SHORE BANCSHARES INC 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Management’s Report on Internal Control over Financial Reporting 62 Report of Independent Registered Public Accounting Fi rm (PCAOB ID 613 ) 64 Consolidated Balance Sheets 68 Consolidated Statements of Income 69 Consolidated Statements of Comprehensive Income 70 Consolidated Statements of Changes in Stockholders’ Equity 71 Consolidated Statements of Cash Flows 72 Notes to Consolidated Financial Statements 74 61 Table of Contents MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Shore Bancshares, Inc. (the “Company”) is responsible for the preparation, integrity and fair presentation of the 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. 62 Table of Contents 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. (“YHB”). 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. /s/ James M. Burke /s/ Todd L. Capitani James M. Burke Todd L. Capitani President and Chief Executive Officer Executive Vice President and Chief Financial Officer (Principal Executive Officer) (Principal Financial Officer) March 15, 2024 March 15, 2024 63 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Shore Bancshares, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Shore Bancshares, Inc. and its subsidiaries (the Company) as of December 31, 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 (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit 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 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 64 Table of Contents 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 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. We have served as the Company's auditor since 2017. Winchester, Virginia March 15, 2024 65 Table of Contents 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. 66 Table of Contents 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 67 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 31, 2023 December 31, 2022 ASSETS Cash and due from banks $ 63,172 $ 37,661 Interest-bearing deposits with other banks 309,241 17,838 Cash and cash equivalents 372,413 55,499 Investment securities: 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 Restricted securities, at cost 17,900 11,169 Loans held for sale, at fair value 8,782 4,248 Loans held for investment ($ 9,944 (2023) and $ 8,437 (2022), at fair value) 4,641,010 2,556,107 Less: 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 OREO, net 179 197 Mortgage servicing rights, at fair value 5,926 5,275 Right-of-use assets 12,487 9,629 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 LIABILITIES Deposits: Noninterest-bearing $ 1,258,037 $ 862,015 Interest-bearing 4,128,083 2,147,769 Total deposits 5,386,120 3,009,784 Advances from FHLB - short-term — 40,000 Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") 29,158 18,398 Subordinated debt 43,139 24,674 Total borrowings 72,297 83,072 Lease liabilities 12,857 9,908 Other liabilities 28,509 10,227 TOTAL LIABILITIES 5,499,783 3,112,991 STOCKHOLDERS' EQUITY Common stock, par value $ .01 per share; shares authorized - 50,000,000 ; shares issued and outstanding - 33,161,532 (2023) and 19,864,956 (2022) 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 $ 6,010,918 $ 3,477,276 The notes to the consolidated financial statements are an integral part of these statements. 68 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, (In thousands, except per share data) 2023 2022 INTEREST INCOME Interest and fees on loans $ 194,339 $ 99,122 Interest and dividends on taxable investment securities 16,832 11,507 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 Total interest income 214,079 113,845 INTEREST EXPENSE Interest on deposits 68,800 9,983 Interest on short-term borrowings 5,518 74 Interest on long-term borrowings 4,454 2,486 Total interest expense 78,772 12,543 NET INTEREST INCOME 135,307 101,302 Provision for credit losses 30,953 1,925 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 104,354 99,377 NONINTEREST INCOME Service charges on deposit accounts 5,501 5,652 Trust and investment fee income 3,608 1,784 Loss on sales and calls of investment securities ( 2,166 ) — Interchange credits 5,714 4,812 Mortgage-banking revenue 4,513 5,210 Title Company revenue 551 1,340 Bargain purchase gain 8,816 — Other noninterest income 6,622 4,288 Total noninterest income 33,159 23,086 NONINTEREST EXPENSE Salaries and wages 44,645 35,931 Employee benefits 12,358 9,908 Occupancy expense 7,791 6,242 Furniture and equipment expense 2,551 2,018 Data processing 8,783 6,890 Directors' fees 1,156 839 Amortization of other intangible assets 6,105 1,988 FDIC insurance premium expense 3,479 1,426 Other real estate owned expenses, net 1 65 Legal and professional fees 4,337 2,840 Merger-related expenses 17,356 2,098 Other noninterest expenses 14,767 10,077 Total noninterest expense 123,329 80,322 Income before income taxes 14,184 42,141 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 Dividends paid per common share $ 0.48 $ 0.48 The notes to the consolidated financial statements are an integral part of these statements. 69 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, (In thousands) 2023 2022 Net income $ 11,228 $ 31,177 Other comprehensive income (loss): Investment securities: 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 The notes to the consolidated financial statements are an integral part of these statements. 70 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the Years Ended December 31, 2023 and 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 ) Common shares issued for employee stock purchase plan 1 385 — — 386 Stock-based compensation — 636 — — 636 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 at $ 0.48 per common share — — ( 12,733 ) — ( 12,733 ) Balances, December 31, 2023 $ 332 $ 356,007 $ 162,290 $ ( 7,494 ) $ 511,135 The notes to the consolidated financial statements are an integral part of these statements. 71 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, For Year Ended December 31, (In thousands) 2023 2022 CASH FLOWS FROM 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 ) Provision for credit losses 30,953 1,925 Depreciation and amortization 10,939 5,861 Net amortization of securities 838 1,414 Amortization of debt issuance costs 122 122 Bargain purchase gain ( 8,816 ) — (Gain) on mortgage banking activities ( 3,477 ) ( 3,918 ) Proceeds from sale of mortgage loans held for sale 121,734 131,286 Originations of loans held for sale ( 123,376 ) ( 102,144 ) Stock-based compensation expense 1,174 636 Deferred income tax expense (benefit) 2,721 ( 1,182 ) 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 (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 Bank owned life insurance income ( 1,997 ) ( 1,118 ) Net changes in: 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 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 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 ) Purchases of equity securities ( 79 ) ( 18 ) Purchase of restricted securities ( 35,350 ) ( 8,560 ) Net change in loans ( 317,283 ) ( 426,973 ) Purchases of premises and equipment ( 5,954 ) ( 2,415 ) Proceeds from sales of premises and equipment — 17 Proceeds from sales of other real estate owned 21 394 Improvements to other real estate owned — ( 34 ) Redemption of restricted securities 32,959 1,550 Purchases of bank owned life insurance ( 249 ) ( 10,165 ) 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 ) 72 Table of Contents For Year Ended December 31, (In thousands) 2023 2022 CASH FLOWS FROM FINANCING ACTIVITIES: Net changes in: 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 ) Issuance of common stock 385 386 Net cash provided by financing activities 121,888 811 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 Supplemental cash flows information: Interest paid $ 74,038 $ 12,621 Income taxes paid $ 7,293 $ 11,851 Recognition (remeasurement of) lease liabilities arising from right-of-use assets $ 179 $ ( 456 ) Transfer from loans held for sale to loans held for investments $ — $ 7,791 Transfers from loans to other real estate owned $ — $ 69 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. 73 Table of Contents Notes to Consolidated Financial Statements NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries (collectively referred to in these Notes as the “Company”), with all significant intercompany transactions eliminated. The investments in subsidiaries are recorded on the Company’s books (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”). For purposes of comparability, certain reclassifications have been made to amounts previously reported to conform with the current period presentation. Reclassifications had no effect on prior year net income or stockholders’ equity. Nature of Operations The Company engages in the banking business through Shore United Bank, N.A., a Maryland commercial bank with trust powers. The Company’s primary source of revenue is derived from interest earned on commercial, residential mortgage and other loans, and fees charged in connection with lending and other banking services located in Maryland, Delaware and Virginia. The Company engages in the trust services business through the trust department at Shore United Bank, N.A. 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. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the determination of the allowance for 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. 74 Table of Contents 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 Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in net income. Any equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. Restricted equity securities are carried at cost and are periodically evaluated for impairment based on the ultimate recovery of par value. The entirety of any impairment on equity securities is recognized in earnings. Loans Held for Sale (“LHFS”) The Company has elected to carry its mortgage loans originated for sale at fair value. Fair value is determined based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements or third-party pricing models. Fair value adjustments are recorded at each balance sheet date with the changes in fair value recognized in mortgage banking revenue in the Consolidated Statements of Income. Gains and losses on loan sales are determined based on the differential between a loan’s carrying value and sales price and are recognized through mortgage-banking revenue in the Consolidated Statements of Income. LHFS are sold either with the mortgage servicing rights (“MSRs”) released or retained by the Bank. Mortgage Servicing Rights When mortgage loans are sold with servicing retained, the MSRs are initially recorded at fair value with the income statement effect recorded in mortgage banking revenue. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The Company measures servicing rights at fair value at each reporting date and records the changes in fair value of servicing assets in earnings in the period in which the changes occur. These gains or losses are included in mortgage banking revenue in the Consolidated Statements of Income. Servicing fee income is also recorded in the mortgage banking revenue line item. 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: 75 Table of Contents 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”) The Company may, from time to time, transfer LHFS to LHFI. Transfers of LHFS to LHFI are accounted for in accordance with the underlying accounting applied to the loan prior to its transfer. For loans where the fair value option had been elected, the Company continues to account for the loan at fair value in the LHFI portfolio. Subsequent changes in the fair value of these loans are recorded in interest income. During the year ended December 31, 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; the 76 Table of Contents 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 Land is carried at cost and premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Useful lives range from three to 10 years for furniture, fixtures and equipment; three to five years for computer hardware and data handling equipment; and 10 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 15 years and leasehold improvements are amortized over the term of the respective lease 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. Long-lived assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash flows of a long-lived asset are less than its carrying value. In that event, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset. Mergers and Acquisitions Business combinations are accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company relies on internal or third-party valuations, such as appraisals, valuations based on discounted cash flow analyses, or other valuation techniques. Under the acquisition method of accounting, the Company identifies the acquirer and the closing date and applies applicable recognition principles and conditions. Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning consultants and advertising costs. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities is recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expenses caption. 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 77 Table of Contents because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Goodwill and other intangible assets are initially required to be recorded at fair value. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate. Intangible assets that have finite lives are amortized over their estimated useful lives and also are subject to impairment testing. If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss. As of December 31, 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. During 2023 and 2022, goodwill and other intangible assets were subjected to assessments for impairment. No impairment charges were recognized in either year. Our assessment of goodwill concluded it was not more likely 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. Properties acquired are recorded at fair value less estimated selling costs at the time of acquisition, establishing a new cost basis. Thereafter, costs incurred to operate or carry the properties as well as reductions in value as determined by periodic appraisals are charged to operating expense. Gains and losses resulting from the final disposition of the properties are included in noninterest expense. Borrowings Short-term and long-term borrowings are comprised primarily of FHLB borrowings. The Company’s short-term borrowings may also include advances on other lines of credit with correspondent banks or 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. The underlying securities sold are U.S. Government agency securities, which are segregated from the Company’s other investment securities by its safekeeping agents. Subordinated Debt Subordinated debt is carried at its outstanding principal balance, net of any unamortized issuance costs and acquisition related fair value adjustments. For additional information on the Company’s subordinated debt, refer to Note 9 of the Consolidated Financial Statements. Income Taxes The Company and its subsidiary file a consolidated federal income tax return. The Company accounts for income taxes using the liability method in accordance with required accounting guidance. Under this method, deferred tax assets and liabilities are determined by applying the applicable federal and state income tax rates to cumulative temporary differences. These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities. Deferred taxes result from such temporary differences. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent on the generation of a sufficient level of future taxable income, recoverable taxes paid in prior years and tax planning strategies. The Company evaluates all positive and negative evidence before determining if a valuation allowance is deemed necessary regarding the realization of deferred tax assets. The Company recognizes accrued interest and penalties as a component of tax expense. The provision for income taxes includes the impact of reserve provisions and changes in the reserves that are considered appropriate as well as the related net interest and penalties. In addition, the Company is subject to the continuous examination of its income tax returns by the IRS and other tax authorities which may assert assessments against the Company. The Company regularly assesses the likelihood of 78 Table of Contents 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. Derivative Financial Instruments and Hedging We account for derivatives in accordance with FASB literature on accounting for derivative instruments and hedging activities. When we enter into a derivative contract, we designate the derivative as held for trading, an economic hedge, or a qualifying hedge as detailed in the literature. The designation may change based upon management’s reassessment or changing circumstances. Derivatives utilized by the Company include interest rate lock commitments (“IRLC” or “IRLCs”) and forward settlement contracts. IRLCs occur when we originate mortgage loans with interest rates determined prior to funding. Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency, or commodity at a predetermined future date, rate, or price. We designate at inception whether a derivative contract is considered hedging or non-hedging. All of our derivatives are nonexchange traded contracts, and as such, their fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgement or estimation. For qualifying hedges, we formally document at inception all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various accounting hedges. We primarily utilize derivatives to manage interest rate sensitivity. At December 31, 2023 and 2022 we did not have any designated hedges. Basic and Diluted Earnings Per Common Share Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding and does not include the effect of any potentially dilutive common stock equivalents. Included in this calculation due to dividend participation rights are restricted stock awards which have been granted. Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding, adjusted for the effect of any potentially dilutive common stock equivalents. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the 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 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 The Company may grant share-based compensation to employees and non-employee directors in the form of restricted stock, restricted stock units and stock options. The fair value of restricted stock is determined based on the closing price of the Parent’s common stock on the date of grant. The Company recognizes compensation expense related to restricted stock on a straight-line basis over the vesting period for service-based awards. The fair value of RSUs is initially valued based on the closing price of the Parent’s common stock on the date of grant and is amortized in the statement of income over the vesting period. The RSUs are subsequently remeasured in each reporting period until settlement based on the quantity of awards for which it is probable that the performance conditions will be achieved. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model and related assumptions. The Company uses historical data to predict option exercise and employee termination behavior. Expected volatilities are based on the historical volatility of the Parent’s common stock. The expected term of options granted is derived from actual historical exercise activity and represents the period of time that options granted are expected to be outstanding. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant based on the expected life of the option. The dividend yield is equal to the dividend yield of the Parent’s common stock at the time of grant. Expense related to stock options is recorded in the statements of income as a component of salaries and benefits for employees and as a component of other noninterest expense for non-employee directors, with a corresponding increase to capital surplus in shareholders’ equity. 79 Table of Contents Fair Value The Company measures certain financial assets and liabilities at fair value and also makes disclosures about certain financial instruments that are not measured at fair value in the Consolidated Balance Sheets. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value estimates involve uncertainties and matters of significant judgement regarding interest rates, credit risk, and other factors, particularly in the absence of broad markets for specific terms. Changes in assumptions or in market conditions could significantly affect these estimates. See Note 18 for a further discussion of fair value. Advertising Costs Advertising costs are generally expensed as incurred. 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 Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on available-for-sale securities net of any gains recognized from the sale of available-for-sale securities. There were no reclassifications from accumulated other comprehensive income in 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. 80 Table of Contents 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 ) Liabilities: 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 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. 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 81 Table of Contents 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. 82 Table of Contents NOTE 2. BUSINESS COMBINATION 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. 83 Table of Contents (In thousands, except per share data) Purchase Price Consideration: Fair value of common shares issued ( 13,201,693 shares) based on Shore Bancshares, Inc. share price of $ 11.56 $ 152,612 Effective settlement of pre-existing debt (1) 500 Cash consideration (cash in lieu for fractional shares) 5 Fair value of converted restricted stock units (2) 475 Total purchase price $ 153,592 Identifiable assets: Cash and cash equivalents $ 25,377 Total securities 454,468 Loans, net 1,765,255 Premises and equipment, net 29,277 Core deposit intangible asset 48,648 Other assets 89,808 Total identifiable assets $ 2,412,833 Identifiable liabilities: Deposits $ 2,131,141 Total debt 97,545 Other liabilities 21,739 Total identifiable liabilities $ 2,250,425 Provisional fair value of net assets acquired $ 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 $ 1.9 billion, including 3,858 of Non-PCD loans and 323 PCD loans. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates and remaining balances. 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. 84 Table of Contents 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. 85 Table of Contents NOTE 3. INVESTMENT SECURITIES 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 U.S. 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 U.S. 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 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. 86 Table of Contents (Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Held-to-maturity securities: December 31, 2023 U.S. 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 U.S. 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 $ 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 Investment Grade (Dollars in thousands) Aaa Aa1 A3 Baa1 Baa2 NR Total U.S. 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 Total held-to-maturity securities $ 498,631 $ 1,470 $ 4,000 $ 4,000 $ 500 $ 4,681 $ 513,282 87 Table of Contents The following table provides information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2023 and December 31, 2022. 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: U.S. 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 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: U.S. 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: U.S. 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. The unrealized losses on debt securities that exist are the result of market changes in interest rates since original purchase and are not related to credit concerns. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost bases, which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary. There were a 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. 88 Table of Contents 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 Due after one year through five years 16,491 15,439 119,768 113,227 Due after five years through ten years 29,257 26,436 50,538 45,833 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. 2023 2022 (Dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Pledged available-for-sale securities $ 62,290 $ 54,489 $ 83,288 $ 72,108 Pledged held-to-maturity securities 185,876 167,649 19,158 16,305 There were no obligations of states or political subdivisions with carrying values, as to any issuer, exceeding 10% of stockholders’ equity at December 31, 2023 or 2022. 89 Table of Contents NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES 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 % Allowance for credit losses ( 57,351 ) ( 16,643 ) Total loans, net $ 4,583,659 $ 2,539,464 In the normal course of banking business, loans are made to officers and directors and their affiliated interests. These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with persons who are not related to the Company and are not considered to involve more than the normal risk of collectability. As of December 31, 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 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. 90 Table of Contents 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 Nonaccrual loans: Construction $ 626 $ — $ 626 Residential real estate 5,865 480 6,345 Commercial real estate 4,364 — 4,364 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 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. 91 Table of Contents 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 Construction 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 ) Commercial 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 ) Consumer 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 ) Total 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 ) 92 Table of Contents Term Loans by Origination Year Revolving loans Revolving converted to term loans Total (Dollars in thousands) Prior 2019 2020 2021 2022 2023 Credit Cards 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 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 Construction $ 239,990 $ 4,343 $ 1,015 $ 24 $ 5,382 $ 297 $ 650 $ 246,319 Residential real estate 787,070 6,214 891 1,107 8,212 1,259 13,956 810,497 Commercial real estate 1,052,314 369 — 710 1,079 150 11,866 1,065,409 Commercial 147,511 15 — — 15 174 156 147,856 Consumer 285,750 223 11 — 234 28 14 286,026 Total $ 2,512,635 $ 11,164 $ 1,917 $ 1,841 $ 14,922 $ 1,908 $ 26,642 $ 2,556,107 Percent of total loans 98.3 % 0.4 % 0.1 % 0.1 % 0.6 % 0.1 % 1.0 % 100.0 % ____________________________________ (1) Includes loans measured at fair value of $ 8.4 million at December 31, 2022. 93 Table of Contents 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 Commercial 1,652 401 278 ( 243 ) 11 ( 232 ) 572 2,671 Consumer (1) 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 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 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: 94 Table of Contents 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 Construction $ — $ — $ — $ — $ — $ — — % Residential real estate — — — — — — — Residential rentals — — — — — — — Commercial real estate 125 — — — — 125 0.01 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 Commercial 12 Consumer 0 Credit Cards 0 During the twelve months ended December 31, 2023, there were no defaults on loan modifications made to borrowers experiencing financial difficulty. 95 Table of Contents The following table present the aging analysis of loan modifications made to borrowers experiencing financial difficulty as of December 31, 2023. Accruing (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 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. 96 Table of Contents 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 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 Construction $ 331 $ 236,901 $ 650 $ 237,882 Residential real estate 5,081 791,460 13,956 810,497 Commercial real estate 2,540 1,051,003 11,866 1,065,409 Commercial 174 147,526 156 147,856 Consumer 28 285,984 14 286,026 Total $ 8,154 2,512,874 26,642 $ 2,547,670 Allowance for credit losses 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 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. 97 Table of Contents The following tables provide information on impaired loans and any related allowance by loan class as of December 31, 2022. 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. (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 Impaired nonaccrual loans: Construction $ 297 $ 297 $ — $ — $ 309 $ — Residential real estate 1,363 1,259 — — 1,661 — Commercial real estate 159 150 — — 604 — Commercial 359 174 — — 227 — Consumer 29 28 — — 43 — Total $ 2,207 $ 1,908 $ — $ — $ 2,844 $ — Impaired accruing TDRs: Construction $ 10 $ 10 $ — $ — $ 16 $ 1 Residential real estate 2,849 1,176 1,539 127 2,979 108 Commercial real estate 1,680 1,680 — — 2,095 56 Commercial — — — — — — Consumer — — — — 5 — Total $ 4,539 $ 2,866 $ 1,539 $ 127 $ 5,095 $ 165 Other impaired accruing loans: Construction $ 24 $ 24 $ — $ — $ 215 $ 6 Residential real estate 1,107 1,107 — — 474 3 Commercial real estate 710 710 — — 553 30 Commercial — — — — 51 1 Consumer — — — — 15 — Total $ 1,841 $ 1,841 $ — $ — $ 1,308 $ 40 Total impaired loans: Construction $ 331 $ 331 $ — $ — $ 540 $ 7 Residential real estate 5,319 3,542 1,539 127 5,114 111 Commercial real estate 2,549 2,540 — — 3,252 86 Commercial 359 174 — — 278 1 Consumer 29 28 — — 63 — Total $ 8,587 $ 6,615 $ 1,539 $ 127 $ 9,247 $ 205 98 Table of Contents Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio. Loans that are identified as special mention, substandard or doubtful are adversely rated. These loans and the pass/watch loans are assigned higher qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At December 31, 2022, there were no nonaccrual loans classified as special mention or doubtful and $ 1.9 million of nonaccrual loans were classified as substandard. The following tables provide information on loan risk ratings at December 31, 2022. (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 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 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 — Commercial — — — — — — — — Consumer — — — — — — — — Total $ 5,667 $ — $ ( 294 ) $ — $ ( 20 ) $ ( 948 ) $ 4,405 $ ( 127 ) Nonaccrual TDRs Construction $ — $ — $ — $ — $ — $ — $ — $ — Residential real estate — — ( 6 ) — 20 — 14 — Commercial real estate — — — — — — — — Commercial 216 — ( 46 ) — — — 170 — Consumer — — — — — — — — Total $ 216 $ — $ ( 52 ) $ — $ 20 $ — $ 184 $ — Total $ 5,883 $ — $ ( 346 ) $ — $ — $ ( 948 ) $ 4,589 $ ( 127 ) There were no TDRs which subsequently defaulted within 12 months of modification for the twelve months ended December 31, 2022. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to OREO or repossessed assets. 99 Table of Contents NOTE 5. 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 (Dollars in thousands) Gross Carrying Amount Additions Measurement Period Adjustments Accumulated Impairment Charges Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life (in years) Goodwill $ 65,476 $ — $ — $ ( 1,543 ) $ ( 667 ) $ 63,266 — Other intangible assets Amortizable 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 (Dollars in thousands) Gross Carrying Amount Measurement Period Adjustments Accumulated Impairment Charges Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life (in years) Goodwill $ 65,631 $ ( 155 ) $ ( 1,543 ) $ ( 667 ) $ 63,266 — Other intangible assets Amortizable 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 2024 $ 9,779 2025 8,589 2026 7,398 2027 6,208 2028 5,060 Thereafter 11,056 Total amortizing intangible assets $ 48,090 100 Table of Contents NOTE 6. LEASES Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. The Company’s long-term lease agreements are classified as operating leases. 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 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 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, 2023 December 31, 2022 Operating lease cost $ 1,645 $ 1,355 Short-term lease cost — — Total lease cost $ 1,645 $ 1,355 Cash paid for amounts included in the measurement of lease liabilities $ 1,553 $ 1,268 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) As of December 31, 2023 2024 $ 1,801 2025 1,617 2026 1,575 2027 1,469 2028 1,419 Thereafter 7,261 Total undiscounted cash flows $ 15,142 Discount 2,285 Lease liabilities $ 12,857 101 Table of Contents 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) As of December 31, 2023 2024 $ 833 2025 854 2026 876 2027 562 2028 578 Thereafter 2,521 Total $ 6,224 NOTE 7. PREMISES AND EQUIPMENT 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. 102 Table of Contents NOTE 8. DEPOSITS 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. NOTE 9. BORROWINGS The Company may periodically borrow from a correspondent federal funds line of credit arrangement, under a secured reverse repurchase agreement, or from the FHLB to meet short-term liquidity needs. The following table summarizes certain information on short-term borrowings as of and for the years ended December 31, 2023 and December 31, 2022. December 31, 2023 December 31, 2022 (Dollars in thousands) Amount Rate Amount Rate Average for the Year Repurchase agreements $ — — % $ 683 0.25 % FHLB Advances 111,392 4.95 1,863 3.87 At Year End Repurchase agreements $ — — % $ — — % FHLB Advances — — 40,000 4.57 103 Table of Contents Securities sold under agreements to repurchase are securities sold to customers, at the customers’ request, under a “roll-over” contract that matures in one business day. The underlying securities sold are U.S. Government agency securities, which are segregated in the Company’s custodial accounts from other investment securities. The Bank had $ 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 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 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. NOTE 10. BENEFIT PLANS 401(k) and Profit Sharing Plan - The Company has a 401(k) and profit sharing plan covering substantially all full-time employees. The plan calls for matching contributions by the Company, and the Company makes discretionary contributions based on profits. Company contributions to this plan included in noninterest expense totaled $ 1.7 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. 104 Table of Contents NOTE 11. STOCK-BASED COMPENSATION At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc. 2006 Stock and Incentive Plan, which expired on that date. The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one - to three-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur. The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 455,530 shares remained available for grant at December 31, 2023. 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 (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 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 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. 105 Table of Contents NOTE 12. DERIVATIVES 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. IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives. We are exposed to price risk from the time a mortgage loan is locked in until the time the loan is sold. The period of time between issuance of a loan commitment, 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, 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 Asset - TBA securities 1,000 2 8,750 41 Liability - IRLCs — — 1,150 7 Liability - TBA securities 18,000 176 1,000 6 NOTE 13. DEFERRED COMPENSATION The Company has multiple deferred compensation agreements with current and former employees. 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. The actual investments purchased are owned by the Company and held in a Rabbi Trust. The accounts of the Rabbi Trust are consolidated and the investments are included in other assets on the Consolidated Balance Sheets. The Company and the 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 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 Deferred compensation liability 1,576 948 During 2019, the Company introduced a new SERP plan for executive officers of the Company and the Bank. The related liability is unfunded; however, BOLI was purchased to offset the benefit costs. The following table provides information on the expense recognized during the years ended December 31, 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) 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 106 Table of Contents 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, 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 NOTE 14. 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 ) NOTE 15. INCOME TAXES 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 3,332 235 12,146 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, 2023 and December 31, 2022. 107 Table of Contents December 31, 2023 December 31, 2022 Tax at federal statutory rate 21.0 % 21.0 % Tax effect of: Tax-exempt income ( 3.6 ) ( 1.0 ) 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, 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 OREO 33 21 Nonaccrual loan interest 344 345 Lease liabilities 3,326 2,635 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 Less valuation allowance ( 1,015 ) ( 791 ) Deferred tax assets, net of valuation allowance 66,808 16,959 Deferred tax liabilities: Depreciation 4,320 2,491 Right-of-use assets 3,229 2,560 Mortgage servicing rights 1,541 1,405 Acquisition fair value adjustments 2,401 466 Deferred capital gain on branch sale 207 220 Intangibles 13,611 2,290 Other 792 170 Total deferred tax liabilities 26,101 9,602 Net deferred tax assets $ 40,707 $ 7,357 NOTE 16. REGULATORY CAPITAL REQUIREMENTS Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 108 Table of Contents 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, 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. There are no conditions or events since that notification that management believes would change the Bank’s classification. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios, and Tier 1 leverage ratios, which are described below. The minimum ratios for capital adequacy purposes 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, 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 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. NOTE 17. RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS 109 Table of Contents 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. NOTE 18. FAIR VALUE MEASUREMENTS Accounting guidance under GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This accounting guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, loans held for sale and OREO (foreclosed assets). These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Under fair value accounting guidance, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine their fair values. These hierarchy levels are: Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Assets Measured at Fair Value on a Recurring Basis Investment Securities Available for Sale Fair value measurement for investment securities available for sale is based on quoted prices from an independent pricing service. The fair value measurements consider observable data that may include present value of future cash flows, prepayment assumptions, credit loss assumptions and other factors. The Company classifies its investments in U.S. Treasury securities, if any, as Level 1 in the fair value hierarchy, and it classifies its investments in U.S. Government agencies securities and mortgage-backed securities issued or guaranteed by U.S. Government sponsored entities as Level 2. Equity Securities Fair value measurement for equity securities is based on quoted market prices retrieved by the Company via 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. 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. Management reviews all significant assumptions on a quarterly basis. Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future 110 Table of Contents 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. The significant unobservable inputs used in the fair value measurement of the reporting entity’s residential MSRs are prepayment speeds, probability of default, rate of return, and cost of servicing. Significant increases/decreases in any of those inputs in isolation would have resulted in a significantly lower/higher fair value measurement. Generally, a change in the assumption used for prepayment speeds would have been accompanied by a directionally similar change in the markets, i.e., the 10-Year Treasury, and in the probability of default. IRLCs We utilize a third-party specialist model to estimate the fair value of our IRLCs, which are valued based upon mortgage securities (TBA) prices less estimated costs to process and settle the loan. Fair value is adjusted for the estimated probability of the loan closing with the borrower (Level 3). (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range December 31, 2023 MSRs (1) $ 5,926 Market Approach Weighted average prepayment speed (PSA) (2) 129 IRLCs - net asset $ 110 Market Approach Range of pull through rate 78 % - 100 % Average pull through rate 98 % (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range December 31, 2022 MSRs (1) $ 5,275 Market Approach Weighted average prepayment speed (PSA) (2) 121 IRLCs - net asset $ 28 Market Approach Range of pull through rate 78 % - 100 % Average pull through rate 92 % ________________________________ (1) The weighted average was calculated with reference to the principal balance of the underlying mortgages. (2) PSA = Public Securities Association Standard Prepayment Model The following table presents activity in MSRs for the year ended December 31, 2023. (Dollars in thousands) For the Year Ended December 31, 2023 Beginning balance $ 5,275 Servicing rights resulting from sales of loans 712 Servicing rights acquired in acquisition of TCFC 190 Valuation adjustment ( 251 ) Ending balance $ 5,926 The following table presents activity in the IRLCs for the year ended December 31, 2023. (Dollars in thousands) For the Year Ended December 31, 2023 Beginning balance $ 28 Valuation adjustment 82 Ending balance $ 110 Forward Contracts To avoid interest rate risk, we hedge the open locked/closed position with TBA forward trades. On a regular basis, we allocate disbursed loans to mandatory commitments with government-sponsored enterprises 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. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and we measure and report them at fair value. Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is 111 Table of Contents a level 2 input. We have elected to measure and report best efforts commitments at fair value using a valuation methodology similar to that used for mandatory commitments. Market assumptions utilized in the fair value measurement of the reporting entity’s residential mortgage derivatives, inclusive of IRLCs, Closed Loan Inventory, TBA derivative trades, and Mandatory Forwards may be subject to investor overlays that may result in a significantly lower fair value measurement. Generally such overlays are announced with advanced notice in order to include the risk adjuster, however there are times when announcements are mandated resulting in a lower fair value measurement. Additionally market assumptions such as spec pool payups may result in a significantly higher fair value measurement at time of loan allocation to specific trades. 112 Table of Contents The following tables present the recorded amount of assets measured at fair value on a recurring basis for the years ended December 31, 2023. No assets were transferred from one hierarchy level to another during 2023 or 2022. (Dollars in thousands) Fair Value Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Observable Inputs (Level 3) December 31, 2023 Assets: Securities available for sale: U.S. Government agencies $ 20,475 $ — $ 20,475 $ — Mortgage-backed 84,027 — 84,027 — Other debt securities 6,019 — 6,019 — 110,521 — 110,521 — Equity securities 5,703 — 5,703 — 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 Liabilities: TBA forward trades $ 176 $ — $ 176 $ — Total liabilities at fair value $ 176 $ — $ 176 $ — (Dollars in thousands) Fair Value Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Observable Inputs (Level 3) December 31, 2022 Assets: Securities available for sale: U.S. Government agencies $ 18,178 $ — $ 18,178 $ — Mortgage-backed 63,519 — 63,519 — Other debt securities 1,890 — 1,890 — 83,587 — 83,587 — Equity securities 1,233 — 1,233 — TBA 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 Liabilities: IRLCs $ 7 $ — $ — $ 7 TBA securities 6 — 6 — Total liabilities at fair value $ 13 $ — $ 6 $ 7 113 Table of Contents Assets Measured at Fair Value on a Nonrecurring Basis 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. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. The estimated fair value for foreclosed assets included in Level 3 are determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to the initial recognition, the Company records the foreclosed asset as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods. 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) Fair Value Valuation Technique Unobservable Input Range Weighted Average December 31, 2023 Nonrecurring measurements: Individually evaluated collateral dependent loan $ 633 Appraisal of collateral (1) Appraisal adjustment (2) Liquidation expense (2) 51 % 10 % 51 % 10 % Other real estate owned $ 179 Appraisal of collateral (1) Appraisal adjustment (2) 0 % - 20 % 0 % Quantitative Information about Level 3 Fair Value Measurements (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range Weighted Average December 31, 2022 Nonrecurring measurements: Other real estate owned $ 197 Appraisal of collateral (1) Appraisal adjustment (2) 0 % - 20 % ( 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. 114 Table of Contents NOTE 19. 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 Assets Cash and cash equivalents $ 372,413 $ 372,413 $ 372,413 $ — $ — 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 Liabilities Deposits: 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 — 115 Table of Contents December 31, 2022 Carrying Amount Fair Value Fair Value Measurements Description of Asset (dollars in thousands) Level 1 Level 2 Level 3 Assets 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 — Loans, net 2,531,027 2,431,808 — — 2,431,808 MSRs 5,275 5,275 — — 5,275 IRLCs 35 35 — — 35 Liabilities Deposits: 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 — Advances from FHLB - short term 40,000 40,002 — 40,002 — Subordinated debt 43,072 41,193 — 41,193 — TBA Securities 6 6 — 6 — IRLCs 7 7 — — 7 NOTE 20. COMMITMENTS AND CONTINGENCIES In the normal course of business, to meet the financial needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit and other commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the letters of credit and commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. 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 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. While this evaluation is completed on a regular basis, it is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The Company provides banking services to customers who do business in the cannabis industry. Prior to the second quarter of 2022, the Company restricted these businesses to include only those in the medical-use cannabis industry in the state of Maryland. During the second quarter of 2022, the Company expanded its cannabis banking program to include both medical and adult-use licensees in other states, with an initial offering of the Company’s existing Maryland customers with multi-state operations. While the Company is providing banking 116 Table of Contents 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. While we are not aware of any instance of a federally insured financial institution being subject to such aiding and abetting liability, the strict enforcement of Federal laws regarding cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the Federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the Company’s Consolidated Financial Statements if the Federal government takes actions against the Company. As of December 31, 2023, the Company has not accrued an amount for the potential impact of any such actions. Following is a summary of the level of business activities with our cannabis customers: • Deposit and loan balances at December 31, 2023 were approximately $ 310.2 million, or 5.80 % of total deposits, and $ 73.7 million, or 1.60 % of total gross loans, respectively. • Interest and noninterest income for the year ended December 31, 2023, were approximately $ 11.2 million and $ 1.1 million, respectively. In the normal course of business, Shore Bancshares, Inc. and its subsidiaries may become involved in litigation arising from banking, financial, and other activities. Management, after consultation with legal counsel, does not anticipate that the future liability, if any, arising out of current proceedings will have a material effect on the Company’s financial condition, operating results, or liquidity. NOTE 21. RELATED PARTY TRANSACTIONS The Company leases a portion of one of its facilities to a law firm, in which the Chairman of the Board of the Company and the Bank is a partner. In January 2022, the lease entered the final five-year renewal option under the leasing agreement. The total rent payments received were $ 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. In addition, the law firm represents the Company and the Bank in certain legal matters. Other related party transactions consisting of normal lending and depository relationships are described in Note 4. Loans and Allowance for Credit Losses and Note 8. Deposits, respectively. NOTE 22. 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, 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. 117 Table of Contents NOTE 23. REVENUE RECOGNITION Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees and merchant income. Noninterest revenue streams in-scope of Topic 606 are discussed below. Service Charges on Deposit Accounts Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts. Trust and Investment Fee Income Trust and investment fee income are primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Title Company Revenue Title Company revenue consists of revenue earned on performing title work for real estate transactions. The revenue is earned when the title work is performed. Payment for such performance obligations generally occurs at the time of the settlement of a real estate transaction. As such settlement is generally within 90 days of the performance of the title work, we recognize the revenue at the time of the settlement. All contract issuance costs are expensed as incurred. We had no contract assets or liabilities at December 31, 2023. Other Noninterest Income Other noninterest income consists of: fees, exchange, other service charges, safety deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as 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. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that rentals and renewals of safe deposit boxes will be recognized on a monthly basis consistent with the duration of the performance obligation. 118 Table of Contents 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 In-scope of Topic 606: Service charges on deposit accounts $ 5,501 $ 5,652 Trust and investment fee income 3,608 1,784 Interchange income 5,714 4,812 Title Company revenue 551 1,340 Other noninterest income 2,961 1,752 Noninterest Income (in-scope of Topic 606) 18,335 15,340 Noninterest Income (out-of-scope of Topic 606) 14,824 7,746 Total Noninterest Income $ 33,159 $ 23,086 Contract Balances A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2023 and 2022, the Company did not have any significant contract balances. 119 Table of Contents NOTE 25. 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 Assets Cash $ 7,345 $ 7,145 Investment in subsidiaries 571,298 396,897 Other assets 7,926 5,392 Total assets $ 586,569 $ 409,434 Liabilities 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 $ 409,434 120 Table of Contents Condensed Statements of Income For the Year Ended (Dollars in thousands) December 31, 2023 December 31, 2022 Income 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 Expenses 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 $ 31,177 121 Table of Contents 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 $ 7,145 122 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.