What changed in this filing

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Item 1. Financial Statements

2021-05-14 compared with 2020-11-06 · 157 added, 321 removed, 688 unchanged (41% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

September 30,

(In thousands, except share and per share data)

Cash and due from banks

15 unchanged sentences

Securities sold under retail repurchase agreements

Advances from FHLB - long-term

Subordinated debt

16 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share amounts)

For Three Months Ended

For Nine Months Ended

September 30,

(In thousands, except per share data)

INTEREST INCOME

14 unchanged sentences

Trust and investment fee income

Gains on sales and calls of investment securities

Other noninterest income

13 unchanged sentences

Total noninterest expense

Income from continuing operations before income taxes

Income before income taxes

Income tax expense

Income from continuing operations

Loss from discontinued operations before income taxes

Income tax benefit

Loss from discontinued operations

Earnings per common share - Basic and diluted

Income from continuing operations

Loss from discontinued operations

Basic and diluted net income per common share

Dividends paid per common share

2 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

For Three Months Ended

For Nine Months Ended

September 30,

(In thousands)

Other comprehensive (loss) income:

1 unchanged sentence

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

Reclassification of (gains) recognized in net income

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

4 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three and Nine months Ended September 30, 2020 and 2019

(Dollars in thousands)

For the Three months Ended March 31, 2021 and 2020

Comprehensive

Stockholders’

(In thousands)

Balances, January 1, 2021

Other comprehensive income

Stock-based compensation

Vesting of restricted stock, net of shares surrendered

Cash dividends declared

Balances, March 31, 2020

Other comprehensive income

Stock-based compensation

Cash dividends declared

Balances, June 30, 2020

Other comprehensive (loss)

2 unchanged sentences

Cash dividends declared

Balances, September 30, 2020

Balances, March 31, 2021

Comprehensive

Stockholders’

Income (Loss)

(In thousands)

Balances, January 1, 2020

1 unchanged sentence

Stock-based compensation

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

Vesting of restricted stock, net of shares surrendered

Cash dividends declared

Balances, March 31, 2020

Other comprehensive income

Stock-based compensation

Cash dividends declared

Balances, June 30, 2019

Other comprehensive income

Retirement of Common Stock

Stock-based compensation

Cash dividends declared

Balances, September 30, 2019

See accompanying notes to Consolidated Financial Statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

For Nine Months Ended

September 30,

For Three Months Ended

(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

6 unchanged sentences

Stock-based compensation expense

Deferred income (benefit) tax expense

(Gains) on sales and calls of securities

Losses on sales and disposals of premises and equipment

Deferred income tax (benefit)

Losses on sales and valuation adjustments on other real estate owned

8 unchanged sentences

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

Proceeds from sales and calls of investment securities available for sale

Purchases of investment securities available for sale

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

3 unchanged sentences

Purchases of premises and equipment

Proceeds from sales of premises and equipment

Proceeds from sales of other real estate owned

Net redemption of restricted securities

Net redemption (purchase) of restricted securities

Purchases of bank owned life insurance

5 unchanged sentences

Short-term borrowings

Long-term borrowings

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

Common stock dividends paid

9 unchanged sentences

Lease liabilities arising from right-of-use assets

Unrealized gain on securities available for sale

Unrealized (loss) gain on securities available for sale

Transfers from loans to other real estate owned

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

2 unchanged sentences

Notes to Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

For the Three Months Ended March 31, 2021 and 2020

Note 1 – Basis of Presentation

3 unchanged sentences

The accompanying interim financial statements are unaudited;

however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at September 30, 2020, the consolidated results of income and comprehensive income for the three and nine months ended September 30, 2020 and 2019, changes in stockholders’ equity for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019, have been included.

however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at March 31, 2021, the consolidated results of income and comprehensive income for the three months ended March 31, 2021 and 2020, changes in stockholders’ equity for the three months ended March 31, 2021 and 2020 and cash flows for the three months ended March 31, 2021 and 2020, have been included.

All such adjustments are of a normal recurring nature.

The amounts as of December 31, 2020 were derived from the 2020 audited financial statements.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc.

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Risks and Uncertainties

The novel coronavirus (“COVID-19”) spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization.

The government and private sector responses to contain its spread began to significantly affect our operations in March and continues to do so.

The pandemic will likely adversely affect our operations in subsequent quarters, although such effects may vary significantly.

The duration and extent of the effects over longer terms cannot be reasonably estimated at this time.

The risks and uncertainties resulting from the pandemic most likely to affect our future earnings, cash flows and financial condition in future quarters primarily include the nature and duration of the financial effects felt by our customers and the related impact on the customers' ability to fulfill their financial obligations to the Company as well as the potential decline of real estate values resulting from market disruption which may impair the recorded values of collateral-dependent loans.

Further, these factors, in addition to those pervasive to the industry and overall U.S.

economy, may negatively impact the overall value of our Company in such a way that an impairment charge to the carrying value of goodwill is required.

Accordingly, significant estimates used in the preparation of our financial statements related to the allowance for credit losses and valuation of goodwill may be subject to significant adjustments in future periods.

The greater the duration and severity of the pandemic the more likely that estimates will be materially impacted by its effects.

Since the novel coronavirus ("COVID-19") was declared a pandemic in March 2020, COVID-19 has significantly affected our communities, customers, and operations.

COVID-19 continues to have a significant impact in 2021, however, the extent of its effects are dependent upon multiple factors, such as the extent of distribution and efficacy of vaccines, COVID-19 variants, pandemic-related restrictions, and government response, among others.

As a result, the ultimate effects of COVID-19 over the longer term cannot be reasonably estimated at this time.

Risks and uncertainties arising from the pandemic remain, primarily concerning the ability of customers to fulfill their financial obligations to the Company as well as potential operational disruptions and the ability of the Company to generate demand for its products and services.

Accordingly, estimates used in the preparation of our financial statements may be subject to significant adjustments in future periods.

Recent Accounting Standards and Other Authoritative Guidance

6 unchanged sentences

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.

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 .

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and (4) validating a systematic methodology.

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

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

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

Early adoption is permitted.

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

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

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

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

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 .

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

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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 expects to meet this expanded category of small reporting company and will no longer be considered an accelerated filer after the 2020 Annual Report .

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.

5 unchanged sentences

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 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 Federal Reserve 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 the nine months ended September 30, 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.

This interagency guidance is expected to have a material impact on the Company’s financial statements;

however, this impact cannot be quantified at this time.

Note 2 – Discontinued Operations

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

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

Together, Avon-Dixon and Mubell are referred to as the “Insurance Subsidiaries”.

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

Certain other assets and liabilities to be sold or settled separately within one year, were classified as discontinued operations in the Company’s consolidated financial statements.

All of the remaining assets and liabilities of discontinued operations were settled prior to December 31, 2019.

There were no assets or liabilities of discontinued operations at September 30, 2020 or December 31, 2019.

The following table presents the financial information of discontinued operations for the periods indicated:

For Nine Months Ended

September 30,

($ in thousands)

Noninterest income

All other income

Total noninterest income

Noninterest expense

Salaries and wages

Employee benefits

Occupancy expense

Furniture and equipment

Legal and professional fees

Other noninterest expenses

Total noninterest expense

Loss from discontinued operations before income taxes

Income tax benefit

Loss from discontinued operations

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.

The amendments were effective in the first quarter of 2021 for the Company and there was no material impact on the Company’s Consolidated Financial Statements.

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

The amendments were effective in the first quarter of 2021 for the Company and there was no material impact on the Company’s Consolidated Financial Statements.

Note 2 – Earnings Per Share

3 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30,

(In thousands, except per share data)

Net income from continuing operations

Net loss from discontinued operations

Weighted average shares outstanding - Basic

1 unchanged sentence

Weighted average shares outstanding - Diluted

Basic earnings per common share

Income from continuing operations

Loss from discontinued operations

Diluted earnings per common share

Income from continuing operations

Loss from discontinued operations

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2020 and 2019.

Earnings per common share - Basic and Diluted

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three months ended March 31, 2021 and 2020.

Note 3 – Investment Securities

2 unchanged sentences

Available-for-sale securities:

September 30, 2020

March 31, 2021

Government agencies

3 unchanged sentences

Mortgage-backed

During the three months ended September 30, 2020, no available for sale securities were sold.

During the nine months ended September 30, 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 the three and nine months ended September 30, 2019.

No available for sale securities were sold during the three months ended March 31, 2021 and 2020.

(Dollars in thousands)

Held-to-maturity securities:

September 30, 2020

March 31, 2021

Government agencies

Mortgage-backed

States and political subdivisions

2 unchanged sentences

Government agencies

Mortgage-backed

States and political subdivisions

Other debt securities

Equity securities with an aggregate fair value of $ 1.4 million at September 30, 2020 and $ 1.3 million at December 31, 2019 are presented separately on the balance sheet.

The fair value adjustment recorded through earnings totaled $ 34 thousand for the nine months ended September 30, 2020 and $ 47 thousand for the nine months ended September 30, 2019, respectively.

The following tables provide 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 September 30, 2020 and December 31, 2019.

Equity securities with an aggregate fair value of $ 1.4 million at March 31, 2021 and $ 1.4 million at December 31, 2020 are presented separately on the balance sheet.

The fair value adjustment recorded through earnings totaled $( 18 ) thousand for the three months ended March 31, 2021 and $ 1 thousand for the three months ended March 31, 2020, respectively.

(Dollars in thousands)

September 30, 2020

March 31, 2021

Available-for-sale securities:

2 unchanged sentences

Held-to-maturity securities:

Government agencies

Mortgage-backed

Other debt securities

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Government agencies

Mortgage-backed

Other debt securities

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.

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 twelve available-for-sale securities and two held-to-maturity securities in an unrealized loss position at September 30, 2020.

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at September 30, 2020.

The unrealized losses on debt securities that exist are the result of market changes in interest rates since original purchase.

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 basis, which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary.

There were eighteen available-for-sale securities and nineteen held-to-maturity securities in an unrealized loss position at March 31, 2021.

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at March 31, 2021.

Available for sale

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Note 4 – Loans and Allowance for Credit Losses

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

The following table provides information about the principal classes of the loan portfolio at September 30, 2020 and December 31, 2019.

Howard County in Maryland, Kent County, Delaware and Accomack County, Virginia.

The following table provides information about the principal classes of the loan portfolio at March 31, 2021 and December 31, 2020.

(Dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

4 unchanged sentences

Loans are stated at their principal amount outstanding net of any purchase premiums/discounts, deferred fees and costs.

Loans included deferred fees, net of costs, of $ 12 thousand and discounts on acquired loans of $ 825 thousand at September 30, 2020.

Loans included deferred costs, net of deferred fees, of $ 1.8 million and discounts on acquired loans of $ 1.1 million at December 31, 2019.

At September 30, 2020 and December 31, 2019, included in total loans were $ 60.2 million and $ 79.2 million in loans, respectively, acquired as part of the NWBI branch acquisition in 2017.

Loans included deferred fees, net of costs, of $ 751 thousand and discounts on acquired loans of $ 677 thousand at March 31, 2021.

Loans included deferred costs, net of deferred fees, of $ 622 thousand and discounts on acquired loans of $ 754 thousand at December 31, 2020.

At March 31, 2021 and December 31, 2020, included in total loans were $ 44.6 million and $ 52.3 million in loans, respectively, acquired as part of the NWBI branch acquisition in 2017.

Interest income on loans is accrued at the contractual rate based on the principal amount outstanding.

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

In 2020, the Company began its participation 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 March 31, 2021, the Company held PPP loans with a total outstanding balance of $ 129.1 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:

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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.

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.

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.

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

The following tables include impairment information relating to loans and the allowance for credit losses as of September 30, 2020 and December 31, 2019.

The following tables include impairment information relating to loans and the allowance for credit losses as of March 31, 2021 and December 31, 2020.

(Dollars in thousands)

September 30, 2020

March 31, 2021

Loans individually evaluated for impairment

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Total allowance

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 the first three quarters of 2020 were not materially impacted as a result of the transition.

The following tables provide information on impaired loans and any related allowance by loan class as of September 30, 2020 and December 31, 2019.

The following tables provide information on impaired loans and any related allowance by loan class as of March 31, 2021 and December 31, 2020.

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.

September 30, 2020

Quarter-to-date

average recorded

(Dollars in thousands)

September 30, 2020

March 31, 2021

Impaired nonaccrual loans:

10 unchanged sentences

Commercial real estate

September 30, 2019

March 31, 2020

Quarter-to-date

average recorded

(Dollars in thousands)

12 unchanged sentences

Commercial real estate

The following tables provide a roll-forward for TDRs as of September 30, 2020 and September 30, 2019.

The following tables provide a roll-forward for TDRs as of March 31, 2021 and March 31, 2020.

Disbursements

2 unchanged sentences

Transfer In/(Out)

For nine months ended

September 30, 2020

For three months ended

March 31, 2021

Accruing TDRs

8 unchanged sentences

Transfer In/(Out)

For nine months ended

September 30, 2019

For three months ended

March 31, 2020

Accruing TDRs

4 unchanged sentences

Commercial real estate

There were no loans modified and considered TDRs during the three months ended September 30, 2020 and 2019.

The following tables provide information on loans that were modified and considered TDRs during the nine months ended September 30, 2020 and September 30, 2019.

There were no loans modified and considered to be TDRs during the three months ended March 31, 2021 and 1 loan modified and considered to be TDR during the three months ended March 31, 2020.

The following tables provide information on loans that were modified and considered to be TDRs during the three months ended March 31, 2021 and March 31, 2020.

Premodification

1 unchanged sentence

(Dollars in thousands)

For nine months ended

September 30, 2020

For three months ended

March 31, 2021

Residential real estate

Commercial real estate

For nine months ended

September 30, 2019

For three months ended

March 31, 2020

Residential real estate

Commercial real estate

For the nine months ended September 30, 2020, the Company had executed principal and/or interest deferrals on outstanding loan balances of $ 221.1 million, of which only $ 12.9 million remained on deferral as of September 30, 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.

For the three months ended March 31, 2021, the Company had executed principal and/or interest deferrals on outstanding loan balances of $ 221.1 million, of which only $ 16.1 million, or 1.10 % of the total portfolio remained on deferral as of March 31, 2021.

These deferrals were no more than six months in duration and were for loans not more than 30 days past due as of March 31, 2021.

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 three and nine months ended September 30, 2020 and 2019.

There were no TDRs which subsequently defaulted within 12 months of modification for the three months ended March 31, 2021 and 2020.

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.

2 unchanged sentences

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 September 30, 2020, there were no nonaccrual loans classified as special mention or doubtful and $ 7.0 million of nonaccrual loans were classified as substandard.

At March 31, 2021, there were no nonaccrual loans classified as special mention or doubtful and $ 4.9 million of nonaccrual loans were classified as substandard.

Similarly, 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.

The following tables provide information on loan risk ratings as of September 30, 2020 and December 31, 2019.

The following tables provide information on loan risk ratings as of March 31, 2021 and December 31, 2020.

(Dollars in thousands)

Pass/Performing

September 30, 2020

March 31, 2021

Residential real estate

5 unchanged sentences

Commercial real estate

The following tables provide information on the aging of the loan portfolio as of September 30, 2020 and December 31, 2019.

The following tables provide information on the aging of the loan portfolio as of March 31, 2021 and December 31, 2020.

(Dollars in thousands)

September 30, 2020

March 31, 2021

Residential real estate

6 unchanged sentences

Percent of total loans

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three and nine months ended September 30, 2020 and September 30, 2019.

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months ended March 31, 2021 and March 31, 2020.

Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

1 unchanged sentence

For three months ended

September 30, 2020

March 31, 2021

Allowance for credit losses:

4 unchanged sentences

For three months ended

September 30, 2019

Allowance for credit losses:

Beginning Balance

Net (charge-offs) recoveries

Ending Balance

(Dollars in thousands)

For nine months ended

September 30, 2020

Allowance for credit losses:

Beginning Balance

Net (charge-offs) recoveries

Ending Balance

(Dollars in thousands)

For nine months ended

September 30, 2019

March 31, 2020

Allowance for credit losses:

3 unchanged sentences

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure totaled $ 23 thousand as of September 30, 2020 and December 31, 2019, respectively.

There were no residential real estate properties included in the balance of other real estate owned at September 30, 2020 and December 31, 2019.

There were no consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of March 31, 2021 and December 31, 2020, respectively.

There was 1 residential real estate property included in the balance of other real estate owned totaling $ 205 thousand at March 31, 2021 and $ 0 at December 31, 2020.

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 September 30, 2020 and December 31, 2019.

Both performing and non-performing TDRs had no further commitments associated with them as of March 31, 2021 and December 31, 2020.

Note 5 – 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 the first quarter of 2020, the Company renewed its copier lease for all locations which added approximately $ 419 thousand to right-of-use assets and lease liabilities .

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.

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.

3 unchanged sentences

(Dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

4 unchanged sentences

For the Three Months Ended

For the nine months ended

For the Three Months Ended

Lease cost (in thousands)

September 30, 2020

March 31, 2021

March 31, 2020

Operating lease cost

4 unchanged sentences

Lease payments due (in thousands)

September 30, 2020

Three months ending December 31, 2020

March 31, 2021

Nine months ending December 31, 2021

Twelve months ending December 31, 2022

6 unchanged sentences

Note 6 – Goodwill and Other Intangibles

Due to the COVID-19 pandemic and its impact on market conditions, the Company performed a qualitative assessment of goodwill as of September 30, 2020.

As a result of management’s qualitative evaluation of relevant events and circumstances as of September 30, 2020, the Company concluded that it was not more likely than not that fair value was less than carrying value.

In addition, the Company will complete a full annual assessment of goodwill in the fourth quarter of 2020.

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 September 30, 2020 and December 31, 2019.

September 30, 2020

The Company concluded there was no impairment of goodwill during its annual fourth quarter assessment in 2020.

Following the fourth quarter evaluation, management evaluated the events and circumstances that could indicate that goodwill may be impaired and concluded that an interim test was not necessary.

The Company will continue to monitor the impact of COVID-19 on the Company as well as the financial markets in evaluating the necessity of interim testing during 2021.

The following table provides information on the significant components of goodwill and other acquired intangible assets at March 31, 2021 and December 31, 2020.

March 31, 2021

Remaining Life

9 unchanged sentences

Total other intangible assets

The aggregate amortization expense included in continuing operations was $ 407 thousand for the nine months ended September 30, 2020 and $ 461 thousand for the nine months ended September 30, 2019.

At September 30, 2020, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:

The aggregate amortization expense was $ 126 thousand for the three months ended March 31, 2021 and $ 144 thousand for the three months ended March 31, 2020.

At March 31, 2021, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:

(Dollars in thousands)

1 unchanged sentence

Note 7 – Other Assets

The Company had the following other assets at September 30, 2020 and December 31, 2019.

September 30,

The Company had the following other assets at March 31, 2021 and December 31, 2020.

(Dollars in thousands)

4 unchanged sentences

Income taxes receivable

The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of September 30, 2020 and December 31, 2019.

September 30,

The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of March 31, 2021 and December 31, 2020.

(Dollars in thousands)

3 unchanged sentences

Nonaccrual loan interest

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

Total deferred tax assets

14 unchanged sentences

Initial debt issuance costs were $ 611 thousand.

The debt balance of $ 24.4 million is presented net of unamortized issuance costs of $ 601 thousand at September 30, 2020.

The debt balance of $ 24.5 million is presented net of unamortized issuance costs of $ 540 thousand at March 31, 2021.

Note 9 – Other Liabilities

The Company had the following other liabilities at September 30, 2020 and December 31, 2019.

The Company had the following other liabilities at March 31, 2021 and December 31, 2020.

(Dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

11 unchanged sentences

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 611,664 shares remained available for grant at September 30, 2020.

The following tables provide information on stock-based compensation expense for the three and nine months ended September 30, 2020 and 2019.

The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 583,831 shares remained available for grant at March 31, 2021.

The following tables provide information on stock-based compensation expense for the three months ended March 31, 2021 and 2020.

For Three Months Ended

For Nine Months Ended

September 30,

(Dollars in thousands)

1 unchanged sentence

Excess tax benefits related to stock-based compensation

September 30,

(Dollars in thousands)

1 unchanged sentence

Weighted average period unrecognized expense is expected to be recognized

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the nine months ended September 30, 2020.

Nine Months Ended September 30, 2020

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the three months ended March 31, 2021.

Three Months Ended March 31, 2021

Weighted Average

1 unchanged sentence

Nonvested at end of period

The fair value of restricted stock awards that vested during the first nine months of 2020 and 2019 was $ 254 thousand and $ 0 , respectively.

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 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 nine months ended September 30, 2020.

Nine Months Ended September 30, 2020

Weighted Average

Outstanding at beginning of period

Outstanding at end of period

The fair value of restricted stock units that vested during the first nine months of 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 nine months ended September 30, 2020.

Nine Months Ended September 30, 2020

The fair value of restricted stock awards that vested during the first three months of 2021 and 2020 was $ 230 thousand and $ 254 thousand, respectively.

The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the three months ended March 31, 2021.

Three Months Ended March 31, 2021

Weighted Average

4 unchanged sentences

Exercisable at end of period

There were no stock options granted during the three and nine months ended September 30, 2020 and September 30, 2019.

At the end of the third quarter of 2020, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $ 20 thousand based on the $ 10.98 market value per share of the Company’s common stock at September 30, 2020.

Similarly, the aggregate intrinsic value of the options exercisable was $ 20 thousand at September 30, 2020.

At September 30, 2020, the weighted average remaining contract life of options outstanding and exercisable was 4.1 years.

There were no stock options granted during the three months ended March 31, 2021 and March 31, 2020.

At the end of the first quarter of 2021, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $ 28 thousand based on the $ 17.02 market value per share of the Company’s common stock at March 31, 2021.

Similarly, the aggregate intrinsic value of the options exercisable was $ 28 thousand at March 31, 2021.

At March 31, 2021, the weighted average remaining contract life of options outstanding and exercisable was 1 year .

Note 11 – 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 the nine months ended September 30, 2020 and 2019.

The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the three months ended March 31, 2021 and 2020.

Unrealized gains

9 unchanged sentences

Balance, December 31, 2020

Other comprehensive income before reclassifications

Reclassification of gains recognized

Balance, September 30, 2020

Other comprehensive loss

Balance, March 31, 2021

Balance, December 31, 2019

Other comprehensive income

Balances, September 30, 2019

Balances, March 31, 2020

Note 12 – Fair Value Measurements

3 unchanged sentences

Securities available for sale 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).

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.

16 unchanged sentences

Although these securities have readily available fair market values, the Company determined that they should 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 September 30, 2020 and December 31, 2019.

No assets were transferred from one hierarchy level to another during the first nine months of 2020 or 2019.

The tables below present the recorded amount of assets measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020.

No assets were transferred from one hierarchy level to another during the first three months of 2021 or 2020.

(Dollars in thousands)

September 30, 2020

March 31, 2021

Securities available for sale:

9 unchanged sentences

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

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.

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.

9 unchanged sentences

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

The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at September 30, 2020 and December 31, 2019, that are valued at the lower of cost or market.

The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at March 31, 2021 and December 31, 2020, 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.

3 unchanged sentences

Unobservable Input

September 30, 2020

March 31, 2021

Nonrecurring measurements:

23 unchanged sentences

Appraisal adjustments

Liquidation expense

(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.

3 unchanged sentences

The carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value on the Company’s Consolidated Balance Sheets are presented in the following table.

Fair values for September 30, 2020 and December 31, 2019 were estimated using an exit price notion.

September 30, 2020

Fair values for March 31, 2021 and December 31, 2020 were estimated using an exit price notion.

March 31, 2021

December 31, 2020

23 unchanged sentences

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 at September 30, 2020 and December 31, 2019.

The following table provides information on commitments outstanding at March 31, 2021 and December 31, 2020.

(Dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

26 unchanged sentences

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.

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.

1 unchanged sentence

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 continuing operations, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2020 and 2019.

The following presents noninterest income from continuing operations, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2021 and 2020.

For Three Months Ended

For Nine Months Ended

September 30,

(Dollars in thousands)

14 unchanged sentences

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

As of September 30, 2020, and December 31, 2019, the Company did not have any significant contract balances.

As of March 31, 2021, and December 31, 2020, the Company did not have any significant contract balances.

Note 15 – Proposed Merger

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.

One of the primary reasons for the proposed acquisition of Severn was the ability 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.

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

What changed 10-Q

Item 1. Financial Statements