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.
Table of Contents
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.
Table of Contents
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 condition that may allow LINK to the LINK Merger Agreement and LINK may exercise its right to the LINK Merger Agreement. If the consummation of the mergers is , including by a in receipt of necessary regulatory approvals, the business, financial condition and results of operations of the Company may also be materially and affected.
Table of Contents
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 other companies from pursuing, announcing or submitting a business combination proposal to the Company that might result in greater value to Company shareholders.
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
Table of Contents
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;
Table of Contents
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 effect on the Company’s borrowers and the values of collateral securing loans, which could 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. in economic conditions could result in an increase in loan 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 impact on the Company’s business, financial condition and results of operations.
Table of Contents
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 loans, and other factors, both within and outside of the Company’s control, may require an increase in the allowance for credit . In addition, bank regulatory agencies periodically review the allowance for credit and may require an increase in the provision for credit 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 , the Company will need additional provisions to increase the allowance for credit . Any increases in the allowance for credit will result in a decrease in net income, and possibly capital, and may have a material 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 in general economic conditions caused by rising interest rates, inflation, , acts of terrorism, outbreak of hostilities (including the war in Ukraine) or other international or domestic occurrences, , 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 effect on the Affiliate Banks’, and therefore the Company’s, financial condition and results of operations.
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.
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 and may require banks with higher levels of such loans to implement risk management practices. It may also be to
Table of Contents
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.
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.
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.
Table of Contents
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.
Table of Contents
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 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 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 in the level of the allowance for credit . If the Company is required to materially increase the level of its allowance for credit for any reason, such increase could affect its capital, regulatory capital ratios, ability to make larger loans, earnings and performance metrics. Any such changes could have a material 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 its assets and wind down its operations, in each case due primarily to liquidity . 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 , including 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 to access undrawn amounts thereunder.In addition, the Company’s credit risk may be when the collateral held by the Company cannot be realized upon or is at prices not sufficient to recover the full amount of the credit exposure due to the Company. Any such could have a material effect on the Company’s financial condition and results of operations.
Table of Contents
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 to access undrawn amounts thereunder. If any parties with whom we conduct business are 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 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 of SVB and uncertainty remains over liquidity 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 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%
Table of Contents
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 effects, which may be material, on its liquidity, financial condition, and .
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.
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 that is other than temporary, the may not accurately reflect the actual in the future.
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.
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 in the markets in which its loans are concentrated, regulatory actions the Company, or changes in the liquidity needs of depositors. Market conditions or other events could also 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 consequences. The Company’s to raise funds through deposits, borrowings, the sale of loans, and other sources could have a substantial effect on its business, and could result in the 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 by factors that affect its organization specifically or the financial services industry or economy in general. Any substantial, , and/or change in the level or cost of liquidity could the Company’s ability to fund operations and meet its obligations as they become due and could have a material effect on its business, financial condition and results of operations.
Table of Contents
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 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
Table of Contents
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 imposed by those federal and state regulations may place banks in general, including the Affiliate Banks in particular, at a competitive compared to non-bank competitors. The Company’s 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 or to our reputation, all of which could have a material 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 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 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
Table of Contents
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 to raise capital in sufficient amounts may 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.
Table of Contents
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 . The Company is to the risk of cyber-attacks in the normal course of business. In addition, the Company is to cyber-attacks on vendors and merchants that affect the Company and its customers. In general, cyber can result from attacks or events. The Company has observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, access to digital systems for purposes of assets or sensitive information, data, or causing operational . To combat these attacks, policies and procedures are in place to prevent or limit the effect of the possible security 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 to cover all . As cyber continue to evolve, the Company also may be required to expend significant additional resources to continue to modify or its protective measures or to and remediate any information security or . efforts to ensure the of the Company’s systems and implement controls, processes, policies and other protective measures, the Company may not be to anticipate all security , nor may it be to implement guaranteed preventive measures such security . Cyber are rapidly evolving, and the Company may not be to anticipate or prevent all such attacks and could be held liable for any security or .
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 that may have been caused; deploying additional personnel and protection technologies, training employees, and engaging third-party experts and consultants; revenues resulting from use of proprietary information or the to retain or attract customers following an attack; or of physical infrastructure, operating systems or networks that support the Company’s business and customers resulting in the of customers and business ; additional regulatory and possible regulatory ; ; and, reputational affecting customer or investor confidence.
Table of Contents
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. to keep pace with technological change affecting the financial services industry could have a material impact on Delmarva’s and Partners’ businesses and, in turn, the Company’s business, financial condition and results of operations.
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.
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 .
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;
Table of Contents
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 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 to attract and retain skilled employees, its business and results of operations could be affected.
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.
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.
Table of Contents
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 judgment in connection with any formal or informal proceeding or by government agencies may result in , or proceedings as other and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material 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 of the Company’s deposit base, the ability of borrowers to repay outstanding loans, the value of collateral securing loans, the Company’s liquidity, cause significant property , result in 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, or affecting any of these systems may cause in service to customers, to the Company’s reputation, and 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
Table of Contents
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 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.
