What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-26 compared with 2020-03-13 · 455 added, 570 removed, 912 unchanged (53% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Management’s Report on Internal Control over Financial Reporting

Reports of Independent Registered Public Accounting Firm

Management’s Report on Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

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Consolidated Statements of Comprehensive Income

Consolidated Statements of Changes in Stockholders’

Consolidated Statements of Changes in Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Shore Bancshares, Inc.

(the “Company”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report.

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include some amounts that are based on the best estimates and judgments of management.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.

This internal control system is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of the Company’s financial reporting and the preparation and presentation of financial statements for external reporting purposes in conformity with accounting principles generally accepted in the United States of America, as well as to safeguard assets from unauthorized use or disposition.

(the “Company”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.

The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal audit with actions taken to correct potential deficiencies as they are identified.

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Further, because of changes in conditions, internal control effectiveness may vary over time.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 based upon criteria set forth in Internal Control –

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO Framework).

Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2019, the Company’s internal control over financial reporting is effective.

Yount, Hyde & Barbour, the Company’s independent registered public accounting firm that audited the financial statements included in this annual report, has issued a report on the Company’s internal control over financial reporting, which appears in the following pages.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 based upon criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO Framework).

Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2020, the Company’s internal control over financial reporting is effective.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm, regarding internal control over financial reporting.

Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in its annual report.

March 26, 2021

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(Principal Financial Officer)

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors

Report of I ndependent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Shore Bancshares, Inc.

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We have audited the accompanying consolidated balance sheets of Shore Bancshares, Inc.

(the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders’

equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

and its subsidiary (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control —

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ( PCAOB ) and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

/s/ Yount, Hyde & Barbour, P.C.

We have served as the Company’s auditor since 2017.

Winchester, Virginia

March 13, 2020

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors

Shore Bancshares, Inc.

Easton, Maryland

Opinion on the Internal Control Over Financial Reporting

We have audited Shore Bancshares, Inc.’s (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control —

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control —

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders’

equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements of the Company, and our report dated March 13, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial Reporting .

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – Qualitative Formula Allowance

As described in Note 1 (Summary of Significant Accounting Policies) and Note 3 (Loans and Allowance for Credit Losses) to the consolidated financial statements, the Company maintains an allowance for credit losses to provide for probable losses inherent in the loan portfolio, which totaled $13,888,000 at December 31, 2020.

The Company’s allowance for credit losses consists of three components:

(i) the specific allowance;

(ii) the historical formula allowance;

and (iii) the qualitative formula allowance.

For loans that are not individually evaluated for impairment, the qualitative formula allowance uses various qualitative factors to develop loss percentages which are applied to the loan portfolio, by loan pool, based on management’s assessment of shared risk characteristics within groups of similar loans.

The qualitative formula allowance is determined based on management’s continuing evaluation of internal and external factors (described in Note 1), which may impact the underlying quality of the loan portfolio.

Management exercised significant judgment when assessing the factors which serve as the basis for the qualitative formula allowance component of the allowance for credit losses estimate.

We identified the assessment of those qualitative factors and the determination of the qualitative formula allowance as a critical audit matter as auditing the qualitative factors and the resultant qualitative formula allowance involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.

How We Addressed the Matter in Our Audit

The primary audit procedures we performed to address this critical audit matter included:

Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative formula allowance, which included:

● Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.

● Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors.

● Evaluating the qualitative factors for directional consistency and for reasonableness.

● Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.

/s/ Yount, Hyde & Barbour, P.C.

We have served as the Company's auditor since 2017.

Winchester, Virginia

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Right-of-use assets

Assets of discontinued operations

Noninterest-bearing

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Total deposits

Short-term borrowings

Long-term borrowings

Securities sold under retail repurchase agreements

Advances from FHLB - long-term

Subordinated debt

Total borrowings

Lease liabilities

Other liabilities

Liabilities of discontinued operations

TOTAL LIABILITIES

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Retained earnings

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

TOTAL STOCKHOLDERS' EQUITY

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Trust and investment fee income

Gains on sales and calls of investment securities

Other noninterest income

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Income from continuing operations

(Loss) income from discontinued operations before income taxes

Gain on sale of insurance agency

Income tax (benefit) expense

(Loss) income from discontinued operations

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)

For the Years Ended December 31,

Earnings per common share - Basic

Income from continuing operations

(Loss) income from discontinued operations

Earnings per common share - Diluted

Loss from discontinued operations before income taxes

Income tax benefit

Loss from discontinued operations

Earnings per common share - Basic and diluted

Income from continuing operations

(Loss) income from discontinued operations

Loss from discontinued operations

Dividends paid per common share

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For the Years Ended December 31,

(Dollars in thousands)

Other comprehensive income (loss):

(In thousands)

Other comprehensive income:

Investment securities:

Unrealized holding gains (losses) on available-for-sale-securities

Unrealized holding gains on available-for-sale-securities

Reclassification of (gains) recognized in net income

Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity

Total other comprehensive income (loss)

Total other comprehensive income

Comprehensive income

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SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2020 and 2019

Comprehensive

Stockholders’

(In thousands)

Balances, January 1, 2020

Cumulative effect adjustment (ASU 2016-01)

Other comprehensive income

Stock-based compensation

Vesting of restricted stock, net of shares surrendered

Cash dividends declared

Balances, March 31, 2020

Other comprehensive income

Stock-based compensation

Cash dividends declared

Balances, June 30, 2020

Other comprehensive (loss)

Retirement of common stock

Stock-based compensation

Exercise of options and vesting of restricted stock, net of shares surrendered

Cash dividends declared

Balances, September 30, 2020

Other comprehensive (loss)

Retirement of common stock

Stock-based compensation

Cash dividends declared

Exercise of options

Balances, December 31, 2020

Comprehensive

Stockholders’

(In thousands)

Income (Loss)

Balances, January 1, 2019

Other comprehensive income

Stock-based compensation

Exercise of options and vesting of restricted stock, net of shares surrendered

Cash dividends declared

Balances, March 31, 2019

Other comprehensive income

Stock-based compensation

Cash dividends declared

Balances, June 30, 2019

Other comprehensive income

Retirement of common stock

Stock-based compensation

Exercise of options and vesting of restricted stock, net of

shares surrendered

Cash dividends declared

Balances, September 30, 2019

Other comprehensive income

Retirement of common stock

Stock-based compensation

Cash dividends declared

Balances, December 31, 2019

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For the Years Ended December 31,

For Year Ended

(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

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Net amortization of securities

Amortization of debt issuance costs

Stock-based compensation expense

Deferred income tax expense (benefit)

Deferred income (benefit) tax expense

(Gains) on sales and calls of securities

Losses on sales and disposals of premises and equipment

Losses on sales and valuation adjustments on other real estate owned

Net (gain) on disposal of discontinued operations

Fair value adjustment on equity securities

Bank owned life insurance income

Net changes in:

Accrued interest receivable

Cash surrender values on compensation plans

Accrued interest payable

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Proceeds from maturities and principal payments of investment securities available for sale

Proceeds from sales and calls of investment securities available for sale

Purchases of investment securities available for sale

Proceeds from maturities and principal payments of investment securities held to maturity

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Purchases of premises and equipment

Proceeds from sales of premises and equipment

Proceeds from sales of other real estate owned

Net redemption of restricted securities

Net purchases of restricted securities

Net proceeds from disposal of discontinued operations

Purchases of bank owned life insurance

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Long-term borrowings

Proceeds from the issuance of common stock

Proceeds from the issuance of subordinated debt, net of issuance costs

Common stock dividends paid

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Repurchase of shares for tax withholding on exercised options and vested restricted stock

Stock options exercised

Net cash provided by financing activities

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Lease liabilities arising from right-of-use assets

Transfers from loans to other real estate owned

Unrealized gain (loss) on securities available for sale

Unrealized gain on securities available for sale

Amortization of unrealized loss on securities transferred from available for sale to held to maturity

The notes to consolidated financial statements are an integral part of these statements.

SHORE BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2019 and 2018

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements include the accounts of Shore Bancshares, Inc.

and its subsidiary (collectively referred to in these Notes as the “Company”), with all significant intercompany transactions eliminated.

The investment in subsidiary is recorded on the Company’s books (Parent only) on the basis of its equity in the net assets of the subsidiary.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”).

and its subsidiary (collectively referred to in these Notes as the “Company”), with all significant intercompany transactions eliminated.

The investment in subsidiary is recorded on the Company’s books (Parent only) on the basis of its equity in the net assets of the subsidiary.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”).

For purposes of comparability, certain reclassifications have been made to amounts previously reported to conform with the current period presentation.

Reclassifications had no effect on prior year net income or stockholders’

Reclassifications had no effect on prior year net income or stockholders’ equity.

Nature of Operations

The Company engages in the banking business through Shore United Bank, a Maryland commercial bank with trust powers.

The Company’s primary source of revenue is interest earned on commercial, real estate and consumer loans made to customers located in Maryland, Delaware and the Eastern Shore of Virginia.

The Company engages in the trust services business through the trust department at Shore United Bank under the trade name Wye Financial & Trust.

The Company’s primary source of revenue is interest earned on commercial, real estate and consumer loans made to customers located in Maryland, Delaware and the Eastern Shore of Virginia.

The Company engages in the trust services business through the trust department at Shore United Bank under the trade name Wye Financial Partners.

Use of Estimates

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Actual results could differ from those estimates.

Estimates that could change significantly relate to the determination of the allowance for loan losses, fair values initially assigned in an acquisition and subsequent evaluations of the related goodwill and intangible assets for impairment.

Estimates that could change significantly relate to the determination of the allowance for loan losses, and the subsequent evaluation of goodwill for impairment.

Investment Securities Available for Sale

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Interest on investment securities is recognized in interest income on an accrual basis.

Net unrealized holding gains and losses on these securities are reported as accumulated other comprehensive income, a separate component of stockholders’

equity, net of related income taxes.

Net unrealized holding gains and losses on these securities are reported as accumulated other comprehensive income, a separate component of stockholders’ equity, net of related income taxes.

Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value and are reflected in earnings as realized losses.

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Declines in the fair value of individual held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value.

the issuer, or a determination that management has the intent to sell the security or will be required to sell the security before recovery of its amortized cost.

Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrade of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or a determination that management has the intent to sell the security or will be required to sell the security before recovery of its amortized cost.

Equity Securities

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Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms when due.

An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral.

The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Generally, the Company measures impairment on such loans by reference to the fair value of the collateral.

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms when due.

An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral.

Generally, the Company measures impairment on such loans by reference to the fair value of the collateral or the present value of expected future cash flows.

Once the amount of impairment has been determined, the uncollectible portion is charged off.

Income on impaired loans is recognized on a cash basis, and payments are first applied against the principal balance outstanding (i.e., placing impaired loans on nonaccrual status).

Income on nonaccrual impaired loans is recognized on a cash basis, and payments are first applied against the principal balance outstanding (i.e., placing impaired loans on nonaccrual status).

Generally, interest income is not recognized on impaired loans unless the likelihood of further loss is remote or the impairment analysis yielded no impairment for the loan.

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Reserves for probable credit losses related to these loans are based on historical loss ratios and an analysis of qualitative factors and are included in the formula portion of the allowance for credit losses.

See additional discussion below under the section, “Allowance for Credit Losses”.

A loan is considered a troubled debt restructuring (“TDR”) if a borrower is experiencing financial difficulties and a creditor has granted a concession.

See additional discussion below under the section, “Allowance for Credit Losses”.

A loan is considered a troubled debt restructuring (“TDR”) if a borrower is experiencing financial difficulties and a creditor has granted a concession.

Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

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The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits.

In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the current underwriting guidelines of the Company’s banking subsidiary, the loan is classified as a TDR.

All loans designated as TDRs are considered impaired loans and may be on either accrual or nonaccrual status.

In instances where the loan has been placed on nonaccrual status, six consecutive months of timely payments are required prior to returning the loan to accrual status.

All loans classified as TDRs which are restructured and accrue interest under revised terms require a full and comprehensive review of the borrower’s financial condition, capacity for repayment, realistic assessment of collateral values, and the assessment of risk entered into any workout agreement.

Current financial information on the borrower, guarantor, and underlying collateral is analyzed to determine if it supports the ultimate collection of principal and interest.

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Following a full analysis, the determination of the appropriate loan structure is made.

The Company does not participate in any specific government or Company sponsored loan modification programs.

The Company does not participate

in any specific government or Company sponsored loan modification programs.

All TDR loan agreements are contracts negotiated with each of the borrowers.

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Loans, or portions thereof, that are considered uncollectible are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance.

The criteria for charge offs are addressed in the Bank’s Collection and Workout Policy.

Per the policy, the recognition of the loss of loans or portions of loans will occur when there is a reasonable probability of loss.

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In cases where a probable charge-off amount cannot be calculated, specific reserves will be maintained.

A provision for credit losses is charged to income based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

Evaluations are conducted at least quarterly and more often if deemed necessary.

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The allowance is based on two basic principles of accounting:

(i) Topic 450, “

Contingencies ”, of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”), which requires that losses be accrued when they are probable of occurring and estimable;

and (ii) ASC Topic 310, “

Receivables ”, which requires that losses be accrued based on the differences between the loan balance and the value of collateral, present value of future cash flows or values that are observable in the secondary market.

Management uses many factors to estimate the inherent loss that may be present in our loan portfolio, including economic conditions and trends, the value and adequacy of collateral, the volume and mix of the loan portfolio, and our internal loan processes.

Actual losses could differ significantly from management’s estimates.

(i) Topic 450, “ Contingencies ”, of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”), which requires that losses be accrued when they are probable of occurring and estimable;

and (ii) ASC Topic 310, “ Receivables ”, which requires that losses be accrued based on the differences between the loan balance and the value of collateral, present value of future cash flows or values that are observable in the secondary market.

Management uses many factors to estimate the inherent loss that may be present in our loan portfolio as discussed further below.

Actual losses could differ significantly from management’s estimates.

In addition, GAAP itself may change from one previously acceptable method to another.

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Each component is determined based on estimates that can and do change when the actual events occur.

The specific allowance is established against impaired loans (i.e., nonaccrual loans and troubled debt restructurings (“TDRs”)) based on our assessment of the losses that may be associated with the individual loans.

The specific allowance remains until charge-offs are made.

An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral.

The specific allowance is established against impaired loans based on our assessment of the losses that may be associated with the individual loans.

The specific allowance remains until charge-offs are made or the metrics underlying the impairment calculation change.

An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral.

The historical formula allowance is used to estimate the loss on internally risk-rated loans, exclusive of those identified as impaired.

Loans are grouped by type (construction, residential real estate, commercial real estate, commercial or consumer).

Each loan type is assigned allowance factors based on management’s estimate of the risk, complexity and size of individual loans within a particular category using average historical charge-offs by segment over the last 16 quarters or 8 quarters.

Loans are grouped by type (construction, residential real estate, commercial real estate, commercial or consumer) and similar risk characteristics.

Each loan pool is assigned allowance factors based on management’s estimate of the risk, complexity and size of individual loans within a particular category using average historical charge-offs by segment over the last 16 quarters.

Loans identified as pass-watch, special mention, substandard, and doubtful are considered to have elevated credit risk.

These loans are assigned higher allowance factors than favorably rated loans due to management’s concerns regarding collectability or management’s knowledge of particular elements regarding the borrower.

The qualitative formula allowance captures losses that have impacted the portfolio but have yet to be recognized in either the specific or historical formula allowance.

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A special mention loan has potential weaknesses that could result in a future loss to the Company if the weaknesses are realized.

A substandard loan has certain deficiencies that could result in a future loss to

the Company if these deficiencies are not corrected.

A substandard loan has certain deficiencies that could result in a future loss to the Company if these deficiencies are not corrected.

A doubtful loan has enough risk that there is a high probability that the Company will sustain a loss.

Management has significant discretion in making the adjustments inherent in the determination of the provision and allowance for credit losses, including in connection with the valuation of collateral, the estimation of a borrower’s prospects of repayment, and the establishment of the allowance factors in the formula allowance and unallocated allowance components of the allowance.

The establishment of allowance factors is a continuing exercise, based on management’s ongoing assessment of the totality of all factors, including, but not limited to, delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, the quality of the loan review system and the effect of external factors such as competition and regulatory requirements, and their impact on the portfolio.

The qualitative formula allowance is used to adjust the historical formula allowance to an amount that is reflective of the probable losses inherent in the loan portfolio.

The qualitative formula allowance is established through the evaluation of various qualitative factors which are used to develop loss percentages that are applied to the identified pools of loans that are not individually evaluated for impairment.

Management has significant discretion in making the adjustments inherent in the determination of the provision and allowance for credit losses, including the establishment of the allowance factors in the qualitative formula allowance component of the allowance.

The establishment of the qualitative factors used in the qualitative formula allowance is a continuing exercise, based on management’s ongoing assessment of the totality of all factors, including, but not limited to, delinquencies, loss history, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, the quality of the loan review system and the effect of other factors as deemed appropriate, and their impact on the portfolio.

Allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based on the same volume and classification of loans.

Changes in allowance factors will have a direct impact on the amount of the provision, and a corresponding effect on net income.

Errors in management’s perception and assessment of these factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs.

Premises and Equipment

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Intangible assets that have finite lives are amortized over their estimated useful lives and also are subject to impairment testing.

Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill.

Goodwill impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill.

If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss.

As of December 31, 2020, the Company had one reporting unit and operating segment (i.e., the Bank).

During the fourth quarter of 2019 and 2018, goodwill and other intangible assets were subjected to the annual assessment for impairment.

As a result of the assessment, it was determined that it was not more likely than not that the fair values of the Company’s reporting units were less than their carrying amounts so no impairment was recorded.

During 2020 and 2019, goodwill and other intangible assets were subjected to assessments for impairment.

No impairment charges were recognized in either year.

Our assessment of goodwill concluded it was not more likely that not that the fair value of the Company's reporting unit was less than its carrying amount.

Other Real Estate Owned

4 unchanged sentences

Short-term and long-term borrowings are comprised primarily of FHLB borrowings.

A portion of the Company’s short-term borrowings are repurchase agreements.

The repurchase agreements are securities sold to the Company’s customers, at the customers’

request, under a continuing “roll-over”

contract that matures in one business day.

A portion of the Company’s short-term borrowings are re-purchase agreements.

The repurchase agreements are securities sold to the Company’s customers, at the customers’ request, under a continuing “roll-over” contract that matures in one business day.

The underlying securities sold are U.S.

Government agency securities, which are segregated from the Company’s other investment securities by its safekeeping agents.

Subordinated Debt

Subordinated debt is carried at its outstanding principal balance, net of any unamortized issuance costs.

For additional information on the Company’s subordinated debt, refer to Note 11 of the Consolidated Financial Statements.

The Company and its subsidiary file a consolidated federal income tax return.

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The Company recognizes accrued interest and penalties as a component of tax expense.

Significant judgement is required in evaluating the Company’s uncertain tax positions and determining its provision for income taxes.

The provision for income taxes includes the impact of reserve provisions and changes in the reserves that are considered appropriate as well as the related net interest and penalties.

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Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding and does not include the effect of any potentially dilutive common stock equivalents.

Included in this calculation due to dividend participation rights are restricted stock awards which have been granted.

Included in this calculation due to dividend participation rights are restricted stock awards which have been

Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding, adjusted for the effect of any potentially dilutive common stock equivalents.

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Cash and Cash Equivalents

Cash and due from banks, interest-bearing deposits with other banks and federal funds sold are considered “cash and cash equivalents”

for financial reporting purposes.

Certain interest-bearing deposits with banks may exceed balances that are recoverable under Federal Deposit Insurance Corporation (“FDIC”) insurance.

Cash and due from banks, interest-bearing deposits with other banks and federal funds sold are considered “cash and cash equivalents” for financial reporting purposes.

Certain interest-bearing deposits with banks may exceed balances that are recoverable under Federal Deposit Insurance (“FDIC”) insurance.

Balances in excess of FDIC insurance at December 31, 2020 were approximately $ 6.7 million.

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The Company may grant share-based compensation to employees and non-employee directors in the form of restricted stock, restricted stock units and stock options.

The fair value of restricted stock is determined based on the closing price of the Parent’s common stock on the date of grant.

The Company recognizes compensation expense related to restricted stock on a straight-line basis over the vesting period for service-based awards, plus additional recognition of costs associated with accelerated vesting based on the projected attainment of Company performance measures.

The fair value of RSUs is initially valued based on the closing price of the Parent’s common stock on the date of grant and is amortized in the statement of income over the vesting period.

The fair value of restricted stock is determined based on the closing price of the Parent’s common stock on the date of grant.

The Company recognizes compensation expense related to restricted stock on a straight-line basis over the vesting period for service-based awards.

The fair value of RSUs is initially valued based on the closing price of the Parent’s common stock on the date of grant and is amortized in the statement of income over the vesting period.

The RSUs are subsequently remeasured in each reporting period until settlement based on the quantity of awards for which it is probable that the performance conditions will be achieved.

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The Company uses historical data to predict option exercise and employee termination behavior.

Expected volatilities are based on the historical volatility of the Parent’s common stock.

The expected term of options granted is derived from actual historical exercise activity and represents the period of time that options granted are expected to be outstanding.

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Treasury yield curve in effect at the time of grant based on the expected life of the option.

The dividend yield is equal to the dividend yield of the Parent’s common stock at the time of grant.

Expense related to stock options is recorded in the statements of income as a component of salaries and benefits for employees and as a component of other noninterest expense for non-employee directors, with a corresponding increase to capital surplus in shareholders’

The dividend yield is equal to the dividend yield of the Parent’s common stock at the time of grant.

The Company measures certain financial assets and liabilities at fair value, with the measurements made on a recurring or nonrecurring basis.

Financial instruments measured at fair value on a recurring basis are investment securities available for sale.

Financial instruments measured at fair value on a recurring basis are investment securities available for sale and equity securities with readily determinable fair values.

Impaired loans and other real estate owned are financial instruments measured at fair value on a nonrecurring basis.

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Comprehensive Income

Unrealized gains and losses on available-for-sale securities and unrealized losses on securities transferred from AFS to HTM are the two components of accumulated other comprehensive income for the Company.

There were no reclassifications from accumulated other comprehensive income (loss) in 2019 and 2018.

Discontinued Operations

During the year ended December 31, 2018, the Company completed the sale of its Insurance Agency, Avon Dixon (“Avon”), which represented the Company’s Insurance segment.

In accordance with ASC 205‑20, the Company determined that the sale of Avon and the discontinued operation of the Company’s Premium Finance Company, Mubell Finance, LLC (“Mubell”), including assets and liabilities that will be sold or settled separately within one year met the criteria to be classified as a discontinued operation and the related operating results and financial condition have been presented as discontinued operations on the consolidated financial statements.

See Note 2 for additional information.

Unless otherwise indicated, information included in these notes to the consolidated financial statements is presented on a consolidated operations basis, which includes results from both continuing and discontinued operations, for all periods presented.

Segment Reporting

In connection with the sale of Avon and the discontinued operation of Mubell, which represented the Company’s Insurance segment, the Company reassessed its reportable operating segments.

Based on this internal evaluation, the Company determined that its previously disclosed reportable segment, Insurance products and services, is no longer applicable.

Accordingly, to better reflect how the Company is now managed and how information is reviewed by the chief operating decision maker, the Company’s chief executive officer, the Company determined that all services offered by the Company relate to Commercial Banking.

As a result, the Company’s only reportable segment is Commercial Banking.

Recent Accounting Standards

Comprehensive income consists of net income and other comprehensive income.

Other comprehensive income consists of unrealized gains and losses on available-for-sale securities net of any gains recognized from the sale of available-for-sale securities and the amortization of unrealized losses on securities transferred from AFS to HTM.

In 2020, the amount reclassified out of accumulated comprehensive income was a gain on available-for-sale securities of $ 347 thousand.

The related tax effect for the reclassification was $ 88 thousand.

There were no reclassifications from accumulated other comprehensive income in 2019.

Recent Accounting Standards and Other Authoritative Guidance

2016-13 – In June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.”

The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

2016-13, “Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.

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In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

At the FASB’s October 16, 2019 meeting, the Board affirmed its decision to amend the effective date of this ASU for many companies.

Public business entities that are SEC filers, excluding those meeting the smaller reporting company definition, will retain the initial required implementation date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

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The Company is continuing to evaluate the extent of the potential impact of this standard and continues to keep current on evolving interpretations and industry practices via webcasts, publications, conferences, and peer bank meetings.

2017-04 –

In January 2017, the FASB issued ASU No.

2017-04, “Intangibles –

Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment”.

The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.

Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.

Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing

the fair value of a reporting unit with its carrying amount.

An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

Public business entities that are U.S.

Securities and Exchange Commission (SEC) filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019.

Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.

2018-13 –

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”

The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty.

Certain disclosure requirements in Topic 820 are also removed or modified.

The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Certain of the amendments are to be applied prospectively while others are to be applied retrospectively.

Early adoption is permitted.

2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

2019-04 –

In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.”

This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various TRG Meetings.

The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Early adoption is permitted.

The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.

2019-05 - In May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326):

Targeted Transition Relief.”

The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326.

The fair value option election does not apply to held-to-maturity debt securities.

An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings.

The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet.

Early adoption is permitted.

The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.

2019-11 - In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments –

Credit Losses.”

This ASU addresses issues raised by stakeholders during the implementation of ASU No.

2016-13, “Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.”

Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries.

“Expected recoveries”

describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered.

While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets).

In response to this question, the ASU permits organizations to record expected recoveries on PCD assets.

In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities.

The ASU includes effective dates and transition requirements that vary depending on whether or not an entity has already adopted ASU 2016-13.

The Company is currently assessing the impact that ASU 2019-11 will have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) –

Simplifying the Accounting for Income Taxes .”

The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’

application of certain income tax-related

This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119.

SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses;

(2) development, governance, and documentation of a systematic methodology;

(3) documenting the results of a systematic methodology;

and (4) validating a systematic methodology.

2019-12 – In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance.

This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

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The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, “Investments –

Equity Securities (Topic 321), Investments –

Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) –

Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”

The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions.

2020-01 – In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions.

ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting.

Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or

discontinue the equity method of accounting.

For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 31, 2020, and interim periods within those fiscal years.

Early adoption is permitted.

The Company is currently assessing the impact that ASU 2020-01 will have on its consolidated financial statements.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119.

SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments –

Credit Losses.”

It covers topics including (1) measuring current expected credit losses;

(2) development, governance, and documentation of a systematic methodology;

(3) documenting the results of a systematic methodology;

and (4) validating a systematic methodology.

SALE OF SUBSIDIARY

Avon-Dixon Agency Sale

On December 31, 2018, the Company completed the sale of specific assets and activities related to its Insurance Agency, Avon Dixon, LLC (“Avon”) to Alera Group Agency, LLC (“Alera”).

Also, on this date the Company discontinued its operations of its Premium Finance Company, Mubell Finance, LLC (“Mubell”).

Together, these companies are referred to as the “Insurance Subsidiaries”.

The Insurance subsidiaries represented the Company’s insurance products and services segment, the activities of which related to originating, servicing and underwriting retail insurance policies.

Assets sold to Alera included various intangible assets and a 40% interest in a segregated portfolio of Eastern Re.

Ltd., a specialty reinsurance company.

The Mubell Company, along with certain other assets and liabilities that were to be sold or settled separately within one year, were classified as discontinued operations in the accompanying Consolidated Balance Sheets and Consolidated Statements of Income.

The specific assets acquired by Alera include, among other things, the insurance origination offices, insurance expirations, workforce and system procedures, trade names and goodwill.

Alera has assumed certain obligations and liabilities of the Company under the acquired leases, and with respect to the employment of transferred employees.

The Company received $25.2 million cash payment, upon the closing of the transaction.

The following table summarizes the calculation of the net gain on disposal of discontinued operations:

($ in thousands)

Year Ended December 31, 2018

Proceeds from the transaction

Compensation expense related to the transaction

Other transaction costs

Net cash proceeds

Net assets sold

Net gain on disposal

The following tables present the financial information of discontinued operations as of the dates and for the periods indicated:

Balance Sheets of Discontinued Operations

($ in thousands)

Assets of discontinued operations

Accrued expenses and other liabilities

Liabilities of discontinued operations

Statements of Income of Discontinued Operations

For Year Ended

($ in thousands)

Noninterest income

Net gain on disposal

Insurance agency commissions

All other income

Total noninterest income

Noninterest expense

Salaries and wages

Employee benefits

Occupancy expense

Furniture and equipment

Amortization of intangible assets

Legal and professional fees

Other noninterest expenses

Total noninterest expense

(Loss) income from discontinued operations before income taxes

Income tax (benefit) expense

(Loss) income from discontinued operations

The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements .

2020-04 – In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2020-04 “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued.

It is intended to help stakeholders during the global market-wide reference rate transition period.

The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.

At present, the Bank has limited exposure to LIBOR based pricing.

LIBOR based loans only comprise 27 loans or 7.8 % of the loan portfolio.

The Bank is confident it can successfully negotiate a migration to the Secured Overnight Financing Rate (“SOFR”) between now and the implementation date.

The Bank will notify customers within 120 days prior to migration to SOFR.

The Bank acknowledges the replacement rate will be more volatile based on different countries migrating to different indexes and limited liquidity to support the rate.

The Bank further acknowledges the volatility will be greatly influenced by the support provided by the Federal Reserve.

On March 12, 2020, the SEC finalized amendments to its “accelerated filer” and “large accelerated filer” definitions.

The amendments increase the threshold criteria for meeting these filer classifications and were effective on April 27, 2020.

Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date.

Prior to these changes, the Company was required to comply with section 404(b) of the Sarbanes Oxley Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter.

The rule change expands the category of “smaller reporting companies” to include entities with public float of less than $700 million and less than $100 million in annual revenues.

The Company is now classified as a “smaller reporting company” and “nonaccelerated filer”.

If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”.

The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (“ICFR”) and include the opinion on ICFR in its annual report on Form 10-K.

Smaller reporting companies also have additional time to file quarterly and annual financial statements.

All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for smaller reporting companies.

As the Bank has total assets exceeding $ 1.0 billion, it remains subject to FDICIA, which requires an auditor attestation concerning internal controls over financial reporting.

As such, other than the additional time provided to file quarterly and annual financial statements, this change does not significantly change the Company’s annual reporting and audit requirements.

In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period.

For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.

Early adoption is not permitted.

All entities should apply ASU No.

2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities.

The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

Recently Adopted Accounting Developments

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”).

ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test.

Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference.

The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.

standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount.

ASU 2017-04 was effective for the Company on January 1, 2020.

There was no material impact on the Company’s consolidated financial statements.

In March 2020, (Revised in April 2020) various regulatory agencies, including the Board of Governors of the CFPB System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19.

The interagency statement was effective immediately and impacted accounting for loan modifications.

Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.

This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

During 2020, the Company has offered payment deferrals for commercial and consumer customers for up to six months.

The loan modifications offered to specific loan types are as follows:

● Full payment-balloon or full amortization loans – Once the deferral period has ended, the Company will go back to billing principal and interest.

As payments are made, all funds will go towards interest until all accrued interest has been caught up.

Once the accrued interest is satisfied, future payments will be broken out for both principal and interest.

The amount of principal that had been deferred will be re-amortized when the balloon maturity/payoff date occurs.

● Full payment ARM loans – Once the deferral period has ended, the Company will go back to billing principal and interest.

As payments are made, all funds will go towards interest until all accrued interest has been caught up.

Once the accrued interest is satisfied, future payments will be broken out for both principal and interest.

The amount of principal that had been deferred will be re-amortized when the ARM repricing occurs.

● Full Payment Rate Reset Loans - Once the deferral period has ended, the Company will go back to billing principal and interest.

As payments are made, all funds will go towards interest until all accrued interest has been caught up.

Once the accrued interest is satisfied, future payments will be broken out for both principal and interest.

The amount of principal that had been deferred will be re-amortized when the rate reset occurs.

● Principal deferral only loans (any type) - Once the deferral period has ended, the Company will go back to billing principal and interest.

The principal amount that has been deferred will be re-amortized when either the maturity, ARM repricing or rate reset occurs.

● Consumer loans – Borrowers are required to sign an amendment to the initial loan agreement at the time of deferral, which re-amortizes the loan and extends the maturity date based on the number of months deferred.

The interagency guidance along with the provisions of the CARES Act as further discussed in Note 3 to the Consolidated Financial Statements, impacted the Company's assessment of loan modifications in 2020.

INVESTMENT SECURITIES

The following table provides information on the amortized cost and estimated fair values of investment securities.

The following table provides information on the amortized cost and estimated fair values of investment securities at December 31, 2020 and 2019.

(Dollars in thousands)

Available-for-sale securities:

December 31, 2019

Government agencies

Mortgage-backed

December 31, 2018

Government agencies

Mortgage-backed

The Company adopted ASU 2016‑01 effective January 1, 2018 and equity securities with an aggregate fair value of $1.3 million at December 31, 2019 and 2018 are presented separately on the balance sheet.

The fair value adjustment recorded through earnings totaled $42 thousand for 2019 and $(5) thousand for 2018, respectively.

During 2020, the Company sold available for sale securities for proceeds of $ 13.0 million and recognized gross gains of $ 347 thousand in the second quarter of 2020.

No available for sale securities were sold during 2019.

(Dollars in thousands)

Held-to-maturity securities:

December 31, 2019

Government agencies

Mortgage-backed

States and political subdivisions

Other debt securities

December 31, 2018

Government agencies

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Other debt securities

Equity securities with an aggregate fair value of $ 1.4 million at December 31, 2020 and $ 1.3 million at December 31, 2019 are presented separately on the balance sheet.

The fair value adjustment recorded through earnings totaled $ 28 thousand for 2020 and $ 42 thousand for 2019, respectively.

The following table provides information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2020 and 2019.

(Dollars in thousands)

December 31, 2019

Available-for-sale securities:

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Government agencies

Mortgage-backed

Other debt securities

(Dollars in thousands)

December 31, 2018

Available-for-sale securities:

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Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost bases, which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary.

There were thirty-three available-for-sale securities in an unrealized loss position at December 31, 2019, of which twenty-six were mortgage-backed and seven were U.S.

There were seven available-for-sale securities in an unrealized loss position at December 31, 2020, of which four were mortgage-backed and three were U.S.

Government agencies.

Three held-to-maturity securities were in an unrealized loss position at December 31, 2019, two corporate securities and one agency.

There were four held-to-maturity securities in an unrealized loss position at December 31, 2020, of which two were U.S.

Government agency bonds, one corporate bond and one mortgage-backed security.

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at December 31, 2020.

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The maturity dates for debt securities are determined using contractual maturity dates.

The following table sets forth the amortized cost and estimated fair values of securities which have been pledged as collateral for obligations to federal, state and local government agencies, and other purposes as required or permitted by law, or sold under agreements to repurchase.

All pledged securities are in the available-for-sale investment portfolio.

December 31, 2019

December 31, 2018

(Dollars in thousands)

Pledged available-for-sale securities

There were no obligations of states or political subdivisions with carrying values, as to any issuer, exceeding 10% of stockholders’

equity at December 31, 2019 or 2018.

Proceeds from sales of investment securities were $0 for the years ended December 31, 2019 and 2018, respectively.

There were no gains on the sale or call of investment securities for the years ended December 31, 2019 and 2018.

Gross losses on sales or calls were less than $1 thousand and $0 for the years ended December 31, 2019 and 2018, respectively.

There were no obligations of states or political subdivisions with carrying values, as to any issuer, exceeding 10% of stockholders’ equity at December 31, 2020 or 2019.

LOANS AND ALLOWANCE FOR CREDIT LOSSES

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County and Dorchester County in Maryland, Kent County, Delaware and in Accomack County, Virginia.

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County and Worcester County in Maryland, Kent County, Delaware and in Accomack County, Virginia.

The following table provides information about the principal classes of the loan portfolio at December 31, 2020 and 2019.

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As of December 31, 2020 and 2019, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy-making officers, totaled approximately $ 3.7 million and $ 18.8 million, respectively.

During 2019 and 2018, loan additions were approximately $15.7 million and $1.9 million, respectively, and loan repayments were approximately $8.6 million and $2.6 million, respectively.

During 2020 and 2019, loan additions were approximately $ 701 thousand and $ 15.7 million, respectively, and loan repayments were approximately $ 776 thousand and $ 8.6 million, respectively.

Due to changes in the composition of related parties, $ 15.0 million of loans included in the total for the prior year end were no longer reported as related party loans at December 31, 2020.

Net loan origination costs, included in balances above, totaled $1.8 million and $789 thousand as of December 31, 2019 and 2018, respectively.

At December 31, 2019 and December 31, 2018 included in total loans were $79.2 million and $92.8 million in loans, respectively, acquired as part of the 2017 NWBI branch acquisition.

These balances are presented net of the related discount which totaled $1.1 million at December 31, 2019 and $1.4 million at December 31, 2018.

Net loan origination costs, included in balances above, totaled $ 622 thousand and $ 1.8 million as of December 31, 2020 and 2019, respectively.

At December 31, 2020 and December 31, 2019 included in total loans were

$ 52.3 million and $ 79.2 million in loans, respectively, acquired as part of the 2017 NWBI branch acquisition.

These balances are presented net of the related discount which totaled $ 754 thousand at December 31, 2020 and $ 1.1 million at December 31, 2019.

In 2020, the Company participated in the Paycheck Protection Program (PPP).

The PPP commenced subsequent to the passage of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in March 2020, and was later expanded by the Paycheck Protection Program and Health Care Enhancement Act of April 2020.

The PPP was designed to provide U.S.

small businesses with cash-flow assistance during the COVID-19 pandemic through loans that are fully guaranteed by the Small Business Administration (SBA) which may be forgiven upon satisfaction of certain criteria.

As of December 31, 2020, the Company held PPP loans with a total outstanding balance of $ 122.9 million, which is included in the commercial loan segment in the table above.

As compensation for originating the loans, the Company received lender processing fees from the SBA, which were deferred, along with the related loan origination costs.

These net fees are being accreted to interest income over the remaining contractual lives of the loans.

Upon forgiveness of a PPP loan and repayment by the SBA, which may be prior to the loan’s maturity, the remainder of any unrecognized net fees are recognized as interest income.

The Company has continued to participate in the newest round of the PPP during the first quarter of 2021.

In the normal course of banking business, risks related to specific loan categories are as follows:

Construction loans –

Construction loans are offered primarily to builders and individuals to finance the construction of single family dwellings.

Construction loans – Construction loans are offered primarily to builders and individuals to finance the construction of single-family dwellings.

In addition, the Bank periodically finances the construction of commercial projects.

Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market

conditions which could affect the value and marketability of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

Residential real estate –

Residential real estate loans are typically made to consumers and are secured by residential real estate.

Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors.

Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market conditions which could affect the value and marketability of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

Residential real estate – Residential real estate loans are typically made to consumers and are secured by residential real estate.

Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors.

Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral.

Commercial real estate –

Commercial real estate loans consist of both loans secured by owner occupied properties and non-owner occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow.

Commercial real estate – Commercial real estate loans consist of both loans secured by owner occupied properties and non-owner occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow.

These loans are subject to adverse changes in the local economy and commercial real estate markets.

Credit risk associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower and the business to repay the loan.

Non-owner occupied properties carry the risk of a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.

Commercial –

Commercial loans are secured or unsecured loans for business purposes.

Credit risk associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower and the business to repay the loan.

Non-owner occupied properties carry the risk of a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.

Commercial – Commercial loans are secured or unsecured loans for business purposes.

Loans are typically secured by accounts receivable, inventory, equipment and/or other assets of the business.

Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.

Consumer –

Consumer loans include home equity loans and lines, installment loans and personal lines of credit.

Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

Consumer – Consumer loans include home equity loans and lines, installment loans and personal lines of credit.

Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

The following tables include impairment information relating to loans and the allowance for credit losses as of December 31, 2020 and 2019.

(Dollars in thousands)

December 31, 2019

Loans individually evaluated for impairment

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(Dollars in thousands)

December 31, 2018

Loans individually evaluated for impairment

4 unchanged sentences

Total allowance

The allowance for loan losses was 0.84% of total loans at December 31, 2019, compared to 0.87% at December 31, 2018.

The allowance for loan losses was 0.95 % of total loans and 1.04 % when excluding PPP loans, at December 31, 2020 compared to 0.84 % at December 31, 2019.

In the first quarter of 2020, the Company transitioned from its in-house allowance model to an external vendor's allowance model software for the calculation of the allowance for loan losses.

Prior to the adoption of the new model, the Company ran both models parallel for multiple periods to confirm the reasonableness of the new model's output as compared to the old.

The primary motivation for the change was to increase efficiencies in the calculation of the allowance estimate under the current incurred loss standard and also allow for a more seamless transition for the Company's eventual adoption of the Current Expected Credit Loss standard in 2023.

The Company's processes for loan segmentation, assessing qualitative factors, and determining specific reserves for impaired loans remained substantially unchanged when comparing the models.

As part of the new model, more precise averages are utilized in the calculation of the net charge-off ratios used in the historical loss analysis and the historical loss rates are applied to all pools of loans accounted for under ASC 450.

Additionally, the historical look-back periods for retail loan pools were adjusted to four years in the new model as compared to two years under the prior in-house model.

While there were some variances between loan pools when comparing the two models, the Company's ending recorded allowance and provision for loan losses during 2020 were not materially impacted as a result of the transition.

The following tables provide information on impaired loans and any related allowance by loan class as of December 31, 2020 and 2019.

4 unchanged sentences

(Dollars in thousands)

December 31, 2019

Impaired nonaccrual loans:

14 unchanged sentences

(Dollars in thousands)

December 31, 2018

Impaired nonaccrual loans:

4 unchanged sentences

Commercial real estate

Other impaired accruing loans:

Residential real estate

Commercial real estate

Total impaired loans:

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Transfer In/(Out)

For year ended

December 31, 2019

Accruing TDRs

8 unchanged sentences

Transfer In/(Out)

For year ended

December 31, 2018

Accruing TDRs

4 unchanged sentences

Commercial real estate

The following tables provide information on loans that were modified and considered TDRs during 2019 and 2018.

The following table provides information on loans that were modified and considered TDRs during 2020 and 2019.

Premodification

1 unchanged sentence

(Dollars in thousands)

For year ended

December 31, 2019

Residential real estate

Commercial real estate

For year ended

December 31, 2018

Residential real estate

Commercial real estate

During the year ended December 31, 2019, there was one new TDR and three previously recorded TDR’s which were modified.

The following tables provide information on TDRs that defaulted during 2019 and 2018 within 12 months of their restructuring.

Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, charged-off, or there is a transfer to OREO or repossessed assets.

(Dollars in thousands)

TDRs that subsequently defaulted:

For year ended

December 31, 2019

Residential real estate

Commercial real estate

For year ended

December 31, 2018

Residential real estate

Commercial real estate

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio.

During the year ended December 31, 2020 there was one new TDR that was modified to extend the term of the loan.

For the year ended December 31, 2020, the Company had executed principal and/or interest deferrals on outstanding loan balances of $ 221.1 million, of which only $ 34.9 million remained on deferral as of December 31, 2020.

These deferrals were no more than six months in duration and were for loans not more than 30 days past due as of December 31, 2019.

As such, they were not considered TDRs based on the relief provisions of the CARES Act and recent interagency regulatory guidance.

There were no TDRs which subsequently defaulted within 12 months of modification for the year ended December 31, 2020 and 2019.

Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to OREO or repossessed assets.

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio.

Loans that are identified as special mention, substandard or doubtful are adversely rated.

5 unchanged sentences

Pass/Performing

December 31, 2019

Residential real estate

2 unchanged sentences

Pass/Performing

December 31, 2018

Residential real estate

1 unchanged sentence

The following tables provide information on the aging of the loan portfolio as of December 31, 2020 and 2019.

30‑59 days

60‑89 days

(Dollars in thousands)

December 31, 2019

Residential real estate

1 unchanged sentence

Percent of total loans

30‑59 days

60‑89 days

(Dollars in thousands)

December 31, 2018

Residential real estate

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Beginning Balance

Net charge-offs

Net (charge-offs) recoveries

Ending Balance

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Beginning Balance

Net charge-offs

Net (charge-offs) recoveries

Ending Balance

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $23 thousand and $949 thousand as of December 31, 2019 and 2018.

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $ 0 and $ 23 thousand as of December 31, 2020 and 2019.

There were no residential real estate properties included in the balance of other real estate owned at December 31, 2020 and December 31, 2019.

All accruing TDRs were in compliance with their modified terms.

One loan was transferred to nonaccrual during 2018.

Both performing and non-performing TDRs had no further commitments associated with them as of December 31, 2020 and December 31, 2019.

On January 1, 2019, the Company adopted ASU No.

2016-02 “Leases (Topic 842)”

and all subsequent ASUs that modified Topic 842.

2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842.

The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842.

The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases.

As stated in the Company’s 2018 Form 10-K, the implementation of the new standard resulted in recognition of right-of-use assets and lease liabilities totaling $3.8 million at the date of adoption, which are primarily related to the Company’s lease of premises used in operations.

Since adoption of the leasing standard in January 2019, the Company recognized additional right-of-use assets and lease liabilities of $1.4 million, primarily related to the lease of additional premises used in operations.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.

Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.

Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

The Company’s long-term lease agreements are classified as operating leases.

As stated in the Company’s 2019 Form 10-K, the implementation of the new standard resulted in recognition of right-of-use assets and lease liabilities totaling $ 3.8 million at the date of adoption, which are primarily related to the Company’s lease of premises used in operations.

During the course of 2019, the Company recognized additional right-of-use assets and lease liabilities of $ 1.4 million, primarily related to the lease of additional premises used in operations.

During 2020, the Company recognized new right-of-use assets and lease liabilities for one location, one equipment lease, and two renewals on existing assets totaling $ 637 thousand.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.

Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.

The Company’s long-term lease agreements are classified as operating leases.

Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised.

The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about the Company’s leases:

(Dollars in thousands)

December 31, 2020

December 31, 2019

Lease liabilities

3 unchanged sentences

For the year ended

Lease cost (in thousands)

December 31, 2020

December 31, 2019

Operating lease cost

4 unchanged sentences

Lease payments due (in thousands)

December 31, 2019

Twelve months ending December 31, 2021

6 unchanged sentences

PREMISES AND EQUIPMENT

The following table provides information on premises and equipment for our continuing operations at December 31, 2019 and 2018.

The following table provides information on premises and equipment from continuing operations at December 31, 2020 and 2019.

(Dollars in thousands)

4 unchanged sentences

GOODWILL AND OTHER INTANGIBLE ASSETS

Due to the COVID-19 pandemic and its impact on market conditions, the Company performed a full annual qualitative assessment of goodwill as of December 31, 2020.

As a result of management’s qualitative evaluation of relevant events and circumstances as of December 31, 2020, the Company concluded that it was not more likely than not that fair value was less than carrying value.

Changes in the economic environment, operations, or other adverse events could result in future impairment charges which could have a material adverse impact on the Company's operating results.

The following table provides information on the significant components of goodwill and other acquired intangible assets at December 31, 2020 and 2019.

On December 31, 2018 the Company sold its insurance subsidiary, Avon Dixon, LLC and discontinued operations of its premium finance company, Mubell, LLC, which have been removed from the table.

In addition, on May 19, 2017, the Bank acquired three branches located in Arbutus, Owings Mills and Elkridge, Maryland from NWBI.

The purchase of these branches resulted in core deposit intangibles of $4.0 million and goodwill of $15.0 million.

December 31, 2019

Remaining Life

3 unchanged sentences

Total other intangible assets

December 31, 2018

Remaining Life

4 unchanged sentences

The aggregate amortization expense was $ 533 thousand and $ 605 thousand for the years ended December 31, 2020 and 2019, respectively.

The following table provides information on current period and estimated future amortization expense for amortizable other intangible assets.

At December 31, 2020, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:

(Dollars in thousands)

Total amortizing intangible assets

The Company had the following other assets at December 31, 2019 and 2018, excluding discontinued operations.

The Company had the following other assets from continuing operations at December 31, 2020 and 2019.

(Dollars in thousands)

5 unchanged sentences

OTHER LIABILITIES

The Company had the following other liabilities at December 31, 2019 and 2018, excluding discontinued operations.

The Company had the following other liabilities from continuing operations at December 31, 2020 and 2019.

(Dollars in thousands)

1 unchanged sentence

Deferred compensation liability

Income taxes payable

Other liabilities

5 unchanged sentences

Due in three to five years

As of December 31, 2019 and 2018, deposits, both direct and indirect, to directors, their associates and policy-making officers, totaled approximately $5.5 million and $3.9 million, respectively.

At December 31, 2019 we had no brokered deposits and $22.1 million at December 31, 2018.

As of December 31, 2020 and 2019, deposits, both direct and indirect, from directors, their associates and policy-making officers, totaled approximately $ 4.8 million and $ 5.5 million, respectively.

At December 31, 2020 and December 31, 2019, we had no brokered deposits.

The Company may periodically borrow from a correspondent federal funds line of credit arrangement, under a secured reverse repurchase agreement, or from the Federal Home Loan Bank to meet short-term liquidity needs.

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Overnight Fed Funds purchased

Securities sold under agreements to repurchase are securities sold to customers, at the customers’

request, under a “roll-over”

contract that matures in one business day.

Securities sold under agreements to repurchase are securities sold to customers, at the customers’ request, under a “roll-over” contract that matures in one business day.

The underlying securities sold are U.S.

Government agency securities, which are segregated in the Company’s custodial accounts from other investment securities.

The Bank had $ 15.0 million in federal funds lines of credit and a reverse repurchase agreement available on a short-term basis from correspondent banks at December 31, 2020 and 2019.

In addition, the Bank had secured credit availability of approximately $ 316.7 million and $ 270.1 million from the Federal Home Loan Bank at December 31, 2020 and 2019, respectively.

These lines of credit are paid for monthly on a fee basis of 0.09%.

The Bank has pledged as collateral, under a blanket lien, all qualifying residential loans under borrowing agreements with the Federal Home Loan Bank.

The Bank had no short-term borrowings from the Federal Home Loan Bank at December 31, 2019 and $60.0 million at December 31, 2018.

At December 31, 2019, the Bank had $15.0 million of fixed rate long-term borrowings from the Federal Home Loan Bank, which carry an interest rate of 2.82% and mature in April 2020.

The Bank had no short-term borrowings from the Federal Home Loan Bank at December 31, 2020 and December 31, 2019.

At December 31, 2019, the Bank had $ 15.0 million of fixed rate long-term borrowings from the Federal Home Loan Bank, which carried an interest rate of 2.82 %.

These advances were paid off in April of 2020.

SUBORDINATED DEBT

On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain Purchasers pursuant to which the Company issued and sold $ 25.0 million in aggregate principal amount with an initial interest rate of 5.375 % Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.

The Company plans to use the net proceeds of this offering for general corporate purposes, organic growth and to support the Bank’s regulatory capital ratios.

The Notes were structured to qualify as Tier 2 capital for regulatory capital purposes and bear an initial interest rate of 5.375 % until September 1, 2025, with interest during this period payable semi-annually in arrears.

From and including September 1, 2025, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 526.5 basis points, with interest during this period payable quarterly in arrears.

The Notes are redeemable by the Company at its option, in whole or in part, on or after September 1, 2025.

Initial debt issuance costs were $ 611 thousand.

The debt balance of $ 24.4 million is presented net of unamortized issuance costs of $ 571 thousand at December 31, 2020.

BENEFIT PLANS

5 unchanged sentences

At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc.

2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc.

2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date.

2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc.

2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date.

The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan.

Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one- to three-year period of time, and, in the case of stock options, expire 10 years from

the grant date.

As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan”

allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle.

Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one - to three-year period of time, and, in the case of stock options, expire 10 years from the grant date.

As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle.

Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur.

8 unchanged sentences

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the two years ended December 31.

Year Ended December 31, 2019

Year Ended December 31, 2018

Weighted Average

2 unchanged sentences

Nonvested at end of period

The total fair value of restricted stock awards that vested was $0 thousand in 2019 and $585 thousand in 2018.

Restricted stock units (RSUs) are similar to restricted stock, except the recipient does not receive the stock immediately, but instead receives it upon the terms and conditions of the Company’s long-term incentive plans which are subject to performance milestones achieved at the end of a three-year period.

The total fair value of restricted stock awards that vested was $ 243 thousand in 2020.

Each RSU cliff vests at the end of the three-year period and entitles the recipient to receive one share of common stock on a specified issuance date.

The recipient does not have any stockholder rights, including voting rights, with respect to the shares underlying awarded RSUs until the recipient becomes the holder of those shares.

In the second quarter of 2019, the Long-Term Incentive Plan culminating December 31, 2020 was terminated by the Board’s Compensation Committee and all outstanding RSUs were forfeited as presented in the table below.

To replace this compensation incentive plan, the Compensation Committee elected to institute individual Supplemental Executive Retirement Plans (“SERPs”) which will be executed in the beginning of 2020, with the exception of three SERPs which began on July 19, 2019 for Lloyd L.

Beatty, Jr., President and Chief Executive Officer, Edward C.

Allen, Executive Vice President and Chief Financial Officer and Donna J.

Stevens, Executive Vice President and Chief Operating Officer.

These individuals also forfeited their RSUs in the LTI culminating December 31, 2019.

During 2017, the Company entered into a long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2019.

Assuming the performance metric is achieved, these awards will cliff vest on this date, in which the final number of common shares to be issued will be determined.

The range of RSUs which could potentially be awarded at the end of the performance cycle is between 6,178 shares and 24,726 shares, assuming a certain performance metric is met.

The table below presents

management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

The following table summarizes restricted stock units activity based on management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle for the Company under the 2016 Equity Plan for the two years ended December 31, 2019.

Year Ended December 31, 2019

Year Ended December 31, 2018

The recipient does not have

any stockholder rights, including voting rights, with respect to the shares underlying awarded RSUs until the recipient becomes the holder of those shares.

During 2017, the Company entered into a long-term incentive plan agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2019.

Based on the results for the year ended December 31, 2019, 6,451 shares were vested.

The following table summarizes restricted stock units activity at the end of the performance cycle for the Company under the 2016 Equity Plan for the two years ended December 31.

Weighted Average

4 unchanged sentences

The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the two years ended December 31, 2020.

Year Ended December 31, 2019

Year Ended December 31, 2018

Weighted Average

6 unchanged sentences

There were no stock options granted during 2020 and 2019, respectively.

The Company estimates the fair value of options using the Black-Scholes valuation model with weighted average assumptions for dividend yield, expected volatility, risk-free interest rate and expected lives (in years).

The expected dividend yield is calculated by dividing the total expected annual dividend payout by the average stock price.

The expected volatility is based on historical volatility of the underlying securities.

The risk-free interest rate is based on the Federal Reserve Bank’s constant maturities daily interest rate in effect at grant date.

The expected contract life of the options represents the period of time that the Company expects the awards to be outstanding based on historical experience with similar awards.

At December 31, 2019, the aggregate intrinsic value of the options outstanding and exercisable under the 2016 Equity Plan was $95 thousand based on the $17.36 market value per share of Shore Bancshares, Inc.’s common stock at December 31, 2019.

At December 31, 2020, the aggregate intrinsic value of the options outstanding and exercisable under the 2016 Equity Plan was $ 22 thousand based on the $ 14.60 market value per share of Shore Bancshares, Inc.’s common stock at December 31, 2020.

Similarly, the aggregate intrinsic value of the options outstanding and exercisable was $ 95 thousand at December 31, 2019.

The intrinsic value of options exercised during 2019 was $72 thousand based on the $14.66 market value per share of the Company’s common stock at January 15, 2019.

The intrinsic value of options exercised in 2018 was $376 thousand based on the $18.22 market value per share of the Company’s common stock at January 31, 2018.

The intrinsic value of options exercised during 2020 was $ 10 thousand based on the $ 12.33 average market value per share of the Company’s common stock.

The intrinsic value of options exercised in 2019 was $ 72 thousand based on the $ 14.66 market value per share of the Company’s common stock at January 15, 2019.

At December 31, 2020, the weighted average remaining contract life of options outstanding and exercisable was 1.3 years.

1 unchanged sentence

The Company has multiple deferred compensation agreements with current and former employees.

The Executive Deferred Compensation Plan (the “Plan”) is reserved for members of management and highly compensated employees of the Company and the Bank.

During 2019, the Plan was expanded to include additional officers who had not previously participated.

The Plan permits a participant to elect, each year, to defer receipt of up to 100 % of his or her salary and bonus to be earned in the following year.

The Plan also permits the participant to defer the receipt of performance-based compensation not later than six months before the end of the period for which it is to be earned.

The Plan also permits the participant to defer the receipt of performance-based

compensation not later than six months before the end of the period for which it is to be earned.

The deferred amounts are credited to an account maintained on behalf of the participant and are invested at the discretion of each participant in certain deemed investment options selected by the Compensation Committee of the Board of the Company.

4 unchanged sentences

Any contributions by the Company will vest over a five-year period.

The following table provides information on Shore Bancshares, Inc.’s contributions and participant deferrals to the Plan for 2019 and 2018 and the related deferred compensation liability at December 31, 2019 and 2018.

The following table provides information on Shore Bancshares, Inc.’s contributions and participant deferrals to the Plan for 2020 and 2019 and the related deferred compensation liability at December 31, 2020 and 2019.

(Dollars in thousands)

5 unchanged sentences

however, BOLI was purchased in order to offset the benefit costs.

The following table provides information on the expense recognized during the year ended December 31, 2019, as well as the balance of the unfunded SERP liability and the cash surrender value of policies purchased to offset the SERP benefit cots as of December 31, 2019.

The following table provides information on the expense recognized during the years ended December 31, 2020 and 2019, as well as the balance of the unfunded SERP liability and the cash surrender value of policies purchased to offset the SERP benefit costs as of December 31, 2020 and 2019.

The unfunded SERP liability and cash surrender value were included in other liabilities and other assets, respectively.

10 unchanged sentences

OTHER EXPENSES

The following table summarizes the Company’s other noninterest expenses for the years ended December 31, excluding discontinued operations:

(Dollars in thousands)

6 unchanged sentences

Trust professional fees

Total noninterest expense

Total other noninterest expense

The following table provides information on components of income tax expense for continuing operations for each of the two years ended December 31.

3 unchanged sentences

Total income tax expense

Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 and introduced significant changes to U.S.

income tax law.

Among other things, the Tax Act reduced the U.S.

statutory tax rate from 35% to 21% beginning in 2018.

The following table provides a reconciliation of tax computed at the statutory federal tax rate to the actual tax expense for continuing operations for each of the two years ended December 31.

4 unchanged sentences

Actual income tax expense rate

The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of December 31.

(Dollars in thousands)

3 unchanged sentences

Nonaccrual loan interest

Unrealized losses on available-for-sale securities

Unrealized losses on available-for-sale securities transferred to held to maturity

9 unchanged sentences

EARNINGS PER COMMON SHARE

Basic earnings per common share is calculated by dividing net income available to (allocable to) common stockholders by the weighted average number of common shares outstanding during the period.

Diluted earnings per common share is calculated by dividing net income available to (allocable to) common stockholders by the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents (stock-based awards).

The following table provides information relating to the calculation of earnings per common share.

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.

Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents (stock-based awards).

The following table provides information relating to the calculation of earnings per common share for the years ended December 31, 2020 and 2019.

(In thousands, except per share data)

Net income from continuing operations

Net (loss) income from discontinued operations

Net loss from discontinued operations

Weighted average shares outstanding - Basic

Dilutive effect of common stock equivalents-options

Dilutive effect of common stock equivalents-restricted stock units

Weighted average shares outstanding - Diluted

Basic earnings per common share

Income from continuing operations

(Loss) income from discontinued operations

Diluted earnings per common share

Basic and diluted earnings per common share

Income from continuing operations

(Loss) income from discontinued operations

For all periods presented, the calculations of diluted income per common share excluded no weighted average common stock equivalents because the effect of including them would have anti-dilutive.

Loss from discontinued operations

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the years ended December 31, 2020 and 2019.

REGULATORY CAPITAL REQUIREMENTS

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Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks’

assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The Banks’

capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific

capital guidelines that involve quantitative measures of the Banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The Banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S.

Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company.

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The final rules also revise the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.

At December 31, 2019 the capital conservation buffer was 2.50% and the Bank’s specific capital buffer was 5.87%.

The phase-in period for the final rules began on January 1, 2015, with full compliance with all of the final rules’

requirements phased in over a multi-year schedule, ending on January 1, 2019.

At December 31, 2020 the capital conservation buffer was 2.50 % and the Bank’s specific capital buffer was 6.25 %.

The phase-in period for the final rules began on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule, ending on January 1, 2019.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of Common Equity Tier 1, Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (leverage ratio).

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As of December 31, 2020, the most recent notification from the Federal Reserve Bank categorized Shore Untied Bank, as well capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events since that notification that management believes would change the Bank’s classification.

To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios, and Tier 1 leverage ratios, which are described below.

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(Dollars in thousands)

December 31, 2019

Shore United Bank

(Dollars in thousands)

December 31, 2018

Shore United Bank

In August of 2018 the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) directed the Federal Reserve Board (“FRB”) to revise the Small Bank Holding Company Policy Statement to raise the total consolidated asset limit in the Policy Statement from $1 billion to $3 billion.

The Company was previously required to comply with the minimum capital requirements on a consolidated basis;

The Company was previously required to

comply with the minimum capital requirements on a consolidated basis;

however, the Company continues to meet the conditions of the revised policy statement and was, therefore, exempt from the consolidated capital requirements at December 31, 2020 and 2019.

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At December 31, 2020, the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios.

The Bank paid $0 and $4.0 million of dividends to Shore Bancshares, Inc.

There were no dividends paid by the Bank to Shore Bancshares, Inc.

for the years ended December 31, 2020 and 2019, respectively.

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ACCUMULATED OTHER COMPREHENSIVE INCOME

The Company records unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’

The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for 2020 and 2019.

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Balance, December 31, 2019

Other comprehensive income

Other comprehensive income before reclassifications

Reclassification of gains recognized

Balance, December 31, 2020

Balance, December 31, 2018

Cumulative effect adjustment (ASU 2016-01)

Other comprehensive income (loss)

Other comprehensive income

Balances, December 31, 2019

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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.

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.

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

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(Dollars in thousands)

December 31, 2019

Securities available for sale:

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(Dollars in thousands)

December 31, 2018

Securities available for sale:

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Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent and these are considered Level 3 in the fair value hierarchy.

Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable.

The value of business equipment, inventory and accounts receivable, discounted on management’s review and analysis.

Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business.

The value of business equipment, inventory and accounts receivable, discounted on management’s review and analysis.

Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above.

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Other Real Estate Owned (Foreclosed Assets)

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets.

Subsequently, foreclosed assets are carried at the lower of carrying value and fair value.

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.

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Valuation techniques are consistent with those techniques applied in prior periods.

The following tables set forth the Company’s financial assets subject to fair value adjustments (impairment) on a nonrecurring basis at December 31, 2019 and 2018, that are valued at the lower of cost or market.

The following tables set forth the Company’s financial assets subject to fair value adjustments (impairment) on a nonrecurring basis at December 31, 2020 and 2019, 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.

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Unobservable Input

December 31, 2019

Nonrecurring measurements:

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Discount rate

Other real estate owned

Appraisal of collateral

Appraisal adjustments

Liquidation expense

Quantitative Information about Level 3 Fair Value Measurements

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Unobservable Input

December 31, 2018

Nonrecurring measurements:

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Appraisal of collateral

Appraisal adjustments

Liquidation expense

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The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

(3) Unobservable inputs were weighted by the relative fair value of the instruments.

Fair Value of Financial Assets and Financial Liabilities

The carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following tables.

Fair values for December 31, 2019 and December 31, 2018 were estimated using an exit price notion.

December 31, 2019

December 31, 2018

The carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following table.

Fair values for December 31, 2020 and 2019 were estimated using an exit price notion.

(Dollars in thousands)

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Checking plus interest

Brokered Deposits

Certificates of deposit, $100,000 or more

Short-term borrowings

Long-term borrowings

Securities sold under retail repurchase agreement

Advances from FHLB - long-term

Subordinated debt

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, to meet the financing needs of its customers, the Bank is party to financial instruments with off-balance sheet risk.

In the normal course of business, to meet the financial needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk.

These financial instruments include commitments to extend credit and standby letters of credit.

The Banks’

exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of the instruments.

The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments.

The Bank generally requires collateral or other security to support the financial instruments with credit risk.

The amount of collateral or other security is determined based on management’s credit evaluation of the counterparty.

The Bank evaluates each customer’s creditworthiness on a case-by-case basis.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

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(Dollars in thousands)

December 31, 2019

December 31, 2018

Commitments to extend credit

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Losses are charged against the allowance when management believes the required funding of these exposures is uncollectible.

While this evaluation is completed on a regular basis, it is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

RELATED PARTY TRANSACTIONS

Shore Bancshares Inc.

and its Bank subsidiary will periodically rent ballroom space and conference meeting space from the Tidewater Inn located in Easton, Maryland and the Chesapeake Beach Club and Resort located in Kent Island, Maryland to hold company meetings and events.

A director of the board of Shore Bancshares Inc.

holds a 61% interest in a limited liability company which owns the Tidewater Inn and 100% of the Chesapeake Beach Club and Resort.

During 2019 and 2018, approximately $11 thousand and $27 thousand in expenses were paid for rental and catering services.

evaluation is completed on a regular basis, it is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

CONTINGENCIES

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and its Bank subsidiary may become involved in litigation arising from banking, financial, and other activities.

Management, after consultation with legal counsel, does not anticipate that the future liability, if any, arising out of current proceedings will have a material effect on the Company’s financial condition, operating results, or liquidity.

PARENT COMPANY FINANCIAL INFORMATION

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(Dollars in thousands)

Investment securities available for sale, at fair value

Investment in subsidiaries

Premises and equipment, net

Accrued interest payable

Other liabilities

Short-term borrowings

Long-term debt

Total liabilities

Stockholders’

Stockholders’ equity

Additional paid in capital

Retained earnings

Accumulated other comprehensive income (loss)

Total stockholders’

Total liabilities and stockholders’

Accumulated other comprehensive income

Total stockholders’ equity

Total liabilities and stockholders’ equity

Condensed Statements of Income

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(Dollars in thousands)

Dividends from subsidiaries

Management and other fees from subsidiaries

Gain on sale of subsidiary

Gain on company owned life insurance

Other operating income

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Salaries and employee benefits

Occupancy and equipment expense

Legal and professional fees

Other operating expenses

Total expenses

(Loss) income before income tax (benefit) expense and equity in

(Loss) before income tax (benefit) and equity in

undistributed net income of subsidiaries

Income tax (benefit) expense

(Loss) income before equity in undistributed net income of subsidiaries

Income tax (benefit)

(Loss) before equity in undistributed net income of subsidiaries

Equity in undistributed net income of subsidiaries

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Adjustments to reconcile net income to cash

provided by operating activities:

provided by (used in) operating activities:

Equity in undistributed net income of subsidiaries

Depreciation and amortization

Amortization of debt issuance costs

Stock-based compensation expense

Gain on sale of subsidiary

Net (increase) decrease in other assets

Net (decrease) increase in other liabilities

Net cash (used in) provided by operating activities

Company owned life insurance income

Net (increase) in other assets

Net increase (decrease) in other liabilities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Proceeds from maturities and principal payments of

investment securities available for sale

Purchases of premises and equipment

Purchase of bank owned life insurance

Purchase of company owned life insurance

Transfer to subsidiary

Cash of subsidiary retained upon disposal

Proceeds from sale of subsidiary

Net cash (used in) provided by investing activities

Net cash (used in) investing activities

Cash flows from financing activities:

(Decrease) increase in short-term borrowings

Increase in short-term borrowings

Proceeds from the issuance of subordinated debt, net of issuance costs

Common stock dividends paid

Retirement of common stock

Exercise of stock options

Repurchase of shares for tax withholding on exercised options

and vested restricted stock

Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

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REVENUE RECOGNITION

On January 1, 2018, the Company adopted ASU No.

2014‑09 “Revenue from Contracts with Customers”

(Topic 606) and all subsequent ASUs that modified Topic 606.

The implementation of the new standard did not have a material impact on the measurement or recognition of revenue;

as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities.

Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees and merchant income.

However, the recognition of these revenue streams did not change significantly

upon adoption of Topic 606.

Substantially all of the Company’s revenue is generated from contracts with customers.

Noninterest revenue streams in-scope of Topic 606 are discussed below.

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Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees.

The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.

Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’

The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.

Payment for service charges on

deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts.

Trust and Investment Fee Income

Trust and investment fee income are primarily comprised of fees earned from the management and administration of trusts and other customer assets.

The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate.

Payment is generally received a few days after month end through a direct charge to customers’

Payment is generally received a few days after month end through a direct charge to customers’ accounts.

The Company does not earn performance-based incentives.

Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers.

The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred).

Payment is received shortly after services are rendered.

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Fees and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges.

Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa.

ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM.

Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.

Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services.

The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.

Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services.

The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.

Payment is typically received immediately or in the following month.

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The Company determined that rentals and renewals of safe deposit boxes will be recognized on a monthly basis consistent with the duration of the performance obligation.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for December 31, 2019 and 2018.

The following presents noninterest income from continued operations, segregated by revenue streams in-scope and out-of-scope of Topic 606, for December 31, 2020 and 2019.

(Dollars in thousands)

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Total Noninterest Income

Noninterest income associated with discontinued operations is reported in Note 2.

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset).

A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer.

The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values.

A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer.

The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values.

Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized.

The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances.

As of December 31, 2019 and December 31, 2018, the Company did not have any significant contract balances.

As of December 31, 2020 and 2019, the Company did not have any significant contract balances.

SUBSEQUENT EVENTS

Pending Acquisition

On March 3, 2021, the Company and Severn Bancorp, Inc.

(“Severn”) entered into a definitive agreement for the Company to acquire the Maryland-based Severn.

This transaction will create the third largest community bank headquartered in Maryland.

The primary reasons for the Company to acquire Severn was to access and deploy excess capital and deposits into a high growth market, while also enhancing scale to drive efficiency and profitability.

Additionally, this transaction will create a competitive position in the Columbia/Baltimore/Towson MSA, while filling in our current market footprint.

Under the terms of the agreement, Severn shareholders will receive 0.6207 shares of Shore common stock and $ 1.59 in cash for each share of Severn common stock.

Upon closing, Shore shareholders will own approximately 59.6 % of the combined Company and Severn will own approximately 40.4 % of the combined Company.

The transaction is still subject to satisfaction of customary closing conditions, including regulatory approvals and shareholder approval from Shore and Severn shareholders.

The transaction is expected to close in the third quarter of 2021.

As of December 31, 2020, Severn had more than $ 950 million in assets and operated 7 full-service community banking offices throughout Anne Arundel County, Maryland.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data