SHORE BANCSHARES INC 10-K

Item 8. Financial Statements and Supplementary Data. ​ INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Management’s Report on Internal Control over Financial Reporting 58 ​ ​ Report of Independent Registered Public Accounting Firm (PCAOB ID 613 ) 59 ​ ​ Consolidated Balance Sheets 61 ​ ​ Consolidated Statements of Income 62 ​ ​ Consolidated Statements of Comprehensive Income 63 ​ ​ Consolidated Statements of Changes in Stockholders’ Equity 64 ​ ​ Consolidated Statements of Cash Flows 66 ​ ​ Notes to Consolidated Financial Statements 68 ​ ​ 57 Table of Contents MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Shore Bancshares, Inc. (the “Company”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include some amounts that are based on the best estimates and judgments of management. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of the Company’s financial reporting and the preparation and presentation of financial statements for external reporting purposes in conformity with accounting principles generally accepted in the United States of America, as well as to safeguard assets from unauthorized use or disposition. The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal audit with actions taken to correct potential deficiencies as they are identified. Because of inherent limitations in any internal control system, no matter how well designed, misstatement due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, based upon criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO Framework). Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was effective. This annual report does not include an attestation report of the Company’s independent registered public accounting firm, regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in its annual report. March 30, 2023 ​ ​ ​ /s/ Lloyd L. Beatty, Jr. /s/ Vance Adkins Lloyd L. Beatty, Jr. ​ Vance Adkins President and Chief Executive Officer ​ Executive Vice President and Chief Financial Officer (Principal Executive Officer) ​ (Principal Financial Officer) ​ ​ ​ ​ 58 Table of Contents ​ ​ Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Shore Bancshares, Inc. ​ Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Shore Bancshares, Inc. and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. ​ Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. ​ We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. ​ Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. ​ Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) 59 Table of Contents 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 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 As described in Note 1 (Summary of Significant Accounting Policies) and Note 4 (Loans and Allowance for Credit Losses) to the consolidated financial statements, the Company maintains an allowance for credit losses to provide for probable losses inherent in the loan portfolio, which totaled $16,643,000 at December 31, 2022. The Company’s allowance for credit losses consists of three components: (i) the specific allowance; (ii) the historical formula allowance; and (iii) the qualitative formula allowance. For loans that are not individually evaluated for impairment, the qualitative formula allowance uses certain qualitative factors to develop loss percentages which are applied to the loan portfolio, by loan pool, based on management’s assessment of shared risk characteristics within groups of similar loans. The qualitative formula allowance is determined based on management’s continuing evaluation of internal and external factors (described in Note 1), which may impact the underlying quality of the loan portfolio. ​ Management exercised significant judgment when assessing the factors which serve as the basis for the qualitative formula allowance component of the allowance for credit losses estimate. We identified the assessment of those qualitative factors and the determination of the qualitative formula allowance as a critical audit matter as auditing the qualitative factors and the resultant qualitative formula allowance involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates. ​ How We Addressed the Matter in Our Audit The primary audit procedures we performed to address this critical audit matter included: ● Obtaining an understanding of the Company’s processes for evaluating qualitative factors, including the development of the data inputs used. ● Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative formula allowance, which included: ● Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors. ● Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors. ● Evaluating the qualitative factors for directional consistency and for reasonableness. ● Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors. ​ /s/ Yount, Hyde & Barbour, P.C. We have served as the Company's auditor since 2017. Winchester, Virginia March 30, 2023 ​ 60 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS December 31, ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, (In thousands, except share and per share data) 2022 2021 ASSETS ​ ​ Cash and due from banks ​ $ 37,661 ​ $ 16,919 Interest-bearing deposits with other banks ​ 17,838 ​ 566,694 Cash and cash equivalents ​ 55,499 ​ 583,613 Investment securities: ​ ​ ​ Available-for-sale, at fair value ​ 83,587 ​ 116,982 Held to maturity, at amortized cost - fair value of $ 494,627 (2022) and $ 401,524 (2021) ​ ​ 559,455 ​ 404,594 Equity securities, at fair value ​ 1,233 ​ 1,372 Restricted securities, at cost ​ 11,169 ​ 4,159 ​ ​ ​ ​ ​ ​ ​ Loans held for sale, at fair value ​ ​ 4,248 ​ ​ 37,749 ​ ​ ​ ​ ​ Loans held for investment ​ 2,556,107 ​ 2,119,175 Less: allowance for credit losses ​ ​ ( 16,643 ) ​ ​ ( 13,944 ) Loans, net ​ 2,539,464 ​ 2,105,231 ​ ​ ​ ​ ​ ​ ​ Premises and equipment, net ​ 51,488 ​ 51,624 Goodwill ​ 63,266 ​ 63,421 Other intangible assets, net ​ 5,547 ​ 7,535 Other real estate owned, net ​ ​ 197 ​ ​ 532 Mortgage servicing rights, at fair value ​ 5,275 ​ 4,087 Right-of-use assets ​ ​ 9,629 ​ ​ 11,370 Cash surrender value on life insurance ​ ​ 59,218 ​ ​ 47,935 Other assets ​ ​ 28,001 ​ ​ 19,932 TOTAL ASSETS ​ $ 3,477,276 ​ $ 3,460,136 ​ ​ ​ ​ ​ ​ ​ LIABILITIES ​ ​ ​ ​ ​ ​ Deposits: ​ ​ ​ ​ ​ ​ Noninterest-bearing ​ $ 862,015 ​ $ 927,497 Interest-bearing ​ 2,147,769 ​ 2,098,739 Total deposits ​ 3,009,784 ​ 3,026,236 ​ ​ ​ ​ ​ ​ ​ Securities sold under retail repurchase agreements ​ — ​ 4,143 Advances from FHLB - short-term ​ ​ 40,000 ​ ​ — Advances from FHLB - long-term ​ ​ — ​ ​ 10,135 Subordinated debt ​ 43,072 ​ ​ 42,762 Total borrowings ​ ​ 83,072 ​ ​ 57,040 ​ ​ ​ ​ ​ ​ ​ Lease liabilities ​ ​ 9,908 ​ ​ 11,567 Other liabilities ​ 10,227 ​ 14,600 TOTAL LIABILITIES ​ ​ 3,112,991 ​ ​ 3,109,443 ​ ​ ​ ​ ​ ​ ​ COMMITMENTS AND CONTINGENCIES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ STOCKHOLDERS' EQUITY ​ ​ ​ ​ ​ ​ Common stock, par value $ .01 per share; shares authorized - 35,000,000 ; shares issued and outstanding - 19,849,563 (2022) and 19,807,533 (2021) ​ ​ 199 ​ ​ 198 Additional paid in capital ​ 201,494 ​ 200,473 Retained earnings ​ ​ 171,613 ​ ​ 149,966 Accumulated other comprehensive (loss) income ​ ​ ( 9,021 ) ​ ​ 56 TOTAL STOCKHOLDERS' EQUITY ​ 364,285 ​ 350,693 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ​ $ 3,477,276 ​ $ 3,460,136 ​ The notes to the consolidated financial statements are an integral part of these statements. 61 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In thousands, except per share data) ​ 2022 ​ 2021 INTEREST INCOME ​ ​ ​ ​ ​ ​ Interest and fees on loans ​ $ 99,122 ​ $ 64,795 Interest and dividends on taxable investment securities ​ 11,507 ​ 5,006 Interest and dividends on tax-exempt investment securities ​ ​ 6 ​ ​ — Interest on deposits with other banks ​ ​ 3,210 ​ ​ 368 Total interest income ​ 113,845 ​ 70,169 ​ ​ ​ ​ ​ ​ ​ INTEREST EXPENSE ​ ​ ​ ​ ​ ​ Interest on deposits ​ 9,983 ​ 4,461 Interest on short-term borrowings ​ 74 ​ 8 Interest on long-term borrowings ​ ​ 2,486 ​ 1,570 Total interest expense ​ 12,543 ​ 6,039 ​ ​ ​ ​ ​ ​ ​ NET INTEREST INCOME ​ 101,302 ​ 64,130 Provision for credit losses ​ 1,925 ​ ( 358 ) ​ ​ ​ ​ ​ ​ ​ NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES ​ 99,377 ​ 64,488 ​ ​ ​ ​ ​ ​ ​ NONINTEREST INCOME ​ ​ ​ ​ ​ ​ Service charges on deposit accounts ​ 5,652 ​ 3,396 Trust and investment fee income ​ 1,784 ​ 1,881 Gains on sales and calls of investment securities ​ — ​ 2 Interchange credits ​ 4,812 ​ 3,964 Mortgage-banking revenue ​ ​ 5,210 ​ ​ 948 Title Company revenue ​ ​ 1,340 ​ ​ 247 Other noninterest income ​ ​ 4,288 ​ ​ 3,060 Total noninterest income ​ 23,086 ​ 13,498 ​ ​ ​ ​ ​ ​ ​ NONINTEREST EXPENSE ​ ​ ​ ​ ​ ​ Salaries and wages ​ 35,931 ​ 21,222 Employee benefits ​ 9,908 ​ 7,262 Occupancy expense ​ 6,242 ​ 3,690 Furniture and equipment expense ​ 2,018 ​ 1,553 Data processing ​ 6,890 ​ 5,001 Directors' fees ​ 839 ​ 620 Amortization of other intangible assets ​ 1,988 ​ 734 FDIC insurance premium expense ​ 1,426 ​ 1,015 Other real estate owned expenses, net ​ 65 ​ 4 Legal and professional fees ​ 2,840 ​ 1,742 Merger-related expenses ​ ​ 2,098 ​ 8,530 Other noninterest expenses ​ ​ 10,077 ​ ​ 5,433 Total noninterest expense ​ 80,322 ​ 56,806 ​ ​ ​ ​ ​ ​ ​ Income before income taxes ​ 42,141 ​ 21,180 Income tax expense ​ 10,964 ​ 5,812 ​ ​ ​ ​ ​ ​ ​ NET INCOME ​ $ 31,177 ​ $ 15,368 ​ ​ ​ ​ ​ ​ ​ Basic and diluted net income per common share ​ $ 1.57 ​ $ 1.17 ​ ​ ​ ​ ​ ​ ​ Dividends paid per common share ​ $ 0.48 ​ $ 0.48 ​ The notes to the consolidated financial statements are an integral part of these statements. ​ 62 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) 2022 2021 Net income ​ $ 31,177 ​ $ 15,368 ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss): ​ ​ ​ ​ ​ ​ Investment securities: ​ ​ ​ ​ ​ ​ Unrealized holding (losses) on available-for-sale-securities ​ ( 12,488 ) ​ ( 2,027 ) Tax effect ​ 3,411 ​ 554 ​ ​ ​ ​ ​ ​ ​ Total other comprehensive (loss) ​ ( 9,077 ) ​ ( 1,473 ) Comprehensive income ​ $ 22,100 ​ $ 13,895 ​ The notes to the consolidated financial statements are an integral part of these statements. ​ 63 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the Years Ended December 31, 2022 and 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ ​ Other ​ Total ​ ​ Common ​ Paid in ​ Retained ​ Comprehensive ​ Stockholders’ (In thousands) Stock Capital Earnings Income (loss) Equity Balances, January 1, 2022 ​ $ 198 ​ $ 200,473 ​ $ 149,966 ​ $ 56 ​ $ 350,693 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ — ​ — ​ 5,613 ​ — ​ 5,613 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss) ​ — ​ — ​ — ​ ( 2,228 ) ​ ( 2,228 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common shares issued for employee stock purchase plan ​ ​ — ​ 37 ​ — ​ — ​ 37 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 130 ​ — ​ — ​ 130 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ — ​ — ​ ( 2,381 ) ​ — ​ ( 2,381 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, March 31, 2022 ​ $ 198 ​ $ 200,640 ​ $ 153,198 ​ $ ( 2,172 ) ​ $ 351,864 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 7,499 ​ — ​ 7,499 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss) ​ — ​ — ​ — ​ ( 4,479 ) ​ ( 4,479 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common shares issued for employee stock purchase plan ​ — ​ 102 ​ — ​ — ​ 102 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 172 ​ — ​ — ​ 172 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ ​ — ​ ​ — ​ ​ ( 2,381 ) ​ ​ — ​ ​ ( 2,381 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, June 30, 2022 ​ $ 198 ​ $ 200,914 ​ $ 158,316 ​ $ ( 6,651 ) ​ $ 352,777 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 9,658 ​ — ​ 9,658 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss) ​ — ​ — ​ — ​ ( 3,130 ) ​ ( 3,130 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common shares issued for employee stock purchase plan ​ ​ 1 ​ ​ 124 ​ ​ — ​ ​ — ​ ​ 125 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 175 ​ — ​ — ​ 175 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ ​ — ​ ​ — ​ ​ ( 2,384 ) ​ ​ — ​ ​ ( 2,384 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, September 30, 2022 ​ $ 199 ​ $ 201,213 ​ $ 165,590 ​ $ ( 9,781 ) ​ $ 357,221 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 8,407 ​ — ​ 8,407 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income ​ — ​ — ​ — ​ 760 ​ 760 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common shares issued for employee stock purchase plan ​ ​ — ​ ​ 122 ​ ​ — ​ ​ — ​ ​ 122 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 159 ​ — ​ — ​ 159 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ ​ — ​ ​ — ​ ​ ( 2,384 ) ​ ​ — ​ ​ ( 2,384 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, December 31, 2022 ​ $ 199 ​ $ 201,494 ​ $ 171,613 ​ $ ( 9,021 ) ​ $ 364,285 ​ ​ 64 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ ​ Other ​ Total ​ ​ Common ​ Paid in ​ Retained ​ Comprehensive ​ Stockholders’ (In thousands) ​ Stock Capital Earnings Income Equity Balances, January 1, 2021 ​ $ 118 ​ $ 52,167 ​ $ 141,205 ​ $ 1,529 ​ $ 195,019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 3,998 ​ — ​ 3,998 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss) ​ — ​ — ​ — ​ ( 782 ) ​ ( 782 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Retirement of common stock ​ — ​ ( 819 ) ​ — ​ — ​ ( 819 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ ​ — ​ ​ 97 ​ ​ — ​ ​ — ​ ​ 97 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ — ​ — ​ ( 1,409 ) ​ — ​ ( 1,409 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, March 31, 2021 ​ $ 118 ​ $ 51,445 ​ $ 143,794 ​ $ 747 ​ $ 196,104 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 4,031 ​ — ​ 4,031 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss) ​ — ​ — ​ — ​ ( 141 ) ​ ( 141 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 99 ​ — ​ — ​ 99 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ — ​ — ​ ( 1,411 ) ​ — ​ ( 1,411 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, June 30, 2021 ​ $ 118 ​ $ 51,544 ​ $ 146,414 ​ $ 606 ​ $ 198,682 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 4,616 ​ — ​ 4,616 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss) ​ — ​ — ​ — ​ ( 378 ) ​ ( 378 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 91 ​ — ​ — ​ 91 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Exercise of options, net of shares surrendered ​ ​ — ​ ​ 6 ​ ​ — ​ — ​ 6 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ — ​ — ​ ( 1,410 ) ​ — ​ ( 1,410 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, September 30, 2021 ​ $ 118 ​ $ 51,641 ​ $ 149,620 ​ $ 228 ​ $ 201,607 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income ​ — ​ — ​ 2,723 ​ — ​ 2,723 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss) ​ — ​ — ​ — ​ ( 172 ) ​ ( 172 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Severn Bank acquisition - 8,053,088 shares ​ ​ 80 ​ 148,741 ​ — ​ — ​ 148,821 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation ​ — ​ 91 ​ — ​ — ​ 91 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash dividends declared ​ — ​ — ​ ( 2,377 ) ​ — ​ ( 2,377 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, December 31, 2021 ​ $ 198 ​ $ 200,473 ​ $ 149,966 ​ $ 56 ​ $ 350,693 ​ The notes to the consolidated financial statements are an integral part of these statements. ​ 65 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ ​ ​ For Year Ended ​ ​ December 31, (In thousands) 2022 2021 ​ ​ ​ ​ ​ ​ ​ CASH FLOWS FROM OPERATING ACTIVITIES: ​ ​ ​ ​ ​ ​ Net Income ​ $ 31,177 ​ $ 15,368 Adjustments to reconcile net income to net cash provided by (used in) operating activities: ​ ​ ​ ​ Net accretion of acquisition accounting estimates ​ ( 1,768 ) ​ ( 440 ) Provision for credit losses ​ 1,925 ​ ( 358 ) Depreciation and amortization ​ 5,861 ​ 3,086 Net amortization of securities ​ 1,414 ​ 1,579 Amortization of debt issuance costs ​ ​ 122 ​ ​ 123 (Gain) on mortgage banking activities ​ ( 3,918 ) ​ ( 918 ) Proceeds from sale of mortgage loans held for sale ​ 131,286 ​ 15,562 Originations of loans held for sale ​ ( 102,144 ) ​ ( 42,199 ) Stock-based compensation expense ​ 636 ​ 378 Deferred income tax expense (benefit) ​ ​ ( 1,182 ) ​ ​ 278 (Gains) on sales and calls of securities ​ — ​ ( 2 ) (Gains) loss on valuation adjustments on mortgage servicing rights ​ ​ ( 372 ) ​ ​ 59 Losses on sales and disposals of premises and equipment ​ ​ 183 ​ ​ 4 Losses on sales and valuation adjustments on other real estate owned ​ ​ 44 ​ ​ 2 Fair value adjustment on equity securities ​ ​ 157 ​ ​ 40 Bank owned life insurance income ​ ( 1,118 ) ​ ( 1,090 ) Net changes in: ​ ​ ​ ​ ​ ​ Accrued interest receivable ​ ​ ( 2,665 ) ​ ​ 2,145 Other assets ​ ( 1,450 ) ​ ( 3,045 ) Accrued interest payable ​ 297 ​ ( 5 ) Other liabilities ​ ​ ( 5,838 ) ​ ​ 1,930 Net cash (used in) provided by operating activities ​ 52,647 ​ ( 7,503 ) ​ ​ ​ ​ ​ ​ ​ CASH FLOWS FROM INVESTING ACTIVITIES: ​ ​ ​ ​ ​ ​ Proceeds from maturities and principal payments of investment securities available for sale ​ 20,441 ​ 40,656 Purchases of investment securities available for sale ​ — ​ — Proceeds from maturities and principal payments of investment securities held to maturity ​ 52,324 ​ 40,274 Purchases of securities held to maturity ​ ​ ( 208,133 ) ​ ( 255,514 ) Purchases of equity securities ​ ( 18 ) ​ ( 17 ) Purchase of restricted securities ​ ( 8,560 ) ​ — Net change in loans ​ ( 426,973 ) ​ ( 79,771 ) Purchases of premises and equipment ​ ( 2,415 ) ​ ( 3,450 ) Proceeds from sales of premises and equipment ​ ​ 17 ​ — Proceeds from sales of other real estate owned ​ ​ 394 ​ — Improvements to other real estate owned ​ ​ ( 34 ) ​ ​ — Redemption of restricted securities ​ ​ 1,550 ​ 437 Purchases of bank owned life insurance ​ ​ ( 10,165 ) ​ ​ ( 10,203 ) Cash acquired in the acquisition of Severn, net of cash paid ​ ​ — ​ ​ 305,781 Net cash (used in) provided by investing activities ​ ( 581,572 ) ​ 38,193 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CASH FLOWS FROM FINANCING ACTIVITIES: ​ ​ ​ ​ ​ Net changes in: ​ ​ ​ ​ ​ Noninterest-bearing deposits ​ ( 65,482 ) ​ 35,821 Interest-bearing deposits ​ 49,580 ​ 334,512 Short-term borrowings ​ ​ 35,857 ​ 3,093 Repayment of long-term borrowings ​ ( 10,000 ) ​ — Common stock dividends paid ​ ​ ( 9,530 ) ​ ( 6,607 ) Retirement of common stock ​ ​ — ​ ( 819 ) Issuance of common stock ​ ​ 386 ​ 6 Net cash provided by financing activities ​ 811 ​ ​ 366,006 Net (decrease) increase in cash and cash equivalents ​ ( 528,114 ) ​ 396,696 Cash and cash equivalents at beginning of period ​ 583,613 ​ 186,917 Cash and cash equivalents at end of period ​ $ 55,499 ​ $ 583,613 ​ ​ ​ 66 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ ​ Supplemental cash flows information: ​ ​ ​ ​ ​ ​ Interest paid ​ $ 12,621 ​ $ 6,007 Income taxes paid ​ $ 11,851 ​ $ 6,253 Recognition (remeasurement of) lease liabilities arising from right-of-use assets ​ $ ( 456 ) ​ $ 1,383 Transfer from loans held for sale to loans held for investment ​ $ 7,791 ​ $ — Transfers from loans to other real estate owned ​ $ 69 ​ $ 205 Unrealized (loss) on securities available for sale ​ $ ( 12,488 ) ​ $ ( 2,027 ) ​ The notes to consolidated financial statements are an integral part of these statements. ​ 67 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries (collectively referred to in these Notes as the “Company”), with all significant intercompany transactions eliminated. The investments in subsidiaries are recorded on the Company’s books (Parent only) on the basis of its equity in the net assets of the subsidiaries. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”). For purposes of comparability, certain reclassifications have been made to amounts previously reported to conform with the current period presentation. Reclassifications had no effect on prior year net income or stockholders’ equity. Nature of Operations The Company engages in the banking business through Shore United Bank, N.A., a Maryland commercial bank with trust powers. The Company’s primary source of revenue is derived from interest earned on commercial, residential mortgage and other loans, and fees charged in connection with lending and other banking services located in Maryland, Delaware and the Eastern Shore of Virginia. The Company engages in the trust services business through the trust department at Shore United Bank, N.A. under the trade name Wye Financial Partners and conducts secondary market lending activities through a division of the Bank. The Title Company engages in title work related to real estate transactions. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the determination of the allowance for loan losses, loans acquired in business combinations, and the subsequent evaluation of goodwill for impairment. Loans Acquired in a Business Combination ​ Loans acquired in a business combination, such as the Company’s acquisition of Severn, are recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses. Purchased credit-impaired (PCI) loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. When determining fair value, PCI loans were aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference,” and is not recorded. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. On a quarterly basis, the Company evaluates its estimate of cash flows expected to be collected. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses, while subsequent increases in cash flows may result in a reversal of post-acquisition provision for loan losses, or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan or pool(s) of loans. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount. ​ PCI loans are not classified as nonperforming loans by the Company at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans. ​ Loans not designated PCI loans as of the acquisition date are designated purchased performing loans. The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based 68 Table of Contents on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses may be required in future periods for any deterioration in these loans in future periods. Investment Securities Available for Sale Investment securities available for sale are stated at estimated fair value based on quoted prices. They represent those debt securities which management may sell as part of its asset/liability management strategy or which may be sold in response to changing interest rates, changes in prepayment risk or other similar factors. Realized gains and losses are recorded in noninterest income and are determined on a trade date basis using the specific identification method. Premiums and discounts are amortized or accreted into interest income using the interest method over the lives of the individual securities. Interest on investment securities is recognized in interest income on an accrual basis. Net unrealized holding gains and losses on these securities are reported as accumulated other comprehensive income, a separate component of stockholders’ equity, net of related income taxes. Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value and are reflected in earnings as realized losses. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrade of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or a determination that management has the intent to sell the security or will be required to sell the security before recovery of its amortized cost. Investment Securities Held to Maturity Investment securities held to maturity are stated at cost adjusted for amortization of premiums and accretion of discounts. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. The Company intends and has the ability to hold such securities until maturity. Declines in the fair value of individual held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrade of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or a determination that management has the intent to sell the security or will be required to sell the security before recovery of its amortized cost. Equity Securities Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in net income. Any equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. Restricted equity securities are carried at cost and are periodically evaluated for impairment based on the ultimate recovery of par value. The entirety of any impairment on equity securities is recognized in earnings. Loans Held for Sale (“LHFS”) The Company has elected to carry its mortgage loans originated for sale at fair value. Fair value is determined based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements or third-party pricing models. 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. Mortgage Servicing Rights When mortgage loans are sold with servicing retained, the MSRs are initially recorded at fair value with the income statement effect recorded in mortgage banking revenue. Fair value is based on a valuation model that calculates the present 69 Table of Contents 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. 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 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 Loans are stated at their principal amount outstanding net of any deferred fees, premiums, discounts and costs and net of any partial charge-offs. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual (i.e., interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those loans is reversed from income. Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms when due. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Generally, the Company measures impairment on such loans by reference to the fair value of the collateral or the present value of expected future cash flows. Once the amount of impairment has been determined, the uncollectible portion is charged off. Income on nonaccrual impaired loans is recognized on a cash basis, and payments are first applied against the principal balance outstanding (i.e., placing impaired loans on nonaccrual status). Generally, interest income is not recognized on impaired loans unless the likelihood of further loss is remote or the impairment analysis yielded no impairment for the loan. The allowance for credit losses may include specific reserves related to impaired loans. Specific reserves remain until charge offs are made. Reserves for probable credit losses related to these loans are based on historical loss ratios and an analysis of qualitative factors and are included in the formula portion of the allowance for credit losses. See additional discussion below under the section, “Allowance for Credit Losses”. A loan is considered a troubled debt restructuring (“TDR”) if a borrower is experiencing financial difficulties and a creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to repay becomes evident. The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits. In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the current underwriting guidelines of the Company’s banking subsidiary, the loan is classified as a TDR. All loans designated as TDRs are considered impaired loans and may be on either accrual or nonaccrual status. In instances where the loan has been placed on nonaccrual status, six consecutive months of timely payments are required prior to returning the loan to accrual status. 70 Table of Contents All loans classified as TDRs which are restructured and accrue interest under revised terms require a full and comprehensive review of the borrower’s financial condition, capacity for repayment, realistic assessment of collateral values, and the assessment of risk entered into any workout agreement. Current financial information on the borrower, guarantor, and underlying collateral is analyzed to determine if it supports the ultimate collection of principal and interest. For commercial loans, the cash flows are analyzed, both for the underlying project and globally. For consumer loans, updated salary, credit history and cash flow information is obtained. Current market conditions are also considered. Following a full analysis, the determination of the appropriate loan structure is made. The Company does not participate in any specific government or Company sponsored loan modification programs. All TDR loan agreements are contracts negotiated with each of the borrowers. Allowance for Credit Losses The allowance for credit losses is maintained at a level believed adequate by management to absorb 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. Loans, or portions thereof, that are considered uncollectible are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. The criteria for charge offs are addressed in the Bank’s Collection and Workout Policy. Per the policy, the recognition of the loss of loans or portions of loans will occur when there is a reasonable probability of loss. When the amount of loss can be readily calculated, the loss will be recognized. In cases where a probable charge-off amount cannot be calculated, specific reserves will be maintained. A provision for credit losses is charged to income based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary. The allowance for credit losses is an estimate of the probable losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) Topic 450, “ Contingencies ”, of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”), which requires that losses be accrued when they are probable of occurring and estimable; and (ii) ASC Topic 310, “ Receivables ”, which requires that losses be accrued based on the differences between the loan balance and the value of collateral, present value of future cash flows or values that are observable in the secondary market. Management uses many factors to estimate the inherent loss that may be present in our loan portfolio as discussed further below. Actual losses could differ significantly from management’s estimates. In addition, GAAP itself may change from one previously acceptable method to another. Although the economics of transactions would be the same, the timing of events that would impact the transactions could change. Three basic components comprise our allowance for credit losses: (i) the specific allowance; (ii) the historical formula allowance; and (iii) the qualitative formula allowance. Each component is determined based on estimates that can and do change when the actual events occur. The specific allowance is established against impaired loans based on our assessment of the losses that may be associated with the individual loans. The specific allowance remains until charge-offs are made or the metrics underlying the impairment calculation change. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The historical formula allowance is used to estimate the loss on internally risk-rated loans, exclusive of those identified as impaired. Loans are grouped by type (construction, residential real estate, commercial real estate, commercial or consumer) and similar risk characteristics. Each loan pool is assigned allowance factors based on management’s estimate of the risk, complexity and size of individual loans within a particular category using average historical charge-offs by segment over the last 16 quarters. Loans identified as pass-watch, special mention, substandard, and doubtful are considered to have elevated credit risk. These loans are assigned higher allowance factors than favorably rated loans due to management’s concerns regarding collectability or management’s knowledge of particular elements regarding the borrower. The qualitative formula allowance captures losses that have impacted the portfolio but have yet to be recognized in either the 71 Table of Contents specific or historical formula allowance. A pass-watch loan has adequate risk and may include loans which may have been upgraded from another higher risk category. A special mention loan has potential weaknesses that could result in a future loss to the Company if the weaknesses are realized. A substandard loan has certain deficiencies that could result in a future loss to the Company if these deficiencies are not corrected. A doubtful loan has enough risk that there is a high probability that the Company will sustain a loss. The qualitative formula allowance is used to adjust the historical formula allowance to an amount that is reflective of the probable losses inherent in the loan portfolio. The qualitative formula allowance is established through the evaluation of various qualitative factors which are used to develop loss percentages that are applied to the identified pools of loans that are not individually evaluated for impairment. Management has significant discretion in making the adjustments inherent in the determination of the provision and allowance for credit losses, including the establishment of the allowance factors in the qualitative formula allowance component of the allowance. The establishment of the qualitative factors used in the qualitative formula allowance is a continuing exercise, based on management’s ongoing assessment of the totality of all factors, including, but not limited to, delinquencies, loss history, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, the quality of the loan review system and the effect of other factors as deemed appropriate, and their impact on the portfolio. Allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based on the same volume and classification of loans. Changes in allowance factors will have a direct impact on the amount of the provision, and a corresponding effect on net income. Errors in management’s perception and assessment of these factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs. Premises and Equipment Land is carried at cost and premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Useful lives range from three to 10 years for furniture, fixtures and equipment; three to five years for computer hardware and data handling equipment; and 10 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 15 years and leasehold improvements are amortized over the term of the respective lease. Maintenance and repairs are charged to expense as incurred, while improvements which extend the useful life of an asset are capitalized and depreciated over the estimated remaining life of the asset. Long-lived assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash flows of a long-lived asset are less than its carrying value. In that event, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset. Mergers and Acquisitions Business combinations are accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company relies on internal or third-party valuations, such as appraisals, valuations based on discounted cash flow analyses, or other valuation techniques. Under the acquisition method of accounting, the Company identifies the acquirer and the closing date and applies applicable recognition principles and conditions. Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning consultants and advertising costs. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities is recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expenses caption. 72 Table of Contents Goodwill and Other Intangible Assets Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Goodwill and other intangible assets are initially required to be recorded at fair value. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate. Intangible assets that have finite lives are amortized over their estimated useful lives and also are subject to impairment testing. 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, 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 . During 2022 and 2021, goodwill and other intangible assets were subjected to assessments for impairment. No impairment charges were recognized in either year. Our assessment of goodwill concluded it was not more likely that not that the fair value of the Company's reporting units were less than their carrying amount. Other Real Estate Owned Other real estate owned represents assets acquired in satisfaction of loans either by foreclosure or deeds taken in lieu of foreclosure. Properties acquired are recorded at fair value less estimated selling costs at the time of acquisition, establishing a new cost basis. Thereafter, costs incurred to operate or carry the properties as well as reductions in value as determined by periodic appraisals are charged to operating expense. Gains and losses resulting from the final disposition of the properties are included in noninterest expense. Borrowings Short-term and long-term borrowings are comprised primarily of FHLB borrowings. 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. The underlying securities sold are U.S. Government agency securities, which are segregated from the Company’s other investment securities by its safekeeping agents. Subordinated Debt Subordinated debt is carried at its outstanding principal balance, net of any unamortized issuance costs. For additional information on the Company’s subordinated debt, refer to Note 12 of the Consolidated Financial Statements. Income Taxes The Company and its subsidiary file a consolidated federal income tax return. The Company accounts for income taxes using the liability method in accordance with required accounting guidance. Under this method, deferred tax assets and liabilities are determined by applying the applicable federal and state income tax rates to cumulative temporary differences. These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities. Deferred taxes result from such temporary differences. 73 Table of Contents Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent on the generation of a sufficient level of future taxable income, recoverable taxes paid in prior years and tax planning strategies. The Company evaluates all positive and negative evidence before determining if a valuation allowance is deemed necessary regarding the realization of deferred tax assets. The Company recognizes accrued interest and penalties as a component of tax expense. The provision for income taxes includes the impact of reserve provisions and changes in the reserves that are considered appropriate as well as the related net interest and penalties. In addition, the Company is subject to the continuous examination of its income tax returns by the IRS and other tax authorities which may assert assessments against the Company. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of its provision for income taxes. The Company remains subject to examination for tax years ending on or after December 31, 2019. Derivative Financial Instruments and Hedging We account for derivatives in accordance with FASB literature on accounting for derivative instruments and hedging activities. When we enter into a derivative contract, we designate the derivative as held for trading, an economic hedge, or a qualifying hedge as detailed in the literature. The designation may change based upon management’s reassessment or changing circumstances. Derivatives utilized by the Company include interest rate lock commitments (“IRLC”) or (“IRLCs”) and forward settlement contracts. IRLCs occur when we originate mortgage loans with interest rates determined prior to funding. Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency, or commodity at a predetermined future date, rate, or price. We designate at inception whether a derivative contract is considered hedging or non-hedging. All of our derivatives are nonexchange traded contracts, and as such, their fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgement or estimation. For qualifying hedges, we formally document at inception all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various accounting hedges. We primarily utilize derivatives to manage interest rate sensitivity., At December 31, 2022 and 2021 we did not have any designated hedges. Basic and Diluted Earnings Per Common Share Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding and does not include the effect of any potentially dilutive common stock equivalents. Included in this calculation due to dividend participation rights are restricted stock awards which have been granted. Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding, adjusted for the effect of any potentially dilutive common stock equivalents. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the 74 Table of Contents transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Cash and Cash Equivalents Cash and due from banks, interest-bearing deposits with other banks and federal funds sold are considered “cash and cash equivalents” for financial reporting purposes. Certain interest-bearing deposits with banks may exceed balances that are recoverable under Federal Deposit Insurance (“FDIC”) insurance. Balances in excess of FDIC insurance at December 31, 2022 were approximately $ 1.8 million. Share-Based Compensation The Company may grant share-based compensation to employees and non-employee directors in the form of restricted stock, restricted stock units and stock options. The fair value of restricted stock is determined based on the closing price of the Parent’s common stock on the date of grant. The Company recognizes compensation expense related to restricted stock on a straight-line basis over the vesting period for service-based awards. The fair value of RSUs is initially valued based on the closing price of the Parent’s common stock on the date of grant and is amortized in the statement of income over the vesting period. The RSUs are subsequently remeasured in each reporting period until settlement based on the quantity of awards for which it is probable that the performance conditions will be achieved. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model and related assumptions. The Company uses historical data to predict option exercise and employee termination behavior. Expected volatilities are based on the historical volatility of the Parent’s common stock. The expected term of options granted is derived from actual historical exercise activity and represents the period of time that options granted are expected to be outstanding. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant based on the expected life of the option. The dividend yield is equal to the dividend yield of the Parent’s common stock at the time of grant. Expense related to stock options is recorded in the statements of income as a component of salaries and benefits for employees and as a component of other noninterest expense for non-employee directors, with a corresponding increase to capital surplus in shareholders’ equity. Fair Value The Company measures certain financial assets and liabilities at fair value 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. 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. Advertising Costs Advertising costs are generally expensed as incurred. The Company incurred advertising costs of approximately $ 898 thousand for the year ended December 31, 2022 and $ 339 thousand for the year ended December 31, 2021. Comprehensive Income 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. There were no reclassifications from accumulated other comprehensive income in 2022 and 2021. ​ ​ ​ 75 Table of Contents Recent Accounting Standards and Other Authoritative Guidance ​ ASU No. 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. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology. ​ ASU No. 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. ​ ASU No. 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 76 Table of Contents 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. ​ ASU No. 2020-04 – In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. At present, the Bank has limited exposure to LIBOR based pricing. LIBOR based loans only comprise 16 loans or 3.1 % of the loan portfolio. The Bank is confident it can successfully negotiate a migration to the Secured Overnight Financing Rate (“SOFR”) between now and the implementation date. The Bank will notify customers within 120 days prior to migration to SOFR. The Bank acknowledges the replacement rate will be more volatile based on different countries migrating to different indexes and limited liquidity to support the rate. The Bank further acknowledges the volatility will be greatly influenced by the support provided by the Federal Reserve. 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. ​ 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 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 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 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 77 Table of Contents 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. ​ 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) ​ ​ ​ Purchase Price Consideration: ​ ​ ​ Fair value of common shares issued ( 8,053,088 shares) based on Shore Bancshares, Inc. share price of $ 18.48 ​ $ 148,821 Cash consideration ​ ​ 20,631 Cash paid for cash-out Severn stock options ​ ​ 310 Cash for fractional shares ​ ​ 3 Total purchase price ​ $ 169,765 ​ ​ ​ ​ Identifiable assets: ​ ​ ​ Cash and cash equivalents ​ $ 326,725 Total securities ​ ​ 146,292 Loans held for sale ​ ​ 9,613 Loans, net (1) ​ ​ 584,776 Premises and equipment, net ​ ​ 24,768 Other real estate owned ​ ​ 329 Core deposit intangible asset ​ ​ 6,550 Other assets (1) ​ ​ 20,319 Total identifiable assets ​ $ 1,119,372 ​ ​ ​ ​ Identifiable liabilities: ​ ​ ​ Deposits ​ $ 955,288 Total debt ​ ​ 28,341 Other liabilities ​ ​ 11,727 Total identifiable liabilities ​ $ 995,356 Fair value of net assets acquired including identifiable intangible assets ​ ​ 124,016 Resulting goodwill (1) ​ $ 45,749 (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 ​ $ 45,904 Effect of measurement period adjustments to: ​ ​ ​ Loans, net ​ ​ ( 192 ) Other assets ​ ​ 37 Goodwill at December 31, 2022 ​ $ 45,749 ​ Acquired loans The following table outlines the contractually required payments receivable, cash flows we expect to receive, and the accretable yield for all Severn PCI loans as of the acquisition date. ​ ​ ​ ​ ​ Contractually required payments receivable ​ $ 46,833 Nonaccretable difference ​ ​ ( 3,364 ) Cash flows expected to be collected ​ ​ 43,469 Accretable yield ​ ​ ( 5,667 ) Fair value ​ $ 37,802 ​ 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. 78 Table of Contents 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. INVESTMENT SECURITIES The following table provides information on the amortized cost and estimated fair values of investment securities at December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross Gross Estimated ​ ​ Amortized ​ Unrealized ​ Unrealized ​ Fair (Dollars in thousands) ​ Cost ​ Gains ​ Losses ​ Value Available-for-sale securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 21,798 ​ $ 5 ​ $ 3,625 ​ $ 18,178 Mortgage-backed ​ 72,183 ​ 2 ​ 8,666 ​ 63,519 Otherd debt securities ​ ​ 2,018 ​ ​ — ​ ​ 128 ​ ​ 1,890 Total ​ $ 95,999 ​ $ 7 ​ $ 12,419 ​ $ 83,587 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 22,932 ​ $ 7 ​ $ 634 ​ $ 22,305 Mortgage-backed ​ 91,948 ​ 1,318 ​ 629 ​ 92,637 Other debt securities ​ 2,026 ​ 14 ​ — ​ 2,040 Total ​ $ 116,906 ​ $ 1,339 ​ $ 1,263 ​ $ 116,982 ​ No available for sale securities were sold during 2022 and 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross Gross Estimated ​ ​ Amortized ​ Unrealized ​ Unrealized ​ Fair (Dollars in thousands) ​ Cost ​ Gains ​ Losses ​ Value Held-to-maturity securities: ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 148,097 ​ $ — ​ $ 13,601 ​ $ 134,496 Mortgage-backed ​ ​ 398,884 ​ ​ — ​ ​ 50,464 ​ ​ 348,420 States and political subdivisions ​ 1,474 ​ 35 ​ 28 ​ 1,481 Other debt securities ​ 11,000 ​ — ​ 770 ​ 10,230 Total ​ $ 559,455 ​ $ 35 ​ $ 64,863 ​ $ 494,627 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 87,072 ​ $ 20 ​ $ 1,231 ​ $ 85,861 Mortgage-backed ​ ​ 302,604 ​ ​ 301 ​ ​ 2,248 ​ ​ 300,657 States and political subdivisions ​ 400 ​ 2 ​ — ​ 402 Other debt securities ​ 14,518 ​ 95 ​ 9 ​ 14,604 Total ​ $ 404,594 ​ $ 418 ​ $ 3,488 ​ $ 401,524 ​ 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. ​ ​ ​ 79 Table of Contents The following table provides information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than ​ More than ​ ​ ​ ​ ​ ​ ​ ​ 12 Months ​ 12 Months ​ Total ​ Fair Unrealized Fair Unrealized Fair Unrealized (Dollars in thousands) ​ Value ​ Losses ​ Value ​ Losses ​ Value ​ Losses December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available-for-sale securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 1,165 ​ $ 4 ​ $ 16,585 ​ $ 3,588 ​ $ 17,750 ​ $ 3,592 Mortgage-backed ​ 29,125 ​ 2,409 ​ 34,167 ​ 6,290 ​ 63,292 ​ 8,699 Other debt securities ​ ​ 1,890 ​ ​ 128 ​ ​ — ​ ​ — ​ ​ 1,890 ​ ​ 128 Total ​ $ 32,180 ​ $ 2,541 ​ $ 50,752 ​ $ 9,878 ​ $ 82,932 ​ $ 12,419 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Held-to-maturity securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 67,332 ​ $ 2,786 ​ $ 67,163 ​ $ 10,815 ​ $ 134,495 ​ $ 13,601 Mortgage-backed ​ ​ 148,771 ​ ​ 9,402 ​ ​ 199,649 ​ ​ 41,062 ​ ​ 348,420 ​ ​ 50,464 States and political subdivisions ​ ​ 780 ​ ​ 28 ​ ​ — ​ ​ — ​ ​ 780 ​ ​ 28 Other debt securities ​ ​ 8,091 ​ ​ 409 ​ ​ 2,139 ​ ​ 361 ​ ​ 10,230 ​ ​ 770 Total ​ $ 224,974 ​ $ 12,625 ​ $ 268,951 ​ $ 52,238 ​ $ 493,925 ​ $ 64,863 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than ​ More than ​ ​ ​ ​ ​ ​ ​ ​ 12 Months ​ 12 Months ​ Total ​ Fair Unrealized Fair Unrealized Fair Unrealized (Dollars in thousands) ​ Value ​ Losses ​ Value ​ Losses ​ Value ​ Losses December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available-for-sale securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 1,561 ​ $ 1 ​ $ 17,368 ​ $ 633 ​ $ 18,929 ​ $ 634 Mortgage-backed ​ 39,851 ​ 593 ​ 3,562 ​ 36 ​ 43,413 ​ 629 Total ​ $ 41,412 ​ $ 594 ​ $ 20,930 ​ $ 669 ​ $ 62,342 ​ $ 1,263 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Held-to-maturity securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Government agencies ​ $ 64,268 ​ $ 1,005 ​ $ 11,719 ​ $ 226 ​ $ 75,987 ​ $ 1,231 Mortgage-backed ​ ​ 226,918 ​ ​ 1,836 ​ ​ 14,564 ​ ​ 412 ​ ​ 241,482 ​ ​ 2,248 Other debt securities ​ 491 ​ 9 ​ — ​ — ​ 491 ​ 9 Total ​ $ 291,677 ​ $ 2,850 ​ $ 26,283 ​ $ 638 ​ $ 317,960 ​ $ 3,488 ​ All of the securities with unrealized losses in the portfolio have modest duration risk, low credit risk, and minimal losses when compared to total amortized cost. The unrealized losses on debt securities that exist are the result of market changes in interest rates since original purchase and are not related to credit concerns. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost bases, which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary. There were 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. The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at December 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available for sale ​ Held to maturity ​ Amortized ​ ​ Amortized ​ ​ (Dollars in thousands) ​ Cost ​ Fair Value ​ Cost ​ Fair Value Due in one year or less ​ $ 75 ​ $ 74 ​ $ 2,117 ​ $ 2,076 Due after one year through five years ​ 6,658 ​ 6,351 ​ 108,632 ​ 101,165 Due after five years through ten years ​ 42,689 ​ 37,856 ​ 73,054 ​ 66,502 Due after ten years ​ 46,577 ​ 39,306 ​ 375,652 ​ 324,884 Total ​ $ 95,999 ​ $ 83,587 ​ $ 559,455 ​ $ 494,627 ​ 80 Table of Contents The maturity dates for debt securities are determined using contractual maturity dates. The following table sets forth the amortized cost and estimated fair values of securities which have been pledged as collateral for obligations to federal, state and local government agencies, and other purposes as required or permitted by law, or sold under agreements to repurchase at December 31, 2022 and 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 ​ 2021 ​ Amortized ​ ​ Amortized ​ ​ (Dollars in thousands) ​ Cost ​ Fair Value ​ Cost ​ Fair Value Pledged available-for-sale securities ​ $ 83,288 ​ ​ 72,108 ​ $ 78,522 ​ $ 78,352 Pledged held to maturity securities ​ ​ 19,158 ​ ​ 16,305 ​ ​ 913 ​ ​ 915 ​ There were no obligations of states or political subdivisions with carrying values, as to any issuer, exceeding 10% of stockholders’ equity at December 31, 2022 or 2021. ​ NOTE 4. 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 and Sussex County, Delaware and in Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at December 31. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Construction ​ $ 246,319 ​ $ 239,353 Residential real estate ​ 810,497 ​ 654,769 Commercial real estate ​ 1,065,409 ​ 896,229 Commercial ​ 147,856 ​ 203,377 Consumer ​ 286,026 ​ 125,447 Total loans (1) ​ 2,556,107 ​ 2,119,175 Allowance for credit losses ​ ( 16,643 ) ​ ( 13,944 ) Total loans, net ​ $ 2,539,464 ​ $ 2,105,231 (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. These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with persons who are not related to the Company and are not considered to involve more than the normal risk of collectability. As of December 31, 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 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, 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. ​ 81 Table of Contents The following table provides information about all loans acquired from Severn. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ Acquired Loans - ​ Acquired Loans - ​ ​ ​ ​ Purchased ​ Purchased ​ Acquired Loans - (Dollars in thousands) Credit Impaired Performing Total Outstanding principal balance ​ $ 29,620 ​ $ 349,262 ​ $ 378,882 Carrying amount ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 650 ​ $ 18,761 ​ $ 19,411 Residential real estate ​ 13,956 ​ 116,118 ​ 130,074 Commercial real estate ​ 11,866 ​ 174,278 ​ 186,144 Commercial ​ 156 ​ 35,687 ​ 35,843 Consumer ​ 14 ​ 697 ​ 711 Total loans ​ $ 26,642 ​ $ 345,541 ​ $ 372,183 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ Acquired Loans - ​ Acquired Loans - ​ ​ ​ ​ Purchased ​ Purchased ​ Acquired Loans - (Dollars in thousands) Credit Impaired Performing Total Outstanding principal balance ​ $ 36,943 ​ $ 524,474 ​ $ 561,417 Carrying amount ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 2,379 ​ $ 91,823 ​ $ 94,202 Residential real estate ​ 17,326 ​ 167,580 ​ 184,906 Commercial real estate ​ 13,594 ​ 202,819 ​ 216,413 Commercial ​ 321 ​ 56,200 ​ 56,521 Consumer ​ 30 ​ 921 ​ 951 Total loans ​ $ 33,650 ​ $ 519,343 ​ $ 552,993 ​ The following table presents a summary of the change in the accretable yield on PCI loans acquired from Severn. ​ ​ ​ ​ ​ ​ ​ For the Year Ended (Dollars in thousands) December 31, 2022 Accretable yield, beginning of period ​ $ 5,367 Accretion ​ ( 1,603 ) Reclassification of nonaccretable difference due to improvement in expected cash flows ​ 469 Other changes, net ​ 506 Accretable yield, end of period ​ $ 4,739 ​ 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. 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. In the normal course of banking business, risks related to specific loan categories are as follows: Construction loans – Construction loans are offered primarily to builders and individuals to finance the construction of single-family dwellings. In addition, the Bank periodically finances the construction of commercial projects. Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market conditions which could affect the value and marketability of projects, changes in the borrower’s ability or willingness to 82 Table of Contents repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value. ​ Residential real estate – Residential real estate loans are typically made to consumers and are secured by residential real estate. Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral. Commercial real estate – Commercial real estate loans consist of both loans secured by owner occupied properties and non-owner occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. These loans are subject to adverse changes in the local economy and commercial real estate markets. Credit risk associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower and the business to repay the loan. Non-owner occupied properties carry the risk of a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow. Commercial – Commercial loans are secured or unsecured loans for business purposes. Loans are typically secured by accounts receivable, inventory, equipment and/or other assets of the business. Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy. Consumer – Consumer loans include home equity loans and lines, installment loans and personal lines of credit. Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan. ​ ​ ​ ​ ​ ​ ​ ​ ​ 83 Table of Contents The following tables include impairment information relating to loans and the allowance for credit losses for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential Commercial ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Construction ​ real estate ​ real estate ​ Commercial ​ Consumer ​ Total December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans individually evaluated for impairment ​ $ 331 ​ $ 5,081 ​ $ 2,540 ​ $ 174 ​ $ 28 ​ $ 8,154 Loans collectively evaluated for impairment ​ 236,901 ​ 791,460 ​ 1,051,003 ​ 147,526 ​ 285,984 ​ 2,512,874 Acquired loans - PCI ​ ​ 650 ​ 13,956 ​ 11,866 ​ 156 ​ 14 ​ 26,642 Total loans (1) ​ $ 237,882 ​ $ 810,497 ​ $ 1,065,409 ​ $ 147,856 ​ $ 286,026 ​ $ 2,547,670 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses allocated to: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans individually evaluated for impairment ​ $ — ​ $ 127 ​ $ — ​ $ — ​ $ — ​ $ 127 Loans collectively evaluated for impairment ​ 2,973 ​ 2,495 ​ 4,899 ​ 1,652 ​ 4,497 ​ 16,516 Total allowance ​ $ 2,973 ​ $ 2,622 ​ $ 4,899 ​ $ 1,652 ​ $ 4,497 ​ $ 16,643 (1) Excludes loans measured at fair value of $ 8.4 million at December 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential Commercial ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Construction ​ real estate ​ real estate ​ Commercial ​ Consumer ​ Total December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans individually evaluated for impairment ​ $ 321 ​ $ 3,717 ​ $ 3,833 ​ $ 226 ​ $ — ​ $ 8,097 Loans collectively evaluated for impairment ​ 236,653 ​ 633,726 ​ 878,802 ​ 202,830 ​ 125,417 ​ 2,077,428 Acquired loans - PCI ​ ​ 2,379 ​ ​ 17,326 ​ ​ 13,594 ​ ​ 321 ​ ​ 30 ​ ​ 33,650 Total loans ​ $ 239,353 ​ $ 654,769 ​ $ 896,229 ​ $ 203,377 ​ $ 125,447 ​ $ 2,119,175 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses allocated to: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans individually evaluated for impairment ​ $ — ​ $ 172 ​ $ 1 ​ $ — ​ $ — ​ $ 173 Loans collectively evaluated for impairment ​ 2,454 ​ 2,686 ​ 4,597 ​ 2,070 ​ 1,964 ​ 13,771 Acquired loans - PCI ​ ​ — ​ — ​ — ​ — ​ — ​ — Total allowance ​ $ 2,454 ​ $ 2,858 ​ $ 4,598 ​ $ 2,070 ​ $ 1,964 ​ $ 13,944 ​ 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. ​ 84 Table of Contents The following tables provide information on impaired loans and any related allowance by loan class as of December 31. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken and interest paid on nonaccrual loans that has been applied to principal. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Recorded Recorded ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unpaid ​ investment ​ investment ​ ​ ​ ​ Year-to-date ​ Interest ​ ​ principal ​ with no ​ with an ​ Related ​ average recorded ​ income (Dollars in thousands) ​ balance ​ allowance ​ allowance ​ allowance ​ investment ​ recognized December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired nonaccrual loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 297 ​ $ 297 ​ $ — ​ $ — ​ $ 309 ​ $ — Residential real estate ​ 1,363 ​ 1,259 ​ — ​ — ​ 1,661 ​ — Commercial real estate ​ 159 ​ 150 ​ — ​ — ​ 604 ​ — Commercial ​ 359 ​ 174 ​ — ​ — ​ 227 ​ — Consumer ​ 29 ​ 28 ​ — ​ — ​ 43 ​ — Total ​ $ 2,207 ​ $ 1,908 ​ $ — ​ $ — ​ $ 2,844 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired accruing TDRs: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 10 ​ $ 10 ​ $ — ​ $ — ​ $ 16 ​ $ 1 Residential real estate ​ 2,849 ​ 1,176 ​ 1,539 ​ 127 ​ 2,979 ​ 108 Commercial real estate ​ 1,680 ​ 1,680 ​ — ​ — ​ 2,095 ​ 56 Commercial ​ — ​ — ​ — ​ — ​ — ​ — Consumer ​ — ​ — ​ — ​ — ​ 5 ​ — Total ​ $ 4,539 ​ $ 2,866 ​ $ 1,539 ​ $ 127 ​ $ 5,095 ​ $ 165 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other impaired accruing loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 24 ​ $ 24 ​ $ — ​ $ — ​ $ 215 ​ $ 6 Residential real estate ​ 1,107 ​ 1,107 ​ — ​ — ​ 474 ​ 3 Commercial real estate ​ 710 ​ 710 ​ — ​ — ​ 553 ​ 30 Commercial ​ — ​ — ​ — ​ — ​ 51 ​ 1 Consumer ​ — ​ — ​ — ​ — ​ 15 ​ — Total ​ $ 1,841 ​ $ 1,841 ​ $ — ​ $ — ​ $ 1,308 ​ $ 40 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total impaired loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 331 ​ $ 331 ​ $ — ​ $ — ​ $ 540 ​ $ 7 Residential real estate ​ 5,319 ​ 3,542 ​ 1,539 ​ 127 ​ 5,114 ​ 111 Commercial real estate ​ 2,549 ​ 2,540 ​ — ​ — ​ 3,252 ​ 86 Commercial ​ 359 ​ 174 ​ — ​ — ​ 278 ​ 1 Consumer ​ 29 ​ 28 ​ — ​ — ​ 63 ​ — Total ​ $ 8,587 ​ $ 6,615 ​ $ 1,539 ​ $ 127 ​ $ 9,247 ​ $ 205 ​ ​ ​ ​ ​ 85 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Recorded Recorded ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unpaid ​ investment ​ investment ​ ​ ​ ​ Year-to-date ​ Interest ​ ​ principal ​ with no ​ with an ​ Related ​ average recorded ​ income (Dollars in thousands) ​ balance ​ allowance ​ allowance ​ allowance ​ investment ​ recognized December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired nonaccrual loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 297 ​ $ 297 ​ $ — ​ $ — ​ $ 297 ​ $ — Residential real estate ​ 882 ​ 803 ​ — ​ — ​ 1,095 ​ — Commercial real estate ​ 994 ​ 606 ​ — ​ — ​ 2,122 ​ — Commercial ​ 380 ​ 216 ​ — ​ — ​ 242 ​ — Consumer ​ — ​ — ​ — ​ — ​ 9 ​ — Total ​ $ 2,553 ​ $ 1,922 ​ $ — ​ $ — ​ $ 3,765 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired accruing TDRs: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 24 ​ $ 24 ​ $ — ​ $ — ​ $ 30 ​ $ 3 Residential real estate ​ 2,965 ​ 475 ​ 2,361 ​ 172 ​ 3,150 ​ 146 Commercial real estate ​ 2,807 ​ 2,352 ​ 455 ​ 1 ​ 2,952 ​ 87 Commercial ​ — ​ — ​ — ​ — ​ — ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 5,796 ​ $ 2,851 ​ $ 2,816 ​ $ 173 ​ $ 6,132 ​ $ 236 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other impaired accruing loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — Residential real estate ​ 78 ​ 78 ​ — ​ — ​ 465 ​ 21 Commercial real estate ​ 420 ​ 420 ​ — ​ — ​ 470 ​ 17 Commercial ​ 10 ​ 10 ​ — ​ — ​ 13 ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 508 ​ $ 508 ​ $ — ​ $ — ​ $ 948 ​ $ 38 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total impaired loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 321 ​ $ 321 ​ $ — ​ $ — ​ $ 327 ​ $ 3 Residential real estate ​ 3,925 ​ 1,356 ​ 2,361 ​ 172 ​ 4,710 ​ 167 Commercial real estate ​ 4,221 ​ 3,378 ​ 455 ​ 1 ​ 5,544 ​ 104 Commercial ​ 390 ​ 226 ​ — ​ — ​ 255 ​ — Consumer ​ — ​ — ​ — ​ — ​ 9 ​ — Total ​ $ 8,857 ​ $ 5,281 ​ $ 2,816 ​ $ 173 ​ $ 10,845 ​ $ 274 ​ ​ 86 Table of Contents The following tables provide a roll-forward for troubled debt restructurings as of and for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 1/1/2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 12/31/2022 ​ ​ ​ ​ TDR ​ New ​ Disbursements ​ Charge- ​ Reclassifications/ ​ ​ ​ ​ TDR ​ Related (Dollars in thousands) ​ Balance ​ TDRs ​ (Payments) ​ offs ​ Transfer In/(Out) ​ Payoffs ​ Balance ​ Allowance For the Year Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accruing TDRs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 24 ​ $ — ​ $ ( 14 ) ​ $ — ​ $ — ​ $ — ​ $ 10 ​ $ — Residential real estate ​ 2,836 ​ ​ — ​ ​ ( 100 ) ​ ​ — ​ ​ ( 20 ) ​ ​ ( 1 ) ​ ​ 2,715 ​ ​ 127 Commercial real estate ​ 2,807 ​ ​ — ​ ​ ( 180 ) ​ ​ — ​ ​ — ​ ​ ( 947 ) ​ ​ 1,680 ​ ​ — Commercial ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Consumer ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Total ​ $ 5,667 ​ $ — ​ $ ( 294 ) ​ $ — ​ $ ( 20 ) ​ $ ( 948 ) ​ $ 4,405 ​ $ 127 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nonaccrual TDRs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — Residential real estate ​ — ​ — ​ ( 6 ) ​ — ​ 20 ​ — ​ 14 ​ — Commercial real estate ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Commercial ​ 216 ​ — ​ ( 46 ) ​ — ​ — ​ — ​ 170 ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 216 ​ $ — ​ $ ( 52 ) ​ $ — ​ $ 20 ​ $ — ​ $ 184 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ $ 5,883 ​ $ — ​ $ ( 346 ) ​ $ — ​ $ — ​ $ ( 948 ) ​ $ 4,589 ​ $ 127 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 1/1/2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 12/31/2021 ​ ​ ​ TDR ​ New ​ Disbursements ​ Charge- ​ Reclassifications/ ​ ​ ​ ​ TDR ​ Related (Dollars in thousands) ​ Balance ​ TDRs ​ (Payments) ​ offs ​ Transfer In/(Out) ​ Payoffs ​ Balance ​ Allowance For the Year Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accruing TDRs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 34 ​ $ — ​ $ ( 10 ) ​ $ — ​ $ — ​ $ — ​ $ 24 ​ $ — Residential real estate ​ 3,845 ​ — ​ ( 109 ) ​ — ​ — ​ ( 900 ) ​ 2,836 ​ 172 Commercial real estate ​ 3,118 ​ — ​ ( 311 ) ​ — ​ — ​ — ​ 2,807 ​ 1 Commercial ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 6,997 ​ $ — ​ $ ( 430 ) ​ $ — ​ $ — ​ $ ( 900 ) ​ $ 5,667 ​ $ 173 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nonaccrual TDRs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — Residential real estate ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Commercial real estate ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Commercial ​ 258 ​ — ​ ( 42 ) ​ — ​ — ​ — ​ 216 ​ — Consumer ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — Total ​ $ 258 ​ $ — ​ $ ( 42 ) ​ $ — ​ $ — ​ $ — ​ $ 216 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ $ 7,255 ​ $ — ​ $ ( 472 ) ​ $ — ​ $ — ​ $ ( 900 ) ​ $ 5,883 ​ $ 173 ​ ​ 87 Table of Contents 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. Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio. Loans that are identified as special mention, substandard or doubtful are adversely rated. These loans and the pass/watch loans are assigned higher qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At December 31, 2022, there were no nonaccrual loans classified as special mention or doubtful and $ 1.9 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 at December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Special ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Pass/Performing (1) ​ Pass/Watch ​ Mention ​ Substandard ​ Doubtful ​ PCI ​ Total December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 231,160 ​ $ 14,212 ​ $ — ​ $ 297 ​ $ — ​ $ 650 ​ $ 246,319 Residential real estate ​ 761,405 ​ 32,467 ​ 1,239 ​ 1,430 ​ — ​ 13,956 ​ 810,497 Commercial real estate ​ 929,501 ​ 121,711 ​ 1,814 ​ 517 ​ — ​ 11,866 ​ 1,065,409 Commercial ​ 131,084 ​ 15,958 ​ 484 ​ 174 ​ — ​ 156 ​ 147,856 Consumer ​ 285,786 ​ 196 ​ 2 ​ 28 ​ — ​ 14 ​ 286,026 Total ​ $ 2,338,936 ​ $ 184,544 ​ $ 3,539 ​ $ 2,446 ​ $ — ​ $ 26,642 ​ $ 2,556,107 (1) Includes loans measured at fair value of $ 8.4 million at December 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Special ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Pass/Performing ​ Pass/Watch ​ Mention ​ Substandard ​ Doubtful ​ PCI ​ Total December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 210,287 ​ $ 24,513 ​ $ 1,877 ​ $ 297 ​ $ — ​ $ 2,379 ​ $ 239,353 Residential real estate ​ 596,694 ​ 38,309 ​ 1,539 ​ 901 ​ — ​ 17,326 ​ 654,769 Commercial real estate ​ 724,561 ​ 151,209 ​ 4,535 ​ 2,330 ​ — ​ 13,594 ​ 896,229 Commercial ​ 186,176 ​ 16,654 ​ — ​ 226 ​ — ​ 321 ​ 203,377 Consumer ​ 125,200 ​ 215 ​ — ​ 2 ​ — ​ 30 ​ 125,447 Total ​ $ 1,842,918 ​ $ 230,900 ​ $ 7,951 ​ $ 3,756 ​ $ — ​ $ 33,650 ​ $ 2,119,175 ​ The following tables provide information on the aging of the loan portfolio at December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accruing ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 30‑59 days 60‑89 days Greater than Total ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Current (1) ​ past due ​ past due ​ 90 days ​ past due ​ Nonaccrual ​ PCI ​ Total December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 239,990 ​ $ 4,343 ​ $ 1,015 ​ $ 24 ​ $ 5,382 ​ $ 297 ​ $ 650 ​ $ 246,319 ​ Residential real estate ​ 787,070 ​ 6,214 ​ 891 ​ 1,107 ​ 8,212 ​ 1,259 ​ 13,956 ​ 810,497 ​ Commercial real estate ​ 1,052,314 ​ 369 ​ — ​ 710 ​ 1,079 ​ 150 ​ 11,866 ​ 1,065,409 ​ Commercial ​ 147,511 ​ 15 ​ — ​ — ​ 15 ​ 174 ​ 156 ​ 147,856 ​ Consumer ​ 285,750 ​ 223 ​ 11 ​ — ​ 234 ​ 28 ​ 14 ​ 286,026 ​ Total ​ $ 2,512,635 ​ $ 11,164 ​ $ 1,917 ​ $ 1,841 ​ $ 14,922 ​ $ 1,908 ​ $ 26,642 ​ $ 2,556,107 ​ Percent of total loans ​ 98.3 % 0.4 % 0.1 % 0.1 % 0.6 % 0.1 % 1.0 % 100.0 % (1) Includes loans measured at fair value of $ 8.4 million at December 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accruing ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 30‑59 days ​ 60‑89 days ​ Greater than ​ Total ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Current ​ past due ​ past due ​ 90 days ​ past due ​ Nonaccrual ​ PCI ​ Total December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Construction ​ $ 235,757 ​ $ 920 ​ $ — ​ $ — ​ $ 920 ​ $ 297 ​ $ 2,379 ​ $ 239,353 ​ Residential real estate ​ 635,166 ​ 1,371 ​ 25 ​ 78 ​ 1,474 ​ 803 ​ 17,326 ​ 654,769 ​ Commercial real estate ​ 881,350 ​ 259 ​ — ​ 420 ​ 679 ​ 606 ​ 13,594 ​ 896,229 ​ Commercial ​ 202,503 ​ 183 ​ 62 ​ 10 ​ 255 ​ 298 ​ 321 ​ 203,377 ​ Consumer ​ 125,130 ​ 287 ​ — ​ — ​ 287 ​ — ​ 30 ​ 125,447 ​ Total ​ $ 2,079,906 ​ $ 3,020 ​ $ 87 ​ $ 508 ​ $ 3,615 ​ $ 2,004 ​ $ 33,650 ​ $ 2,119,175 ​ Percent of total loans ​ 98.2 % 0.1 % — % — % 0.1 % 0.1 % 1.6 % 100.0 % ​ 88 Table of Contents The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the years ended December 31. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential Commercial ​ ​ ​ ​ ​ (Dollars in thousands) ​ Construction ​ real estate ​ real estate ​ Commercial ​ Consumer ​ Total For the year ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Beginning Balance ​ $ 2,454 ​ $ 2,858 ​ $ 4,598 ​ $ 2,070 ​ $ 1,964 $ 13,944 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Charge-offs ​ — ​ ( 5 ) ​ ( 6 ) ​ ( 546 ) ​ ( 31 ) ​ ( 588 ) Recoveries ​ 13 ​ 142 ​ 951 ​ 227 ​ 29 ​ 1,362 Net (charge-offs) recoveries ​ 13 ​ 137 ​ 945 ​ ( 319 ) ​ ( 2 ) ​ 774 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Provision ​ 506 ​ ( 373 ) ​ ( 644 ) ​ ( 99 ) ​ 2,535 ​ 1,925 Ending Balance ​ $ 2,973 ​ $ 2,622 ​ $ 4,899 ​ $ 1,652 ​ $ 4,497 $ 16,643 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential Commercial ​ ​ ​ ​ ​ (Dollars in thousands) ​ Construction ​ real estate ​ real estate ​ Commercial ​ Consumer ​ Total For the year ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses: ​ ​ ​ ​ ​ ​ Beginning Balance ​ $ 2,022 ​ $ 3,699 ​ $ 5,426 ​ $ 2,089 ​ $ 652 ​ $ 13,888 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Charge-offs ​ — ​ — ​ — ​ ( 235 ) ​ ( 28 ) ​ ( 263 ) Recoveries ​ 278 ​ 82 ​ 114 ​ 193 ​ 10 ​ 677 Net (charge-offs) recoveries ​ 278 ​ 82 ​ 114 ​ ( 42 ) ​ ( 18 ) ​ 414 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Provision ​ 154 ​ ( 923 ) ​ ( 942 ) ​ 23 ​ 1,330 ​ ( 358 ) Ending Balance ​ $ 2,454 ​ $ 2,858 ​ $ 4,598 ​ $ 2,070 ​ $ 1,964 ​ $ 13,944 ​ Foreclosure Proceedings 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. Both performing and non-performing TDRs had no further commitments associated with them as of December 31, 2022 and 2021. ​ NOTE 5. LEASES Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. ​ The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. ​ 89 Table of Contents During 2021, the Company acquired long-term branch leases and equipment due to the acquisition of Severn. These leases were reassessed by management as of the acquisition date of October 31, 2021, which included updating the incremental borrowing rates and remaining lease terms. ​ The following tables present information about the Company’s leases as of and for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ December 31, 2022 ​ December 31, 2021 Lease liabilities ​ $ 9,908 ​ ​ $ 11,567 ​ Right-of-use assets ​ $ 9,629 ​ ​ $ 11,370 ​ Weighted average remaining lease term ​ 12.55 years ​ 13.61 years Weighted average discount rate ​ 2.50 % ​ 2.48 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended Lease cost (in thousands) ​ December 31, 2022 ​ December 31, 2021 Operating lease cost ​ $ 1,355 ​ $ 902 Short-term lease cost ​ — ​ — Total lease cost ​ $ 1,355 ​ $ 902 ​ ​ ​ ​ ​ ​ ​ Cash paid for amounts included in the measurement of lease liabilities ​ $ 1,268 ​ $ 777 ​ The following table presents a maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities at December 31. ​ ​ ​ ​ ​ ​ ​ As of Lease payments due (in thousands) ​ December 31, 2022 2023 ​ $ 1,231 2024 ​ 1,141 2025 ​ ​ 917 2026 ​ ​ 916 2027 ​ ​ 849 Thereafter ​ ​ 6,584 Total undiscounted cash flows ​ $ 11,638 Discount ​ ​ 1,730 Lease liabilities ​ $ 9,908 ​ 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. ​ ​ ​ ​ ​ ​ ​ As of (In thousands) ​ December 31, 2022 2023 ​ $ 918 2024 ​ 701 2025 ​ 719 2026 ​ ​ 737 2027 ​ ​ 418 Thereafter ​ ​ 1,554 Total ​ $ 5,047 ​ ​ ​ 90 Table of Contents ​ ​ ​ ​ NOTE 6. PREMISES AND EQUIPMENT ​ The following table provides information on premises and equipment at December 31. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Land ​ $ 10,886 ​ $ 10,886 Buildings and land improvements ​ 48,605 ​ 47,002 Furniture and equipment ​ 8,177 ​ 8,467 ​ ​ 67,668 ​ 66,355 Accumulated depreciation ​ ( 16,180 ) ​ ( 14,731 ) Total ​ $ 51,488 ​ $ 51,624 ​ Depreciation expense totaled $ 2.4 million for 2022 and $ 1.5 million for 2021. NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS The following table provides information on the significant components of goodwill and other acquired intangible assets at December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ Gross ​ Measurement ​ Accumulated ​ ​ ​ ​ Net ​ Average ​ ​ Carrying ​ Period ​ Impairment ​ Accumulated ​ Carrying ​ Remaining Life (Dollars in thousands) Amount Adjustments ​ Charges Amortization Amount ​ (in years) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Goodwill ​ $ 65,631 ​ $ ( 155 ) ​ $ ( 1,543 ) ​ $ ( 667 ) ​ $ 63,266 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other intangible assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortizable ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Core deposit intangible ​ $ 10,504 ​ $ — ​ $ — ​ $ ( 4,957 ) ​ $ 5,547 ​ ​ 2.6 Total other intangible assets ​ $ 10,504 ​ $ — ​ $ — ​ $ ( 4,957 ) ​ $ 5,547 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ Gross ​ ​ ​ Accumulated ​ ​ ​ ​ Net ​ ​ Average ​ Carrying ​ ​ Impairment ​ Accumulated ​ Carrying ​ ​ Remaining Life (Dollars in thousands) Amount Additions ​ Charges ​ Amortization ​ Amount ​ ​ (in years) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Goodwill ​ $ 19,727 ​ $ 45,904 ​ $ ( 1,543 ) ​ $ ( 667 ) ​ $ 63,421 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other intangible assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortizable ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Core deposit intangible ​ $ 3,954 ​ $ 6,550 ​ $ — ​ $ ( 2,969 ) ​ $ 7,535 ​ 2.9 Total other intangible assets ​ $ 3,954 ​ $ 6,550 ​ $ — ​ $ ( 2,969 ) ​ $ 7,535 ​ ​ ​ ​ The aggregate amortization expense was $ 2.0 million and $ 734 thousand for the years ended December 31, 2022 and 2021, respectively. ​ 91 Table of Contents The following table presents estimated future remaining amortization for amortizing intangibles at December 31, 2022. ​ ​ ​ ​ ​ (Dollars in thousands) ​ Amortization Expense 2023 ​ $ 1,682 2024 ​ 1,376 2025 ​ 1,070 2026 ​ 765 2027 ​ ​ 459 Thereafter ​ ​ 195 Total amortizing intangible assets ​ $ 5,547 ​ ​ ​ ​ ​ ​ ​ ​ NOTE 8. OTHER ASSETS The Company had the following other assets at December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Accrued interest receivable ​ $ 9,384 ​ $ 6,719 Deferred income taxes ​ 7,357 ​ 2,926 Prepaid expenses ​ 2,680 ​ 2,865 Income taxes receivable ​ ​ 74 ​ ​ 616 Other assets ​ 8,506 ​ 6,806 Total ​ $ 28,001 ​ $ 19,932 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ NOTE 9. OTHER LIABILITIES The Company had the following other liabilities at December 31. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Accrued interest payable ​ $ 989 ​ $ 692 Accrued salaries and wages ​ ​ 1,360 ​ ​ 3,422 Accounts payable ​ ​ 353 ​ ​ 2,745 Deferred compensation liability ​ 5,679 ​ 4,660 Other liabilities ​ 1,846 ​ 3,081 Total ​ $ 10,227 ​ $ 14,600 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ NOTE 10. DEPOSITS 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. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Due in one year or less ​ $ 231,089 ​ $ 291,685 Due in one to three years ​ 162,216 ​ 128,222 Due in three to five years ​ 31,417 ​ 40,044 Total ​ $ 424,722 ​ $ 459,951 ​ As of December 31, 2022 and 2021, deposits, both direct and indirect, from directors, their associates and policy-making officers, totaled approximately $ 11.9 million and $ 7.7 million, respectively. At December 31, 2022 and December 31, 2021, we had no brokered deposits. ​ 92 Table of Contents NOTE 11. BORROWINGS 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 ​ 2021 (Dollars in thousands) Amount Rate Amount Rate Average for the Year ​ ​ ​ Repurchase agreements ​ $ 683 0.25 % $ 3,017 0.25 % FHLB Advances ​ 1,863 3.87 ​ — — ​ Overnight Fed Funds purchased ​ — — ​ — — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At Year End ​ ​ ​ ​ ​ ​ ​ Repurchase agreements ​ $ — — % $ 4,143 0.18 % FHLB Advances ​ 40,000 4.57 ​ — — ​ Overnight Fed Funds purchased ​ — — ​ — — ​ ​ Securities sold under agreements to repurchase are securities sold to customers, at the customers’ request, under a “roll-over” contract that matures in one business day. The underlying securities sold are U.S. Government agency securities, which are segregated in the Company’s custodial accounts from other investment securities. The Bank had $ 15.0 million in federal funds lines of credit and a reverse repurchase agreement available on a short-term basis from correspondent banks at December 31, 2022 and 2021. 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. ​ NOTE 12. 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 Notes were structured to qualify as Tier 2 capital for regulatory capital purposes and bear an initial interest rate of 5.375 % until September 1, 2025, with interest during this period payable semi-annually in arrears. From and including September 1, 2025, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 526.5 basis points, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company at its option, in whole or in part, on or after September 1, 2025. Initial debt issuance costs were $ 611 thousand. The debt balance of $ 24.7 million is presented net of unamortized issuance costs of $ 326 thousand at December 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 93 Table of Contents redemption, in whole or in part, upon repayment of the 2035 Debentures. We have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee. Under the terms of the 2035 Debentures, we are permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred and is continuing. As of December 31, 2022, we were current on all interest due on the 2035 Debentures. NOTE 13. BENEFIT PLANS 401(k) and Profit Sharing Plan The Company has a 401(k) and profit sharing plan covering substantially all full-time employees. The plan calls for matching contributions by the Company, and the Company makes discretionary contributions based on profits. Company contributions to this plan included in noninterest expense totaled $ 1.3 million and $ 696 thousand for 2022 and 2021, respectively. ​ NOTE 14. STOCK-BASED COMPENSATION At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc. 2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date. The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one - to three-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur. The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 499,870 shares remained available for grant at December 31, 2022. The following tables provide information on stock-based compensation expense as of and for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (Dollars in thousands) 2022 2021 Stock-based compensation expense ​ $ 636 ​ $ 378 Excess tax benefits related to stock-based compensation ​ 42 ​ 9 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ (Dollars in thousands) 2022 2021 Unrecognized stock-based compensation expense ​ $ 138 ​ $ 80 ​ Weighted average period unrecognized expense is expected to be recognized ​ 0.2 years 0.2 years ​ ​ 94 Table of Contents The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 ​ 2021 ​ ​ ​ ​ Weighted Average ​ ​ ​ Weighted Average ​ ​ Number of ​ Grant Date ​ Number of ​ Grant Date ​ Shares Fair Value Shares Fair Value Nonvested at beginning of period 29,425 ​ $ 13.95 24,505 ​ $ 13.78 Granted 34,184 ​ 20.48 26,583 ​ 13.81 Vested ( 26,749 ) ​ 13.75 ( 20,240 ) ​ 13.54 Forfeited — ​ — ( 1,423 ) ​ 13.34 Nonvested at end of period 36,860 ​ $ 20.15 29,425 ​ $ 13.95 ​ The fair value of restricted stock awards that vested during 2022 and 2021 was $ 532 thousand and $ 309 thousand, respectively. There were no stock options granted during 2022 and 2021. ​ NOTE 15. DERIVATIVES ​ We maintain and account for derivatives, in the form of IRLCs and mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses through mortgage-banking revenue in the Consolidated Statements of Income. ​ IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives. We are exposed to price risk from the time a mortgage loan is locked in until the time the loan is sold. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 120 days . For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of TBA securities, which are forward contracts, as well as, to a lesser degree, loan level commitments in the form of best efforts and mandatory forward contracts. These assets and liabilities are included in the Consolidated Balance Sheets in other assets and accrued expenses and other liabilities, respectively. ​ The following table provides information pertaining to the carrying amounts of our derivative financial instruments at December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ December 31, 2021 ​ ​ Notional ​ Estimated ​ Notional ​ Estimated (Dollars in thousands) ​ Amount ​ Fair Value ​ Amount ​ Fair Value Asset - IRLCs ​ $ 4,166 ​ $ 35 ​ $ 17,557 ​ $ 380 Asset - TBA securities ​ ​ 8,750 ​ ​ 41 ​ ​ 26,500 ​ ​ 55 Liability - IRLCs ​ ​ 1,150 ​ ​ 7 ​ ​ — ​ ​ — Liability - TBA securities ​ ​ 1,000 ​ ​ 6 ​ ​ 20,500 ​ ​ 41 ​ NOTE 16. DEFERRED COMPENSATION ​ The Company has multiple deferred compensation agreements with current and former employees. The Executive Deferred Compensation Plan (the “Plan”) is reserved for members of management and highly compensated employees of the Company and the Bank. During 2019, the Plan was expanded to include additional officers who had not previously participated. The Plan permits a participant to elect, each year, to defer receipt of up to 100 % of his or her salary and bonus to be earned in the following year. The Plan also permits the participant to defer the receipt of performance-based compensation not later than six months before the end of the period for which it is to be earned. The deferred amounts are credited to an account maintained on behalf of the participant and are invested at the discretion of each participant in certain deemed investment options selected by the Compensation Committee of the Board of the Company. The actual investments purchased are owned by the Company and held in a Rabbi Trust. The accounts of the Rabbi Trust are consolidated and the investments are included in other assets on the Consolidated Balance Sheets. The Company and the 95 Table of Contents Bank may also make matching, mandatory and discretionary contributions for certain participants. A participant is fully vested at all times in the amounts that he or she elects to defer. Any contributions by the Company will vest over a five-year period. The following table provides information on Shore Bancshares, Inc.’s contributions and participant deferrals to the Plan for 2022 and 2021 and the related deferred compensation liability as of December 31. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Elective deferrals ​ $ 238 ​ $ 192 Deferred compensation liability ​ ​ 948 ​ ​ 972 ​ During 2019, the Company introduced a new SERP plan for executive officers of the Company and the Bank. The related liability is unfunded; however, BOLI was purchased to offset the benefit costs. The following table provides information on the expense recognized during the years ended December 31, as well as the balance of the unfunded SERP liability and the cash surrender value of policies purchased to offset the SERP benefit costs as of December 31. The unfunded SERP liability and cash surrender value were included in other liabilities and other assets, respectively. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Cash surrender value ​ $ 56,117 ​ $ 38,414 Deferred compensation liability - SERP ​ 4,177 ​ 3,114 SERP Expense ​ ​ 1,063 ​ ​ 1,455 ​ Lastly, in 2016, the Bank assumed agreements held by the former CNB Bank under which its former directors had elected to defer part of their fees and compensation while serving on the former Board of CNB. The amounts deferred were invested in insurance policies on the lives of the respective individuals. Amounts available under the policies are to be paid to the individuals as retirement benefits over future years. ​ The following table includes information on the deferred compensation liability and cash surrender value as of December 31. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ 2022 ​ 2021 Deferred compensation liability ​ $ 450 ​ $ 554 Cash surrender value ​ ​ 2,260 ​ ​ 2,200 ​ ​ ​ ​ NOTE 17. OTHER EXPENSES The following table summarizes the Company’s other noninterest expenses for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Advertising and marketing ​ $ 898 ​ $ 339 Other customer expense ​ 1,075 693 Other expense ​ 3,694 2,425 Other loan expense ​ 1,670 188 Software expense ​ 1,853 1,048 Travel and entertainment expense ​ 478 216 Trust professional fees ​ 409 524 Total other noninterest expense ​ $ 10,077 ​ $ 5,433 ​ ​ ​ 96 Table of Contents ​ ​ ​ NOTE 18. INCOME TAXES The following table provides information on components of income tax expense for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Current tax expense: ​ ​ Federal ​ $ 8,814 ​ $ 3,920 State ​ 3,332 ​ 1,614 ​ ​ 12,146 ​ 5,534 Deferred income tax (benefit) expense: ​ ​ Federal ​ ( 911 ) ​ 136 State ​ ( 271 ) ​ 142 ​ ​ ( 1,182 ) ​ 278 ​ ​ ​ ​ ​ ​ ​ Total income tax expense ​ $ 10,964 ​ $ 5,812 ​ The following table provides a reconciliation of tax computed at the statutory federal tax rate to the actual tax expense for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ 2022 2021 Tax at federal statutory rate 21 % 21 % Tax effect of: ​ Tax-exempt income ( 1.0 ) ( 1.6 ) ​ State income taxes, net of federal benefit 5.7 6.6 ​ Other 0.3 1.4 ​ Actual income tax expense rate 26.0 % 27.4 % ​ The following table provides information on significant components of the Company’s deferred tax assets and liabilities for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, (Dollars in thousands) 2022 2021 Deferred tax assets: ​ ​ Allowance for credit losses ​ $ 4,460 ​ $ 3,728 Write-downs of other real estate owned ​ 21 ​ 12 Nonaccrual loan interest ​ 345 ​ 253 Lease liabilities ​ ​ 2,635 ​ ​ 3,021 Deferred compensation ​ ​ 1,522 ​ ​ 1,246 Deferred loan costs ​ 1,183 ​ 730 Unrealized losses on available-for-sale securities ​ ​ 3,399 ​ ​ — Other ​ 1,487 ​ 903 Total deferred tax assets ​ 15,052 ​ 9,893 Less valuation allowance ​ ​ ( 791 ) ​ ​ ( 474 ) Deferred tax assets, net of valuation allowance ​ ​ 14,261 ​ ​ 9,419 Deferred tax liabilities: ​ ​ Depreciation ​ 2,491 ​ 1,030 Right-of-use assets ​ ​ 2,560 ​ ​ 2,968 Mortgage servicing rights ​ ​ 1,405 ​ ​ 1,084 Acquisition accounting adjustments ​ 57 ​ 986 Deferred capital gain on branch sale ​ 220 ​ 228 Unrealized gains on available-for-sale securities ​ — ​ 13 Other ​ ​ 171 ​ ​ 184 Total deferred tax liabilities ​ 6,904 ​ 6,493 Net deferred tax assets ​ $ 7,357 ​ $ 2,926 ​ ​ ​ ​ 97 Table of Contents ​ NOTE 19. EARNINGS PER COMMON SHARE Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents (stock-based awards). The following table provides information relating to the calculation of earnings per common share for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended ​ ​ December 31, (In thousands, except per share data) 2022 2021 Net Income ​ $ 31,177 ​ $ 15,368 Weighted average shares outstanding - Basic and Diluted ​ 19,847 ​ 13,119 ​ ​ ​ ​ ​ ​ ​ Earnings per common share - Basic and Diluted ​ $ 1.57 ​ $ 1.17 ​ There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the years ended December 31, 2022 and 2021. NOTE 20. REGULATORY CAPITAL REQUIREMENTS Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific 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. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain amounts and ratios (set forth in the table below) of Common Equity Tier 1, Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (leverage ratio). As of December 31, 2022, management believes that the Company and the Bank met all capital adequacy requirements to which they were subject. As of December 31, 2022, the most recent notification from our primary regulator categorized Shore United Bank, N.A., as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change the Bank’s classification. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios, and Tier 1 leverage ratios, which are described below. The minimum ratios for capital adequacy purposes are 7.00 %, 8.50 %, 10.50 % and 4.00 % for the common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively which include a capital conservation buffer of 2.50 % respectively. To be categorized as well capitalized, a bank must maintain minimum ratios of 6.50 %, 8.00 %, 10.00 % and 5.00 % for its common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively. ​ 98 Table of Contents The following tables present the capital amounts and ratios at December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common ​ ​ ​ Total ​ Net ​ ​ ​ ​ ​ ​ Tier 1 ​ Total ​ ​ ​ ​ Equity ​ ​ ​ Risk- ​ Risk- ​ Adjusted ​ Common ​ Risk-Based ​ Risk-Based ​ Tier 1 (Dollars in thousands) ​ Tier 1 ​ Tier 1 ​ Based ​ Weighted ​ Average ​ Equity ​ Capital ​ Capital ​ Leverage 2022 Capital Capital Capital Assets Total Assets Tier 1 ratio Ratio Ratio Ratio Shore Bancshares, Inc. ​ $ 304,493 ​ $ 322,891 ​ $ 364,419 ​ $ 2,619,400 ​ $ 3,390,516 11.62 % 12.33 % 13.91 % 9.52 % Shore United Bank, N.A. ​ $ 335,802 ​ $ 335,802 ​ $ 352,657 ​ $ 2,618,939 ​ $ 3,386,771 12.82 % 12.82 % 13.47 % 9.92 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common ​ ​ ​ Total ​ Net ​ ​ ​ ​ ​ ​ Tier 1 ​ Total ​ ​ ​ ​ Equity ​ ​ ​ Risk- ​ Risk- ​ Adjusted ​ Common ​ Risk-Based ​ Risk-Based ​ Tier 1 (Dollars in thousands) ​ Tier 1 ​ Tier 1 ​ Based ​ Weighted ​ Average ​ Equity ​ Capital ​ Capital ​ Leverage 2021 Capital Capital Capital Assets Total Assets Tier 1 ratio Ratio Ratio Ratio Shore Bancshares, Inc. ​ $ 279,681 ​ $ 279,681 ​ $ 336,696 ​ $ 2,191,557 ​ $ 2,966,412 12.76 % 12.76 % 15.36 % 9.43 % Shore United Bank, N.A. ​ $ 304,362 ​ $ 304,362 ​ $ 318,614 ​ $ 2,189,775 ​ $ 2,965,319 13.90 % 13.90 % 14.55 % 9.48 % ​ Bank and holding company regulations impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At December 31, 2022, the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios. The Bank issued a dividend to Shore Bancshares, Inc. in the fourth quarter of 2021 of $ 25.0 million in relation to the purchase of Severn. NOTE 21. 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 ​ ​ available for sale (Dollars in thousands) ​ securities Balance, December 31, 2021 ​ $ 56 Other comprehensive (loss) ​ ( 9,077 ) Balance, December 31, 2022 ​ $ ( 9,021 ) ​ ​ ​ ​ Balance, December 31, 2020 ​ $ 1,529 Other comprehensive (loss) ​ ( 1,473 ) Balance, December 31, 2021 ​ $ 56 ​ ​ ​ ​ NOTE 22. FAIR VALUE MEASUREMENTS Accounting guidance under GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This accounting guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, loans held for sale and other real estate owned (foreclosed assets). These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. 99 Table of Contents Under fair value accounting guidance, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine their fair values. These hierarchy levels are: Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Assets Measured at Fair Value on a Recurring Basis Investment Securities Available for Sale Fair value measurement for investment securities available for sale is based on quoted prices from an independent pricing service. The fair value measurements consider observable data that may include present value of future cash flows, prepayment assumptions, credit loss assumptions and other factors. The Company classifies its investments in U.S. Treasury securities, if any, as Level 1 in the fair value hierarchy, and it classifies its investments in U.S. Government agencies securities and mortgage-backed securities issued or guaranteed by U.S. Government sponsored entities as Level 2. Equity Securities Fair value measurement for equity securities is based on quoted market prices retrieved by the Company via on-line resources. Although these securities have readily available fair market values, the Company deems that they be classified as level 2 investments in the fair value hierarchy due to not being considered traded in a highly active market. LHFS 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. ​ MSRs The fair value of MSRs is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, and other ancillary income such as late fees. Management reviews all significant assumptions on a quarterly basis. Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, 100 Table of Contents 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. IRLCs 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) Fair Value Valuation Technique Unobservable Input Range December 31, 2022 ​ ​ ​ MSRs (1) ​ $ 5,275 Market Approach ​ Weighted average prepayment speed (PSA) (2) ​ 121 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ IRLCs - net asset ​ $ 28 Market Approach ​ Range of pull through rate ​ 78 % - 100 % ​ ​ ​ ​ ​ ​ ​ Average pull through rate ​ 92 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range December 31, 2021 ​ ​ ​ MSRs (1) ​ $ 4,087 Market Approach ​ Weighted average prepayment speed (PSA) (2) ​ 156 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ IRLCs - asset ​ $ 380 Market Approach ​ Range of pull through rate ​ 77 % - 100 % ​ ​ ​ ​ ​ ​ ​ Average pull through rate ​ 93 % (1) The weighted average was calculated with reference to the principal balance of the underlying mortgages. (2) PSA = Public Securities Association Standard Prepayment Model ​ ​ The following table presents activity in MSRs for the year ended December 31. ​ ​ ​ ​ ​ ​ For the Year Ended (Dollars in thousands) December 31, 2022 Beginning balance $ 4,087 Servicing rights resulting from sales of loans ​ ​ 816 Valuation adjustment ​ ​ 372 Ending balance ​ $ 5,275 ​ 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 $ 380 Valuation adjustment ​ ​ ( 352 ) Ending balance ​ $ 28 ​ 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 101 Table of Contents delivering the loans within 120 days of origination to maximize interest earnings. For a small percentage of our business, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and we measure and report them at fair value. Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is a level 2 input. We have elected to measure and report best efforts commitments at fair value using a valuation methodology similar to that used for mandatory commitments. Market assumptions utilized in the fair value measurement of the reporting entity’s residential mortgage derivatives, inclusive of IRLCs, Closed Loan Inventory, TBA derivative trades, and Mandatory Forwards may be subject to investor overlays that may result in a significantly lower fair value measurement. Generally such overlays are announced with advanced notice in order to include the risk adjuster, however there are times when announcements are mandated resulting in a lower fair value measurement. Additionally market assumptions such as spec pool payups may result in a significantly higher fair value measurement at time of loan allocation to specific trades. The following tables present the recorded amount of assets measured at fair value on a recurring basis for the years ended December 31. No assets were transferred from one hierarchy level to another during 2022 or 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Significant ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ Significant ​ ​ ​ ​ ​ Quoted ​ Observable ​ Unobservable ​ ​ ​ ​ ​ Prices ​ Inputs ​ Inputs (Dollars in thousands) Fair Value (Level 1) (Level 2) (Level 3) December 31, 2022 ​ ​ ​ ​ Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Securities available for sale: ​ ​ ​ ​ U.S. Government agencies ​ $ 18,178 ​ $ — ​ $ 18,178 ​ $ — Mortgage-backed ​ 63,519 ​ — ​ 63,519 ​ — Other debt securities ​ ​ 1,890 ​ ​ — ​ ​ 1,890 ​ ​ — ​ ​ 83,587 ​ — ​ 83,587 ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity securities ​ ​ 1,233 ​ ​ — ​ ​ 1,233 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ TBA securities ​ ​ 41 ​ ​ — ​ ​ 41 ​ ​ — LHFS ​ ​ 4,248 ​ ​ — ​ ​ 4,248 ​ ​ — LHFI, at fair value ​ ​ 8,437 ​ ​ — ​ ​ 8,437 ​ ​ — MSRs ​ ​ 5,275 ​ ​ — ​ ​ — ​ ​ 5,275 IRLCs ​ ​ 35 ​ ​ — ​ ​ — ​ ​ 35 Total assets at fair value ​ $ 102,856 ​ $ — ​ $ 97,546 ​ $ 5,310 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ IRLCs ​ $ 7 ​ $ — ​ $ — ​ $ 7 TBA securities ​ ​ 6 ​ ​ — ​ ​ 6 ​ ​ — Total liabilities at fair value ​ $ 13 ​ $ — ​ $ 6 ​ $ 7 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 102 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Significant ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ Significant ​ ​ ​ ​ ​ Quoted ​ Observable ​ Unobservable ​ ​ ​ ​ ​ Prices ​ Inputs ​ Inputs (Dollars in thousands) Fair Value (Level 1) (Level 2) (Level 3) December 31, 2021 ​ ​ ​ ​ Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Securities available for sale: ​ ​ ​ ​ U.S. Government agencies ​ $ 22,305 ​ $ — ​ $ 22,305 ​ $ — Mortgage-backed ​ 92,637 ​ — ​ 92,637 ​ — Other debt securities ​ ​ 2,040 ​ ​ — ​ ​ 2,040 ​ ​ — ​ ​ 116,982 ​ — ​ 116,982 ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity securities ​ ​ 1,372 ​ ​ — ​ ​ 1,372 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ TBA securities ​ ​ 55 ​ ​ — ​ ​ 55 ​ ​ — LHFS ​ ​ 37,749 ​ ​ — ​ ​ 37,749 ​ ​ — MSRs ​ ​ 4,087 ​ ​ — ​ ​ — ​ ​ 4,087 IRLCs ​ ​ 380 ​ ​ — ​ ​ — ​ ​ 380 Total assets at fair value ​ $ 160,625 ​ $ — ​ $ 156,158 ​ $ 4,467 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ TBA securities ​ $ 41 ​ $ — ​ $ 41 ​ $ — Total liabilities at fair value ​ $ 41 ​ $ — ​ $ 41 ​ $ — ​ Assets Measured at Fair Value on a Nonrecurring Basis Impaired Loans Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent and these are considered Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable, discounted on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those techniques applied in prior periods. Other Real Estate Owned (Foreclosed Assets) Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets establishing a new cost basis. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. The estimated fair value for foreclosed assets included in Level 3 are determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to the initial recognition, the Company records the foreclosed asset as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods. ​ ​ ​ ​ ​ 103 Table of Contents The following tables set forth the Company’s financial assets subject to fair value adjustments (impairment) on a nonrecurring basis for the years ended December 31, that are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Quantitative Information about Level 3 Fair Value Measurements ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range Average (3) December 31, 2022 ​ ​ ​ ​ Nonrecurring measurements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired loans ​ $ 1,412 Discounted cash flow analysis (1) Discount rate ​ 6 % - 6.5 % ​ ( 6 %) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other real estate owned ​ $ 197 Appraisal of collateral (1) Appraisal adjustments (2) 0 % - 20 % ​ ( 2 %) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Quantitative Information about Level 3 Fair Value Measurements ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range ​ Average (3) December 31, 2021 ​ ​ ​ ​ ​ Nonrecurring measurements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired loans ​ $ 617 Appraisal of collateral (1) Liquidation expense (2) 10 % ​ ( 10 %) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Impaired loans ​ $ 2,026 Discounted cash flow analysis (1) Discount rate ​ 4 % - 7.25 % ​ ( 6 %) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other real estate owned ​ $ 532 Appraisal of collateral (1) Appraisal adjustments (2) 20 % - 40 % ​ ( 35 %) ​ (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 observable. (2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. (3) Unobservable inputs were weighted by the relative fair value of the instruments. 104 Table of Contents Fair Value of Financial Assets and Financial Liabilities ​ The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments for the years ended December 31. Fair values for December 31, 2022 and 2021 were estimated using an exit price notion. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 December 31, 2021 ​ ​ ​ ​ ​ Estimated ​ ​ ​ ​ Estimated ​ ​ Carrying ​ Fair ​ Carrying ​ Fair (Dollars in thousands) Amount Value Amount Value Financial assets ​ ​ ​ ​ Level 1 inputs ​ ​ ​ ​ Cash and cash equivalents ​ $ 55,499 ​ $ 55,499 ​ $ 583,613 ​ $ 583,613 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Level 2 inputs ​ ​ ​ ​ Investment securities available for sale ​ $ 83,587 ​ $ 83,587 ​ $ 116,982 ​ $ 116,982 Investment securities held to maturity ​ ​ 559,455 ​ ​ 494,626 ​ ​ 404,594 ​ ​ 401,524 Equity securities ​ ​ 1,233 ​ ​ 1,233 ​ ​ 1,372 ​ ​ 1,372 Restricted securities ​ 11,169 ​ 11,169 ​ 4,159 ​ 4,159 LHFS ​ ​ 4,248 ​ ​ 4,248 ​ ​ 37,749 ​ ​ 37,749 TBA securities ​ ​ 41 ​ ​ 41 ​ ​ 55 ​ ​ 55 Cash surrender value on life insurance ​ 59,218 ​ 59,218 ​ 47,935 ​ 47,935 Loans, at fair value ​ ​ 8,437 ​ ​ 8,437 ​ ​ — ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Level 3 inputs ​ ​ ​ ​ Loans, net ​ $ 2,531,027 ​ $ 2,431,808 ​ $ 2,105,231 ​ $ 2,106,373 MSRs ​ ​ 5,275 ​ ​ 5,275 ​ ​ 4,087 ​ ​ 4,087 IRLCs ​ ​ 35 ​ ​ 35 ​ ​ 380 ​ ​ 380 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Financial liabilities ​ ​ ​ ​ Level 2 inputs ​ ​ ​ ​ Deposits: ​ ​ ​ ​ Noninterest-bearing demand ​ $ 862,015 ​ $ 862,015 ​ $ 927,497 ​ $ 927,497 Checking plus interest ​ 694,101 ​ 694,101 ​ 524,143 ​ 524,143 Money market ​ 709,132 ​ 709,132 ​ 889,099 ​ 889,099 Savings ​ 319,814 ​ 319,814 ​ 225,546 ​ 225,546 Club ​ 374 ​ 374 ​ 388 ​ 388 Certificates of deposit ​ 424,348 ​ 410,455 ​ 459,563 ​ 461,135 Securities sold under retail repurchase agreement ​ — ​ — ​ 4,143 ​ 4,143 Advances from FHLB - short-term ​ 40,000 ​ 40,002 ​ — ​ — Advances from FHLB - long-term ​ ​ — ​ — ​ 10,135 ​ 10,187 Subordinated debt ​ ​ 43,072 ​ 41,193 ​ 42,762 ​ 44,876 TBA Securities ​ ​ 6 ​ 6 ​ 41 ​ 41 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Level 3 inputs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ IRLCs ​ ​ 7 ​ ​ 7 ​ ​ — ​ — ​ ​ ​ NOTE 23. 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. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit and other commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the letters of credit and commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. 105 Table of Contents ​ The following table provides information on commitments outstanding for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) December 31, 2022 December 31, 2021 Commitments to extend credit ​ $ 406,353 ​ $ 421,088 Letters of credit ​ 8,009 ​ 8,399 Total ​ $ 414,362 ​ $ 429,487 ​ 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 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. 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 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, 2022, were approximately $ 4.9 million and $ 2.0 million, respectively ​ In the normal course of business, Shore Bancshares, Inc. 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. NOTE 24. SEGMENT REPORTING ​ 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. 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. ​ 106 Table of Contents The following tables present certain information regarding our business segments as of and for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Community ​ ​ ​ ​ Consolidated (Dollars in thousands) Banking Mortgage Banking Total For the Year Ended December 31, 2022 ​ ​ ​ Interest Income $ 113,253 ​ $ 592 ​ $ 113,845 Interest Expense ​ 12,501 ​ 42 ​ 12,543 Net interest income ​ ​ 100,752 ​ ​ 550 ​ ​ 101,302 Provision for credit losses ​ ​ 1,925 ​ ​ — ​ ​ 1,925 Net interest income after provision for credit losses ​ ​ 98,827 ​ ​ 550 ​ ​ 99,377 Noninterest income ​ 17,876 ​ 5,210 ​ 23,086 Noninterest expense ​ 75,267 ​ 5,055 ​ 80,322 Income before income taxes ​ 41,436 ​ 705 ​ 42,141 Income tax expense ​ ​ 10,782 ​ ​ 182 ​ ​ 10,964 Net income ​ $ 30,654 ​ $ 523 ​ $ 31,177 Total assets, December 31, 2022 ​ $ 3,467,548 ​ $ 9,728 ​ $ 3,477,276 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Community ​ ​ ​ ​ Consolidated (Dollars in thousands) Banking Mortgage Banking Total For the Year Ended December 31, 2021 ​ ​ ​ Interest Income $ 70,037 ​ $ 132 ​ $ 70,169 Interest Expense ​ 6,031 ​ 8 ​ 6,039 Net interest income ​ ​ 64,006 ​ ​ 124 ​ ​ 64,130 Provision for credit losses ​ ​ ( 358 ) ​ ​ — ​ ​ ( 358 ) Net interest income after provision for credit losses ​ ​ 64,364 ​ ​ 124 ​ ​ 64,488 Noninterest income ​ 12,550 ​ 948 ​ 13,498 Noninterest expense ​ 55,628 ​ 1,178 ​ 56,806 Income (loss) before income taxes ​ 21,286 ​ ( 106 ) ​ 21,180 Income tax expense (benefit) ​ ​ 5,841 ​ ​ ( 29 ) ​ ​ 5,812 Net income (loss) ​ $ 15,445 ​ $ ( 77 ) ​ $ 15,368 Total assets, December 31, 2021 ​ $ 3,416,519 ​ $ 43,617 ​ $ 3,460,136 ​ ​ ​ NOTE 25. RELATED PARTY TRANSACTIONS 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. NOTE 26. 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. ​ 107 Table of Contents 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. ​ NOTE 27. PARENT COMPANY FINANCIAL INFORMATION The following tables provide condensed financial information for Shore Bancshares, Inc. (Parent Company Only) at and for the years ending December 31. Condensed Balance Sheets December 31, ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Assets ​ ​ Cash ​ $ 7,145 ​ $ 13,092 Investment in subsidiaries ​ 396,897 ​ 376,453 Other assets ​ 5,392 ​ 5,712 Total assets ​ $ 409,434 ​ $ 395,257 ​ ​ ​ ​ ​ ​ ​ Liabilities ​ ​ Accrued interest payable ​ $ 744 ​ $ 551 Other liabilities ​ 1,333 ​ 1,251 Long-term debt ​ ​ 43,072 ​ ​ 42,762 Total liabilities ​ 45,149 ​ 44,564 ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity ​ ​ Common stock ​ 199 ​ 198 Additional paid in capital ​ 201,494 ​ 200,473 Retained earnings ​ 171,613 ​ 149,966 Accumulated other comprehensive (loss) income ​ ( 9,021 ) ​ 56 Total stockholders’ equity ​ 364,285 ​ 350,693 ​ ​ ​ ​ ​ ​ ​ Total liabilities and stockholders’ equity ​ $ 409,434 ​ $ 395,257 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 108 Table of Contents Condensed Statements of Income For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Income ​ ​ Dividends from subsidiaries ​ $ 5,500 ​ $ 25,000 Company owned life insurance income ​ 67 ​ 110 Total income ​ 5,567 ​ 25,110 ​ ​ ​ ​ ​ ​ ​ Expenses ​ ​ Interest expense ​ 2,451 ​ 1,560 Salaries and employee benefits ​ 324 ​ 423 Legal and professional fees ​ ​ 1,654 ​ ​ 2,465 Other operating expenses ​ 540 ​ 384 Total expenses ​ 4,969 ​ 4,832 ​ ​ ​ ​ ​ ​ ​ Income before income tax (benefit) and equity (deficit) in ​ ​ undistributed net income of subsidiaries ​ 598 ​ 20,278 Income tax (benefit) ​ ( 1,059 ) ​ ( 990 ) Income before (deficit) equity in undistributed net income of subsidiaries ​ 1,657 ​ 21,268 ​ ​ ​ ​ ​ ​ ​ Equity (deficit) in undistributed net income of subsidiaries ​ 29,520 ​ ( 5,900 ) Net income ​ $ 31,177 ​ $ 15,368 ​ ​ 109 Table of Contents Condensed Statements of Cash Flows For the Years Ended December 31, ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Cash flows from operating activities: ​ ​ Net income ​ $ 31,177 ​ $ 15,368 Adjustments to reconcile net income to cash ​ ​ provided by operating activities: ​ ​ (Equity) deficit in undistributed net income of subsidiaries ​ ( 29,521 ) ​ 5,900 Amortization of debt issuance costs ​ ​ 122 ​ ​ 123 Stock-based compensation expense ​ 636 ​ 378 Company owned life insurance income ​ ( 67 ) ​ ( 110 ) Acquisition accounting adjustments ​ ​ 188 ​ 31 Net decrease (increase) in other assets ​ 387 ​ ( 1,552 ) Net increase (decrease) increase in other liabilities ​ 275 ​ ( 142 ) Net cash provided by operating activities ​ 3,197 ​ 19,996 ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ Purchase of company owned life insurance ​ ​ — ​ ​ ( 192 ) Acquisition of business activity, net of cash paid ​ ​ — ​ ​ ( 15,945 ) Net cash (used in) investing activities ​ — ​ ( 16,137 ) ​ ​ ​ Cash flows from financing activities: ​ ​ Common stock dividends paid ​ ( 9,530 ) ​ ( 6,607 ) Retirement of common stock ​ ​ — ​ ​ ( 819 ) Issuance of common stock ​ ​ 386 ​ ​ — Exercise of stock options ​ ​ — ​ ​ 6 Net cash (used in) financing activities ​ ( 9,144 ) ​ ( 7,420 ) ​ ​ ​ ​ ​ ​ ​ Net (decrease) in cash and cash equivalents ​ ( 5,947 ) ​ ( 3,561 ) Cash and cash equivalents at beginning of year ​ 13,092 ​ 16,653 Cash and cash equivalents at end of year ​ $ 7,145 ​ $ 13,092 ​ ​ ​ NOTE 28. REVENUE RECOGNITION Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees and merchant income. Noninterest revenue streams in-scope of Topic 606 are discussed below. ​ Service Charges on Deposit Accounts Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts. 110 Table of Contents Trust and Investment Fee Income Trust and investment fee income are primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Title Company Revenue Title Company revenue consists of revenue earned on performing title work for real estate transactions. The revenue is earned when the title work is performed. Payment for such performance obligations generally occurs at the time of the settlement of a real estate transaction. As such settlement is generally within 90 days of the performance of the title work, we recognize the revenue at the time of the settlement. All contract issuance costs are expensed as incurred. We had no contract assets or liabilities at December 31, 2022. Other Noninterest Income Other noninterest income consists of: fees, exchange, other service charges, safety deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that rentals and renewals of safe deposit boxes will be recognized on a monthly basis consistent with the duration of the performance obligation. The following presents noninterest income from continued operations, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (Dollars in thousands) ​ 2022 2021 Noninterest Income ​ ​ In-scope of Topic 606: ​ ​ Service charges on deposit accounts ​ $ 5,652 ​ $ 3,396 Trust and investment fee income ​ 1,784 ​ 1,881 Interchange income ​ ​ 4,812 ​ ​ 3,964 Title Company revenue ​ ​ 1,340 ​ ​ 247 Other noninterest income ​ 1,752 ​ 1,519 Noninterest Income (in-scope of Topic 606) ​ 15,340 ​ 11,007 Noninterest Income (out-of-scope of Topic 606) ​ 7,746 ​ 2,491 Total Noninterest Income ​ $ 23,086 ​ $ 13,498 ​ 111 Table of Contents Contract Balances A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2022 and 2021, the Company did not have any significant contract balances. ​ ​ ​ ​ ​ 112 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. ​