What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-31 compared with 2021-03-26 · 525 added, 295 removed, 1072 unchanged (43% of the section changed)

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Management’s Report on Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 613 )

Consolidated Balance Sheets

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Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, 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.

Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2021, the Company’s internal control over financial reporting was effective.

As permitted by the guidance issued by the Office of the Chief Accountant of the Securities and Exchange Commission, management excluded the operations of Severn Bancorp, Inc.

and its subsidiaries (“Severn”) from its assessment of internal control over financial reporting as of December 31, 2021.

As described in Note 2 to the Consolidated Financial Statements, the Company acquired Severn on October 31, 2021.

As of and for the year ended December 31, 2021, the assets and revenue attributable to the acquisition of Severn represented approximately 30% and 8% of the Company’s consolidated assets and consolidated revenues, respectively.

See "Note 2.

Business Combination"

for further discussion of the merger and its impact on the Company’s consolidated financial statements.

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

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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).

and its subsidiaries (the Company) as of December 31, 2021 and 2020, 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, 2021 and 2020, 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.

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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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses – Qualitative Formula Allowance

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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.

For loans that are not individually evaluated for impairment, the qualitative formula allowance uses certain 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.

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

Obtaining an understanding of the Company’s processes for evaluating qualitative factors, including the development of the data inputs used.

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

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

Business Combinations – Fair Value of Acquired Loans

As described in Note 1 (Summary of Significant Accounting Policies) and Note 2 (Business Combination) to the consolidated financial statements, the Company completed its acquisition of Severn Bancorp, Inc.

on October 31, 2021, for total consideration valued at approximately $169.8 million.

The transaction was accounted for as a business combination using the acquisition method of accounting.

Accordingly, assets acquired and liabilities assumed were recorded at fair value on the acquisition date, including acquired loans.

As disclosed by management, determining the acquired fair values, particularly in relation to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value.

In determining the fair value of loans acquired, management must determine whether or not acquired loans have evidence of credit deterioration at acquisition, the amount and timing of cash flows expected to be collected, and market discount rates, among other assumptions.

Changes in these assumptions could have a significant impact on the fair value of the loans acquired and the amount of goodwill recorded.

We identified the acquisition date fair value of acquired loans as a critical audit matter as auditing this estimate is especially complex and requires subjective auditor judgment.

Auditing this estimate required a high level of judgment in evaluating management’s identification of loans with evidence of credit deterioration, the need for specialized skill in development and application of subjective assumptions in estimated cash flows, and the size of the acquired loan portfolio.

How We Addressed the Matter in Our Audit

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

Obtaining an understanding of the Company’s processes for valuing the acquired loan portfolio, including the underlying methods and assumptions used.

• Substantively testing management’s process, including:

Using our own valuation specialist to assess the Company’s methods and significant assumptions utilized in determining the fair value of the acquired loan portfolio and evaluating whether the assumptions used were reasonable with respect to market participant views and other factors.

Testing the completeness and accuracy of loans determined to have credit deterioration at acquisition and evaluating the reasonableness of the criteria utilized by management in making the determination.

Testing the accuracy of the data utilized in the development of acquisition date fair values by confirming, on a sample basis, select data.

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

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Restricted securities

Loans held for sale, at fair value

allowance for credit losses

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Other real estate owned, net

Mortgage servicing rights

Right-of-use assets

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Gains on sales and calls of investment securities

Interchange credits

Mortgage-banking revenue

Title Company revenue

Other noninterest income

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Legal and professional fees

Merger-related expenses

Other noninterest expenses

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

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(In thousands)

Other comprehensive income:

Other comprehensive (loss) income:

Investment securities:

Unrealized holding gains on available-for-sale-securities

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

Total other comprehensive income

Total other comprehensive (loss) income

Comprehensive income

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Balances, January 1, 2021

Other comprehensive income

Other comprehensive (loss)

Retirement of common stock

Stock-based compensation

Vesting of restricted stock, net of shares surrendered

Cash dividends declared

Balances, March 31, 2021

Other comprehensive income

Other comprehensive (loss)

Stock-based compensation

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Other comprehensive (loss)

Retirement of common stock

Stock-based compensation

Exercise of options, net of shares surrendered

Cash dividends declared

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Other comprehensive (loss)

Retirement of common stock

Severn Bank acquisition - 8,053,088 shares

Stock-based compensation

Cash dividends declared

Exercise of options

Balances, December 31, 2021

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(In thousands)

Income (Loss)

Balances, January 1, 2020

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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

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Balances, June 30, 2020

Other comprehensive income

Other comprehensive (loss)

Retirement of common stock

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Balances, September 30, 2020

Other comprehensive income

Other comprehensive (loss)

Retirement of common stock

Stock-based compensation

Exercise of options, net of shares surrendered

Cash dividends declared

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For the Years Ended December 31,

For Year Ended

(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Net accretion of acquisition accounting estimates

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Amortization of debt issuance costs

(Gain) on mortgage banking activities

Proceeds from sale of mortgage loans held for sale

Originations of loans held for sale

Stock-based compensation expense

Deferred income (benefit) tax expense

Deferred income tax expense (benefit)

(Gains) on sales and calls of securities

Losses on valuation adjustments on mortgage servicing rights

Losses on sales and disposals of premises and equipment

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Fair value adjustment on equity securities

Bank owned life insurance income

Net changes in:

Accrued interest receivable

Cash surrender values on compensation plans

Accrued interest payable

Other liabilities

Net cash provided by operating activities

Net cash (used in) provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

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Purchases of bank owned life insurance

Net cash (used in) investing activities

Cash acquired in the acquisition of Severn, net of cash paid

Net cash provided by (used in) investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

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

Stock options exercised

Stock options exercised, net of shares surrendered

Net cash provided by financing activities

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Cash and cash equivalents at end of period

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the Years Ended December 31,

Supplemental cash flows information:

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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

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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.

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

The investments in subsidiaries are recorded on the Company’s books (Parent only) on the basis of its equity in the net assets of the subsidiaries.

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

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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.

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

The Company’s primary source of revenue is derived from interest earned on commercial, residential mortgage and other loans, and fees charged in connection with lending and other banking services 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, N.A.

under the trade name Wye Financial Partners and conducts secondary market lending activities through a division of the Bank.

The Title Company engages in title work related to real estate transactions.

Use of Estimates

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Actual results could differ from those estimates.

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

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

Loans Acquired in a Business Combination

Loans acquired in a business combination, such as the Company’s acquisition of Severn, are recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses.

Purchased credit-impaired (PCI) loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments.

When determining fair value, PCI loans were aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status.

The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference,” and is not recorded.

Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

On a quarterly basis, the Company evaluates its estimate of cash flows expected to be collected.

Estimates of cash flows for PCI loans require significant judgment.

Subsequent decreases to the expected cash flows will generally result in a provision for loan losses, while subsequent increases in cash flows may result in a reversal of post-acquisition provision for loan losses, or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan or pool(s) of loans.

Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at it’s carrying amount.

PCI loans are not classified as nonperforming loans by the Company at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.

Loans not designated PCI loans as of the acquisition date are designated purchased performing loans.

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based

on the acquired loans’ contractual cash flows.

Purchased performing loans are recorded at fair value, including a credit discount.

The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans.

There is no allowance for loan losses established at the acquisition date for purchased performing loans.

A provision for loan losses may be required in future periods for any deterioration in these loans in future periods.

Investment Securities Available for Sale

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The entirety of any impairment on equity securities is recognized in earnings.

Loans Held for Sale (“LHFS”)

The Company has elected to carry its mortgage loans originated for sale at fair value.

Fair value is determined based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements or third-party pricing models.

Gains and losses on loan sales are determined using specific-identification method and are recognized through mortgage-banking revenue in the Consolidated Statements of Income.

LHFS are sold either with the mortgage servicing rights (“MSRs”) released or retained by the Bank.

Mortgage Servicing Rights

When mortgage loans are sold with servicing retained, the MSRs are initially recorded at fair value with the income statement effect recorded in mortgage banking revenue.

Fair value is based on a valuation model that calculates the present value of estimated future net servicing income.

The Company measures servicing rights at fair value at each reporting date and records the changes in fair value of servicing assets in earnings in the period in which the changes occur.

gains or losses are included in mortgage banking revenue in the Consolidated Statements of Income.

Servicing fee income is also recorded in the mortgage banking revenue line item.

Transfers of LHFS

In accordance with FASB guidance on mortgage-banking activities, any loans which are originally originated for sale into the secondary market and which we subsequently elect to transfer into the Company's loan portfolio are valued at fair value at the time of the transfer with any decline in value recorded as a charge against mortgage-banking revenue.

Loans are stated at their principal amount outstanding net of any deferred fees, premiums, discounts and costs and net of any partial charge-offs.

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

The Company does not participate

in any specific government or Company sponsored loan modification programs.

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

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

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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 for credit losses is an estimate of the probable losses that may be sustained in the loan portfolio.

The allowance is based on two basic principles of accounting:

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In that event, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset.

Mergers and Acquisitions

Business combinations are accounted for under ASC 805, Business Combinations, using the acquisition method of accounting.

The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date.

To determine the fair values, the Company relies on internal or third-party valuations, such as appraisals, valuations based on discounted cash flow analyses, or other valuation techniques.

Under the acquisition method of accounting, the Company identifies the acquirer and the closing date and applies applicable recognition principles and conditions.

Acquisition-related costs are costs the Company incurs to effect a business combination.

Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees.

Some other examples of costs to the Company include systems conversions, integration planning consultants and advertising costs.

The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception.

The costs to issue debt or equity securities is recognized in accordance with other applicable GAAP.

These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expenses caption.

Goodwill and Other Intangible Assets

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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).

As of December 31, 2021, the Company had one reporting unit and two operating segments (i.e., the Bank and Mortgage Banking division).

Other intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions and are amortized using an accelerated method over their estimated useful lives, which range from 7 to 10 years .

During 2021 and 2020, 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.

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

Other Real Estate Owned

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The Company remains subject to examination for tax years ending on or after December 31, 2018.

Derivative Financial Instruments and Hedging

We account for derivatives in accordance with FASB literature on accounting for derivative instruments and hedging activities.

When we enter into a derivative contract, we designate the derivative as held for trading, an economic hedge, or a qualifying hedge as detailed in the literature.

The designation may change based upon management’s reassessment or changing circumstances.

Derivatives utilized by the Company include interest rate lock commitments (“IRLC”) or (“IRLCs”) and forward settlement contracts.

IRLCs occur when we originate mortgage loans with interest rates determined prior to funding.

Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency, or commodity at a predetermined future date, rate, or price.

We designate at inception whether a derivative contract is considered hedging or non-hedging.

All of our derivatives are nonexchange traded contracts, and as such, their fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgement or estimation.

For qualifying hedges, we formally document at inception all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various accounting hedges.

We primarily utilize derivatives to manage interest rate sensitivity.

At December 31, 2021, we did not have any designated hedges.

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

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

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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.

Financial instruments measured at fair value on a recurring basis are investment securities available for sale equity securities with readily determinable fair values, loans held for sale, IRLCs, forward sale commitments, and MSRs.

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

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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.

The Company incurred advertising costs of approximately $ 339 thousand for the year ended December 31, 2021 and $ 331 thousand for the year ended December 31, 2020.

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.

Comprehensive income consists of net income and other comprehensive income (loss).

Other comprehensive income (loss) 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.

There were no reclassifications from accumulated other comprehensive income in 2021.

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

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

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

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

All other entities will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022 .

The FASB has issued multiple updates to ASU 2016-13 as codified in

Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03.

These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters.

Smaller reporting companies who file with the U.S.

Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are 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.

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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 team is currently running a parallel simulation to its current incurred loss 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.

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

Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2021-01 “Reference Rate Reform (Topic 848):

Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

An entity may elect to apply ASU No.

2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.

An entity may elect to apply ASU No.

2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.

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

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

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

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

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

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

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

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

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

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

Early adoption is not permitted.

All entities should apply ASU No.

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

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

Recently Adopted Accounting Developments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Recent Adopted Accounting Developments

In December 2020, the Consolidated Appropriations Act of 2021 (“CAA”) was passed.

Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic.

The Bank participated in the second round of PPP lending under the CAA, which resulted in 959 PPP loans for approximately $ 67.3 million.

BUSINESS COMBINATION

On October 31, 2021 (“Acquisition Date”), the Company completed the acquisition of Severn Bancorp, Inc.

(“Severn”), a Maryland charted commercial bank, in accordance with the definitive agreement that was entered into on March 3, 2021, by and among the Company and Severn.

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.

In connection with the completion of the merger, former Severn shareholders received 0.6207 shares of Shore common stock and $ 1.59 in cash for each share of Severn common stock.

Based on the $ 18.48 per share closing price of the Company’s common stock on October 29, 2021 and including the fair value of options converted or cashed-out, the total transaction value was approximately $ 169.8 million.

Upon completion of the acquisition, Shore shareholders owned approximately 59.6 % of the combined company, and former Severn shareholders owned approximately 40.4 %.

As of October 31, 2021, Severn, headquartered in Annapolis, MD, had more than $ 1.1 billion in assets and operated 7 full-service community banking offices throughout Anne Arundel County, Maryland.

The acquisition of Severn was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid are recorded at estimated fair values on the Acquisition Date.

The provisional amount of goodwill recognized as of the Acquisition Date was approximately $ 45.9 million.

The Company will continue to keep the measurement of goodwill open for any additional adjustments to the fair value of certain accounts, for example loans, that may arise during the Company’s final review procedures of any updated information.

If considered necessary, any subsequent adjustments to the fair value of assets acquired and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to goodwill within the first 12 months following the Acquisition Date.

The goodwill is not expected to be deductible for tax purposes.

As a result of the integration of the operations of Severn, it is not practicable to determine revenue or net income included in the Company’s consolidated operating results relating to Severn since the date of acquisition, as Severn’s results cannot be separately identified.

Comparative pro-forma financial statements for the prior year period were not presented, as adjustments to those statements would not be indicative of what would have occurred had the acquisition taken place on January 1, 2020.

In particular, adjustments that would have been necessary to be made to record the loans at fair value, the provision of credit losses or the core deposit intangible would not be practical to estimate.

The consideration paid for Severn’s common equity and outstanding stock options and the provisional fair values of acquired identifiable assets and assumed identifiable liabilities as of the Acquisition Date were as follows:

(In thousands, except per share data)

Purchase Price Consideration:

Fair value of common shares issued ( 8,053,088 shares) based on Shore Bancshares, Inc.

share price of $ 18.48

Cash consideration

Cash paid for cash-out Severn stock options

Cash for fractional shares

Total purchase price

Identifiable assets:

Cash and cash equivalents

Total securities

Loans held for sale

Premises and equipment, net

Other real estate owned

Core deposit intangible asset

Total identifiable assets

Identifiable liabilities:

Other liabilities

Total identifiable liabilities

Provisional fair value of net assets acquired including identifiable intangible assets

Provisional resulting goodwill

Acquired loans

The following table outlines the contractually required payments receivable, cash flows we expect to receive, and the accretable yield for all Severn PCI loans as of the acquisition date.

Contractually required payments receivable

Nonaccretable difference

Cash flows expected to be collected

Accretable yield

The Company recorded all loans acquired at the estimated fair value on the acquisition date with no carryover of the related allowance for loan losses.

The Company determined the net discounted value of cash flows on gross loans totaling $ 593.3 million, including 1,306 performing loans and 162 PCI loans.

The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-loan value ratios, loss exposures, and remaining balances.

These performing loans were segregated into pools based on loan and payment type.

The effect of the valuation process was a total net discount of $ 8.7 million at acquisition.

INVESTMENT SECURITIES

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

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

(Dollars in thousands)

Available-for-sale securities:

December 31, 2021

Government agencies

Mortgage-backed

Other Debt Securities

December 31, 2020

Government agencies

Mortgage-backed

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 2021.

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.

(Dollars in thousands)

Held-to-maturity securities:

December 31, 2021

Government agencies

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Other debt securities

December 31, 2020

Government agencies

Mortgage-backed

States and political subdivisions

Other debt securities

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

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

The fair value adjustment recorded through earnings totaled $( 40 ) thousand for 2021 and $ 28 thousand for 2020, respectively.

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

(Dollars in thousands)

December 31, 2021

Available-for-sale securities:

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(Dollars in thousands)

December 31, 2020

Available-for-sale securities:

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Government agencies

Mortgage-backed

Other debt securities

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

There were 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.

There were thirty-five available-for-sale securities and a hundred and fourteen held to maturity securities in an unrealized loss position at December 31, 2021.

There were seven available-for-sale securities and four held to maturity securities in an unrealized loss position at December 31, 2020.

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

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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, 2021 and 2020.

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

(Dollars in thousands)

Pledged available-for-sale securities

Pledged held to maturity securities

There were no obligations of states or political subdivisions with carrying values, as to any issuer, exceeding 10% of stockholders’ equity at December 31, 2021 or 2020.

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.

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Anne Arundel County, 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.

(Dollars in thousands)

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As of December 31, 2021 and 2020, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy-making officers, totaled approximately $ 18.7 million and $ 3.7 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

$ 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).

During 2021 and 2020, loan additions were approximately $ 16.5 million of which $ 15.4 million were due to the acquisition of Severn and loan repayments were approximately $ 1.5 million.

Net loan origination costs, included in balances above, totaled $ 1.2 million and $ 622 thousand as of December 31, 2021 and 2020, respectively.

At December 31, 2021 and December 31, 2020 included in total loans were $ 39.9 million and $ 52.3 million in loans, respectively, acquired as part of the 2017 NWBI branch acquisition.

These balances are presented net of the related discount which totaled $ 516 thousand at December 31, 2021 and $ 754 thousand at December 31, 2020.

At December 31, 2021 included in total loans were $ 553.0 million in loans, acquired as part of the acquisition of Severn.

These balances are presented net of the related discount which totaled $ 8.4 million at December 31, 2021.

The following table provides information about all loans acquired from Severn.

December 31, 2021

Acquired Loans -

(Dollars in thousands)

Credit Impaired

Outstanding principal balance

Carrying amount

Residential real estate

Commercial real estate

The following table presents a summary of the change in the accretable yield on PCI loans acquired from Severn.

For the Year Ended

(Dollars in thousands)

December 31, 2021

Accretable yield, beginning of period

Reclassification of nonaccretable difference due to improvement in expected cash flows

Other changes, net

Accretable yield, end of period

In April 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.

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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.

In December 2020, the Consolidated Appropriations Act of 2021 (“CAA”) was passed.

This extension of PPP lending expired on May 31, 2021.

Under both the CARES and CAA, the Company funded 2,454 loans for a cumulative balance of $ 196.3 million.

As of December 31, 2021, the Company held PPP loans with a total outstanding balance of $ 27.6 million, of which $ 9.2 million was acquired from Severn, which is included in the commercial loan segment in the table above.

As of December 31, 2020, the Company held PPP loans with a total outstanding balance of $ 122.8 million, which is included in the commercial loan segment in the table above.

The decrease is due to repayment and forgiveness received throughout 2021.

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.

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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.

At December 31, 2021, the Bank was servicing $ 301.4 million, in loans for the Federal National Mortgage Association and $ 69.8 million in loans for the Federal Home Loan Mortgage Corporation.

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

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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 December 31, 2020 and 2019.

The following tables include impairment information relating to loans and the allowance for credit losses for the years ended December 31.

(Dollars in thousands)

December 31, 2021

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Acquired loans - PCI

Allowance for credit losses allocated to:

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Loans collectively evaluated for impairment

Acquired loans - PCI

Total allowance

(Dollars in thousands)

December 31, 2020

Loans individually evaluated for impairment

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Total allowance

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.

The allowance for loan losses was 0.66 % of total loans and 0.67 % when excluding PPP loans, at December 31, 2021 compared to 0.95 % and 1.04 % at December 31, 2020.

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.

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

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

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

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.

Quarter-to-date

average recorded

(Dollars in thousands)

December 31, 2021

Impaired nonaccrual loans:

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Commercial real estate

Quarter-to-date

average recorded

(Dollars in thousands)

December 31, 2020

Impaired nonaccrual loans:

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Commercial real estate

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.

The following tables provide a roll-forward for troubled debt restructurings as of and for the years ended December 31.

Disbursements

2 unchanged sentences

Transfer In/(Out)

For year ended

December 31, 2021

Accruing TDRs

8 unchanged sentences

Transfer In/(Out)

For year ended

December 31, 2020

Accruing TDRs

4 unchanged sentences

Commercial real estate

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

The following tables provide information on loans that were modified and considered to be TDRs for the years ended December 31.

Premodification

1 unchanged sentence

(Dollars in thousands)

For year ended

December 31, 2021

Residential real estate

Commercial real estate

For year ended

December 31, 2020

Residential real estate

Commercial real estate

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.

Since the beginning of the pandemic and through December 31, 2021, the Company had executed principal and/or interest deferrals on outstanding loan balances of $ 221.1 million.

As of December 31, 2021, the Company had no COVID related deferrals remaining.

These deferrals were not considered TDRs based on the relief provisions of the CARES Act and CAA or recent interagency regulatory guidance.

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

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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 December 31, 2020 and 2019.

The following tables provide information on loan risk ratings at December 31.

(Dollars in thousands)

Pass/Performing

December 31, 2021

Residential real estate

2 unchanged sentences

Pass/Performing

December 31, 2020

Residential real estate

Commercial real estate

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

The following tables provide information on the aging of the loan portfolio at December 31.

(Dollars in thousands)

December 31, 2021

Residential real estate

2 unchanged sentences

(Dollars in thousands)

December 31, 2020

Residential real estate

1 unchanged sentence

Percent of total loans

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for 2020 and 2019.

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the years ended December 31.

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

(Dollars in thousands)

For year ended

December 31, 2021

Allowance for credit losses:

3 unchanged sentences

(Dollars in thousands)

For year ended

December 31, 2020

Allowance for credit losses:

3 unchanged sentences

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.

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $ 311 thousand and $ 0 as of December 31, 2021 and 2020.

There were $ 203 thousand of residential real estate properties included in the balance of other real estate owned at December 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 December 31, 2020 and December 31, 2019.

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

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

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.

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

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.

4 unchanged sentences

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:

During 2021, the Company acquired long-term branch leases and equipment due to the acquisition of Severn.

These leases were reassessed by management as of the acquisition date of October 31, 2021, which included updating the incremental borrowing rates and remaining lease terms.

The following tables present information about the Company’s leases as of and for the years ended December 31.

(Dollars in thousands)

6 unchanged sentences

For the Year Ended

For the year ended

Lease cost (in thousands)

5 unchanged sentences

Cash paid for amounts included in the measurement of lease liabilities

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:

The following table presents a maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities at December 31.

Lease payments due (in thousands)

December 31, 2021

Twelve months ending December 31, 2022

5 unchanged sentences

Lease liabilities

West, LLC, a subsidiary of the Bank, leases space to five unrelated companies and to a law firm of which the Chairman of the Board of the Company and Bank is a partner.

Total gross rental income was $ 180 thousand for the year ended December 31, 2021.

The following table presents our minimum future annual rental income on such leases at December 31.

(In thousands)

December 31, 2021

PREMISES AND EQUIPMENT

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

The following table provides information on premises and equipment at December 31.

(Dollars in thousands)

2 unchanged sentences

Accumulated depreciation

Depreciation expense of continuing operations totaled $ 1.2 million for 2020 and $ 1.1 million for 2019.

Depreciation expense totaled $ 1.5 million for 2021 and $ 1.2 million for 2020.

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.

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

December 31, 2021

Remaining Life

3 unchanged sentences

Total other intangible assets

December 31, 2020

Remaining Life

4 unchanged sentences

The aggregate amortization expense was $ 734 thousand and $ 533 thousand for the years ended December 31, 2021 and 2020, respectively.

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

The following table presents estimated future remaining amortization for amortizing intangibles at December 31, 2021.

(Dollars in thousands)

Total amortizing intangible assets

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

The Company had the following other assets at December 31.

(Dollars in thousands)

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OTHER LIABILITIES

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

The Company had the following other liabilities at December 31.

(Dollars in thousands)

Accrued interest payable

Accrued salaries and wages

Accounts payable

Deferred compensation liability

Other liabilities

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.

The approximate amount of certificates of deposit of $250,000 or more was $ 78.0 million and $ 43.2 million at December 31.

The following table provides information on the approximate maturities of total time deposits at December 31.

(Dollars in thousands)

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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.

The following table summarizes certain information on short-term borrowings as of and for the years ended December 31.

(Dollars in thousands)

1 unchanged sentence

Repurchase agreements

FHLB Advances

Overnight Fed Funds purchased

Repurchase agreements

FHLB Advances

Overnight Fed Funds purchased

3 unchanged sentences

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, 2021 and 2020.

In conjunction with the acquisition of Severn, the Company assumed $ 10.0 million in Long-term FHLB Advances which carry a contractual interest rate of 2.19 %.

The associated purchase premium at acquisition was $ 162 thousand.

The premium is being amortized over the contractual life of the obligation which matures in October 2022.

In addition, the Bank had secured credit availability of approximately $ 363.9 million and $ 316.7 million from the Federal Home Loan Bank at December 31, 2021 and 2020, respectively.

1 unchanged sentence

The Bank had no short-term borrowings from the Federal Home Loan Bank at December 31, 2021 and December 31, 2020.

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

These advances were paid off in April of 2020.

SUBORDINATED DEBT

6 unchanged sentences

The debt balance of $ 24.5 million is presented net of unamortized issuance costs of $ 448 thousand at December 31, 2021.

In conjunction with the acquisition of Severn, the Company assumed $ 20.6 million in junior subordinated debt securities (“2035 Debentures”).

The 2035 Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of which 100% of the common equity is owned by the Company.

The Trust was formed for the purpose of issuing corporation-obligated

mandatorily redeemable Capital Securities (“Capital Securities”) to third-party investors and using the proceeds from the sale of such Capital Securities to purchase the 2035 Debentures.

The 2035 Debentures held by the Trust are the sole assets of the Trust.

Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures.

The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the 2035 Debentures.

We have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee.

Under the terms of the 2035 Debentures, we are permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred and is continuing.

As of December 31, 2021, we were current on all interest due on the 2035 Debentures

BENEFIT PLANS

2 unchanged sentences

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.

Company contributions to this plan included in noninterest expense totaled $ 696 thousand and $ 601 thousand for 2021 and 2020, respectively.

Employee Stock Ownership Plan

Prior to the closing of the acquisition of Severn, Severn paid into the Severn Employee Stock Ownership Plan (“ESOP”) all employer contributions and adopted resolutions to (i) terminate the ESOP and (ii) provide for full vesting of all account balances in the ESOP.

A determination letter has been filed with the IRS to terminate the ESOP and the ESOP will be terminated if and when the IRS issues a favorable determination letter.

STOCK-BASED COMPENSATION

7 unchanged sentences

The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 579,822 shares remained available for grant at December 31, 2021.

The following tables provide information on stock-based compensation expense for 2020 and 2019.

The following tables provide information on stock-based compensation expense as of and for the years ended December 31.

(Dollars in thousands)

4 unchanged sentences

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 two years ended December 31.

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

Weighted Average

2 unchanged sentences

Nonvested at end of period

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

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

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

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

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

Weighted Average

Outstanding at beginning of period

Outstanding at end of period

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.

The fair value of restricted stock awards that vested during 2021 and 2020 was $ 309 thousand and $ 243 thousand, respectively.

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

Weighted Average

6 unchanged sentences

There were no stock options granted during 2021 and 2020, 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.

We maintain and account for derivatives, in the form of IRLCs and mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities.

We recognize gains and losses through mortgage-banking revenue in the Consolidated Statements of Income.

IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives.

We are exposed to price risk from the time a mortgage loan is locked in until the time the loan is sold.

The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 120 days .

For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of TBA securities, which are forward contracts, as well as, to a lesser degree, loan level commitments in the form of best efforts and mandatory forward contracts.

These assets and liabilities are included in the Consolidated Balance Sheets in other assets and accrued expenses and other liabilities, respectively.

The following table provides information pertaining to the carrying amounts of our derivative financial instruments at December 31.

(Dollars in thousands)

Asset - IRLCs

Asset - TBA securities

Liability - TBA securities

The Company had no derivatives at December 31, 2020.

DEFERRED COMPENSATION

3 unchanged sentences

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

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

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

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

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

4 unchanged sentences

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

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

The following table provides information on Shore Bancshares, Inc.’s contributions and participant deferrals to the Plan for 2021 and 2020 and the related deferred compensation liability as of December 31.

(Dollars in thousands)

Deferred compensation contribution

Elective deferrals

2 unchanged sentences

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.

however, BOLI was purchased to offset the benefit costs.

The following table provides information on the expense recognized during the years ended December 31, 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.

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

5 unchanged sentences

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.

The following table includes information on the deferred compensation liability and cash surrender value as of December 31.

(Dollars in thousands)

2 unchanged sentences

OTHER EXPENSES

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

The following table summarizes the Company’s other noninterest expenses for the years ended December 31.

(Dollars in thousands)

7 unchanged sentences

Total other noninterest expense

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

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

(Dollars in thousands)

2 unchanged sentences

Total income tax expense

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.

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

Tax at federal statutory rate

3 unchanged sentences

Actual income tax expense rate

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

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

(Dollars in thousands)

3 unchanged sentences

Nonaccrual loan interest

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

Lease liabilities

Deferred compensation

Deferred loan costs

Total deferred tax assets

2 unchanged sentences

Deferred tax liabilities:

Right-of-use assets

Mortgage servicing rights

Acquisition accounting adjustments

6 unchanged sentences

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.

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

(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 and diluted earnings per common share

Income from continuing operations

Loss from discontinued operations

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 years ended December 31, 2021 and 2020.

2 unchanged sentences

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

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

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

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks’ assets, liabilities, and certain off-balance sheet items as

calculated under regulatory accounting practices.

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

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

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

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.

Quantitative measures established by regulation to ensure capital adequacy require the Company and 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, 2021, management believes that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2021, the most recent notification from our primary regulator categorized Shore United Bank, N.A., 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.

2 unchanged sentences

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.

The following tables present the capital amounts and ratios at December 31.

(Dollars in thousands)

Shore United Bank

Shore Bancshares, Inc.

Shore United Bank, N.A.

(Dollars in thousands)

Shore United Bank

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

The Company was previously required to

comply with the minimum capital requirements on a consolidated basis;

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.

Shore United Bank, N.A.

Bank and holding company regulations 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, 2021, the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios.

The Bank issued a dividend to Shore Bancshares, Inc.

in the fourth quarter of 2021 of $ 25.0 million in relation to the purchase of Severn.

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.

2 unchanged sentences

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.

The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the years ended December 31.

Unrealized gains

9 unchanged sentences

Balance, December 31, 2020

Other comprehensive income before reclassifications

Reclassification of gains recognized

Other comprehensive loss

Balance, December 31, 2021

1 unchanged sentence

Other comprehensive income

Reclassification of (gain) recognized

Balances, December 31, 2020

23 unchanged sentences

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.

LHFS are carried at fair value, which is determined based on Mark to Trade (MTT) for allocated/committed loans or Mark to Market (MTM) analysis for unallocated/uncommitted loans based on third-party pricing models.

The fair value of MSRs is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income.

The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, and other ancillary income such as late fees.

Management reviews all significant assumptions on a quarterly basis.

Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal.

The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk.

Both assumptions can, and generally will, change as market conditions and interest rates change.

The significant unobservable inputs used in the fair value measurement of the reporting entity’s residential MSRs are prepayment speeds, probability of default, rate of return, and cost of servicing.

Significant increases/decreases in any of those inputs in isolation would have resulted in a significantly lower/higher fair value measurement.

Generally, a change in the assumption used for prepayment speeds would have been accompanied by a directionally similar change in the markets, i.e.

the 10-Year Treasury, and in the probability of default.

We utilize a third-party specialist model to estimate the fair value of our IRLCs, which are valued based upon mortgage securities (TBA) prices less estimated costs to process and settle the loan.

Fair value is adjusted for the estimated probability of the loan closing with the borrower.

(Dollars in thousands)

Valuation Technique

Unobservable Input

December 31, 2021

Market Approach

Weighted average prepayment speed (PSA) (2)

IRLCs - net asset

Market Approach

Range of pull through rate

Average pull through rate

(1) The weighted average was calculated with reference to the principal balance of the underlying mortgages.

(2) PSA = Public Securities Association Standard Prepayment Model

The following table presents activity in MSRs for the year ended December 31.

(Dollars in thousands)

Beginning balance

Valuation adjustment

Ending balance

The following table presents activity in the IRLCs for the year ended December 31.

(Dollars in thousands)

Beginning balance

Valuation adjustment

Ending balance

Forward Contracts

To avoid interest rate risk, we hedge the open locked/closed position with TBA forward trades.

On a regular basis, we allocate disbursed loans to mandatory commitments with government-sponsored enterprises (“GSE”) and private investors delivering the loans within 120 days of origination to maximize interest earnings.

For a small percentage of our business, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower.

Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments.

The mandatory commitments are derivatives, and we measure and report them at fair value.

Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date.

This is a level 2 input.

We have elected to measure and report best efforts commitments at fair value using a valuation methodology similar to that used for mandatory commitments.

Market assumptions utilized in the fair value measurement of the reporting entity’s residential mortgage derivatives, inclusive of IRLCs, Closed Loan Inventory, TBA derivative trades, and Mandatory Forwards may be subject to investor overlays that may result in a significantly lower fair value measurement.

Generally such overlays are announced with advanced notice in order to include the risk adjuster, however there are times when announcements are mandated resulting in a lower fair value measurement.

Additionally market assumptions such as spec pool payups may result in a significantly higher fair value measurement at time of loan allocation to specific trades.

The following tables present the recorded amount of assets measured at fair value on a recurring basis for the years ended December 31.

No assets were transferred from one hierarchy level to another during 2021 or 2020.

(Dollars in thousands)

December 31, 2021

Securities available for sale:

1 unchanged sentence

Mortgage-backed

Other Debt Securities

Equity securities

TBA securities

Total assets at fair value

TBA securities

Total liabilities at fair value

(Dollars in thousands)

December 31, 2020

Securities available for sale:

1 unchanged sentence

Mortgage-backed

Equity securities

Total assets at fair value

Assets Measured at Fair Value on a Nonrecurring Basis

2 unchanged sentences

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.

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.

8 unchanged sentences

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

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

The following tables set forth the Company’s financial assets subject to fair value adjustments (impairment) on a nonrecurring basis for the years ended December 31, 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

December 31, 2021

Nonrecurring measurements:

5 unchanged sentences

Discount rate

Other real estate owned

Appraisal of collateral

Appraisal adjustments

Quantitative Information about Level 3 Fair Value Measurements

2 unchanged sentences

Unobservable Input

December 31, 2020

Nonrecurring measurements:

5 unchanged sentences

Discount rate

Other real estate owned

Appraisal of collateral

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

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.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments for the years ended December 31.

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

December 31, 2021

December 31, 2020

(Dollars in thousands)

3 unchanged sentences

Level 2 inputs

Investment securities available for sale

Investment securities held to maturity

Equity securities

Restricted securities

TBA securities

Cash surrender value on life insurance

4 unchanged sentences

Checking plus interest

Certificates of deposit, $100,000 or more

Certificates of deposit

Securities sold under retail repurchase agreement

1 unchanged sentence

Subordinated debt

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

TBA Securities

COMMITMENTS AND CONTINGENCIES

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.

4 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 as of December 31, 2020 and 2019.

The following table provides information on commitments outstanding for the years ended December 31.

(Dollars in thousands)

December 31, 2021

December 31, 2020

Commitments to extend credit

Letters of credit

The Bank has established an reserve for off balance sheet credit exposures.

The Bank has established a 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.

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

CONTINGENCIES

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

The Company provides banking services to customers who do business in the medical-use cannabis industry.

While the growing, processing, and sales of medical-use cannabis is legal in the state of Maryland, such customers engaged in those activities currently violate Federal law.

The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers.

The strict enforcement of Federal laws regarding medical-use cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the Federal government, including imprisonment and fines.

There is an uncertainty of the potential impact to the Company’s Consolidated Financial Statements if the Federal government takes actions against the Company.

As of December 31, 2021, the Company has not accrued an amount for the potential impact of any such actions.

Following is a summary of the level of business activities with our medical-use cannabis customers:

● Deposit and loan balances at December 31, 2021 were approximately $ 49.1 million, or 1.6 % of total deposits, and $ 42.3 million, or 2.0 % of total gross loans, respectively.

● Interest and noninterest income for the year ended December 31, 2021, were approximately $ 360 thousand and $ 363 thousand, respectively

In the normal course of business, Shore Bancshares, Inc.

1 unchanged sentence

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.

SEGMENT REPORTING

We are in the business of providing financial services and we operate in two business segments – commercial and consumer banking and mortgage-banking.

Commercial and consumer banking is conducted through the Bank and involves delivering a broad range of financial services, including lending and deposit taking, to individuals and commercial enterprises.

This segment also includes our treasury and administrative functions.

Mortgage-banking is conducted through the Bank’s secondary marketing department and involves originating first and second-lien residential mortgages for sale in the secondary market.

The following tables present certain information regarding our business segments as of and for the year ended December 31.

(Dollars in thousands)

Mortgage Banking

For the year ended December 31, 2021

Interest Income

Interest Expense

Net interest income

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

Noninterest expense

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Total assets, December 31, 2021

RELATED PARTY TRANSACTIONS

During January 2007, a law firm, in which the Chairman of the Board of the Company and the Bank is a partner, entered into a five year lease agreement with a subsidiary of the Company.

The term of the lease was five years with the option to renew the lease for three additional five year terms.

The second option to renew was exercised in January 2017.

The total rent payments received by the subsidiary were $ 50 thousand for the year ended December 31, 2021.

The law firm also reimburses the Company for its share of common area maintenance and utilities.

In addition, the law firm represents the Company and the Bank in certain legal matters.

PARENT COMPANY FINANCIAL INFORMATION

The following tables provide condensed financial information for Shore Bancshares, Inc.

(Parent Company Only).

(Parent Company Only) at December 31.

Condensed Balance Sheets

14 unchanged sentences

(Dollars in thousands)

Management and other fees from subsidiaries

Dividends from subsidiaries

Gain on company owned life insurance

Other operating income

Interest expense

3 unchanged sentences

Total expenses

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

Income (loss) before income tax (benefit) and equity in

undistributed net income of subsidiaries

Income tax (benefit)

(Loss) before equity in undistributed net income of subsidiaries

Equity in undistributed net income of subsidiaries

Income tax expense

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

(Deficit) equity in undistributed net income of subsidiaries

Condensed Statements of Cash Flows

3 unchanged sentences

Adjustments to reconcile net income to cash

provided by (used in) operating activities:

Equity in undistributed net income of subsidiaries

provided by operating activities:

Deficit (equity) in undistributed net income of subsidiaries

Amortization of debt issuance costs

1 unchanged sentence

Company owned life insurance income

Acquisition accounting adjustments

Net (increase) in other assets

Net increase (decrease) in other liabilities

Net cash provided by (used in) operating activities

Net (decrease) increase in other liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Purchase of company owned life insurance

Transfer to subsidiary

Acquisition of business activity, net of cash paid

Net cash (used in) investing activities

Cash flows from financing activities:

Increase in short-term borrowings

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

4 unchanged sentences

and vested restricted stock

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental cash flow information:

Transfer of building, available for sale securities and other assets to banking subsidiary

REVENUE RECOGNITION

6 unchanged sentences

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

Payment for service charges on

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

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

Trust and Investment Fee Income

6 unchanged sentences

Payment is received shortly after services are rendered.

Title Company Revenue

Title Company revenue consists of revenue earned on performing title work for real estate transactions.

The revenue is earned when the title work is performed.

Payment for such performance obligations generally occurs at the time of the settlement of a real estate transaction.

As such settlement is generally within 90 days of the performance of the title work, we recognize the revenue at the time of the settlement.

All contract issuance costs are expensed as incurred.

We had no contract assets or liabilities at December 31, 2021.

Other Noninterest Income

10 unchanged sentences

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.

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

(Dollars in thousands)

4 unchanged sentences

Interchange income

Title Company revenue

Other noninterest income

9 unchanged sentences

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

SUBSEQUENT EVENTS

Pending Acquisition

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

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

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

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

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

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

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

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

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

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

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

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data