SHORE BANCSHARES INC 10-K

Item 8. Financial Statements and Supplementary Data. ​ INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Management’s Report on Internal Control over Financial Reporting 54 ​ ​ Report of Independent Registered Public Accounting Firm 55 ​ ​ Consolidated Balance Sheets 57 ​ ​ Consolidated Statements of Income 58 ​ ​ Consolidated Statements of Comprehensive Income 59 ​ ​ Consolidated Statements of Changes in Stockholders’ Equity 60 ​ ​ Consolidated Statements of Cash Flows 62 ​ ​ Notes to Consolidated Financial Statements 63 ​ ​ 53 Table of Contents 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 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. Because of inherent limitations in any internal control system, no matter how well designed, misstatement due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. 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, 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 ​ ​ ​ /s/ Lloyd L. Beatty, Jr. /s/ Edward C. Allen Lloyd L. Beatty, Jr. ​ Edward C. Allen President and Chief Executive Officer ​ Executive Vice President and Chief Financial Officer (Principal Executive Officer) ​ (Principal Financial Officer) ​ ​ ​ ​ 54 Table of Contents ​ Report of I ndependent Registered Public Accounting Firm To the Board of Directors and Stockholders Shore Bancshares, Inc. Easton, Maryland Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Shore Bancshares, Inc. 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. 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 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 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 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. 55 Table of Contents 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 March 26, 2021 ​ 56 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS December 31, ​ ​ ​ ​ ​ ​ ​ (In thousands, except share and per share data) 2020 2019 ASSETS ​ ​ ​ Cash and due from banks ​ $ 16,666 ​ $ 18,465 Interest-bearing deposits with other banks ​ 170,251 ​ 76,506 Cash and cash equivalents ​ 186,917 ​ 94,971 Investment securities: ​ ​ ​ Available-for-sale, at fair value ​ 139,568 ​ 122,791 Held to maturity, at amortized cost - fair value of $ 65,828 (2020) and $ 8,654 (2019) ​ ​ 65,706 ​ 8,786 Equity securities, at fair value ​ 1,395 ​ 1,342 Restricted securities ​ 3,626 ​ 4,190 ​ ​ ​ ​ ​ ​ ​ Loans ​ 1,454,256 ​ 1,248,654 Less: allowance for credit losses ​ ( 13,888 ) ​ ( 10,507 ) Loans, net ​ 1,440,368 ​ 1,238,147 ​ ​ ​ ​ ​ ​ ​ Premises and equipment, net ​ 24,924 ​ 23,821 Goodwill ​ 17,518 ​ 17,518 Other intangible assets, net ​ 1,719 ​ 2,252 Other real estate owned, net ​ — ​ 74 Right-of-use assets ​ ​ 4,795 ​ ​ 4,771 Other assets ​ 46,779 ​ 40,572 TOTAL ASSETS ​ $ 1,933,315 ​ $ 1,559,235 ​ ​ ​ ​ ​ ​ ​ LIABILITIES ​ ​ ​ Deposits: ​ ​ ​ Noninterest-bearing ​ $ 509,091 ​ $ 356,618 Interest-bearing ​ 1,191,614 ​ 984,716 Total deposits ​ 1,700,705 ​ 1,341,334 ​ ​ ​ ​ ​ ​ ​ Securities sold under retail repurchase agreements ​ 1,050 ​ 1,226 Advances from FHLB - long-term ​ — ​ 15,000 Subordinated debt ​ 24,429 ​ — Total borrowings ​ ​ 25,479 ​ ​ 16,226 ​ ​ ​ ​ ​ ​ ​ Lease liabilities ​ 4,874 ​ 4,792 Other liabilities ​ ​ 7,238 ​ ​ 4,081 TOTAL LIABILITIES ​ ​ 1,738,296 ​ ​ 1,366,433 ​ ​ ​ ​ COMMITMENTS AND CONTINGENCIES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ STOCKHOLDERS' EQUITY ​ ​ ​ ​ ​ Common stock, par value $ .01 per share; shares authorized - 35,000,000 ; shares issued and outstanding - 11,783,380 (2020) and 12,500,372 (2019) ​ ​ 118 ​ ​ 125 Additional paid in capital ​ ​ 52,167 ​ ​ 61,045 Retained earnings ​ ​ 141,205 ​ ​ 131,425 Accumulated other comprehensive income ​ 1,529 ​ 207 TOTAL STOCKHOLDERS' EQUITY ​ 195,019 ​ 192,802 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ​ $ 1,933,315 ​ $ 1,559,235 ​ The notes to the consolidated financial statements are an integral part of these statements. 57 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In thousands, except per share data) ​ 2020 ​ 2019 INTEREST INCOME ​ ​ ​ ​ ​ ​ Interest and fees on loans ​ $ 56,420 ​ $ 55,391 Interest and dividends on investment securities: ​ ​ ​ ​ Taxable ​ 2,997 ​ 3,582 Interest on deposits with other banks ​ ​ 260 ​ ​ 794 Total interest income ​ 59,677 ​ 59,767 ​ ​ ​ ​ ​ ​ ​ INTEREST EXPENSE ​ ​ ​ ​ ​ ​ Interest on deposits ​ 6,440 ​ 8,726 Interest on short-term borrowings ​ 5 ​ 481 Interest on long-term borrowings ​ ​ 635 ​ 429 Total interest expense ​ 7,080 ​ 9,636 ​ ​ ​ ​ ​ ​ ​ NET INTEREST INCOME ​ 52,597 ​ 50,131 Provision for credit losses ​ 3,900 ​ 700 ​ ​ ​ ​ ​ ​ ​ NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES ​ 48,697 ​ 49,431 ​ ​ ​ ​ ​ ​ ​ NONINTEREST INCOME ​ ​ ​ ​ ​ ​ Service charges on deposit accounts ​ 2,839 ​ 3,910 Trust and investment fee income ​ 1,558 ​ 1,522 Gains on sales and calls of investment securities ​ 347 ​ — Other noninterest income ​ 6,005 ​ 4,588 Total noninterest income ​ 10,749 ​ 10,020 ​ ​ ​ ​ ​ ​ ​ NONINTEREST EXPENSE ​ ​ ​ ​ ​ ​ Salaries and wages ​ 14,935 ​ 15,413 Employee benefits ​ 6,461 ​ 5,283 Occupancy expense ​ 2,919 ​ 2,758 Furniture and equipment expense ​ 1,224 ​ 1,107 Data processing ​ 4,288 ​ 3,790 Directors' fees ​ 504 ​ 479 Amortization of other intangible assets ​ 533 ​ 605 FDIC insurance premium expense ​ 485 ​ 344 Other real estate owned expenses, net ​ 56 ​ 425 Legal and professional fees ​ 2,296 ​ 2,223 Other noninterest expenses ​ 4,698 ​ 5,130 Total noninterest expense ​ 38,399 ​ 37,557 ​ ​ ​ ​ ​ ​ ​ Income from continuing operations before income taxes ​ 21,047 ​ 21,894 Income tax expense ​ 5,317 ​ 5,610 Income from continuing operations ​ 15,730 ​ 16,284 ​ ​ ​ ​ ​ ​ ​ Loss from discontinued operations before income taxes ​ — ​ ( 113 ) Income tax benefit ​ — ​ ( 27 ) Loss from discontinued operations ​ — ​ ( 86 ) ​ ​ ​ ​ ​ ​ ​ NET INCOME ​ $ 15,730 ​ $ 16,198 Earnings per common share - Basic and diluted ​ ​ ​ ​ ​ ​ Income from continuing operations ​ $ 1.27 ​ $ 1.28 Loss from discontinued operations ​ — ​ ( 0.01 ) Net income ​ $ 1.27 ​ $ 1.27 ​ ​ ​ ​ ​ ​ ​ Dividends paid per common share ​ $ 0.48 ​ $ 0.42 ​ The notes to the consolidated financial statements are an integral part of these statements. ​ 58 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) 2020 2019 Net income ​ $ 15,730 ​ $ 16,198 ​ ​ ​ ​ ​ ​ ​ Other comprehensive income: ​ ​ ​ ​ ​ ​ Investment securities: ​ ​ ​ ​ ​ ​ Unrealized holding gains on available-for-sale-securities ​ 2,151 ​ 4,314 Tax effect ​ ( 581 ) ​ ( 1,178 ) ​ ​ ​ ​ ​ ​ ​ Reclassification of (gains) recognized in net income ​ ( 347 ) ​ — Tax effect ​ 88 ​ — ​ ​ ​ ​ ​ ​ ​ Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity ​ 15 ​ 29 Tax effect ​ ( 4 ) ​ ( 8 ) Total other comprehensive income ​ 1,322 ​ 3,157 Comprehensive income ​ $ 17,052 ​ $ 19,355 ​ The notes to the consolidated financial statements are an integral part of these statements. ​ 59 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the Years Ended December 31, 2020 and 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ ​ Other ​ Total ​ ​ Common ​ Paid in ​ Retained ​ Comprehensive ​ Stockholders’ (In thousands) Stock Capital Earnings Income Equity Balances, January 1, 2020 ​ $ 125 ​ $ 61,045 ​ $ 131,425 ​ $ 207 ​ $ 192,802 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ — ​ — ​ 3,118 ​ — ​ 3,118 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income ​ — ​ — ​ — ​ 1,251 ​ 1,251 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 61 ​ — ​ — ​ 61 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Vesting of restricted stock, net of shares surrendered ​ ​ — ​ ( 39 ) ​ — ​ — ​ ​ ( 39 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ — ​ — ​ ( 1,499 ) ​ — ​ ( 1,499 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, March 31, 2020 ​ $ 125 ​ $ 61,067 ​ $ 133,044 ​ $ 1,458 ​ $ 195,694 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 5,335 ​ — ​ 5,335 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income ​ — ​ — ​ — ​ 546 ​ 546 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 62 ​ — ​ — ​ 62 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ ​ — ​ ​ — ​ ​ ( 1,503 ) ​ ​ — ​ ​ ( 1,503 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, June 30, 2020 ​ $ 125 ​ $ 61,129 ​ $ 136,876 ​ $ 2,004 ​ $ 200,134 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 3,391 ​ — ​ 3,391 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss) ​ — ​ — ​ — ​ ( 100 ) ​ ( 100 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Retirement of common stock ​ ​ ( 3 ) ​ ​ ( 3,106 ) ​ ​ — ​ ​ — ​ ​ ( 3,109 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 67 ​ — ​ — ​ 67 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ ​ — ​ ​ — ​ ​ ( 1,502 ) ​ ​ — ​ ​ ( 1,502 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, September 30, 2020 ​ $ 122 ​ $ 58,090 ​ $ 138,765 ​ $ 1,904 ​ $ 198,881 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 3,886 ​ — ​ 3,886 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss) ​ — ​ — ​ — ​ ( 375 ) ​ ( 375 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Retirement of common stock ​ ​ ( 4 ) ​ ​ ( 5,999 ) ​ ​ — ​ ​ — ​ ​ ( 6,003 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 73 ​ — ​ — ​ 73 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ ​ — ​ ​ — ​ ​ ( 1,446 ) ​ ​ — ​ ​ ( 1,446 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Exercise of options ​ — ​ 3 ​ — ​ — ​ 3 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, December 31, 2020 ​ $ 118 ​ $ 52,167 ​ $ 141,205 ​ $ 1,529 ​ $ 195,019 ​ ​ 60 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ ​ Other ​ Total ​ ​ Common ​ Paid in ​ Retained ​ Comprehensive ​ Stockholders’ (In thousands) ​ Stock Capital Earnings Income (Loss) Equity Balances, January 1, 2019 ​ $ 127 ​ $ 65,434 ​ $ 120,574 ​ $ ( 2,950 ) ​ $ 183,185 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 3,754 ​ — ​ 3,754 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income ​ — ​ — ​ — ​ 1,446 ​ 1,446 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 63 ​ — ​ — ​ 63 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Exercise of options and vesting of restricted stock, net of shares surrendered ​ ​ 1 ​ ​ ( 89 ) ​ ​ — ​ ​ — ​ ​ ( 88 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ — ​ — ​ ( 1,278 ) ​ — ​ ( 1,278 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, March 31, 2019 ​ $ 128 ​ $ 65,408 ​ $ 123,050 ​ $ ( 1,504 ) ​ $ 187,082 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 4,224 ​ — ​ 4,224 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income ​ — ​ — ​ — ​ 1,311 ​ 1,311 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ ( 32 ) ​ — ​ — ​ ( 32 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ — ​ — ​ ( 1,278 ) ​ — ​ ( 1,278 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, June 30, 2019 ​ $ 128 ​ $ 65,376 ​ $ 125,996 ​ $ ( 193 ) ​ $ 191,307 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 4,206 ​ — ​ 4,206 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income ​ — ​ — ​ — ​ 226 ​ 226 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Retirement of common stock ​ ​ ( 1 ) ​ ​ ( 558 ) ​ ​ — ​ ​ — ​ ​ ( 559 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 61 ​ — ​ — ​ 61 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ — ​ — ​ ( 1,278 ) ​ — ​ ( 1,278 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, September 30, 2019 ​ $ 127 ​ $ 64,879 ​ $ 128,924 ​ $ 33 ​ $ 193,963 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 4,014 ​ — ​ 4,014 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income ​ — ​ — ​ — ​ 174 ​ 174 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Retirement of common stock ​ ​ ( 2 ) ​ ( 3,891 ) ​ — ​ — ​ ( 3,893 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 57 ​ — ​ — ​ 57 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ — ​ — ​ ( 1,513 ) ​ — ​ ( 1,513 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, December 31, 2019 ​ $ 125 ​ $ 61,045 ​ $ 131,425 ​ $ 207 ​ $ 192,802 ​ The notes to the consolidated financial statements are an integral part of these statements. ​ 61 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ (In thousands) 2020 2019 ​ ​ ​ ​ ​ ​ ​ CASH FLOWS FROM OPERATING ACTIVITIES: ​ $ 15,730 ​ $ 16,198 Net Income ​ ​ ​ ​ ​ ​ Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ Net accretion of acquisition accounting estimates ​ ( 330 ) ​ ( 468 ) Provision for credit losses ​ 3,900 ​ 700 Depreciation and amortization ​ 2,476 ​ 2,393 Net amortization of securities ​ 513 ​ 512 Amortization of debt issuance costs ​ ​ 40 ​ ​ — Stock-based compensation expense ​ 263 ​ 149 Deferred income (benefit) tax expense ​ ( 2,185 ) ​ 241 (Gains) on sales and calls of securities ​ ( 347 ) ​ — Losses on sales and disposals of premises and equipment ​ 41 ​ — Losses on sales and valuation adjustments on other real estate owned ​ ​ 56 ​ ​ 417 Fair value adjustment on equity securities ​ ​ ( 28 ) ​ ​ ( 42 ) Net changes in: ​ ​ ​ ​ ​ ​ Accrued interest receivable ​ ( 3,161 ) ​ ( 110 ) Cash surrender values on compensation plans ​ ​ ( 917 ) ​ ​ ( 443 ) Other assets ​ ( 255 ) ​ 2,304 Accrued interest payable ​ 317 ​ ( 274 ) Other liabilities ​ ​ 2,317 ​ ​ ( 7,834 ) Net cash provided by operating activities ​ 18,430 ​ 13,743 ​ ​ ​ ​ ​ ​ ​ CASH FLOWS FROM INVESTING ACTIVITIES: ​ ​ ​ ​ ​ ​ Proceeds from maturities and principal payments of investment securities available for sale ​ 45,329 ​ 35,447 Proceeds from sales and calls of investment securities available for sale ​ 13,019 ​ — Purchases of investment securities available for sale ​ ( 73,450 ) ​ — Proceeds from maturities and principal payments of investment securities held to maturity ​ 244 ​ 1,282 Purchases of securities held to maturity ​ ​ ( 57,186 ) ​ ​ ( 4,000 ) Purchases of equity securities ​ ( 25 ) ​ ( 31 ) Net change in loans ​ ( 205,901 ) ​ ( 53,528 ) Purchases of premises and equipment ​ ( 2,375 ) ​ ( 2,244 ) Proceeds from sales of premises and equipment ​ 2 ​ — Proceeds from sales of other real estate owned ​ ​ 18 ​ 731 Net redemption of restricted securities ​ ​ 564 ​ ​ 2,286 Purchases of bank owned life insurance ​ ( 319 ) ​ ( 25,621 ) Net cash (used in) investing activities ​ ( 280,080 ) ​ ( 45,678 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CASH FLOWS FROM FINANCING ACTIVITIES: ​ ​ ​ ​ ​ Net changes in: ​ ​ ​ ​ ​ Noninterest-bearing deposits ​ 152,473 ​ 26,152 Interest-bearing deposits ​ 207,008 ​ 103,002 Short-term borrowings ​ ​ ( 176 ) ​ ​ ( 59,586 ) Long-term borrowings ​ ( 15,000 ) ​ — Proceeds from the issuance of subordinated debt, net of issuance costs ​ ​ 24,389 ​ — Common stock dividends paid ​ ​ ( 5,950 ) ​ ​ ( 5,347 ) Retirement of common stock ​ ​ ( 9,112 ) ​ ​ ( 4,452 ) Repurchase of shares for tax withholding on exercised options and vested restricted stock ​ ​ ( 39 ) ​ ​ ( 88 ) Stock options exercised ​ ​ 3 ​ ​ — Net cash provided by financing activities ​ 353,596 ​ ​ 59,681 Net increase in cash and cash equivalents ​ 91,946 ​ 27,746 Cash and cash equivalents at beginning of period ​ 94,971 ​ 67,225 Cash and cash equivalents at end of period ​ $ 186,917 ​ $ 94,971 ​ ​ ​ ​ ​ ​ ​ Supplemental cash flows information: ​ ​ ​ ​ ​ ​ Interest paid ​ $ 6,833 ​ $ 10,071 Income taxes paid ​ $ 7,935 ​ $ 11,920 Lease liabilities arising from right-of-use assets ​ $ 605 ​ $ 5,243 Unrealized gain on securities available for sale ​ $ 1,804 ​ $ 4,314 Amortization of unrealized loss on securities transferred from available for sale to held to maturity ​ $ 15 ​ $ 29 ​ The notes to consolidated financial statements are an integral part of these statements. 62 Table of Contents NOTE 1. 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”). 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’ 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 Partners. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and affect the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. 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 Investment securities available for sale are stated at estimated fair value based on quoted prices. They represent those debt securities which management may sell as part of its asset/liability management strategy or which may be sold in response to changing interest rates, changes in prepayment risk or other similar factors. Realized gains and losses are recorded in noninterest income and are determined on a trade date basis using the specific identification method. Premiums and discounts are amortized or accreted into interest income using the interest method over the lives of the individual securities. 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. 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. 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. Investment Securities Held to Maturity Investment securities held to maturity are stated at cost adjusted for amortization of premiums and accretion of discounts. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. The Company intends and has the ability to hold such securities until maturity. 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. 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. 63 Table of Contents Equity Securities Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in net income. Any equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. Restricted equity securities are carried at cost and are periodically evaluated for impairment based on the ultimate recovery of par value. The entirety of any impairment on equity securities is recognized in earnings. Loans Loans are stated at their principal amount outstanding net of any deferred fees, premiums, discounts and costs and net of any partial charge-offs. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual (i.e., interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those loans is reversed from income. Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. 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 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 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. The allowance for credit losses may include specific reserves related to impaired loans. Specific reserves remain until charge offs are made. 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. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to repay becomes evident. 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. For commercial loans, the cash flows are analyzed, both for the underlying project and globally. For consumer loans, updated salary, credit history and cash flow information is obtained. Current market conditions are also considered. Following a full analysis, the determination of the appropriate loan structure is made. The Company does not participate 64 Table of Contents in any specific government or Company sponsored loan modification programs. All TDR loan agreements are contracts negotiated with each of the borrowers. Allowance for Credit Losses The allowance for credit losses is maintained at a level believed adequate by management to absorb losses inherent in the loan portfolio as of the balance sheet date and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions and other observable data. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows or collateral value of impaired loans, estimated losses on pools of similar loans that are based on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. 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. When the amount of loss can be readily calculated, the loss will be recognized. 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. The allowance for credit losses is an estimate of the losses that may be sustained in the loan portfolio. 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 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. Although the economics of transactions would be the same, the timing of events that would impact the transactions could change. Three basic components comprise our allowance for credit losses: (i) the specific allowance; (ii) the historical formula allowance; and (iii) the qualitative formula allowance. 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 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) 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. A pass-watch loan has adequate risk and may include loans which may have been upgraded from another higher risk category. 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 doubtful loan has enough risk that there is a high probability that the Company will sustain a loss. 65 Table of Contents 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 Land is carried at cost and premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Useful lives range from three to 10 years for furniture, fixtures and equipment; three to five years for computer hardware and data handling equipment; and 10 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 15 years and leasehold improvements are amortized over the term of the respective lease. Maintenance and repairs are charged to expense as incurred, while improvements which extend the useful life of an asset are capitalized and depreciated over the estimated remaining life of the asset. Long-lived assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash flows of a long-lived asset are less than its carrying value. In that event, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Goodwill and other intangible assets are initially required to be recorded at fair value. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate. Intangible assets that have finite lives are amortized over their estimated useful lives and also are subject to impairment testing. 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 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. 66 Table of Contents Other Real Estate Owned Other real estate owned represents assets acquired in satisfaction of loans either by foreclosure or deeds taken in lieu of foreclosure. Properties acquired are recorded at fair value less estimated selling costs at the time of acquisition, establishing a new cost basis. Thereafter, costs incurred to operate or carry the properties as well as reductions in value as determined by periodic appraisals are charged to operating expense. Gains and losses resulting from the final disposition of the properties are included in noninterest expense. Borrowings Short-term and long-term borrowings are comprised primarily of FHLB borrowings. 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. Income Taxes The Company and its subsidiary file a consolidated federal income tax return. The Company accounts for income taxes using the liability method in accordance with required accounting guidance. Under this method, deferred tax assets and liabilities are determined by applying the applicable federal and state income tax rates to cumulative temporary differences. These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities. Deferred taxes result from such temporary differences. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent on the generation of a sufficient level of future taxable income, recoverable taxes paid in prior years and tax planning strategies. The Company evaluates all positive and negative evidence before determining if a valuation allowance is deemed necessary regarding the realization of deferred tax assets. The Company recognizes accrued interest and penalties as a component of tax expense. 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. In addition, the Company is subject to the continuous examination of its income tax returns by the IRS and other tax authorities which may assert assessments against the Company. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of its provision for income taxes. The Company remains subject to examination for tax years ending on or after December 31, 2017. Basic and Diluted Earnings Per Common Share 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 67 Table of Contents granted. 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. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. 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 (“FDIC”) insurance. Balances in excess of FDIC insurance at December 31, 2020 were approximately $ 6.7 million. Share-Based Compensation 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. 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. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model and related assumptions. 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. The risk-free rate is derived from the U.S. 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’ equity. Fair Value 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 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. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining fair value, the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs, reducing subjectivity. See Note 20 for a further discussion of fair value. Advertising Costs Advertising costs are generally expensed as incurred. The Company incurred advertising costs for continuing operations of approximately $ 331 thousand for the year ended December 31, 2020 and $ 425 thousand for the year ended December 31, 2019. 68 Table of Contents Comprehensive Income 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 ASU No. 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. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. 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. All other entities will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022 . At this time, the Company has established a project management team which meets periodically to discuss and assign roles and responsibilities, key tasks to complete, and a general timeline to be followed for implementation. The team has been working with an advisory consultant and has purchased a vendor model for implementation. Historical data has been collected and uploaded to the new model and the team is in the process of finalizing the methodologies that will be utilized. The team is currently running a parallel simulation to its current incurred loss impairment model. 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. ​ 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. ​ ASU No. 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. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements. ​ ASU No. 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 69 Table of Contents 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 does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements . ​ ASU No. 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. The 70 Table of Contents 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. ​ 71 Table of Contents NOTE 2. INVESTMENT SECURITIES The following table provides information on the amortized cost and estimated fair values of investment securities at December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross Gross Estimated ​ ​ Amortized ​ Unrealized ​ Unrealized ​ Fair (Dollars in thousands) ​ Cost ​ Gains ​ Losses ​ Value Available-for-sale securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 23,600 ​ $ 20 ​ $ 83 ​ $ 23,537 Mortgage-backed ​ 113,865 ​ 2,234 ​ 68 ​ 116,031 Total ​ $ 137,465 ​ $ 2,254 ​ $ 151 ​ $ 139,568 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 23,854 ​ $ 3 ​ $ 31 ​ $ 23,826 Mortgage-backed ​ 98,638 ​ 574 ​ 247 ​ 98,965 Total ​ $ 122,492 ​ $ 577 ​ $ 278 ​ $ 122,791 ​ 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross Gross Estimated ​ ​ Amortized ​ Unrealized ​ Unrealized ​ Fair (Dollars in thousands) ​ Cost ​ Gains ​ Losses ​ Value Held-to-maturity securities: ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 18,893 ​ $ 38 ​ $ 43 ​ $ 18,888 Mortgage-backed ​ ​ 27,347 ​ ​ 7 ​ ​ 18 ​ ​ 27,336 States and political subdivisions ​ 400 ​ 1 ​ — ​ 401 Other debt securities ​ 19,066 ​ 139 ​ 2 ​ 19,203 Total ​ $ 65,706 ​ $ 185 ​ $ 63 ​ $ 65,828 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 1,386 ​ $ — ​ $ 5 ​ $ 1,381 States and political subdivisions ​ 400 ​ 1 ​ — ​ 401 Other debt securities ​ 7,000 ​ — ​ 128 ​ 6,872 Total ​ $ 8,786 ​ $ 1 ​ $ 133 ​ $ 8,654 ​ 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. ​ 72 Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than ​ More than ​ ​ ​ ​ ​ ​ ​ ​ 12 Months ​ 12 Months ​ Total ​ Fair Unrealized Fair Unrealized Fair Unrealized (Dollars in thousands) ​ Value ​ Losses ​ Value ​ Losses ​ Value ​ Losses 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available-for-sale securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 14,919 ​ $ 82 ​ $ 236 ​ $ 1 ​ $ 15,155 ​ $ 83 Mortgage-backed ​ 11,869 ​ 68 ​ — ​ — ​ 11,869 ​ 68 Total ​ $ 26,788 ​ $ 150 ​ $ 236 ​ $ 1 ​ $ 27,024 ​ $ 151 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Held-to-maturity securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 6,646 ​ $ 43 ​ $ — ​ $ — ​ $ 6,646 ​ $ 43 Mortgage-backed ​ ​ 5,093 ​ ​ 18 ​ ​ — ​ ​ — ​ ​ 5,093 ​ ​ 18 Other debt securities ​ ​ 498 ​ ​ 2 ​ ​ — ​ ​ — ​ ​ 498 ​ ​ 2 Total ​ $ 12,237 ​ $ 63 ​ $ — ​ $ — ​ $ 12,237 ​ $ 63 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than ​ More than ​ ​ ​ ​ ​ ​ ​ ​ 12 Months ​ 12 Months ​ Total ​ Fair Unrealized Fair Unrealized Fair Unrealized (Dollars in thousands) ​ Value ​ Losses ​ Value ​ Losses ​ Value ​ Losses 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available-for-sale securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 4,995 ​ $ 5 ​ $ 18,516 ​ $ 26 ​ $ 23,511 ​ $ 31 Mortgage-backed ​ 12,180 ​ 27 ​ 22,282 ​ 220 ​ 34,462 ​ 247 Total ​ $ 17,175 ​ $ 32 ​ $ 40,798 ​ $ 246 ​ $ 57,973 ​ $ 278 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Held-to-maturity securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 1,381 ​ $ 5 ​ $ — ​ $ — ​ $ 1,381 ​ $ 5 Other debt securities ​ 3,905 ​ 95 ​ 2,967 ​ 33 ​ 6,872 ​ 128 Total ​ $ 5,286 ​ $ 100 ​ $ 2,967 ​ $ 33 ​ $ 8,253 ​ $ 133 ​ All of the securities with unrealized losses in the portfolio have modest duration risk, low credit risk, and minimal losses when compared to total amortized cost. The unrealized losses on debt securities that exist are the result of market changes in interest rates since original purchase and are not related to credit concerns. 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 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. 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. 73 Table of Contents The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at December 31, 2020. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available for sale ​ Held to maturity ​ Amortized ​ ​ Amortized ​ ​ (Dollars in thousands) ​ Cost ​ Fair Value ​ Cost ​ Fair Value Due in one year or less ​ $ 4,999 ​ $ 5,015 ​ $ — ​ $ — Due after one year through five years ​ 1,393 ​ 1,431 ​ 2,944 ​ 2,957 Due after five years through ten years ​ 57,061 ​ 58,419 ​ 27,728 ​ 27,818 Due after ten years ​ 74,012 ​ 74,703 ​ 35,034 ​ 35,053 Total ​ $ 137,465 ​ $ 139,568 ​ $ 65,706 ​ $ 65,828 ​ 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 at December 31, 2020 and 2019. All pledged securities are in the available-for-sale investment portfolio. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ 2019 ​ Amortized ​ ​ Amortized ​ ​ (Dollars in thousands) ​ Cost ​ Fair Value ​ Cost ​ Fair Value Pledged available-for-sale securities ​ $ 60,600 ​ $ 61,094 ​ $ 66,904 ​ $ 67,142 ​ 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. ​ NOTE 3. 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, 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. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Construction ​ $ 106,760 ​ $ 99,829 Residential real estate ​ 443,542 ​ 442,506 Commercial real estate ​ 661,232 ​ 586,562 Commercial ​ 211,256 ​ 102,020 Consumer ​ 31,466 ​ 17,737 Total loans ​ 1,454,256 ​ 1,248,654 Allowance for credit losses ​ ( 13,888 ) ​ ( 10,507 ) Total loans, net ​ $ 1,440,368 ​ $ 1,238,147 ​ In the normal course of banking business, loans are made to officers and directors and their affiliated interests. These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with persons who are not related to the Company and are not considered to involve more than the normal risk of collectability. 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 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 $ 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 74 Table of Contents $ 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. 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. 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. 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. 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. 75 Table of Contents The following tables include impairment information relating to loans and the allowance for credit losses as of December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential Commercial ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Construction ​ real estate ​ real estate ​ Commercial ​ Consumer ​ Total 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans individually evaluated for impairment ​ $ 331 ​ $ 5,722 ​ $ 6,917 ​ $ 258 ​ $ 28 ​ $ 13,256 Loans collectively evaluated for impairment ​ 106,429 ​ 437,820 ​ 654,315 ​ 210,998 ​ 31,438 ​ 1,441,000 Total loans ​ $ 106,760 ​ $ 443,542 ​ $ 661,232 ​ $ 211,256 ​ $ 31,466 ​ $ 1,454,256 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses allocated to: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans individually evaluated for impairment ​ $ — ​ $ 135 ​ $ 78 ​ $ — ​ $ — ​ $ 213 Loans collectively evaluated for impairment ​ 2,022 ​ 3,564 ​ 5,348 ​ 2,089 ​ 652 ​ 13,675 Total allowance ​ $ 2,022 ​ $ 3,699 ​ $ 5,426 ​ $ 2,089 ​ $ 652 ​ $ 13,888 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential Commercial ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Construction ​ real estate ​ real estate ​ Commercial ​ Consumer ​ Total 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans individually evaluated for impairment ​ $ 41 ​ $ 7,072 ​ $ 12,006 ​ $ 298 ​ $ — ​ $ 19,417 Loans collectively evaluated for impairment ​ 99,788 ​ 435,434 ​ 574,556 ​ 101,722 ​ 17,737 ​ 1,229,237 Total loans ​ $ 99,829 ​ $ 442,506 ​ $ 586,562 ​ $ 102,020 ​ $ 17,737 ​ $ 1,248,654 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses allocated to: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans individually evaluated for impairment ​ $ — ​ $ 395 ​ $ 580 ​ $ — ​ $ — ​ $ 975 Loans collectively evaluated for impairment ​ 1,576 ​ 2,106 ​ 3,452 ​ 1,929 ​ 469 ​ 9,532 Total allowance ​ $ 1,576 ​ $ 2,501 ​ $ 4,032 ​ $ 1,929 ​ $ 469 ​ $ 10,507 ​ 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. 76 Table of Contents The following tables provide information on impaired loans and any related allowance by loan class as of December 31, 2020 and 2019. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken and interest paid on nonaccrual loans that has been applied to principal. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Recorded Recorded ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unpaid ​ investment ​ investment ​ ​ ​ ​ Quarter-to-date ​ Year-to-date ​ Interest ​ ​ principal ​ with no ​ with an ​ Related ​ average recorded ​ average recorded ​ recorded (Dollars in thousands) ​ balance ​ allowance ​ allowance ​ allowance ​ investment ​ investment ​ investment 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired nonaccrual loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 297 ​ $ 297 ​ $ — ​ $ — ​ $ 297 ​ $ 247 ​ $ — Residential real estate ​ 1,665 ​ 1,585 ​ — ​ — ​ 1,861 ​ 2,648 ​ — Commercial real estate ​ 4,288 ​ 3,220 ​ 67 ​ 67 ​ 3,971 ​ 5,669 ​ — Commercial ​ 401 ​ 258 ​ — ​ — ​ 272 ​ 390 ​ — Consumer ​ 28 ​ ​ 28 ​ ​ — ​ ​ — ​ ​ 28 ​ ​ 9 ​ ​ — Total ​ $ 6,679 ​ $ 5,388 ​ $ 67 ​ $ 67 ​ $ 6,429 ​ $ 8,963 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired accruing TDRs: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 34 ​ $ 34 ​ $ — ​ $ — ​ $ 34 ​ $ 37 ​ $ 3 Residential real estate ​ 3,845 ​ 2,617 ​ 1,228 ​ 135 ​ 3,857 ​ 3,920 ​ 160 Commercial real estate ​ 3,118 ​ 2,479 ​ 639 ​ 11 ​ 3,261 ​ 3,349 ​ 104 Commercial ​ — ​ — ​ — ​ — ​ — ​ — ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 6,997 ​ $ 5,130 ​ $ 1,867 ​ $ 146 ​ $ 7,152 ​ $ 7,306 ​ $ 267 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other impaired accruing loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 25 ​ $ — Residential real estate ​ 292 ​ 292 ​ — ​ — ​ 269 ​ 362 ​ 2 Commercial real estate ​ 512 ​ 512 ​ — ​ — ​ 532 ​ 774 ​ 5 Commercial ​ — ​ — ​ — ​ — ​ — ​ 13 ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ 9 ​ — Total ​ $ 804 ​ $ 804 ​ $ — ​ $ — ​ $ 801 ​ $ 1,183 ​ $ 7 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total impaired loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 331 ​ $ 331 ​ $ — ​ $ — ​ $ 331 ​ $ 309 ​ $ 3 Residential real estate ​ 5,802 ​ 4,494 ​ 1,228 ​ 135 ​ 5,987 ​ 6,930 ​ 162 Commercial real estate ​ 7,918 ​ 6,211 ​ 706 ​ 78 ​ 7,764 ​ 9,792 ​ 109 Commercial ​ 401 ​ 258 ​ — ​ — ​ 272 ​ 403 ​ — Consumer ​ 28 ​ 28 ​ — ​ — ​ 28 ​ 18 ​ — Total ​ $ 14,480 ​ $ 11,322 ​ $ 1,934 ​ $ 213 ​ $ 14,382 ​ $ 17,452 ​ $ 274 ​ 77 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Recorded Recorded ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unpaid ​ investment ​ investment ​ ​ ​ ​ Quarter-to-date ​ Year-to-date ​ Interest ​ ​ principal ​ with no ​ with an ​ Related ​ average recorded ​ average recorded ​ income (Dollars in thousands) ​ balance ​ allowance ​ allowance ​ allowance ​ investment ​ investment ​ recognized 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired nonaccrual loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 1,076 ​ $ — Residential real estate ​ 2,660 ​ 678 ​ 1,797 ​ 215 ​ 2,052 ​ 2,691 ​ — Commercial real estate ​ 8,242 ​ 5,680 ​ 2,137 ​ 561 ​ 8,533 ​ 9,421 ​ — Commercial ​ 421 ​ 298 ​ — ​ — ​ 301 ​ 313 ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 11,323 ​ $ 6,656 ​ $ 3,934 ​ $ 776 ​ $ 10,886 ​ $ 13,501 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired accruing TDRs: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 41 ​ $ 41 ​ $ — ​ $ — ​ $ 41 ​ $ 46 ​ $ 10 Residential real estate ​ 4,041 ​ 2,583 ​ 1,458 ​ 180 ​ 4,052 ​ 4,157 ​ 171 Commercial real estate ​ 3,419 ​ 2,748 ​ 671 ​ 19 ​ 3,438 ​ 3,496 ​ 125 Commercial ​ — ​ — ​ — ​ — ​ — ​ — ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 7,501 ​ $ 5,372 ​ $ 2,129 ​ $ 199 ​ $ 7,531 ​ $ 7,699 ​ $ 306 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other impaired accruing loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 18 ​ $ — Residential real estate ​ 556 ​ 556 ​ — ​ — ​ 786 ​ 337 ​ 5 Commercial real estate ​ 770 ​ 770 ​ — ​ — ​ 297 ​ 336 ​ 4 Commercial ​ — ​ — ​ — ​ — ​ 89 ​ 38 ​ 1 Consumer ​ — ​ — ​ — ​ — ​ — ​ 3 ​ — Total ​ $ 1,326 ​ $ 1,326 ​ $ — ​ $ — ​ $ 1,172 ​ $ 732 ​ $ 10 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total impaired loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 41 ​ $ 41 ​ $ — ​ $ — ​ $ 41 ​ $ 1,140 ​ $ 10 Residential real estate ​ 7,257 ​ 3,817 ​ 3,255 ​ 395 ​ 6,890 ​ 7,185 ​ 176 Commercial real estate ​ 12,431 ​ 9,198 ​ 2,808 ​ 580 ​ 12,268 ​ 13,253 ​ 129 Commercial ​ 421 ​ 298 ​ — ​ — ​ 390 ​ 351 ​ 1 Consumer ​ — ​ — ​ — ​ — ​ — ​ 3 ​ — Total ​ $ 20,150 ​ $ 13,354 ​ $ 6,063 ​ $ 975 ​ $ 19,589 ​ $ 21,932 ​ $ 316 ​ 78 Table of Contents The following tables provide a roll-forward for troubled debt restructurings as of and for the years ended December 31, 2020 and December 31, 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 1/1/2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 12/31/2020 ​ ​ ​ ​ TDR ​ New ​ Disbursements ​ Charge- ​ Reclassifications/ ​ ​ ​ ​ TDR ​ Related (Dollars in thousands) ​ Balance ​ TDRs ​ (Payments) ​ offs ​ Transfer In/(Out) ​ Payoffs ​ Balance ​ Allowance 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accruing TDRs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 41 ​ $ — ​ $ ( 7 ) ​ $ — ​ $ — ​ $ — ​ $ 34 ​ $ — Residential real estate ​ 4,041 ​ — ​ ( 113 ) ​ — ​ — ​ ( 83 ) ​ 3,845 ​ 135 Commercial real estate ​ 3,419 ​ — ​ ( 97 ) ​ — ​ — ​ ( 204 ) ​ 3,118 ​ 11 Commercial ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 7,501 ​ $ — ​ $ ( 217 ) ​ $ — ​ $ — ​ $ ( 287 ) ​ $ 6,997 ​ $ 146 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nonaccrual TDRs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — Residential real estate ​ 1,393 ​ — ​ ( 51 ) ​ — ​ — ​ ( 1,342 ) ​ — ​ — Commercial real estate ​ — ​ 1,506 ​ ( 401 ) ​ — ​ — ​ ( 1,105 ) ​ — ​ — Commercial ​ 299 ​ — ​ ( 41 ) ​ — ​ — ​ — ​ 258 ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 1,692 ​ $ 1,506 ​ $ ( 493 ) ​ $ — ​ $ — ​ $ ( 2,447 ) ​ $ 258 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ $ 9,193 ​ $ 1,506 ​ $ ( 710 ) ​ $ — ​ $ — ​ $ ( 2,734 ) ​ $ 7,255 ​ $ 146 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 1/1/2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 12/31/2019 ​ ​ ​ TDR ​ New ​ Disbursements ​ Charge- ​ Reclassifications/ ​ ​ ​ ​ TDR ​ Related (Dollars in thousands) ​ Balance ​ TDRs ​ (Payments) ​ offs ​ Transfer In/(Out) ​ Payoffs ​ Balance ​ Allowance 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accruing TDRs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 51 ​ $ — ​ $ ( 10 ) ​ $ — ​ $ — ​ $ — ​ $ 41 ​ $ — Residential real estate ​ 4,454 ​ 41 ​ ( 101 ) ​ — ​ — ​ ( 353 ) ​ 4,041 ​ 180 Commercial real estate ​ 4,158 ​ — ​ ( 739 ) ​ — ​ — ​ — ​ 3,419 ​ 19 Commercial ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 8,663 ​ $ 41 ​ $ ( 850 ) ​ $ — ​ $ — ​ $ ( 353 ) ​ $ 7,501 ​ $ 199 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nonaccrual TDRs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 2,798 ​ $ — ​ $ ( 1,402 ) ​ $ ( 3 ) ​ $ ( 1,393 ) ​ $ — ​ $ — ​ $ — Residential real estate ​ — ​ — ​ — ​ — ​ 1,393 ​ — ​ 1,393 ​ 113 Commercial real estate ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Commercial ​ 320 ​ — ​ ( 21 ) ​ — ​ — ​ — ​ 299 ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 3,118 ​ $ — ​ $ ( 1,423 ) ​ $ ( 3 ) ​ $ — ​ $ — ​ $ 1,692 ​ $ 113 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ $ 11,781 ​ $ 41 ​ $ ( 2,273 ) ​ $ ( 3 ) ​ $ — ​ $ ( 353 ) ​ $ 9,193 ​ $ 312 ​ 79 Table of Contents The following table provides information on loans that were modified and considered TDRs during 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Premodification Postmodification ​ ​ ​ ​ ​ outstanding ​ outstanding ​ ​ ​ ​ Number of ​ recorded ​ recorded ​ Related (Dollars in thousands) ​ contracts ​ investment ​ investment ​ allowance TDRs: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction — ​ $ — ​ $ — $ — Residential real estate — ​ — ​ — — Commercial real estate 1 ​ 1,535 ​ 1,506 — Commercial — ​ — ​ — — Consumer — ​ — ​ — — Total 1 ​ $ 1,535 ​ $ 1,506 $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction — ​ $ — ​ $ — $ — Residential real estate 3 ​ 2,310 ​ 2,119 — Commercial real estate 1 ​ 2,152 ​ 1,531 — Commercial — ​ — ​ — — Consumer — ​ — ​ — — Total 4 ​ $ 4,462 ​ $ 3,650 $ — ​ 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. These loans and the pass/watch loans are assigned higher qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At December 31, 2020, there were no nonaccrual loans classified as special mention or doubtful and $ 5.5 million of nonaccrual loans were classified as substandard. Similarly, at December 31, 2019, there were no nonaccrual loans classified as special mention or doubtful and $ 10.6 million of nonaccrual loans were classified as substandard. ​ 80 Table of Contents The following tables provide information on loan risk ratings as of December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Special ​ ​ ​ ​ ​ (Dollars in thousands) ​ Pass/Performing ​ Pass/Watch ​ Mention ​ Substandard ​ Doubtful ​ Total 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 81,926 ​ $ 22,547 ​ $ 1,990 ​ $ 297 ​ $ — ​ $ 106,760 Residential real estate ​ 401,494 ​ 36,759 ​ 2,946 ​ 2,343 ​ — ​ 443,542 Commercial real estate ​ 514,524 ​ 133,892 ​ 3,504 ​ 9,312 ​ — ​ 661,232 Commercial ​ 182,166 ​ 25,870 ​ 2,948 ​ 272 ​ — ​ 211,256 Consumer ​ 31,221 ​ 215 ​ — ​ 30 ​ — ​ 31,466 Total ​ $ 1,211,331 ​ $ 219,283 ​ $ 11,388 ​ $ 12,254 ​ $ — ​ $ 1,454,256 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Special ​ ​ ​ ​ ​ (Dollars in thousands) ​ Pass/Performing ​ Pass/Watch ​ Mention ​ Substandard ​ Doubtful ​ Total 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 84,357 ​ $ 13,068 ​ $ 2,404 ​ $ — ​ $ — ​ $ 99,829 Residential real estate ​ 404,500 ​ 29,223 ​ 5,549 ​ 3,234 ​ — ​ 442,506 Commercial real estate ​ 455,388 ​ 115,190 ​ 4,822 ​ 11,162 ​ — ​ 586,562 Commercial ​ 80,816 ​ 20,130 ​ 746 ​ 328 ​ — ​ 102,020 Consumer ​ 17,347 ​ 383 ​ 2 ​ 5 ​ — ​ 17,737 Total ​ $ 1,042,408 ​ $ 177,994 ​ $ 13,523 ​ $ 14,729 ​ $ — ​ $ 1,248,654 ​ The following tables provide information on the aging of the loan portfolio as of December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accruing ​ ​ ​ ​ ​ ​ ​ ​ ​ 30‑59 days 60‑89 days Greater than Total ​ ​ ​ ​ (Dollars in thousands) ​ Current ​ past due ​ past due ​ 90 days ​ past due ​ Nonaccrual ​ Total 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 106,463 ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 297 ​ $ 106,760 ​ Residential real estate ​ 440,210 ​ 517 ​ 938 ​ 292 ​ 1,747 ​ 1,585 ​ 443,542 ​ Commercial real estate ​ 657,066 ​ 367 ​ — ​ 512 ​ 879 ​ 3,287 ​ 661,232 ​ Commercial ​ 210,704 ​ 226 ​ 68 ​ — ​ 294 ​ 258 ​ 211,256 ​ Consumer ​ 31,318 ​ 119 ​ 1 ​ — ​ 120 ​ 28 ​ 31,466 ​ Total ​ $ 1,445,761 ​ $ 1,229 ​ $ 1,007 ​ $ 804 ​ $ 3,040 ​ $ 5,455 ​ $ 1,454,256 ​ Percent of total loans ​ 99.3 % 0.1 % 0.1 % 0.1 % 0.3 % 0.4 % 100.0 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accruing ​ ​ ​ ​ ​ ​ ​ ​ ​ 30‑59 days ​ 60‑89 days ​ Greater than ​ Total ​ ​ ​ ​ ​ (Dollars in thousands) ​ Current ​ past due ​ past due ​ 90 days ​ past due ​ Nonaccrual ​ Total 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 99,234 ​ $ 595 ​ $ — ​ $ — ​ $ 595 ​ $ — ​ $ 99,829 ​ Residential real estate ​ 435,671 ​ 3,021 ​ 783 ​ 556 ​ 4,360 ​ 2,475 ​ 442,506 ​ Commercial real estate ​ 577,015 ​ 743 ​ 217 ​ 770 ​ 1,730 ​ 7,817 ​ 586,562 ​ Commercial ​ 101,476 ​ 246 ​ — ​ — ​ 246 ​ 298 ​ 102,020 ​ Consumer ​ 17,680 ​ 57 ​ — ​ — ​ 57 ​ — ​ 17,737 ​ Total ​ $ 1,231,076 ​ $ 4,662 ​ $ 1,000 ​ $ 1,326 ​ $ 6,988 ​ $ 10,590 ​ $ 1,248,654 ​ Percent of total loans ​ 98.6 % 0.4 % 0.1 % 0.1 % 0.6 % 0.8 % 100.0 % ​ ​ 81 Table of Contents The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for 2020 and 2019. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential Commercial ​ ​ ​ ​ ​ (Dollars in thousands) ​ Construction ​ real estate ​ real estate ​ Commercial ​ Consumer ​ Total 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Beginning Balance ​ $ 1,576 ​ $ 2,501 ​ $ 4,032 ​ $ 1,929 ​ $ 469 $ 10,507 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Charge-offs ​ — ​ ( 201 ) ​ ( 601 ) ​ ( 286 ) ​ ( 9 ) ​ ( 1,097 ) Recoveries ​ 17 ​ 211 ​ 1 ​ 322 ​ 27 ​ 578 Net (charge-offs) recoveries ​ 17 ​ 10 ​ ( 600 ) ​ 36 ​ 18 ​ ( 519 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Provision ​ 429 ​ 1,188 ​ 1,994 ​ 124 ​ 165 ​ 3,900 Ending Balance ​ $ 2,022 ​ $ 3,699 ​ $ 5,426 ​ $ 2,089 ​ $ 652 $ 13,888 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential Commercial ​ ​ ​ ​ ​ (Dollars in thousands) ​ Construction ​ real estate ​ real estate ​ Commercial ​ Consumer ​ Total 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses: ​ ​ ​ ​ ​ ​ Beginning Balance ​ $ 2,662 ​ $ 2,353 ​ $ 3,077 ​ $ 1,949 ​ $ 302 ​ $ 10,343 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Charge-offs ​ ( 3 ) ​ ( 646 ) ​ — ​ ( 411 ) ​ ( 37 ) ​ ( 1,097 ) Recoveries ​ 18 ​ 27 ​ 206 ​ 306 ​ 4 ​ 561 Net (charge-offs) recoveries ​ 15 ​ ( 619 ) ​ 206 ​ ( 105 ) ​ ( 33 ) ​ ( 536 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Provision ​ ( 1,101 ) ​ 767 ​ 749 ​ 85 ​ 200 ​ 700 Ending Balance ​ $ 1,576 ​ $ 2,501 ​ $ 4,032 ​ $ 1,929 ​ $ 469 ​ $ 10,507 ​ Foreclosure Proceedings 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. Both performing and non-performing TDRs had no further commitments associated with them as of December 31, 2020 and December 31, 2019. ​ NOTE 4. LEASES On January 1, 2019, the Company adopted ASU No. 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 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. ​ 82 Table of Contents 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. 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 ​ $ 4,874 ​ ​ $ 4,792 ​ Right-of-use assets ​ $ 4,795 ​ ​ $ 4,771 ​ Weighted average remaining lease term ​ 10.49 years ​ 11.76 years Weighted average discount rate ​ 2.89 % ​ 3.13 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ For the year ended Lease cost (in thousands) ​ December 31, 2020 ​ ​ December 31, 2019 Operating lease cost ​ $ 712 ​ ​ $ 620 Short-term lease cost ​ — ​ ​ — Total lease cost ​ $ 712 ​ ​ $ 620 ​ ​ ​ ​ ​ ​ ​ ​ Cash paid for amounts included in the measurement of lease liabilities ​ $ 666 ​ ​ $ 587 ​ A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows: ​ ​ ​ ​ ​ ​ ​ As of Lease payments due (in thousands) ​ December 31, Twelve months ending December 31, 2021 ​ $ 652 Twelve months ending December 31, 2022 ​ 651 Twelve months ending December 31, 2023 ​ 610 Twelve months ending December 31, 2024 ​ ​ 569 Twelve months ending December 31, 2025 ​ ​ 423 Thereafter ​ ​ 2,816 Total undiscounted cash flows ​ $ 5,721 Discount ​ ​ 847 Lease liabilities ​ $ 4,874 ​ ​ 83 Table of Contents ​ ​ ​ ​ NOTE 5. PREMISES AND EQUIPMENT The following table provides information on premises and equipment from continuing operations at December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Land ​ $ 8,509 ​ $ 8,509 Buildings and land improvements ​ 22,101 ​ 21,250 Furniture and equipment ​ 8,283 ​ 7,354 ​ ​ 38,893 ​ 37,113 Accumulated depreciation ​ ( 13,969 ) ​ ( 13,292 ) Total ​ $ 24,924 ​ $ 23,821 ​ Depreciation expense of continuing operations totaled $ 1.2 million for 2020 and $ 1.1 million for 2019. NOTE 6. 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ Gross ​ Accumulated ​ ​ ​ ​ Net ​ Average ​ ​ Carrying ​ Impairment ​ Accumulated ​ Carrying ​ Remaining Life (Dollars in thousands) Amount Charges Amortization Amount ​ (in years) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Goodwill ​ $ 19,728 ​ $ ( 1,543 ) ​ $ ( 667 ) ​ $ 17,518 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other intangible assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortizable ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Core deposit intangible ​ $ 3,954 ​ $ — ​ $ ( 2,235 ) ​ $ 1,719 ​ ​ 4.7 Total other intangible assets ​ $ 3,954 ​ $ — ​ $ ( 2,235 ) ​ $ 1,719 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ Gross ​ Accumulated ​ ​ ​ Net ​ Average ​ Carrying Impairment ​ Accumulated Carrying ​ Remaining Life (Dollars in thousands) Amount Charges ​ Amortization Amount ​ (in years) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Goodwill ​ $ 19,728 ​ $ ( 1,543 ) ​ $ ( 667 ) ​ $ 17,518 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other intangible assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortizable ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Core deposit intangible ​ $ 3,954 ​ $ — ​ $ ( 1,702 ) ​ $ 2,252 ​ 5.7 Total other intangible assets ​ $ 3,954 ​ $ — ​ $ ( 1,702 ) ​ $ 2,252 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The aggregate amortization expense was $ 533 thousand and $ 605 thousand for the years ended December 31, 2020 and 2019, respectively. 84 Table of Contents At December 31, 2020, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows: ​ ​ ​ ​ ​ (Dollars in thousands) ​ Amortization Expense 2021 ​ $ 461 2022 ​ 389 2023 ​ 317 2024 ​ 246 2025 ​ 174 Thereafter ​ ​ 132 Total amortizing intangible assets ​ $ 1,719 ​ ​ ​ ​ ​ ​ ​ NOTE 7. OTHER ASSETS The Company had the following other assets from continuing operations at December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Accrued interest receivable ​ $ 6,616 ​ $ 3,455 Deferred income taxes ​ 4,442 ​ 2,754 Prepaid expenses ​ 1,472 ​ 1,157 Cash surrender value on life insurance ​ 31,018 ​ 29,782 Income taxes receivable ​ ​ 156 ​ ​ 175 Other assets ​ 3,075 ​ 3,249 Total ​ $ 46,779 ​ $ 40,572 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ NOTE 8. OTHER LIABILITIES The Company had the following other liabilities from continuing operations at December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Accrued interest payable ​ $ 647 ​ $ 330 Deferred compensation liability ​ 2,905 ​ 1,401 Other liabilities ​ 3,686 ​ 2,350 Total ​ $ 7,238 ​ $ 4,081 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ NOTE 9. DEPOSITS The approximate amount of certificates of deposit of $250,000 or more was $ 43.2 million and $ 38.9 million at December 31, 2020 and 2019, respectively. The following table provides information on the approximate maturities of total time deposits at December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Due in one year or less ​ $ 179,073 ​ $ 126,055 Due in one to three years ​ 71,327 ​ 116,979 Due in three to five years ​ 24,473 ​ 34,084 Total ​ $ 274,873 ​ $ 277,118 ​ 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. 85 Table of Contents At December 31, 2020 and December 31, 2019, we had no brokered deposits. ​ NOTE 10. BORROWINGS 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. The following table summarizes certain information on short-term borrowings for the years ended December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ 2019 (Dollars in thousands) Amount Rate Amount Rate Average for the Year ​ ​ ​ Repurchase agreements ​ $ 1,484 0.32 % $ 1,061 1.39 % FHLB Advances ​ — — ​ 17,378 2.68 ​ Overnight Fed Funds purchased ​ 1 0.61 ​ 14 2.86 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At Year End ​ ​ ​ Repurchase agreements ​ $ 1,050 0.03 % $ 1,226 0.81 % FHLB Advances ​ — — ​ — — ​ 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. 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. 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, 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. ​ NOTE 11. 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. 86 Table of Contents NOTE 12. BENEFIT PLANS 401(k) and Profit Sharing Plan The Company has a 401(k) and profit sharing plan covering substantially all full-time employees. The plan calls for matching contributions by the Company, and the Company makes discretionary contributions based on profits. Company contributions to this plan excluding discontinued operations and included in noninterest expense totaled $ 601 thousand and $ 580 thousand for 2020 and 2019, respectively. ​ NOTE 13. STOCK-BASED COMPENSATION 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. 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 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. The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 608,414 shares remained available for grant at December 31, 2020. The following tables provide information on stock-based compensation expense for 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (Dollars in thousands) 2020 2019 Stock-based compensation expense ​ $ 263 ​ $ 149 Excess tax benefits related to stock-based compensation ​ 11 ​ 7 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ (Dollars in thousands) 2020 2019 Unrecognized stock-based compensation expense ​ $ 97 ​ $ 35 ​ Weighted average period unrecognized expense is expected to be recognized ​ 0.3 years 0.1 years ​ The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the two years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ 2019 ​ ​ ​ ​ Weighted Average ​ ​ ​ Weighted Average ​ ​ Number of ​ Grant Date ​ Number of ​ Grant Date ​ Shares Fair Value Shares Fair Value Nonvested at beginning of period 15,702 ​ $ 15.36 — ​ $ — Granted 25,507 ​ 13.78 15,702 ​ 15.36 Vested ( 15,065 ) ​ 15.35 — ​ — Forfeited ( 1,639 ) ​ 15.85 — ​ — Nonvested at end of period 24,505 ​ $ 13.78 15,702 ​ $ 15.36 ​ The total fair value of restricted stock awards that vested was $ 243 thousand in 2020. 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. 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 87 Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ 2019 ​ ​ ​ ​ Weighted Average ​ ​ ​ Weighted Average ​ ​ Number of ​ Grant Date ​ Number of ​ Grant Date ​ Shares Fair Value Shares Fair Value Outstanding at beginning of period 6,451 ​ $ 16.57 38,562 ​ $ 14.69 Granted — ​ — — ​ — Vested ( 6,451 ) ​ 16.57 ( 15,577 ) ​ 11.68 Forfeited — ​ — ( 16,534 ) ​ 16.78 Outstanding at end of period — ​ $ — 6,451 ​ $ 16.57 ​ The fair value of restricted stock units that vested during 2020 and 2019 was $ 107 thousand and $ 241 thousand, respectively. The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the two years ended December 31, 2020. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ 2019 ​ ​ ​ ​ Weighted Average ​ ​ ​ Weighted Average ​ ​ Number of ​ Grant Date ​ Number of ​ Exercise ​ Shares Exercise Price Shares Prices Outstanding at beginning of period 11,671 ​ $ 9.25 27,249 ​ $ 9.68 Granted — ​ — — ​ — Exercised ( 7,760 ) ​ 9.01 ( 15,578 ) ​ 10.01 Expired/Cancelled ( 1,202 ) ​ 16.65 — ​ — Outstanding at end of period 2,709 ​ $ 6.64 11,671 ​ $ 9.25 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Exercisable at end of period 2,709 ​ $ 6.64 11,671 ​ $ 9.25 ​ There were no stock options granted during 2020 and 2019, respectively. ​ 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 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. ​ NOTE 14. DEFERRED COMPENSATION 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 88 Table of Contents 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. The actual investments purchased are owned by the Company and held in a Rabbi Trust. The accounts of the Rabbi Trust are consolidated and the investments are included in other assets on the Consolidated Balance Sheets. The Company and the Bank may also make matching, mandatory and discretionary contributions for certain participants. A participant is fully vested at all times in the amounts that he or she elects to defer. 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 2020 and 2019 and the related deferred compensation liability at December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Deferred compensation contribution ​ $ — ​ $ — Elective deferrals ​ ​ 319 ​ ​ 133 Deferred compensation liability ​ ​ 614 ​ ​ 363 ​ During 2019, the Company introduced a new SERP plan for executive officers of the Company and the Bank. The related liability is unfunded; however, BOLI was purchased in order to offset the benefit costs. 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. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Cash surrender value ​ $ 27,501 ​ $ 26,721 Deferred compensation liability - SERP ​ 1,659 ​ 347 SERP Expense ​ ​ 1,422 ​ ​ 347 ​ Lastly, in 2016, the Bank assumed agreements held by the former CNB Bank under which its former directors had elected to defer part of their fees and compensation while serving on the former Board of CNB. The amounts deferred were invested in insurance policies on the lives of the respective individuals. Amounts available under the policies are to be paid to the individuals as retirement benefits over future years. ​ The following table includes information on the deferred compensation liability and cash surrender value at December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ 2020 ​ 2019 Deferred compensation liability ​ $ 631 ​ $ 691 Cash surrender value ​ ​ 2,979 ​ ​ 2,919 ​ ​ 89 Table of Contents ​ NOTE 15. OTHER EXPENSES The following table summarizes the Company’s other noninterest expenses for the years ended December 31, excluding discontinued operations: ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Advertising and marketing ​ $ 331 ​ $ 425 Other customer expense ​ 538 400 Other expense ​ 1,919 2,220 Other loan expense ​ 361 277 Software expense ​ 908 1,001 Travel and entertainment expense ​ 180 322 Trust professional fees ​ 461 485 Total other noninterest expense ​ $ 4,698 ​ $ 5,130 ​ ​ ​ ​ NOTE 16. INCOME TAXES The following table provides information on components of income tax expense for continuing operations for each of the two years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Current tax expense: ​ ​ Federal ​ $ 5,477 ​ $ 3,974 State ​ 2,025 ​ 1,395 ​ ​ 7,502 ​ 5,369 Deferred income tax (benefit) expense: ​ ​ Federal ​ ( 1,650 ) ​ 122 State ​ ( 535 ) ​ 119 ​ ​ ( 2,185 ) ​ 241 ​ ​ ​ ​ ​ ​ ​ Total income tax expense ​ $ 5,317 ​ $ 5,610 ​ 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. ​ ​ ​ ​ ​ ​ ​ ​ 2020 2019 Tax at federal statutory rate 21 % 21 % Tax effect of: ​ Tax-exempt income ( 1.6 ) ( 1.0 ) ​ State income taxes, net of federal benefit 5.6 5.5 ​ Other 0.3 0.1 ​ Actual income tax expense rate 25.3 % 25.6 % ​ 90 Table of Contents The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of December 31. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Deferred tax assets: ​ ​ Allowance for credit losses ​ $ 3,721 ​ $ 2,850 Write-downs of other real estate owned ​ 12 ​ 9 Nonaccrual loan interest ​ 367 ​ 353 Unrealized losses on available-for-sale securities transferred to held to maturity ​ ​ — ​ 4 Other ​ 2,152 ​ 735 Total deferred tax assets ​ 6,252 ​ 3,951 Less valuation allowance ​ ​ ( 169 ) ​ ​ ( 63 ) Deferred tax assets net of valuation allowance ​ ​ 6,083 ​ ​ 3,888 Deferred tax liabilities: ​ ​ Depreciation ​ 177 ​ 198 Acquisition accounting adjustments ​ 580 ​ 508 Deferred capital gain on branch sale ​ 187 ​ 194 Unrealized gains on available-for-sale securities ​ 567 ​ 74 Other ​ ​ 130 ​ ​ 160 Total deferred tax liabilities ​ 1,641 ​ 1,134 Net deferred tax assets ​ $ 4,442 ​ $ 2,754 ​ ​ NOTE 17. 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) 2020 2019 Net income from continuing operations ​ $ 15,730 ​ $ 16,284 Net loss from discontinued operations ​ - ​ ( 86 ) Net Income ​ $ 15,730 ​ $ 16,198 Weighted average shares outstanding - Basic ​ 12,380 ​ 12,725 Dilutive effect of common stock equivalents-options ​ 1 ​ 5 Weighted average shares outstanding - Diluted ​ 12,381 ​ 12,730 ​ ​ ​ ​ ​ ​ ​ Basic and diluted earnings per common share ​ ​ ​ ​ Income from continuing operations ​ $ 1.27 ​ $ 1.28 Loss from discontinued operations ​ — ​ ( 0.01 ) Net income ​ $ 1.27 ​ $ 1.27 ​ 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. NOTE 18. REGULATORY CAPITAL REQUIREMENTS Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific 91 Table of Contents 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. Basel III The FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5 %, raise the minimum ratio of Tier 1 capital to risk-weighted assets to 6.0 %, require a minimum ratio of Total Capital to risk-weighted assets of 8.0 %, and require a minimum Tier 1 leverage ratio of 4.0 %. A capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer was phased in beginning January 1, 2016 at 0.625 % of risk-weighted assets and increased each subsequent year by an additional 0.625 % until reaching its final level of 2.5 % on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revise the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets. 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). As of December 31, 2020, management believes that Shore United Bank met all capital adequacy requirements to which it was subject. 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. The minimum ratios for capital adequacy purposes are 7.00 %, 8.50 %, 10.50 % and 4.00 % for the common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively which include a capital conservation buffer of 2.50 % respectively. To be categorized as well capitalized, a bank must maintain minimum ratios of 6.50 %, 8.00 %, 10.00 % and 5.00 % for its common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively. The following tables present the capital amounts and ratios as of December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common ​ Total ​ Net ​ ​ ​ ​ ​ ​ Tier 1 ​ Total ​ ​ ​ ​ Equity/ ​ Risk- ​ Risk- ​ Adjusted ​ Common ​ Risk-Based ​ Risk-Based ​ Tier 1 (Dollars in thousands) ​ Tier 1 ​ Based ​ Weighted ​ Average ​ Equity ​ Capital ​ Capital ​ Leverage 2020 Capital Capital Assets Total Assets Tier 1 ratio Ratio Ratio Ratio Shore United Bank ​ $ 180,696 ​ $ 194,885 ​ $ 1,367,544 ​ $ 1,857,802 13.21 % 13.21 % 14.25 % 9.73 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common ​ Total ​ Net ​ ​ ​ ​ ​ ​ Tier 1 ​ Total ​ ​ ​ ​ Equity/ ​ Risk- ​ Risk- ​ Adjusted ​ Common ​ Risk-Based ​ Risk-Based ​ Tier 1 (Dollars in thousands) ​ Tier 1 ​ Based ​ Weighted ​ Average ​ Equity ​ Capital ​ Capital ​ Leverage 2019 Capital Capital Assets Total Assets Tier 1 ratio Ratio Ratio Ratio Shore United Bank ​ $ 163,206 ​ $ 174,014 ​ $ 1,254,980 ​ $ 1,533,919 13.00 % 13.00 % 13.87 % 10.64 % ​ 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 92 Table of Contents 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. ​ Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. 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. There were no dividends paid by the Bank to Shore Bancshares, Inc. for the years ended December 31, 2020 and 2019, respectively. Shore Bancshares, Inc. had no outstanding receivables from its subsidiary at December 31, 2020 or 2019. NOTE 19. 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’ equity. The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized gains ​ ​ ​ ​ ​ (losses) on securities ​ ​ ​ ​ Unrealized ​ transferred from ​ Accumulated ​ ​ gains (losses) on ​ Available-for-sale ​ other ​ ​ available for sale ​ to ​ comprehensive (Dollars in thousands) ​ securities ​ Held-to-maturity ​ income (loss) Balance, December 31, 2019 ​ $ 218 ​ $ ( 11 ) ​ $ 207 Other comprehensive income before reclassifications ​ 1,570 ​ 11 ​ 1,581 Reclassification of gains recognized ​ ​ ( 259 ) ​ — ​ ( 259 ) Balance, December 31, 2020 ​ $ 1,529 ​ $ — ​ $ 1,529 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance, December 31, 2018 ​ $ ( 2,918 ) ​ $ ( 32 ) ​ $ ( 2,950 ) Other comprehensive income ​ 3,136 ​ 21 ​ 3,157 Balances, December 31, 2019 ​ $ 218 ​ $ ( 11 ) ​ $ 207 ​ ​ NOTE 20. FAIR VALUE MEASUREMENTS Accounting guidance under GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This accounting guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, loans held for sale and other real estate owned (foreclosed assets). These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Under fair value accounting guidance, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine their fair values. These hierarchy levels are: Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. 93 Table of Contents Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Assets Measured at Fair Value on a Recurring Basis Investment Securities Available for Sale Fair value measurement for investment securities available for sale is based on quoted prices from an independent pricing service. The fair value measurements consider observable data that may include present value of future cash flows, prepayment assumptions, credit loss assumptions and other factors. The Company classifies its investments in U.S. Treasury securities, if any, as Level 1 in the fair value hierarchy, and it classifies its investments in U.S. Government agencies securities and mortgage-backed securities issued or guaranteed by U.S. Government sponsored entities as Level 2. Equity Securities Fair value measurement for equity securities is based on quoted market prices retrieved by the Company via on-line resources. Although these securities have readily available fair market values, the Company deems that they be classified as level 2 investments in the fair value hierarchy due to not being considered traded in a highly active market. The tables below present the recorded amount of assets measured at fair value on a recurring basis at December 31, 2020 and 2019. No assets were transferred from one hierarchy level to another during 2020 or 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Significant ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ Significant ​ ​ ​ ​ ​ Quoted ​ Observable ​ Unobservable ​ ​ ​ ​ ​ Prices ​ Inputs ​ Inputs (Dollars in thousands) Fair Value (Level 1) (Level 2) (Level 3) 2020 ​ ​ ​ ​ Securities available for sale: ​ ​ ​ ​ U.S. Government agencies ​ $ 23,537 ​ $ — ​ $ 23,537 ​ $ — Mortgage-backed ​ 116,031 ​ — ​ 116,031 ​ — ​ ​ 139,568 ​ — ​ 139,568 ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity ​ 1,395 ​ — ​ 1,395 ​ — Total ​ $ 140,963 ​ $ — ​ $ 140,963 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Significant ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ Significant ​ ​ ​ ​ ​ Quoted ​ Observable ​ Unobservable ​ ​ ​ ​ ​ Prices ​ Inputs ​ Inputs (Dollars in thousands) Fair Value (Level 1) (Level 2) (Level 3) 2019 ​ ​ ​ ​ Securities available for sale: ​ ​ ​ ​ U.S. Government agencies ​ $ 23,826 ​ $ — ​ $ 23,826 ​ $ — Mortgage-backed ​ 98,965 ​ — ​ 98,965 ​ — ​ ​ 122,791 ​ — ​ 122,791 ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity ​ 1,342 ​ — ​ 1,342 ​ — Total ​ $ 124,133 ​ $ — ​ $ 124,133 ​ $ — 94 Table of Contents ​ Assets Measured at Fair Value on a Nonrecurring Basis Impaired Loans 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. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those techniques applied in prior periods. Other Real Estate Owned (Foreclosed Assets) Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets establishing a new cost basis. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. The estimated fair value for foreclosed assets included in Level 3 are determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to the initial recognition, the Company records the foreclosed asset as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods. ​ 95 Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Quantitative Information about Level 3 Fair Value Measurements ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range Average (3) 2020 ​ ​ ​ ​ Nonrecurring measurements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired loans ​ $ 610 Appraisal of collateral (1) Liquidation expense (2) 10 % ​ ( 10 %) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired loans ​ $ 1,110 Discounted cash flow analysis (1) Discount rate ​ 6 % - 7.25 % ​ ( 6 %) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Quantitative Information about Level 3 Fair Value Measurements (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range 2019 ​ ​ ​ ​ Nonrecurring measurements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired loans ​ $ 2,489 Appraisal of collateral (1) Liquidation expense (2) 10 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired loans ​ $ 2,599 Discounted cash flow analysis (1) Discount rate ​ 4 % - 7.25 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other real estate owned ​ $ 74 Appraisal of collateral (1) Appraisal adjustments (2) 0 % - 31 % ​ ​ Liquidation expense (2) 10 % (1) Fair value is generally determined through independent appraisals of the underlying collateral (impaired loans and OREO) or discounted cash flow analyses (impaired loans), which generally include various level III inputs which are not identifiable. (2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. (3) Unobservable inputs were weighted by the relative fair value of the instruments. 96 Table of Contents 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 table. Fair values for December 31, 2020 and 2019 were estimated using an exit price notion. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 2019 ​ ​ ​ ​ ​ Estimated ​ ​ ​ ​ Estimated ​ ​ Carrying ​ Fair ​ Carrying ​ Fair (Dollars in thousands) Amount Value Amount Value Financial assets ​ ​ ​ ​ Level 1 inputs ​ ​ ​ ​ Cash and cash equivalents ​ $ 186,917 ​ $ 186,917 ​ $ 94,971 ​ $ 94,971 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Level 2 inputs ​ ​ ​ ​ Investment securities held to maturity ​ $ 65,706 ​ $ 65,828 ​ $ 8,786 ​ $ 8,654 Restricted securities ​ 3,626 ​ 3,626 ​ 4,190 ​ 4,190 Cash surrender value on life insurance ​ 31,018 ​ 31,018 ​ 29,782 ​ 29,782 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Level 3 inputs ​ ​ ​ ​ Loans, net ​ $ 1,440,368 ​ $ 1,436,292 ​ $ 1,238,147 ​ $ 1,242,867 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Financial liabilities ​ ​ ​ ​ Level 2 inputs ​ ​ ​ ​ Deposits: ​ ​ ​ ​ Noninterest-bearing demand ​ $ 509,091 ​ $ 509,091 ​ $ 356,618 ​ $ 356,618 Checking plus interest ​ 446,243 ​ 446,243 ​ 302,227 ​ 302,227 Money market ​ 292,974 ​ 292,974 ​ 262,050 ​ 262,050 Savings ​ 177,524 ​ 177,524 ​ 143,322 ​ 143,322 Club ​ 392 ​ 392 ​ 387 ​ 387 Certificates of deposit, $100,000 or more ​ 129,623 ​ 131,271 ​ 127,600 ​ 128,167 Other time ​ 144,858 ​ 146,137 ​ 149,130 ​ 149,209 Securities sold under retail repurchase agreement ​ 1,050 ​ 1,050 ​ 1,226 ​ 1,226 Advances from FHLB - long-term ​ ​ — ​ ​ — ​ ​ 15,000 ​ 15,040 Subordinated debt ​ ​ 24,429 ​ ​ 25,745 ​ ​ — ​ — ​ ​ NOTE 21. 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. 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. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit and other commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the letters of credit and commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The following table provides information on commitments outstanding as of December 31, 2020 and 2019. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Commitments to extend credit ​ $ 248,607 ​ $ 211,652 Letters of credit ​ 7,944 ​ 7,691 Total ​ $ 256,551 ​ $ 219,343 ​ The Bank has established an reserve for off balance sheet credit exposures. The reserve is established as losses are estimated to have occurred through a loss for off balance sheet credit exposures charged to earnings. Losses are charged against the allowance when management believes the required funding of these exposures is uncollectible. While this 97 Table of Contents 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. ​ NOTE 22. CONTINGENCIES In the normal course of business, Shore Bancshares, Inc. 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. ​ NOTE 23. PARENT COMPANY FINANCIAL INFORMATION The following tables provide condensed financial information for Shore Bancshares, Inc. (Parent Company Only). Condensed Balance Sheets December 31, ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Assets ​ ​ Cash ​ $ 16,653 ​ $ 7,522 Investment in subsidiaries ​ 201,462 ​ 183,183 Other assets ​ 3,204 ​ 2,483 Total assets ​ $ 221,319 ​ $ 193,188 ​ ​ ​ ​ ​ ​ ​ Liabilities ​ ​ Accrued interest payable ​ $ 482 ​ $ — Other liabilities ​ 1,389 ​ 386 Long-term debt ​ ​ 24,429 ​ ​ — Total liabilities ​ 26,300 ​ 386 ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity ​ ​ Common stock ​ 118 ​ 125 Additional paid in capital ​ 52,167 ​ 61,045 Retained earnings ​ 141,205 ​ 131,425 Accumulated other comprehensive income ​ 1,529 ​ 207 Total stockholders’ equity ​ 195,019 ​ 192,802 ​ ​ ​ ​ ​ ​ ​ Total liabilities and stockholders’ equity ​ $ 221,319 ​ $ 193,188 ​ 98 Table of Contents Condensed Statements of Income For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Income ​ ​ Management and other fees from subsidiaries ​ $ — ​ $ 498 Gain on company owned life insurance ​ 152 ​ 4 Other operating income ​ — ​ 62 Total income ​ 152 ​ 564 ​ ​ ​ ​ ​ ​ ​ Expenses ​ ​ Interest expense ​ 522 ​ 22 Salaries and employee benefits ​ 349 ​ 111 Legal and professional fees ​ ​ 600 ​ ​ 658 Other operating expenses ​ 251 ​ 274 Total expenses ​ 1,722 ​ 1,065 ​ ​ ​ ​ ​ ​ ​ (Loss) before income tax (benefit) and equity in ​ ​ undistributed net income of subsidiaries ​ ( 1,570 ) ​ ( 501 ) Income tax (benefit) ​ ( 343 ) ​ ( 131 ) (Loss) before equity in undistributed net income of subsidiaries ​ ( 1,227 ) ​ ( 370 ) ​ ​ ​ ​ ​ ​ ​ Equity in undistributed net income of subsidiaries ​ 16,957 ​ 16,568 Net income ​ $ 15,730 ​ $ 16,198 ​ 99 Table of Contents Condensed Statements of Cash Flows For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Cash flows from operating activities: ​ ​ Net income ​ $ 15,730 ​ $ 16,198 Adjustments to reconcile net income to cash ​ ​ provided by (used in) operating activities: ​ ​ Equity in undistributed net income of subsidiaries ​ ( 16,957 ) ​ ( 16,568 ) Amortization of debt issuance costs ​ ​ 40 ​ ​ — Stock-based compensation expense ​ 263 ​ 149 Company owned life insurance income ​ ( 152 ) ​ — Net (increase) in other assets ​ ( 250 ) ​ ( 1,093 ) Net increase (decrease) in other liabilities ​ 1,485 ​ ( 6,109 ) Net cash provided by (used in) operating activities ​ 159 ​ ( 7,423 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ Purchase of company owned life insurance ​ ​ ( 319 ) ​ ​ ( 139 ) Transfer to subsidiary ​ ​ — ​ ​ ( 571 ) Net cash (used in) investing activities ​ ( 319 ) ​ ( 710 ) ​ ​ ​ Cash flows from financing activities: ​ ​ Increase in short-term borrowings ​ — ​ ( 1,041 ) Proceeds from the issuance of subordinated debt, net of issuance costs ​ 24,389 ​ — Common stock dividends paid ​ ( 5,950 ) ​ ( 5,347 ) Retirement of common stock ​ ​ ( 9,112 ) ​ ​ ( 4,452 ) Exercise of stock options ​ ​ 3 ​ ​ — Repurchase of shares for tax withholding on exercised options ​ ​ and vested restricted stock ​ ( 39 ) ​ ( 88 ) Net cash provided by (used in) financing activities ​ 9,291 ​ ( 10,928 ) ​ ​ ​ ​ ​ ​ ​ Net increase (decrease) in cash and cash equivalents ​ 9,131 ​ ( 19,061 ) Cash and cash equivalents at beginning of year ​ 7,522 ​ 26,583 Cash and cash equivalents at end of year ​ $ 16,653 ​ $ 7,522 ​ ​ ​ ​ ​ ​ ​ Supplemental cash flow information: ​ ​ Transfer of building, available for sale securities and other assets to banking subsidiary ​ $ — ​ $ 5,032 ​ ​ NOTE 24. REVENUE RECOGNITION 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. Noninterest revenue streams in-scope of Topic 606 are discussed below. ​ Service Charges on Deposit Accounts 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 100 Table of Contents 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’ 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. Other Noninterest Income Other noninterest income consists of: fees, exchange, other service charges, safety deposit box rental fees, and other miscellaneous revenue streams. 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. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. 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 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) ​ 2020 2019 Noninterest Income ​ ​ In-scope of Topic 606: ​ ​ Service charges on deposit accounts ​ $ 2,839 ​ $ 3,910 Trust and investment fee income ​ 1,558 ​ 1,522 Interchange income ​ ​ 3,006 ​ ​ 2,678 Other noninterest income ​ 1,803 ​ 1,354 Noninterest Income (in-scope of Topic 606) ​ 9,206 ​ 9,464 Noninterest Income (out-of-scope of Topic 606) ​ 1,543 ​ 556 Total Noninterest Income ​ $ 10,749 ​ $ 10,020 ​ 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. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. 101 Table of Contents 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, 2020 and 2019, the Company did not have any significant contract balances. ​ NOTE 25. 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. ​ ​ ​ 102 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. ​