What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-16 compared with 2021-11-15 · 400 added, 284 removed, 658 unchanged (51% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

September 30,

(In thousands, except share and per share data)

6 unchanged sentences

Equity securities, at fair value

Restricted securities

Restricted securities, at cost

Loans held for sale, at fair value

Loans held for investment

allowance for credit losses

2 unchanged sentences

Other real estate owned, net

Mortgage servicing rights, at fair value

Right-of-use assets

3 unchanged sentences

Securities sold under retail repurchase agreements

Advances from FHLB - long-term

Subordinated debt

10 unchanged sentences

Retained earnings

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income

TOTAL STOCKHOLDERS' EQUITY

4 unchanged sentences

For Three Months Ended

For Nine Months Ended

September 30,

(In thousands, except per share data)

1 unchanged sentence

Interest and fees on loans

Interest and dividends on investment securities:

Interest and dividends on taxable investment securities

Interest on deposits with other banks

11 unchanged sentences

Trust and investment fee income

Gains on sales and calls of investment securities

Interchange credits

Mortgage-banking revenue

Title Company revenue

Other noninterest income

16 unchanged sentences

Income tax expense

Earnings per common share - Basic and diluted

Basic and diluted net income per common share

Dividends paid per common share

3 unchanged sentences

For Three Months Ended

For Nine Months Ended

September 30,

(In thousands)

Other comprehensive (loss) income:

Other comprehensive (loss):

Investment 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 (loss) income

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

Total other comprehensive (loss)

Comprehensive income

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three and Nine months Ended September 30, 2021 and 2020

For the Three Months Ended March 31, 2022 and 2021

Comprehensive

1 unchanged sentence

(In thousands)

Income (loss)

Balances, January 1, 2022

Other comprehensive (loss)

Retirement of common stock

Common shares issued for employee stock purchase plan

Stock-based compensation

1 unchanged sentence

Balances, March 31, 2022

Other comprehensive (loss)

Stock-based compensation

Cash dividends declared

Balances, June 30, 2021

Other comprehensive (loss)

Stock-based compensation

Exercise of options, net of shares surrendered

Cash dividends declared

Balances, September 30, 2021

Comprehensive

2 unchanged sentences

Balances, January 1, 2021

Other comprehensive income

Stock-based compensation

Vesting of restricted stock, net of shares surrendered

Cash dividends declared

Balances, March 31, 2020

Other comprehensive income

Stock-based compensation

Cash dividends declared

Balances, June 30, 2020

Other comprehensive (loss)

2 unchanged sentences

Cash dividends declared

Balances, September 30, 2020

Balances, March 31, 2021

See accompanying notes to Consolidated Financial Statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For Nine Months Ended

September 30,

For Three Months Ended

(In thousands)

6 unchanged sentences

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 tax (benefit)

(Gains) on sales and calls of securities

Losses on sales and disposals of premises and equipment

Losses on sales and valuation adjustments on other real estate owned

Deferred income tax expense (benefit)

(Gains) on valuation adjustments on mortgage servicing rights

(Gains) on sales and valuation adjustments on other real estate owned

Fair value adjustment on equity securities

7 unchanged sentences

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

Proceeds from sales and calls of investment securities available for sale

Purchases of investment securities available for sale

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

1 unchanged sentence

Purchases of equity securities

Purchases of restricted securities

Net change in loans

Purchases of premises and equipment

Proceeds from sales of premises and equipment

Proceeds from sales of other real estate owned

Improvements to other real estate owned

Net redemption of restricted securities

1 unchanged sentence

Net cash (used in) investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Net changes in:

2 unchanged sentences

Short-term borrowings

Long-term borrowings

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

Common stock dividends paid

Retirement of common stock

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

Stock options exercised, net of shares surrendered

Issuance of common stock

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental cash flows information:

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (CONTINUED)

Interest paid

Income taxes paid

Recognition (remeasurement of) discount marks on PCI loans acquired

Lease liabilities arising from right-of-use assets

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

Unrealized (loss) on securities available for sale

See accompanying notes to Consolidated Financial Statements.

1 unchanged sentence

Notes to Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

For the Three Months Ended March 31, 2022 and 2021

Note 1 – Basis of Presentation

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

and its subsidiary with all significant intercompany transactions eliminated.

and its subsidiaries with all significant intercompany transactions eliminated.

The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry.

The accompanying interim financial statements are unaudited;

however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at September 30, 2021, the consolidated results of income and comprehensive income for the three and nine months ended September 30, 2021 and 2020, changes in stockholders’ equity for the three and nine months ended September 30, 2021 and 2020 and cash flows for the nine months ended September 30, 2021 and 2020, have been included.

however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at March 31, 2022, the consolidated results of income and comprehensive income for the three months ended March 31, 2022 and 2021, changes in stockholders’ equity for the three months ended March 31, 2022 and 2021 and cash flows for the three months ended March 31, 2022 and 2021, have been included.

All such adjustments are of a normal recurring nature.

The amounts as of December 31, 2021 were derived from the 2021 audited financial statements.

The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

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

3 unchanged sentences

and, unless the context requires otherwise, its consolidated subsidiary, Shore United Bank (the “Bank”).

Risks and Uncertainties

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

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

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

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

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

Recent Accounting Standards and Other Authoritative Guidance

9 unchanged sentences

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.

At this time, the Company has established a project management team which meets periodically to discuss and assign roles and responsibilities, key tasks to complete, and a general timeline to be followed for implementation.

The team has been working with an advisory consultant and has purchased a vendor model for implementation.

8 unchanged sentences

2022-02 – In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model.

The amendments eliminate the accounting guidance for

troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancing’s and restructurings made with borrowers experiencing financial difficulty.

In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures.

The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of troubled debt restructurings (TDR), an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13.

Early adoption is permitted if an entity has adopted ASU 2016-13.

An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures.

The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

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

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

17 unchanged sentences

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

2020-06 - In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S.

Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features.

The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it.

The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas.

In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency.

For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.

For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption is permitted.

The Bank does not expect the adoption of ASU 2020-06 to have a material impact on its (consolidated) financial statements.

2021-04 - In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40):

Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic.

For both public and private companies, the ASU is effective for fiscal years beginning after December 15, 2021.

Transition is prospective.

Early adoption is permitted.

The Company does not expect the adoption of ASU 2021-04 to have a material impact on its consolidated financial statements.

2021-06 - In August 2021, the FASB issued ASU 2021-06, “'Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946):

Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.

33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.

This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No.

33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants”.

The ASU is effective upon addition to the FASB Codification.

The Company does not expect the adoption of ASU 2021-06 to have a material impact on its consolidated financial statements.

Recent 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.

Note 2 – 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 Company acquired Severn to access deposits and deploy excess capital into a high growth market, while also enhancing scale to drive efficiency and profitability.

Additionally, this transaction creates 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, 2021.

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 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

Loans, net (1)

Premises and equipment, net

Other real estate owned

Core deposit intangible asset

Other assets (1)

Total identifiable assets

Identifiable liabilities:

Other liabilities

Total identifiable liabilities

Provisional fair value of net assets acquired including identifiable intangible assets

Provisional resulting goodwill (1)

(1) Includes the effect of measurement period adjustments recorded in the first quarter of 2022 and reconciled in the table below.

The following table details the changes in fair value of net assets acquired and liabilities assumed from the amounts reported for the year ended December 31, 2021 (dollars in thousands).

Goodwill at December 31, 2021

Effect of adjustments to:

Goodwill at March 31, 2022

The adjustment to goodwill made during the first quarter of 2022 was related to the fair value of certain acquired loans, net of the related deferred tax impact which was determined to be higher than their acquisition date fair values.

Acquired loans

The following table outlines the contractually required payments receivable, cash flows we expected to receive, and the accretable yield for all Severn purchase credit-impaired (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.

Note 3 – Earnings Per Share

3 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30,

(In thousands, except per share data)

3 unchanged sentences

Earnings per common share - Basic and Diluted

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2021 and 2020.

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three months ended March 31, 2022 and 2021.

Note 4 – Investment Securities

2 unchanged sentences

Available-for-sale securities:

September 30, 2021

March 31, 2022

Government agencies

Mortgage-backed

Other Debt securities

December 31, 2021

1 unchanged sentence

Mortgage-backed

No available for sale securities were sold during the three and nine months ended September 30, 2021.

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

During the nine months ended September 30, 2020, the Company sold available for sale securities for proceeds of $ 13.0 million and recognized gross gains of $ 347 thousand.

Other Debt securities

No available for sale securities were sold during the three months ended March 31, 2022 and 2021.

(Dollars in thousands)

Held-to-maturity securities:

September 30, 2021

March 31, 2022

Government agencies

7 unchanged sentences

Other debt securities

Equity securities with an aggregate fair value of $ 1.4 million at September 30, 2021 and December 31, 2020 are presented separately on the balance sheet.

The fair value adjustment recorded through earnings totaled $( 24 ) thousand for the nine months ended September 30, 2021 and $ 34 thousand for the nine months ended September 30, 2020, respectively.

The following tables provide information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2021 and December 31, 2020.

Equity securities with an aggregate fair value of $ 1.3 million at March 31, 2022 and $ 1.4 million at December 31, 2021 are presented separately on the balance sheet.

The fair value adjustment recorded through earnings totaled $( 70 ) thousand for the three months ended March 31, 2022 and $( 18 ) thousand for the three months ended March 31, 2021, respectively.

(Dollars in thousands)

September 30, 2021

March 31, 2022

Available-for-sale securities:

1 unchanged sentence

Mortgage-backed

Other debt securities

Held-to-maturity securities:

12 unchanged sentences

All of the securities with unrealized losses in the portfolio have modest duration risk, low credit risk, and minimal losses when compared to total amortized cost.

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

The unrealized losses on debt securities that exist are the result of market changes in interest rates since original purchase and are not related to credit concerns.

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

There were nineteen available-for-sale securities and forty-six held-to-maturity securities in an unrealized loss position at September 30, 2021.

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at September 30, 2021.

There were fifty-four available-for-sale securities and one hundred and fifty-three held-to-maturity securities in an unrealized loss position at March 31, 2022.

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at March 31, 2022.

Available for sale

7 unchanged sentences

Note 5 – Loans and Allowance for Credit Losses

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Talbot County, Queen Anne’s County, Kent County, Caroline County, Dorchester County, Worcester County, Baltimore County and

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

The following table provides information about the principal classes of the loan portfolio at September 30, 2021 and December 31, 2020.

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 March 31, 2022 and December 31, 2021.

(Dollars in thousands)

September 30, 2021

March 31, 2022

December 31, 2021

4 unchanged sentences

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

Loans included deferred fees, net of costs, of $ 376 thousand and discounts on acquired loans of $ 577 thousand at September 30, 2021.

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

At September 30, 2021 and December 31, 2020, included in total loans were $ 40.5 million and $ 52.3 million in loans, respectively, acquired as part of the NWBI branch acquisition in 2017.

Included in loans were deferred fees, net of costs, of $ 795 thousand and $ 1.2 million at March 31, 2022 and December 31, 2021.

At March 31, 2022 and December 31, 2021, included in total loans were $ 36.5 million and $ 39.9 million in loans, respectively, net of discounts on acquired loans of $ 480 thousand and $ 516 thousand, respectively, as part of the Northwest Bancshares, Inc.

branch acquisition in 2017.

At March 31, 2022 and December 31, 2021, included in total loans were $ 506.5 million and $ 553.0 million in loans, acquired as part of the acquisition of Severn.

These balances were presented net of the related discount which totaled $ 8.0 million and $ 8.4 million at March 31, 2022 and December 31, 2021, respectively.

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

6 unchanged sentences

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

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

The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest

rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

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

20 unchanged sentences

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

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.

The PPP was designed to provide U.S.

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

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 September 30, 2021, the Company held PPP loans with a total outstanding balance of $ 41.5 million, which is included in the commercial loan segment in the table above.

The decrease is due to repayment and forgiveness received as of September 30, 2021.

During 2021 and 2020, the Company participated in the Small Business Administration’s Paycheck Protection Program (PPP).

As of March 31, 2022, the Company held PPP loans with a total outstanding balance of $ 14.9 million, inclusive of loans issued pre-merger and those acquired from Severn, which are included in the commercial loan segment in the table above.

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 are included in the commercial loan segment in the table above.

The decrease is due to repayment and forgiveness received as of March 31, 2022.

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.

1 unchanged sentence

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 following tables provide information about all loans acquired from Severn.

March 31, 2022

Acquired Loans -

(Dollars in thousands)

Credit Impaired

Outstanding principal balance

Carrying amount

Residential real estate

Commercial real estate

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 Three Months Ended

(Dollars in thousands)

March 31, 2022

Accretable yield, beginning of period

Reclassification of nonaccretable difference due to improvement in expected cash flows

Other changes, net

Accretable yield, end of period

At March 31, 2022, the Bank was servicing $ 336.5 million in loans for the Federal National Mortgage Association and $ 75.9 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:

1 unchanged sentence

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

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

repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

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

10 unchanged sentences

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

The following tables include impairment information relating to loans and the allowance for credit losses as of September 30, 2021 and December 31, 2020.

The following tables include impairment information relating to loans and the allowance for credit losses as of March 31, 2022 and December 31, 2021.

(Dollars in thousands)

September 30, 2021

March 31, 2022

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Acquired loans - PCI

Allowance for credit losses allocated to:

1 unchanged sentence

Loans collectively evaluated for impairment

Acquired loans - PCI

Total allowance

3 unchanged sentences

Loans collectively evaluated for impairment

Acquired loans - PCI

Allowance for credit losses allocated to:

1 unchanged sentence

Loans collectively evaluated for impairment

Acquired loans - PCI

Total allowance

The following tables provide information on impaired loans and any related allowance by loan class as of September 30, 2021 and December 31, 2020.

The allowance for loan losses was 0.67 % of total loans and 0.92 % when excluding PPP loans and acquired loans, at March 31, 2022 compared to 0.66 % and 0.93 % at December 31, 2021.

The following tables provide information on impaired loans and any related allowance by loan class as of March 31, 2022 and December 31, 2021.

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.

1 unchanged sentence

average recorded

(Dollars in thousands)

September 30, 2021

March 31, 2022

Impaired nonaccrual loans:

10 unchanged sentences

Commercial real estate

September 30, 2020

March 31, 2021

Quarter-to-date

average recorded

(Dollars in thousands)

12 unchanged sentences

Commercial real estate

The following tables provide a roll-forward for TDRs as of September 30, 2021 and September 30, 2020.

The following tables provide a roll-forward for TDRs as of March 31, 2022 and March 31, 2021.

Disbursements

2 unchanged sentences

Transfer In/(Out)

For nine months ended

September 30, 2021

For three months ended

March 31, 2022

Accruing TDRs

8 unchanged sentences

Transfer In/(Out)

For nine months ended

September 30, 2020

For three months ended

March 31, 2021

Accruing TDRs

4 unchanged sentences

Commercial real estate

There were no loans modified and considered to be TDRs during the three months ended September 30, 2021 and September 30, 2020.

The following tables provide information on loans that were modified and considered to be TDRs during the nine months ended September 30, 2021 and September 30, 2020.

Premodification

Postmodification

(Dollars in thousands)

For nine months ended

September 30, 2021

Residential real estate

Commercial real estate

For nine months ended

September 30, 2020

Residential real estate

Commercial real estate

Since the beginning of the pandemic and through September 30, 2021, the Company had executed principal and/or interest deferrals on outstanding loan balances of $ 221.1 million.

As of September 30, 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 three and nine months ended September 30, 2021 and 2020.

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

There were no loans modified and considered to be TDRs during the three months ended March 31, 2022 and March 31, 2021.

There were no TDRs which subsequently defaulted within 12 months of modification for the three months ended March 31, 2022 and 2021.

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

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

1 unchanged sentence

These loans and the pass/watch loans are assigned higher qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses.

At September 30, 2021, there were no nonaccrual loans classified as special mention or doubtful and $ 3.5 million of nonaccrual loans were classified as substandard.

At March 31, 2022, there were no nonaccrual loans classified as special mention or doubtful and $ 2.8 million of nonaccrual loans were classified as substandard.

Similarly, at December 31, 2021, there were no nonaccrual loans classified as special mention or doubtful and $ 2.0 million of nonaccrual loans were classified as substandard.

The following tables provide information on loan risk ratings as of September 30, 2021 and December 31, 2020.

The following tables provide information on loan risk ratings as of March 31, 2022 and December 31, 2021.

(Dollars in thousands)

Pass/Performing

September 30, 2021

March 31, 2022

Residential real estate

5 unchanged sentences

Commercial real estate

The following tables provide information on the aging of the loan portfolio as of September 30, 2021 and December 31, 2020.

The following tables provide information on the aging of the loan portfolio as of March 31, 2022 and December 31, 2021.

(Dollars in thousands)

September 30, 2021

March 31, 2022

Residential real estate

6 unchanged sentences

Percent of total loans

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three and nine months ended September 30, 2021 and September 30, 2020.

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months ended March 31, 2022 and March 31, 2021.

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

1 unchanged sentence

For three months ended

September 30, 2021

March 31, 2022

Allowance for credit losses:

4 unchanged sentences

For three months ended

September 30, 2020

Allowance for credit losses:

Beginning Balance

Net (charge-offs) recoveries

Ending Balance

(Dollars in thousands)

For nine months ended

September 30, 2021

Allowance for credit losses:

Beginning Balance

Net (charge-offs) recoveries

Ending Balance

(Dollars in thousands)

For nine months ended

September 30, 2020

March 31, 2021

Allowance for credit losses:

3 unchanged sentences

Foreclosure Proceedings

There were no consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of September 30, 2021 and December 31, 2020, respectively.

There was 1 residential real estate property included in the balance of other real estate owned totaling $ 203 thousand at September 30, 2021 and $ 0 at December 31, 2020.

There were $ 297 thousand of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of March 31, 2022 and $ 311 thousand as of December 31, 2021, respectively.

There were 2 residential real estate properties included in the balance of other real estate owned totaling $ 198 thousand at March 31, 2022 and 1 residential real estate property totaling $ 203 thousand at December 31, 2021.

All accruing TDRs were in compliance with their modified terms.

Both performing and non-performing TDRs had no further commitments associated with them as of September 30, 2021 and December 31, 2020.

Both performing and non-performing TDRs had no further commitments associated with them as of March 31, 2022 and December 31, 2021.

Note 6 – Leases

5 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.

During the second quarter of 2021, one of the Company’s long-term branch leases was reassessed by management and it was determined that it was not reasonably certain that the options to renew would be exercised after the initial lease term of 10 years .

This resulted in a shorter lease term and a reduction of the lease liability and right-to-use assets as compared to the first quarter of 2021 when the lease was initially placed into service.

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:

(Dollars in thousands)

September 30, 2021

March 31, 2022

December 31, 2021

4 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

Lease cost (in thousands)

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Operating lease cost

4 unchanged sentences

Lease payments due (in thousands)

September 30, 2021

Three months ending December 31, 2021

March 31, 2022

Nine months ending December 31, 2022

Twelve months ending December 31, 2023

5 unchanged sentences

Lease liabilities

Total gross rental income was $ 272 thousand for the three months ended March 31, 2022.

The following table presents our minimum future annual rental income on such leases as of March 31, 2022.

(In thousands)

March 31, 2022

Nine months ending December 31, 2022

Note 7 – Goodwill and Other Intangibles

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

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

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

The following table provides information on the significant components of goodwill and other acquired intangible assets at September 30, 2021 and December 31, 2020.

September 30, 2021

The following table provides information on the significant components of goodwill and other acquired intangible assets at March 31, 2022 and December 31, 2021.

March 31, 2022

Remaining Life

9 unchanged sentences

Total other intangible assets

The aggregate amortization expense was $ 353 thousand for the nine months ended September 30, 2021 and $ 407 thousand for the nine months ended September 30, 2020.

At September 30, 2021, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:

The aggregate amortization expense was $ 517 thousand for the three months ended March 31, 2022 and $ 126 thousand for the three months ended March 31, 2021.

At March 31, 2022, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:

(Dollars in thousands)

1 unchanged sentence

Note 8 – Other Assets

The Company had the following other assets at September 30, 2021 and December 31, 2020.

September 30,

The Company had the following other assets at March 31, 2022 and December 31, 2021.

(Dollars in thousands)

4 unchanged sentences

Income taxes receivable

The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of September 30, 2021 and December 31, 2020.

September 30,

(Dollars in thousands)

Deferred tax assets:

Allowance for credit losses

Write-downs of other real estate owned

Nonaccrual loan interest

Total deferred tax assets

Less valuation allowance

Deferred tax assets, net of valuation allowance

Deferred tax liabilities:

Acquisition accounting adjustments

Deferred capital gain on branch sale

Unrealized gains on available-for-sale securities

Total deferred tax liabilities

Net deferred tax assets

Note 9 - Subordinated Debt

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

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

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

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

2 unchanged sentences

Initial debt issuance costs were $ 611 thousand.

The debt balance of $ 24.5 million is presented net of unamortized issuance costs of $ 479 thousand at September 30, 2021.

The debt balance of $ 24.6 million is presented net of unamortized issuance costs of $ 418 thousand at March 31, 2022.

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.

The recorded balance was $ 18.2 million at March 31, 2022 and December 31, 2021, which included fair value adjustments of $ 2.4 million.

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 March 31, 2022, we were current on all interest due on the 2035 Debentures.

Note 10 – Other Liabilities

The Company had the following other liabilities at September 30, 2021 and December 31, 2020.

The Company had the following other liabilities at March 31, 2022 and December 31, 2021.

(Dollars in thousands)

September 30, 2021

March 31, 2022

December 31, 2021

Accrued interest payable

Accrued salaries and wages

Accounts payable

Deferred compensation liability

Income taxes payable

Other liabilities

7 unchanged sentences

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

The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 581,822 shares remained available for grant at September 30, 2021.

The following tables provide information on stock-based compensation expense for the three and nine months ended September 30, 2021 and 2020.

The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 546,217 shares remained available for grant at March 31, 2022.

The following tables provide information on stock-based compensation expense for the three months ended March 31, 2022 and 2021.

For Three Months Ended

For Nine Months Ended

September 30,

(Dollars in thousands)

1 unchanged sentence

Excess tax benefits related to stock-based compensation

September 30,

(Dollars in thousands)

1 unchanged sentence

Weighted average period unrecognized expense is expected to be recognized

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the nine months ended September 30, 2021.

Nine Months Ended September 30, 2021

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the three months ended March 31, 2022.

Three Months Ended March 31, 2022

Weighted Average

1 unchanged sentence

Nonvested at end of period

The fair value of restricted stock awards that vested during the first nine months of 2021 and 2020 was $ 268 thousand and $ 254 thousand, respectively.

The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the nine months ended September 30, 2021.

Nine Months Ended September 30, 2021

Weighted Average

Exercise Price

Outstanding at beginning of period

Expired/Cancelled

Outstanding at end of period

Exercisable at end of period

There were no stock options granted during the three and nine months ended September 30, 2021 and September 30, 2020.

Note 11 – Accumulated Other Comprehensive Income

The fair value of restricted stock awards that vested during the first three months of 2022 and 2021 was $ 492 thousand and $ 230 thousand, respectively.

There were no stock options granted during the three months ended March 31, 2022 and March 31, 2021.

All of the Company’s previously issued stock options that were outstanding on January 1, 2021 were either exercised or expired prior to December 31, 2021.

Note 12 – Derivatives

We maintain and account for derivatives, in the form of interest rate lock commitments (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 to be announced (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 March 31, 2022 and December 31, 2021.

March 31, 2022

December 31, 2021

(Dollars in thousands)

Asset - IRLCs

Asset - TBA securities

Liability - TBA securities

Note 13 – Accumulated Other Comprehensive Income (Loss)

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

The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2021 and 2020.

The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021.

Unrealized gains

10 unchanged sentences

Other comprehensive loss

Reclassification of gains recognized

Balance, September 30, 2021

Balance, March 31, 2022

Balance, December 31, 2020

Other comprehensive income

Reclassification of (gain) recognized

Balances, September 30, 2020

Other comprehensive (loss)

Balances, March 31, 2021

Note 14 – Fair Value Measurements

2 unchanged sentences

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

Securities available for sale are recorded at fair value on a recurring basis.

Securities available for sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis.

Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, loans held for sale and other real estate owned (foreclosed assets).

14 unchanged sentences

Government sponsored entities as Level 2.

Subordinated Debt

Fair value measurement for subordinated debt is based on recent issuance rates of subordinated debt offerings over the prior 3 months for issuers of a relative size.

A liquidity premium was added to the assumed market spreads to reflect exit pricing and the marketability/liquidity costs contained with consummating an orderly transaction.

Although these securities have readily available fair market values, the Company determined that they should be classified as level 2 investments in the fair value hierarchy due to not being considered traded in a highly active market.

Equity Securities

1 unchanged sentence

The tables below present the recorded amount of assets measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020.

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

Loans held for sale (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 mortgage servicing rights (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)

September 30, 2021

Valuation Technique

Unobservable Input

March 31, 2022

Market Approach

Weighted average prepayment speed (PSA) (2)

IRLCs - net asset

Market Approach

Range of pull through rate

Average pull through rate

(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 three months ended March 31, 2022.

(Dollars in thousands)

March 31, 2022

Beginning balance

Servicing rights reulting from sales of loans

Valuation adjustment

Ending balance

The following table presents activity in the IRLCs for the three months ended March 31, 2022.

(Dollars in thousands)

March 31, 2022

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 at March 31, 2022 and December 31, 2021.

No assets were transferred from one hierarchy level to another during the first three months of 2022 or 2021.

(Dollars in thousands)

March 31, 2022

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)

3 unchanged sentences

Mortgage-backed

Other Debt Securities

Equity securities

TBA securities

Total assets at fair value

TBA securities

Total liabilities at fair value

Below is a discussion on the Company’s assets measured at fair value on a nonrecurring basis.

13 unchanged sentences

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

The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at September 30, 2021 and December 31, 2020, that are valued at the lower of cost or market.

The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at March 31, 2022 and December 31, 2021, that are valued at the lower of cost or market.

Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

3 unchanged sentences

Unobservable Input

September 30, 2021

March 31, 2022

Nonrecurring measurements:

20 unchanged sentences

Discount rate

Other real estate owned

Appraisal of collateral

Appraisal adjustments

(1) Fair value is generally determined through independent appraisals of the underlying collateral (impaired loans and OREO) or discounted cash flow analyses (impaired loans), which generally include various level III inputs which are not identifiable.

3 unchanged sentences

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

Fair values for September 30, 2021 and December 31, 2020 were estimated using an exit price notion.

September 30, 2021

Fair values for March 31, 2022 and December 31, 2021 were estimated using an exit price notion.

March 31, 2022

December 31, 2021

4 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

Advances from FHLB - long-term

Subordinated debt

Note 13 – Financial Instruments with Off-Balance Sheet Risk

TBA Securities

Note 14 – 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 at September 30, 2021 and December 31, 2020.

The following table provides information on commitments outstanding at March 31, 2022 and December 31, 2021.

(Dollars in thousands)

September 30, 2021

March 31, 2022

December 31, 2021

1 unchanged sentence

Letters of credit

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.

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 March 31, 2022, the Company had 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 March 31, 2022 were approximately $ 54.2 million, or 1.8 % of total deposits, and $ 35.2 million, or 1.6 % of total gross loans, respectively.

● Interest and noninterest income for the three months ended March 31, 2022, were approximately $ 503 thousand and $ 506 thousand, respectively

In the normal course of business, the Company.

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

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

Note 15 – Segment Reporting

We are in the business of providing financial services and subsequent to the acquisition of Severn in the fourth quarter of 2021 we operate in two business segments – community banking and mortgage-banking.

Community 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 residential mortgage division of the Bank 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 for the three months ended March 31, 2022.

(Dollars in thousands)

Mortgage Banking

March 31, 2022

Interest Income

Interest Expense

Net interest income

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

Noninterest expense

Income before income taxes

Income tax expense

Total assets, March 31, 2022

Note 16 – Revenue Recognition

15 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 March 31, 2022.

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 continuing operations, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2021 and 2020.

The following presents noninterest income from continuing operations, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2022 and 2021.

For Three Months Ended

For Nine Months Ended

September 30,

(Dollars in thousands)

4 unchanged sentences

Interchange income

Title Company revenue

Other noninterest income

8 unchanged sentences

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

As of September 30, 2021, and December 31, 2020, the Company did not have any significant contract balances.

Note 15 – Subsequent Event

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.

On September 27, 2021, the Company and Severn received regulatory approval from the Office of the Comptroller of the Currency to convert Shore United Bank to a national bank and, for Severn to be merged with and into Shore United Bank, National Association.

The Company also received regulatory approval from the Federal Reserve Bank of Richmond for Severn to be merged with and into the Company.

On October 22, 2021, the shareholders of the Company and Severn approved the merger of Severn with and into the Company, with the Company as the surviving corporation.

The transaction closed on October 31, 2021, and as of that date, Severn had approximately, $ 1.3 billion in total assets, $ 950.0 million in total deposits and $ 589.6 million in total loans.

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

The following table represents the consideration paid by the Company to acquire Severn:

(Dollars in thousands)

Purchase Price:

Shore Bancshares, Inc common stock paid at closing price of $ 18.48

Cash consideration

Cash consideration for Severn options

Total purchase price

As of March 31, 2022, and December 31, 2021, the Company did not have any significant contract balances.

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

What changed 10-Q

Item 1. Financial Statements