SHORE BANCSHARES INCSHBI
SHORE BANCSHARES INC Fair Value Disclosure
Fair Value Measurements
Accounting guidance under GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This accounting guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis, along with other mortgage related items identified in the recurring fair value table below. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent loans, repossessed assets and OREO (foreclosed assets). These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Under fair value accounting guidance, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine their fair values. These hierarchy levels are:
Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Assets Measured at Fair Value on a Recurring Basis
Investment Securities Available for Sale
Fair value measurement for investment securities available for sale is based on quoted prices from an independent pricing service. The fair value measurements consider observable data that may include present value of future cash flows, prepayment assumptions, credit loss assumptions and other factors. The Company classifies its investments in U.S. Treasury securities, if any, as Level 1 in the fair value hierarchy, and it classifies its investments in U.S. government agency securities and mortgage-backed securities issued or guaranteed by U.S. government-sponsored entities as Level 2.
Equity Securities
Fair value measurement for equity securities is based on quoted market prices retrieved by the Company via online resources. Although these securities have readily available fair market values, the Company deems that they be classified as level 2 investments in the fair value hierarchy due to not being considered traded in a highly active market.
Loans Held for Sale
Loans held for sale are carried at fair value, which is determined based on Mark to Trade for allocated/committed loans or Mark to Market analysis for unallocated/uncommitted loans based on third-party pricing models (Level 2).
Mortgage Servicing Rights
The fair value of MSRs is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income (Level 3). The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, and other ancillary income such as late fees. Management reviews all significant assumptions on a quarterly basis. Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.
The significant unobservable inputs used in the fair value measurement of the reporting entity’s residential MSRs are prepayment speeds, probability of default, rate of return, and cost of servicing. Significant increases/decreases in any of those inputs in isolation would have resulted in a significantly lower/higher fair value measurement. Generally, a change in the assumption used for prepayment speeds would have been accompanied by a directionally similar change in the markets (i.e., the 10-Year Treasury) and in the probability of default.
IRLCs
We utilize a third-party specialist model to estimate the fair value of our IRLCs, which are valued based upon mortgage securities (TBA) prices less estimated costs to process and settle the loan. Fair value is adjusted for the estimated probability of the loan closing with the borrower (Level 3).
| ($ in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range | ||||||||||||||||||||||
| December 31, 2024 | ||||||||||||||||||||||||||
MSRs(1) | $ | 5,874 | Market Approach | Weighted-average prepayment speed (PSA)(2) | 140 | |||||||||||||||||||||
| IRLCs - net asset | $ | 113 | Market Approach | Range of pull through rate | 78% - 100% | |||||||||||||||||||||
| Average pull through rate | 98% | |||||||||||||||||||||||||
| ($ in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range | ||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||
MSRs(1) | $ | 5,926 | Market Approach | Weighted-average prepayment speed (PSA)(2) | 129 | |||||||||||||||||||||
| IRLCs - net asset | $ | 110 | Market Approach | Range of pull through rate | 78% - 100% | |||||||||||||||||||||
| Average pull through rate | 98% | |||||||||||||||||||||||||
________________________________
(1)The weighted-average was calculated with reference to the principal balance of the underlying mortgages.
(2)PSA = Public Securities Association Standard Prepayment Model.
The following table presents activity in the IRLCs for the year ended December 31, 2024.
| ($ in thousands) | Year Ended December 31, 2024 | |||||||
| Beginning balance | $ | 110 | ||||||
| Valuation adjustment | 3 | |||||||
| Ending balance | $ | 113 | ||||||
Forward Contracts
To avoid interest rate risk, we hedge the open locked/closed position with TBA forward trades. On a regular basis, we allocate disbursed loans to mandatory commitments with government-sponsored enterprises and private investors delivering the loans within 120 days of origination to maximize interest earnings. For a small percentage of our business, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and we measure and report them at fair value. Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is a level 2 input. We have elected to measure and report best efforts commitments at fair value using a valuation methodology similar to that used for mandatory commitments.
Market assumptions utilized in the fair value measurement of the reporting entity’s residential mortgage derivatives, inclusive of IRLCs, Closed Loan Inventory, TBA derivative trades, and Mandatory Forwards may be subject to investor overlays that may result in a significantly lower fair value measurement. Generally such overlays are announced with advanced notice in order to include the risk adjuster, however there are times when announcements are mandated resulting in a lower fair value measurement. Additionally market assumptions such as spec pool payups may result in a significantly higher fair value measurement at time of loan allocation to specific trades.
The following tables present the recorded amount of assets measured at fair value on a recurring basis as of December 31, 2024 and 2023. No assets were transferred from one hierarchy level to another during the years ended December 31, 2024 or 2023.
| ($ in thousands) | Fair Value | Quoted Prices (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Observable Inputs (Level 3) | ||||||||||||||||||||||
| December 31, 2024 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||||
| U.S. government agency securities | $ | 20,202 | $ | — | $ | 20,202 | $ | — | ||||||||||||||||||
| Mortgage-backed securities | 122,384 | — | 122,384 | — | ||||||||||||||||||||||
| Other debt securities | 6,626 | — | 6,626 | — | ||||||||||||||||||||||
| 149,212 | — | 149,212 | — | |||||||||||||||||||||||
| Equity securities | 5,814 | — | 5,814 | — | ||||||||||||||||||||||
| TBA forward trades | 164 | — | 164 | — | ||||||||||||||||||||||
| Loans held for sale | 19,606 | — | 19,606 | — | ||||||||||||||||||||||
| Loans held for investment, at fair value | 9,466 | — | 9,466 | — | ||||||||||||||||||||||
| MSRs | 5,874 | — | — | 5,874 | ||||||||||||||||||||||
| IRLCs | 113 | — | — | 113 | ||||||||||||||||||||||
| Total assets at fair value | $ | 190,249 | $ | — | $ | 184,262 | $ | 5,987 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| TBA forward trades | $ | 23 | $ | — | $ | 23 | $ | — | ||||||||||||||||||
| Total liabilities at fair value | $ | 23 | $ | — | $ | 23 | $ | — | ||||||||||||||||||
| ($ in thousands) | Fair Value | Quoted Prices (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Observable Inputs (Level 3) | ||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||||
| U.S. government agency securities | $ | 20,475 | $ | — | $ | 20,475 | $ | — | ||||||||||||||||||
| Mortgage-backed securities | 84,027 | — | 84,027 | — | ||||||||||||||||||||||
| Other debt securities | 6,019 | — | 6,019 | — | ||||||||||||||||||||||
| 110,521 | — | 110,521 | — | |||||||||||||||||||||||
| Equity securities | 5,703 | — | 5,703 | — | ||||||||||||||||||||||
| TBA forward trades | 2 | — | 2 | — | ||||||||||||||||||||||
| Loans held for sale | 8,782 | — | 8,782 | — | ||||||||||||||||||||||
| Loans held for investment, at fair value | 9,944 | — | 9,944 | — | ||||||||||||||||||||||
| MSRs | 5,926 | — | — | 5,926 | ||||||||||||||||||||||
| IRLCs | 110 | — | — | 110 | ||||||||||||||||||||||
| Total assets at fair value | $ | 140,988 | $ | — | $ | 134,952 | $ | 6,036 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| TBA securities | $ | 176 | $ | — | $ | 176 | $ | — | ||||||||||||||||||
| Total liabilities at fair value | $ | 176 | $ | — | $ | 176 | $ | — | ||||||||||||||||||
Assets Measured at Fair Value on a Nonrecurring Basis
Individually Evaluated Collateral-Dependent Loans
Loans for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, where applicable. Accordingly, collateral dependent loans are classified within Level 3 of the fair value hierarchy.
OREO (Foreclosed Assets)
Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets establishing a new cost basis. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. The estimated fair value for foreclosed assets included in Level 3 are determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to the initial recognition, the Company records the foreclosed asset as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.
Repossessed Assets
The Company records repossessed assets at fair value on a nonrecurring basis. All repossessed assets are recorded at lower of the estimated fair value of the properties, less expected selling costs, or the carrying amount of the defaulted loans. From time to time, nonrecurring fair value adjustments are recorded to reflect partial write-downs based on current appraised value of an asset. The Company considers any valuation inputs related to repossessed assets to be Level 3 inputs.
The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis as of December 31, 2024 and 2023 that are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| Quantitative Information About Level 3 Fair Value Measurements | ||||||||||||||||||||||||||||||||
| ($ in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range | Weighted-Average | |||||||||||||||||||||||||||
| December 31, 2024 | ||||||||||||||||||||||||||||||||
| Nonrecurring measurements: | ||||||||||||||||||||||||||||||||
| Individually evaluated collateral dependent loans: | ||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 2,220 | Appraisal of collateral(1) | Appraisal adjustment(2) Liquidation expense(2) | 62% 10% | 38% 10% | ||||||||||||||||||||||||||
| Residential real estate | 817 | Appraisal of collateral(1) | Appraisal adjustment(2) Liquidation expense(2) | 55% - 100% 10% | 17% 10% | |||||||||||||||||||||||||||
| Commercial | — | Appraisal of collateral(1) | Appraisal adjustment(2) Liquidation expense(2) | 14% - 100% 10% | 0% 10% | |||||||||||||||||||||||||||
| Consumer | 624 | Appraisal of collateral(1) | Appraisal adjustment(2) Liquidation expense(2) | 80% - 86% 10% | 15% 10% | |||||||||||||||||||||||||||
| Other real estate owned | 179 | Appraisal of collateral(1) | Appraisal adjustment(2) | N/A | 0% | |||||||||||||||||||||||||||
| Repossessed assets | 3,315 | Appraisal of collateral(1) | Appraisal adjustment(2) | N/A | 39% | |||||||||||||||||||||||||||
| Assets held for sale | 900 | Appraisal of collateral(1) | Appraisal adjustment(2) | N/A | 0% | |||||||||||||||||||||||||||
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||||||||||||||||||
| ($ in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range | Weighted-Average | |||||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||
| Nonrecurring measurements: | ||||||||||||||||||||||||||||||||
| Individually evaluated collateral dependent loan | ||||||||||||||||||||||||||||||||
| Commercial real estate | $ | — | Appraisal of collateral(1) | Appraisal adjustment(2) Liquidation expense(2) | 0% 0% | 0% 0% | ||||||||||||||||||||||||||
| Residential real estate | 288 | Appraisal of collateral(1) | Appraisal adjustment(2) Liquidation expense(2) | 53% 10% | 24% 10% | |||||||||||||||||||||||||||
| Commercial | — | Appraisal of collateral(1) | Appraisal adjustment(2) Liquidation expense(2) | 15% - 100% 0% | 0% 0% | |||||||||||||||||||||||||||
| Consumer | 345 | Appraisal of collateral(1) | Appraisal adjustment(2) Liquidation expense(2) | 80% - 100% 0% | 46% 0% | |||||||||||||||||||||||||||
| Other real estate owned | 179 | Appraisal of collateral(1) | Appraisal adjustment(2) | 0% - 20% | 0% | |||||||||||||||||||||||||||
_____________________________
(1)Unobservable inputs were weighted by the relative fair value of the instruments.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
Fair Value of Financial InstrumentsFinancial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the financial instrument fair value disclosure requirements, including the Company’s common stock, OREO, premises and equipment and other assets and liabilities.
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments for the years ended December 31, 2024 and 2023. Fair values for December 31, 2024 and 2023 were estimated using an exit price notion.
| December 31, 2024 | Carrying Amount | Fair Value | Fair Value Measurements | |||||||||||||||||||||||||||||
($ in thousands) | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 459,851 | $ | 459,851 | $ | 459,851 | $ | — | $ | — | ||||||||||||||||||||||
| Available for sale investment securities | 149,212 | 149,212 | — | 149,212 | — | |||||||||||||||||||||||||||
| Held to maturity investment securities | 481,077 | 424,734 | — | 424,734 | — | |||||||||||||||||||||||||||
| Equity securities | 5,814 | 5,814 | — | 5,814 | — | |||||||||||||||||||||||||||
| Restricted securities | 20,253 | 20,253 | — | 20,253 | — | |||||||||||||||||||||||||||
| Loans held for sale | 19,606 | 19,606 | — | 19,606 | — | |||||||||||||||||||||||||||
| TBA securities | 164 | 164 | — | 164 | — | |||||||||||||||||||||||||||
| Loans held for investment, at fair value | 9,466 | 9,466 | — | 9,466 | — | |||||||||||||||||||||||||||
| Loans held for investment, at amortized cost, net | 4,704,612 | 4,551,983 | — | — | 4,551,983 | |||||||||||||||||||||||||||
| Mortgage servicing rights | 5,874 | 5,874 | — | — | 5,874 | |||||||||||||||||||||||||||
| Accrued interest receivable | 19,570 | 19,570 | — | 19,570 | — | |||||||||||||||||||||||||||
| IRLCs | 113 | 113 | — | — | 113 | |||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||||||
| Noninterest-bearing | $ | 1,562,815 | $ | 1,562,815 | $ | — | $ | 1,562,815 | $ | — | ||||||||||||||||||||||
| Interest-bearing checking | 978,076 | 978,076 | — | 978,076 | — | |||||||||||||||||||||||||||
| Money market and savings | 1,805,884 | 1,805,884 | — | 1,805,884 | — | |||||||||||||||||||||||||||
| Time deposits | 1,181,561 | 1,179,716 | — | 1,179,716 | — | |||||||||||||||||||||||||||
| FHLB advances | 50,000 | 50,201 | — | 50,201 | — | |||||||||||||||||||||||||||
| TRUPS | 29,847 | 27,952 | — | 27,952 | — | |||||||||||||||||||||||||||
| Subordinated debt | 43,870 | 43,669 | — | 43,669 | — | |||||||||||||||||||||||||||
| TBA securities | 23 | 23 | — | 23 | — | |||||||||||||||||||||||||||
| Accrued interest payable | 3,398 | 3,398 | — | 3,398 | — | |||||||||||||||||||||||||||
| December 31, 2023 | Carrying Amount | Fair Value | Fair Value Measurements | |||||||||||||||||||||||||||||
| ($ in thousands) | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 372,413 | $ | 372,413 | $ | 372,413 | $ | — | $ | — | ||||||||||||||||||||||
| Available for sale investment securities | 110,521 | 110,521 | — | 110,521 | — | |||||||||||||||||||||||||||
| Held to maturity investment securities | 513,188 | 457,830 | — | 457,830 | — | |||||||||||||||||||||||||||
| Equity securities | 5,703 | 5,703 | — | 5,703 | — | |||||||||||||||||||||||||||
| Restricted securities | 17,900 | 17,900 | — | 17,900 | — | |||||||||||||||||||||||||||
| Loans held for sale | 8,782 | 8,782 | — | 8,782 | — | |||||||||||||||||||||||||||
| TBA securities | 2 | 2 | — | 2 | — | |||||||||||||||||||||||||||
| Cash surrender value on life insurance | 101,704 | 101,704 | — | 101,704 | — | |||||||||||||||||||||||||||
| Loans held for investment | 9,944 | 9,944 | — | 9,944 | — | |||||||||||||||||||||||||||
| Loans, net | 4,573,715 | 4,477,468 | — | — | 4,477,468 | |||||||||||||||||||||||||||
| Mortgage servicing rights | 5,926 | 5,926 | — | — | 5,926 | |||||||||||||||||||||||||||
| Accrued interest receivable | 19,217 | 19,217 | — | 19,217 | — | |||||||||||||||||||||||||||
| IRLCs | 110 | 110 | — | — | 110 | |||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||||||
| Noninterest-bearing | $ | 1,258,037 | $ | 1,258,037 | $ | — | $ | 1,258,037 | $ | — | ||||||||||||||||||||||
| Interest-bearing checking | 1,165,546 | 1,165,546 | — | 1,165,546 | — | |||||||||||||||||||||||||||
| Money market and savings | 1,777,927 | 1,777,927 | — | 1,777,927 | — | |||||||||||||||||||||||||||
| Time deposits | 1,184,610 | 1,184,447 | — | 1,184,447 | — | |||||||||||||||||||||||||||
| TRUPS | 29,158 | 28,266 | — | 28,266 | — | |||||||||||||||||||||||||||
| Subordinated debt | 43,139 | 42,579 | — | 42,579 | — | |||||||||||||||||||||||||||
| TBA securities | 176 | 176 | — | 176 | — | |||||||||||||||||||||||||||
| Accrued interest payable | 4,711 | 4,711 | — | 4,711 | — | |||||||||||||||||||||||||||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.