What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-30 compared with 2022-03-31 · 276 added, 261 removed, 1336 unchanged (29% of the section changed)

21 unchanged sentences

Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2022, 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.

1 unchanged sentence

March 30, 2023

/s/ Edward C.

/s/ Vance Adkins

President and Chief Executive Officer

2 unchanged sentences

(Principal Financial Officer)

Report of I ndependent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Shore Bancshares, Inc.

Easton, Maryland

Opinion on the Financial Statements

16 unchanged sentences

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

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:

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:

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.

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

Allowance for Loan Losses – Qualitative Formula Allowance

16 unchanged sentences

● 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.

12 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

Mortgage servicing rights, at fair value

Right-of-use assets

Cash surrender value on life insurance

Noninterest-bearing

2 unchanged sentences

Securities sold under retail repurchase agreements

Advances from FHLB - short-term

Advances from FHLB - long-term

11 unchanged sentences

Retained earnings

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income

TOTAL STOCKHOLDERS' EQUITY

7 unchanged sentences

Interest and fees on loans

Interest and dividends on investment securities:

Interest and dividends on taxable investment securities

Interest and dividends on tax-exempt investment securities

Interest on deposits with other banks

33 unchanged sentences

Income tax expense

Earnings per common share - Basic and diluted

Basic and diluted net income per common share

5 unchanged sentences

(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

6 unchanged sentences

(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

2 unchanged sentences

Other comprehensive (loss)

Common shares issued for employee stock purchase plan

Stock-based compensation

2 unchanged sentences

Other comprehensive (loss)

Common shares issued for employee stock purchase plan

Stock-based compensation

Exercise of options, net of shares surrendered

Cash dividends declared

Balances, September 30, 2022

Other comprehensive (loss)

Severn Bank acquisition - 8,053,088 shares

Other comprehensive income

Common shares issued for employee stock purchase plan

Stock-based compensation

5 unchanged sentences

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

2 unchanged sentences

Other comprehensive (loss)

Retirement of common stock

Stock-based compensation

Exercise of options, net of shares surrendered

Cash dividends declared

1 unchanged sentence

Other comprehensive (loss)

Retirement of common stock

Severn Bank acquisition - 8,053,088 shares

Stock-based compensation

Exercise of options, net of shares surrendered

Cash dividends declared

7 unchanged sentences

CASH FLOWS FROM OPERATING ACTIVITIES:

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

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

Net accretion of acquisition accounting estimates

9 unchanged sentences

(Gains) on sales and calls of securities

Losses on valuation adjustments on mortgage servicing rights

(Gains) loss on valuation adjustments on mortgage servicing rights

Losses on sales and disposals of premises and equipment

9 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

2 unchanged sentences

Purchases of equity securities

Purchase of restricted securities

Net change in loans

2 unchanged sentences

Proceeds from sales of other real estate owned

Net redemption of restricted securities

Improvements to other real estate owned

Redemption of restricted securities

Purchases of bank owned life insurance

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

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

3 unchanged sentences

Short-term borrowings

Long-term borrowings

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

Repayment of long-term borrowings

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

6 unchanged sentences

Income taxes paid

Lease liabilities arising from right-of-use assets

Unrealized (loss) gain on securities available for sale

Recognition (remeasurement of) lease liabilities arising from right-of-use assets

Transfer from loans held for sale to loans held for investment

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

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

25 unchanged sentences

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.

29 unchanged sentences

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.

Fair value adjustments are recorded at each balance sheet date with the changes in fair value recognized in mortgage banking revenue in the Consolidated Statements of Income.

Gains and losses on loan sales are determined based on the differential between a loan’s carrying value and sales price 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.

1 unchanged sentence

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.

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.

These 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.

Transfers of LHFS to Loans Held for Investment (LHFI)

The Company may, from time to time, transfer LHFS to LHFI.

Transfers of LHFS to LHFI are accounted for in accordance with the underlying accounting applied to the loan prior to its transfer.

For loans where the fair value option had been elected, the Company continues to account for the loan at fair value in the LHFI portfolio.

Subsequent changes in the fair value of these loans are recorded in interest income.

During the year ended December 31, 2022, the Company transferred LHFS accounted for under the fair value option totaling approximately $ 7.8 million from LHFS to LHFI There were no transfers between LHFS and LHFI during the year ended December 31, 2021.

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

32 unchanged sentences

Allowance for Credit Losses

The allowance for credit losses is maintained at a level believed adequate by management to absorb losses inherent in the loan portfolio as of the balance sheet date and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions and other observable data.

The allowance for credit losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio as of the balance sheet date and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions and other observable data.

Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows or collateral value of impaired loans, estimated losses on pools of similar loans that are based on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change.

27 unchanged sentences

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

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

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

specific or historical formula allowance.

A pass-watch loan has adequate risk and may include loans which may have been upgraded from another higher risk category.

39 unchanged sentences

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

As of December 31, 2022, the Company had two operating segments the Community Banking segment and Mortgage Banking segment.

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 .

8 unchanged sentences

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

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

The Company’s short-term borrowings may also include advances on other lines of credit with correspondent banks or re-purchase agreements with customers.

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

31 unchanged sentences

We primarily utilize derivatives to manage interest rate sensitivity.,

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

At December 31, 2022 and 2021 we did not have any designated hedges.

Basic and Diluted Earnings Per Common Share

4 unchanged sentences

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.

Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Cash and Cash Equivalents

16 unchanged sentences

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

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 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.

The Company measures certain financial assets and liabilities at fair value and also makes disclosures about certain financial instruments that are not measured at fair value in the Consolidated Balance Sheets.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

In determining fair value, the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs, reducing subjectivity.

Fair value estimates involve uncertainties and matters of significant judgement regarding interest rates, credit risk, and other factors, particularly in the absence of broad markets for specific terms.

Changes in assumptions or in market conditions could significantly affect these estimates.

See Note 22 for a further discussion of fair value.

4 unchanged sentences

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.

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.

There were no reclassifications from accumulated other comprehensive income in 2022 and 2021.

Recent Accounting Standards and Other Authoritative Guidance

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

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

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

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

Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.

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

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.

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

Historical data has been collected and uploaded to the new model and the team is in the process of finalizing the methodologies that will be utilized.

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

2016-13 During June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts.

Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration.

The Company adopted ASU 2016-13 as of January 1, 2023 in accordance with the required implementation date.

Transition adjustments during the first quarter of 2023, will primarily include increases in the allowance for credit losses on loans and the reserve for credit losses on unfunded commitments to extend credit as well as a reduction of total equity, net of taxes.

This reduction of equity capital may, at the Company’s election, be phased-in over a three-year period in accordance with regulatory guidelines.

The final cumulative effect of the transition adjustments remains subject to completion by the Company but is estimated to reduce opening retained earnings in January 1, 2023 by a reasonable range of $ 7 million to $ 9 million.

Subsequent to adoption, the Company will record adjustments to its allowance and reserve for unfunded commitments by recognizing a provision for credit losses in the consolidated statements of income.

The Company is utilizing a third-party model to tabulate its estimate of current expected credit losses, using a DCF methodology.

In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics which included types of collateral, use, lien position, secured and unsecured lending, purchased portfolios and risk rating.

The Company primarily utilizes a published unemployment rate forecast in its reasonable and supportable forecasting of current expected credit losses.

To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors:

underwriting standards, national, regional and local economic conditions, experience and depth of lending staff, past due loans, the strength of the credit review function, the value of underlying collateral, concentrations of credit, and other factors as deemed appropriate by management.

The Company’s CECL implementation process was overseen by a CECL Implementation Committee and included an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience.

During 2022, the Company calculated its current expected credit losses model in parallel to its incurred loss model in order to further refine the methodology and model.

In addition, the Company engaged a third-party audit firm to perform a comprehensive model validation.

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

3 unchanged sentences

and (4) validating a systematic methodology.

2022-02 – In March 2022, the (FASB) issued (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.

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

2022-03 - In June 2022, the (FASB) issued (ASU) No.

2022-03, “Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”.

ASU 2022-03 clarifies that a

contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023.

Early adoption is permitted.

The Company does not expect the adoption of ASU 2022-03 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.

18 unchanged sentences

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

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.

The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

BUSINESS COMBINATION

1 unchanged sentence

(“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.

The primary reasons for the Company to acquire Severn were 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 is expected to enhance the Company’s competitive position in the Columbia/Baltimore/Towson MSA, while filling in our 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.

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 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 %.

2 unchanged sentences

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 Company kept the measurement of goodwill open for any additional adjustments to the fair value of certain accounts.

The measurement period was closed within the first 12 months following the acquisition date.

Adjustments to

the provisional amount of goodwill recognized as of the Acquisition Date are detailed below.

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:

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

(In thousands, except per share data)

10 unchanged sentences

Loans held for sale

Loans, net (1)

Premises and equipment, net

1 unchanged sentence

Core deposit intangible asset

Other assets (1)

Total identifiable assets

2 unchanged sentences

Total identifiable liabilities

Provisional fair value of net assets acquired including identifiable intangible assets

Provisional resulting goodwill

Fair value of net assets acquired including identifiable intangible assets

Resulting goodwill (1)

(1) Includes the effect of measurement period adjustments recorded during 2022 and reconciled

in the table below.

Measurement period adjustments included adjustments related to loan

validations and the final accounting for the income taxes of Severn.

Goodwill at December 31, 2021

Effect of measurement period adjustments to:

Goodwill at December 31, 2022

Acquired loans

16 unchanged sentences

Mortgage-backed

Other Debt Securities

Otherd debt securities

December 31, 2021

1 unchanged sentence

Mortgage-backed

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.

Other debt securities

No available for sale securities were sold during 2022 and 2021.

(Dollars in thousands)

10 unchanged sentences

Other debt securities

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.

Equity securities with an aggregate fair value of $ 1.2 million at December 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 $( 157 ) thousand for 2022 and $( 40 ) thousand for 2021, respectively.

5 unchanged sentences

Mortgage-backed

Other debt securities

Held-to-maturity securities:

1 unchanged sentence

Mortgage-backed

States and political subdivisions

Other debt securities

11 unchanged sentences

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 a hundred and sixteen available-for-sale securities and a hundred and ninety two held to maturity securities in an unrealized loss position at December 31, 2022.

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, 2022.

13 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES

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.

2 unchanged sentences

Commercial real estate

Total loans (1)

Allowance for credit losses

Total loans, net

(1) Includes net origination costs totaling $ 1.4 million and $ 1.2 million as of December 31, 2022 and 2021, respectively.

In the normal course of banking business, loans are made to officers and directors and their affiliated interests.

1 unchanged sentence

As of December 31, 2022 and 2021, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy-making officers, totaled approximately $ 24.1 million and $ 18.7 million, respectively.

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.

During 2022 and 2021, loan additions were approximately $ 7.6 million and $ 16.5 million of which $ 15.4 million were due to the acquisition of Severn and loan repayments were approximately $ 2.2 million and $ 1.5 million, respectively.

At December 31, 2022 and December 31, 2021 included in total loans were $ 22.9 million and $ 39.9 million in loans, respectively, acquired as part of the 2017 NWBI branch acquisition.

These balances are presented net of the related discount which totaled $ 298 thousand at December 31, 2022 and $ 516 thousand at December 31, 2021.

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.

At December 31, 2022 and December 31, 2021 included in total loans were $ 372.2 million and $ 553.0 million in loans, acquired as part of the acquisition of Severn.

These balances are presented net of the related discount which totaled $ 6.7 million at December 31, 2022 and $ 8.4 million at December 31, 2021.

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

9 unchanged sentences

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.

6 unchanged sentences

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.

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 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.

In April 2020, the Company began its participation in the Paycheck Protection Program (“PPP”) and continued participation in the Program through its expiration in 2021.

As of December 31, 2022, the Company held PPP loans with a total outstanding balance of $ 187 thousand.

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.

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

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

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

The net fees associated with the PPP loans have been accreted to interest income over the remaining contractual lives of the loans, with any unrecognized fees recorded in interest income upon forgiveness and repayment by the SBA.

At December 31, 2022, the Bank was servicing $ 343.8 million in loans for the Federal National Mortgage Association and $ 74.1 million in loans for the Federal Home Loan Mortgage Corporation.

2 unchanged sentences

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.

16 unchanged sentences

Acquired loans - PCI

Total loans (1)

Allowance for credit losses allocated to:

1 unchanged sentence

Loans collectively evaluated for impairment

Acquired loans - PCI

Total allowance

(1) Excludes loans measured at fair value of $ 8.4 million at December 31, 2022.

(Dollars in thousands)

2 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 allowance for loan losses was 0.65 % of total loans and 0.65 % when excluding PPP loans, at December 31, 2022 compared to 0.66 % and 0.67 % at December 31, 2021.

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

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

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

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

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

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

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

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

35 unchanged sentences

Transfer In/(Out)

For year ended

For the Year Ended

December 31, 2022

9 unchanged sentences

Transfer In/(Out)

For year ended

For the Year Ended

December 31, 2021

5 unchanged sentences

Commercial real estate

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

Premodification

Postmodification

(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

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.

There were no TDRs which subsequently defaulted within 12 months of modification for the years ended December 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 OREO or repossessed assets.

10 unchanged sentences

Commercial real estate

(1) Includes loans measured at fair value of $ 8.4 million at December 31, 2022.

(Dollars in thousands)

9 unchanged sentences

Percent of total loans

(1) Includes loans measured at fair value of $ 8.4 million at December 31, 2022.

(Dollars in thousands)

6 unchanged sentences

(Dollars in thousands)

For year ended

For the year ended

December 31, 2022

4 unchanged sentences

(Dollars in thousands)

For year ended

For the year ended

December 31, 2021

4 unchanged sentences

Foreclosure Proceedings

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.

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $ 263 thousand and $ 311 thousand as of December 31, 2022 and 2021, respectively.

There were $ 18 thousand of residential real estate properties included in the balance of other real estate owned at December 31, 2022 and $ 203 thousand at December 31, 2021.

All accruing TDRs were in compliance with their modified terms.

27 unchanged sentences

December 31, 2022

Twelve months ending December 31, 2022

Twelve months ending December 31, 2023

Twelve months ending December 31, 2024

Twelve months ending December 31, 2025

Twelve months ending December 31, 2026

Total undiscounted cash flows

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.

Total gross rental income was $ 1.3 million and $ 180 thousand for the years ended December 31, 2022 and December 31, 2021, respectively.

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

22 unchanged sentences

Total other intangible assets

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

The aggregate amortization expense was $ 2.0 million and $ 734 thousand for the years ended December 31, 2022 and 2021, respectively.

The following table presents estimated future remaining amortization for amortizing intangibles at December 31, 2022.

6 unchanged sentences

Prepaid expenses

Cash surrender value on life insurance

Income taxes receivable

7 unchanged sentences

Other liabilities

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

The approximate amount of certificates of deposit of $250,000 or more was $ 77.7 million and $ 78.0 million at December 31, 2022 and 2021, respectively.

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

5 unchanged sentences

At December 31, 2022 and December 31, 2021, we had no brokered deposits.

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

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

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

2 unchanged sentences

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, 2022 and 2021.

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.

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

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

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

The associated purchase premium at acquisition was $ 162 thousand which was amortized over the contractual life of the obligation which matured in October 2022.

In addition, the Bank had secured credit availability of approximately $ 298.9 million and $ 363.9 million from the FHLB at December 31, 2022 and 2021, respectively.

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

The Bank had $ 40 million in short-term borrowings from the FHLB at December 31, 2022 and no short term FHLB borrowings at December 31, 2021.

SUBORDINATED DEBT

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

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

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

5 unchanged sentences

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 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.

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.

5 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 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.

Company contributions to this plan included in noninterest expense totaled $ 1.3 million and $ 696 thousand for 2022 and 2021, respectively.

STOCK-BASED COMPENSATION

20 unchanged sentences

The fair value of restricted stock awards that vested during 2022 and 2021 was $ 532 thousand and $ 309 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

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 2021 and 2020, respectively.

There were no stock options granted during 2022 and 2021.

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.

6 unchanged sentences

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

December 31, 2022

December 31, 2021

(Dollars in thousands)

1 unchanged sentence

Asset - TBA securities

Liability - IRLCs

Liability - TBA securities

The Company had no derivatives at December 31, 2020.

DEFERRED COMPENSATION

7 unchanged sentences

The accounts of the Rabbi Trust are consolidated and the investments are included in other assets on the Consolidated Balance Sheets.

The Company and the Bank may also make matching, mandatory and discretionary contributions for certain participants.

The Company and the

Bank may also make matching, mandatory and discretionary contributions for certain participants.

A participant is fully vested at all times in the amounts that he or she elects to defer.

50 unchanged sentences

Deferred loan costs

Unrealized losses on available-for-sale securities

Total deferred tax assets

13 unchanged sentences

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

For the Year Ended

(In thousands, except per share data)

Weighted average shares outstanding - Basic

Dilutive effect of common stock equivalents-options

Weighted average shares outstanding - Diluted

Weighted average shares outstanding - Basic and Diluted

Earnings per common share - Basic and Diluted

3 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.

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

11 unchanged sentences

(Dollars in thousands)

Shore Bancshares, Inc.

Shore United Bank, N.A.

3 unchanged sentences

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.

Shore Bancshares, Inc.

had no outstanding receivables from its subsidiary at December 31, 2021 or 2020.

ACCUMULATED OTHER COMPREHENSIVE INCOME

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 years ended December 31.

Unrealized gains

(losses) on securities

transferred from

gains (losses) on

available for sale

comprehensive

(Dollars in thousands)

Held-to-maturity

income (loss)

Balance, December 31, 2021

2 unchanged sentences

Balance, December 31, 2020

Other comprehensive income

Reclassification of (gain) recognized

Balances, December 31, 2020

Other comprehensive (loss)

Balance, December 31, 2021

FAIR VALUE MEASUREMENTS

22 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.

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 using quoted prices for similar loans and adjusted for observable inputs related to the loans.

LHFI, at fair value

Certain loans that have been transferred from LHFS to LHFI have and continue to be accounted for under the fair value option as described in Note 1.

These loans are valued based on third-party pricing models using quoted prices for similar loans and adjusted for observable inputs related to the loans.

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.

2 unchanged sentences

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.

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.

1 unchanged sentence

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.

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.

10 unchanged sentences

Average pull through rate

(Dollars in thousands)

Valuation Technique

Unobservable Input

December 31, 2021

Market Approach

Weighted average prepayment speed (PSA) (2)

IRLCs - 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.

1 unchanged sentence

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

For the Year Ended

(Dollars in thousands)

December 31, 2022

Beginning balance

Servicing rights resulting from sales of loans

Valuation adjustment

1 unchanged sentence

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

For the Year Ended

(Dollars in thousands)

December 31, 2022

Beginning balance

3 unchanged sentences

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.

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.

17 unchanged sentences

TBA securities

LHFI, at fair value

Total assets at fair value

6 unchanged sentences

Mortgage-backed

Other debt securities

Equity securities

TBA securities

Total assets at fair value

TBA securities

Total liabilities 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.

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

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

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

17 unchanged sentences

Impaired loans

Appraisal of collateral

Liquidation expense

Impaired loans

Discounted cash flow analysis

15 unchanged sentences

Discount rate

(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.

Other real estate owned

Appraisal of collateral

Appraisal adjustments

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

17 unchanged sentences

Cash surrender value on life insurance

Loans, at fair value

Level 3 inputs

5 unchanged sentences

Securities sold under retail repurchase agreement

Advances from FHLB - short-term

Advances from FHLB - long-term

1 unchanged sentence

TBA Securities

Level 3 inputs

COMMITMENTS AND CONTINGENCIES

15 unchanged sentences

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 provides banking services to customers who do business in the cannabis industry.

Prior to the second quarter of 2022, the Company restricted these businesses to include only those in the medical-use cannabis industry in the state of Maryland.

During the second quarter of 2022, the Company expanded its cannabis banking program to include both medical and adult-use licensees in other states, with an initial offering of the Company’s existing Maryland customers with multi-state operations.

While the Company is providing banking services to customers that are engaged in growing, processing, and sales of medical-use cannabis in a manner that complies with applicable state law, 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.

While we are not aware of any instance of a federally insured financial institution being subject to such aiding and abetting liability, the strict enforcement of Federal laws regarding 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, 2022, 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:

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

● Deposit and loan balances at December 31, 2022 were approximately $ 131.7 million, or 4.4 % of total deposits, and $ 54.9 million, or 2.2 % of total gross loans, respectively.

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

● Interest and noninterest income for the year ended December 31, 2022, were approximately $ 4.9 million and $ 2.0 million, respectively

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

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

and its subsidiaries 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.

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.

We are in the business of providing financial services and we operate in two business segments – commercial and consumer banking, termed “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 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.

Results of the mortgage banking segment for the year ended December 31, 2022, reflect a full year of operating results, while results for the year ended December 31, 2021, reflect results for the mortgage banking segment from the Acquisition Date of Severn through the end of the year.

Prior to the acquisition of Severn, the Company did not engage in the business of 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 years ended December 31.

(Dollars in thousands)

8 unchanged sentences

Noninterest expense

Income before income taxes

Income tax expense

Total assets, December 31, 2022

(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

3 unchanged sentences

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 Company leases a portion of one of its facilities to a law firm, in which the Chairman of the Board of the Company and the Bank is a partner.

In January 2022, the lease entered the final five-year renewal option under the leasing agreement.

The total rent payments received were $ 305 thousand for the year ended December 31, 2022 and $ 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.

Other related party transactions consisting of normal lending and depository relationships are described in Note 4.

Loans and Allowance for Credit Losses and Note 10.

Deposits, respectively.

PENDING MERGER

On December 14, 2022, the Company and The Community Financial Corporation (TCFC) entered into a definitive agreement for the Company to acquire TCFC.

Under the terms of the agreement, TCFC shareholders will have the right to receive 2.3287 shares of Shore common stock and cash in lieu of any fractional shares of Shore common stock.

Upon closing, shareholders of Shore will own approximately 60 % of the combined company and shareholders of TCFC will own approximately 40 % of the combined company.

The transaction is subject to satisfaction of customary closing conditions, including approval from Shore and TCFC shareholders.

Shore and TCFC have received all required regulatory approvals and waivers.

The transaction is expected to close late in the second quarter or early in the third quarter of 2023.

As of December 31, 2022, TCFC had more than $ 2.4 billion in assets and operated ten full-service offices in Maryland and two full-service offices in Virginia.

PARENT COMPANY FINANCIAL INFORMATION

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

(Parent Company Only) at December 31.

(Parent Company Only) at and for the years ending December 31.

Condensed Balance Sheets

8 unchanged sentences

Retained earnings

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income

Total stockholders’ equity

4 unchanged sentences

Dividends from subsidiaries

Gain on company owned life insurance

Company owned life insurance income

Interest expense

3 unchanged sentences

Total expenses

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

Income before income tax (benefit) and equity (deficit) 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

Income tax (benefit)

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

Equity (deficit) in undistributed net income of subsidiaries

Condensed Statements of Cash Flows

4 unchanged sentences

provided by operating activities:

Deficit (equity) in undistributed net income of subsidiaries

(Equity) deficit in undistributed net income of subsidiaries

Amortization of debt issuance costs

2 unchanged sentences

Acquisition accounting adjustments

Net (increase) in other assets

Net (decrease) increase in other liabilities

Net decrease (increase) in other assets

Net increase (decrease) increase in other liabilities

Net cash provided by operating activities

4 unchanged sentences

Cash flows from financing activities:

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

Common stock dividends paid

Retirement of common stock

Issuance of common stock

Exercise of stock options

Repurchase of shares for tax withholding on exercised options

and vested restricted stock

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net cash (used in) financing activities

Net (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

57 unchanged sentences

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