale, at fair value as of December 31, 2022 were $133.7 million, an increase of $11.6 million, or 9.5%, from December 31, 2021. Key drivers of this change were management of the investment securities portfolio in light of the Company’s liquidity needs, which was partially offset by two higher yielding investment securities being called, and an increase in unrealized losses on the investment securities available for sale portfolio as a result of increases in market interest rates ;

Loans, net of unamortized discounts on acquired loans of $1.7 million as of December 31, 2022 were $1.23 billion, an increase of $115.7 million, or 10.4%, from December 31, 2021. The key driver of this change was an increase in organic growth, including growth of approximately $68.9 million in loans related to Partners’ expansion into the Greater Washington market, which was partially offset by forgiveness payments received of approximately $8.2 million under round two of the PPP. As of December 31, 2022, there were no loans under the PPP that were still outstanding;

Total deposits as of December 31, 2022 were $1.34 billion, a decrease of $103.3 million, or 7.2%, from December 31, 2021. Key drivers of this change were scheduled maturities of time deposits that were not replaced and significant outflows related to competitive pressures in the higher interest rate environment, which were partially offset by organic growth as a result of our continued focus on total relationship banking and Partners’ expansion into the Greater Washington market;

Total borrowings as of December 31, 2022 were $84.6 million, an increase of $35.4 million, or 71.9%, from December 31, 2021. The key driver of this change was an increase in short-term borrowings with the FHLB due to the aforementioned items noted in the analysis of total deposits, which was partially offset by a decrease in long-term borrowings with the FHLB resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, and a decrease in Partners’ majority owned subsidiary JMC’s warehouse line of credit with another financial institution; and

Total stockholders’ equity as of December 31, 2022 was $139.3 million, a decrease of $2.0 million, or 1.4%, from December 31, 2021. Key drivers of this change were an increase in accumulated other comprehensive (loss), net of tax, and cash dividends paid to shareholders, which were partially offset by the net income attributable to the Company for the twelve months ended December 31, 2022, the proceeds from stock option exercises, and stock-based compensation expense related to restricted stock awards.

Delmarva's Tier 1 leverage capital ratio was 9.3% at December 31, 2022 as compared to 8.1% at December 31, 2021. At December 31, 2022, Delmarva's Tier 1 risk weighted capital ratio and total risk weighted capital ratio were 12.1% and 13.4%, respectively, as compared to a Tier 1 risk weighted capital ratio and total risk weighted capital ratio of 11.6% and 12.9%, respectively, at December 31, 2021.

Partners’ Tier 1 leverage capital ratio was 8.9% at December 31, 2022 as compared to 8.5% at December 31, 2021. At December 31, 2022, Partners’ Tier 1 risk weighted capital ratio and total risk weighted capital ratio were 10.5% and 11.3%, respectively, as compared to a Tier 1 risk weighted capital ratio and total risk weighted capital ratio of 11.3% and 12.0%, respectively, at December 31, 2021.

As of December 31, 2022, all of the capital ratios of Delmarva and Partners continue to exceed regulatory requirements, with total risk-based capital substantially above well-capitalized regulatory requirements.

See “Capital” below for additional information about Delmarva’s and Partners’ capital ratios and requirements.

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At December 31, 2022, nonperforming assets totaled $2.2 million, a decrease from December 31, 2021 balances of $9.8 million. The primary drivers of this decrease were decreases in nonaccrual loans and other real estate owned, net (“OREO”), which were partially offset by an increase in loans past due 90 days or more and still accruing interest. Nonaccrual loans totaled approximately $2.2 million at December 31, 2022, as compared to $9.0 million at December 31, 2021. Loans past due 90 days or more and still accruing interest totaled $45 thousand at December 31, 2022, as compared to $0 at December 31, 2021. OREO, net as of December 31, 2022 totaled $0, as compared to $837 thousand at December 31, 2021. Nonperforming loans as a percentage of total assets was 0.14% at December 31, 2022, as compared to 0.54% at December 31, 2021. Nonperforming assets to total assets as of December 31, 2022 was 0.14%, as compared to 0.60% at December 31, 2021. Loans classified as troubled debt restructurings (“TDRs”) totaled $3.4 million at December 31, 2022, as compared to $7.9 million at December 31, 2021, representing a decrease of $4.5 million during the twelve months ended December 31, 2022. Of this decrease, approximately $1.1 million was due to five loan relationships that are no longer considered to be TDRs due to the restructuring of the loans subsequent to them initially being classified as a TDR. At the time of the subsequent restructurings, the borrowers were not experiencing financial difficulties and, under the terms of the subsequent restructuring agreements, no concessions have been granted to the borrowers. In addition, during 2022, one loan relationship that was classified as a TDR was paid down and the remaining balance was charged-off, reducing the balance in total by approximately $2.9 million, which was partially offset by one loan relationship in the amount of approximately $48 thousand being classified as a TDR during the second quarter of 2022. The remaining decrease was the result of loan relationships classified as TDRs that were paid down or paid off.

Net charge-offs were $1.7 million, or 0.14% of average total loans, for the twelve months ended December 31, 2022, as compared to $870 thousand, or 0.08% of average total loans, for the same period of 2021. The allowance for credit losses to total loans ratio was 1.16% at December 31, 2022, as compared to 1.31% at December 31, 2021. In addition to the allowance for credit losses, as of December 31, 2022 and December 31, 2021, the Company had $1.7 million and $2.3 million, respectively, in unamortized discounts on acquired loans related to the acquisitions of Liberty and Partners. This discount is amortized over the life of the remaining loans.

Summary of Return on Equity and Assets

Year Ended

December 31,

Yield on earning assets

Return on average assets

Return on average equity

Average equity to average assets

Earnings Analysis

The Company's primary source of revenue is interest income and fees, which it earns by lending and investing the funds which are held on deposit. Because loans generally earn higher rates of interest than investment securities, the Company seeks to deploy as much of its deposit funds as possible in the form of loans to individuals, businesses, and other organizations. To ensure sufficient liquidity, the Company also maintains a portion of its deposits in cash and cash equivalents, government securities, interest bearing deposits in other financial institutions, and overnight loans of excess reserves (known as “Federal Funds Sold”) to correspondent banks. The revenue which the Company earns (prior to deducting its overhead expenses) is essentially a function of the amount of the Company's loans and deposits, as well as the profit margin (“interest spread”) and fee income which can be generated on these amounts.

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Net income attributable to the Company was $13.6 million and $7.4 million for the years ended December 31, 2022 and 2021, respectively, as reported in its audited consolidated financial statements. The following discussion should be read in conjunction with the Company's audited consolidated financial statements and the notes to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

The following is a summary of the results of operations and financial condition of the Company at and for the periods and at the dates indicated, respectively:

Year Ended

December 31,

Results of operations:

(Dollars in Thousands, except per share data)

Net interest income

Provision for credit losses

Provision for income taxes

Noninterest income

Noninterest expense

Total income

Total expenses

Net income

Net income attributable to Partners Bancorp

Basic earnings per share

Diluted earnings per share

December 31,

Financial condition at year end:

(Dollars in Thousands, except per share data)

Total assets

Loans receivable, net

Investment securities, available for sale

Federal funds sold

Demand and NOW deposits

Savings, money market, and time deposits

Stockholders' equity

Tangible common equity per share

Interest Income and Expense – Years Ended December 31, 2022 and 2021

Net Interest Income and Net Interest Margin

The largest component of net income for the Company is net interest income, which is the difference between the income earned on assets, such as loans and investment securities, and interest paid on liabilities, such as deposits and borrowings, used to support such assets. Net interest income is determined by the rates earned on the Company's interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities.

Net interest income during the twelve months ended December 31, 2022 increased by $9.6 million, or 20.6%, when compared to the twelve months ended December 31, 2021. The Company’s net interest margin (tax equivalent basis) increased to 3.51%, representing an increase of 46 basis points for the twelve months ended December 31, 2022 as compared to the same period in 2021. The increase in the net interest margin (tax equivalent basis) was primarily due to higher average balances of loans, higher average balances of and yields earned on investment securities, higher yields earned on average interest bearing deposits in other financial institutions and federal funds sold, and lower average balances of and rates paid on average interest-bearing liabilities, which were partially offset by a decrease in the yields earned on average loans, and lower average balances of interest bearing deposits in other financial institutions and

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federal funds sold. Total interest income increased by $7.3 million, or 13.2%, for the twelve months ended December 31, 2022, while total interest expense decreased by $2.3 million, or 25.3%, both as compared to the same period in 2021. The most significant factors impacting net interest income during the twelve months ended December 31, 2022 were as follows:

Positive Impacts:

Increases in average loan balances, primarily due to organic loan growth, which was partially offset by the forgiveness of loans originated and funded under the PPP;

Increases in average investment securities balances and higher investment securities yields, primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs, lower accelerated pre-payments on mortgage-backed investment securities and higher interest rates over the comparable periods, partially offset by calls on higher yielding investment securities in the previously low interest rate environment;

Decrease in average interest bearing deposits in other financial institutions and federal funds sold, primarily due to loan growth outpacing deposit growth and higher investment securities balances, and higher yields on each due to higher interest rates over the comparable periods;

Decrease in average interest-bearing deposit balances and lower rates paid, primarily due to scheduled maturities of time deposits that were not replaced and competitive pressures in the higher interest rate environment, partially offset by organic deposit growth in interest bearing demand, money market and savings accounts, and lower rates paid on average interest bearing demand, money market, savings and time deposits; and

Decrease in average borrowings balances, primarily due to a decrease in the average balance of FHLB advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, a decrease in average borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the loans under the PPP originated by the Company were previously pledged as collateral, the early redemption of $2.0 million in subordinated notes payable, net, in early July 2021, and offset by higher rates paid. The increase in average rates paid was primarily due to the decreases in the average balances of FHLB advances and borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility, both of which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.

Negative Impacts:

Lower loan yields, primarily due to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP and pay-offs of higher yielding fixed rate loans, which were partially offset by repricing of variable rate loans and higher average yields on new loan originations.

Loans

Average loan balances increased by $82.5 million, or 7.6%, and average yields earned decreased by 0.11% to 4.74% for the twelve months ended December 31, 2022, as compared to the same period in 2021. The increase in average loan balances was primarily due to organic loan growth, including growth in average loan balances of approximately $57.0 million related to Partners’ expansion into the Greater Washington market, which was partially offset by the forgiveness of loans originated and funded under the PPP. The decrease in average yields earned was primarily due to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP and pay-offs of higher yielding fixed rate loans, which were partially offset by the repricing of variable rate loans and higher average yields on new loan originations. Total average loans were 73.2% of total average interest-earning assets for the twelve months ended December 31, 2022, compared to 71.2% for the twelve months ended December 31, 2021.

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Investment securities

Average total investment securities balances increased by $17.7 million, or 13.6%, and average yields earned increased by 0.39% to 2.28% for the twelve months ended December 31, 2022, as compared to the same period in 2021. The increases in average total investment securities balances and average yields earned was primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs, lower accelerated pre-payments on mortgage-backed investment securities and higher interest rates over the comparable periods, partially offset by calls on higher yielding investment securities in the previously low interest rate environment. During the twelve months ended December 31, 2021, accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned. Total average investment securities were 9.2% of total average interest-earning assets for the twelve months ended December 31, 2022, compared to 8.5% for the twelve months ended December 31, 2021.

Interest-bearing deposits

Average total interest-bearing deposit balances decreased by $8.3 million, or 0.9%, and average rates paid decreased by 0.21% to 0.52% for the twelve months ended December 31, 2022, as compared to the same period in 2021, primarily due to scheduled maturities of time deposits that were not replaced and competitive pressures in the higher interest rate environment, partially offset by organic deposit growth, including average growth of approximately $18.4 million in interest-bearing deposits related to Partners’ expansion into the Greater Washington market, and a decrease in the average rate paid on interest bearing demand, money market, savings and time deposits.

Borrowings

Average total borrowings decreased by $10.3 million, or 17.6%, and average rates paid increased by 0.31% to 4.04% for the twelve months ended December 31, 2022, as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of FHLB advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, a decrease in average borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the loans under the PPP originated by the Company were previously pledged as collateral, and the early redemption of $2.0 million in subordinated notes payable, net, in early July 2021. The increase in average rates paid was primarily due to the decreases in the average balances of FHLB advances and borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility, which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.

Interest earned on assets and interest paid on liabilities is significantly influenced by market factors, specifically interest rate targets established by the Federal Reserve.

The Federal Open Markets Committee (“FOMC”) raised Federal Funds target rates by 25 basis points in March 2022, which was the first increase since December 2018. Subsequent to this, the FOMC raised Federal Funds target rates by 50 basis points in May 2022, 75 basis points in June 2022, 75 basis points in July 2022, 75 basis points in September 2022, 75 basis points in November 2022, 50 basis points in December 2022, 25 basis points in January 2023, and 25 basis points in March 2023. These increases were done in an effort to address increasing inflation without negatively impacting economic growth. The FOMC currently projects a continued path of rate increases, with rate increases targeted at future FOMC meetings in 2023. The FOMC’s current Federal Funds target rate range is 4.75% to 5.00%. As a result, long-term interest rates have increased. The Company anticipates that the current and projected interest rate environment will lead to an expanded net interest margin for the Company. In general, the Company believes interest rate increases lead to improved net interest margins whereas interest rate decreases result in correspondingly lower net interest margins.

The following table depicts, for the periods indicated, certain information related to the average balance sheet and average yields earned on assets and average costs paid on liabilities for the Company. Such yields and costs are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.

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Year Ended

December 31, 2022

December 31, 2021

(Dollars in Thousands)

Average

Interest/

Average

Interest/

(Unaudited)

Balance

Expense

Yield/Rate

Balance

Expense

Yield/Rate

Assets

Cash & Due From Banks

Interest Bearing Deposits From Banks

Taxable Securities (1)

Tax‑exempt Securities (2)

Total Investment Securities (1) (2)

Federal Funds Sold

Loans: (3)

Commercial and Industrial (4)

Real Estate (4)

Consumer (4)

Keyline Equity (4)

Visa Credit Card

State and Political

Keyline Credit

Other Loans

Total Loans (2)

Allowance For Credit Losses

Unamortized Discounts on Acquired Loans

Total Loans, Net

Other Assets

Total Assets/Interest Income

Liabilities and Stockholders' Equity

Deposits In Domestic Offices

Non‑interest Bearing Demand

Interest Bearing Demand

Money Market Accounts

Savings Accounts

All Time Deposits

Total Interest Bearing Deposits

Total Deposits

Borrowings

Notes Payable

Lease Liability

Other Liabilities

Stockholders' Equity

Total Liabilities & Equity/Interest Expense

Earning Assets/Interest Income (2)

Interest Bearing Liabilities/Interest Expense

Net interest income

Net Yield on Interest Earning Assets

Earning Assets/Interest Expense

Net Interest Spread (2)

Net Interest Margin (2)

Yields on securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities, which is reflected as a component of stockholders’ equity.

Presented on a taxable-equivalent basis using the statutory income tax rate of 21.0% for 2022 and 2021. Taxable equivalent adjustments of $193 thousand and $11 thousand are included in the calculation of tax exempt income for investment interest income and loan interest income, respectively for the year ended December 31, 2022 and $229 thousand and $9 thousand, respectively for the year ended December 31, 2021.

Loans placed on nonaccrual are included in average balances.

Yields do not include the average balance of the fair value adjustment for pools of non-credit impaired loans acquired or discounts on credit impaired loans acquired.

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The level of net interest income is affected primarily by variations in the volume and mix of these interest-earning assets and interest-bearing liabilities, as well as changes in interest rates. The following table shows the effect that these factors had on the interest earned from the Company's interest-earning assets and interest paid on its interest-bearing liabilities for the year ended December 31, 2022 versus 2021.

Rate and Volume Analysis

Year Ended December 31, 2022 Versus December 31, 2021

(Dollars in Thousands)

Increase (Decrease) Due to

Volume

Yield/Rate

Net

Earning Assets

Loans (1)

Investment securities

Taxable

Exempt from Federal income tax

Federal funds sold

Other interest income

Total interest income

Interest Bearing Liabilities

Interest bearing deposits

Notes payable and leases

Funds purchased

Total Interest Expense

Net Interest Income

Nonaccrual loans are included in average balances and do not have a material effect on the average yield.

Interest Sensitivity. The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. The Company also performs asset/liability modeling to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. Interest rate sensitivity can be managed by repricing assets or liabilities, selling investment securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk.

At December 31, 2022, the Company was asset sensitive within the one-year time frame when looking at a repricing gap analysis. The cumulative gap, in an unchanged interest rate environment, as a percentage of total assets up to one year is 13.7%. A positive gap indicates more assets than liabilities are repricing within the indicated time frame. Management believes there is more upside potential than downside risk and, based on the current and projected interest rate environment, management expects to see net interest income rise in the future.

Provision and Allowance for Credit Losses

The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and for timely identifying potential problem loans. Management's judgment as to the adequacy of the allowance for credit losses is based upon a number of assumptions about future events which it believes to be reasonable, but which may not prove to be accurate. Thus, there can be no assurance that loan charge-offs in future periods will not exceed the allowance for credit losses or that additional increases in the allowance for credit losses will not be required.

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The Company's allowance for credit losses consists of two parts. The first part is determined in accordance with authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) regarding the allowance for credit losses. The Company's determination of this part of the allowance for credit losses is based upon quantitative and qualitative factors. A loan loss history based upon the prior three years is utilized in determining the appropriate allowance for credit losses. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance for credit losses. The historical loss factors may also be modified based upon other qualitative factors including, but not limited to, local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management's knowledge of the loan portfolio.

The second part of the allowance for credit losses is determined in accordance with guidance issued by the FASB regarding impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in the Company's opinion the ultimate source of repayment will be generated from the liquidation of collateral.

The sum of the two parts constitutes management's best estimate of an appropriate allowance for credit losses. When the estimated allowance for credit losses is determined, it is presented to the Company's Board of Directors for review and approval on a quarterly basis.

At December 31, 2022, the Company's allowance for credit losses was $14.3 million, or 1.16% of total outstanding loans. At December 31, 2021, the allowance for credit losses was $14.7 million, or 1.31% of total outstanding loans. The Company's provision for credit losses was $1.3 million for the year ended December 31, 2022, as compared to $2.3 million for the year ended December 31, 2021. The decrease in the provision for credit losses during the twelve months ended December 31, 2022, as compared to the same period of 2021, was primarily due to a reduction of qualitative adjustment factors that had previously been increased in the allowance for credit losses related to the COVID-19 pandemic and the uncertainty in the economic environment, and the reversal of a specific reserve on one loan relationship due to a large principal curtailment and improved performance, which were partially offset by higher net charge-offs, loans acquired in the Partners acquisition that have converted from acquired to originated status, and organic loan growth. The provision for credit losses during the twelve months ended December 31, 2022, as well as the allowance for credit losses as of December 31, 2022, represents management’s best estimate of the impact of current economic trends, including the impact of the COVID-19 pandemic, on the ability of the Company’s borrowers to repay their loans. Management continues to carefully assess the exposure of the Company’s loan portfolio to COVID-19 pandemic related factors, economic trends and their potential effect on asset quality. As of December 31, 2022, the Company’s delinquencies and nonperforming assets had not been materially impacted by the COVID-19 pandemic. In addition, as of December 31, 2022, all of the loan balances that were approved by the Company, on a consolidated basis, for loan payment deferrals or payments of interest only have either resumed regular payments or have been paid off.

The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts that a borrower's financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

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The following tables illustrate the Company's past due and nonaccrual loans at December 31, 2022 and 2021:

Past Due and Nonaccrual Loans

(Dollars in Thousands)

At December 31, 2022 and 2021

30 - 89 Days

Greater than 90 Days

Total

December 31, 2022

Past Due

NonAccrual

Real Estate Mortgage

Construction and land development

Residential real estate

Nonresidential

Home equity loans

Commercial

Consumer and other loans

TOTAL

30 - 89 Days

Greater than 90 Days

Total

December 31, 2021

Past Due

NonAccrual

Real Estate Mortgage

Construction and land development

Residential real estate

Nonresidential

Home equity loans

Commercial

Consumer and other loans

TOTAL

Total nonaccrual loans at December 31, 2022 were $2.2 million, which reflects a decrease of $6.8 million from $9.0 million at December 31, 2021. Management believes the relationships on nonaccrual were adequately reserved at December 31, 2022. TDRs not past due or on nonaccrual at December 31, 2022 amounted to $2.3 million, as compared to $3.9 million at December 31, 2021. This decrease was primarily due to five loan relationships that no longer met the definition of a TDR and pay-downs of principal loan balances during 2022. There was also one loan with a balance of $172 thousand at December 31, 2022 that was classified as nonaccrual during 2022. Total TDRs decreased $4.5 million to $3.4 million at December 31, 2022, compared to $7.9 million at December 31, 2021. Of this decrease, approximately $1.1 million was due to five loan relationships that are no longer considered to be TDRs due to the restructuring of the loans subsequent to them initially being classified as a TDR. At the time of the subsequent restructurings, the borrowers were not experiencing financial difficulties and, under the terms of the subsequent restructuring agreements, no concessions have been granted to the borrowers. In addition, during 2022, one loan relationship that was classified as a TDR was paid down and the remaining balance was charged-off, reducing the balance in total by approximately $2.9 million, which was partially offset by one loan relationship in the amount of approximately $48 thousand being classified as a TDR during the second quarter of 2022. The remaining decrease was the result of loan relationships classified as TDRs that were paid down or paid off.

Nonperforming assets, defined as nonaccrual loans, loans past due 90 days or more and accruing, and OREO, net, at December 31, 2022 were $2.2 million compared to $9.8 million at December 31, 2021. The Company's ratio of nonperforming assets to total assets was 0.14% at December 31, 2022 compared to 0.60% at December 31, 2021. As noted above, there was a decrease in nonaccrual loans during the year ended December 31, 2022. OREO, net decreased during the year ended December 31, 2022 by $837 thousand. There were two properties with aggregate values of $837 thousand that were sold at a gain of $7 thousand during the first quarter of 2022.

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It is likely that the COVID-19 pandemic and the economic disruption related to it as well as the uncertainty in the macroeconomic environment due to higher market interest rates, inflation and the possibility of a recession will continue to negatively impact the Company’s financial position and results of operations during the year ending December 31, 2023.

The following tables provide additional information on the Company's nonperforming assets at December 31, 2022 and 2021.

Nonperforming Assets

(Dollars in thousands)

December 31,

Nonperforming assets:

Nonaccrual loans

Loans past due 90 days or more and accruing

Total nonperforming loans (NPLs)

Other real estate owned (OREO)

Total nonperforming assets (NPAs)

Performing TDR's and TDR's 30-89 days past due

NPLs/Total Assets

NPAs/Total Assets

NPAs and TDRs/Total Assets

Allowance for credit losses/Nonaccrual Loans

Allowance for credit losses/NPLs

Nonaccrual loans to total loans outstanding

Nonperforming Loans by Type

(Dollars in thousands)

December 31,

Real Estate Mortgage

Construction and land development

Residential real estate

Nonresidential

Home equity loans

Commercial

Consumer and other loans

Total

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The following table provides data related to loan balances and the allowance for credit losses for the years ended December 31, 2022 and 2021.

Allowance for Credit Losses Data

(Dollars in Thousands)

At December 31, 2022 and 2021

December 31,

Average loans outstanding

Total loans outstanding

Total nonaccrual loans

Net loans charged off

Provision for credit losses

Allowance for credit losses

Allowance as a percentage of total loans outstanding

Net loans charged off to average loans outstanding

Nonaccrual loans as a percentage of total loans outstanding

Allowance as a percentage of nonaccrual loans outstanding

The following table represents the activity of the allowance for credit losses for the years ended December 31, 2022 and 2021 by loan type:

Allowance for Credit Losses and Recorded Investments in Loans

(Dollars in Thousands)

At December 31, 2022 and 2021

December 31, 2022

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Development

Real Estate

Nonresidential

Home Equity

Commercial

and Other

Unallocated

Total

Beginning Balance

Charge-offs

Recoveries

Provision (recovery)

Ending Balance

December 31, 2021

Real Estate Mortgage

Construction

and Land

Residential

Consumer

Development

Real Estate

Nonresidential

Home Equity

Commercial

and Other

Unallocated

Total

Beginning Balance

Charge-offs

Recoveries

Provision (recovery)

Ending Balance

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The following table provides information related to the allocation of the allowance for credit losses by loan category, the related loan balance for each category, and the percentage of loan balance to total loans by category:

Allocation of the Allowance for Credit Losses

At December 31, 2022 and 2021

(Dollars in thousands)

December 31,

Percent

Loan

Total

Loan

Total

Balances

Allocation

Loans

Balances

Allocation

Loans

Real Estate Mortgage

Construction and land development

Residential real estate

Nonresidential

Home equity loans

Commercial

Consumer and other loans

Unallocated

Additional information related to net charge-offs (recoveries) is presented in the tables below.

December 31,

Net

Charge-Offs

Average

Charge-Off

Charge-Offs

Average

Charge-Off

Dollars in thousands

(Recoveries)

Loans

Ratio

(Recoveries)

Loans

Ratio

Year Ended

Real Estate Mortgage

Construction and land development

Residential real estate

Nonresidential

Home equity loans

Commercial

Consumer and other loans

Total Loans Receivable

Noninterest Income

Noninterest Income. The Company's primary source of noninterest income is service charges on deposit accounts, mortgage banking income and other income. Sources of other noninterest income include ATM and credit card fees, debit card income, safe deposit box income, earnings on bank owned life insurance policies and investment fees and commissions.

Noninterest income for the twelve months ended December 31, 2022 decreased by $3.1 million, or 37.5%, when compared to the twelve months ended December 31, 2021. Key changes in the components of noninterest income for the twelve months ended December 31, 2022, as compared to the same period in 2021, are as follows:

Service charges on deposit accounts increased by $178 thousand, or 22.0%, due primarily to increases in overdraft fees as a result of the easing of restrictions and the lifting of lockdowns in the Company’s markets of operation and Partners no longer automatically waiving overdraft fees which was previously done in an

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effort to provide all necessary financial support and services to its customers and communities, both as related to the ongoing COVID-19 pandemic as compared to the same period of 2021;

(Losses) gains on sales and calls of investment securities decreased by $33 thousand, or 119.4%, due primarily to Partners recording losses of $5 thousand on sales or calls of investment securities during the twelve months ended December 31, 2022, as compared to recording gains of $25 thousand on sales or calls of investment securities during the same period of 2021. In addition, during the twelve months ended December 31, 2021, Delmarva recorded gains of $3 thousand on sales or calls of investment securities, as compared to recording no gains on sales or calls of investment securities during the same period of 2022;

Mortgage banking income, net decreased by $2.5 million, or 67.3%, due primarily to Partners’ majority owned subsidiary JMC having a lower volume of loan closings as compared to the same period in 2021;

(Losses) gains on disposal of other assets, net decreased by $27 thousand, or 1,944.1%, as a result of Delmarva recording losses of $26 thousand on the disposal of certain assets in connection with the closing of its North Ocean City, Maryland branch during the fourth quarter of 2022, as compared to Delmarva recording a gain of $1 thousand on the sale of its VISA credit card portfolio during the first quarter of 2021; and

Impairment loss on restricted stock increased from zero to $1 thousand, due primarily to Partners recording the final write-down of its investment in Maryland Financial Bank, which had been going through an orderly liquidation;

Other income decreased by $708 thousand, or 19.0%, due primarily to lower mortgage division fees at Delmarva, Partners recording lower fees from its participation in a loan hedging program with a correspondent bank, and decreases in ATM fees and debit card income, which were partially offset by Delmarva recording higher earnings on bank owned life insurance policies due to additional purchases made in 2021.

Noninterest Expense

Noninterest Expense . Noninterest expense includes all expenses with the exception of those paid for interest on deposits and borrowings. Significant expense items included in this component are salaries and employee benefits, premises and equipment and other operating expenses.

Noninterest expense for the twelve months ended December 31, 2022 decreased by $436 thousand, or 1.0%, when compared to the twelve months ended December 31, 2021. Key changes in the components of noninterest expense for the twelve months ended December 31, 2022, as compared to the same period in 2021, are as follows:

Salaries and employee benefits decreased by $889 thousand, or 3.8%, primarily due to recording no accelerated stock-based compensation expense during the twelve months ended December 31, 2022 as compared to recording $896 thousand in accelerated stock-based compensation expense during the same period of 2021 related to the accelerated vesting of restricted stock awards, which accelerated vesting was subject to the prior approval of the Company and was not contingent on the closing of the merger with OCFC, decreases related to staffing changes and a decrease in commissions expense paid due to the decrease in mortgage banking income from Partners’ majority owned subsidiary JMC, which were partially offset by merit increases and higher expenses related to payroll taxes, benefit costs, and bonus accruals. In addition, salaries and employee benefits increased due to Partners’ new key hires and expansion into the Greater Washington market and Delmarva opening its new full-service branch at 26 th Street in Ocean City, Maryland;

Premises and equipment increased by $568 thousand, or 11.1%, primarily due to increases related to Delmarva opening its new full-service branch at 26 th Street in Ocean City, Maryland during the second quarter of 2021 and Partners opening its new full-service branch and commercial banking office in Reston, Virginia during the third quarter of 2021, and higher expenses related to repairs and maintenance, software

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amortization and maintenance contracts, which were partially offset by lower expenses related to Partners’ majority owned subsidiary JMC, building security and purchased software, the cost of which did not qualify for capitalization;

(Gains) losses and operating expenses on other real estate owned, net increased by $179 thousand, or 105.6%, primarily due to valuation adjustments being recorded on properties during the twelve months ended December 31, 2021 as compared to no valuation adjustments being recorded during the same period of 2022, and lower expenses related to other real estate owned;

Amortization of core deposit intangible decreased by $80 thousand, or 13.3%, primarily due to lower amortization related to the $2.7 million and $1.5 million, respectively, in core deposit intangibles recognized in the Partners and Liberty acquisitions;

Merger related expenses increased by $421 thousand, or 43.0%, primarily due to higher legal fees and other costs associated with the terminated merger with OCFC; and

Other expenses decreased by $277 thousand, or 2.3%, primarily due to lower expenses related to professional services, stationery, printing and supplies, director fees, correspondent bank services, legal, and other, which were partially offset by higher expenses related to postage and delivery, FDIC insurance assessments, marketing, ATM, and audit and related professional fees.

The following table sets forth the primary components of other operating expenses for the periods indicated:

Other Operating Expenses

(Dollars in Thousands)

December 31,

Professional services

Stationary, printing and supplies

Postage and delivery

FDIC assessment

State bank assessment

Directors fees and expenses

Marketing

Correspondent bank services

ATM expenses

Telephones and mobile devices

Membership dues and fees

Legal fees

Audit and related professional fees

Insurance

Listing fees

Other

Income Taxes

The provision for income taxes was $4.5 million during the year ended December 31, 2022, compared to the provision for income taxes of $2.2 million during the year ended December 31, 2021, an increase of $2.3 million or 100.8%. This increase was due primarily to higher consolidated income before taxes, higher merger related expenses, which are typically non-deductible, and lower earnings on tax-exempt income, primarily tax-exempt investment securities. For the twelve months ended December 31, 2022, the Company’s effective tax rate was approximately 24.9% as compared to 23.3% for the same period in 2021.

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Partners is not subject to Virginia state income tax, but instead pays Virginia franchise tax. The Virginia franchise tax paid by Partners is recorded in the “Other operating expenses” line item on the Consolidated Statements of Income for the twelve months ended December 31, 2022 and 2021.

Financial Condition

Interest Earning Assets

Loans. Loans typically provide higher yields than the other types of interest earning assets, and thus one of the Company's goals is to increase loan balances. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Total gross loans, excluding unamortized discounts on acquired loans, averaged $1.17 billion and $1.09 billion during the years ended December 31, 2022 and 2021, respectively.

The following table shows the composition of the loan portfolio by category:

Composition of Loan Portfolio by Category

(Dollars in Thousands)

As of December 31, 2022 and 2021

December 31,

Real Estate Mortgage

Construction and land development

Residential real estate

Nonresidential

Home equity loans

Commercial

Consumer and other loans

Less: Allowance for credit losses

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The following table sets forth the repricing characteristics and sensitivity to interest rate changes of the Company's loan portfolio, including unamortized discounts on acquired loans at December 31, 2022.

Loan Maturities and Interest Rate Sensitivity

At December 31, 2022

(Dollars in thousands)

Between

One Year

One and

Five and

After

December 31, 2022

or Less

Five Years

Fifteen Years

Total

Real Estate Mortgage

Construction and land development

Residential real estate

Nonresidential

Home equity loans

Commercial

Consumer and other loans

Total loans receivable

Fixed-rate loans:

Real Estate Mortgage

Construction and land development

Residential real estate

Nonresidential

Home equity loans

Commercial

Consumer and other loans

Total fixed-rate loans

Floating-rate loans:

Real Estate Mortgage

Construction and land development

Residential real estate

Nonresidential

Home equity loans

Commercial

Consumer and other loans

Total floating-rate loans

At December 31, 2022, real estate mortgage loans included $334.3 million of owner-occupied non-farm, non-residential loans, and $319.3 million of other non-farm, non-residential loans, which is 30.4% and 29.0% of real estate mortgage loans, respectively. By comparison, at December 31, 2021, real estate mortgage loans included $287.4 million of owner-occupied non-farm, non-residential loans, and $313.8 million of other non-farm, non-residential loans, which is 29.3% and 32.0% of real estate mortgage loans, respectively. This represents an increase at December 31, 2022 of $47.0 million and $5.5 million, or 16.3% and 1.8%, in owner-occupied non-farm, non-residential loans and other non-farm, non-residential loans, respectively.

At December 31, 2022, real estate mortgage loans included $117.3 million of construction and land development loans, and $52.3 million of multi-family residential loans, which is 10.7% and 4.8% of real estate mortgage loans, respectively. By comparison, at December 31, 2021, real estate mortgage loans included $107.9 million of construction and land development loans, and $24.4 million of multi-family residential loans, which is 11.0% and 2.5% of real estate mortgage loans, respectively. This represents an increase at December 31, 2022 of $9.4 million and $27.9 million, or 8.7% and 114.3%, in construction and land development loans and multi-family residential loans, respectively.

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Commercial real estate loans, excluding owner-occupied non-farm, non-residential loans, were 273.9% of total risk-based capital at December 31, 2022, as compared to 267.9% at December 31, 2021. Construction and land development loans were 65.7% of total risk-based capital at December 31, 2022, as compared to 64.8% at December 31, 2021.

At December 31, 2022, real estate mortgage loans included home equity loans of $31.4 million and residential real estate loans of $229.9 million, compared to $30.4 million and $201.2 million at December 31, 2021, respectively. Home equity loans increased $1.1 million, or 3.5%, during the year ended December 31, 2022, while residential real estate loans increased $28.7 million, or 14.2%, during the year ended December 31, 2022. At December 31, 2022, commercial loans were $128.6 million, compared to $130.9 million at December 31, 2021, a decrease of $2.4 million, or 1.8%, during the year ended December 31, 2022.

The overall increase in loans from the year ended December 31, 2021 to December 31, 2022 was due primarily to an increase in organic growth, including growth of approximately $68.9 million in loans related to Partners’ expansion into the Greater Washington market, which was partially offset by forgiveness payments received of approximately $8.2 million under round two of the PPP. As of December 31, 2022, there were no loans under the PPP that were still outstanding.

Investment Securities. The investment securities portfolio is a significant component of the Company's total interest-earning assets. Total investment securities averaged $147.5 million during the year ended December 31, 2022 as compared to $129.8 million for the year ended December 31, 2021. This represented 9.2% and 8.5% of total average interest-earning assets for the years ended December 31, 2022 and 2021, respectively. This increase was primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs and lower accelerated pre-payments on mortgage-backed investment securities, partially offset by calls on higher yielding investment securities in the low interest rate environment during 2021. During the twelve months ended December 31, 2021, accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned.

During the year ended December 31, 2022, the Company’s investment securities portfolio was negatively impacted by unrealized losses in the market value of investment securities available for sale as a result of increases in market interest rates. The Company believes that further increases in market interest rates will likely result in higher unrealized losses in the market value of the investment securities available for sale portfolio. The Company expects to recover its investment in debt securities through scheduled payments of principal and interest, and unrealized losses are not expected to affect the earnings or regulatory capital of the Company.

The Company classifies all of its investment securities as available for sale. This classification requires that investment securities be recorded at their fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of stockholders’ equity (accumulated other comprehensive income (loss)), net of deferred taxes. At December 31, 2022 and 2021, investment securities available for sale, at fair value totaled $133.7 million and $122.0 million, respectively. Investment securities available for sale, at fair value increased by $11.7 million, or 9.5%, during the year ended December 31, 2022. This increase was primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs, which was partially offset by two higher yielding investment securities being called, and an increase in unrealized losses on the investment securities available for sale portfolio. The Company attempts to maintain an investment securities portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations. At December 31, 2022 and 2021 there were no issuers, other than the U.S. Government and its agencies, whose securities owned by the Company had a book or fair value exceeding 10% of the Company's stockholders' equity.

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The following table summarizes the amortized cost and fair value of investment securities available for sale for the dates indicated:

Amortized Cost and Fair Value of Investment Securities

(Dollars in Thousands)

As of December 31, 2022 and 2021

December 31, 2022

Gross

Amortized

Percentage

Unrealized

Fair

Cost

of Total

Gains

Losses

Value

Obligations of U.S. Government agencies and corporations

Obligations of States and political subdivisions

Mortgage-backed securities

Subordinated debt investments

December 31, 2021

Gross

Amortized

Percentage

Unrealized

Fair

Cost

of Total

Gains

Losses

Value

Obligations of U.S. Government agencies and corporations

Obligations of States and political subdivisions

Mortgage-backed securities

Subordinated debt investments

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The following table sets forth the fair value and weighted average yields by maturity category of the investment securities available for sale portfolio as of December 31, 2022. Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 21%. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

Fair Value and Weighted Average Yields of Investment Securities by Maturity

(Dollars in Thousands)

As of December 31, 2022

December 31, 2022

Within 1 Year

1-5 Years

5-10 years

After 10 Years

Total

Weighted

Fair

Average

Fair

Average

Fair

Average

Fair

Average

Fair

Average

Value

Yield

Value

Yield

Value

Yield

Value

Yield

Value

Yield

Obligations of U.S. Government agencies and corporations

Obligations of States and political subdivisions

Mortgage-backed securities

Subordinated debt investments

In addition, the Company holds stock in various correspondent banks as well as the Federal Reserve. The balance of these securities was $6.5 million and $4.9 million at December 31, 2022 and 2021, respectively, an increase of $1.6 million, or 33.7%, for the year ended December 31, 2022.

Due to the increase in longer term interest rates and ongoing volatility in the securities markets during the year ended December 31, 2022, the net unrealized losses in the Company’s investment securities available for sale portfolio increased from December 31, 2021 by approximately $17.5 million, or 3,655.7%, to $17.0 million at December 31, 2022.

Subsequent interest rate fluctuations could have an adverse effect on our investment securities available for sale portfolio by increasing reinvestment risk and reducing our ability to achieve our targeted investment returns.

Interest Bearing Liabilities

Deposits. Average total deposits increased from $1.39 billion to $1.47 billion, an increase of $72.5 million, or 5.2%, for the year ended December 31, 2022 over the average total deposits for the year ended December 31, 2021. This increase was primarily due to organic deposit growth, including average growth of approximately $51.7 million in deposits related to Partners’ expansion into the Greater Washington market, which was partially offset by scheduled maturities of time deposits that were not replaced and competitive pressures in the higher interest rate environment. At December 31, 2022, total deposits were $1.34 billion as compared to $1.44 billion at December 31, 2021, a decrease of $103.3 million, or 7.2%. This decrease was primarily driven by scheduled maturities of time deposits that were not replaced and significant outflows related to competitive pressures in the higher interest rate environment, which were partially offset by organic growth as a result of our continued focus on total relationship banking and Partners’ expansion into the Greater Washington market. Non-interest bearing demand deposits increased to $528.8 million at December 31, 2022, a $34.9 million, or 7.1%, increase from $493.9 million in non-interest bearing demand deposits at December 31, 2021, due primarily to the aforementioned items above.

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The following table sets forth the deposits of the Company by category for the period indicated:

Deposits by Category

(Dollars in Thousands)

As of December 31, 2022 and 2021

December 31,

Percentage

December 31,

Percentage

of Deposits

Noninterest bearing demand deposits

Interest bearing deposits:

Money market, NOW, and savings accounts

Certificates of deposit, $250 thousand or more

Other certificates of deposit

Total interest bearing deposits

Total

The Company's loan-to-deposit ratio was 92.0% at December 31, 2022 as compared to 77.4% at December 31, 2021. Core deposits, which exclude certificates of deposit of $250 thousand or more, provide a relatively stable funding source for the Company's loan portfolio and other interest earning assets. The Company's core deposits were $1.28 billion at December 31, 2022, a decrease of $80.4 million, or 5.9%, from $1.36 billion at December 31, 2021, and excluded $59.2 million and $83.3 million in certificates of deposit of $250 thousand or more as of those dates, respectively. Management anticipates that a stable base of deposits will be the Company's primary source of funding to meet both its short-term and long-term liquidity needs in the future, and, therefore, feels that presenting core deposits provides valuable information to investors.

The following table provides a summary of the Company's maturity distribution for certificates of deposit at the dates indicated:

Maturities of Certificates of Deposit

(Dollars in Thousands)

As of December 31, 2022

December 31,

Three months or less

Over three months through six months

Over six months through twelve months

Over twelve months

Total

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The following table provides a summary of the Company's maturity distribution for certificates of deposit of greater than $250 thousand at the dates indicated:

Maturities of Certificates of Deposit Greater than $250 Thousand

(Dollars in Thousands)

As of December 31, 2022

December 31,

Three months or less

Over three months through six months

Over six months through twelve months

Over twelve months

Total

Borrowings. Borrowings at December 31, 2022 and 2021 consist primarily of short-term and long-term borrowings with the FHLB, subordinated notes payable, net, and other borrowings.

At December 31, 2022, short-term borrowings with the FHLB were $42.0 million as compared to $0 at December 31, 2021, an increase of $42.0 million, or 100.0%. This increase was primarily due to the aforementioned items noted in the analysis of total deposits.

At December 31, 2022, long- term borrowings with the FHLB were $19.8 million as compared to $26.3 million at December 31, 2021, a decrease of $6.5 million, or 24.8%. This decrease was primarily due to maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments. These borrowings are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB.

At December 31, 2022 and 2021, subordinated notes payable, net, were $22.2 million.

At December 31, 2022, other borrowings were $613 thousand as compared to $755 thousand at December 31, 2021, a decrease of $142 thousand, or 18.8%. Partners majority owned subsidiary, JMC, has a warehouse line of credit with another financial institution in the amount of $3.0 million, of which $0 and $120 thousand were outstanding as of December 31, 2022 and 2021, respectively. In addition to the decrease in JMC’s warehouse line of credit, there was a decrease on Partners’ note payable on 410 William Street, Fredericksburg, Virginia, primarily due to scheduled principal curtailments, partially offset by the amortization of the related discount on the note payable.

See Note 8 – Borrowings and Notes Payable of the audited consolidated financial statements for the year ended December 31, 2022 for additional information on the Company’s subordinated notes payable, net, Partners’ note payable, and JMC’s warehouse line of credit.

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Capital

The Federal Reserve and other bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. The following table presents actual and required capital ratios as of December 31, 2022 and December 31, 2021 for Delmarva and Partners under Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2022 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required for an institution to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A more in depth discussion of regulatory capital requirements is included in Note 16 of the audited consolidated financial statements included at Item 8 to this Annual Report on Form 10-K.

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Capital Components

At December 31, 2022 and 2021

(Dollars in Thousands)

To Be Well

Capitalized

For Capital

Under Prompt

Adequacy

Corrective Action

Actual

Purposes

Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2022

Total Capital Ratio

(To Risk Weighted Assets)

The Bank of Delmarva

Virginia Partners Bank

Tier 1 Capital Ratio

(To Risk Weighted Assets)

The Bank of Delmarva

Virginia Partners Bank

Common Equity Tier 1 Ratio

(To Risk Weighted Assets)

The Bank of Delmarva

Virginia Partners Bank

Tier 1 Leverage Ratio

(To Average Assets)

The Bank of Delmarva

Virginia Partners Bank

To Be Well

Capitalized

For Capital

Under Prompt

Adequacy

Corrective Action

Actual

Purposes

Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2021

Total Capital Ratio

(To Risk Weighted Assets)

The Bank of Delmarva

Virginia Partners Bank

Tier 1 Capital Ratio

(To Risk Weighted Assets)

The Bank of Delmarva

Virginia Partners Bank

Common Equity Tier 1 Ratio

(To Risk Weighted Assets)

The Bank of Delmarva

Virginia Partners Bank

Tier 1 Leverage Ratio

(To Average Assets)

The Bank of Delmarva

Virginia Partners Bank

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Liquidity Management

Liquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the available for sale investment securities portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in the Company's market area. The Company's cash and cash equivalents position, which includes funds in cash and due from banks, interest bearing deposits in other financial institutions, and federal funds sold, averaged $296.3 million during the year ended December 31, 2022 and totaled $141.6 million at December 31, 2022, as compared to an average of $326.9 million during the year ended December 31, 2021 and a year-end position of $338.8 million at December 31, 2021. Also, the Company has available advances from the FHLB. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At December 31, 2022, advances available totaled approximately $412.0 million of which $61.8 million had been drawn, or used for letters of credit. Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources. Subject to certain aggregation rules, FDIC deposit insurance covers the funds in deposit accounts up to at least $250 thousand.

PTRS Partners Bancorp - 10-K

Risk Factors (Item 1A)

MD&A (Item 7)

External resources

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