What changed in this filing

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Item 1. Financial Statements

2023-11-14 compared with 2023-08-14 · 696 added, 435 removed, 611 unchanged (65% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(In thousands, except share and per share data) September 30, 2023 December 31, 2022

ASSETS (Unaudited)

Cash and due from banks $ 68,097 $ 37,661

3 unchanged sentences

Available-for-sale, at fair value (amortized cost of $ 93,052 (2023) and $ 95,999 (2022))

79,143 83,587

Held to maturity, net of allowance for credit losses of $ 126 (2023) (fair value of $ 445,652 (2023) and $ 494,627 (2022))

523,051 559,455

Equity securities, at fair value 5,434 1,233

2 unchanged sentences

Loans held for investment ($ 9,302 (2023) and $ 8,437 (2022), at fair value)

4,617,719 2,556,107

allowance for credit losses ( 57,051 ) ( 16,643 )

Loans, net 4,560,668 2,539,464

Premises and equipment, net 81,149 51,488

Other intangible assets, net

Goodwill 63,266 63,266

Core deposit intangible, net 50,685 5,547

Other real estate owned, net 179 197

2 unchanged sentences

Cash surrender value on life insurance 100,950 59,218

Accrued interest receivable 15,683 9,384

Deferred income taxes 48,699 7,357

Other assets 24,392 11,260

TOTAL ASSETS $ 5,708,725 $ 3,477,276

Noninterest-bearing $ 1,211,401 $ 862,015

2 unchanged sentences

Advances from FHLB - short-term — 40,000

Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") 29,079 18,398

Subordinated debt 42,956 24,674

3 unchanged sentences

TOTAL LIABILITIES 5,203,794 3,112,991

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY

9 unchanged sentences

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

For Three Months Ended

For Six Months Ended

CONSOLIDATED STATEMENTS OF (LOSS)/INCOME (Unaudited)

For Three Months Ended September 30, For Nine Months Ended September 30,

(In thousands, except per share data) 2023 2022 2023 2022

3 unchanged sentences

Interest and dividends on tax-exempt investment securities 27 — 41 —

Interest on federal funds sold 92 — 92 —

Interest on deposits with other banks 1,213 1,466 1,546 2,546

11 unchanged sentences

Trust and investment fee income 1,933 421 2,764 1,383

Loss on sales and calls of investment securities ( 2,166 ) — ( 2,166 ) —

Interchange credits 1,557 1,241 4,081 3,532

1 unchanged sentence

Title Company revenue 89 397 412 1,146

Bargain purchase gain 12,169 — 12,169 —

Other noninterest income 1,873 1,096 4,317 3,214

7 unchanged sentences

Directors' fees 295 217 730 617

Amortization of other intangible assets

Amortization of core deposit intangible 2,634 499 3,510 1,528

FDIC insurance premium expense 618 339 1,747 1,111

4 unchanged sentences

Total noninterest expense 47,158 18,899 89,661 59,323

Income before income taxes

Income tax expense

Basic and diluted net income per common share

(Loss)/income before income taxes ( 11,375 ) 13,085 3,031 30,785

Income tax (benefit) expense ( 4,991 ) 3,427 ( 1,060 ) 8,016

NET (LOSS) INCOME $ ( 6,384 ) $ 9,658 $ 4,091 $ 22,769

Basic and diluted net (loss) income per common share $ ( 0.19 ) $ 0.49 $ 0.17 $ 1.15

Dividends paid per common share $ 0.12 $ 0.12 $ 0.36 $ 0.36

1 unchanged sentence

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

For Three Months Ended

For Six Months Ended

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME (Unaudited)

For Three Months Ended September 30, For Nine Months Ended September 30,

(In thousands) 2023 2022 2023 2022

Other comprehensive income (loss):

Net (loss) income $ ( 6,384 ) $ 9,658 $ 4,091 $ 22,769

Other comprehensive loss:

Investment securities:

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

Total other comprehensive (loss) income

Comprehensive income

Unrealized holding losses on available-for-sale-securities ( 2,132 ) ( 4,307 ) ( 1,498 ) ( 13,533 )

Tax effect 584 1,177 410 3,696

Total other comprehensive loss ( 1,548 ) ( 3,130 ) ( 1,088 ) ( 9,837 )

Comprehensive (loss) income $ ( 7,932 ) $ 6,528 $ 3,003 $ 12,932

See accompanying notes to Consolidated Financial Statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

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

Comprehensive

Stockholders’

(In thousands)

(Loss) Income

For the Three and Nine Months Ended September 30, 2023 and 2022

(In thousands) Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Stockholders’ Equity

Balances, January 1, 2023 $ 199 $ 201,494 $ 171,613 $ ( 9,021 ) $ 364,285

Cumulative effect adjustment due to the adoption of ASC 326, net of tax — — ( 7,818 ) — ( 7,818 )

Net income — — 6,457 — 6,457

Other comprehensive income — — — 860 860

3 unchanged sentences

Balances, March 31, 2023 $ 199 $ 201,736 $ 167,864 $ ( 8,161 ) $ 361,638

Net income $ — $ — $ 4,018 $ — $ 4,018

Other comprehensive loss — — — ( 400 ) ( 400 )

3 unchanged sentences

Balances, June 30, 2023 $ 199 $ 202,008 $ 169,494 $ ( 8,561 ) $ 363,140

Net loss $ — $ — $ ( 6,384 ) $ — $ ( 6,384 )

Other comprehensive loss — — — ( 1,548 ) ( 1,548 )

TCFC acquisition 132 152,954 — — 153,086

Common shares issued for employee stock purchase plan — 84 — — 84

Stock-based compensation — 529 — — 529

Cash dividends declared — — ( 3,976 ) — ( 3,976 )

Balances, September 30, 2023 $ 331 $ 355,575 $ 159,134 $ ( 10,109 ) $ 504,931

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) - Continued

Comprehensive

Stockholders’

(In thousands)

Income (Loss)

(In thousands) Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Stockholders’ 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 )

3 unchanged sentences

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 )

3 unchanged sentences

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

See accompanying notes to Consolidated Financial Statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For Six Months Ended

For Nine Months Ended September 30,

(In thousands) 2023 2022

CASH FLOWS FROM OPERATING ACTIVITIES:

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

Net Income $ 4,091 $ 22,769

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

Net accretion of acquisition accounting estimates ( 6,672 ) ( 1,225 )

3 unchanged sentences

Amortization of debt issuance costs 92 92

Bargain purchase gain ( 12,169 ) —

(Gain) on mortgage banking activities ( 2,602 ) ( 2,526 )

2 unchanged sentences

Stock-based compensation expense 853 477

Deferred income tax (benefit) expense

Deferred income tax (benefit) ( 934 ) ( 723 )

Losses on sales and calls of securities 2,166 —

Loss (Gain) on valuation adjustments on mortgage servicing rights 5 ( 459 )

1 unchanged sentence

(Gain) Loss on sales and valuation adjustments on other real estate owned ( 3 ) 44

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

Fair value adjustments on loans held for investments, at fair value 492 —

Fair value adjustment on equity securities 177 162

2 unchanged sentences

Accrued interest receivable 2,810 ( 721 )

Other assets ( 10,145 ) ( 304 )

Accrued interest payable 1,192 ( 217 )

Other liabilities ( 20,663 ) ( 4,030 )

Net cash provided by operating activities

Net cash (used in) provided by operating activities ( 13,356 ) 50,061

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from maturities and principal payments of investment securities available for sale 12,304 16,719

Proceeds from the sale of acquired AFS securities 434,215 —

Proceeds from maturities and principal payments of investment securities held to maturity 35,023 40,603

Proceeds from sale of loans held for investment 8,611 —

Purchases of securities held to maturity — ( 207,466 )

8 unchanged sentences

Proceeds from disposal of premises held for sale 721 —

Net cash (used in) investing activities

Cash acquired in the acquisition of TCFC, net of cash paid 25,372 —

Net cash provided by (used in) investing activities 216,534 ( 448,810 )

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - Continued

For Nine Months Ended September 30,

(In thousands) 2023 2022

CASH FLOWS FROM FINANCING ACTIVITIES:

6 unchanged sentences

Net cash provided by (used in) financing activities ( 149,968 ) ( 21,558 )

Net (decrease) in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents 53,210 ( 420,307 )

Cash and cash equivalents at beginning of period 55,499 583,613

Cash and cash equivalents at end of period $ 108,709 $ 163,306

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (CONTINUED)

Supplemental cash flows information:

1 unchanged sentence

Income taxes paid $ 7,894 $ 7,070

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

Recognition (remeasurement of) lease liabilities arising from right-of-use assets $ 45 $ ( 616 )

Transfers from loans to other real estate owned $ — $ 69

Unrealized gain (loss) on securities available for sale

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

Unrealized losses on securities available for sale $ ( 1,498 ) $ ( 13,533 )

Transfer of premises to held for sale (included in other assets) $ 750 $ —

See accompanying notes to Consolidated Financial Statements.

1 unchanged sentence

Notes to Consolidated Financial Statements

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

For the Three and Nine Months Ended September 30, 2023 and 2022

Note 1 – Basis of Presentation

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The accompanying interim financial statements are unaudited;

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.

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

The results of operations for the three and nine months ended September 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 (the “2022 Annual Report”).

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

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

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Pending Recent Accounting Standards

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

2022-03 - In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

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

5 unchanged sentences

Note 2 – Adoption of Accounting Standards

On January 1, 2023, the Company adopted Accounting Standards Updates (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326):

On January 1, 2023, the Company adopted ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,” ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326):

3 unchanged sentences

It also applies to unfunded commitments to extend credit, including loan commitments, standby letters of credit, and other similar instruments.

The impairment model for available-for-sale debt securities was modified and ASC 326 also provided for a simplified accounting model for purchased financial assets with credit

deterioration since their origination.

The impairment model for available-for-sale (“AFS”) debt securities was modified and ASC 326 also provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination.

Additionally, the measurement principles for modifications of loans to borrowers experiencing financial difficulty were modified, including how the ACL is measured for such loans.

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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 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.

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.

The adoption of ASC 326 also replaced previous TDR accounting guidance, and the evaluation of the ACL will include loans previously designated as TDRs together with other loans that share similar risk characteristics, unless the loans are specifically identified for individual evaluation under our CECL methodology.

The following table shows the impact of the Company's adoption of ASC 326 on loans, the allowance for credit losses, and the Company’s reserve for unfunded commitments:

The following table shows the impact of the Company's adoption of ASC 326 on loans, the ACL, and the Company’s reserve for unfunded commitments.

January 1, 2023

As Reported Under

(Dollars in thousands)

(Dollars in thousands) As Reported Under ASC 326 Pre-ASC 326 Adoption Change

Total Loans, gross $ 2,556,267 $ 2,556,107 $ 160

2 unchanged sentences

Reserve for Unfunded Commitments $ 581 $ 316 $ 265

As discussed in Note 3, the Company completed the merger with The Community Financial Corporation (“TCFC”) on July 1, 2023.

Due to inconsistencies with historical loan loss data between the Bank and TCFC, management updated the methodology used to estimate the probability of default and the independent economic variables used to forecast default rates.

Due to the lack of uniformity of historical data used for probability default data between the legacy banks, management concluded that the exclusive use of either legacy model was inappropriate in a post-merger environment.

As a result, management engaged the model vendor to perform a Loss Driver Analysis ("LDA"), which utilized the legacy Shore United and legacy CBTC’s Call Report data to derive gross loan balances and charge-off data on a quarterly basis dating back to 2004.

Using this data, the vendor performed regression analyses of a number of independent economic variables to determine the "best fit" of the economic variable to be used as a predictor of expected losses or the periodic default rate ("PDR").

Loss Given Default (“LGD”) values were calculated utilizing Frye-Jacobs model using the same historical gross-charge-off data derived from the Call Reports.

In conjunction with our change in methodology used to derive the PDR/LGD, management also reassessed our qualitative factor overlay design.

The following table shows the impact of change in methodology.

(Dollars in thousands) Balance as of June 30, 2023 Impact of methodology change Balance as of adoption of methodology change

Construction $ 2,386 $ 33 $ 2,419

Residential real estate 9,151 4,016 13,167

Commercial real estate 10,267 1,065 11,332

Commercial 1,956 442 2,398

Consumer 5,254 1,791 7,045

Total allowance $ 29,014 $ 7,347 $ 36,361

The following accounting policies have been updated in connection with the adoption of ASC 326 and apply to periods beginning after December 31, 2022.

1 unchanged sentence

Investments in Debt Securities

Investments in debt securities are classified as either held to maturity, available for sale, or trading, based on management’s intent.

Currently, the Company has classified its debt securities within the available for sale and held to maturity classifications.

Debt securities purchased with the positive intent and ability to hold to maturity are classified as held to maturity and are recorded at amortized cost, net of any ACL.

Debt securities not classified as held to maturity are classified as available for sale and are carried at estimated fair value with the corresponding unrealized gains and losses recognized in other comprehensive income (loss).

Investments in debt securities are classified as either held to maturity (“HTM”), AFS, or trading, based on management’s intent.

Currently, the Company has classified its debt securities within the AFS and HTM classifications.

Debt securities purchased with the positive intent and ability to hold to maturity are classified as HTM and are recorded at amortized cost, net of any ACL.

Debt securities not classified as HTM are classified as AFS and are carried at estimated fair value with the corresponding unrealized gains and losses recognized in other comprehensive income (loss).

Gains or losses are recognized in net income on the trade date using the amortized cost of the specific security sold.

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 $ 2.1 million at June 30, 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 HTM and AFS debt securities and has included such accrued interest of $ 2.0 million at September 30, 2023 within the accrued interest receivable 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.

Certain securities in our held to maturity securities portfolio are either explicitly or implicitly guaranteed by the U.S.

Certain securities in our HTM securities portfolio are either explicitly or implicitly guaranteed by the U.S.

government, are highly rated by major rating agencies and have a long history of no credit losses.

With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ACL.

The estimate of an ACL on our held to maturity securities that are not guaranteed by the U.S.

The estimate of an ACL on our HTM securities that are not guaranteed by the U.S.

government considers historical credit loss information and severity of loss in the event of default and leverages external data.

1 unchanged sentence

An ACL on held to maturity debt securities that do not share common risk characteristics with our collective portfolio are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows and the recorded amortized cost basis of the security.

For debt securities available for sale, impairment is recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis.

For debt securities AFS, impairment is recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis.

If, however, the Company does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security before recovery, the Company evaluates unrealized losses to determine whether a decline in fair value below amortized cost basis is a result of a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security, or other factors such as changes in market interest rates.

If a credit loss exists, an allowance for credit losses is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the specific security’s amortized cost basis exceeds its fair value.

Changes in the allowance for credit losses are recorded in net income in the period of change and are included in provision for credit losses.

Changes in the fair value of debt securities available for sale not resulting from credit losses are recorded in other comprehensive income (loss).

If a credit loss exists, an ACL is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the specific security’s amortized cost basis exceeds its fair value.

Changes in the ACL are recorded in net income in the period of change and are included in provision for credit losses.

Changes in the fair value of debt securities AFS not resulting from credit losses are recorded in other comprehensive income (loss).

The Company regularly reviews unrealized losses in its investments in securities and cash flows expected to be collected from impaired securities based on criteria including the extent to which market value is below amortized cost, the financial health of and specific prospects for the issuer, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Loans Held for Investment

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 $ 6.6 million at June 30, 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 $ 13.6 million at September 30, 2023 within the accrued interest receivable 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.

1 unchanged sentence

Loans acquired in a business combination are recorded at estimated fair value on the date of acquisition.

In the case of loans that have experienced more than insignificant deterioration in credit quality since origination as of the acquisition date, the loan’s amortized cost basis is increased above estimated fair value by the amount of expected credit losses as of the acquisition date, and a corresponding allowance for credit losses is also recorded.

Any remaining non-credit discount or premium for such purchased loans with credit deterioration (PCD loans) and any fair value discount or premium for non-PCD loans is accreted or amortized as an adjustment to yield over the estimated lives of the loans using the level-yield method.

A loan’s past due status is based on the contractual due date of the most delinquent payment due.

Loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain.

Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest

Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest income.

Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest.

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

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

Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market conditions which could affect the value and

marketability of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

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

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No ACL is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income.

Management’s judgment in determining the level of the allowance is based

on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans.

Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans.

The methodology for estimating the amount reported in the ACL is the sum of two main components, an allowance assessed on a collective basis for pools of loans that share similar risk characteristics and an allowance assessed on individual loans that do not share similar risk characteristics with other loans .

3 unchanged sentences

When a loan is collateral-dependent and the repayment is expected to be provided substantially through the operation or sale of the collateral, the ACL is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral.

Cash flow projections and estimated expected losses on loans which share common risk characteristics are based in part on forecasts of the national unemployment rate that are reasonable and supportable over a twelve month period and incorporated into the estimate of expected credit losses using a statistical regression analysis.

For periods beyond those for which reasonable and supportable forecasts are available, projections are based on a reversion of the national unemployment rate from the last forecast to a historical average level over the following twelve months.

Management’s estimate of the allowance for credit losses on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the quantitative loss estimation process.

Cash flow projections and estimated expected losses on loans which share common risk characteristics are based in part on forecasts economic independent variables, namely the national unemployment rate, 10 year Treasury rate and changes in GDP that are reasonable and supportable over a twelve month period and incorporated into the estimate of expected credit losses using a statistical regression analysis.

For periods beyond those for which reasonable and supportable forecasts are available, projections are based on a reversion of the corresponding economic independent variable from the last forecast to a historical average level over the following twelve months.

Management’s estimate of the ACL on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the quantitative loss estimation process.

Factors considered by management include changes in general market, economic and business conditions;

4 unchanged sentences

Reserve for Unfunded Commitments

The Company records a reserve, reported in other liabilities, for expected credit losses on commitments to extend credit that are not unconditionally cancelable by the Company.

The reserve for unfunded commitments is measured based on the principles utilized in estimating the allowance for credit losses on loans and an estimate of the amount of unfunded commitments expected to be advanced.

The Company records a reserve, reported in other liabilities, for expected credit losses on commitments to extend credit that are not unconditionally cancellable by the Company.

The reserve for unfunded commitments is measured based on the principles utilized in estimating the ACL on loans and an estimate of the amount of unfunded commitments expected to be advanced.

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

Note 3 – Earnings Per 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 potential common stock equivalents (stock-based awards).

The following table provides information relating to the calculation of earnings per common share:

For the Three Months Ended

For the Six Months Ended

(In thousands, except per share data)

Weighted average shares outstanding - Basic and Diluted

Earnings per common share - Basic and Diluted

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

During the three and nine months ended September 30, 2023, the Company recorded a $ 241,000 and $ 308,000 , respectively, provision for credit losses associated with its unfunded commitments.

Note 3 – Business Combinations

On July 1, 2023 (the “Acquisition Date”), the Company completed the acquisition of TCFC, a Maryland charted commercial bank, in accordance with the definitive agreement that was entered into on December 14, 2022, by and among the Company and TCFC.

The primary reasons for the merger included:

expansion of the branch network and commanding market share positions in attractive Maryland markets and a growing presence in Virginia and Delaware;

attractive low-cost funding base;

strong cultural alignment and a deep commitment to shareholders, customers, employees, and communities served by Shore and TCFC, meaningful value creation to shareholders;

and increased trading liquidity for both companies and increased dividends for TCFC shareholders.

In connection with the completion of the merger, former TCFC shareholders received 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.

The acquisition of TCFC 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 bargain purchase gain as of the Acquisition Date was approximately $ 12.2 million.

The exchange ratio was determined at the time of announcement of the merger between the Company and TCFC in December of 2022 when the stock price of the Company was much higher than at the legal merger date.

The decline in the Company’s stock price was the primary driver in recording a bargain purchase gain on this transaction.

The decline in stock price for the Company was comparable to other financial institutions similar to the Company leading up to the merger due to bank failures in the first quarter of 2023 and increases to overnight borrowing rates by the Fed which resulted in continued pressure on net interest margins.

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

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

The bargain purchase gain is not expected to be included as taxable income for tax purposes.

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

Comparative pro-forma financial statements for the prior year period were not presented, as adjustments to those statements would not be indicative of what would have occurred had the acquisition taken place on January 1, 2022.

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

(Dollars in thousands)

Purchase Price Consideration:

Shore Bancshares, Inc.

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

Effective settlement of pre-existing debt (1)

Cash consideration (cash in lieu for fractional shares)

Fair value of converted restricted stock units (2)

Total purchase price $ 153,592

Identifiable assets:

Cash and cash equivalents $ 25,377

Total securities 454,468

Loans, net 1,765,255

Premises and equipment, net 29,277

Core deposit intangible, net

Other assets 93,161

Total identifiable assets $ 2,416,186

Identifiable Liabilities

Deposits $ 2,131,141

Total debt 97,545

Other liabilities 21,739

Total identifiable liabilities $ 2,250,425

Provisional fair value of net assets acquired $ 165,761

Provisional bargain purchase gain $ ( 12,169 )

____________________________________

(1) SHBI held $ 500,000 in subordinated debt of TCFC.

The debt was effectively settled.

(2) Represents the number of TCFC restricted stock units outstanding and the equity exchange ratio, further multiplied by the price per share of SHBI common stock of $ 11.56 and the estimated ratio of the completed service period relative to the total service period of the underlying awards.

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

The Company determined the net discounted value of cash flows on gross loans totaling $ 1.9 billion, including 3,858 of Non-PCD loans and 323 PCD 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 Non-PCD loans were segregated into pools based on loan and payment type.

The effect of the valuation process was a total net discount $ 120.9 million at the Acquisition Date.

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 a security 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 June 30, 2023 is in accordance with ASC 326.

On January 1, 2023, the Company adopted ASC 326, which made changes to accounting for AFS 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 ACL to be recorded on HTM debt securities measured at amortized cost.

All securities information presented as of September 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.

For further discussion on the Corporation’s accounting policies and policy elections related to the accounting standard update refer to Note 2.

The following table summarizes the activity in the ACL on held-to-maturity securities:

Three Months Ended

Six Months Ended

(Dollars in thousands)

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 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 table summarizes the activity in the ACL on HTM securities.

(Dollars in thousands) Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023

Balance, beginning of period $ 163 $ —

Other debt securities, provision for credit losses ( 37 ) 126

Balance, end of period $ 126 $ 126

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

Upon re-estimation in the third quarter of 2023, an ACL recovery of $ 37,000 was recorded based on the results of our evaluation at September 30, 2023.

The provision for credit losses of $ 126,000 was recorded for the nine months ended September 30, 2023.

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

(Dollars in thousands)

(Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value

Available-for-sale securities:

June 30, 2023

September 30, 2023

Government agencies $ 23,622 $ 4 $ 3,995 $ 19,631

Mortgage-backed

Mortgage-backed-residential 63,371 — 9,798 53,573

Other debt securities 6,059 26 146 5,939

Total $ 93,052 $ 30 $ 13,939 $ 79,143

December 31, 2022

Government agencies $ 21,798 $ 5 $ 3,625 $ 18,178

Mortgage-backed

Mortgage-backed-residential 72,183 2 8,666 63,519

Other debt securities 2,018 — 128 1,890

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

(Dollars in thousands)

Total $ 95,999 $ 7 $ 12,419 $ 83,587

No AFS securities were sold from the Company’s legacy securities’ portfolios during the three and nine months ended September 30, 2023 and 2022.

The Company sold virtually all of the AFS securities portfolio acquired from TCFC immediately after the legal merger with the proceeds of $ 430.0 million, and recognized gross losses of $ 2.2 million from the sale of securities.

(Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Credit Losses

Held-to-maturity securities:

June 30, 2023

September 30, 2023

Government agencies $ 143,494 $ — $ 14,873 $ 128,621 $ —

Mortgage-backed

Mortgage-backed-residential 367,712 — 61,177 306,535 —

States and political subdivisions 1,471 2 68 1,405 —

Other debt securities 10,500 — 1,409 9,091 126

Total $ 523,177 $ 2 $ 77,527 $ 445,652 $ 126

December 31, 2022

Government agencies $ 148,097 $ — $ 13,601 $ 134,496 $ —

Mortgage-backed

Mortgage-backed-residential 398,884 — 50,464 348,420 —

States and political subdivisions 1,474 35 28 1,481 —

Other debt securities 11,000 — 770 10,230 —

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.

Total $ 559,455 $ 35 $ 64,863 $ 494,627 $ —

Equity securities with an aggregate fair value of $ 5.4 million at September 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 $ 0.3 million for the nine months ended September 30, 2023 and $ 0.1 million for the nine months ended September 30, 2022, respectively.

Credit Quality Information

The Company monitors the credit quality of held-to-maturity securities through credit ratings provided by Standard & Poor’s Rating Services and Moody’s Investor Services.

The Company monitors the credit quality of HTM securities through credit ratings provided by Standard & Poor’s Rating Services and Moody’s Investor Services.

Credit ratings express opinions about the credit quality of a security, and are updated at each quarter end.

1 unchanged sentence

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 June 30, 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 subordinated debt of other financial institutions.

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

There were no speculative grade HTM securities at September 30, 2023 or December 31, 2022.

HTM securities that are not rated are agency mortgage-backed securities sponsored by U.S.

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 HTM securities based on their lowest publicly available credit rating as of September 30, 2023.

September 30, 2023

Investment Grade

(Dollars in thousands)

(Dollars in thousands) Aaa Aa1 A3 Baa1 Baa2 NR Total

Government agencies $ 143,494 $ — $ — $ — $ — $ — $ 143,494

Mortgage-backed

Mortgage-backed-residential 367,712 — — — — — 367,712

States and political subdivisions — 1,471 — — — — 1,471

1 unchanged sentence

Total Held-to Maturity Securities $ 511,206 $ 1,471 $ 4,000 $ 4,000 $ 500 $ 2,000 $ 523,177

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 June 30, 2023 and December 31, 2022.

(Dollars in thousands)

June 30, 2023

Less than 12 Months More than 12 Months Total

(Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses

September 30, 2023

Available-for-sale securities:

Government agencies $ 596 $ 1 $ 16,352 $ 3,994 $ 16,948 $ 3,995

Mortgage-backed

Mortgage-backed-residential 433 4 53,140 9,794 53,573 9,798

Other debt securities — — 1,866 146 1,866 146

(Dollars in thousands)

Total $ 1,029 $ 5 $ 71,358 $ 13,934 $ 72,387 $ 13,939

Less than 12 Months More than 12 Months Total

(Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses

December 31, 2022

1 unchanged sentence

Government agencies $ 1,165 $ 4 $ 16,585 $ 3,621 $ 17,750 $ 3,625

Mortgage-backed

Mortgage-backed-residential 29,125 2,409 34,167 6,257 63,292 8,666

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:

Government agencies $ 67,332 $ 2,786 $ 67,163 $ 10,815 $ 134,495 $ 13,601

Mortgage-backed

Mortgage-backed-residential 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

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 June 30, 2023.

Total $ 224,974 $ 12,625 $ 268,951 $ 52,238 $ 493,925 $ 64,863

There were 116 AFS debt securities with a fair value below the amortized cost basis, totaling $ 13.9 million of aggregate fair value as of September 30, 2023.

The Company concluded that a credit loss does not exist in its AFS securities portfolio as of September 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 U.S.

government agencies or U.S.

government sponsored enterprises.

Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S.

government, that investors in such mortgage-backed securities will receive timely principal and interest payments.

All HTM and AFS securities were current with no securities past due or on nonaccrual as of September 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.

At September 30, 2023, the carrying value of pledged AFS securities was $ 53.3 million and $ 180.7 million of pledged HTM securities.

The comparable amounts for December 31, 2022 were $ 72.1 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

Held to maturity

(Dollars in thousands)

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

Available for sale Held to maturity

(Dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value

Due in one year or less $ 2,478 $ 2,479 $ 7,000 $ 6,873

2 unchanged sentences

Due after ten years 42,946 34,407 343,738 282,646

Total $ 93,052 $ 79,143 $ 523,177 $ 445,652

The maturity dates for debt securities are determined using contractual maturity dates.

2 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 2022 Annual Report.

All loan information presented as of June 30, 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 Company’s 2022 Annual Report on Form 10-K.

All loan information presented as of September 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 June 30, 2023 and December 31, 2022.

(Dollars in thousands)

June 30, 2023

December 31, 2022

The Company makes residential mortgage, commercial, and consumer loans to customers primarily in Anne Arundel County, Baltimore County, Charles County, Calvert County, St Mary’s 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 and Spotsylvania County in Virginia.

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

(Dollars in thousands) September 30, 2023 % of Total Loans December 31, 2022 % of Total Loans

Construction $ 328,750 7.12 % $ 246,319 9.64 %

Residential real estate 1,439,464 31.17 % 810,497 31.71 %

Commercial real estate 2,283,521 49.45 % 1,065,409 41.68 %

Allowance for credit losses

Commercial 229,474 4.97 % 147,856 5.78 %

Consumer 330,411 7.16 % 286,026 11.19 %

Credit Cards 6,099 0.13 % — — %

Total loans 4,617,719 100.00 % 2,556,107 100.00 %

Allowance for credit losses on loans ( 57,051 ) ( 16,643 )

Total loans, net $ 4,560,668 $ 2,539,464

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 $ 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.

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

At September 30, 2023 and December 31, 2022, included in total loans were $ 307.8 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 $ 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

90 days or more

allowance for

(Dollars in thousands)

June 30, 2023

These balances were presented net of the related discount which totaled $ 4.9 million and $ 6.7 million at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023 included in total loans were $ 1.7 billion acquired as part of the acquisition of TCFC, effective July 1, 2023.

These balances were presented net of the related discount which totaled $ 109.8 million at September 30, 2023.

The following purchased credit deteriorated loans were acquired in connection with the merger on the Acquisition Date.

(Dollars in Thousands) Par Value Purchase Discount Allowance Purchase Price

Construction $ 177 $ ( 11 ) $ ( 3 ) $ 163

Residential real estate 8,379 ( 1,157 ) ( 215 ) 7,007

Commercial real estate 55,779 ( 6,864 ) ( 985 ) 47,930

Commercial 2,137 ( 59 ) ( 278 ) 1,800

Consumer 519 ( 35 ) ( 14 ) 470

Credit Card 999 ( 144 ) ( 18 ) 837

Total $ 67,990 $ ( 8,270 ) $ ( 1,513 ) $ 58,207

At September 30, 2023, the Bank was servicing $ 361.8 million in loans for the Federal National Mortgage Association and $ 100.8 million in loans for Freddie Mac.

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

(Dollars in thousands) Non-accrual with no allowance for credit loss Non-accrual with an allowance for credit loss Total Non-accruals

September 30, 2023

Nonaccrual loans:

Construction $ 147 $ — $ 147

Residential real estate 3,603 299 3,902

Commercial real estate 3,866 — 3,866

Commercial 174 671 845

Consumer 203 19 222

Total $ 7,993 $ 989 $ 8,982

Interest income $ — $ — $ —

(Dollars in thousands) Non-accrual Delinquent Loans Non-accrual Current Loans Total Non-accruals

September 30, 2023

Nonaccrual loans:

Construction $ 147 $ — $ 147

Residential real estate 2,258 1,644 3,902

Commercial real estate 749 3,117 3,866

Commercial 1 844 845

Consumer 221 1 222

Total $ 3,376 $ 5,606 $ 8,982

The overall quality of the Bank’s loan portfolio is primarily assessed using the Bank’s risk-grading scale.

13 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 credit 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 loan 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 June 30, 2023 and gross write-offs during the six months ended June 30, 2023.

Term Loans by Origination Year

(Dollars in thousands)

June 30, 2023

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

Term Loans by Origination Year Revolving Loans Revolving Converted to Term Loans Total

(Dollars in thousands) Prior 2019 2020 2021 2022 2023

September 30, 2023

Pass $ 27,243 $ 14,732 $ 29,531 $ 40,493 $ 135,418 $ 72,852 $ 8,331 $ — $ 328,600

Substandard 138 — — 12 — — — — 150

Total $ 27,381 $ 14,732 $ 29,531 $ 40,505 $ 135,418 $ 72,852 $ 8,331 $ — $ 328,750

Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Residential real estate

Pass $ 330,183 $ 55,088 $ 107,259 $ 248,445 $ 355,912 $ 218,563 $ 116,868 $ 876 $ 1,433,194

Special Mention 41 259 — — — — 192 — 492

Substandard 5,320 — — — — — 458 — 5,778

Total $ 335,544 $ 55,347 $ 107,259 $ 248,445 $ 355,912 $ 218,563 $ 117,518 $ 876 $ 1,439,464

Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Commercial real estate

Pass $ 683,984 $ 192,789 $ 302,597 $ 430,908 $ 430,214 $ 195,260 $ 16,420 $ 2,202 $ 2,254,374

Special Mention 13,931 141 — 6,184 4,475 — — 426 25,157

Substandard 1,498 1,937 — 555 — — — — 3,990

Total $ 699,413 $ 194,867 $ 302,597 $ 437,647 $ 434,689 $ 195,260 $ 16,420 $ 2,628 $ 2,283,521

Gross Charge-offs $ ( 513 ) $ — $ ( 814 ) $ — $ — $ — $ — $ — $ ( 1,327 )

Pass $ 25,796 $ 14,254 $ 15,332 $ 43,209 $ 40,337 $ 24,582 $ 62,679 $ 1,641 $ 227,830

Special Mention 137 — — 440 — — 75 243 895

Substandard 1 186 — — 23 — 493 46 749

Total $ 25,934 $ 14,440 $ 15,332 $ 43,649 $ 40,360 $ 24,582 $ 63,247 $ 1,930 $ 229,474

Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Pass $ 682 $ 1,258 $ 15,574 $ 83,768 $ 150,126 $ 78,067 $ 713 $ — $ 330,188

Special Mention — — — — — — 1 — 1

Substandard — 26 — 117 78 — 1 — 222

Total $ 682 $ 1,284 $ 15,574 $ 83,885 $ 150,204 $ 78,067 $ 715 $ — $ 330,411

Gross Charge-offs $ ( 45 ) $ — $ ( 16 ) $ ( 3 ) $ ( 1 ) $ ( 328 ) $ ( 1 ) $ ( 5 ) $ ( 399 )

Pass $ 1,067,888 $ 278,121 $ 470,293 $ 846,823 $ 1,112,007 $ 589,324 $ 205,011 $ 4,719 $ 4,574,186

Special Mention 14,109 400 — 6,624 4,475 — 268 669 26,545

Substandard 6,957 2,149 — 684 101 — 952 46 10,889

Total loans by risk category $ 1,088,954 $ 280,670 $ 470,293 $ 854,131 $ 1,116,583 $ 589,324 $ 206,231 $ 5,434 $ 4,611,620

Total gross charge-offs $ ( 558 ) $ — $ ( 830 ) $ ( 3 ) $ ( 1 ) $ ( 328 ) $ ( 1 ) $ ( 5 ) $ ( 1,726 )

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)

June 30, 2023

Term Loans by Origination Year Revolving Loans Revolving Converted to Term Loans Total

(Dollars in thousands) Prior 2019 2020 2021 2022 2023

September 30, 2023

Performing $ — $ — $ — $ — $ — $ — $ 6,099 $ — $ 6,099

Non-Performing — — — — — — — — —

Total $ — $ — $ — $ — $ — $ — $ 6,099 $ — $ 6,099

Gross Charge-offs $ — $ — $ — $ — $ — $ — $ ( 60 ) $ — $ ( 60 )

Total loans evaluated by performing status $ — $ — $ — $ — $ — $ — $ 6,099 $ — $ 6,099

Total gross charge-offs $ — $ — $ — $ — $ — $ — $ ( 60 ) $ — $ ( 60 )

Total Recorded Investment $ 1,088,954 $ 280,670 $ 470,293 $ 854,131 $ 1,116,583 $ 589,324 $ 212,330 $ 5,434 $ 4,617,719

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

(Dollars in thousands) 30‑59 days past due

60‑89 days past due

90 days past due and still accruing 90 days past due and not accruing Total

past due Current Non-accrual Current Accrual Loans (1)

September 30, 2023

Construction $ 1,035 $ — $ 65 $ 147 $ 1,247 $ — $ 327,503 $ 328,750

Residential real estate 3,036 250 871 1,669 5,826 1,644 1,431,994 1,439,464

Commercial real estate 785 445 — 749 1,979 3,117 2,278,425 2,283,521

Commercial 103 — — — 103 844 228,527 229,474

Consumer 593 2,744 1,160 214 4,711 1 325,699 330,411

Credit Cards 61 41 53 — 155 — 5,944 6,099

Total $ 5,613 $ 3,480 $ 2,149 $ 2,779 $ 14,021 $ 5,606 $ 4,598,092 $ 4,617,719

Percent of total loans 0.1 % 0.1 % — % — % 0.3 % 0.1 % 99.6 % 100.0 %

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

90 days or more

(Dollars in thousands)

(1) Includes loans measured at fair value of $ 9.3 million at September 30, 2023.

(Dollars in thousands) Current (1)

30‑59 days past due

60‑89 days past due

90 days or more past due

past due Non-accrual 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.

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.

The following tables provide a summary of the activity in the ACL allocated by loan class for the three and nine months ended September 30, 2023 and September 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.

(Dollars in thousands)

For three months ended

June 30, 2023

Allowance for credit losses:

Beginning Balance

Net (charge-offs) recoveries

Ending Balance

(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

June 30, 2022

Allowance for credit losses:

Beginning Balance

Net (charge-offs) recoveries

Ending Balance

(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.

(Dollars in thousands) Beginning Balance Merger Adjustments (2)

Charge-offs Recoveries Net (charge-offs) recoveries Provisions Ending Balance

For three months ended September 30, 2023

Construction $ 2,386 $ 3 $ — $ 3 $ 3 $ 1,439 $ 3,831

Residential real estate 9,151 215 — 3 3 9,806 19,175

Commercial real estate 10,267 985 ( 1,327 ) — ( 1,327 ) 12,875 22,800

Commercial 1,956 278 — 2 2 2,101 4,337

5,254 14 ( 115 ) 45 ( 70 ) 1,658 6,856

Credit Card — 18 ( 60 ) — ( 60 ) 94 52

Total $ 29,014 $ 1,513 $ ( 1,502 ) $ 53 $ ( 1,449 ) $ 27,973 $ 57,051

(1) Gross charge-offs of consumer loans for the three months ended September 30, 2023 included $ 95,000 of demand deposit overdrafts.

(2) Merger adjustments consist of gross-up for acquired PCD loans in the TCFC merger.

(Dollars in thousands) Beginning Balance Charge-offs Recoveries Net (charge-offs) recoveries Provisions Ending Balance

For three months ended September 30, 2022

Construction $ 3,345 $ — $ 2 $ 2 $ ( 315 ) $ 3,032

Residential real estate 2,778 — 12 12 218 3,008

Commercial real estate 4,441 — 243 243 325 5,009

Commercial 1,681 ( 202 ) 60 ( 142 ) 368 1,907

Consumer 3,238 — 4 4 79 3,321

Total $ 15,483 $ ( 202 ) $ 321 $ 119 $ 675 $ 16,277

(Dollars in thousands) Beginning Balance Impact of ASC326 Adoption Merger Adjustments (2)

Charge-offs Recoveries Net (charge-offs) recoveries Provisions Ending Balance

For nine months ended September 30, 2023

Construction $ 2,973 $ 1,222 $ 3 $ — $ 10 $ 10 $ ( 377 ) $ 3,831

Residential real estate 2,622 4,974 215 — 37 37 11,327 19,175

Commercial real estate 4,899 3,742 985 ( 1,327 ) — ( 1,327 ) 14,501 22,800

Commercial 1,652 401 278 — 10 10 1,996 4,337

4,497 452 14 ( 399 ) 210 ( 189 ) 2,082 6,856

Credit Card — — 18 ( 60 ) — ( 60 ) 94 52

Total $ 16,643 $ 10,791 $ 1,513 $ ( 1,786 ) $ 267 $ ( 1,519 ) $ 29,623 $ 57,051

(1) Gross charge-offs of consumer loans for the nine months ended September 30, 2023 included $ 0.4 million of demand deposit overdrafts.

(2) Merger adjustments consist of gross-up for acquired PCD loans in the TCFC merger.

(Dollars in thousands) Beginning Balance Charge-offs Recoveries Net (charge-offs) recoveries Provisions Ending Balance

For nine months ended September 30, 2022

Construction $ 2,454 $ — $ 9 $ 9 $ 569 $ 3,032

Residential real estate 2,858 ( 4 ) 131 127 23 3,008

Commercial real estate 4,598 ( 6 ) 948 942 ( 531 ) 5,009

Commercial 2,070 ( 416 ) 200 ( 216 ) 53 1,907

Consumer 1,964 ( 31 ) 27 ( 4 ) 1,361 3,321

Total $ 13,944 $ ( 457 ) $ 1,315 $ 858 $ 1,475 $ 16,277

There were no modifications to loans for borrowers experiencing financial difficulty (“BEFD”) during the three and nine months ended September 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

September 30, 2023

(Dollars in thousands) Real Estate Collateral Other Collateral Total

Construction $ 250 $ — $ 250

Residential real estate 7,620 — 7,620

Commercial real estate 5,411 — 5,411

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.

Commercial — 1,100 1,100

Consumer — 1,381 1,381

Total $ 13,281 $ 2,481 $ 15,762

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 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.

There were $ 0.7 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of September 30, 2023 and $ 0.3 million as of December 31, 2022, respectively.

There were no residential real estate properties included in the balance of other real estate owned (“OREO”) at September 30, 2023 and one residential real estate property totaling $ 18,000 at December 31, 2022.

Prior to the adoption of ASC 326

1 unchanged sentence

December 31, 2022

Acquired Loans -

(Dollars in thousands)

Credit Impaired

(Dollars in thousands) Acquired Loans - Purchased Credit Impaired Acquired Loans - Purchased Performing Acquired Loans - 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

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

For the Six Months Ended

(Dollars in thousands)

June 30, 2022

(Dollars in thousands) Nine Months Ended September 30, 2022

Accretable yield, beginning of period $ 5,367

Accretion ( 1,195 )

Reclassification of nonaccretable difference due to improvement in expected cash flows 399

1 unchanged sentence

Accretable yield, end of period $ 4,858

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

(Dollars in thousands)

The following tables include impairment information relating to loans and the ACL on loans as of December 31, 2022.

(Dollars in thousands) Ending balance:

Individually evaluated for impairment Ending balance:

Collectively evaluated for impairment Acquired Loans- PCI Total (1)

December 31, 2022

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Acquired loans - PCI

Total loans (1)

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Total allowance

Loan Receivables:

Construction $ 331 $ 236,901 $ 650 $ 237,882

Residential real estate 5,081 791,460 13,956 810,497

Commercial real estate 2,540 1,051,003 11,866 1,065,409

Commercial 174 147,526 156 147,856

Consumer 28 285,984 14 286,026

Total $ 8,154 $ 2,512,874 $ 26,642 $ 2,547,670

Allowance for credit losses on loans:

Allocated to loans individually evaluated for impairment Allocated to loans collectively evaluated for impairment Total

Construction $ — $ 2,973 $ 2,973

Residential real estate 127 2,495 2,622

Commercial real estate — 4,899 4,899

Commercial — 1,652 1,652

Consumer — 4,497 4,497

Total $ 127 $ 16,516 $ 16,643

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

1 unchanged sentence

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.

June 30, 2022

Quarter-to-date

average recorded

(Dollars in thousands)

Unpaid principal balance Recorded investment with no allowance Recorded investment with an allowance Related allowance September 30, 2022

(Dollars in thousands) Quarter-to-date average recorded investment Year-to-date average recorded investment Interest income recognized

December 31, 2022

Impaired nonaccrual loans:

Construction $ 297 $ 297 $ — $ — $ 297 $ 314 $ —

Residential real estate 1,363 1,259 — — 1,639 1,534 —

Commercial real estate 159 150 — — 466 704 —

Commercial 359 174 — — 197 242 —

Consumer 29 28 — — 40 48 —

Total $ 2,207 $ 1,908 $ — $ — $ 2,639 $ 2,842 $ —

Impaired accruing TDRs:

Construction $ 10 $ 10 $ — $ — $ 14 $ 18 $ 1

Residential real estate 2,849 1,176 1,539 127 2,750 3,064 83

Commercial real estate 1,680 1,680 — — 1,830 2,231 48

Commercial — — — — — — —

Consumer — — — — — 6 —

Total $ 4,539 $ 2,866 $ 1,539 $ 127 $ 4,594 $ 5,319 $ 132

Other impaired accruing loans:

Construction $ 24 $ 24 $ — $ — $ 304 $ 190 $ 6

Residential real estate 1,107 1,107 — — 745 259 3

Commercial real estate 710 710 — — 537 493 7

Commercial — — — — 13 7 1

Consumer — — — — — 13 —

Total $ 1,841 $ 1,841 $ — $ — $ 1,599 $ 962 $ 17

Total impaired loans:

Construction $ 331 $ 331 $ — $ — $ 615 $ 522 $ 7

Residential real estate 5,319 3,542 1,539 127 5,134 4,857 86

Commercial real estate 2,549 2,540 — — 2,833 3,428 55

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

Commercial 359 174 — — 210 249 1

Consumer 29 28 — — 40 67 —

Total $ 8,587 $ 6,615 $ 1,539 $ 127 $ 8,832 $ 9,123 $ 149

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

There were no TDRs which subsequently defaulted within 12 months of modification for the three and nine months ended September 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.

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

(Dollars in thousands)

Pass/Performing (1)

(Dollars in thousands) Pass/Performing (1)

Pass Special 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.

Note 6 – Goodwill and Other Intangibles

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

September 30, 2023

(Dollars in thousands) Gross Carrying Amount Additions Accumulated Impairment Charges Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life (in years)

Goodwill $ 65,476 $ — $ ( 1,543 ) $ ( 667 ) $ 63,266 n/a

Core deposit intangible $ 10,503 $ 48,648 $ — $ ( 8,466 ) $ 50,685 4.9

Total core deposit intangible $ 10,503 $ 48,648 $ — $ ( 8,466 ) $ 50,685

December 31, 2022

(Dollars in thousands) Gross Carrying Amount Measurement Period Adjustments Accumulated Impairment Charges Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life

Goodwill $ 65,631 $ ( 155 ) $ ( 1,543 ) $ ( 667 ) $ 63,266 n/a

Core deposit intangible $ 10,504 $ — $ — $ ( 4,957 ) $ 5,547 2.6

Total core deposit intangible $ 10,504 $ — $ — $ ( 4,957 ) $ 5,547

The aggregate amortization expense was $ 3.5 million for the nine months ended September 30, 2023 and $ 1.5 million for the nine months ended September 30, 2022.

At September 30, 2023, estimated future remaining amortization for amortizing core deposit intangible within the years ending December 31, is as follows:

(Dollars in thousands) Amortization Expense

Thereafter 16,115

Total amortizing core deposit intangible $ 50,685

Note 7 – Leases

5 unchanged sentences

The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

During the third quarter of 2023, the Company acquired long-term branch leases and equipment leases due to the acquisition of TCFC.

These leases were reassessed by management as of the Acquisition Date, which included updating the incremental borrowing rates and remaining lease terms.

The following tables present information about the Company’s leases.

(Dollars in thousands)

June 30, 2023

December 31, 2022

(Dollars in thousands) September 30, 2023 December 31, 2022

Lease liabilities $ 13,082 $ 9,908

Right-of-use assets $ 12,741 $ 9,629

Weighted average remaining lease term

Weighted average remaining lease term 11.07 years 12.55 years

Weighted average discount rate 3.18 % 2.50 %

For the Three Months Ended

For the Six Months Ended

Remaining lease term - min 0.64 years 0.16 years

Remaining lease term - max 17.93 years 18.68 years

Three Months Ended September 30, Nine Months Ended September 30,

Lease cost (in thousands) 2023 2022 2023 2022

Operating lease cost $ 485 $ 340 $ 1,153 $ 1,007

Short-term lease cost

Total lease cost $ 485 $ 340 $ 1,153 $ 1,007

1 unchanged sentence

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

Lease payments due (in thousands)

June 30, 2023

Six months ending December 31, 2023

Lease payments due (in thousands) As of September 30, 2023

Three months ending December 31, 2023 $ 460

Thereafter 8,669

Total undiscounted cash flows $ 15,449

Discount 2,367

Lease liabilities $ 13,082

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)

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 June 30, 2023 and December 31, 2022.

June 30, 2023

Remaining Life

(Dollars in thousands)

Other intangible assets

Core deposit intangible

Total other intangible assets

December 31, 2022

Remaining Life

(Dollars in thousands)

Other intangible assets

Core deposit intangible

Total other intangible assets

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)

Total amortizing intangible assets

Note 8 – Other Assets

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

(Dollars in thousands)

Accrued interest receivable

Deferred income taxes

Prepaid expenses

Income taxes receivable

Total gross rental income was $ 0.3 million and $ 0.2 million for the three months ended September 30, 2023 and 2022, respectively.

Total gross rental income was $ 0.9 million and $ 0.7 million for the nine months ended September 30, 2023, and 2022, respectively.

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

(In thousands) As of September 30, 2023

Three months ending December 31, 2023 $ 206

Thereafter 1,554

Total $ 4,335

Note 8 - Deposits

Deposits consist of the following categories as of the dates indicated:

(dollars in thousands) September 30, 2023 December 31, 2022

Balance % Balance %

Noninterest-bearing demand $ 1,211,401 23.70 % $ 862,015 28.60 %

Interest-bearing:

Demand 1,210,051 23.70 % 694,101 23.10 %

Money market deposits 1,179,049 23.10 % 709,132 23.60 %

Savings 371,755 7.30 % 320,188 10.60 %

Certificates of deposit 1,136,488 22.20 % 424,348 14.10 %

Total interest-bearing 3,897,343 76.30 % 2,147,769 71.40 %

Total Deposits $ 5,108,744 100.00 % $ 3,009,784 100.00 %

At September 30, 2023, the scheduled contractual maturities of certificates of deposit are as follows:

(dollars in thousands) September 30, 2023

Within one year $ 894,384

Year 2 162,135

Year 3 48,171

Year 4 15,530

Year 5 15,816

Thereafter 452

The aggregate amount of certificates of deposit that met or exceeded the FDIC insurance limit of $250,000 at September 30, 2023 and December 31, 2022 was $ 311.3 million and $ 77.7 million, respectively.

Note 9 - Borrowings

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 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 June 30, 2023 and December 31, 2022.

(Dollars in thousands)

June 30, 2023

December 31, 2022

Accrued interest payable

Accrued salaries and wages

Accounts payable

Deferred compensation liability

Other liabilities

Long-term debt consisted of the following:

September 30,

(dollars in thousands) 2023 2022 Issue Date Stated Maturity Date Earliest Call Date Interest Rate

September 2030 Subordinated Debentures $ 25,000 $ 25,000 2020 2030 2025 5.375 % through September 2025, 3-month SOFR + 5.265 % thereafter

October 2030 Subordinated Debentures 19,500 — 2020 2030 2025 4.75 % through October 2025, 3-month SOFR + 4.58 % thereafter

Total subordinated debentures 44,500 25,000

Severn Capital Trust I 20,619 20,619 2004 2035 3-month SOFR + 2.00 %

Tri-County Capital Trust I 7,000 — 2004 2034 90-day SOFR + 2.60 %

Tri-County Capital Trust II 5,000 — 2005 2035 90-day SOFR + 1.70 %

Total trust preferred securities 32,619 20,619

Less net discount and unamortized issuance costs ( 5,084 ) ( 2,547 )

Total long-term debt $ 72,035 $ 43,072

At September 30, 2023, subordinated notes consisted of $ 25.0 million of long-term debt issued by the Company in August 2020, and $ 19.5 million of long-term debt assumed as a result of the merger with TCFC.

The recorded balance of subordinated debt issued in 2020 and the assumed subordinated debt from TCFC, net of unamortized issuance costs and fair value discounts, respectively, were $ 24.8 million and $ 18.2 million, respectively.

The Company also assumed trust preferred securities in the aggregate of $ 32.6 million as a result of the merger with TCFC in 2023 and the acquisition of Severn in 2021.

Trust preferred securities consisted of $ 20.6 million issued to Severn Capital Trust I, $ 7.0 million issued by Tri-County Capital Trust I and $ 5.0 million issued by Tri-County Capital Trust II.

The recorded balance of the debt acquired from Severn at September 30, 2023 was $ 18.5 million, net of the unamortized fair value adjustment of $ 2.1 million.

At September 30, 2023, the junior subordinated debt securities of Tri-County Capital Trust I and Tri-County Capital Trust II had a recorded balance of $ 6.4 million and $ 4.2 million, which are presented as net of the unamortized fair value adjustment of $ 0.6 million and $ 0.8 million, respectively.

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.

Short-term borrowings from the Federal Home Loan Bank (“FHLB”) at September 30, 2023 and December 31, 2022 were zero and $ 40.0 million, respectively.

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

Note 10 - Stock-Based Compensation

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

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

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

3 unchanged sentences

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

The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 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 (deficiencies) related to stock-based compensation

(Dollars in thousands)

Unrecognized stock-based compensation expense

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 six months ended June 30, 2023.

Weighted Average

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

The Company assumed 3,977 shares of restricted stock and 90,783 of restricted stock units at a fair market value of $ 11.56 per share as a result of the merger with TCFC.

The recipients of the restricted stock unites do not have any stockholder rights, including voting, dividend, or liquidation rights, with respect to the shares underlying awarded restricted stock units until the recipient becomes the record holder of those shares.

The following table summarizes restricted stock award and restricted stock unit activity for the Company under the 2016 Equity Plan for the nine months ended September 30, 2023.

Restricted Stock Restricted Stock Units

Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value

Nonvested at beginning of period 36,860 $ 20.15 — $ —

Replacement awards issued in acquisition of TCFC 3,977 11.56 90,783 11.56

Granted 53,655 14.73 91,047 11.56

Vested ( 40,525 ) 17.65 ( 11,459 ) 11.56

Forfeited ( 1,671 ) 17.49 ( 1,202 ) 11.56

Nonvested at end of period 52,296 $ 15.95 169,169 $ 11.56

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.

The fair value of restricted stock awards that vested during the first nine months of 2023 and 2022 was $ 0.6 million and $ 0.5 million, respectively.

The fair value of restricted stock units vested during the first nine months of 2023 was $ 0.1 million.

Note 11 – Derivatives

4 unchanged sentences

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 upon permanent financing.

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.

For these IRLCs and our closed inventory in loans held for sale (“LHFS”), 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 June 30, 2023 and December 31, 2022.

June 30, 2023

December 31, 2022

(Dollars in thousands)

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

September 30, 2023 December 31, 2022

(Dollars in thousands) Notional Amount Estimated Fair Value Notional Amount Estimated Fair Value

Asset - IRLCs $ 10,969 $ 89 $ 4,166 $ 35

3 unchanged sentences

Note 12 – 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 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

available for sale

(Dollars in thousands)

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, June 30, 2022

The Company records unrealized holding gains (losses), net of tax, on investment securities AFS 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 and nine months ended September 30, 2023 and 2022.

Three Months Ended September 30, 2023 Three Months Ended September 30, 2022 Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022

(Dollars in thousands) Net Unrealized Gains And (Losses) Net Unrealized Gains And (Losses) Net Unrealized Gains And (Losses) Net Unrealized Gains And (Losses)

Beginning of period $ ( 8,561 ) $ ( 6,651 ) $ ( 9,021 ) $ 56

Other comprehensive losses, net of tax before reclassifications ( 1,548 ) ( 3,130 ) ( 1,088 ) ( 9,837 )

End of period $ ( 10,109 ) $ ( 9,781 ) $ ( 10,109 ) $ ( 9,781 )

Note 13 – Regulatory Capital

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 September 30, 2023 and 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 the Bank, as well capitalized under the regulatory framework for prompt corrective action.

At September 30, 2023, there were 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.

Regulatory Capital and Ratios Regulatory Minimum Ratio + CCB ( 1)

The Company The Bank

(dollars in thousands) September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022

Common equity $ 504,931 $ 364,285 $ 566,129 $ 395,594

Goodwill ( 63,266 ) ( 63,266 ) ( 63,266 ) ( 63,266 )

Core deposit intangible (3)

( 37,507 ) ( 5,547 ) ( 37,507 ) ( 5,547 )

DTAs that arise from net operating loss and tax credit carry forwards ( 9,158 ) — ( 6,765 ) —

AOCI (gains) losses 10,109 9,021 10,109 9,021

Common Equity Tier 1 Capital 405,109 304,493 468,700 335,802

TRUPs 29,079 18,398 — —

Tier 1 Capital 434,188 322,891 468,700 335,802

Allowable reserve for credit losses and other Tier 2 adjustments 58,190 16,855 58,190 16,855

Subordinated notes 42,956 24,674 — —

Tier 2 Capital $ 535,334 $ 364,420 $ 526,890 $ 352,657

Risk-Weighted Assets ("RWA") $ 4,707,597 $ 2,619,400 $ 4,703,362 $ 2,618,939

Average Assets ("AA") $ 5,674,370 $ 3,390,516 $ 5,661,864 $ 3,386,771

Common Tier 1 Capital to RWA 7.00 % 8.61 % 11.62 % 9.97 % 12.82 %

Tier 1 Capital to RWA 8.50 % 9.22 % 12.33 % 9.97 % 12.82 %

Tier 2 Capital to RWA 10.50 % 11.37 % 13.91 % 11.20 % 13.47 %

Tier 1 Capital to AA (Leverage) (2)

n/a 7.65 % 9.52 % 8.28 % 9.92 %

____________________________________

(1) The regulatory minimum capital ratio ("Min.

Ratio") + the capital conservation buffer ("CCB").

(2) Tier 1 Capital to AA (Leverage) has no capital conservation buffer defined.

The PCA well capitalized is defined as 5.00 %.

(3) Core deposit intangible at September 30, 2023 is net of deferred tax liability.

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 September 30, 2023, the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained required capital ratios.

Note 14 – Fair Value Measurements

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Investment Securities Available for Sale

Fair value measurement for investment securities available for sale is based on quoted prices from an independent pricing service.

Fair value measurement for investment securities AFS 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.

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

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.

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

Mortgage Servicing Rights

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).

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Fair value is adjusted for the estimated probability of the loan closing with the borrower (Level 3).

(Dollars in thousands)

Valuation Technique

Unobservable Input

June 30, 2023

Market Approach

Weighted average prepayment speed (PSA) (2)

IRLCs - asset

Market Approach

Range of pull through rate

(Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range

September 30, 2023

$ 5,890 Market Approach Weighted average prepayment speed (PSA) (2)

IRLCs - net asset $ 39 Market Approach Range of pull through rate 84 % - 100 %

Average pull through rate 98 %

(Dollars in thousands)

Valuation Technique

Unobservable Input

(Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range

December 31, 2022

Market Approach

Weighted average prepayment speed (PSA) (2)

IRLCs - net asset

Market Approach

Range of pull through rate

$ 5,275 Market Approach Weighted average prepayment speed (PSA) (2)

IRLCs - net asset $ 28 Market Approach Range of pull through rate 78 % - 100 %

Average pull through rate 92 %

____________________________________

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

(2) PSA = Public Securities Association Standard Prepayment Model

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

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

June 30, 2023

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

(Dollars in thousands) Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023

Beginning balance $ 5,466 $ 5,275

2 unchanged sentences

Ending balance $ 5,890 $ 5,890

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)

June 30, 2023

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

(Dollars in thousands) Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023

Beginning balance $ 32 $ 28

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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.

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.

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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 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)

June 30, 2023

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

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

(Dollars in thousands) Fair Value Quoted Prices

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

September 30, 2023

Securities available for sale:

2 unchanged sentences

Other debt securities 5,939 — 5,939 —

79,143 — 79,143 —

Equity securities 5,434 — 5,434 —

TBA securities

LHFI, at fair value

TBA forward trades 359 — 359 —

Loans Held for Sale 14,725 — 14,725 —

Loans Held for Investment, at fair value 9,302 — 9,302 —

MSRs 5,890 — — 5,890

IRLCs 89 — — 89

Total assets at fair value $ 114,942 $ — $ 108,963 $ 5,979

IRLCs $ 50 $ — $ — $ 50

TBA securities — — — —

Total liabilities at fair value $ 50 $ — $ — $ 50

(Dollars in thousands)

(Dollars in thousands) Fair Value Quoted Prices

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

December 31, 2022

3 unchanged sentences

Other debt securities 1,890 — 1,890 —

83,587 — 83,587 —

Equity securities 1,233 — 1,233 —

TBA securities

LHFI, at fair value

TBA forward trades 41 — 41 —

Loans Held for Sale 4,248 — 4,248 —

Loans Held for Investment, 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

IRLCs $ 7 $ — $ — $ 7

TBA securities 6 — 6 —

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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.

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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 June 30, 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 September 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.

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

Valuation Technique

Unobservable Input

June 30, 2023

(Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range Weighted Average (1)

September 30, 2023

Nonrecurring measurements:

Individually evaluated collateral dependent loans

Appraisal of collateral

Liquidation expense

Other real estate owned

Appraisal of collateral

Appraisal adjustments

Individually evaluated collateral dependent loans $ 619 Appraisal of collateral Liquidation expense 10 % 10 %

Other real estate owned $ 179 Appraisal of collateral Appraisal adjustments ( 0 %) - ( 20 %)

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

Valuation Technique

Unobservable Input

(Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range Weighted Average (1)

December 31, 2022

Nonrecurring measurements:

Other real estate owned

Appraisal of collateral

Appraisal adjustments

Other real estate owned $ 197 Appraisal of collateral Appraisal adjustments ( 0 %) - 20 %

_________________________________

(1) Unobservable inputs were weighted by the relative fair value of the instruments.

Note 15 – Fair Value of Financial Instruments

Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value.

A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash.

Certain items are specifically excluded from the financial instrument fair value disclosure requirements, including the Company’s common stock, OREO, premises and equipment and other assets and liabilities.

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

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

June 30, 2023

December 31, 2022

(Dollars in thousands)

Financial assets

Level 1 inputs

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

September 30, 2023 Carrying Amount Fair Value Fair Value Measurements

Description of Asset (dollars in thousands)

Level 1 Level 2 Level 3

Cash and cash equivalents $ 108,709 $ 108,709 $ 108,709 $ — $ —

Level 2 inputs

Investment securities available for sale

Investment securities held to maturity

Investment securities - AFS 79,143 79,143 — 79,143 —

Investment securities - HTM, net 523,051 445,652 — 445,652 —

Equity securities 5,434 5,434 — 5,434 —

Restricted securities 13,361 13,361 — 13,361 —

Loans held for sale 14,725 14,725 — 14,725 —

TBA derivatives trades 359 359 — 359 —

Cash surrender value on life insurance 100,950 100,950 — 100,950 —

Loans, at fair value 9,302 9,302 — 9,302 —

Loans, net 4,551,366 4,425,585 — — 4,425,585

MSRs 5,890 5,890 — — 5,890

IRLCs 89 89 — — 89

Noninterest-bearing demand $ 1,211,401 $ 1,211,401 $ — $ 1,211,401 $ —

Checking plus interest 1,210,052 1,210,052 — 1,210,052 —

Money Market 1,179,049 1,179,049 — 1,179,049 —

Savings 370,049 370,049 — 370,049 —

Club 1,706 1,706 — 1,706 —

Certificates of Deposit 1,136,488 1,124,904 — 1,124,904 —

Subordinated debt 42,956 41,503 — 41,503 —

TRUPS 29,079 27,364 — 27,364 —

IRLCs 50 50 — — 50

See the Company’s methodologies disclosed in Note 21 of the Company’s 2022 Annual Report for the fair value methodologies used as of December 31, 2022:

December 31, 2022 Carrying Amount Fair Value Fair Value Measurements

Description of Asset (dollars in thousands)

Level 1 Level 2 Level 3

Cash and cash equivalents $ 55,499 $ 55,499 $ 55,499 $ — $ —

Investment securities - AFS 83,587 83,587 — 83,587 —

Investment securities - HTM 559,455 494,626 — 494,626 —

Equity securities 1,233 1,233 — 1,233 —

Restricted securities 11,169 11,169 — 11,169 —

Loans held for sale 4,248 4,248 — 4,248 —

TBA securities 41 41 — 41 —

1 unchanged sentence

Loans, at fair value 8,437 8,437 — 8,437 —

Level 3 inputs

Financial liabilities

Level 2 inputs

Loans, net 2,531,027 2,431,808 — — 2,431,808

MSRs 5,275 5,275 — — 5,275

IRLCs 35 35 — — 35

Noninterest-bearing demand $ 862,015 $ 862,015 $ — $ 862,015 $ —

Checking plus interest 694,101 694,101 — 694,101 —

Money Market 709,132 709,132 — 709,132 —

Savings 319,814 319,814 — 319,814 —

Club 374 374 — 374 —

Certificates of Deposit 424,348 410,455 — 410,455 —

2 unchanged sentences

TBA Securities 6 6 — 6 —

Level 3 inputs

IRLCs 7 7 — — 7

Note 16 – Commitments and Contingencies

5 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 June 30, 2023 and December 31, 2022.

(Dollars in thousands)

June 30, 2023

December 31, 2022

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

(Dollars in thousands) September 30, 2023 December 31, 2022

Commitments to extend credit $ 618,628 $ 406,353

Letters of credit 28,896 8,009

Total $ 647,524 $ 414,362

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 the growing, processing, and sales of cannabis in a manner that complies with applicable state law, such customers engaged in those activities currently violate Federal law.

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 to the Company’s existing Maryland customers with multi-state operations.

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

law, such customers engaged in those activities currently violate Federal laws.

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

1 unchanged sentence

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

As of September 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 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.

• Deposit and loan balances at September 30, 2023 were approximately $ 175.5 million, or 3.4 % of total deposits, and $ 76.2 million, or 1.7 % of total gross loans, respectively.

• Interest and noninterest income for the nine months ended September 30, 2023, were approximately $ 7.2 million and $ 0.8 million, respectively.

In the normal course of business, the Company 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 17 – Earnings Per 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.

The following table provides information relating to the calculation of earnings per common share.

Three Months Ended September 30, Nine Months Ended September 30,

(In thousands, except per share data) 2023 2022 2023 2022

Net (Loss)/Income $ ( 6,384 ) $ 9,658 $ 4,091 $ 22,769

Average number of common shares outstanding 33,129 19,852 24,354 19,842

Dilutive effect of common stock equivalents — — — —

Average number of shares used to calculate diluted EPS 33,129 19,852 24,354 19,842

Anti-dilutive shares 219 — 219 —

Earnings per common share

Basic $ ( 0.19 ) $ 0.49 $ 0.17 $ 1.15

Diluted $ ( 0.19 ) $ 0.49 $ 0.17 $ 1.15

There were no potentially dilutive shares outstanding during the three and nine months ended September 30, 2022.

Note 18 – Revenue Recognition

8 unchanged sentences

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.

Trust and investment fee income primarily comprise 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.

10 unchanged sentences

All contract issuance costs are expensed as incurred.

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

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

Other Noninterest Income

2 unchanged sentences

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.

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 Mastercard and VISA.

ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM.

5 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 and six months ended June 30, 2023 and 2022.

For the Three Months Ended

For the Six Months Ended

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

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in thousands) 2023 2022 2023 2022

9 unchanged sentences

Total Noninterest Income $ 18,337 $ 5,344 $ 28,966 $ 17,224

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.

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