What changed in this filing

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Item 1. Financial Statements

2023-08-14 compared with 2023-05-15 · 209 added, 144 removed, 837 unchanged (30% of the section changed)

43 unchanged sentences

For Three Months Ended

For Six Months Ended

(In thousands, except per share data)

16 unchanged sentences

Trust and investment fee income

Gains on sales and calls of investment securities

Interchange credits

25 unchanged sentences

For Three Months Ended

For Six Months Ended

(In thousands)

1 unchanged sentence

Investment securities:

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

Total other comprehensive income (loss)

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

Total other comprehensive (loss) income

Comprehensive income

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three Months Ended March 31, 2023 and 2022

For the Three and Six Months Ended June 30, 2023 and 2022

Comprehensive

1 unchanged sentence

(In thousands)

(Loss) Income

Balances, January 1, 2023

5 unchanged sentences

Balances, March 31, 2023

Other comprehensive (loss)

Common shares issued for employee stock purchase plan

Stock-based compensation

Cash dividends declared

Balances, June 30, 2023

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) (CONTINUED)

Comprehensive

8 unchanged sentences

Balances, March 31, 2022

Other comprehensive (loss)

Common shares issued for employee stock purchase plan

Stock-based compensation

Cash dividends declared

Balances, June 30, 2022

See accompanying notes to Consolidated Financial Statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For Three Months Ended

For Six Months Ended

(In thousands)

10 unchanged sentences

Stock-based compensation expense

Deferred income tax expense (benefit)

(Gains) loss on valuation adjustments on mortgage servicing rights

Deferred income tax (benefit) expense

Loss (Gain) on valuation adjustments on mortgage servicing rights

Valuation adjustments on premises transferred to held for sale

Losses on sales and valuation adjustments on other real estate owned

Fair value adjustments on loans held for investments, at fair value

Gain (loss) on sales and valuation adjustments on other real estate owned

Fair value adjustments on loans held for investment, at fair value

Fair value adjustment on equity securities

17 unchanged sentences

Purchases of bank owned life insurance

Proceeds from disposal of premises held for sale

Net cash (used in) investing activities

6 unchanged sentences

Issuance of common stock

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Net (decrease) in cash and cash equivalents

6 unchanged sentences

Income taxes paid

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

Transfer of premises to held for sale (included in other assets)

Remeasurement of lease liabilities arising from right-of-use assets

Transfers from loans to other real estate owned

Unrealized gain (loss) on securities available for sale

Transfers of premises to held for sale (included in other assets)

See accompanying notes to Consolidated Financial Statements.

1 unchanged sentence

Notes to Consolidated Financial Statements

For the Three Months Ended March 31, 2023 and 2022

For the Three and Six Months Ended June 30, 2023 and 2022

Note 1 – Basis of Presentation

3 unchanged sentences

The accompanying interim financial statements are unaudited;

however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at March 31, 2023, the consolidated results of income and comprehensive income for the three months ended March 31, 2023 and 2022, changes in stockholders’ equity for the three months ended March 31, 2023 and 2022 and cash flows for the three months ended March 31, 2023 and 2022, have been included.

however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at June 30, 2023, the consolidated results of income and comprehensive income for the three and six months ended June 30, 2023 and 2022, changes in stockholders’ equity for the three and six months ended June 30, 2023 and 2022 and cash flows for the six months ended June 30, 2023 and 2022, have been included.

All such adjustments were of a normal recurring nature.

The amounts as of December 31, 2022 were derived from the 2022 audited financial statements.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

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

on Form 10-K for the year ended December 31, 2022.

on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”).

For purposes of comparability, certain immaterial reclassifications have been made to amounts previously reported to conform with the current period presentation.

26 unchanged sentences

The Company adopted ASC 326 using the prospective transition approach for PCD loans that were previously identified as PCI and accounted for under ASC 310-30.

On January 1, 2023, the Corporation’s PCD loans were adjusted to reflect the addition of expected credit losses to the amortized cost basis of the loans and a corresponding increase to the ACL.

The remaining noncredit discount, which represents the difference between the adjusted amortized cost basis and the outstanding principal balance on PCD loans, will be accreted into interest income over the estimated remaining lives of the loans using the effective interest rate method.

On January 1, 2023, the Company’s PCD loans were adjusted to reflect the addition of expected credit losses to the amortized cost basis of the loans and a corresponding increase to the ACL.

The remaining noncredit discount, which represented the difference between the adjusted amortized cost basis and the outstanding principal balance on PCD loans, will be accreted into interest income over the estimated remaining lives of the loans using the effective interest rate method.

The evaluation of the ACL will include PCD loans together with other loans that share similar risk characteristics, rather than using the separate pools that were used under PCI accounting, unless the loans are specifically identified for individual evaluation under our CECL methodology.

17 unchanged sentences

Purchase premiums are recognized in interest income using the effective interest rate method over the period from purchase to maturity or, for callable securities, the earliest call date, and purchase discounts are recognized in the same manner from purchase to maturity.

The Company has elected to exclude accrued interest receivable from the amortized cost basis and fair value of its held to maturity and available for sale debt securities and has included such accrued interest of $ 1.8 million at March 31, 2023 within the other assets line item of the Consolidated Balance Sheets.

The Company has elected to exclude accrued interest receivable from the amortized cost basis and fair value of its held to maturity and available for sale debt securities and has included such accrued interest of $ 2.1 million at June 30, 2023 within the other assets line item of the Consolidated Balance Sheets.

The Company estimates an ACL for held to maturity debt securities on a collective basis by major security type and standard credit rating.

14 unchanged sentences

The Company’s recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is reported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for credit losses.

The Company has elected to exclude accrued interest receivable from the amortized cost basis of its loans held for investment and has included such accrued interest of $ 6.2 million at March 31, 2023 within the other assets line item of the Consolidated Balance Sheets.

The Company has elected to exclude accrued interest receivable from the amortized cost basis of its loans held for investment and has included such accrued interest of $ 6.6 million at June 30, 2023 within the other assets line item of the Consolidated Balance Sheets.

Interest on loans is recorded to interest income based on the contractual rates and the amount of outstanding principal of the loans.

53 unchanged sentences

Changes in the reserve for unfunded commitments are recorded through the provision for credit losses.

During the three months ended March 31, 2023, the Company recorded no provision for credit losses associated with its unfunded commitments.

Note 3 – Earnings Per Share

3 unchanged sentences

For the Three Months Ended

For the Six Months Ended

(In thousands, except per share data)

1 unchanged sentence

Earnings per common share - Basic and Diluted

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

There were no potentially dilutive shares outstanding during the three months ended March 31, 2023.

There were no potentially dilutive shares outstanding during the three and six months ended June 30, 2023 and 2022.

Note 4 – Investment Securities

On January 1, 2023, the Company adopted ASC 326, which made changes to accounting for available for sale debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity.

In addition, ASC 326 requires an allowance for credit losses to be recorded on held to maturity debt securities measured at amortized cost.

All securities information presented as of March 31, 2023 is in accordance with ASC 326.

All securities information presented as of June 30, 2023 is in accordance with ASC 326.

All securities information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.

2 unchanged sentences

Three Months Ended

Six Months Ended

(Dollars in thousands)

March 31, 2023

Balance, beginning of period

Other debt securities, provision for credit losses

Balance, end of period

June 30, 2023

Provision for credit losses - HTM Debt Securities

The ACL for held-to-maturity securities was initially determined to be immaterial as of the date of adoption of ASC 326.

Upon re-estimation in the current period, ACL was recorded based on the results of our calculation as of March 31, 2023.

Upon re-estimation in the first quarter of 2023, an ACL of $ 163 thousand was recorded based on the results of our evaluation at March 31, 2023.

Based on the Company’s current period re-evaluation, no provision for credit losses was recorded for the three months ended June 30, 2023.

The following tables provide information on the amortized cost and estimated fair values of debt securities.

1 unchanged sentence

Available-for-sale securities:

March 31, 2023

June 30, 2023

Government agencies

5 unchanged sentences

Other debt securities

No available for sale securities were sold during the three months ended March 31, 2023 and 2022.

No available for sale securities were sold during the three and six months ended June 30, 2023 and 2022.

(Dollars in thousands)

Held-to-maturity securities:

March 31, 2023

June 30, 2023

Government agencies

7 unchanged sentences

Other debt securities

Equity securities with an aggregate fair value of $ 1.3 million at March 31, 2023 and $ 1.2 million at December 31, 2022 are presented separately on the balance sheet.

The fair value adjustment recorded through earnings totaled $ 17 thousand for the three months ended March 31, 2023 and $( 70 ) thousand for the three months ended March 31, 2022, respectively.

Equity securities with an aggregate fair value of $ 1.2 million at June 30, 2023 and $ 1.2 million at December 31, 2022 are presented separately on the balance sheet.

The fair value adjustment recorded through earnings totaled $( 3 ) thousand for the six months ended June 30, 2023 and $( 108 ) thousand for the six months ended June 30, 2022, respectively.

Credit Quality Information

3 unchanged sentences

Conversely, securities rated below investment grade, which are labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade securities.

There were no speculative grade held-to-maturity securities at March 31, 2023 or December 31, 2022.

Held-to-maturity securities that are not rated are agency mortgage-backed securities sponsored by US government agencies, as well as direct obligations of the agencies, with the remainder being sub-debt of other banks.

The following table shows the amortized cost of held-to-maturity securities based on their lowest publicly available credit rating as of March 31, 2023.

March 31, 2023

There were no speculative grade held-to-maturity securities at June 30, 2023 or December 31, 2022.

The following table shows the amortized cost of held-to-maturity securities based on their lowest publicly available credit rating as of June 30, 2023.

June 30, 2023

Investment Grade

5 unchanged sentences

Total Held-to Maturity Securities

The following tables provide information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2023 and December 31, 2022.

(Dollars in thousands)

March 31, 2023

June 30, 2023

Available-for-sale securities:

13 unchanged sentences

Other debt securities

There were one hundred fifteen available-for-sale debt securities with a fair value below the amortized cost basis, totaling $ 11.2 million of aggregate fair value as of March 31, 2023.

The Company concluded that a credit loss does not exist in its available-for-sale securities portfolio as of March 31, 2023, and no impairment loss has been recognized based on the fact that (1) changes in fair value were caused primarily by fluctuations in interest rates, (2) securities with unrealized losses had generally high credit quality, (3) the Company intends to hold these investments in debt securities to maturity and it is more-likely-than-not the Company will not be required to sell these investments before a recovery of its investment, and (4) issuers have continued to make timely payments of principal and interest.

There were one hundred sixteen available-for-sale debt securities with a fair value below the amortized cost basis, with unrealized losses totaling $ 11.8 million as of June 30, 2023.

The Company concluded that a credit loss does not exist in its available-for-sale securities portfolio as of June 30, 2023, and no impairment loss has been recognized based on the fact that (1) changes in fair value were caused primarily by fluctuations in interest rates, (2) securities with unrealized losses had generally high credit quality, (3) the Company intends to hold these investments in debt securities to maturity and it is more-likely-than-not the Company will not be required to sell these investments before a recovery of its investment, and (4) issuers have continued to make timely payments of principal and interest.

Additionally, the Company’s mortgage-back securities are issued by either US government agencies or US government sponsored enterprises.

Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the US government, that investors in such mortgage-backed securities will receive timely principal and interest payments.

All held-to-maturity and available for sale securities were current with no securities past due or on nonaccrual as of March 31, 2023.

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at March 31, 2023.

All held-to-maturity and available for sale securities were current with no securities past due or on nonaccrual as of June 30, 2023.

The Company has securities which have been pledged as collateral for obligations to federal, state, and local government agencies, and other purpose as required or permitted by law, or sold under agreements to repurchase.

At June 30, 2023 the amortized cost of pledged available-for-sale securities was $ 65.5 million and $ 166.2 million of pledged held to maturity securities.

The comparable amounts for December 31, 2022 were $ 83.3 million and $ 19.2 million, respectively.

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at June 30, 2023.

Available for sale

9 unchanged sentences

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables.

For further discussion on the most significant accounting policies that the Company follows see Note 2 – Adoption of Accounting Standards and Note 1 of the Company’s Annual Report on Form 10-K.

All loan information presented as of March 31, 2023 is in accordance with ASC 326.

For further discussion on the most significant accounting policies that the Company follows see Note 2 – Adoption of Accounting Standards and Note 1 of the 2022 Annual Report.

All loan information presented as of June 30, 2023 is in accordance with ASC 326.

All loan information presented as of December 31, 2022, or a prior date is presented in accordance with previously applicable GAAP.

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Anne Arundel County, 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 March 31, 2023 and December 31, 2022.

The following table provides information about the principal classes of the loan portfolio at June 30, 2023 and December 31, 2022.

(Dollars in thousands)

March 31, 2023

June 30, 2023

December 31, 2022

4 unchanged sentences

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

Included in loans were deferred costs, net of fees, of $ 1.7 million and $ 1.4 million at March 31, 2023 and December 31, 2022.

At March 31, 2023 and December 31, 2022, included in total loans were $ 342.8 million and $ 372.2 million in loans, acquired as part of the acquisition of Severn Bancorp, Inc.

Included in loans were deferred costs, net of fees, of $ 2.0 million and $ 1.4 million at June 30, 2023 and December 31, 2022.

At June 30, 2023 and December 31, 2022, included in total loans were $ 332.4 million and $ 372.2 million in loans, acquired as part of the acquisition of Severn Bancorp, Inc.

(“Severn”), effective October 31, 2021.

These balances were presented net of the related discount which totaled $ 6.0 million and $ 6.7 million at March 31, 2023 and December 31, 2022, respectively.

At March 31, 2023, the Bank was servicing $ 349.8 million in loans for the Federal National Mortgage Association and $ 74.9 million in loans for Freddie Mac.

The following table provides information on nonaccrual loans by loan class as of March 31, 2023.

These balances were presented net of the related discount which totaled $ 5.7 million and $ 6.7 million at June 30, 2023 and December 31, 2022, respectively.

At June 30, 2023, the Bank was servicing $ 352.3 million in loans for the Federal National Mortgage Association and $ 78.0 million in loans for Freddie Mac.

The following table provides information on nonaccrual loans by loan class as of June 30, 2023.

Loans past due

3 unchanged sentences

(Dollars in thousands)

March 31, 2023

June 30, 2023

Nonaccrual loans:

17 unchanged sentences

The loans may have a delinquent history or combination of weak collateral, weak guarantor or operating losses.

When a loan is assigned to this category the Bank may estimate a specific reserve in the loan loss allowance analysis and/or place the loan on nonaccrual.

When a loan is assigned to this category the Bank may estimate a specific reserve in the credit loss allowance analysis and/or place the loan on nonaccrual.

These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies.

9 unchanged sentences

Rating 10 – Loss – Loss assets are uncollectible or of little value.

The following table provides information on loan risk ratings as of March 31, 2023.

The following table provides information on loan risk ratings as of June 30, 2023 and gross write-offs during the six months ended June 30, 2023.

Term Loans by Origination Year

(Dollars in thousands)

March 31, 2023

June 30, 2023

Gross Charge-offs

9 unchanged sentences

Gross Charge-offs

Special Mention

Total loans by risk category

Total gross charge-offs

The following tables provide information on the aging of the loan portfolio as of March 31, 2023 and December 31, 2022.

The following tables provide information on the aging of the loan portfolio as of June 30, 2023 and December 31, 2022.

90 days or more

(Dollars in thousands)

March 31, 2023

June 30, 2023

Residential real estate

1 unchanged sentence

Percent of total loans

(1) Includes loans measured at fair value of $ 9.5 million at March 31, 2023.

(1) Includes loans measured at fair value of $ 9.7 million at June 30, 2023.

90 days or more

5 unchanged sentences

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

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months ended March 31, 2023 and March 31, 2022.

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three and six months ended June 30, 2023 and June 30, 2022.

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

1 unchanged sentence

For three months ended

March 31, 2023

June 30, 2023

Allowance for credit losses:

Beginning Balance

Impact of ASC326 Adoption

Charge-offs (1)

Net (charge-offs) recoveries

Ending Balance

(1) Gross charge-offs of commercial loans for the three months ended March 31, 2023 included $ 107 of demand deposit overdrafts.

(1) Gross charge-offs of consumer loans for the three months ended June 30, 2023 included $ 172 of demand deposit overdrafts.

(Dollars in thousands)

For three months ended

March 31, 2022

June 30, 2022

Allowance for credit losses:

2 unchanged sentences

Ending Balance

There were no modifications to loans for borrowers experiencing financial difficulty (“BEFD”) during the three months ending March 31, 2023.

(Dollars in thousands)

For the six months ended

June 30, 2023

Allowance for credit losses:

Beginning Balance

Impact of ASC326 Adoption

Net (charge-offs) recoveries

Ending Balance

(1) Gross charge-offs of consumer loans for the six months ended June 30, 2023 included $ 279 of demand deposit overdrafts.

(Dollars in thousands)

For the six months ended

June 30, 2022

Allowance for credit losses:

Beginning Balance

Net (charge-offs) recoveries

Ending Balance

There were no modifications to loans for borrowers experiencing financial difficulty (“BEFD”) during the three and six months ending June 30, 2023.

The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment.

June 30, 2023

(Dollars in thousands)

Real Estate Collateral

Other Collateral

Residential real estate

Commercial real estate

The Company did not identify any significant changes in the extent to which collateral secures its collateral dependent loans, whether in the form of general deterioration or from other factors during the period ended June 30, 2023.

Foreclosure Proceedings

There were $ 39 thousand of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of March 31, 2023 and $ 263 thousand as of December 31, 2022, respectively.

There were no residential real estate properties included in the balance of other real estate owned at March 31, 2023 and 1 residential real estate property totaling $ 18 thousand at December 31, 2022.

There were $ 39 thousand of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of June 30, 2023 and $ 263 thousand as of December 31, 2022, respectively.

There were no residential real estate properties included in the balance of other real estate owned at June 30, 2023 and 1 residential real estate property totaling $ 18 thousand at December 31, 2022.

Prior to the adoption of ASC 326

11 unchanged sentences

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

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

March 31, 2022

June 30, 2022

Accretable yield, beginning of period

16 unchanged sentences

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.

March 31, 2022

June 30, 2022

Quarter-to-date

average recorded

(Dollars in thousands)

12 unchanged sentences

Commercial real estate

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

There were no loans modified and considered to be TDRs during the three and six months ended June 30, 2022.

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.

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

There were no TDRs which subsequently defaulted within 12 months of modification for the three and six months ended June 30, 2022.

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

15 unchanged sentences

(Dollars in thousands)

March 31, 2023

June 30, 2023

December 31, 2022

4 unchanged sentences

For the Three Months Ended

For the Six Months Ended

Lease cost (in thousands)

March 31, 2023

March 31, 2022

Operating lease cost

4 unchanged sentences

Lease payments due (in thousands)

March 31, 2023

Nine months ending December 31, 2023

June 30, 2023

Six months ending December 31, 2023

Total undiscounted cash flows

Lease liabilities

Total gross rental income was $ 393 thousand for the three months ended March 31, 2023 and $ 272 thousand for the three months ended March 31, 2022.

The following table presents our minimum future annual rental income on such leases as of March 31, 2023.

Total gross rental income was $ 291 thousand and $ 254 thousand for the three months ended June 30, 2023 and 2022, respectively.

Total gross rental income was $ 684 thousand and $ 526 thousand for the six months ended June 30, 2023 and 2022, respectively.

The following table presents our minimum future annual rental income on such leases as of June 30, 2023.

(In thousands)

March 31, 2023

Nine months ending December 31, 2023

June 30, 2023

Six months ending December 31, 2023

Note 7 – Goodwill and Other Intangibles

The following table provides information on the significant components of goodwill and other acquired intangible assets at March 31, 2023 and December 31, 2022.

March 31, 2023

The following table provides information on the significant components of goodwill and other acquired intangible assets at June 30, 2023 and December 31, 2022.

June 30, 2023

Remaining Life

9 unchanged sentences

Total other intangible assets

The aggregate amortization expense was $ 441 thousand for the three months ended March 31, 2023 and $ 517 thousand for the three months ended March 31, 2022.

At March 31, 2023, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:

The aggregate amortization expense was $ 876 thousand for the six months ended June 30, 2023 and $ 1.0 million for the six months ended June 30, 2022.

At June 30, 2023, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:

(Dollars in thousands)

1 unchanged sentence

Note 8 – Other Assets

The Company had the following other assets at March 31, 2023 and December 31, 2022.

The Company had the following other assets at June 30, 2023 and December 31, 2022.

(Dollars in thousands)

4 unchanged sentences

Note 9 - Borrowings

At March 31, 2023, subordinated debt consisted of $ 25.0 million of long-term debt issued by the Company in August 2020 and $ 20.6 million of long-term debt acquired in the acquisition of Severn in 2021.

The recorded balance of subordinated debt issued in 2020, net of unamortized issuance costs was $ 24.7 million at March 31, 2023 and December 31, 2022.

The recorded balance of the debt acquired from Severn was $ 18.4 million at March 31, 2023 and December 31, 2022, which is presented net of the unamortized fair value adjustment of $ 2.4 million at both period ends.

At June 30, 2023, subordinated debt consisted of $ 25.0 million of long-term debt issued by the Company in August 2020 and $ 20.6 million of long-term debt acquired in the acquisition of Severn in 2021.

The recorded balance of subordinated debt issued in 2020, net of unamortized issuance costs was $ 24.7 million at June 30, 2023 and December 31, 2022.

The recorded balance of the debt acquired from Severn was $ 18.5 million at June 30, 2023 and $ 18.4 million at December 31, 2022, which is presented net of the unamortized fair value adjustment of $ 2.1 million at June 30, 2023 and $ 2.2 at December 31, 2022.

These obligations mature in 2030 and 2035, respectively.

Further information on these obligations is provided in the Company’s 2022 Annual Report on Form 10-K.

At March 31, 2023 and December 31, 2022, the Company had short-term borrowings from the FHLB of $ 131.5 million and $ 40.0 million, respectively.

The outstanding obligations at March 31, 2023 carried interest rates ranging from 4.57 % to 5.07 %.

Further information on these obligations is provided in the 2022 Annual Report.

At June 30, 2023 and December 31, 2022, the Company had short-term borrowings from the FHLB of $ 276.0 million and $ 40.0 million, respectively.

The outstanding obligations at June 30, 2023 carried interest rates ranging from 5.07 % to 5.32 %.

Note 10 – Other Liabilities

The Company had the following other liabilities at March 31, 2023 and December 31, 2022.

The Company had the following other liabilities at June 30, 2023 and December 31, 2022.

(Dollars in thousands)

March 31, 2023

June 30, 2023

December 31, 2022

3 unchanged sentences

Deferred compensation liability

Income taxes payable

Other liabilities

Note 11 - Stock-Based Compensation

At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc.

At the 2016 annual meeting of the Company’s stockholders, stockholders approved the Shore Bancshares, Inc.

2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc.

2 unchanged sentences

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 five-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 472,320 shares remained available for grant at March 31, 2023.

The following tables provide information on stock-based compensation expense for the three months ended March 31, 2023 and 2022.

For the Three Months Ended

The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 472,320 shares remained available for grant at June 30, 2023.

The following tables provide information on stock-based compensation expense for the three and six months ended June 30, 2023 and 2022.

For Three Months Ended

For the Six Months Ended

(Dollars in thousands)

Stock-based compensation expense

Excess tax benefits related to stock-based compensation

Excess tax benefits (deficiencies) related to stock-based compensation

(Dollars in thousands)

1 unchanged sentence

Weighted average period unrecognized expense is expected to be recognized

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the three months ended March 31, 2023.

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2023.

Weighted Average

1 unchanged sentence

Nonvested at end of period

The fair value of restricted stock awards that vested during the first three months of 2023 and 2022 was $ 515 thousand and $ 492 thousand, respectively.

The fair value of restricted stock awards that vested during the first six months of 2023 and 2022 was $ 523 thousand and $ 505 thousand, respectively.

Note 12 – Derivatives

3 unchanged sentences

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 , however, this period may be longer for construction to permanent loans that are originated with the intent of selling in the secondary market.

For these IRLCs and our closed inventory in loans held for sale, we attempt to protect the Bank from changes in interest rates through the use of to be announced (TBA) securities, which are forward contracts, as well as, to a significantly lesser degree, loan level commitments in the form of best efforts and mandatory forward contracts.

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

The following table provides information pertaining to the carrying amounts of our derivative financial instruments at March 31, 2023 and December 31, 2022.

March 31, 2023

The following table provides information pertaining to the carrying amounts of our derivative financial instruments at June 30, 2023 and December 31, 2022.

June 30, 2023

December 31, 2022

6 unchanged sentences

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

The following table provides information on the changes in the component of accumulated other comprehensive income (loss) for the three months ended March 31, 2023 and 2022.

The following tables provide information on the changes in the component of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2023 and 2022.

gains (losses) on

1 unchanged sentence

(Dollars in thousands)

Balance, December 31, 2022

Balance, March 31, 2023

Other comprehensive income

Balance, June 30, 2023

Balance, March 31, 2022

Other comprehensive (loss)

Balance, June 30, 2022

gains (losses) on

available for sale

(Dollars in thousands)

Balance, December 31, 2022

Other comprehensive income

Balance, June 30, 2023

Balance, December 31, 2021

Other comprehensive (loss)

Balance, March 31, 2022

Balance, June 30, 2022

Note 14 – 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.

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 on a recurring basis and to determine fair value disclosures.

19 unchanged sentences

Loans held for sale (LHFS) are carried at fair value, which is determined based on Mark to Trade (MTT) for allocated/committed loans or Mark to Market (MTM) analysis for unallocated/uncommitted loans based on third-party pricing models (Level 2).

LHFI, at fair value

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

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

The fair value of mortgage servicing rights (MSRs) is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income (Level 3).

13 unchanged sentences

Unobservable Input

March 31, 2023

June 30, 2023

Market Approach

16 unchanged sentences

(2) PSA = Public Securities Association Standard Prepayment Model

The following table presents activity in MSRs for the three months ended March 31, 2023.

The following table presents activity in MSRs for the three and six months ended June 30, 2023.

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

March 31, 2023

June 30, 2023

Beginning balance

2 unchanged sentences

Ending balance

The following table presents activity in the IRLCs for the three months ended March 31, 2023.

The following table presents activity in the IRLCs for the three and six months ended June 30, 2023.

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

March 31, 2023

June 30, 2023

Beginning balance

14 unchanged sentences

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

The following tables present the recorded amount of assets measured at fair value on a recurring basis at March 31, 2023 and December 31, 2022.

No assets were transferred from one hierarchy level to another during the first three months of 2023 or 2022.

The following tables present the recorded amount of assets measured at fair value on a recurring basis at June 30, 2023 and December 31, 2022.

No assets were transferred from one hierarchy level to another during the first six months of 2023 or 2022.

(Dollars in thousands)

March 31, 2023

June 30, 2023

Securities available for sale:

23 unchanged sentences

Loans for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, where applicable.

Individually evaluated collateral-dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above.

Accordingly, collateral dependent loans are classified within Level 3 of the fair value hierarchy.

Impaired Loans

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)

4 unchanged sentences

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

The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at March 31, 2023 and December 31, 2022.

The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at June 30, 2023 and December 31, 2022.

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

3 unchanged sentences

Unobservable Input

March 31, 2023

June 30, 2023

Nonrecurring measurements:

16 unchanged sentences

The carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following table.

Fair values for March 31, 2023 and December 31, 2022 were estimated using an exit price notion.

March 31, 2023

Fair values for June 30, 2023 and December 31, 2022 were estimated using an exit price notion.

June 30, 2023

December 31, 2022

28 unchanged sentences

Because many of the letters of credit and commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

The following table provides information on commitments outstanding at March 31, 2023 and December 31, 2022.

The following table provides information on commitments outstanding at June 30, 2023 and December 31, 2022.

(Dollars in thousands)

March 31, 2023

June 30, 2023

December 31, 2022

8 unchanged sentences

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

As of March 31, 2023, the Company had not accrued an amount for the potential impact of any such actions.

As of June 30, 2023, the Company had not accrued an amount for the potential impact of any such actions.

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

● Deposit and loan balances at March 31, 2023 were approximately $ 144.6 million, or 4.8 % of total deposits, and $ 55.2 million, or 2.1 % of total gross loans, respectively.

● Interest and noninterest income for the three months ended March 31, 2023, were approximately $ 2.2 million and $ 266 thousand, respectively.

● Deposit and loan balances at June 30, 2023 were approximately $ 121.8 million, or 4.2 % of total deposits, and $ 59.8 million, or 2.2 % of total gross loans, respectively.

● Interest and noninterest income for the six months ended June 30, 2023, were approximately $ 4.8 million and $ 549 thousand, respectively.

In the normal course of business, the Company may become involved in litigation arising from banking, financial, and other activities.

23 unchanged sentences

All contract issuance costs are expensed as incurred.

We had no contract assets or liabilities at March 31, 2023.

We had no contract assets or liabilities at June 30, 2023.

Other Noninterest Income

10 unchanged sentences

The Company determined that rentals and renewals of safe deposit boxes will be recognized on a monthly basis consistent with the duration of the performance obligation.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2023 and 2022.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2023 and 2022.

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

9 unchanged sentences

Total Noninterest Income

Note 17 – Pending Merger

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

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

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

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

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

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

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

Note 17 – Subsequent Events

On July 3, 2023, the Company announced that it had completed the acquisition, effective July 1, 2023, of The Community Financial Corporation (“TCFC”).

Pursuant to the terms of the merger agreement, each outstanding share of TCFC ‘s common stock was converted into the right to receive 2.3287 shares of the Company’s common stock.

The value of the total transaction consideration was approximately $ 153.6 million.

The consideration included the issuance of 13,201,693 shares of the Company’s common stock, which had a value of $ 11.56 per share, which was the closing price of the Company’s common stock on June 30, 2023, the last trading day prior to the consummation of the acquisition.

Also included in the total consideration were cash in lieu of any fractional shares, converted share-based payment awards, and debt of TCFC that was effectively settled upon closing.

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

(Dollars in thousands)

Purchase Price:

Shore Bancshares, Inc common stock paid at closing price of $ 11.56 as of June 30, 2023

Effective settlement of pre-existing debt

Cash consideration (cash in lieu for fractional shares)

Fair value of converted share-based payment awards

Total purchase price

Sales of Acquired Securities

As of July 24, 2023, the Company sold most of the available-for-sale securities portfolio acquired from TCFC on July 1, 2023, for net proceeds of $ 430 million and used $ 380 million of the proceeds to reduce FHLB advances and brokered deposits.

Management anticipates these actions will positively impact the return on average assets, net interest margin and the tangible common equity ratios in the third quarter.

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

What changed 10-Q

Item 1. Financial Statements