What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-14 · 281 added, 468 removed, 390 unchanged (66% of the section changed)

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This Quarterly Report on Form 10-Q contains forward-looking statements.

These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance.

These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “goal,” “target,” “would,” “aim” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature.

These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control.

The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved.

Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict.

New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence.

In addition, we cannot assess the impact of each risk and uncertainty on our business or the extent to which any risk or uncertainty, or combination of risks and uncertainties, may cause actual results to differ materially from those contained in any forward-looking statements.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the Securities and Exchange Commission (“SEC”).

For information on the factors that could cause actual results to differ from the expectations stated in the forward- looking statements, see “Risk Factors” under Part I, Item 1A of our 2022 Form 10-K, Part II, Item IA of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, and other reports filed by us with the SEC.

Any forward-looking statement speaks only as of the date of this Quarterly Report on Form 10-Q, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether because of new information, future developments or otherwise, except as required by law.

The statements contained herein that are not historical facts are forward-looking statements (as defined by the Private Securities Litigation Reform Act of 1995) based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company.

Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company.

There can be no assurance that future developments affecting the Company will be the same as those anticipated by management.

These statements are evidenced by terms such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions.

Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not prove true.

These projections involve risk and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements:

• general economic conditions, (including the interest rate environment, government economic and monetary policies, the strength of global financial markets and inflation/deflation and supply chain issues), whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products, our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans;

• recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments;

• the Company’s ability to remediate the material weaknesses identified in the Company’s internal control over financial reporting;

• the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures;

• cybersecurity threats and the cost of defending against them;

• results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses or to write-down assets;

• changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, which could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;

• changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet;

• our liquidity requirements could be adversely affected by changes in our assets and liabilities;

• our ability to prudently manage our growth and execute our strategy;

• impairment of our goodwill and intangible assets;

• competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;

• the expected cost savings, synergies and other financial benefits from the acquisition of The Community Financial Corporation (“TCFC”) or any other acquisition the Company has made or may make might not be realized within the expected time frames or at all;

• the growth and profitability of non-interest or fee income being less than expected;

• the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;

• the effect of any change in federal government enforcement of federal laws affecting the cannabis industry;

• the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies;

• potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election;

• a deterioration of the credit rating for U.S.

long-term sovereign debt, actions that the U.S.

government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;

• the impact of recent or future changes in Federal Deposit Insurance Corporation (the “FDIC”) insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount, including any special assessments;

• the effect of fiscal and governmental policies of the U.S.

federal government;

• climate change, including the enhanced regulatory, compliance, credit and reputational risks and costs;

• geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts of terrorism, and/or military conflicts, including the war between Russian and Ukraine and the conflict in the Middle East, which could impact business and economic conditions in the United States and abroad.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”) filed with SEC and available at the SEC’s Internet site (http://www.sec.gov).

The Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

Critical Accounting Policies

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Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

The most significant accounting policies that the Company follows are presented in Note 1 of the 2022 Annual Report along with Note 2 of the current period interim financial information.

The most significant accounting policies that the Company follows are presented in Note 1 to the Notes to Consolidated Financial Statement included in the 2023 Annual Report.

These policies, along with the disclosures presented in the notes to the financial statements and in this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies for the allowance for credit losses (“ACL”) on loans, goodwill and bargain purchase gain, loans acquired in a business combination and income taxes are critical accounting policies.

These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

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Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

The Company’s management reviews the adequacy of the ACL on loans on at least a quarterly basis.

Refer to Note 2, “Adoption of Accounting Standards”, of the interim consolidated financial information for additional detail concerning the determination of the ACL on loans.

Goodwill and Bargain Purchase Gain

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Purchased performing loans do not have a more-than-insignificant deterioration in credit quality since origination and have an ACL established in a manner that is consistent with the Company originated loans.

The allowance for PCD loans is determined based upon the Company’s methodology for estimating the allowance under CECL, and is recorded as an adjustment to the acquired loan balance on the date of acquisition.

The allowance for PCD loans is

determined based upon the Company’s methodology for estimating the allowance under CECL, and is recorded as an adjustment to the acquired loan balance on the date of acquisition.

Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records a reserve for credit losses based on the Company’s methodology for determining the allowance under CECL.

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(the “Bank”).

The Bank operates 42 full-service branches in Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County, Anne Arundel County, Charles County, St Mary's County, Calvert County and Worcester County in Maryland, Kent County and Sussex County in Delaware and Accomack County and Spotsylvania County in Virginia.

The Company engages in trust and wealth management services through Wye Financial Partners, a division of Shore United Bank, N.A.

The Company through Wye Financial Partners, a department of the Bank, provides full-service investment and insurance solutions through our broker/dealer, LPL Financial.

The Bank also offers wealth management solutions such as corporate trustee services and trust administration through Wye Trust, a division of the Bank.

The Company also engages in title work for real estate transactions through its wholly-owned subsidiary, Mid-Maryland Title Company, Inc.

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maintains an Internet site at www.shorebancshares.com on which it makes available free of charge its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

Third quarter results include the successful completion of the merger (the “merger”) on July 1, 2023 with The Community Financial Corporation (“TCFC”) with total assets exceeding $5.7 billion for the combined company.

In the third quarter of 2023, the Company’s net loss was $6.4 million or $(0.19) per diluted common share compared to net income of $4.0 million or $0.20 per diluted common share for the second quarter of 2023, and net income of $9.7 million or $0.49 per diluted common share for the third quarter of 2022.

Net income for the first nine months of 2023 was $4.1 million or $0.17 per diluted common share, compared to net income for the first nine months of 2022 of $22.8 million or $1.15 per diluted common share.

The Company’s financial results for any periods ended prior to July 1, 2023 reflect the Company’s results only on a standalone, pre-merger basis.

As a result of the merger, the Company’s financial results for the third quarter of 2023 may not be directly comparable to prior reported periods.

Third Quarter 2023 Highlights:

Merger with TCFC

The Company acquired TCFC and its wholly-owned subsidiary Community Bank of the Chesapeake (“CBTC”) on July 1, 2023.

The merger and acquisition method of accounting was used to account for the transaction with the Company as the acquirer.

The Company recorded the assets and liabilities of TCFC at their respective fair values as of July 1, 2023.

The transaction was valued at approximately $153.6 million and expanded the Bank’s footprint into the Southern Maryland Counties of Charles, St.

Mary’s and Calvert and the greater Fredericksburg area in Virginia, which includes, Stafford and Spotsylvania Counties.

This acquired market area is one of the fastest growing regions in the country and is home to a mix of federal facilities and industrial and high-tech businesses.

These areas boast a strong median household income, low unemployment and projected population growth better than national averages .

Based on information from the U.S.

Bureau of Labor Statistics, unemployment rates in legacy CBTC’s footprint have historically remained well below the national average.

At the time of the acquisition, TCFC added $2.4 billion in assets, $454.5 million in investments, $1.8 billion in loans, $2.0 billion in deposits, $150.6 million in brokered deposits, $69.0 million in FHLB advances and $32.0 million in subordinated debt and trust preferred debentures.

The excess of the fair value of net TCFC assets acquired over the merger consideration resulted in a $12.2 million bargain purchase gain.

For the three months ended September 30, 2023, the Company incurred net expenses of $31.2 million related to the merger with TCFC including acquisition costs of $14.9 million, losses from the sale of CBTC legacy securities of $2.2 million and, increases to the ACL of $20.1 million.

In addition, the Company changed its method of estimating the ACL, which resulted in an increase of $7.3 million related to legacy SHBI loans.

These expenses were partially offset by non-recurring revenues including a net transition payment of $1.1 million to move CBTC’s securities broker of record to the Bank’s broker of record and a bargain purchase gain of $12.2 million.

For the first six months of 2023, the Company incurred $1.9 million in merger and acquisition costs.

The Company incurred net expenses related to the merger and non-recurring merger related activities with TCFC of $33.1 million for the nine months ended September 30, 2023.

As a result of the merger, fair value accounting adjustments, net accretion interest income increased $5.1 million to $5.4 million for the three months ended September 30, 2023 compared $0.3 million for the three months ended June 30, 2023.

In addition, the Bank’s core deposit intangible (“CDI”) increased to $50.7 million at September 30, 2023 from $5.5 million at December 31, 2022.

The increase in the CDI resulted in increased CDI amortization of $2.2 million to $2.6 million for the three months ended September 30, 2023 compared to $0.4 million for the three months ended June 30, 2023.

The TCFC merger led to a 20% dilution in tangible book value per share which was $11.80 at September 30, 2023 compared to $14.83 at June 30, 2023.

The principal cause of the dilution was due to the Company’s stock price decline between the announcement date of December 14, 2022 and legal close date of July 1, 2023.

In addition, fair value discount adjustments of approximately $110.0 million to the acquired loan portfolio due to increasing interest rates in the last 12-18 months had an impact on the dilution.

The Company’s tangible common equity ratio at September 30, 2023 was 7.00%.

The Company’s Tier 1 and Tier 2 Risk-Based Capital Ratios at September 30, 2023 were 9.22% and 11.37%, respectively.

The Bank’s Tier 1 and Tier 2 Risk-Based Capital Ratios at September 30, 2023 were 9.97% and 11.20%, respectively.

The loan fair value adjustments will accrete back through income (and capital) as the loans mature and should lead to earnings per share accretion moving forward.

Margin Expansion

The Company sold most of AFS securities portfolio acquired from TCFC for net proceeds of $434.2 million and used $380.0 million to reduce higher cost FHLB advances and brokered deposits.

As a result of this balance sheet restructuring, net interest margin (“NIM”) increased to 3.35% for the third quarter of 2023 from 2.68% for the second quarter of 2023.

Excluding net accretion interest income of $5.4 million and $0.3 million for the same time periods, NIM increased 32 basis points to 2.96% for the third quarter of 2023 from 2.64% for the second quarter of 2023.

Funding and Liquidity

Total funding, which includes customer deposits, FHLB advances, and brokered deposits, increased $1.9 billion from $3.2 billion at June 30, 2023 to $5.1 billion at September 30, 2023.

The Bank had no FHLB advances at September 30, 2023.

The Bank's uninsured deposits at September 30, 2023 greater than the Federal Deposit Insurance Corporation's ("FDIC") $250,000 insurance limit were $1.0 billion or 19.76% of total deposits.

At September 30, 2023, there were $144.9 million included in uninsured deposits that the Bank secured using the market value of pledged collateral.

The Bank's uninsured deposits, excluding the market value of pledged collateral, at September 30, 2023 were $864.6 million or 16.92% of total deposits.

At September 30, 2023, the Bank had approximately $1.1 billion of available liquidity including:

$108.7 million in cash, $954.4 million in secured borrowing capacity at the FHLB and the other correspondent banks, and $35.0 million in unsecured lines of credit.

At September 30, 2023, available liquidity of approximately $1.1 billion was 127% of uninsured deposits of $864.6 million, excluding the market value of pledged collateral.

During the third quarter, the merger drove a 73.91% quarterly increase in total deposits to $5.1 billion and a 55.5% quarterly increase in noninterest bearing (“NIB”) deposits to $1.2 billion.

At September 30, 2023, brokered deposits amounted to $111.0 million or 2.2% of total deposits.

The Bank’s loan to deposit ratio at September 30, 2023 was 89%.

Increased Allowance for Credit Losses (“ACL”)

The ACL increased from $29.0 million and 1.05% of total loans at June 30, 2023 to $57.1 million and 1.24% of total loans at September 30, 2023.

The Bank's provision for credit losses for the third quarter of 2023 was $28.2 million and consisted of $20.1 million related to the acquisition of TCFC legacy loans including $0.2 million related to unfunded commitments to extend credit, $7.3 million due to a change in ACL methodology on the Bank’s legacy loans and $0.8 million related to third quarter activity.

Management believes that the allowance was adequate as of September 30, 2023.

Asset Quality:

Non-accrual loans, other real estate owned (“OREO”) and loan modifications to borrowers' experiencing financial difficulties ("BEFDs") were $9.2 million or 0.16% of total assets at September 30, 2023 compared to $3.9 million or 0.11% of total assets at December 31, 2022,

and $4.7 million or 0.13% of total assets at June 30, 2023.

Classified assets increased $8.4 million to $11.1 million or 0.19% of total assets at September 30, 2023 from $2.7 million or 0.08% of total assets at December 31, 2022.

Classified assets are substandard loans and OREO.

The increase in classified assets was due to the acquisition of TCFC classified loans of $5.1 million, the Company’s legacy classified loans of $5.8 million and OREO of $0.2 million at September 30, 2023.

The modest increase in nonperforming and classified assets was the result of a small increase in late payments in consumer loans and a proactive review of larger commercial relationships in the current interest rate environment.

The Company’s net income for the first quarter of 2024 was $8.2 million or $0.25 per diluted common share compared to net income of $10.5 million or $0.32 per diluted common share for the fourth quarter of 2023, and net income of $6.5 million or $0.32 per diluted common share for the first quarter of 2023.

First Quarter 2024 Highlights:

• Return on Average Assets (“ROAA”) - The Company reported ROAA of 0.57% for the first quarter of 2024, compared to 0.72% and 0.75% for the fourth and first quarters of 2023, respectively.

• Stable Net Interest Margin - Net interest margin (“NIM”) remained relatively stable at 3.08% for the first quarter of 2024 from 3.09% for the fourth quarter of 2023.

Excluding net accretion interest income of $3.6 million and $3.0 million for the same time periods, NIM decreased six basis points to 2.81% for the first quarter of 2024 from 2.87% for the fourth quarter of 2023.

• Deposit Costs - Decreases in rates on higher cost deposit relationships mitigated margin compression in the first quarter of 2024 .

For the month of March 2024, asset yields grew more quickly than funding costs which positively impacted the Company’s NIM and may position the Bank to see positive margin movement during the second quarter of 2024 .

As a result of decreased rates paid on some deposits and expected seasonal cash outflows in the first quarter of 2024 , deposits decreased $201.8 million, or 3.7% to $5.2 billion at March 31, 2024 when compared to December 31, 2023.

Liquidity remained relatively stable with the loan to deposit ratio modestly increasing from 86.2% at December 31, 2023 to 89.7% at March 31, 2024 .

The Bank had no brokered deposits or advances at March 31, 2024 .

• Stable Credit Trends - The Company’s total nonperforming assets to total assets at March 31, 2024 was 0.28% compared to 0.23% at December 31, 2023.

The Company’s credit quality metrics remain at historical lows with no signs of significant deterioration or systemic issues within its loan portfolios.

• Operational Efficiencies - Management continues to pursue opportunities to increase efficiencies and decrease expenses as a percentage of operating revenues.

Following feasibility assessments, management decided to close two branches by the end of the third quarter.

The Onley, VA branch should close on or about July 17, 2024 and the Westgate branch located in Annapolis, MD should close on or about September 30, 2024.

Limited growth opportunities within the Eastern Shore of Virginia and a conscientious focus on profitability led to the decision to close the Onley branch.

The Westgate branch has limited foot traffic and is located less than a mile from another SUB branch within the City of Annapolis.

Customer disruption is expected to be limited.

These closures are estimated to cost $0.2 million.

The Company is expected to reduce four positions as part of these closings.

• Additionally, the Company plans to reduce professional office space located in Easton, MD.

By the end of the third quarter, a newly renovated office building is expected to be put into service eliminating the need for two currently-occupied office buildings.

In the second quarter, the Company expects to begin marketing for sale the two redundant office properties.

Recent appraisals on these properties exceed the Bank’s cost bases resulting in no impairment.

At the present time, the two properties remain in service, are not listed for immediate sale, and are classified as active assets on our balance sheet.

Once these properties meet the accounting criteria they will be moved to held for sale.

SUMMARY OF OPERATING RESULTS

A comparison of the results of operations for the three and nine months ended September 30, 2023 and September 30, 2022 is presented below.

Unaudited (QTD) Unaudited (YTD)

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

A comparison of the results of operations for the three months ended March 31, 2024 and March 31, 2023 is presented below.

Unaudited (QTD)

Three Months Ended March 31,

(Dollars in thousands) 2024 2023

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Noninterest expenses 36,698 20,893

(Loss)/income before income tax taxes

(11,375) 13,085 3,031 30,785

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

Net (loss) income

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

Unaudited (QTD) Unaudited (YTD)

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

Income before income tax taxes 10,597 8,892

Income tax expense 2,413 2,435

Net income $ 8,184 $ 6,457

Unaudited (QTD)

Three Months Ended March 31,

(Dollars in thousands, except per share amounts) 2024 2023

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Return on average equity (“ROAE”)

(4.75) 10.72 1.30 8.59

Return on average tangible equity (“ROATCE”) Non-GAAP (1)

3.27 13.98 7.61 11.63

Average total equity to average total assets 8.93 10.30

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Efficiency ratio (2)

73.73 57.87 73.04 64.78

Non-interest income to average assets 0.46 0.62

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Net operating expense to average assets (3)

1.98 1.56 1.89 1.63

COMMON SHARE DATA

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

Basic and diluted net income per common share

$ 0.25 $ 0.32

Cash dividends paid per common share $ 0.12 $ 0.12

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(1) ROATCE is computed by dividing net earnings applicable to common shareholders by average tangible common shareholders' equity.

(1) ROATCE is computed by dividing net earnings applicable to common stockholders by average tangible common stockholders' equity.

ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

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(3) Net operating expense is the sum of noninterest expense offset by noninterest income.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023

Summary of Financial Results

The Company reported a net loss for the three months ended September 30, 2023 of $6.4 million or ($0.19) diluted earnings per share compared to net income of $9.7 million or diluted earnings per share of $0.49 for the three months ended September 30, 2022.

The Company’s ROAA, ROACE 1 and ROATCE 2 were (0.44)%, (4.75)% and 3.27% for the three months ended September 30, 2023 compared to 1.11%, 10.72% and 13.98% for the three months ended September 30, 2022.

The Company’s net loss in the third quarter of 2023 compared to net income for the same quarter in 2022, was primarily due to merger activity with merger related expenses and increased provision for loan losses being the largest drivers of the net loss.

These decreases to pretax earnings were partially offset by increased net interest income from an increased balance sheet as a result of the merger with TCFC.

The increase to noninterest income was principally due to the bargain purchase gain of $12.2 million recognized in the third quarter of 2023.

Three Months Ended September 30,

The Company reported net income for the three months ended March 31, 2024 of $8.2 million or $0.25 diluted earnings per share compared to net income of $6.5 million or diluted earnings per share of $0.32 for the three months ended March 31, 2023.

The Company’s ROAA, ROACE 1 and ROATCE 2 were 0.57%, 6.38% and 13.39%, respectively, for the three months ended March 31, 2024 compared to 0.75%, 7.25% and 10.09%, respectively, for the three months ended March 31, 2023.

Three Months Ended March 31,

(Dollars in thousands) 2024 2023 $ Change % Change

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Income before income taxes 10,597 8,892 1,705 19.17 %

Income tax (benefit) expense

(4,991) 3,427 (8,418) (245.64) %

Net (loss) income

$ (6,384) $ 9,658 $ (16,042) (166.10) %

Income tax expense 2,413 2,435 (22) (0.90) %

Net income $ 8,184 $ 6,457 $ 1,727 26.75 %

Net Interest Income

Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments.

As shown in the table below, tax-equivalent net interest income was $45.7 million for the third quarter of 2023 and $27.4 million for the third quarter of 2022.

The increase in net interest income when compared to the prior periods was primarily due to the overall increased size of the balance sheet from the merger in the third quarter of 2023.

Three Months Ended September 30,

As shown in the table below, tax-equivalent net interest income was $41.2 million for the first quarter of 2024 and $25.7 million for the first quarter of 2023.

The increase in net interest income when compared to the first quarter of 2023 was primarily due to the increase in interest and fees on loans, interest on deposits from other banks, a decrease in interest on short term borrowings partially offset by the increase in interest on deposits and interest on long-term borrowings all significantly impacted by the merger of equals with TCFC in the third quarter of 2023.

Three Months Ended March 31,

(Dollars in thousands) 2024 2023 $ Change % Change

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The yields set forth below include the effects of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

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

Three Months Ended March 31, Three Months Ended March 31,

(Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate

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Loans (1), (2), (3)

Consumer real estate $ 1,141,707 $ 14,548 5.06 % $ 743,227 $ 7,990 4.27 %

Residential real estate $ 1,361,636 $ 18,492 5.46 % $ 881,799 $ 10,507 4.83 %

Commercial real estate 2,722,600 38,604 5.70 1,279,923 15,173 4.81

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660 8 4.85 666 9 5.41

Federal funds sold 7,533 92 4.85 — — —

Interest-bearing deposits 77,276 960 5.00 13,849 163 4.77

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Total assets $ 5,774,824 $ 3,506,336

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

Three Months Ended March 31, Three Months Ended March 31,

(Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate

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Advances from FHLB - short-term 4,000 56 5.63 113,972 1,361 4.84

Advances from FHLB - long-term — — — 10,035 16 0.63

Subordinated debt and Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") (4)

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(3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations.

There were $6.1 million and $0.3 million of accretion interest on loans for the three months ended September 30, 2023 and 2022, respectively.

There were $4.2 million and $0.5 million of accretion interest on loans for the three months ended March 31, 2024 and 2023, respectively.

(4) Interest expense on deposits and borrowing includes amortization of deposit premiums and amortization of borrowing fair value adjustment.

There were $(0.5) million and $0.2 million of amortization of deposits premium, and $(0.2) million and $(47,000) of amortization of borrowing fair value adjustment for the three months ended September 30, 2023 and 2022, respectively.

There were $(0.4) million and $0.1 million of amortization of deposits premium, and $(0.2) million and $(47,000) of amortization of borrowing fair value adjustment for the three months ended March 31, 2024 and 2023, respectively.

The following table presents changes in interest income and interest expense for the periods indicated.

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Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

Volume Due to Rate Total

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Loan Portfolio

Consumer real estate $ 5,082 $ 1,476 $ 6,558

Residential real estate $ 6,517 $ 1,468 $ 7,985

Commercial real estate 20,456 2,975 23,431

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Tax-exempt investment securities — (1) (1)

Fed funds sold 92 — 92

Interest-bearing deposits 788 9 797

5 unchanged sentences

Advances from FHLB - Short-term (1,540) 235 (1,305)

Advances from FHLB - Long-term — (16) (16)

Subordinated debt 587 108 695

3 unchanged sentences

Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities.

Net interest income was $45.6 million for the third quarter of 2023, compared to $27.3 million for the third quarter of 2022.

The increase in net interest income when compared to the prior period was primarily due to the overall increased size of the balance sheet from the merger in the third quarter of 2023 as well as increases in net accretion interest income.

Net accretion interest income for the three months ended September 30, 2023 and September 30, 2022 was $5.4 million and $0.5 million, respectively.

Over the last 18 months, deposits have repriced at a faster rate than loans due to the Federal Reserve Open Market Committee’s increases in short-term interest rates from 0.25% to 5.50%.

The Company’s NIM decreased to 3.35% for the third quarter of 2023 from 3.38% for the third quarter of 2022 as the increase in funding costs slightly exceeded the additional interest income from accretion interest from fair value marks, higher yields on CBTC’s legacy loan portfolio, and the benefits to margin for the paydown of higher cost wholesale funding with the proceeds received from the sale of CBTC’s securities portfolio in July 2023.

The Company’s increase in the cost of funds was seven basis points greater than the increase in interest-earning asset yields for the comparable periods.

Comparing the third quarter of 2023 to the third quarter of 2022, the Company’s interest-earning asset yields increased 146 basis points, while the cost of funds increased 153 basis points.

Provision for Credit Losses (“PCL”) and Allowance for Credit Losses (“ACL”)

See discussion of the Bank’s PCL and ACL in the asset quality discussion in the analysis of financial condition in this MD&A.

Noninterest Income

Total noninterest income for the third quarter of 2023 of $18.3 million increased $13.0 million from $5.3 million for the third quarter of 2022, primarily due to the bargain purchase gain of $12.2 million and an increase of $1.1 million in trust and investment fee income both the result of the merger, partially offset by a loss of $2.2 million on the sale of investment securities in the third quarter of 2023.

Management sold virtually all of CBTC’s AFS investment securities soon after the merger close on July 1, 2023.

The $2.2 million loss relates to the difference in the fair values of the securities on July 1, 2023 compared to actual sales proceeds received from the sales on the settlement date.

Noninterest Expense

Total noninterest expense of $47.2 million for the third quarter of 2023 increased $28.3 million or 149.5%, when compared to the third quarter of 2022 expense of $18.9 million.

The increases in noninterest expense for the comparable periods were primarily due to merger related expenses and the addition of headcount and infrastructure, including 11 additional branches, amortization of intangible assets, and core processing fees.

The Bank’s average full-time equivalent employees (“FTEs”) increased from 453 FTEs for the third quarter of 2022 to 660 FTEs for the third quarter of 2023.

Excluding merger related expenses and amortization of core deposit intangible, of $17.5 million for the third quarter of 2023 and $0.7 million for the third quarter of 2022, noninterest expense for the comparable periods was $29.7 million and $18.2 million, respectively.

Noninterest expense as a percentage of average assets increased to 3.24% for the three months ended September 30, 2023 from 2.18% for the three months ended September 30, 2022.

Excluding merger related expenses and amortization of core deposit intangible for the comparable periods, noninterest expense as a percentage of average assets decreased to 2.04% for the third quarter of 2023 compared to 2.10% for the third quarter of 2022.

The Company reported income tax benefit of $5.0 million for the third quarter of 2023, and an income tax expense of $3.4 million for the third quarter of 2022.

The effective tax rate for the third quarter of 2023 was (43.9%) and 26.2% for the third quarter of 2022.

The third quarter 2023 effective tax rate was impacted by a net pre-tax loss, nondeductible merger costs, and reassessment of deferred tax assets and liabilities at an estimated effective tax rate due to an adjustment to state apportionment.

The Company’s estimated effective tax rate applied to net deferred tax assets of $48.7 million at September 30, 2023 was 27.52%.

The bank's deferred taxes are recorded at 26.00%.

As of September 30, 2023 the Company recorded $38.4 million and $34.1 million of gross federal and state net operating loss carryovers, (“NOL’s”).

These NOL’s will offset future taxable income to the Company.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

Summary of Financial Results

The Company reported net income for the nine months ended September 30, 2023 of $4.1 million or diluted earnings per share of $0.17 compared to net income of $22.8 million or diluted earnings per share of $1.15 for the nine months ended September 30, 2022.

The Company’s ROAA, ROACE 3 and ROATCE 4 were 0.13%, 1.30% and 7.61% for the nine months ended September 30, 2023 compared to 0.88% and 8.59% and 11.63% for the nine months ended September 30, 2022.

The decrease to net income in the first nine months of 2023 compared to the same period in 2022 was primarily due to merger-related expenses and increased provision for loan losses.

These decreases to pretax earnings were partially offset by increased net interest income from an increased balance sheet as a result of the merger.

The increase to noninterest income was principally due to the bargain purchase gain recognized in the third quarter of 2023 of $12.2 million.

Nine Months Ended September 30,

(Dollars in thousands) 2023 2022 $ Change % Change

Interest and dividend income $ 142,943 $ 81,566 $ 61,377 75.25 %

Interest expenses 49,161 7,207 41,954 582.13 %

Net interest income 93,782 74,359 19,423 26.12 %

Provision for credit loses 30,056 1,475 28,581 1937.69 %

Noninterest income 28,966 17,224 11,742 68.17 %

Noninterest expenses 89,661 59,323 30,338 51.14 %

Income before income taxes 3,031 30,785 (27,754) (90.15) %

Income tax (benefit) expense (1,060) 8,016 (9,076) (113.22) %

Net income $ 4,091 $ 22,769 $ (18,678) (82.03) %

Net Interest Income

As shown in the table below, tax-equivalent net interest income increased $19.5 million to $94.0 million for the nine months ended September 30, 2023 compared to $74.5 million for nine months ended September 30, 2022.

The increase in net interest income when compared to the prior period was primarily due to the overall increased size of the balance sheet from the merger and increased accretion interest income in the third quarter of 2023.

On a year to date basis, $18.3 million or 93.8% of the $19.5 million increase from the comparable period was from third quarter 2023 merger activity and operations.

Nine Months Ended September 30,

(Dollars in thousands) 2023 2022 $ Change % Change

Interest and dividend income

Loans, including fees $ 128,424 $ 71,458 $ 56,966 79.72 %

Interest and dividends on investment securities

12,973 7,562 5,411 71.56 %

Interest on deposits with banks 1,546 2,546 (1,000) (39.28) %

Total Interest and Dividend Income $ 142,943 $ 81,566 $ 61,377 75.25 %

Interest Expenses

Deposits $ 40,668 $ 5,429 $ 35,239 649.09 %

Short-term borrowings 5,501 2 5,499 274,950.00 %

Long-term debt 2,992 1,776 1,216 68.47 %

Total Interest Expenses $ 49,161 $ 7,207 $ 41,954 582.13 %

Taxable-equivalent adjustment $ 172 $ 117 $ 55 47.01 %

Tax Equivalent Net Interest Income $ 93,954 $ 74,476 $ 19,478 26.15 %

____________________________________

3 For additional details, see "Reconciliation of Non-GAAP Measures (Unaudited).

4 For additional details, see "Reconciliation of Non-GAAP Measures (Unaudited).

Average Balances and Yields

The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the nine months ended September 30, 2023 and 2022.

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

(Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate

Earning assets

Loans (1), (2), (3)

Consumer real estate $ 990,970 $ 35,929 4.85 % $ 660,611 $ 23,491 4.75 %

Commercial real estate 1,806,983 71,328 5.28 % 1,161,237 36,706 4.23 %

Commercial 171,702 9,312 7.25 % 210,192 5,863 3.73 %

Consumer 318,066 11,440 4.81 % 179,054 4,957 3.70 %

State and political 936 27 3.86 % 1,791 53 3.96 %

Credit Cards 2,077 149 9.59 % — — — %

Other 11,192 400 4.78 % 22,207 505 2.90 %

Total Loans 3,301,926 128,585 5.21 % 2,235,092 71,575 4.28 %

Investment securities:

Taxable 692,718 12,840 2.47 565,535 7,562 1.79

Tax-exempt (1)

664 52 10.44 — — —

Federal funds sold 2,539 92 4.84 — — —

Interest-bearing deposits 27,750 1,546 7.45 424,790 2,546 0.80

Total earning assets 4,025,597 143,115 4.75 % 3,225,417 81,683 3.39 %

Cash and due from banks 36,831 14,383

Other assets 271,745 222,236

Allowance for credit losses (35,206) (15,095)

Total assets $ 4,298,967 $ 3,446,941

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

(Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate

Interest-bearing liabilities

Demand deposits $ 813,834 13,808 2.27 % $ 627,213 1,652 0.35 %

Money market and savings deposits 1,163,595 11,709 1.35 1,046,230 2,027 0.26

Brokered deposits 33,244 1,225 4.93 — — —

Certificates of deposit $100,000 or more 421,852 9,685 3.07 247,635 931 0.50

Other time deposits 239,834 4,241 2.36 204,283 819 0.54

Interest-bearing deposits (4)

2,672,359 40,668 2.03 2,125,361 5,429 0.34

Securities sold under retail repurchase agreements and federal funds purchased — — — 913 2 0.29

Advances from FHLB - short-term 148,546 5,501 4.95 — — —

Advances from FHLB - long-term — — — 10,075 45 0.60

Subordinated debt and Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") (4)

52,839 2,992 7.57 42,878 1,731 5.40

Total interest-bearing liabilities 2,873,744 49,161 2.29 % 2,179,227 7,207 0.44 %

Noninterest-bearing deposits 983,325 891,233

Accrued expenses and other liabilities 22,073 21,932

Stockholders’ equity 419,825 354,549

Total liabilities and stockholders’ equity $ 4,298,967 $ 3,446,941

Net interest income $ 93,954 $ 74,476

Net interest spread 2.46 % 2.95 %

Net interest margin 3.12 % 3.09 %

Cost of Funds 1.70 % 0.31 %

Cost of Deposits 1.49 % 0.24 %

Cost of Debt 5.64 % 4.48 %

Tax-equivalent adjustment

Loans $ 161 $ 117

Investment securities 11 —

Total $ 172 $ 117

____________________________________

(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense.

(2) Average loan balances include nonaccrual loans.

(3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations.

There were $7.0 million and $1.0 million of accretion interest on loans for the nine months ended September 30, 2023 and 2022, respectively.

(4) Interest expense on deposits and borrowing includes amortization of deposit premiums and amortization of borrowing fair value adjustment.

There were $(0.3) million and $0.4 million of amortization of deposits premium, and $(0.3) million and $(0.1) million of amortization of borrowing fair value adjustment for the nine months ended September 30, 2023 and 2022, respectively.

The following table presents changes in interest income and interest expense for the periods indicated.

For each category of interest earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate);

and (2) changes in rate (changes in rate multiplied by old volume).

Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Volume Due to Rate Total

Interest income from earning assets:

Consumer real estate $ 11,984 $ 454 $ 12,438

Commercial real estate 25,501 9,121 34,622

Commercial (2,087) 5,536 3,449

Consumer 5,001 1,482 6,483

State and political (25) (1) (26)

Credit Cards 149 — 149

Other (394) 289 (105)

Taxable investment securities 2,356 2,922 5,278

Tax-exempt investment securities 52 — 52

Fed funds sold 92 — 92

Interest-bearing deposits (22,124) 21,123 (1,001)

Total interest income $ 20,505 $ 40,926 $ 61,431

Interest-bearing liabilities:

Interest-bearing demand deposits 3,169 8,987 12,156

Money market and savings deposits 1,185 8,497 9,682

Certificate of deposits 5,854 7,547 13,401

Securities sold under repurchase agreements and federal funds purchased — (2) (2)

Advances from FHLB - Short-term 5,501 — 5,501

Advances from FHLB - Long-term — (45) (45)

Subordinated debt 564 697 1,261

Total interest-bearing liabilities $ 16,273 $ 25,681 $ 41,954

Net change in net interest income $ 4,232 $ 15,245 $ 19,477

Net interest income for the first nine months of 2023 was $93.8 million, an increase of $19.4 million, or 26.1%, when compared to the first nine months of 2022.

The increase in net interest income was primarily due to an increase in total interest income of $61.4 million, or 75.2%, which included an increase in interest and fees on loans of $57.0 million, or 79.7%.

The increase of interest and fees on loans was primarily due to increases in loan yields and in the average balance of loans of $1.1 billion, or 47.7%, largely due to the merger.

Interest on investment securities increased $5.3 million, or 69.8%, primarily due to an increase in the average balance of $127.2 million, or 22.5%.

Increases to net interest income were partially offset by increased total interest expense of $42.0 million, or 582.1%, primarily due to increases in the cost of funds and in the average balance of interest-bearing deposits of $547.0 million, or 25.7%, largely due to the merger.

The Company’s NIM increased to 3.12% for the first nine months of 2023 from 3.09% for the first nine months of 2022.

The increase in the NIM was primarily due to an increase in the average balance and rates earned on total earning assets of $800.2 million and 136 basis points, partially offset by an increase in the average balance and rates paid on interest-bearing liabilities of $694.5 million and 185 basis points.

For the comparable periods, the cost of funds increased at a similar rate as interest-earning assets or 139 basis points to 1.70% for the nine months ended September 30, 2023 compared to 0.31% for the nine months ended September 30, 2022.

Total net accretion income for the first nine months of 2023 was $6.4 million, compared to $1.2 million for the first nine months of 2022.

Prior to the balance sheet restructuring in the third quarter of 2023, the NIM experienced compression due to the Company’s liability sensitive position, deposit rate pressures, and significantly higher FHLB borrowing rates.

Provision for Credit Losses and Allowance for Credit Losses

Net interest income was $41.1 million for the first quarter of 2024, compared to $41.5 million for the fourth quarter of 2023 and $25.7 million for the first quarter of 2023.

The decrease in net interest income when compared to the fourth quarter of 2023 was primarily due to the increase in interest expense of $0.4 million resulting from an increase in the average balance of interest-bearing deposits of $70.9 million.

The increase when compared to the first quarter of 2023 was primarily due to the increase in interest and fees on loans, interest on deposits from other banks, a decrease in interest on short term borrowings partially offset by the increase in interest on deposits and interest on long-term borrowings all significantly impacted by the merger of equals with TCFC in the third quarter of 2023.

The Company’s NIM decreased slightly to 3.08% for the first quarter of 2024 from 3.09% for the fourth quarter of 2023 primarily due to an increase in the overall mix of interest-bearing deposits compared to non-interest-bearing deposits.

Average interest-bearing deposits increased $70.9 million which resulted in a two basis point rate increase.

In addition to the change in deposit mix, rates on money market and time deposits also increased, which were partly offset by lower rates on demand deposits.

The Company’s NIM decreased to 3.08% for the first quarter of 2024 from 3.18% for the first quarter of 2023.

Comparing the first quarter of 2024 to the first quarter of 2023, the Company’s interest-earning asset yields increased 98 basis points to 5.32% from 4.34%, while the cost of funds repriced at a faster pace resulting in an increase of 109 basis points to 2.31% from 1.22% for the same period.

Provision for Credit Losses (“PCL”) and Allowance for Credit Losses

See discussion of the Bank’s PCL and ACL in the asset quality discussion in the analysis of financial condition in this MD&A.

Noninterest Income

Total noninterest income for the nine months ended September 30, 2023 of $29.0 million increased $11.7 million or 68.2% from $17.2 million for the nine months ended September 30, 2022.

The increase in noninterest income was primarily due to the bargain purchase gain of $12.2 million and an increase of $1.4 million in trust and investment fee income of which $1.1 million of the increase related to the transition of customers to a new broker of record for the Bank's investment division.

Both the bargain purchase gain and the transition payment were the result of the merger.

Additionally, interchange income increased $0.5 million due to a larger customer base and increased transaction activity.

These increases to noninterest income were partially offset by a $2.2 million loss on sales of investment securities in the third quarter and a decrease of $0.7 million in title company revenue.

Management sold virtually all of CBTC’s AFS investment securities soon after the merger close on July 1, 2023.

The $2.2 million loss relates to the difference in the fair values of the securities on July 1, 2023 compared to actual sales proceeds received from the sales on the settlement date.

Title company revenues have fallen in 2023 as real estate settlement activity has decreased in 2023 due to higher interest rates.

Total noninterest income for the first quarter of 2024 was $6.6 million, a decrease of $1.0 million from $7.5 million for the fourth quarter of 2023 and an increase $1.2 million from $5.3 million for the first quarter of 2023.

The decrease from the fourth quarter of 2023 was primarily due to other noninterest income, which included decreases in other fees on bank services and other loan fee income, decreases in mortgage banking revenue and trust and investment fee income.

The increase from the first quarter of 2023 was primarily due to other noninterest income, which included increases in other loan fee income, gains on life insurance contracts and an increase in credit card income, increases in trust and investment fee income and interchange credits all a result of the merger in the third quarter of 2023 .

Noninterest Expense

Total noninterest expense of $89.7 million for the nine months ended September 30, 2023 increased $30.3 million, or 51.1%, when compared to $59.3 million for the same period in 2022.

Almost all noninterest expense line items increased as a result of the merger and the expanded operations of the newly combined Company.

Merger-related expenses were almost entirely captured during the third quarter of 2023 and totaled $16.8 million for the first nine months of 2023, compared to $1.1 million for the first nine months of 2022.

Excluding merger and acquisition costs and core deposit amortization, of $20.3 million million for the first nine months of 2023 and $2.7 million million for the first nine months of 2022, noninterest expense for the comparable periods was $69.4 million million and $56.7 million million, respectively.

Noninterest expense as a percentage of average assets increased to 2.79% for the nine months ended September 30, 2023 from 2.30% for the nine months ended September 30, 2022.

Excluding merger and acquisition costs and core deposit amortization for the comparable periods, noninterest expense as a percentage of average assets decreased to 2.16% for the nine months ended September 30, 2023 compared to 2.20% for the nine months ended September 30, 2022.

As the Company continues its merger integration, a key focus of management will be to streamline processes, unlock operational efficiencies and reduce overall noninterest expense.

The Company reported income tax benefit of $1.1 million for the nine months ended September 30, 2023, and income tax expense of $8.0 million for the nine months ended September 30, 2022.

The effective tax rate was (35.0%) for the nine months ended September 30, 2023, and 26.0% for the nine months ended September 30, 2022.

The 2023 effective tax rate was impacted by nondeductible merger costs incurred.

The Company’s estimated effective tax rate applied to net deferred tax assets of $48.7 million at September 30, 2023 was 27.52%.

Total noninterest expense of $36.7 million for the first quarter of 2024 increased $3.0 million when compared to the fourth quarter of 2023 expense of $33.7 million and increased $15.8 million when compared to the first quarter of 2023 expense of $20.9 million.

The increase from the fourth quarter of 2023 was primarily due to credit card fraud expense of $4.3 million, and an increase in employee benefits of $0.7 million partially offset by decreases in salaries and wages expense of $1.0 million, merger-related expenses of $0.6 million, and FDIC insurance premium expense of $0.6 million.

The increase from the first quarter of 2023 was primarily due to other noninterest expense, salaries, amortization of intangibles, employee benefits, data processing, and the credit card fraud expenses.

Other than the credit card fraud expenses, all noninterest expenses categories were significantly impacted by the merger in the third quarter of 2023.

The Company reported income tax expense of $2.4 million for the first quarter of 2024, and income tax expense of $2.4 million for the first quarter of 2023.

The effective tax rate for the first quarter of 2024 was 22.8% and 27.4% for the first quarter of 2023.

The decrease in the effective tax rate was due to a re-assessment of year-end 2023 tax deductions during the first quarter of 2024 which presented favorable differences.

Due to the timing of the re-assessment, the differences were recorded in the first quarter of 2024 to reduce significant tax return to provision adjustments when the 2023 tax return is filed and to properly calculate the effective tax rate.

The Company’s estimated effective tax rate applied to net deferred tax assets of $39.0 million at March 31, 2024 was 27.52%.

The Bank's deferred taxes are recorded at 26.00%.

As of September 30, 2023 the Company recorded $38.4 million and $34.1 million of gross federal and state net operating loss carryovers, (“NOL’s”).

As of March 31, 2024 the Company recorded $23.2 million and $39.2 million of gross federal and state net operating loss carryovers (“NOL’s”).

These NOL’s will offset future taxable income to the Company.

1 unchanged sentence

Balance Sheet Summary

Total assets were $5.7 billion at September 30, 2023, an increase of $2.2 billion or 64.2%, when compared to $3.5 billion at December 31, 2022.

The aggregate increase was primarily due to the merger, with significant increases in loans held for investment of $2.1 billion, or 80.7%, and cash and cash equivalents of $53.2 million, partially offset by an increase in ACL of $40.4 million.

The ratio of the allowance for credit losses on loans to total loans increased from 0.65% at December 31, 2022, to 1.05% at June 30, 2023 and 1.24% at September 30, 2023.

The increases were due to the adoption of CECL on January 1, 2023 and the merger with TCFC in July 2023.

Due to a lack of uniformity of historical data between the legacy banks in their respective CECL models, management implemented a new post-merger model methodology.

The Bank's provision for credit losses for the third quarter of 2023 was $28.2 million and consisted of approximately $20.1 million related to the acquisition of TCFC legacy loans, $7.3 million due to the change in ACL methodology on the Bank’s legacy loans and $0.8 million related to third quarter activity.

Total assets were $5.8 billion at March 31, 2024, a decrease of $185.2 million or 3.1%, when compared to $6.0 billion at December 31, 2023.

The aggregate decrease was primarily due to decreases in cash and cash equivalents of $257.9 million and investment securities held to maturity (“HTM”) of $9.4 million partially offset by an increase in investment securities available for sale (“AFS”) of $69.0 million and loans held for investment of $7.7 million.

The ratio of the ACL on loans to total loans decreased from 1.24% at December 31, 2023 to 1.23% at March 31, 2024.

Cash and Cash Equivalents

Cash and cash equivalents totaled $108.7 million at September 30, 2023, compared to $55.5 million at December 31, 2022.

Cash and cash equivalents totaled $114.6 million at March 31, 2024, compared to $372.4 million at December 31, 2023.

Total cash and cash equivalents fluctuate due to transactions in process and other liquidity demands.

Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and wholesale funding sources, and the portions of the investment and loan portfolios that mature within one year.

In addition, management sold low cost deposits during the third quarter of 2023 to manage liquidity and earn additional interest income of $0.4 million, earning greater than a 4.5% yield.

These funds are off-balance sheet and totaled $68.7 million at September 30, 2023.

These sold deposits are available daily if needed to fund the Bank’s operating needs.

Investment Securities

6 unchanged sentences

We have the intent and ability to hold such securities until maturity.

At September 30, 2023, 13.1% of the portfolio of debt securities was classified as AFS and 86.9% was classified as HTM, compared to 13.0% and 87.0% respectively, at December 31, 2022.

At March 31, 2024, 26.3% of the portfolio of debt securities was classified as AFS and 73.7% was classified as HTM, compared to 17.7% and 82.3% respectively, at December 31, 2023.

See Note 3 – “Investment Securities”, in the Notes to Consolidated Financial Statements for additional details on the composition of our investment portfolio.

Investment securities, including restricted stock and equity securities, totaled $621.0 million at September 30, 2023, a $34.5 million, or 5.3%, decrease compared to $655.4 million at December 31, 2022.

The Bank acquired approximately $454.5 million in securities as a result of the merger and subsequently sold most of the acquired available-for-sale securities (“AFS”) portfolio for net proceeds of434.2 million, and used $380.0 million to reduce higher cost Federal Home Loan Bank (“FHLB”) advances and brokered deposits.

At September 30, 2023, AFS securities, carried at fair value, totaled $79.1 million compared to $83.6 million at December 31, 2022.

At September 30, 2023, AFS securities consisted of 67.7% mortgage-backed, 24.8% U.S.

Investment securities, including restricted stock and equity securities, totaled $707.0 million at March 31, 2024, a $59.6 million, or 9.2%, increase compared to $647.4 million at December 31, 2023.

At March 31, 2024, AFS securities, carried at fair value, totaled $179.5 million compared to $110.5 million at December 31, 2023.

At March 31, 2024, AFS securities consisted of 57.7% mortgage-backed, 38.7% U.S.

Government agencies and 3.5% corporate bonds, compared to 76.0%, 18.5% and 5.5%, respectively, at year-end 2023.

At September 30, 2023, HTM securities, carried at amortized cost, totaled $523.1 million compared to $559.5 million at December 31, 2022.

At September 30, 2023, HTM securities consisted of 70.3% mortgage-backed, 27.4% U.S.

At March 31, 2024, HTM securities, carried at amortized cost, totaled $503.9 million compared to $513.3 million at December 31, 2023.

At March 31, 2024, HTM securities consisted of 69.2% mortgage-backed, 28.4% U.S.

Government agencies, 2.1% other debt securities, and 0.3% states and political subdivisions, compared to 69.7%, 27.9%, 2.0% and 0.3%, respectively, at year-end 2023.

At September 30, 2023 and December 31, 2022, 97.0% and 97.8%, respectively, of the Bank’s carrying value of it’s investment portfolio consisted of securities issued or guaranteed by U.S.

At March 31, 2024 and December 31, 2023, 97.3% and 97.1%, respectively, of the Bank’s carrying value of its investment portfolio consisted of securities issued or guaranteed by U.S.

Government agencies or government-sponsored agencies.

1 unchanged sentence

The Bank originates residential mortgage loans for sale on the secondary market, which are recorded at fair value.

At September 30, 2023 and December 31, 2022 , the fair value of loans held for sale amounted to $14.7 million and $4.2 million, respectively.

At March 31, 2024 and December 31, 2023 , the fair value of loans held for sale amounted to $13.8 million and $8.8 million, respectively.

The Bank makes certain representations to purchasers in the sale of the mortgage loans related to loan ownership, loan compliance and legality, and accurate documentation.

1 unchanged sentence

Loans Held for Investment

The following table summarizes the Company’s loan portfolio at September 30, 2023 and December 31, 2022.

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

The following table summarizes the Company’s loan portfolio at March 31, 2024 and December 31, 2023.

(Dollars in thousands) March 31, 2024 % December 31, 2023 % $ Change % Change

Construction $ 299,133 6.43 % $ 299,000 6.44 % $ 133 0.04 %

7 unchanged sentences

Total loans, net $ 4,591,389 $ 4,583,659 $ 7,730 0.17 %

Our loan portfolio has a commercial real estate loan concentration, which is generally defined as a combination of certain construction and commercial real estate loans.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending.

Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital;

or (2) total non-owner occupied commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied commercial real estate loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk.

Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital.

The Bank has a concentration in commercial real estate loans, and has experienced significant growth in its commercial real estate portfolio in recent years and was further impacted with its acquisition of CBTC.

Non-owner occupied commercial real estate (“CRE”) as a percentage of the Bank’s Tier 1 Capital + ACL at September 30, 2023 and December 31, 2022 were $2.1 billion or 394.5% and $1.0 billion or 289.4%, respectively.

Construction loans as a percentage of the Bank’s Tier 1 Capital + ACL at September 30, 2023 and December 31, 2022 were $330.0 million or 62.8% and $246.3 million or 69.9%, respectively.

The commercial real estate portfolio (including construction) has increased significantly in the past two years.

Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its commercial real estate portfolio.

Our loan portfolio has a commercial real estate loan (“CRE”) concentration, which is generally defined as a combination of certain construction and CRE loans.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in CRE lending.

Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential CRE concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital;

or (2) total non-owner occupied CRE loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied CRE loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential CRE concentration risk.

Institutions which are deemed to have concentrations in CRE estate lending are expected to employ heightened levels of risk management with respect to their CRE portfolios, and may be required to hold higher levels of capital.

The Bank has a concentration in CRE loans, and has experienced significant growth in its CRE portfolio in recent years and was further impacted with its acquisition of CBTC in the third quarter of 2023.

Non-owner occupied CRE loans as a percentage of the Bank’s Tier 1 Capital + ACL at March 31, 2024 and December 31, 2023 were $2.0 billion or 370.0% and $2.0 billion or 382.6%, respectively.

Construction loans as a percentage of the Bank’s Tier 1 Capital + ACL at March 31, 2024 and December 31, 2023 were $299.1 million or 54.9% and $299.0 million or 56.7%, respectively.

The CRE portfolio (including construction) has increased significantly in the past two years.

Management has extensive experience in CRE lending, and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its CRE portfolio.

Monitoring practices include stress testing analysis to evaluate changes in collateral values and to cash flows from interest rate increases and declines in net operating income.

We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital or be required to sell/participate portions of loans, which may adversely affect shareholder returns.

The Bank's office CRE portfolio, which included owner-occupied and non-owner occupied CRE loans, was $520.7 million or 11.2% of total loans of $4.6 billion at September 30, 2023, which included $139.0 million or 26.7% with medical tenants and $56.5 million or 10.8% with government or government contractor tenants.

We may be required to maintain higher levels of capital as a result of our CRE concentrations, which could require us to obtain additional capital or be required to sell/participate portions of loans, which may adversely affect stockholder returns.

Non-Owner Occupied CRE Loans

March 31, 2024

(dollars in thousands) Amount Average Loan Size % of Non-Owner Occupied CRE Loans % of Total Portfolio Loans, Gross

Retail $ 454,347 $ 2,113 22.5 % 9.7 %

Office/Office Condo 375,143 1,443 18.6 % 8.0 %

Multi-Family (5+ Units) 265,709 2,233 13.2 % 5.7 %

Industrial/Warehouse 217,890 1,492 10.8 % 4.7 %

702,900 688 34.9 % 15.1 %

Total non-owner occupied CRE loans (2)

$ 2,015,989 $ 1,145 100.0 % 43.2 %

Total Portfolio loans, gross (3)

____________________________________

(1) Other non-owner occupied CRE loans include Motel/Hotel loans of $215.1 million, mini-storage loans of $85.2 million, restaurant loans of $45.9 million, and other loans of $356.7 million.

(2) The balances for our non-owner occupied CRE portfolio as of March 31, 2024, as presented in this table, coincide with our internal evaluation of risk for the purpose of monitoring loan concentrations in accordance with internal and regulatory guidelines.

Within the non-owner occupied balances presented in this table, the Company has included certain loans secured by multi-family residential properties and other investor owned 1-4 family residential properties that are reported in the residential real estate caption in other areas of this report.

As such, the total balance of loans presented in this table when added to the balance of the table presented below detailing owner occupied CRE may not reconcile to the CRE caption included in other tables and footnotes.

(3) Includes loans held for sale of $13.8 million.

Owner-Occupied CRE Loans

March 31, 2024

(dollars in thousands) Amount Average Loan Size % of Owner-Occupied CRE Loans % of Total Portfolio Loans, Gross

Office/Office Condo $ 140,839 $ 514 18.6 % 3.0 %

Industrial/Warehouse 111,599 631 14.7 % 2.4 %

Church 71,106 936 9.4 % 1.5 %

Retail 61,411 558 8.1 % 1.3 %

373,353 1,023 49.2 % 8.0 %

Total owner-occupied CRE loans $ 758,308 $ 757 100.0 % 16.2 %

Total Portfolio loans, gross (2)

____________________________________

(1) Other owner-occupied CRE loans include restaurant loans of $61.0 million, marine/boat slips of $59.9 million, fire/CMS building loans of $41.6 million and other loans of $210.9 million..

(2) Includes loans held for sale of $13.8 million.

Office CRE Portfolio

The Bank's office CRE loan portfolio, which includes owner-occupied and non-owner-occupied CRE loans, was $516.0 million or 11.1% of total loans of $4.6 billion at March 31, 2024.

The Bank’s office CRE loan portfolio included $137.7 million or 26.7% of the total with medical tenants and $73.3 million or 14.2% of the total with government or government contractor tenants.

There were 513 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $0.4 million, respectively.

Loan to Value ("LTV") estimates are less than 70.0% for $356.7 million or 68.0% of the office CRE portfolio.

The Bank had 23 CRE office loans totaling $207.0 million that were greater than $5.0 million at September 30, 2023.

For this subset of the office CRE portfolio, at September 30, 2023, the average loan debt-service coverage (“DSC”) ratio was 1.42x and average LTV was 57.04%.

Most buildings in the Bank's office CRE portfolio are two stories or less.

Asset Quality

The following table summarizes asset quality information and ratios at September 30, 2023 and December 31, 2022.

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

Loan to Value ("LTV") estimates are less than 70% for $395.8 million or 76.7% of the office CRE portfolio and less than 80% for $490.4 million or 95.0% of the office CRE portfolio.

The Bank had 19 office CRE loans totaling $172.0 million that were greater than $5.0 million at March 31, 2024, compared to 24 office CRE loans totaling $189.8 million at December 31, 2023.

The decrease in this portfolio segment was the result of normal amortization and two large loan payoffs in the quarter.

For the office CRE portfolio, at March 31, 2024, the average loan debt-service coverage ratio was 1.7x and average LTV was 57.6%.

Of the office CRE portfolio balance, 73% is secured by properties in rural or suburban areas with limited exposure to metropolitan cities and 92% are secured by properties with five stories or less.

Of the office CRE loans, $5.8 million will mature and $5.1 million will reprice prior to December 31, 2024.

Of the office CRE loans, $2.2 million are special mention or substandard.

The following table summarizes asset quality information and ratios at March 31, 2024 and December 31, 2023.

(dollars in thousands,) March 31, 2024 December 31, 2023

ASSET QUALITY

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Classified Assets (1)

15,427 14,851

Allowance for credit losses on loans

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Accruing borrowers experiencing financial difficulty ("BEFD") modifications (2)

Other real estate owned (OREO) 179 197

Non-accrual loans, OREO and BEFD modifications 9,161 6,510

Other real estate owned (OREO) and Repossessed Property 2,024 179

Non-accrual loans, OREO, Repossessed Property and BEFD modifications 14,800 13,116

ASSET QUALITY RATIOS

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Past due loans - 30 to 89 days to total portfolio loans

0.18 % 0.23 %

Past due loans >=90 days and non-accrual to total loans 0.31 % 0.29 %

Total past due (delinquency) to total portfolio loans 0.43 % 0.58 %

Total past due (delinquency) and non-accrual to total portfolio loans

0.49 % 0.53 %

Non-accrual loans to total portfolio loans 0.27 % 0.28 %

Non-accrual loans and BEFD modifications to total loans 0.27 % 0.28 %

Non-accrual loans and OREO to total assets 0.16 % 0.06 %

Non-accrual loans and OREO to total portfolio loans and OREO 0.20 % 0.08 %

Non-accrual loans, OREO and BEFD modifications to total assets 0.16 % 0.19 %

Non-accrual loans OREO and repossessed property to total assets 0.25 % 0.22 %

Non-accrual loans OREO and repossessed property to total portfolio loans, OREO and repossessed property 0.32 % 0.28 %

Non-accrual loans, OREO, repossessed property and BEFD modifications to total assets 0.25 % 0.22 %

____________________________________

(1) Classified assets are substandard loans and OREO.

(1) Classified assets are substandard loans and OREO and other repossessed property.

Classified assets do not include special mention loans.

(2) On January 1, 2023, the Company adopted ASU 2022-02– Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures, which eliminated the TDR recognition and measurement guidance.

As such, loans designated as TDRs prior to January 1, 2023 and are currently performing are no longer reported as a BEFD loan beginning in the quarter ended March 31, 2023, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

(2) BEFD modification loans include both non-accrual and accruing performing loans.

2 unchanged sentences

Allowance for Credit Losses on Loans

The ACL was $57.1 million at September 30, 2023, $16.6 million at December 31, 2022 and $16.3 million at September 30, 2022.

There were net charge-offs of $1.4 million for the third quarter of 2023, compared to net charge-offs of $50,000 for the second quarter of 2023 and net recoveries of $119,000 for the third quarter of 2022.

The ratio of annualized net charge-offs to average loans was 0.13% for the third quarter of 2023, compared to annualized net charge-offs of 0.01% for the second quarter of 2023 and annualized net recoveries of 0.02% for the third quarter of 2022.

The ACL was $57.3 million at March 31, 2024, $57.4 million at December 31, 2023 and $28.5 million at March 31, 2023.

There were net charge-offs of $0.6 million for the first quarter of 2024, compared to net charge-offs of $0.5 million for the fourth quarter of 2023 and net charge-offs of $20,000 for the first quarter of 2023.

The ratio of annualized net charge-offs to average loans was 0.05% for the first quarter of 2024, compared to annualized net charge-offs of 0.04% for the fourth quarter of 2024 and annualized net recoveries of 0.00% for the first quarter of 2023.

Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming loans to enable the Company to maintain overall credit quality.

The ACL on loans as a percentage of period-end loans was 1.24% at September 30, 2023 and 0.65% at December 31, 2022.

We adopted ASU 2016-13 using the modified retrospective method.

Results for reporting periods beginning after January 1, 2023 are presented under ASU 2016-13.

Upon the adoption of ASC 326, the Company recorded a $10.8 million increase to the ACL.

ACL balances increased to 1.07% and 1.05% of portfolio loans at March 31, 2023 and June 30, 2023, respectively, compared to 0.65% at December 31, 2022.

In the third quarter of 2023, as a result of the merger with TCFC, the ACL increased from $29.0 million and 1.05% of total loans at

June 30, 2023 to $57.1 million and 1.24% of total loans at September 30, 2023.

The Bank's provision for credit losses for the third quarter of 2023 was $28.2 million and consisted of $20.1 million related to the acquisition of TCFC legacy loans including $0.2 million related to unfunded commitments to extent credit, $7.3 million due to a change in ACL methodology on the Bank’s legacy loans and $0.8 million related to third quarter activity.

Management believes that the allowance is adequate at September 30, 2023.

The ACL as a percent of total loans may increase or decrease in future periods based on economic conditions.

Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio.

For additional information regarding the allowance for credit losses, refer to Notes 1, 2 and 5 of the Consolidated Financial Statements and the Critical Accounting Policies section of the MD&A.

The following tables present a summary of the net charge-off activity in the ACL at or for the three and nine months ended September 30, 2023 and 2022.

The ACL on loans as a percentage of period-end loans was 1.23% at March 31, 2024 and 1.24% at December 31, 2023.

The following tables present a summary of the net charge-off activity in the ACL at or for the three months ended March 31, 2024 and 2023.

For the Three Months Ended

September 30, 2023 September 30, 2022

(Dollars in thousands) Average balances Net (charge-offs) recoveries Percentage of net charge-offs (recoveries) (annualized) to average loans outstanding during the year Average balances Net (charge-offs) recoveries Percentage of net charge-offs (recoveries) (annualized) to average loans outstanding during the year

Construction $ 398,340 $ 3 - % $ 239,120 $ 2 - %

Residential real estate 1,425,729 3 - 730,738 12 (0.01)

Commercial real estate 2,389,138 (1,327) 0.22 980,174 243 (0.10)

Commercial 776 2 (1.02) 150,143 (142) 0.38

Consumer 330,929 (70) 0.08 213,984 4 (0.01)

Credit Cards 6,223 (60) 3.83 — — -

Total $ 4,551,135 $ (1,449) 0.13 % $ 2,314,159 $ 119 (0.02) %

Allowance for credit losses on loans at period end as a percentage of total period end loans (1)

1.24 % 0.68 %

Allowance for credit losses on loans at period end as a percentage of total period end loans (2)

1.24 % 0.84 %

Allowance for credit losses on loans at period end as a percentage of average loans (3)

1.25 % 0.70 %

Allowance for credit losses on loans at period end as a percentage of period end nonaccrual loans

635.17 % 550.08 %

____________________________________

(1) At September 30, 2023 and September 30, 2022, these ratios included all loans held for investment, including PPP loans of $129,000 and $291,000, respectively.

(2) For 2023, this ratio excludes only PPP loans given the Company’s adoption of the CECL standard.

For periods in 2022, this ratio excludes PPP loans and loans acquired in the Severn and Northwest branch acquisitions.

(3) At September 30, 2023 and September 30, 2022, these ratios included all loans held for investment, including average PPP loans of $137,000 and $749,000, respectively.

For Nine Months Ended September 30, 2023

September 30, 2023 September 30, 2022

March 31, 2024 March 31, 2023

(Dollars in thousands) Net (Charge-offs) Recoveries Average Balance (1)

% Net (Charge-offs) Recoveries Average Balance (1)

Construction $ (10) $ 292,803 0.01 % $ 3 $ 248,286 — %

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Credit Cards (108) 4,196 10.35 % — — — %

Total $ 3,293,890 $ (1,519) 0.06 % $ 2,217,284 $ 858 (0.05) %

Allowance for credit losses on loans at period end as a percentage of total period end loans (1)

$ (565) $ 4,645,805 0.05 % $ (20) $ 2,606,558 — %

Allowance for credit losses on loans at period end as a percentage of total period end loans (2)

1.24 % 0.84 %

Allowance for credit losses on loans at period end as a percentage of average loans (3)

1.73 % 0.73 %

Allowance for credit losses on loans at period end as a percentage of period end nonaccrual loans

635.17 % 550.08 %

Allowance for credit losses — (57,336) - % — (28,464) — %

Total net charge-off and average loans $ (565) $ 4,588,469 0.05 % $ (20) $ 2,578,094 - %

____________________________________

(1) At September 30, 2023 and September 30, 2022, these ratios included all loans held for investment, including PPP loans of $129,000 and $291,000, respectively.

(2) For 2023, this ratio excludes only PPP loans given the Company’s adoption of the CECL standard.

For periods in 2022, this ratio excludes PPP loans and loans acquired in the Severn and Northwest branch acquisitions.

(3) At September 30, 2023 and September 30, 2022, these ratios included all loans held for investment, including average PPP loans of $156,000 and $8.9 million, respectively.

(1) Excludes Loans Held for Sale

Nonperforming Assets

Classified assets increased $8.4 million to $11.1 million or 0.19% of total assets at September 30, 2023 from $2.7 million or 0.08% of total assets at December 31, 2022.

Classified assets are substandard loans and OREO.

The increase in classified assets was due to the acquisition of TCFC classified loans of $5.1 million and an increase in Shore legacy classified loans to $5.8 million, and OREO of $0.2 million at September 30, 2023.

As shown in the following table, nonperforming assets were $11.3 million or 0.20% of total assets at September 30, 2023 compared to $3.9 million or 0.11% of total assets at December 31, 2022.

The balance of nonperforming assets increased due to a $7.1 million increase in total nonaccrual loans.

The modest increase in nonperforming and classified assets was the result of the merger, a small increase in late payments in consumer loans and a proactive review of larger commercial relationships in the current interest rate environment.

The following table summarizes our nonperforming assets at September 30, 2023 and December 31, 2022.

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

Classified assets increased $0.6 million to $15.4 million or 0.26% of total assets at March 31, 2024 from $14.9 million or 0.25% of total assets at December 31, 2023.

Classified assets are substandard loans, repossessed properties and OREO.

The increase was primarily due to the repossessed properties of $1.8 million and offset by decrease of $1.3 million in substandard loans.

As shown in the following table, nonperforming assets were $16.4 million or 0.28% of total assets at March 31, 2024 compared to $13.7 million or 0.23% of total assets at December 31, 2023.

The balance of nonperforming assets increased primarily due to an increase in repossessed properties of $1.8 million and an increase of $0.8 million in loans 90 days past due and still accruing.

The following table summarizes our nonperforming assets at March 31, 2024 and December 31, 2023.

(Dollars in thousands) March 31, 2024 December 31, 2023

Nonperforming assets

1 unchanged sentence

Total loans 90 days or more past due and still accruing 1,560 738

Other real estate owned 179 197

Other real estate owned and repossessed property 2,024 179

Total nonperforming assets $ 16,360 $ 13,701

1 unchanged sentence

Nonaccrual loans 0.27 % 0.28 %

As a percent of total loans and other real estate owned:

As a percent of total loans, other real estate owned and repossessed property:

Nonperforming assets 0.35 % 0.30 %

2 unchanged sentences

Nonperforming assets 0.28 % 0.23 %

The following is a breakdown of the Company’s deposit portfolio at September 30, 2023 and December 31, 2022:

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

The following is a breakdown of the Company’s deposit portfolio at March 31, 2024 and December 31, 2023:

(dollars in thousands) March 31, 2024 December 31, 2023

Balance % Balance % $ Change % Change

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Total Deposits $ 5,184,279 100.00 % $ 5,386,120 100.00 % $ (201,841) (3.70) %

Total deposits increased $2.1 billion, or 69.7% to $5.1 billion at September 30, 2023 when compared to December 31, 2022.

The increase in total deposits was primarily due to the merger, which resulted in an increase in time deposits of $712.1 million, demand deposits of $516.0 million, money market and savings of $521.5 million, and noninterest-bearing deposits of $349.4 million.

Total estimated uninsured deposits were $1.0 billion or 19.76% of total deposits at September 30, 2023 and $871.5 million or 28.95% of total deposits at December 31, 2022.

At September 30, 2023, there were $144.9 million included in uninsured deposits that the Bank secured using the market value of pledged collateral.

The Bank's uninsured deposits, excluding the market value of pledged collateral, at September 30, 2023 were $864.6 million or 16.92% of total deposits.

Total deposits decreased $0.2 billion, or 3.7% to $5.2 billion at March 31, 2024 when compared to December 31, 2023.

The decrease in total deposits was primarily due to a decrease in time deposits of $15.3 million, demand deposits of $63.6 million, money market and savings of $65.6 million, and noninterest-bearing deposits of $57.4 million.

The decrease in deposits is attributable seasonal municipal runoff and MRB deposits.

Total estimated uninsured deposits were $1.0 billion or 18.9% of total deposits at March 31, 2024 and $1.0 billion or 19.5% of total deposits at December 31, 2023.

At March 31, 2024, there were $155.4 million included in uninsured deposits that the Bank secured using the market value of pledged collateral.

The Bank's uninsured deposits, excluding the market value of pledged collateral, at March 31, 2024 were $825.9 million or 15.9% of total deposits.

The Company does not consider reciprocal deposits to be brokered as reciprocal deposits are used to maximize FDIC insurance available to our customers.

During 2018, revisions to the Federal Deposit Insurance Act determined that reciprocal deposits are core deposits and are not considered brokered deposits unless they exceed 20% of the Bank’s total liabilities of $5.2 billion.

Reciprocal deposits were $1.1 billion at September 30, 2023 compared to $475.8 million at December 31, 2022.

Reciprocal deposits as a percentage of the Bank’s liabilities at September 30, 2023 and December 31, 2022 were 20.47% and 15.44%, respectively.

For call reporting purposes, there were $24.4 million and zero reciprocal deposits that were considered brokered at September 30, 2023 and December 31, 2022.

Reciprocal deposits were $1.2 billion at March 31, 2024 compared to $1.3 billion at December 31, 2023.

Reciprocal deposits as a percentage of the Bank’s liabilities at March 31, 2024 and December 31, 2023 were 23.1% and 24%, respectively.

For call reporting purposes, there were $161.5 million and $204.8 million reciprocal deposits that were considered brokered at March 31, 2024 and December 31, 2023.

The Bank is required to monitor large deposit relationships and concentration risks in accordance with regulatory guidance.

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Regulatory guidance defines a large depositor as a customer or entity that owns or controls 2% or more of the Bank’s total deposits.

At September 30, 2023, the Bank had three local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $406.4 million which represented 8.0% of total deposits of $5.1 billion.

At December 31, 2022, there were two customer deposit relationships that exceeded 2% of total deposits, totaling $217.8 million which represented 7.2% of total deposits of $3.0 billion.

At March 31, 2024, the Bank had three local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $403.7 million which represented 7.8% of total deposits of $5.2 billion.

At December 31, 2023, there were four customer deposit relationships that exceeded 2% of total deposits, totaling $598.5 million which represented 11.1% of total deposits of $5.4 billion.

Wholesale Funding - Short-Term Borrowings and Brokered Deposits

The Company had no short-term borrowings as of September 30, 2023, compared to short-term advances with the FHLB of $40.0 million at December 31, 2022.

The Company had no short-term borrowings as of March 31, 2024, and reduced brokered deposits of $44.5 million to zero.

Other short-term borrowings may consist of overnight borrowing from correspondent banks or securities sold under agreements to repurchase, primarily with commercial depositors.

Short-term advances are defined as those with original maturities of one year or less.

At September 30, 2023 and December 31, 2022, the Company had no securities sold under agreements to repurchase or overnight borrowings from correspondent banks.

The Company's wholesale funding increased $71.0 million, which includes FHLB advances and brokered deposits, from $40.0 million in FHLB advances at December 31, 2022 to $111.0 million in brokered deposits at September 30, 2023.

Brokered deposits for the Company’s measurement of wholesale funding exclude reciprocal deposit balances that exceeded 2% of total deposits.

The Bank decreased wholesale funding by $380.0 million during the third quarter of 2023 using proceeds from the sale of TCFC’s securities portfolio after the legal merger.

At March 31, 2024 and December 31, 2023, the Company had no securities sold under agreements to repurchase or overnight borrowings from correspondent banks.

Long-Term Debt

The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient.

There were no long-term borrowings from the FHLB outstanding at September 30, 2023 and December 31, 2022.

The Company occasionally borrows from the Federal Home Loan Bank (“FHLB”) to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient.

There were no long-term borrowings from the FHLB outstanding at March 31, 2024 and December 31, 2023.

On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% of Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.

As a result of the Severn merger, the Company acquired Junior Subordinated Debt Securities due in 2035 which had an outstanding principal balance of $20.6 million.

The debt balance of $18.5 million at September 30, 2023 and $18.4 million at December 31, 2022 was presented net of fair value adjustments of $2.1 million and $2.2 million, respectively.

As a result of the merger with Severn Bancorp, Inc., effective October 31, 2021, the Company acquired Junior Subordinated Debt Securities due in 2035 which had an outstanding principal balance of $20.6 million.

The debt balance of $18.6 million at March 31, 2024 and $18.6 million at December 31, 2023 was presented net of fair value adjustments of $2.0 million and $2.0 million, respectively.

Additionally, as a result of the TCFC merger, the Company acquired Junior Subordinated Debt Securities which had an outstanding principal balance of $12.0 million.

The debt balance of $10.5 million at September 30, 2023 was presented net of a fair value adjustment of $1.5 million.

In addition, the Company acquired 4.75% fixed-to-floating rate subordinated notes with a carrying value of $19.5 million at September 30, 2023.

The notes balance of $18.2 million at September 30, 2023 was presented net of fair value adjustment of $1.3 million.

The debt balance of $10.6 million at March 31, 2024 was presented net of a fair value adjustment of $1.4 million.

In addition, the Company acquired 4.75% fixed-to-floating rate subordinated notes with a carrying value of $19.5 million at March 31, 2024.

The notes balance of $18.5 million at March 31, 2024 was presented net of fair value adjustment of $1.0 million.

Stockholders’ Equity

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

(Dollars in thousands) March 31, 2024 December 31, 2023 $ Change % Change

Common Stock at par of $0.01 $ 332 $ 332 $ — — %

3 unchanged sentences

Total Stockholders' Equity $ 515,228 $ 511,135 $ 4,093 0.80 %

Total stockholders’ equity increased $140.6 million, or 38.61%, to $504.9 million at September 30, 2023 when compared to December 31, 2022 primarily due to a $153.1 million additional paid in capital from the merger on July 1, 2023, offset by $7.8 million CECL adjustment in the first quarter of 2023 and dividends paid of $8.8 million.

Total stockholders’ equity increased $4.1 million, or 0.80%, to $515.2 million at March 31, 2024 when compared to December 31, 2023 primarily due to a $8.2 million of net income partially offset by dividends paid of $4.0 million.

Liquidity and Capital Resources

Liquidity is our ability to meet cash demands as they arise.

Cash needs may come from loan demand, deposit withdrawals or acquisition opportunities.

Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs.

Many of these obligations and commitments are expected to expire without being drawn upon;

therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.

The Company’s principal sources of liquidity are cash on hand and dividends received from the Bank.

The Bank’s most liquid assets are cash, cash equivalents and federal funds sold.

The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time.

The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows.

Customer deposits are considered the primary source of funds supporting the Bank’s lending and investment activities.

Based on management’s going concern evaluation, we believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s or the Bank’s ability to continue as a going concern, within one year of the date of the issuance of the financial statements.

The Bank’s principal sources of funds for investment and operations are net income, deposits, sales of loans, borrowings, principal and interest payments on loans, principal and interest received on investment securities and proceeds from the maturity and sale of investment securities.

The Bank’s principal funding commitments are for the origination or purchase of loans, the purchase of securities and the payment of maturing deposits.

The Bank’s most liquid assets are cash, cash equivalents and federal funds sold.

The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time.

The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows.

Liquidity is provided by access to funding sources, which include core depositors and brokered deposits.

Other sources of funds include our ability to borrow, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB of Atlanta.

The Bank uses wholesale funding (brokered deposits and other sources of funds) to supplement funding when loan growth exceeds core deposit growth and for asset-liability management purposes.

We derive liquidity through increased customer deposits, non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets.

As seen in the Consolidated Statements of Cash Flows in the Financial Statements, the net increase in cash and cash equivalents was $53.2 million for the first nine months of 2023 compared to a decrease of $420.3 million for the first nine months of 2022.

The increase in cash and cash equivalents in 2023 was mainly due to the proceeds from the sale of acquired AFS securities of $434.2 million.

As seen in the Consolidated Statements of Cash Flows, the net decrease in cash and cash equivalents was $257.9 million for the first three months of 2024 compared to a decrease of $17.8 million for the first three months of 2023.

The decrease in cash and cash equivalents in the first quarter of 2024 was mainly due to the decrease of $144.9 million in interest-bearing deposits.

To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term fund markets.

The Bank has arrangements with other correspondent banks whereby it has $45.0 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash.

At September 30, 2023, the Bank had approximately $1.1 billion of available liquidity including:

$108.7 million in cash, and $954.4 million in secured borrowing capacity at the FHLB and the other correspondent banks.

The Bank is a member of the FHLB, which provides another source of liquidity.

Through the FHLB, the Bank had available lendable collateral of approximately $726.6 million and $298.9 million at September 30, 2023 and December 31, 2022, respectively.

The Bank has pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB.

At March 31, 2024, the Bank had approximately $1.2 billion of available liquidity including:

$114.6 million in cash and cash equivalents, $321.0 million in unpledged securities, $782.2 million in secured borrowing capacity at the FHLB of Atlanta and the other correspondent banks of $66.1 million.

The Bank is a member of the FHLB of Atlanta, which provides another source of liquidity.

Through the FHLB of Atlanta, the Bank had available lendable collateral of approximately $782.2 million and $745.1 million at March 31, 2024 and December 31, 2023, respectively.

The Bank has pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB of Atlanta.

The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies.

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The Bank and Company are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.

The Bank and the Company were deemed “well capitalized” under applicable regulatory capital requirements at September 30, 2023.

The following tables present the applicable capital ratios for the Company and the Bank as of September 30, 2023 and December 31, 2022.

September 30, 2023 Tier 1 leverage ratio Common Equity Tier 1 ratio Tier 1 risk-based capital ratio Total risk-based capital ratio

The Bank and the Company were deemed “well capitalized” under applicable regulatory capital requirements at March 31, 2024.

The Bank and Company were in compliance with all applicable regulatory capital requirements to which they were subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations.

The following tables present the applicable capital ratios for the Company and the Bank as of March 31, 2024 and December 31, 2023.

March 31, 2024 Tier 1 leverage ratio Common Equity Tier 1 ratio Tier 1 risk-based capital ratio Total risk-based capital ratio

Shore Bancshares, Inc.

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Shore United Bank 8.33 % 10.02 % 10.02 % 11.27 %

For information on risks relating to liquidity, see Item 1A.

"Risk Factors - Liquidity Risk,” as presented in the Company's 2023 Annual Report.

USE OF NON-GAAP FINANCIAL MEASURES

Statements included in the MD&A include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures.

Statements in the MD&A include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures.

The Company’s management uses these non-GAAP financial measures and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company.

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RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)

Reconciliation of U.S.

GAAP total assets, common equity, common equity to assets and book value to Non-GAAP tangible assets, tangible common equity, tangible common equity to tangible assets and tangible book value.

Reconciliation of GAAP total assets, common equity, common equity to assets and book value to non-GAAP tangible assets, tangible common equity, tangible common equity to tangible assets and tangible book value.

This Quarterly Report on Form 10-Q, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with GAAP.

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These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.

(dollars in thousands, except per share amounts) September 30, 2023 December 31, 2022 September 30, 2022

(dollars in thousands, except per share amounts) March 31, 2024 December 31, 2023 March 31, 2023

Total assets $ 5,825,704 $ 6,010,918 $ 3,553,694

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Return on Average Common Equity (“ROACE”)

The ROACE is a financial ratio that measures the profitability of a company in relation to the average shareholders' equity.

This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average shareholders' equity for a specific period of time.

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

The ROACE is a financial ratio that measures the profitability of a company in relation to the average stockholders' equity.

This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average stockholders' equity for a specific period of time.

Three Months Ended March 31,

(dollars in thousands, except per share amounts) 2024 2023

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

Net income (as reported) $ 8,184 $ 6,457

ROACE 6.38 % 7.25 %

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Return on Average Tangible Common Equity (“ROATCE”)

ROATCE is computed by dividing net earnings applicable to common shareholders by average tangible common shareholders' equity.

ROATCE is computed by dividing net earnings applicable to common stockholders by average tangible common shareholders' equity.

Management believes that ROATCE is meaningful because it measures the performance of a business consistently, whether acquired or internally developed.

ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

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

Three Months Ended March 31,

(dollars in thousands, except per share amounts) 2024 2023

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

Net income (as reported) $ 8,184 $ 6,457

Merger and acquisition costs (net of tax) — 502

Core deposit intangible amortization (net of tax) 1,989 320

Net (loss) earnings applicable to common shareholders

Net earnings applicable to common stockholders

$ 10,173 $ 7,279

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis