What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-09 · 272 added, 243 removed, 602 unchanged (46% of the section changed)

24 unchanged sentences

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

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

• the growth and profitability of noninterest or fee income being less than expected;

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

40 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 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.

Impairment testing requires a qualitative assessment and/or an independent valuation of the fair value of each of the Company’s reporting units 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.

1 unchanged sentence

Determining fair value is subjective, requiring the use of estimates, assumptions and management judgement.

Bargain purchase gain is recorded within noninterest income in the period it was generated.

Bargain purchase gain is recorded as noninterest income in the period it was generated.

An acquirer has a measurement period to finalize the accounting for a business combination which could adjust bargain purchase gain if material facts or circumstances arise.

41 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 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.

The Company’s net income for the third quarter of 2024 was $11.2 million or $0.34 per diluted common share, which was equal to the second quarter of 2024.

The Company had a net loss of $9.7 million or $(0.29) per diluted common share for the third quarter of 2023, as a result of the merger with TCFC.

Net income for the first nine months of 2024 was $30.6 million or $0.92 per diluted common share, compared to net income for the first nine months of 2023 of $738 thousand or $0.03 per diluted common share.

Third Quarter and Nine Months Ended September 30, 2024 Highlights

• Return on Average Assets (“ROAA”) - The Company reported ROAA of 0.77% for the third quarter of 2024, which was equal to reported ROAA for the second quarter of 2024.

Non-GAAP ROAA, which excludes fraud expense, core deposit intangible amortization, and merger-related expenses, was 0.90% for the third quarter of 2024, compared to 0.91% for the second quarter of 2024.

• Net Interest Income and Net Interest Margin - Third quarter 2024 net interest income increased $1.1 million to $43.3 million from $42.1 million in the second quarter of 2024.

Net interest income increased due to modest loan growth, slightly higher accelerated accretion income, and loans and securities repricing at a faster pace than the Bank’s cost of funds.

Net interest margin (“NIM”) increased six basis points (“bps”) to 3.17% for the third quarter of 2024, from 3.11% for the second quarter of 2024.

Excluding net accretion interest income of $4.5 million and $3.8 million for the same time periods, NIM increased one bp to 2.84% for the third quarter of 2024, from 2.83% for the second quarter of 2024.

• Asset Quality - Allowance for credit losses (“ACL”) was $58.7 million at September 30, 2024, compared to $58.5 million at June 30, 2024.

The third quarter of 2024 ACL as a percentage of loans remained stable at 1.24% from the second quarter of 2024.

Nonperforming assets to total assets were 0.27% for the third quarter of 2024 compared to 0.29% for the second quarter of 2024 and 0.23% for the fourth quarter of 2023.

Classified assets to total assets increased to 0.39% in the third quarter of 2024 compared to 0.33% for the second quarter of 2024 and 0.25% for the fourth quarter of 2023.

• Operating Leverage - The third quarter of 2024 efficiency ratio was 67.49% when compared to 66.23% in the second quarter of 2024.

The third quarter efficiency ratio was affected by one-time data processing expense related to the fraud incident in the first quarter of 2024.

The third quarter of 2024 non-GAAP efficiency ratio was 62.10% when compared to 61.05% in the second quarter of 2024.

• Deposits - Total deposits increased to $5.23 billion at September 30, 2024 from $5.15 billion at June 30, 2024 .

Average noninterest bearing deposits were $1.58 billion for the third quarter of 2024 representing 30.55% of average funding, excluding subordinated debt, compared to 28.42% during the second quarter of 2024.

The Bank’s use of wholesale funding, which includes Federal Home Loan Bank (“ FHLB”) advances and brokered deposits, has been minimal in 2024.

Wholesale funding increased from $44.5 million or 0.74% of assets at December 31, 2023 to $50.0 million or 0.84% of total assets at September 30, 2024.

Sustained efforts to enhance the Bank’s deposit franchise are expected to continue to attract additional deposits in future quarters.

SUMMARY OF OPERATING RESULTS

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

A comparison of the results of operations for the three and nine months ended September 30, 2024 and September 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

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

($ in thousands) 2024 2023 2024 2023

OPERATING DATA

Interest income $ 74,689 $ 71,248 $ 218,934 $ 142,943

Interest expenses 30,966 14,139 60,970 23,537

Interest expense 31,426 25,626 92,396 49,161

Net interest income (“NII”)

43,263 45,622 126,538 93,782

Provision for credit loses 2,081 667 2,488 1,880

Provision for credit losses 1,470 28,176 3,958 30,056

NII after provision for credit losses 41,793 17,446 122,580 63,726

Noninterest income 7,287 14,984 22,294 25,613

Noninterest expenses 33,499 21,608 70,197 42,501

Income before income tax taxes 15,000 5,513 25,597 14,405

Income tax expense 3,766 1,495 6,179 3,930

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

Noninterest expense 34,114 47,158 104,311 89,661

Income (loss) before income taxes 14,966 (14,728) 40,563 (322)

Income tax expense (benefit) 3,777 (4,991) 9,956 (1,060)

Net income (loss) $ 11,189 $ (9,737) $ 30,607 $ 738

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

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

2024 2023 2024 2023

KEY OPERATING RATIOS

10 unchanged sentences

67.49 77.81 70.09 75.10

Non-interest income to average assets 0.58 0.59 0.52 0.60

Non-interest expense to average assets 2.31 2.41 2.43 2.41

Noninterest income to average assets 0.50 1.03 0.51 0.80

Noninterest expense to average assets 2.34 3.24 2.40 2.79

Net operating expense to average assets (3)

1 unchanged sentence

COMMON SHARE DATA

Basic and diluted net income per common share

$ 0.34 $ 0.20 $ 0.58 $ 0.53

Basic net income (loss) per common share $ 0.34 $ (0.29) $ 0.92 $ 0.03

Diluted net income (loss) per common share $ 0.34 $ (0.29) $ 0.92 $ 0.03

Cash dividends paid per common share $ 0.12 $ 0.12 $ 0.36 $ 0.36

Common dividend payout ratio 35.48 % 60.00 % 41.20 % 45.28 %

Common dividend payout ratio 35.74 % (40.83) % 39.10 % NM

____________________________________

4 unchanged sentences

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

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

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

Summary of Financial Results

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

The Company reported net income for the three months ended September 30, 2024 of $11.2 million or $0.34 diluted earnings per common share compared to a net loss of $9.7 million or diluted earnings per common share of $(0.29) for the three months ended September 30, 2023.

The Company’s ROAA, ROACE and ROATCE were 0.77%, 8.41% and 12.37%, respectively, for the three months ended September 30, 2024, compared to (0.67)%, (7.25)% and 1.74%, respectively, for the three months ended September 30, 2023.

Three Months Ended September 30,

($ in thousands) 2024 2023 $ Change % Change

Interest and dividend income $ 74,689 $ 71,248 $ 3,441 4.83 %

Interest expenses 30,966 14,139 16,827 119.01 %

Interest expense 31,426 25,626 5,800 22.63 %

Net interest income 43,263 45,622 (2,359) (5.17) %

1 unchanged sentence

Noninterest income 7,287 14,984 (7,697) (51.37) %

Noninterest expenses 33,499 21,608 11,891 55.03 %

Income before income taxes 15,000 5,513 9,487 172.08 %

Income tax expense 3,766 1,495 2,271 151.91 %

Net income $ 11,234 $ 4,018 $ 7,216 179.59 %

Noninterest expense 34,114 47,158 (13,044) (27.66) %

Income (loss) before income taxes 14,966 (14,728) 29,694 (201.61) %

Income tax expense (benefit) 3,777 (4,991) 8,768 (175.68) %

Net income (loss) $ 11,189 $ (9,737) $ 20,926 (214.91) %

Net Interest Income

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

As shown in the table below, tax-equivalent net interest income was $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

As shown in the table below, tax-equivalent net interest income was $43.3 million for the third quarter of 2024 and $45.7 million for the third quarter of 2023.

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

Three Months Ended September 30,

($ in thousands) 2024 2023 $ Change % Change

Interest and dividend income

4 unchanged sentences

Total Interest and Dividend Income $ 74,689 $ 71,248 $ 3,441 4.83 %

Interest Expenses

Interest Expense

Deposits $ 28,856 $ 23,473 $ 5,383 22.93 %

1 unchanged sentence

Long-term debt 2,079 1,461 618 42.30 %

Total Interest Expenses $ 30,966 $ 14,139 $ 16,827 119.01 %

Total Interest Expense $ 31,426 $ 25,626 $ 5,800 22.63 %

Taxable-equivalent adjustment $ 82 $ 80 $ 2 2.50 %

6 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 June 30, Three Months Ended June 30,

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

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

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

Earning assets

12 unchanged sentences

657 8 4.87 663 34 20.51

Federal funds sold — — — 7,533 92 4.85

Interest-bearing deposits 44,935 564 4.99 55,547 1,213 8.66

4 unchanged sentences

Total assets $ 5,810,492 $ 5,769,312

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

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

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

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

Interest-bearing liabilities

29 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 $4.5 million and $0.3 million of accretion interest on loans for the three months ended June 30, 2024 and 2023, respectively.

There were $5.0 million and $6.1 million of accretion interest on loans for the three months ended September 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 $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.

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) (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.

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

Volume Due to Rate Total

There were $287 thousand and $484 thousand of amortization of deposits premium, and $232 thousand and $232 thousand of amortization of borrowing fair value adjustment for the three months ended September 30, 2024 and 2023, respectively.

The following table presents changes in volume and rate related to interest income and interest expense for the periods indicated.

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

($ in thousands) Volume Due to Rate Total

Interest income:

9 unchanged sentences

Tax-exempt investment securities — (26) (26)

Fed funds sold — (92) (92)

Interest-bearing deposits (136) (512) (648)

5 unchanged sentences

Advances from FHLB - Short-term (542) 341 (201)

Advances from FHLB - Long-term 625 — 625

Subordinated debt 17 (23) (6)

3 unchanged sentences

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

Net interest income was $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.

Net interest income was $43.3 million for the third quarter of 2024, compared to $45.6 million for the third quarter of 2023.

The decrease was primarily due to an increase in interest on deposits of $5.4 million, a decrease in interest on deposits with other banks of $649 thousand and an increase in interest on long-term borrowings of $618 thousand.

These changes were partially offset by an increase in interest and fees on loans of $4.3 million.

The Company’s NIM decreased to 3.17% for the third quarter of 2024 from 3.35% for the third quarter of 2023.

Comparing the third quarter of 2024 to the third quarter of 2023, the Company’s interest-earning asset yields increased 23 basis points to 5.47% from 5.24%, while the cost of funds repriced at a faster pace resulting in an increase of 43 basis points to 2.38% from 1.95% for the same period.

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

1 unchanged sentence

Noninterest Income

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 .

Total noninterest income for the third quarter of 2024 was $7.3 million, a decrease of $7.7 million from $15.0 million for the third quarter of 2023.

The decrease was primarily due to lower trust and investment fee income of $1.1 million.

and a one time third quarter 2023 bargain purchase gain of $8.8 million, partially offset by $2.2 million of losses on sale of investment securities, a direct result of the merger with TCFC in the third quarter of 2023.

Noninterest Expense

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

Total noninterest expense of $34.1 million for the third quarter of 2024 decreased $13.0 million when compared to the third quarter of 2023 total noninterest expense of $47.2 million.

The decrease in total noninterest expense from the third quarter of 2023 was primarily due to one time merger related expenses that were incurred in 2023, partially offset by an increase in expenses 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.

In addition, despite the increased size, the Company has prudently reduced its staff by approximately 72 FTEs since the consummation of the merger.

The Company reported income tax expense of $3.8 million for the third quarter of 2024, and income tax benefit of $5.0 million for the third quarter of 2023.

The effective tax rate for the third quarter of 2024 and 2023 was 25.24% and (33.89%), respectively.

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

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 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 Company reported net income for the nine months ended September 30, 2024 of $30.6 million or diluted earnings per share of $0.92 compared to net income of $738 thousand or diluted earnings per share of $0.03 for the nine months ended September 30, 2023.

The Company’s ROAA, Non-GAAP ROAA, ROACE and ROATCE were 0.70%, 0.91%, 7.84% and 12.83% for the nine months ended September 30, 2024, respectively, compared to 0.02%, 0.49%, 0.24% and 6.27% for the nine months ended September 30, 2023, respectively.

The increase to net income in the first nine 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 a lower provision for credit losses, partially offset by higher noninterest expense, higher income tax expense and lower noninterest income.

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 .

The decrease in the provision for credit losses in 2024 was due to higher levels of reserves required by the Company’s CECL model related to the merger in 2023 and recognition of provision on acquired loans.

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

Nine Months Ended September 30,

($ in thousands) 2024 2023 $ Change % Change

Interest and dividend income $ 218,934 $ 142,943 $ 75,991 53.16 %

1 unchanged sentence

Net interest income 126,538 93,782 32,756 34.93 %

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

Provision for credit losses 3,958 30,056 (26,098) (86.83) %

Noninterest income 22,294 25,613 (3,319) (12.96) %

Noninterest expenses 104,311 89,661 14,650 16.34 %

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 %

Income (loss) before income taxes 40,563 (322) 40,885 NM

Income tax expense (benefit) 9,956 (1,060) 11,016 NM

Net income $ 30,607 $ 738 $ 29,869 NM

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%.

As shown in the table below, tax-equivalent net interest income increased $32.8 million to $126.8 million for the nine months ended September 30, 2024, compared to $94.0 million for the nine months ended September 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 $1.40 billion, or 42.3%.

The increase in interest income was partially offset by increased total interest expense of $43.2 million, or 87.9%, primarily due to increases in the cost of funds and in the average balance of interest-bearing deposits of $1.02 billion, or 38.1%, and an increase in net accretion interest of $5.5 million.

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

Six Months Ended June 30,

(Dollars in thousands) 2024 2023 $ Change % Change

Nine Months Ended September 30,

($ in thousands) 2024 2023 $ Change % Change

Interest and dividend income

12 unchanged sentences

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

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

Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023

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

Earning assets

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Total assets $ 5,808,153 $ 4,298,943

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

Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023

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

Interest-bearing liabilities

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

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

There were $13.7 million and $7.0 million of accretion interest on loans for the nine months ended September 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

There were $1.1 million and $308 thousand of amortization of deposits premium, and $695 thousand and $325 thousand of amortization of borrowing fair value adjustment for the nine months ended September 30, 2024 and 2023, respectively.

The following table presents changes in volume and rate related to interest income and interest expense for the periods indicated.

Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023

($ in thousands) Volume Due to Rate Total

Interest income from earning assets:

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Certificate of deposits 15,586 5,946 21,532

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

Advances from FHLB - Short-term (4,159) 790 (3,369)

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Net change in net interest income $ 38,345 $ (5,519) $ 32,826

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.

The Company’s net interest margin remained flat at 3.12% for the nine months ended September 30, 2024 as compared to the same period in 2023, as more rapid increases in rates on interest-bearing liabilities were offset by lower increases in interest-earning asset yields and larger balances in noninterest-bearing deposits.

The increases in the average balance and rates paid on interest-bearing deposits of $1.02 billion and 104 bps, respectively, were partially offset by increases in the average balance and yields earned on average earning assets of $1.40 billion and 64 bps, respectively.

Additionally, margins were positively impacted as average balances of noninterest-bearing deposits increased $424.9 million, or 43.2%, from 25.9% of average funding for the nine months ended September 30, 2023 to 27.2% of average funding for the nine months ended September 30, 2024.

Net accretion income impacted net interest margin by 29 bps and 21 bps for the nine months ended September 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.

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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.

Total noninterest income of $22.3 for the nine months ended September 30, 2024 decreased $3.3 million, or 13.0%, when compared to the same period in 2023.

The decrease was primarily due to lower trust and investment fee income of $1.1 million.

The decrease was affected by one-time bargain purchase income of $8.8 million and $2.2 million of losses on sale of investment securities in the third quarter 2023, both a direct result of the merger with TCFC in the third quarter of 2023.

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.

Total noninterest expense of $104.3 for the nine months ended September 30, 2024 increased $14.6 million, or 16.3%, 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 and $4.7 million of credit card related fraud losses.

There were no merger-related expenses for the nine months ended September 30, 2024, compared to $16.8 million for the nine months ended September 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.

The Company reported income tax expense of $10.0 million for the nine months ended September 30, 2024, and income tax benefit of $1.1 million for the nine months ended September 30, 2023.

The effective tax rate was 24.54% for the nine months ended September 30, 2024, and (329.12)% for the nine months ended September 30, 2023.

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

ANALYSIS OF FINANCIAL CONDITION

Balance Sheet Summary

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.

Total assets were $5.92 billion at September 30, 2024, a decrease of $93.2 million, or 1.6%, when compared to $6.01 billion at December 31, 2023.

The aggregate decrease was primarily due to decreases in cash and cash equivalents of $188.8 million and investment securities held to maturity (“HTM”) of $28.6 million partially offset by an increase in investment securities available for sale (“AFS”) of $22.8 million and loans held for investment of $92.9 million.

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.

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

Cash and Cash Equivalents

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

Cash and cash equivalents totaled $183.6 million at September 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 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.

At September 30, 2024, 21.6% of the portfolio of debt securities was classified as AFS and 78.4% 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 $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.

Investment securities, including restricted stock and equity securities, totaled $644.2 million at September 30, 2024, a $3.2 million, or 0.5%, decrease compared to $647.4 million at December 31, 2023.

At September 30, 2024, AFS securities, carried at fair value, totaled $133.3 million compared to $110.5 million at December 31, 2023.

At September 30, 2024, AFS securities consisted of 79.7% mortgage-backed, 15.5% U.S.

Government agencies and 4.8% corporate bonds, compared to 76.0%, 18.5% and 5.5%, respectively, at year-end 2023.

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.

At September 30, 2024, the accumulated other comprehensive loss was $5.5 million, compared to $7.5 million at December 31, 2023.

At September 30, 2024, HTM securities, carried at amortized cost, totaled $484.7 million compared to $513.3 million at December 31, 2023.

At September 30, 2024, HTM securities consisted of 70.1% mortgage-backed, 27.4% U.S.

Government agencies, 2.2% 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 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.

At September 30, 2024 and December 31, 2023, 97.0% 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.

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 September 30, 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 September 30, 2024.

September 30, 2024

Investment Grade

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

Treasury and government agencies $ 132,870 $ — $ — $ — $ — $ — $ 132,870

Mortgage-backed-residential 339,848 — — — — — 339,848

States and political subdivisions — 1,466 — — — — 1,466

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

Total held-to maturity securities $ 472,718 $ 1,466 $ 4,000 $ 4,000 $ 500 $ 2,000 $ 484,684

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

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

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

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

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

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

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

Loans Held for Sale

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

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.

At September 30, 2024 and December 31, 2023 , the fair value of loans held for sale amounted to $26.9 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.

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Loans Held for Investment

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

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

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

Construction $ 337,113 7.12 % $ 299,000 6.40 % $ 38,113 12.75 %

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

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

Institutions which are deemed to have concentrations in CRE

lending are expected to employ heightened levels of risk management with respect to their CRE portfolios, and may be required to hold higher levels of capital.

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

Non-owner occupied CRE loans as a percentage of the Bank’s Tier 1 Capital + ACL at 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.

Non-owner occupied CRE loans as an amount and as a percentage of the Bank’s Tier 1 Capital + ACL at September 30, 2024 and December 31, 2023 were $2.07 billion or 364.0% and $2.02 billion or 382.6%, respectively.

Construction loans as an amount and as a percentage of the Bank’s Tier 1 Capital + ACL at September 30, 2024 and December 31, 2023 were $337.1 million or 59.3% and $299.0 million or 56.7%, respectively.

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

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

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

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

Non-Owner Occupied CRE Loans

June 30, 2024

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

September 30, 2024

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

Retail $ 432,222 $ 2,349 20.9 % 9.1 %

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____________________________________

(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.

(1) Other non-owner occupied CRE loans include 1-4 family dwelling loans of $116.9 million, lot/land loans of $94.3 million, self-storage loans of $84.2 million and other loans of $99.7 million.

(2) The balances for our non-owner occupied CRE portfolio as of September 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.

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

(3) Includes loans held for sale of $27.8 million.

(3) Excludes loans held for sale of $26.9 million.

Owner Occupied CRE Loans

June 30, 2024

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

September 30, 2024

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

Office/Office Condo $ 139,901 $ 530 18.7 % 3.0 %

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____________________________________

(1) Other owner occupied CRE loans include restaurant loans of $60.4 million, marine/boat slips of $59.7 million, fire/CMS building loans of $41.3 million and other loans of $43.6 million.

(2) Includes loans held for sale of $27.8 million.

(1) Other owner occupied CRE loans include marine/boat slips of $59.1 million, restaurant loans of $58.7 million, fire/CMS building loans of $41.0 million and other loans of $44.4 million.

(2) Excludes loans held for sale of $26.9 million.

Office CRE Portfolio

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, which includes owner occupied and non-owner occupied CRE loans, was $509.4 million or 10.8% of total loans of $4.73 billion at September 30, 2024.

The Bank’s office CRE loan portfolio included $140.9 million or 27.7% of the total with medical tenants and $71.8 million or 14.1% 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.

There were 503 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $380 thousand, respectively.

Loan to Value (“LTV”) estimates are less than 50% for $177.8 million or 34.9% of the office CRE portfolio and greater than 80% for $18.4 million or 3.6% 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.

LTV estimates for the office CRE portfolio are summarized below and LTV collateral values are based on the most recent appraisal, which may vary from the appraised value at loan origination.

LTV Range ($ in thousands)

Loan Count Loan Balance % of Total CRE

Less than or equal to 50% 258 $ 177,771 35 %

50%-60% 69 118,547 23 %

60%-70% 80 111,951 22 %

70%-80% 73 82,674 16 %

Greater than 80% 23 18,433 4 %

Grand Total 503 $ 509,376 100 %

The Bank had 18 office CRE loans totaling $164.6 million that were greater than $5.0 million at September 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%.

For the office CRE portfolio, at September 30, 2024, the average loan debt-service coverage ratio was 2.5x and average LTV was 50.0%.

Of the office CRE portfolio balance, 73% 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, $2.0 million are special mention or substandard.

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

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

($ in thousands) September 30, 2024 December 31, 2023

ASSET QUALITY

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

Other real estate owned (“OREO”) and Repossessed Property 1,739 179

Non-accrual loans, OREO, Repossessed Property and BEFD modifications 16,576 13,116

Other real estate owned (“OREO”) and repossessed assets 485 179

Non-accrual loans, OREO, repossessed assets and BEFD modifications 15,329 13,116

ASSET QUALITY RATIOS

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Non-accrual loans and BEFD modifications to total loans 0.31 % 0.28 %

Non-accrual loans OREO and repossessed property to total assets 0.28 % 0.22 %

Non-accrual loans OREO and repossessed property to total portfolio loans, OREO and repossessed property 0.35 % 0.28 %

Non-accrual loans, OREO, repossessed property and BEFD modifications to total assets 0.28 % 0.22 %

Non-accrual loans OREO and repossessed assets to total assets 0.26 % 0.22 %

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

Non-accrual loans, OREO, repossessed assets and BEFD modifications to total assets 0.26 % 0.22 %

____________________________________

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

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

Classified assets do not include special mention loans.

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Allowance for Credit Losses on Loans

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.

The ACL was $58.7 million at September 30, 2024, $57.4 million at December 31, 2023 and $57.1 million at September 30, 2023.

There were net charge-offs of $1.4 million for the three months ended September 30, 2024, compared to net charge-offs of $1.4 million for the three months ended September 30, 2023.

There were net charge-offs of $3.0 million for the nine months ended September 30, 2024, compared to net charge-offs of $1.5 million for the nine months ended September 30, 2023.

The ratio of annualized net charge-offs to average loans was 0.12% for the three months ended September 30, 2024, compared to annualized net charge-offs of 0.13% for the three months ended September 30, 2023.

The ratio of annualized net charge-offs to average loans was 0.09% for the nine months ended September 30, 2024, compared to annualized net charge-offs of 0.06% for the nine months ended September 30, 2023.

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

The ACL on loans as a percentage of period-end loans was 1.24% at 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

June 30, 2024 June 30, 2023

(Dollars in thousands) Net

(Charge-offs)

Recoveries Average Balance (1)

(Charge-offs)

Recoveries Average Balance (1)

The ACL as a percentage of period-end loans was 1.24% at September 30, 2024 and 1.23% 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 nine months ended September 30, 2024 and 2023.

Three Months Ended

September 30, 2024 September 30, 2023

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

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

Construction $ 1 $ 333,912 — % $ 3 $ 398,341 — %

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(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 %

Nine Months Ended

September 30, 2024 September 30, 2023

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

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

Construction $ (5) $ 314,191 — % $ 10 $ 292,430 — %

6 unchanged sentences

Allowance for credit losses — (58,669) — % — (57,051) — %

Total net charge-off and

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

Total net charge-off and average loans $ (2,739) $ 4,620,470 0.08 % $ (1,519) $ 3,236,839 0.06 %

____________________________________

(1) Excludes loans held for sale.

Nonperforming Assets

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 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

Classified assets increased $8.4 million to $23.3 million or 0.39% of total assets at September 30, 2024 from $14.9 million or 0.25% of total assets at December 31, 2023.

Classified assets are substandard loans, repossessed assets and OREO.

The increase was primarily due to increases in OREO and repossessed assets of $0.3 million and $8.1 million in substandard loans.

As shown in the following table, nonperforming assets were $15.8 million or 0.27% of total assets at September 30, 2024 compared to $13.7 million or 0.23% of total assets at December 31, 2023.

The balance of nonperforming assets decreased primarily due to decreases in total loans 90 days or more past due of $0.3 million and repossessed assets and OREO of $0.3 million, partially offset by an increase in nonaccrual loans of $2.1 million.

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

($ in thousands) September 30, 2024 December 31, 2023

Nonperforming assets

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Total loans 90 days or more past due and still accruing 454 738

Other real estate owned and repossessed property 1,739 179

Other real estate owned and repossessed assets 485 179

Total nonperforming assets $ 15,783 $ 13,701

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Nonaccrual loans 0.31 % 0.28 %

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

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

Nonperforming assets 0.33 % 0.30 %

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Nonperforming assets 0.27 % 0.23 %

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

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

($ in thousands) September 30, 2024 December 31, 2023

Balance % Balance % $ Change % Change

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Total Deposits $ 5,225,723 100.00 % $ 5,386,120 100.00 % $ (160,397) (2.98) %

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

Total deposits decreased $160.4 million, or 3.0%, to $5.23 billion at September 30, 2024 when compared to December 31, 2023.

The decrease in total deposits was primarily due to a decrease in demand deposits of $414.0 million, and money market and savings of $143.8 million.

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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 $5.3 billion or $5.0 billion.

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.

Total estimated uninsured deposits were $895.9 million or 17.1% of total deposits at September 30, 2024 and $1.05 billion or 19.5% of total deposits at December 31, 2023.

At September 30, 2024, there were $127.4 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 September 30, 2024 were $768.6 million or 14.7% of total deposits.

Reciprocal deposits were $1.29 billion at September 30, 2024 compared to $1.29 billion at December 31, 2023.

Reciprocal deposits as a percentage of the Bank’s liabilities at September 30, 2024 and December 31, 2023 were 24.3% and 23.8%, respectively.

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

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

At 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 September 30, 2024, the Bank had three local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $477.3 million, which represented 9.1% of total deposits of $5.23 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 $5.40 billion.

Wholesale Funding - Short-Term Borrowings and Brokered Deposits

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.

The Company had no short-term borrowings at September 30, 2024 and December 31, 2023.

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

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.

At September 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 $5.5 million, which includes FHLB advances and brokered deposits, from $44.5 million in brokered deposits at December 31, 2023 to $50.0 million in FHLB advances at September 30, 2024.

Long-Term Debt

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

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

There were long-term borrowings from the FHLB outstanding at September 30, 2024 of $50.0 million and zero 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.

On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements 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 $18.7 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.

The debt balances of $18.7 million at September 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 $12.4 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.

The debt balance of $11.0 million at September 30, 2024 was presented net of a fair value adjustment of $1.3 million.

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

The notes aggregate balance of $18.8 million at September 30, 2024 was presented net of fair value adjustment of $700 thousand.

Stockholders’ Equity

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

($ in thousands, except per share amounts) September 30, 2024 December 31, 2023 $ Change % Change

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

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Total Stockholders' Equity $ 533,271 $ 511,135 $ 22,136 4.33 %

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.

Total stockholders’ equity increased $22.1 million, or 4.33%, to $533.3 million at September 30, 2024 when compared to December 31, 2023, primarily due to $30.6 million of net income, partially offset by dividends paid of $12.0 million.

Liquidity and Capital Resources

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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 $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.

As seen in the Consolidated Statements of Cash Flows, the net decrease in cash and cash equivalents was $188.8 million for the first nine months of 2024 compared to an increase of $53.2 million for the first nine months of 2023.

The decrease in cash and cash equivalents in the first nine months of 2024 was mainly due to the decrease of $474.8 million in interest-bearing deposits, partially offset by an increase of $313.4 million in noninterest-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:

At September 30, 2024, the Bank had approximately $1.12 billion of available liquidity including:

$183.6 million in cash and cash equivalents, $321.2 million in unpledged securities, $742.4 million in secured borrowing capacity at the FHLB of Atlanta offset by FHLB advances and letter of credit of $50.0 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.

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.

Through the FHLB of Atlanta, the Bank had available lendable collateral of approximately $742.4 million and $745.1 million at September 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.

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

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

The Bank was deemed “well capitalized” under applicable regulatory capital requirements at September 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 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

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

September 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.

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Shore United Bank 8.33 % 10.02 % 10.02 % 11.27 %

On October 30, 2024, the Company announced that its Board of Directors declared a cash dividend of $0.12 per share, payable on November 29, 2024, to holders of record of shares of common stock as of November 12, 2024.

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

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

The Company provides banking services to customers who do business in the cannabis industry.

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 Company’s Consolidated Financial Statements if the Federal government takes actions against the Company.

As of September 30, 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 September 30, 2024 were approximately $134.0 million, or 2.6% of total deposits, and $75.1 million, or 1.6% of total gross loans, respectively.

• Interest income and noninterest income for the nine months ended September 30, 2024, were approximately $2.9 million and $813 thousand, respectively.

USE OF NON-GAAP FINANCIAL MEASURES

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

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

($ in thousands, except per share amounts) September 30, 2024 December 31, 2023 September 30, 2023

Total assets $ 5,917,704 $ 6,010,918 $ 5,705,372

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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 June 30, Six Months Ended June 30,

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

Net income (as reported) $ 11,234 $ 4,018 $ 19,418 $ 10,475

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

($ in thousands) 2024 2023 2024 2023

Net income (loss) (as reported) $ 11,189 $ (9,737) $ 30,607 $ 738

ROACE 8.41 % (7.25) % 7.84 % 0.24 %

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

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

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

Net income (as reported) $ 11,234 $ 4,018 $ 19,418 $ 10,475

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

($ in thousands) 2024 2023 2024 2023

Net income (loss) (as reported) $ 11,189 $ (9,737) $ 30,607 $ 738

Merger and acquisition costs (net of tax) (1)

— 9,828 — 12,398

Core deposit intangible amortization (net of tax) (1)

1,746 1,741 5,646 2,597

Net earnings applicable to common stockholders

4 unchanged sentences

Average Tangible Common Equity $ 424,019 $ 417,510 $ 413,941 $ 335,501

____________________________________

(1) The Bank utilized a tax rate of 26% for the nine months ended September 30, 2023.

The Company’s effective tax rate was (329.12)% for the nine months ended September 30, 2023, and was impacted by nondeductible merger related costs incurred.

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