What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-09 compared with 2024-05-09 · 330 added, 156 removed, 515 unchanged (49% of the section changed)

57 unchanged sentences

The Company assesses an ACL to groups of loans which share similar risk characteristics or on an individual basis, as deemed appropriate.

Changes in the ACL on loans, and as a result, the related provision for credit losses, can materially affect financial results.

Changes in the ACL on loans and the related provision for credit losses, can materially affect financial results.

Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for loans in the portfolio.

7 unchanged sentences

Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate.

Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill.

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

Impairment testing requires a qualitative assessment and/or an independent valuation be obtained to determine the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill.

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

A bargain purchase gain represents the excess of the fair value of net assets acquired over the cost of an acquisition.

5 unchanged sentences

PCD loans are those for which there is more than insignificant evidence of credit deterioration since origination.

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

At the acquisition date, the ACL is determined and added to the fair value of the loan to determine the new amortized cost basis.

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

At the acquisition

date, the ACL is determined and added to the fair value of the loan to determine the new amortized cost basis.

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

4 unchanged sentences

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

The allowance for PCD loans is

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

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

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

2 unchanged sentences

The Company accounts for income taxes using the liability method in accordance with required accounting guidance.

Under this method, deferred tax assets and liabilities are determined by applying the applicable federal and state income tax rates to cumulative temporary differences.

These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities.

Deferred taxes result from such temporary differences.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

15 unchanged sentences

(the “Bank”).

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

The Bank operates 41 full-service branches in Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County, Anne Arundel County, Charles County, St Mary's County, Calvert County and Worcester County in Maryland, Kent County and Sussex County in Delaware, Fredericksburg City, Stafford County and Spotsylvania County in Virginia.

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

5 unchanged sentences

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

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

First Quarter 2024 Highlights:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Customer disruption is expected to be limited.

These closures are estimated to cost $0.2 million.

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

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

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

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

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

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

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

The Company’s net income for the second quarter of 2024 was $11.2 million or $0.34 per diluted common share compared to net income of $8.2 million or $0.25 per diluted common share for the first quarter of 2024, and net income of $4.0 million or $0.20 per diluted common share for the second quarter of 2023.

Net income for the first-half of 2024 was $19.4 million or $0.58 per diluted common share, compared to net income for the first-half of 2023 of $10.5 million or $0.53 per diluted common share.

Second Quarter and First-Half of 2024 Highlights

• Return on Average Assets (“ROAA”) - The Company reported ROAA of 0.77% for the second quarter of 2024, compared to 0.57% for the first quarter of 2024 and 0.45% for the second quarter of 2023.

Non-GAAP ROAA, which excludes fraud expense, core deposit intangible amortization, and merger-related expenses, was 0.91% for the second quarter of 2024, compared to 0.94% for the first quarter of 2024 and 0.59% for the second quarter of 2023.

• Net Interest Margin Expansion - Net interest margin (“NIM”) increased to 3.11% for the second quarter of 2024, from 3.08% for the first quarter of 2024.

Excluding net accretion interest income of $3.8 million and $3.6 million for the same time periods, NIM increased two basis points (“bps”) to 2.83% for the second quarter of 2024, from 2.81% for the first quarter of 2024.

• Continued Stable and Low Cost Funding - Total deposits remained stable in the second quarter of 2024 with noninterest-bearing deposits increasing $386.6 million to 30.8% of total deposits.

The increase in noninterest-bearing deposits was primarily due to the migration of low-cost demand deposits to noninterest-bearing deposits and successful initiatives designed to drive noninterest-bearing deposit growth.

The total average cost of deposits for the second quarter of 2024 declined four bps to 2.19% when compared to the first quarter of 2024 .

• Improving Earnings Drive Capital Accretion - Second quarter net interest income and noninterest income increased $1.0 million and $1.9 million , respectively, from the first quarter of 2024 .

Net interest income increased due to modest loan growth, slightly higher accelerated accretion income, the repricing of loans and securities.

Noninterest income increased primarily due to higher mortgage-banking revenue from the increased volume and sales of residential mortgages.

The improved earnings for the second quarter resulted in a 14 bps increase in the Company’s Tier 1 Capital Ratio and a 14 bps increase in the Company’s Total Risk-Based Capital Ratio, which were 9.67% and 11.82% , respectively, on June 30, 2024 .

The Company’s leverage ratio and tangible common equity ratio also increased to 8.07% and 7.23% , respectively, in the second quarter of 2024 .

• Reduced Commercial Real Estate (“CRE”) Concentration - The CRE Concentration Ratio, which is calculated as n on-owner occupied CRE loans as a percentage of the Bank’s Tier 1 Capital + Allowance for Credit Losses (“ACL”), decreased in the second quarter of 2024 to 368.7% from 370.0% in the first quarter of 2024 and 382.6% in the fourth quarter of 2023.

Capital accretion has allowed the Bank to meet the needs of its customers and fund new CRE loans.

• Improving Operating Leverage - The second quarter efficiency ratio improved to 66.2% when compared to 76.9% in the first quarter 2024 and 77.8% in the second quarter 2023.

The second quarter Non-GAAP efficiency ratio, which excludes core deposit intangible amortization and non-recurring activity, improved to 61.1% when compared to 62.4% in the first quarter 2024 and 71.8% in the second quarter 2023.

Management anticipates ongoing expense management and technology investments will result in continued improvements in operating leverage over time.

SUMMARY OF OPERATING RESULTS

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

Unaudited (QTD)

Three Months Ended March 31,

A comparison of the results of operations for the three and six months ended June 30, 2024 and June 30, 2023 is presented below.

Unaudited (QTD) Unaudited (YTD)

Three Months Ended June 30, Six Months Ended June 30,

(Dollars in thousands) 2024 2023 2024 2023

11 unchanged sentences

Net income $ 11,234 $ 4,018 $ 19,418 $ 10,475

Unaudited (QTD)

Three Months Ended March 31,

Unaudited (QTD) Unaudited (YTD)

Three Months Ended June 30, Six Months Ended June 30,

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

3 unchanged sentences

Return on average equity (“ROAE”)

8.70 4.49 7.54 5.83

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

12.85 7.16 13.08 8.57

Average total equity to average total assets 8.90 7.16 8.92 10.20

2 unchanged sentences

Efficiency ratio (2)

66.23 77.76 71.42 72.30

Non-interest income to average assets 0.58 0.59 0.52 0.60

1 unchanged sentence

Net operating expense to average assets (3)

1.73 1.82 1.91 1.81

COMMON SHARE DATA

9 unchanged sentences

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

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2024 AND 2023

Summary of Financial Results

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

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

Three Months Ended March 31,

The Company reported net income for the three months ended June 30, 2024 of $11.2 million or $0.34 diluted earnings per share compared to net income of $4.0 million or diluted earnings per share of $0.20 for the three months ended June 30, 2023.

The Company’s ROAA, ROACE and ROATCE were 0.77%, 8.70% and 12.85%, respectively, for the three months ended June 30, 2024 compared to 0.45%, 4.49% and 7.16%, respectively, for the three months ended June 30, 2023.

Three Months Ended June 30,

(Dollars in thousands) 2024 2023 $ Change % Change

10 unchanged sentences

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

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

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

Three Months Ended March 31,

As shown in the table below, tax-equivalent net interest income was $42.2 million for the second quarter of 2024 and $22.5 million for the second quarter of 2023.

The increase in net interest income when compared to the second quarter of 2023 was primarily due to the increase in interest and fees on loans, interest and dividends on investment securities and interest on deposits from other banks, coupled with a decrease in interest on short-term borrowings.

These improvements to net interest income were partially offset by the increase in interest on deposits and interest on long-term borrowings all significantly impacted by the merger with TCFC in the third quarter of 2023.

Three Months Ended June 30,

(Dollars in thousands) 2024 2023 $ Change % Change

12 unchanged sentences

Tax Equivalent Net Interest Income $ 42,222 $ 22,545 $ 19,677 87.28 %

____________________________________

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

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

Average Balances and Yields

4 unchanged sentences

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

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

Three Months Ended June 30, Three Months Ended June 30,

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

19 unchanged sentences

Total assets $ 5,839,328 $ 3,596,311

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

Three Months Ended June 30, Three Months Ended June 30,

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

8 unchanged sentences

Advances from FHLB - short-term 113,549 1,584 5.61 261,797 3,449 5.28

Advances from FHLB - long-term 30,220 346 4.60 — — —

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

19 unchanged sentences

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

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

There were $4.5 million and $0.3 million of accretion interest on loans for the three months ended June 30, 2024 and 2023, respectively.

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

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

There were $(0.4) million and $41,000 of amortization of deposits premium, and $(0.2) million and $(47,000) of amortization of borrowing fair value adjustment for the three months ended June 30, 2024 and 2023, respectively.

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

1 unchanged sentence

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

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

Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023

Volume Due to Rate Total

22 unchanged sentences

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

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

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

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

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

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

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

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

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

Net interest income was $42.1 million for the second quarter of 2024, compared to $41.1 million for the first quarter of 2024 and $22.5 million for the second quarter of 2023.

The increased in net interest income when compared to the first quarter of 2024 was primarily due to the increase in interest and fees on loans of $1.5 million and interest and dividends on investment securities of $0.8 million, partially offset by an increase in interest expense of $1.0 million.

The increase in net interest income when compared to the second quarter of 2023 was primarily due to the increase in interest and fees on loans of $34.6 million, interest and dividends on investment securities of $1.5 million and interest on deposits from other banks of $0.4 million, coupled with a decrease in interest on short-term borrowings of $1.9 million.

These improvements were partially offset by the increase in interest on deposits of $17.7 million and interest on long-term borrowings of $1.0 million all significantly impacted by the merger with TCFC in the third quarter of 2023.

The Company’s NIM increased slightly to 3.11% for the second quarter of 2024 from 3.08% for the first quarter of 2024 primarily due to the repricing of loans and securities at a greater rate than deposits.

The Company’s cost of funds was positively impacted during the second quarter due to a shift from interest-bearing to noninterest-bearing deposits.

Average interest-bearing deposits decreased $395.0 million which resulted in $0.9 million less interest expense.

The Company’s NIM increased to 3.11% for the second quarter of 2024 from 2.68% for the second quarter of 2023.

Comparing the second quarter of 2024 to the second quarter of 2023, the Company’s interest-earning asset yields increased 102 basis points to 5.39% from 4.37%, while the cost of funds repriced at a slower pace resulting in an increase of 60 basis points to 2.36% from 1.76% for the same period.

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

1 unchanged sentence

Noninterest Income

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

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

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

Total noninterest income for the second quarter of 2024 was $8.4 million, an increase of $1.9 million from $6.6 million for the first quarter of 2024 and an increase $3.1 million from $5.3 million for the second quarter of 2023.

The increase from the first quarter of 2024 was primarily due to improved mortgage banking revenue.

In addition, both Wye Financial Partners and the Mid-Maryland Title Company, Inc.

have experienced improved revenue streams due to increased activity.

The increase from the second quarter of 2023 was due to higher revenue among all revenue line items, a direct result of the merger with TCFC in the third quarter of 2023 .

Noninterest Expense

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

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

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

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

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

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

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

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

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

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

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

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

Total noninterest expense of $33.5 million for the second quarter of 2024 decreased $3.2 million when compared to the first quarter of 2024 total non-interest expense of $36.7 million and increased $11.9 million when compared to the second quarter of 2023 total non-interest expense of $21.6 million.

The decrease in total non-interest expenses from the first quarter of 2024 was primarily due to credit card fraud loss of $4.3 million in the first quarter, partially offset by an increase in salaries and wages of $1.5 million.

The increase in total non-interest expense from the second quarter of 2023 was primarily due to the operation of a larger branch network and employee base due to the merger with TCFC, which significantly impacted almost all expense line items.

The Company reported income tax expense of $3.8 million for the second quarter of 2024, and income tax expense of $1.5 million for the second quarter of 2023.

The effective tax rate for the second quarter of 2024 and 2023 was 25.1% and 27.1%, respectively.

The decrease in the effective tax rate was due primarily to lower nondeductible expenses associated with merger activity.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND 2023

Summary of Financial Results

The Company reported net income for the six months ended June 30, 2024 of $19.4 million or diluted earnings per share of $0.58 compared to net income of $10.5 million or diluted earnings per share of $0.53 for the six months ended June 30, 2023.

The Company’s ROAA, Non-GAAP ROAA, ROACE and ROATCE were 0.67%, 0.92% , 7.54% and 13.08% for the six months ended June 30, 2024, respectively, compared to 0.59%, 0.71%, 5.83% and 8.57% for the six months ended June 30, 2023, respectively.

The increase to net income in the first six months of 2024 compared to the same period in 2023 was primarily due to the merger with TCFC, which resulted in higher net interest income and noninterest income, partially offset by a higher provision for credit losses and noninterest expenses.

The increase in net interest income was impacted by higher average balances and yields earned on average earning assets, partially offset by higher average balances and rates paid on interest-bearing liabilities.

The increase in provision for credit losses for 2024 was due to higher levels of reserves required by the Company’s CECL model and higher net charge-offs .

Almost all noninterest expense line items in 2024 increased as a result of the merger and the expanded operations of the newly combined Company.

Six Months Ended June 30,

(Dollars in thousands) 2024 2023 $ Change % Change

Interest and dividend income $ 144,245 $ 71,695 $ 72,550 101.19 %

Interest expenses 60,970 23,537 37,433 159.04 %

Net interest income 83,275 48,158 35,117 72.92 %

Provision for credit loses 2,488 1,880 608 32.34 %

Noninterest income 15,007 10,628 4,379 41.20 %

Noninterest expenses 70,197 42,501 27,696 65.17 %

Income before income taxes 25,597 14,405 11,192 77.70 %

Income tax (benefit) expense 6,179 3,930 2,249 57.23 %

Net income $ 19,418 $ 10,475 $ 8,943 85.37 %

Net Interest Income

As shown in the table below, tax-equivalent net interest income increased $35.2 million to $83.4 million for the six months ended June 30, 2024 compared to $48.3 million for six months ended June 30, 2023.

The increase in net interest income when compared to the prior period was primarily due to the increase in the average balance of loans of $2.0 billion, or 75.9%, and an increase in net accretion income of $6.7 million.

Increases to net interest income were partially offset by increased total interest expense of $37.4 million, or 159.0%, primarily due to increases in the cost of funds and in the average balance of interest-bearing deposits of $1.6 billion, or 76.8%.

All of the noted increases were significantly impacted by the merger.

Six Months Ended June 30,

(Dollars in thousands) 2024 2023 $ Change % Change

Interest and dividend income

Loans, including fees $ 133,045 $ 63,557 $ 69,488 109.33 %

Interest and dividends on investment securities

9,662 7,805 1,857 23.79 %

Interest on deposits with banks 1,538 333 1,205 361.86 %

Total Interest and Dividend Income $ 144,245 $ 71,695 $ 72,550 101.19 %

Interest Expenses

Deposits $ 56,081 $ 17,195 $ 38,886 226.15 %

Short-term borrowings 1,641 4,810 (3,169) (65.88) %

Long-term debt 3,248 1,532 1,716 112.01 %

Total Interest Expenses $ 60,970 $ 23,537 $ 37,433 159.04 %

Taxable-equivalent adjustment $ 161 $ 92 $ 69 75.00 %

Tax Equivalent Net Interest Income $ 83,436 $ 48,250 $ 35,186 72.92 %

Average Balances and Yields

The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the six months ended June 30, 2024 and 2023.

Six Months Ended June 30, 2024 Six Months Ended June 30, 2023

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

Earning assets

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

Consumer real estate $ 1,374,902 $ 37,770 5.52 % $ 914,351 $ 21,383 4.72 %

Commercial real estate 2,730,646 77,974 5.74 % 1,286,199 30,793 4.83 %

Commercial 218,346 8,024 7.39 % 140,161 3,997 5.75 %

Consumer 328,450 8,537 5.23 % 310,736 7,257 4.71 %

State and political 1,902 46 4.86 % 939 17 3.65 %

Credit Cards 7,918 368 9.35 % — — — %

Other 18,682 484 5.21 % 8,680 199 4.62 %

Total Loans 4,680,846 133,203 5.72 % 2,661,066 63,646 4.82 %

Investment securities:

Taxable 680,042 9,650 2.84 649,329 7,793 2.40

Tax-exempt (1)

659 15 4.55 665 15 4.51

Federal funds sold — — — — — —

Interest-bearing deposits 62,324 1,538 4.96 13,622 333 4.93

Total earning assets 5,423,871 144,406 5.35 % 3,324,682 71,787 4.35 %

Cash and due from banks 47,320 29,266

Other assets 393,439 226,989

Allowance for credit losses (57,554) (29,364)

Total assets $ 5,807,076 $ 3,551,573

Six Months Ended June 30, 2024 Six Months Ended June 30, 2023

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

Interest-bearing liabilities

Demand deposits $ 910,831 11,911 2.63 % $ 690,258 7,149 2.09 %

Money market and savings deposits 1,679,615 20,451 2.45 955,541 4,899 1.03

Brokered deposits 14,107 345 4.92 — — —

Certificates of deposit $100,000 or more 760,211 15,256 4.04 277,096 3,413 2.48

Other time deposits 417,346 8,118 3.91 216,500 1,734 1.62

Interest-bearing deposits (4)

3,782,110 56,081 2.98 2,139,395 17,195 1.62

Securities sold under retail repurchase agreements and federal funds purchased — — — — — —

Advances from FHLB - short-term 58,775 1,641 5.61 188,293 4,810 5.15

Advances from FHLB - long-term 15,110 346 4.60 — — —

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

72,549 2,902 8.04 43,147 1,532 7.16

Total interest-bearing liabilities 3,928,544 60,970 3.12 % 2,370,835 23,537 2.00 %

Noninterest-bearing deposits 1,321,705 798,994

Accrued expenses and other liabilities 39,100 19,539

Stockholders’ equity 517,727 362,205

Total liabilities and stockholders’ equity $ 5,807,076 $ 3,551,573

Net interest income $ 83,436 $ 48,250

Net interest spread 2.23 % 2.35 %

Net interest margin 3.09 % 2.93 %

Cost of Funds 2.34 % 1.50 %

Cost of Deposits 2.21 % 1.18 %

Cost of Debt 6.71 % 5.53 %

Tax-equivalent adjustment

Loans $ 158 $ 89

Investment securities 3 3

Total $ 161 $ 92

____________________________________

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

(2) Average loan balances include nonaccrual loans.

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

There were $8.7 million and $0.7 million of accretion interest on loans for the six months ended June 30, 2024 and 2023, respectively.

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

There were $(0.8) million and $0.2 million of amortization of deposits premium, and $(0.5) million and $(0.1) million of amortization of borrowing fair value adjustment for the six months ended June 30, 2024 and 2023, respectively.

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

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

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

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

Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023

Volume Due to Rate Total

Interest income from earning assets:

Residential real estate $ 12,750 $ 3,637 $ 16,387

Commercial real estate 41,361 5,820 47,181

Commercial 2,884 1,143 4,027

Consumer 477 803 1,280

State and political 23 6 29

Credit Cards 368 — 368

Other 260 25 285

Taxable investment securities 493 1,364 1,857

Tax-exempt investment securities — — —

Fed funds sold — — —

Interest-bearing deposits 1,203 2 1,205

Total interest income $ 59,819 $ 12,800 $ 72,619

Interest-bearing liabilities:

Interest-bearing demand deposits 2,908 1,854 4,762

Money market and savings deposits 8,805 6,747 15,552

Certificate of deposits 13,957 4,615 18,572

Securities sold under repurchase agreements and federal funds purchased — — —

Advances from FHLB - Short-term (3,600) 431 (3,169)

Advances from FHLB - Long-term 346 — 346

Subordinated debt 1,181 189 1,370

Total interest-bearing liabilities $ 23,597 $ 13,836 $ 37,433

Net change in net interest income $ 36,222 $ (1,036) $ 35,186

The Company’s net interest margin increased to 3.09% for 2024 from 2.93% for 2023, primarily due to recent loan growth and repricing of earning assets, higher net accretion due to the merger, a positive shift in lower cost deposits and an overall stabilized funding base.

The increase in the average balance and yields earned on average earning assets of $2.1 billion and 100 bps, respectively, were partially offset by increases in the average balance and rates paid on interest-bearing deposits of $1.6 billion and 136 bps, respectively.

The average balance on noninterest-bearing deposits increased $522.7 million, or 65.4%.

Net accretion income impacted the increased net interest margin by 27 bps and five bps for the six months ended June 30, 2024 and 2023, respectively.

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

Provision for Credit Losses and Allowance for Credit Losses

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

Noninterest Income

Total noninterest income for the six months ended June 30, 2024 increased $4.4 million, or 41.2%, when compared to the same period in 2023.

The increase in noninterest income was experienced among almost all revenue line items.

These increases were attributable to the increased size and scale of the Company following the merger with TCFC as well as strategic initiatives to improve business line operations and profitability.

Noninterest Expense

Total noninterest expense for the six months ended June 30, 2024 increased $27.7 million, or 65.2%, when compared to the same period in 2023.

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

There were no merger-related expenses for the six months ended June 30, 2024, compared to $1.9 million for the six months ended June 30, 2023.

The Company continues to focus on streamlining processes to unlock operational efficiencies and reduce overall noninterest expenses .

The Company reported income tax expense of $6.2 million for the six months ended June 30, 2024, and income tax expense of $3.9 million for the six months ended June 30, 2023.

The effective tax rate was 24.1% for the six months ended June 30, 2024, and 27.3% for the six months ended June 30, 2023.

The decrease in the effective tax rate in 2024 was due to a re-assessment of year-end 2023 tax deductions during the first quarter of 2024 which presented favorable differences and lower nondeductible expenses associated with merger activity.

The Company’s consolidated deferred tax assets, net of deferred tax liabilities and valuation allowances, totaled $36.1 million at June 30, 2024, representing an aggregate rate of approximately 25.5% of the Company’s temporary federal and state tax differences.

For the year-to-date period in 2024, the Company’s gross federal and state net operating loss carryovers (“NOL’s”) that were recorded in 2023 have been reduced by approximately $20.8 million and $19.5 million, respectively, resulting from estimated utilization and true-ups of 2023 tax estimates.

As of June 30, 2024, the Company’s estimated remaining gross NOL’s expected to be realized for federal and state income tax purposes were approximately $10.3 million and $5.5 million, respectively.

These NOL’s are available to offset future taxable income of the Company.

ANALYSIS OF FINANCIAL CONDITION

Balance Sheet Summary

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

Total assets were $5.9 billion at June 30, 2024, a decrease of $144.6 million, or 2.4%, when compared to $6.0 billion at December 31, 2023.

The aggregate decrease was primarily due to decreases in cash and cash equivalents of $233.5 million and investment securities held to maturity (“HTM”) of $13.8 million partially offset by an increase in investment securities available for sale (“AFS”) of $21.1 million and loans held for investment of $64.7 million.

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

The ratio of the ACL on loans to total loans were 1.24% and 1.24% at June 30, 2024 and December 31, 2023, respectively.

Cash and Cash Equivalents

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

Cash and cash equivalents totaled $138.9 million at June 30, 2024, compared to $372.4 million at December 31, 2023.

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

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

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

At June 30, 2024, 20.9% of the portfolio of debt securities was classified as AFS and 79.1% was classified as HTM, compared to 17.7% and 82.3% respectively, at December 31, 2023.

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

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

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

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

Investment securities, including restricted stock and equity securities, totaled $658.6 million at June 30, 2024, a $11.2 million, or 1.7%, increase compared to $647.4 million at December 31, 2023.

At June 30, 2024, AFS securities, carried at fair value, totaled $131.6 million compared to $110.5 million at December 31, 2023.

At June 30, 2024, AFS securities consisted of 80.2% mortgage-backed, 15.3% U.S.

Government agencies and 4.5% corporate bonds, compared to 76.0%, 18.5% and 5.5%, respectively, at year-end 2023.

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

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

At June 30, 2024, HTM securities, carried at amortized cost, totaled $499.5 million compared to $513.3 million at December 31, 2023.

At June 30, 2024, HTM securities consisted of 68.9% mortgage-backed, 28.7% U.S.

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

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

At June 30, 2024 and December 31, 2023, 97.2% and 97.1%, respectively, of the Bank’s carrying value of its investment portfolio consisted of securities issued or guaranteed by U.S.

Government agencies or government-sponsored agencies.

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

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

At June 30, 2024 and December 31, 2023 , the fair value of loans held for sale amounted to $27.8 million and $8.8 million, respectively.

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

1 unchanged sentence

Loans Held for Investment

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

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

The following table summarizes the Company’s loan portfolio at June 30, 2024 and December 31, 2023.

(Dollars in thousands) June 30, 2024 % December 31, 2023 % $ Change % Change

Construction $ 327,875 6.97 % $ 299,000 6.40 % $ 28,875 9.66 %

7 unchanged sentences

Total loans, net $ 4,647,259 $ 4,583,659 $ 63,600 1.39 %

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

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

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

3 unchanged sentences

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

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

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

Non-owner occupied CRE loans as a percentage of the Bank’s Tier 1 Capital + ACL at June 30, 2024 and December 31, 2023 were $2.1 billion or 368.7% and $2.0 billion or 382.6%, respectively.

Construction loans as a percentage of the Bank’s Tier 1 Capital + ACL at June 30, 2024 and December 31, 2023 were $327.9 million or 58.6% and $299.0 million or 56.7%, respectively.

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

3 unchanged sentences

Non-Owner Occupied CRE Loans

March 31, 2024

June 30, 2024

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

2 unchanged sentences

Multi-Family (5+ Units) 268,015 2,310 13.0 % 5.7 %

Motel/Hotel 214,410 4,123 10.4 % 4.5 %

Industrial/Warehouse 222,320 1,577 10.8 % 4.7 %

Commercial - Improved 146,411 1,181 7.1 % 3.1 %

394,913 518 19.1 % 8.3 %

3 unchanged sentences

____________________________________

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

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

(1) Other non-owner occupied CRE loans include mini-storage loans of $83.0 million, restaurant loans of $46.2 million, and other loans of $265.7 million.

(2) The balances for our non-owner occupied CRE portfolio as of June 30, 2024, as presented in this table, coincide with our internal evaluation of risk for the purpose of monitoring loan concentrations in accordance with internal and regulatory guidelines.

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

2 unchanged sentences

Owner Occupied CRE Loans

March 31, 2024

June 30, 2024

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

3 unchanged sentences

Retail 63,216 580 8.4 % 1.3 %

Commercial - Improved 166,355 962 22.1 % 3.5 %

204,980 1,220 27.2 % 4.3 %

5 unchanged sentences

Office CRE Portfolio

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

The Bank's office CRE loan portfolio, which includes owner occupied and non-owner occupied CRE loans, was $504.9 million or 10.7% of total loans of $4.7 billion at June 30, 2024.

The Bank’s office CRE loan portfolio included $141.1 million or 28.0% of the total with medical tenants and $72.9 million or 14.4% of the total with government or government contractor tenants.

There were 507 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $0.4 million, respectively.

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

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

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

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

Loan to Value ("LTV") estimates are less than 50% for $169.2 million or 33.5% of the office CRE portfolio and greater than 80% for $16.6 million or 3.3% of the office CRE portfolio.

LTV collateral values are based on the most recent appraisal, which varies from the initial loan boarding to interim credit reviews .

The Bank had 18 office CRE loans totaling $164.1 million that were greater than $5.0 million at June 30, 2024, compared to 24 office CRE loans totaling $189.8 million at December 31, 2023.

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

For the office CRE portfolio, at June 30, 2024, the average loan debt-service coverage ratio was 2.5x and average LTV was 51.0%.

Of the office CRE portfolio balance, 74% is secured by properties in rural or suburban areas with limited exposure to metropolitan cities and 97% are secured by properties with five stories or less.

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Of the office CRE loans, $2.1 million are special mention or substandard.

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

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

The following table summarizes asset quality information and ratios at June 30, 2024 and December 31, 2023.

(dollars in thousands,) June 30, 2024 December 31, 2023

ASSET QUALITY

37 unchanged sentences

Allowance for Credit Losses on Loans

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

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

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

The ACL was $58.5 million at June 30, 2024, $57.4 million at December 31, 2023 and $29.0 million at June 30, 2023.

There were net charge-offs of $0.9 million for the second quarter of 2024, compared to net charge-offs of $0.6 million for the first quarter of 2024 and net charge-offs of $50,000 for the second quarter of 2023.

The ratio of annualized net charge-offs to average loans was 0.08% for the second quarter of 2024, compared to annualized net charge-offs of 0.05% for the first quarter of 2024 and annualized net charge-offs of 0.01% for the second quarter of 2023.

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

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

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

The ACL on loans as a percentage of period-end loans was 1.24% at June 30, 2024 and 1.24% at December 31, 2023.

The following tables present a summary of the net charge-off activity in the ACL at or for the three and six months ended June 30, 2024 and 2023.

For the Three Months Ended

March 31, 2024 March 31, 2023

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

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

June 30, 2024 June 30, 2023

(Dollars in thousands) Net

(Charge-offs)

Recoveries Average Balance (1)

(Charge-offs)

Recoveries Average Balance (1)

Construction $ 4 $ 315,820 (0.01) % $ 4 $ 228,689 (0.01) %

9 unchanged sentences

(1) Excludes Loans Held for Sale

For Six Months Ended June 30, 2024

June 30, 2024 June 30, 2023

(Dollars in thousands) Net

(charge-offs)

recoveries Average balances % Net

(charge-offs)

recoveries Average balances %

Construction $ (6) 304,307 — % $ 7 238,540 (0.01) %

Residential real estate 3 1,523,791 - % 34 869,069 (0.01) %

Commercial real estate — 2,280,227 - % — 1,094,387 - %

Commercial (20) 229,059 0.02 % 8 139,975 (0.01) %

Consumer (1,242) 325,264 0.77 % (119) 312,877 0.08 %

Credit cards (186) 3,174 11.78 % — — - %

$ (1,451) $ 4,665,822 0.06 % $ (70) $ 2,654,848 0.01 %

Allowance for credit losses — (58,478) - % — (29,014) — %

Total net charge-off and

average loans $ (1,451) $ 4,607,344 0.06 % $ (70) $ 2,625,834 0.01 %

Nonperforming Assets

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

Classified assets increased $4.3 million to $19.1 million or 0.33% of total assets at June 30, 2024 from $14.9 million or 0.25% of total assets at December 31, 2023.

Classified assets are substandard loans, repossessed properties and OREO.

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

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

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

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

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

The increase was primarily due to increases in OREO and repossessed properties of $1.6 million and $2.7 million in substandard loans.

As shown in the following table, nonperforming assets were $17.0 million or 0.29% of total assets at June 30, 2024 compared to $13.7 million or 0.23% of total assets at December 31, 2023.

The balance of nonperforming assets increased primarily due to increases in nonaccrual loans of $2.1 million and OREO of $1.6 million , partially offset by a decrease in loans 90 days past due and still accruing of $0.3 million.

The following table summarizes our nonperforming assets at June 30, 2024 and December 31, 2023.

(Dollars in thousands) June 30, 2024 December 31, 2023

Nonperforming assets

10 unchanged sentences

Nonperforming assets 0.29 % 0.23 %

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

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

The following is a breakdown of the Company’s deposit portfolio at June 30, 2024 and December 31, 2023:

(dollars in thousands) June 30, 2024 December 31, 2023

Balance % Balance % $ Change % Change

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Total Deposits $ 5,148,885 100.00 % $ 5,386,120 100.00 % $ (237,235) (4.40) %

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

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

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

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

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

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

Total deposits decreased $237.2 million, or 4.4%, to $5.1 billion at June 30, 2024 when compared to December 31, 2023.

The decrease in total deposits was primarily due to a decrease in demand deposits of $507.0 million, and money market and savings of $88.6 million.

The decrease in deposits is attributable to seasonal municipal runoff and a decrease in interest rate-sensitive cannabis-related deposits.

The increase in noninterest-bearing deposits was significantly impacted by a transfer of $399.4 million of demand deposits which carried an average rate of four bps during the second quarter of 2024.

Total estimated uninsured deposits were $0.9 billion or 18.4% of total deposits at June 30, 2024 and $1.0 billion or 19.5% of total deposits at December 31, 2023.

At June 30, 2024, there were $129.5 million included in uninsured deposits that the Bank secured using the market value of pledged collateral.

The Bank's uninsured deposits, excluding the market value of pledged collateral, at June 30, 2024 were $819.4 million or 15.9% of total deposits.

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

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

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

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

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

Reciprocal deposits were $1.2 billion at June 30, 2024 compared to $1.3 billion at December 31, 2023.

Reciprocal deposits as a percentage of the Bank’s liabilities at June 30, 2024 and December 31, 2023 were 22.9% and 24%, respectively.

For call reporting purposes, there were $154.3 million and $204.8 million of reciprocal deposits that were considered brokered at June 30, 2024 and December 31, 2023, respectively.

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

1 unchanged sentence

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

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

At June 30, 2024, the Bank had three local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $347.7 million, which represented 6.7% of total deposits of $5.2 billion.

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

Wholesale Funding - Short-Term Borrowings and Brokered Deposits

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

The Company had short-term borrowings as of June 30, 2024 of $31.0 million, compared to $0 as of December 31, 2023.

The increase was due to the purchase of short-term advances with FHLB to offset seasonality in our municipal and cannabis related deposits.

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

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

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

At June 30, 2024 and December 31, 2023, the Company had no securities sold under agreements to repurchase or overnight borrowings from correspondent banks.

The Company’s wholesale funding increased $36.5 million, which includes FHLB advances and brokered deposits, from $44.5 million in brokered deposits at December 31, 2023 to $81.0 million in FHLB advances at June 30, 2024.

For FDIC call reporting purposes, reciprocal deposits are classified as brokered deposits when they exceed 20% of a bank’s liabilities or $5.0 billion.

Reciprocal deposit balances considered brokered were excluded from the Company’s measurement of wholesale funding.

Long-Term Debt

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

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

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

There were long-term borrowings from the FHLB outstanding at June 30, 2024 of $50.0 million and $0 at December 31, 2023.

This increase was due to a purchase of $50 million in FHLB advances for 18-months at 4.79% which was lower than short-term FHLB advances of 5.57%.

These advances have the option to be called by FHLB at any time and mature on November 7, 2025.

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

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

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

The debt balance of $18.7 million at June 30, 2024 and $18.6 million at December 31, 2023 were presented net of fair value adjustments of $1.9 million and $2.0 million, respectively.

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

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

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

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

The debt balance of $10.6 million at June 30, 2024 was presented net of a fair value adjustment of $1.4 million.

In addition, the Company acquired 4.75% fixed-to-floating rate subordinated notes with a carrying value of $19.5 million at June 30, 2024.

The notes balance of $18.6 million at June 30, 2024 was presented net of fair value adjustment of $0.9 million.

Stockholders’ Equity

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

(Dollars in thousands) June 30, 2024 December 31, 2023 $ Change % Change

Common Stock at par of $0.01 $ 333 $ 332 $ 1 0.30 %

3 unchanged sentences

Total Stockholders' Equity $ 522,783 $ 511,135 $ 11,648 2.28 %

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

Total stockholders’ equity increased $11.6 million, or 2.28%, to $522.8 million at June 30, 2024 when compared to December 31, 2023 primarily due to a $19.4 million of net income partially offset by dividends paid of $8.0 million.

Liquidity and Capital Resources

19 unchanged sentences

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

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

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

As seen in the Consolidated Statements of Cash Flows, the net decrease in cash and cash equivalents was $233.5 million for the first six months of 2024 compared to a decrease of $9.7 million for the first six months of 2023.

The decrease in cash and cash equivalents in the second quarter of 2024 was mainly due to the decrease of $567.2 million in interest-bearing deposits.

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

At June 30, 2024, the Bank had approximately $1.0 billion of available liquidity including:

$138.9 million in cash and cash equivalents, $321.9 million in unpledged securities, $734.5 million in secured borrowing capacity at the FHLB of Atlanta offset by FHLB advances and letter of credit of $81.0 million and $81.1 million, respectively.

The Bank has arrangements with other correspondent banks whereby it has $95.0 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash.

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

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

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

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

Through the FHLB of Atlanta, the Bank had available lendable collateral of approximately $734.5 million and $745.1 million at June 30, 2024 and December 31, 2023, respectively.

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

5 unchanged sentences

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

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

The Bank was deemed “well capitalized” under applicable regulatory capital requirements at June 30, 2024.

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

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

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

The following tables present the applicable capital ratios for the Company and the Bank as of June 30, 2024 and December 31, 2023.

June 30, 2024 Tier 1 leverage ratio Common Equity Tier 1 ratio Tier 1 risk-based capital ratio Total risk-based capital ratio

Shore Bancshares, Inc.

18 unchanged sentences

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

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

(dollars in thousands, except per share amounts) June 30, 2024 December 31, 2023 June 30, 2023

Total assets $ 5,864,017 $ 6,010,918 $ 3,641,631

15 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

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

6 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

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

9 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis