SHORE BANCSHARES INC 10-Q/A

Item 2 – Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations. Unless the context clearly suggests otherwise, references to “the Company”, “we”, “our”, and “us” in the remainder of this Amendment No. 1 on Form 10-Q/A (this “Amended Quarterly Report” or “Form 10-Q/A”) are to Shore Bancshares, Inc. and its consolidated subsidiaries. Forward-Looking Information This Amended Quarterly Report contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events, our financial performance, the Company’s expectations regarding the impact of the error in the Unaudited Financial Statements and our ability to remediate the material weakness in our internal control over financial reporting. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “goal,” “target,” “would,” “aim” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence. In addition, we cannot assess the impact of each risk and uncertainty on our business or the extent to which any risk or uncertainty, or combination of risks and uncertainties, may cause actual results to differ materially from those contained in any forward-looking statements. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Amended Quarterly Report and other reports and registration statements filed by us with the SEC. For information on the factors that could cause actual results to differ from the expectations stated in the forward- looking statements, see “Risk Factors” under Part II, Item 1A of this Amended Quarterly Report, “Risk Factors” under Part I, Item 1A of our 2022 Form 10-K, Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, and other reports filed by us with the SEC. Any forward-looking statement speaks only as of the date of this Amended Quarterly Report, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether because of new information, future developments or otherwise, except as required by law. Critical Accounting Policies The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. The most significant accounting policies that the Company follows are presented in Note 1 of the 2022 Annual Report along with Note 2 of the current period interim financial information. These policies, along with the disclosures presented in the notes to the financial statements and in this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies the ACL on loans and goodwill are critical accounting policies. These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available. Allowance for Credit Losses on Loans The Company adopted ASU No. 2026-13, “Financial Instruments – Credit Losses (Topic 326)”, as amended, on January 1, 2023 and in accordance with ASC 326, has recorded an ACL on loans carried at amortized cost. The ACL represents management’s best estimate of expected lifetime credit losses within the Company's loan portfolio as of the balance sheet date. The ACL is established through a provision for credit losses and is increased by recoveries of loans previously charged off. Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. The calculation of expected credit losses is determined using cash flow methodology, and includes considerations of historical experience, current conditions, and reasonable and supportable economic forecasts that may affect collection of the recorded balances. The Company assesses an ACL to groups of loans which share similar risk characteristics or on an individual basis, as deemed appropriate. Changes in the ACL on loans, and 44 Table of Contents as a result, the related provision for credit losses, can materially affect financial results. Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for loans in the portfolio. The determination of the appropriate level of ACL on loans inherently involves a high degree of subjectivity and requires the Company to make significant judgments concerning credit risks and trends using quantitative and qualitative information, as well as reasonable and supportable forecasts of future economic conditions, all of which may undergo frequent and significant changes. Changes in conditions, including unforeseen events, changes in asset-specific risk characteristics, and other economic factors, both within and outside the Company's control, may indicate the need for an increase or decrease in the ACL on loans. While management makes every effort to utilize the best information available in making its assessment of the ACL estimate, the estimation process is inherently challenging as potential changes in any one factor or input may occur at different rates and/or impact pools of loans in different ways. Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others. The Company’s management reviews the adequacy of the ACL on loans on at least a quarterly basis. Refer to Note 2, “Adoption of Accounting Standards”, of the interim consolidated financial information for additional detail concerning the determination of the ACL on loans. Goodwill and Bargain Purchase Gain Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate. Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill. If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss. A bargain purchase gain represents the excess of the fair value of net assets acquired over the cost of an acquisition. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgement. Bargain purchase gain is recorded within noninterest income in the period it was generated. An acquirer has a measurement period to finalize the accounting for a business combination which could adjust bargain purchase gain if material facts or circumstances arise. Loans Acquired in a Business Combination Acquired loans are classified as either (i) purchase credit-deteriorated (“PCD”) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition. PCD loans are those for which there is more than insignificant evidence of credit deterioration since origination. When determining fair value, PCD loans are aggregated into pools based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. At the acquisition date, the ACL is determined and added to the fair value of the loan to determine the new amortized cost basis. The difference between the new amortized cost basis and the unpaid principal balance is either a noncredit discount or premium that will be amortized or accredited into the interest income over the remaining life of the loan. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCD loan portfolio at its carrying amount. The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. Purchased performing loans do not have a more-than-insignificant deterioration in credit quality since origination and have an ACL established in a manner that is consistent with the Company originated loans. The allowance for PCD loans is determined based upon the Company’s methodology for estimating the allowance under CECL, and is recorded as an adjustment to the acquired loan balance on the date of acquisition. Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records a reserve for credit losses based on the Company’s methodology for determining the allowance under CECL. The allowance for non-PCD loans is recorded through a charge to provision for credit losses in the period in which the loans were purchased or acquired. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The Company accounts for income taxes using the liability method in accordance with required accounting guidance. Under this method, deferred tax assets and liabilities are determined by applying the applicable federal and state income tax rates to cumulative temporary differences. These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities. Deferred taxes result from such temporary differences. 45 Table of Contents Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent on the generation of a sufficient level of future taxable income, recoverable taxes paid in prior years and tax planning strategies. The Company evaluates all positive and negative evidence before determining if a valuation allowance is deemed necessary regarding the realization of deferred tax assets. The Company recognizes accrued interest and penalties as a component of tax expense. The provision for income taxes includes the impact of reserve provisions and changes in the reserves that are considered appropriate as well as the related net interest and penalties. In addition, the Company is subject to the continuous examination of its income tax returns by the IRS and other tax authorities which may assert assessments against the Company. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of its provision for income taxes. The Company remains subject to examination for tax years ending on or after December 31, 2020. Introduction The following MD&A is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented elsewhere in this report, as well as the audited consolidated financial statements and related notes included in the 2022 Annual Report. Shore Bancshares, Inc. is headquartered on the Eastern Shore of Maryland. It is the parent company of Shore United Bank, N.A. (the “Bank”). The Bank operates 42 full-service branches in Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County, Anne Arundel County, Charles County, St Mary's County, Calvert County and Worcester County in Maryland, Kent County and Sussex County in Delaware and Accomack County and Spotsylvania County in Virginia. The Company engages in trust and wealth management services through Wye Financial Partners, a division of Shore United Bank, N.A. The Company also engages in title work for real estate transactions through its wholly-owned subsidiary, Mid-Maryland Title Company, Inc. The shares of common stock of Shore Bancshares, Inc. are listed on the NASDAQ Global Select Market under the symbol “SHBI”. Shore Bancshares, Inc. maintains an Internet site at www.shorebancshares.com on which it makes available free of charge its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC. OVERVIEW Third quarter results include the successful completion of the merger (the “merger”) on July 1, 2023 with The Community Financial Corporation (“TCFC”) with total assets exceeding $5.7 billion for the combined company. In the third quarter of 2023, the Company’s net loss was $9.7 million (as restated) or $(0.29) (as restated) per diluted common share compared to net income of $4.0 million or $0.20 per diluted common share for the second quarter of 2023, and net income of $9.7 million or $0.49 per diluted common share for the third quarter of 2022. Net income for the first nine months of 2023 was $0.7 million (as restated) or $0.03 (as restated) per diluted common share, compared to net income for the first nine months of 2022 of $22.8 million or $1.15 per diluted common share. The Company’s financial results for any periods ended prior to July 1, 2023 reflect the Company’s results only on a standalone, pre-merger basis. As a result of the merger, the Company’s financial results for the third quarter of 2023 may not be directly comparable to prior reported periods. Third Quarter 2023 Highlights: Merger with TCFC The Company acquired TCFC and its wholly-owned subsidiary Community Bank of the Chesapeake (“CBTC”) on July 1, 2023. The merger and acquisition method of accounting was used to account for the transaction with the Company as the acquirer. The Company recorded the assets and liabilities of TCFC at their respective fair values as of July 1, 2023. The transaction was valued at approximately $153.6 million and expanded the Bank’s footprint into the Southern Maryland Counties of Charles, St. Mary’s and Calvert and the greater Fredericksburg area in Virginia, which includes, Stafford and Spotsylvania Counties. This acquired market area is one of the fastest growing regions in the country and is home to a mix of federal facilities and industrial and high-tech businesses. These areas boast a strong median household income, low unemployment and projected population growth better than national averages . Based on information from the U.S. Bureau of Labor Statistics, unemployment rates in legacy CBTC’s footprint have historically remained well below the national average. 46 Table of Contents At the time of the acquisition, TCFC added $2.4 billion in assets, $454.5 million in investments, $1.8 billion in loans, $2.0 billion in deposits, $150.6 million in brokered deposits, $69.0 million in FHLB advances and $32.0 million in subordinated debt and trust preferred debentures. The excess of the fair value of net TCFC assets acquired over the merger consideration resulted in an $8.8 million bargain purchase gain. For the three months ended September 30, 2023, the Company incurred net expenses of $31.2 million related to the merger with TCFC including acquisition costs of $14.9 million, losses from the sale of CBTC legacy securities of $2.2 million and, increases to the ACL of $20.1 million. In addition, the Company changed its method of estimating the ACL, which resulted in an increase of $7.3 million related to legacy SHBI loans. These expenses were partially offset by non-recurring revenues including a net transition payment of $1.1 million to move CBTC’s securities broker of record to the Bank’s broker of record and a bargain purchase gain of $8.8 million (as restated). For the first six months of 2023, the Company incurred $1.9 million in merger and acquisition costs. The Company incurred net expenses related to the merger and non-recurring merger related activities with TCFC of $33.1 million for the nine months ended September 30, 2023. As a result of the merger, fair value accounting adjustments, net accretion interest income increased $5.1 million to $5.4 million for the three months ended September 30, 2023 compared $0.3 million for the three months ended June 30, 2023. In addition, the Bank’s core deposit intangible (“CDI”) increased to $50.7 million at September 30, 2023 from $5.5 million at December 31, 2022. The increase in the CDI resulted in increased CDI amortization of $2.2 million to $2.6 million for the three months ended September 30, 2023 compared to $0.4 million for the three months ended June 30, 2023. Capital The TCFC merger led to a 20% dilution in tangible book value per share which was $11.70 (as restated) at September 30, 2023 compared to $14.83 at June 30, 2023. The principal cause of the dilution was due to the Company’s stock price decline between the announcement date of December 14, 2022 and legal close date of July 1, 2023. In addition, fair value discount adjustments of approximately $110.0 million to the acquired loan portfolio due to increasing interest rates in the last 12-18 months had an impact on the dilution. The Company’s tangible common equity ratio at September 30, 2023 was 6.93% (as restated). The Company’s Tier 1 and Total Risk-Based Capital Ratios at September 30, 2023 were 9.10% (as restated) and 11.26% (as restated), respectively. The Bank’s Tier 1 and Total Risk-Based Capital Ratios at September 30, 2023 were 9.85% (as restated) and 11.09% (as restated), respectively. The loan fair value adjustments will accrete back through income (and capital) as the loans mature and should lead to earnings per share accretion moving forward. Margin Expansion The Company sold most of AFS securities portfolio acquired from TCFC for net proceeds of $434.2 million and used $380.0 million to reduce higher cost FHLB advances and brokered deposits. As a result of this balance sheet restructuring, net interest margin (“NIM”) increased to 3.35% for the third quarter of 2023 from 2.68% for the second quarter of 2023. Excluding net accretion interest income of $5.4 million and $0.3 million for the same time periods, NIM increased 32 basis points to 2.96% for the third quarter of 2023 from 2.64% for the second quarter of 2023. Funding and Liquidity Total funding, which includes customer deposits, FHLB advances, and brokered deposits, increased $1.9 billion from $3.2 billion at June 30, 2023 to $5.1 billion at September 30, 2023. The Bank had no FHLB advances at September 30, 2023. The Bank's uninsured deposits at September 30, 2023 greater than the Federal Deposit Insurance Corporation's ("FDIC") $250,000 insurance limit were $1.0 billion or 19.76% of total deposits. At September 30, 2023, there were $144.9 million included in uninsured deposits that the Bank secured using the market value of pledged collateral. The Bank's uninsured deposits, excluding the market value of pledged collateral, at September 30, 2023 were $864.6 million or 16.92% of total deposits. At September 30, 2023, the Bank had approximately $1.1 billion of available liquidity including: $108.7 million in cash, $954.4 million in secured borrowing capacity at the FHLB and the other correspondent banks, and $35.0 million in unsecured lines of credit. At September 30, 2023, available liquidity of approximately $1.1 billion was 127% of uninsured deposits of $864.6 million, excluding the market value of pledged collateral. During the third quarter, the merger drove a 73.91% quarterly increase in total deposits to $5.1 billion and a 55.5% quarterly increase in noninterest bearing (“NIB”) deposits to $1.2 billion. At September 30, 2023, brokered deposits amounted to $111.0 million or 2.2% of total deposits. The Bank’s loan to deposit ratio at September 30, 2023 was 89%. Increased Allowance for Credit Losses (“ACL”) The ACL increased from $29.0 million and 1.05% of total loans at June 30, 2023 to $57.1 million and 1.24% of total loans at September 30, 2023. The Bank's provision for credit losses for the third quarter of 2023 was $28.2 million and consisted of $20.1 million related to the acquisition of TCFC legacy loans including $0.2 million related to unfunded commitments to extend credit, $7.3 million due 47 Table of Contents to a change in ACL methodology on the Bank’s legacy loans and $0.8 million related to third quarter activity. Management believes that the allowance was adequate as of September 30, 2023. Asset Quality: Non-accrual loans, other real estate owned (“OREO”) and loan modifications to borrowers' experiencing financial difficulties ("BEFDs") were $9.2 million or 0.16% of total assets at September 30, 2023 compared to $3.9 million or 0.11% of total assets at December 31, 2022, and $4.7 million or 0.13% of total assets at June 30, 2023. Classified assets increased $8.4 million to $11.1 million or 0.19% of total assets at September 30, 2023 from $2.7 million or 0.08% of total assets at December 31, 2022. Classified assets are substandard loans and OREO. The increase in classified assets was due to the acquisition of TCFC classified loans of $5.1 million, the Company’s legacy classified loans of $5.8 million and OREO of $0.2 million at September 30, 2023. The modest increase in nonperforming and classified assets was the result of a small increase in late payments in consumer loans and a proactive review of larger commercial relationships in the current interest rate environment. 48 Table of Contents SUMMARY OF OPERATING RESULTS A comparison of the results of operations for the three and nine months ended September 30, 2023 and September 30, 2022 is presented below. Unaudited (QTD) Unaudited (YTD) Three Months Ended September 30, Nine Months Ended September 30, (Dollars in thousands) 2023 2022 2023 2022 (As Restated) (As Restated) OPERATING DATA Interest income $ 71,248 $ 30,576 $ 142,943 $ 81,566 Interest expenses 25,626 3,261 49,161 7,207 Net interest income (“NII”) 45,622 27,315 93,782 74,359 Provision for credit loses 28,176 675 30,056 1,475 NII after provision for credit losses 17,446 26,640 63,726 72,884 Noninterest income 14,984 5,344 25,613 17,224 Noninterest expenses 47,158 18,899 89,661 59,323 (Loss)/income before income tax taxes (14,728) 13,085 (322) 30,785 Income tax (benefit) expense (4,991) 3,427 (1,060) 8,016 Net (loss) income $ (9,737) $ 9,658 $ 738 $ 22,769 Unaudited (QTD) Unaudited (YTD) Three Months Ended September 30, Nine Months Ended September 30, (Dollars in thousands, except per share amounts) 2023 2022 2023 2022 (As Restated) (As Restated) KEY OPERATING RATIOS Return on average assets (“ROAA”) (0.67) % 1.11 % 0.02 % 0.88 % Return on average equity (“ROAE”) (7.25) 10.72 0.24 8.59 Return on average tangible equity (“ROATCE”) Non-GAAP (1) 1.74 13.98 6.27 11.63 Average total equity to average total assets 9.24 10.38 9.77 10.29 Interest rate spread 2.61 3.18 2.46 2.95 Net interest margin 3.35 3.38 3.12 3.09 Efficiency ratio (2) 77.81 57.87 75.10 64.78 Non-interest income to average assets 1.03 0.62 0.80 0.67 Non-interest expense to average assets 3.24 2.18 2.79 2.30 Net operating expense to average assets (3) 2.21 1.56 1.99 1.63 COMMON SHARE DATA Basic and diluted net (loss) income per common share $ (0.29) $ 0.49 $ 0.03 $ 1.15 Cash dividends paid per common share $ 0.12 $ 0.12 $ 0.36 $ 0.36 Common dividend payout ratio (40.83) % 24.49 % 1192.05 % 31.30 % ____________________________________ (1) ROATCE is computed by dividing net earnings applicable to common shareholders by average tangible common shareholders' equity. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. Refer to Use of Non-GAAP Financial Measures for additional details. (2) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income. (3) Net operating expense is the sum of noninterest expense offset by noninterest income. 49 Table of Contents RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 Summary of Financial Results The Company reported a net loss for the three months ended September 30, 2023 of $9.7 million or ($0.29) diluted earnings per share compared to net income of $9.7 million or diluted earnings per share of $0.49 for the three months ended September 30, 2022. The Company’s ROAA, ROACE 1 and ROATCE 2 were (0.67)%, (7.25)% and 1.74% for the three months ended September 30, 2023 compared to 1.11%, 10.72% and 13.98% for the three months ended September 30, 2022. The Company’s net loss in the third quarter of 2023 compared to net income for the same quarter in 2022, was primarily due to merger activity with merger related expenses and increased provision for loan losses being the largest drivers of the net loss. These decreases to pretax earnings were partially offset by increased net interest income from an increased balance sheet as a result of the merger with TCFC. The increase to noninterest income was principally due to the bargain purchase gain of $8.8 million recognized in the third quarter of 2023. Three Months Ended September 30, (Dollars in thousands) 2023 2022 $ Change % Change (As Restated) Interest and dividend income $ 71,248 $ 30,576 $ 40,672 133.02 % Interest expenses 25,626 3,261 22,365 685.83 % Net interest income 45,622 27,315 18,307 67.02 % Provision for credit losses 28,176 675 27,501 4074.22 % Noninterest income 14,984 5,344 9,640 180.39 % Noninterest expenses 47,158 18,899 28,259 149.53 % Income before income taxes (14,728) 13,085 (27,813) (212.56) % Income tax (benefit) expense (4,991) 3,427 (8,418) (245.64) % Net (loss) income $ (9,737) $ 9,658 $ (19,395) (200.82) % Net Interest Income Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, tax-equivalent net interest income was $45.7 million for the third quarter of 2023 and $27.4 million for the third quarter of 2022. The increase in net interest income when compared to the prior periods was primarily due to the overall increased size of the balance sheet from the merger in the third quarter of 2023. Three Months Ended September 30, (Dollars in thousands) 2023 2022 $ Change % Change Interest and dividend income Loans, including fees $ 64,869 $ 25,924 $ 38,945 150.23 % Interest and dividends on investment securities 5,166 3,186 1,980 62.15 % Interest on deposits with banks 1,213 1,466 (253) (17.26) % Total Interest and Dividend Income $ 71,248 $ 30,576 $ 40,672 133.02 % Interest Expenses Deposits $ 23,473 $ 2,561 $ 20,912 816.56 % Short-term borrowings 692 — 692 — % Long-term debt 1,461 700 761 108.71 % Total Interest Expenses $ 25,626 $ 3,261 $ 22,365 685.83 % Taxable-equivalent adjustment $ 80 $ 35 $ 45 128.57 % Tax Equivalent Net Interest Income $ 45,702 $ 27,350 $ 18,352 67.10 % ____________________________________ 1 For additional details, see "Reconciliation of Non-GAAP Measures (Unaudited)”. 2 For additional details, see "Reconciliation of Non-GAAP Measures (Unaudited)”. 50 Table of Contents Average Balances and Yields The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. Tax-equivalent adjustments were made. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effects of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Three Months Ended September 30, Three Months Ended September 30, 2023 2022 (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (As Restated) Earning assets Loans (1), (2), (3) Consumer real estate $ 1,141,707 $ 14,548 5.06 % $ 743,227 $ 7,990 4.27 % Commercial real estate 2,831,569 40,536 5.68 1,201,785 13,668 4.51 Commercial 233,756 5,315 9.02 152,182 1,984 5.17 Consumer 332,486 4,183 4.99 209,891 2,146 4.06 State and political 929 10 4.27 1,504 15 3.96 Credit Cards 6,164 149 9.59 — — — Other 16,137 201 4.94 18,690 157 3.87 Total Loans 4,562,748 64,942 5.65 2,327,279 25,960 4.43 Investment securities: Taxable 778,081 5,047 2.59 618,378 3,185 2.06 Tax-exempt (1) 663 34 20.51 — — — Federal funds sold 7,533 92 4.85 — — — Interest-bearing deposits 55,547 1,213 8.66 264,576 1,466 2.20 Total earning assets 5,404,572 71,328 5.24 % 3,210,233 30,611 3.78 % Cash and due from banks 51,714 31,724 Other assets 359,726 218,163 Allowance for credit losses (46,700) (15,755) Total assets $ 5,769,312 $ 3,444,365 51 Table of Contents Three Months Ended September 30, Three Months Ended September 30, 2023 2022 (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (As Restated) Interest-bearing liabilities Demand deposits $ 1,056,956 $ 6,659 2.50 % $ 646,399 $ 1,070 0.66 % Money market and savings deposits 1,572,920 6,810 1.72 1,034,580 907 0.35 Brokered deposits 98,649 1,225 4.93 — — — Certificates of deposit $100,000 or more 706,642 6,272 3.52 222,697 308 0.55 Other time deposits 285,743 2,507 3.48 215,014 275 0.51 Interest-bearing deposits (4) 3,720,910 23,473 2.50 2,118,690 2,560 0.48 Advances from FHLB - short-term 70,348 692 3.90 — — — Advances from FHLB - long-term — — — 10,035 16 0.63 Subordinated debt and Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") (4) 71,907 1,461 8.06 42,953 685 6.33 Total interest-bearing liabilities 3,863,165 25,626 2.63 % 2,171,678 3,261 0.60 % Noninterest-bearing deposits 1,345,976 893,968 Accrued expenses and other liabilities 27,057 21,336 Stockholders’ equity 533,114 357,383 Total liabilities and stockholders’ equity $ 5,769,312 $ 3,444,365 Net interest income $ 45,702 $ 27,350 Net interest spread 2.61 % 3.18 % Net interest margin 3.35 % 3.38 % Cost of Funds 1.95 % 0.42 % Cost of Deposits 1.84 % 0.34 % Cost of Debt 6.00 % 5.25 % Tax-equivalent adjustment Loans $ 73 $ 35 Investment securities 7 — Total $ 80 $ 35 ____________________________________ (1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense. (2) Average loan balances include nonaccrual loans. (3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations. There were $6.1 million and $0.3 million of accretion interest on loans for the three months ended September 30, 2023 and 2022, respectively. (4) Interest expense on deposits and borrowing includes amortization of deposit premiums and amortization of borrowing fair value adjustment. There were $(0.5) million and $0.2 million of amortization of deposits premium, and $(0.2) million and $(47,000) of amortization of borrowing fair value adjustment for the three months ended September 30, 2023 and 2022, respectively. 52 Table of Contents The following table presents changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume. Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022 Volume Due to Rate Total Interest income: Loan Portfolio Consumer real estate $ 5,082 $ 1,476 $ 6,558 Commercial real estate 23,333 3,535 26,868 Commercial 1,855 1,477 3,332 Consumer 1,542 495 2,037 State and political (6) 1 (5) Credit Cards 149 — 149 Other (32) 75 43 Taxable investment securities 1,034 828 1,862 Tax-exempt investment securities 34 — 34 Fed funds sold 92 — 92 Interest-bearing deposits (4,563) 4,310 (253) Total interest income $ 28,520 $ 12,197 $ 40,717 Interest-bearing liabilities: Interest-bearing demand deposits $ 2,587 $ 3,002 $ 5,589 Money market and savings deposits 2,334 3,570 5,904 Certificate of deposits 6,140 3,281 9,421 Advances from FHLB - Short-term 692 — 692 Advances from FHLB - Long-term — (16) (16) Subordinated debt 588 187 775 Total interest-bearing liabilities $ 12,341 $ 10,024 $ 22,365 Net change in net interest income $ 16,179 $ 2,173 $ 18,352 Fluctuations in net interest income can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities. Net interest income was $45.6 million for the third quarter of 2023, compared to $27.3 million for the third quarter of 2022. The increase in net interest income when compared to the prior period was primarily due to the overall increased size of the balance sheet from the merger in the third quarter of 2023 as well as increases in net accretion interest income. Net accretion interest income for the three months ended September 30, 2023 and September 30, 2022 was $5.4 million and $0.5 million, respectively. Over the last 18 months, deposits have repriced at a faster rate than loans due to the Federal Reserve Open Market Committee’s increases in short-term interest rates from 0.25% to 5.50%. The Company’s NIM decreased to 3.35% for the third quarter of 2023 from 3.38% for the third quarter of 2022 as the increase in funding costs slightly exceeded the additional interest income from accretion interest from fair value marks, higher yields on CBTC’s legacy loan portfolio, and the benefits to margin for the paydown of higher cost wholesale funding with the proceeds received from the sale of CBTC’s securities portfolio in July 2023. The Company’s increase in the cost of funds was seven basis points greater than the increase in interest-earning asset yields for the comparable periods. Comparing the third quarter of 2023 to the third quarter of 2022, the Company’s interest-earning asset yields increased 146 basis points, while the cost of funds increased 153 basis points. 53 Table of Contents Provision for Credit Losses (“PCL”) and Allowance for Credit Losses (“ACL”) See discussion of the Bank’s PCL and ACL in the asset quality discussion in the analysis of financial condition in this MD&A. Noninterest Income Total noninterest income for the third quarter of 2023 of $15.0 million increased $9.6 million from $5.3 million for the third quarter of 2022, primarily due to the bargain purchase gain of $8.8 million and an increase of $1.1 million in trust and investment fee income both the result of the merger, partially offset by a loss of $2.2 million on the sale of investment securities in the third quarter of 2023. Management sold virtually all of CBTC’s AFS investment securities soon after the merger close on July 1, 2023. The $2.2 million loss relates to the difference in the fair values of the securities on July 1, 2023 compared to actual sales proceeds received from the sales on the settlement date. Noninterest Expense Total noninterest expense of $47.2 million for the third quarter of 2023 increased $28.3 million or 149.5%, when compared to the third quarter of 2022 expense of $18.9 million. The increases in noninterest expense for the comparable periods were primarily due to merger related expenses and the addition of headcount and infrastructure, including 11 additional branches, amortization of intangible assets, and core processing fees. The Bank’s average full-time equivalent employees (“FTEs”) increased from 453 FTEs for the third quarter of 2022 to 660 FTEs for the third quarter of 2023. Excluding merger related expenses and amortization of core deposit intangible, of $17.5 million for the third quarter of 2023 and $0.7 million for the third quarter of 2022, noninterest expense for the comparable periods was $29.7 million and $18.2 million, respectively. Noninterest expense as a percentage of average assets increased to 3.24% for the three months ended September 30, 2023 from 2.18% for the three months ended September 30, 2022. Excluding merger related expenses and amortization of core deposit intangible for the comparable periods, noninterest expense as a percentage of average assets decreased to 2.04% for the third quarter of 2023 compared to 2.10% for the third quarter of 2022. Income Taxes The Company reported income tax benefit of $5.0 million for the third quarter of 2023, and an income tax expense of $3.4 million for the third quarter of 2022. The effective tax rate for the third quarter of 2023 was (33.9%) (as restated) and 26.2% for the third quarter of 2022. The third quarter 2023 effective tax rate was impacted by a net pre-tax loss, nondeductible merger costs, and reassessment of deferred tax assets and liabilities at an estimated effective tax rate due to an adjustment to state apportionment. The Company’s estimated effective tax rate applied to net deferred tax assets of $45.3 million (as restated) at September 30, 2023 was 27.52%. The Bank's deferred taxes are recorded at 26.00%. As of September 30, 2023 the Company recorded $42.5 million (as restated) and $38.3 million (as restated) of gross federal and state net operating loss carryovers, (“NOL’s”). These NOL’s will offset future taxable income to the Company. 54 Table of Contents RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 Summary of Financial Results The Company reported net income for the nine months ended September 30, 2023 of $0.7 million (as restated) or diluted earnings per share of $0.03 (as restated) compared to net income of $22.8 million or diluted earnings per share of $1.15 for the nine months ended September 30, 2022. The Company’s ROAA, ROACE 3 and ROATCE 4 were 0.02% (as restated), 0.24% (as restated)and 6.27% (as restated)for the nine months ended September 30, 2023 compared to 0.88% and 8.59% and 11.63% for the nine months ended September 30, 2022. The decrease to net income in the first nine months of 2023 compared to the same period in 2022 was primarily due to merger-related expenses and increased provision for loan losses. These decreases to pretax earnings were partially offset by increased net interest income from an increased balance sheet as a result of the merger. The increase to noninterest income was principally due to the bargain purchase gain recognized in the third quarter of 2023 of $8.8 million (as restated). Nine Months Ended September 30, (Dollars in thousands) 2023 2022 $ Change % Change (As Restated) Interest and dividend income $ 142,943 $ 81,566 $ 61,377 75.25 % Interest expenses 49,161 7,207 41,954 582.13 % Net interest income 93,782 74,359 19,423 26.12 % Provision for credit loses 30,056 1,475 28,581 1937.69 % Noninterest income 25,613 17,224 8,389 48.71 % Noninterest expenses 89,661 59,323 30,338 51.14 % Income before income taxes (322) 30,785 (31,107) (101.05) % Income tax (benefit) expense (1,060) 8,016 (9,076) (113.22) % Net income $ 738 $ 22,769 $ (22,031) (96.76) % Net Interest Income As shown in the table below, tax-equivalent net interest income increased $19.5 million to $94.0 million for the nine months ended September 30, 2023 compared to $74.5 million for nine months ended September 30, 2022. The increase in net interest income when compared to the prior period was primarily due to the overall increased size of the balance sheet from the merger and increased accretion interest income in the third quarter of 2023. On a year to date basis, $18.3 million or 93.8% of the $19.5 million increase from the comparable period was from third quarter 2023 merger activity and operations. Nine Months Ended September 30, (Dollars in thousands) 2023 2022 $ Change % Change Interest and dividend income Loans, including fees $ 128,424 $ 71,458 $ 56,966 79.72 % Interest and dividends on investment securities 12,973 7,562 5,411 71.56 % Interest on deposits with banks 1,546 2,546 (1,000) (39.28) % Total Interest and Dividend Income $ 142,943 $ 81,566 $ 61,377 75.25 % Interest Expenses Deposits $ 40,668 $ 5,429 $ 35,239 649.09 % Short-term borrowings 5,501 2 5,499 274,950.00 % Long-term debt 2,992 1,776 1,216 68.47 % Total Interest Expenses $ 49,161 $ 7,207 $ 41,954 582.13 % Taxable-equivalent adjustment $ 172 $ 117 $ 55 47.01 % Tax Equivalent Net Interest Income $ 93,954 $ 74,476 $ 19,478 26.15 % ____________________________________ 3 For additional details, see "Reconciliation of Non-GAAP Measures (Unaudited)”. 4 For additional details, see "Reconciliation of Non-GAAP Measures (Unaudited)”. 55 Table of Contents Average Balances and Yields The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the nine months ended September 30, 2023 and 2022. Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (As Restated) Earning assets Loans (1), (2), (3) Consumer real estate $ 990,970 $ 35,929 4.85 % $ 660,611 $ 23,491 4.75 % Commercial real estate 1,806,983 71,328 5.28 % 1,161,237 36,706 4.23 % Commercial 171,702 9,312 7.25 % 210,192 5,863 3.73 % Consumer 318,066 11,440 4.81 % 179,054 4,957 3.70 % State and political 936 27 3.86 % 1,791 53 3.96 % Credit Cards 2,077 149 9.59 % — — — % Other 11,192 400 4.78 % 22,207 505 2.90 % Total Loans 3,301,926 128,585 5.21 % 2,235,092 71,575 4.28 % Investment securities: Taxable 692,718 12,840 2.47 565,535 7,562 1.79 Tax-exempt (1) 664 52 10.44 — — — Federal funds sold 2,539 92 4.84 — — — Interest-bearing deposits 27,750 1,546 7.45 424,790 2,546 0.80 Total earning assets 4,025,597 143,115 4.75 % 3,225,417 81,683 3.39 % Cash and due from banks 36,831 14,383 Other assets 271,721 222,236 Allowance for credit losses (35,206) (15,095) Total assets $ 4,298,943 $ 3,446,941 56 Table of Contents Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (As Restated) Interest-bearing liabilities Demand deposits $ 813,834 13,808 2.27 % $ 627,213 1,652 0.35 % Money market and savings deposits 1,163,595 11,709 1.35 1,046,230 2,027 0.26 Brokered deposits 33,244 1,225 4.93 — — — Certificates of deposit $100,000 or more 421,852 9,685 3.07 247,635 931 0.50 Other time deposits 239,834 4,241 2.36 204,283 819 0.54 Interest-bearing deposits (4) 2,672,359 40,668 2.03 2,125,361 5,429 0.34 Securities sold under retail repurchase agreements and federal funds purchased — — — 913 2 0.29 Advances from FHLB - short-term 148,546 5,501 4.95 — — — Advances from FHLB - long-term — — — 10,075 45 0.60 Subordinated debt and Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") (4) 52,839 2,992 7.57 42,878 1,731 5.40 Total interest-bearing liabilities 2,873,744 49,161 2.29 % 2,179,227 7,207 0.44 % Noninterest-bearing deposits 983,325 891,233 Accrued expenses and other liabilities 22,073 21,932 Stockholders’ equity 419,801 354,549 Total liabilities and stockholders’ equity $ 4,298,943 $ 3,446,941 Net interest income $ 93,954 $ 74,476 Net interest spread 2.46 % 2.95 % Net interest margin 3.12 % 3.09 % Cost of Funds 1.70 % 0.31 % Cost of Deposits 1.49 % 0.24 % Cost of Debt 5.64 % 4.48 % Tax-equivalent adjustment Loans $ 161 $ 117 Investment securities 11 — Total $ 172 $ 117 ____________________________________ (1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense. (2) Average loan balances include nonaccrual loans. (3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations. There were $7.0 million and $1.0 million of accretion interest on loans for the nine months ended September 30, 2023 and 2022, respectively. (4) Interest expense on deposits and borrowing includes amortization of deposit premiums and amortization of borrowing fair value adjustment. There were $(0.3) million and $0.4 million of amortization of deposits premium, and $(0.3) million and $(0.1) million of amortization of borrowing fair value adjustment for the nine months ended September 30, 2023 and 2022, respectively. 57 Table of Contents The following table presents changes in interest income and interest expense for the periods indicated. For each category of interest earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume. Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 Volume Due to Rate Total Interest income from earning assets: Loans Consumer real estate $ 11,984 $ 454 $ 12,438 Commercial real estate 25,501 9,121 34,622 Commercial (2,087) 5,536 3,449 Consumer 5,001 1,482 6,483 State and political (25) (1) (26) Credit Cards 149 — 149 Other (394) 289 (105) Taxable investment securities 2,356 2,922 5,278 Tax-exempt investment securities 52 — 52 Fed funds sold 92 — 92 Interest-bearing deposits (22,124) 21,123 (1,001) Total interest income $ 20,505 $ 40,926 $ 61,431 Interest-bearing liabilities: Interest-bearing demand deposits 3,169 8,987 12,156 Money market and savings deposits 1,185 8,497 9,682 Certificate of deposits 5,854 7,547 13,401 Securities sold under repurchase agreements and federal funds purchased — (2) (2) Advances from FHLB - Short-term 5,501 — 5,501 Advances from FHLB - Long-term — (45) (45) Subordinated debt 564 697 1,261 Total interest-bearing liabilities $ 16,273 $ 25,681 $ 41,954 Net change in net interest income $ 4,232 $ 15,245 $ 19,477 Net interest income for the first nine months of 2023 was $93.8 million, an increase of $19.4 million, or 26.1%, when compared to the first nine months of 2022. The increase in net interest income was primarily due to an increase in total interest income of $61.4 million, or 75.2%, which included an increase in interest and fees on loans of $57.0 million, or 79.7%. The increase of interest and fees on loans was primarily due to increases in loan yields and in the average balance of loans of $1.1 billion, or 47.7%, largely due to the merger. Interest on investment securities increased $5.3 million, or 69.8%, primarily due to an increase in the average balance of $127.2 million, or 22.5%. Increases to net interest income were partially offset by increased total interest expense of $42.0 million, or 582.1%, primarily due to increases in the cost of funds and in the average balance of interest-bearing deposits of $547.0 million, or 25.7%, largely due to the merger. The Company’s NIM increased to 3.12% for the first nine months of 2023 from 3.09% for the first nine months of 2022. The increase in the NIM was primarily due to an increase in the average balance and rates earned on total earning assets of $800.2 million and 136 basis points, partially offset by an increase in the average balance and rates paid on interest-bearing liabilities of $694.5 million and 185 basis points. For the comparable periods, the cost of funds increased at a similar rate as interest-earning assets or 139 basis points to 1.70% for the nine months ended September 30, 2023 compared to 0.31% for the nine months ended September 30, 2022. Total net accretion income for the first nine months of 2023 was $6.4 million, compared to $1.2 million for the first nine months of 2022. Prior to the balance sheet restructuring in the third quarter of 2023, the NIM experienced compression due to the Company’s liability sensitive position, deposit rate pressures, and significantly higher FHLB borrowing rates. Provision for Credit Losses and Allowance for Credit Losses See discussion of the Bank’s PCL and ACL in the asset quality discussion in the analysis of financial condition in this MD&A. 58 Table of Contents Noninterest Income Total noninterest income for the nine months ended September 30, 2023 of $25.6 million (as restated) increased $8.4 million or 48.7% from $17.2 million for the nine months ended September 30, 2022. The increase in noninterest income was primarily due to the bargain purchase gain of $8.8 million (as restated) and an increase of $1.4 million in trust and investment fee income of which $1.1 million of the increase related to the transition of customers to a new broker of record for the Bank's investment division. Both the bargain purchase gain and the transition payment were the result of the merger. Additionally, interchange income increased $0.5 million due to a larger customer base and increased transaction activity. These increases to noninterest income were partially offset by a $2.2 million loss on sales of investment securities in the third quarter and a decrease of $0.7 million in title company revenue. Management sold virtually all of CBTC’s AFS investment securities soon after the merger close on July 1, 2023. The $2.2 million loss relates to the difference in the fair values of the securities on July 1, 2023 compared to actual sales proceeds received from the sales on the settlement date. Title company revenues have fallen in 2023 as real estate settlement activity has decreased in 2023 due to higher interest rates. Noninterest Expense Total noninterest expense of $89.7 million for the nine months ended September 30, 2023 increased $30.3 million, or 51.1%, when compared to $59.3 million for the same period in 2022. Almost all noninterest expense line items increased as a result of the merger and the expanded operations of the newly combined Company. Merger-related expenses were almost entirely captured during the third quarter of 2023 and totaled $16.8 million for the first nine months of 2023, compared to $1.1 million for the first nine months of 2022. Excluding merger and acquisition costs and core deposit amortization, of $20.3 million for the first nine months of 2023 and $2.7 million for the first nine months of 2022, noninterest expense for the comparable periods was $69.4 million and $56.7 million, respectively. Noninterest expense as a percentage of average assets increased to 2.79% for the nine months ended September 30, 2023 from 2.30% for the nine months ended September 30, 2022. Excluding merger and acquisition costs and core deposit amortization for the comparable periods, noninterest expense as a percentage of average assets decreased to 2.16% for the nine months ended September 30, 2023 compared to 2.20% for the nine months ended September 30, 2022. As the Company continues its merger integration, a key focus of management will be to streamline processes, unlock operational efficiencies and reduce overall noninterest expense. Income Taxes The Company reported income tax benefit of $1.1 million for the nine months ended September 30, 2023, and income tax expense of $8.0 million for the nine months ended September 30, 2022. The effective tax rate was (329.1%) (as restated)for the nine months ended September 30, 2023, and 26.0% for the nine months ended September 30, 2022. The 2023 effective tax rate was impacted by nondeductible merger costs incurred. The Company’s estimated effective tax rate applied to net deferred tax assets of $45.3 million (as restated) at September 30, 2023 was 27.52%. The Bank's deferred taxes are recorded at 26.00%. As of September 30, 2023 the Company recorded $42.5 million (as restated) and $38.3 million (as restated) of gross federal and state net operating loss carryovers, (“NOL’s”). These NOL’s will offset future taxable income to the Company. 59 Table of Contents ANALYSIS OF FINANCIAL CONDITION Balance Sheet Summary Total assets were $5.7 billion at September 30, 2023, an increase of $2.2 billion or 64.1%, when compared to $3.5 billion at December 31, 2022. The aggregate increase was primarily due to the merger, with significant increases in loans held for investment of $2.1 billion, or 80.7%, and cash and cash equivalents of $53.2 million, partially offset by an increase in ACL of $40.4 million. The ratio of the allowance for credit losses on loans to total loans increased from 0.65% at December 31, 2022, to 1.05% at June 30, 2023 and 1.24% at September 30, 2023. The increases were due to the adoption of CECL on January 1, 2023 and the merger with TCFC in July 2023. Due to a lack of uniformity of historical data between the legacy banks in their respective CECL models, management implemented a new post-merger model methodology. The Bank's provision for credit losses for the third quarter of 2023 was $28.2 million and consisted of approximately $20.1 million related to the acquisition of TCFC legacy loans, $7.3 million due to the change in ACL methodology on the Bank’s legacy loans and $0.8 million related to third quarter activity. Cash and Cash Equivalents Cash and cash equivalents totaled $108.7 million at September 30, 2023, compared to $55.5 million at December 31, 2022. Total cash and cash equivalents fluctuate due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and wholesale funding sources, and the portions of the investment and loan portfolios that mature within one year. In addition, management sold low cost deposits during the third quarter of 2023 to manage liquidity and earn additional interest income of $0.4 million, earning greater than a 4.5% yield. These funds are off-balance sheet and totaled $68.7 million at September 30, 2023. These sold deposits are available daily if needed to fund the Bank’s operating needs. Investment Securities The investment portfolio includes debt and equity securities. Securities are classified as either AFS or HTM. AFS investment securities are stated at estimated fair value based on market prices. They represent securities which may be sold as part of the asset/liability management strategy or in response to changing interest rates. Net unrealized holding gains and losses on these securities are reported net of related income taxes as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Investment securities in the HTM category are stated at cost adjusted for amortization of premiums and accretion of discounts and the ACL. We have the intent and ability to hold such securities until maturity. At September 30, 2023, 13.1% of the portfolio of debt securities was classified as AFS and 86.9% was classified as HTM, compared to 13.0% and 87.0% respectively, at December 31, 2022. See Note 4 – “Investment Securities”, in the Notes to Consolidated Financial Statements for additional details on the composition of our investment portfolio. Investment securities, including restricted stock and equity securities, totaled $621.0 million at September 30, 2023, a $34.5 million, or 5.3%, decrease compared to $655.4 million at December 31, 2022. The Bank acquired approximately $454.5 million in securities as a result of the merger and subsequently sold most of the acquired available-for-sale securities (“AFS”) portfolio for net proceeds of $434.2 million, and used $380.0 million to reduce higher cost Federal Home Loan Bank (“FHLB”) advances and brokered deposits. At September 30, 2023, AFS securities, carried at fair value, totaled $79.1 million compared to $83.6 million at December 31, 2022. At September 30, 2023, AFS securities consisted of 67.7% mortgage-backed, 24.8% U.S. Government agencies and 7.5% corporate bonds, compared to 76.0%, 21.7% and 2.3%, respectively, at year-end 2022. At September 30, 2023, HTM securities, carried at amortized cost, totaled $523.1 million compared to $559.5 million at December 31, 2022. At September 30, 2023, HTM securities consisted of 70.3% mortgage-backed, 27.4% U.S. Government agencies, 2.0% other debt securities, and 0.3% states and political subdivisions, compared to 71.3%, 26.5%, 2.0% and 0.3%, respectively, at year-end 2022. At September 30, 2023 and December 31, 2022, 97.0% and 97.8%, respectively, of the Bank’s carrying value of it’s investment portfolio consisted of securities issued or guaranteed by U.S. Government agencies or government-sponsored agencies. Loans Loans Held for Sale The Bank originates residential mortgage loans for sale on the secondary market, which are recorded at fair value. At September 30, 2023 and December 31, 2022 , the fair value of loans held for sale amounted to $14.7 million and $4.2 million, respectively. The Bank makes certain representations to purchasers in the sale of the mortgage loans related to loan ownership, loan compliance and legality, and accurate documentation. If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, the Bank may be required to repurchase the loan or indemnify the purchaser. 60 Table of Contents Loans Held for Investment The following table summarizes the Company’s loan portfolio at September 30, 2023 and December 31, 2022. (Dollars in thousands) September 30, 2023 % December 31, 2022 % $ Change % Change Construction $ 328,750 7.12 % $ 246,319 9.64 % $ 82,431 33.47 % Residential real estate 1,439,464 31.17 % 810,497 31.71 % 628,967 77.60 % Commercial real estate 2,283,521 49.45 % 1,065,409 41.68 % 1,218,112 114.33 % Commercial 229,474 4.97 % 147,856 5.78 % 81,618 55.20 % Consumer 330,411 7.16 % 286,026 11.19 % 44,385 15.52 % Credit Cards 6,099 0.13 % — — % 6,099 — % Total loans 4,617,719 100.00 % 2,556,107 100.00 % 2,061,612 80.65 % Allowance for credit losses on loans (57,051) (16,643) (40,408) 242.79 % Total loans, net $ 4,560,668 $ 2,539,464 $ 2,021,204 79.59 % Our loan portfolio has a commercial real estate loan concentration, which is generally defined as a combination of certain construction and commercial real estate loans. The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied commercial real estate loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Bank has a concentration in commercial real estate loans, and has experienced significant growth in its commercial real estate portfolio in recent years and was further impacted with its acquisition of CBTC. Non-owner occupied commercial real estate (“CRE”) as a percentage of the Bank’s Tier 1 Capital + ACL at September 30, 2023 and December 31, 2022 were $2.1 billion or 399.2% (as restated) and $1.0 billion or 289.4%, respectively. Construction loans as a percentage of the Bank’s Tier 1 Capital + ACL at September 30, 2023 and December 31, 2022 were $330.0 million or 63.5% (as restated) and $246.3 million or 69.9%, respectively. The commercial real estate portfolio (including construction) has increased significantly in the past two years. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its commercial real estate portfolio. Monitoring practices include stress testing analysis to evaluate changes in collateral values and to cash flows from interest rate increases and declines in net operating income. We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital or be required to sell/participate portions of loans, which may adversely affect shareholder returns. The Bank's office CRE portfolio, which included owner-occupied and non-owner occupied CRE loans, was $520.7 million or 11.2% of total loans of $4.6 billion at September 30, 2023, which included $139.0 million or 26.7% with medical tenants and $56.5 million or 10.8% with government or government contractor tenants. There were 529 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $0.3 million, respectively. Loan to Value ("LTV") estimates are less than 70.0% for $356.7 million or 68.0% of the office CRE portfolio. The Bank had 23 CRE office loans totaling $207.0 million that were greater than $5.0 million at September 30, 2023. For this subset of the office CRE portfolio, at September 30, 2023, the average loan debt-service coverage (“DSC”) ratio was 1.42x and average LTV was 57.04%. Most buildings in the Bank's office CRE portfolio are two stories or less. 61 Table of Contents Asset Quality The following table summarizes asset quality information and ratios at September 30, 2023 and December 31, 2022. (dollars in thousands,) September 30, 2023 December 31, 2022 ASSET QUALITY Total portfolio loans $ 4,617,719 $ 2,556,107 Classified Assets (1) 11,068 2,663 Allowance for credit losses on loans (57,051) (16,643) Past due loans - 31 to 89 days 9,093 13,081 Accruing past due loans >= 90 days 2,149 1,841 Total past due (delinquency) loans 11,242 14,922 Non-accrual loans 8,982 1,908 Accruing borrowers experiencing financial difficulty ("BEFD") modifications (2), (3) — 4,405 Other real estate owned (OREO) 179 197 Non-accrual loans, OREO and BEFD modifications 9,161 6,510 ASSET QUALITY RATIOS Classified assets to total assets (1) 0.19 % 0.08 % Classified assets to total capital (1) (As Restated) 2.09 % 0.73 % Allowance for credit losses on loans to total portfolio loans 1.24 % 0.65 % Allowance for credit losses on loans to non-accrual loans 635.17 % 872.27 % Past due loans - 31 to 89 days to total portfolio loans 0.20 % 0.51 % Past due loans >=90 days and non-accrual to total loans 0.24 % 0.15 % Total past due (delinquency) to total portfolio loans 0.43 % 0.58 % Non-accrual loans to total portfolio loans 0.19 % 0.07 % Non-accrual loans and BEFD modifications to total loans 0.19 % 0.25 % Non-accrual loans and OREO to total assets 0.16 % 0.06 % Non-accrual loans and OREO to total portfolio loans and OREO 0.20 % 0.08 % Non-accrual loans, OREO and BEFD modifications to total assets 0.16 % 0.19 % ____________________________________ (1) Classified assets are substandard loans and OREO. Classified assets do not include special mention loans. (2) On January 1, 2023, the Company adopted ASU 2022-02– Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminated the TDR recognition and measurement guidance. As such, loans designated as TDRs prior to January 1, 2023 and are currently performing are no longer reported as a BEFD loan beginning in the quarter ended March 31, 2023, while prior period amounts continue to be reported in accordance with previously applicable GAAP. (3) BEFD modification loans include both non-accrual and accruing performing loans. All BEFD modification loans are included in the calculation of asset quality financial ratios. Non-accrual BEFD modification loans are included in the non-accrual balance and accruing BEFD modification loans are included in the accruing BEFD modification balance. Allowance for Credit Losses on Loans The ACL was $57.1 million at September 30, 2023, $16.6 million at December 31, 2022 and $16.3 million at September 30, 2022. There were net charge-offs of $1.4 million for the third quarter of 2023, compared to net charge-offs of $50,000 for the second quarter of 2023 and net recoveries of $119,000 for the third quarter of 2022. The ratio of annualized net charge-offs to average loans was 0.13% for the third quarter of 2023, compared to annualized net charge-offs of 0.01% for the second quarter of 2023 and annualized net recoveries of 0.02% for the third quarter of 2022. Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming loans to enable the Company to maintain overall credit quality. The ACL on loans as a percentage of period-end loans was 1.24% at September 30, 2023 and 0.65% at December 31, 2022. We adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2023 are presented under ASU 2016-13. Upon the adoption of ASC 326, the Company recorded a $10.8 million increase to the ACL. ACL balances increased to 1.07% and 1.05% of portfolio loans at March 31, 2023 and June 30, 2023, respectively, compared to 0.65% at December 31, 2022. In the third quarter of 2023, as a result of the merger with TCFC, the ACL increased from $29.0 million and 1.05% of total loans at 62 Table of Contents June 30, 2023 to $57.1 million and 1.24% of total loans at September 30, 2023. The Bank's provision for credit losses for the third quarter of 2023 was $28.2 million and consisted of $20.1 million related to the acquisition of TCFC legacy loans including $0.2 million related to unfunded commitments to extent credit, $7.3 million due to a change in ACL methodology on the Bank’s legacy loans and $0.8 million related to third quarter activity. Management believes that the allowance is adequate at September 30, 2023. The ACL as a percent of total loans may increase or decrease in future periods based on economic conditions. Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio. For additional information regarding the allowance for credit losses, refer to Notes 1, 2 and 5 of the Consolidated Financial Statements and the Critical Accounting Policies section of the MD&A. The following tables present a summary of the net charge-off activity in the ACL at or for the three and nine months ended September 30, 2023 and 2022. For the Three Months Ended September 30, 2023 September 30, 2022 (Dollars in thousands) Average balances Net (charge-offs) recoveries Percentage of net charge-offs (recoveries) (annualized) to average loans outstanding during the year Average balances Net (charge-offs) recoveries Percentage of net charge-offs (recoveries) (annualized) to average loans outstanding during the year Construction $ 398,340 $ 3 - % $ 239,120 $ 2 - % Residential real estate 1,425,729 3 - 730,738 12 (0.01) Commercial real estate 2,389,138 (1,327) 0.22 980,174 243 (0.10) Commercial 776 2 (1.02) 150,143 (142) 0.38 Consumer 330,929 (70) 0.08 213,984 4 (0.01) Credit Cards 6,223 (60) 3.83 — — - Total $ 4,551,135 $ (1,449) 0.13 % $ 2,314,159 $ 119 (0.02) % Allowance for credit losses on loans at period end as a percentage of total period end loans (1) 1.24 % 0.68 % Allowance for credit losses on loans at period end as a percentage of total period end loans (2) 1.24 % 0.84 % Allowance for credit losses on loans at period end as a percentage of average loans (3) 1.25 % 0.70 % Allowance for credit losses on loans at period end as a percentage of period end nonaccrual loans 635.17 % 550.08 % ____________________________________ (1) At September 30, 2023 and September 30, 2022, these ratios included all loans held for investment, including PPP loans of $129,000 and $291,000, respectively. (2) For 2023, this ratio excludes only PPP loans given the Company’s adoption of the CECL standard. For periods in 2022, this ratio excludes PPP loans and loans acquired in the Severn and Northwest branch acquisitions. (3) At September 30, 2023 and September 30, 2022, these ratios included all loans held for investment, including average PPP loans of $137,000 and $749,000, respectively. For Nine Months Ended September 30, 2023 September 30, 2023 September 30, 2022 (Dollars in thousands) Average balances Net (charge-offs) recoveries Percentage of net charge-offs (recoveries) (annualized) to average loans outstanding during the year Average balances Net (charge-offs) recoveries Percentage of net charge-offs (recoveries) (annualized) to average loans outstanding during the year Construction $ 292,430 $ 10 - % $ 251,150 $ 9 - % Residential real estate 1,056,892 37 - 680,107 127 (0.02) Commercial real estate 1,528,869 (1,327) 0.12 938,892 942 (0.13) Commercial 93,925 10 (0.01) 165,692 (216) 0.17 Consumer 319,699 (189) 0.08 181,443 (4) - Credit cards 2,075 (60) 3.87 — — - Total $ 3,293,890 $ (1,519) 0.06 % $ 2,217,284 $ 858 (0.05) % Allowance for credit losses on loans at period end as a percentage of total period end loans (1) 1.24 % 0.68 % Allowance for credit losses on loans at period end as a percentage of total period end loans (2) 1.24 % 0.84 % Allowance for credit losses on loans at period end as a percentage of average loans (3) 1.73 % 0.73 % Allowance for credit losses on loans at period end as a percentage of period end nonaccrual loans 635.17 % 550.08 % ____________________________________ (1) At September 30, 2023 and September 30, 2022, these ratios included all loans held for investment, including PPP loans of $129,000 and $291,000, respectively. (2) For 2023, this ratio excludes only PPP loans given the Company’s adoption of the CECL standard. For periods in 2022, this ratio excludes PPP loans and loans acquired in the Severn and Northwest branch acquisitions. (3) At September 30, 2023 and September 30, 2022, these ratios included all loans held for investment, including average PPP loans of $156,000 and $8.9 million, respectively. 63 Table of Contents Nonperforming Assets Classified assets increased $8.4 million to $11.1 million or 0.19% of total assets at September 30, 2023 from $2.7 million or 0.08% of total assets at December 31, 2022. Classified assets are substandard loans and OREO. The increase in classified assets was due to the acquisition of TCFC classified loans of $5.1 million and an increase in Shore legacy classified loans to $5.8 million, and OREO of $0.2 million at September 30, 2023. As shown in the following table, nonperforming assets were $11.3 million or 0.20% of total assets at September 30, 2023 compared to $3.9 million or 0.11% of total assets at December 31, 2022. The balance of nonperforming assets increased due to a $7.1 million increase in total nonaccrual loans. The modest increase in nonperforming and classified assets was the result of the merger, a small increase in late payments in consumer loans and a proactive review of larger commercial relationships in the current interest rate environment. The following table summarizes our nonperforming assets at September 30, 2023 and December 31, 2022. (Dollars in thousands) September 30, 2023 December 31, 2022 Nonperforming assets Nonaccrual loans $ 8,982 $ 1,908 Total loans 90 days or more past due and still accruing 2,149 1,841 Other real estate owned 179 197 Total nonperforming assets $ 11,310 $ 3,946 As a percent of total loans: Nonaccrual loans 0.19 % 0.07 % As a percent of total loans and other real estate owned: Nonperforming assets 0.24 % 0.15 % As a percent of total assets: Nonaccrual loans 0.16 % 0.05 % Nonperforming assets 0.20 % 0.11 % Deposits The following is a breakdown of the Company’s deposit portfolio at September 30, 2023 and December 31, 2022: (dollars in thousands) September 30, 2023 December 31, 2022 Balance % Balance % $ Change % Change Noninterest-bearing demand $ 1,211,401 23.70 % $ 862,015 28.60 % $ 349,386 40.50 % Interest-bearing: Demand 1,210,051 23.70 % 694,101 23.10 % 515,950 74.30 % Money market deposits 1,179,049 23.10 % 709,132 23.60 % 469,917 66.30 % Savings 371,755 7.30 % 320,188 10.60 % 51,567 16.10 % Certificates of deposit 1,136,488 22.20 % 424,348 14.10 % 712,140 167.80 % Total interest-bearing 3,897,343 76.30 % 2,147,769 71.40 % 1,749,574 81.50 % Total Deposits $ 5,108,744 100.00 % $ 3,009,784 100.00 % $ 2,098,960 69.70 % Total deposits increased $2.1 billion, or 69.7% to $5.1 billion at September 30, 2023 when compared to December 31, 2022. The increase in total deposits was primarily due to the merger, which resulted in an increase in time deposits of $712.1 million, demand deposits of $516.0 million, money market and savings of $521.5 million, and noninterest-bearing deposits of $349.4 million. Total estimated uninsured deposits were $1.0 billion or 19.76% of total deposits at September 30, 2023 and $871.5 million or 28.95% of total deposits at December 31, 2022. At September 30, 2023, there were $144.9 million included in uninsured deposits that the Bank secured using the market value of pledged collateral. The Bank's uninsured deposits, excluding the market value of pledged collateral, at September 30, 2023 were $864.6 million or 16.92% of total deposits. 64 Table of Contents The Company does not consider reciprocal deposits to be brokered as reciprocal deposits are used to maximize FDIC insurance available to our customers. During 2018, revisions to the Federal Deposit Insurance Act determined that reciprocal deposits are core deposits and are not considered brokered deposits unless they exceed 20% of the Bank’s total liabilities of $5.1 billion. Reciprocal deposits were $1.1 billion at September 30, 2023 compared to $475.8 million at December 31, 2022. Reciprocal deposits as a percentage of the Bank’s liabilities at September 30, 2023 and December 31, 2022 were 20.47% and 15.44%, respectively. For call reporting purposes, there were $24.4 million and zero reciprocal deposits that were considered brokered at September 30, 2023 and December 31, 2022. The Bank is required to monitor large deposit relationships and concentration risks in accordance with regulatory guidance. This includes monitoring deposit concentrations and maintaining fund management policies and strategies that take into account potentially volatile concentrations and significant deposits that mature simultaneously. Regulatory guidance defines a large depositor as a customer or entity that owns or controls 2% or more of the Bank’s total deposits. At September 30, 2023, the Bank had three local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $406.4 million which represented 8.0% of total deposits of $5.1 billion. At December 31, 2022, there were two customer deposit relationships that exceeded 2% of total deposits, totaling $217.8 million which represented 7.2% of total deposits of $3.0 billion. Wholesale Funding - Short-Term Borrowings and Brokered Deposits The Company had no short-term borrowings as of September 30, 2023, compared to short-term advances with the FHLB of $40.0 million at December 31, 2022. Other short-term borrowings may consist of overnight borrowing from correspondent banks or securities sold under agreements to repurchase, primarily with commercial depositors. Short-term advances are defined as those with original maturities of one year or less. At September 30, 2023 and December 31, 2022, the Company had no securities sold under agreements to repurchase or overnight borrowings from correspondent banks. The Company's wholesale funding increased $71.0 million, which includes FHLB advances and brokered deposits, from $40.0 million in FHLB advances at December 31, 2022 to $111.0 million in brokered deposits at September 30, 2023. Brokered deposits for the Company’s measurement of wholesale funding exclude reciprocal deposit balances that exceeded 2% of total deposits. The Bank decreased wholesale funding by $380.0 million during the third quarter of 2023 using proceeds from the sale of TCFC’s securities portfolio after the legal merger. Long-Term Debt The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. There were no long-term borrowings from the FHLB outstanding at September 30, 2023 and December 31, 2022. On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% of Fixed-to-Floating Rate Subordinated Notes due September 1, 2030. As a result of the Severn merger, the Company acquired Junior Subordinated Debt Securities due in 2035 which had an outstanding principal balance of $20.6 million. The debt balance of $18.5 million at September 30, 2023 and $18.4 million at December 31, 2022 was presented net of fair value adjustments of $2.1 million and $2.2 million, respectively. Additionally, as a result of the TCFC merger, the Company acquired Junior Subordinated Debt Securities which had an outstanding principal balance of $12.0 million. The debt balance of $10.5 million at September 30, 2023 was presented net of a fair value adjustment of $1.5 million. In addition, the Company acquired 4.75% fixed-to-floating rate subordinated notes with a carrying value of $19.5 million at September 30, 2023. The notes balance of $18.2 million at September 30, 2023 was presented net of fair value adjustment of $1.3 million. Stockholders’ Equity (Dollars in thousands) September 30, 2023 December 31, 2022 $ Change % Change (As Restated) Common Stock at par of $0.01 $ 331 $ 199 $ 132 66.33 % Additional paid in capital 355,575 201,494 154,081 76.47 % Retained earnings 155,781 171,613 (15,832) (9.23) % Accumulated other comprehensive loss (10,109) (9,021) (1,088) 12.06 % Total Stockholders' Equity $ 501,578 $ 364,285 $ 137,293 37.69 % 65 Table of Contents Total stockholders’ equity increased $137.3 million, or 37.69%, to $501.6 million (as restated) at September 30, 2023 when compared to December 31, 2022 primarily due to a $153.1 million additional paid in capital from the merger on July 1, 2023, offset by $7.8 million CECL adjustment in the first quarter of 2023 and dividends paid of $8.8 million. 66 Table of Contents Liquidity and Capital Resources We derive liquidity through increased customer deposits, non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets. As seen in the Consolidated Statements of Cash Flows in the Financial Statements, the net increase in cash and cash equivalents was $53.2 million for the first nine months of 2023 compared to a decrease of $420.3 million for the first nine months of 2022. The increase in cash and cash equivalents in 2023 was mainly due to the proceeds from the sale of acquired AFS securities of $434.2 million. To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term fund markets. The Bank has arrangements with other correspondent banks whereby it has $35.0 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash. At September 30, 2023, the Bank had approximately $1.1 billion of available liquidity including: $108.7 million in cash, and $954.4 million in secured borrowing capacity at the FHLB and the other correspondent banks. The Bank is a member of the FHLB, which provides another source of liquidity. Through the FHLB, the Bank had available lendable collateral of approximately $726.6 million and $298.9 million at September 30, 2023 and December 31, 2022, respectively. The Bank has pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB. The Bank and the Company 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 material effect on the Company’s 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 its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications 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 Bank and the Company to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 12.50%. The Bank and Company are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. The Bank and the Company were deemed “well capitalized” under applicable regulatory capital requirements at September 30, 2023. The following tables present the applicable capital ratios for the Company and the Bank as of September 30, 2023 and December 31, 2022. September 30, 2023 Tier 1 leverage ratio Common Equity Tier 1 ratio Tier 1 risk-based capital ratio Total risk-based capital ratio (As Restated) (As Restated) (As Restated) (As Restated) Shore Bancshares, Inc. 7.55 % 8.49 % 9.10 % 11.26 % Shore United Bank 8.17 % 9.85 % 9.85 % 11.09 % December 31, 2022 Tier 1 leverage ratio Common Equity Tier 1 ratio Tier 1 risk-based capital ratio Total risk-based capital ratio Shore Bancshares, Inc. 9.52 % 11.62 % 12.33 % 13.91 % Shore United Bank 9.92 % 12.82 % 12.82 % 13.47 % 67 Table of Contents USE OF NON-GAAP FINANCIAL MEASURES Statements included in the MD&A include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company’s management uses these non-GAAP financial measures and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP. See Non-GAAP reconciliation schedules that immediately follow: RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED) Reconciliation of U.S. GAAP total assets, common equity, common equity to assets and book value to Non-GAAP tangible assets, tangible common equity, tangible common equity to tangible assets and tangible book value. This Amended Quarterly Report, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with GAAP. This financial information includes certain performance measures, which exclude intangible assets. These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company. (dollars in thousands, except per share amounts) September 30, 2023 December 31, 2022 September 30, 2022 (As Restated) Total assets $ 5,705,372 $ 3,477,276 $ 3,446,804 Less: intangible assets Goodwill 63,266 63,266 63,281 Core deposit intangibles 50,685 5,547 6,007 Total intangible assets 113,951 68,813 69,288 Tangible assets $ 5,591,421 $ 3,408,463 $ 3,377,516 Total common equity $ 501,578 $ 364,285 $ 357,221 Less: intangible assets 113,951 68,813 69,288 Tangible common equity $ 387,627 $ 295,472 $ 287,933 Common shares outstanding at end of period 33,136,182 19,864,956 19,857,774 Common equity to assets 8.79 % 10.48 % 10.36 % Tangible common equity to tangible assets 6.93 % 8.67 % 8.52 % Common book value per share $ 15.14 $ 18.34 $ 17.99 Tangible common book value per share $ 11.70 $ 14.87 $ 14.50 68 Table of Contents Return on Average Common Equity (“ROACE”) The ROACE is a financial ratio that measures the profitability of a company in relation to the average shareholders' equity. This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average shareholders' equity for a specific period of time. Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands, except per share amounts) 2023 2022 2023 2022 (As Restated) (As Restated) Net (loss) income (as reported) $ (9,737) $ 9,658 $ 738 $ 22,769 ROACE (7.25) % 10.72 % 0.24 % 8.59 % Average Equity $ 533,114 $ 357,383 $ 419,801 $ 354,549 Return on Average Tangible Common Equity (“ROATCE”) ROATCE is computed by dividing net earnings applicable to common shareholders by average tangible common shareholders' equity. Management believes that ROATCE is meaningful because it measures the performance of a business consistently, whether acquired or internally developed. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands, except per share amounts) 2023 2022 2023 2022 (As Restated) (As Restated) Net (loss) income (as reported) $ (9,737) $ 9,658 $ 738 $ 22,769 Merger and acquisition costs (net of tax) 9,828 117 12,398 837 Core deposit intangible amortization (net of tax) 1,741 368 2,597 1,130 Net (loss) earnings applicable to common shareholders $ 1,832 $ 10,143 $ 15,733 $ 24,736 ROATCE 1.74 % 13.98 % 6.27 % 11.63 % Average equity $ 533,114 $ 357,383 $ 419,801 $ 354,549 Less: Average goodwill and core deposit intangible (115,604) (69,558) (84,300) (70,104) Average Tangible Common Equity $ 417,510 $ 287,825 $ 335,501 $ 284,445 69 Table of Contents