SHORE BANCSHARES INC 10-Q

Item 1. Financial Statements. SHORE BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) March 31, 2024 December 31, 2023 ASSETS (Unaudited) Cash and due from banks $ 43,079 $ 63,172 Interest-bearing deposits with other banks 71,481 309,241 Cash and cash equivalents 114,560 372,413 Investment securities: Available-for-sale, at fair value (amortized cost of $ 190,583 (2024) and $ 120,832 (2023)) 179,496 110,521 Held to maturity, net of allowance for credit losses of $ 116 (2024) and $ 94 (2023) (fair value of $ 444,258 (2024) and $ 457,830 (2023)) 503,822 513,188 Equity securities, at fair value 5,681 5,703 Restricted securities, at cost 17,863 17,900 Loans held for sale, at fair value 13,767 8,782 Loans held for investment ($ 9,684 (2024) and $ 9,944 (2023), at fair value) 4,648,725 4,641,010 Less: allowance for credit losses ( 57,336 ) ( 57,351 ) Loans, net 4,591,389 4,583,659 Premises and equipment, net 83,084 82,386 Goodwill 63,266 63,266 Other intangible assets, net 45,515 48,090 Other real estate owned, net 179 179 Repossessed properties 1,845 — Mortgage servicing rights, at fair value 5,821 5,926 Right-of-use assets 12,153 12,487 Cash surrender value on life insurance 102,321 101,704 Accrued interest receivable 19,541 19,217 Deferred income taxes 38,978 40,707 Other assets 26,423 24,790 TOTAL ASSETS $ 5,825,704 $ 6,010,918 LIABILITIES Deposits: Noninterest-bearing $ 1,200,680 $ 1,258,037 Interest-bearing 3,983,599 4,128,083 Total deposits 5,184,279 5,386,120 Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS"), net 29,237 29,158 Subordinated debt, net 43,322 43,139 Total borrowings 72,559 72,297 Lease liabilities 12,552 12,857 Other liabilities 41,086 28,509 TOTAL LIABILITIES 5,310,476 5,499,783 STOCKHOLDERS' EQUITY Common stock, par value $ .01 per share; shares authorized - 50,000,000 ; shares issued and outstanding - 33,210,522 (2024) and 33,161,532 (2023) 332 332 Additional paid in capital 356,464 356,007 Retained earnings 166,490 162,290 Accumulated other comprehensive loss ( 8,058 ) ( 7,494 ) TOTAL STOCKHOLDERS' EQUITY 515,228 511,135 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,825,704 $ 6,010,918 See accompanying notes to Consolidated Financial Statements. 3 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For Three Months Ended March 31, (In thousands, except per share data) 2024 2023 INTEREST INCOME Interest and fees on loans $ 65,754 $ 30,828 Interest and dividends on taxable investment securities 4,419 4,064 Interest and dividends on tax-exempt investment securities 6 7 Interest on deposits with other banks 960 163 Total interest income 71,139 35,062 INTEREST EXPENSE Interest on deposits 28,497 7,281 Interest on short-term borrowings 56 1,361 Interest on long-term borrowings 1,451 756 Total interest expense 30,004 9,398 NET INTEREST INCOME 41,135 25,664 Provision for credit losses 407 1,213 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 40,728 24,451 NONINTEREST INCOME Service charges on deposit accounts 1,507 1,213 Trust and investment fee income 734 432 Interchange credits 1,587 1,212 Mortgage-banking revenue 801 977 Title Company revenue 78 137 Other noninterest income 1,860 1,363 Total noninterest income 6,567 5,334 NONINTEREST EXPENSE Salaries and wages 11,852 8,684 Employee benefits 4,097 2,921 Occupancy expense 2,416 1,619 Furniture and equipment expense 904 534 Data processing 2,867 1,798 Directors' fees 295 250 Amortization of other intangible assets 2,576 441 FDIC insurance premium expense 1,150 371 Other real estate owned expenses, net — ( 1 ) Legal and professional fees 1,599 750 Fraud losses (1) 4,502 67 Merger-related expenses — 691 Other noninterest expenses 4,440 2,768 Total noninterest expense 36,698 20,893 Income before income taxes 10,597 8,892 Income tax expense 2,413 2,435 NET INCOME $ 8,184 $ 6,457 Basic and diluted net income per common share $ 0.25 $ 0.32 Dividends paid per common share $ 0.12 $ 0.12 ____________________________________ (1) Fraud losses includes $ 4.3 million of credit card fraud losses for the quarter ended March 31, 2024 . See accompanying notes to Consolidated Financial Statements. 4 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) For Three Months Ended March 31, (In thousands) 2024 2023 Net income $ 8,184 $ 6,457 Other comprehensive income (loss): Investment securities: Unrealized holding gains (losses) on available-for-sale-securities ( 776 ) 1,183 Tax effect 212 ( 323 ) Total other comprehensive income (loss) ( 564 ) 860 Comprehensive income $ 7,620 $ 7,317 See accompanying notes to Consolidated Financial Statements. 5 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) For the Three Months Ended March 31, 2024 and 2023 (In thousands) Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity Balances, January 1, 2024 $ 332 $ 356,007 $ 162,290 $ ( 7,494 ) $ 511,135 Net income — — 8,184 — 8,184 Other comprehensive loss — — — ( 564 ) ( 564 ) Common shares issued for employee stock purchase plan — 103 — — 103 Stock-based compensation — 354 — — 354 Cash dividends declared — — ( 3,984 ) — ( 3,984 ) Balances, March 31, 2024 $ 332 $ 356,464 $ 166,490 $ ( 8,058 ) $ 515,228 6 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) - Continued (In thousands) Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Stockholders’ Equity Balances, January 1, 2023 $ 199 $ 201,494 $ 171,613 $ ( 9,021 ) $ 364,285 Cumulative effect adjustment due to the adoption of ASC 326, net of tax — — ( 7,818 ) — ( 7,818 ) Net Income — — 6,457 — 6,457 Other comprehensive income — — — 860 860 Common shares issued for employee stock purchase plan — 87 — — 87 Stock-based compensation — 155 — — 155 Cash dividends declared — — ( 2,388 ) — ( 2,388 ) Balances, March 31, 2023 $ 199 $ 201,736 $ 167,864 $ ( 8,161 ) $ 361,638 See accompanying notes to Consolidated Financial Statements. 7 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For Three Months Ended March 31, (In thousands) 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 8,184 $ 6,457 Adjustments to reconcile net income to net cash provided by operating activities: Net accretion of acquisition accounting estimates ( 3,753 ) ( 646 ) Provision for credit losses 407 1,213 Depreciation and amortization 4,099 1,383 Net amortization of securities 43 249 Amortization of debt issuance costs 31 31 Gain on mortgage banking activities ( 820 ) ( 719 ) Proceeds from sale of mortgage loans held for sale 22,737 21,947 Originations of loans held for sale ( 27,257 ) ( 20,710 ) Stock-based compensation expense 354 155 Deferred income tax expense (benefit) 1,941 ( 126 ) Loss on valuation adjustments on mortgage servicing rights 223 82 Valuation adjustments on premises transferred to held for sale — 225 Gain on sales and valuation adjustments on other real estate owned — ( 3 ) Fair value adjustments on loans held for investments, at fair value 210 ( 195 ) Fair value adjustment on equity securities 61 ( 17 ) Bank owned life insurance income ( 592 ) ( 364 ) Net changes in: Accrued interest receivable ( 324 ) 1,291 Other assets ( 1,508 ) ( 1,408 ) Accrued interest payable ( 1,353 ) 320 Other liabilities ( 296 ) 2,055 Net cash provided by operating activities 2,387 11,220 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities and principal payments of investment securities available for sale 3,849 3,175 Proceeds from maturities and principal payments of investment securities held to maturity 9,215 10,017 Purchases of investment securities available for sale ( 59,431 ) — Purchases of equity securities ( 39 ) ( 8 ) Purchase of restricted securities ( 5,973 ) ( 11,421 ) Net change in loans ( 5,984 ) ( 111,681 ) Purchases of premises and equipment ( 1,773 ) ( 619 ) Proceeds from sales of other real estate owned — 21 Redemption of restricted securities 6,010 7,523 Purchases of bank owned life insurance ( 25 ) ( 129 ) Net cash (used in) investing activities $ ( 54,151 ) $ ( 103,122 ) 8 Table of Contents SHORE BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - Continued For Three Months Ended March 31, (In thousands) 2024 2023 CASH FLOWS FROM FINANCING ACTIVITIES: Net changes in: Noninterest-bearing deposits $ ( 57,357 ) $ ( 53,336 ) Interest-bearing deposits ( 144,851 ) 38,249 Short-term borrowings — 91,500 Common stock dividends paid ( 3,984 ) ( 2,388 ) Issuance of common stock 103 87 Net cash (used in) provided by financing activities ( 206,089 ) 74,112 Net decrease in cash and cash equivalents ( 257,853 ) ( 17,790 ) Cash and cash equivalents at beginning of period 372,413 55,499 Cash and cash equivalents at end of period $ 114,560 $ 37,709 Supplemental cash flows information: Interest paid $ 30,728 $ 12,711 Income taxes paid $ 87 $ 215 Recognition (remeasurement of) lease liabilities arising from right-of-use assets $ 71 $ ( 5 ) Transfers from loans to repossessed properties $ 1,845 $ — Unrealized (losses) gains on securities available for sale $ ( 776 ) $ 1,183 Unsettled securities transaction $ 14,083 $ — Transfer of premises to held for sale (included in other assets) $ — $ 750 See accompanying notes to Consolidated Financial Statements. 9 Table of Contents Shore Bancshares, Inc. Notes to Consolidated Financial Statements For the Three Months Ended March 31, 2024 and 2023 (Unaudited) Note 1 – Basis of Presentation The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at March 31, 2024, the consolidated results of income and comprehensive income for the three months ended March 31, 2024 and 2023, changes in stockholders’ equity for the three months ended March 31, 2024 and 2023 and cash flows for the three months ended March 31, 2024 and 2023, have been included. All such adjustments were of a normal recurring nature. The amounts as of December 31, 2023 were derived from the 2023 audited financial statements. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2023 ( the “2023 Annual Report”).. For purposes of comparability, certain immaterial reclassifications have been made to amounts previously reported to conform with the current period presentation. When used in these notes, the term “the Company” refers to Shore Bancshares, Inc. and, unless the context requires otherwise, its consolidated subsidiaries, Shore United Bank, N.A. (the “Bank”) and Mid-Maryland Title Company, Inc. (the “Title Company”). Recent Accounting Pronouncements ASU Update 2023-09 – In December 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its consolidated financial statements. ASU Update 2023-07 – In November 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark (CODM), an amount for other segment items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements. Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoptions permitted. The amendments should be applied retrospectively. The Company does not expect the adoption of ASU 2023-07 to have a material impact on its consolidated financial statements. ASU Update 2023-06 – In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the 10 Table of Contents amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements. ASU Update 2023-05 – In August 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-05, “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement.” This ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification Master Glossary. While joint ventures are defined in the Master Glossary, there has been no specific guidance in the Codification that applies to the formation accounting by a joint venture in its separate financial statements. The amendments in the ASU require that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). This ASU is effective on a prospective basis for all joint ventures with a formation date on or after January 1, 2025. Early adoption of ASU No. 2023-05 is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance). A joint venture that elects to early adopt may apply ASU No. 2023-05 either prospectively or retrospectively. The Company does not expect the adoption of ASU 2023-05 to have a material impact on its consolidated financial statements. ASU Update 2023-03 – In July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718).” This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements. 11 Table of Contents Note 2 – Business Combinations On July 1, 2023 (the “Acquisition Date”), the Company completed the acquisition of TCFC, a Maryland corporation, in accordance with the definitive agreement that was entered into on December 14, 2022, by and among the Company and TCFC. The primary reasons for the merger included: expansion of the branch network and commanding market share positions in attractive Maryland markets and a growing presence in Virginia and Delaware; attractive low-cost funding base; strong cultural alignment and a deep commitment to stockholders, customers, employees, and communities served by the Company and TCFC, meaningful value creation to shareholders; and increased trading liquidity for both companies and increased dividends for TCFC shareholders. In connection with the completion of the merger, former TCFC shareholders received 2.3287 shares of the Company’s common stock. The value of the total transaction consideration was approximately $ 153.6 million. The consideration included the issuance of 13,201,693 shares of the Company’s common stock, which had a value of $ 11.56 per share, which was the closing price of the Company’s common stock on June 30, 2023, the last trading day prior to the consummation of the acquisition. Also included in the total consideration were cash in lieu of any fractional shares, converted share-based payment awards, and debt of TCFC that was effectively settled upon closing. The acquisition of TCFC was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid are recorded at estimated fair values on the Acquisition Date. The provisional amount of bargain purchase gain as of the Acquisition Date was approximately $ 8.8 million. The exchange ratio was determined at the time of announcement of the merger between the Company and TCFC in December of 2022 when the stock price of the Company was much higher than at the legal merger date. The decline in the Company’s stock price was the primary driver in recording a bargain purchase gain on this transaction. The decline in stock price for the Company was comparable to other financial institutions similar to the Company leading up to the merger due to bank failures in the first quarter of 2023 and increases to overnight borrowing rates by the Fed which resulted in continued pressure on net interest margins. The Company will continue to keep the measurement of bargain purchase gain open for any additional adjustments to the fair value of certain accounts, for example loans, that may arise during the Company’s final review procedures of any updated information. If considered necessary, any subsequent adjustments to the fair value of assets acquired and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to bargain purchase gain within the first 12 months following the Acquisition Date. The bargain purchase gain is not included as taxable income for tax purposes. As a result of the integration of operations of TCFC, it is not practicable to determine revenue or net income included in the Company’s consolidated operating results relating to TCFC since the Acquisition Date, as TCFC’s results cannot be separately identified. Comparative pro-forma financial statements for the prior year period were not presented, as adjustments to those statements would not be indicative of what would have occurred had the acquisition taken place on January 1, 2022. In particular, adjustments that would have been necessary to be made to record the loans at fair value, the provision of credit losses or the core deposit intangible would not be practical to estimate. 12 Table of Contents (Dollars in thousands) Purchase Price Consideration: Fair value of common shares issued ( 13,201,693 shares) based on Shore Bancshares, Inc. share price of $ 11.56 $ 152,612 Effective settlement of pre-existing debt (1) 500 Cash consideration (cash in lieu for fractional shares) 5 Fair value of converted restricted stock units (2) 475 Total purchase price $ 153,592 Identifiable assets: Cash and cash equivalents $ 25,377 Total securities 454,468 Loans, net 1,765,255 Premises and equipment, net 29,277 Core deposit intangible, net 48,648 Other assets 89,808 Total identifiable assets $ 2,412,833 Identifiable Liabilities Deposits $ 2,131,141 Total debt 97,545 Other liabilities 21,739 Total identifiable liabilities $ 2,250,425 Provisional fair value of net assets acquired $ 162,408 Provisional bargain purchase gain $ ( 8,816 ) ____________________________________ (1) The Company held $ 500,000 in subordinated debt of TCFC. The debt was effectively settled. (2) Represents the number of TCFC restricted stock units outstanding and the equity exchange ratio, further multiplied by the price per share of the Company’s common stock of $ 11.56 and the estimated ratio of the completed service period relative to the total service period of the underlying awards. The acquired assets and assumed liabilities of TCFC were measured at fair value as of the Acquisition Date. Management made significant estimates and exercised significant judgement in accounting for the acquisition of TCFC. The following is a brief description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed. The Company utilized a valuation specialist to assist with the determination of fair values for certain acquired assets and assumed liabilities. The Company recorded all loans acquired at the estimated fair value on the Acquisition Date with no carryover of the related allowance for credit losses. The Company determined the net discounted value of cash flows on gross loans totaling $ 1.9 billion, including 3,858 of Non-PCD loans and 323 PCD loans. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates and remaining balances. Valuations also considered default rates, loss severity estimates, and estimates related to expected prepayments over the contractual lives of the loans. The effect of the valuation process was a total net discount $ 120.9 million at the Acquisition Date. The core deposit intangible was valued using an income approach focused on cost savings, which recognizes the cost savings represented by the expense of maintaining the core deposit base versus the cost of an alternative funding source. The valuation incorporates assumptions related to account retention, discount rates, deposit interest rates, deposit maintenance costs and alternative funding rates. The fair value of premises acquired was based on recent third-party appraised values of the properties, with fair value adjustments made to both the buildings and any associated parcels of land. Acquired equipment was based on the remaining net book value of TCFC, which approximated fair value. The fair value of noninterest bearing demand deposits, interest checking, money market and savings deposit accounts from TCFC were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued at the present value of the certificates’ expected contractual payments discounted at market rates for certificates with similar terms. The estimated fair value of the acquired portfolio of debt securities was based on quoted market prices and dealer quotes. Substantially all the acquired portfolio was sold following the acquisition. The estimated fair value of short-term borrowings was determined to approximate their stated value. Subordinated debt and trust preferred debt were valued using a discounted cash flow approach incorporating a discount rate that considered market terms, maturities, and credit ratings. 13 Table of Contents Note 3 – Investment Securities On January 1, 2023, the Company adopted ASC 326, which made changes to accounting for AFS debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity. In addition, ASC 326 requires an ACL to be recorded on HTM debt securities measured at amortized cost. All securities information presented as of March 31, 2024 and as of December 31, 2023 are in accordance with ASC 326. The following table summarizes the activity in the ACL on HTM securities. (Dollars in thousands) Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Balance, beginning of period $ 94 $ — Other debt securities, provision for credit losses 22 163 Balance, end of period $ 116 $ 163 A provision for credit losses of $ 22,000 and $ 0.2 million was recorded for the three months ended March 31, 2024 and March 31, 2023, respectively. The following tables provide information on the amortized cost and estimated fair values of debt securities. (Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Available-for-sale securities: March 31, 2024 U.S. Treasury and government agencies $ 72,701 $ 8 $ 3,168 $ 69,541 Mortgage-backed-residential 111,780 20 8,174 103,626 Other debt securities 6,102 322 95 6,329 Total $ 190,583 $ 350 $ 11,437 $ 179,496 December 31, 2023 U.S. Treasury and government agencies $ 23,472 $ 5 $ 3,002 $ 20,475 Mortgage-backed-residential 91,280 5 7,258 84,027 Other debt securities 6,080 59 120 6,019 Total $ 120,832 $ 69 $ 10,380 $ 110,521 No AFS securities were sold during the three months ended March 31, 2024 and 2023. (Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Credit Losses Held-to-maturity securities: March 31, 2024 U.S. Treasury and government agencies $ 143,215 $ — $ 11,172 $ 132,043 $ — Mortgage-backed-residential 348,754 — 47,343 301,411 — States and political subdivisions 1,469 44 24 1,489 — Other debt securities 10,500 — 1,185 9,315 116 Total $ 503,938 $ 44 $ 59,724 $ 444,258 $ 116 December 31, 2023 U.S. Treasury and government agencies $ 143,442 $ — $ 10,377 $ 133,065 $ — Mortgage-backed-residential 357,870 — 43,864 314,006 — States and political subdivisions 1,470 57 19 1,508 — Other debt securities 10,500 — 1,249 9,251 94 Total $ 513,282 $ 57 $ 55,509 $ 457,830 $ 94 14 Table of Contents Equity securities with an aggregate fair value of $ 5.7 million at March 31, 2024 and $ 5.7 million at December 31, 2023 are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled gain of $ 61,000 for the three months ended March 31, 2024 and loss of $ 17,000 for the three months ended March 31, 2023, respectively. Credit Quality Information The Company monitors the credit quality of HTM securities through credit ratings provided by Standard & Poor’s Rating Services and Moody’s Investor Services. Credit ratings express opinions about the credit quality of a security, and are updated at each quarter end. Investment grade securities are rated BBB- or higher by S&P and Baa3 or higher by Moody’s and are generally considered by the rating agencies and market participants to be of low credit risk. Conversely, securities rated below investment grade, which are labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade securities. There were no speculative grade HTM securities at March 31, 2024 or December 31, 2023. HTM securities that are not rated are agency mortgage-backed securities sponsored by U.S. government agencies, as well as direct obligations of the agencies, with the remainder being sub-debt of other banks. The following table shows the amortized cost of HTM securities based on their lowest publicly available credit rating as of March 31, 2024. March 31, 2024 Investment Grade (Dollars in thousands) Aaa Aa1 A3 Baa1 Baa2 NR Total U.S. Treasury and government agencies $ 139,543 $ — $ — $ — $ — $ 3,672 $ 143,215 Mortgage-backed-residential 348,754 — — — — — 348,754 States and political subdivisions — 1,469 — — — — 1,469 Other debt securities — — 4,000 4,000 500 2,000 10,500 Total held-to maturity securities $ 488,297 $ 1,469 $ 4,000 $ 4,000 $ 500 $ 5,672 $ 503,938 The following table shows the amortized cost of HTM securities based on their lowest publicly available credit rating as of December 31, 2023. December 31, 2023 Investment Grade (Dollars in thousands) Aaa Aa1 A3 Baa1 Baa2 NR Total U.S. Treasury and government agencies $ 140,761 $ — $ — $ — $ — $ 2,681 $ 143,442 Mortgage-backed securities 357,870 — — — — — 357,870 Obligations of states and political subdivisions — 1,470 — — — — 1,470 Other debt securities — — 4,000 4,000 500 2,000 10,500 Total held-to-maturity securities $ 498,631 $ 1,470 $ 4,000 $ 4,000 $ 500 $ 4,681 $ 513,282 The following tables provide information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2024 and December 31, 2023. Less than 12 Months More than 12 Months Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses March 31, 2024 Available-for-sale securities: U.S. Treasury and government agencies $ 196 $ 1 $ 17,278 $ 3,167 $ 17,474 $ 3,168 Mortgage-backed-residential 33,688 526 63,243 7,648 96,931 8,174 Other debt securities — — 1,913 95 1,913 95 Total $ 33,884 $ 527 $ 82,434 $ 10,910 $ 116,318 $ 11,437 15 Table of Contents Less than 12 Months More than 12 Months Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses December 31, 2023 Available-for-sale securities: U.S. Treasury and government agencies $ 74 $ — $ 17,750 $ 3,002 $ 17,824 $ 3,002 Mortgage-backed-residential 24,405 150 52,864 7,108 77,269 7,258 Other debt securities — — 1,890 120 1,890 120 Total $ 24,479 $ 150 $ 72,504 $ 10,230 $ 96,983 $ 10,380 There were 115 AFS debt securities with a fair value below the amortized cost basis, totaling $ 11.4 million of aggregate fair value as of March 31, 2024. The Company concluded that a credit loss does not exist in its AFS securities portfolio as of March 31, 2024, and no impairment loss has been recognized based on the fact that (1) changes in fair value were caused primarily by fluctuations in interest rates, (2) securities with unrealized losses had generally high credit quality, (3) the Company intends to hold these investments in debt securities to maturity and it is more-likely-than-not the Company will not be required to sell these investments before a recovery of its investment, and (4) issuers have continued to make timely payments of principal and interest. Additionally, the Company’s mortgage-back securities are issued by either U.S. government agencies or U.S. government sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments. All HTM and AFS securities were current with no securities past due or on nonaccrual as of March 31, 2024. The Company has securities which have been pledged as collateral for obligations to federal, state, and local government agencies, and other purpose as required or permitted by law, or sold under agreements to repurchase. At March 31, 2024, the carrying value of pledged AFS securities was $ 53.1 million and $ 195.8 million of pledged HTM securities. The comparable amounts for December 31, 2023 were $ 54.5 million and $ 185.9 million, respectively. There were no obligations of states or political subdivisions with carrying values, as to any issuer, exceeding 10% of stockholders’ equity at March 31, 2024 or December 31, 2023. The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at March 31, 2024. Available for sale Held to maturity (Dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Due in one year or less $ 51,911 $ 51,915 $ 7,000 $ 6,947 Due after one year through five years 16,189 15,075 129,497 121,031 Due after five years through ten years 42,049 39,399 39,125 35,652 Due after ten years 80,434 73,107 328,316 280,628 Total $ 190,583 $ 179,496 $ 503,938 $ 444,258 The maturity dates for debt securities are determined using contractual maturity dates. 16 Table of Contents Note 4 – Loans and Allowance for Credit Losses On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the most significant accounting policies that the Company follows see Note 1 – Summary of Significant Accounting Policies of the Company’s 2023 Annual Report. The Company makes residential mortgage, commercial, and consumer loans to customers primarily in Anne Arundel County, Baltimore County, Charles County, Calvert County, St Mary’s County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County and Worcester County in Maryland, Kent and Sussex County, Delaware and in Accomack County, Stafford County, Spotsylvania County and Fredericksburg City in Virginia. The following table provides information about the principal classes of the loan portfolio at March 31, 2024 and December 31, 2023. (Dollars in thousands) March 31, 2024 % of Total Loans December 31, 2023 % of Total Loans Construction $ 299,133 6.43 % $ 299,000 6.44 % Residential real estate 1,515,134 32.59 % 1,490,438 32.11 % Commercial real estate 2,272,867 48.90 % 2,286,154 49.27 % Commercial 229,594 4.94 % 229,939 4.95 % Consumer 325,076 6.99 % 328,896 7.09 % Credit Cards 6,921 0.15 % 6,583 0.14 % Total loans 4,648,725 100.00 % 4,641,010 100.00 % Allowance for credit losses on loans ( 57,336 ) ( 57,351 ) Total loans, net $ 4,591,389 $ 4,583,659 Loans are stated at their principal amount outstanding net of any purchase premiums/discounts, deferred fees and costs. Included in loans were deferred costs, net of fees, of $ 2.4 million and $ 2.2 million at March 31, 2024 and December 31, 2023. At March 31, 2024 and December 31, 2023 included in total loans were $ 1.6 billion and $ 1.6 billion in loans acquired as part of the acquisition of TCFC, effective July 1, 2023. These balances were presented net of the related discount which totaled $ 104.2 million and $ 108.4 million at March 31, 2024 and December 31, 2023, respectively. At March 31, 2024 and December 31, 2023, included in total loans were $ 289.0 million and $ 297.9 million in loans, acquired as part of the acquisition of Severn Bancorp, Inc. (“Severn”), effective October 31, 2021. These balances were presented net of the related discount which totaled $ 4.4 million and $ 4.7 million at March 31, 2024 and December 31, 2023, respectively. At March 31, 2024, the Bank was servicing $ 371.1 million in loans for the Federal National Mortgage Association and $ 117.8 million in loans for Freddie Mac. The following table provides information on nonaccrual loans by loan class as of March 31, 2024 and December 31, 2023. (Dollars in thousands) Non-accrual with no allowance for credit loss Non-accrual with an allowance for credit loss Total Non-accruals March 31, 2024 Nonaccrual loans: Construction $ — $ 476 $ 476 Residential real estate 4 6,379 6,383 Commercial real estate — 3,643 3,643 Commercial 1,209 147 1,356 Consumer 694 224 918 Total $ 1,907 $ 10,869 $ 12,776 Interest income $ 187 $ 33 $ 220 17 Table of Contents (Dollars in thousands) Non-accrual with no allowance for credit loss Non-accrual with an allowance for credit loss Total Non-accruals December 31, 2023 Nonaccrual loans: Construction $ 626 $ — $ 626 Residential real estate 5,865 480 6,345 Commercial real estate 4,364 — 4,364 Commercial 176 368 544 Consumer 216 689 905 Total $ 11,247 $ 1,537 $ 12,784 Interest income $ 399 $ 53 $ 452 (Dollars in thousands) Non-accrual Delinquent Loans Non-accrual Current Loans Total Non-accruals March 31, 2024 Nonaccrual loans: Construction $ 210 $ 266 $ 476 Residential real estate 3,718 2,665 6,383 Commercial real estate 940 2,703 3,643 Commercial 51 1,305 1,356 Consumer 918 — 918 Total $ 5,837 $ 6,939 $ 12,776 (Dollars in thousands) Non-accrual Delinquent Loans Non-accrual Current Loans Total Non-accruals December 31, 2023 Nonaccrual loans: Construction $ 221 $ 405 $ 626 Residential real estate 4,137 2,208 6,345 Commercial real estate 1,215 3,149 4,364 Commercial 28 516 544 Consumer 903 2 905 Total $ 6,504 $ 6,280 $ 12,784 The overall quality of the Bank’s loan portfolio is primarily assessed using the Bank’s risk-grading scale. This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Credit quality indicators are adjusted based on management’s judgment during the quarterly review process. Consumer credit cards are monitored based on a borrower payment history. Credit card loans are classified as performing and are typically charged off no later than 180 days past due when, in the opinion of management, the collection of principal or interest is considered doubtful. Loans subject to risk ratings are graded on a scale of one to ten. Ratings 1 thru 6 – Pass - Ratings 1 thru 6 have asset risks ranging from excellent-low to adequate. The specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks. Rating 7 – Special Mention - These credits have potential weaknesses due to economic conditions, less than adequate earnings performance or other factors which require the lending officer to direct more than normal attention to the credit. Financing alternatives may be limited and/or command higher risk interest rates. Special mention loan relationships are reviewed at least quarterly. Rating 8 – Substandard - Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. Substandard loans are the first adversely classified loans on the Bank's watchlist. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Bank 18 Table of Contents will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor or operating losses. When a loan is assigned to this category the Bank may estimate a specific reserve in the loan loss allowance analysis and/or place the loan on nonaccrual. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly. Rating 9 – Doubtful - Doubtful assets have many of the same characteristics of substandard with the exception that the Bank has determined that loss is not only possible but is probable. The amount of loss is not discernible due to factors such as merger, acquisition, or liquidation; a capital injection; a pledge of additional collateral; the sale of assets; or alternative refinancing plans. Credits receiving a doubtful classification are required to be on nonaccrual. These relationships will be reviewed at least quarterly. Rating 10 – Loss – Loss assets are uncollectible or of little value. 19 Table of Contents The following tables provides information on loan risk ratings as of March 31, 2024 and gross write-offs during the three months ended March 31, 2024. Term Loans by Origination Year Revolving Loans Revolving Converted to Term Loans Total (Dollars in thousands) Prior 2020 2021 2022 2023 2024 March 31, 2024 Construction Pass $ 38,125 $ 14,343 $ 25,261 $ 87,793 $ 112,241 $ 12,386 $ 7,890 $ 617 $ 298,656 Substandard 62 — — 415 — — — — 477 Total $ 38,187 $ 14,343 $ 25,261 $ 88,208 $ 112,241 $ 12,386 $ 7,890 $ 617 $ 299,133 Gross Charge-offs $ — $ — $ ( 12 ) $ — $ — $ — $ — $ — $ ( 12 ) Residential real estate Pass $ 370,852 $ 102,832 $ 250,832 $ 400,047 $ 238,040 $ 23,294 $ 107,384 $ 12,880 $ 1,506,161 Special Mention 403 552 498 — — — 182 — 1,635 Substandard 5,922 — — — — — 1,416 — 7,338 Total $ 377,177 $ 103,384 $ 251,330 $ 400,047 $ 238,040 $ 23,294 $ 108,982 $ 12,880 $ 1,515,134 Gross Charge-offs $ ( 1 ) $ — $ — $ — $ — $ — $ — $ — $ ( 1 ) Commercial real estate Pass $ 843,547 $ 306,361 $ 418,343 $ 428,863 $ 211,540 $ 23,024 $ 15,782 $ — $ 2,247,460 Special Mention 11,383 — 5,474 4,418 — — 166 — 21,441 Substandard 3,437 — 529 — — — — — 3,966 Total $ 858,367 $ 306,361 $ 424,346 $ 433,281 $ 211,540 $ 23,024 $ 15,948 $ — $ 2,272,867 Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial Pass $ 33,571 $ 14,629 $ 55,492 $ 35,027 $ 29,904 $ 10,915 $ 46,160 $ 394 $ 226,092 Special Mention 135 — — 1,514 580 — 500 70 2,799 Substandard 402 — — — — — 301 — 703 Total $ 34,108 $ 14,629 $ 55,492 $ 36,541 $ 30,484 $ 10,915 $ 46,961 $ 464 $ 229,594 Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Consumer Pass $ 1,355 $ 12,829 $ 71,502 $ 136,759 $ 82,331 $ 17,387 $ 677 $ — $ 322,840 Special Mention — — — — 1,317 — — — 1,317 Substandard 8 7 12 783 108 — 1 — 919 Total $ 1,363 $ 12,836 $ 71,514 $ 137,542 $ 83,756 $ 17,387 $ 678 $ — $ 325,076 Gross Charge-offs $ ( 226 ) $ — $ ( 46 ) $ ( 238 ) $ — $ ( 15 ) $ — $ ( 525 ) Total Pass $ 1,287,450 $ 450,994 $ 821,430 $ 1,088,489 $ 674,056 $ 87,006 $ 177,893 $ 13,891 $ 4,601,209 Special Mention 11,921 552 5,972 5,932 1,897 — 848 70 27,192 Substandard 9,831 7 541 1,198 108 — 1,718 — 13,403 Total loans by risk category $ 1,309,202 $ 451,553 $ 827,943 $ 1,095,619 $ 676,061 $ 87,006 $ 180,459 $ 13,961 $ 4,641,804 Total gross charge-offs $ ( 227 ) $ — $ ( 58 ) $ ( 238 ) $ — $ ( 15 ) $ — $ — $ ( 538 ) 20 Table of Contents Term Loans by Origination Year Revolving Loans Revolving Converted to Term Loans Total (Dollars in thousands) Prior 2020 2021 2022 2023 2024 March 31, 2024 Credit Cards Performing $ — $ — $ — $ — $ — $ — $ 6,921 $ — $ 6,921 Total $ — $ — $ — $ — $ — $ — $ 6,921 $ — $ 6,921 Gross Charge-offs $ — $ — $ — $ — $ — $ — $ ( 116 ) $ — $ ( 116 ) Total loans evaluated by performing status $ — $ — $ — $ — $ — $ — $ 6,921 $ — $ 6,921 Total gross charge-offs $ — $ — $ — $ — $ — $ — $ ( 116 ) $ — $ ( 116 ) Total Recorded Investment $ 1,309,202 $ 451,553 $ 827,943 $ 1,095,619 $ 676,061 $ 87,006 $ 187,380 $ 13,961 $ 4,648,725 The following tables provides information on loan risk ratings as of December 31, 2023 and gross write-offs during twelve months ended December 31, 2023. Term Loans by Origination Year Revolving loans Revolving converted to term loans Total (Dollars in thousands) Prior 2019 2020 2021 2022 2023 December 31, 2023 Construction Pass $ 23,450 $ 15,721 $ 14,773 $ 34,325 $ 101,426 $ 100,620 $ 8,056 $ — $ 298,371 Substandard 199 — — 12 418 — — — 629 Total $ 23,649 $ 15,721 $ 14,773 $ 34,337 $ 101,844 $ 100,620 $ 8,056 $ — $ 299,000 Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Residential real estate Pass $ 317,528 $ 54,387 $ 105,269 $ 251,269 $ 392,378 $ 239,914 $ 119,777 $ 874 $ 1,481,396 Special Mention 154 256 564 503 — — 192 — 1,669 Substandard 6,000 — — — — — 1,373 — 7,373 Total $ 323,682 $ 54,643 $ 105,833 $ 251,772 $ 392,378 $ 239,914 $ 121,342 $ 874 $ 1,490,438 Gross Charge-offs $ — $ — $ — $ — $ — $ — $ ( 119 ) $ — $ ( 119 ) Commercial real estate Pass $ 670,042 $ 190,753 $ 311,980 $ 426,750 $ 428,240 $ 210,915 $ 14,873 $ 2,138 $ 2,255,691 Special Mention 14,986 331 — 5,501 4,446 — 100 409 25,773 Substandard 2,119 2,029 — 542 — — — — 4,690 Total $ 687,147 $ 193,113 $ 311,980 $ 432,793 $ 432,686 $ 210,915 $ 14,973 $ 2,547 $ 2,286,154 Gross Charge-offs $ ( 512 ) $ — $ ( 814 ) $ — $ — $ — $ — $ — $ ( 1,326 ) Commercial Pass $ 23,771 $ 12,946 $ 14,464 $ 41,621 $ 35,897 $ 27,901 $ 49,160 $ 22,284 $ 228,044 Special Mention 143 — — 425 — — 251 — 819 Substandard 160 69 — — 487 — 314 46 1,076 Total $ 24,074 $ 13,015 $ 14,464 $ 42,046 $ 36,384 $ 27,901 $ 49,725 $ 22,330 $ 229,939 Gross Charge-offs $ ( 1 ) $ — $ — $ — $ — $ — $ ( 242 ) $ ( 243 ) Consumer Pass $ 621 $ 961 $ 14,158 $ 76,629 $ 143,507 $ 91,415 $ 699 $ — $ 327,990 Special Mention — — — — — — 2 — 2 Substandard — 38 5 80 780 — 1 — 904 Total $ 621 $ 999 $ 14,163 $ 76,709 $ 144,287 $ 91,415 $ 702 $ — $ 328,896 Gross Charge-offs $ ( 522 ) $ — $ ( 16 ) $ ( 17 ) $ ( 8 ) $ ( 4 ) $ ( 7 ) $ — $ ( 574 ) 21 Table of Contents Total Pass $ 1,035,412 $ 274,768 $ 460,644 $ 830,594 $ 1,101,448 $ 670,765 $ 192,565 $ 25,296 $ 4,591,492 Special Mention 15,283 $ 587 $ 564 $ 6,429 $ 4,446 $ — $ 545 $ 409 28,263 Substandard 8,478 2,136 5 634 1,685 — 1,688 46 14,672 Total loans by risk category $ 1,059,173 $ 277,491 $ 461,213 $ 837,657 $ 1,107,579 $ 670,765 $ 194,798 $ 25,751 $ 4,634,427 Total gross charge-offs $ ( 1,035 ) $ — $ ( 830 ) $ ( 17 ) $ ( 8 ) $ ( 4 ) $ ( 126 ) $ ( 242 ) $ ( 2,262 ) Credit Cards Performing $ — $ — $ — $ — $ — $ — $ 6,583 $ — $ 6,583 Total $ — $ — $ — $ — $ — $ — $ 6,583 $ — $ 6,583 Gross Charge-offs $ — $ — $ — $ — $ — $ — $ ( 111 ) $ — $ ( 111 ) Total loans evaluated by performing status $ — $ — $ — $ — $ — $ — $ 6,583 $ — $ 6,583 Total gross charge-offs $ — $ — $ — $ — $ — $ — $ ( 111 ) $ — $ ( 111 ) Total Recorded Investment $ 1,059,173 $ 277,491 $ 461,213 $ 837,657 $ 1,107,579 $ 670,765 $ 201,381 $ 25,751 $ 4,641,010 The following tables provide information on the aging of the loan portfolio as of March 31, 2024 and December 31, 2023. Accruing (Dollars in thousands) 30‑59 days past due 60‑89 days past due 30-89 days past due and not accruing 90 days past due and still accruing 90 days past due and not accruing Total past due Current Accrual Loans (1) Current Non Accrual Loans Total March 31, 2024 Construction $ — $ — $ — $ — $ 210 $ 210 $ 298,657 $ 266 $ 299,133 Residential real estate 2,930 354 723 145 2,995 7,147 1,505,322 2,665 1,515,134 Commercial real estate 433 — — — 940 1,373 2,268,791 2,703 2,272,867 Commercial 2,137 — — — 51 2,188 226,101 1,305 229,594 Consumer 2,200 138 24 1,317 894 4,573 320,503 — 325,076 Credit Cards 58 89 — 98 — 245 6,676 — 6,921 Total $ 7,758 $ 581 $ 747 $ 1,560 $ 5,090 $ 15,736 $ 4,626,050 $ 6,939 $ 4,648,725 Percent of total loans 0.17 % 0.01 % 0.02 % 0.03 % 0.11 % 0.34 % 99.51 % 0.15 % 100.0 % (1) Includes loans measured at fair value of $ 9.7 million at March 31, 2024. Accruing (Dollars in thousands) 30‑59 days past due 60‑89 days past due 30-89 days past due and not accruing 90 days past due and still accruing 90 days past due and not accruing Total past due Current Accrual Loans (1) Current Non accrual Loans Total December 31, 2023 Construction $ 1,919 $ — $ — $ — $ 220 $ 2,139 $ 296,456 $ 405 $ 299,000 Residential real estate 2,420 271 1,469 108 2,668 6,936 1,481,294 2,208 1,490,438 Commercial real estate 16 — — — 1,222 1,238 2,281,767 3,149 2,286,154 Commercial 48 — — 488 28 564 228,859 516 229,939 Consumer 3,224 1,391 24 — 879 5,518 323,376 2 328,896 Credit cards $ 35 $ 36 $ — $ 142 $ — $ 213 $ 6,370 $ — $ 6,583 Total $ 7,662 $ 1,698 $ 1,493 $ 738 $ 5,017 $ 16,608 $ 4,618,122 $ 6,280 $ 4,641,010 Percent of total loans 0.17 % 0.04 % 0.03 % 0.02 % 0.11 % 0.37 % 99.50 % 0.13 % 100.00 % (1) Includes loans measured at fair value of $ 9.9 million at December 31, 2023. 22 Table of Contents The following tables provide a summary of the activity in the ACL allocated by loan class for the three months ended March 31, 2024 and March 31, 2023. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes. (Dollars in thousands) Beginning Balance Charge-offs Recoveries Net (charge-offs) recoveries Provisions Ending Balance For three months ended March 31, 2024 Construction $ 3,935 $ ( 12 ) $ 2 $ ( 10 ) $ ( 367 ) $ 3,558 Residential real estate 21,949 ( 1 ) 2 1 ( 1,182 ) 20,768 Commercial real estate 20,975 — — — 275 21,250 Commercial 2,671 — 1 1 207 2,879 Consumer (1) 7,601 ( 525 ) 76 ( 449 ) 1,530 8,682 Credit Card 220 ( 116 ) 8 ( 108 ) 87 199 Total $ 57,351 $ ( 654 ) $ 89 $ ( 565 ) $ 550 $ 57,336 (1) Gross charge-offs of consumer loans for the three months ended March 31, 2024 included $ 0.2 million of demand deposit overdrafts. (Dollars in thousands) Beginning Balance Impact of ASC326 Adoption Charge-offs Recoveries Net (charge-offs) recoveries Provisions Ending Balance For Three Months Ended March 31, 2023 Construction $ 2,973 $ 1,222 $ — $ 3 $ 3 $ ( 1,509 ) $ 2,689 Residential real estate 2,622 4,974 — 31 31 1,120 8,747 Commercial real estate 4,899 3,742 — — — 1,217 9,858 Commercial 1,652 401 ( 107 ) 53 ( 54 ) ( 139 ) 1,860 Consumer 4,497 452 — — — 361 5,310 Total $ 16,643 $ 10,791 $ ( 107 ) $ 87 $ ( 20 ) $ 1,050 $ 28,464 The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment. March 31, 2024 (Dollars in thousands) Real Estate Collateral Other Collateral Total Construction $ 477 $ — $ 477 Residential real estate 19,272 — 19,272 Commercial real estate 5,197 — 5,197 Commercial — 733 733 Consumer — 918 918 Total $ 24,946 $ 1,651 $ 26,597 December 31, 2023 (Dollars in thousands) Real Estate Collateral Other Collateral Total Construction $ 662 $ — $ 662 Residential real estate 8,047 — 8,047 Commercial real estate 6,134 — 6,134 Commercial — 1,106 1,106 Consumer — 904 904 Total $ 14,843 $ 2,010 $ 16,853 The Company did not identify any significant changes in the extent to which collateral secures its collateral dependent loans, whether in the form of general deterioration or from other factors during the period ended March 31, 2024. 23 Table of Contents Loan Modifications to Borrowers Experiencing Financial Difficulty Modifications to borrowers experiencing financial difficulty may include interest rate reduction, principal or interest forgiveness, forbearance, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. The following illustrates the most common loan modifications by loan classes offered by the Company that are required to be disclosed pursuant to the requirements of ASU 2022-02: Loan Classes Modification Types Commercial Real Estate Term extension greater than three months . Commercial Term extension greater than three months . The following table presents the amortized cost basis of loan modifications made to borrowers experiencing financial difficulty during three months ended March 31, 2024, and there were no modifications to loans for borrowers experiencing financial difficulty during the three months ended March 31, 2023. (dollars in thousands) Term Extension Interest Rate Reduction Payment Delay and Term Extension Term Extension and Interest Rate Reduction Payment Delay Total % of Total Portfolio Segment March 31, 2024 Construction $ — $ — $ — $ — $ — $ — — % Residential real estate — — — — — — — % Residential rentals — — — — — — — % Commercial real estate 117 — — — — 117 0.01 % Commercial 232 — — — — 232 0.10 % Consumer — — — — — — — % Credit Cards — — — — — — — % Total $ 349 $ — $ — $ — $ — $ 349 0.01 % The following table presents the financial effect of loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2024, and there were no modifications to loans for borrowers experiencing financial difficulty during the three months ended March 31, 2023. (dollars in thousands) Weighted-Average Months of Term Extension March 31, 2024 Commercial real estate 12 months Commercial 12 months During the three months ended March 31, 2024 and March 31, 2023, there were no defaults on loan modifications made to borrowers experiencing financial difficulty. 24 Table of Contents The following table present the aging analysis of loan modifications made to borrowers experiencing financial difficulty as of March 31, 2024, and there were no loan modifications made to borrowers experiencing financial difficulty at March 31, 2023. Accruing (Dollars in thousands) 30‑59 days past due 60‑89 days past due 90 days past due and still accruing 90 days past due and not accruing Total past due Current Accrual Current Non-Accrual Total Recorded Investment March 31, 2024 Construction $ — $ — $ — $ — $ — $ — $ — $ — Residential real estate — — — — — — — — Commercial real estate — — — — — — 117 117 Commercial — — — — — — 232 232 Consumer — — — — — — — — Credit Cards — — — — — — — — Total $ — $ — $ — $ — $ — $ — $ 349 $ 349 Foreclosure Proceedings There were $ 0.2 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of March 31, 2024 and $ 0.2 million as of December 31, 2023, respectively. There were no residential real estate properties included in the balance of other real estate owned (“OREO”) at March 31, 2024 and December 31, 2023. 25 Table of Contents Note 5 – Goodwill and Other Intangibles The following table provides information on the significant components of goodwill and other acquired intangible assets at March 31, 2024 and December 31, 2023. March 31, 2024 (Dollars in thousands) Gross Carrying Amount Additions Accumulated Impairment Charges Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life (in years) Goodwill $ 65,476 $ — $ ( 1,543 ) $ ( 667 ) $ 63,266 0.0 years Other intangible assets Amortizable Core deposit intangible $ 59,151 $ — $ — $ ( 13,636 ) $ 45,515 3.7 years Total other intangible assets $ 59,151 $ — $ — $ ( 13,636 ) $ 45,515 December 31, 2023 (Dollars in thousands) Gross Carrying Amount Additions Accumulated Impairment Charges Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life (in years) Goodwill $ 65,476 $ — $ ( 1,543 ) $ ( 667 ) $ 63,266 0.0 years Other intangible assets Amortizable Core deposit intangible $ 10,503 48,648 $ — $ ( 11,061 ) $ 48,090 3.7 years Total other intangible assets $ 10,503 $ 48,648 $ — $ ( 11,061 ) $ 48,090 The aggregate amortization expense was $ 2.6 million for the three months ended March 31, 2024 and $ 0.4 million for the three months ended March 31, 2023. At March 31, 2024, estimated future remaining amortization for amortizing core deposit intangibles within the years ending December 31, is as follows: (Dollars in thousands) Amortization Expense 2024 $ 7,204 2025 8,589 2026 7,398 2027 6,208 2028 5,060 Thereafter 11,056 Total amortizing intangible assets $ 45,515 26 Table of Contents Note 6 – Leases Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. The Company’s long-term lease agreements are classified as operating leases. Certain leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. The following tables present information about the Company’s leases. (Dollars in thousands) March 31, 2024 December 31, 2023 Lease liabilities $ 12,552 $ 12,857 Right-of-use assets $ 12,153 $ 12,487 Weighted average remaining lease term 10.72 years 10.88 years Weighted average discount rate 3.24 % 3.24 % Remaining lease term - min 0.14 years 0.39 years Remaining lease term - max 17.43 years 17.68 years Three Months Ended March 31, Lease cost (in thousands) 2024 2023 Operating lease cost $ 492 $ 340 Total lease cost $ 492 $ 340 Cash paid for amounts included in the measurement of lease liabilities $ 462 $ 322 A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows: Lease payments due (in thousands) As of March 31, 2024 Nine months ending December 31, 2024 $ 1,347 2025 1,642 2026 1,600 2027 1,472 2028 1,419 Thereafter 7,261 Total undiscounted cash flows $ 14,741 Discount 2,189 Lease liabilities $ 12,552 Total gross rental income was $ 0.3 million and $ 0.4 million for the three months ended March 31, 2024 and 2023, respectively. The following table presents our minimum future annual rental income on such leases as of March 31, 2024. (In thousands) As of March 31, 2024 Nine months ending December 31, 2024 $ 635 2025 854 2026 876 2027 562 2028 578 Thereafter 2,438 Total $ 5,943 27 Table of Contents Note 7 - Deposits Deposits consist of the following categories as of the dates indicated: (dollars in thousands) March 31, 2024 December 31, 2023 Balance % Balance % Noninterest-bearing demand $ 1,200,680 23.15 % $ 1,258,037 23.36 % Interest-bearing: Demand 1,101,954 21.26 % 1,165,546 21.64 % Money market deposits 1,358,205 26.20 % 1,430,603 26.56 % Savings 354,098 6.83 % 347,324 6.45 % Certificates of deposit 1,169,342 22.56 % 1,184,610 21.99 % Total interest-bearing 3,983,599 76.85 % 4,128,083 76.64 % Total Deposits $ 5,184,279 100.00 % $ 5,386,120 100.00 % At March 31, 2024, the scheduled contractual maturities of certificates of deposit are as follows: (dollars in thousands) March 31, 2024 Within one year $ 1,023,551 Year 2 111,651 Year 3 16,812 Year 4 11,048 Year 5 6,276 Thereafter 4 $ 1,169,342 The aggregate amount of certificates of deposit that met or exceeded the FDIC insurance limit of $250,000 at March 31, 2024 and December 31, 2023 was $ 371.0 million and $ 354.6 million, respectively. 28 Table of Contents Note 8 - Borrowings Long-term debt consisted of the following: (dollars in thousands) March 31, 2024 December 31, 2023 Issue Date Stated Maturity Date Earliest Call Date Interest Rate September 2030 Subordinated Debentures $ 25,000 $ 25,000 2020 2030 2025 5.375 % through September 2025, 3-month SOFR + 5.265 % thereafter October 2030 Subordinated Debentures 19,500 19,500 2020 2030 2025 4.75 % through October 2025, 3-month SOFR + 4.58 % thereafter Total subordinated debentures 44,500 44,500 Severn Capital Trust I 20,619 20,619 2004 2035 3-month SOFR + 2.00 % Tri-County Capital Trust I 7,000 7,000 2004 2034 90-day SOFR + 2.60 % Tri-County Capital Trust II 5,000 5,000 2005 2035 90-day SOFR + 1.70 % Total trust preferred securities 32,619 32,619 Less net discount and unamortized issuance costs ( 4,560 ) ( 4,822 ) Total long-term debt $ 72,559 $ 72,297 At March 31, 2024, subordinated notes consisted of $ 25.0 million of long-term debt issued by the Company in August 2020, and $ 19.5 million of long-term debt assumed as a result of the merger with TCFC. The recorded balance of subordinated debt issued in 2021 and the assumed subordinated debt from TCFC, net of unamortized issuance costs and fair value discounts, respectively, were $ 24.8 million and $ 18.5 million, respectively. The Company also assumed trust preferred securities in the aggregate of $ 32.6 million as a result of the merger with TCFC in the third quarter of 2023 and the acquisition of Severn in the fourth quarter of 2022. Trust preferred securities consisted of $ 20.6 million issued to Severn Capital Trust I, $ 7.0 million issued by Tri-County Capital Trust I and $ 5.0 million issued by Tri-County Capital Trust II. The recorded balance of the debt acquired from Severn at March 31, 2024 was $ 18.6 million, net of the unamortized fair value adjustment of $ 2.0 million. At March 31, 2024, the junior subordinated debt securities of Tri-County Capital Trust I and Tri-County Capital Trust II had a recorded balance of $ 6.4 million and $ 4.2 million, which are presented as net of the unamortized fair value adjustment of $ 0.6 million and $ 0.8 million, respectively. The Company may periodically borrow from a correspondent federal funds line of credit arrangement, under a secured reverse repurchase agreement, or from the Federal Home Loan Bank (“FHLB”) to meet short-term liquidity needs. There were no outstanding borrowings from the Federal Home Loan Bank (“FHLB”) at March 31, 2024 and December 31, 2023. Further information on these obligations is provided in the Company’s 2023 Annual Report. Note 9 - Stock-Based Compensation At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc. 2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date. The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one - to five-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur. The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 401,868 shares remained available for grant at March 31, 2024. The Company assumed 3,977 shares of restricted stock and 90,783 of restricted stock units at a fair market value of $ 11.56 per share as a result of the merger with TCFC. The vesting period for the outstanding restricted stock grants is between three and five years . Restricted stock units and performance stock units vesting period is between one to three years . The recipients of the restricted stock units and performance stock units do not have any stockholder rights, including voting, dividend, or liquidation rights, with respect to the shares underlying awarded restricted stock units until the recipient becomes the record holder of those shares. 29 Table of Contents The following table summarizes restricted stock award and restricted stock unit activity for the Company under the 2016 Equity Plan for the three months ended March 31, 2024. Restricted Stock Restricted Stock Units Performance Stock Units Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Nonvested at beginning of period 45,322 $ 15.42 165,055 $ 11.56 — $ — Granted 5,326 13.14 53,279 11.31 43,651 11.32 Vested ( 26,717 ) 17.30 ( 32,763 ) 11.56 — — Forfeited — — ( 982 ) 11.56 — — Nonvested at end of period 23,931 $ 12.81 184,589 $ 11.49 43,651 $ 11.32 The fair value of restricted stock awards that vested during the first three months of 2024 and 2023 was $ 0.3 million and $ 0.5 million, respectively. The fair value of restricted stock units vested during the first three months of 2024 and 2023 was $ 0.4 million and zero . Note 10 – Derivatives The Company maintains and accounts for derivatives, in the form of interest rate lock commitments (“IRLCs”) and mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses through mortgage-banking revenue in the Consolidated Statements of Income. IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives. We are exposed to price risk from the time a mortgage loan is locked in until the time the loan is sold. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 120 days, however, this period may be longer for construction to permanent loans that are originated with the intent of selling in the secondary market upon permanent financing. For these IRLCs and our closed inventory in loans held for sale, we attempt to protect the Bank from changes in interest rates through the use of to be announced (“TBA”) securities, which are forward contracts, as well as, to a significantly lesser degree, loan level commitments in the form of best efforts and mandatory forward contracts. These assets and liabilities are included in the Consolidated Balance Sheets in other assets and accrued expenses and other liabilities, respectively. The following table provides information pertaining to the carrying amounts of our derivative financial instruments at March 31, 2024 and December 31, 2023. March 31, 2024 December 31, 2023 (Dollars in thousands) Notional Amount Estimated Fair Value Notional Amount Estimated Fair Value Asset - IRLCs $ 15,188 $ 233 $ 6,785 $ 110 Asset - TBA securities 4,750 10 1,000 2 Liability - IRLCs 198 1 — — Liability - TBA securities 19,750 108 18,000 176 Note 11 – Accumulated Other Comprehensive Income (Loss) The Company records unrealized holding gains (losses), net of tax, on investment securities AFS as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The following table provides information on the changes in the component of accumulated other comprehensive income (loss) for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 (Dollars in thousands) Net Unrealized (Losses) Net Unrealized Gains And (Losses) Beginning of period $ ( 7,494 ) $ ( 9,021 ) Other comprehensive (loss) income, net of tax ( 564 ) 860 End of period $ ( 8,058 ) $ ( 8,161 ) 30 Table of Contents Note 12 – Regulatory Capital Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain amounts and ratios (set forth in the table below) of Common Equity Tier 1, Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (leverage ratio). As of March 31, 2024 and December 31, 2023, management believes that the Company and the Bank met all capital adequacy requirements to which they were subject. As of December 31, 2023, the most recent notification from our primary regulator categorized the Bank, as well capitalized under the regulatory framework for prompt corrective action. At March 31, 2024, there were no conditions or events since that notification that management believes would change the Bank’s classification. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios, and Tier 1 leverage ratios, which are described below. The minimum ratios for capital adequacy purposes are 7.00 %, 8.50 %, 10.50 % and 4.00 % for the common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively which include a capital conservation buffer of 2.50% respectively. To be categorized as well capitalized, a bank must maintain minimum ratios of 6.50 %, 8.00 %, 10.00 % and 5.00 % for its common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively. Regulatory Capital and Ratios Regulatory Minimum Ratio + CCB ( 1) The Company The Bank (dollars in thousands) March 31, 2024 December 31, 2023 March 31, 2024 December 31, 2023 Common equity $ 515,228 $ 511,135 $ 579,520 $ 570,100 Goodwill (4) ( 61,523 ) ( 63,266 ) ( 61,523 ) ( 63,266 ) Core deposit intangible (3) ( 34,235 ) ( 38,069 ) ( 34,235 ) ( 38,069 ) DTAs that arise from net operating loss and tax credit carry forwards ( 5,858 ) ( 8,977 ) ( 4,326 ) ( 6,059 ) AOCI losses 8,058 7,494 8,058 7,494 Common Equity Tier 1 Capital 421,670 408,317 487,494 470,200 TRUPs 29,237 29,158 — — Tier 1 Capital 450,907 437,475 487,494 470,200 Allowable reserve for credit losses and other Tier 2 adjustments 58,428 58,586 58,428 58,586 Subordinated notes 43,322 43,139 — — Tier 2 Capital $ 552,657 $ 539,200 $ 545,922 $ 528,786 Risk-Weighted Assets ("RWA") $ 4,729,930 $ 4,697,504 $ 4,723,872 $ 4,693,009 Average Assets ("AA") $ 5,684,150 $ 5,649,116 $ 5,679,282 $ 5,644,930 Common Tier 1 Capital to RWA 7.00 % 8.91 % 8.69 % 10.32 % 10.02 % Tier 1 Capital to RWA 8.50 % 9.53 % 9.31 % 10.32 % 10.02 % Tier 2 Capital to RWA 10.50 % 11.68 % 11.48 % 11.56 % 11.27 % Tier 1 Capital to AA (Leverage) (2) n/a 7.93 % 7.74 % 8.58 % 8.33 % ____________________________________ (1) The regulatory minimum capital ratio ("Min. Ratio") + the capital conservation buffer ("CCB"). (2) Tier 1 Capital to AA (Leverage) has no capital conservation buffer defined. The PCA well capitalized is defined as 5.00 %. (3) Core deposit intangible is net of deferred tax liability. (4) Goodwill is net of deferred tax liability as of March 31, 2024. Bank and holding company regulations impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At March 31, 2024, the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained required capital ratios. 31 Table of Contents Note 13 – Fair Value Measurements Accounting guidance under GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This accounting guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities on a recurring basis and to determine fair value disclosures. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Under fair value accounting guidance, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine their fair values. These hierarchy levels are: Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Below is a discussion on the Company’s assets measured at fair value on a recurring basis. Investment Securities Available for Sale Fair value measurement for investment securities AFS is based on quoted prices from an independent pricing service. The fair value measurements consider observable data that may include present value of future cash flows, prepayment assumptions, credit loss assumptions and other factors. The Company classifies its investments in U.S. Treasury securities, if any, as Level 1 in the fair value hierarchy, and it classifies its investments in U.S. Government agencies securities and mortgage-backed securities issued or guaranteed by U.S. Government sponsored entities as Level 2. Equity Securities Fair value measurement for equity securities is based on quoted market prices retrieved by the Company via on-line resources. Although these securities have readily available fair market values, the Company determined that they should be classified as level 2 investments in the fair value hierarchy due to not being considered traded in a highly active market. Loans Held for Sale Loans held for sale are carried at fair value, which is determined based on Mark to Trade for allocated/committed loans or Mark to Market analysis for unallocated/uncommitted loans based on third-party pricing models (Level 2). Mortgage Servicing Rights The fair value of mortgage servicing rights (“MSRs”) is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income (Level 3). The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, and other ancillary income such as late fees. Management reviews all significant assumptions on a quarterly basis. Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change. The significant unobservable inputs used in the fair value measurement of the reporting entity’s residential MSRs are prepayment speeds, probability of default, rate of return, and cost of servicing. Significant increases/decreases in any of those inputs in isolation would have resulted in a significantly lower/higher fair value measurement. Generally, a change in the assumption used for prepayment speeds would have been accompanied by a directionally similar change in the markets, i.e. the 10-Year Treasury, and in the probability of default. 32 Table of Contents IRLCs We utilize a third-party specialist model to estimate the fair value of our IRLCs, which are valued based upon mortgage securities (TBA) prices less estimated costs to process and settle the loan. Fair value is adjusted for the estimated probability of the loan closing with the borrower (Level 3). (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range March 31, 2024 MSRs (1) $ 5,821 Market Approach Weighted average prepayment speed (PSA) (2) 147 IRLCs - net asset $ 232 Market Approach Range of pull through rate 79 % - 100 % Average pull through rate 96 % (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range December 31, 2023 MSRs (1) $ 5,926 Market Approach Weighted average prepayment speed (PSA) (2) 129 IRLCs - net asset $ 110 Market Approach Range of pull through rate 78 % - 100 % Average pull through rate 98 % ____________________________________ (1) The weighted average was calculated with reference to the principal balance of the underlying mortgages. (2) PSA = Public Securities Association Standard Prepayment Model The following table presents activity in MSRs for the three months ended March 31, 2024. (Dollars in thousands) Three Months Ended March 31, 2024 Beginning balance $ 5,926 Servicing rights resulting from sales of loans 118 Valuation adjustment ( 223 ) Ending balance $ 5,821 The following table presents activity in the IRLCs - net asset for the three months ended March 31, 2024. (Dollars in thousands) Three Months Ended March 31, 2024 Beginning balance $ 110 Valuation adjustment 122 Ending balance $ 232 Forward Contracts To avoid interest rate risk, we hedge the open locked/closed position with TBA forward trades. On a regular basis, we allocate disbursed loans to mandatory commitments with government-sponsored enterprises and private investors delivering the loans within 120 days of origination to maximize interest earnings. For a small percentage of our business, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and we measure and report them at fair value. Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is a Level 2 input. We have elected to measure and report best efforts commitments at fair value, when outstanding, using a valuation methodology similar to that used for mandatory commitments. Market assumptions utilized in the fair value measurement of the reporting entity’s residential mortgage derivatives, inclusive of IRLCs, Closed Loan Inventory, TBA derivative trades, and Mandatory Forwards may be subject to investor overlays that may result in a significantly lower fair value measurement. Generally such overlays are announced with advanced notice in order to include the risk adjuster, however there are times when announcements are mandated resulting in a lower fair value measurement. Additionally market assumptions such as spec pool payups may result in a significantly higher fair value measurement at time of loan allocation to specific trades. 33 Table of Contents The following tables present the recorded amount of assets measured at fair value on a recurring basis at March 31, 2024 and December 31, 2023. No assets were transferred from one hierarchy level to another during the first three months of 2024 or 2023. (Dollars in thousands) Fair Value Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2024 Assets: Securities available for sale: U.S. Government agencies $ 69,541 $ — $ 69,541 $ — Mortgage-backed 103,626 — 103,626 — Other debt securities 6,329 — 6,329 — 179,496 — 179,496 — Equity securities 5,681 — 5,681 — TBA forward trades 10 — 10 — Loans Held for Sale 13,767 — 13,767 — Loans Held for Investment, at fair value 9,684 — 9,684 — MSRs 5,821 — — 5,821 IRLCs 233 — — 233 Total assets at fair value $ 214,692 $ — $ 208,638 $ 6,054 Liabilities: IRLCs $ 1 $ — $ — $ 1 TBA securities 108 — 108 — Total liabilities at fair value $ 109 $ — $ 108 $ 1 (Dollars in thousands) Fair Value Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2023 Assets: Securities available for sale: U.S. Government agencies $ 20,475 $ — $ 20,475 $ — Mortgage-backed 84,027 — 84,027 — Other debt securities 6,019 — 6,019 — 110,521 — 110,521 — Equity securities 5,703 — 5,703 — TBA forward trades 2 — 2 — Loans Held for Sale 8,782 — 8,782 — Loans Held for Investment, at fair value 9,944 — 9,944 — MSRs 5,926 — — 5,926 IRLCs 110 — — 110 Total assets at fair value $ 140,988 $ — $ 134,952 $ 6,036 Liabilities: TBA securities $ 176 $ — $ 176 $ — Total liabilities at fair value $ 176 $ — $ 176 $ — Below is a discussion on the Company’s assets measured at fair value on a nonrecurring basis. 34 Table of Contents Individually Evaluated Collateral-Dependent Loans Loans for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, where applicable. Accordingly, collateral dependent loans are classified within Level 3 of the fair value hierarchy. Other Real Estate Owned (Foreclosed Assets) Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets establishing a new cost basis. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. The estimated fair value for foreclosed assets included in Level 3 are determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to the initial recognition, the Company records the foreclosed asset as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods. Repossessed Properties The Company records repossessed assets at fair value on a nonrecurring basis. All repossessed properties are recorded at lower of the estimated fair value of the properties, less expected selling costs, or the carrying amount of the defaulted loans. From time to time, nonrecurring fair value adjustments are recorded to reflect partial write-downs based on current appraised value of property. The Company considers any valuation inputs related to repossessed properties to be Level 3 inputs. The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at March 31, 2024 and December 31, 2023. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Quantitative Information about Level 3 Fair Value Measurements (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range Weighted Average (1) March 31, 2024 Nonrecurring measurements: Individually evaluated collateral dependent loans $ 17 Appraisal of collateral (1) Appraisal adjustment (2) Liquidation expense (2) 99 % 10 % 99 % 10 % Other real estate owned $ 179 Appraisal of collateral (1) Appraisal adjustment (2) ( 0 %) - ( 20 %) 0 % Repossessed properties $ 1,845 Appraisal of collateral (1) Appraisal adjustment (2) 12 % - 13 % 13 % Quantitative Information about Level 3 Fair Value Measurements (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range Weighted Average December 31, 2023 Nonrecurring measurements: Individually evaluated collateral dependent loan $ 633 Appraisal of collateral (1) Appraisal adjustment (2) Liquidation expense (2) 51 % 10 % 51 % 10 % Other real estate owned $ 179 Appraisal of collateral (1) Appraisal adjustment (2) 0 % - 20 % 0 % _________________________________ (1) Unobservable inputs were weighted by the relative fair value of the instruments. (2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. 35 Table of Contents Note 14 – Fair Value of Financial Instruments Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the financial instrument fair value disclosure requirements, including the Company’s common stock, OREO, premises and equipment and other assets and liabilities. The carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following table. Fair values for March 31, 2024 and December 31, 2023 were estimated using an exit price notion. March 31, 2024 Carrying Amount Fair Value Fair Value Measurements Description of Asset (dollars in thousands) Level 1 Level 2 Level 3 Assets Cash and cash equivalents $ 114,560 $ 114,560 $ 114,560 $ — $ — Investment securities - AFS 179,496 179,496 — 179,496 — Investment securities - HTM, net 503,822 444,258 — 444,258 — Equity securities 5,681 5,681 — 5,681 — Restricted securities 17,863 17,863 — 17,863 — Loans held for sale 13,767 13,767 — 13,767 — TBA derivatives trades 10 10 — 10 — Cash surrender value on life insurance 102,321 102,321 — 102,321 — Loans, at fair value 9,684 9,684 — 9,684 — Loans, net 4,581,705 4,397,048 — — 4,397,048 MSRs 5,821 5,821 — — 5,821 IRLCs 233 233 — — 233 Liabilities Deposits: Noninterest-bearing demand $ 1,200,680 $ 1,200,680 $ — $ 1,200,680 $ — Checking plus interest 1,101,954 1,101,954 — 1,101,954 — Money Market 1,358,205 1,358,205 — 1,358,205 — Savings 353,213 353,213 — 353,213 — Club 885 885 — 885 — Certificates of Deposit 1,169,342 1,168,144 — 1,168,144 — Subordinated debt, net 43,322 42,498 — 42,498 — TRUPS, net 29,237 28,049 — 28,049 — TBA Securities 108 108 — 108 — IRLCs 1 1 — — 1 36 Table of Contents December 31, 2023 Carrying Amount Fair Value Fair Value Measurements Description of Asset (dollars in thousands) Level 1 Level 2 Level 3 Assets Cash and cash equivalents $ 372,413 $ 372,413 $ 372,413 $ — $ — Investment securities - AFS 110,521 110,521 — 110,521 — Investment securities - HTM 513,188 457,830 — 457,830 — Equity securities 5,703 5,703 — 5,703 — Restricted securities 17,900 17,900 — 17,900 — Loans held for sale 8,782 8,782 — 8,782 — TBA securities 2 2 — 2 — Cash surrender value on life insurance 101,704 101,704 — 101,704 — Loans, at fair value 9,944 9,944 — 9,944 — Loans, net 4,573,715 4,477,468 — — 4,477,468 MSRs 5,926 5,926 — — 5,926 IRLCs 110 110 — — 110 Liabilities Deposits: Noninterest-bearing demand $ 1,258,037 $ 1,258,037 $ — $ 1,258,037 $ — Checking plus interest 1,165,546 1,165,546 — 1,165,546 — Money Market 1,430,603 1,430,603 — 1,430,603 — Savings 347,324 347,324 — 347,324 — Certificates of Deposit 1,184,610 1,184,447 — 1,184,447 — Subordinated debt, net 43,139 42,579 — 42,579 — TRUPS, net 29,158 28,266 — 28,266 — TBA Securities 176 176 — 176 — Note 15 – Commitments and Contingencies In the normal course of business, to meet the financial needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit and other commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the letters of credit and commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The following table provides information on commitments outstanding at March 31, 2024 and December 31, 2023. (Dollars in thousands) March 31, 2024 December 31, 2023 Commitments to extend credit $ 694,646 $ 613,266 Letters of credit 27,373 28,519 Total $ 722,019 $ 641,785 The Company provides banking services to customers who do business in the cannabis industry. Prior to the second quarter of 2022, the Company restricted these businesses to include only those in the medical-use cannabis industry in the state of Maryland. During the second quarter of 2022, the Company expanded its cannabis banking program to include both medical and adult-use licensees in other states, with an initial offering to the Company’s existing Maryland customers with multi-state operations. While the Company is providing banking services to customers that are engaged in the growing, processing, and sales of cannabis in a manner that complies with applicable state law, such customers engaged in those activities currently violate Federal laws. The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers. While we are not aware of any instance of a federally-insured financial institution being subject to such aiding and abetting liability, the strict enforcement of Federal laws regarding cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the Federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the 37 Table of Contents Company’s Consolidated Financial Statements if the Federal government takes actions against the Company. As of March 31, 2024, the Company had not accrued an amount for the potential impact of any such actions. Following is a summary of the level of business activities with our cannabis industry customers: • Deposit and loan balances at March 31, 2024 were approximately $ 227.6 million, or 4.4 % of total deposits, and $ 73.7 million, or 1.6 % of total gross loans, respectively. • Interest and noninterest income for the three months ended March 31, 2024, were approximately $ 1.0 million and $ 0.3 million, respectively. In the normal course of business, the Company may become involved in litigation arising from banking, financial, and other activities. Management, after consultation with legal counsel, does not anticipate that the future liability, if any, arising out of current proceedings will have a material effect on the Company’s financial condition, operating results, or liquidity. Note 16 – Earnings Per Share Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of potential common stock equivalents (stock-based awards). The following table provides information relating to the calculation of earnings per common share. Three Months Ended March 31, (In thousands, except per share data) 2024 2023 Net Income $ 8,184 $ 6,457 Average number of common shares outstanding 33,189 19,886 Dilutive effect of common stock equivalents 2 — Average number of shares used to calculate diluted EPS 33,191 19,886 Anti-dilutive shares 1 — Earnings per common share Basic $ 0.25 $ 0.32 Diluted $ 0.25 $ 0.32 As of March 31, 2024 there were 1,000 and as of March 31, 2023 there were zero unvested common stock equivalents excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive. Note 17 – Revenue Recognition Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees and merchant income. Noninterest revenue streams in-scope of Topic 606 are discussed below. Service Charges on Deposit Accounts Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts. Trust and Investment Fee Income 38 Table of Contents Trust and investment fee income primarily comprise fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Title Company Revenue Title Company revenue consists of revenue earned on performing title work for real estate transactions. The revenue is earned when the title work is performed. Payment for such performance obligations generally occurs at the time of the settlement of a real estate transaction. As such settlement is generally within 90 days of the performance of the title work, we recognize the revenue at the time of the settlement. All contract issuance costs are expensed as incurred. We had no contract assets or liabilities at March 31, 2024. Other Noninterest Income Other noninterest income consists of: fees, exchange, other service charges, safety deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Mastercard and VISA. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that rentals and renewals of safe deposit boxes will be recognized on a monthly basis consistent with the duration of the performance obligation. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, (Dollars in thousands) 2024 2023 Noninterest Income In-scope of Topic 606: Service charges on deposit accounts $ 1,507 $ 1,213 Trust and investment fee income 734 432 Interchange income 1,587 1,212 Title Company revenue 78 137 Other noninterest income 803 794 Noninterest Income (in-scope of Topic 606) 4,709 3,788 Noninterest Income (out-of-scope of Topic 606) 1,858 1,546 Total Noninterest Income $ 6,567 $ 5,334 Note 18 – Subsequent Events On April 12, 2024 the Board of Directors determined that it is in the best interest of the Company to close two branches. Management is directed to close the Onley branch located in Onley, VA on or about July 17, 2024 and to close the Westgate branch located in Annapolis, MD on or about September 30, 2024. 39 Table of Contents