What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2024-03-15 compared with 2023-03-30 · 1175 added, 885 removed, 727 unchanged (74% of the section changed)

2 unchanged sentences

Management’s Report on Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm (PCAOB ID 613 )

Report of Independent Registered Public Accounting Fi rm (PCAOB ID 613 )

Consolidated Balance Sheets

6 unchanged sentences

Management of Shore Bancshares, Inc.

(the “Company”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report.

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include some amounts that are based on the best estimates and judgments of management.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.

This internal control system is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of the Company’s financial reporting and the preparation and presentation of financial statements for external reporting purposes in conformity with accounting principles generally accepted in the United States of America, as well as to safeguard assets from unauthorized use or disposition.

The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal audit with actions taken to correct potential deficiencies as they are identified.

Because of inherent limitations in any internal control system, no matter how well designed, misstatement due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls.

Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation.

Further, because of changes in conditions, internal control effectiveness may vary over time.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, based upon criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO Framework).

Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was effective.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm, regarding internal control over financial reporting.

Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in its annual report.

March 30, 2023

/s/ Vance Adkins

President and Chief Executive Officer

Executive Vice President and Chief Financial Officer

(Principal Executive Officer)

(Principal Financial Officer)

(the “Company”) is responsible for the preparation, integrity and fair presentation of the financial statements included in this Annual Report.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management's judgments and estimates concerning the effects of events and transactions that are accounted for or disclosed.

Management is also responsible for establishing and maintaining effective internal control over financial reporting.

The Company's internal control over financial reporting includes those policies and procedures that pertain to the Company's ability to record, process, summarize and report reliable financial data.

The internal control system contains monitoring mechanisms, and appropriate actions taken to correct identified deficiencies.

Management believes that internal controls over financial reporting, which are subject to scrutiny by management and the Company's internal auditors, support the integrity and reliability of the financial statements.

Management recognizes that there are inherent limitations in the effectiveness of any internal control system, including the possibility of human error and the circumvention or overriding of internal controls.

Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation.

In addition, because of changes in conditions and circumstances, the effectiveness of internal control over financial reporting may vary over time.

The Audit Committee of the board of directors (the “Committee”), is comprised entirely of outside directors who are independent of management.

The Committee is responsible for the appointment and compensation of the independent auditors and makes decisions regarding the appointment or removal of members of the internal audit function.

The Committee meets periodically with management, the independent auditors, and the internal auditors to ensure that they are carrying out their responsibilities.

The Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company's financial reports.

The independent auditors and the internal auditors have full and unlimited access to the Committee, with or without the presence of management, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Committee.

As permitted by the guidance issued by the Office of the Chief Accountant of the Securities and Exchange Commission, management excluded the operations of The Community Financial Corporation and its subsidiary (“TCFC”) from its assessment of internal control over financial reporting as of December 31, 2023.

TCFC and its subsidiary were merged with and into the Company, however, their legacy operations utilized separate accounting systems from July 1, 2023 (the date of acquisition) until the systems were converted on September 11, 2023.

TCFC’s total assets represented approximately 39.9% of the Company’s consolidated assets as of the date of acquisition.

Management assessed the Company's system of internal control over financial reporting as of December 31, 2023.

This assessment was conducted based on the Committee of Sponsoring Organizations of the Treadway Commission "Internal Control - Integrated Framework (2013)." Based on this assessment, management identified material weaknesses related to the Company’s internal control over financial reporting, and, as such, concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2023.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Management identified a material weakness associated with ineffective input review controls relating to specific aspects of the Company’s allowance for credit loss (“ACL”) model and previously disclosed a material weakness in relation to deferred income taxes discussed in Part I, Item 4 of the Company’s Form 10-Q/A for the quarter ended September 30, 2023 (the “amended Form 10-Q”).

Concerning the identified material weakness with respect to the ACL, management has concluded that the issue resulted from an insufficient validation of key loan payment and projected historical loss variable inputs in the post-merger ACL model.

The lack of sufficient data validation did not require a restatement of previously reported ACL balances.

Concerning the material weakness identified in the Company’s amended Form 10-Q, management has concluded that the issue resulted from not performing a key control that was previously only performed in the fourth quarter on annual basis, which was the Company’s annual year-end roll-forward reconciliation and review of book to tax basis differences in the Company’s deferred tax asset and liability categories.

Management concluded that the Company should have performed this key control in the third quarter of 2023 when the merger was consummated.

Management, with the oversight of the Audit Committee, is actively engaged in remediating the material weaknesses in internal control over financial reporting that existed as of December 31, 2023.

In response to the material weaknesses identified above, the Company is in the process of implementing changes to its internal control over financial reporting.

Specifically in relation to the allowance for credit losses, management is in the process of completing a detailed inventory covering select inputs to the allowance for credit losses calculation, a re-evaluation of SOX control design and operation, and determining the appropriate frequency and precision of controls to ensure all significant inputs to the allowance for credit losses calculation are addressed.

In addition, management expects to conduct a detailed data audit to ensure the completeness and accuracy of select inputs to the allowance for credit losses calculation.

Specifically, in relation to the Company’s remediation plan for the error in deferred taxes, management has continued to follow the remediation plans outlined in the Company’s amended Form 10-Q.

This plan includes a quarterly reconciliation of book to tax basis differences to ensure deferred tax basis items are properly recorded.

Beginning in the fourth quarter of 2023, management revised the frequency of the roll-forward reconciliation and review control from an annual key control to a quarterly key control.

Management will consider the material weaknesses remediated once the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

We expect that the remediation of the allowance for credit losses material weakness will be completed prior to the end of 2024.

We expect that the remediation of the deferred tax material weakness will be completed with the filing of the Company’s 10-Q for quarter ended March 31, 2024.

Except as described above, there were no other changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

The 2023 financial statements have been audited by the independent registered public accounting firm of Yount, Hyde & Barbour, P.C.

Personnel from YHB were given unrestricted access to all financial records and related data, including minutes of all meetings of the Board of Directors and committees thereof.

Management believes that all representations made to all the independent auditors were valid and appropriate.

The resulting report from YHB accompanies the financial statements.

YHB has also issued a report on the effectiveness of internal control over financial reporting.

This report has also been made a part of this Annual Report.

Burke /s/ Todd L.

Burke Todd L.

President and Chief Executive Officer Executive Vice President and Chief Financial Officer

(Principal Executive Officer) (Principal Financial Officer)

March 15, 2024 March 15, 2024

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Shore Bancshares, Inc.

To the Stockholders and the Board of Directors of Shore Bancshares, Inc.

Opinion on the Financial Statements

2 unchanged sentences

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Our report dated March 15, 2024, expressed an opinion that the Company had not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Adoption of New Accounting Standard

As discussed in Notes 1 and 4 to the financial statements, the Company changed its method of accounting for credit losses in 2023 due to the adoption of Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments , including all related amendments.

Basis for Opinion

1 unchanged sentence

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

1 unchanged sentence

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

2 unchanged sentences

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

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

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

Allowance for Loan Losses – Qualitative Formula Allowance

As described in Note 1 (Summary of Significant Accounting Policies) and Note 4 (Loans and Allowance for Credit Losses) to the consolidated financial statements, the Company maintains an allowance for credit losses to provide for probable losses inherent in the loan portfolio, which totaled $16,643,000 at December 31, 2022.

The Company’s allowance for credit losses consists of three components:

(i) the specific allowance;

(ii) the historical formula allowance;

and (iii) the qualitative formula allowance.

For loans that are not individually evaluated for impairment, the qualitative formula allowance uses certain qualitative factors to develop loss percentages which are applied to the loan portfolio, by loan pool, based on management’s assessment of shared risk characteristics within groups of similar loans.

The qualitative formula allowance is determined based on management’s continuing evaluation of internal and external factors (described in Note 1), which may impact the underlying quality of the loan portfolio.

Management exercised significant judgment when assessing the factors which serve as the basis for the qualitative formula allowance component of the allowance for credit losses estimate.

We identified the assessment of those qualitative factors and the determination of the qualitative formula allowance as a critical audit matter as auditing the qualitative factors and the resultant qualitative formula allowance involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.

How We Addressed the Matter in Our Audit

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

Allowance for Credit Losses – Collectively Evaluated Loans

As further described in Notes 1 and 4 to the consolidated financial statements, the Company changed its method of accounting for credit losses on January 1, 2023, due to the adoption of Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended.

The allowance for credit losses on loans (ACL) is a valuation allowance that represents management’s best estimate of expected credit losses on loans measured at amortized cost considering available information relevant to assessing collectability over the loans’ contractual terms.

Loans which share common risk characteristics are pooled and collectively evaluated by the Company using historical data, as well as assessments of current conditions and reasonable and supportable forecasts of future conditions.

The Company’s ACL related to collectively evaluated loans represented $56.43 million of the total recorded ACL of $57.35 million as of December 31, 2023.

The collectively evaluated ACL consists of quantitative and qualitative components.

The quantitative component consists of loss estimates derived from a cash flow model adjusted for estimated prepayments and forecasts of future conditions over a reasonable and supportable period.

These estimates consider large amounts of data in tabulating significant inputs to the calculations, including default, loss given default, and prepayment speeds and require complex calculations as well as management

judgment in the selection of appropriate inputs.

In addition to the quantitative component, the collectively evaluated ACL also includes a qualitative component which aggregates management’s assessment of available information relevant to assessing collectability that is not captured in the quantitative loss estimation process.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Management exercised significant judgment when estimating the ACL on collectively evaluated loans.

We identified the estimation of the collectively evaluated ACL as a critical audit matter as auditing the collectively evaluated ACL involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.

The primary audit procedures we performed to address this critical audit matter included:

Obtaining an understanding of the Company’s processes for evaluating qualitative factors, including the development of the data inputs used.

Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative formula allowance, which included:

● Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.

● Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors.

● Evaluating the qualitative factors for directional consistency and for reasonableness.

● Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.

• Obtaining an understanding of the Company’s process for determining its ACL on collectively evaluated loans, including the underlying methodology and significant inputs to the calculation.

• Substantively testing management’s process for measuring the collectively evaluated ACL, including:

◦ Evaluating the conceptual soundness of the methodology for determining the collectively evaluated ACL.

◦ Testing significant inputs to the calculation, including probability of default, loss given default, and prepayment rates, and the data on which those inputs were based.

◦ Evaluating management’s selection of forecasting inputs and testing the accuracy of management’s incorporation of its forecasts in the collectively evaluated ACL estimate.

◦ Testing the completeness and accuracy of internal loan level data used in the calculation, as well as evaluating the pool of collectively evaluated loans for completeness.

◦ Evaluating management’s determination of qualitative adjustments, including evaluating data on which the qualitative adjustments were based as well as the relative magnitude of the adjustments.

◦ Testing the mathematical accuracy of the ACL for collectively evaluated loans, including the calculations underlying the quantitative component as well as application of qualitative factors to the collectively evaluated loan balances.

Fair Value of Acquired Loans

As described in Note 2 – “Business Combination”, the Company completed its acquisition of The Community Financial Corporation on July 1, 2023, for total consideration valued at approximately $153.6 million.

The transaction was accounted for as a business combination using the acquisition method of accounting.

Accordingly, the assets acquired and liabilities assumed were recorded at fair value on the acquisition date, including acquired loans with an aggregate fair value of $1.77 billion.

As disclosed by management, determining the acquired fair values, particularly in relation to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value.

In determining the fair value of acquired loans, management must determine whether or not acquired loans have evidence of more-than-insignificant credit deterioration at acquisition, the amount and timing of cash flows expected to be collected, and market discount rates, among other assumptions.

Changes in these assumptions could have a significant impact on the fair value of the acquired loans.

We identified the acquisition date fair value of acquired loans as a critical audit matter as auditing this estimate required significant auditor judgment in evaluating management’s identification of loans with evidence of credit deterioration, the need for specialized skill in development and application of subjective assumptions in estimated cash flows, and the size of the acquired loan portfolio.

The primary audit procedures we performed to address this critical audit matter included:

• Assessing the effectiveness of the Company’s controls over the fair value measurement process, including management’s engagement and review of the work performed by its third-party valuation specialist, including the completeness and accuracy of the data utilized in forming the estimates, review of key assumptions and inputs in estimating fair value, as well as identification of loans with credit deterioration.

• Substantively testing management’s process, including:

◦ Using our own valuation specialist to assess the Company’s methods and significant assumptions utilized in determining the fair value of the acquired loan portfolio and evaluating whether the assumptions used were reasonable with respect to market participant views and other factors.

◦ Testing the completeness and accuracy of loans determined to have experienced more-than-insignificant credit deterioration since origination and evaluating the reasonableness of the criteria utilized by management in making the determination.

◦ Testing the accuracy of the data utilized in the development of acquisition date fair values by confirming, on a sample basis, select data.

◦ Confirming the mathematical accuracy of the underlying calculations of fair value.

/s/ Yount, Hyde & Barbour, P.C.

2 unchanged sentences

March 15, 2024

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Shore Bancshares, Inc.

Opinion on the Internal Control Over Financial Reporting

We have audited Shore Bancshares, Inc.'s (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements of the Company, and our report dated March 15, 2024, expressed an unqualified opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weaknesses have been identified and included in management's assessment:

• Ineffective review controls over inputs for specific aspects of the Company’s allowance for credit losses calculation for the loan portfolio.

• Ineffective review controls concerning the verification of income tax related balances.

These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2023 financial statements, and this report does not affect our report dated March 15, 2024, on those financial statements.

As described in Management’s Report on Internal Control Over Financial Reporting , management has excluded The Community Financial Corporation, Inc.

from its assessment of internal control over financial reporting as of December 31, 2023, because it was acquired by the Company in a purchase business combination in the third quarter of 2023.

We have also excluded The Community Financial Corporation, Inc.

from our audit of internal control over financial reporting.

The Community Financial Corporation, Inc.

and its subsidiary operated under separate accounting systems from July 1, 2023 (the date of acquisition) until the systems were converted on September 11, 2023.

The Community Financial Corporation, Inc.’s total assets represented approximately 39.9% of the Company’s consolidated assets as of the date of acquisition.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial Reporting .

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia

March 15, 2024

SHORE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

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

Cash and due from banks $ 63,172 $ 37,661

2 unchanged sentences

Investment securities:

Available-for-sale, at fair value

Held to maturity, at amortized cost - fair value of $ 494,627 (2022) and $ 401,524 (2021)

Available-for-sale, at fair value (amortized cost of $ 120,832 (2023) and $ 95,999 (2022))

110,521 83,587

Held to maturity, net of allowance for credit losses of $ 94 (2023) (fair value of $ 457,830 (2023) and $ 494,627 (2022))

513,188 559,455

Equity securities, at fair value 5,703 1,233

1 unchanged sentence

Loans held for sale, at fair value 8,782 4,248

Loans held for investment

Loans held for investment ($ 9,944 (2023) and $ 8,437 (2022), at fair value)

4,641,010 2,556,107

allowance for credit losses ( 57,351 ) ( 16,643 )

Loans, net 4,583,659 2,539,464

Premises and equipment, net 82,386 51,488

Goodwill 63,266 63,266

Other intangible assets, net 48,090 5,547

Other real estate owned, net

OREO, net 179 197

Mortgage servicing rights, at fair value 5,926 5,275

1 unchanged sentence

Cash surrender value on life insurance 101,704 59,218

Accrued interest receivable 19,217 9,384

Deferred income taxes 40,707 7,357

Other assets 24,790 11,260

TOTAL ASSETS $ 6,010,918 $ 3,477,276

Noninterest-bearing $ 1,258,037 $ 862,015

1 unchanged sentence

Total deposits 5,386,120 3,009,784

Securities sold under retail repurchase agreements

Advances from FHLB - short-term — 40,000

Advances from FHLB - long-term

Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") 29,158 18,398

Subordinated debt 43,139 24,674

3 unchanged sentences

TOTAL LIABILITIES 5,499,783 3,112,991

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY

4 unchanged sentences

Retained earnings 162,290 171,613

Accumulated other comprehensive (loss) income

Accumulated other comprehensive loss ( 7,494 ) ( 9,021 )

TOTAL STOCKHOLDERS' EQUITY 511,135 364,285

9 unchanged sentences

Interest and dividends on tax-exempt investment securities 46 6

Interest on federal funds sold 92 —

Interest on deposits with other banks 2,770 3,210

11 unchanged sentences

Trust and investment fee income 3,608 1,784

Gains on sales and calls of investment securities

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

Interchange credits 5,714 4,812

1 unchanged sentence

Title Company revenue 551 1,340

Bargain purchase gain 8,816 —

Other noninterest income 6,622 4,288

16 unchanged sentences

Income tax expense 2,956 10,964

NET INCOME $ 11,228 $ 31,177

Basic and diluted net income per common share $ 0.42 $ 1.57

5 unchanged sentences

(In thousands) 2023 2022

Other comprehensive (loss):

Net income $ 11,228 $ 31,177

Other comprehensive income (loss):

Investment securities:

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

Total other comprehensive (loss)

Unrealized holding gains (losses) on available-for-sale-securities 2,101 ( 12,488 )

Tax effect ( 574 ) 3,411

Total other comprehensive income (loss) 1,527 ( 9,077 )

Comprehensive income $ 12,755 $ 22,100

3 unchanged sentences

For the Years Ended December 31, 2023 and 2022

Comprehensive

Stockholders’

(In thousands)

Income (loss)

Balances, January 1, 2022

Other comprehensive (loss)

Common shares issued for employee stock purchase plan

Stock-based compensation

Cash dividends declared

Balances, March 31, 2022

Other comprehensive (loss)

Common shares issued for employee stock purchase plan

Stock-based compensation

Cash dividends declared

Balances, June 30, 2022

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

Balances, December 31, 2021 $ 198 $ 200,473 $ 149,966 $ 56 $ 350,693

Net Income — — 31,177 — 31,177

Other comprehensive (loss) — — — ( 9,077 ) ( 9,077 )

1 unchanged sentence

Stock-based compensation — 636 — — 636

Cash dividends declared

Balances, September 30, 2022

Cash dividends at $ 0.48 per common share

— — ( 9,530 ) — ( 9,530 )

Balances, December 31, 2022 $ 199 $ 201,494 $ 171,613 $ ( 9,021 ) $ 364,285

Net Income — — 11,228 — 11,228

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

Other comprehensive income — — — 1,527 1,527

TCFC acquisition 132 152,955 — — 153,087

Common shares issued for employee stock purchase plan 1 384 — — 385

Stock-based compensation — 1,174 — — 1,174

Cash dividends declared

Balances, December 31, 2022

Comprehensive

Stockholders’

(In thousands)

Balances, January 1, 2021

Other comprehensive (loss)

Retirement of common stock

Stock-based compensation

Cash dividends declared

Balances, March 31, 2021

Other comprehensive (loss)

Stock-based compensation

Cash dividends declared

Balances, June 30, 2021

Other comprehensive (loss)

Stock-based compensation

Exercise of options, net of shares surrendered

Cash dividends declared

Balances, September 30, 2021

Other comprehensive (loss)

Severn Bank acquisition - 8,053,088 shares

Stock-based compensation

Cash dividends declared

Cash dividends at $ 0.48 per common share

— — ( 12,733 ) — ( 12,733 )

Balances, December 31, 2023 $ 332 $ 356,007 $ 162,290 $ ( 7,494 ) $ 511,135

3 unchanged sentences

For the Years Ended December 31,

For Year Ended

For Year Ended December 31,

(In thousands) 2023 2022

CASH FLOWS FROM OPERATING ACTIVITIES:

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

Net Income $ 11,228 $ 31,177

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

Net accretion of acquisition accounting estimates ( 8,772 ) ( 1,768 )

3 unchanged sentences

Amortization of debt issuance costs 122 122

Bargain purchase gain ( 8,816 ) —

(Gain) on mortgage banking activities ( 3,477 ) ( 3,918 )

3 unchanged sentences

Deferred income tax expense (benefit) 2,721 ( 1,182 )

(Gains) on sales and calls of securities

(Gains) loss on valuation adjustments on mortgage servicing rights

Losses on sales and calls of securities 2,166 —

Loss (Gain) on valuation adjustments on mortgage servicing rights 251 ( 372 )

Loss on sale and valuation adjustments on premises transferred to held for sale 272 —

Losses on sales and disposals of premises and equipment — 183

Losses on sales and valuation adjustments on other real estate owned

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

Fair value adjustments on loans held for investments, at fair value ( 33 ) —

Fair value adjustment on equity securities ( 54 ) 157

2 unchanged sentences

Accrued interest receivable ( 724 ) ( 2,665 )

Other assets ( 10,875 ) ( 1,450 )

Accrued interest payable 2,095 297

Other liabilities ( 3,653 ) ( 5,838 )

Net cash (used in) provided by operating activities

Net cash provided by operating activities 22,713 52,647

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from maturities and principal payments of investment securities available for sale 17,754 20,441

Purchases of investment securities available for sale

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

Proceeds from maturities and principal payments of investment securities held to maturity 44,801 52,324

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

Purchase of securities available for sale ( 33,226 ) —

Purchases of securities held to maturity — ( 208,133 )

8 unchanged sentences

Purchases of bank owned life insurance ( 249 ) ( 10,165 )

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

Net cash (used in) provided by investing activities

Proceeds from disposal of premises held for sale 721 —

Cash acquired in the acquisition of TCFC 25,372 —

Net cash provided by (used in) investing activities 172,313 ( 581,572 )

For Year Ended December 31,

(In thousands) 2023 2022

CASH FLOWS FROM FINANCING ACTIVITIES:

Net changes in:

Noninterest-bearing deposits

Interest-bearing deposits

Short-term borrowings

Net change in deposits $ 243,236 $ ( 15,902 )

Net (repayment) advances of short-term borrowings ( 109,000 ) 35,857

Repayment of long-term borrowings — ( 10,000 )

Common stock dividends paid ( 12,733 ) ( 9,530 )

Retirement of common stock

Issuance of common stock 385 386

Net cash provided by financing activities 121,888 811

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents 316,914 ( 528,114 )

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

Cash and cash equivalents at end of period $ 372,413 $ 55,499

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the Years Ended December 31,

Supplemental cash flows information:

2 unchanged sentences

Recognition (remeasurement of) lease liabilities arising from right-of-use assets $ 179 $ ( 456 )

Transfer from loans held for sale to loans held for investment

Transfer from loans held for sale to loans held for investments $ — $ 7,791

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

Unrealized (loss) on securities available for sale

Unrealized gain (loss) on securities available for sale $ 2,101 $ ( 12,488 )

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

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

Notes to Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1 unchanged sentence

and its subsidiaries (collectively referred to in these Notes as the “Company”), with all significant intercompany transactions eliminated.

The investments in subsidiaries are recorded on the Company’s books (Parent only) on the basis of its equity in the net assets of the subsidiaries.

The investments in subsidiaries are recorded on the Company’s books (holding company only) on the basis of its equity in the net assets of the subsidiaries.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”).

3 unchanged sentences

The Company engages in the banking business through Shore United Bank, N.A., a Maryland commercial bank with trust powers.

The Company’s primary source of revenue is derived from interest earned on commercial, residential mortgage and other loans, and fees charged in connection with lending and other banking services located in Maryland, Delaware and the Eastern Shore of Virginia.

The Company engages in the trust services business through the trust department at Shore United Bank, N.A.

under the trade name Wye Financial Partners and conducts secondary market lending activities through a division of the Bank.

under the trade name Wye Trust and conducts secondary market lending activities through a division of the Bank.

The Title Company engages in title work related to real estate transactions.

2 unchanged sentences

Actual results could differ from those estimates.

Estimates that could change significantly relate to the determination of the allowance for loan losses, loans acquired in business combinations, and the subsequent evaluation of goodwill for impairment.

Loans Acquired in a Business Combination

Loans acquired in a business combination, such as the Company’s acquisition of Severn, are recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses.

Purchased credit-impaired (PCI) loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments.

When determining fair value, PCI loans were aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status.

The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference,” and is not recorded.

Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

On a quarterly basis, the Company evaluates its estimate of cash flows expected to be collected.

Estimates of cash flows for PCI loans require significant judgment.

Subsequent decreases to the expected cash flows will generally result in a provision for loan losses, while subsequent increases in cash flows may result in a reversal of post-acquisition provision for loan losses, or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan or pool(s) of loans.

Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.

PCI loans are not classified as nonperforming loans by the Company at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.

Loans not designated PCI loans as of the acquisition date are designated purchased performing loans.

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based

on the acquired loans’ contractual cash flows.

Purchased performing loans are recorded at fair value, including a credit discount.

The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans.

There is no allowance for loan losses established at the acquisition date for purchased performing loans.

A provision for loan losses may be required in future periods for any deterioration in these loans in future periods.

Investment Securities Available for Sale

Investment securities available for sale are stated at estimated fair value based on quoted prices.

They represent those debt securities which management may sell as part of its asset/liability management strategy or which may be sold in response to changing interest rates, changes in prepayment risk or other similar factors.

Realized gains and losses are recorded in noninterest income and are determined on a trade date basis using the specific identification method.

Premiums and discounts are amortized or accreted into interest income using the interest method over the lives of the individual securities.

Interest on investment securities is recognized in interest income on an accrual basis.

Net unrealized holding gains and losses on these securities are reported as accumulated other comprehensive income, a separate component of stockholders’ equity, net of related income taxes.

Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value and are reflected in earnings as realized losses.

Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrade of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or a determination that management has the intent to sell the security or will be required to sell the security before recovery of its amortized cost.

Investment Securities Held to Maturity

Investment securities held to maturity are stated at cost adjusted for amortization of premiums and accretion of discounts.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

The Company intends and has the ability to hold such securities until maturity.

Declines in the fair value of individual held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value.

Estimates that could change significantly relate to the determination of the allowance for credit losses on loans, loans acquired in business combinations, valuation of deferred tax assets and the subsequent evaluation of goodwill for impairment.

Investments in Debt Securities

Investments in debt securities are classified as either held to maturity (“HTM”), available for sale (“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 allowance for credit losses (“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 HTM and AFS debt securities and has included such accrued interest of $ 2.2 million at December 31, 2023 and at December 31, 2022 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 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 $ 94,000 .

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.

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

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 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 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.

Equity Securities

11 unchanged sentences

When mortgage loans are sold with servicing retained, the MSRs are initially recorded at fair value with the income statement effect recorded in mortgage banking revenue.

Fair value is based on a valuation model that calculates the present

value of estimated future net servicing income.

Fair value is based on a valuation model that calculates the present value of estimated future net servicing income.

The Company measures servicing rights at fair value at each reporting date and records the changes in fair value of servicing assets in earnings in the period in which the changes occur.

1 unchanged sentence

Servicing fee income is also recorded in the mortgage banking revenue line item.

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 ACL.

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 $ 16.8 million and $ 7.2 million at December 31, 2023 and December 31, 2022, respectively 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.

Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the level-yield method.

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 ACL is also recorded.

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 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.

Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.

A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit.

Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.

In the normal course of banking business, risks related to specific loan categories are as follows:

Construction loans – Construction loans are offered primarily to builders and individuals to finance the construction of single-family dwellings.

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

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

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

Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors.

Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral.

Commercial real estate – Commercial real estate loans consist of both loans secured by owner occupied properties and non-owner occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow.

These loans are subject to adverse changes in the local economy and commercial real estate markets.

Credit risk associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower and the business to repay the loan.

Non-owner occupied properties carry the risk of a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.

Commercial – Commercial loans are secured or unsecured loans for business purposes.

Loans are typically secured by accounts receivable, inventory, equipment and/or other assets of the business.

Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.

Consumer – Consumer loans include installment loans and personal lines of credit.

Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

Transfers of LHFS to Loans Held for Investment (“LHFI”)

3 unchanged sentences

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

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

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

Interest income on loans is accrued at the contractual rate based on the principal amount outstanding.

Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan.

A loan is placed on nonaccrual (i.e., interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection.

Any unpaid interest previously accrued on those loans is reversed from income.

Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms when due.

An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral.

The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Generally, the Company measures impairment on such loans by reference to the fair value of the collateral or the present value of expected future cash flows.

Once the amount of impairment has been determined, the uncollectible portion is charged off.

Income on nonaccrual impaired loans is recognized on a cash basis, and payments are first applied against the principal balance outstanding (i.e., placing impaired loans on nonaccrual status).

Generally, interest income is not recognized on impaired loans unless the likelihood of further loss is remote or the impairment analysis yielded no impairment for the loan.

The allowance for credit losses may include specific reserves related to impaired loans.

Specific reserves remain until charge offs are made.

Reserves for probable credit losses related to these loans are based on historical loss ratios and an analysis of qualitative factors and are included in the formula portion of the allowance for credit losses.

See additional discussion below under the section, “Allowance for Credit Losses”.

A loan is considered a troubled debt restructuring (“TDR”) if a borrower is experiencing financial difficulties and a creditor has granted a concession.

Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to repay becomes evident.

The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits.

In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the current underwriting guidelines of the Company’s banking subsidiary, the loan is classified as a TDR.

All loans designated as TDRs are considered impaired loans and may be on either accrual or nonaccrual status.

In instances where the loan has been placed on nonaccrual status, six consecutive months of timely payments are required prior to returning the loan to accrual status.

All loans classified as TDRs which are restructured and accrue interest under revised terms require a full and comprehensive review of the borrower’s financial condition, capacity for repayment, realistic assessment of collateral values, and the assessment of risk entered into any workout agreement.

Current financial information on the borrower, guarantor, and underlying collateral is analyzed to determine if it supports the ultimate collection of principal and interest.

For commercial loans, the cash flows are analyzed, both for the underlying project and globally.

For consumer loans, updated salary, credit history and cash flow information is obtained.

Current market conditions are also considered.

Following a full analysis, the determination of the appropriate loan structure is made.

The Company does not participate in any specific government or Company sponsored loan modification programs.

All TDR loan agreements are contracts negotiated with each of the borrowers.

Allowance for Credit Losses

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

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

Loans, or portions thereof, that are considered uncollectible are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance.

The criteria for charge offs are addressed in the Bank’s Collection and Workout Policy.

Per the policy, the recognition of the loss of loans or portions of loans will occur when there is a reasonable probability of loss.

When the amount of loss can be readily calculated, the loss will be recognized.

In cases where a probable charge-off amount cannot be calculated, specific reserves will be maintained.

A provision for credit losses is charged to income based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

Evaluations are conducted at least quarterly and more often if deemed necessary.

The allowance for credit losses is an estimate of the probable losses that may be sustained in the loan portfolio.

The allowance is based on two basic principles of accounting:

(i) Topic 450, “ Contingencies ”, of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”), which requires that losses be accrued when they are probable of occurring and estimable;

and (ii) ASC Topic 310, “ Receivables ”, which requires that losses be accrued based on the differences between the loan balance and the value of collateral, present value of future cash flows or values that are observable in the secondary market.

Management uses many factors to estimate the inherent loss that may be present in our loan portfolio as discussed further below.

Actual losses could differ significantly from management’s estimates.

In addition, GAAP itself may change from one previously acceptable method to another.

Although the economics of transactions would be the same, the timing of events that would impact the transactions could change.

Three basic components comprise our allowance for credit losses:

(i) the specific allowance;

(ii) the historical formula allowance;

and (iii) the qualitative formula allowance.

Each component is determined based on estimates that can and do change when the actual events occur.

The specific allowance is established against impaired loans based on our assessment of the losses that may be associated with the individual loans.

The specific allowance remains until charge-offs are made or the metrics underlying the impairment calculation change.

An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral.

The historical formula allowance is used to estimate the loss on internally risk-rated loans, exclusive of those identified as impaired.

Loans are grouped by type (construction, residential real estate, commercial real estate, commercial or consumer) and similar risk characteristics.

Each loan pool is assigned allowance factors based on management’s estimate of the risk, complexity and size of individual loans within a particular category using average historical charge-offs by segment over the last 16 quarters.

Loans identified as pass-watch, special mention, substandard, and doubtful are considered to have elevated credit risk.

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

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

specific or historical formula allowance.

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

A special mention loan has potential weaknesses that could result in a future loss to the Company if the weaknesses are realized.

A substandard loan has certain deficiencies that could result in a future loss to the Company if these deficiencies are not corrected.

A doubtful loan has enough risk that there is a high probability that the Company will sustain a loss.

The qualitative formula allowance is used to adjust the historical formula allowance to an amount that is reflective of the probable losses inherent in the loan portfolio.

The qualitative formula allowance is established through the evaluation of various qualitative factors which are used to develop loss percentages that are applied to the identified pools of loans that are not individually evaluated for impairment.

Management has significant discretion in making the adjustments inherent in the determination of the provision and allowance for credit losses, including the establishment of the allowance factors in the qualitative formula allowance component of the allowance.

The establishment of the qualitative factors used in the qualitative formula allowance is a continuing exercise, based on management’s ongoing assessment of the totality of all factors, including, but not limited to, delinquencies, loss history, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, the quality of the loan review system and the effect of other factors as deemed appropriate, and their impact on the portfolio.

Allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based on the same volume and classification of loans.

Changes in allowance factors will have a direct impact on the amount of the provision, and a corresponding effect on net income.

Errors in management’s perception and assessment of these factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs.

During the year ended December 31, 2023, the Company had no transfers from LHFS to LHFI.

There were $ 7.8 million transfers between LHFS and LHFI during the year ended December 31, 2022.

ACL on Loans Held for Investment

An ACL is estimated on loans held for investment, excluding loans carried at fair value.

The ACL on loans is established through charges to earnings in the form of a provision for credit losses.

Loan losses are charged against the ACL for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely.

Subsequent recoveries, if any, are credited to the allowance.

The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected.

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.

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 .

Loans that share common risk characteristics are evaluated collectively using a cash flow approach.

The cash flow approach used by the Company utilizes loan-level cash flow projections and pool-level assumptions.

For loans that do not share risk characteristics with other loans, the ACL is measured based on the net realizable value, that is, the difference between the discounted value of the expected future cash flows and the amortized cost basis of the loan.

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 economic independent variables, namely the national unemployment rate, 10 year Treasury rate and changes in GDP that are reasonable and supportable over a twenty four 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 12-month straight-line reversion of the corresponding economic independent variable from the last forecast to a historical average level.

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, concentrations, economic and business conditions;

the nature and volume of the loan portfolio;

volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral;

and other factors as deemed necessary and appropriate.

This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

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 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.

During the 2023, the Company recorded a $ 436 thousand provision for credit losses associated with its unfunded commitments.

Premises and Equipment

4 unchanged sentences

and 10 to 40 years for buildings and building improvements.

Land improvements are amortized over a period of 15 years and leasehold improvements are amortized over the term of the respective lease.

Land improvements are amortized over a period of 15 years and leasehold improvements are amortized over the term of the respective lease or useful life, whichever is shorter.

Maintenance and repairs are charged to expense as incurred, while improvements which extend the useful life of an asset are capitalized and depreciated over the estimated remaining life of the asset.

13 unchanged sentences

These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expenses caption.

The most significant assessment of fair value in our accounting for business combinations relates to the valuation of an acquired loan portfolio.

At acquisition, loans are classified as either (i) purchase credit-deteriorated (“PCD”) loans or (ii) non-PCD 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.

Fair values are determined primarily through a discounted cash flow approach which considers the acquired loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, timing of principal and interest payments, current market rates, and remaining balances.

Estimates of fair value also include estimates of default, loss severity, and estimated prepayments.

At acquisition, an allowance for PCD loans is determined based upon the Company’s methodology for estimating the ACL on loans.

This allowance is credited to the ACL on loans with a corresponding adjustment to the amortized cost basis of the loan on the date of the acquisition.

The difference between the new amortized cost basis and the unpaid principal balance is either a noncredit discount or premium that is amortized or accreted to interest income over the remaining life of the loan.

Disposals of PCD 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 loan portfolio at its carrying amount.

For non-PCD loans, an ACL is established in a manner that is consistent with the Company’s originated loans.

The ACL is determined using the Company’s methodology and the related ACL for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans are purchased or acquired.

The entirety of any purchase discount or premium on non-PCD loans is amortized or accreted to interest income over the remaining life of the loan.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.

Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability.

Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or

because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability.

Goodwill and other intangible assets are initially required to be recorded at fair value.

3 unchanged sentences

If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss.

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

As of December 31, 2023, the Company had one operating segment the Community Banking segment.

Other intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions and are amortized using an accelerated method over their estimated useful lives, which range from 7 to 10 years.

1 unchanged sentence

No impairment charges were recognized in either year.

Our assessment of goodwill concluded it was not more likely that not that the fair value of the Company's reporting units were less than their carrying amount.

Other Real Estate Owned

Our assessment of goodwill concluded it was not more likely than not that the fair value of the Company's reporting unit was less than their carrying amount.

Other Real Estate Owned (“OREO”)

Other real estate owned represents assets acquired in satisfaction of loans either by foreclosure or deeds taken in lieu of foreclosure.

3 unchanged sentences

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

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

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

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

2 unchanged sentences

Subordinated Debt

Subordinated debt is carried at its outstanding principal balance, net of any unamortized issuance costs.

Subordinated debt is carried at its outstanding principal balance, net of any unamortized issuance costs and acquisition related fair value adjustments.

For additional information on the Company’s subordinated debt, refer to Note 9 of the Consolidated Financial Statements.

13 unchanged sentences

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 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.

17 unchanged sentences

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

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

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

Cash and Cash Equivalents

Cash and due from banks, interest-bearing deposits with other banks and federal funds sold are considered “cash and cash equivalents” for financial reporting purposes.

Certain interest-bearing deposits with banks may exceed balances that are recoverable under Federal Deposit Insurance (“FDIC”) insurance.

Balances in excess of FDIC insurance at December 31, 2022 were approximately $ 1.8 million.

Certain interest-bearing deposits with banks may exceed balances that are recoverable under Federal Deposit Insurance Corporation (“FDIC”) insurance.

Balances in excess of FDIC insurance at December 31, 2023 were approximately $ 8.7 million and approximately $ 1.8 million at December 31, 2022.

Share-Based Compensation

19 unchanged sentences

Advertising costs are generally expensed as incurred.

The Company incurred advertising costs of approximately $ 898 thousand for the year ended December 31, 2022 and $ 339 thousand for the year ended December 31, 2021.

The Company incurred advertising costs of approximately $ 1.1 million for the year ended December 31, 2023 and $ 0.9 million for the year ended December 31, 2022.

Comprehensive Income

2 unchanged sentences

There were no reclassifications from accumulated other comprehensive income in 2023 and 2022.

Adoption of Accounting Standards

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):

Targeted Transition Relief,” ASU 2019-10, “Financial instruments – Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842) – Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842),” ASU 2020-03, “Codification Improvements to Financial Instruments” and ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures” (collectively, ASC 326).

The significant impacts of adopting these standards and related updates to the Company’s accounting policies are discussed below.

ASC 326 requires entities to estimate an allowance for credit losses (“ACL”) on certain types of financial instruments measured at amortized cost using a current expected credit losses (“CECL”) methodology, replacing the incurred loss methodology from prior GAAP.

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 (“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.

The amendments of ASC 326, upon adoption, were applied on a modified retrospective basis, by recording an increase in the reported balance of loans and the allowance for credit losses on loans, an increase in the liability for credit losses on commitments to extend credit and reducing total equity of both the Company and the Bank.

As a result of adopting ASC 326, the Company recorded a decrease to opening retained earnings, net of taxes, of approximately $ 7.8 million.

ASC 326 also replaced the Company’s previous accounting policies for purchased credit-impaired (“PCI”) loans and troubled-debt restructurings (“TDRs”).

With the adoption of ASC 326, loans previously designated as PCI loans were designated as purchased loans with credit deterioration (“PCD loans”).

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

On January 1, 2023, the 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 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 ACL, and the Company’s reserve for unfunded commitments.

January 1, 2023

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

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

Allowance for credit losses ( 27,434 ) ( 16,643 ) ( 10,791 )

Total loans, net $ 2,528,833 $ 2,539,464 $ ( 10,631 )

Reserve for Unfunded Commitments $ 581 $ 316 $ 265

As discussed in Note 2, 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

Accounting policies applied to prior periods are described in the 2022 Annual Report.

Recent Accounting Standards and Other Authoritative Guidance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses;

(2) development, governance, and documentation of a systematic methodology;

(3) documenting the results of a systematic methodology;

and (4) validating a systematic methodology.

2022-02 – In March 2022, the (FASB) issued (ASU) No.

2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model.

The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancing’s and restructurings made with borrowers experiencing financial difficulty.

In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures.

The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of troubled debt restructurings (TDR), an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

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

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

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

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

ASU 2022-03 clarifies that a

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

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

In December 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis.

Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received).

Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign.

This ASU is effective for annual periods beginning after December 15, 2024.

Early adoption is permitted.

The amendments should be applied on a prospective basis;

however, retrospective application is permitted.

The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

2020-04 – In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2020-04 “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued.

It is intended to help stakeholders during the global market-wide reference rate transition period.

The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.

Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2021-01 “Reference Rate Reform (Topic 848):

Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

An entity may elect to apply ASU No.

2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.

An entity may elect to apply ASU No.

2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.

At present, the Bank has limited exposure to LIBOR based pricing.

LIBOR based loans only comprise 16 loans or 3.1 % of the loan portfolio.

The Bank is confident it can successfully negotiate a migration to the Secured Overnight Financing Rate (“SOFR”) between now and the implementation date.

The Bank will notify customers within 120 days prior to migration to SOFR.

The Bank acknowledges the replacement rate will be more volatile based on different countries migrating to different indexes and limited liquidity to support the rate.

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

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

In November 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.” The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses.

This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark (CODM), an amount for other segment items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures.

Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements.

Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280.

This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption

is permitted.

The amendments should be applied retrospectively.

The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

BUSINESS COMBINATION

On October 31, 2021 (“Acquisition Date”), the Company completed the acquisition of Severn Bancorp, Inc.

(“Severn”), a Maryland charted commercial bank, in accordance with the definitive agreement that was entered into on March 3, 2021, by and among the Company and Severn.

The primary reasons for the Company to acquire Severn were to access and deploy excess capital and deposits into a high growth market, while also enhancing scale to drive efficiency and profitability.

Additionally, this transaction is expected to enhance the Company’s competitive position in the Columbia/Baltimore/Towson MSA, while filling in our market footprint.

In connection with the completion of the merger, former Severn shareholders received 0.6207 shares of Shore common stock and $ 1.59 in cash for each share of Severn common stock.

Based on the $ 18.48 per share closing price of the Company’s common stock on October 29, 2021 and including the fair value of options cashed-out, the total transaction value was approximately $ 169.8 million.

Upon completion of the acquisition, Shore shareholders owned approximately 59.6 % of the combined company, and former Severn shareholders owned approximately 40.4 %.

As of October 31, 2021, Severn, headquartered in Annapolis, MD, had more than $ 1.1 billion in assets and operated 7 full-service community banking offices throughout Anne Arundel County, Maryland.

The acquisition of Severn was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid are recorded at estimated fair values on the Acquisition Date.

The provisional amount of goodwill recognized as of the Acquisition Date was approximately $ 45.9 million.

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

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

Adjustments to

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

The goodwill is not expected to be deductible for tax purposes.

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

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 $ 8.8 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 included as taxable income for tax purposes.

As 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.

(In thousands, except per share data)

2 unchanged sentences

share price of $ 11.56

Cash consideration

Cash paid for cash-out Severn stock options

Cash for fractional shares

Effective settlement of pre-existing debt (1)

Cash consideration (cash in lieu for fractional shares) 5

Fair value of converted restricted stock units (2)

Total purchase price $ 153,592

2 unchanged sentences

Total securities 454,468

Loans held for sale

Loans, net 1,765,255

Premises and equipment, net 29,277

Other real estate owned

Core deposit intangible asset 48,648

2 unchanged sentences

Identifiable liabilities:

Deposits $ 2,131,141

Total debt 97,545

Other liabilities 21,739

Total identifiable liabilities $ 2,250,425

Fair value of net assets acquired including identifiable intangible assets

Resulting goodwill (1)

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

in the table below.

Measurement period adjustments included adjustments related to loan

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

Goodwill at December 31, 2021

Effect of measurement period adjustments to:

Goodwill at December 31, 2022

Acquired loans

The following table outlines the contractually required payments receivable, cash flows we expect to receive, and the accretable yield for all Severn PCI loans as of the acquisition date.

Contractually required payments receivable

Nonaccretable difference

Cash flows expected to be collected

Accretable yield

Provisional fair value of net assets acquired $ 162,408

Provisional bargain purchase gain $ ( 8,816 )

____________________________________

(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 acquired assets and assumed liabilities of TCFC were measured at fair value as of the Acquisition Date.

Management made significant estimates and exercised significant judgement in accounting for the acquisition of TCFC.

The following is a brief description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed.

The Company utilized a valuation specialist to assist with the determination of fair values for certain acquired assets and assumed liabilities

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 $ 593.3 million, including 1,306 performing loans and 162 PCI loans.

The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-loan value ratios, loss exposures, and remaining balances.

These performing loans were segregated into pools based on loan and payment type.

The effect of the valuation process was a total net discount of $ 8.7 million at acquisition.

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.

Valuations also considered default rates, loss severity estimates, and estimates related to expected prepayments over the contractual lives of the loans.

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

The core deposit intangible was valued using an income approach focused on cost savings, which recognizes the cost savings represented by the expense of maintaining the core deposit base versus the cost of an alternative funding source.

The valuation incorporates assumptions related to account retention, discount rates, deposit interest rates, deposit maintenance costs and alternative funding rates.

The fair value of premises acquired was based on recent third-party appraised values of the properties, with fair value adjustments made to both the buildings and any associated parcels of land.

Acquired equipment was based on the remaining net book value of TCFC, which approximated fair value.

The fair value of noninterest bearing demand deposits, interest checking, money market and savings deposit accounts from TCFC were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.

Certificates of deposit were valued at the present value of the certificates’ expected contractual payments discounted at market rates for certificates with similar terms.

The estimated fair value of the acquired portfolio of debt securities was based on quoted market prices and dealer quotes.

Substantially all the acquired portfolio was sold following the acquisition.

The estimated fair value of short-term borrowings was determined to approximate their stated value.

Subordinated debt and trust preferred debt were valued using a discounted cash flow approach incorporating a discount rate that considered market terms, maturities, and credit ratings.

INVESTMENT SECURITIES

The following table provides information on the amortized cost and estimated fair values of investment securities at December 31.

(Dollars in thousands)

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 December 31, 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 Company’s accounting policies and policy elections related to the accounting standard update refer to Note 1.

The following table summarizes the activity in the ACL on HTM securities.

(Dollars in thousands) Three Months Ended December 31, 2023 Twelve Months Ended December 31, 2023

Balance, beginning of period $ 126 $ —

Other debt securities, provision for credit losses ( 32 ) 94

Balance, end of period $ 94 $ 94

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 fourth quarter of 2023, a provision of $( 32 ) thousand was recorded based on the results of our evaluation at December 31, 2023.

A provision for credit losses of $ 94 thousand was recorded for the twelve months ended December 31, 2023.

The following table provides information on the amortized cost and estimated fair values of investment securities at December 31, 2023 and December 31, 2022.

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

Available-for-sale securities:

December 31, 2023

Government agencies

Mortgage-backed

Otherd debt securities

Treasury and government agencies $ 23,472 $ 5 $ 3,002 $ 20,475

Mortgage-backed securities 91,280 5 7,258 84,027

Other debt securities 6,080 59 120 6,019

Total $ 120,832 $ 69 $ 10,380 $ 110,521

December 31, 2022

Government agencies

Mortgage-backed

Treasury and government agencies $ 21,798 $ 5 $ 3,625 $ 18,178

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

Other debt securities 2,018 — 128 1,890

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

(Dollars in thousands)

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

No AFS securities were sold from the Company’s legacy securities’ portfolios during 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 $ 434.2 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

Held-to-maturity securities:

December 31, 2023

Government agencies

Mortgage-backed

States and political subdivisions

Treasury and government agencies $ 143,442 $ — $ 10,377 $ 133,065

Mortgage-backed securities 357,870 — 43,864 314,006

Obligations of states and political subdivisions 1,470 57 19 1,508

Other debt securities 10,500 — 1,249 9,251

Total $ 513,282 $ 57 $ 55,509 $ 457,830

December 31, 2022

Government agencies

Mortgage-backed

States and political subdivisions

Treasury and government agencies $ 148,097 $ — $ 13,601 $ 134,496

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

Obligations of states and political subdivisions 1,474 35 28 1,481

Other debt securities 11,000 — 770 10,230

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

Equity securities with an aggregate fair value of $ 5.7 million at December 31, 2023 and $ 1.2 million at December 31, 2022 are presented separately on the balance sheet.

The fair value adjustment recorded through earnings totaled $( 157 ) thousand for 2022 and $( 40 ) thousand for 2021, respectively.

The following table provides information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at December 31.

(Dollars in thousands)

The fair value adjustment recorded through earnings totaled $ 54 thousand for 2023 and $( 0.2 ) million for 2022, respectively.

Credit Quality Information

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.

Investment grade securities are rated BBB- or higher by S&P and Baa3 or higher by Moody’s and are generally considered by the rating agencies and market participants to be of low credit risk.

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 HTM securities at December 31, 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 December 31, 2023.

December 31, 2023

Available-for-sale securities:

Government agencies

Mortgage-backed

Investment Grade

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

Treasury and government agencies $ 140,761 $ — $ — $ — $ — $ 2,681 $ 143,442

Mortgage-backed securities 357,870 — — — — — 357,870

Obligations of states and political subdivisions — 1,470 — — — — 1,470

Other debt securities — — 4,000 4,000 500 2,000 10,500

Held-to-maturity securities:

Government agencies

Mortgage-backed

States and political subdivisions

Total held-to-maturity securities $ 498,631 $ 1,470 $ 4,000 $ 4,000 $ 500 $ 4,681 $ 513,282

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, 2023

Available-for-sale securities:

Treasury and government agencies $ 74 $ — $ 17,750 $ 3,002 $ 17,824 $ 3,002

Mortgage-backed securities 24,405 150 52,864 7,108 77,269 7,258

Other debt securities — — 1,890 120 1,890 120

(Dollars in thousands)

Total $ 24,479 $ 150 $ 72,504 $ 10,230 $ 96,983 $ 10,380

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

Available-for-sale securities:

Government agencies

Mortgage-backed

Treasury and government agencies $ 1,165 $ 4 $ 16,585 $ 3,588 $ 17,750 $ 3,592

Mortgage-backed securities 29,125 2,409 34,167 6,290 63,292 8,699

Other debt securities $ 1,890 $ 128 $ — $ — $ 1,890 $ 128

Total $ 32,180 $ 2,541 $ 50,752 $ 9,878 $ 82,932 $ 12,419

Held-to-maturity securities:

Government agencies

Mortgage-backed

Treasury and government agencies $ 67,332 $ 2,786 $ 67,163 $ 10,815 $ 134,495 $ 13,601

Mortgage-backed securities 148,771 9,402 199,649 41,062 348,420 50,464

Obligations of states and political subdivisions 780 28 — — 780 28

Other debt securities 8,091 409 2,139 361 10,230 770

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

There were 115 AFS debt securities with a fair value below the amortized cost basis, with unrealized losses totaling $ 10.4 million as of December 31, 2023.

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

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 December 31, 2023.

All of the securities with unrealized losses in the portfolio have modest duration risk, low credit risk, and minimal losses when compared to total amortized cost.

1 unchanged sentence

Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost bases, which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary.

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

There were thirty-five available-for-sale securities and a hundred and fourteen held to maturity securities in an unrealized loss position at December 31, 2021.

There were a 115 available-for-sale securities and a 185 held to maturity securities in an unrealized loss position at December 31, 2023.

There were 192 available-for-sale securities and a 116 held to maturity securities in an unrealized loss position at December 31, 2022.

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

Available for sale

Held to maturity

(Dollars in thousands)

Available for sale Held to maturity

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

Due in one year or less $ 2,447 $ 2,449 $ 7,000 $ 6,927

2 unchanged sentences

Due after ten years 72,637 66,197 335,976 291,843

Total $ 120,832 $ 110,521 $ 513,282 $ 457,830

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

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 December 31, 2023, the aggregate carrying value of pledged AFS and HTM pledged securities was $ 54.5 million and $ 185.9 million, respectively.

The comparable amounts for December 31, 2022 were $ 72.1 million and $ 19.2 million, respectively.

The following table sets forth the amortized cost and estimated fair values of securities which have been pledged as collateral for obligations to federal, state and local government agencies, and other purposes as required or permitted by law, or sold under agreements to repurchase at December 31, 2023 and 2022.

(Dollars in thousands)

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

Pledged available-for-sale securities $ 62,290 $ 54,489 $ 83,288 $ 72,108

2 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Anne Arundel County, Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County and Worcester County in Maryland, Kent and Sussex County, Delaware and in Accomack County, Virginia.

The following table provides information about the principal classes of the loan portfolio at December 31.

(Dollars in thousands)

On January 1, 2023, the Company adopted ASC 326.

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 1 – Summary of Significant Accounting Policies.

All loan information presented as of December 31, 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, 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, Stafford County, Spotsylvania County, and Fredericksburg city in Virginia.

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

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

Construction $ 299,000 6.40 % $ 246,319 9.60 %

Residential real estate 1,490,438 32.10 % 810,497 31.70 %

Commercial real estate 2,286,154 49.30 % 1,065,409 41.70 %

Commercial 229,939 5.00 % 147,856 5.80 %

Consumer 328,896 7.10 % 286,026 11.20 %

Credit Cards 6,583 0.10 % — — %

Total loans $ 4,641,010 100.00 % $ 2,556,107 100.00 %

1 unchanged sentence

Total loans, net $ 4,583,659 $ 2,539,464

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

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

1 unchanged sentence

As of December 31, 2023 and 2022, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy-making officers, totaled approximately $ 53.1 million and $ 24.1 million, respectively.

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

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

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

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

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

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

December 31, 2022

Acquired Loans -

(Dollars in thousands)

Credit Impaired

Outstanding principal balance

Carrying amount

During 2023 and 2022, loan additions were approximately $ 35.9 million and $ 7.7 million of which $ 27.4 million were due to the 2023 acquisition of TCFC and loan repayments and no longer reportable loans were approximately $ 1.3 million and $ 2.2 million, respectively.

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 $ 2.2 million and $ 1.4 million at December 31, 2023 and December 31, 2022.

At December 31, 2023 and December 31, 2022, included in total loans were $ 297.9 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 $ 4.7 million and $ 6.7 million at December 31, 2023 and December 31, 2022, respectively.

At December 31, 2023 included in total loans were $ 1.6 billion acquired as part of the acquisition of TCFC, effective July 1, 2023.

This balance was presented net of the related discount which totaled $ 108.4 million at December 31, 2023.

The following purchased credit deteriorated loans were acquired in connection with the TCFC merger on July 1, 2023.

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

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

Residential real estate 8,379 ( 1,307 ) ( 215 ) 6,857

Commercial real estate 55,779 ( 6,950 ) ( 985 ) 47,844

Commercial 2,317 ( 243 ) ( 278 ) 1,796

Consumer 519 ( 38 ) ( 14 ) 467

Credit Card 999 ( 222 ) ( 18 ) 759

Total $ 68,170 $ ( 8,771 ) $ ( 1,513 ) $ 57,886

At December 31, 2023, the Bank was servicing $ 371.5 million in loans for the Federal National Mortgage Association and $ 113.2 million in loans for Freddie Mac.

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

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

December 31, 2023

Acquired Loans -

(Dollars in thousands)

Credit Impaired

Outstanding principal balance

Carrying amount

Nonaccrual loans:

Construction $ 626 $ — $ 626

Residential real estate 5,865 480 6,345

Commercial real estate 4,364 — 4,364

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

For the Year Ended

(Dollars in thousands)

Commercial 176 368 544

Consumer 216 689 905

Total $ 11,247 $ 1,537 $ 12,784

Interest income $ 399 $ 53 $ 452

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

December 31, 2023

Accretable yield, beginning of period

Reclassification of nonaccretable difference due to improvement in expected cash flows

Other changes, net

Accretable yield, end of period

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

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

As of December 31, 2021, the Company held PPP loans with a total outstanding balance of $ 27.6 million, of which $ 9.2 million was acquired from Severn, which are included in the commercial loan segment in the table above.

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

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

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

In the normal course of banking business, risks related to specific loan categories are as follows:

Construction loans – Construction loans are offered primarily to builders and individuals to finance the construction of single-family dwellings.

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

repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

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

Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors.

These loans are subject to adverse changes in the local economy and commercial real estate markets.

Credit risk associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower and the business to repay the loan.

Non-owner occupied properties carry the risk of a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.

Commercial – Commercial loans are secured or unsecured loans for business purposes.

Loans are typically secured by accounts receivable, inventory, equipment and/or other assets of the business.

Consumer – Consumer loans include home equity loans and lines, installment loans and personal lines of credit.

Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

The following tables include impairment information relating to loans and the allowance for credit losses for the years ended December 31.

(Dollars in thousands)

Nonaccrual loans:

Construction $ 221 $ 405 $ 626

Residential real estate 4,137 2,208 6,345

Commercial real estate 1,215 3,149 4,364

Commercial 28 516 544

Consumer 903 2 905

Total $ 6,504 $ 6,280 $ 12,784

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

This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans.

Credit quality indicators are adjusted based on management’s judgment during the quarterly review process.

Loans are graded on a scale of one to ten.

Ratings 1 thru 6 – Pass - Ratings 1 thru 6 have asset risks ranging from excellent-low to adequate.

The specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.

Rating 7 – Special Mention - These credits have potential weaknesses due to economic conditions, less than adequate earnings performance or other factors which require the lending officer to direct more than normal attention to the credit.

Financing alternatives may be limited and/or command higher risk interest rates.

Special mention loan relationships are reviewed at least quarterly.

Rating 8 – Substandard - Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged.

Substandard loans are the first adversely classified loans on the Bank's watchlist.

These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

They are characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard.

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

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

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

These relationships will be reviewed at least quarterly.

Rating 9 – Doubtful - Doubtful assets have many of the same characteristics of substandard with the exception that the Bank has determined that loss is not only possible but is probable.

The amount of loss is not discernible due to factors such as merger, acquisition, or liquidation;

a capital injection;

a pledge of additional collateral;

the sale of assets;

or alternative refinancing plans.

Credits receiving a doubtful classification are required to be on nonaccrual.

These relationships will be reviewed at least quarterly.

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

The following table provides information on loan risk ratings as of December 31, 2023 and gross write-offs during the twelve months ended December 31, 2023.

Term Loans by Origination Year Revolving loans Revolving converted to term loans Total

(Dollars in thousands) Prior 2019 2020 2021 2022 2023

December 31, 2023

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

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

(Dollars in thousands)

Pass $ 23,450 $ 15,721 $ 14,773 $ 34,325 $ 101,426 $ 100,620 $ 8,056 $ — $ 298,371

Substandard 199 — — 12 418 — — — 629

Total $ 23,649 $ 15,721 $ 14,773 $ 34,337 $ 101,844 $ 100,620 $ 8,056 $ — $ 299,000

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

Residential real estate

Pass $ 317,528 $ 54,387 $ 105,269 $ 251,269 $ 392,378 $ 239,914 $ 119,777 $ 874 $ 1,481,396

Special Mention 154 256 564 503 — — 192 — 1,669

Substandard 6,000 — — — — — 1,373 — 7,373

Total $ 323,682 $ 54,643 $ 105,833 $ 251,772 $ 392,378 $ 239,914 $ 121,342 $ 874 $ 1,490,438

Gross Charge-offs $ — $ — $ — $ — $ — $ — $ ( 119 ) $ — $ ( 119 )

Commercial real estate

Pass $ 670,042 $ 190,753 $ 311,980 $ 426,750 $ 428,240 $ 210,915 $ 14,873 $ 2,138 $ 2,255,691

Special Mention 14,986 331 — 5,501 4,446 — 100 409 25,773

Substandard 2,119 2,029 — 542 — — — — 4,690

Total $ 687,147 $ 193,113 $ 311,980 $ 432,793 $ 432,686 $ 210,915 $ 14,973 $ 2,547 $ 2,286,154

Gross Charge-offs $ ( 512 ) $ — $ ( 814 ) $ — $ — $ — $ — $ — $ ( 1,326 )

Pass $ 23,771 $ 12,946 $ 14,464 $ 41,621 $ 35,897 $ 27,901 $ 49,160 $ 22,284 $ 228,044

Special Mention 143 — — 425 — — 251 — 819

Substandard 160 69 — — 487 — 314 46 1,076

Total $ 24,074 $ 13,015 $ 14,464 $ 42,046 $ 36,384 $ 27,901 $ 49,725 $ 22,330 $ 229,939

Gross Charge-offs $ ( 1 ) $ — $ — $ — $ — $ — $ ( 242 ) $ ( 243 )

Pass $ 621 $ 961 $ 14,158 $ 76,629 $ 143,507 $ 91,415 $ 699 $ — $ 327,990

Special Mention — — — — — — 2 — 2

Substandard — 38 5 80 780 — 1 — 904

Total $ 621 $ 999 $ 14,163 $ 76,709 $ 144,287 $ 91,415 $ 702 $ — $ 328,896

Gross Charge-offs $ ( 522 ) $ — $ ( 16 ) $ ( 17 ) $ ( 8 ) $ ( 4 ) $ ( 7 ) $ — $ ( 574 )

Pass $ 1,035,412 $ 274,768 $ 460,644 $ 830,594 $ 1,101,448 $ 670,765 $ 192,565 $ 25,296 $ 4,591,492

Special Mention 15,283 587 564 6,429 4,446 — 545 409 28,263

Substandard 8,478 2,136 5 634 1,685 — 1,688 46 14,672

Total loans by risk category $ 1,059,173 $ 277,491 $ 461,213 $ 837,657 $ 1,107,579 $ 670,765 $ 194,798 $ 25,751 $ 4,634,427

Total gross charge-offs $ ( 1,035 ) $ — $ ( 830 ) $ ( 17 ) $ ( 8 ) $ ( 4 ) $ ( 126 ) $ ( 242 ) $ ( 2,262 )

Term Loans by Origination Year Revolving loans Revolving converted to term loans Total

(Dollars in thousands) Prior 2019 2020 2021 2022 2023

Performing $ — $ — $ — $ — $ — $ — $ 6,583 $ — $ 6,583

Non-Performing — — — — — — — — —

Total $ — $ — $ — $ — $ — $ — $ 6,583 $ — $ 6,583

Gross Charge-offs $ — $ — $ — $ — $ — $ — $ ( 111 ) $ — $ ( 111 )

Total loans evaluated by performing status $ — $ — $ — $ — $ — $ — $ 6,583 $ — $ 6,583

Total gross charge-offs $ — $ — $ — $ — $ — $ — $ ( 111 ) $ — $ ( 111 )

Total Recorded Investment $ 1,059,173 $ 277,491 $ 461,213 $ 837,657 $ 1,107,579 $ 670,765 $ 201,381 $ 25,751 $ 4,641,010

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

Current Accrual Loans (1)

Current Non-accrual Loans Total

(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

December 31, 2023

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Acquired loans - PCI

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Acquired loans - PCI

Total allowance

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

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

The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken and interest paid on nonaccrual loans that has been applied to principal.

average recorded

(Dollars in thousands)

Construction $ 1,919 $ — $ — $ 220 $ 2,139 $ 296,456 $ 405 $ 299,000

Residential real estate 2,962 1,198 108 2,668 6,936 1,481,294 2,208 1,490,438

Commercial real estate 16 — — 1,222 1,238 2,281,767 3,149 2,286,154

Commercial 48 — 488 28 564 228,859 516 229,939

Consumer 3,224 1,415 — 879 5,518 323,376 2 328,896

Credit Cards 35 36 142 — 213 6,370 — 6,583

Total $ 8,204 $ 2,649 $ 738 $ 5,017 $ 16,608 $ 4,618,122 $ 6,280 $ 4,641,010

Percent of total loans 0.2 % 0.1 % — % 0.1 % 0.4 % 99.5 % 0.1 % 100.0 %

____________________________________

(1) Includes loans measured at fair value of $ 9.9 million at December 31, 2023.

Accruing Nonaccrual PCI Total

(Dollars in thousands) Current (1)

30‑59 days past due 60‑89 days past due Greater than 90 days Total past due

December 31, 2022

Impaired nonaccrual loans:

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

Impaired accruing TDRs:

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 ACL allocated by loan class for the twelve months ended December 31, 2023 and December 31, 2022.

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

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

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

For the year ended December 31, 2023

Construction $ 2,973 $ 1,222 $ 3 $ — $ 15 $ 15 $ ( 278 ) $ 3,935

Residential real estate 2,622 4,974 215 ( 119 ) 44 ( 75 ) 14,213 21,949

Commercial real estate 4,899 3,742 985 ( 1,326 ) — ( 1,326 ) 12,675 20,975

Other impaired accruing loans:

Commercial 1,652 401 278 ( 243 ) 11 ( 232 ) 572 2,671

4,497 452 14 ( 574 ) 284 ( 290 ) 2,928 7,601

Credit Card — — 18 ( 111 ) — ( 111 ) 313 220

Total $ 16,643 $ 10,791 $ 1,513 $ ( 2,373 ) $ 354 $ ( 2,019 ) $ 30,423 $ 57,351

____________________________________

(1) Gross charge-offs of consumer loans for the twelve months ended December 31, 2023 included $ 0.2 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 Provision Ending Balance

For the year ended December 31, 2022

Allowance for credit losses:

Construction $ 2,454 — 13 13 506 $ 2,973

Residential real estate 2,858 ( 5 ) 142 137 ( 373 ) 2,622

Commercial real estate 4,598 ( 6 ) 951 945 ( 644 ) 4,899

Total impaired loans:

Commercial 2,070 ( 546 ) 227 ( 319 ) ( 99 ) 1,652

Consumer 1,964 ( 31 ) 29 ( 2 ) 2,535 4,497

Total $ 13,944 $ ( 588 ) $ 1,362 $ 774 $ 1,925 $ 16,643

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

December 31, 2023

(Dollars in thousands) Real Estate Collateral Other Collateral Total

Construction $ 662 $ — $ 662

Residential real estate 8,047 — 8,047

Commercial real estate 6,134 — 6,134

average recorded

(Dollars in thousands)

Commercial — 1,106 1,106

Consumer — 904 904

Total $ 14,843 $ 2,010 $ 16,853

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 December 31, 2023.

Loan Modifications to Borrowers Experiencing Financial Difficulty

Modifications to borrowers experiencing financial difficulty may include interest rate reduction, principal or interest forgiveness, forbearance, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

The following illustrates the most common loan modifications by loan classes offered by the Company that are required to be disclosed pursuant to the requirements of ASU 2022-02:

Loan Classes Modification Types

Commercial Real Estate Term extension greater than three months .

Commercial Term extension greater than three months .

The following table presents the amortized cost basis of loan modifications made to borrowers experiencing financial difficulty during twelve months ended December 31, 2023.

(dollars in thousands) Term Extension Interest Rate Reduction Payment Delay and Term Extension Term Extension and Interest Rate Reduction Payment Delay Total % of Total Portfolio Segment

December 31, 2023

Impaired nonaccrual loans:

Construction $ — $ — $ — $ — $ — $ — — %

Residential real estate — — — — — — —

Residential rentals — — — — — — —

Commercial real estate 125 — — — — 125 0.01

Impaired accruing TDRs:

Commercial 242 — — — — 242 0.11

Consumer — — — — — — —

Credit Cards — — — — — — —

Total $ 367 $ — $ — $ — $ — $ 367 0.01

The following table presents the financial effect of loan modifications made to borrowers experiencing financial difficulty during the twelve months ended December 31, 2023.

(dollars in thousands) Weighted-Average Months of Term Extension

December 31, 2023

Construction 0

Residential real estate 0

Residential rentals 0

Commercial real estate 12

Other impaired accruing loans:

Commercial 12

Credit Cards 0

During the twelve months ended December 31, 2023, there were no defaults on loan modifications made to borrowers experiencing financial difficulty.

The following table present the aging analysis of loan modifications made to borrowers experiencing financial difficulty as of December 31, 2023.

(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 Accrual Current Non-Accrual Total Recorded Investment

December 31, 2023

Construction $ — $ — $ — $ — $ — $ — $ — $ —

Residential real estate — — — — — — — —

Residential rentals — — — — — — — —

Commercial real estate — — — — — — 125 125

Total impaired loans:

Commercial — — — — — 153 89 242

Consumer — — — — — — — —

Credit Cards — — — — — — — —

Total $ — $ — $ — $ — $ — $ 153 $ 214 $ 367

Foreclosure Proceedings

There were $ 0.2 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of December 31, 2023 and $ 0.3 million as of December 31, 2022, respectively.

There were no residential real estate properties included in the balance of OREO at December 31, 2023 and one residential real estate property totaling $ 18,000 at December 31, 2022.

Prior to the adoption of ASC 326

The following table provides information about all loans acquired from Severn as of December 31, 2022.

December 31, 2022

(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

The following tables provide a roll-forward for troubled debt restructurings as of and for the years ended December 31.

Disbursements

Reclassifications/

(Dollars in thousands)

Transfer In/(Out)

For the Year Ended

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.

(Dollars in thousands) For the Year Ended December 31, 2022

Accretable yield, beginning of period $ 5,367

Accretion ( 1,603 )

Reclassification of nonaccretable difference due to improvement in expected cash flows 469

Other changes, net 506

Accretable yield, end of period $ 4,739

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

(Dollars in thousands) Loans individually evaluated for impairment Loans collectively evaluated for impairment (1)

Acquired loans - PCI Total

December 31, 2022

Accruing TDRs

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

Nonaccrual TDRs

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 allocated to:

Loans individually evaluated for impairment Loans collectively evaluated for impairment Total allowance

December 31, 2022

Construction $ — $ 2,973 $ 2,973

Residential real estate 127 2,495 2,622

Commercial real estate — 4,899 4,899

Disbursements

Reclassifications/

(Dollars in thousands)

Transfer In/(Out)

For the Year Ended

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.

The following tables provide information on impaired loans and any related allowance by loan class as of December 31, 2022.

(Dollars in thousands) Unpaid principal balance Recorded investment with no allowance Recorded investment with an allowance Related allowance Year-to-date average recorded investment Interest income recognized

December 31, 2022

Accruing TDRs

Impaired nonaccrual loans:

Construction $ 297 $ 297 $ — $ — $ 309 $ —

Residential real estate 1,363 1,259 — — 1,661 —

Commercial real estate 159 150 — — 604 —

Nonaccrual TDRs

Commercial 359 174 — — 227 —

Consumer 29 28 — — 43 —

Total $ 2,207 $ 1,908 $ — $ — $ 2,844 $ —

Impaired accruing TDRs:

Construction $ 10 $ 10 $ — $ — $ 16 $ 1

Residential real estate 2,849 1,176 1,539 127 2,979 108

Commercial real estate 1,680 1,680 — — 2,095 56

There were no TDRs which subsequently defaulted within 12 months of modification for the years ended December 31, 2022 and 2021.

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

Commercial — — — — — —

Consumer — — — — 5 —

Total $ 4,539 $ 2,866 $ 1,539 $ 127 $ 5,095 $ 165

Other impaired accruing loans:

Construction $ 24 $ 24 $ — $ — $ 215 $ 6

Residential real estate 1,107 1,107 — — 474 3

Commercial real estate 710 710 — — 553 30

Commercial — — — — 51 1

Consumer — — — — 15 —

Total $ 1,841 $ 1,841 $ — $ — $ 1,308 $ 40

Total impaired loans:

Construction $ 331 $ 331 $ — $ — $ 540 $ 7

Residential real estate 5,319 3,542 1,539 127 5,114 111

Commercial real estate 2,549 2,540 — — 3,252 86

Commercial 359 174 — — 278 1

Consumer 29 28 — — 63 —

Total $ 8,587 $ 6,615 $ 1,539 $ 127 $ 9,247 $ 205

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio.

2 unchanged sentences

At December 31, 2022, there were no nonaccrual loans classified as special mention or doubtful and $ 1.9 million of nonaccrual loans were classified as substandard.

Similarly, at December 31, 2021, there were no nonaccrual loans classified as special mention or doubtful and $ 2.0 million of nonaccrual loans were classified as substandard.

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

(Dollars in thousands)

Pass/Performing (1)

December 31, 2022

Residential real estate

Commercial real estate

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

(Dollars in thousands)

Pass/Performing

(Dollars in thousands) Pass/Performing (1)

Pass/Watch 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

The following tables provide information on the aging of the loan portfolio at December 31.

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 on December 31, 2022.

The following tables provide a roll-forward for TDRs as of and for the years ended December 31, 2022.

(Dollars in thousands) 1/1/2022

December 31, 2022

TDR Balance New TDRs Disbursements (Payments) Charge-offs Reclassifications/ Transfer In/ (Out) Payoffs 12/31/2022

TDR Balance Related Allowance

For the Year Ended December 31, 2022

Accruing TDRs

Construction $ 24 $ — $ ( 14 ) $ — $ — $ — $ 10 $ —

Residential real estate 2,836 — ( 100 ) — ( 20 ) ( 1 ) 2,715 ( 127 )

Commercial real estate 2,807 — ( 180 ) — — ( 947 ) 1,680 —

Percent of total loans

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

(Dollars in thousands)

December 31, 2021

Commercial — — — — — — — —

Consumer — — — — — — — —

Total $ 5,667 $ — $ ( 294 ) $ — $ ( 20 ) $ ( 948 ) $ 4,405 $ ( 127 )

Nonaccrual TDRs

Construction $ — $ — $ — $ — $ — $ — $ — $ —

Residential real estate — — ( 6 ) — 20 — 14 —

Commercial real estate — — — — — — — —

Percent of total loans

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the years ended December 31.

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

(Dollars in thousands)

For the year ended

Commercial 216 — ( 46 ) — — — 170 —

Consumer — — — — — — — —

Total $ 216 $ — $ ( 52 ) $ — $ 20 $ — $ 184 $ —

Total $ 5,883 $ — $ ( 346 ) $ — $ — $ ( 948 ) $ 4,589 $ ( 127 )

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

GOODWILL AND OTHER INTANGIBLE ASSETS

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

December 31, 2023

Allowance for credit losses:

Beginning Balance

Net (charge-offs) recoveries

Ending Balance

(Dollars in thousands)

For the year ended

(Dollars in thousands) Gross

Amount Additions Measurement

Adjustments Accumulated

Charges Accumulated

Amortization Net Carrying

Amount Weighted Average

Remaining Life

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

Other intangible assets

Core deposit intangible $ 10,503 $ 48,648 $ — $ — $ ( 11,061 ) $ 48,090 3.7

Total other intangible assets $ 10,503 $ 48,648 $ — $ — $ ( 11,061 ) $ 48,090

December 31, 2022

Allowance for credit losses:

Beginning Balance

Net (charge-offs) recoveries

Ending Balance

Foreclosure Proceedings

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

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

All accruing TDRs were in compliance with their modified terms.

Both performing and non-performing TDRs had no further commitments associated with them as of December 31, 2022 and 2021.

(Dollars in thousands) Gross Carrying Amount Measurement

Adjustments Accumulated Impairment Charges Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life

Goodwill $ 65,631 $ ( 155 ) $ ( 1,543 ) $ ( 667 ) $ 63,266 —

Other intangible assets

Core deposit intangible $ 10,503 $ — $ — $ ( 4,956 ) $ 5,547 2.6

Total other intangible assets $ 10,503 $ — $ — $ ( 4,956 ) $ 5,547

The aggregate amortization expense was $ 6.1 million and $ 2.0 million for the years ended December 31, 2023 and 2022, respectively.

At December 31, 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 11,056

Total amortizing intangible assets $ 48,090

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.

2 unchanged sentences

The Company’s long-term lease agreements are classified as operating leases.

Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised.

Some of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised.

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

During 2021, the Company acquired long-term branch leases and equipment due to the acquisition of Severn.

These leases were reassessed by management as of the acquisition date of October 31, 2021, which included updating the incremental borrowing rates and remaining lease terms.

The following tables present information about the Company’s leases as of and for the years ended December 31.

(Dollars in thousands)

December 31, 2022

December 31, 2021

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 as of and for the years ended December 31, 2023 and December 31, 2022.

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

Lease liabilities $ 12,857 $ 9,908

Right-of-use assets $ 12,487 $ 9,629

Weighted average remaining lease term

Weighted average remaining lease term 10.88 years 12.55 years

Weighted average discount rate 3.24 % 2.50 %

Remaining lease term - min 0.39 years 0.16 years

Remaining lease term - max 17.68 years 18.68 years

For the Year Ended

Lease cost (in thousands)

December 31, 2022

December 31, 2021

Lease cost (in thousands) December 31, 2023 December 31, 2022

Operating lease cost $ 1,645 $ 1,355

3 unchanged sentences

The following table presents a maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities at December 31, 2023.

Lease payments due (in thousands)

Lease payments due (in thousands) As of

December 31, 2023

Thereafter 7,261

Total undiscounted cash flows $ 15,142

Discount 2,285

Lease liabilities $ 12,857

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

Total gross rental income was $ 1.2 million and $ 1.3 million for the years ended December 31, 2023 and December 31, 2022, respectively.

The following table presents our minimum future annual rental income on such leases at December 31, 2023.

(In thousands)

(In thousands) As of

December 31, 2023

Thereafter 2,521

Total $ 6,224

PREMISES AND EQUIPMENT

The following table provides information on premises and equipment at December 31.

(Dollars in thousands)

The following table provides information on premises and equipment at December 31, 2023 and December 31, 2022.

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

Land $ 19,041 $ 10,886

Buildings and land improvements 67,506 48,605

Furniture and equipment 14,820 8,177

101,367 67,668

Accumulated depreciation ( 18,981 ) ( 16,180 )

Total $ 82,386 $ 51,488

Depreciation expense totaled $ 3.3 million for 2023 and $ 2.4 million for 2022.

GOODWILL AND OTHER INTANGIBLE ASSETS

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

December 31, 2022

Remaining Life

(Dollars in thousands)

Other intangible assets

Core deposit intangible

Total other intangible assets

December 31, 2021

Remaining Life

(Dollars in thousands)

Other intangible assets

Core deposit intangible

Total other intangible assets

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

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

(Dollars in thousands)

Total amortizing intangible assets

The Company had the following other assets at December 31.

(Dollars in thousands)

Accrued interest receivable

Deferred income taxes

Prepaid expenses

Income taxes receivable

OTHER LIABILITIES

The Company had the following other liabilities at December 31.

(Dollars in thousands)

Accrued interest payable

Accrued salaries and wages

Accounts payable

Deferred compensation liability

Other liabilities

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

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

Balance % Balance %

Noninterest-bearing demand $ 1,258,037 23.36 % $ 862,015 28.64 %

Interest-bearing:

Demand 1,165,546 21.64 694,101 23.06

Money market deposits 1,430,603 26.56 709,132 23.56

Savings 347,324 6.45 320,188 10.64

Certificates of deposit 1,184,610 21.99 424,348 14.10

Total interest-bearing 4,128,083 76.64 % 2,147,769 71.36 %

Total Deposits $ 5,386,120 100.00 % $ 3,009,784 100.00 %

As of December 31, 2023 and 2022, deposits, both direct and indirect, from executive officers and directors, their associates and policy-making officers, totaled approximately $ 35.6 million and $ 11.9 million, respectively.

The following table provides information on the approximate maturities of total time deposits at December 31, 2023 and December 31, 2022.

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

Within one year $ 1,042,343 $ 230,715

Year 2 78,585 138,356

Year 3 36,469 23,860

Year 4 12,081 17,327

Year 5 14,955 14,051

Thereafter 177 39

Total $ 1,184,610 $ 424,348

The approximate amount of certificates of deposit of $250,000 or more was $ 354.6 million and $ 77.7 million at December 31, 2023 and 2022, respectively.

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

(Dollars in thousands)

Due in one year or less

Due in one to three years

Due in three to five years

As of December 31, 2022 and 2021, deposits, both direct and indirect, from directors, their associates and policy-making officers, totaled approximately $ 11.9 million and $ 7.7 million, respectively.

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

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

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

(Dollars in thousands)

The following table summarizes certain information on short-term borrowings as of and for the years ended December 31, 2023 and December 31, 2022.

December 31, 2023 December 31, 2022

(Dollars in thousands) Amount Rate Amount Rate

Average for the Year

1 unchanged sentence

FHLB Advances 111,392 4.95 1,863 3.87

Overnight Fed Funds purchased

Repurchase agreements $ — — % $ — — %

FHLB Advances — — 40,000 4.57

Overnight Fed Funds purchased

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

2 unchanged sentences

The Bank had $ 45.0 million in federal funds lines of credit and a reverse repurchase agreement available on a short-term basis from correspondent banks at December 31, 2023 and 2022.

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

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

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

In addition, the Bank had secured credit availability of approximately $ 659.0 million from the FHLB at December 31, 2023.

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

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

SUBORDINATED DEBT

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

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

From and including September 1, 2025, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 526.5 basis points, with interest during this period payable quarterly in arrears.

The Notes are redeemable by the Company at its option, in whole or in part, on or after September 1, 2025.

Initial debt issuance costs were $ 611 thousand.

The debt balance of $ 24.7 million is presented net of unamortized issuance costs of $ 326 thousand at December 31, 2022.

In conjunction with the acquisition of Severn, the Company assumed $ 20.6 million in junior subordinated debt securities (“2035 Debentures”).

The 2035 Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of which 100% of the common equity is owned by the Company.

The Trust was formed for the purpose of issuing corporation-obligated mandatorily redeemable Capital Securities (“Capital Securities”) to third-party investors and using the proceeds from the sale of such Capital Securities to purchase the 2035 Debentures.

The 2035 Debentures held by the Trust are the sole assets of the Trust.

Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures.

The Capital Securities are subject to mandatory

redemption, in whole or in part, upon repayment of the 2035 Debentures.

We have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee.

Under the terms of the 2035 Debentures, we are permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred and is continuing.

As of December 31, 2022, we were current on all interest due on the 2035 Debentures.

The Bank had letters of credit with FHLB of $ 86.1 million and $ 6.1 million as of December 31, 2023 and 2022, respectively.

These letters of credit are used to secure public deposits held with various municipal customers.

The Bank had no borrowings from the FHLB at December 31, 2023 and $ 40.0 million short term FHLB borrowings at December 31, 2022.

(dollars in thousands) December 31, 2023 December 31, 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 ( 4,822 ) ( 2,547 )

Total long-term debt $ 72,297 $ 43,072

At December 31, 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.

As of December 31, 2023, the recorded balance of subordinated debt issued by the Company and the assumed subordinated debt from TCFC, net of unamortized issuance costs and fair value discounts, were $ 24.8 million and $ 18.3 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 December 31, 2023 was $ 18.6 million, net of the unamortized fair value adjustment of $ 2.0 million.

At December 31, 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.

As both the Capital Trust I and Capital Trust II variable-rate capital securities were originally LIBOR-linked instruments that matured after June 30, 2023, the interest rate transitioned from a LIBOR-based rate to an alternative reference rate.

Both instruments were subject to the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) and neither instrument contains fallback provision or a clearly practicable fallback provision in the event that LIBOR was no longer published or quoted.

The interest rate on both the Capital Trust I and Capital Trust II transitioned pursuant to the LIBOR Act to a rate based on the Secured Overnight Financing Rate (“SOFR”) on July 1, 2023.

BENEFIT PLANS

401(k) and Profit Sharing Plan

The Company has a 401(k) and profit sharing plan covering substantially all full-time employees.

401(k) and Profit Sharing Plan - The Company has a 401(k) and profit sharing plan covering substantially all full-time employees.

The plan calls for matching contributions by the Company, and the Company makes discretionary contributions based on profits.

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

Company contributions to this plan included in noninterest expense totaled $ 1.7 million and $ 1.3 million for 2023 and 2022, respectively.

Employee Stock Ownership Plan - Prior to the closing of the acquisition of TCFC, TCFC paid into the Employee Stock Ownership Plan (“ESOP”) and adopted resolutions to (i) terminate the ESOP and (ii) provide for full vesting of all account balances in the ESOP.

A determination letter has been filed with the IRS to terminate the ESOP and the ESOP will be terminated if and when the IRS issues a favorable determination letter.

STOCK-BASED COMPENSATION

1 unchanged sentence

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

2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date.

2006 Stock and Incentive Plan, which expired on that date.

The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan.

3 unchanged sentences

The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 455,530 shares remained available for grant at December 31, 2023.

The following tables provide information on stock-based compensation expense as of and for the years ended December 31.

(Dollars in thousands)

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

The vesting period for the outstanding restricted stock grants and restricted stock units is between three and five years and one to three years , respectively.

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

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

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

Stock-based compensation expense $ 1,174 $ 636

Excess tax benefits related to stock-based compensation

(Dollars in thousands)

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

Unrecognized stock-based compensation expense $ 1,859 $ 138

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 years ended December 31.

Weighted Average

Weighted average period unrecognized expense is expected to be recognized 1.3 years 0.2 years

The following tables summarize the unvested restricted stock and restricted stock unit awards outstanding for the Company for the years ended December 31, 2023 and 2022, respectively.

Restricted Stock Restricted Stock Units

December 31, 2023 December 31, 2023

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 44,340 15.58 91,047 11.56

Vested ( 38,184 ) 19.68 ( 15,573 ) 11.56

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

Nonvested at end of period 45,322 15.42 165,055 11.56

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

Restricted Stock Restricted Stock Units

December 31, 2022 December 31, 2022

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

Nonvested at beginning of period 29,425 $ 13.95 — $ —

Granted 34,184 20.48 — —

Vested ( 26,749 ) 13.75 — —

Forfeited — — — —

Nonvested at end of period 36,860 20.15 — —

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

The fair value of restricted stock units vested during 2023 was $ 0.2 million.

There were no stock options granted during 2023 and 2022.

We maintain and account for derivatives, in the form of IRLCs and mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities.

The Company maintains and account for derivatives, in the form of IRLCs and mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities.

We recognize gains and losses through mortgage-banking revenue in the Consolidated Statements of Income.

1 unchanged sentence

We are exposed to price risk from the time a mortgage loan is locked in until the time the loan is sold.

The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 120 days .

For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of TBA securities, which are forward contracts, as well as, to a lesser degree, loan level commitments in the form of best efforts and mandatory forward contracts.

The period of time between issuance of a loan commitment, closing and sale of the loan generally ranges from 14 days to 120 days.

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

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

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

December 31, 2022

December 31, 2021

(Dollars in thousands)

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

December 31, 2023 December 31, 2022

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

Asset - IRLCs $ 6,785 $ 110 $ 4,166 $ 35

4 unchanged sentences

The Company has multiple deferred compensation agreements with current and former employees.

The Executive Deferred Compensation Plan (the “Plan”) is reserved for members of management and highly compensated employees of the Company and the Bank.

During 2019, the Plan was expanded to include additional officers who had not previously participated.

The Plan permits a participant to elect, each year, to defer receipt of up to 100 % of his or her salary and bonus to be earned in the following year.

The Plan also permits the participant to defer the receipt of performance-based compensation not later than six months before the end of the period for which it is to be earned.

The Executive Deferred Compensation Plan is reserved for members of management and highly compensated employees of the Company and the Bank.

During 2019, the Executive Deferred Compensation Plan was expanded to include additional officers who had not previously participated.

The Executive Deferred Compensation Plan permits a participant to elect, each year, to defer receipt of up to 100 % of his or her salary and bonus to be earned in the following year.

The Executive Deferred Compensation Plan also permits the participant to defer the receipt of performance-based compensation not later than six months before the end of the period for which it is to be earned.

The deferred amounts are credited to an account maintained on behalf of the participant and are invested at the discretion of each participant in certain deemed investment options selected by the Compensation Committee of the Board of the Company.

1 unchanged sentence

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

The Company and the

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

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

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

Any contributions by the Company will vest over a five-year period.

The following table provides information on Shore Bancshares, Inc.’s contributions and participant deferrals to the Plan for 2022 and 2021 and the related deferred compensation liability as of December 31.

(Dollars in thousands)

The following table provides information on Shore Bancshares, Inc.’s contributions and participant deferrals to the Executive Deferred Compensation Plan for 2023 and 2022 and the related deferred compensation liability.

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

Elective deferrals $ 273 $ 238

3 unchanged sentences

however, BOLI was purchased to offset the benefit costs.

The following table provides information on the expense recognized during the years ended December 31, as well as the balance of the unfunded SERP liability and the cash surrender value of policies purchased to offset the SERP benefit costs as of December 31.

The following table provides information on the expense recognized during the years ended December 31, 2023 and December 31, 2022, as well as the balance of the unfunded SERP liability and the cash surrender value of policies purchased to offset the SERP benefit costs as of December 31, 2023 and December 31, 2022.

The unfunded SERP liability and cash surrender value were included in other liabilities and other assets, respectively.

(Dollars in thousands)

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

Cash surrender value $ 98,140 $ 56,117

Deferred compensation liability - SERP 12,869 4,177

SERP Expense 1,405 1,063

Lastly, in 2016, the Bank assumed agreements held by the former CNB Bank under which its former directors had elected to defer part of their fees and compensation while serving on the former Board of CNB.

The amounts deferred were invested in insurance policies on the lives of the respective individuals.

The amounts deferred were invested in insurance policies on the

lives of the respective individuals.

Amounts available under the policies are to be paid to the individuals as retirement benefits over future years.

The following table includes information on the deferred compensation liability and cash surrender value as of December 31.

(Dollars in thousands)

The following table includes information on the deferred compensation liability and cash surrender value as of December 31, 2023 and December 31, 2022.

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

Deferred compensation liability $ 388 $ 450

Cash surrender value 2,322 2,260

OTHER EXPENSES

The following table summarizes the Company’s other noninterest expenses for the years ended December 31.

(Dollars in thousands)

Advertising and marketing

Other customer expense

Other expense

Other loan expense

Software expense

Travel and entertainment expense

Trust professional fees

Total other noninterest expense

The following table provides information on components of income tax expense for the years ended December 31.

(Dollars in thousands)

ACCUMULATED OTHER COMPREHENSIVE LOSS

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 years ended December 31, 2023 and December 31, 2022.

Twelve Months Ended December 31, 2023 Twelve Months Ended December 31, 2022

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

Beginning of period $ ( 9,021 ) $ 56

Other comprehensive income (loss), net of tax 1,527 ( 9,077 )

End of period $ ( 7,494 ) $ ( 9,021 )

The Company files income tax returns in the U.S.

federal jurisdiction and the State of Maryland.

With few exceptions, the Company is no longer subject to U.S.

Federal and State income tax examinations by tax authorities for years prior to 2020.

The following table provides information on components of income tax expense for the years ended December 31, 2023 and December 31, 2022.

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

Current tax expense:

Federal $ 172 $ 8,814

State 63 3,332

Deferred income tax (benefit) expense:

Federal 1,692 ( 911 )

State 1,029 ( 271 )

2,721 ( 1,182 )

Total income tax expense $ 2,956 $ 10,964

The following table provides a reconciliation of tax computed at the statutory federal tax rate to the actual tax expense for the years ended December 31.

The following table provides a reconciliation of tax computed at the statutory federal tax rate to the actual tax expense for the years ended December 31, 2023 and December 31, 2022.

December 31, 2023 December 31, 2022

Tax at federal statutory rate 21.0 % 21.0 %

2 unchanged sentences

State income taxes, net of federal benefit 6.1 5.7

Bargain purchase gain ( 13.1 ) —

Nondeductible compensation costs 3.9 —

Nondeductible merger related expenses 2.6 —

Other 3.9 0.3

Actual income tax expense rate 20.8 % 26.0 %

The following table provides information on significant components of the Company’s deferred tax assets and liabilities for the years ended December 31.

(Dollars in thousands)

The following table provides information on significant components of the Company’s deferred tax assets and liabilities for the years ended December 31, 2023 and December 31, 2022.

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

Deferred tax assets:

Allowance for credit losses $ 14,534 $ 4,460

Write-downs of other real estate owned

Write-downs of OREO 33 21

Nonaccrual loan interest 344 345

1 unchanged sentence

Deferred compensation 4,160 1,522

Federal net operating loss 6,528 —

State net operating loss 2,448 722

Deferred loan costs 1,775 1,183

Acquisition fair value adjustments 30,452 2,580

Unrealized losses on available-for-sale securities 2,825 3,399

Other 1,398 883

Total deferred tax assets 67,823 17,750

2 unchanged sentences

Deferred tax liabilities:

Depreciation 4,320 2,491

Right-of-use assets 3,229 2,560

Mortgage servicing rights 1,541 1,405

Acquisition accounting adjustments

Acquisition fair value adjustments 2,401 466

Deferred capital gain on branch sale 207 220

Unrealized gains on available-for-sale securities

Intangibles 13,611 2,290

Other 792 170

Total deferred tax liabilities 26,101 9,602

Net deferred tax assets $ 40,707 $ 7,357

EARNINGS PER COMMON SHARE

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.

Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents (stock-based awards).

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

For the Year Ended

(In thousands, except per share data)

Weighted average shares outstanding - Basic and Diluted

Earnings per common share - Basic and Diluted

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the years ended December 31, 2022 and 2021.

REGULATORY CAPITAL REQUIREMENTS

4 unchanged sentences

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain amounts and ratios (set forth in the table below) of Common Equity Tier 1, Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (leverage ratio).

As of December 31, 2022, management believes that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 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, 2023, the most recent notification from our primary regulator categorized Shore United Bank, N.A., as well capitalized under the regulatory framework for prompt corrective action.

1 unchanged sentence

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.

The minimum ratios for capital adequacy purposes require a common equity Tier 1 capital to risk-weighted assets ratio of 4.5 %, a ratio of Tier 1 capital to risk-weighted assets of 6.0 %, a ratio of Total Capital to risk-weighted assets of 8.0 %, and a Tier 1 leverage ratio of 4.0 %.

A capital conservation buffer is also established above the regulatory minimum capital requirements of 2.50% for all regulatory risk-weighted ratios.

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.

The following tables present the capital amounts and ratios at December 31.

(Dollars in thousands)

Shore Bancshares, Inc.

Shore United Bank, N.A.

The following tables present the capital amounts and ratios at December 31, 2023 and December 31, 2022.

Regulatory Capital and Ratios Regulatory Minimum Ratio + Capital Conversation Buffer ( 1)

The Company The Bank

(dollars in thousands) 2023 2022 2023 2022

Shore Bancshares, Inc.

Shore United Bank, N.A.

Common equity $ 511,135 $ 364,285 $ 570,100 $ 395,594

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

Core deposit intangible (2)

( 38,069 ) ( 5,547 ) ( 38,069 ) ( 5,547 )

DTAs that arise from net operating loss and tax credit carry forwards ( 8,977 ) — ( 6,059 ) —

AOCI (gains) losses 7,494 9,021 7,494 9,021

Common Equity Tier 1 Capital 408,317 304,493 470,200 335,802

TRUPs 29,158 18,398 — —

Tier 1 Capital 437,475 322,891 470,200 335,802

Allowable reserve for credit losses and other Tier 2 adjustments 58,586 16,854 58,586 16,854

Subordinated notes 43,139 24,674 — —

Total Capital 539,200 364,419 528,786 352,656

Risk-Weighted Assets ("RWA") 4,697,504 2,619,400 4,693,009 2,618,939

Average Assets ("AA") 5,649,116 3,390,516 5,644,930 3,386,771

Common Tier 1 Capital to RWA 7.00 % 8.69 % 11.62 % 10.02 % 12.82 %

Tier 1 Capital to RWA 8.50 % 9.31 % 12.33 % 10.02 % 12.82 %

Total Capital to RWA 10.50 % 11.48 % 13.91 % 11.27 % 13.47 %

Tier 1 Capital to AA (Leverage) (3)

n/a 7.74 % 9.52 % 8.33 % 9.92 %

___________________________________

(1) The regulatory minimum capital ratio + the capital conservation buffer .

(2) Core deposit intangible at December 31, 2023 is net of deferred tax liability.

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

The PCA well capitalized is defined as 5.00 %

Bank and holding company regulations impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company.

At December 31, 2023, the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios.

The Bank issued a dividend to Shore Bancshares, Inc.

in the fourth quarter of 2021 of $ 25.0 million in relation to the purchase of Severn.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the years ended December 31.

gains (losses) on

available for sale

(Dollars in thousands)

Balance, December 31, 2021

Other comprehensive (loss)

Balance, December 31, 2022

Balance, December 31, 2020

Other comprehensive (loss)

Balance, December 31, 2021

RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

The Bank was required to maintain average balances on hand or with the Federal Reserve Bank.

The Federal Reserve Bank announced on March 15, 2020, the reduction of reserve requirement ratios to zero percent effective March 26, 2020, which eliminated reserve requirements for all depository institutions.

FAIR VALUE MEASUREMENTS

3 unchanged sentences

Securities available for sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis.

Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, loans held for sale and other real estate owned (foreclosed assets).

Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, loans held for sale and OREO (foreclosed assets).

These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

14 unchanged sentences

Equity Securities

Fair value measurement for equity securities is based on quoted market prices retrieved by the Company via on-line resources.

Fair value measurement for equity securities is based on quoted market prices retrieved by the Company via online resources.

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

LHFS are carried at fair value, which is determined based on Mark to Trade (MTT) for allocated/committed loans or Mark to Market (MTM) analysis for unallocated/uncommitted loans based on third-party pricing models using quoted prices for similar loans and adjusted for observable inputs related to the loans.

LHFI, at fair value

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

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

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

Loans Held for Sale

Loans held for sale 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 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).

The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, and other ancillary income such as late fees.

1 unchanged sentence

Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal.

The discount rate used to determine the present value of estimated future net servicing income,

another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk.

The discount rate used to determine the present value of estimated future

net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk.

Both assumptions can, and generally will, change as market conditions and interest rates change.

3 unchanged sentences

We utilize a third-party specialist model to estimate the fair value of our IRLCs, which are valued based upon mortgage securities (TBA) prices less estimated costs to process and settle the loan.

Fair value is adjusted for the estimated probability of the loan closing with the borrower.

(Dollars in thousands)

Valuation Technique

Unobservable Input

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

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

December 31, 2023

Market Approach

Weighted average prepayment speed (PSA) (2)

IRLCs - net asset

Market Approach

Range of pull through rate

$ 5,926 Market Approach Weighted average prepayment speed (PSA) (2)

IRLCs - net asset $ 110 Market Approach Range of pull through rate 78 % - 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 - 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.

1 unchanged sentence

The following table presents activity in MSRs for the year ended December 31, 2023.

For the Year Ended

(Dollars in thousands)

(Dollars in thousands) For the Year Ended

December 31, 2023

1 unchanged sentence

Servicing rights resulting from sales of loans 712

Servicing rights acquired in acquisition of TCFC 190

Valuation adjustment ( 251 )

1 unchanged sentence

The following table presents activity in the IRLCs for the year ended December 31, 2023.

For the Year Ended

(Dollars in thousands)

(Dollars in thousands) For the Year Ended

December 31, 2023

4 unchanged sentences

To avoid interest rate risk, we hedge the open locked/closed position with TBA forward trades.

On a regular basis, we allocate disbursed loans to mandatory commitments with government-sponsored enterprises (“GSE”) and private investors

delivering the loans within 120 days of origination to maximize interest earnings.

On a regular basis, we allocate disbursed loans to mandatory commitments with government-sponsored enterprises and private investors delivering the loans within 120 days of origination to maximize interest earnings.

For a small percentage of our business, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower.

2 unchanged sentences

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.

a level 2 input.

We have elected to measure and report best efforts commitments at fair value using a valuation methodology similar to that used for mandatory commitments.

4 unchanged sentences

No assets were transferred from one hierarchy level to another during 2023 or 2022.

(Dollars in thousands)

(Dollars in thousands) Fair Value Quoted Prices

(Level 1) Significant Other Observable Inputs (Level 2) Significant Other Observable Inputs (Level 3)

December 31, 2023

3 unchanged sentences

Other debt securities 6,019 — 6,019 —

110,521 — 110,521 —

Equity securities 5,703 — 5,703 —

TBA securities

LHFI, at fair value

TBA forward trades 2 — 2 —

Loans Held for Sale 8,782 — 8,782 —

Loans Held for Investment, at fair value 9,944 — 9,944 —

MSRs 5,926 — — 5,926

IRLCs 110 — — 110

Total assets at fair value $ 140,988 $ — $ 134,952 $ 6,036

TBA securities

TBA forward trades $ 176 $ — $ 176 $ —

Total liabilities at fair value $ 176 $ — $ 176 $ —

(Dollars in thousands)

(Dollars in thousands) Fair Value Quoted Prices

(Level 1) Significant Other Observable Inputs (Level 2) Significant Other Observable Inputs (Level 3)

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

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 —

1 unchanged sentence

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent and these are considered Level 3 in the fair value hierarchy.

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

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

Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business.

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

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

Other Real Estate Owned (Foreclosed Assets)

Individually Evaluated Collateral-Dependent Loans

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.

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

OREO (Foreclosed Assets)

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets establishing a new cost basis.

3 unchanged sentences

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

The following tables set forth the Company’s financial assets subject to fair value adjustments (impairment) on a nonrecurring basis for the years ended December 31, that are valued at the lower of cost or market.

The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis for the years ended December 31, that are valued at the lower of cost or market.

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

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

Valuation Technique

Unobservable Input

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

December 31, 2023

Nonrecurring measurements:

Impaired loans

Discounted cash flow analysis

Discount rate

Other real estate owned

Appraisal of collateral

Appraisal adjustments

Individually evaluated collateral dependent loan $ 633 Appraisal of collateral (1)

Appraisal adjustment (2)

Liquidation expense (2)

Other real estate owned $ 179 Appraisal of collateral (1)

Appraisal adjustment (2)

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

December 31, 2022

Nonrecurring measurements:

Impaired loans

Appraisal of collateral

Liquidation expense

Impaired loans

Discounted cash flow analysis

Discount rate

Other real estate owned

Appraisal of collateral

Appraisal adjustments

(1) Fair value is generally determined through independent appraisals of the underlying collateral (impaired loans and OREO) or discounted cash flow analyses (impaired loans), which generally include various level III inputs which are not observable.

Other real estate owned $ 197 Appraisal of collateral (1)

Appraisal adjustment (2)

_____________________________

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

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

The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

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

Fair Value of Financial Assets and Financial Liabilities

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments for the years ended December 31.

Fair values for December 31, 2022 and 2021 were estimated using an exit price notion.

December 31, 2022

December 31, 2021

(Dollars in thousands)

Financial assets

Level 1 inputs

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 following table presents the carrying amounts and estimated fair values of the Company’s financial instruments for the years ended December 31, 2023 and December 31, 2022.

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

December 31, 2023 Carrying Amount Fair Value Fair Value Measurements

Description of Asset (dollars in thousands)

Level 1 Level 2 Level 3

Cash and cash equivalents $ 372,413 $ 372,413 $ 372,413 $ — $ —

Level 2 inputs

Investment securities available for sale

Investment securities held to maturity

Investment securities - AFS 110,521 110,521 — 110,521 —

Investment securities - HTM, net 513,188 457,830 — 457,830 —

Equity securities 5,703 5,703 — 5,703 —

Restricted securities 17,900 17,900 — 17,900 —

Loans held for sale 8,782 8,782 — 8,782 —

TBA derivatives trades 2 2 — 2 —

Cash surrender value on life insurance 101,704 101,704 — 101,704 —

Loans, at fair value 9,944 9,944 — 9,944 —

Loans, net 4,573,715 4,477,468 — — 4,477,468

MSRs 5,926 5,926 — — 5,926

IRLCs 110 110 — — 110

Noninterest-bearing demand $ 1,258,037 $ 1,258,037 $ — $ 1,258,037 $ —

Checking plus interest 1,165,546 1,165,546 — 1,165,546 —

Money Market 1,430,603 1,430,603 — 1,430,603 —

Savings 347,324 347,324 — 347,324 —

Certificates of Deposit 1,184,610 1,184,447 — 1,184,447 —

Subordinated debt 43,139 42,579 — 42,579 —

TRUPS 29,158 28,266 — 28,266 —

TBA Securities 176 176 — 176 —

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 —

Cash surrender value on life insurance 59,218 59,218 — 59,218 —

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 320,188 320,188 — 320,188 —

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

Securities sold under retail repurchase agreement

Advances from FHLB - short term 40,000 40,002 — 40,002 —

Advances from FHLB - long-term

Subordinated debt 43,072 41,193 — 41,193 —

TBA Securities 6 6 — 6 —

Level 3 inputs

IRLCs 7 7 — — 7

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 for the years ended December 31.

(Dollars in thousands)

December 31, 2022

December 31, 2021

The following table provides information on commitments outstanding for the years ended December 31, 2023 and December 31, 2022.

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

Commitments to extend credit $ 613,266 $ 406,353

Letters of credit 28,519 8,009

The Bank has established a reserve for off balance sheet credit exposures.

The reserve is established as losses are estimated to have occurred through a loss for off balance sheet credit exposures charged to earnings.

Total $ 641,785 $ 414,362

The Bank has established a reserve for off balance sheet credit exposures of $ 1.1 million.The reserve is established as losses are estimated to have occurred through a loss for off balance sheet credit exposures charged to earnings.

Losses are charged against the allowance when management believes the required funding of these exposures is uncollectible.

3 unchanged sentences

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

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

While the Company is providing banking

services to customers that are engaged in growing, processing, and sales of both medical and adult-use cannabis in a manner that complies with applicable state law, such customers engaged in those activities currently violate Federal law.

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

8 unchanged sentences

Management, after consultation with legal counsel, does not anticipate that the future liability, if any, arising out of current proceedings will have a material effect on the Company’s financial condition, operating results, or liquidity.

SEGMENT REPORTING

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

Community banking is conducted through the Bank and involves delivering a broad range of financial services, including lending and deposit taking, to individuals and commercial enterprises.

This segment also includes our treasury and administrative functions.

Mortgage-banking is conducted through the Bank’s secondary marketing department and involves originating first and second-lien residential mortgages for sale in the secondary market.

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

Prior to the acquisition of Severn, the Company did not engage in the business of originating first and second lien residential mortgages for sale in the secondary market.

The following tables present certain information regarding our business segments as of and for the years ended December 31.

(Dollars in thousands)

Mortgage Banking

For the Year Ended December 31, 2022

Interest Income

Interest Expense

Net interest income

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

Noninterest expense

Income before income taxes

Income tax expense

Total assets, December 31, 2022

(Dollars in thousands)

Mortgage Banking

For the Year Ended December 31, 2021

Interest Income

Interest Expense

Net interest income

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

Noninterest expense

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Total assets, December 31, 2021

RELATED PARTY TRANSACTIONS

1 unchanged sentence

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

The total rent payments received were $ 305 thousand for the year ended December 31, 2022 and $ 50 thousand for the year ended December 31, 2021.

The total rent payments received were $ 0.3 million for the year ended December 31, 2023 and $ 0.3 million for the year ended December 31, 2022.

The law firm also reimburses the Company for its share of common area maintenance and utilities.

3 unchanged sentences

Deposits, respectively.

PENDING MERGER

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

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

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

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

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

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

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

PARENT COMPANY FINANCIAL INFORMATION

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

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

Condensed Balance Sheets

(Dollars in thousands)

Investment in subsidiaries

Accrued interest payable

Other liabilities

Long-term debt

Total liabilities

Stockholders’ equity

Additional paid in capital

Retained earnings

Accumulated other comprehensive (loss) income

Total stockholders’ equity

Total liabilities and stockholders’ equity

Condensed Statements of Income

For the Years Ended December 31,

(Dollars in thousands)

Dividends from subsidiaries

Company owned life insurance income

Interest expense

Salaries and employee benefits

Legal and professional fees

Other operating expenses

Total expenses

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

undistributed net income of subsidiaries

Income tax (benefit)

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

Equity (deficit) in undistributed net income of subsidiaries

Condensed Statements of Cash Flows

For the Years Ended December 31,

(Dollars in thousands)

Cash flows from operating activities:

Adjustments to reconcile net income to cash

provided by operating activities:

(Equity) deficit in undistributed net income of subsidiaries

Amortization of debt issuance costs

Stock-based compensation expense

Company owned life insurance income

Acquisition accounting adjustments

Net decrease (increase) in other assets

Net increase (decrease) increase in other liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Purchase of company owned life insurance

Acquisition of business activity, net of cash paid

Net cash (used in) investing activities

Cash flows from financing activities:

Common stock dividends paid

Retirement of common stock

Issuance of common stock

Exercise of stock options

Net cash (used in) financing activities

Net (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

EARNINGS PER COMMON SHARE

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.

The following table provides information relating to the calculation of earnings per common share for the years ended December 31, 2023 and December 31, 2022.

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

Net Income $ 11,228 $ 31,177

Average number of common shares outstanding 26,572 19,847

Dilutive effect of common stock equivalents 2 —

Average number of shares used to calculate diluted EPS 26,574 19,847

Anti-dilutive shares — $ —

Earnings per common share

Basic $ 0.42 $ 1.57

Diluted $ 0.42 $ 1.57

As of December 31, 2023 and 2022, there were no unvested common stock equivalents excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.

REVENUE RECOGNITION

26 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 from continued operations, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31.

(Dollars in thousands)

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

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

Noninterest Income

15 unchanged sentences

As of December 31, 2023 and 2022, the Company did not have any significant contract balances.

PARENT COMPANY FINANCIAL INFORMATION

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

(Parent Company Only) at and for the years ending December 31, 2023 and 2022.

Condensed Balance Sheets

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

Cash $ 7,345 $ 7,145

Investment in subsidiaries 571,298 396,897

Other assets 7,926 5,392

Total assets $ 586,569 $ 409,434

Accrued interest payable $ 1,050 $ 744

Other liabilities 2,087 1,333

Long-term debt 72,297 43,072

Total liabilities 75,434 45,149

Stockholders’ equity

Common stock 332 199

Additional paid in capital 356,007 201,494

Retained earnings 162,290 171,613

Accumulated other comprehensive (loss) ( 7,494 ) ( 9,021 )

Total stockholders’ equity 511,135 364,285

Total liabilities and stockholders’ equity $ 586,569 $ 409,434

Condensed Statements of Income

For the Year Ended

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

Dividends from subsidiaries $ 22,000 $ 5,500

Company owned life insurance income 141 67

Bargain purchase gain 8,816 —

Total income 30,957 5,567

Interest expense 4,454 2,451

Salaries and employee benefits 358 324

Occupancy and equipment expense 1 —

Legal and professional fees, including merger expenses 5,164 1,654

Other operating expenses 775 540

Total expenses 10,752 4,969

Income before income tax (benefit) and equity (deficit) in undistributed net income of subsidiaries 20,205 598

Income tax (benefit) ( 1,557 ) ( 1,059 )

Income before (deficit) equity in undistributed net income of subsidiaries 21,762 1,657

Equity (deficit) in undistributed net income of subsidiaries ( 10,534 ) 29,520

Net income $ 11,228 $ 31,177

Condensed Statements of Cash Flows

For the Year Ended

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

Cash flows from operating activities:

Net income $ 11,228 $ 31,177

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

Deficit (equity) in undistributed net income of subsidiaries 10,534 ( 29,521 )

Bargain purchase gain ( 8,816 ) —

Amortization of debt issuance costs 122 122

Stock-based compensation expense 1,174 636

Company owned life insurance income ( 141 ) ( 67 )

Acquisition accounting adjustments 557 188

Net (increase) decrease in other assets ( 1,267 ) 387

Net (decrease) increase in other liabilities ( 682 ) 275

Net cash provided by operating activities 12,709 3,197

Cash flows from investing activities:

Purchase of company owned life insurance ( 249 ) —

Cash acquired in the acquisition of TCFC, net of cash paid 88 —

Net cash (used in) investing activities ( 161 ) —

Cash flows from financing activities:

Common stock dividends paid ( 12,733 ) ( 9,530 )

Issuance of common stock 385 386

Net cash (used in) financing activities ( 12,348 ) ( 9,144 )

Net increase (decrease) in cash and cash equivalents 200 ( 5,947 )

Cash and cash equivalents at beginning of year 7,145 13,092

Cash and cash equivalents at end of year $ 7,345 $ 7,145

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data